Paul Graham - Essays

[1] Success here is defined from the initial investors' point of view: either an IPO, or an acquisition for more than the valuation at the last round of funding. The conventional 1 in 10 success rate is suspiciously neat, but conversations with VCs suggest it's roughly correct for startups overall. Top VC firms expect to do better.

[2] I'm not claiming founders sit down and calculate the expected after-tax return from a startup. They're motivated by examples of other people who did it. And those examples do reflect after-tax returns.

[3] Conjecture: The variation in wealth in a (non-corrupt) country or organization will be inversely proportional to the prevalence of systems of seniority. So if you suppress variation in wealth, seniority will become correspondingly more important. So far, I know of no counterexamples, though in very corrupt countries you may get both simultaneously. (Thanks to Daniel Sobral for pointing this out.)

[4] In a country with a truly feudal economy, you might be able to redistribute wealth successfully, because there are no startups to kill.

[5] The speed at which startups develop new techology is the other reason they pay so well. As I explained in "How to Make Wealth" (in Hackers & Painters), what you do in a startup is compress a lifetime's worth of work into a few years. It seems as dumb to discourage that as to discourage risk-taking.

Thanksto Chris Anderson, Trevor Blackwell, Dan Giffin, Jessica Livingston, and Evan Williams for reading drafts of this essay, and to Langley Steinert, Sangam Pant, and Mike Moritz for information about venture investing.

The first Summer Founders Program has just finished. We were surprised how well it went. Overall only about 10% of startups succeed, but if I had to guess now, I'd predict three or four of the eight startups we funded will make it.

Of the startups that needed further funding, I believe all have either closed a round or are likely to soon. Two have already turned down (lowball) acquisition offers.

We would have been happy if just one of the eight seemed promising by the end of the summer. What's going on? Did some kind of anomaly make this summer's applicants especially good? We worry about that, but we can't think of one. We'll find out this winter.

The whole summer was full of surprises. The best was that the hypothesis we were testing seems to be correct. Young hackers can start viable companies. This is good news for two reasons: (a) it's an encouraging thought, and (b) it means that Y Combinator, which is predicated on the idea, is not hosed.

More precisely, the hypothesis was that success in a startup depends mainly on how smart and energetic you are, and much less on how old you are or how much business experience you have. The results so far bear this out. The 2005 summer founders ranged in age from 18 to 28 (average 23), and there is no correlation between their ages and how well they're doing.

This should not really be surprising. Bill Gates and Michael Dell were both 19 when they started the companies that made them famous. Young founders are not a new phenomenon: the trend began as soon as computers got cheap enough for college kids to afford them.

Another of our hypotheses was that you can start a startup on less money than most people think. Other investors were surprised to hear the most we gave any group was $20,000. But we knew it was possible to start on that little because we started Viaweb on $10,000.

And so it proved this summer. Three months' funding is enough to get into second gear. We had a demo day for potential investors ten weeks in, and seven of the eight groups had a prototype ready by that time. One, Reddit, had already launched, and were able to give a demo of their live site.

A researcher who studied the SFP startups said the one thing they had in common was that they all worked ridiculously hard. People this age are commonly seen as lazy. I think in some cases it's not so much that they lack the appetite for work, but that the work they're offered is unappetizing.

The experience of the SFP suggests that if you let motivated people do real work, they work hard, whatever their age. As one of the founders said "I'd read that starting a startup consumed your life, but I had no idea what that meant until I did it."

I'd feel guilty if I were a boss making people work this hard. But we're not these people's bosses. They're working on their own projects. And what makes them work is not us but their competitors. Like good athletes, they don't work hard because the coach yells at them, but because they want to win.

We have less power than bosses, and yet the founders work harder than employees. It seems like a win for everyone. The only catch is that we get on average only about 5-7% of the upside, while an employer gets nearly all of it. (We're counting on it being 5-7% of a much larger number.)

As well as working hard, the groups all turned out to be extraordinarily responsible. I can't think of a time when one failed to do something they'd promised to, even by being late for an appointment. This is another lesson the world has yet to learn. One of the founders discovered that the hardest part of arranging a meeting with executives at a big cell phone carrier was getting a rental company to rent him a car, because he was too young.

I think the problem here is much the same as with the apparent laziness of people this age. They seem lazy because the work they're given is pointless, and they act irresponsible because they're not given any power. Some of them, anyway. We only have a sample size of about twenty, but it seems so far that if you let people in their early twenties be their own bosses, they rise to the occasion.

The summer founders were as a rule very idealistic. They also wanted very much to get rich. These qualities might seem incompatible, but they're not. These guys want to get rich, but they want to do it by changing the world. They wouldn't (well, seven of the eight groups wouldn't) be interested in making money by speculating in stocks. They want to make something people use.

I think this makes them more effective as founders. As hard as people will work for money, they'll work harder for a cause. And since success in a startup depends so much on motivation, the paradoxical result is that the people likely to make the most money are those who aren't in it just for the money.

The founders of Kiko, for example, are working on an Ajax calendar. They want to get rich, but they pay more attention to design than they would if that were their only motivation. You can tell just by looking at it.

I never considered it till this summer, but this might be another reason startups run by hackers tend to do better than those run by MBAs. Perhaps it's not just that hackers understand technology better, but that they're driven by more powerful motivations. Microsoft, as I've said before, is a dangerously misleading example. Their mean corporate culture only works for monopolies. Google is a better model.

Considering that the summer founders are the sharks in this ocean, we were surprised how frightened most of them were of competitors. But now that I think of it, we were just as frightened when we started Viaweb. For the first year, our initial reaction to news of a competitor was always: we're doomed. Just as a hypochondriac magnifies his symptoms till he's convinced he has some terrible disease, when you're not used to competitors you magnify them into monsters.

Here's a handy rule for startups: competitors are rarely as dangerous as they seem. Most will self-destruct before you can destroy them. And it certainly doesn't matter how many of them there are, any more than it matters to the winner of a marathon how many runners are behind him.