The New Funding Landscape Want to start a startup? Get funded by Y Combinator . After barely changing at all for , the startup funding business is now in what could, at least by comparison, be called turmoil. At Y Combinator we've seen dramatic changes in the funding environment for startups. Fortunately one of them is much higher valuations. The trends we've been seeing are probably not YC-specific. I wish I could say they were, but the main cause is probably just that we see trends first-partly because the startups we fund are very plugged into the and are quick to take advantage of anything new, and partly because we fund so many that we have enough data points to see patterns clearly. What we're seeing now, everyone's probably going to be seeing in . So I'm going to explain what we're seeing, and what that will mean for you if you try to raise money. Super-Angels Let me start by describing what the world of startup funding used to look like. There used to be two sharply differentiated types of investors: angels and venture capitalists. Angels are individual rich people who invest small amounts of their own money, while VCs are employees of funds that invest large amounts of other people's. For there were just those two types of investors, but now a third type has appeared halfway between them: the so-called super-angels. [ 1 ] And VCs have been provoked by their arrival into making a lot of angel-style investments themselves. So the previously sharp line between angels and VCs has become hopelessly blurred. There used to be a no man's land between angels and VCs. Angels would invest $20k to $50k apiece, and VCs usually a million or more. So an angel round meant a collection of angel investments that combined to maybe $200k, and a VC round meant a series A round in which a single VC fund (or occasionally two) invested $1-5 million. The no man's land between angels and VCs was a very inconvenient one for startups, because it coincided with the amount many wanted to raise. Most startups coming out of wanted to raise around $400k. But it was a pain to stitch together that much out of angel investments, and most VCs weren't interested in investments so small. That's the fundamental reason the super-angels have appeared. They're responding to the market. The arrival of a new type of investor is big news for startups, because there used to be only two and they rarely competed with one another. Super-angels compete with both angels and VCs. That's going to change the rules about how to raise money. I don't know yet what the new rules will be, but it looks like most of the changes will be for the better. A super-angel has some of the qualities of an angel, and some of the qualities of a . They're usually individuals, like angels. In fact many of the current super-angels were initially angels of the classic type. But like VCs, they invest other people's money. This allows them to invest larger amounts than angels: a typical super-angel investment is currently about $100k. They make investment decisions quickly, like angels. And they make a lot more investments per partner than VCs-up to 10 times as many. The fact that super-angels invest other people's money makes them doubly alarming to VCs. They don't just compete for startups; they also compete for investors. What super-angels really are is a new form of fast-moving, lightweight VC fund. And those of us in the technology world know what usually happens when something comes along that can be described in terms like that. Usually it's the replacement. Will it be? As of now, few of the startups that take money from super-angels are ruling out taking VC money. They're just postponing it. But that's still a problem for VCs. Some of the startups that postpone raising VC money may do so well on the angel money they raise that they never bother to raise more. And those who do raise VC rounds will be able to get higher valuations when they do. If the best startups get 10x higher valuations when they raise series A rounds, that would cut VCs' returns from winners at least tenfold. [ 2 ] So I think VC funds are seriously threatened by the super-angels. But one thing that may save them to some extent is the uneven distribution of startup outcomes: practically all the returns are concentrated in a few big successes. The expected value of a startup is the percentage chance it's Google. So to the extent that winning is a matter of absolute returns, the super-angels could win practically all the battles for individual startups and yet lose the war, if they merely failed to get those few big winners. And there's a chance that could happen, because the top VC funds have better brands, and can also do more for their portfolio companies. [ 3 ] Because super-angels make more investments per partner, they have less partner per investment. They can't pay as much attention to you as a on your board could. How much is that extra attention worth? It will vary enormously from one partner to another. There's no consensus yet in the general case. So for now this is something startups are deciding individually. Till now, VCs' claims about how much value they added were sort of like the government's. Maybe they made you feel better, but you had no choice in the matter, if you needed money on the scale only VCs could supply. Now that VCs have competitors, that's going to put a market price on the help they offer. The interesting thing is, no one knows yet what it will be. Do startups that want to get really big need the sort of advice and connections only the top VCs can supply? Or would super-angel money do just as well? The VCs will say you need them, and the super-angels will say you don't. But the truth is, no one knows yet, not even the and super-angels themselves. All the super-angels know is that their new model seems promising enough to be worth trying, and all the VCs know is that it seems promising enough to worry about. Rounds Whatever the outcome, the conflict between VCs and super-angels is good news for founders. And not just for the obvious reason that more competition for deals means better terms. The whole shape of deals is changing. One of the biggest differences between angels and VCs is the amount of your company they want. VCs want a lot. In a series A round they want a third of your company, if they can get it. They don't care much how much they pay for it, but they want a lot because the number of series A investments they can do is so small. In a traditional series A investment, at least one partner from the VC fund takes a seat on your board. [ 4 ] Since board seats last and each partner can't handle more than about 10 at once, that means a VC fund can only do about 2 series A deals per partner per year. And that means they need to get as much of the company as they can in each one. You'd have to be a very promising startup indeed to get a VC to use up one of his 10 board seats for only a few percent of you. Since angels generally don't take board seats, they don't have this constraint. They're happy to buy only a few percent of you. And although the super-angels are in most respects mini VC funds, they've retained this critical property of angels. They don't take board seats, so they don't need a big percentage of your company. Though that means you'll get correspondingly less attention from them, it's good news in other respects. Founders never really liked giving up as much equity as VCs wanted. It was a lot of the company to give up in one shot. Most founders doing series A deals would prefer to take half as much money for half as much stock, and then see what valuation they could get for of the stock after using of the money to increase its value. But VCs never offered that option. Now startups have another alternative. Now it's easy to raise angel rounds about half the size of series A rounds. Many of the startups we fund are taking this route, and I predict that will be true of startups in general. A typical big angel round might be $600k on a convertible note with a valuation cap of $4 million premoney. Meaning that when the note converts into stock (in a later round, or upon acquisition), the investors in that round will get .6 / 4.6, or 13% of the company. That's a lot less than the 30 to 40% of the company you usually give up in a series A round if you do it so early. [ 5 ] But the advantage of these medium-sized rounds is not just that they cause less dilution. You also lose less control. After an angel round, the founders almost always still have control of the company, whereas after a series A round they often don't. The traditional board structure after a series A round is two founders, two VCs, and a (supposedly) neutral fifth person. Plus series A terms usually give the investors a veto over various kinds of important decisions, including selling the company. Founders usually have a lot of de facto control after a series A, as long as things are going well. But that's not the same as just being able to do what you want, like you could before. A third and quite significant advantage of angel rounds is that they're less stressful to raise. Raising a traditional series A round has in , if not . When a VC firm can only do 2 deals per partner per year, they're careful about which they do. To get a traditional series A round you have to go through a series of meetings, culminating in a full partner meeting where the firm as a whole says yes or no. That's the really scary part for founders: not just that series A rounds take so long, but at the end of this long process the VCs might still say no. The chance of getting rejected after the full partner meeting averages about 25%. At some firms it's over 50%. Fortunately for founders, VCs have been getting a lot faster. Nowadays Valley VCs are more likely to take . But they're still not as fast as angels and super-angels, the most decisive of whom sometimes decide in . Raising an angel round is not only quicker, but you get feedback as it progresses. An angel round is not an all or nothing thing like a series A. It's composed of multiple investors with varying degrees of seriousness, ranging from the upstanding ones who commit unequivocally to the jerks who give you lines like "come back to me to fill out the round." You usually start collecting money from the most committed investors and work your way out toward the ambivalent ones, whose interest increases as the round fills up. But at each point you know how you're doing. If investors turn cold you may have to raise less, but when investors in an angel round turn cold the process at least degrades gracefully, instead of blowing up in your face and leaving you with nothing, as happens if you get rejected by a VC fund after a full partner meeting. Whereas if investors seem hot, you can not only close the round faster, but now that convertible notes are becoming the norm, actually raise the price to reflect demand. Valuation However, the VCs have a weapon they can use against the super-angels, and they have started to use it. VCs have started making angel-sized investments too. The term "angel round" doesn't mean that all the investors in it are angels; it just describes the structure of the round. Increasingly the participants include VCs making investments of a hundred thousand or two. And when VCs invest in angel rounds they can do things that super-angels don't like. VCs are quite valuation-insensitive in angel rounds-partly because they are in general, and partly because they don't care that much about the returns on angel rounds, which they still view mostly as a way to recruit startups for series A rounds later. So VCs who invest in angel rounds can blow up the valuations for angels and super-angels who invest in them. [ 6 ] Some super-angels seem to care about valuations. Several turned down YC-funded startups after because their valuations were too high. This was not a problem for the startups; by definition a high valuation means enough investors were willing to accept it. But it was mysterious to me that the super-angels would quibble about valuations. Did they not understand that the big returns come from a few big successes, and that it therefore mattered far more which startups you picked than how much you paid for them? After thinking about it for a while and observing certain other signs, I have a theory that explains why the super-angels may be smarter than they seem. It would make sense for super-angels to want low valuations if they're hoping to invest in startups that get bought early. If you're hoping to hit the next Google, you shouldn't care if the valuation is 20 million. But if you're looking for companies that are going to get bought for 30 million, you care. If you invest at 20 and the company gets bought for 30, you only get 1.5x. You might as well buy Apple. So if some of the super-angels were looking for companies that could get acquired quickly, that would explain why they'd care about valuations. But why would they be looking for those? Because depending on the meaning of "quickly," it could actually be very profitable. A company that gets acquired for 30 million is a failure to a VC, but it could be a 10x return for an angel, and moreover, a quick 10x return. Rate of return is what matters in investing-not the multiple you get, but the multiple per year. If a super-angel gets 10x in , that's a higher rate of return than a VC could ever hope to get from a company that took to go public. To get the same rate of return, the VC would have to get a multiple of 10^6-one million x. Even Google didn't come close to that. So I think at least some super-angels are looking for companies that will get bought. That's the only rational explanation for focusing on getting the right valuations, instead of the right companies. And if so they'll be different to deal with than VCs. They'll be tougher on valuations, but more accommodating if you want to sell early. Prognosis Who will win, the super-angels or the VCs? I think the answer to that is, some of each. They'll each become more like one another. The super-angels will start to invest larger amounts, and the VCs will gradually figure out ways to make more, smaller investments faster. now the players will be hard to tell apart, and there will probably be survivors from each group. What does that mean for founders? One thing it means is that the high valuations startups are presently getting may not last forever. To the extent that valuations are being driven up by price-insensitive VCs, they'll fall again if VCs become more like super-angels and start to become more miserly about valuations. Fortunately if this does happen it will take . The short term forecast is more competition between investors, which is good news for you. The super-angels will try to undermine the VCs by acting faster, and the VCs will try to undermine the super-angels by driving up valuations. Which for founders will result in the perfect combination: funding rounds that close fast, with high valuations. But remember that to get that combination, your startup will have to appeal to both super-angels and VCs. If you don't seem like you have the potential to go public, you won't be able to use VCs to drive up the valuation of an angel round. There is a danger of having VCs in an angel round: the so-called signalling risk. If VCs are only doing it in the hope of investing more later, what happens if they don't? That's a signal to everyone else that they think you're lame. How much should you worry about that? The seriousness of signalling risk depends on how far along you are. If by the next time you need to raise money, you have graphs showing rising revenue or traffic after <DATE_TIME>, you don't have to worry about any signals your existing investors are sending. Your results will speak for themselves. [ 7 ] Whereas if the next time you need to raise money you won't yet have concrete results, you may need to think more about the message your investors might send if they don't invest more. I'm not sure yet how much you have to worry, because this whole phenomenon of VCs doing angel investments is so new. But my instincts tell me you don't have to worry much. Signalling risk smells like one of those things founders worry about that's not a real problem. As a rule, the only thing that can kill a good startup is the startup itself. Startups hurt themselves way more often than competitors hurt them, for example. I suspect signalling risk is in this category too. One thing YC-funded startups have been doing to mitigate the risk of taking money from VCs in angel rounds is not to take too much from any one . Maybe that will help, if you have the luxury of turning down money. Fortunately, more and more startups will. After of competition that could best be described as intramural, the startup funding business is finally getting some real competition. That should last at least, and maybe a lot longer. Unless there's some huge market crash, are going to be a good time for startups to raise money. And that's exciting because it means lots more startups will happen. Notes [ 1 ] I've also heard them called "Mini-VCs" and "Micro-VCs." I don't know which name will stick. There were a couple predecessors. had angel funds starting in , and in some ways First Round Capital is closer to a super-angel than a VC fund. [ 2 ] It wouldn't cut their overall returns tenfold, because investing later would probably (a) cause them to lose less on investments that failed, and (b) not allow them to get as large a percentage of startups as they do now. So it's hard to predict precisely what would happen to their returns. [ 3 ] The brand of an investor derives mostly from the success of their portfolio companies. The top VCs thus have a big brand advantage over the super-angels. They could make it self-perpetuating if they used it to get all the best new startups. But I don't think they'll be able to. To get all the best startups, you have to do more than make them want you. You also have to want them; you have to recognize them when you see them, and that's much harder. Super-angels will snap up stars that VCs miss. And that will cause the brand gap between the top VCs and the super-angels gradually to erode. [ 4 ] Though in a traditional series A round VCs put two partners on your board, there are signs now that VCs may begin to conserve board seats by switching to what used to be considered an angel-round board, consisting of two founders and one VC. Which is also to the founders' advantage if it means they still control the company. [ 5 ] In a series A round, you usually have to give up more than the actual amount of stock the VCs buy, because they insist you dilute yourselves to set aside an "option pool" as well. I predict this practice will gradually disappear though. [ 6 ] The best thing for founders, if they can get it, is a convertible note with no valuation cap at all. In that case the money invested in the angel round just converts into stock at the valuation of the next round, no matter how large. Angels and super-angels tend not to like uncapped notes. They have no idea how much of the company they're buying. If the company does well and the valuation of the next round is high, they may end up with only a sliver of it. So by agreeing to uncapped notes, VCs who don't care about valuations in angel rounds can make offers that super-angels hate to match. [ 7 ] Obviously signalling risk is also not a problem if you'll never need to raise more money. But startups are often mistaken about that. Thanks to , , , , , and Harj Taggar for reading drafts of this.


Where to to start a startup? Get funded by Y Combinator . proper is mostly suburban sprawl. At first glance it doesn't seem there's anything to see. It's not the sort of place that has conspicuous monuments. But if you look, there are subtle signs you're in a place that's different from other places. 1. Stanford University Stanford is a strange place. Structurally it is to an ordinary university what suburbia is to a city. It's enormously spread out, and feels surprisingly empty much of the time. But notice the weather. It's probably perfect. And notice the beautiful mountains to the west. And though you can't see it, cosmopolitan is to the north. That combination is much of the reason grew up around this university and not some other one. 2. University Ave A surprising amount of the work of the is done in the cafes on or just off University Ave in . If you visit on a weekday between 10 and 5, you'll often see founders pitching investors. In case you can't tell, the founders are the ones leaning forward eagerly, and the investors are the ones sitting back with slightly pained expressions. 3. The Lucky Office The office at 165 University Ave was Google's first. Then it was Paypal's. (Now it's 's.) The interesting thing about it is the location. It's a smart move to put a startup in a place with restaurants and people walking around instead of in an office park, because then the people who work there want to stay there, instead of fleeing as soon as conventional working end. They go out for dinner together, talk about ideas, and then come back and implement them. It's important to realize that Google's current location in an office park is not where they started; it's just where they were forced to move when they needed more space. Facebook was till recently across the street, till they too had to move because they needed more space. 4. Old was not originally a suburb. For of its existence, it was a college town out in the countryside. Then in it was engulfed in a wave of suburbia that raced down the peninsula. But north of expressway still feels noticeably different from the area around it. It's one of the nicest places in the . The buildings are old (though increasingly they are being torn down and replaced with generic McMansions) and the trees are tall. But houses are very expensive-around $1000 per square foot. This is post-exit . 5. Sand Hill Road It's interesting to see the VCs' offices on the north side of precisely because they're so boringly uniform. The buildings are all more or less the same, their exteriors express very little, and they are arranged in a confusing maze. (I've been visiting them for and I still occasionally get lost.) It's not a coincidence. These buildings are a pretty accurate reflection of the VC business. If you go on a weekday you may see groups of founders there to meet VCs. But mostly you won't see anyone; bustling is the last word you'd use to describe the atmos. Visiting reminds you that the opposite of "down and dirty" would be "up and clean." 6. Castro Street It's a tossup whether or University Ave should be considered the heart of the now. University Ave would have been . But is getting expensive. Increasingly startups are located in , and is a place they come to meet investors. has a lot of different cafes, but there is one that clearly dominates in : . 7. Google Google spread out from its first building in to a lot of the surrounding ones. But because the buildings were built at different times by different people, the place doesn't have the sterile, walled-off feel that a typical large company's headquarters have. It definitely has a flavor of its own though. You sense there is something afoot. The general atmos is vaguely utopian; there are lots of Priuses, and people who look like they drive them. You can't get into Google unless you know someone there. It's very much worth seeing inside if you can, though. Ditto for Facebook, at the end of California Ave in , though there is nothing to see outside. 8. runs along the crest of the mountains. On one side is the , and on the other is the sea-which because it's cold and foggy and has few harbors, plays surprisingly little role in the lives of people in the , considering how close it is. Along some parts of Skyline the dominant trees are huge redwoods, and in others they're live oaks. Redwoods mean those are the parts where the fog off the coast comes in at ; redwoods condense rain out of fog. The MROSD manages a collection of great walking trails off . 9. 280 has two highways running the length of it: 101, which is pretty ugly, and 280, which is one of the more beautiful highways in the world. I always take 280 when I have a choice. Notice the long narrow lake to the west? That's . It runs along the base of the hills, then heads uphill through . One of the MROSD trails runs right along the fault . A string of rich neighborhoods runs along the foothills to the west of 280: , , , , . goes right under 280 a little bit south of . And a couple miles south of that is the 's equivalent of the "Welcome to " sign: The Dish . Notes I skipped the Computer History Museum because this is a list of where to see the itself, not where to see artifacts from it. I also skipped . calls itself the capital of , but when people in the use the phrase "the city," they mean . is a dotted line on a map. Thanks to , , , and for reading drafts of this.


High Resolution Fundraising Want to start a startup? Get funded by Y Combinator . The reason startups have been using more convertible notes in angel rounds is that they make deals close faster. By making it easier for startups to give different prices to different investors, they help them break the sort of deadlock that happens when investors all wait to see who else is going to invest. By far the biggest influence on investors' opinions of a startup is the opinion of other investors. There are very, very few who simply decide for themselves. Any startup founder can tell you the most common question they hear from investors is not about the founders or the product, but "who else is investing?" That tends to produce deadlocks. Raising an old-fashioned fixed-size equity round can take , because all the angels sit around waiting for the others to commit, like competitors in a bicycle sprint who deliberately ride slowly at the start so they can follow whoever breaks first. Convertible notes let startups beat such deadlocks by rewarding investors willing to move first with lower (effective) valuations. Which they deserve because they're taking more risk. It's much safer to invest in a startup has already invested in; someone who comes after him should pay a higher price. The reason convertible notes allow more flexibility in price is that valuation caps aren't actual valuations, and notes are cheap and easy to do. So you can do high-resolution fundraising: if you wanted you could have a separate note with a different cap for each investor. That cap need not simply rise monotonically. A startup could also give better deals to investors they expected to help them most. The point is simply that different investors, whether because of the help they offer or their willingness to commit, have different values for startups, and their terms should reflect that. Different terms for different investors is clearly the way of the future. Markets always evolve toward higher resolution. You may not need to use convertible notes to do it. With sufficiently lightweight standardized equity terms (and some changes in investors' and lawyers' expectations about equity rounds) you might be able to do the same thing with equity instead of debt. Either would be fine with startups, so long as they can easily change their valuation. Deadlocks weren't the only problem with fixed-size equity rounds. Another was that startups had to decide in advance how much to raise. I think it's a mistake for a startup to fix upon a specific number. If investors are easily convinced, the startup should raise more now, and if investors are skeptical, the startup should take a smaller amount and use that to get the company to the point where it's more convincing. It's just not reasonable to expect startups to pick an optimal round size in advance, because that depends on the reactions of investors, and those are impossible to predict. Fixed-size, multi-investor angel rounds are such a bad idea for startups that one wonders why things were ever done that way. One possibility is that this custom reflects the way investors like to collude when they can get away with it. But I think the actual explanation is less sinister. I think angels (and their lawyers) organized rounds this way in unthinking imitation of VC series A rounds. In a series A, a fixed-size equity round with a lead makes sense, because there is usually just one big investor, who is unequivocally the lead. Fixed-size series A rounds already are high res. But the more investors you have in a round, the less sense it makes for everyone to get the same price. The most interesting question here may be what high res fundraising will do to the world of investors. Bolder investors will now get rewarded with lower prices. But more important, in a hits-driven business, is that they'll be able to get into the deals they want. Whereas the "who else is investing?" type of investors will not only pay higher prices, but may not be able to get into the best deals at all. Thanks to , , , , , , Harj Taggar, and for reading drafts of this.


What Happened to Yahoo Want to start a startup? Get funded by Y Combinator . When I went to work for Yahoo after they bought our startup in , it felt like the center of the world. It was supposed to be the next big thing. It was supposed to be what Google turned out to be. What went wrong? The problems that hosed Yahoo go back a long time, practically to the beginning of the company. They were already very visible when I got there in . Yahoo had two problems Google didn't: easy money, and ambivalence about being a technology company. Money The first time I met , we thought we were meeting for different reasons. He thought we were meeting so he could check us out in person before buying us. I thought we were meeting so we could show him our new technology, Revenue Loop. It was a way of sorting shopping search results. Merchants bid a percentage of sales for traffic, but the results were sorted not by the bid but by the bid times the average amount a user would buy. It was like the algorithm Google uses now to sort ads, but this was in , before Google was founded. Revenue Loop was the optimal sort for shopping search, in the sense that it sorted in order of how much money Yahoo would make from each link. But it wasn't just optimal in that sense. Ranking search results by user behavior also makes search better. Users train the search: you can start out finding matches based on mere textual similarity, and as users buy more stuff the search results get better and better. didn't seem to care. I was confused. I was showing him technology that extracted the maximum value from search traffic, and he didn't care? I couldn't tell whether I was explaining it badly, or he was just very poker faced. I didn't realize the answer till later, after I went to work at Yahoo. It was neither of my guesses. The reason Yahoo didn't care about a technique that extracted the full value of traffic was that advertisers were already overpaying for it. If Yahoo merely extracted the actual value, they'd have made less. Hard as it is to believe now, the big money then was in banner ads. Advertisers were willing to pay ridiculous amounts for banner ads. So Yahoo's sales force had evolved to exploit this source of revenue. Led by a large and terrifyingly formidable man called , Yahoo's sales guys would fly out to Procter & Gamble and come back with million dollar orders for banner ad impressions. The prices seemed cheap compared to print, which was what advertisers, for lack of any other reference, compared them to. But they were expensive compared to what they were worth. So these big, dumb companies were a dangerous source of revenue to depend on. But there was another source even more dangerous: other Internet startups. By , Yahoo was the beneficiary of a de facto Ponzi scheme. Investors were excited about the Internet. One reason they were excited was Yahoo's revenue growth. So they invested in new Internet startups. The startups then used the money to buy ads on Yahoo to get traffic. Which caused yet more revenue growth for Yahoo, and further convinced investors the Internet was worth investing in. When I realized this one day, sitting in my cubicle, I jumped up like Archimedes in his bathtub, except instead of " !" I was shouting "Sell!" Both the Internet startups and the Procter & Gambles were doing brand advertising. They didn't care about targeting. They just wanted lots of people to see their ads. So traffic became the thing to get at Yahoo. It didn't matter what type. [ 1 ] It wasn't just Yahoo. All the search engines were doing it. This was why they were trying to get people to start calling them "portals" instead of "search engines." Despite the actual meaning of the word portal, what they meant by it was a site where users would find what they wanted on the site itself, instead of just passing through on their way to other destinations, as they did at a search engine. I remember telling in or that Yahoo should buy Google, because I and most of the other programmers in the company were using it instead of Yahoo for search. He told me that it wasn't worth worrying about. Search was only 6% of our traffic, and we were growing at 10% a month. It wasn't worth doing better. I didn't say "But search traffic is worth more than other traffic!" I said "Oh, ok." Because I didn't realize either how much search traffic was worth. I'm not sure even and did then. If they had, Google presumably wouldn't have expended any effort on enterprise search. If circumstances had been different, the people running Yahoo might have realized sooner how important search was. But they had the most opaque obstacle in the world between them and the truth: money. As long as customers were writing big checks for banner ads, it was hard to take search seriously. Google didn't have that to distract them. Hackers But Yahoo also had another problem that made it hard to change directions. They'd been thrown off balance from the start by their ambivalence about being a technology company. One of the weirdest things about Yahoo when I went to work there was the way they insisted on calling themselves a "media company." If you walked around their offices, it seemed like a software company. The cubicles were full of programmers writing code, product managers thinking about feature lists and ship dates, support people (yes, there were actually support people) telling users to restart their browsers, and so on, just like a software company. So why did they call themselves a media company? One reason was the way they made money: by selling ads. In it was hard to imagine a technology company making money that way. Technology companies made money by selling their software to users. Media companies sold ads. So they must be a media company. Another big factor was the fear of Microsoft. If anyone at Yahoo considered the idea that they should be a technology company, the next thought would have been that Microsoft would crush them. It's hard for anyone much younger than me to understand the fear Microsoft still inspired in . Imagine a company with several times the power Google has now, but way meaner. It was perfectly reasonable to be afraid of them. Yahoo watched them crush the first hot Internet company, Netscape. It was reasonable to worry that if they tried to be the next Netscape, they'd suffer the same fate. How were they to know that Netscape would turn out to be Microsoft's last victim? It would have been a clever move to pretend to be a media company to throw Microsoft off their scent. But unfortunately Yahoo actually tried to be one, sort of. Project managers at Yahoo were called "producers," for example, and the different parts of the company were called "properties." But what Yahoo really needed to be was a technology company, and by trying to be something else, they ended up being something that was neither here nor there. That's why Yahoo as a company has never had a sharply defined identity. The worst consequence of trying to be a media company was that they didn't take programming seriously enough. Microsoft (back in ), Google, and Facebook have all had hacker-centric cultures. But Yahoo treated programming as a commodity. At Yahoo, user-facing software was controlled by product managers and designers. The job of programmers was just to take the work of the product managers and designers the final step, by translating it into code. One obvious result of this practice was that when Yahoo built things, they often weren't very good. But that wasn't the worst problem. The worst problem was that they hired bad programmers. Microsoft (back in ), Google, and Facebook have all been obsessed with hiring the best programmers. Yahoo wasn't. They preferred good programmers to bad ones, but they didn't have the kind of single-minded, almost obnoxiously elitist focus on hiring the smartest people that the big winners have had. And when you consider how much competition there was for programmers when they were hiring, during the Bubble, it's not surprising that the quality of their programmers was uneven. In technology, once you have bad programmers, you're doomed. I can't think of an instance where a company has sunk into technical mediocrity and recovered. Good programmers want to work with other good programmers. So once the quality of programmers at your company starts to drop, you enter a death spiral from which there is no recovery. [ 2 ] At Yahoo this death spiral started early. If there was ever a time when Yahoo was a Google-style talent magnet, it was over by the time I got there in . The company felt prematurely old. Most technology companies eventually get taken over by suits and middle managers. At Yahoo it felt as if they'd deliberately accelerated this process. They didn't want to be a bunch of hackers. They wanted to be suits. A media company should be run by suits. The first time I visited Google, they had about 500 people, the same number Yahoo had when I went to work there. But boy did things seem different. It was still very much a hacker-centric culture. I remember talking to some programmers in the cafeteria about the problem of gaming search results (now known as SEO), and they asked "what should we do?" Programmers at Yahoo wouldn't have asked that. Theirs was not to reason why; theirs was to build what product managers spec'd. I remember coming away from Google thinking "Wow, it's still a startup." There's not much we can learn from Yahoo's first fatal flaw. It's probably too much to hope any company could avoid being damaged by depending on a bogus source of revenue. But startups can learn an important lesson from the second one. In the software business, you can't afford not to have a hacker-centric culture. Probably the most impressive commitment I've heard to having a hacker-centric culture came from , when he spoke at Startup School in . He said that in Facebook made a point of hiring programmers even for jobs that would not ordinarily consist of programming, like HR and marketing. So which companies need to have a hacker-centric culture? Which companies are "in the software business" in this respect? As Yahoo discovered, the area covered by this rule is bigger than most people realize. The answer is: any company that needs to have good software. Why would great programmers want to work for a company that didn't have a hacker-centric culture, as long as there were others that did? I can imagine two reasons: if they were paid a huge amount, or if the domain was interesting and none of the companies in it were hacker-centric. Otherwise you can't attract good programmers to work in a suit-centric culture. And without good programmers you won't get good software, no matter how many people you put on a task, or how many procedures you establish to ensure "quality." Hacker culture often seems kind of irresponsible. That's why people proposing to destroy it use phrases like "adult supervision." That was the phrase they used at Yahoo. But there are worse things than seeming irresponsible. Losing, for example. Notes [ 1 ] The closest we got to targeting when I was there was when we created in order to provoke a bidding war between 3 pet supply startups for the spot as top sponsor. [ 2 ] In theory you could beat the death spiral by buying good programmers instead of hiring them. You can get programmers who would never have come to you as employees by buying their startups. But so far the only companies smart enough to do this are companies smart enough not to need to. Thanks to , , and for reading drafts of this.


The Future of Startup Funding Want to start a startup? Get funded by Y Combinator . I wrote about what I called " a huge, unexploited opportunity in startup funding:" the growing disconnect between VCs, whose current business model requires them to invest large amounts, and a large class of startups that need less than they used to. Increasingly, startups want a couple hundred thousand dollars, not a couple million. [ 1 ] The opportunity is a lot less unexploited now. Investors have poured into this territory from both directions. VCs are much more likely to make angel-sized investments than they were . And meanwhile has seen a dramatic increase in a new type of investor: the super-angel, who operates like an angel, but using other people's money, like a . Though a lot of investors are entering this territory, there is still room for more. The distribution of investors should mirror the distribution of startups, which has the usual power law dropoff. So there should be a lot more people investing tens or hundreds of thousands than millions. [ 2 ] In fact, it may be good for angels that there are more people doing angel-sized deals, because if angel rounds become more legitimate, then startups may start to opt for angel rounds even when they could, if they wanted, raise series A rounds from VCs. One reason startups prefer series A rounds is that they're more prestigious. But if angel investors become more active and better known, they'll increasingly be able to compete with VCs in brand. Of course, prestige isn't the main reason to prefer a series A round. A startup will probably get more attention from investors in a series A round than an angel round. So if a startup is choosing between an angel round and an A round from a good VC fund, I usually advise them to take the A round. [ 3 ] But while series A rounds aren't going away, I think VCs should be more worried about super-angels than vice versa. Despite their name, the super-angels are really mini VC funds, and they clearly have existing VCs in their sights. They would seem to have history on their side. The pattern here seems the same one we see when startups and established companies enter a new market. Online video becomes possible, and YouTube plunges right in, while existing media companies embrace it only half-willingly, driven more by fear than hope, and aiming more to protect their turf than to do great things for users. Ditto for PayPal. This pattern is repeated over and over, and it's usually the invaders who win. In this case the super-angels are the invaders. Angel rounds are their whole business, as online video was for YouTube. Whereas VCs who make angel investments mostly do it as a way to generate deal flow for series A rounds. [ 4 ] On the other hand, startup investing is a very strange business. Nearly all the returns are concentrated in a few big winners. If the super-angels merely fail to invest in (and to some extent produce) the big winners, they'll be out of business, even if they invest in all the others. VCs Why don't VCs start doing smaller series A rounds? The sticking point is board seats. In a traditional series A round, the partner whose deal it is takes a seat on the startup's board. If we assume the average startup runs for and a partner can bear to be on 12 boards at once, then a VC fund can do 2 series A deals per partner per year. It has always seemed to me the solution is to take fewer board seats. You don't have to be on the board to help a startup. Maybe VCs feel they need the power that comes with board membership to ensure their money isn't wasted. But have they tested that theory? Unless they've tried not taking board seats and found their returns are lower, they're not bracketing the problem. I'm not saying VCs don't help startups. The good ones help them a lot. What I'm saying is that the kind of help that matters, you may not have to be a board member to give. [ 5 ] How will this all play out? Some VCs will probably adapt, by doing more, smaller deals. I wouldn't be surprised if by streamlining their selection process and taking fewer board seats, VC funds could do 2 to 3 times as many series A rounds with no loss of quality. But other VCs will make no more than superficial changes. VCs are conservative, and the threat to them isn't mortal. The VC funds that don't adapt won't be violently displaced. They'll edge gradually into a different business without realizing it. They'll still do what they will call series A rounds, but these will increasingly be de facto series B rounds. [ 6 ] In such rounds they won't get the 25 to 40% of the company they do now. You don't give up as much of the company in later rounds unless something is seriously wrong. Since the VCs who don't adapt will be investing later, their returns from winners may be smaller. But investing later should also mean they have fewer losers. So their ratio of risk to return may be the same or even better. They'll just have become a different, more conservative, type of investment. Angels In the big angel rounds that increasingly compete with series A rounds, the investors won't take as much equity as VCs do now. And VCs who try to compete with angels by doing more, smaller deals will probably find they have to take less equity to do it. Which is good news for founders: they'll get to keep more of the company. The deal terms of angel rounds will become less restrictive too-not just less restrictive than series A terms, but less restrictive than angel terms have traditionally been. In the future, angel rounds will less often be for specific amounts or have a lead investor. In , the standard m.o. for startups was to find one angel to act as the lead investor. You'd negotiate a round size and valuation with the lead, who'd supply some but not all of the money. Then the startup and the lead would cooperate to find the rest. The future of angel rounds looks more like this: instead of a fixed round size, startups will do a rolling close, where they take money from investors one at a time till they feel they have enough. [ 7 ] And though there's going to be one investor who gives them the first check, and his or her help in recruiting other investors will certainly be welcome, this initial investor will no longer be the lead in the old sense of managing the round. The startup will now do that themselves. There will continue to be lead investors in the sense of investors who take the lead in advising a startup. They may also make the biggest investment. But they won't always have to be the one terms are negotiated with, or be the first money in, as they have in the past. Standardized paperwork will do away with the need to negotiate anything except the valuation, and that will get easier too. If multiple investors have to share a valuation, it will be whatever the startup can get from the first one to write a check, limited by their guess at whether this will make later investors balk. But there may not have to be just one valuation. Startups are increasingly raising money on convertible notes, and convertible notes have not valuations but at most valuation caps : caps on what the effective valuation will be when the debt converts to equity (in a later round, or upon acquisition if that happens first). That's an important difference because it means a startup could do multiple notes at once with different caps. This is now starting to happen, and I predict it will become more common. Sheep The reason things are moving this way is that the old way sucked for startups. Leads could (and did) use a fixed size round as a legitimate-seeming way of saying what all founders hate to hear: I'll invest if other people will. Most investors, unable to judge startups for themselves, rely instead on the opinions of other investors. If everyone wants in, they want in too; if not, not. Founders hate this because it's a recipe for deadlock, and delay is the thing a startup can least afford. Most investors know this m.o. is lame, and few say openly that they're doing it. But the craftier ones achieve the same result by offering to lead rounds of fixed size and supplying only part of the money. If the startup can't raise the rest, the lead is out too. How could they go ahead with the deal? The startup would be underfunded! In the future, investors will increasingly be unable to offer investment subject to contingencies like other people investing. Or rather, investors who do that will get last place in line. Startups will go to them only to fill up rounds that are mostly subscribed. And since hot startups tend to have rounds that are oversubscribed, being last in line means they'll probably miss the hot deals. Hot deals and successful startups are not identical, but there is a significant correlation. [ 8 ] So investors who won't invest unilaterally will have lower returns. Investors will probably find they do better when deprived of this crutch anyway. Chasing hot deals doesn't make investors choose better; it just makes them feel better about their choices. I've seen feeding frenzies both form and fall apart many times, and as far as I can tell they're mostly random. [ 9 ] If investors can no longer rely on their herd instincts, they'll have to think more about each startup before investing. They may be surprised how well this works. Deadlock wasn't the only disadvantage of letting a lead investor manage an angel round. The investors would not infrequently collude to push down the valuation. And rounds took too long to close, because however motivated the lead was to get the round closed, he was not a tenth as motivated as the startup. Increasingly, startups are taking charge of their own angel rounds. Only a few do so far, but I think we can already declare the old way dead, because those few are the best startups. They're the ones in a position to tell investors how the round is going to work. And if the startups you want to invest in do things a certain way, what difference does it make what the others do? Traction In fact, it may be slightly misleading to say that angel rounds will increasingly take the place of series A rounds. What's really happening is that startup-controlled rounds are taking the place of investor-controlled rounds. This is an instance of a very important meta-trend, one that Y Combinator itself has been based on from the beginning: founders are becoming increasingly powerful relative to investors. So if you want to predict what the future of venture funding will be like, just ask: how would founders like it to be? One by one, all the things founders dislike about raising money are going to get eliminated. [ 10 ] Using that heuristic, I'll predict a couple more things. One is that investors will increasingly be unable to wait for startups to have "traction" before they put in significant money. It's hard to predict in advance which startups will succeed. So most investors prefer, if they can, to wait till the startup is already succeeding, then jump in quickly with an offer. Startups hate this as well, partly because it tends to create deadlock, and partly because it seems kind of slimy. If you're a promising startup but don't yet have significant growth, all the investors are your friends in words, but few are in actions. They all say they love you, but they all wait to invest. Then when you start to see growth, they claim they were your friend all along, and are aghast at the thought you'd be so disloyal as to leave them out of your round. If founders become more powerful, they'll be able to make investors give them more money upfront. (The worst variant of this behavior is the tranched deal, where the investor makes a small initial investment, with more to follow if the startup does well. In effect, this structure gives the investor a free option on the next round, which they'll only take if it's worse for the startup than they could get in the open market. Tranched deals are an abuse. They're increasingly rare, and they're going to get rarer.) [ 11 ] Investors don't like trying to predict which startups will succeed, but increasingly they'll have to. Though the way that happens won't necessarily be that the behavior of existing investors will change; it may instead be that they'll be replaced by other investors with different behavior-that investors who understand startups well enough to take on the hard problem of predicting their trajectory will tend to displace suits whose skills lie more in raising money from LPs. Speed The other thing founders hate most about fundraising is how long it takes. So as founders become more powerful, rounds should start to close faster. Fundraising is still terribly distracting for startups. If you're a founder in the middle of raising a round, the round is the top idea in your mind , which means working on the company isn't. If a round takes to close, which is reasonably fast by present standards, that means during which the company is basically treading water. That's the worst thing a startup could do. So if investors want to get the best deals, the way to do it will be to close faster. Investors don't need to make up their minds anyway. We decide based on of reading an application plus of in person interview, and we only regret about 10% of our decisions. If we can decide in , surely the next round of investors can decide in . [ 12 ] There are a lot of institutionalized delays in startup funding: the multi-week mating dance with investors; the distinction between termsheets and deals; the fact that each series A has enormously elaborate, custom paperwork. Both founders and investors tend to take these for granted. It's the way things have always been. But ultimately the reason these delays exist is that they're to the advantage of investors. More time gives investors more information about a startup's trajectory, and it also tends to make startups more pliable in negotiations, since they're usually short of money. These conventions weren't designed to drag out the funding process, but that's why they're allowed to persist. Slowness is to the advantage of investors, who have in the past been the ones with the most power. But there is no need for rounds to take or even to close, and once founders realize that, it's going to stop. Not just in angel rounds, but in series A rounds too. The future is simple deals with standard terms, done quickly. One minor abuse that will get corrected in the process is option pools. In a traditional series A round, before the VCs invest they make the company set aside a block of stock for future hires-usually between 10 and 30% of the company. The point is to ensure this dilution is borne by the existing shareholders. The practice isn't dishonest; founders know what's going on. But it makes deals unnecessarily complicated. In effect the valuation is 2 numbers. There's no need to keep doing this. [ 13 ] The final thing founders want is to be able to sell some of their own stock in later rounds. This won't be a change, because the practice is now quite common. A lot of investors hated the idea, but the world hasn't exploded as a result, so it will happen more, and more openly. Surprise I've talked here about a bunch of changes that will be forced on investors as founders become more powerful. Now the good news: investors may actually make more money as a result. an interviewer asked me if founders having more power would be better or worse for the world. I was surprised, because I'd never considered that question. Better or worse, it's happening. But after a second's reflection, the answer seemed obvious. Founders understand their companies better than investors, and it has to be better if the people with more knowledge have more power. One of the mistakes novice pilots make is overcontrolling the aircraft: applying corrections too vigorously, so the aircraft oscillates about the desired configuration instead of approaching it asymptotically. It seems probable that investors have till now on average been overcontrolling their portfolio companies. In a lot of startups, the biggest source of stress for the founders is not competitors but investors. Certainly it was for us at . And this is not a new phenomenon: investors were biggest problem too. If having less power prevents investors from overcontrolling startups, it should be better not just for founders but for investors too. Investors may end up with less stock per startup, but startups will probably do better with founders more in control, and there will almost certainly be more of them. Investors all compete with one another for deals, but they aren't one another's main competitor. Our main competitor is employers. And so far that competitor is crushing us. Only a tiny fraction of people who could start a startup do. Nearly all customers choose the competing product, a job. Why? Well, let's look at the product we're offering. An unbiased review would go something like this: Starting a startup gives you more freedom and the opportunity to make a lot more money than a job, but it's also hard work and at times very stressful. Much of the stress comes from dealing with investors. If reforming the investment process removed that stress, we'd make our product much more attractive. The kind of people who make good startup founders don't mind dealing with technical problems-they enjoy technical problems-but they hate the type of problems investors cause. Investors have no idea that when they maltreat one startup, they're preventing 10 others from happening, but they are. Indirectly, but they are. So when investors stop trying to squeeze a little more out of their existing deals, they'll find they're net ahead, because so many more new deals appear. One of our axioms at Y Combinator is not to think of deal flow as a zero-sum game. Our main focus is to encourage more startups to happen, not to win a larger share of the existing stream. We've found this principle very useful, and we think as it spreads outward it will help later stage investors as well. "Make something people want" applies to us too. Notes [ 1 ] In this essay I'm talking mainly about software startups. These points don't apply to types of startups that are still expensive to start, e.g. in energy or biotech. Even the cheap kinds of startups will generally raise large amounts at some point, when they want to hire a lot of people. What has changed is how much they can get done before that. [ 2 ] It's not the distribution of good startups that has a power law dropoff, but the distribution of potentially good startups, which is to say, good deals. There are lots of potential winners, from which a few actual winners emerge with superlinear certainty. [ 3 ] As I was writing this, I asked some founders who'd taken series A rounds from top VC funds whether it was worth it, and they unanimously said yes. The quality of investor is more important than the type of round, though. I'd take an angel round from good angels over a series A from a mediocre VC. [ 4 ] Founders also worry that taking an angel investment from a VC means they'll look bad if the VC declines to participate in the next round. The trend of VC angel investing is so new that it's hard to say how justified this worry is. Another danger, pointed out by , is that if VCs are only doing angel deals to generate series A deal flow, then their incentives aren't aligned with the founders'. The founders want the valuation of the next round to be high, and the VCs want it to be low. Again, hard to say yet how much of a problem this will be. [ 5 ] pointed out that another way to be on fewer boards at once is to take board seats for shorter periods. [ 6 ] Google was in this respect as so many others the pattern for the future. It would be great for VCs if the similarity extended to returns. That's probably too much to hope for, but the returns may be somewhat higher, as I explain later. [ 7 ] Doing a rolling close doesn't mean the company is always raising money. That would be a distraction. The point of a rolling close is to make fundraising take less time, not more. With a classic fixed sized round, you don't get any money till all the investors agree, and that often creates a situation where they all sit waiting for the others to act. A rolling close usually prevents this. [ 8 ] There are two (non-exclusive) causes of hot deals: the quality of the company, and domino effects among investors. The former is obviously a better predictor of success. [ 9 ] Some of the randomness is concealed by the fact that investment is a self fulfilling prophecy. [ 10 ] The shift in power to founders is exaggerated now because it's a seller's market. On the next downtick it will seem like I overstated the case. But on the next uptick after that, founders will seem more powerful than ever. [ 11 ] More generally, it will become less common for the same investor to invest in successive rounds, except when exercising an option to maintain their percentage. When the same investor invests in successive rounds, it often means the startup isn't getting market price. They may not care; they may prefer to work with an investor they already know; but as the investment market becomes more efficient, it will become increasingly easy to get market price if they want it. Which in turn means the investment community will tend to become more stratified. [ 12 ] The two 10 minuteses have between them so founders can get cheap plane tickets, but except for that they could be adjacent. [ 13 ] I'm not saying option pools themselves will go away. They're an administrative convenience. What will go away is investors requiring them. Thanks to , , , , , , , , , , , , , , , , , , Harj Taggar, and for reading drafts of this.


The Acceleration of Addictiveness What hard liquor, cigarettes, heroin, and crack have in common is that they're all more concentrated forms of less addictive predecessors. Most if not all the things we describe as addictive are. And the scary thing is, the process that created them is accelerating. We wouldn't want to stop it. It's the same process that cures diseases: technological progress. Technological progress means making things do more of what we want. When the thing we want is something we want to want, we consider technological progress good. If some new technique makes solar cells x% more efficient, that seems strictly better. When progress concentrates something we don't want to want - when it transforms opium into heroin - it seems bad. But it's the same process at work. [ 1 ] No one doubts this process is accelerating, which means increasing numbers of things we like will be transformed into things we like too much. [ 2 ] As far as I know there's no word for something we like too much. The closest is the colloquial sense of "addictive." That usage has become increasingly common during my lifetime. And it's clear why: there are an increasing number of things we need it for. At the extreme end of the spectrum are crack and meth. Food has been transformed by a combination of factory farming and innovations in food processing into something with way more immediate bang for the buck, and you can see the results in any town in . Checkers and solitaire have been replaced by World of Warcraft and FarmVille. TV has become much more engaging, and even so it can't compete with Facebook. The world is more addictive than it was . And unless the forms of technological progress that produced these things are subject to different laws than technological progress in general, the world will get more addictive in than it did in . will bring us some wonderful things. I don't mean to imply they're all to be avoided. Alcohol is a dangerous drug, but I'd rather live in a world with wine than one without. Most people can coexist with alcohol; but you have to be careful. More things we like will mean more things we have to be careful about. Most people won't, unfortunately. Which means that as the world becomes more addictive, the two senses in which one can live a normal life will be driven ever further apart. One sense of "normal" is statistically normal: what everyone else does. The other is the sense we mean when we talk about the normal operating range of a piece of machinery: what works best. These two senses are already quite far apart. Already someone trying to live well would seem eccentrically abstemious in most of the . That phenomenon is only going to become more pronounced. You can probably take it as a rule of thumb from now on that if people don't think you're weird, you're living badly. Societies eventually develop antibodies to addictive new things. I've seen that happen with cigarettes. When cigarettes first appeared, they spread the way an infectious disease spreads through a previously isolated population. Smoking rapidly became a (statistically) normal thing. There were ashtrays everywhere. We had ashtrays in our house when I was a kid, even though neither of my parents smoked. You had to for guests. As knowledge spread about the dangers of smoking, customs changed. In , smoking has been transformed from something that seemed totally normal into a rather seedy habit: from something movie stars did in publicity shots to something small huddles of addicts do outside the doors of office buildings. A lot of the change was due to legislation, of course, but the legislation couldn't have happened if customs hadn't already changed. It took a while though-on the order of . And unless the rate at which social antibodies evolve can increase to match the accelerating rate at which technological progress throws off new addictions, we'll be increasingly unable to rely on customs to protect us. [ 3 ] Unless we want to be canaries in the coal mine of each new addiction-the people whose sad example becomes a lesson to future generations-we'll have to figure out for ourselves what to avoid and how. It will actually become a reasonable strategy (or a more reasonable strategy) to suspect everything new . In fact, even that won't be enough. We'll have to worry not just about new things, but also about existing things becoming more addictive. That's what bit me. I've avoided most addictions, but the Internet got me because it became addictive while I was using it. [ 4 ] Most people I know have problems with Internet addiction. We're all trying to figure out our own customs for getting free of it. That's why I don't have an iPhone, for example; the last thing I want is for the Internet to follow me out into the world. [ 5 ] My latest trick is taking long hikes. I used to think running was a better form of exercise than hiking because it took less time. Now the slowness of hiking seems an advantage, because the longer I spend on the trail, the longer I have to think without interruption. Sounds pretty eccentric, doesn't it? It always will when you're trying to solve problems where there are no customs yet to guide you. Maybe I can't plead Occam's razor; maybe I'm simply eccentric. But if I'm right about the acceleration of addictiveness, then this kind of lonely squirming to avoid it will increasingly be the fate of anyone who wants to get things done. We'll increasingly be defined by what we say no to. Notes [ 1 ] Could you restrict technological progress to areas where you wanted it? Only in a limited way, without becoming a police state. And even then your restrictions would have undesirable side effects. "Good" and "bad" technological progress aren't sharply differentiated, so you'd find you couldn't slow the latter without also slowing the former. And in any case, as Prohibition and the "war on drugs" show, bans often do more harm than good. [ 2 ] Technology has always been accelerating. By Paleolithic standards, technology evolved at a blistering pace in the Neolithic period. [ 3 ] Unless we mass produce social customs. I suspect the recent resurgence of evangelical in the is partly a reaction to drugs. In desperation people reach for the sledgehammer; if their kids won't listen to them, maybe they'll listen to God. But that solution has broader consequences than just getting kids to say no to drugs. You end up saying no to science as well. I worry we may be heading for a future in which only a few people plot their own itinerary through no-land, while everyone else books a package tour. Or worse still, has one booked for them by the government. [ 4 ] People commonly use the word "procrastination" to describe what they do on the Internet. It seems to me too mild to describe what's happening as merely not-doing-work. We don't call it procrastination when someone gets drunk instead of working. [ 5 ] Several people have told me they like the iPad because it lets them bring the Internet into situations where a laptop would be too conspicuous. In other words, it's a hip flask. (This is true of the iPhone too, of course, but this advantage isn't as obvious because it reads as a phone, and everyone's used to those.) Thanks to , , , and for reading drafts of this.


Organic Startup Ideas Want to start a startup? Get funded by Y Combinator . The best way to come up with startup ideas is to ask yourself the question: what do you wish someone would make for you? There are two types of startup ideas: those that grow organically out of your own life, and those that you decide, from afar, are going to be necessary to some class of users other than you. Apple was the first type. Apple happened because wanted a computer. Unlike most people who wanted computers, he could design one, so he did. And since lots of other people wanted the same thing, Apple was able to sell enough of them to get the company rolling. They still rely on this principle , incidentally. The iPhone is the phone wants. [ 1 ] Our own startup, , was of the second type. We made software for building online stores. We didn't need this software ourselves. We weren't direct marketers. We didn't even know when we started that our users were called "direct marketers." But we were comparatively old when we started the company (I was and was ), so we'd seen enough to know users would need this type of software. [ 2 ] There is no sharp line between the two types of ideas, but the most successful startups seem to be closer to the Apple type than the type. When he was writing that first Basic interpreter for the , was writing something he would use, as were and when they wrote the first versions of Google. Organic ideas are generally preferable to the made up kind, but particularly so when the founders are young. It takes experience to predict what other people will want. The worst ideas we see at Y Combinator are from young founders making things they think other people will want. So if you want to start a startup and don't know yet what you're going to do, I'd encourage you to focus initially on organic ideas. What's missing or broken in your daily life? Sometimes if you just ask that question you'll get immediate answers. It must have seemed obviously broken to that you could only program the Altair in machine language. You may need to stand outside yourself a bit to see brokenness, because you tend to get used to it and take it for granted. You can be sure it's there, though. There are always great ideas sitting right under our noses. In it was ridiculous that Harvard undergrads were still using a Facebook printed on paper. Surely that sort of thing should have been online. There are ideas that obvious lying around now. The reason you're overlooking them is the same reason you'd have overlooked the idea of building Facebook in : organic startup ideas usually don't seem like startup ideas at first. We know now that Facebook was very successful, but put yourself back in . Putting undergraduates' profiles online wouldn't have seemed like much of a startup idea. And in fact, it wasn't initially a startup idea. When spoke at a YC dinner he said he wasn't trying to start a company when he wrote the first version of Facebook. It was just a project. So was the Apple I when first started working on it. He didn't think he was starting a company. If these guys had thought they were starting companies, they might have been tempted to do something more "serious," and that would have been a mistake. So if you want to come up with organic startup ideas, I'd encourage you to focus more on the idea part and less on the startup part. Just fix things that seem broken, regardless of whether it seems like the problem is important enough to build a company on. If you keep pursuing such threads it would be hard not to end up making something of value to a lot of people, and when you do, surprise, you've got a company. [ 3 ] Don't be discouraged if what you produce initially is something other people dismiss as a toy. In fact, that's a good sign. That's probably why everyone else has been overlooking the idea. The first microcomputers were dismissed as toys. And the first planes, and the first cars. At this point, when someone comes to us with something that users like but that we could envision forum trolls dismissing as a toy, it makes us especially likely to invest. While young founders are at a disadvantage when coming up with made-up ideas, they're the best source of organic ones, because they're at the forefront of technology. They use the latest stuff. They only just decided what to use, so why wouldn't they? And because they use the latest stuff, they're in a position to discover valuable types of fixable brokenness first. There's nothing more valuable than an unmet need that is just becoming fixable. If you find something broken that you can fix for a lot of people, you've found a gold mine. As with an actual gold mine, you still have to work hard to get the gold out of it. But at least you know where the seam is, and that's the hard part. Notes [ 1 ] This suggests a way to predict areas where Apple will be weak: things doesn't use. E.g. I doubt he is much into gaming. [ 2 ] In retrospect, we should have become direct marketers. If I were doing again, I'd open our own online store. If we had, we'd have understood users a lot better. I'd encourage anyone starting a startup to become one of its users, however unnatural it seems. [ 3 ] Possible exception: It's hard to compete directly with open source software. You can build things for programmers, but there has to be some part you can charge for. Thanks to , , and for reading drafts of this.


Persuade xor Discover When meeting people you don't know very well, the convention is to seem extra friendly. You smile and say "pleased to meet you," whether you are or not. There's nothing dishonest about this. Everyone knows that these little social lies aren't meant to be taken literally, just as everyone knows that "Can you pass the salt?" is only grammatically a question. I'm perfectly willing to smile and say "pleased to meet you" when meeting new people. But there is another set of customs for being ingratiating in print that are not so harmless. The reason there's a convention of being ingratiating in print is that most essays are written to persuade. And as any politician could tell you, the way to persuade people is not just to baldly state the facts. You have to add a spoonful of sugar to make the medicine go down. For example, a politician announcing the cancellation of a government program will not merely say "The program is canceled." That would seem offensively curt. Instead he'll spend most of his time talking about the noble effort made by the people who worked on it. The reason these conventions are more dangerous is that they interact with the ideas. Saying "pleased to meet you" is just something you prepend to a conversation, but the sort of spin added by politicians is woven through it. We're starting to move from social lies to real lies. Here's an example of a paragraph from an essay I wrote about labor unions . As written, it tends to offend people who like unions. People who think the labor movement was the creation of heroic union organizers have a problem to explain: why are unions shrinking now? The best they can do is fall back on the default explanation of people living in fallen civilizations. Our ancestors were giants. The workers of must have had a moral courage that's lacking . Now here's the same paragraph rewritten to please instead of offending them: Early union organizers made heroic sacrifices to improve conditions for workers. But though labor unions are shrinking now, it's not because present union leaders are any less courageous. An employer couldn't get away with hiring thugs to beat up union leaders , but if they did, I see no reason to believe 's union leaders would shrink from the challenge. So I think it would be a mistake to attribute the decline of unions to some kind of decline in the people who run them. Early union leaders were heroic, certainly, but we should not suppose that if unions have declined, it's because present union leaders are somehow inferior. The cause must be external. [ 1 ] It makes the same point: that it can't have been the personal qualities of early union organizers that made unions successful, but must have been some external factor, or otherwise present-day union leaders would have to be inferior people. But written this way it seems like a defense of union organizers rather than an attack on early ones. That makes it more persuasive to people who like unions, because it seems sympathetic to their cause. I believe everything I wrote in the second version. Early union leaders did make heroic sacrifices. And present union leaders probably would rise to the occasion if necessary. People tend to; I'm skeptical about the idea of "the greatest generation." [ 2 ] If I believe everything I said in the second version, why didn't I write it that way? Why offend people needlessly? Because I'd rather offend people than pander to them, and if you write about controversial topics you have to choose one or the other. The degree of courage of past or present union leaders is beside the point; all that matters for the argument is that they're the same. But if you want to please people who are mistaken, you can't simply tell the truth. You're always going to have to add some sort of padding to protect their misconceptions from bumping against reality. Most writers do. Most writers write to persuade, if only out of habit or politeness. But I don't write to persuade; I write to figure out. I write to persuade a hypothetical perfectly unbiased reader. Since the custom is to write to persuade the actual reader, someone who doesn't will seem arrogant. In fact, worse than arrogant: since readers are used to essays that try to please someone, an essay that displeases one side in a dispute reads as an attempt to pander to the other. To a lot of pro-union readers, the first paragraph sounds like the sort of thing a right-wing radio talk show host would say to stir up his followers. But it's not. Something that curtly contradicts one's beliefs can be hard to distinguish from a partisan attack on them, but though they can end up in the same place they come from different sources. Would it be so bad to add a few extra words, to make people feel better? Maybe not. Maybe I'm excessively attached to conciseness. I write code the same way I write essays, making pass after pass looking for anything I can cut. But I have a legitimate reason for doing this. You don't know what the ideas are until you get them down to the fewest words. [ 3 ] The danger of the second paragraph is not merely that it's longer. It's that you start to lie to yourself. The ideas start to get mixed together with the spin you've added to get them past the readers' misconceptions. I think the goal of an essay should be to discover surprising things. That's my goal, at least. And most surprising means most different from what people currently believe. So writing to persuade and writing to discover are diametrically opposed. The more your conclusions disagree with readers' present beliefs, the more effort you'll have to expend on selling your ideas rather than having them. As you accelerate, this drag increases, till eventually you reach a point where 100% of your energy is devoted to overcoming it and you can't go any faster. It's hard enough to overcome one's own misconceptions without having to think about how to get the resulting ideas past other people's. I worry that if I wrote to persuade, I'd start to shy away unconsciously from ideas I knew would be hard to sell. When I notice something surprising, it's usually very faint at first. There's nothing more than a slight stirring of discomfort. I don't want anything to get in the way of noticing it consciously. Notes [ 1 ] I had a strange feeling of being back in high school writing this. To get a good grade you had to both write the sort of pious crap you were expected to, but also seem to be writing with conviction. The solution was a kind of method acting. It was revoltingly familiar to slip back into it. [ 2 ] Exercise for the reader: rephrase that thought to please the same people the first version would offend. [ 3 ] Come to think of it, there is one way in which I deliberately pander to readers, because it doesn't change the number of words: I switch person. This flattering distinction seems so natural to the average reader that they probably don't notice even when I switch in mid-sentence, though you tend to notice when it's done as conspicuously as this. Thanks to and for reading drafts of this. Note: An earlier version of this essay began by talking about why people dislike . I now believe that was mistaken, and that most people don't dislike him for the same reason I did when I first met him, but simply because he writes about controversial things.


Post-Medium Publishing Publishers of all types, from news to music, are unhappy that consumers won't pay for content anymore. At least, that's how they see it. In fact consumers never really were paying for content, and publishers weren't really selling it either. If the content was what they were selling, why has the price of books or music or movies always depended mostly on the format? Why didn't better content cost more? [ 1 ] A copy of Time costs $5 for 58 pages, or 8.6 cents a page. The Economist costs $7 for 86 pages, or 8.1 cents a page. Better journalism is actually slightly cheaper. Almost every form of publishing has been organized as if the medium was what they were selling, and the content was irrelevant. Book publishers, for example, set prices based on the cost of producing and distributing books. They treat the words printed in the book the same way a textile manufacturer treats the patterns printed on its fabrics. Economically, the print media are in the business of marking up paper. We can all imagine an old-style editor getting a scoop and saying "this will sell a lot of papers!" Cross out that final S and you're describing their business model. The reason they make less money now is that people don't need as much paper. I ran into a friend in a cafe. I had a copy of the New York Times , which I still occasionally buy on weekends. As I was leaving I offered it to him, as I've done countless times before in the same situation. But this time something new happened. I felt that sheepish feeling you get when you offer someone something worthless. "Do you, er, want a printout of 's news?" I asked. (He didn't.) Now that the medium is evaporating, publishers have nothing left to sell. Some seem to think they're going to sell content-that they were always in the content business, really. But they weren't, and it's unclear whether anyone could be. Selling There have always been people in the business of selling information, but that has historically been a distinct business from publishing. And the business of selling information to consumers has always been a marginal one. When I was a kid there were people who used to sell newsletters containing stock tips, printed on colored paper that made them hard for the copiers of to reproduce. That is a different world, both culturally and economically, from the one publishers currently inhabit. People will pay for information they think they can make money from. That's why they paid for those stock tip newsletters, and why companies pay now for Bloomberg terminals and Economist Intelligence Unit reports. But will people pay for information otherwise? History offers little encouragement. If audiences were willing to pay more for better content, why wasn't anyone already selling it to them? There was no reason you couldn't have done that in the era of physical media. So were the print media and the music labels simply overlooking this opportunity? Or is it, rather, nonexistent? What about iTunes? Doesn't that show people will pay for content? Well, not really. iTunes is more of a tollbooth than a store. Apple controls the default path onto the iPod. They offer a convenient list of songs, and whenever you choose one they ding your credit card for a small amount, just below the threshold of attention. Basically, iTunes makes money by taxing people, not selling them stuff. You can only do that if you own the channel, and even then you don't make much from it, because a toll has to be ignorable to work. Once a toll becomes painful, people start to find ways around it, and that's pretty easy with digital content. The situation is much the same with digital books. Whoever controls the device sets the terms. It's in their interest for content to be as cheap as possible, and since they own the channel, there's a lot they can do to drive prices down. Prices will fall even further once writers realize they don't need publishers. Getting a book printed and distributed is a daunting prospect for a writer, but most can upload a file. Is software a counterexample? People pay a lot for desktop software, and that's just information. True, but I don't think publishers can learn much from software. Software companies can charge a lot because (a) many of the customers are businesses, who get in trouble if they use pirated versions, and (b) though in form merely information, software is treated by both maker and purchaser as a different type of thing from a song or an article. A Photoshop user needs Photoshop in a way that no one needs a particular song or article. That's why there's a separate word, "content," for information that's not software. Software is a different business. Software and content blur together in some of the most lightweight software, like casual games. But those are usually free. To make money the way software companies do, publishers would have to become software companies, and being publishers gives them no particular head start in that domain. [ 2 ] The most promising countertrend is the premium cable channel. People still pay for those. But broadcasting isn't publishing: you're not selling a copy of something. That's one reason the movie business hasn't seen their revenues decline the way the news and music businesses have. They only have one foot in publishing. To the extent the movie business can avoid becoming publishers, they may avoid publishing's problems. But there are limits to how well they'll be able to do that. Once publishing-giving people copies-becomes the most natural way of distributing your content, it probably doesn't work to stick to old forms of distribution just because you make more that way. If free copies of your content are available online, then you're competing with publishing's form of distribution, and that's just as bad as being a publisher. Apparently some people in the music business hope to retroactively convert it away from publishing, by getting listeners to pay for subscriptions. It seems unlikely that will work if they're just streaming the same files you can get as . Next What happens to publishing if you can't sell content? You have two choices: give it away and make money from it indirectly, or find ways to embody it in things people will pay for. The first is probably the future of most current media. Give music away and make money from concerts and t-shirts. Publish articles for free and make money from one of a dozen permutations of advertising. Both publishers and investors are down on advertising at the moment, but it has more potential than they realize. I'm not claiming that potential will be realized by the existing players. The optimal ways to make money from the written word probably require different words written by different people. It's harder to say what will happen to movies. They could evolve into ads. Or they could return to their roots and make going to the theater a treat. If they made the experience good enough, audiences might start to prefer it to watching pirated movies at home. [ 3 ] Or maybe the movie business will dry up, and the people working in it will go to work for game developers. I don't know how big embodying information in physical form will be. It may be surprisingly large; people overvalue physical stuff . There should remain some market for printed books, at least. I can see the evolution of book publishing in the books on my shelves. Clearly at some point in the big publishing houses started to ask: how cheaply can we make books before people refuse to buy them? The answer turned out to be one step short of phonebooks. As long as it isn't floppy, consumers still perceive it as a book. That worked as long as buying printed books was the only way to read them. If printed books are optional, publishers will have to work harder to entice people to buy them. There should be some market, but it's hard to foresee how big, because its size will depend not on macro trends like the amount people read, but on the ingenuity of individual publishers. [ 4 ] Some magazines may thrive by focusing on the magazine as a physical object. Fashion magazines could be made lush in a way that would be hard to match digitally, at least for a while. But this is probably not an option for most magazines. I don't know exactly what the future will look like, but I'm not too worried about it. This sort of change tends to create as many good things as it kills. Indeed, the really interesting question is not what will happen to existing forms, but what new forms will appear. The reason I've been writing about existing forms is that I don't know what new forms will appear. But though I can't predict specific winners, I can offer a recipe for recognizing them. When you see something that's taking advantage of new technology to give people something they want that they couldn't have before, you're probably looking at a winner. And when you see something that's merely reacting to new technology in an attempt to preserve some existing source of revenue, you're probably looking at a loser. Notes [ 1 ] I don't like the word "content" and tried for a while to avoid using it, but I have to admit there's no other word that means the right thing. "Information" is too general. Ironically, the main reason I don't like "content" is the thesis of this essay. The word suggests an undifferentiated slurry, but economically that's how both publishers and audiences treat it. Content is information you don't need. [ 2 ] Some types of publishers would be at a disadvantage trying to enter the software business. Record labels, for example, would probably find it more natural to expand into casinos than software, because the kind of people who run them would be more at home at the mafia end of the business spectrum than the don't-be-evil end. [ 3 ] I never watch movies in theaters anymore. The tipping point for me was the ads they show first. [ 4 ] Unfortunately, making physically nice books will only be a niche within a niche. Publishers are more likely to resort to expedients like selling autographed copies, or editions with the buyer's picture on the cover. Thanks to , , , , and for reading drafts of this.