- Venture Capital pouring millions into untried businesses.
- The crazy valuations.
- The recent complains of VCs that "Entrepreneurs aren't working on enough big ideas".
It all actually makes sense now. It's all in the name of Big Risk = Big Reward style ventures. Especially after defining a "startup" as a company meant to grow rapidly and to massive proportions. Not necessarily a tech business. Not an online store for your company. But instead an extreme-expantion-potential style company. I wish Startups were defined like this from the beginning.
It also further pushes me away from the whole Startup / Silicon Valley thing. Growing that fast means a lot can go wrong and there's very little time to learn from mistakes. I'm a slower thinker, I like to analyze and enjoy, learn and understand, build and live, not sacrifice my life and grow my company like a lunatic.
Thank you Paul. You've actually freed me from a dream that I now realize will never make me happy. I can finally let go of my plan to abandon my family, move to the bay area, drain my life savings, live in a shoebox, stumble from one conference and event to the next hoping to network and find my messiah & co-founder, try to get funded, grow my business to someone else's expectations, all for a tiny fraction of a chance to succeed and be either a slave to my own company or lose control of my baby and walk away with diluted equity. I think I'll stay here in St. Louis with my aging family and build my businesses slowly and calmly.
You freed me Paul. You gave me back my life, my real one.
pg's definition of a startup is just one kind of startup. I like to call it the VC startup. It's an organization whose goal is to succeed big or fail, and fast. This "charter" is driven by the needs of investors, and I get that. It makes perfect sense, and from where pg's sitting, it's the attitude he needs to have to successfully manage his portfolio. But it's not the only way to grow a startup, and I think it unfairly marginalizes non-VC startups as non-startups.
pg probably wouldn't consider my company a startup, but I think he'd be wrong.
We're 4 years old, have 4 employees, profitable, and grow at a pokey 100% YoY. The pace of work is enjoyable. We build things for the long-term. We have time to help our customers. We get to see our friends and family. A lot. The principals own 100% of the equity.
But in our minds we aren't building just a tech business, we are building a startup. A slow startup. We picked a huge market (photography). We started by marketing to a small niche where we could be profitable while building the infrastructure required to scale to a larger horizontal market.
If we'd been VC funded, we might be in the same position for growth; finally finding traction after years and several expensive, painful pivots. In this alternate startup universe we'd own practically none of the company at that point, and we'd have wasted a lot more money.
I "grew up" in the 90s dot-com era reading Geoffrey Moore. We feel like we're executing that strategy and doing it well. We're poised for overnight success in a larger market, and on our own terms. I don't feel like any less of a startup than the multiple VC-backed startups I have worked for previously. I do feel a lot less stress.
So, if you want to enjoy life, build great things, and potentially make a ton of money, don't think it's not possible. Find or found a slow startup and change the world!
It pretty much describes with different terms what pg here described as a "startup". I think startups have always had that definition (at least since the late 90s) but folks came along and started calling every little thing they own (i.e. their blog, non-profit, life-style business) a startup.
Obviously, a lot of that had to do with how the tech media also entertained that liberal definition of a startup -- and everyone and their mom started jumping on that wagon because it was considered cool.
I think articles like this should be a must-read for anyone wanting to get in the game, seriously.
+1 I had the same thought. A small business that grows slowly with a high probability for sustainability in shifting economic times is a very good thing.
I think there is a middle ground. I see that startups have 3 phases:
1. The first phase is figuring our scalable business model. That includes product, customer acquisition, etc. For this phase the best is that you are bootstrapped or having just small investment. At the end of this phase, you should be profitable or your natural/viral growth should be like Facebook in early days.
2. The second phase is growth. For this phase, you might need VC money since during growth profit might not be enough. Or you might decide that this is "lifestyle" business.
3. The third phase is optimization.
Now, the problem with some startups is that they jump onto phase 2 too early. And I have feeling that some SV startups (not all - but one pumped via techrunch and similar) jump to second phase too early. I think it is ok if phase one is extended by 6 months or even one year - that is just a rounding error if you are going to be big. No need to rush.
Yeah, there is something about this startup model I don't quite like. To be upfront, I am not arguing what the word startup means - the society is free to assign to it any meaning it wants and what Paul describes here is a clear, specific meaning that's as good as any.
What makes me uneasy is the model itself and what it implies for the entrepreneur. To me, it makes the most sense for the VCs and other investors who manage a portfolio and can accept to fail in 90%+ of their decisions while still getting massive returns from the remaining 10% that succeed (Maybe I'm even understating the split here). But it's awful for the entrepreneur. They manage portfolios of one and surely, nobody sets out to fail! It's an awful feeling and no matter how much you say "I've learned a ton!", you still waste a big part of your life while also surviving under intense stress.
There is no one model, no clear right/wrong here and clearly Paul's model does work over large numbers of cases, judging from the Googles, Apples, Dropboxes of the world.
I personally favor a more grounded approach where you start with a strong industry background/knowledge or at least a set of skills that make you and your team special. The more diverse your team, the better, as you'll make connections between possible/untapped solutions and your domain's problems. Then you set out to solve a problem you've noticed (with a clear business model and path to initial traction based on your industry intuition and upfront customer discussions) and seek customer interaction as early as possible. If you're in IT, you're in luck as you can often get to your MVP early and you should try to get customers FAST.
Doing this with limited exposure to the VC game, in my mind, teaches your company to live within constraints and minimize your burn rate while making the most out of every member of your team. You can also take a little more time evolving your product, devoting your energy to the science (as opposed to fund-raising, etc.) and discovering unique value propositions. You also have the freedom to pivot as you need and perhaps even spend lots of time with your initial clients (and maybe be a consulting firm for a while) to learn. There may then be a point where you are much better informed about your business and want to go the VC route to transition to Paul's growth mindset. Apple started in a garage with family loans (if memory serves right) and got funded after it was already selling its prototypes and had traction. This formula, of course, would never work for a crappy team, but then no formula does.
Now if you happen to be working on the next Google, then it really is moot trying to achieve a disciplined organization upfront or taking it slow or spending time with initial clients or [fill in the blanks here]. You've found a gold mine and you're essentially pillaging it - who cares if you're inefficient. But less than 1% of smart entrepreneurs out there will end up finding that gold mine and somehow I would hate to be in the 99%. I would prefer a strategy that increases my chances of initial traction, possibly slows me down a litte, but gives me the mental leeway to discover a true niche and possibly a scalable product later on. The book "Nail It then Scale It" comes to mind.
Maybe this is what Paul means all along, but I can't help thinking that the "weekly growth targets" would paralyze many of the newcomer entrepreneurs out there with its singular mindset and make them blind to the intricacies of the problem they are actually trying to solve.
I second that one - I have been feeling, well, second class for not making the leap family and all. Well I am - just not the growth startup, just the get rich, slowly startup.
1. This is a superb essay delineating the attributes of a fast-growth, all-or-nothing type of startup. No surprise here. Who besides pg has had the depth and breadth of quality first-hand experience with such ventures over such a sustained period and in such an explosive context as that of recent years? He has here given us a classic analysis of the prototypical, Google-style startup.
2. I think the idea of a startup should not be so narrowly defined, however, and the big reason is this: many founders set out to build ventures that are tech-based, innovative, aimed at winning key niches via hoped-for rapid growth and scaling, positioned for outside funding as suited to their needs, and aimed at liquidity via capital gains as the primary ROI for their efforts . . . but who also place a huge premium on minimizing dilution and maximizing founder control. These are the independents. The ones who, by design, want to defer or even avoid VC funding so as to build their ventures on their own timing and on their own terms. Now this is not the Google startup model. It is, in a sense, its opposite. But it is not the model of a small business either. It is just a different type of startup.
3. The trend over this past decade has moved decidedly toward greater founder independence in the startup world. Back in the bubble days, as a founder, you had very little information available to learn how startups worked, you often had heavy capital needs (e.g., $2M to $4M) right up front to do such things as build your own server banks, and you would almost certainly have little leverage by which to minimize dilution or loss of control at the time of first funding. Today, this has completely flipped. Vast resources are extant teaching founders how startups work. Initial capital needs are often minimal. And it is relatively easy to get reasonable funding on founder-friendly terms. What this means is that, today more than ever, the independent-style startup is more open to founders than ever before.
4. Given the above, it seems to me that this is not the time to say that the only style of startup worthy of the name is that of the super-rapid-growth type. The rapid-growth type may be more glamorous by far but it really defines only the tip of the startup world. Beneath it is a vast world offering incredible opportunities to founders who want more control over the timing, scale, and management of their ventures and who seek to realize gains and manage risks accordingly.
I strongly agree with your #2. PG's essay makes it sound like you're only a startup if nothing else matters but growth. But if all you care about is growth, does that make it acceptable to exploit your users Zynga-style? Obviously not to all startups, so even for many startups that are heavily growth-oriented, they are still constrained by other priorities.
So why would balancing lifestyle, minimizing dilution, and maximizing founder control not qualify as valid constraints for a "startup" on the principle of growth as a priority? After all, no startup, ever, has grown as fast as they could have if nothing else truly mattered.
EDIT: removed a reference to criminal activity deemed to be a strawman
"but who also place a huge premium on minimizing dilution and maximizing founder control. These are the independents. The ones who, by design, want to defer or even avoid VC funding so as to build their ventures on their own timing and on their own terms."
I find the entire discussion about "terms" and getting the best deal for startup founders laughable.
While there are certainly people who are truly unique and doing truly unique things (just like there are people in high school who are so "hot" they can choose which quarterback or cheerleader to date and still get dates no matter how they treat people or people who can go to Harvard, Yale, Princeton or Stanford with fully paid scholarships) I believe most likely the majority of people would be glad to just get funded and would take any reasonable terms to get an investment. By the way, if you, mr/ms founder, are such hot shit there is nothing to prevent you from renegotiating your value or terms later either (celebrities and sports stars do this when they are exceptional, right?)
Getting funded on any terms and having success of course will allow you to move to something else in the future because you will have made contacts and have your ticket punched. If you succeed as we often see even if you fail.
Participants on Shark Tank on TV exhibit this behavior as well. You have a chance to get an investment and advice of, for example, Mark Cuban for your crappy little company with a marginal "maybe" idea that you haven't been able to do by yourself. And you're going to kill a deal with him because you want to only give up 15% vs. the 20% he is asking.
It's interesting how the startup world is always complaining about how they get taken advantage of by VC's, angels etc. and trying not to get "screwed" and playing games. I think they actually are giving the funding sources a run for their money in many cases. Nobody wants to loose out on the next big thing and since they are expecting failure it's not as if they can easily corelate when they impulsively get manipulated and give founders to good of a deal.
A good growth rate during YC is 5-7% a week. If you can hit 10% a week you're doing exceptionally well. If you can only manage 1%, it's a sign you haven't yet figured out what you're doing.
This is, to me, the most interesting thing here: I've seen lots of people talk about "traction", but this is the first time I've seen someone in the startup world give hard numbers for what a "good growth rate" is.
Another way to look at these numbers: A good growth rate during YC means that you're doubling every 10-14 weeks. An exceptional growth rate is doubling every 7 weeks, and if your doubling time is more than a year, it's a sign you haven't yet figured out what you're doing.
This fits pretty well with the rather imprecise commentary that "a startup measures the time to double in size in months, except for wildly successful ones, which measure it in weeks".
To me, the cautionary warning (echoing Andrew Chen's[1]) for consumer startups was key:
Beware too of the edge case where something spreads rapidly but the churn is high too, so that you have good net growth till you run through all the potential users, at which point it suddenly stops
Sean Ellis[2] has a similar test for product market fit (the 40% rule):
I ask existing users of a product how they would feel if they could no longer use the product. In my experience, achieving product/market fit requires at least 40% of users saying they would be “very disappointed” without your product.
Am I the only one who think pg's view points appear to be getting more and more extreme, in some sense rather biased compared to his previous essays?
Zynga is definitely all about growth. It is fiercely focused on metrics, fiercely focused on growth. But as someone from game industry, we cannot agree that this model is THE model that gives the world and everyone value. If the game industry worked like the way pg describes in the essay decades ago, we would never have Diablo, Baldur's Gate, Grim Fandango or Minecraft. We would all be left with choices like Farmville, Monsterville, Mineville, forever and ever.
"Growth drives everything in this world."? Does it? All fads grow like wildfire too, but does it drive everything in world? Or a better question would be: should we allow it to?
I don't think he's trying to make any moral judgements. He's just making observations about what actually works within the context of our capitalist system. Capitalism has produced this period of explosive growth centered around technology in the USA and Silicon Valley in particular. And if you are trying to participate in that ecosystem, then you should understand what he says (IMO).
There wasn't any part of the essay which says you should start a startup, or that it is a morally valuable thing to do.
I somewhat agree with you that capitalism doesn't produce optimum value for society. Zynga's maybe an example of that -- I'm sure the are worse ones. But as the saying going, we have the worst system except for all the other ones that have been tried. For all the Zyngas there are some pretty good companies too.
Also, I think your question is essentially hypothetical or philosophical: "should be allow it to?" Who's we? Short of an overthrow of the US government, I think this segment of the economy will exist for a long time.
If you want to have an interesting reflection on capitalism, read "The Idea Factory", about Bell Labs. That is the other end of a spectrum -- a single company holding a monopoly for 50+ years. But it actually produced immeasurable value. It's interesting to think on which model produces more value -- a monopoly where people are free from competitive pressures, or an intensely competitive market.
This is not true. Minecraft is the best example; it had an insane growth rate both in percent and absolute numbers, exactly what PG is talking about. The other games you mention are also good examples of starups in high-growth terms. And when talking about markets, most people who enjoy Diablo, Baldur's Gate and Minecraft _don't_ enjoy free-to-play games, since these games have no element of art or story to them.
And PG even explicitly said that not all companies should be startups. You are reading things into this essay that aren't there.
Growth is the litmus test, but the article seems agnostic about how you achieve it. Do you go full on psychological predation like Zynga? Or do you make a tool that is undeniably better than the competition by orders of magnitude such as Google? The article seems non-prescriptive on this point. But, if you do not achieve growth by any means, then your company is dead by definition, so you should probably be measuring it.
For modern startups, growth can be optimized on an ongoing basis but not if you're not building something that people love. There's a reason why Zynga games' growth aren't sustainable and they need to rely on the novelty of games to grow.
I'm sure even Blizzard and Steam teams are very focused on growth as a metric. It's just that unlike Zynga, they believe that creating fun mechanics in their games and improving on them through patches make for a great way to move their needle. Therein lies the difference. I guess the focus shouldn't just be growth at all cost, but sustainable growth.
I think you're choosing one single sentence and taking it out of context, in other words, misunderstanding. By "this world", I took pg to mean the high-tech area of economic activity, with silicon valley serving as a figurative stand-in. I don't think pg means that every single thing in the world is driven by growth. The essay is about what makes a company a startup, and how a startup can be successful. The essay is not about what is most important in the world.
Growth is for startups. This determines the value of startups. Startups are only a minority but they get alot of attention. This is logical since to achieve the growth goal they need the publicity.
People have different understanding of success. Make your pick and don't care of the others.
Some people get confused one their goal or success target.
The discussion of expected return sounds good from an investors perspective, but founders have no diversification, so a 1% chance of $100m or 99% chance of wasting five years sounds pretty lousy. This is my biggest issue with the VC world from a founder's standpoint. The situation gets even worse once you throw the decreasing marginal utility of money into the mix, because now the expected value of $100m is not worth 10x as much to me as $10m. In terms of ability to change my life, $10m provides probably 50-70% of the value that $100m provides.
So if my odds of succeeding with a $10m payout from a bootstrapped business are 10%, and my odds of succeeding with a $100m payout from a VC business are 1%, those expected returns are equal in math terms, but not utility terms, and I'd be crazy to raise money.
The whole 1% of $100M versus 10% of $10M calculation vastly oversimplifies the outcome of these companies as binary. This is totally wrong.
In my experience in silicon valley, people start with building something small/simple (but in a big market), get little drips of funding from investors as they show progress. If they fail at any point along the way, there's value in what they've created, and they exit for whatever they get. The later you exit, typically the further along you get, and the bigger the exit. That's why the diversity of outcomes in the valley are everything from zero to billions, and companies raise anywhere from zero to a dozen rounds of funding.
At any inflection point in the business, you have lots of options: you can sell, raise more money, raise more and cash out some shares, you can quit, you can make yourself chairman and have your cofoudner run it, you can do nothing and grow it organically, etc., etc.
Each one of the choices above are part of your arsenal of options at almost any point. The people who choose to raise tons of money, not cash out at all, and then who fail- well, they made a series of active decisions to do all of that. They're big boys.
My point is, when you're building a company you can make a lot of choices along the way, and it's not just setting out for a suicide run of either 1% of $100M or 10% of $10M. Choosing to raise outside financing is sort of like deciding whether or not you want a cofounder (or 2, or 3) - it just another form of business partner. You get less %, but hopefully they add to the business in a meaningful way that leaves you better off.
This is why, as the balance of power has shifted towards founders, new things have appeared in the funding rounds.
The most prominent is the trend towards allowing founders to cash out in a portion of their ownership as part of the deal. Another is the trend towards smaller rounds where the founder gives up less control and fewer liquidation preferences.
This article is, for me, more proof of a general phenomenon that's happening recently - startups are no longer considered the best vehicle for hackers to become wealthy.
Maybe it's just my own history and confirmation bias speaking here (recently switched from startups to a Consulting business). But lately, the whole "bootstrap" movement is getting much more popular around here. More and more, I'm seeing articles and comments from tptacek, patio11, and others talking about how programmers could make vastly more money, especially by doing freelancing. I think the message is starting to sink in - the kind of people who read this site can start very profitable businesses, make loads of cash, and do this without the high risk of startups. No chance of a working 5 years and then striking a goldmine of an exit, but much higher chance of working 5 years and putting aside large amounts of money.
This pg article is a great one, and a very honest one too. To me it reflects the changing times, and the changing understanding of what a startup means. No longer, like in previous articles on wealth, is pg very clearly advocating that all hackers should be starting startups. This essay, to me, reads as a much more precise explanation of what someone can expect if they start a startup. And it makes it much clearer when people should not start a startup.
I agree, and it's also a direction that I'm personally headed (currently focused on freelancing/bootstrapping), but I also think it has more to do with the current recession more than anything. It's a really tough environment now and I think a lot of the innovation over the next few years is actually going to come from the big tech companies.
No one ever becomes a great entrepreneur overnight and it's a fallacy to think that you could do a high-growth startup only when you're young and in your 20s (Jeff Bezos, Larry Ellison, Jim Clark, Mike Bloomberg all started their big companies in their 30s; Mark Cuban and Mark Pincus started their billion-dollar co's in their early 40s).
I think it's wise to maintain a very long-term view of the startup game, and to take bigger risks gradually as you develop into a stronger entrepreneur. So, I think it's smart to prove yourself as a bootstrapped entrepreneur and make your first few million and be financially independent, and then be in a position to take big risks to work on a high-growth startup.
Jim Clark, the greatest serial tech entrepreneur to date, started SGI when he was 37 and Netscape when he was 50. This is a long-term game.
Interesting observation, but I'd extend it to posit that maybe there is no "best" vehicle for hackers to become wealthy. It depends on the particular options available to you, and your "best" strategy is simply to consider all the options and pick the ones that seem most promising.
In an efficient market, eventually you'd expect that you'd be paid the same amount for equal amounts of value created. In today's low-capital, target-rich hacker environment, it seems like good hackers would eventually become indifferent to the particular corporate structure used, and would instead choose whatever corporate structure lets them work on the highest-impact problems. Sometimes that'll be a startup, sometimes it'll be a consulting firm, and sometimes it'll be employment at a large tech company.
Personally, I'm a plain old employee of a large tech firm. I see some of the financials that patio11 posts, and I'm making significantly more than that (we're the same age). I'm not nearly as well-off as tptacek, thanks to Matasano's acquisition, but I have a few years to catch up. I see rumors posted to HN about engineers at large tech companies making outlandish amounts of money, and I'm making more than that, and yet the comments are all "Wow. This seems unbelievable, it can't be true." I also know coworkers that are rumored to have those multi-million-$ retention grants; I'm fairly certain they exist.
One of my favorite pg essays of all time. Loved this:
"Almost every company needs some amount of funding to get started. But startups often raise money even when they are or could be profitable. It might seem foolish to sell stock in a profitable company for less than you think it will later be worth, but it's no more foolish than buying insurance. Fundamentally that's how the most successful startups view fundraising. They could grow the company on its own revenues, but the extra money and help supplied by VCs will let them grow even faster."
Took me awhile to realize this as a founder.
Profitability is a great goal (and makes the business very "real" by cutting away vanity metrics), but self-funding growth from profitability pretty much guarantees you are locked into a relatively slow growth rate. pg's simple charts show why being locked into a lower growth rate could mean being blown away by your competitors.
self-funding growth from profitability pretty much guarantees you are locked into a relatively slow growth rate
That's an unwarranted assumption. Part of designing a startup business model is organizing growth so that you are unconstrained, so that more input produces greater output, earlier -- whether it's capital, users, employees, or support. All it takes is for one component of your business to not scale and you won't hit your growth numbers despite the brilliance of every other part.
Capital is just one of the areas you have to look at. Amazon is a decent example. Bezos chose books because it was (a) accessible (catalogs existed), and (b) he got 6 months to pay back booksellers, which meant he could afford to grow the more he sold, by using the money owed to the booksellers as float.
Startups would do well to evaluate all possible constraints on growth, capital and otherwise. Many times small tweaks to how you sell your product (or what product you sell) can produce large variations in the amount and timing of capital needed.
Here's an example: do you have customers pay for the first 30 days up front, with an option to cancel within that time? Or do you charge your customers after the first 30 days are up?
Now, you'd think the latter would always be better for "growth", because it involves a weaker commitment -- no money changes hands early.
But it also has a huge capital cost differential, if the service costs a substantial amount of money to deliver. In order to grow the latter model, you'll have to obtain more and more capital over time as you grow.
But if you do the former, you can "fund" your company's growth off of its earlier growth. Although this might impact growth negatively, by turning away customers that "won't pay" for the first 30 days up front, but who would have become customers the other way.
So which is better? It really depends. If your growth rate is already 7% with the pay-up-front model, that's better IMO than getting, say, an 8% growth rate with the pay-after model. The latter will require raising increasingly greater amounts of capital, despite the fact that it's growing "faster" initially, ultimately hurting your growth or wiping out your equity, or both.
Both approaches will still have their "S" curves end up at the same place (the market size doesn't change), but let's be blunt here: no company can catches up to 7% growth, so wasting your equity on 8% growth just makes you poorer, and the VCs richer.
Sustainable growth is just as important, and treating capital as something you "have to" raise is exactly what VCs want you to think, since, hey, that's what they sell. Venture capital is a financial tool, not the only (real) way to capitalize a startup during and after growth.
This is a tough sell to young entrepreneurs. Its hard for them to understand that buy giving away some portion now will make their equity more valuable when they are able to scale to mass market.
I gotta say, "a company designed to grow fast" is not only more concise, but broader and more on point than Steve Blanks' definition ("an organization formed to search for a repeatable and scalable business model"[1])
An epic essay with tremendous depth. Love the ending:
"A startup founder is in effect an economic research scientist. Most don't discover anything that remarkable, but some discover relativity."
While the definition "a company designed to grow fast" makes his point clear, it's not as accurate as Blank's. There are lots of companies "designed to grow fast" that are not at all startups. The "search for a business model" is essential to the definition of a startup.
I love this essay... but I'm concerned that the emphasis on growth so early on will cause some new startup founders to put their focus on vanity metrics, as opposed to spending time to talk with users and build a product that has true product-market fit and organic growth.
I gotta say, "a company designed to grow fast" is not only more concise, but broader and more on point than Steve Blanks' definition
I would prefer just to say that the definitions are "different" :-)
Blank's focus is on startups that are discovering their business model. PG's focus is on startups that are designed to grow fast. Those two groups of organisation overlap, but are not identical.
Based on required growth rates and measurement intervals (5-10% per week), there would seem to be a pretty heavy bias towards the consumer space.
B2B or so-called Enterprise Companies, especially industry-specific new companies, would have a hard time qualifying on several fronts (market size, growth rate, growth interval). I am particularly interested in the B2B style of startup because I run an Enterprise Startu-er... Enterprise New Company focused on serving the insurance industry. A B2B Startup, it would seem, would have to link customer charges to something that can grow without a new sales contract. I guess, the trick to achieving high growth rates is to create viral growth inside an existing account. Growth in the B2B space will be large jumps (with a new contract) followed by organic growth or not (within the bounds of the existing sales contract). It seems to follow then that since the purchase agreement is the painful and tough and slow part, a B2B Startup would want to have a Freemium or some other type of contract with low/no startup costs and higher per user/GB/account/server/unit costs.
Gives me some new direction on pricing.
On an unrelated note, I'll disagree with other comments of "favorite pg essays" and say that "Wealth" was the best by an order of magnitude. http://paulgraham.com/wealth.html
Selling expensive enterprise products does have a longer sales cycle than cheaper consumer products, and increments to your revenue come in more discrete blocks. But that doesn't invalidate pg's argument about growth: you just have to use other proxies to estimate your trajectory.
For example, instead of active users you track a number of leads and how interested they are. Even without a single closed deal, you can measure your sales pipeline. It is an imperfect proxy for potential revenue growth, but so is daily active users for consumer internet startups.
Thus, if you are planning to sell an enterprise solution costing $100000, and you think you are going to make these kind of deals a few times a year in the beginning, then you use your sales pipeline measurements to estimate your growth with a finer granularity than a big sale now and then.
I think seeing it put so clearly, it's convinced me that I don't even want to found a startup. I'd like to own a business, but that's different, and I should behave accordingly. That might make it the most useful thing I've read in years.
I'll admit that I was a little bummed after reading this article. Every single PG essay I've read left me feeling stoked, lit on fire like I could take on the world. I felt I could identify with the man, and like I belonged here.
This essay, on the other hand, left me feeling like I don't belong here. I feel as if the YC philosophy has evolved into something different than it was, or perhaps, that this is more honesty than we've ever seen before.
Either way, I couldn't be happier to use revenue as my measuring tool, and not free users. Racing to give my product away at a rate of 5-7% weekly growth would require me to completely change my product development philosophy. I build what I build because I see something missing, not because I hope to flip it in a year.
Recently there was an article floating around where a VC asked why there aren't more B2B startups. This mindset is why - there's simply no way you can grow at these rates in the early days with most B2B products, particularly the ones in very hard to solve areas like ERP or the like. Anything with a longer sales cycles seems to be instantly disqualified by this definition, which is why we're relegated to so many photo apps and twitter thingies.
Consider an alternate universe with far worse odds: 1 startup in a field of 100,000 makes $100 billion, the rest make zero. Expected value is $1 million.
Should you be one of the 100,000 founders who "rationally" choose to buy a startup lottery ticket for $100b?
Well of course! If you could live for long enough to run through thousands of iterations of the startup game, that is.
In the real world,
- Founders are typically limited to 1 startup at a time
- It takes time - years perhaps - for a startup to fail
- Founders can do only a few startups in their lifetimes
Given low odds like 1%, with < 10 iterations per lifetime, expected value is the wrong metric. From a purely financial POV then, it appears only rational to do growth startups
- If you are on the investing side (a "parallel" entrepreneur, running tens or hundreds of iterations in your lifetime)
- You are a founder (a "serial" entrepreneur) with reasonable financial security and none of your life goals would be irrevocably damaged by the most likely outcome - a string of failures.
(There are of course several non-financial reasons and payoffs. For instance, an Idea takes demonic possession of you, and the only way to exorcise from your tortured brain is to do a startup..)
This essay highlighted something for me, you actually end up having a 2x2 matrix for "work for" vs "invest in" and "startup" vs "non-startup."
For example, a certain person may try increasing their wealth by investing in startups, but prefer working in a non-startup. Or another person may prefer investing in non-startups (safe, dividend paying stocks or bonds), but try increasing their wealth by working for startups.
For people with talent in creating products, best to focus their investing in safe, low maintenance non-startup investments and their wealth creation in working for startups. For people who have access to capital and a knack for choosing winners, they should work for non-startups (or philanthropy, or whatever, since they are probably already fairly wealthy) and invest in startups they think can win.
For the really talented, who both know a thing or two about building products, and also can pick winners, then you should work for a startup that invests in startups. See: pg.
"We usually advise startups to pick a growth rate they think they can hit, and then just try to hit it every week. The key word here is "just." If they decide to grow at 7% a week and they hit that number, they're successful for that week. There's nothing more they need to do. But if they don't hit it, they've failed in the only thing that mattered, and should be correspondingly alarmed."
"The best thing to measure the growth rate of is revenue. The next best, for startups that aren't charging initially, is active users. That's a reasonable proxy for revenue growth because whenever the startup does start trying to make money, their revenues will probably be a constant multiple of active users"
This, for me, is the weak point in an otherwise excellent article. A lot of investments, valuations and jobs rest on this assumption. Facebook's PE ratio is currently 127, this assumption is the reason that it isn't around the same level as other entertainment companies like, say, Disney (17) or News Corp (56). And when Facebook's valuation rises like that and people invest at that level then there's a whole lot of money for paying engineers >$100k salaries and buying up pre-revenue businesses like Instagram. So, even if you're Google and you're bringing in real money, the application of this assumption to a few big cases permeates through the whole system and means that you too have to pay engineers >$100k and you too have to pay more to get hold of someone like Nik (makers of Snapseed).
PG logic appears flawless, but as a seed fund manager in the middle of this ecosystem, he's working several layers of abstraction up from some big applications of this assumption. So much so that it probably doesn't feel like an assumption to him. After all, he didn't value Facebook[1] at that level.
I genuinely hope this assumption is correct, because a lot of people and livelihoods are depending on it.
[1] I'm using Facebook here as an exemplar, I'm sure there are lots of other companies out there with valuations that are due in part to the assumption that users = revenue. My argument is that when someone sets a valuation based on this assumption it has a knock on effect to the whole ecosystem.
So, is "b) reaching all the people in the Market" a function of converting a decentralised market to a centralised model?
Facebook is a successful startup because it took a decentralised model (talking to your friends) and centralised it.
Barbers are decentralised - but after I build a robo-barber for every home, then suddenly one company can cut everyones hair.
So is it possible that growing a startup fast is about increasing the slope between a decentralised (diffuse players, low margins) and a centralised model.
I suspect there are good counter examples but really startups that grow fast seem to optimise for one central point for doing what they do - dropbox, airbnb readthedocs
PG's definition of startup is self selecting. Increasingly, startups do not need VCs nor Angels as the cloud (Azure, outsourcing what used to be IT for pennies, etc.) quashes the cost curve of startups.
This is pushing angels, seed round, and VCs farther and farther up the enterprise growth curve where costs become something that the founders can't bootstrap. For virtual enterprises, this is leaving them with a smaller and smaller set of companies as software eats all of the historical infrastructure costs.
Basically, he is defining startup in a way that YC is a necessary component - but increasingly, it isn't.
Not a fan of praise for the sake of it either, but having said that, this is one of the most succinct and focused essays I've read on startups, in a long time, and hard to fault it's fundamental message.
As founders it's easy to do things other than push every day to get customers and/or active users. Some founders are so focused on other less stressful activities, that they outsource the entire function to a 'growth hacker'. Let someone else deal with it... Yikes!
Grow is core to the startup's success, and happy to be reminded of it.
So basically a startup is a company whose goal is not to create a profitable business, but a company whose goal is to grow a large userbase rapidly and lure VCs to pump more money into it, because VCs just dream about finding the next google or apple and funding it in an early stage.
This just emphasizes why I do not want to be a part of this scene.
[+] [-] ChrisNorstrom|13 years ago|reply
- The crazy valuations.
- The recent complains of VCs that "Entrepreneurs aren't working on enough big ideas".
It all actually makes sense now. It's all in the name of Big Risk = Big Reward style ventures. Especially after defining a "startup" as a company meant to grow rapidly and to massive proportions. Not necessarily a tech business. Not an online store for your company. But instead an extreme-expantion-potential style company. I wish Startups were defined like this from the beginning.
It also further pushes me away from the whole Startup / Silicon Valley thing. Growing that fast means a lot can go wrong and there's very little time to learn from mistakes. I'm a slower thinker, I like to analyze and enjoy, learn and understand, build and live, not sacrifice my life and grow my company like a lunatic.
Thank you Paul. You've actually freed me from a dream that I now realize will never make me happy. I can finally let go of my plan to abandon my family, move to the bay area, drain my life savings, live in a shoebox, stumble from one conference and event to the next hoping to network and find my messiah & co-founder, try to get funded, grow my business to someone else's expectations, all for a tiny fraction of a chance to succeed and be either a slave to my own company or lose control of my baby and walk away with diluted equity. I think I'll stay here in St. Louis with my aging family and build my businesses slowly and calmly.
You freed me Paul. You gave me back my life, my real one.
[+] [-] apinstein|13 years ago|reply
pg's definition of a startup is just one kind of startup. I like to call it the VC startup. It's an organization whose goal is to succeed big or fail, and fast. This "charter" is driven by the needs of investors, and I get that. It makes perfect sense, and from where pg's sitting, it's the attitude he needs to have to successfully manage his portfolio. But it's not the only way to grow a startup, and I think it unfairly marginalizes non-VC startups as non-startups.
pg probably wouldn't consider my company a startup, but I think he'd be wrong.
We're 4 years old, have 4 employees, profitable, and grow at a pokey 100% YoY. The pace of work is enjoyable. We build things for the long-term. We have time to help our customers. We get to see our friends and family. A lot. The principals own 100% of the equity.
But in our minds we aren't building just a tech business, we are building a startup. A slow startup. We picked a huge market (photography). We started by marketing to a small niche where we could be profitable while building the infrastructure required to scale to a larger horizontal market.
If we'd been VC funded, we might be in the same position for growth; finally finding traction after years and several expensive, painful pivots. In this alternate startup universe we'd own practically none of the company at that point, and we'd have wasted a lot more money.
I "grew up" in the 90s dot-com era reading Geoffrey Moore. We feel like we're executing that strategy and doing it well. We're poised for overnight success in a larger market, and on our own terms. I don't feel like any less of a startup than the multiple VC-backed startups I have worked for previously. I do feel a lot less stress.
So, if you want to enjoy life, build great things, and potentially make a ton of money, don't think it's not possible. Find or found a slow startup and change the world!
[+] [-] michaelkscott|13 years ago|reply
It pretty much describes with different terms what pg here described as a "startup". I think startups have always had that definition (at least since the late 90s) but folks came along and started calling every little thing they own (i.e. their blog, non-profit, life-style business) a startup.
Obviously, a lot of that had to do with how the tech media also entertained that liberal definition of a startup -- and everyone and their mom started jumping on that wagon because it was considered cool.
I think articles like this should be a must-read for anyone wanting to get in the game, seriously.
[+] [-] mark_l_watson|13 years ago|reply
[+] [-] tlogan|13 years ago|reply
1. The first phase is figuring our scalable business model. That includes product, customer acquisition, etc. For this phase the best is that you are bootstrapped or having just small investment. At the end of this phase, you should be profitable or your natural/viral growth should be like Facebook in early days.
2. The second phase is growth. For this phase, you might need VC money since during growth profit might not be enough. Or you might decide that this is "lifestyle" business.
3. The third phase is optimization.
Now, the problem with some startups is that they jump onto phase 2 too early. And I have feeling that some SV startups (not all - but one pumped via techrunch and similar) jump to second phase too early. I think it is ok if phase one is extended by 6 months or even one year - that is just a rounding error if you are going to be big. No need to rush.
[+] [-] hasenj|13 years ago|reply
I don't want anything to do with this life style.
I posted this in another reply but I'll post it again because I think it's so relevant.
DHH talking about startups
http://vimeo.com/3899696#t=1290
[+] [-] ozataman|13 years ago|reply
What makes me uneasy is the model itself and what it implies for the entrepreneur. To me, it makes the most sense for the VCs and other investors who manage a portfolio and can accept to fail in 90%+ of their decisions while still getting massive returns from the remaining 10% that succeed (Maybe I'm even understating the split here). But it's awful for the entrepreneur. They manage portfolios of one and surely, nobody sets out to fail! It's an awful feeling and no matter how much you say "I've learned a ton!", you still waste a big part of your life while also surviving under intense stress.
There is no one model, no clear right/wrong here and clearly Paul's model does work over large numbers of cases, judging from the Googles, Apples, Dropboxes of the world.
I personally favor a more grounded approach where you start with a strong industry background/knowledge or at least a set of skills that make you and your team special. The more diverse your team, the better, as you'll make connections between possible/untapped solutions and your domain's problems. Then you set out to solve a problem you've noticed (with a clear business model and path to initial traction based on your industry intuition and upfront customer discussions) and seek customer interaction as early as possible. If you're in IT, you're in luck as you can often get to your MVP early and you should try to get customers FAST.
Doing this with limited exposure to the VC game, in my mind, teaches your company to live within constraints and minimize your burn rate while making the most out of every member of your team. You can also take a little more time evolving your product, devoting your energy to the science (as opposed to fund-raising, etc.) and discovering unique value propositions. You also have the freedom to pivot as you need and perhaps even spend lots of time with your initial clients (and maybe be a consulting firm for a while) to learn. There may then be a point where you are much better informed about your business and want to go the VC route to transition to Paul's growth mindset. Apple started in a garage with family loans (if memory serves right) and got funded after it was already selling its prototypes and had traction. This formula, of course, would never work for a crappy team, but then no formula does.
Now if you happen to be working on the next Google, then it really is moot trying to achieve a disciplined organization upfront or taking it slow or spending time with initial clients or [fill in the blanks here]. You've found a gold mine and you're essentially pillaging it - who cares if you're inefficient. But less than 1% of smart entrepreneurs out there will end up finding that gold mine and somehow I would hate to be in the 99%. I would prefer a strategy that increases my chances of initial traction, possibly slows me down a litte, but gives me the mental leeway to discover a true niche and possibly a scalable product later on. The book "Nail It then Scale It" comes to mind.
Maybe this is what Paul means all along, but I can't help thinking that the "weekly growth targets" would paralyze many of the newcomer entrepreneurs out there with its singular mindset and make them blind to the intricacies of the problem they are actually trying to solve.
[+] [-] unknown|13 years ago|reply
[deleted]
[+] [-] lifeisstillgood|13 years ago|reply
Fingers crossed for you
[+] [-] unknown|13 years ago|reply
[deleted]
[+] [-] grellas|13 years ago|reply
1. This is a superb essay delineating the attributes of a fast-growth, all-or-nothing type of startup. No surprise here. Who besides pg has had the depth and breadth of quality first-hand experience with such ventures over such a sustained period and in such an explosive context as that of recent years? He has here given us a classic analysis of the prototypical, Google-style startup.
2. I think the idea of a startup should not be so narrowly defined, however, and the big reason is this: many founders set out to build ventures that are tech-based, innovative, aimed at winning key niches via hoped-for rapid growth and scaling, positioned for outside funding as suited to their needs, and aimed at liquidity via capital gains as the primary ROI for their efforts . . . but who also place a huge premium on minimizing dilution and maximizing founder control. These are the independents. The ones who, by design, want to defer or even avoid VC funding so as to build their ventures on their own timing and on their own terms. Now this is not the Google startup model. It is, in a sense, its opposite. But it is not the model of a small business either. It is just a different type of startup.
3. The trend over this past decade has moved decidedly toward greater founder independence in the startup world. Back in the bubble days, as a founder, you had very little information available to learn how startups worked, you often had heavy capital needs (e.g., $2M to $4M) right up front to do such things as build your own server banks, and you would almost certainly have little leverage by which to minimize dilution or loss of control at the time of first funding. Today, this has completely flipped. Vast resources are extant teaching founders how startups work. Initial capital needs are often minimal. And it is relatively easy to get reasonable funding on founder-friendly terms. What this means is that, today more than ever, the independent-style startup is more open to founders than ever before.
4. Given the above, it seems to me that this is not the time to say that the only style of startup worthy of the name is that of the super-rapid-growth type. The rapid-growth type may be more glamorous by far but it really defines only the tip of the startup world. Beneath it is a vast world offering incredible opportunities to founders who want more control over the timing, scale, and management of their ventures and who seek to realize gains and manage risks accordingly.
[+] [-] ryanwaggoner|13 years ago|reply
So why would balancing lifestyle, minimizing dilution, and maximizing founder control not qualify as valid constraints for a "startup" on the principle of growth as a priority? After all, no startup, ever, has grown as fast as they could have if nothing else truly mattered.
EDIT: removed a reference to criminal activity deemed to be a strawman
[+] [-] larrys|13 years ago|reply
I find the entire discussion about "terms" and getting the best deal for startup founders laughable.
While there are certainly people who are truly unique and doing truly unique things (just like there are people in high school who are so "hot" they can choose which quarterback or cheerleader to date and still get dates no matter how they treat people or people who can go to Harvard, Yale, Princeton or Stanford with fully paid scholarships) I believe most likely the majority of people would be glad to just get funded and would take any reasonable terms to get an investment. By the way, if you, mr/ms founder, are such hot shit there is nothing to prevent you from renegotiating your value or terms later either (celebrities and sports stars do this when they are exceptional, right?)
Getting funded on any terms and having success of course will allow you to move to something else in the future because you will have made contacts and have your ticket punched. If you succeed as we often see even if you fail.
Participants on Shark Tank on TV exhibit this behavior as well. You have a chance to get an investment and advice of, for example, Mark Cuban for your crappy little company with a marginal "maybe" idea that you haven't been able to do by yourself. And you're going to kill a deal with him because you want to only give up 15% vs. the 20% he is asking.
It's interesting how the startup world is always complaining about how they get taken advantage of by VC's, angels etc. and trying not to get "screwed" and playing games. I think they actually are giving the funding sources a run for their money in many cases. Nobody wants to loose out on the next big thing and since they are expecting failure it's not as if they can easily corelate when they impulsively get manipulated and give founders to good of a deal.
[+] [-] cperciva|13 years ago|reply
This is, to me, the most interesting thing here: I've seen lots of people talk about "traction", but this is the first time I've seen someone in the startup world give hard numbers for what a "good growth rate" is.
Another way to look at these numbers: A good growth rate during YC means that you're doubling every 10-14 weeks. An exceptional growth rate is doubling every 7 weeks, and if your doubling time is more than a year, it's a sign you haven't yet figured out what you're doing.
This fits pretty well with the rather imprecise commentary that "a startup measures the time to double in size in months, except for wildly successful ones, which measure it in weeks".
[+] [-] DanielRibeiro|13 years ago|reply
Beware too of the edge case where something spreads rapidly but the churn is high too, so that you have good net growth till you run through all the potential users, at which point it suddenly stops
Sean Ellis[2] has a similar test for product market fit (the 40% rule):
I ask existing users of a product how they would feel if they could no longer use the product. In my experience, achieving product/market fit requires at least 40% of users saying they would be “very disappointed” without your product.
[1] http://andrewchen.co/2012/06/20/quora-when-does-high-growth-...
[2] http://startup-marketing.com/the-startup-pyramid/
[+] [-] asknemo|13 years ago|reply
Zynga is definitely all about growth. It is fiercely focused on metrics, fiercely focused on growth. But as someone from game industry, we cannot agree that this model is THE model that gives the world and everyone value. If the game industry worked like the way pg describes in the essay decades ago, we would never have Diablo, Baldur's Gate, Grim Fandango or Minecraft. We would all be left with choices like Farmville, Monsterville, Mineville, forever and ever.
"Growth drives everything in this world."? Does it? All fads grow like wildfire too, but does it drive everything in world? Or a better question would be: should we allow it to?
[+] [-] chubot|13 years ago|reply
There wasn't any part of the essay which says you should start a startup, or that it is a morally valuable thing to do.
I somewhat agree with you that capitalism doesn't produce optimum value for society. Zynga's maybe an example of that -- I'm sure the are worse ones. But as the saying going, we have the worst system except for all the other ones that have been tried. For all the Zyngas there are some pretty good companies too.
Also, I think your question is essentially hypothetical or philosophical: "should be allow it to?" Who's we? Short of an overthrow of the US government, I think this segment of the economy will exist for a long time.
If you want to have an interesting reflection on capitalism, read "The Idea Factory", about Bell Labs. That is the other end of a spectrum -- a single company holding a monopoly for 50+ years. But it actually produced immeasurable value. It's interesting to think on which model produces more value -- a monopoly where people are free from competitive pressures, or an intensely competitive market.
[+] [-] marvin|13 years ago|reply
And PG even explicitly said that not all companies should be startups. You are reading things into this essay that aren't there.
[+] [-] dasil003|13 years ago|reply
[+] [-] zackyap|13 years ago|reply
I'm sure even Blizzard and Steam teams are very focused on growth as a metric. It's just that unlike Zynga, they believe that creating fun mechanics in their games and improving on them through patches make for a great way to move their needle. Therein lies the difference. I guess the focus shouldn't just be growth at all cost, but sustainable growth.
[+] [-] blakeweb|13 years ago|reply
I think you're choosing one single sentence and taking it out of context, in other words, misunderstanding. By "this world", I took pg to mean the high-tech area of economic activity, with silicon valley serving as a figurative stand-in. I don't think pg means that every single thing in the world is driven by growth. The essay is about what makes a company a startup, and how a startup can be successful. The essay is not about what is most important in the world.
[+] [-] chmike|13 years ago|reply
People have different understanding of success. Make your pick and don't care of the others.
Some people get confused one their goal or success target.
[+] [-] ryanwaggoner|13 years ago|reply
So if my odds of succeeding with a $10m payout from a bootstrapped business are 10%, and my odds of succeeding with a $100m payout from a VC business are 1%, those expected returns are equal in math terms, but not utility terms, and I'd be crazy to raise money.
[+] [-] tlb|13 years ago|reply
As Charlie Stross's essay (http://www.antipope.org/charlie/blog-static/2012/09/on-the-d...) points out, there's another level. Elon Musk might get to retire on Mars. Bill Gates will probably cure malaria and several other big world problems.
So if your goal in life is not just having enough food & toys but changing the world, the big money comes in handy.
[+] [-] andrew_null|13 years ago|reply
In my experience in silicon valley, people start with building something small/simple (but in a big market), get little drips of funding from investors as they show progress. If they fail at any point along the way, there's value in what they've created, and they exit for whatever they get. The later you exit, typically the further along you get, and the bigger the exit. That's why the diversity of outcomes in the valley are everything from zero to billions, and companies raise anywhere from zero to a dozen rounds of funding.
At any inflection point in the business, you have lots of options: you can sell, raise more money, raise more and cash out some shares, you can quit, you can make yourself chairman and have your cofoudner run it, you can do nothing and grow it organically, etc., etc.
Each one of the choices above are part of your arsenal of options at almost any point. The people who choose to raise tons of money, not cash out at all, and then who fail- well, they made a series of active decisions to do all of that. They're big boys.
My point is, when you're building a company you can make a lot of choices along the way, and it's not just setting out for a suicide run of either 1% of $100M or 10% of $10M. Choosing to raise outside financing is sort of like deciding whether or not you want a cofounder (or 2, or 3) - it just another form of business partner. You get less %, but hopefully they add to the business in a meaningful way that leaves you better off.
[+] [-] emmett|13 years ago|reply
The most prominent is the trend towards allowing founders to cash out in a portion of their ownership as part of the deal. Another is the trend towards smaller rounds where the founder gives up less control and fewer liquidation preferences.
[+] [-] edanm|13 years ago|reply
Maybe it's just my own history and confirmation bias speaking here (recently switched from startups to a Consulting business). But lately, the whole "bootstrap" movement is getting much more popular around here. More and more, I'm seeing articles and comments from tptacek, patio11, and others talking about how programmers could make vastly more money, especially by doing freelancing. I think the message is starting to sink in - the kind of people who read this site can start very profitable businesses, make loads of cash, and do this without the high risk of startups. No chance of a working 5 years and then striking a goldmine of an exit, but much higher chance of working 5 years and putting aside large amounts of money.
This pg article is a great one, and a very honest one too. To me it reflects the changing times, and the changing understanding of what a startup means. No longer, like in previous articles on wealth, is pg very clearly advocating that all hackers should be starting startups. This essay, to me, reads as a much more precise explanation of what someone can expect if they start a startup. And it makes it much clearer when people should not start a startup.
[+] [-] sayemm|13 years ago|reply
Some of the best startup advice you'll ever get is by @yegg in "Paths to $5M for a startup founder": http://gabrielweinberg.com/blog/2010/06/paths-to-5m-for-a-st...
No one ever becomes a great entrepreneur overnight and it's a fallacy to think that you could do a high-growth startup only when you're young and in your 20s (Jeff Bezos, Larry Ellison, Jim Clark, Mike Bloomberg all started their big companies in their 30s; Mark Cuban and Mark Pincus started their billion-dollar co's in their early 40s).
I think it's wise to maintain a very long-term view of the startup game, and to take bigger risks gradually as you develop into a stronger entrepreneur. So, I think it's smart to prove yourself as a bootstrapped entrepreneur and make your first few million and be financially independent, and then be in a position to take big risks to work on a high-growth startup.
Jim Clark, the greatest serial tech entrepreneur to date, started SGI when he was 37 and Netscape when he was 50. This is a long-term game.
[+] [-] nostrademons|13 years ago|reply
In an efficient market, eventually you'd expect that you'd be paid the same amount for equal amounts of value created. In today's low-capital, target-rich hacker environment, it seems like good hackers would eventually become indifferent to the particular corporate structure used, and would instead choose whatever corporate structure lets them work on the highest-impact problems. Sometimes that'll be a startup, sometimes it'll be a consulting firm, and sometimes it'll be employment at a large tech company.
Personally, I'm a plain old employee of a large tech firm. I see some of the financials that patio11 posts, and I'm making significantly more than that (we're the same age). I'm not nearly as well-off as tptacek, thanks to Matasano's acquisition, but I have a few years to catch up. I see rumors posted to HN about engineers at large tech companies making outlandish amounts of money, and I'm making more than that, and yet the comments are all "Wow. This seems unbelievable, it can't be true." I also know coworkers that are rumored to have those multi-million-$ retention grants; I'm fairly certain they exist.
[+] [-] simonb|13 years ago|reply
[+] [-] pixelmonkey|13 years ago|reply
"Almost every company needs some amount of funding to get started. But startups often raise money even when they are or could be profitable. It might seem foolish to sell stock in a profitable company for less than you think it will later be worth, but it's no more foolish than buying insurance. Fundamentally that's how the most successful startups view fundraising. They could grow the company on its own revenues, but the extra money and help supplied by VCs will let them grow even faster."
Took me awhile to realize this as a founder.
Profitability is a great goal (and makes the business very "real" by cutting away vanity metrics), but self-funding growth from profitability pretty much guarantees you are locked into a relatively slow growth rate. pg's simple charts show why being locked into a lower growth rate could mean being blown away by your competitors.
[+] [-] erichocean|13 years ago|reply
That's an unwarranted assumption. Part of designing a startup business model is organizing growth so that you are unconstrained, so that more input produces greater output, earlier -- whether it's capital, users, employees, or support. All it takes is for one component of your business to not scale and you won't hit your growth numbers despite the brilliance of every other part.
Capital is just one of the areas you have to look at. Amazon is a decent example. Bezos chose books because it was (a) accessible (catalogs existed), and (b) he got 6 months to pay back booksellers, which meant he could afford to grow the more he sold, by using the money owed to the booksellers as float.
Startups would do well to evaluate all possible constraints on growth, capital and otherwise. Many times small tweaks to how you sell your product (or what product you sell) can produce large variations in the amount and timing of capital needed.
Here's an example: do you have customers pay for the first 30 days up front, with an option to cancel within that time? Or do you charge your customers after the first 30 days are up?
Now, you'd think the latter would always be better for "growth", because it involves a weaker commitment -- no money changes hands early.
But it also has a huge capital cost differential, if the service costs a substantial amount of money to deliver. In order to grow the latter model, you'll have to obtain more and more capital over time as you grow.
But if you do the former, you can "fund" your company's growth off of its earlier growth. Although this might impact growth negatively, by turning away customers that "won't pay" for the first 30 days up front, but who would have become customers the other way.
So which is better? It really depends. If your growth rate is already 7% with the pay-up-front model, that's better IMO than getting, say, an 8% growth rate with the pay-after model. The latter will require raising increasingly greater amounts of capital, despite the fact that it's growing "faster" initially, ultimately hurting your growth or wiping out your equity, or both.
Both approaches will still have their "S" curves end up at the same place (the market size doesn't change), but let's be blunt here: no company can catches up to 7% growth, so wasting your equity on 8% growth just makes you poorer, and the VCs richer.
Sustainable growth is just as important, and treating capital as something you "have to" raise is exactly what VCs want you to think, since, hey, that's what they sell. Venture capital is a financial tool, not the only (real) way to capitalize a startup during and after growth.
[+] [-] bavidar|13 years ago|reply
[+] [-] paulsutter|13 years ago|reply
An epic essay with tremendous depth. Love the ending:
"A startup founder is in effect an economic research scientist. Most don't discover anything that remarkable, but some discover relativity."
[1] http://steveblank.com/2010/01/25/whats-a-startup-first-princ...
[+] [-] filip01|13 years ago|reply
[+] [-] friendstock|13 years ago|reply
[+] [-] adrianhoward|13 years ago|reply
I would prefer just to say that the definitions are "different" :-)
Blank's focus is on startups that are discovering their business model. PG's focus is on startups that are designed to grow fast. Those two groups of organisation overlap, but are not identical.
[+] [-] nwenzel|13 years ago|reply
B2B or so-called Enterprise Companies, especially industry-specific new companies, would have a hard time qualifying on several fronts (market size, growth rate, growth interval). I am particularly interested in the B2B style of startup because I run an Enterprise Startu-er... Enterprise New Company focused on serving the insurance industry. A B2B Startup, it would seem, would have to link customer charges to something that can grow without a new sales contract. I guess, the trick to achieving high growth rates is to create viral growth inside an existing account. Growth in the B2B space will be large jumps (with a new contract) followed by organic growth or not (within the bounds of the existing sales contract). It seems to follow then that since the purchase agreement is the painful and tough and slow part, a B2B Startup would want to have a Freemium or some other type of contract with low/no startup costs and higher per user/GB/account/server/unit costs.
Gives me some new direction on pricing.
On an unrelated note, I'll disagree with other comments of "favorite pg essays" and say that "Wealth" was the best by an order of magnitude. http://paulgraham.com/wealth.html
[+] [-] dirtyaura|13 years ago|reply
For example, instead of active users you track a number of leads and how interested they are. Even without a single closed deal, you can measure your sales pipeline. It is an imperfect proxy for potential revenue growth, but so is daily active users for consumer internet startups.
Thus, if you are planning to sell an enterprise solution costing $100000, and you think you are going to make these kind of deals a few times a year in the beginning, then you use your sales pipeline measurements to estimate your growth with a finer granularity than a big sale now and then.
[+] [-] kemiller|13 years ago|reply
[+] [-] nhangen|13 years ago|reply
This essay, on the other hand, left me feeling like I don't belong here. I feel as if the YC philosophy has evolved into something different than it was, or perhaps, that this is more honesty than we've ever seen before.
Either way, I couldn't be happier to use revenue as my measuring tool, and not free users. Racing to give my product away at a rate of 5-7% weekly growth would require me to completely change my product development philosophy. I build what I build because I see something missing, not because I hope to flip it in a year.
[+] [-] nemesisj|13 years ago|reply
[+] [-] tubelite|13 years ago|reply
Should you be one of the 100,000 founders who "rationally" choose to buy a startup lottery ticket for $100b?
Well of course! If you could live for long enough to run through thousands of iterations of the startup game, that is.
In the real world, - Founders are typically limited to 1 startup at a time - It takes time - years perhaps - for a startup to fail - Founders can do only a few startups in their lifetimes
Given low odds like 1%, with < 10 iterations per lifetime, expected value is the wrong metric. From a purely financial POV then, it appears only rational to do growth startups - If you are on the investing side (a "parallel" entrepreneur, running tens or hundreds of iterations in your lifetime) - You are a founder (a "serial" entrepreneur) with reasonable financial security and none of your life goals would be irrevocably damaged by the most likely outcome - a string of failures.
(There are of course several non-financial reasons and payoffs. For instance, an Idea takes demonic possession of you, and the only way to exorcise from your tortured brain is to do a startup..)
[+] [-] gfodor|13 years ago|reply
For example, a certain person may try increasing their wealth by investing in startups, but prefer working in a non-startup. Or another person may prefer investing in non-startups (safe, dividend paying stocks or bonds), but try increasing their wealth by working for startups.
For people with talent in creating products, best to focus their investing in safe, low maintenance non-startup investments and their wealth creation in working for startups. For people who have access to capital and a knack for choosing winners, they should work for non-startups (or philanthropy, or whatever, since they are probably already fairly wealthy) and invest in startups they think can win.
For the really talented, who both know a thing or two about building products, and also can pick winners, then you should work for a startup that invests in startups. See: pg.
[+] [-] sandee|13 years ago|reply
This is the gem.
[+] [-] d4nt|13 years ago|reply
This, for me, is the weak point in an otherwise excellent article. A lot of investments, valuations and jobs rest on this assumption. Facebook's PE ratio is currently 127, this assumption is the reason that it isn't around the same level as other entertainment companies like, say, Disney (17) or News Corp (56). And when Facebook's valuation rises like that and people invest at that level then there's a whole lot of money for paying engineers >$100k salaries and buying up pre-revenue businesses like Instagram. So, even if you're Google and you're bringing in real money, the application of this assumption to a few big cases permeates through the whole system and means that you too have to pay engineers >$100k and you too have to pay more to get hold of someone like Nik (makers of Snapseed).
PG logic appears flawless, but as a seed fund manager in the middle of this ecosystem, he's working several layers of abstraction up from some big applications of this assumption. So much so that it probably doesn't feel like an assumption to him. After all, he didn't value Facebook[1] at that level.
I genuinely hope this assumption is correct, because a lot of people and livelihoods are depending on it.
[1] I'm using Facebook here as an exemplar, I'm sure there are lots of other companies out there with valuations that are due in part to the assumption that users = revenue. My argument is that when someone sets a valuation based on this assumption it has a knock on effect to the whole ecosystem.
[+] [-] lifeisstillgood|13 years ago|reply
Facebook is a successful startup because it took a decentralised model (talking to your friends) and centralised it.
Barbers are decentralised - but after I build a robo-barber for every home, then suddenly one company can cut everyones hair.
So is it possible that growing a startup fast is about increasing the slope between a decentralised (diffuse players, low margins) and a centralised model.
I suspect there are good counter examples but really startups that grow fast seem to optimise for one central point for doing what they do - dropbox, airbnb readthedocs
[+] [-] outside1234|13 years ago|reply
This is pushing angels, seed round, and VCs farther and farther up the enterprise growth curve where costs become something that the founders can't bootstrap. For virtual enterprises, this is leaving them with a smaller and smaller set of companies as software eats all of the historical infrastructure costs.
Basically, he is defining startup in a way that YC is a necessary component - but increasingly, it isn't.
[+] [-] wamatt|13 years ago|reply
As founders it's easy to do things other than push every day to get customers and/or active users. Some founders are so focused on other less stressful activities, that they outsource the entire function to a 'growth hacker'. Let someone else deal with it... Yikes!
Grow is core to the startup's success, and happy to be reminded of it.
[+] [-] hasenj|13 years ago|reply
This just emphasizes why I do not want to be a part of this scene.
As DHH says: fuck doing a startup.
http://vimeo.com/3899696#t=1290