Paul Graham - Essays

One thing most people did learn about for the first time during the Bubble was the startup created with the intention of selling it. Originally a startup meant a small company that hoped to grow into a big one. But increasingly startups are evolving into a vehicle for developing technology on spec.

As I wrote in Hackers & Painters, employees seem to be most productive when they're paid in proportion to the wealth they generate. And the advantage of a startup-- indeed, almost its raison d'etre-- is that it offers something otherwise impossible to obtain: a way of measuring that.

In many businesses, it just makes more sense for companies to get technology by buying startups rather than developing it in house. You pay more, but there is less risk, and risk is what big companies don't want. It makes the guys developing the technology more accountable, because they only get paid if they build the winner. And you end up with better technology, created faster, because things are made in the innovative atmosphere of startups instead of the bureaucratic atmosphere of big companies.

Our startup, Viaweb, was built to be sold. We were open with investors about that from the start. And we were careful to create something that could slot easily into a larger company. That is the pattern for the future.

The Bubble was a California phenomenon. When I showed up in Silicon Valley in 1998, I felt like an immigrant from Eastern Europe arriving in America in 1900. Everyone was so cheerful and healthy and rich. It seemed a new and improved world.

The press, ever eager to exaggerate small trends, now gives one the impression that Silicon Valley is a ghost town. Not at all. When I drive down 101 from the airport, I still feel a buzz of energy, as if there were a giant transformer nearby. Real estate is still more expensive than just about anywhere else in the country. The people still look healthy, and the weather is still fabulous. The future is there. (I say "there" because I moved back to the East Coast after Yahoo. I still wonder if this was a smart idea.)

What makes the Bay Area superior is the attitude of the people. I notice that when I come home to Boston. The first thing I see when I walk out of the airline terminal is the fat, grumpy guy in charge of the taxi line. I brace myself for rudeness: remember, you're back on the East Coast now.

The atmosphere varies from city to city, and fragile organisms like startups are exceedingly sensitive to such variation. If it hadn't already been hijacked as a new euphemism for liberal, the word to describe the atmosphere in the Bay Area would be "progressive." People there are trying to build the future. Boston has MIT and Harvard, but it also has a lot of truculent, unionized employees like the police who recently held the Democratic National Convention for ransom, and a lot of people trying to be Thurston Howell. Two sides of an obsolete coin.

Silicon Valley may not be the next Paris or London, but it is at least the next Chicago. For the next fifty years, that's where new wealth will come from.

During the Bubble, optimistic analysts used to justify high price to earnings ratios by saying that technology was going to increase productivity dramatically. They were wrong about the specific companies, but not so wrong about the underlying principle. I think one of the big trends we'll see in the coming century is a huge increase in productivity.

Or more precisely, a huge increase in variation in productivity. Technology is a lever. It doesn't add; it multiplies. If the present range of productivity is 0 to 100, introducing a multiple of 10 increases the range from 0 to 1000.

One upshot of which is that the companies of the future may be surprisingly small. I sometimes daydream about how big you could grow a company (in revenues) without ever having more than ten people. What would happen if you outsourced everything except product development? If you tried this experiment, I think you'd be surprised at how far you could get. As Fred Brooks pointed out, small groups are intrinsically more productive, because the internal friction in a group grows as the square of its size.

Till quite recently, running a major company meant managing an army of workers. Our standards about how many employees a company should have are still influenced by old patterns. Startups are perforce small, because they can't afford to hire a lot of people. But I think it's a big mistake for companies to loosen their belts as revenues increase. The question is not whether you can afford the extra salaries. Can you afford the loss in productivity that comes from making the company bigger?

The prospect of technological leverage will of course raise the specter of unemployment. I'm surprised people still worry about this. After centuries of supposedly job-killing innovations, the number of jobs is within ten percent of the number of people who want them. This can't be a coincidence. There must be some kind of balancing mechanism.

When one looks over these trends, is there any overall theme? There does seem to be: that in the coming century, good ideas will count for more. That 26 year olds with good ideas will increasingly have an edge over 50 year olds with powerful connections. That doing good work will matter more than dressing up-- or advertising, which is the same thing for companies. That people will be rewarded a bit more in proportion to the value of what they create.

If so, this is good news indeed. Good ideas always tend to win eventually. The problem is, it can take a very long time. It took decades for relativity to be accepted, and the greater part of a century to establish that central planning didn't work. So even a small increase in the rate at which good ideas win would be a momentous change-- big enough, probably, to justify a name like the "new economy."

[1] Actually it's hard to say now. As Jeremy Seigel points out, if the value of a stock is its future earnings, you can't tell if it was overvalued till you see what the earnings turn out to be. While certain famous Internet stocks were almost certainly overvalued in 1999, it is still hard to say for sure whether, e.g., the Nasdaq index was.

Seigel, Jeremy J. "What Is an Asset Price Bubble? An Operational Definition." European Financial Management, 9:1, 2003.

[2] The number of users comes from a 6/03 Nielsen study quoted on Google's site. (You'd think they'd have something more recent.) The revenue estimate is based on revenues of $1.35 billion for the first half of 2004, as reported in their IPO filing.

Thanksto Chris Anderson, Trevor Blackwell, Sarah Harlin, Jessica Livingston, and Robert Morris for reading drafts of this.

A lot of people are writing now about why Kerry lost. Here I want to examine a more specific question: why were the exit polls so wrong?

In Ohio, which Kerry ultimately lost 49-51, exit polls gave him a 52-48 victory. And this wasn't just random error. In every swing state they overestimated the Kerry vote. In Florida, which Bush ultimately won 52-47, exit polls predicted a dead heat.

(These are not early numbers. They're from about midnight eastern time, long after polls closed in Ohio and Florida. And yet by the next afternoon the exit poll numbers online corresponded to the returns. The only way I can imagine this happening is if those in charge of the exit polls cooked the books after seeing the actual returns. But that's another issue.)

What happened? The source of the problem may be a variant of the Bradley Effect. This term was invented after Tom Bradley, the black mayor of Los Angeles, lost an election for governor of California despite a comfortable lead in the polls. Apparently voters were afraid to say they planned to vote against him, lest their motives be (perhaps correctly) suspected.