Startup Library

By Us

How to Start a Startup.

Build something users love, and spend less than you make.

Startups in 13 Sentences.
Above all, understand your users.

Hiring is Obsolete.
The market is a lot more discerning than any employer.

How to Make Wealth.

To get rich you need to get yourself in a situation with two things, measurement and
leverage.

You Weren't Meant to Have a Boss.

Startup founders seem to be working in a way that's more natural for humans.

Why to Not Not Start a Startup.

All the reasons you aren't doing it, and why most (but not all) should be ignored.

Why to Start a Startup in a Bad Economy.

It's the people that matter.

A Student's Guide to Startups.

Starting a startup could well become as popular as grad school.

Ideas for Startups.

The initial idea is not a blueprint, but a question.

Why Smart People Have Bad Ideas.

A hacker who has learned what to make, and not just how to make, is extraordinarily
powerful.

Be Relentlessly Resourceful.
You have to keep trying new things.

The 18 Mistakes that Kill Startups.

If you avoid every cause of failure, you succeed.

The Hardest Lessons for Startups to Learn

Some things about startups are kind of counterintuitive.

How to Fund a Startup.

Venture funding works like gears.

The Hacker's Guide to Investors.

Hackers don't know how little they know about this strange world.

How to Present to Investors.

Explain what you're doing and why users will want it.

The Equity Equation.

You should always feel richer after trading equity.

A Fundraising Survival Guide.

Founders have to treat raising money as a dangerous process.

The Venture Capital Squeeze.

Why not let the founders have that first million, or at least half million?

The Other Road Ahead.

You may not believe it, but I promise you, Microsoft is scared of you.

How Not to Die.

Startups run on morale.

What Business Can Learn from Open Source.

There may be more pain in your own company, but it won't hurt as much.

What the Bubble Got Right.

Even a small increase in the rate at which good ideas win would be a momentous
change.

The High-Res Society.

The economy of the future will be a fluid network of smaller, independent units.

By Others

They Would Be Gods.

The group that would eventually make Santa Clara, CA, "Silicon Valley."

The New Boom.

Today companies are starting small and lean and staying that way.

For Start-Ups, Web Success on the Cheap.

Many of the current crop of Internet start-ups have gone from zero to 60 on a
shoestring.

ArsDigita: From Start-Up to Bust-Up.

Within a few weeks of Allen's arrival, I found people telling me that I had no power at
all.

Journey to the Center of Google.

Larry and Sergey plainly hold all the cards at Google.

A Couple of Yahoos.
Really, we'd do anything to keep from working on our theses.

The Cult of the NDA.

Cases where trade secrets and/or patents are both protectable and essential are rare.

Fixing Venture Capital.

VCs do not have goals that are aligned with the goals of the company founders.

For entrepreneurs, paranoia might be wise.

How much do you reveal about your business plan, and to whom?

The Long Tail.

Unlimited selection is revealing truths about what consumers want.

It's a Great Time to Be an Entrepreneur.

More people can and will be entrepreneurs than ever before.

Net start-ups face odd problem: more VC cash than they need.
Many Internet entrepreneurs don't need the cash, because they're building products
cheaply.

An Engineer's View of Venture Capital.

Answering to their investors contributes to a sheep mentality.
Breaking the Rules with Open Source.
Open source is just a more efficient, effective software business model.

Ten Rules for Web Startups.

Great products almost always come from someone scratching their own itch.

Valuation.
I think it is much better to think of a venture capital deal as a loan plus an option.

Who Will Google Buy Next?

Google's past conquests have all been smallish Internet companies that are doing cool
stuff.

Buy It Now.
Companies purchase their ideas one startup at a time.

How to Negotiate a Term Sheet with a VC.

Pick your battles.

Start-Ups Are Telling Venture Capitalists: 'We Don't Need You'.

Some entrepreneurs believe the balance of power in Silicon Valley is shifting.

A Lesson on Elementary Worldly Wisdom.

How does a guy in Bentonville, Arkansas with no money blow right by Sears, Roebuck?

If You Want to be Rich, First Stop Being So Frightened.

Fear of failing in the eyes of the world is the single biggest impediment.

Books

Dale Carnegie: How to Win Friends and Influence People

Edward Tufte: The Visual Display of Quantitative Information

Paul Graham: Hackers and Painters

Jessica Livingston: Founders at Work

Individuals

Chris Anderson

John Battelle

David Cowan

Paul Graham

David Hornik (et al)

Guy Kawasaki

Paul Kedrosky

Tim O'Reilly

Joel Spolsky

Fred Wilson

Resources and Tools

Hacker News

Startup School

TechCrunch
Mashable

GigaOm

O'Reilly Radar

Domain Name Search

Red Herring

Startupping

HBS Working Knowledge

STVP Educators Corner

Reddit: Startup

del.icio.us: Business, Startup, Web 2.0

Technorati: Startup

Digg: Startup

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Y Combinator is a new kind of venture firm specializing in funding early stage startups.
We help startups through what is for many the hardest step, from idea to company.

We invest mostly in software and web services. And because we are ourselves
technology people, we prefer groups with a lot of technical depth. We care more about
how smart you are than how old you are, and more about the quality of your ideas than
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 Want to start a startup? Apply for funding by October
26.

March 2005

(This essay is derived from a talk at the Harvard Computer

Society.)

You need three things to create a successful startup: to

start with good people, to make something customers
actually want, and to spend as little money as possible. Most
startups that fail do it because they fail at one of these. A
startup that does all three will probably succeed.

And that's kind of exciting, when you think about it, because
all three are doable. Hard, but doable. And since a startup
that succeeds ordinarily makes its founders rich, that implies
getting rich is doable too. Hard, but doable.

If there is one message I'd like to get across about startups,

that's it. There is no magically difficult step that requires
brilliance to solve.

The Idea

In particular, you don't need a brilliant idea to start a

startup around. The way a startup makes money is to offer
people better technology than they have now. But what
people have now is often so bad that it doesn't take
brilliance to do better.

Google's plan, for example, was simply to create a search

site that didn't suck. They had three new ideas: index more
of the Web, use links to rank search results, and have clean,
simple web pages with unintrusive keyword-based ads.
Above all, they were determined to make a site that was
good to use. No doubt there are great technical tricks within
Google, but the overall plan was straightforward. And while
they probably have bigger ambitions now, this alone brings
them a billion dollars a year. [1]

There are plenty of other areas that are just as backward as

search was before Google. I can think of several heuristics
for generating ideas for startups, but most reduce to this:
look at something people are trying to do, and figure out
how to do it in a way that doesn't suck.

For example, dating sites currently suck far worse than

search did before Google. They all use the same simple-
minded model. They seem to have approached the problem
by thinking about how to do database matches instead of
how dating works in the real world. An undergrad could build
something better as a class project. And yet there's a lot of
money at stake. Online dating is a valuable business now,
and it might be worth a hundred times as much if it worked.

An idea for a startup, however, is only a beginning. A lot of

would-be startup founders think the key to the whole
process is the initial idea, and from that point all you have
to do is execute. Venture capitalists know better. If you go
to VC firms with a brilliant idea that you'll tell them about if
they sign a nondisclosure agreement, most will tell you to
get lost. That shows how much a mere idea is worth. The
market price is less than the inconvenience of signing an
NDA.

Another sign of how little the initial idea is worth is the

number of startups that change their plan en route.
Microsoft's original plan was to make money selling
programming languages, of all things. Their current business
model didn't occur to them until IBM dropped it in their lap
five years later.

Ideas for startups are worth something, certainly, but the

trouble is, they're not transferrable. They're not something
you could hand to someone else to execute. Their value is
mainly as starting points: as questions for the people who
had them to continue thinking about.

What matters is not ideas, but the people who have them.
Good people can fix bad ideas, but good ideas can't save
bad people.

People

What do I mean by good people? One of the best tricks I

learned during our startup was a rule for deciding who to
hire. Could you describe the person as an animal? It might
be hard to translate that into another language, but I think
everyone in the US knows what it means. It means someone
who takes their work a little too seriously; someone who
does what they do so well that they pass right through
professional and cross over into obsessive.

What it means specifically depends on the job: a salesperson

who just won't take no for an answer; a hacker who will
stay up till 4:00 AM rather than go to bed leaving code with
a bug in it; a PR person who will cold-call New York Times
reporters on their cell phones; a graphic designer who feels
physical pain when something is two millimeters out of
place.

Almost everyone who worked for us was an animal at what

they did. The woman in charge of sales was so tenacious
that I used to feel sorry for potential customers on the
phone with her. You could sense them squirming on the
hook, but you knew there would be no rest for them till
they'd signed up.

If you think about people you know, you'll find the animal
test is easy to apply. Call the person's image to mind and
imagine the sentence "so-and-so is an animal." If you laugh,
they're not. You don't need or perhaps even want this
quality in big companies, but you need it in a startup.

For programmers we had three additional tests. Was the

person genuinely smart? If so, could they actually get things
done? And finally, since a few good hackers have unbearable
personalities, could we stand to have them around?

That last test filters out surprisingly few people. We could

bear any amount of nerdiness if someone was truly smart.
What we couldn't stand were people with a lot of attitude.
But most of those weren't truly smart, so our third test was
largely a restatement of the first.

When nerds are unbearable it's usually because they're

trying too hard to seem smart. But the smarter they are,
the less pressure they feel to act smart. So as a rule you
can recognize genuinely smart people by their ability to say
things like "I don't know," "Maybe you're right," and "I don't
understand x well enough."

This technique doesn't always work, because people can be

influenced by their environment. In the MIT CS department,
there seems to be a tradition of acting like a brusque know-
it-all. I'm told it derives ultimately from Marvin Minsky, in
the same way the classic airline pilot manner is said to
derive from Chuck Yeager. Even genuinely smart people
start to act this way there, so you have to make allowances.

It helped us to have Robert Morris, who is one of the

readiest to say "I don't know" of anyone I've met. (At least,
he was before he became a professor at MIT.) No one dared
put on attitude around Robert, because he was obviously
smarter than they were and yet had zero attitude himself.

Like most startups, ours began with a group of friends, and

it was through personal contacts that we got most of the
people we hired. This is a crucial difference between startups
and big companies. Being friends with someone for even a
couple days will tell you more than companies could ever
learn in interviews. [2]

It's no coincidence that startups start around universities,

because that's where smart people meet. It's not what
people learn in classes at MIT and Stanford that has made
technology companies spring up around them. They could
sing campfire songs in the classes so long as admissions
worked the same.

If you start a startup, there's a good chance it will be with

people you know from college or grad school. So in theory
you ought to try to make friends with as many smart people
as you can in school, right? Well, no. Don't make a conscious
effort to schmooze; that doesn't work well with hackers.

What you should do in college is work on your own projects.

Hackers should do this even if they don't plan to start
startups, because it's the only real way to learn how to
program. In some cases you may collaborate with other
students, and this is the best way to get to know good
hackers. The project may even grow into a startup. But once
again, I wouldn't aim too directly at either target. Don't
force things; just work on stuff you like with people you like.

Ideally you want between two and four founders. It would be

hard to start with just one. One person would find the moral
weight of starting a company hard to bear. Even Bill Gates,
who seems to be able to bear a good deal of moral weight,
had to have a co-founder. But you don't want so many
founders that the company starts to look like a group photo.
Partly because you don't need a lot of people at first, but
mainly because the more founders you have, the worse
disagreements you'll have. When there are just two or three
founders, you know you have to resolve disputes
immediately or perish. If there are seven or eight,
disagreements can linger and harden into factions. You don't
want mere voting; you need unanimity.

In a technology startup, which most startups are, the

founders should include technical people. During the Internet
Bubble there were a number of startups founded by business
people who then went looking for hackers to create their
product for them. This doesn't work well. Business people
are bad at deciding what to do with technology, because
they don't know what the options are, or which kinds of
problems are hard and which are easy. And when business
people try to hire hackers, they can't tell which ones are
good. Even other hackers have a hard time doing that. For
business people it's roulette.

Do the founders of a startup have to include business

people? That depends. We thought so when we started ours,
and we asked several people who were said to know about
this mysterious thing called "business" if they would be the
president. But they all said no, so I had to do it myself. And
what I discovered was that business was no great mystery.
It's not something like physics or medicine that requires
extensive study. You just try to get people to pay you for
stuff.

I think the reason I made such a mystery of business was

that I was disgusted by the idea of doing it. I wanted to
work in the pure, intellectual world of software, not deal
with customers' mundane problems. People who don't want
to get dragged into some kind of work often develop a
protective incompetence at it. Paul Erdos was particularly
good at this. By seeming unable even to cut a grapefruit in
half (let alone go to the store and buy one), he forced other
people to do such things for him, leaving all his time free for
math. Erdos was an extreme case, but most husbands use
the same trick to some degree.

Once I was forced to discard my protective incompetence, I

found that business was neither so hard nor so boring as I
feared. There are esoteric areas of business that are quite
hard, like tax law or the pricing of derivatives, but you don't
need to know about those in a startup. All you need to know
about business to run a startup are commonsense things
people knew before there were business schools, or even
universities.
If you work your way down the Forbes 400 making an x
next to the name of each person with an MBA, you'll learn
something important about business school. You don't even
hit an MBA till number 22, Phil Knight, the CEO of Nike.
There are only four MBAs in the top 50. What you notice in
the Forbes 400 are a lot of people with technical
backgrounds. Bill Gates, Steve Jobs, Larry Ellison, Michael
Dell, Jeff Bezos, Gordon Moore. The rulers of the technology
business tend to come from technology, not business. So if
you want to invest two years in something that will help you
succeed in business, the evidence suggests you'd do better
to learn how to hack than get an MBA. [3]

There is one reason you might want to include business

people in a startup, though: because you have to have at
least one person willing and able to focus on what
customers want. Some believe only business people can do
this-- that hackers can implement software, but not design
it. That's nonsense. There's nothing about knowing how to
program that prevents hackers from understanding users, or
about not knowing how to program that magically enables
business people to understand them.

If you can't understand users, however, you should either

learn how or find a co-founder who can. That is the single
most important issue for technology startups, and the rock
that sinks more of them than anything else.

What Customers Want

It's not just startups that have to worry about this. I think
most businesses that fail do it because they don't give
customers what they want. Look at restaurants. A large
percentage fail, about a quarter in the first year. But can
you think of one restaurant that had really good food and
went out of business?

Restaurants with great food seem to prosper no matter

what. A restaurant with great food can be expensive,
crowded, noisy, dingy, out of the way, and even have bad
service, and people will keep coming. It's true that a
restaurant with mediocre food can sometimes attract
customers through gimmicks. But that approach is very
risky. It's more straightforward just to make the food good.

It's the same with technology. You hear all kinds of reasons
why startups fail. But can you think of one that had a
massively popular product and still failed?

In nearly every failed startup, the real problem was that

customers didn't want the product. For most, the cause of
death is listed as "ran out of funding," but that's only the
immediate cause. Why couldn't they get more funding?
Probably because the product was a dog, or never seemed
likely to be done, or both.

When I was trying to think of the things every startup

needed to do, I almost included a fourth: get a version 1 out
as soon as you can. But I decided not to, because that's
implicit in making something customers want. The only way
to make something customers want is to get a prototype in
front of them and refine it based on their reactions.

The other approach is what I call the "Hail Mary" strategy.

You make elaborate plans for a product, hire a team of
engineers to develop it (people who do this tend to use the
term "engineer" for hackers), and then find after a year that
you've spent two million dollars to develop something no
one wants. This was not uncommon during the Bubble,
especially in companies run by business types, who thought
of software development as something terrifying that
therefore had to be carefully planned.

We never even considered that approach. As a Lisp hacker, I

come from the tradition of rapid prototyping. I would not
claim (at least, not here) that this is the right way to write
every program, but it's certainly the right way to write
software for a startup. In a startup, your initial plans are
almost certain to be wrong in some way, and your first
priority should be to figure out where. The only way to do
that is to try implementing them.

Like most startups, we changed our plan on the fly. At first

we expected our customers to be Web consultants. But it
turned out they didn't like us, because our software was
easy to use and we hosted the site. It would be too easy for
clients to fire them. We also thought we'd be able to sign up
a lot of catalog companies, because selling online was a
natural extension of their existing business. But in 1996 that
was a hard sell. The middle managers we talked to at
catalog companies saw the Web not as an opportunity, but
as something that meant more work for them.

We did get a few of the more adventurous catalog

companies. Among them was Frederick's of Hollywood, which
gave us valuable experience dealing with heavy loads on our
servers. But most of our users were small, individual
merchants who saw the Web as an opportunity to build a
business. Some had retail stores, but many only existed
online. And so we changed direction to focus on these users.
Instead of concentrating on the features Web consultants
and catalog companies would want, we worked to make the
software easy to use.

I learned something valuable from that. It's worth trying

very, very hard to make technology easy to use. Hackers
are so used to computers that they have no idea how
horrifying software seems to normal people. Stephen
Hawking's editor told him that every equation he included in
his book would cut sales in half. When you work on making
technology easier to use, you're riding that curve up instead
of down. A 10% improvement in ease of use doesn't just
increase your sales 10%. It's more likely to double your
sales.

How do you figure out what customers want? Watch them.

One of the best places to do this was at trade shows. Trade
shows didn't pay as a way of getting new customers, but
they were worth it as market research. We didn't just give
canned presentations at trade shows. We used to show
people how to build real, working stores. Which meant we
got to watch as they used our software, and talk to them
about what they needed.

No matter what kind of startup you start, it will probably be

a stretch for you, the founders, to understand what users
want. The only kind of software you can build without
studying users is the sort for which you are the typical user.
But this is just the kind that tends to be open source:
operating systems, programming languages, editors, and so
on. So if you're developing technology for money, you're
probably not going to be developing it for people like you.
Indeed, you can use this as a way to generate ideas for
startups: what do people who are not like you want from
technology?

When most people think of startups, they think of companies

like Apple or Google. Everyone knows these, because they're
big consumer brands. But for every startup like that, there
are twenty more that operate in niche markets or live
quietly down in the infrastructure. So if you start a
successful startup, odds are you'll start one of those.

Another way to say that is, if you try to start the kind of
startup that has to be a big consumer brand, the odds
against succeeding are steeper. The best odds are in niche
markets. Since startups make money by offering people
something better than they had before, the best
opportunities are where things suck most. And it would be
hard to find a place where things suck more than in
corporate IT departments. You would not believe the amount
of money companies spend on software, and the crap they
get in return. This imbalance equals opportunity.

If you want ideas for startups, one of the most valuable

things you could do is find a middle-sized non-technology
company and spend a couple weeks just watching what they
do with computers. Most good hackers have no more idea of
the horrors perpetrated in these places than rich Americans
do of what goes on in Brazilian slums.

Start by writing software for smaller companies, because it's

easier to sell to them. It's worth so much to sell stuff to big
companies that the people selling them the crap they
currently use spend a lot of time and money to do it. And
while you can outhack Oracle with one frontal lobe tied
behind your back, you can't outsell an Oracle salesman. So
if you want to win through better technology, aim at smaller
customers. [4]

They're the more strategically valuable part of the market

anyway. In technology, the low end always eats the high
end. It's easier to make an inexpensive product more
powerful than to make a powerful product cheaper. So the
products that start as cheap, simple options tend to
gradually grow more powerful till, like water rising in a
room, they squash the "high-end" products against the
ceiling. Sun did this to mainframes, and Intel is doing it to
Sun. Microsoft Word did it to desktop publishing software
like Interleaf and Framemaker. Mass-market digital cameras
are doing it to the expensive models made for professionals.
Avid did it to the manufacturers of specialized video editing
systems, and now Apple is doing it to Avid. Henry Ford did it
to the car makers that preceded him. If you build the
simple, inexpensive option, you'll not only find it easier to
sell at first, but you'll also be in the best position to conquer
the rest of the market.

It's very dangerous to let anyone fly under you. If you have
the cheapest, easiest product, you'll own the low end. And if
you don't, you're in the crosshairs of whoever does.

Raising Money

To make all this happen, you're going to need money. Some

startups have been self-funding-- Microsoft for example--
but most aren't. I think it's wise to take money from
investors. To be self-funding, you have to start as a
consulting company, and it's hard to switch from that to a
product company.

Financially, a startup is like a pass/fail course. The way to

get rich from a startup is to maximize the company's
chances of succeeding, not to maximize the amount of stock
you retain. So if you can trade stock for something that
improves your odds, it's probably a smart move.

To most hackers, getting investors seems like a terrifying

and mysterious process. Actually it's merely tedious. I'll try
to give an outline of how it works.

The first thing you'll need is a few tens of thousands of

dollars to pay your expenses while you develop a prototype.
This is called seed capital. Because so little money is
involved, raising seed capital is comparatively easy-- at least
in the sense of getting a quick yes or no.

Usually you get seed money from individual rich people

called "angels." Often they're people who themselves got
rich from technology. At the seed stage, investors don't
expect you to have an elaborate business plan. Most know
that they're supposed to decide quickly. It's not unusual to
get a check within a week based on a half-page agreement.

We started Viaweb with $10,000 of seed money from our

friend Julian. But he gave us a lot more than money. He's a
former CEO and also a corporate lawyer, so he gave us a lot
of valuable advice about business, and also did all the legal
work of getting us set up as a company. Plus he introduced
us to one of the two angel investors who supplied our next
round of funding.

Some angels, especially those with technology backgrounds,

may be satisfied with a demo and a verbal description of
what you plan to do. But many will want a copy of your
business plan, if only to remind themselves what they
invested in.

Our angels asked for one, and looking back, I'm amazed
how much worry it caused me. "Business plan" has that
word "business" in it, so I figured it had to be something I'd
have to read a book about business plans to write. Well, it
doesn't. At this stage, all most investors expect is a brief
description of what you plan to do and how you're going to
make money from it, and the resumes of the founders. If
you just sit down and write out what you've been saying to
one another, that should be fine. It shouldn't take more than
a couple hours, and you'll probably find that writing it all
down gives you more ideas about what to do.

For the angel to have someone to make the check out to,
you're going to have to have some kind of company. Merely
incorporating yourselves isn't hard. The problem is, for the
company to exist, you have to decide who the founders are,
and how much stock they each have. If there are two
founders with the same qualifications who are both equally
committed to the business, that's easy. But if you have a
number of people who are expected to contribute in varying
degrees, arranging the proportions of stock can be hard. And
once you've done it, it tends to be set in stone.

I have no tricks for dealing with this problem. All I can say
is, try hard to do it right. I do have a rule of thumb for
recognizing when you have, though. When everyone feels
they're getting a slightly bad deal, that they're doing more
than they should for the amount of stock they have, the
stock is optimally apportioned.

There is more to setting up a company than incorporating it,

of course: insurance, business license, unemployment
compensation, various things with the IRS. I'm not even
sure what the list is, because we, ah, skipped all that. When
we got real funding near the end of 1996, we hired a great
CFO, who fixed everything retroactively. It turns out that no
one comes and arrests you if you don't do everything you're
supposed to when starting a company. And a good thing too,
or a lot of startups would never get started. [5]

It can be dangerous to delay turning yourself into a

company, because one or more of the founders might decide
to split off and start another company doing the same thing.
This does happen. So when you set up the company, as well
as as apportioning the stock, you should get all the founders
to sign something agreeing that everyone's ideas belong to
this company, and that this company is going to be
everyone's only job.

[If this were a movie, ominous music would begin here.]

While you're at it, you should ask what else they've signed.
One of the worst things that can happen to a startup is to
run into intellectual property problems. We did, and it came
closer to killing us than any competitor ever did.

As we were in the middle of getting bought, we discovered

that one of our people had, early on, been bound by an
agreement that said all his ideas belonged to the giant
company that was paying for him to go to grad school. In
theory, that could have meant someone else owned big
chunks of our software. So the acquisition came to a
screeching halt while we tried to sort this out. The problem
was, since we'd been about to be acquired, we'd allowed
ourselves to run low on cash. Now we needed to raise more
to keep going. But it's hard to raise money with an IP cloud
over your head, because investors can't judge how serious it
is.

Our existing investors, knowing that we needed money and

had nowhere else to get it, at this point attempted certain
gambits which I will not describe in detail, except to remind
readers that the word "angel" is a metaphor. The founders
thereupon proposed to walk away from the company, after
giving the investors a brief tutorial on how to administer the
servers themselves. And while this was happening, the
acquirers used the delay as an excuse to welch on the deal.

Miraculously it all turned out ok. The investors backed down;

we did another round of funding at a reasonable valuation;
the giant company finally gave us a piece of paper saying
they didn't own our software; and six months later we were
bought by Yahoo for much more than the earlier acquirer
had agreed to pay. So we were happy in the end, though
the experience probably took several years off my life.

Don't do what we did. Before you consummate a startup,

ask everyone about their previous IP history.

Once you've got a company set up, it may seem

presumptuous to go knocking on the doors of rich people
and asking them to invest tens of thousands of dollars in
something that is really just a bunch of guys with some
ideas. But when you look at it from the rich people's point of
view, the picture is more encouraging. Most rich people are
looking for good investments. If you really think you have a
chance of succeeding, you're doing them a favor by letting
them invest. Mixed with any annoyance they might feel
about being approached will be the thought: are these guys
the next Google?

Usually angels are financially equivalent to founders. They

get the same kind of stock and get diluted the same amount
in future rounds. How much stock should they get? That
depends on how ambitious you feel. When you offer x
percent of your company for y dollars, you're implicitly
claiming a certain value for the whole company. Venture
investments are usually described in terms of that number.
If you give an investor new shares equal to 5% of those
already outstanding in return for $100,000, then you've
done the deal at a pre-money valuation of $2 million.

How do you decide what the value of the company should

be? There is no rational way. At this stage the company is
just a bet. I didn't realize that when we were raising money.
Julian thought we ought to value the company at several
million dollars. I thought it was preposterous to claim that a
couple thousand lines of code, which was all we had at the
time, were worth several million dollars. Eventually we
settled on one millon, because Julian said no one would
invest in a company with a valuation any lower. [6]
What I didn't grasp at the time was that the valuation
wasn't just the value of the code we'd written so far. It was
also the value of our ideas, which turned out to be right,
and of all the future work we'd do, which turned out to be a
lot.

The next round of funding is the one in which you might

deal with actual venture capital firms. But don't wait till
you've burned through your last round of funding to start
approaching them. VCs are slow to make up their minds.
They can take months. You don't want to be running out of
money while you're trying to negotiate with them.

Getting money from an actual VC firm is a bigger deal than

getting money from angels. The amounts of money involved
are larger, millions usually. So the deals take longer, dilute
you more, and impose more onerous conditions.

Sometimes the VCs want to install a new CEO of their own

choosing. Usually the claim is that you need someone
mature and experienced, with a business background. Maybe
in some cases this is true. And yet Bill Gates was young and
inexperienced and had no business background, and he
seems to have done ok. Steve Jobs got booted out of his
own company by someone mature and experienced, with a
business background, who then proceeded to ruin the
company. So I think people who are mature and
experienced, with a business background, may be overrated.
We used to call these guys "newscasters," because they had
neat hair and spoke in deep, confident voices, and generally
didn't know much more than they read on the teleprompter.

We talked to a number of VCs, but eventually we ended up

financing our startup entirely with angel money. The main
reason was that we feared a brand-name VC firm would
stick us with a newscaster as part of the deal. That might
have been ok if he was content to limit himself to talking to
the press, but what if he wanted to have a say in running
the company? That would have led to disaster, because our
software was so complex. We were a company whose whole
m.o. was to win through better technology. The strategic
decisions were mostly decisions about technology, and we
didn't need any help with those.

This was also one reason we didn't go public. Back in 1998

our CFO tried to talk me into it. In those days you could go
public as a dogfood portal, so as a company with a real
product and real revenues, we might have done well. But I
feared it would have meant taking on a newscaster--
someone who, as they say, "can talk Wall Street's
language."

I'm happy to see Google is bucking that trend. They didn't

talk Wall Street's language when they did their IPO, and
Wall Street didn't buy. And now Wall Street is collectively
kicking itself. They'll pay attention next time. Wall Street
learns new languages fast when money is involved.

You have more leverage negotiating with VCs than you

realize. The reason is other VCs. I know a number of VCs
now, and when you talk to them you realize that it's a
seller's market. Even now there is too much money chasing
too few good deals.

VCs form a pyramid. At the top are famous ones like

Sequoia and Kleiner Perkins, but beneath those are a huge
number you've never heard of. What they all have in
common is that a dollar from them is worth one dollar. Most
VCs will tell you that they don't just provide money, but
connections and advice. If you're talking to Vinod Khosla or
John Doerr or Mike Moritz, this is true. But such advice and
connections can come very expensive. And as you go down
the food chain the VCs get rapidly dumber. A few steps
down from the top you're basically talking to bankers who've
picked up a few new vocabulary words from reading Wired.
(Does your product use XML?) So I'd advise you to be
skeptical about claims of experience and connections.
Basically, a VC is a source of money. I'd be inclined to go
with whoever offered the most money the soonest with the
least strings attached.

You may wonder how much to tell VCs. And you should,
because some of them may one day be funding your
competitors. I think the best plan is not to be overtly
secretive, but not to tell them everything either. After all, as
most VCs say, they're more interested in the people than
the ideas. The main reason they want to talk about your
idea is to judge you, not the idea. So as long as you seem
like you know what you're doing, you can probably keep a
few things back from them. [7]

Talk to as many VCs as you can, even if you don't want

their money, because a) they may be on the board of
someone who will buy you, and b) if you seem impressive,
they'll be discouraged from investing in your competitors.
The most efficient way to reach VCs, especially if you only
want them to know about you and don't want their money,
is at the conferences that are occasionally organized for
startups to present to them.

Not Spending It

When and if you get an infusion of real money from

investors, what should you do with it? Not spend it, that's
what. In nearly every startup that fails, the proximate cause
is running out of money. Usually there is something deeper
wrong. But even a proximate cause of death is worth trying
hard to avoid.

During the Bubble many startups tried to "get big fast."

Ideally this meant getting a lot of customers fast. But it was
easy for the meaning to slide over into hiring a lot of people
fast.

Of the two versions, the one where you get a lot of

customers fast is of course preferable. But even that may be
overrated. The idea is to get there first and get all the users,
leaving none for competitors. But I think in most businesses
the advantages of being first to market are not so
overwhelmingly great. Google is again a case in point. When
they appeared it seemed as if search was a mature market,
dominated by big players who'd spent millions to build their
brands: Yahoo, Lycos, Excite, Infoseek, Altavista, Inktomi.
Surely 1998 was a little late to arrive at the party.

But as the founders of Google knew, brand is worth next to

nothing in the search business. You can come along at any
point and make something better, and users will gradually
seep over to you. As if to emphasize the point, Google never
did any advertising. They're like dealers; they sell the stuff,
but they know better than to use it themselves.

The competitors Google buried would have done better to

spend those millions improving their software. Future
startups should learn from that mistake. Unless you're in a
market where products are as undifferentiated as cigarettes
or vodka or laundry detergent, spending a lot on brand
advertising is a sign of breakage. And few if any Web
businesses are so undifferentiated. The dating sites are
running big ad campaigns right now, which is all the more
evidence they're ripe for the picking. (Fee, fie, fo, fum, I
smell a company run by marketing guys.)

We were compelled by circumstances to grow slowly, and in

retrospect it was a good thing. The founders all learned to
do every job in the company. As well as writing software, I
had to do sales and customer support. At sales I was not
very good. I was persistent, but I didn't have the
smoothness of a good salesman. My message to potential
customers was: you'd be stupid not to sell online, and if you
sell online you'd be stupid to use anyone else's software.
Both statements were true, but that's not the way to
convince people.

I was great at customer support though. Imagine talking to

a customer support person who not only knew everything
about the product, but would apologize abjectly if there was
a bug, and then fix it immediately, while you were on the
phone with them. Customers loved us. And we loved them,
because when you're growing slow by word of mouth, your
first batch of users are the ones who were smart enough to
find you by themselves. There is nothing more valuable, in
the early stages of a startup, than smart users. If you listen
to them, they'll tell you exactly how to make a winning
product. And not only will they give you this advice for free,
they'll pay you.

We officially launched in early 1996. By the end of that year

we had about 70 users. Since this was the era of "get big
fast," I worried about how small and obscure we were. But
in fact we were doing exactly the right thing. Once you get
big (in users or employees) it gets hard to change your
product. That year was effectively a laboratory for improving
our software. By the end of it, we were so far ahead of our
competitors that they never had a hope of catching up. And
since all the hackers had spent many hours talking to users,
we understood online commerce way better than anyone
else.

That's the key to success as a startup. There is nothing

more important than understanding your business. You
might think that anyone in a business must, ex officio,
understand it. Far from it. Google's secret weapon was
simply that they understood search. I was working for Yahoo
when Google appeared, and Yahoo didn't understand search.
I know because I once tried to convince the powers that be
that we had to make search better, and I got in reply what
was then the party line about it: that Yahoo was no longer a
mere "search engine." Search was now only a small
percentage of our page views, less than one month's growth,
and now that we were established as a "media company," or
"portal," or whatever we were, search could safely be
allowed to wither and drop off, like an umbilical cord.

Well, a small fraction of page views they may be, but they
are an important fraction, because they are the page views
that Web sessions start with. I think Yahoo gets that now.

Google understands a few other things most Web companies

still don't. The most important is that you should put users
before advertisers, even though the advertisers are paying
and users aren't. One of my favorite bumper stickers reads
"if the people lead, the leaders will follow." Paraphrased for
the Web, this becomes "get all the users, and the
advertisers will follow." More generally, design your product
to please users first, and then think about how to make
money from it. If you don't put users first, you leave a gap
for competitors who do.

To make something users love, you have to understand

them. And the bigger you are, the harder that is. So I say
"get big slow." The slower you burn through your funding,
the more time you have to learn.

The other reason to spend money slowly is to encourage a

culture of cheapness. That's something Yahoo did
understand. David Filo's title was "Chief Yahoo," but he was
proud that his unofficial title was "Cheap Yahoo." Soon after
we arrived at Yahoo, we got an email from Filo, who had
been crawling around our directory hierarchy, asking if it
was really necessary to store so much of our data on
expensive RAID drives. I was impressed by that. Yahoo's
market cap then was already in the billions, and they were
still worrying about wasting a few gigs of disk space.

When you get a couple million dollars from a VC firm, you

tend to feel rich. It's important to realize you're not. A rich
company is one with large revenues. This money isn't
revenue. It's money investors have given you in the hope
you'll be able to generate revenues. So despite those
millions in the bank, you're still poor.

For most startups the model should be grad student, not law
firm. Aim for cool and cheap, not expensive and impressive.
For us the test of whether a startup understood this was
whether they had Aeron chairs. The Aeron came out during
the Bubble and was very popular with startups. Especially
the type, all too common then, that was like a bunch of kids
playing house with money supplied by VCs. We had office
chairs so cheap that the arms all fell off. This was slightly
embarrassing at the time, but in retrospect the grad-
studenty atmosphere of our office was another of those
things we did right without knowing it.

Our offices were in a wooden triple-decker in Harvard

Square. It had been an apartment until about the 1970s,
and there was still a claw-footed bathtub in the bathroom. It
must once have been inhabited by someone fairly eccentric,
because a lot of the chinks in the walls were stuffed with
aluminum foil, as if to protect against cosmic rays. When
eminent visitors came to see us, we were a bit sheepish
about the low production values. But in fact that place was
the perfect space for a startup. We felt like our role was to
be impudent underdogs instead of corporate stuffed shirts,
and that is exactly the spirit you want.

An apartment is also the right kind of place for developing

software. Cube farms suck for that, as you've probably
discovered if you've tried it. Ever notice how much easier it
is to hack at home than at work? So why not make work
more like home?

When you're looking for space for a startup, don't feel that it
has to look professional. Professional means doing good
work, not elevators and glass walls. I'd advise most startups
to avoid corporate space at first and just rent an apartment.
You want to live at the office in a startup, so why not have
a place designed to be lived in as your office?

Besides being cheaper and better to work in, apartments

tend to be in better locations than office buildings. And for a
startup location is very important. The key to productivity is
for people to come back to work after dinner. Those hours
after the phone stops ringing are by far the best for getting
work done. Great things happen when a group of employees
go out to dinner together, talk over ideas, and then come
back to their offices to implement them. So you want to be
in a place where there are a lot of restaurants around, not
some dreary office park that's a wasteland after 6:00 PM.
Once a company shifts over into the model where everyone
drives home to the suburbs for dinner, however late, you've
lost something extraordinarily valuable. God help you if you
actually start in that mode.

If I were going to start a startup today, there are only three

places I'd consider doing it: on the Red Line near Central,
Harvard, or Davis Squares (Kendall is too sterile); in Palo
Alto on University or California Aves; and in Berkeley
immediately north or south of campus. These are the only
places I know that have the right kind of vibe.

The most important way to not spend money is by not

hiring people. I may be an extremist, but I think hiring
people is the worst thing a company can do. To start with,
people are a recurring expense, which is the worst kind.
They also tend to cause you to grow out of your space, and
perhaps even move to the sort of uncool office building that
will make your software worse. But worst of all, they slow
you down: instead of sticking your head in someone's office
and checking out an idea with them, eight people have to
have a meeting about it. So the fewer people you can hire,
the better.

During the Bubble a lot of startups had the opposite policy.

They wanted to get "staffed up" as soon as possible, as if
you couldn't get anything done unless there was someone
with the corresponding job title. That's big company
thinking. Don't hire people to fill the gaps in some a priori
org chart. The only reason to hire someone is to do
something you'd like to do but can't.

If hiring unnecessary people is expensive and slows you

down, why do nearly all companies do it? I think the main
reason is that people like the idea of having a lot of people
working for them. This weakness often extends right up to
the CEO. If you ever end up running a company, you'll find
the most common question people ask is how many
employees you have. This is their way of weighing you. It's
not just random people who ask this; even reporters do.
And they're going to be a lot more impressed if the answer
is a thousand than if it's ten.

This is ridiculous, really. If two companies have the same

revenues, it's the one with fewer employees that's more
impressive. When people used to ask me how many people
our startup had, and I answered "twenty," I could see them
thinking that we didn't count for much. I used to want to
add "but our main competitor, whose ass we regularly kick,
has a hundred and forty, so can we have credit for the
larger of the two numbers?"

As with office space, the number of your employees is a

choice between seeming impressive, and being impressive.
Any of you who were nerds in high school know about this
choice. Keep doing it when you start a company.

Should You?

But should you start a company? Are you the right sort of
person to do it? If you are, is it worth it?

More people are the right sort of person to start a startup

than realize it. That's the main reason I wrote this. There
could be ten times more startups than there are, and that
would probably be a good thing.

I was, I now realize, exactly the right sort of person to start

a startup. But the idea terrified me at first. I was forced into
it because I was a Lisp hacker. The company I'd been
consulting for seemed to be running into trouble, and there
were not a lot of other companies using Lisp. Since I
couldn't bear the thought of programming in another
language (this was 1995, remember, when "another
language" meant C++) the only option seemed to be to
start a new company using Lisp.

I realize this sounds far-fetched, but if you're a Lisp hacker

you'll know what I mean. And if the idea of starting a
startup frightened me so much that I only did it out of
necessity, there must be a lot of people who would be good
at it but who are too intimidated to try.

So who should start a startup? Someone who is a good

hacker, between about 23 and 38, and who wants to solve
the money problem in one shot instead of getting paid
gradually over a conventional working life.

I can't say precisely what a good hacker is. At a first rate

university this might include the top half of computer
science majors. Though of course you don't have to be a CS
major to be a hacker; I was a philosophy major in college.

It's hard to tell whether you're a good hacker, especially

when you're young. Fortunately the process of starting
startups tends to select them automatically. What drives
people to start startups is (or should be) looking at existing
technology and thinking, don't these guys realize they should
be doing x, y, and z? And that's also a sign that one is a
good hacker.

I put the lower bound at 23 not because there's something

that doesn't happen to your brain till then, but because you
need to see what it's like in an existing business before you
try running your own. The business doesn't have to be a
startup. I spent a year working for a software company to
pay off my college loans. It was the worst year of my adult
life, but I learned, without realizing it at the time, a lot of
valuable lessons about the software business. In this case
they were mostly negative lessons: don't have a lot of
meetings; don't have chunks of code that multiple people
own; don't have a sales guy running the company; don't
make a high-end product; don't let your code get too big;
don't leave finding bugs to QA people; don't go too long
between releases; don't isolate developers from users; don't
move from Cambridge to Route 128; and so on. [8] But
negative lessons are just as valuable as positive ones.
Perhaps even more valuable: it's hard to repeat a brilliant
performance, but it's straightforward to avoid errors. [9]

The other reason it's hard to start a company before 23 is

that people won't take you seriously. VCs won't trust you,
and will try to reduce you to a mascot as a condition of
funding. Customers will worry you're going to flake out and
leave them stranded. Even you yourself, unless you're very
unusual, will feel your age to some degree; you'll find it
awkward to be the boss of someone much older than you,
and if you're 21, hiring only people younger rather limits
your options.

Some people could probably start a company at 18 if they

wanted to. Bill Gates was 19 when he and Paul Allen started
Microsoft. (Paul Allen was 22, though, and that probably
made a difference.) So if you're thinking, I don't care what
he says, I'm going to start a company now, you may be the
sort of person who could get away with it.

The other cutoff, 38, has a lot more play in it. One reason I
put it there is that I don't think many people have the
physical stamina much past that age. I used to work till 2:00
or 3:00 AM every night, seven days a week. I don't know if
I could do that now.

Also, startups are a big risk financially. If you try something

that blows up and leaves you broke at 26, big deal; a lot of
26 year olds are broke. By 38 you can't take so many risks-
- especially if you have kids.

My final test may be the most restrictive. Do you actually

want to start a startup? What it amounts to, economically, is
compressing your working life into the smallest possible
space. Instead of working at an ordinary rate for 40 years,
you work like hell for four. And maybe end up with nothing--
though in that case it probably won't take four years.

During this time you'll do little but work, because when

you're not working, your competitors will be. My only leisure
activities were running, which I needed to do to keep
working anyway, and about fifteen minutes of reading a
night. I had a girlfriend for a total of two months during that
three year period. Every couple weeks I would take a few
hours off to visit a used bookshop or go to a friend's house
for dinner. I went to visit my family twice. Otherwise I just
worked.

Working was often fun, because the people I worked with

were some of my best friends. Sometimes it was even
technically interesting. But only about 10% of the time. The
best I can say for the other 90% is that some of it is
funnier in hindsight than it seemed then. Like the time the
power went off in Cambridge for about six hours, and we
made the mistake of trying to start a gasoline powered
generator inside our offices. I won't try that again.

I don't think the amount of bullshit you have to deal with in

a startup is more than you'd endure in an ordinary working
life. It's probably less, in fact; it just seems like a lot
because it's compressed into a short period. So mainly what
a startup buys you is time. That's the way to think about it
if you're trying to decide whether to start one. If you're the
sort of person who would like to solve the money problem
once and for all instead of working for a salary for 40 years,
then a startup makes sense.

For a lot of people the conflict is between startups and

graduate school. Grad students are just the age, and just
the sort of people, to start software startups. You may
worry that if you do you'll blow your chances of an academic
career. But it's possible to be part of a startup and stay in
grad school, especially at first. Two of our three original
hackers were in grad school the whole time, and both got
their degrees. There are few sources of energy so powerful
as a procrastinating grad student.

If you do have to leave grad school, in the worst case it

won't be for too long. If a startup fails, it will probably fail
quickly enough that you can return to academic life. And if it
succeeds, you may find you no longer have such a burning
desire to be an assistant professor.

If you want to do it, do it. Starting a startup is not the great

mystery it seems from outside. It's not something you have
to know about "business" to do. Build something users love,
and spend less than you make. How hard is that?

Notes

[1] Google's revenues are about two billion a year, but half
comes from ads on other sites.

[2] One advantage startups have over established

companies is that there are no discrimination laws about
starting businesses. For example, I would be reluctant to
start a startup with a woman who had small children, or was
likely to have them soon. But you're not allowed to ask
prospective employees if they plan to have kids soon.
Believe it or not, under current US law, you're not even
allowed to discriminate on the basis of intelligence. Whereas
when you're starting a company, you can discriminate on
any basis you want about who you start it with.

[3] Learning to hack is a lot cheaper than business school,

because you can do it mostly on your own. For the price of a
Linux box, a copy of K&R, and a few hours of advice from
your neighbor's fifteen year old son, you'll be well on your
way.

[4] Corollary: Avoid starting a startup to sell things to the

biggest company of all, the government. Yes, there are lots
of opportunities to sell them technology. But let someone
else start those startups.

[5] A friend who started a company in Germany told me

they do care about the paperwork there, and that there's
more of it. Which helps explain why there are not more
startups in Germany.

[6] At the seed stage our valuation was in principle

$100,000, because Julian got 10% of the company. But this
is a very misleading number, because the money was the
least important of the things Julian gave us.

[7] The same goes for companies that seem to want to

acquire you. There will be a few that are only pretending to
in order to pick your brains. But you can never tell for sure
which these are, so the best approach is to seem entirely
open, but to fail to mention a few critical technical secrets.

[8] I was as bad an employee as this place was a company.

I apologize to anyone who had to work with me there.

[9] You could probably write a book about how to succeed in

business by doing everything in exactly the opposite way
from the DMV.
Thanks to Trevor Blackwell, Sarah Harlin, Jessica
Livingston, and Robert Morris for reading drafts of this
essay, and to Steve Melendez and Gregory Price for inviting
me to speak.

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 Watch how this essay was written on Etherpad.

February 2009

One of the things I always tell startups is a principle I

learned from Paul Buchheit: it's better to make a few people
really happy than to make a lot of people semi-happy. I was
saying recently to a reporter that if I could only tell startups
10 things, this would be one of them. Then I thought: what
would the other 9 be?

When I made the list there turned out to be 13:

1. Pick good cofounders.

Cofounders are for a startup what location is for real estate.

You can change anything about a house except where it is.
In a startup you can change your idea easily, but changing
your cofounders is hard. [1] And the success of a startup is
almost always a function of its founders.

2. Launch fast.

The reason to launch fast is not so much that it's critical to

get your product to market early, but that you haven't really
started working on it till you've launched. Launching teaches
you what you should have been building. Till you know that
you're wasting your time. So the main value of whatever
you launch with is as a pretext for engaging users.

3. Let your idea evolve.

This is the second half of launching fast. Launch fast and

iterate. It's a big mistake to treat a startup as if it were
merely a matter of implementing some brilliant initial idea.
As in an essay, most of the ideas appear in the
implementing.

4. Understand your users.

You can envision the wealth created by a startup as a

rectangle, where one side is the number of users and the
other is how much you improve their lives. [2] The second
dimension is the one you have most control over. And
indeed, the growth in the first will be driven by how well you
do in the second. As in science, the hard part is not
answering questions but asking them: the hard part is
seeing something new that users lack. The better you
understand them the better the odds of doing that. That's
why so many successful startups make something the
founders needed.
5. Better to make a few users love you than a lot
ambivalent.

Ideally you want to make large numbers of users love you,

but you can't expect to hit that right away. Initially you have
to choose between satisfying all the needs of a subset of
potential users, or satisfying a subset of the needs of all
potential users. Take the first. It's easier to expand userwise
than satisfactionwise. And perhaps more importantly, it's
harder to lie to yourself. If you think you're 85% of the way
to a great product, how do you know it's not 70%? Or 10%?
Whereas it's easy to know how many users you have.

6. Offer surprisingly good customer service.

Customers are used to being maltreated. Most of the

companies they deal with are quasi-monopolies that get
away with atrocious customer service. Your own ideas about
what's possible have been unconsciously lowered by such
experiences. Try making your customer service not merely
good, but surprisingly good. Go out of your way to make
people happy. They'll be overwhelmed; you'll see. In the
earliest stages of a startup, it pays to offer customer service
on a level that wouldn't scale, because it's a way of learning
about your users.

7. You make what you measure.

I learned this one from Joe Kraus. [3] Merely measuring

something has an uncanny tendency to improve it. If you
want to make your user numbers go up, put a big piece of
paper on your wall and every day plot the number of users.
You'll be delighted when it goes up and disappointed when it
goes down. Pretty soon you'll start noticing what makes the
number go up, and you'll start to do more of that. Corollary:
be careful what you measure.

8. Spend little.

I can't emphasize enough how important it is for a startup

to be cheap. Most startups fail before they make something
people want, and the most common form of failure is
running out of money. So being cheap is (almost)
interchangeable with iterating rapidly. [4] But it's more than
that. A culture of cheapness keeps companies young in
something like the way exercise keeps people young.

9. Get ramen profitable.

"Ramen profitable" means a startup makes just enough to

pay the founders' living expenses. It's not rapid prototyping
for business models (though it can be), but more a way of
hacking the investment process. Once you cross over into
ramen profitable, it completely changes your relationship
with investors. It's also great for morale.

10. Avoid distractions.

Nothing kills startups like distractions. The worst type are

those that pay money: day jobs, consulting, profitable side-
projects. The startup may have more long-term potential,
but you'll always interrupt working on it to answer calls from
people paying you now. Paradoxically, fundraising is this
type of distraction, so try to minimize that too.

11. Don't get demoralized.

Though the immediate cause of death in a startup tends to

be running out of money, the underlying cause is usually
lack of focus. Either the company is run by stupid people
(which can't be fixed with advice) or the people are smart
but got demoralized. Starting a startup is a huge moral
weight. Understand this and make a conscious effort not to
be ground down by it, just as you'd be careful to bend at
the knees when picking up a heavy box.

12. Don't give up.

Even if you get demoralized, don't give up. You can get
surprisingly far by just not giving up. This isn't true in all
fields. There are a lot of people who couldn't become good
mathematicians no matter how long they persisted. But
startups aren't like that. Sheer effort is usually enough, so
long as you keep morphing your idea.

13. Deals fall through.

One of the most useful skills we learned from Viaweb was

not getting our hopes up. We probably had 20 deals of
various types fall through. After the first 10 or so we learned
to treat deals as background processes that we should
ignore till they terminated. It's very dangerous to morale to
start to depend on deals closing, not just because they so
often don't, but because it makes them less likely to.

Having gotten it down to 13 sentences, I asked myself which

I'd choose if I could only keep one.

Understand your users. That's the key. The essential task in

a startup is to create wealth; the dimension of wealth you
have most control over is how much you improve users'
lives; and the hardest part of that is knowing what to make
for them. Once you know what to make, it's mere effort to
make it, and most decent hackers are capable of that.

Understanding your users is part of half the principles in this

list. That's the reason to launch early, to understand your
users. Evolving your idea is the embodiment of
understanding your users. Understanding your users well will
tend to push you toward making something that makes a
few people deeply happy. The most important reason for
having surprisingly good customer service is that it helps you
understand your users. And understanding your users will
even ensure your morale, because when everything else is
collapsing around you, having just ten users who love you
will keep you going.
Notes

[1] Strictly speaking it's impossible without a time machine.

[2] In practice it's more like a ragged comb.

[3] Joe thinks one of the founders of Hewlett Packard said it

first, but he doesn't remember which.

[4] They'd be interchangeable if markets stood still. Since

they don't, working twice as fast is better than having twice
as much time.

Comment on this essay.

May 2005

(This essay is derived from a talk at the Berkeley CSUA.)

The three big powers on the Internet now are Yahoo,

Google, and Microsoft. Average age of their founders: 24. So
it is pretty well established now that grad students can start
successful companies. And if grad students can do it, why
not undergrads?

Like everything else in technology, the cost of starting a

startup has decreased dramatically. Now it's so low that it
has disappeared into the noise. The main cost of starting a
Web-based startup is food and rent. Which means it doesn't
cost much more to start a company than to be a total
slacker. You can probably start a startup on ten thousand
dollars of seed funding, if you're prepared to live on ramen.

The less it costs to start a company, the less you need the
permission of investors to do it. So a lot of people will be
able to start companies now who never could have before.

The most interesting subset may be those in their early

twenties. I'm not so excited about founders who have
everything investors want except intelligence, or everything
except energy. The most promising group to be liberated by
the new, lower threshold are those who have everything
investors want except experience.

Market Rate

I once claimed that nerds were unpopular in secondary

school mainly because they had better things to do than
work full-time at being popular. Some said I was just telling
people what they wanted to hear. Well, I'm now about to do
that in a spectacular way: I think undergraduates are
undervalued.

Or more precisely, I think few realize the huge spread in the

value of 20 year olds. Some, it's true, are not very capable.
But others are more capable than all but a handful of 30
year olds. [1]

Till now the problem has always been that it's difficult to
pick them out. Every VC in the world, if they could go back
in time, would try to invest in Microsoft. But which would
have then? How many would have understood that this
particular 19 year old was Bill Gates?

It's hard to judge the young because (a) they change

rapidly, (b) there is great variation between them, and (c)
they're individually inconsistent. That last one is a big
problem. When you're young, you occasionally say and do
stupid things even when you're smart. So if the algorithm is
to filter out people who say stupid things, as many investors
and employers unconsciously do, you're going to get a lot of
false positives.

Most organizations who hire people right out of college are

only aware of the average value of 22 year olds, which is
not that high. And so the idea for most of the twentieth
century was that everyone had to begin as a trainee in
some entry-level job. Organizations realized there was a lot
of variation in the incoming stream, but instead of pursuing
this thought they tended to suppress it, in the belief that it
was good for even the most promising kids to start at the
bottom, so they didn't get swelled heads.

The most productive young people will always be

undervalued by large organizations, because the young have
no performance to measure yet, and any error in guessing
their ability will tend toward the mean.

What's an especially productive 22 year old to do? One thing

you can do is go over the heads of organizations, directly to
the users. Any company that hires you is, economically,
acting as a proxy for the customer. The rate at which they
value you (though they may not consciously realize it) is an
attempt to guess your value to the user. But there's a way
to appeal their judgement. If you want, you can opt to be
valued directly by users, by starting your own company.

The market is a lot more discerning than any employer. And

it is completely non-discriminatory. On the Internet, nobody
knows you're a dog. And more to the point, nobody knows
you're 22. All users care about is whether your site or
software gives them what they want. They don't care if the
person behind it is a high school kid.

If you're really productive, why not make employers pay

market rate for you? Why go work as an ordinary employee
for a big company, when you could start a startup and make
them buy it to get you?

When most people hear the word "startup," they think of

the famous ones that have gone public. But most startups
that succeed do it by getting bought. And usually the
acquirer doesn't just want the technology, but the people
who created it as well.

Often big companies buy startups before they're profitable.

Obviously in such cases they're not after revenues. What
they want is the development team and the software they've
built so far. When a startup gets bought for 2 or 3 million
six months in, it's really more of a hiring bonus than an
acquisition.
I think this sort of thing will happen more and more, and
that it will be better for everyone. It's obviously better for
the people who start the startup, because they get a big
chunk of money up front. But I think it will be better for the
acquirers too. The central problem in big companies, and the
main reason they're so much less productive than small
companies, is the difficulty of valuing each person's work.
Buying larval startups solves that problem for them: the
acquirer doesn't pay till the developers have proven
themselves. Acquirers are protected on the downside, but
still get most of the upside.

Product Development

Buying startups also solves another problem afflicting big

companies: they can't do product development. Big
companies are good at extracting the value from existing
products, but bad at creating new ones.

Why? It's worth studying this phenomenon in detail, because

this is the raison d'etre of startups.

To start with, most big companies have some kind of turf to

protect, and this tends to warp their development decisions.
For example, Web-based applications are hot now, but
within Microsoft there must be a lot of ambivalence about
them, because the very idea of Web-based software
threatens the desktop. So any Web-based application that
Microsoft ends up with, will probably, like Hotmail, be
something developed outside the company.

Another reason big companies are bad at developing new

products is that the kind of people who do that tend not to
have much power in big companies (unless they happen to
be the CEO). Disruptive technologies are developed by
disruptive people. And they either don't work for the big
company, or have been outmaneuvered by yes-men and
have comparatively little influence.

Big companies also lose because they usually only build one
of each thing. When you only have one Web browser, you
can't do anything really risky with it. If ten different startups
design ten different Web browsers and you take the best,
you'll probably get something better.

The more general version of this problem is that there are

too many new ideas for companies to explore them all.
There might be 500 startups right now who think they're
making something Microsoft might buy. Even Microsoft
probably couldn't manage 500 development projects in-
house.

Big companies also don't pay people the right way. People
developing a new product at a big company get paid roughly
the same whether it succeeds or fails. People at a startup
expect to get rich if the product succeeds, and get nothing if
it fails. [2] So naturally the people at the startup work a lot
harder.

The mere bigness of big companies is an obstacle. In

startups, developers are often forced to talk directly to
users, whether they want to or not, because there is no one
else to do sales and support. It's painful doing sales, but you
learn much more from trying to sell people something than
reading what they said in focus groups.

And then of course, big companies are bad at product

development because they're bad at everything. Everything
happens slower in big companies than small ones, and
product development is something that has to happen fast,
because you have to go through a lot of iterations to get
something good.

Trend

I think the trend of big companies buying startups will only

accelerate. One of the biggest remaining obstacles is pride.
Most companies, at least unconsciously, feel they ought to
be able to develop stuff in house, and that buying startups
is to some degree an admission of failure. And so, as people
generally do with admissions of failure, they put it off for as
long as possible. That makes the acquisition very expensive
when it finally happens.

What companies should do is go out and discover startups

when they're young, before VCs have puffed them up into
something that costs hundreds of millions to acquire. Much
of what VCs add, the acquirer doesn't need anyway.

Why don't acquirers try to predict the companies they're

going to have to buy for hundreds of millions, and grab
them early for a tenth or a twentieth of that? Because they
can't predict the winners in advance? If they're only paying
a twentieth as much, they only have to predict a twentieth
as well. Surely they can manage that.

I think companies that acquire technology will gradually

learn to go after earlier stage startups. They won't
necessarily buy them outright. The solution may be some
hybrid of investment and acquisition: for example, to buy a
chunk of the company and get an option to buy the rest
later.

When companies buy startups, they're effectively fusing

recruiting and product development. And I think that's more
efficient than doing the two separately, because you always
get people who are really committed to what they're working
on.

Plus this method yields teams of developers who already

work well together. Any conflicts between them have been
ironed out under the very hot iron of running a startup. By
the time the acquirer gets them, they're finishing one
another's sentences. That's valuable in software, because so
many bugs occur at the boundaries between different
people's code.

Investors

The increasing cheapness of starting a company doesn't just

give hackers more power relative to employers. It also gives
them more power relative to investors.

The conventional wisdom among VCs is that hackers

shouldn't be allowed to run their own companies. The
founders are supposed to accept MBAs as their bosses, and
themselves take on some title like Chief Technical Officer.
There may be cases where this is a good idea. But I think
founders will increasingly be able to push back in the matter
of control, because they just don't need the investors'
money as much as they used to.

Startups are a comparatively new phenomenon. Fairchild

Semiconductor is considered the first VC-backed startup,
and they were founded in 1959, less than fifty years ago.
Measured on the time scale of social change, what we have
now is pre-beta. So we shouldn't assume the way startups
work now is the way they have to work.

Fairchild needed a lot of money to get started. They had to

build actual factories. What does the first round of venture
funding for a Web-based startup get spent on today? More
money can't get software written faster; it isn't needed for
facilities, because those can now be quite cheap; all money
can really buy you is sales and marketing. A sales force is
worth something, I'll admit. But marketing is increasingly
irrelevant. On the Internet, anything genuinely good will
spread by word of mouth.

Investors' power comes from money. When startups need

less money, investors have less power over them. So future
founders may not have to accept new CEOs if they don't
want them. The VCs will have to be dragged kicking and
screaming down this road, but like many things people have
to be dragged kicking and screaming toward, it may actually
be good for them.

Google is a sign of the way things are going. As a condition

of funding, their investors insisted they hire someone old
and experienced as CEO. But from what I've heard the
founders didn't just give in and take whoever the VCs
wanted. They delayed for an entire year, and when they did
finally take a CEO, they chose a guy with a PhD in computer
science.

It sounds to me as if the founders are still the most

powerful people in the company, and judging by Google's
performance, their youth and inexperience doesn't seem to
have hurt them. Indeed, I suspect Google has done better
than they would have if the founders had given the VCs
what they wanted, when they wanted it, and let some MBA
take over as soon as they got their first round of funding.

I'm not claiming the business guys installed by VCs have no

value. Certainly they have. But they don't need to become
the founders' bosses, which is what that title CEO means. I
predict that in the future the executives installed by VCs will
increasingly be COOs rather than CEOs. The founders will
run engineering directly, and the rest of the company
through the COO.
The Open Cage

With both employers and investors, the balance of power is

slowly shifting towards the young. And yet they seem the
last to realize it. Only the most ambitious undergrads even
consider starting their own company when they graduate.
Most just want to get a job.

Maybe this is as it should be. Maybe if the idea of starting a

startup is intimidating, you filter out the uncommitted. But I
suspect the filter is set a little too high. I think there are
people who could, if they tried, start successful startups,
and who instead let themselves be swept into the intake
ducts of big companies.

Have you ever noticed that when animals are let out of
cages, they don't always realize at first that the door's open?
Often they have to be poked with a stick to get them out.
Something similar happened with blogs. People could have
been publishing online in 1995, and yet blogging has only
really taken off in the last couple years. In 1995 we thought
only professional writers were entitled to publish their ideas,
and that anyone else who did was a crank. Now publishing
online is becoming so popular that everyone wants to do it,
even print journalists. But blogging has not taken off
recently because of any technical innovation; it just took
eight years for everyone to realize the cage was open.

I think most undergrads don't realize yet that the economic

cage is open. A lot have been told by their parents that the
route to success is to get a good job. This was true when
their parents were in college, but it's less true now. The
route to success is to build something valuable, and you
don't have to be working for an existing company to do
that. Indeed, you can often do it better if you're not.

When I talk to undergrads, what surprises me most about

them is how conservative they are. Not politically, of course.
I mean they don't seem to want to take risks. This is a
mistake, because the younger you are, the more risk you
can take.

Risk

Risk and reward are always proportionate. For example,

stocks are riskier than bonds, and over time always have
greater returns. So why does anyone invest in bonds? The
catch is that phrase "over time." Stocks will generate
greater returns over thirty years, but they might lose value
from year to year. So what you should invest in depends on
how soon you need the money. If you're young, you should
take the riskiest investments you can find.

All this talk about investing may seem very theoretical. Most
undergrads probably have more debts than assets. They
may feel they have nothing to invest. But that's not true:
they have their time to invest, and the same rule about risk
applies there. Your early twenties are exactly the time to
take insane career risks.
The reason risk is always proportionate to reward is that
market forces make it so. People will pay extra for stability.
So if you choose stability-- by buying bonds, or by going to
work for a big company-- it's going to cost you.

Riskier career moves pay better on average, because there

is less demand for them. Extreme choices like starting a
startup are so frightening that most people won't even try.
So you don't end up having as much competition as you
might expect, considering the prizes at stake.

The math is brutal. While perhaps 9 out of 10 startups fail,

the one that succeeds will pay the founders more than 10
times what they would have made in an ordinary job. [3]
That's the sense in which startups pay better "on average."

Remember that. If you start a startup, you'll probably fail.

Most startups fail. It's the nature of the business. But it's
not necessarily a mistake to try something that has a 90%
chance of failing, if you can afford the risk. Failing at 40,
when you have a family to support, could be serious. But if
you fail at 22, so what? If you try to start a startup right
out of college and it tanks, you'll end up at 23 broke and a
lot smarter. Which, if you think about it, is roughly what you
hope to get from a graduate program.

Even if your startup does tank, you won't harm your

prospects with employers. To make sure I asked some
friends who work for big companies. I asked managers at
Yahoo, Google, Amazon, Cisco and Microsoft how they'd feel
about two candidates, both 24, with equal ability, one who'd
tried to start a startup that tanked, and another who'd spent
the two years since college working as a developer at a big
company. Every one responded that they'd prefer the guy
who'd tried to start his own company. Zod Nazem, who's in
charge of engineering at Yahoo, said:

I actually put more value on the guy with the

failed startup. And you can quote me!

So there you have it. Want to get hired by Yahoo? Start

your own company.

The Man is the Customer

If even big employers think highly of young hackers who

start companies, why don't more do it? Why are undergrads
so conservative? I think it's because they've spent so much
time in institutions.

The first twenty years of everyone's life consists of being

piped from one institution to another. You probably didn't
have much choice about the secondary schools you went to.
And after high school it was probably understood that you
were supposed to go to college. You may have had a few
different colleges to choose between, but they were probably
pretty similar. So by this point you've been riding on a
subway line for twenty years, and the next stop seems to be
a job.
Actually college is where the line ends. Superficially, going
to work for a company may feel like just the next in a series
of institutions, but underneath, everything is different. The
end of school is the fulcrum of your life, the point where you
go from net consumer to net producer.

The other big change is that now, you're steering. You can
go anywhere you want. So it may be worth standing back
and understanding what's going on, instead of just doing the
default thing.

All through college, and probably long before that, most

undergrads have been thinking about what employers want.
But what really matters is what customers want, because
they're the ones who give employers the money to pay you.

So instead of thinking about what employers want, you're

probably better off thinking directly about what users want.
To the extent there's any difference between the two, you
can even use that to your advantage if you start a company
of your own. For example, big companies like docile
conformists. But this is merely an artifact of their bigness,
not something customers need.

Grad School

I didn't consciously realize all this when I was graduating

from college-- partly because I went straight to grad school.
Grad school can be a pretty good deal, even if you think of
one day starting a startup. You can start one when you're
done, or even pull the ripcord part way through, like the
founders of Yahoo and Google.

Grad school makes a good launch pad for startups, because

you're collected together with a lot of smart people, and you
have bigger chunks of time to work on your own projects
than an undergrad or corporate employee would. As long as
you have a fairly tolerant advisor, you can take your time
developing an idea before turning it into a company. David
Filo and Jerry Yang started the Yahoo directory in February
1994 and were getting a million hits a day by the fall, but
they didn't actually drop out of grad school and start a
company till March 1995.

You could also try the startup first, and if it doesn't work,
then go to grad school. When startups tank they usually do
it fairly quickly. Within a year you'll know if you're wasting
your time.

If it fails, that is. If it succeeds, you may have to delay grad

school a little longer. But you'll have a much more enjoyable
life once there than you would on a regular grad student
stipend.

Experience

Another reason people in their early twenties don't start

startups is that they feel they don't have enough experience.
Most investors feel the same.
I remember hearing a lot of that word "experience" when I
was in college. What do people really mean by it? Obviously
it's not the experience itself that's valuable, but something it
changes in your brain. What's different about your brain
after you have "experience," and can you make that change
happen faster?

I now have some data on this, and I can tell you what tends
to be missing when people lack experience. I've said that
every startup needs three things: to start with good people,
to make something users want, and not to spend too much
money. It's the middle one you get wrong when you're
inexperienced. There are plenty of undergrads with enough
technical skill to write good software, and undergrads are
not especially prone to waste money. If they get something
wrong, it's usually not realizing they have to make
something people want.

This is not exclusively a failing of the young. It's common

for startup founders of all ages to build things no one wants.

Fortunately, this flaw should be easy to fix. If undergrads

were all bad programmers, the problem would be a lot
harder. It can take years to learn how to program. But I
don't think it takes years to learn how to make things
people want. My hypothesis is that all you have to do is
smack hackers on the side of the head and tell them: Wake
up. Don't sit here making up a priori theories about what
users need. Go find some users and see what they need.

Most successful startups not only do something very specific,

but solve a problem people already know they have.

The big change that "experience" causes in your brain is

learning that you need to solve people's problems. Once you
grasp that, you advance quickly to the next step, which is
figuring out what those problems are. And that takes some
effort, because the way software actually gets used,
especially by the people who pay the most for it, is not at
all what you might expect. For example, the stated purpose
of Powerpoint is to present ideas. Its real role is to
overcome people's fear of public speaking. It allows you to
give an impressive-looking talk about nothing, and it causes
the audience to sit in a dark room looking at slides, instead
of a bright one looking at you.

This kind of thing is out there for anyone to see. The key is
to know to look for it-- to realize that having an idea for a
startup is not like having an idea for a class project. The
goal in a startup is not to write a cool piece of software. It's
to make something people want. And to do that you have to
look at users-- forget about hacking, and just look at users.
This can be quite a mental adjustment, because little if any
of the software you write in school even has users.

A few steps before a Rubik's Cube is solved, it still looks like

a mess. I think there are a lot of undergrads whose brains
are in a similar position: they're only a few steps away from
being able to start successful startups, if they wanted to,
but they don't realize it. They have more than enough
technical skill. They just haven't realized yet that the way to
create wealth is to make what users want, and that
employers are just proxies for users in which risk is pooled.

If you're young and smart, you don't need either of those.

You don't need someone else to tell you what users want,
because you can figure it out yourself. And you don't want
to pool risk, because the younger you are, the more risk you
should take.

A Public Service Message

I'd like to conclude with a joint message from me and your

parents. Don't drop out of college to start a startup. There's
no rush. There will be plenty of time to start companies
after you graduate. In fact, it may be just as well to go work
for an existing company for a couple years after you
graduate, to learn how companies work.

And yet, when I think about it, I can't imagine telling Bill
Gates at 19 that he should wait till he graduated to start a
company. He'd have told me to get lost. And could I have
honestly claimed that he was harming his future-- that he
was learning less by working at ground zero of the
microcomputer revolution than he would have if he'd been
taking classes back at Harvard? No, probably not.

And yes, while it is probably true that you'll learn some

valuable things by going to work for an existing company for
a couple years before starting your own, you'd learn a thing
or two running your own company during that time too.

The advice about going to work for someone else would get
an even colder reception from the 19 year old Bill Gates. So
I'm supposed to finish college, then go work for another
company for two years, and then I can start my own? I
have to wait till I'm 23? That's four years. That's more than
twenty percent of my life so far. Plus in four years it will be
way too late to make money writing a Basic interpreter for
the Altair.

And he'd be right. The Apple II was launched just two years
later. In fact, if Bill had finished college and gone to work
for another company as we're suggesting, he might well
have gone to work for Apple. And while that would probably
have been better for all of us, it wouldn't have been better
for him.

So while I stand by our responsible advice to finish college

and then go work for a while before starting a startup, I
have to admit it's one of those things the old tell the young,
but don't expect them to listen to. We say this sort of thing
mainly so we can claim we warned you. So don't say I didn't
warn you.

Notes

[1] The average B-17 pilot in World War II was in his early
twenties. (Thanks to Tad Marko for pointing this out.)

[2] If a company tried to pay employees this way, they'd be

called unfair. And yet when they buy some startups and not
others, no one thinks of calling that unfair.

[3] The 1/10 success rate for startups is a bit of an urban

legend. It's suspiciously neat. My guess is the odds are
slightly worse.

Thanks to Jessica Livingston for reading drafts of this, to

the friends I promised anonymity to for their opinions about
hiring, and to Karen Nguyen and the Berkeley CSUA for
organizing this talk.

Russian Translation Romanian Translation

Japanese Translation

If you liked this, you may also like Hackers & Painters.
May 2004

(This essay was originally published in Hackers & Painters.)

If you wanted to get rich, how would you do it? I think your
best bet would be to start or join a startup. That's been a
reliable way to get rich for hundreds of years. The word
"startup" dates from the 1960s, but what happens in one is
very similar to the venture-backed trading voyages of the
Middle Ages.

Startups usually involve technology, so much so that the

phrase "high-tech startup" is almost redundant. A startup is
a small company that takes on a hard technical problem.

Lots of people get rich knowing nothing more than that. You
don't have to know physics to be a good pitcher. But I think
it could give you an edge to understand the underlying
principles. Why do startups have to be small? Will a startup
inevitably stop being a startup as it grows larger? And why
do they so often work on developing new technology? Why
are there so many startups selling new drugs or computer
software, and none selling corn oil or laundry detergent?

The Proposition

Economically, you can think of a startup as a way to

compress your whole working life into a few years. Instead
of working at a low intensity for forty years, you work as
hard as you possibly can for four. This pays especially well in
technology, where you earn a premium for working fast.

Here is a brief sketch of the economic proposition. If you're

a good hacker in your mid twenties, you can get a job
paying about $80,000 per year. So on average such a
hacker must be able to do at least $80,000 worth of work
per year for the company just to break even. You could
probably work twice as many hours as a corporate
employee, and if you focus you can probably get three times
as much done in an hour. [1] You should get another
multiple of two, at least, by eliminating the drag of the
pointy-haired middle manager who would be your boss in a
big company. Then there is one more multiple: how much
smarter are you than your job description expects you to
be? Suppose another multiple of three. Combine all these
multipliers, and I'm claiming you could be 36 times more
productive than you're expected to be in a random corporate
job. [2] If a fairly good hacker is worth $80,000 a year at a
big company, then a smart hacker working very hard without
any corporate bullshit to slow him down should be able to do
work worth about $3 million a year.

Like all back-of-the-envelope calculations, this one has a lot

of wiggle room. I wouldn't try to defend the actual numbers.
But I stand by the structure of the calculation. I'm not
claiming the multiplier is precisely 36, but it is certainly
more than 10, and probably rarely as high as 100.

If $3 million a year seems high, remember that we're talking

about the limit case: the case where you not only have zero
leisure time but indeed work so hard that you endanger your
health.

Startups are not magic. They don't change the laws of

wealth creation. They just represent a point at the far end of
the curve. There is a conservation law at work here: if you
want to make a million dollars, you have to endure a million
dollars' worth of pain. For example, one way to make a
million dollars would be to work for the Post Office your
whole life, and save every penny of your salary. Imagine the
stress of working for the Post Office for fifty years. In a
startup you compress all this stress into three or four years.
You do tend to get a certain bulk discount if you buy the
economy-size pain, but you can't evade the fundamental
conservation law. If starting a startup were easy, everyone
would do it.

Millions, not Billions

If $3 million a year seems high to some people, it will seem

low to others. Three million? How do I get to be a
billionaire, like Bill Gates?

So let's get Bill Gates out of the way right now. It's not a
good idea to use famous rich people as examples, because
the press only write about the very richest, and these tend
to be outliers. Bill Gates is a smart, determined, and
hardworking man, but you need more than that to make as
much money as he has. You also need to be very lucky.

There is a large random factor in the success of any

company. So the guys you end up reading about in the
papers are the ones who are very smart, totally dedicated,
and win the lottery. Certainly Bill is smart and dedicated,
but Microsoft also happens to have been the beneficiary of
one of the most spectacular blunders in the history of
business: the licensing deal for DOS. No doubt Bill did
everything he could to steer IBM into making that blunder,
and he has done an excellent job of exploiting it, but if there
had been one person with a brain on IBM's side, Microsoft's
future would have been very different. Microsoft at that
stage had little leverage over IBM. They were effectively a
component supplier. If IBM had required an exclusive
license, as they should have, Microsoft would still have
signed the deal. It would still have meant a lot of money for
them, and IBM could easily have gotten an operating system
elsewhere.

Instead IBM ended up using all its power in the market to

give Microsoft control of the PC standard. From that point,
all Microsoft had to do was execute. They never had to bet
the company on a bold decision. All they had to do was play
hardball with licensees and copy more innovative products
reasonably promptly.
If IBM hadn't made this mistake, Microsoft would still have
been a successful company, but it could not have grown so
big so fast. Bill Gates would be rich, but he'd be somewhere
near the bottom of the Forbes 400 with the other guys his
age.

There are a lot of ways to get rich, and this essay is about
only one of them. This essay is about how to make money
by creating wealth and getting paid for it. There are plenty
of other ways to get money, including chance, speculation,
marriage, inheritance, theft, extortion, fraud, monopoly,
graft, lobbying, counterfeiting, and prospecting. Most of the
greatest fortunes have probably involved several of these.

The advantage of creating wealth, as a way to get rich, is

not just that it's more legitimate (many of the other
methods are now illegal) but that it's more straightforward.
You just have to do something people want.

Money Is Not Wealth

If you want to create wealth, it will help to understand what

it is. Wealth is not the same thing as money. [3] Wealth is
as old as human history. Far older, in fact; ants have
wealth. Money is a comparatively recent invention.

Wealth is the fundamental thing. Wealth is stuff we want:

food, clothes, houses, cars, gadgets, travel to interesting
places, and so on. You can have wealth without having
money. If you had a magic machine that could on command
make you a car or cook you dinner or do your laundry, or do
anything else you wanted, you wouldn't need money.
Whereas if you were in the middle of Antarctica, where there
is nothing to buy, it wouldn't matter how much money you
had.

Wealth is what you want, not money. But if wealth is the

important thing, why does everyone talk about making
money? It is a kind of shorthand: money is a way of moving
wealth, and in practice they are usually interchangeable. But
they are not the same thing, and unless you plan to get rich
by counterfeiting, talking about making money can make it
harder to understand how to make money.

Money is a side effect of specialization. In a specialized

society, most of the things you need, you can't make for
yourself. If you want a potato or a pencil or a place to live,
you have to get it from someone else.

How do you get the person who grows the potatoes to give
you some? By giving him something he wants in return. But
you can't get very far by trading things directly with the
people who need them. If you make violins, and none of the
local farmers wants one, how will you eat?

The solution societies find, as they get more specialized, is

to make the trade into a two-step process. Instead of
trading violins directly for potatoes, you trade violins for,
say, silver, which you can then trade again for anything else
you need. The intermediate stuff-- the medium of exchange-
- can be anything that's rare and portable. Historically
metals have been the most common, but recently we've
been using a medium of exchange, called the dollar, that
doesn't physically exist. It works as a medium of exchange,
however, because its rarity is guaranteed by the U.S.
Government.

The advantage of a medium of exchange is that it makes

trade work. The disadvantage is that it tends to obscure
what trade really means. People think that what a business
does is make money. But money is just the intermediate
stage-- just a shorthand-- for whatever people want. What
most businesses really do is make wealth. They do
something people want. [4]

The Pie Fallacy

A surprising number of people retain from childhood the idea

that there is a fixed amount of wealth in the world. There is,
in any normal family, a fixed amount of money at any
moment. But that's not the same thing.

When wealth is talked about in this context, it is often

described as a pie. "You can't make the pie larger," say
politicians. When you're talking about the amount of money
in one family's bank account, or the amount available to a
government from one year's tax revenue, this is true. If one
person gets more, someone else has to get less.

I can remember believing, as a child, that if a few rich

people had all the money, it left less for everyone else.
Many people seem to continue to believe something like this
well into adulthood. This fallacy is usually there in the
background when you hear someone talking about how x
percent of the population have y percent of the wealth. If
you plan to start a startup, then whether you realize it or
not, you're planning to disprove the Pie Fallacy.

What leads people astray here is the abstraction of money.

Money is not wealth. It's just something we use to move
wealth around. So although there may be, in certain specific
moments (like your family, this month) a fixed amount of
money available to trade with other people for things you
want, there is not a fixed amount of wealth in the world.
You can make more wealth. Wealth has been getting created
and destroyed (but on balance, created) for all of human
history.

Suppose you own a beat-up old car. Instead of sitting on

your butt next summer, you could spend the time restoring
your car to pristine condition. In doing so you create wealth.
The world is-- and you specifically are-- one pristine old car
the richer. And not just in some metaphorical way. If you
sell your car, you'll get more for it.

In restoring your old car you have made yourself richer. You
haven't made anyone else poorer. So there is obviously not
a fixed pie. And in fact, when you look at it this way, you
wonder why anyone would think there was. [5]
Kids know, without knowing they know, that they can create
wealth. If you need to give someone a present and don't
have any money, you make one. But kids are so bad at
making things that they consider home-made presents to be
a distinct, inferior, sort of thing to store-bought ones-- a
mere expression of the proverbial thought that counts. And
indeed, the lumpy ashtrays we made for our parents did not
have much of a resale market.

Craftsmen

The people most likely to grasp that wealth can be created

are the ones who are good at making things, the craftsmen.
Their hand-made objects become store-bought ones. But
with the rise of industrialization there are fewer and fewer
craftsmen. One of the biggest remaining groups is computer
programmers.

A programmer can sit down in front of a computer and

create wealth. A good piece of software is, in itself, a
valuable thing. There is no manufacturing to confuse the
issue. Those characters you type are a complete, finished
product. If someone sat down and wrote a web browser that
didn't suck (a fine idea, by the way), the world would be
that much richer. [5b]

Everyone in a company works together to create wealth, in

the sense of making more things people want. Many of the
employees (e.g. the people in the mailroom or the personnel
department) work at one remove from the actual making of
stuff. Not the programmers. They literally think the product,
one line at a time. And so it's clearer to programmers that
wealth is something that's made, rather than being
distributed, like slices of a pie, by some imaginary Daddy.

It's also obvious to programmers that there are huge

variations in the rate at which wealth is created. At Viaweb
we had one programmer who was a sort of monster of
productivity. I remember watching what he did one long day
and estimating that he had added several hundred thousand
dollars to the market value of the company. A great
programmer, on a roll, could create a million dollars worth
of wealth in a couple weeks. A mediocre programmer over
the same period will generate zero or even negative wealth
(e.g. by introducing bugs).

This is why so many of the best programmers are

libertarians. In our world, you sink or swim, and there are
no excuses. When those far removed from the creation of
wealth-- undergraduates, reporters, politicians-- hear that
the richest 5% of the people have half the total wealth, they
tend to think injustice! An experienced programmer would
be more likely to think is that all? The top 5% of
programmers probably write 99% of the good software.

Wealth can be created without being sold. Scientists, till

recently at least, effectively donated the wealth they
created. We are all richer for knowing about penicillin,
because we're less likely to die from infections. Wealth is
whatever people want, and not dying is certainly something
we want. Hackers often donate their work by writing open
source software that anyone can use for free. I am much
the richer for the operating system FreeBSD, which I'm
running on the computer I'm using now, and so is Yahoo,
which runs it on all their servers.

What a Job Is

In industrialized countries, people belong to one institution

or another at least until their twenties. After all those years
you get used to the idea of belonging to a group of people
who all get up in the morning, go to some set of buildings,
and do things that they do not, ordinarily, enjoy doing.
Belonging to such a group becomes part of your identity:
name, age, role, institution. If you have to introduce
yourself, or someone else describes you, it will be as
something like, John Smith, age 10, a student at such and
such elementary school, or John Smith, age 20, a student at
such and such college.

When John Smith finishes school he is expected to get a

job. And what getting a job seems to mean is joining
another institution. Superficially it's a lot like college. You
pick the companies you want to work for and apply to join
them. If one likes you, you become a member of this new
group. You get up in the morning and go to a new set of
buildings, and do things that you do not, ordinarily, enjoy
doing. There are a few differences: life is not as much fun,
and you get paid, instead of paying, as you did in college.
But the similarities feel greater than the differences. John
Smith is now John Smith, 22, a software developer at such
and such corporation.

In fact John Smith's life has changed more than he realizes.

Socially, a company looks much like college, but the deeper
you go into the underlying reality, the more different it gets.

What a company does, and has to do if it wants to continue

to exist, is earn money. And the way most companies make
money is by creating wealth. Companies can be so
specialized that this similarity is concealed, but it is not only
manufacturing companies that create wealth. A big
component of wealth is location. Remember that magic
machine that could make you cars and cook you dinner and
so on? It would not be so useful if it delivered your dinner
to a random location in central Asia. If wealth means what
people want, companies that move things also create
wealth. Ditto for many other kinds of companies that don't
make anything physical. Nearly all companies exist to do
something people want.

And that's what you do, as well, when you go to work for a
company. But here there is another layer that tends to
obscure the underlying reality. In a company, the work you
do is averaged together with a lot of other people's. You
may not even be aware you're doing something people
want. Your contribution may be indirect. But the company as
a whole must be giving people something they want, or they
won't make any money. And if they are paying you x dollars
a year, then on average you must be contributing at least x
dollars a year worth of work, or the company will be
spending more than it makes, and will go out of business.

Someone graduating from college thinks, and is told, that he

needs to get a job, as if the important thing were becoming
a member of an institution. A more direct way to put it
would be: you need to start doing something people want.
You don't need to join a company to do that. All a company
is is a group of people working together to do something
people want. It's doing something people want that matters,
not joining the group. [6]

For most people the best plan probably is to go to work for

some existing company. But it is a good idea to understand
what's happening when you do this. A job means doing
something people want, averaged together with everyone
else in that company.

Working Harder

That averaging gets to be a problem. I think the single

biggest problem afflicting large companies is the difficulty of
assigning a value to each person's work. For the most part
they punt. In a big company you get paid a fairly predictable
salary for working fairly hard. You're expected not to be
obviously incompetent or lazy, but you're not expected to
devote your whole life to your work.

It turns out, though, that there are economies of scale in

how much of your life you devote to your work. In the right
kind of business, someone who really devoted himself to
work could generate ten or even a hundred times as much
wealth as an average employee. A programmer, for
example, instead of chugging along maintaining and
updating an existing piece of software, could write a whole
new piece of software, and with it create a new source of
revenue.

Companies are not set up to reward people who want to do

this. You can't go to your boss and say, I'd like to start
working ten times as hard, so will you please pay me ten
times as much? For one thing, the official fiction is that you
are already working as hard as you can. But a more serious
problem is that the company has no way of measuring the
value of your work.

Salesmen are an exception. It's easy to measure how much

revenue they generate, and they're usually paid a
percentage of it. If a salesman wants to work harder, he can
just start doing it, and he will automatically get paid
proportionally more.

There is one other job besides sales where big companies

can hire first-rate people: in the top management jobs. And
for the same reason: their performance can be measured.
The top managers are held responsible for the performance
of the entire company. Because an ordinary employee's
performance can't usually be measured, he is not expected
to do more than put in a solid effort. Whereas top
management, like salespeople, have to actually come up
with the numbers. The CEO of a company that tanks cannot
plead that he put in a solid effort. If the company does
badly, he's done badly.

A company that could pay all its employees so

straightforwardly would be enormously successful. Many
employees would work harder if they could get paid for it.
More importantly, such a company would attract people who
wanted to work especially hard. It would crush its
competitors.

Unfortunately, companies can't pay everyone like salesmen.

Salesmen work alone. Most employees' work is tangled
together. Suppose a company makes some kind of consumer
gadget. The engineers build a reliable gadget with all kinds
of new features; the industrial designers design a beautiful
case for it; and then the marketing people convince
everyone that it's something they've got to have. How do
you know how much of the gadget's sales are due to each
group's efforts? Or, for that matter, how much is due to the
creators of past gadgets that gave the company a reputation
for quality? There's no way to untangle all their
contributions. Even if you could read the minds of the
consumers, you'd find these factors were all blurred
together.

If you want to go faster, it's a problem to have your work

tangled together with a large number of other people's. In a
large group, your performance is not separately measurable-
- and the rest of the group slows you down.

Measurement and Leverage

To get rich you need to get yourself in a situation with two

things, measurement and leverage. You need to be in a
position where your performance can be measured, or there
is no way to get paid more by doing more. And you have to
have leverage, in the sense that the decisions you make
have a big effect.

Measurement alone is not enough. An example of a job with

measurement but not leverage is doing piecework in a
sweatshop. Your performance is measured and you get paid
accordingly, but you have no scope for decisions. The only
decision you get to make is how fast you work, and that can
probably only increase your earnings by a factor of two or
three.

An example of a job with both measurement and leverage

would be lead actor in a movie. Your performance can be
measured in the gross of the movie. And you have leverage
in the sense that your performance can make or break it.

CEOs also have both measurement and leverage. They're

measured, in that the performance of the company is their
performance. And they have leverage in that their decisions
set the whole company moving in one direction or another.

I think everyone who gets rich by their own efforts will be

found to be in a situation with measurement and leverage.
Everyone I can think of does: CEOs, movie stars, hedge fund
managers, professional athletes. A good hint to the presence
of leverage is the possibility of failure. Upside must be
balanced by downside, so if there is big potential for gain
there must also be a terrifying possibility of loss. CEOs,
stars, fund managers, and athletes all live with the sword
hanging over their heads; the moment they start to suck,
they're out. If you're in a job that feels safe, you are not
going to get rich, because if there is no danger there is
almost certainly no leverage.

But you don't have to become a CEO or a movie star to be

in a situation with measurement and leverage. All you need
to do is be part of a small group working on a hard problem.

Smallness = Measurement

If you can't measure the value of the work done by

individual employees, you can get close. You can measure
the value of the work done by small groups.

One level at which you can accurately measure the revenue

generated by employees is at the level of the whole
company. When the company is small, you are thereby fairly
close to measuring the contributions of individual employees.
A viable startup might only have ten employees, which puts
you within a factor of ten of measuring individual effort.

Starting or joining a startup is thus as close as most people

can get to saying to one's boss, I want to work ten times as
hard, so please pay me ten times as much. There are two
differences: you're not saying it to your boss, but directly to
the customers (for whom your boss is only a proxy after all),
and you're not doing it individually, but along with a small
group of other ambitious people.

It will, ordinarily, be a group. Except in a few unusual kinds

of work, like acting or writing books, you can't be a
company of one person. And the people you work with had
better be good, because it's their work that yours is going to
be averaged with.

A big company is like a giant galley driven by a thousand

rowers. Two things keep the speed of the galley down. One
is that individual rowers don't see any result from working
harder. The other is that, in a group of a thousand people,
the average rower is likely to be pretty average.

If you took ten people at random out of the big galley and
put them in a boat by themselves, they could probably go
faster. They would have both carrot and stick to motivate
them. An energetic rower would be encouraged by the
thought that he could have a visible effect on the speed of
the boat. And if someone was lazy, the others would be
more likely to notice and complain.

But the real advantage of the ten-man boat shows when you
take the ten best rowers out of the big galley and put them
in a boat together. They will have all the extra motivation
that comes from being in a small group. But more
importantly, by selecting that small a group you can get the
best rowers. Each one will be in the top 1%. It's a much
better deal for them to average their work together with a
small group of their peers than to average it with everyone.

That's the real point of startups. Ideally, you are getting

together with a group of other people who also want to work
a lot harder, and get paid a lot more, than they would in a
big company. And because startups tend to get founded by
self-selecting groups of ambitious people who already know
one another (at least by reputation), the level of
measurement is more precise than you get from smallness
alone. A startup is not merely ten people, but ten people like
you.

Steve Jobs once said that the success or failure of a startup

depends on the first ten employees. I agree. If anything, it's
more like the first five. Being small is not, in itself, what
makes startups kick butt, but rather that small groups can
be select. You don't want small in the sense of a village, but
small in the sense of an all-star team.

The larger a group, the closer its average member will be to

the average for the population as a whole. So all other
things being equal, a very able person in a big company is
probably getting a bad deal, because his performance is
dragged down by the overall lower performance of the
others. Of course, all other things often are not equal: the
able person may not care about money, or may prefer the
stability of a large company. But a very able person who
does care about money will ordinarily do better to go off and
work with a small group of peers.

Technology = Leverage

Startups offer anyone a way to be in a situation with

measurement and leverage. They allow measurement
because they're small, and they offer leverage because they
make money by inventing new technology.

What is technology? It's technique. It's the way we all do

things. And when you discover a new way to do things, its
value is multiplied by all the people who use it. It is the
proverbial fishing rod, rather than the fish. That's the
difference between a startup and a restaurant or a barber
shop. You fry eggs or cut hair one customer at a time.
Whereas if you solve a technical problem that a lot of people
care about, you help everyone who uses your solution.
That's leverage.

If you look at history, it seems that most people who got

rich by creating wealth did it by developing new technology.
You just can't fry eggs or cut hair fast enough. What made
the Florentines rich in 1200 was the discovery of new
techniques for making the high-tech product of the time,
fine woven cloth. What made the Dutch rich in 1600 was
the discovery of shipbuilding and navigation techniques that
enabled them to dominate the seas of the Far East.
Fortunately there is a natural fit between smallness and
solving hard problems. The leading edge of technology
moves fast. Technology that's valuable today could be
worthless in a couple years. Small companies are more at
home in this world, because they don't have layers of
bureaucracy to slow them down. Also, technical advances
tend to come from unorthodox approaches, and small
companies are less constrained by convention.

Big companies can develop technology. They just can't do it

quickly. Their size makes them slow and prevents them from
rewarding employees for the extraordinary effort required.
So in practice big companies only get to develop technology
in fields where large capital requirements prevent startups
from competing with them, like microprocessors, power
plants, or passenger aircraft. And even in those fields they
depend heavily on startups for components and ideas.

It's obvious that biotech or software startups exist to solve

hard technical problems, but I think it will also be found to
be true in businesses that don't seem to be about
technology. McDonald's, for example, grew big by designing
a system, the McDonald's franchise, that could then be
reproduced at will all over the face of the earth. A
McDonald's franchise is controlled by rules so precise that it
is practically a piece of software. Write once, run
everywhere. Ditto for Wal-Mart. Sam Walton got rich not by
being a retailer, but by designing a new kind of store.

Use difficulty as a guide not just in selecting the overall aim

of your company, but also at decision points along the way.
At Viaweb one of our rules of thumb was run upstairs.
Suppose you are a little, nimble guy being chased by a big,
fat, bully. You open a door and find yourself in a staircase.
Do you go up or down? I say up. The bully can probably run
downstairs as fast as you can. Going upstairs his bulk will be
more of a disadvantage. Running upstairs is hard for you but
even harder for him.

What this meant in practice was that we deliberately sought

hard problems. If there were two features we could add to
our software, both equally valuable in proportion to their
difficulty, we'd always take the harder one. Not just because
it was more valuable, but because it was harder. We
delighted in forcing bigger, slower competitors to follow us
over difficult ground. Like guerillas, startups prefer the
difficult terrain of the mountains, where the troops of the
central government can't follow. I can remember times when
we were just exhausted after wrestling all day with some
horrible technical problem. And I'd be delighted, because
something that was hard for us would be impossible for our
competitors.

This is not just a good way to run a startup. It's what a

startup is. Venture capitalists know about this and have a
phrase for it: barriers to entry. If you go to a VC with a new
idea and ask him to invest in it, one of the first things he'll
ask is, how hard would this be for someone else to develop?
That is, how much difficult ground have you put between
yourself and potential pursuers? [7] And you had better
have a convincing explanation of why your technology would
be hard to duplicate. Otherwise as soon as some big
company becomes aware of it, they'll make their own, and
with their brand name, capital, and distribution clout, they'll
take away your market overnight. You'd be like guerillas
caught in the open field by regular army forces.

One way to put up barriers to entry is through patents. But

patents may not provide much protection. Competitors
commonly find ways to work around a patent. And if they
can't, they may simply violate it and invite you to sue them.
A big company is not afraid to be sued; it's an everyday
thing for them. They'll make sure that suing them is
expensive and takes a long time. Ever heard of Philo
Farnsworth? He invented television. The reason you've never
heard of him is that his company was not the one to make
money from it. [8] The company that did was RCA, and
Farnsworth's reward for his efforts was a decade of patent
litigation.

Here, as so often, the best defense is a good offense. If you

can develop technology that's simply too hard for
competitors to duplicate, you don't need to rely on other
defenses. Start by picking a hard problem, and then at
every decision point, take the harder choice. [9]

The Catch(es)

If it were simply a matter of working harder than an

ordinary employee and getting paid proportionately, it would
obviously be a good deal to start a startup. Up to a point it
would be more fun. I don't think many people like the slow
pace of big companies, the interminable meetings, the
water-cooler conversations, the clueless middle managers,
and so on.

Unfortunately there are a couple catches. One is that you

can't choose the point on the curve that you want to inhabit.
You can't decide, for example, that you'd like to work just
two or three times as hard, and get paid that much more.
When you're running a startup, your competitors decide how
hard you work. And they pretty much all make the same
decision: as hard as you possibly can.

The other catch is that the payoff is only on average

proportionate to your productivity. There is, as I said before,
a large random multiplier in the success of any company. So
in practice the deal is not that you're 30 times as productive
and get paid 30 times as much. It is that you're 30 times as
productive, and get paid between zero and a thousand times
as much. If the mean is 30x, the median is probably zero.
Most startups tank, and not just the dogfood portals we all
heard about during the Internet Bubble. It's common for a
startup to be developing a genuinely good product, take
slightly too long to do it, run out of money, and have to
shut down.

A startup is like a mosquito. A bear can absorb a hit and a

crab is armored against one, but a mosquito is designed for
one thing: to score. No energy is wasted on defense. The
defense of mosquitos, as a species, is that there are a lot of
them, but this is little consolation to the individual mosquito.

Startups, like mosquitos, tend to be an all-or-nothing

proposition. And you don't generally know which of the two
you're going to get till the last minute. Viaweb came close to
tanking several times. Our trajectory was like a sine wave.
Fortunately we got bought at the top of the cycle, but it was
damned close. While we were visiting Yahoo in California to
talk about selling the company to them, we had to borrow a
conference room to reassure an investor who was about to
back out of a new round of funding that we needed to stay
alive.

The all-or-nothing aspect of startups was not something we

wanted. Viaweb's hackers were all extremely risk-averse. If
there had been some way just to work super hard and get
paid for it, without having a lottery mixed in, we would have
been delighted. We would have much preferred a 100%
chance of $1 million to a 20% chance of $10 million, even
though theoretically the second is worth twice as much.
Unfortunately, there is not currently any space in the
business world where you can get the first deal.

The closest you can get is by selling your startup in the early
stages, giving up upside (and risk) for a smaller but
guaranteed payoff. We had a chance to do this, and
stupidly, as we then thought, let it slip by. After that we
became comically eager to sell. For the next year or so, if
anyone expressed the slightest curiousity about Viaweb we
would try to sell them the company. But there were no
takers, so we had to keep going.

It would have been a bargain to buy us at an early stage,

but companies doing acquisitions are not looking for
bargains. A company big enough to acquire startups will be
big enough to be fairly conservative, and within the
company the people in charge of acquisitions will be among
the more conservative, because they are likely to be
business school types who joined the company late. They
would rather overpay for a safe choice. So it is easier to sell
an established startup, even at a large premium, than an
early-stage one.

Get Users

I think it's a good idea to get bought, if you can. Running a

business is different from growing one. It is just as well to
let a big company take over once you reach cruising altitude.
It's also financially wiser, because selling allows you to
diversify. What would you think of a financial advisor who
put all his client's assets into one volatile stock?

How do you get bought? Mostly by doing the same things

you'd do if you didn't intend to sell the company. Being
profitable, for example. But getting bought is also an art in
its own right, and one that we spent a lot of time trying to
master.

Potential buyers will always delay if they can. The hard part
about getting bought is getting them to act. For most
people, the most powerful motivator is not the hope of gain,
but the fear of loss. For potential acquirers, the most
powerful motivator is the prospect that one of their
competitors will buy you. This, as we found, causes CEOs to
take red-eyes. The second biggest is the worry that, if they
don't buy you now, you'll continue to grow rapidly and will
cost more to acquire later, or even become a competitor.

In both cases, what it all comes down to is users. You'd

think that a company about to buy you would do a lot of
research and decide for themselves how valuable your
technology was. Not at all. What they go by is the number
of users you have.

In effect, acquirers assume the customers know who has the

best technology. And this is not as stupid as it sounds. Users
are the only real proof that you've created wealth. Wealth is
what people want, and if people aren't using your software,
maybe it's not just because you're bad at marketing. Maybe
it's because you haven't made what they want.

Venture capitalists have a list of danger signs to watch out

for. Near the top is the company run by techno-weenies who
are obsessed with solving interesting technical problems,
instead of making users happy. In a startup, you're not just
trying to solve problems. You're trying to solve problems
that users care about.

So I think you should make users the test, just as acquirers

do. Treat a startup as an optimization problem in which
performance is measured by number of users. As anyone
who has tried to optimize software knows, the key is
measurement. When you try to guess where your program is
slow, and what would make it faster, you almost always
guess wrong.

Number of users may not be the perfect test, but it will be

very close. It's what acquirers care about. It's what revenues
depend on. It's what makes competitors unhappy. It's what
impresses reporters, and potential new users. Certainly it's a
better test than your a priori notions of what problems are
important to solve, no matter how technically adept you are.

Among other things, treating a startup as an optimization

problem will help you avoid another pitfall that VCs worry
about, and rightly-- taking a long time to develop a product.
Now we can recognize this as something hackers already
know to avoid: premature optimization. Get a version 1.0
out there as soon as you can. Until you have some users to
measure, you're optimizing based on guesses.

The ball you need to keep your eye on here is the

underlying principle that wealth is what people want. If you
plan to get rich by creating wealth, you have to know what
people want. So few businesses really pay attention to
making customers happy. How often do you walk into a
store, or call a company on the phone, with a feeling of
dread in the back of your mind? When you hear "your call is
important to us, please stay on the line," do you think, oh
good, now everything will be all right?

A restaurant can afford to serve the occasional burnt dinner.

But in technology, you cook one thing and that's what
everyone eats. So any difference between what people want
and what you deliver is multiplied. You please or annoy
customers wholesale. The closer you can get to what they
want, the more wealth you generate.

Wealth and Power

Making wealth is not the only way to get rich. For most of
human history it has not even been the most common. Until
a few centuries ago, the main sources of wealth were mines,
slaves and serfs, land, and cattle, and the only ways to
acquire these rapidly were by inheritance, marriage,
conquest, or confiscation. Naturally wealth had a bad
reputation.

Two things changed. The first was the rule of law. For most
of the world's history, if you did somehow accumulate a
fortune, the ruler or his henchmen would find a way to steal
it. But in medieval Europe something new happened. A new
class of merchants and manufacturers began to collect in
towns. [10] Together they were able to withstand the local
feudal lord. So for the first time in our history, the bullies
stopped stealing the nerds' lunch money. This was naturally
a great incentive, and possibly indeed the main cause of the
second big change, industrialization.

A great deal has been written about the causes of the

Industrial Revolution. But surely a necessary, if not
sufficient, condition was that people who made fortunes be
able to enjoy them in peace. [11] One piece of evidence is
what happened to countries that tried to return to the old
model, like the Soviet Union, and to a lesser extent Britain
under the labor governments of the 1960s and early 1970s.
Take away the incentive of wealth, and technical innovation
grinds to a halt.

Remember what a startup is, economically: a way of saying,

I want to work faster. Instead of accumulating money slowly
by being paid a regular wage for fifty years, I want to get it
over with as soon as possible. So governments that forbid
you to accumulate wealth are in effect decreeing that you
work slowly. They're willing to let you earn $3 million over
fifty years, but they're not willing to let you work so hard
that you can do it in two. They are like the corporate boss
that you can't go to and say, I want to work ten times as
hard, so please pay me ten times a much. Except this is not
a boss you can escape by starting your own company.

The problem with working slowly is not just that technical

innovation happens slowly. It's that it tends not to happen at
all. It's only when you're deliberately looking for hard
problems, as a way to use speed to the greatest advantage,
that you take on this kind of project. Developing new
technology is a pain in the ass. It is, as Edison said, one
percent inspiration and ninety-nine percent perspiration.
Without the incentive of wealth, no one wants to do it.
Engineers will work on sexy projects like fighter planes and
moon rockets for ordinary salaries, but more mundane
technologies like light bulbs or semiconductors have to be
developed by entrepreneurs.

Startups are not just something that happened in Silicon

Valley in the last couple decades. Since it became possible
to get rich by creating wealth, everyone who has done it has
used essentially the same recipe: measurement and
leverage, where measurement comes from working with a
small group, and leverage from developing new techniques.
The recipe was the same in Florence in 1200 as it is in Santa
Clara today.

Understanding this may help to answer an important

question: why Europe grew so powerful. Was it something
about the geography of Europe? Was it that Europeans are
somehow racially superior? Was it their religion? The answer
(or at least the proximate cause) may be that the
Europeans rode on the crest of a powerful new idea:
allowing those who made a lot of money to keep it.

Once you're allowed to do that, people who want to get rich

can do it by generating wealth instead of stealing it. The
resulting technological growth translates not only into wealth
but into military power. The theory that led to the stealth
plane was developed by a Soviet mathematician. But
because the Soviet Union didn't have a computer industry, it
remained for them a theory; they didn't have hardware
capable of executing the calculations fast enough to design
an actual airplane.

In that respect the Cold War teaches the same lesson as

World War II and, for that matter, most wars in recent
history. Don't let a ruling class of warriors and politicians
squash the entrepreneurs. The same recipe that makes
individuals rich makes countries powerful. Let the nerds
keep their lunch money, and you rule the world.

Notes

[1] One valuable thing you tend to get only in startups is

uninterruptability. Different kinds of work have different time
quanta. Someone proofreading a manuscript could probably
be interrupted every fifteen minutes with little loss of
productivity. But the time quantum for hacking is very long:
it might take an hour just to load a problem into your head.
So the cost of having someone from personnel call you
about a form you forgot to fill out can be huge.

This is why hackers give you such a baleful stare as they

turn from their screen to answer your question. Inside their
heads a giant house of cards is tottering.

The mere possibility of being interrupted deters hackers from

starting hard projects. This is why they tend to work late at
night, and why it's next to impossible to write great software
in a cubicle (except late at night).
One great advantage of startups is that they don't yet have
any of the people who interrupt you. There is no personnel
department, and thus no form nor anyone to call you about
it.

[2] Faced with the idea that people working for startups
might be 20 or 30 times as productive as those working for
large companies, executives at large companies will naturally
wonder, how could I get the people working for me to do
that? The answer is simple: pay them to.

Internally most companies are run like Communist states. If

you believe in free markets, why not turn your company into
one?

Hypothesis: A company will be maximally profitable when

each employee is paid in proportion to the wealth they
generate.

[3] Until recently even governments sometimes didn't grasp

the distinction between money and wealth. Adam Smith
(Wealth of Nations, v:i) mentions several that tried to
preserve their "wealth" by forbidding the export of gold or
silver. But having more of the medium of exchange would
not make a country richer; if you have more money chasing
the same amount of material wealth, the only result is
higher prices.

[4] There are many senses of the word "wealth," not all of
them material. I'm not trying to make a deep philosophical
point here about which is the true kind. I'm writing about
one specific, rather technical sense of the word "wealth."
What people will give you money for. This is an interesting
sort of wealth to study, because it is the kind that prevents
you from starving. And what people will give you money for
depends on them, not you.

When you're starting a business, it's easy to slide into

thinking that customers want what you do. During the
Internet Bubble I talked to a woman who, because she liked
the outdoors, was starting an "outdoor portal." You know
what kind of business you should start if you like the
outdoors? One to recover data from crashed hard disks.

What's the connection? None at all. Which is precisely my

point. If you want to create wealth (in the narrow technical
sense of not starving) then you should be especially
skeptical about any plan that centers on things you like
doing. That is where your idea of what's valuable is least
likely to coincide with other people's.

[5] In the average car restoration you probably do make

everyone else microscopically poorer, by doing a small
amount of damage to the environment. While environmental
costs should be taken into account, they don't make wealth
a zero-sum game. For example, if you repair a machine
that's broken because a part has come unscrewed, you
create wealth with no environmental cost.
[5b] This essay was written before Firefox.

[6] Many people feel confused and depressed in their early

twenties. Life seemed so much more fun in college. Well, of
course it was. Don't be fooled by the surface similarities.
You've gone from guest to servant. It's possible to have fun
in this new world. Among other things, you now get to go
behind the doors that say "authorized personnel only." But
the change is a shock at first, and all the worse if you're not
consciously aware of it.

[7] When VCs asked us how long it would take another

startup to duplicate our software, we used to reply that they
probably wouldn't be able to at all. I think this made us
seem naive, or liars.

[8] Few technologies have one clear inventor. So as a rule, if

you know the "inventor" of something (the telephone, the
assembly line, the airplane, the light bulb, the transistor) it
is because their company made money from it, and the
company's PR people worked hard to spread the story. If
you don't know who invented something (the automobile,
the television, the computer, the jet engine, the laser), it's
because other companies made all the money.

[9] This is a good plan for life in general. If you have two
choices, choose the harder. If you're trying to decide
whether to go out running or sit home and watch TV, go
running. Probably the reason this trick works so well is that
when you have two choices and one is harder, the only
reason you're even considering the other is laziness. You
know in the back of your mind what's the right thing to do,
and this trick merely forces you to acknowledge it.

[10] It is probably no accident that the middle class first

appeared in northern Italy and the low countries, where
there were no strong central governments. These two
regions were the richest of their time and became the twin
centers from which Renaissance civilization radiated. If they
no longer play that role, it is because other places, like the
United States, have been truer to the principles they
discovered.

[11] It may indeed be a sufficient condition. But if so, why

didn't the Industrial Revolution happen earlier? Two possible
(and not incompatible) answers: (a) It did. The Industrial
Revolution was one in a series. (b) Because in medieval
towns, monopolies and guild regulations initially slowed the
development of new means of production.

Comment on this essay.

Russian Translation German Translation

 Spanish Translation

You'll find this essay and 14 others in Hackers & Painters.

March 2008, rev. June 2008

Technology tends to separate normal from natural. Our

bodies weren't designed to eat the foods that people in rich
countries eat, or to get so little exercise. There may be a
similar problem with the way we work: a normal job may be
as bad for us intellectually as white flour or sugar is for us
physically.

I began to suspect this after spending several years working

with startup founders. I've now worked with over 200 of
them, and I've noticed a definite difference between
programmers working on their own startups and those
working for large organizations. I wouldn't say founders
seem happier, necessarily; starting a startup can be very
stressful. Maybe the best way to put it is to say that they're
happier in the sense that your body is happier during a long
run than sitting on a sofa eating doughnuts.

Though they're statistically abnormal, startup founders seem

to be working in a way that's more natural for humans.

I was in Africa last year and saw a lot of animals in the wild
that I'd only seen in zoos before. It was remarkable how
different they seemed. Particularly lions. Lions in the wild
seem about ten times more alive. They're like different
animals. I suspect that working for oneself feels better to
humans in much the same way that living in the wild must
feel better to a wide-ranging predator like a lion. Life in a
zoo is easier, but it isn't the life they were designed for.

Trees

What's so unnatural about working for a big company? The

root of the problem is that humans weren't meant to work in
such large groups.

Another thing you notice when you see animals in the wild is
that each species thrives in groups of a certain size. A herd
of impalas might have 100 adults; baboons maybe 20; lions
rarely 10. Humans also seem designed to work in groups,
and what I've read about hunter-gatherers accords with
research on organizations and my own experience to
suggest roughly what the ideal size is: groups of 8 work
well; by 20 they're getting hard to manage; and a group of
50 is really unwieldy. [1]
Whatever the upper limit is, we are clearly not meant to
work in groups of several hundred. And yet—for reasons
having more to do with technology than human nature—a
great many people work for companies with hundreds or
thousands of employees.

Companies know groups that large wouldn't work, so they

divide themselves into units small enough to work together.
But to coordinate these they have to introduce something
new: bosses.

These smaller groups are always arranged in a tree

structure. Your boss is the point where your group attaches
to the tree. But when you use this trick for dividing a large
group into smaller ones, something strange happens that
I've never heard anyone mention explicitly. In the group one
level up from yours, your boss represents your entire group.
A group of 10 managers is not merely a group of 10 people
working together in the usual way. It's really a group of
groups. Which means for a group of 10 managers to work
together as if they were simply a group of 10 individuals,
the group working for each manager would have to work as
if they were a single person—the workers and manager
would each share only one person's worth of freedom
between them.

In practice a group of people are never able to act as if they

were one person. But in a large organization divided into
groups in this way, the pressure is always in that direction.
Each group tries its best to work as if it were the small
group of individuals that humans were designed to work in.
That was the point of creating it. And when you propagate
that constraint, the result is that each person gets freedom
of action in inverse proportion to the size of the entire tree.
[2]

Anyone who's worked for a large organization has felt this.

You can feel the difference between working for a company
with 100 employees and one with 10,000, even if your group
has only 10 people.

Corn Syrup

A group of 10 people within a large organization is a kind of

fake tribe. The number of people you interact with is about
right. But something is missing: individual initiative. Tribes
of hunter-gatherers have much more freedom. The leaders
have a little more power than other members of the tribe,
but they don't generally tell them what to do and when the
way a boss can.

It's not your boss's fault. The real problem is that in the
group above you in the hierarchy, your entire group is one
virtual person. Your boss is just the way that constraint is
imparted to you.

So working in a group of 10 people within a large

organization feels both right and wrong at the same time.
On the surface it feels like the kind of group you're meant to
work in, but something major is missing. A job at a big
company is like high fructose corn syrup: it has some of the
qualities of things you're meant to like, but is disastrously
lacking in others.

Indeed, food is an excellent metaphor to explain what's

wrong with the usual sort of job.

For example, working for a big company is the default thing

to do, at least for programmers. How bad could it be? Well,
food shows that pretty clearly. If you were dropped at a
random point in America today, nearly all the food around
you would be bad for you. Humans were not designed to eat
white flour, refined sugar, high fructose corn syrup, and
hydrogenated vegetable oil. And yet if you analyzed the
contents of the average grocery store you'd probably find
these four ingredients accounted for most of the calories.
"Normal" food is terribly bad for you. The only people who
eat what humans were actually designed to eat are a few
Birkenstock-wearing weirdos in Berkeley.

If "normal" food is so bad for us, why is it so common?

There are two main reasons. One is that it has more
immediate appeal. You may feel lousy an hour after eating
that pizza, but eating the first couple bites feels great. The
other is economies of scale. Producing junk food scales;
producing fresh vegetables doesn't. Which means (a) junk
food can be very cheap, and (b) it's worth spending a lot to
market it.

If people have to choose between something that's cheap,

heavily marketed, and appealing in the short term, and
something that's expensive, obscure, and appealing in the
long term, which do you think most will choose?

It's the same with work. The average MIT graduate wants to
work at Google or Microsoft, because it's a recognized brand,
it's safe, and they'll get paid a good salary right away. It's
the job equivalent of the pizza they had for lunch. The
drawbacks will only become apparent later, and then only in
a vague sense of malaise.

And founders and early employees of startups, meanwhile,

are like the Birkenstock-wearing weirdos of Berkeley: though
a tiny minority of the population, they're the ones living as
humans are meant to. In an artificial world, only extremists
live naturally.

Programmers

The restrictiveness of big company jobs is particularly hard

on programmers, because the essence of programming is to
build new things. Sales people make much the same pitches
every day; support people answer much the same questions;
but once you've written a piece of code you don't need to
write it again. So a programmer working as programmers
are meant to is always making new things. And when you're
part of an organization whose structure gives each person
freedom in inverse proportion to the size of the tree, you're
going to face resistance when you do something new.
This seems an inevitable consequence of bigness. It's true
even in the smartest companies. I was talking recently to a
founder who considered starting a startup right out of
college, but went to work for Google instead because he
thought he'd learn more there. He didn't learn as much as
he expected. Programmers learn by doing, and most of the
things he wanted to do, he couldn't—sometimes because the
company wouldn't let him, but often because the company's
code wouldn't let him. Between the drag of legacy code, the
overhead of doing development in such a large organization,
and the restrictions imposed by interfaces owned by other
groups, he could only try a fraction of the things he would
have liked to. He said he has learned much more in his own
startup, despite the fact that he has to do all the company's
errands as well as programming, because at least when he's
programming he can do whatever he wants.

An obstacle downstream propagates upstream. If you're not

allowed to implement new ideas, you stop having them. And
vice versa: when you can do whatever you want, you have
more ideas about what to do. So working for yourself makes
your brain more powerful in the same way a low-restriction
exhaust system makes an engine more powerful.

Working for yourself doesn't have to mean starting a

startup, of course. But a programmer deciding between a
regular job at a big company and their own startup is
probably going to learn more doing the startup.

You can adjust the amount of freedom you get by scaling

the size of company you work for. If you start the company,
you'll have the most freedom. If you become one of the first
10 employees you'll have almost as much freedom as the
founders. Even a company with 100 people will feel different
from one with 1000.

Working for a small company doesn't ensure freedom. The

tree structure of large organizations sets an upper bound on
freedom, not a lower bound. The head of a small company
may still choose to be a tyrant. The point is that a large
organization is compelled by its structure to be one.

Consequences

That has real consequences for both organizations and

individuals. One is that companies will inevitably slow down
as they grow larger, no matter how hard they try to keep
their startup mojo. It's a consequence of the tree structure
that every large organization is forced to adopt.

Or rather, a large organization could only avoid slowing

down if they avoided tree structure. And since human nature
limits the size of group that can work together, the only way
I can imagine for larger groups to avoid tree structure would
be to have no structure: to have each group actually be
independent, and to work together the way components of a
market economy do.

That might be worth exploring. I suspect there are already

some highly partitionable businesses that lean this way. But
I don't know any technology companies that have done it.

There is one thing companies can do short of structuring

themselves as sponges: they can stay small. If I'm right,
then it really pays to keep a company as small as it can be
at every stage. Particularly a technology company. Which
means it's doubly important to hire the best people.
Mediocre hires hurt you twice: they get less done, but they
also make you big, because you need more of them to solve
a given problem.

For individuals the upshot is the same: aim small. It will

always suck to work for large organizations, and the larger
the organization, the more it will suck.

In an essay I wrote a couple years ago I advised graduating

seniors to work for a couple years for another company
before starting their own. I'd modify that now. Work for
another company if you want to, but only for a small one,
and if you want to start your own startup, go ahead.

The reason I suggested college graduates not start startups

immediately was that I felt most would fail. And they will.
But ambitious programmers are better off doing their own
thing and failing than going to work at a big company.
Certainly they'll learn more. They might even be better off
financially. A lot of people in their early twenties get into
debt, because their expenses grow even faster than the
salary that seemed so high when they left school. At least if
you start a startup and fail your net worth will be zero
rather than negative. [3]

We've now funded so many different types of founders that

we have enough data to see patterns, and there seems to
be no benefit from working for a big company. The people
who've worked for a few years do seem better than the ones
straight out of college, but only because they're that much
older.

The people who come to us from big companies often seem

kind of conservative. It's hard to say how much is because
big companies made them that way, and how much is the
natural conservatism that made them work for the big
companies in the first place. But certainly a large part of it is
learned. I know because I've seen it burn off.

Having seen that happen so many times is one of the things

that convinces me that working for oneself, or at least for a
small group, is the natural way for programmers to live.
Founders arriving at Y Combinator often have the
downtrodden air of refugees. Three months later they're
transformed: they have so much more confidence that they
seem as if they've grown several inches taller. [4] Strange
as this sounds, they seem both more worried and happier at
the same time. Which is exactly how I'd describe the way
lions seem in the wild.

Watching employees get transformed into founders makes it

clear that the difference between the two is due mostly to
environment—and in particular that the environment in big
companies is toxic to programmers. In the first couple
weeks of working on their own startup they seem to come
to life, because finally they're working the way people are
meant to.

Notes

[1] When I talk about humans being meant or designed to

live a certain way, I mean by evolution.

[2] It's not only the leaves who suffer. The constraint
propagates up as well as down. So managers are
constrained too; instead of just doing things, they have to
act through subordinates.

[3] Do not finance your startup with credit cards. Financing a

startup with debt is usually a stupid move, and credit card
debt stupidest of all. Credit card debt is a bad idea, period.
It is a trap set by evil companies for the desperate and the
foolish.

[4] The founders we fund used to be younger (initially we

encouraged undergrads to apply), and the first couple times
I saw this I used to wonder if they were actually getting
physically taller.

Thanks to Trevor Blackwell, Ross Boucher, Aaron Iba, Abby

Kirigin, Ivan Kirigin, Jessica Livingston, and Robert Morris
for reading drafts of this.

Comment on this essay.

French Translation
March 2007

(This essay is derived from talks at the 2007 Startup School

and the Berkeley CSUA.)

We've now been doing Y Combinator long enough to have

some data about success rates. Our first batch, in the
summer of 2005, had eight startups in it. Of those eight, it
now looks as if at least four succeeded. Three have been
acquired: Reddit was a merger of two, Reddit and Infogami,
and a third was acquired that we can't talk about yet.
Another from that batch was Loopt, which is doing so well
they could probably be acquired in about ten minutes if they
wanted to.

So about half the founders from that first summer, less than
two years ago, are now rich, at least by their standards.
(One thing you learn when you get rich is that there are
many degrees of it.)

I'm not ready to predict our success rate will stay as high as
50%. That first batch could have been an anomaly. But we
should be able to do better than the oft-quoted (and
probably made up) standard figure of 10%. I'd feel safe
aiming at 25%.

Even the founders who fail don't seem to have such a bad
time. Of those first eight startups, three are now probably
dead. In two cases the founders just went on to do other
things at the end of the summer. I don't think they were
traumatized by the experience. The closest to a traumatic
failure was Kiko, whose founders kept working on their
startup for a whole year before being squashed by Google
Calendar. But they ended up happy. They sold their software
on eBay for a quarter of a million dollars. After they paid
back their angel investors, they had about a year's salary
each. [1] Then they immediately went on to start a new and
much more exciting startup, Justin.TV.

So here is an even more striking statistic: 0% of that first

batch had a terrible experience. They had ups and downs,
like every startup, but I don't think any would have traded it
for a job in a cubicle. And that statistic is probably not an
anomaly. Whatever our long-term success rate ends up
being, I think the rate of people who wish they'd gotten a
regular job will stay close to 0%.

The big mystery to me is: why don't more people start

startups? If nearly everyone who does it prefers it to a
regular job, and a significant percentage get rich, why
doesn't everyone want to do this? A lot of people think we
get thousands of applications for each funding cycle. In fact
we usually only get several hundred. Why don't more people
apply? And while it must seem to anyone watching this
world that startups are popping up like crazy, the number is
small compared to the number of people with the necessary
skills. The great majority of programmers still go straight
from college to cubicle, and stay there.

It seems like people are not acting in their own interest.

What's going on? Well, I can answer that. Because of Y
Combinator's position at the very start of the venture
funding process, we're probably the world's leading experts
on the psychology of people who aren't sure if they want to
start a company.

There's nothing wrong with being unsure. If you're a hacker

thinking about starting a startup and hesitating before taking
the leap, you're part of a grand tradition. Larry and Sergey
seem to have felt the same before they started Google, and
so did Jerry and Filo before they started Yahoo. In fact, I'd
guess the most successful startups are the ones started by
uncertain hackers rather than gung-ho business guys.

We have some evidence to support this. Several of the most

successful startups we've funded told us later that they only
decided to apply at the last moment. Some decided only
hours before the deadline.

The way to deal with uncertainty is to analyze it into

components. Most people who are reluctant to do something
have about eight different reasons mixed together in their
heads, and don't know themselves which are biggest. Some
will be justified and some bogus, but unless you know the
relative proportion of each, you don't know whether your
overall uncertainty is mostly justified or mostly bogus.

So I'm going to list all the components of people's

reluctance to start startups, and explain which are real.
Then would-be founders can use this as a checklist to
examine their own feelings.

I admit my goal is to increase your self-confidence. But

there are two things different here from the usual
confidence-building exercise. One is that I'm motivated to be
honest. Most people in the confidence-building business have
already achieved their goal when you buy the book or pay
to attend the seminar where they tell you how great you
are. Whereas if I encourage people to start startups who
shouldn't, I make my own life worse. If I encourage too
many people to apply to Y Combinator, it just means more
work for me, because I have to read all the applications.

The other thing that's going to be different is my approach.

Instead of being positive, I'm going to be negative. Instead
of telling you "come on, you can do it" I'm going to consider
all the reasons you aren't doing it, and show why most (but
not all) should be ignored. We'll start with the one
everyone's born with.

1. Too young

A lot of people think they're too young to start a startup.

Many are right. The median age worldwide is about 27, so
probably a third of the population can truthfully say they're
too young.

What's too young? One of our goals with Y Combinator was

to discover the lower bound on the age of startup founders.
It always seemed to us that investors were too conservative
here—that they wanted to fund professors, when really they
should be funding grad students or even undergrads.

The main thing we've discovered from pushing the edge of

this envelope is not where the edge is, but how fuzzy it is.
The outer limit may be as low as 16. We don't look beyond
18 because people younger than that can't legally enter into
contracts. But the most successful founder we've funded so
far, Sam Altman, was 19 at the time.

Sam Altman, however, is an outlying data point. When he

was 19, he seemed like he had a 40 year old inside him.
There are other 19 year olds who are 12 inside.

There's a reason we have a distinct word "adult" for people

over a certain age. There is a threshold you cross. It's
conventionally fixed at 21, but different people cross it at
greatly varying ages. You're old enough to start a startup if
you've crossed this threshold, whatever your age.

How do you tell? There are a couple tests adults use. I

realized these tests existed after meeting Sam Altman,
actually. I noticed that I felt like I was talking to someone
much older. Afterward I wondered, what am I even
measuring? What made him seem older?

One test adults use is whether you still have the kid flake
reflex. When you're a little kid and you're asked to do
something hard, you can cry and say "I can't do it" and the
adults will probably let you off. As a kid there's a magic
button you can press by saying "I'm just a kid" that will get
you out of most difficult situations. Whereas adults, by
definition, are not allowed to flake. They still do, of course,
but when they do they're ruthlessly pruned.

The other way to tell an adult is by how they react to a

challenge. Someone who's not yet an adult will tend to
respond to a challenge from an adult in a way that
acknowledges their dominance. If an adult says "that's a
stupid idea," a kid will either crawl away with his tail
between his legs, or rebel. But rebelling presumes inferiority
as much as submission. The adult response to "that's a
stupid idea," is simply to look the other person in the eye
and say "Really? Why do you think so?"

There are a lot of adults who still react childishly to

challenges, of course. What you don't often find are kids
who react to challenges like adults. When you do, you've
found an adult, whatever their age.

2. Too inexperienced

I once wrote that startup founders should be at least 23,

and that people should work for another company for a few
years before starting their own. I no longer believe that,
and what changed my mind is the example of the startups
we've funded.

I still think 23 is a better age than 21. But the best way to
get experience if you're 21 is to start a startup. So,
paradoxically, if you're too inexperienced to start a startup,
what you should do is start one. That's a way more efficient
cure for inexperience than a normal job. In fact, getting a
normal job may actually make you less able to start a
startup, by turning you into a tame animal who thinks he
needs an office to work in and a product manager to tell
him what software to write.

What really convinced me of this was the Kikos. They

started a startup right out of college. Their inexperience
caused them to make a lot of mistakes. But by the time we
funded their second startup, a year later, they had become
extremely formidable. They were certainly not tame animals.
And there is no way they'd have grown so much if they'd
spent that year working at Microsoft, or even Google. They'd
still have been diffident junior programmers.

So now I'd advise people to go ahead and start startups

right out of college. There's no better time to take risks
than when you're young. Sure, you'll probably fail. But even
failure will get you to the ultimate goal faster than getting a
job.

It worries me a bit to be saying this, because in effect we're

advising people to educate themselves by failing at our
expense, but it's the truth.

3. Not determined enough

You need a lot of determination to succeed as a startup

founder. It's probably the single best predictor of success.

Some people may not be determined enough to make it. It's

hard for me to say for sure, because I'm so determined that
I can't imagine what's going on in the heads of people who
aren't. But I know they exist.

Most hackers probably underestimate their determination.

I've seen a lot become visibly more determined as they get
used to running a startup. I can think of several we've
funded who would have been delighted at first to be bought
for $2 million, but are now set on world domination.

How can you tell if you're determined enough, when Larry

and Sergey themselves were unsure at first about starting a
company? I'm guessing here, but I'd say the test is whether
you're sufficiently driven to work on your own projects.
Though they may have been unsure whether they wanted to
start a company, it doesn't seem as if Larry and Sergey
were meek little research assistants, obediently doing their
advisors' bidding. They started projects of their own.

4. Not smart enough

You may need to be moderately smart to succeed as a
startup founder. But if you're worried about this, you're
probably mistaken. If you're smart enough to worry that you
might not be smart enough to start a startup, you probably
are.

And in any case, starting a startup just doesn't require that

much intelligence. Some startups do. You have to be good at
math to write Mathematica. But most companies do more
mundane stuff where the decisive factor is effort, not brains.
Silicon Valley can warp your perspective on this, because
there's a cult of smartness here. People who aren't smart at
least try to act that way. But if you think it takes a lot of
intelligence to get rich, try spending a couple days in some
of the fancier bits of New York or LA.

If you don't think you're smart enough to start a startup

doing something technically difficult, just write enterprise
software. Enterprise software companies aren't technology
companies, they're sales companies, and sales depends
mostly on effort.

5. Know nothing about business

This is another variable whose coefficient should be zero.

You don't need to know anything about business to start a
startup. The initial focus should be the product. All you need
to know in this phase is how to build things people want. If
you succeed, you'll have to think about how to make money
from it. But this is so easy you can pick it up on the fly.

I get a fair amount of flak for telling founders just to make

something great and not worry too much about making
money. And yet all the empirical evidence points that way:
pretty much 100% of startups that make something popular
manage to make money from it. And acquirers tell me
privately that revenue is not what they buy startups for, but
their strategic value. Which means, because they made
something people want. Acquirers know the rule holds for
them too: if users love you, you can always make money
from that somehow, and if they don't, the cleverest business
model in the world won't save you.

So why do so many people argue with me? I think one

reason is that they hate the idea that a bunch of twenty
year olds could get rich from building something cool that
doesn't make any money. They just don't want that to be
possible. But how possible it is doesn't depend on how much
they want it to be.

For a while it annoyed me to hear myself described as some

kind of irresponsible pied piper, leading impressionable
young hackers down the road to ruin. But now I realize this
kind of controversy is a sign of a good idea.

The most valuable truths are the ones most people don't
believe. They're like undervalued stocks. If you start with
them, you'll have the whole field to yourself. So when you
find an idea you know is good but most people disagree
with, you should not merely ignore their objections, but
push aggressively in that direction. In this case, that means
you should seek out ideas that would be popular but seem
hard to make money from.

We'll bet a seed round you can't make something popular

that we can't figure out how to make money from.

6. No cofounder

Not having a cofounder is a real problem. A startup is too

much for one person to bear. And though we differ from
other investors on a lot of questions, we all agree on this.
All investors, without exception, are more likely to fund you
with a cofounder than without.

We've funded two single founders, but in both cases we

suggested their first priority should be to find a cofounder.
Both did. But we'd have preferred them to have cofounders
before they applied. It's not super hard to get a cofounder
for a project that's just been funded, and we'd rather have
cofounders committed enough to sign up for something
super hard.

If you don't have a cofounder, what should you do? Get one.
It's more important than anything else. If there's no one
where you live who wants to start a startup with you, move
where there are people who do. If no one wants to work
with you on your current idea, switch to an idea people
want to work on.

If you're still in school, you're surrounded by potential

cofounders. A few years out it gets harder to find them. Not
only do you have a smaller pool to draw from, but most
already have jobs, and perhaps even families to support. So
if you had friends in college you used to scheme about
startups with, stay in touch with them as well as you can.
That may help keep the dream alive.

It's possible you could meet a cofounder through something

like a user's group or a conference. But I wouldn't be too
optimistic. You need to work with someone to know whether
you want them as a cofounder. [2]

The real lesson to draw from this is not how to find a

cofounder, but that you should start startups when you're
young and there are lots of them around.

7. No idea

In a sense, it's not a problem if you don't have a good idea,

because most startups change their idea anyway. In the
average Y Combinator startup, I'd guess 70% of the idea is
new at the end of the first three months. Sometimes it's
100%.

In fact, we're so sure the founders are more important than

the initial idea that we're going to try something new this
funding cycle. We're going to let people apply with no idea
at all. If you want, you can answer the question on the
application form that asks what you're going to do with "We
have no idea." If you seem really good we'll accept you
anyway. We're confident we can sit down with you and cook
up some promising project.

Really this just codifies what we do already. We put little

weight on the idea. We ask mainly out of politeness. The
kind of question on the application form that we really care
about is the one where we ask what cool things you've
made. If what you've made is version one of a promising
startup, so much the better, but the main thing we care
about is whether you're good at making things. Being lead
developer of a popular open source project counts almost as
much.

That solves the problem if you get funded by Y Combinator.

What about in the general case? Because in another sense,
it is a problem if you don't have an idea. If you start a
startup with no idea, what do you do next?

So here's the brief recipe for getting startup ideas. Find

something that's missing in your own life, and supply that
need—no matter how specific to you it seems. Steve
Wozniak built himself a computer; who knew so many other
people would want them? A need that's narrow but genuine
is a better starting point than one that's broad but
hypothetical. So even if the problem is simply that you don't
have a date on Saturday night, if you can think of a way to
fix that by writing software, you're onto something, because
a lot of other people have the same problem.

8. No room for more startups

A lot of people look at the ever-increasing number of

startups and think "this can't continue." Implicit in their
thinking is a fallacy: that there is some limit on the number
of startups there could be. But this is false. No one claims
there's any limit on the number of people who can work for
salary at 1000-person companies. Why should there be any
limit on the number who can work for equity at 5-person
companies? [3]

Nearly everyone who works is satisfying some kind of need.

Breaking up companies into smaller units doesn't make those
needs go away. Existing needs would probably get satisfied
more efficiently by a network of startups than by a few
giant, hierarchical organizations, but I don't think that would
mean less opportunity, because satisfying current needs
would lead to more. Certainly this tends to be the case in
individuals. Nor is there anything wrong with that. We take
for granted things that medieval kings would have
considered effeminate luxuries, like whole buildings heated
to spring temperatures year round. And if things go well,
our descendants will take for granted things we would
consider shockingly luxurious. There is no absolute standard
for material wealth. Health care is a component of it, and
that alone is a black hole. For the foreseeable future, people
will want ever more material wealth, so there is no limit to
the amount of work available for companies, and for
startups in particular.
Usually the limited-room fallacy is not expressed directly.
Usually it's implicit in statements like "there are only so
many startups Google, Microsoft, and Yahoo can buy."
Maybe, though the list of acquirers is a lot longer than that.
And whatever you think of other acquirers, Google is not
stupid. The reason big companies buy startups is that
they've created something valuable. And why should there
be any limit to the number of valuable startups companies
can acquire, any more than there is a limit to the amount of
wealth individual people want? Maybe there would be
practical limits on the number of startups any one acquirer
could assimilate, but if there is value to be had, in the form
of upside that founders are willing to forgo in return for an
immediate payment, acquirers will evolve to consume it.
Markets are pretty smart that way.

9. Family to support

This one is real. I wouldn't advise anyone with a family to

start a startup. I'm not saying it's a bad idea, just that I
don't want to take responsibility for advising it. I'm willing to
take responsibility for telling 22 year olds to start startups.
So what if they fail? They'll learn a lot, and that job at
Microsoft will still be waiting for them if they need it. But
I'm not prepared to cross moms.

What you can do, if you have a family and want to start a
startup, is start a consulting business you can then gradually
turn into a product business. Empirically the chances of
pulling that off seem very small. You're never going to
produce Google this way. But at least you'll never be without
an income.

Another way to decrease the risk is to join an existing

startup instead of starting your own. Being one of the first
employees of a startup is a lot like being a founder, in both
the good ways and the bad. You'll be roughly 1/n^2
founder, where n is your employee number.

As with the question of cofounders, the real lesson here is to

start startups when you're young.

10. Independently wealthy

This is my excuse for not starting a startup. Startups are

stressful. Why do it if you don't need the money? For every
"serial entrepreneur," there are probably twenty sane ones
who think "Start another company? Are you crazy?"

I've come close to starting new startups a couple times, but

I always pull back because I don't want four years of my life
to be consumed by random schleps. I know this business
well enough to know you can't do it half-heartedly. What
makes a good startup founder so dangerous is his
willingness to endure infinite schleps.

There is a bit of a problem with retirement, though. Like a

lot of people, I like to work. And one of the many weird little
problems you discover when you get rich is that a lot of the
interesting people you'd like to work with are not rich. They
need to work at something that pays the bills. Which means
if you want to have them as colleagues, you have to work at
something that pays the bills too, even though you don't
need to. I think this is what drives a lot of serial
entrepreneurs, actually.

That's why I love working on Y Combinator so much. It's an

excuse to work on something interesting with people I like.

11. Not ready for commitment

This was my reason for not starting a startup for most of

my twenties. Like a lot of people that age, I valued freedom
most of all. I was reluctant to do anything that required a
commitment of more than a few months. Nor would I have
wanted to do anything that completely took over my life the
way a startup does. And that's fine. If you want to spend
your time travelling around, or playing in a band, or
whatever, that's a perfectly legitimate reason not to start a
company.

If you start a startup that succeeds, it's going to consume at

least three or four years. (If it fails, you'll be done a lot
quicker.) So you shouldn't do it if you're not ready for
commitments on that scale. Be aware, though, that if you
get a regular job, you'll probably end up working there for
as long as a startup would take, and you'll find you have
much less spare time than you might expect. So if you're
ready to clip on that ID badge and go to that orientation
session, you may also be ready to start that startup.

12. Need for structure

I'm told there are people who need structure in their lives.
This seems to be a nice way of saying they need someone
to tell them what to do. I believe such people exist. There's
plenty of empirical evidence: armies, religious cults, and so
on. They may even be the majority.

If you're one of these people, you probably shouldn't start a

startup. In fact, you probably shouldn't even go to work for
one. In a good startup, you don't get told what to do very
much. There may be one person whose job title is CEO, but
till the company has about twelve people no one should be
telling anyone what to do. That's too inefficient. Each person
should just do what they need to without anyone telling
them.

If that sounds like a recipe for chaos, think about a soccer

team. Eleven people manage to work together in quite
complicated ways, and yet only in occasional emergencies
does anyone tell anyone else what to do. A reporter once
asked David Beckham if there were any language problems
at Real Madrid, since the players were from about eight
different countries. He said it was never an issue, because
everyone was so good they never had to talk. They all just
did the right thing.

How do you tell if you're independent-minded enough to

start a startup? If you'd bristle at the suggestion that you
aren't, then you probably are.

13. Fear of uncertainty

Perhaps some people are deterred from starting startups

because they don't like the uncertainty. If you go to work
for Microsoft, you can predict fairly accurately what the next
few years will be like—all too accurately, in fact. If you start
a startup, anything might happen.

Well, if you're troubled by uncertainty, I can solve that

problem for you: if you start a startup, it will probably fail.
Seriously, though, this is not a bad way to think about the
whole experience. Hope for the best, but expect the worst.
In the worst case, it will at least be interesting. In the best
case you might get rich.

No one will blame you if the startup tanks, so long as you

made a serious effort. There may once have been a time
when employers would regard that as a mark against you,
but they wouldn't now. I asked managers at big companies,
and they all said they'd prefer to hire someone who'd tried
to start a startup and failed over someone who'd spent the
same time working at a big company.

Nor will investors hold it against you, as long as you didn't

fail out of laziness or incurable stupidity. I'm told there's a
lot of stigma attached to failing in other places—in Europe,
for example. Not here. In America, companies, like
practically everything else, are disposable.

14. Don't realize what you're avoiding

One reason people who've been out in the world for a year
or two make better founders than people straight from
college is that they know what they're avoiding. If their
startup fails, they'll have to get a job, and they know how
much jobs suck.

If you've had summer jobs in college, you may think you

know what jobs are like, but you probably don't. Summer
jobs at technology companies are not real jobs. If you get a
summer job as a waiter, that's a real job. Then you have to
carry your weight. But software companies don't hire
students for the summer as a source of cheap labor. They
do it in the hope of recruiting them when they graduate. So
while they're happy if you produce, they don't expect you to.

That will change if you get a real job after you graduate.
Then you'll have to earn your keep. And since most of what
big companies do is boring, you're going to have to work on
boring stuff. Easy, compared to college, but boring. At first
it may seem cool to get paid for doing easy stuff, after
paying to do hard stuff in college. But that wears off after a
few months. Eventually it gets demoralizing to work on
dumb stuff, even if it's easy and you get paid a lot.

And that's not the worst of it. The thing that really sucks
about having a regular job is the expectation that you're
supposed to be there at certain times. Even Google is
afflicted with this, apparently. And what this means, as
everyone who's had a regular job can tell you, is that there
are going to be times when you have absolutely no desire to
work on anything, and you're going to have to go to work
anyway and sit in front of your screen and pretend to. To
someone who likes work, as most good hackers do, this is
torture.

In a startup, you skip all that. There's no concept of office

hours in most startups. Work and life just get mixed
together. But the good thing about that is that no one
minds if you have a life at work. In a startup you can do
whatever you want most of the time. If you're a founder,
what you want to do most of the time is work. But you
never have to pretend to.

If you took a nap in your office in a big company, it would

seem unprofessional. But if you're starting a startup and you
fall asleep in the middle of the day, your cofounders will just
assume you were tired.

15. Parents want you to be a doctor

A significant number of would-be startup founders are

probably dissuaded from doing it by their parents. I'm not
going to say you shouldn't listen to them. Families are
entitled to their own traditions, and who am I to argue with
them? But I will give you a couple reasons why a safe
career might not be what your parents really want for you.

One is that parents tend to be more conservative for their

kids than they would be for themselves. This is actually a
rational response to their situation. Parents end up sharing
more of their kids' ill fortune than good fortune. Most
parents don't mind this; it's part of the job; but it does tend
to make them excessively conservative. And erring on the
side of conservatism is still erring. In almost everything,
reward is proportionate to risk. So by protecting their kids
from risk, parents are, without realizing it, also protecting
them from rewards. If they saw that, they'd want you to
take more risks.

The other reason parents may be mistaken is that, like

generals, they're always fighting the last war. If they want
you to be a doctor, odds are it's not just because they want
you to help the sick, but also because it's a prestigious and
lucrative career. [4] But not so lucrative or prestigious as it
was when their opinions were formed. When I was a kid in
the seventies, a doctor was the thing to be. There was a
sort of golden triangle involving doctors, Mercedes 450SLs,
and tennis. All three vertices now seem pretty dated.

The parents who want you to be a doctor may simply not

realize how much things have changed. Would they be that
unhappy if you were Steve Jobs instead? So I think the way
to deal with your parents' opinions about what you should
do is to treat them like feature requests. Even if your only
goal is to please them, the way to do that is not simply to
give them what they ask for. Instead think about why
they're asking for something, and see if there's a better way
to give them what they need.

16. A job is the default

This leads us to the last and probably most powerful reason

people get regular jobs: it's the default thing to do. Defaults
are enormously powerful, precisely because they operate
without any conscious choice.

To almost everyone except criminals, it seems an axiom that

if you need money, you should get a job. Actually this
tradition is not much more than a hundred years old. Before
that, the default way to make a living was by farming. It's a
bad plan to treat something only a hundred years old as an
axiom. By historical standards, that's something that's
changing pretty rapidly.

We may be seeing another such change right now. I've read

a lot of economic history, and I understand the startup world
pretty well, and it now seems to me fairly likely that we're
seeing the beginning of a change like the one from farming
to manufacturing.

And you know what? If you'd been around when that change
began (around 1000 in Europe) it would have seemed to
nearly everyone that running off to the city to make your
fortune was a crazy thing to do. Though serfs were in
principle forbidden to leave their manors, it can't have been
that hard to run away to a city. There were no guards
patrolling the perimeter of the village. What prevented most
serfs from leaving was that it seemed insanely risky. Leave
one's plot of land? Leave the people you'd spent your whole
life with, to live in a giant city of three or four thousand
complete strangers? How would you live? How would you
get food, if you didn't grow it?

Frightening as it seemed to them, it's now the default with

us to live by our wits. So if it seems risky to you to start a
startup, think how risky it once seemed to your ancestors to
live as we do now. Oddly enough, the people who know this
best are the very ones trying to get you to stick to the old
model. How can Larry and Sergey say you should come work
as their employee, when they didn't get jobs themselves?

Now we look back on medieval peasants and wonder how

they stood it. How grim it must have been to till the same
fields your whole life with no hope of anything better, under
the thumb of lords and priests you had to give all your
surplus to and acknowledge as your masters. I wouldn't be
surprised if one day people look back on what we consider a
normal job in the same way. How grim it would be to
commute every day to a cubicle in some soulless office
complex, and be told what to do by someone you had to
acknowledge as a boss—someone who could call you into
their office and say "take a seat," and you'd sit! Imagine
having to ask permission to release software to users.
Imagine being sad on Sunday afternoons because the
weekend was almost over, and tomorrow you'd have to get
up and go to work. How did they stand it?
It's exciting to think we may be on the cusp of another shift
like the one from farming to manufacturing. That's why I
care about startups. Startups aren't interesting just because
they're a way to make a lot of money. I couldn't care less
about other ways to do that, like speculating in securities. At
most those are interesting the way puzzles are. There's
more going on with startups. They may represent one of
those rare, historic shifts in the way wealth is created.

That's ultimately what drives us to work on Y Combinator.

We want to make money, if only so we don't have to stop
doing it, but that's not the main goal. There have only been
a handful of these great economic shifts in human history. It
would be an amazing hack to make one happen faster.

Notes

[1] The only people who lost were us. The angels had
convertible debt, so they had first claim on the proceeds of
the auction. Y Combinator only got 38 cents on the dollar.

[2] The best kind of organization for that might be an open

source project, but those don't involve a lot of face to face
meetings. Maybe it would be worth starting one that did.

[3] There need to be some number of big companies to

acquire the startups, so the number of big companies
couldn't decrease to zero.

[4] Thought experiment: If doctors did the same work, but

as impoverished outcasts, which parents would still want
their kids to be doctors?

Thanks to Trevor Blackwell, Jessica Livingston, and Robert

Morris for reading drafts of this, to the founders of Zenter
for letting me use their web-based PowerPoint killer even
though it isn't launched yet, and to Ming-Hay Luk of the
Berkeley CSUA for inviting me to speak.

Comment on this essay.

Russian Translation Japanese Translation

October 2008

The economic situation is apparently so grim that some

experts fear we may be in for a stretch as bad as the mid
seventies.

When Microsoft and Apple were founded.

As those examples suggest, a recession may not be such a

bad time to start a startup. I'm not claiming it's a
particularly good time either. The truth is more boring: the
state of the economy doesn't matter much either way.

If we've learned one thing from funding so many startups,

it's that they succeed or fail based on the qualities of the
founders. The economy has some effect, certainly, but as a
predictor of success it's rounding error compared to the
founders.

Which means that what matters is who you are, not when
you do it. If you're the right sort of person, you'll win even
in a bad economy. And if you're not, a good economy won't
save you. Someone who thinks "I better not start a startup
now, because the economy is so bad" is making the same
mistake as the people who thought during the Bubble "all I
have to do is start a startup, and I'll be rich."

So if you want to improve your chances, you should think

far more about who you can recruit as a cofounder than the
state of the economy. And if you're worried about threats to
the survival of your company, don't look for them in the
news. Look in the mirror.

But for any given team of founders, would it not pay to wait
till the economy is better before taking the leap? If you're
starting a restaurant, maybe, but not if you're working on
technology. Technology progresses more or less
independently of the stock market. So for any given idea,
the payoff for acting fast in a bad economy will be higher
than for waiting. Microsoft's first product was a Basic
interpreter for the Altair. That was exactly what the world
needed in 1975, but if Gates and Allen had decided to wait a
few years, it would have been too late.

Of course, the idea you have now won't be the last you
have. There are always new ideas. But if you have a specific
idea you want to act on, act now.

That doesn't mean you can ignore the economy. Both

customers and investors will be feeling pinched. It's not
necessarily a problem if customers feel pinched: you may
even be able to benefit from it, by making things that save
money. Startups often make things cheaper, so in that
respect they're better positioned to prosper in a recession
than big companies.

Investors are more of a problem. Startups generally need to

raise some amount of external funding, and investors tend
to be less willing to invest in bad times. They shouldn't be.
Everyone knows you're supposed to buy when times are bad
and sell when times are good. But of course what makes
investing so counterintuitive is that in equity markets, good
times are defined as everyone thinking it's time to buy. You
have to be a contrarian to be correct, and by definition only
a minority of investors can be.

So just as investors in 1999 were tripping over one another

trying to buy into lousy startups, investors in 2009 will
presumably be reluctant to invest even in good ones.

You'll have to adapt to this. But that's nothing new: startups

always have to adapt to the whims of investors. Ask any
founder in any economy if they'd describe investors as fickle,
and watch the face they make. Last year you had to be
prepared to explain how your startup was viral. Next year
you'll have to explain how it's recession-proof.

(Those are both good things to be. The mistake investors

make is not the criteria they use but that they always tend
to focus on one to the exclusion of the rest.)

Fortunately the way to make a startup recession-proof is to

do exactly what you should do anyway: run it as cheaply as
possible. For years I've been telling founders that the surest
route to success is to be the cockroaches of the corporate
world. The immediate cause of death in a startup is always
running out of money. So the cheaper your company is to
operate, the harder it is to kill. And fortunately it has gotten
very cheap to run a startup. A recession will if anything
make it cheaper still.

If nuclear winter really is here, it may be safer to be a

cockroach even than to keep your job. Customers may drop
off individually if they can no longer afford you, but you're
not going to lose them all at once; markets don't "reduce
headcount."

What if you quit your job to start a startup that fails, and
you can't find another? That could be a problem if you work
in sales or marketing. In those fields it can take months to
find a new job in a bad economy. But hackers seem to be
more liquid. Good hackers can always get some kind of job.
It might not be your dream job, but you're not going to
starve.

Another advantage of bad times is that there's less

competition. Technology trains leave the station at regular
intervals. If everyone else is cowering in a corner, you may
have a whole car to yourself.

You're an investor too. As a founder, you're buying stock

with work: the reason Larry and Sergey are so rich is not so
much that they've done work worth tens of billions of
dollars, but that they were the first investors in Google. And
like any investor you should buy when times are bad.

Were you nodding in agreement, thinking "stupid investors"

a few paragraphs ago when I was talking about how
investors are reluctant to put money into startups in bad
markets, even though that's the time they should rationally
be most willing to buy? Well, founders aren't much better.
When times get bad, hackers go to grad school. And no
doubt that will happen this time too. In fact, what makes
the preceding paragraph true is that most readers won't
believe it—at least to the extent of acting on it.

So maybe a recession is a good time to start a startup. It's

hard to say whether advantages like lack of competition
outweigh disadvantages like reluctant investors. But it
doesn't matter much either way. It's the people that matter.
And for a given set of people working on a given technology,
the time to act is always now.

Comment on this essay.

Russian Translation
October 2006

(This essay is derived from a talk at MIT.)

Till recently graduating seniors had two choices: get a job or

go to grad school. I think there will increasingly be a third
option: to start your own startup. But how common will that
be?

I'm sure the default will always be to get a job, but starting
a startup could well become as popular as grad school. In
the late 90s my professor friends used to complain that they
couldn't get grad students, because all the undergrads were
going to work for startups. I wouldn't be surprised if that
situation returns, but with one difference: this time they'll be
starting their own instead of going to work for other
people's.

The most ambitious students will at this point be asking:

Why wait till you graduate? Why not start a startup while
you're in college? In fact, why go to college at all? Why not
start a startup instead?

A year and a half ago I gave a talk where I said that the
average age of the founders of Yahoo, Google, and Microsoft
was 24, and that if grad students could start startups, why
not undergrads? I'm glad I phrased that as a question,
because now I can pretend it wasn't merely a rhetorical one.
At the time I couldn't imagine why there should be any
lower limit for the age of startup founders. Graduation is a
bureaucratic change, not a biological one. And certainly
there are undergrads as competent technically as most grad
students. So why shouldn't undergrads be able to start
startups as well as grad students?

I now realize that something does change at graduation: you

lose a huge excuse for failing. Regardless of how complex
your life is, you'll find that everyone else, including your
family and friends, will discard all the low bits and regard
you as having a single occupation at any given time. If
you're in college and have a summer job writing software,
you still read as a student. Whereas if you graduate and get
a job programming, you'll be instantly regarded by everyone
as a programmer.

The problem with starting a startup while you're still in

school is that there's a built-in escape hatch. If you start a
startup in the summer between your junior and senior year,
it reads to everyone as a summer job. So if it goes nowhere,
big deal; you return to school in the fall with all the other
seniors; no one regards you as a failure, because your
occupation is student, and you didn't fail at that. Whereas if
you start a startup just one year later, after you graduate,
as long as you're not accepted to grad school in the fall the
startup reads to everyone as your occupation. You're now a
startup founder, so you have to do well at that.

For nearly everyone, the opinion of one's peers is the most

powerful motivator of all—more powerful even than the
nominal goal of most startup founders, getting rich. [1]
About a month into each funding cycle we have an event
called Prototype Day where each startup presents to the
others what they've got so far. You might think they
wouldn't need any more motivation. They're working on their
cool new idea; they have funding for the immediate future;
and they're playing a game with only two outcomes: wealth
or failure. You'd think that would be motivation enough. And
yet the prospect of a demo pushes most of them into a rush
of activity.

Even if you start a startup explicitly to get rich, the money

you might get seems pretty theoretical most of the time.
What drives you day to day is not wanting to look bad.

You probably can't change that. Even if you could, I don't

think you'd want to; someone who really, truly doesn't care
what his peers think of him is probably a psychopath. So the
best you can do is consider this force like a wind, and set up
your boat accordingly. If you know your peers are going to
push you in some direction, choose good peers, and position
yourself so they push you in a direction you like.

Graduation changes the prevailing winds, and those make a

difference. Starting a startup is so hard that it's a close call
even for the ones that succeed. However high a startup may
be flying now, it probably has a few leaves stuck in the
landing gear from those trees it barely cleared at the end of
the runway. In such a close game, the smallest increase in
the forces against you can be enough to flick you over the
edge into failure.

When we first started Y Combinator we encouraged people

to start startups while they were still in college. That's partly
because Y Combinator began as a kind of summer program.
We've kept the program shape—all of us having dinner
together once a week turns out to be a good idea—but
we've decided now that the party line should be to tell
people to wait till they graduate.

Does that mean you can't start a startup in college? Not at

all. Sam Altman, the co-founder of Loopt, had just finished
his sophomore year when we funded them, and Loopt is
probably the most promising of all the startups we've funded
so far. But Sam Altman is a very unusual guy. Within about
three minutes of meeting him, I remember thinking "Ah, so
this is what Bill Gates must have been like when he was 19."

If it can work to start a startup during college, why do we

tell people not to? For the same reason that the probably
apocryphal violinist, whenever he was asked to judge
someone's playing, would always say they didn't have
enough talent to make it as a pro. Succeeding as a musician
takes determination as well as talent, so this answer works
out to be the right advice for everyone. The ones who are
uncertain believe it and give up, and the ones who are
sufficiently determined think "screw that, I'll succeed
anyway."

So our official policy now is only to fund undergrads we

can't talk out of it. And frankly, if you're not certain, you
should wait. It's not as if all the opportunities to start
companies are going to be gone if you don't do it now.
Maybe the window will close on some idea you're working
on, but that won't be the last idea you'll have. For every
idea that times out, new ones become feasible. Historically
the opportunities to start startups have only increased with
time.

In that case, you might ask, why not wait longer? Why not
go work for a while, or go to grad school, and then start a
startup? And indeed, that might be a good idea. If I had to
pick the sweet spot for startup founders, based on who
we're most excited to see applications from, I'd say it's
probably the mid-twenties. Why? What advantages does
someone in their mid-twenties have over someone who's
21? And why isn't it older? What can 25 year olds do that
32 year olds can't? Those turn out to be questions worth
examining.

Plus

If you start a startup soon after college, you'll be a young

founder by present standards, so you should know what the
relative advantages of young founders are. They're not what
you might think. As a young founder your strengths are:
stamina, poverty, rootlessness, colleagues, and ignorance.

The importance of stamina shouldn't be surprising. If you've

heard anything about startups you've probably heard about
the long hours. As far as I can tell these are universal. I
can't think of any successful startups whose founders
worked 9 to 5. And it's particularly necessary for younger
founders to work long hours because they're probably not as
efficient as they'll be later.

Your second advantage, poverty, might not sound like an

advantage, but it is a huge one. Poverty implies you can live
cheaply, and this is critically important for startups. Nearly
every startup that fails, fails by running out of money. It's a
little misleading to put it this way, because there's usually
some other underlying cause. But regardless of the source of
your problems, a low burn rate gives you more opportunity
to recover from them. And since most startups make all
kinds of mistakes at first, room to recover from mistakes is
a valuable thing to have.

Most startups end up doing something different than they

planned. The way the successful ones find something that
works is by trying things that don't. So the worst thing you
can do in a startup is to have a rigid, pre-ordained plan and
then start spending a lot of money to implement it. Better
to operate cheaply and give your ideas time to evolve.

Recent grads can live on practically nothing, and this gives

you an edge over older founders, because the main cost in
software startups is people. The guys with kids and
mortgages are at a real disadvantage. This is one reason I'd
bet on the 25 year old over the 32 year old. The 32 year old
probably is a better programmer, but probably also has a
much more expensive life. Whereas a 25 year old has some
work experience (more on that later) but can live as cheaply
as an undergrad.

Robert Morris and I were 29 and 30 respectively when we

started Viaweb, but fortunately we still lived like 23 year
olds. We both had roughly zero assets. I would have loved
to have a mortgage, since that would have meant I had a
house. But in retrospect having nothing turned out to be
convenient. I wasn't tied down and I was used to living
cheaply.

Even more important than living cheaply, though, is thinking

cheaply. One reason the Apple II was so popular was that it
was cheap. The computer itself was cheap, and it used
cheap, off-the-shelf peripherals like a cassette tape recorder
for data storage and a TV as a monitor. And you know why?
Because Woz designed this computer for himself, and he
couldn't afford anything more.

We benefitted from the same phenomenon. Our prices were

daringly low for the time. The top level of service was $300
a month, which was an order of magnitude below the norm.
In retrospect this was a smart move, but we didn't do it
because we were smart. $300 a month seemed like a lot of
money to us. Like Apple, we created something inexpensive,
and therefore popular, simply because we were poor.

A lot of startups have that form: someone comes along and

makes something for a tenth or a hundredth of what it used
to cost, and the existing players can't follow because they
don't even want to think about a world in which that's
possible. Traditional long distance carriers, for example,
didn't even want to think about VoIP. (It was coming, all the
same.) Being poor helps in this game, because your own
personal bias points in the same direction technology
evolves in.

The advantages of rootlessness are similar to those of

poverty. When you're young you're more mobile—not just
because you don't have a house or much stuff, but also
because you're less likely to have serious relationships. This
turns out to be important, because a lot of startups involve
someone moving.

The founders of Kiko, for example, are now en route to the

Bay Area to start their next startup. It's a better place for
what they want to do. And it was easy for them to decide to
go, because neither as far as I know has a serious girlfriend,
and everything they own will fit in one car—or more
precisely, will either fit in one car or is crappy enough that
they don't mind leaving it behind.

They at least were in Boston. What if they'd been in

Nebraska, like Evan Williams was at their age? Someone
wrote recently that the drawback of Y Combinator was that
you had to move to participate. It couldn't be any other
way. The kind of conversations we have with founders, we
have to have in person. We fund a dozen startups at a time,
and we can't be in a dozen places at once. But even if we
could somehow magically save people from moving, we
wouldn't. We wouldn't be doing founders a favor by letting
them stay in Nebraska. Places that aren't startup hubs are
toxic to startups. You can tell that from indirect evidence.
You can tell how hard it must be to start a startup in
Houston or Chicago or Miami from the microscopically small
number, per capita, that succeed there. I don't know exactly
what's suppressing all the startups in these towns—probably
a hundred subtle little things—but something must be. [2]

Maybe this will change. Maybe the increasing cheapness of

startups will mean they'll be able to survive anywhere,
instead of only in the most hospitable environments. Maybe
37signals is the pattern for the future. But maybe not.
Historically there have always been certain towns that were
centers for certain industries, and if you weren't in one of
them you were at a disadvantage. So my guess is that
37signals is an anomaly. We're looking at a pattern much
older than "Web 2.0" here.

Perhaps the reason more startups per capita happen in the

Bay Area than Miami is simply that there are more founder-
type people there. Successful startups are almost never
started by one person. Usually they begin with a
conversation in which someone mentions that something
would be a good idea for a company, and his friend says,
"Yeah, that is a good idea, let's try it." If you're missing that
second person who says "let's try it," the startup never
happens. And that is another area where undergrads have
an edge. They're surrounded by people willing to say that.
At a good college you're concentrated together with a lot of
other ambitious and technically minded people—probably
more concentrated than you'll ever be again. If your nucleus
spits out a neutron, there's a good chance it will hit another
nucleus.

The number one question people ask us at Y Combinator is:

Where can I find a co-founder? That's the biggest problem
for someone starting a startup at 30. When they were in
school they knew a lot of good co-founders, but by 30
they've either lost touch with them or these people are tied
down by jobs they don't want to leave.

Viaweb was an anomaly in this respect too. Though we were

comparatively old, we weren't tied down by impressive jobs.
I was trying to be an artist, which is not very constraining,
and Robert, though 29, was still in grad school due to a
little interruption in his academic career back in 1988. So
arguably the Worm made Viaweb possible. Otherwise Robert
would have been a junior professor at that age, and he
wouldn't have had time to work on crazy speculative
projects with me.

Most of the questions people ask Y Combinator we have

some kind of answer for, but not the co-founder question.
There is no good answer. Co-founders really should be
people you already know. And by far the best place to meet
them is school. You have a large sample of smart people;
you get to compare how they all perform on identical tasks;
and everyone's life is pretty fluid. A lot of startups grow out
of schools for this reason. Google, Yahoo, and Microsoft,
among others, were all founded by people who met in
school. (In Microsoft's case, it was high school.)

Many students feel they should wait and get a little more
experience before they start a company. All other things
being equal, they should. But all other things are not quite
as equal as they look. Most students don't realize how rich
they are in the scarcest ingredient in startups, co-founders.
If you wait too long, you may find that your friends are now
involved in some project they don't want to abandon. The
better they are, the more likely this is to happen.

One way to mitigate this problem might be to actively plan

your startup while you're getting those n years of
experience. Sure, go off and get jobs or go to grad school or
whatever, but get together regularly to scheme, so the idea
of starting a startup stays alive in everyone's brain. I don't
know if this works, but it can't hurt to try.

It would be helpful just to realize what an advantage you

have as students. Some of your classmates are probably
going to be successful startup founders; at a great technical
university, that is a near certainty. So which ones? If I were
you I'd look for the people who are not just smart, but
incurable builders. Look for the people who keep starting
projects, and finish at least some of them. That's what we
look for. Above all else, above academic credentials and
even the idea you apply with, we look for people who build
things.

The other place co-founders meet is at work. Fewer do than

at school, but there are things you can do to improve the
odds. The most important, obviously, is to work somewhere
that has a lot of smart, young people. Another is to work for
a company located in a startup hub. It will be easier to talk
a co-worker into quitting with you in a place where startups
are happening all around you.

You might also want to look at the employment agreement

you sign when you get hired. Most will say that any ideas
you think of while you're employed by the company belong
to them. In practice it's hard for anyone to prove what ideas
you had when, so the line gets drawn at code. If you're
going to start a startup, don't write any of the code while
you're still employed. Or at least discard any code you wrote
while still employed and start over. It's not so much that
your employer will find out and sue you. It won't come to
that; investors or acquirers or (if you're so lucky)
underwriters will nail you first. Between t = 0 and when you
buy that yacht, someone is going to ask if any of your code
legally belongs to anyone else, and you need to be able to
say no. [3]

The most overreaching employee agreement I've seen so far

is Amazon's. In addition to the usual clauses about owning
your ideas, you also can't be a founder of a startup that has
another founder who worked at Amazon—even if you didn't
know them or even work there at the same time. I suspect
they'd have a hard time enforcing this, but it's a bad sign
they even try. There are plenty of other places to work; you
may as well choose one that keeps more of your options
open.

Speaking of cool places to work, there is of course Google.

But I notice something slightly frightening about Google:
zero startups come out of there. In that respect it's a black
hole. People seem to like working at Google too much to
leave. So if you hope to start a startup one day, the
evidence so far suggests you shouldn't work there.

I realize this seems odd advice. If they make your life so

good that you don't want to leave, why not work there?
Because, in effect, you're probably getting a local maximum.
You need a certain activation energy to start a startup. So
an employer who's fairly pleasant to work for can lull you
into staying indefinitely, even if it would be a net win for
you to leave. [4]

The best place to work, if you want to start a startup, is

probably a startup. In addition to being the right sort of
experience, one way or another it will be over quickly. You'll
either end up rich, in which case problem solved, or the
startup will get bought, in which case it it will start to suck
to work there and it will be easy to leave, or most likely,
the thing will blow up and you'll be free again.

Your final advantage, ignorance, may not sound very useful.

I deliberately used a controversial word for it; you might
equally call it innocence. But it seems to be a powerful force.
My Y Combinator co-founder Jessica Livingston is just about
to publish a book of interviews with startup founders, and I
noticed a remarkable pattern in them. One after another
said that if they'd known how hard it would be, they would
have been too intimidated to start.

Ignorance can be useful when it's a counterweight to other

forms of stupidity. It's useful in starting startups because
you're capable of more than you realize. Starting startups is
harder than you expect, but you're also capable of more
than you expect, so they balance out.

Most people look at a company like Apple and think, how

could I ever make such a thing? Apple is an institution, and
I'm just a person. But every institution was at one point just
a handful of people in a room deciding to start something.
Institutions are made up, and made up by people no
different from you.

I'm not saying everyone could start a startup. I'm sure most
people couldn't; I don't know much about the population at
large. When you get to groups I know well, like hackers, I
can say more precisely. At the top schools, I'd guess as
many as a quarter of the CS majors could make it as startup
founders if they wanted.
That "if they wanted" is an important qualification—so
important that it's almost cheating to append it like that—
because once you get over a certain threshold of
intelligence, which most CS majors at top schools are past,
the deciding factor in whether you succeed as a founder is
how much you want to. You don't have to be that smart. If
you're not a genius, just start a startup in some unsexy field
where you'll have less competition, like software for human
resources departments. I picked that example at random,
but I feel safe in predicting that whatever they have now, it
wouldn't take genius to do better. There are a lot of people
out there working on boring stuff who are desperately in
need of better software, so however short you think you fall
of Larry and Sergey, you can ratchet down the coolness of
the idea far enough to compensate.

As well as preventing you from being intimidated, ignorance

can sometimes help you discover new ideas. Steve Wozniak
put this very strongly:

All the best things that I did at Apple came from

(a) not having money and (b) not having done it
before, ever. Every single thing that we came
out with that was really great, I'd never once
done that thing in my life.

When you know nothing, you have to reinvent stuff for

yourself, and if you're smart your reinventions may be
better than what preceded them. This is especially true in
fields where the rules change. All our ideas about software
were developed in a time when processors were slow, and
memories and disks were tiny. Who knows what obsolete
assumptions are embedded in the conventional wisdom? And
the way these assumptions are going to get fixed is not by
explicitly deallocating them, but by something more akin to
garbage collection. Someone ignorant but smart will come
along and reinvent everything, and in the process simply fail
to reproduce certain existing ideas.

Minus

So much for the advantages of young founders. What about

the disadvantages? I'm going to start with what goes wrong
and try to trace it back to the root causes.

What goes wrong with young founders is that they build

stuff that looks like class projects. It was only recently that
we figured this out ourselves. We noticed a lot of similarities
between the startups that seemed to be falling behind, but
we couldn't figure out how to put it into words. Then finally
we realized what it was: they were building class projects.

But what does that really mean? What's wrong with class
projects? What's the difference between a class project and
a real startup? If we could answer that question it would be
useful not just to would-be startup founders but to students
in general, because we'd be a long way toward explaining
the mystery of the so-called real world.

There seem to be two big things missing in class projects:

(1) an iterative definition of a real problem and (2) intensity.

The first is probably unavoidable. Class projects will

inevitably solve fake problems. For one thing, real problems
are rare and valuable. If a professor wanted to have
students solve real problems, he'd face the same paradox as
someone trying to give an example of whatever "paradigm"
might succeed the Standard Model of physics. There may
well be something that does, but if you could think of an
example you'd be entitled to the Nobel Prize. Similarly, good
new problems are not to be had for the asking.

In technology the difficulty is compounded by the fact that

real startups tend to discover the problem they're solving by
a process of evolution. Someone has an idea for something;
they build it; and in doing so (and probably only by doing
so) they realize the problem they should be solving is
another one. Even if the professor let you change your
project description on the fly, there isn't time enough to do
that in a college class, or a market to supply evolutionary
pressures. So class projects are mostly about
implementation, which is the least of your problems in a
startup.

It's not just that in a startup you work on the idea as well
as implementation. The very implementation is different. Its
main purpose is to refine the idea. Often the only value of
most of the stuff you build in the first six months is that it
proves your initial idea was mistaken. And that's extremely
valuable. If you're free of a misconception that everyone
else still shares, you're in a powerful position. But you're not
thinking that way about a class project. Proving your initial
plan was mistaken would just get you a bad grade. Instead
of building stuff to throw away, you tend to want every line
of code to go toward that final goal of showing you did a lot
of work.

That leads to our second difference: the way class projects

are measured. Professors will tend to judge you by the
distance between the starting point and where you are now.
If someone has achieved a lot, they should get a good
grade. But customers will judge you from the other
direction: the distance remaining between where you are
now and the features they need. The market doesn't give a
shit how hard you worked. Users just want your software to
do what they need, and you get a zero otherwise. That is
one of the most distinctive differences between school and
the real world: there is no reward for putting in a good
effort. In fact, the whole concept of a "good effort" is a fake
idea adults invented to encourage kids. It is not found in
nature.

Such lies seem to be helpful to kids. But unfortunately when

you graduate they don't give you a list of all the lies they
told you during your education. You have to get them
beaten out of you by contact with the real world. And this is
why so many jobs want work experience. I couldn't
understand that when I was in college. I knew how to
program. In fact, I could tell I knew how to program better
than most people doing it for a living. So what was this
mysterious "work experience" and why did I need it?

Now I know what it is, and part of the confusion is

grammatical. Describing it as "work experience" implies it's
like experience operating a certain kind of machine, or using
a certain programming language. But really what work
experience refers to is not some specific expertise, but the
elimination of certain habits left over from childhood.

One of the defining qualities of kids is that they flake. When

you're a kid and you face some hard test, you can cry and
say "I can't" and they won't make you do it. Of course, no
one can make you do anything in the grownup world either.
What they do instead is fire you. And when motivated by
that you find you can do a lot more than you realized. So
one of the things employers expect from someone with
"work experience" is the elimination of the flake reflex—the
ability to get things done, with no excuses.

The other thing you get from work experience is an

understanding of what work is, and in particular, how
intrinsically horrible it is. Fundamentally the equation is a
brutal one: you have to spend most of your waking hours
doing stuff someone else wants, or starve. There are a few
places where the work is so interesting that this is
concealed, because what other people want done happens to
coincide with what you want to work on. But you only have
to imagine what would happen if they diverged to see the
underlying reality.

It's not so much that adults lie to kids about this as never
explain it. They never explain what the deal is with money.
You know from an early age that you'll have some sort of
job, because everyone asks what you're going to "be" when
you grow up. What they don't tell you is that as a kid you're
sitting on the shoulders of someone else who's treading
water, and that starting working means you get thrown into
the water on your own, and have to start treading water
yourself or sink. "Being" something is incidental; the
immediate problem is not to drown.

The relationship between work and money tends to dawn on

you only gradually. At least it did for me. One's first thought
tends to be simply "This sucks. I'm in debt. Plus I have to
get up on monday and go to work." Gradually you realize
that these two things are as tightly connected as only a
market can make them.

So the most important advantage 24 year old founders have

over 20 year old founders is that they know what they're
trying to avoid. To the average undergrad the idea of
getting rich translates into buying Ferraris, or being admired.
To someone who has learned from experience about the
relationship between money and work, it translates to
something way more important: it means you get to opt out
of the brutal equation that governs the lives of 99.9% of
people. Getting rich means you can stop treading water.

Someone who gets this will work much harder at making a

startup succeed—with the proverbial energy of a drowning
man, in fact. But understanding the relationship between
money and work also changes the way you work. You don't
get money just for working, but for doing things other
people want. Someone who's figured that out will
automatically focus more on the user. And that cures the
other half of the class-project syndrome. After you've been
working for a while, you yourself tend to measure what
you've done the same way the market does.

Of course, you don't have to spend years working to learn

this stuff. If you're sufficiently perceptive you can grasp
these things while you're still in school. Sam Altman did. He
must have, because Loopt is no class project. And as his
example suggests, this can be valuable knowledge. At a
minimum, if you get this stuff, you already have most of
what you gain from the "work experience" employers
consider so desirable. But of course if you really get it, you
can use this information in a way that's more valuable to
you than that.

Now

So suppose you think you might start a startup at some

point, either when you graduate or a few years after. What
should you do now? For both jobs and grad school, there are
ways to prepare while you're in college. If you want to get a
job when you graduate, you should get summer jobs at
places you'd like to work. If you want to go to grad school,
it will help to work on research projects as an undergrad.
What's the equivalent for startups? How do you keep your
options maximally open?

One thing you can do while you're still in school is to learn

how startups work. Unfortunately that's not easy. Few if any
colleges have classes about startups. There may be business
school classes on entrepreneurship, as they call it over
there, but these are likely to be a waste of time. Business
schools like to talk about startups, but philosophically
they're at the opposite end of the spectrum. Most books on
startups also seem to be useless. I've looked at a few and
none get it right. Books in most fields are written by people
who know the subject from experience, but for startups
there's a unique problem: by definition the founders of
successful startups don't need to write books to make
money. As a result most books on the subject end up being
written by people who don't understand it.

So I'd be skeptical of classes and books. The way to learn

about startups is by watching them in action, preferably by
working at one. How do you do that as an undergrad?
Probably by sneaking in through the back door. Just hang
around a lot and gradually start doing things for them. Most
startups are (or should be) very cautious about hiring. Every
hire increases the burn rate, and bad hires early on are hard
to recover from. However, startups usually have a fairly
informal atmosphere, and there's always a lot that needs to
be done. If you just start doing stuff for them, many will be
too busy to shoo you away. You can thus gradually work
your way into their confidence, and maybe turn it into an
official job later, or not, whichever you prefer. This won't
work for all startups, but it would work for most I've known.

Number two, make the most of the great advantage of

school: the wealth of co-founders. Look at the people
around you and ask yourself which you'd like to work with.
When you apply that test, you may find you get surprising
results. You may find you'd prefer the quiet guy you've
mostly ignored to someone who seems impressive but has
an attitude to match. I'm not suggesting you suck up to
people you don't really like because you think one day they'll
be successful. Exactly the opposite, in fact: you should only
start a startup with someone you like, because a startup will
put your friendship through a stress test. I'm just saying you
should think about who you really admire and hang out with
them, instead of whoever circumstances throw you together
with.

Another thing you can do is learn skills that will be useful to

you in a startup. These may be different from the skills
you'd learn to get a job. For example, thinking about getting
a job will make you want to learn programming languages
you think employers want, like Java and C++. Whereas if
you start a startup, you get to pick the language, so you
have to think about which will actually let you get the most
done. If you use that test you might end up learning Ruby
or Python instead.

But the most important skill for a startup founder isn't a

programming technique. It's a knack for understanding users
and figuring out how to give them what they want. I know I
repeat this, but that's because it's so important. And it's a
skill you can learn, though perhaps habit might be a better
word. Get into the habit of thinking of software as having
users. What do those users want? What would make them
say wow?

This is particularly valuable for undergrads, because the

concept of users is missing from most college programming
classes. The way you get taught programming in college
would be like teaching writing as grammar, without
mentioning that its purpose is to communicate something to
an audience. Fortunately an audience for software is now
only an http request away. So in addition to the
programming you do for your classes, why not build some
kind of website people will find useful? At the very least it
will teach you how to write software with users. In the best
case, it might not just be preparation for a startup, but the
startup itself, like it was for Yahoo and Google.

Notes

[1] Even the desire to protect one's children seems weaker,

judging from things people have historically done to their
kids rather than risk their community's disapproval. (I
assume we still do things that will be regarded in the future
as barbaric, but historical abuses are easier for us to see.)

[2] Worrying that Y Combinator makes founders move for 3

months also suggests one underestimates how hard it is to
start a startup. You're going to have to put up with much
greater inconveniences than that.

[3] Most employee agreements say that any idea relating to

the company's present or potential future business belongs
to them. Often as not the second clause could include any
possible startup, and anyone doing due diligence for an
investor or acquirer will assume the worst.

To be safe either (a) don't use code written while you were
still employed in your previous job, or (b) get your employer
to renounce, in writing, any claim to the code you write for
your side project. Many will consent to (b) rather than lose a
prized employee. The downside is that you'll have to tell
them exactly what your project does.

[4] Geshke and Warnock only founded Adobe because Xerox

ignored them. If Xerox had used what they built, they would
probably never have left PARC.

Thanks to Jessica Livingston and Robert Morris for reading

drafts of this, and to Jeff Arnold and the SIPB for inviting
me to speak.

Comment on this essay.

Chinese Translation
October 2005

(This essay is derived from a talk at the 2005 Startup

School.)

How do you get good ideas for startups? That's probably the
number one question people ask me.

I'd like to reply with another question: why do people think

it's hard to come up with ideas for startups?

That might seem a stupid thing to ask. Why do they think

it's hard? If people can't do it, then it is hard, at least for
them. Right?

Well, maybe not. What people usually say is not that they
can't think of ideas, but that they don't have any. That's not
quite the same thing. It could be the reason they don't have
any is that they haven't tried to generate them.

I think this is often the case. I think people believe that

coming up with ideas for startups is very hard-- that it must
be very hard-- and so they don't try do to it. They assume
ideas are like miracles: they either pop into your head or
they don't.

I also have a theory about why people think this. They

overvalue ideas. They think creating a startup is just a
matter of implementing some fabulous initial idea. And since
a successful startup is worth millions of dollars, a good idea
is therefore a million dollar idea.

If coming up with an idea for a startup equals coming up

with a million dollar idea, then of course it's going to seem
hard. Too hard to bother trying. Our instincts tell us
something so valuable would not be just lying around for
anyone to discover.

Actually, startup ideas are not million dollar ideas, and

here's an experiment you can try to prove it: just try to sell
one. Nothing evolves faster than markets. The fact that
there's no market for startup ideas suggests there's no
demand. Which means, in the narrow sense of the word,
that startup ideas are worthless.

Questions

The fact is, most startups end up nothing like the initial
idea. It would be closer to the truth to say the main value
of your initial idea is that, in the process of discovering it's
broken, you'll come up with your real idea.

The initial idea is just a starting point-- not a blueprint, but

a question. It might help if they were expressed that way.
Instead of saying that your idea is to make a collaborative,
web-based spreadsheet, say: could one make a
collaborative, web-based spreadsheet? A few grammatical
tweaks, and a woefully incomplete idea becomes a promising
question to explore.

There's a real difference, because an assertion provokes

objections in a way a question doesn't. If you say: I'm going
to build a web-based spreadsheet, then critics-- the most
dangerous of which are in your own head-- will immediately
reply that you'd be competing with Microsoft, that you
couldn't give people the kind of UI they expect, that users
wouldn't want to have their data on your servers, and so on.

A question doesn't seem so challenging. It becomes: let's try

making a web-based spreadsheet and see how far we get.
And everyone knows that if you tried this you'd be able to
make something useful. Maybe what you'd end up with
wouldn't even be a spreadsheet. Maybe it would be some
kind of new spreasheet-like collaboration tool that doesn't
even have a name yet. You wouldn't have thought of
something like that except by implementing your way
toward it.

Treating a startup idea as a question changes what you're

looking for. If an idea is a blueprint, it has to be right. But if
it's a question, it can be wrong, so long as it's wrong in a
way that leads to more ideas.

One valuable way for an idea to be wrong is to be only a

partial solution. When someone's working on a problem that
seems too big, I always ask: is there some way to bite off
some subset of the problem, then gradually expand from
there? That will generally work unless you get trapped on a
local maximum, like 1980s-style AI, or C.

Upwind

So far, we've reduced the problem from thinking of a million

dollar idea to thinking of a mistaken question. That doesn't
seem so hard, does it?

To generate such questions you need two things: to be

familiar with promising new technologies, and to have the
right kind of friends. New technologies are the ingredients
startup ideas are made of, and conversations with friends
are the kitchen they're cooked in.

Universities have both, and that's why so many startups

grow out of them. They're filled with new technologies,
because they're trying to produce research, and only things
that are new count as research. And they're full of exactly
the right kind of people to have ideas with: the other
students, who will be not only smart but elastic-minded to a
fault.

The opposite extreme would be a well-paying but boring job

at a big company. Big companies are biased against new
technologies, and the people you'd meet there would be
wrong too.
In an essay I wrote for high school students, I said a good
rule of thumb was to stay upwind-- to work on things that
maximize your future options. The principle applies for
adults too, though perhaps it has to be modified to: stay
upwind for as long as you can, then cash in the potential
energy you've accumulated when you need to pay for kids.

I don't think people consciously realize this, but one reason

downwind jobs like churning out Java for a bank pay so well
is precisely that they are downwind. The market price for
that kind of work is higher because it gives you fewer
options for the future. A job that lets you work on exciting
new stuff will tend to pay less, because part of the
compensation is in the form of the new skills you'll learn.

Grad school is the other end of the spectrum from a coding

job at a big company: the pay's low but you spend most of
your time working on new stuff. And of course, it's called
"school," which makes that clear to everyone, though in fact
all jobs are some percentage school.

The right environment for having startup ideas need not be a

university per se. It just has to be a situation with a large
percentage of school.

It's obvious why you want exposure to new technology, but

why do you need other people? Can't you just think of new
ideas yourself? The empirical answer is: no. Even Einstein
needed people to bounce ideas off. Ideas get developed in
the process of explaining them to the right kind of person.
You need that resistance, just as a carver needs the
resistance of the wood.

This is one reason Y Combinator has a rule against investing

in startups with only one founder. Practically every
successful company has at least two. And because startup
founders work under great pressure, it's critical they be
friends.

I didn't realize it till I was writing this, but that may help
explain why there are so few female startup founders. I read
on the Internet (so it must be true) that only 1.7% of VC-
backed startups are founded by women. The percentage of
female hackers is small, but not that small. So why the
discrepancy?

When you realize that successful startups tend to have

multiple founders who were already friends, a possible
explanation emerges. People's best friends are likely to be of
the same sex, and if one group is a minority in some
population, pairs of them will be a minority squared. [1]

Doodling

What these groups of co-founders do together is more

complicated than just sitting down and trying to think of
ideas. I suspect the most productive setup is a kind of
together-alone-together sandwich. Together you talk about
some hard problem, probably getting nowhere. Then, the
next morning, one of you has an idea in the shower about
how to solve it. He runs eagerly to to tell the others, and
together they work out the kinks.

What happens in that shower? It seems to me that ideas

just pop into my head. But can we say more than that?

Taking a shower is like a form of meditation. You're alert,

but there's nothing to distract you. It's in a situation like
this, where your mind is free to roam, that it bumps into
new ideas.

What happens when your mind wanders? It may be like

doodling. Most people have characteristic ways of doodling.
This habit is unconscious, but not random: I found my
doodles changed after I started studying painting. I started
to make the kind of gestures I'd make if I were drawing
from life. They were atoms of drawing, but arranged
randomly. [2]

Perhaps letting your mind wander is like doodling with ideas.

You have certain mental gestures you've learned in your
work, and when you're not paying attention, you keep
making these same gestures, but somewhat randomly. In
effect, you call the same functions on random arguments.
That's what a metaphor is: a function applied to an
argument of the wrong type.

Conveniently, as I was writing this, my mind wandered:

would it be useful to have metaphors in a programming
language? I don't know; I don't have time to think about
this. But it's convenient because this is an example of what
I mean by habits of mind. I spend a lot of time thinking
about language design, and my habit of always asking
"would x be useful in a programming language" just got
invoked.

If new ideas arise like doodles, this would explain why you
have to work at something for a while before you have any.
It's not just that you can't judge ideas till you're an expert in
a field. You won't even generate ideas, because you won't
have any habits of mind to invoke.

Of course the habits of mind you invoke on some field don't

have to be derived from working in that field. In fact, it's
often better if they're not. You're not just looking for good
ideas, but for good new ideas, and you have a better chance
of generating those if you combine stuff from distant fields.
As hackers, one of our habits of mind is to ask, could one
open-source x? For example, what if you made an open-
source operating system? A fine idea, but not very novel.
Whereas if you ask, could you make an open-source play?
you might be onto something.

Are some kinds of work better sources of habits of mind

than others? I suspect harder fields may be better sources,
because to attack hard problems you need powerful
solvents. I find math is a good source of metaphors-- good
enough that it's worth studying just for that. Related fields
are also good sources, especially when they're related in
unexpected ways. Everyone knows computer science and
electrical engineering are related, but precisely because
everyone knows it, importing ideas from one to the other
doesn't yield great profits. It's like importing something from
Wisconsin to Michigan. Whereas (I claim) hacking and
painting are also related, in the sense that hackers and
painters are both makers, and this source of new ideas is
practically virgin territory.

Problems

In theory you could stick together ideas at random and see

what you came up with. What if you built a peer-to-peer
dating site? Would it be useful to have an automatic book?
Could you turn theorems into a commodity? When you
assemble ideas at random like this, they may not be just
stupid, but semantically ill-formed. What would it even mean
to make theorems a commodity? You got me. I didn't think
of that idea, just its name.

You might come up with something useful this way, but I

never have. It's like knowing a fabulous sculpture is hidden
inside a block of marble, and all you have to do is remove
the marble that isn't part of it. It's an encouraging thought,
because it reminds you there is an answer, but it's not much
use in practice because the search space is too big.

I find that to have good ideas I need to be working on some

problem. You can't start with randomness. You have to start
with a problem, then let your mind wander just far enough
for new ideas to form.

In a way, it's harder to see problems than their solutions.

Most people prefer to remain in denial about problems. It's
obvious why: problems are irritating. They're problems!
Imagine if people in 1700 saw their lives the way we'd see
them. It would have been unbearable. This denial is such a
powerful force that, even when presented with possible
solutions, people often prefer to believe they wouldn't work.

I saw this phenomenon when I worked on spam filters. In

2002, most people preferred to ignore spam, and most of
those who didn't preferred to believe the heuristic filters
then available were the best you could do.

I found spam intolerable, and I felt it had to be possible to

recognize it statistically. And it turns out that was all you
needed to solve the problem. The algorithm I used was
ridiculously simple. Anyone who'd really tried to solve the
problem would have found it. It was just that no one had
really tried to solve the problem. [3]

Let me repeat that recipe: finding the problem intolerable

and feeling it must be possible to solve it. Simple as it
seems, that's the recipe for a lot of startup ideas.

Wealth

So far most of what I've said applies to ideas in general.

What's special about startup ideas? Startup ideas are ideas
for companies, and companies have to make money. And
the way to make money is to make something people want.

Wealth is what people want. I don't mean that as some kind

of philosophical statement; I mean it as a tautology.

So an idea for a startup is an idea for something people

want. Wouldn't any good idea be something people want?
Unfortunately not. I think new theorems are a fine thing to
create, but there is no great demand for them. Whereas
there appears to be great demand for celebrity gossip
magazines. Wealth is defined democratically. Good ideas and
valuable ideas are not quite the same thing; the difference
is individual tastes.

But valuable ideas are very close to good ideas, especially in

technology. I think they're so close that you can get away
with working as if the goal were to discover good ideas, so
long as, in the final stage, you stop and ask: will people
actually pay for this? Only a few ideas are likely to make it
that far and then get shot down; RPN calculators might be
one example.

One way to make something people want is to look at stuff

people use now that's broken. Dating sites are a prime
example. They have millions of users, so they must be
promising something people want. And yet they work
horribly. Just ask anyone who uses them. It's as if they used
the worse-is-better approach but stopped after the first
stage and handed the thing over to marketers.

Of course, the most obvious breakage in the average

computer user's life is Windows itself. But this is a special
case: you can't defeat a monopoly by a frontal attack.
Windows can and will be overthrown, but not by giving
people a better desktop OS. The way to kill it is to redefine
the problem as a superset of the current one. The problem
is not, what operating system should people use on desktop
computers? but how should people use applications? There
are answers to that question that don't even involve desktop
computers.

Everyone thinks Google is going to solve this problem, but it

is a very subtle one, so subtle that a company as big as
Google might well get it wrong. I think the odds are better
than 50-50 that the Windows killer-- or more accurately,
Windows transcender-- will come from some little startup.

Another classic way to make something people want is to

take a luxury and make it into a commmodity. People must
want something if they pay a lot for it. And it is a very rare
product that can't be made dramatically cheaper if you try.

This was Henry Ford's plan. He made cars, which had been a
luxury item, into a commodity. But the idea is much older
than Henry Ford. Water mills transformed mechanical power
from a luxury into a commodity, and they were used in the
Roman empire. Arguably pastoralism transformed a luxury
into a commodity.
When you make something cheaper you can sell more of
them. But if you make something dramatically cheaper you
often get qualitative changes, because people start to use it
in different ways. For example, once computers get so cheap
that most people can have one of their own, you can use
them as communication devices.

Often to make something dramatically cheaper you have to

redefine the problem. The Model T didn't have all the
features previous cars did. It only came in black, for
example. But it solved the problem people cared most
about, which was getting from place to place.

One of the most useful mental habits I know I learned from

Michael Rabin: that the best way to solve a problem is often
to redefine it. A lot of people use this technique without
being consciously aware of it, but Rabin was spectacularly
explicit. You need a big prime number? Those are pretty
expensive. How about if I give you a big number that only
has a 10 to the minus 100 chance of not being prime?
Would that do? Well, probably; I mean, that's probably
smaller than the chance that I'm imagining all this anyway.

Redefining the problem is a particularly juicy heuristic when

you have competitors, because it's so hard for rigid-minded
people to follow. You can work in plain sight and they don't
realize the danger. Don't worry about us. We're just working
on search. Do one thing and do it well, that's our motto.

Making things cheaper is actually a subset of a more general

technique: making things easier. For a long time it was most
of making things easier, but now that the things we build
are so complicated, there's another rapidly growing subset:
making things easier to use.

This is an area where there's great room for improvement.

What you want to be able to say about technology is: it just
works. How often do you say that now?

Simplicity takes effort-- genius, even. The average

programmer seems to produce UI designs that are almost
willfully bad. I was trying to use the stove at my mother's
house a couple weeks ago. It was a new one, and instead of
physical knobs it had buttons and an LED display. I tried
pressing some buttons I thought would cause it to get hot,
and you know what it said? "Err." Not even "Error." "Err."
You can't just say "Err" to the user of a stove. You should
design the UI so that errors are impossible. And the
boneheads who designed this stove even had an example of
such a UI to work from: the old one. You turn one knob to
set the temperature and another to set the timer. What was
wrong with that? It just worked.

It seems that, for the average engineer, more options just

means more rope to hang yourself. So if you want to start a
startup, you can take almost any existing technology
produced by a big company, and assume you could build
something way easier to use.

Design for Exit

Success for a startup approximately equals getting bought.
You need some kind of exit strategy, because you can't get
the smartest people to work for you without giving them
options likely to be worth something. Which means you
either have to get bought or go public, and the number of
startups that go public is very small.

If success probably means getting bought, should you make

that a conscious goal? The old answer was no: you were
supposed to pretend that you wanted to create a giant,
public company, and act surprised when someone made you
an offer. Really, you want to buy us? Well, I suppose we'd
consider it, for the right price.

I think things are changing. If 98% of the time success

means getting bought, why not be open about it? If 98% of
the time you're doing product development on spec for
some big company, why not think of that as your task? One
advantage of this approach is that it gives you another
source of ideas: look at big companies, think what they
should be doing, and do it yourself. Even if they already
know it, you'll probably be done faster.

Just be sure to make something multiple acquirers will want.

Don't fix Windows, because the only potential acquirer is
Microsoft, and when there's only one acquirer, they don't
have to hurry. They can take their time and copy you
instead of buying you. If you want to get market price, work
on something where there's competition.

If an increasing number of startups are created to do

product development on spec, it will be a natural
counterweight to monopolies. Once some type of technology
is captured by a monopoly, it will only evolve at big
company rates instead of startup rates, whereas alternatives
will evolve with especial speed. A free market interprets
monopoly as damage and routes around it.

The Woz Route

The most productive way to generate startup ideas is also

the most unlikely-sounding: by accident. If you look at how
famous startups got started, a lot of them weren't initially
supposed to be startups. Lotus began with a program Mitch
Kapor wrote for a friend. Apple got started because Steve
Wozniak wanted to build microcomputers, and his employer,
Hewlett-Packard, wouldn't let him do it at work. Yahoo
began as David Filo's personal collection of links.

This is not the only way to start startups. You can sit down
and consciously come up with an idea for a company; we
did. But measured in total market cap, the build-stuff-for-
yourself model might be more fruitful. It certainly has to be
the most fun way to come up with startup ideas. And since
a startup ought to have multiple founders who were already
friends before they decided to start a company, the rather
surprising conclusion is that the best way to generate
startup ideas is to do what hackers do for fun: cook up
amusing hacks with your friends.
It seems like it violates some kind of conservation law, but
there it is: the best way to get a "million dollar idea" is just
to do what hackers enjoy doing anyway.

Notes

[1] This phenomenon may account for a number of

discrepancies currently blamed on various forbidden isms.
Never attribute to malice what can be explained by math.

[2] A lot of classic abstract expressionism is doodling of this

type: artists trained to paint from life using the same
gestures but without using them to represent anything. This
explains why such paintings are (slightly) more interesting
than random marks would be.

[3] Bill Yerazunis had solved the problem, but he got there
by another path. He made a general-purpose file classifier so
good that it also worked for spam.

One Specific Idea Romanian Translation

Japanese Translation Traditional Chinese

Translation

Russian Translation
April 2005

This summer, as an experiment, some friends and I are

giving seed funding to a bunch of new startups. It's an
experiment because we're prepared to fund younger
founders than most investors would. That's why we're doing
it during the summer-- so even college students can
participate.

We know from Google and Yahoo that grad students can

start successful startups. And we know from experience that
some undergrads are as capable as most grad students. The
accepted age for startup founders has been creeping
downward. We're trying to find the lower bound.

The deadline has now passed, and we're sifting through 227
applications. We expected to divide them into two
categories, promising and unpromising. But we soon saw we
needed a third: promising people with unpromising ideas.
[1]

The Artix Phase

We should have expected this. It's very common for a group

of founders to go through one lame idea before realizing
that a startup has to make something people will pay for. In
fact, we ourselves did.

Viaweb wasn't the first startup Robert Morris and I started.

In January 1995, we and a couple friends started a company
called Artix. The plan was to put art galleries on the Web. In
retrospect, I wonder how we could have wasted our time on
anything so stupid. Galleries are not especially excited about
being on the Web even now, ten years later. They don't
want to have their stock visible to any random visitor, like
an antique store. [2]

Besides which, art dealers are the most technophobic people

on earth. They didn't become art dealers after a difficult
choice between that and a career in the hard sciences. Most
of them had never seen the Web before we came to tell
them why they should be on it. Some didn't even have
computers. It doesn't do justice to the situation to describe
it as a hard sell; we soon sank to building sites for free, and
it was hard to convince galleries even to do that.

Gradually it dawned on us that instead of trying to make

Web sites for people who didn't want them, we could make
sites for people who did. In fact, software that would let
people who wanted sites make their own. So we ditched
Artix and started a new company, Viaweb, to make software
for building online stores. That one succeeded.

We're in good company here. Microsoft was not the first

company Paul Allen and Bill Gates started either. The first
was called Traf-o-data. It does not seem to have done as
well as Micro-soft.

In Robert's defense, he was skeptical about Artix. I dragged

him into it. [3] But there were moments when he was
optimistic. And if we, who were 29 and 30 at the time, could
get excited about such a thoroughly boneheaded idea, we
should not be surprised that hackers aged 21 or 22 are
pitching us ideas with little hope of making money.

The Still Life Effect

Why does this happen? Why do good hackers have bad

business ideas?

Let's look at our case. One reason we had such a lame idea
was that it was the first thing we thought of. I was in New
York trying to be a starving artist at the time (the starving
part is actually quite easy), so I was haunting galleries
anyway. When I learned about the Web, it seemed natural
to mix the two. Make Web sites for galleries-- that's the
ticket!

If you're going to spend years working on something, you'd

think it might be wise to spend at least a couple days
considering different ideas, instead of going with the first
that comes into your head. You'd think. But people don't. In
fact, this is a constant problem when you're painting still
lifes. You plonk down a bunch of stuff on a table, and maybe
spend five or ten minutes rearranging it to look interesting.
But you're so impatient to get started painting that ten
minutes of rearranging feels very long. So you start
painting. Three days later, having spent twenty hours staring
at it, you're kicking yourself for having set up such an
awkward and boring composition, but by then it's too late.

Part of the problem is that big projects tend to grow out of

small ones. You set up a still life to make a quick sketch
when you have a spare hour, and days later you're still
working on it. I once spent a month painting three versions
of a still life I set up in about four minutes. At each point (a
day, a week, a month) I thought I'd already put in so much
time that it was too late to change.

So the biggest cause of bad ideas is the still life effect: you
come up with a random idea, plunge into it, and then at
each point (a day, a week, a month) feel you've put so
much time into it that this must be the idea.

How do we fix that? I don't think we should discard

plunging. Plunging into an idea is a good thing. The solution
is at the other end: to realize that having invested time in
something doesn't make it good.

This is clearest in the case of names. Viaweb was originally

called Webgen, but we discovered someone else had a
product called that. We were so attached to our name that
we offered him 5% of the company if he'd let us have it.
But he wouldn't, so we had to think of another. [4] The best
we could do was Viaweb, which we disliked at first. It was
like having a new mother. But within three days we loved it,
and Webgen sounded lame and old-fashioned.

If it's hard to change something so simple as a name,

imagine how hard it is to garbage-collect an idea. A name
only has one point of attachment into your head. An idea for
a company gets woven into your thoughts. So you must
consciously discount for that. Plunge in, by all means, but
remember later to look at your idea in the harsh light of
morning and ask: is this something people will pay for? Is
this, of all the things we could make, the thing people will
pay most for?

Muck

The second mistake we made with Artix is also very

common. Putting galleries on the Web seemed cool.

One of the most valuable things my father taught me is an

old Yorkshire saying: where there's muck, there's brass.
Meaning that unpleasant work pays. And more to the point
here, vice versa. Work people like doesn't pay well, for
reasons of supply and demand. The most extreme case is
developing programming languages, which doesn't pay at all,
because people like it so much they do it for free.

When we started Artix, I was still ambivalent about

business. I wanted to keep one foot in the art world. Big,
big, mistake. Going into business is like a hang-glider
launch-- you'd better do it wholeheartedly, or not at all. The
purpose of a company, and a startup especially, is to make
money. You can't have divided loyalties.

Which is not to say that you have to do the most disgusting

sort of work, like spamming, or starting a company whose
only purpose is patent litigation. What I mean is, if you're
starting a company that will do something cool, the aim had
better be to make money and maybe be cool, not to be cool
and maybe make money.

It's hard enough to make money that you can't do it by

accident. Unless it's your first priority, it's unlikely to happen
at all.

Hyenas

When I probe our motives with Artix, I see a third mistake:

timidity. If you'd proposed at the time that we go into the
e-commerce business, we'd have found the idea terrifying.
Surely a field like that would be dominated by fearsome
startups with five million dollars of VC money each. Whereas
we felt pretty sure that we could hold our own in the slightly
less competitive business of generating Web sites for art
galleries.

We erred ridiculously far on the side of safety. As it turns

out, VC-backed startups are not that fearsome. They're too
busy trying to spend all that money to get software written.
In 1995, the e-commerce business was very competitive as
measured in press releases, but not as measured in
software. And really it never was. The big fish like Open
Market (rest their souls) were just consulting companies
pretending to be product companies [5], and the offerings at
our end of the market were a couple hundred lines of Perl
scripts. Or could have been implemented as a couple
hundred lines of Perl; in fact they were probably tens of
thousands of lines of C++ or Java. Once we actually took
the plunge into e-commerce, it turned out to be surprisingly
easy to compete.

So why were we afraid? We felt we were good at

programming, but we lacked confidence in our ability to do a
mysterious, undifferentiated thing we called "business." In
fact there is no such thing as "business." There's selling,
promotion, figuring out what people want, deciding how
much to charge, customer support, paying your bills, getting
customers to pay you, getting incorporated, raising money,
and so on. And the combination is not as hard as it seems,
because some tasks (like raising money and getting
incorporated) are an O(1) pain in the ass, whether you're
big or small, and others (like selling and promotion) depend
more on energy and imagination than any kind of special
training.

Artix was like a hyena, content to survive on carrion

because we were afraid of the lions. Except the lions turned
out not to have any teeth, and the business of putting
galleries online barely qualified as carrion.

A Familiar Problem

Sum up all these sources of error, and it's no wonder we

had such a bad idea for a company. We did the first thing
we thought of; we were ambivalent about being in business
at all; and we deliberately chose an impoverished market to
avoid competition.

Looking at the applications for the Summer Founders

Program, I see signs of all three. But the first is by far the
biggest problem. Most of the groups applying have not
stopped to ask: of all the things we could do, is this the one
with the best chance of making money?

If they'd already been through their Artix phase, they'd have

learned to ask that. After the reception we got from art
dealers, we were ready to. This time, we thought, let's make
something people want.

Reading the Wall Street Journal for a week should give

anyone ideas for two or three new startups. The articles are
full of descriptions of problems that need to be solved. But
most of the applicants don't seem to have looked far for
ideas.

We expected the most common proposal to be for

multiplayer games. We were not far off: this was the second
most common. The most common was some combination of
a blog, a calendar, a dating site, and Friendster. Maybe
there is some new killer app to be discovered here, but it
seems perverse to go poking around in this fog when there
are valuable, unsolved problems lying about in the open for
anyone to see. Why did no one propose a new scheme for
micropayments? An ambitious project, perhaps, but I can't
believe we've considered every alternative. And newspapers
and magazines are (literally) dying for a solution.

Why did so few applicants really think about what customers

want? I think the problem with many, as with people in their
early twenties generally, is that they've been trained their
whole lives to jump through predefined hoops. They've spent
15-20 years solving problems other people have set for
them. And how much time deciding what problems would be
good to solve? Two or three course projects? They're good
at solving problems, but bad at choosing them.

But that, I'm convinced, is just the effect of training. Or

more precisely, the effect of grading. To make grading
efficient, everyone has to solve the same problem, and that
means it has to be decided in advance. It would be great if
schools taught students how to choose problems as well as
how to solve them, but I don't know how you'd run such a
class in practice.

Copper and Tin

The good news is, choosing problems is something that can

be learned. I know that from experience. Hackers can learn
to make things customers want. [6]

This is a controversial view. One expert on

"entrepreneurship" told me that any startup had to include
business people, because only they could focus on what
customers wanted. I'll probably alienate this guy forever by
quoting him, but I have to risk it, because his email was
such a perfect example of this view:

80% of MIT spinoffs succeed provided they have

at least one management person in the team at
the start. The business person represents the
"voice of the customer" and that's what keeps
the engineers and product development on
track.

This is, in my opinion, a crock. Hackers are perfectly capable

of hearing the voice of the customer without a business
person to amplify the signal for them. Larry Page and
Sergey Brin were grad students in computer science, which
presumably makes them "engineers." Do you suppose
Google is only good because they had some business guy
whispering in their ears what customers wanted? It seems to
me the business guys who did the most for Google were the
ones who obligingly flew Altavista into a hillside just as
Google was getting started.

The hard part about figuring out what customers want is

figuring out that you need to figure it out. But that's
something you can learn quickly. It's like seeing the other
interpretation of an ambiguous picture. As soon as someone
tells you there's a rabbit as well as a duck, it's hard not to
see it.
And compared to the sort of problems hackers are used to
solving, giving customers what they want is easy. Anyone
who can write an optimizing compiler can design a UI that
doesn't confuse users, once they choose to focus on that
problem. And once you apply that kind of brain power to
petty but profitable questions, you can create wealth very
rapidly.

That's the essence of a startup: having brilliant people do

work that's beneath them. Big companies try to hire the
right person for the job. Startups win because they don't--
because they take people so smart that they would in a big
company be doing "research," and set them to work instead
on problems of the most immediate and mundane sort.
Think Einstein designing refrigerators. [7]

If you want to learn what people want, read Dale Carnegie's

How to Win Friends and Influence People. [8] When a friend
recommended this book, I couldn't believe he was serious.
But he insisted it was good, so I read it, and he was right. It
deals with the most difficult problem in human experience:
how to see things from other people's point of view, instead
of thinking only of yourself.

Most smart people don't do that very well. But adding this
ability to raw brainpower is like adding tin to copper. The
result is bronze, which is so much harder that it seems a
different metal.

A hacker who has learned what to make, and not just how
to make, is extraordinarily powerful. And not just at making
money: look what a small group of volunteers has achieved
with Firefox.

Doing an Artix teaches you to make something people want

in the same way that not drinking anything would teach you
how much you depend on water. But it would be more
convenient for all involved if the Summer Founders didn't
learn this on our dime-- if they could skip the Artix phase
and go right on to make something customers wanted. That,
I think, is going to be the real experiment this summer. How
long will it take them to grasp this?

We decided we ought to have T-Shirts for the SFP, and we'd

been thinking about what to print on the back. Till now we'd
been planning to use

If you can read this, I should be working.

but now we've decided it's going to be

Make something people want.

Notes

[1] SFP applicants: please don't assume that not being

accepted means we think your idea is bad. Because we want
to keep the number of startups small this first summer,
we're going to have to turn down some good proposals too.

[2] Dealers try to give each customer the impression that

the stuff they're showing him is something special that only
a few people have seen, when in fact it may have been
sitting in their racks for years while they tried to unload it
on buyer after buyer.

[3] On the other hand, he was skeptical about Viaweb too. I

have a precise measure of that, because at one point in the
first couple months we made a bet: if he ever made a
million dollars out of Viaweb, he'd get his ear pierced. We
didn't let him off, either.

[4] I wrote a program to generate all the combinations of

"Web" plus a three letter word. I learned from this that most
three letter words are bad: Webpig, Webdog, Webfat,
Webzit, Webfug. But one of them was Webvia; I swapped
them to make Viaweb.

[5] It's much easier to sell services than a product, just as

it's easier to make a living playing at weddings than by
selling recordings. But the margins are greater on products.
So during the Bubble a lot of companies used consulting to
generate revenues they could attribute to the sale of
products, because it made a better story for an IPO.

[6] Trevor Blackwell presents the following recipe for a

startup: "Watch people who have money to spend, see what
they're wasting their time on, cook up a solution, and try
selling it to them. It's surprising how small a problem can be
and still provide a profitable market for a solution."

[7] You need to offer especially large rewards to get great

people to do tedious work. That's why startups always pay
equity rather than just salary.

[8] Buy an old copy from the 1940s or 50s instead of the
current edition, which has been rewritten to suit present
fashions. The original edition contained a few unPC ideas,
but it's always better to read an original book, bearing in
mind that it's a book from a past era, than to read a new
version sanitized for your protection.

Thanks to Bill Birch, Trevor Blackwell, Jessica Livingston,

and Robert Morris for reading drafts of this.

Russian Translation Italian Translation

Japanese Translation

If you liked this, you may also like Hackers & Painters.
March 2009

A couple days ago I finally got being a good startup founder

down to two words: relentlessly resourceful.

Till then the best I'd managed was to get the opposite
quality down to one: hapless. Most dictionaries say hapless
means unlucky. But the dictionaries are not doing a very
good job. A team that outplays its opponents but loses
because of a bad decision by the referee could be called
unlucky, but not hapless. Hapless implies passivity. To be
hapless is to be battered by circumstances—to let the world
have its way with you, instead of having your way with the
world. [1]

Unfortunately there's no antonym of hapless, which makes it

difficult to tell founders what to aim for. "Don't be hapless"
is not much of rallying cry.

It's not hard to express the quality we're looking for in

metaphors. The best is probably a running back. A good
running back is not merely determined, but flexible as well.
They want to get downfield, but they adapt their plans on
the fly.

Unfortunately this is just a metaphor, and not a useful one

to most people outside the US. "Be like a running back" is
no better than "Don't be hapless."

But finally I've figured out how to express this quality

directly. I was writing a talk for investors, and I had to
explain what to look for in founders. What would someone
who was the opposite of hapless be like? They'd be
relentlessly resourceful. Not merely relentless. That's not
enough to make things go your way except in a few mostly
uninteresting domains. In any interesting domain, the
difficulties will be novel. Which means you can't simply plow
through them, because you don't know initially how hard
they are; you don't know whether you're about to plow
through a block of foam or granite. So you have to be
resourceful. You have to keep trying new things.

Be relentlessly resourceful.

That sounds right, but is it simply a description of how to be

successful in general? I don't think so. This isn't the recipe
for success in writing or painting, for example. In that kind
of work the recipe is more to be actively curious.
Resourceful implies the obstacles are external, which they
generally are in startups. But in writing and painting they're
mostly internal; the obstacle is your own obtuseness. [2]

There probably are other fields where "relentlessly

resourceful" is the recipe for success. But though other fields
may share it, I think this is the best short description we'll
find of what makes a good startup founder. I doubt it could
be made more precise.

Now that we know what we're looking for, that leads to

other questions. For example, can this quality be taught?
After four years of trying to teach it to people, I'd say that
yes, surprisingly often it can. Not to everyone, but to many
people. [3] Some people are just constitutionally passive,
but others have a latent ability to be relentlessly resourceful
that only needs to be brought out.

This is particularly true of young people who have till now

always been under the thumb of some kind of authority.
Being relentlessly resourceful is definitely not the recipe for
success in big companies, or in most schools. I don't even
want to think what the recipe is in big companies, but it is
certainly longer and messier, involving some combination of
resourcefulness, obedience, and building alliances.

Identifying this quality also brings us closer to answering a

question people often wonder about: how many startups
there could be. There is not, as some people seem to think,
any economic upper bound on this number. There's no
reason to believe there is any limit on the amount of newly
created wealth consumers can absorb, any more than there
is a limit on the number of theorems that can be proven. So
probably the limiting factor on the number of startups is the
pool of potential founders. Some people would make good
founders, and others wouldn't. And now that we can say
what makes a good founder, we know how to put an upper
bound on the size of the pool.

This test is also useful to individuals. If you want to know

whether you're the right sort of person to start a startup,
ask yourself whether you're relentlessly resourceful. And if
you want to know whether to recruit someone as a
cofounder, ask if they are.

You can even use it tactically. If I were running a startup,

this would be the phrase I'd tape to the mirror. "Make
something people want" is the destination, but "Be
relentlessly resourceful" is how you get there.

Notes

[1] I think the reason the dictionaries are wrong is that the
meaning of the word has shifted. No one writing a dictionary
from scratch today would say that hapless meant unlucky.
But a couple hundred years ago they might have. People
were more at the mercy of circumstances in the past, and as
a result a lot of the words we use for good and bad
outcomes have origins in words about luck.
When I was living in Italy, I was once trying to tell someone
that I hadn't had much success in doing something, but I
couldn't think of the Italian word for success. I spent some
time trying to describe the word I meant. Finally she said
"Ah! Fortuna!"

[2] There are aspects of startups where the recipe is to be

actively curious. There can be times when what you're doing
is almost pure discovery. Unfortunately these times are a
small proportion of the whole. On the other hand, they are
in research too.

[3] I'd almost say to most people, but I realize (a) I have
no idea what most people are like, and (b) I'm
pathologically optimistic about people's ability to change.

Thanks to Trevor Blackwell and Jessica Livingston for

reading drafts of this.

Comment on this essay.

October 2006

In the Q & A period after a recent talk, someone asked what

made startups fail. After standing there gaping for a few
seconds I realized this was kind of a trick question. It's
equivalent to asking how to make a startup succeed—if you
avoid every cause of failure, you succeed—and that's too big
a question to answer on the fly.

Afterwards I realized it could be helpful to look at the

problem from this direction. If you have a list of all the
things you shouldn't do, you can turn that into a recipe for
succeeding just by negating. And this form of list may be
more useful in practice. It's easier to catch yourself doing
something you shouldn't than always to remember to do
something you should. [1]

In a sense there's just one mistake that kills startups: not

making something users want. If you make something users
want, you'll probably be fine, whatever else you do or don't
do. And if you don't make something users want, then
you're dead, whatever else you do or don't do. So really this
is a list of 18 things that cause startups not to make
something users want. Nearly all failure funnels through
that.

1. Single Founder

Have you ever noticed how few successful startups were

founded by just one person? Even companies you think of as
having one founder, like Oracle, usually turn out to have
more. It seems unlikely this is a coincidence.

What's wrong with having one founder? To start with, it's a

vote of no confidence. It probably means the founder
couldn't talk any of his friends into starting the company
with him. That's pretty alarming, because his friends are the
ones who know him best.

But even if the founder's friends were all wrong and the
company is a good bet, he's still at a disadvantage. Starting
a startup is too hard for one person. Even if you could do all
the work yourself, you need colleagues to brainstorm with,
to talk you out of stupid decisions, and to cheer you up
when things go wrong.

The last one might be the most important. The low points in
a startup are so low that few could bear them alone. When
you have multiple founders, esprit de corps binds them
together in a way that seems to violate conservation laws.
Each thinks "I can't let my friends down." This is one of the
most powerful forces in human nature, and it's missing when
there's just one founder.
2. Bad Location

Startups prosper in some places and not others. Silicon

Valley dominates, then Boston, then Seattle, Austin, Denver,
and New York. After that there's not much. Even in New
York the number of startups per capita is probably a 20th of
what it is in Silicon Valley. In towns like Houston and
Chicago and Detroit it's too small to measure.

Why is the falloff so sharp? Probably for the same reason it

is in other industries. What's the sixth largest fashion center
in the US? The sixth largest center for oil, or finance, or
publishing? Whatever they are they're probably so far from
the top that it would be misleading even to call them
centers.

It's an interesting question why cities become startup hubs,

but the reason startups prosper in them is probably the
same as it is for any industry: that's where the experts are.
Standards are higher; people are more sympathetic to what
you're doing; the kind of people you want to hire want to
live there; supporting industries are there; the people you
run into in chance meetings are in the same business. Who
knows exactly how these factors combine to boost startups
in Silicon Valley and squish them in Detroit, but it's clear
they do from the number of startups per capita in each.

3. Marginal Niche

Most of the groups that apply to Y Combinator suffer from a

common problem: choosing a small, obscure niche in the
hope of avoiding competition.

If you watch little kids playing sports, you notice that below
a certain age they're afraid of the ball. When the ball comes
near them their instinct is to avoid it. I didn't make a lot of
catches as an eight year old outfielder, because whenever a
fly ball came my way, I used to close my eyes and hold my
glove up more for protection than in the hope of catching it.

Choosing a marginal project is the startup equivalent of my

eight year old strategy for dealing with fly balls. If you make
anything good, you're going to have competitors, so you
may as well face that. You can only avoid competition by
avoiding good ideas.

I think this shrinking from big problems is mostly

unconscious. It's not that people think of grand ideas but
decide to pursue smaller ones because they seem safer.
Your unconscious won't even let you think of grand ideas. So
the solution may be to think about ideas without involving
yourself. What would be a great idea for someone else to do
as a startup?

4. Derivative Idea

Many of the applications we get are imitations of some

existing company. That's one source of ideas, but not the
best. If you look at the origins of successful startups, few
were started in imitation of some other startup. Where did
they get their ideas? Usually from some specific, unsolved
problem the founders identified.

Our startup made software for making online stores. When

we started it, there wasn't any; the few sites you could
order from were hand-made at great expense by web
consultants. We knew that if online shopping ever took off,
these sites would have to be generated by software, so we
wrote some. Pretty straightforward.

It seems like the best problems to solve are ones that affect
you personally. Apple happened because Steve Wozniak
wanted a computer, Google because Larry and Sergey
couldn't find stuff online, Hotmail because Sabeer Bhatia and
Jack Smith couldn't exchange email at work.

So instead of copying the Facebook, with some variation

that the Facebook rightly ignored, look for ideas from the
other direction. Instead of starting from companies and
working back to the problems they solved, look for problems
and imagine the company that might solve them. [2] What
do people complain about? What do you wish there was?

5. Obstinacy

In some fields the way to succeed is to have a vision of

what you want to achieve, and to hold true to it no matter
what setbacks you encounter. Starting startups is not one of
them. The stick-to-your-vision approach works for
something like winning an Olympic gold medal, where the
problem is well-defined. Startups are more like science,
where you need to follow the trail wherever it leads.

So don't get too attached to your original plan, because it's

probably wrong. Most successful startups end up doing
something different than they originally intended—often so
different that it doesn't even seem like the same company.
You have to be prepared to see the better idea when it
arrives. And the hardest part of that is often discarding your
old idea.

But openness to new ideas has to be tuned just right.

Switching to a new idea every week will be equally fatal. Is
there some kind of external test you can use? One is to ask
whether the ideas represent some kind of progression. If in
each new idea you're able to re-use most of what you built
for the previous ones, then you're probably in a process that
converges. Whereas if you keep restarting from scratch,
that's a bad sign.

Fortunately there's someone you can ask for advice: your

users. If you're thinking about turning in some new direction
and your users seem excited about it, it's probably a good
bet.

6. Hiring Bad Programmers

I forgot to include this in the early versions of the list,

because nearly all the founders I know are programmers.
This is not a serious problem for them. They might
accidentally hire someone bad, but it's not going to kill the
company. In a pinch they can do whatever's required
themselves.

But when I think about what killed most of the startups in

the e-commerce business back in the 90s, it was bad
programmers. A lot of those companies were started by
business guys who thought the way startups worked was
that you had some clever idea and then hired programmers
to implement it. That's actually much harder than it sounds
—almost impossibly hard in fact—because business guys
can't tell which are the good programmers. They don't even
get a shot at the best ones, because no one really good
wants a job implementing the vision of a business guy.

In practice what happens is that the business guys choose

people they think are good programmers (it says here on his
resume that he's a Microsoft Certified Developer) but who
aren't. Then they're mystified to find that their startup
lumbers along like a World War II bomber while their
competitors scream past like jet fighters. This kind of startup
is in the same position as a big company, but without the
advantages.

So how do you pick good programmers if you're not a

programmer? I don't think there's an answer. I was about to
say you'd have to find a good programmer to help you hire
people. But if you can't recognize good programmers, how
would you even do that?

7. Choosing the Wrong Platform

A related problem (since it tends to be done by bad

programmers) is choosing the wrong platform. For example,
I think a lot of startups during the Bubble killed themselves
by deciding to build server-based applications on Windows.
Hotmail was still running on FreeBSD for years after
Microsoft bought it, presumably because Windows couldn't
handle the load. If Hotmail's founders had chosen to use
Windows, they would have been swamped.

PayPal only just dodged this bullet. After they merged with
X.com, the new CEO wanted to switch to Windows—even
after PayPal cofounder Max Levchin showed that their
software scaled only 1% as well on Windows as Unix.
Fortunately for PayPal they switched CEOs instead.

Platform is a vague word. It could mean an operating

system, or a programming language, or a "framework" built
on top of a programming language. It implies something
that both supports and limits, like the foundation of a house.

The scary thing about platforms is that there are always

some that seem to outsiders to be fine, responsible choices
and yet, like Windows in the 90s, will destroy you if you
choose them. Java applets were probably the most
spectacular example. This was supposed to be the new way
of delivering applications. Presumably it killed just about
100% of the startups who believed that.
How do you pick the right platforms? The usual way is to
hire good programmers and let them choose. But there is a
trick you could use if you're not a programmer: visit a top
computer science department and see what they use in
research projects.

8. Slowness in Launching

Companies of all sizes have a hard time getting software

done. It's intrinsic to the medium; software is always 85%
done. It takes an effort of will to push through this and get
something released to users. [3]

Startups make all kinds of excuses for delaying their launch.

Most are equivalent to the ones people use for
procrastinating in everyday life. There's something that
needs to happen first. Maybe. But if the software were
100% finished and ready to launch at the push of a button,
would they still be waiting?

One reason to launch quickly is that it forces you to actually

finish some quantum of work. Nothing is truly finished till it's
released; you can see that from the rush of work that's
always involved in releasing anything, no matter how
finished you thought it was. The other reason you need to
launch is that it's only by bouncing your idea off users that
you fully understand it.

Several distinct problems manifest themselves as delays in

launching: working too slowly; not truly understanding the
problem; fear of having to deal with users; fear of being
judged; working on too many different things; excessive
perfectionism. Fortunately you can combat all of them by the
simple expedient of forcing yourself to launch something
fairly quickly.

9. Launching Too Early

Launching too slowly has probably killed a hundred times

more startups than launching too fast, but it is possible to
launch too fast. The danger here is that you ruin your
reputation. You launch something, the early adopters try it
out, and if it's no good they may never come back.

So what's the minimum you need to launch? We suggest

startups think about what they plan to do, identify a core
that's both (a) useful on its own and (b) something that can
be incrementally expanded into the whole project, and then
get that done as soon as possible.

This is the same approach I (and many other programmers)

use for writing software. Think about the overall goal, then
start by writing the smallest subset of it that does anything
useful. If it's a subset, you'll have to write it anyway, so in
the worst case you won't be wasting your time. But more
likely you'll find that implementing a working subset is both
good for morale and helps you see more clearly what the
rest should do.

The early adopters you need to impress are fairly tolerant.

They don't expect a newly launched product to do
everything; it just has to do something.

10. Having No Specific User in Mind

You can't build things users like without understanding

them. I mentioned earlier that the most successful startups
seem to have begun by trying to solve a problem their
founders had. Perhaps there's a rule here: perhaps you
create wealth in proportion to how well you understand the
problem you're solving, and the problems you understand
best are your own. [4]

That's just a theory. What's not a theory is the converse: if

you're trying to solve problems you don't understand, you're
hosed.

And yet a surprising number of founders seem willing to

assume that someone, they're not sure exactly who, will
want what they're building. Do the founders want it? No,
they're not the target market. Who is? Teenagers. People
interested in local events (that one is a perennial tarpit). Or
"business" users. What business users? Gas stations? Movie
studios? Defense contractors?

You can of course build something for users other than

yourself. We did. But you should realize you're stepping into
dangerous territory. You're flying on instruments, in effect,
so you should (a) consciously shift gears, instead of
assuming you can rely on your intuitions as you ordinarily
would, and (b) look at the instruments.

In this case the instruments are the users. When designing

for other people you have to be empirical. You can no
longer guess what will work; you have to find users and
measure their responses. So if you're going to make
something for teenagers or "business" users or some other
group that doesn't include you, you have to be able to talk
some specific ones into using what you're making. If you
can't, you're on the wrong track.

11. Raising Too Little Money

Most successful startups take funding at some point. Like

having more than one founder, it seems a good bet
statistically. How much should you take, though?

Startup funding is measured in time. Every startup that isn't

profitable (meaning nearly all of them, initially) has a certain
amount of time left before the money runs out and they
have to stop. This is sometimes referred to as runway, as in
"How much runway do you have left?" It's a good metaphor
because it reminds you that when the money runs out
you're going to be airborne or dead.

Too little money means not enough to get airborne. What

airborne means depends on the situation. Usually you have
to advance to a visibly higher level: if all you have is an
idea, a working prototype; if you have a prototype,
launching; if you're launched, significant growth. It depends
on investors, because until you're profitable that's who you
have to convince.

So if you take money from investors, you have to take

enough to get to the next step, whatever that is. [5]
Fortunately you have some control over both how much you
spend and what the next step is. We advise startups to set
both low, initially: spend practically nothing, and make your
initial goal simply to build a solid prototype. This gives you
maximum flexibility.

12. Spending Too Much

It's hard to distinguish spending too much from raising too

little. If you run out of money, you could say either was the
cause. The only way to decide which to call it is by
comparison with other startups. If you raised five million
and ran out of money, you probably spent too much.

Burning through too much money is not as common as it

used to be. Founders seem to have learned that lesson. Plus
it keeps getting cheaper to start a startup. So as of this
writing few startups spend too much. None of the ones
we've funded have. (And not just because we make small
investments; many have gone on to raise further rounds.)

The classic way to burn through cash is by hiring a lot of

people. This bites you twice: in addition to increasing your
costs, it slows you down—so money that's getting consumed
faster has to last longer. Most hackers understand why that
happens; Fred Brooks explained it in The Mythical Man-
Month.

We have three general suggestions about hiring: (a) don't

do it if you can avoid it, (b) pay people with equity rather
than salary, not just to save money, but because you want
the kind of people who are committed enough to prefer
that, and (c) only hire people who are either going to write
code or go out and get users, because those are the only
things you need at first.

13. Raising Too Much Money

It's obvious how too little money could kill you, but is there
such a thing as having too much?

Yes and no. The problem is not so much the money itself as
what comes with it. As one VC who spoke at Y Combinator
said, "Once you take several million dollars of my money,
the clock is ticking." If VCs fund you, they're not going to let
you just put the money in the bank and keep operating as
two guys living on ramen. They want that money to go to
work. [6] At the very least you'll move into proper office
space and hire more people. That will change the
atmosphere, and not entirely for the better. Now most of
your people will be employees rather than founders. They
won't be as committed; they'll need to be told what to do;
they'll start to engage in office politics.

When you raise a lot of money, your company moves to the

suburbs and has kids.

Perhaps more dangerously, once you take a lot of money it

gets harder to change direction. Suppose your initial plan
was to sell something to companies. After taking VC money
you hire a sales force to do that. What happens now if you
realize you should be making this for consumers instead of
businesses? That's a completely different kind of selling.
What happens, in practice, is that you don't realize that. The
more people you have, the more you stay pointed in the
same direction.

Another drawback of large investments is the time they

take. The time required to raise money grows with the
amount. [7] When the amount rises into the millions,
investors get very cautious. VCs never quite say yes or no;
they just engage you in an apparently endless conversation.
Raising VC scale investments is thus a huge time sink—more
work, probably, than the startup itself. And you don't want
to be spending all your time talking to investors while your
competitors are spending theirs building things.

We advise founders who go on to seek VC money to take

the first reasonable deal they get. If you get an offer from a
reputable firm at a reasonable valuation with no unusually
onerous terms, just take it and get on with building the
company. [8] Who cares if you could get a 30% better deal
elsewhere? Economically, startups are an all-or-nothing
game. Bargain-hunting among investors is a waste of time.

14. Poor Investor Management

As a founder, you have to manage your investors. You

shouldn't ignore them, because they may have useful
insights. But neither should you let them run the company.
That's supposed to be your job. If investors had sufficient
vision to run the companies they fund, why didn't they start
them?

Pissing off investors by ignoring them is probably less

dangerous than caving in to them. In our startup, we erred
on the ignoring side. A lot of our energy got drained away in
disputes with investors instead of going into the product. But
this was less costly than giving in, which would probably
have destroyed the company. If the founders know what
they're doing, it's better to have half their attention focused
on the product than the full attention of investors who don't.

How hard you have to work on managing investors usually

depends on how much money you've taken. When you raise
VC-scale money, the investors get a great deal of control. If
they have a board majority, they're literally your bosses. In
the more common case, where founders and investors are
equally represented and the deciding vote is cast by neutral
outside directors, all the investors have to do is convince the
outside directors and they control the company.

If things go well, this shouldn't matter. So long as you seem

to be advancing rapidly, most investors will leave you alone.
But things don't always go smoothly in startups. Investors
have made trouble even for the most successful companies.
One of the most famous examples is Apple, whose board
made a nearly fatal blunder in firing Steve Jobs. Apparently
even Google got a lot of grief from their investors early on.

15. Sacrificing Users to (Supposed) Profit

When I said at the beginning that if you make something

users want, you'll be fine, you may have noticed I didn't
mention anything about having the right business model.
That's not because making money is unimportant. I'm not
suggesting that founders start companies with no chance of
making money in the hope of unloading them before they
tank. The reason we tell founders not to worry about the
business model initially is that making something people
want is so much harder.

I don't know why it's so hard to make something people

want. It seems like it should be straightforward. But you can
tell it must be hard by how few startups do it.

Because making something people want is so much harder

than making money from it, you should leave business
models for later, just as you'd leave some trivial but messy
feature for version 2. In version 1, solve the core problem.
And the core problem in a startup is how to create wealth
(= how much people want something x the number who
want it), not how to convert that wealth into money.

The companies that win are the ones that put users first.
Google, for example. They made search work, then worried
about how to make money from it. And yet some startup
founders still think it's irresponsible not to focus on the
business model from the beginning. They're often
encouraged in this by investors whose experience comes
from less malleable industries.

It is irresponsible not to think about business models. It's

just ten times more irresponsible not to think about the
product.

16. Not Wanting to Get Your Hands Dirty

Nearly all programmers would rather spend their time

writing code and have someone else handle the messy
business of extracting money from it. And not just the lazy
ones. Larry and Sergey apparently felt this way too at first.
After developing their new search algorithm, the first thing
they tried was to get some other company to buy it.

Start a company? Yech. Most hackers would rather just have

ideas. But as Larry and Sergey found, there's not much of a
market for ideas. No one trusts an idea till you embody it in
a product and use that to grow a user base. Then they'll pay
big time.

Maybe this will change, but I doubt it will change much.

There's nothing like users for convincing acquirers. It's not
just that the risk is decreased. The acquirers are human,
and they have a hard time paying a bunch of young guys
millions of dollars just for being clever. When the idea is
embodied in a company with a lot of users, they can tell
themselves they're buying the users rather than the
cleverness, and this is easier for them to swallow. [9]

If you're going to attract users, you'll probably have to get

up from your computer and go find some. It's unpleasant
work, but if you can make yourself do it you have a much
greater chance of succeeding. In the first batch of startups
we funded, in the summer of 2005, most of the founders
spent all their time building their applications. But there was
one who was away half the time talking to executives at cell
phone companies, trying to arrange deals. Can you imagine
anything more painful for a hacker? [10] But it paid off,
because this startup seems the most successful of that
group by an order of magnitude.

If you want to start a startup, you have to face the fact that
you can't just hack. At least one hacker will have to spend
some of the time doing business stuff.

17. Fights Between Founders

Fights between founders are surprisingly common. About

20% of the startups we've funded have had a founder leave.
It happens so often that we've reversed our attitude to
vesting. We still don't require it, but now we advise founders
to vest so there will be an orderly way for people to quit.

A founder leaving doesn't necessarily kill a startup, though.

Plenty of successful startups have had that happen. [11]
Fortunately it's usually the least committed founder who
leaves. If there are three founders and one who was
lukewarm leaves, big deal. If you have two and one leaves,
or a guy with critical technical skills leaves, that's more of a
problem. But even that is survivable. Blogger got down to
one person, and they bounced back.

Most of the disputes I've seen between founders could have

been avoided if they'd been more careful about who they
started a company with. Most disputes are not due to the
situation but the people. Which means they're inevitable.
And most founders who've been burned by such disputes
probably had misgivings, which they suppressed, when they
started the company. Don't suppress misgivings. It's much
easier to fix problems before the company is started than
after. So don't include your housemate in your startup
because he'd feel left out otherwise. Don't start a company
with someone you dislike because they have some skill you
need and you worry you won't find anyone else. The people
are the most important ingredient in a startup, so don't
compromise there.

18. A Half-Hearted Effort

The failed startups you hear most about are the spectactular
flameouts. Those are actually the elite of failures. The most
common type is not the one that makes spectacular
mistakes, but the one that doesn't do much of anything—the
one we never even hear about, because it was some project
a couple guys started on the side while working on their day
jobs, but which never got anywhere and was gradually
abandoned.

Statistically, if you want to avoid failure, it would seem like

the most important thing is to quit your day job. Most
founders of failed startups don't quit their day jobs, and
most founders of successful ones do. If startup failure were
a disease, the CDC would be issuing bulletins warning
people to avoid day jobs.

Does that mean you should quit your day job? Not
necessarily. I'm guessing here, but I'd guess that many of
these would-be founders may not have the kind of
determination it takes to start a company, and that in the
back of their minds, they know it. The reason they don't
invest more time in their startup is that they know it's a bad
investment. [12]

I'd also guess there's some band of people who could have
succeeded if they'd taken the leap and done it full-time, but
didn't. I have no idea how wide this band is, but if the
winner/borderline/hopeless progression has the sort of
distribution you'd expect, the number of people who could
have made it, if they'd quit their day job, is probably an
order of magnitude larger than the number who do make it.
[13]

If that's true, most startups that could succeed fail because

the founders don't devote their whole efforts to them. That
certainly accords with what I see out in the world. Most
startups fail because they don't make something people
want, and the reason most don't is that they don't try hard
enough.

In other words, starting startups is just like everything else.

The biggest mistake you can make is not to try hard
enough. To the extent there's a secret to success, it's not to
be in denial about that.

Notes

[1] This is not a complete list of the causes of failure, just

those you can control. There are also several you can't,
notably ineptitude and bad luck.

[2] Ironically, one variant of the Facebook that might work

is a facebook exclusively for college students.

[3] Steve Jobs tried to motivate people by saying "Real

artists ship." This is a fine sentence, but unfortunately not
true. Many famous works of art are unfinished. It's true in
fields that have hard deadlines, like architecture and
filmmaking, but even there people tend to be tweaking stuff
till it's yanked out of their hands.

[4] There's probably also a second factor: startup founders

tend to be at the leading edge of technology, so problems
they face are probably especially valuable.

[5] You should take more than you think you'll need, maybe
50% to 100% more, because software takes longer to write
and deals longer to close than you expect.

[6] Since people sometimes call us VCs, I should add that

we're not. VCs invest large amounts of other people's
money. We invest small amounts of our own, like angel
investors.

[7] Not linearly of course, or it would take forever to raise

five million dollars. In practice it just feels like it takes
forever.

Though if you include the cases where VCs don't invest, it

would literally take forever in the median case. And maybe
we should, because the danger of chasing large investments
is not just that they take a long time. That's the best case.
The real danger is that you'll expend a lot of time and get
nothing.

[8] Some VCs will offer you an artificially low valuation to

see if you have the balls to ask for more. It's lame that VCs
play such games, but some do. If you're dealing with one of
those you should push back on the valuation a bit.

[9] Suppose YouTube's founders had gone to Google in 2005

and told them "Google Video is badly designed. Give us $10
million and we'll tell you all the mistakes you made." They
would have gotten the royal raspberry. Eighteen months
later Google paid $1.6 billion for the same lesson, partly
because they could then tell themselves that they were
buying a phenomenon, or a community, or some vague
thing like that.

I don't mean to be hard on Google. They did better than

their competitors, who may have now missed the video boat
entirely.

[10] Yes, actually: dealing with the government. But phone

companies are up there.

[11] Many more than most people realize, because

companies don't advertise this. Did you know Apple
originally had three founders?

[12] I'm not dissing these people. I don't have the

determination myself. I've twice come close to starting
startups since Viaweb, and both times I bailed because I
realized that without the spur of poverty I just wasn't willing
to endure the stress of a startup.

[13] So how do you know whether you're in the category of

people who should quit their day job, or the presumably
larger one who shouldn't? I got to the point of saying that
this was hard to judge for yourself and that you should seek
outside advice, before realizing that that's what we do. We
think of ourselves as investors, but viewed from the other
direction Y Combinator is a service for advising people
whether or not to quit their day job. We could be mistaken,
and no doubt often are, but we do at least bet money on
our conclusions.

Thanks to Sam Altman, Jessica Livingston, Greg McAdoo,

and Robert Morris for reading drafts of this.

Comment on this essay.

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April 2006

(This essay is derived from a talk at the 2006 Startup

School.)

The startups we've funded so far are pretty quick, but they
seem quicker to learn some lessons than others. I think it's
because some things about startups are kind of
counterintuitive.

We've now invested in enough companies that I've learned a

trick for determining which points are the counterintuitive
ones: they're the ones I have to keep repeating.

So I'm going to number these points, and maybe with future

startups I'll be able to pull off a form of Huffman coding. I'll
make them all read this, and then instead of nagging them
in detail, I'll just be able to say: number four!

1. Release Early.

The thing I probably repeat most is this recipe for a startup:

get a version 1 out fast, then improve it based on users'
reactions.

By "release early" I don't mean you should release

something full of bugs, but that you should release
something minimal. Users hate bugs, but they don't seem to
mind a minimal version 1, if there's more coming soon.

There are several reasons it pays to get version 1 done fast.

One is that this is simply the right way to write software,
whether for a startup or not. I've been repeating that since
1993, and I haven't seen much since to contradict it. I've
seen a lot of startups die because they were too slow to
release stuff, and none because they were too quick. [1]

One of the things that will surprise you if you build

something popular is that you won't know your users. Reddit
now has almost half a million unique visitors a month. Who
are all those people? They have no idea. No web startup
does. And since you don't know your users, it's dangerous to
guess what they'll like. Better to release something and let
them tell you.

Wufoo took this to heart and released their form-builder

before the underlying database. You can't even drive the
thing yet, but 83,000 people came to sit in the driver's seat
and hold the steering wheel. And Wufoo got valuable
feedback from it: Linux users complained they used too
much Flash, so they rewrote their software not to. If they'd
waited to release everything at once, they wouldn't have
discovered this problem till it was more deeply wired in.
Even if you had no users, it would still be important to
release quickly, because for a startup the initial release acts
as a shakedown cruise. If anything major is broken-- if the
idea's no good, for example, or the founders hate one
another-- the stress of getting that first version out will
expose it. And if you have such problems you want to find
them early.

Perhaps the most important reason to release early, though,

is that it makes you work harder. When you're working on
something that isn't released, problems are intriguing. In
something that's out there, problems are alarming. There is
a lot more urgency once you release. And I think that's
precisely why people put it off. They know they'll have to
work a lot harder once they do. [2]

2. Keep Pumping Out Features.

Of course, "release early" has a second component, without

which it would be bad advice. If you're going to start with
something that doesn't do much, you better improve it fast.

What I find myself repeating is "pump out features." And

this rule isn't just for the initial stages. This is something all
startups should do for as long as they want to be considered
startups.

I don't mean, of course, that you should make your

application ever more complex. By "feature" I mean one unit
of hacking-- one quantum of making users' lives better.

As with exercise, improvements beget improvements. If you

run every day, you'll probably feel like running tomorrow.
But if you skip running for a couple weeks, it will be an
effort to drag yourself out. So it is with hacking: the more
ideas you implement, the more ideas you'll have. You should
make your system better at least in some small way every
day or two.

This is not just a good way to get development done; it is

also a form of marketing. Users love a site that's constantly
improving. In fact, users expect a site to improve. Imagine
if you visited a site that seemed very good, and then
returned two months later and not one thing had changed.
Wouldn't it start to seem lame? [3]

They'll like you even better when you improve in response to

their comments, because customers are used to companies
ignoring them. If you're the rare exception-- a company that
actually listens-- you'll generate fanatical loyalty. You won't
need to advertise, because your users will do it for you.

This seems obvious too, so why do I have to keep repeating

it? I think the problem here is that people get used to how
things are. Once a product gets past the stage where it has
glaring flaws, you start to get used to it, and gradually
whatever features it happens to have become its identity.
For example, I doubt many people at Yahoo (or Google for
that matter) realized how much better web mail could be till
Paul Buchheit showed them.
I think the solution is to assume that anything you've made
is far short of what it could be. Force yourself, as a sort of
intellectual exercise, to keep thinking of improvements. Ok,
sure, what you have is perfect. But if you had to change
something, what would it be?

If your product seems finished, there are two possible

explanations: (a) it is finished, or (b) you lack imagination.
Experience suggests (b) is a thousand times more likely.

3. Make Users Happy.

Improving constantly is an instance of a more general rule:

make users happy. One thing all startups have in common is
that they can't force anyone to do anything. They can't force
anyone to use their software, and they can't force anyone to
do deals with them. A startup has to sing for its supper.
That's why the successful ones make great things. They
have to, or die.

When you're running a startup you feel like a little bit of

debris blown about by powerful winds. The most powerful
wind is users. They can either catch you and loft you up into
the sky, as they did with Google, or leave you flat on the
pavement, as they do with most startups. Users are a fickle
wind, but more powerful than any other. If they take you
up, no competitor can keep you down.

As a little piece of debris, the rational thing for you to do is

not to lie flat, but to curl yourself into a shape the wind will
catch.

I like the wind metaphor because it reminds you how

impersonal the stream of traffic is. The vast majority of
people who visit your site will be casual visitors. It's them
you have to design your site for. The people who really care
will find what they want by themselves.

The median visitor will arrive with their finger poised on the
Back button. Think about your own experience: most links
you follow lead to something lame. Anyone who has used
the web for more than a couple weeks has been trained to
click on Back after following a link. So your site has to say
"Wait! Don't click on Back. This site isn't lame. Look at this,
for example."

There are two things you have to do to make people pause.

The most important is to explain, as concisely as possible,
what the hell your site is about. How often have you visited
a site that seemed to assume you already knew what they
did? For example, the corporate site that says the company
makes

enterprise content management solutions for

business that enable organizations to unify
people, content and processes to minimize
business risk, accelerate time-to-value and
sustain lower total cost of ownership.

An established company may get away with such an opaque

description, but no startup can. A startup should be able to
explain in one or two sentences exactly what it does. [4]
And not just to users. You need this for everyone: investors,
acquirers, partners, reporters, potential employees, and even
current employees. You probably shouldn't even start a
company to do something that can't be described
compellingly in one or two sentences.

The other thing I repeat is to give people everything you've

got, right away. If you have something impressive, try to
put it on the front page, because that's the only one most
visitors will see. Though indeed there's a paradox here: the
more you push the good stuff toward the front, the more
likely visitors are to explore further. [5]

In the best case these two suggestions get combined: you

tell visitors what your site is about by showing them. One of
the standard pieces of advice in fiction writing is "show,
don't tell." Don't say that a character's angry; have him
grind his teeth, or break his pencil in half. Nothing will
explain what your site does so well as using it.

The industry term here is "conversion." The job of your site

is to convert casual visitors into users-- whatever your
definition of a user is. You can measure this in your growth
rate. Either your site is catching on, or it isn't, and you must
know which. If you have decent growth, you'll win in the
end, no matter how obscure you are now. And if you don't,
you need to fix something.

4. Fear the Right Things.

Another thing I find myself saying a lot is "don't worry."

Actually, it's more often "don't worry about this; worry about
that instead." Startups are right to be paranoid, but they
sometimes fear the wrong things.

Most visible disasters are not so alarming as they seem.

Disasters are normal in a startup: a founder quits, you
discover a patent that covers what you're doing, your
servers keep crashing, you run into an insoluble technical
problem, you have to change your name, a deal falls
through-- these are all par for the course. They won't kill
you unless you let them.

Nor will most competitors. A lot of startups worry "what if

Google builds something like us?" Actually big companies are
not the ones you have to worry about-- not even Google.
The people at Google are smart, but no smarter than you;
they're not as motivated, because Google is not going to go
out of business if this one product fails; and even at Google
they have a lot of bureaucracy to slow them down.

What you should fear, as a startup, is not the established

players, but other startups you don't know exist yet. They're
way more dangerous than Google because, like you, they're
cornered animals.

Looking just at existing competitors can give you a false

sense of security. You should compete against what
someone else could be doing, not just what you can see
people doing. A corollary is that you shouldn't relax just
because you have no visible competitors yet. No matter
what your idea, there's someone else out there working on
the same thing.

That's the downside of it being easier to start a startup:

more people are doing it. But I disagree with Caterina Fake
when she says that makes this a bad time to start a startup.
More people are starting startups, but not as many more as
could. Most college graduates still think they have to get a
job. The average person can't ignore something that's been
beaten into their head since they were three just because
serving web pages recently got a lot cheaper.

And in any case, competitors are not the biggest threat.

Way more startups hose themselves than get crushed by
competitors. There are a lot of ways to do it, but the three
main ones are internal disputes, inertia, and ignoring users.
Each is, by itself, enough to kill you. But if I had to pick the
worst, it would be ignoring users. If you want a recipe for a
startup that's going to die, here it is: a couple of founders
who have some great idea they know everyone is going to
love, and that's what they're going to build, no matter what.

Almost everyone's initial plan is broken. If companies stuck

to their initial plans, Microsoft would be selling programming
languages, and Apple would be selling printed circuit boards.
In both cases their customers told them what their business
should be-- and they were smart enough to listen.

As Richard Feynman said, the imagination of nature is

greater than the imagination of man. You'll find more
interesting things by looking at the world than you could
ever produce just by thinking. This principle is very
powerful. It's why the best abstract painting still falls short
of Leonardo, for example. And it applies to startups too. No
idea for a product could ever be so clever as the ones you
can discover by smashing a beam of prototypes into a beam
of users.

5. Commitment Is a Self-Fulfilling Prophecy.

I now have enough experience with startups to be able to

say what the most important quality is in a startup founder,
and it's not what you might think. The most important
quality in a startup founder is determination. Not
intelligence-- determination.

This is a little depressing. I'd like to believe Viaweb

succeeded because we were smart, not merely determined.
A lot of people in the startup world want to believe that. Not
just founders, but investors too. They like the idea of
inhabiting a world ruled by intelligence. And you can tell
they really believe this, because it affects their investment
decisions.

Time after time VCs invest in startups founded by eminent

professors. This may work in biotech, where a lot of startups
simply commercialize existing research, but in software you
want to invest in students, not professors. Microsoft, Yahoo,
and Google were all founded by people who dropped out of
school to do it. What students lack in experience they more
than make up in dedication.

Of course, if you want to get rich, it's not enough merely to

be determined. You have to be smart too, right? I'd like to
think so, but I've had an experience that convinced me
otherwise: I spent several years living in New York.

You can lose quite a lot in the brains department and it

won't kill you. But lose even a little bit in the commitment
department, and that will kill you very rapidly.

Running a startup is like walking on your hands: it's

possible, but it requires extraordinary effort. If an ordinary
employee were asked to do the things a startup founder has
to, he'd be very indignant. Imagine if you were hired at
some big company, and in addition to writing software ten
times faster than you'd ever had to before, they expected
you to answer support calls, administer the servers, design
the web site, cold-call customers, find the company office
space, and go out and get everyone lunch.

And to do all this not in the calm, womb-like atmosphere of

a big company, but against a backdrop of constant disasters.
That's the part that really demands determination. In a
startup, there's always some disaster happening. So if you're
the least bit inclined to find an excuse to quit, there's
always one right there.

But if you lack commitment, chances are it will have been

hurting you long before you actually quit. Everyone who
deals with startups knows how important commitment is, so
if they sense you're ambivalent, they won't give you much
attention. If you lack commitment, you'll just find that for
some mysterious reason good things happen to your
competitors but not to you. If you lack commitment, it will
seem to you that you're unlucky.

Whereas if you're determined to stick around, people will

pay attention to you, because odds are they'll have to deal
with you later. You're a local, not just a tourist, so everyone
has to come to terms with you.

At Y Combinator we sometimes mistakenly fund teams who

have the attitude that they're going to give this startup
thing a shot for three months, and if something great
happens, they'll stick with it-- "something great" meaning
either that someone wants to buy them or invest millions of
dollars in them. But if this is your attitude, "something
great" is very unlikely to happen to you, because both
acquirers and investors judge you by your level of
commitment.

If an acquirer thinks you're going to stick around no matter

what, they'll be more likely to buy you, because if they don't
and you stick around, you'll probably grow, your price will go
up, and they'll be left wishing they'd bought you earlier.
Ditto for investors. What really motivates investors, even big
VCs, is not the hope of good returns, but the fear of missing
out. [6] So if you make it clear you're going to succeed no
matter what, and the only reason you need them is to make
it happen a little faster, you're much more likely to get
money.

You can't fake this. The only way to convince everyone that
you're ready to fight to the death is actually to be ready to.

You have to be the right kind of determined, though. I

carefully chose the word determined rather than stubborn,
because stubbornness is a disastrous quality in a startup.
You have to be determined, but flexible, like a running back.
A successful running back doesn't just put his head down
and try to run through people. He improvises: if someone
appears in front of him, he runs around them; if someone
tries to grab him, he spins out of their grip; he'll even run in
the wrong direction briefly if that will help. The one thing
he'll never do is stand still. [7]

6. There Is Always Room.

I was talking recently to a startup founder about whether it

might be good to add a social component to their software.
He said he didn't think so, because the whole social thing
was tapped out. Really? So in a hundred years the only
social networking sites will be the Facebook, MySpace, Flickr,
and Del.icio.us? Not likely.

There is always room for new stuff. At every point in history,

even the darkest bits of the dark ages, people were
discovering things that made everyone say "why didn't
anyone think of that before?" We know this continued to be
true up till 2004, when the Facebook was founded-- though
strictly speaking someone else did think of that.

The reason we don't see the opportunities all around us is

that we adjust to however things are, and assume that's
how things have to be. For example, it would seem crazy to
most people to try to make a better search engine than
Google. Surely that field, at least, is tapped out. Really? In a
hundred years-- or even twenty-- are people still going to
search for information using something like the current
Google? Even Google probably doesn't think that.

In particular, I don't think there's any limit to the number of

startups. Sometimes you hear people saying "All these guys
starting startups now are going to be disappointed. How
many little startups are Google and Yahoo going to buy,
after all?" That sounds cleverly skeptical, but I can prove it's
mistaken. No one proposes that there's some limit to the
number of people who can be employed in an economy
consisting of big, slow-moving companies with a couple
thousand people each. Why should there be any limit to the
number who could be employed by small, fast-moving
companies with ten each? It seems to me the only limit
would be the number of people who want to work that hard.

The limit on the number of startups is not the number that

can get acquired by Google and Yahoo-- though it seems
even that should be unlimited, if the startups were actually
worth buying-- but the amount of wealth that can be
created. And I don't think there's any limit on that, except
cosmological ones.

So for all practical purposes, there is no limit to the number

of startups. Startups make wealth, which means they make
things people want, and if there's a limit on the number of
things people want, we are nowhere near it. I still don't
even have a flying car.

7. Don't Get Your Hopes Up.

This is another one I've been repeating since long before Y

Combinator. It was practically the corporate motto at
Viaweb.

Startup founders are naturally optimistic. They wouldn't do it

otherwise. But you should treat your optimism the way
you'd treat the core of a nuclear reactor: as a source of
power that's also very dangerous. You have to build a shield
around it, or it will fry you.

The shielding of a reactor is not uniform; the reactor would

be useless if it were. It's pierced in a few places to let pipes
in. An optimism shield has to be pierced too. I think the
place to draw the line is between what you expect of
yourself, and what you expect of other people. It's ok to be
optimistic about what you can do, but assume the worst
about machines and other people.

This is particularly necessary in a startup, because you tend

to be pushing the limits of whatever you're doing. So things
don't happen in the smooth, predictable way they do in the
rest of the world. Things change suddenly, and usually for
the worse.

Shielding your optimism is nowhere more important than

with deals. If your startup is doing a deal, just assume it's
not going to happen. The VCs who say they're going to
invest in you aren't. The company that says they're going to
buy you isn't. The big customer who wants to use your
system in their whole company won't. Then if things work
out you can be pleasantly surprised.

The reason I warn startups not to get their hopes up is not

to save them from being disappointed when things fall
through. It's for a more practical reason: to prevent them
from leaning their company against something that's going
to fall over, taking them with it.

For example, if someone says they want to invest in you,

there's a natural tendency to stop looking for other
investors. That's why people proposing deals seem so
positive: they want you to stop looking. And you want to
stop too, because doing deals is a pain. Raising money, in
particular, is a huge time sink. So you have to consciously
force yourself to keep looking.

Even if you ultimately do the first deal, it will be to your

advantage to have kept looking, because you'll get better
terms. Deals are dynamic; unless you're negotiating with
someone unusually honest, there's not a single point where
you shake hands and the deal's done. There are usually a
lot of subsidiary questions to be cleared up after the
handshake, and if the other side senses weakness-- if they
sense you need this deal-- they will be very tempted to
screw you in the details.

VCs and corp dev guys are professional negotiators. They're

trained to take advantage of weakness. [8] So while they're
often nice guys, they just can't help it. And as pros they do
this more than you. So don't even try to bluff them. The
only way a startup can have any leverage in a deal is
genuinely not to need it. And if you don't believe in a deal,
you'll be less likely to depend on it.

So I want to plant a hypnotic suggestion in your heads:

when you hear someone say the words "we want to invest in
you" or "we want to acquire you," I want the following
phrase to appear automatically in your head: don't get your
hopes up. Just continue running your company as if this
deal didn't exist. Nothing is more likely to make it close.

The way to succeed in a startup is to focus on the goal of

getting lots of users, and keep walking swiftly toward it
while investors and acquirers scurry alongside trying to wave
money in your face.

Speed, not Money

The way I've described it, starting a startup sounds pretty

stressful. It is. When I talk to the founders of the companies
we've funded, they all say the same thing: I knew it would
be hard, but I didn't realize it would be this hard.

So why do it? It would be worth enduring a lot of pain and

stress to do something grand or heroic, but just to make
money? Is making money really that important?

No, not really. It seems ridiculous to me when people take

business too seriously. I regard making money as a boring
errand to be got out of the way as soon as possible. There
is nothing grand or heroic about starting a startup per se.

So why do I spend so much time thinking about startups?

I'll tell you why. Economically, a startup is best seen not as
a way to get rich, but as a way to work faster. You have to
make a living, and a startup is a way to get that done
quickly, instead of letting it drag on through your whole life.
[9]

We take it for granted most of the time, but human life is

fairly miraculous. It is also palpably short. You're given this
marvellous thing, and then poof, it's taken away. You can
see why people invent gods to explain it. But even to people
who don't believe in gods, life commands respect. There are
times in most of our lives when the days go by in a blur,
and almost everyone has a sense, when this happens, of
wasting something precious. As Ben Franklin said, if you love
life, don't waste time, because time is what life is made of.

So no, there's nothing particularly grand about making

money. That's not what makes startups worth the trouble.
What's important about startups is the speed. By
compressing the dull but necessary task of making a living
into the smallest possible time, you show respect for life,
and there is something grand about that.

Notes

[1] Startups can die from releasing something full of bugs,

and not fixing them fast enough, but I don't know of any
that died from releasing something stable but minimal very
early, then promptly improving it.

[2] I know this is why I haven't released Arc. The moment I

do, I'll have people nagging me for features.

[3] A web site is different from a book or movie or desktop

application in this respect. Users judge a site not as a single
snapshot, but as an animation with multiple frames. Of the
two, I'd say the rate of improvement is more important to
users than where you currently are.

[4] It should not always tell this to users, however. For

example, MySpace is basically a replacement mall for
mallrats. But it was wiser for them, initially, to pretend that
the site was about bands.

[5] Similarly, don't make users register to try your site.

Maybe what you have is so valuable that visitors should
gladly register to get at it. But they've been trained to
expect the opposite. Most of the things they've tried on the
web have sucked-- and probably especially those that made
them register.

[6] VCs have rational reasons for behaving this way. They
don't make their money (if they make money) off their
median investments. In a typical fund, half the companies
fail, most of the rest generate mediocre returns, and one or
two "make the fund" by succeeding spectacularly. So if they
miss just a few of the most promising opportunities, it could
hose the whole fund.

[7] The attitude of a running back doesn't translate to

soccer. Though it looks great when a forward dribbles past
multiple defenders, a player who persists in trying such
things will do worse in the long term than one who passes.

[8] The reason Y Combinator never negotiates valuations is

that we're not professional negotiators, and don't want to
turn into them.

[9] There are two ways to do work you love: (a) to make
money, then work on what you love, or (b) to get a job
where you get paid to work on stuff you love. In practice the
first phases of both consist mostly of unedifying schleps, and
in (b) the second phase is less secure.

Thanks to Sam Altman, Trevor Blackwell, Beau Hartshorne,

Jessica Livingston, and Robert Morris for reading drafts of
this.

Comment on this essay.

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November 2005

Venture funding works like gears. A typical startup goes

through several rounds of funding, and at each round you
want to take just enough money to reach the speed where
you can shift into the next gear.

Few startups get it quite right. Many are underfunded. A few

are overfunded, which is like trying to start driving in third
gear.

I think it would help founders to understand funding better—

not just the mechanics of it, but what investors are thinking.
I was surprised recently when I realized that all the worst
problems we faced in our startup were due not to
competitors, but investors. Dealing with competitors was
easy by comparison.

I don't mean to suggest that our investors were nothing but

a drag on us. They were helpful in negotiating deals, for
example. I mean more that conflicts with investors are
particularly nasty. Competitors punch you in the jaw, but
investors have you by the balls.

Apparently our situation was not unusual. And if trouble with

investors is one of the biggest threats to a startup,
managing them is one of the most important skills founders
need to learn.

Let's start by talking about the five sources of startup

funding. Then we'll trace the life of a hypothetical (very
fortunate) startup as it shifts gears through successive
rounds.

Friends and Family

A lot of startups get their first funding from friends and

family. Excite did, for example: after the founders graduated
from college, they borrowed $15,000 from their parents to
start a company. With the help of some part-time jobs they
made it last 18 months.

If your friends or family happen to be rich, the line blurs

between them and angel investors. At Viaweb we got our
first $10,000 of seed money from our friend Julian, but he
was sufficiently rich that it's hard to say whether he should
be classified as a friend or angel. He was also a lawyer,
which was great, because it meant we didn't have to pay
legal bills out of that initial small sum.

The advantage of raising money from friends and family is

that they're easy to find. You already know them. There are
three main disadvantages: you mix together your business
and personal life; they will probably not be as well
connected as angels or venture firms; and they may not be
accredited investors, which could complicate your life later.

The SEC defines an "accredited investor" as someone with

over a million dollars in liquid assets or an income of over
$200,000 a year. The regulatory burden is much lower if a
company's shareholders are all accredited investors. Once
you take money from the general public you're more
restricted in what you can do. [1]

A startup's life will be more complicated, legally, if any of

the investors aren't accredited. In an IPO, it might not
merely add expense, but change the outcome. A lawyer I
asked about it said:

When the company goes public, the SEC will

carefully study all prior issuances of stock by the
company and demand that it take immediate
action to cure any past violations of securities
laws. Those remedial actions can delay, stall or
even kill the IPO.

Of course the odds of any given startup doing an IPO are

small. But not as small as they might seem. A lot of startups
that end up going public didn't seem likely to at first. (Who
could have guessed that the company Wozniak and Jobs
started in their spare time selling plans for microcomputers
would yield one of the biggest IPOs of the decade?) Much of
the value of a startup consists of that tiny probability
multiplied by the huge outcome.

It wasn't because they weren't accredited investors that I

didn't ask my parents for seed money, though. When we
were starting Viaweb, I didn't know about the concept of an
accredited investor, and didn't stop to think about the value
of investors' connections. The reason I didn't take money
from my parents was that I didn't want them to lose it.

Consulting

Another way to fund a startup is to get a job. The best sort

of job is a consulting project in which you can build
whatever software you wanted to sell as a startup. Then you
can gradually transform yourself from a consulting company
into a product company, and have your clients pay your
development expenses.

This is a good plan for someone with kids, because it takes

most of the risk out of starting a startup. There never has to
be a time when you have no revenues. Risk and reward are
usually proportionate, however: you should expect a plan
that cuts the risk of starting a startup also to cut the
average return. In this case, you trade decreased financial
risk for increased risk that your company won't succeed as a
startup.

But isn't the consulting company itself startup? No, not

generally. A company has to be more than small and newly
founded to be a startup. There are millions of small
businesses in America, but only a few thousand are startups.
To be a startup, a company has to be a product business,
not a service business. By which I mean not that it has to
make something physical, but that it has to have one thing
it sells to many people, rather than doing custom work for
individual clients. Custom work doesn't scale. To be a startup
you need to be the band that sells a million copies of a
song, not the band that makes money by playing at
individual weddings and bar mitzvahs.

The trouble with consulting is that clients have an awkward

habit of calling you on the phone. Most startups operate
close to the margin of failure, and the distraction of having
to deal with clients could be enough to put you over the
edge. Especially if you have competitors who get to work full
time on just being a startup.

So you have to be very disciplined if you take the consulting

route. You have to work actively to prevent your company
growing into a "weed tree," dependent on this source of
easy but low-margin money. [2]

Indeed, the biggest danger of consulting may be that it

gives you an excuse for failure. In a startup, as in grad
school, a lot of what ends up driving you are the
expectations of your family and friends. Once you start a
startup and tell everyone that's what you're doing, you're
now on a path labelled "get rich or bust." You now have to
get rich, or you've failed.

Fear of failure is an extraordinarily powerful force. Usually it

prevents people from starting things, but once you publish
some definite ambition, it switches directions and starts
working in your favor. I think it's a pretty clever piece of
jiujitsu to set this irresistible force against the slightly less
immovable object of becoming rich. You won't have it
driving you if your stated ambition is merely to start a
consulting company that you will one day morph into a
startup.

An advantage of consulting, as a way to develop a product,

is that you know you're making something at least one
customer wants. But if you have what it takes to start a
startup you should have sufficient vision not to need this
crutch.

Angel Investors

Angels are individual rich people. The word was first used
for backers of Broadway plays, but now applies to individual
investors generally. Angels who've made money in
technology are preferable, for two reasons: they understand
your situation, and they're a source of contacts and advice.

The contacts and advice can be more important than the

money. When del.icio.us took money from investors, they
took money from, among others, Tim O'Reilly. The amount
he put in was small compared to the VCs who led the round,
but Tim is a smart and influential guy and it's good to have
him on your side.

You can do whatever you want with money from consulting

or friends and family. With angels we're now talking about
venture funding proper, so it's time to introduce the concept
of exit strategy. Younger would-be founders are often
surprised that investors expect them either to sell the
company or go public. The reason is that investors need to
get their capital back. They'll only consider companies that
have an exit strategy—meaning companies that could get
bought or go public.

This is not as selfish as it sounds. There are few large,

private technology companies. Those that don't fail all seem
to get bought or go public. The reason is that employees are
investors too—of their time—and they want just as much to
be able to cash out. If your competitors offer employees
stock options that might make them rich, while you make it
clear you plan to stay private, your competitors will get the
best people. So the principle of an "exit" is not just
something forced on startups by investors, but part of what
it means to be a startup.

Another concept we need to introduce now is valuation.

When someone buys shares in a company, that implicitly
establishes a value for it. If someone pays $20,000 for 10%
of a company, the company is in theory worth $200,000. I
say "in theory" because in early stage investing, valuations
are voodoo. As a company gets more established, its
valuation gets closer to an actual market value. But in a
newly founded startup, the valuation number is just an
artifact of the respective contributions of everyone involved.

Startups often "pay" investors who will help the company in

some way by letting them invest at low valuations. If I had
a startup and Steve Jobs wanted to invest in it, I'd give him
the stock for $10, just to be able to brag that he was an
investor. Unfortunately, it's impractical (if not illegal) to
adjust the valuation of the company up and down for each
investor. Startups' valuations are supposed to rise over time.
So if you're going to sell cheap stock to eminent angels, do
it early, when it's natural for the company to have a low
valuation.

Some angel investors join together in syndicates. Any city

where people start startups will have one or more of them.
In Boston the biggest is the Common Angels. In the Bay
Area it's the Band of Angels. You can find groups near you
through the Angel Capital Association. [3] However, most
angel investors don't belong to these groups. In fact, the
more prominent the angel, the less likely they are to belong
to a group.

Some angel groups charge you money to pitch your idea to

them. Needless to say, you should never do this.

One of the dangers of taking investment from individual

angels, rather than through an angel group or investment
firm, is that they have less reputation to protect. A big-
name VC firm will not screw you too outrageously, because
other founders would avoid them if word got out. With
individual angels you don't have this protection, as we found
to our dismay in our own startup. In many startups' lives
there comes a point when you're at the investors' mercy—
when you're out of money and the only place to get more is
your existing investors. When we got into such a scrape, our
investors took advantage of it in a way that a name-brand
VC probably wouldn't have.

Angels have a corresponding advantage, however: they're

also not bound by all the rules that VC firms are. And so
they can, for example, allow founders to cash out partially in
a funding round, by selling some of their stock directly to
the investors. I think this will become more common; the
average founder is eager to do it, and selling, say, half a
million dollars worth of stock will not, as VCs fear, cause
most founders to be any less committed to the business.

The same angels who tried to screw us also let us do this,

and so on balance I'm grateful rather than angry. (As in
families, relations between founders and investors can be
complicated.)

The best way to find angel investors is through personal

introductions. You could try to cold-call angel groups near
you, but angels, like VCs, will pay more attention to deals
recommended by someone they respect.

Deal terms with angels vary a lot. There are no generally

accepted standards. Sometimes angels' deal terms are as
fearsome as VCs'. Other angels, particularly in the earliest
stages, will invest based on a two-page agreement.

Angels who only invest occasionally may not themselves

know what terms they want. They just want to invest in this
startup. What kind of anti-dilution protection do they want?
Hell if they know. In these situations, the deal terms tend to
be random: the angel asks his lawyer to create a vanilla
agreement, and the terms end up being whatever the lawyer
considers vanilla. Which in practice usually means, whatever
existing agreement he finds lying around his firm. (Few legal
documents are created from scratch.)

These heaps o' boilerplate are a problem for small startups,

because they tend to grow into the union of all preceding
documents. I know of one startup that got from an angel
investor what amounted to a five hundred pound handshake:
after deciding to invest, the angel presented them with a
70-page agreement. The startup didn't have enough money
to pay a lawyer even to read it, let alone negotiate the
terms, so the deal fell through.

One solution to this problem would be to have the startup's

lawyer produce the agreement, instead of the angel's. Some
angels might balk at this, but others would probably
welcome it.

Inexperienced angels often get cold feet when the time

comes to write that big check. In our startup, one of the two
angels in the initial round took months to pay us, and only
did after repeated nagging from our lawyer, who was also,
fortunately, his lawyer.
It's obvious why investors delay. Investing in startups is
risky! When a company is only two months old, every day
you wait gives you 1.7% more data about their trajectory.
But the investor is already being compensated for that risk
in the low price of the stock, so it is unfair to delay.

Fair or not, investors do it if you let them. Even VCs do it.

And funding delays are a big distraction for founders, who
ought to be working on their company, not worrying about
investors. What's a startup to do? With both investors and
acquirers, the only leverage you have is competition. If an
investor knows you have other investors lined up, he'll be a
lot more eager to close-- and not just because he'll worry
about losing the deal, but because if other investors are
interested, you must be worth investing in. It's the same
with acquisitions. No one wants to buy you till someone else
wants to buy you, and then everyone wants to buy you.

The key to closing deals is never to stop pursuing

alternatives. When an investor says he wants to invest in
you, or an acquirer says they want to buy you, don't believe
it till you get the check. Your natural tendency when an
investor says yes will be to relax and go back to writing
code. Alas, you can't; you have to keep looking for more
investors, if only to get this one to act. [4]

Seed Funding Firms

Seed firms are like angels in that they invest relatively small
amounts at early stages, but like VCs in that they're
companies that do it as a business, rather than individuals
making occasional investments on the side.

Till now, nearly all seed firms have been so-called

"incubators," so Y Combinator gets called one too, though
the only thing we have in common is that we invest in the
earliest phase.

According to the National Association of Business Incubators,

there are about 800 incubators in the US. This is an
astounding number, because I know the founders of a lot of
startups, and I can't think of one that began in an incubator.

What is an incubator? I'm not sure myself. The defining

quality seems to be that you work in their space. That's
where the name "incubator" comes from. They seem to vary
a great deal in other respects. At one extreme is the sort of
pork-barrel project where a town gets money from the state
government to renovate a vacant building as a "high-tech
incubator," as if it were merely lack of the right sort of office
space that had till now prevented the town from becoming a
startup hub. At the other extreme are places like Idealab,
which generates ideas for new startups internally and hires
people to work for them.

The classic Bubble incubators, most of which now seem to

be dead, were like VC firms except that they took a much
bigger role in the startups they funded. In addition to
working in their space, you were supposed to use their office
staff, lawyers, accountants, and so on.
Whereas incubators tend (or tended) to exert more control
than VCs, Y Combinator exerts less. And we think it's better
if startups operate out of their own premises, however
crappy, than the offices of their investors. So it's annoying
that we keep getting called an "incubator," but perhaps
inevitable, because there's only one of us so far and no word
yet for what we are. If we have to be called something, the
obvious name would be "excubator." (The name is more
excusable if one considers it as meaning that we enable
people to escape cubicles.)

Because seed firms are companies rather than individual

people, reaching them is easier than reaching angels. Just go
to their web site and send them an email. The importance of
personal introductions varies, but is less than with angels or
VCs.

The fact that seed firms are companies also means the
investment process is more standardized. (This is generally
true with angel groups too.) Seed firms will probably have
set deal terms they use for every startup they fund. The fact
that the deal terms are standard doesn't mean they're
favorable to you, but if other startups have signed the same
agreements and things went well for them, it's a sign the
terms are reasonable.

Seed firms differ from angels and VCs in that they invest
exclusively in the earliest phases—often when the company
is still just an idea. Angels and even VC firms occasionally
do this, but they also invest at later stages.

The problems are different in the early stages. For example,

in the first couple months a startup may completely redefine
their idea. So seed investors usually care less about the idea
than the people. This is true of all venture funding, but
especially so in the seed stage.

Like VCs, one of the advantages of seed firms is the advice

they offer. But because seed firms operate in an earlier
phase, they need to offer different kinds of advice. For
example, a seed firm should be able to give advice about
how to approach VCs, which VCs obviously don't need to do;
whereas VCs should be able to give advice about how to
hire an "executive team," which is not an issue in the seed
stage.

In the earliest phases, a lot of the problems are technical,

so seed firms should be able to help with technical as well
as business problems.

Seed firms and angel investors generally want to invest in

the initial phases of a startup, then hand them off to VC
firms for the next round. Occasionally startups go from seed
funding direct to acquisition, however, and I expect this to
become increasingly common.

Google has been aggressively pursuing this route, and now

Yahoo is too. Both now compete directly with VCs. And this
is a smart move. Why wait for further funding rounds to jack
up a startup's price? When a startup reaches the point
where VCs have enough information to invest in it, the
acquirer should have enough information to buy it. More
information, in fact; with their technical depth, the acquirers
should be better at picking winners than VCs.

Venture Capital Funds

VC firms are like seed firms in that they're actual

companies, but they invest other people's money, and much
larger amounts of it. VC investments average several million
dollars. So they tend to come later in the life of a startup,
are harder to get, and come with tougher terms.

The word "venture capitalist" is sometimes used loosely for

any venture investor, but there is a sharp difference
between VCs and other investors: VC firms are organized as
funds, much like hedge funds or mutual funds. The fund
managers, who are called "general partners," get about 2%
of the fund annually as a management fee, plus about 20%
of the fund's gains.

There is a very sharp dropoff in performance among VC

firms, because in the VC business both success and failure
are self-perpetuating. When an investment scores
spectacularly, as Google did for Kleiner and Sequoia, it
generates a lot of good publicity for the VCs. And many
founders prefer to take money from successful VC firms,
because of the legitimacy it confers. Hence a vicious (for the
losers) cycle: VC firms that have been doing badly will only
get the deals the bigger fish have rejected, causing them to
continue to do badly.

As a result, of the thousand or so VC funds in the US now,

only about 50 are likely to make money, and it is very hard
for a new fund to break into this group.

In a sense, the lower-tier VC firms are a bargain for

founders. They may not be quite as smart or as well
connected as the big-name firms, but they are much
hungrier for deals. This means you should be able to get
better terms from them.

Better how? The most obvious is valuation: they'll take less

of your company. But as well as money, there's power. I
think founders will increasingly be able to stay on as CEO,
and on terms that will make it fairly hard to fire them later.

The most dramatic change, I predict, is that VCs will allow

founders to cash out partially by selling some of their stock
direct to the VC firm. VCs have traditionally resisted letting
founders get anything before the ultimate "liquidity event."
But they're also desperate for deals. And since I know from
my own experience that the rule against buying stock from
founders is a stupid one, this is a natural place for things to
give as venture funding becomes more and more a seller's
market.

The disadvantage of taking money from less known firms is

that people will assume, correctly or not, that you were
turned down by the more exalted ones. But, like where you
went to college, the name of your VC stops mattering once
you have some performance to measure. So the more
confident you are, the less you need a brand-name VC. We
funded Viaweb entirely with angel money; it never occurred
to us that the backing of a well known VC firm would make
us seem more impressive. [5]

Another danger of less known firms is that, like angels, they

have less reputation to protect. I suspect it's the lower-tier
firms that are responsible for most of the tricks that have
given VCs such a bad reputation among hackers. They are
doubly hosed: the general partners themselves are less able,
and yet they have harder problems to solve, because the
top VCs skim off all the best deals, leaving the lower-tier
firms exactly the startups that are likely to blow up.

For example, lower-tier firms are much more likely to

pretend to want to do a deal with you just to lock you up
while they decide if they really want to. One experienced
CFO said:

The better ones usually will not give a term

sheet unless they really want to do a deal. The
second or third tier firms have a much higher
break rate—it could be as high as 50%.

It's obvious why: the lower-tier firms' biggest fear, when

chance throws them a bone, is that one of the big dogs will
notice and take it away. The big dogs don't have worry
about that.

Falling victim to this trick could really hurt you. As one VC

told me:

If you were talking to four VCs, told three of

them that you accepted a term sheet, and then
have to call them back to tell them you were
just kidding, you are absolutely damaged goods.

Here's a partial solution: when a VC offers you a term sheet,

ask how many of their last 10 term sheets turned into deals.
This will at least force them to lie outright if they want to
mislead you.

Not all the people who work at VC firms are partners. Most
firms also have a handful of junior employees called
something like associates or analysts. If you get a call from
a VC firm, go to their web site and check whether the
person you talked to is a partner. Odds are it will be a junior
person; they scour the web looking for startups their bosses
could invest in. The junior people will tend to seem very
positive about your company. They're not pretending; they
want to believe you're a hot prospect, because it would be a
huge coup for them if their firm invested in a company they
discovered. Don't be misled by this optimism. It's the
partners who decide, and they view things with a colder eye.

Because VCs invest large amounts, the money comes with

more restrictions. Most only come into effect if the company
gets into trouble. For example, VCs generally write it into the
deal that in any sale, they get their investment back first. So
if the company gets sold at a low price, the founders could
get nothing. Some VCs now require that in any sale they get
4x their investment back before the common stock holders
(that is, you) get anything, but this is an abuse that should
be resisted.

Another difference with large investments is that the

founders are usually required to accept "vesting"—to
surrender their stock and earn it back over the next 4-5
years. VCs don't want to invest millions in a company the
founders could just walk away from. Financially, vesting has
little effect, but in some situations it could mean founders
will have less power. If VCs got de facto control of the
company and fired one of the founders, he'd lose any
unvested stock unless there was specific protection against
this. So vesting would in that situation force founders to toe
the line.

The most noticeable change when a startup takes serious

funding is that the founders will no longer have complete
control. Ten years ago VCs used to insist that founders step
down as CEO and hand the job over to a business guy they
supplied. This is less the rule now, partly because the
disasters of the Bubble showed that generic business guys
don't make such great CEOs.

But while founders will increasingly be able to stay on as

CEO, they'll have to cede some power, because the board of
directors will become more powerful. In the seed stage, the
board is generally a formality; if you want to talk to the
other board members, you just yell into the next room. This
stops with VC-scale money. In a typical VC funding deal, the
board of directors might be composed of two VCs, two
founders, and one outside person acceptable to both. The
board will have ultimate power, which means the founders
now have to convince instead of commanding.

This is not as bad as it sounds, however. Bill Gates is in the

same position; he doesn't have majority control of Microsoft;
in principle he also has to convince instead of commanding.
And yet he seems pretty commanding, doesn't he? As long
as things are going smoothly, boards don't interfere much.
The danger comes when there's a bump in the road, as
happened to Steve Jobs at Apple.

Like angels, VCs prefer to invest in deals that come to them

through people they know. So while nearly all VC funds have
some address you can send your business plan to, VCs
privately admit the chance of getting funding by this route is
near zero. One recently told me that he did not know a
single startup that got funded this way.

I suspect VCs accept business plans "over the transom"

more as a way to keep tabs on industry trends than as a
source of deals. In fact, I would strongly advise against
mailing your business plan randomly to VCs, because they
treat this as evidence of laziness. Do the extra work of
getting personal introductions. As one VC put it:

I'm not hard to find. I know a lot of people. If

 you can't find some way to reach me, how are
you going to create a successful company?

One of the most difficult problems for startup founders is

deciding when to approach VCs. You really only get one
chance, because they rely heavily on first impressions. And
you can't approach some and save others for later, because
(a) they ask who else you've talked to and when and (b)
they talk among themselves. If you're talking to one VC and
he finds out that you were rejected by another several
months ago, you'll definitely seem shopworn.

So when do you approach VCs? When you can convince

them. If the founders have impressive resumes and the idea
isn't hard to understand, you could approach VCs quite
early. Whereas if the founders are unknown and the idea is
very novel, you might have to launch the thing and show
that users loved it before VCs would be convinced.

If several VCs are interested in you, they will sometimes be

willing to split the deal between them. They're more likely to
do this if they're close in the VC pecking order. Such deals
may be a net win for founders, because you get multiple
VCs interested in your success, and you can ask each for
advice about the other. One founder I know wrote:

Two-firm deals are great. It costs you a little

more equity, but being able to play the two
firms off each other (as well as ask one if the
other is being out of line) is invaluable.

When you do negotiate with VCs, remember that they've

done this a lot more than you have. They've invested in
dozens of startups, whereas this is probably the first you've
founded. But don't let them or the situation intimidate you.
The average founder is smarter than the average VC. So
just do what you'd do in any complex, unfamiliar situation:
proceed deliberately, and question anything that seems odd.

It is, unfortunately, common for VCs to put terms in an

agreement whose consequences surprise founders later, and
also common for VCs to defend things they do by saying
that they're standard in the industry. Standard, schmandard;
the whole industry is only a few decades old, and rapidly
evolving. The concept of "standard" is a useful one when
you're operating on a small scale (Y Combinator uses
identical terms for every deal because for tiny seed-stage
investments it's not worth the overhead of negotiating
individual deals), but it doesn't apply at the VC level. On
that scale, every negotiation is unique.

Most successful startups get money from more than one of

the preceding five sources. [6] And, confusingly, the names
of funding sources also tend to be used as the names of
different rounds. The best way to explain how it all works is
to follow the case of a hypothetical startup.

Stage 1: Seed Round

Our startup begins when a group of three friends have an

idea-- either an idea for something they might build, or
simply the idea "let's start a company." Presumably they
already have some source of food and shelter. But if you
have food and shelter, you probably also have something
you're supposed to be working on: either classwork, or a
job. So if you want to work full-time on a startup, your
money situation will probably change too.

A lot of startup founders say they started the company

without any idea of what they planned to do. This is actually
less common than it seems: many have to claim they
thought of the idea after quitting because otherwise their
former employer would own it.

The three friends decide to take the leap. Since most

startups are in competitive businesses, you not only want to
work full-time on them, but more than full-time. So some or
all of the friends quit their jobs or leave school. (Some of
the founders in a startup can stay in grad school, but at
least one has to make the company his full-time job.)

They're going to run the company out of one of their

apartments at first, and since they don't have any users
they don't have to pay much for infrastructure. Their main
expenses are setting up the company, which costs a couple
thousand dollars in legal work and registration fees, and the
living expenses of the founders.

The phrase "seed investment" covers a broad range. To

some VC firms it means $500,000, but to most startups it
means several months' living expenses. We'll suppose our
group of friends start with $15,000 from their friend's rich
uncle, who they give 5% of the company in return. There's
only common stock at this stage. They leave 20% as an
options pool for later employees (but they set things up so
that they can issue this stock to themselves if they get
bought early and most is still unissued), and the three
founders each get 25%.

By living really cheaply they think they can make the

remaining money last five months. When you have five
months' runway left, how soon do you need to start looking
for your next round? Answer: immediately. It takes time to
find investors, and time (always more than you expect) for
the deal to close even after they say yes. So if our group of
founders know what they're doing they'll start sniffing
around for angel investors right away. But of course their
main job is to build version 1 of their software.

The friends might have liked to have more money in this

first phase, but being slightly underfunded teaches them an
important lesson. For a startup, cheapness is power. The
lower your costs, the more options you have—not just at
this stage, but at every point till you're profitable. When you
have a high "burn rate," you're always under time pressure,
which means (a) you don't have time for your ideas to
evolve, and (b) you're often forced to take deals you don't
like.

Every startup's rule should be: spend little, and work fast.
After ten weeks' work the three friends have built a
prototype that gives one a taste of what their product will
do. It's not what they originally set out to do—in the process
of writing it, they had some new ideas. And it only does a
fraction of what the finished product will do, but that fraction
includes stuff that no one else has done before.

They've also written at least a skeleton business plan,

addressing the five fundamental questions: what they're
going to do, why users need it, how large the market is,
how they'll make money, and who the competitors are and
why this company is going to beat them. (That last has to
be more specific than "they suck" or "we'll work really
hard.")

If you have to choose between spending time on the demo

or the business plan, spend most on the demo. Software is
not only more convincing, but a better way to explore ideas.

Stage 2: Angel Round

While writing the prototype, the group has been traversing

their network of friends in search of angel investors. They
find some just as the prototype is demoable. When they
demo it, one of the angels is willing to invest. Now the
group is looking for more money: they want enough to last
for a year, and maybe to hire a couple friends. So they're
going to raise $200,000.

The angel agrees to invest at a pre-money valuation of $1

million. The company issues $200,000 worth of new shares
to the angel; if there were 1000 shares before the deal, this
means 200 additional shares. The angel now owns 200/1200
shares, or a sixth of the company, and all the previous
shareholders' percentage ownership is diluted by a sixth.
After the deal, the capitalization table looks like this:

shareholder shares percent

-------------------------------
angel 200 16.7
uncle 50 4.2
each founder 250 20.8
option pool 200 16.7
---- -----
total 1200 100

To keep things simple, I had the angel do a straight cash for

stock deal. In reality the angel might be more likely to make
the investment in the form of a convertible loan. A
convertible loan is a loan that can be converted into stock
later; it works out the same as a stock purchase in the end,
but gives the angel more protection against being squashed
by VCs in future rounds.

Who pays the legal bills for this deal? The startup,
remember, only has a couple thousand left. In practice this
turns out to be a sticky problem that usually gets solved in
some improvised way. Maybe the startup can find lawyers
who will do it cheaply in the hope of future work if the
startup succeeds. Maybe someone has a lawyer friend.
Maybe the angel pays for his lawyer to represent both sides.
(Make sure if you take the latter route that the lawyer is
representing you rather than merely advising you, or his
only duty is to the investor.)
An angel investing $200k would probably expect a seat on
the board of directors. He might also want preferred stock,
meaning a special class of stock that has some additional
rights over the common stock everyone else has. Typically
these rights include vetoes over major strategic decisions,
protection against being diluted in future rounds, and the
right to get one's investment back first if the company is
sold.

Some investors might expect the founders to accept vesting

for a sum this size, and others wouldn't. VCs are more likely
to require vesting than angels. At Viaweb we managed to
raise $2.5 million from angels without ever accepting
vesting, largely because we were so inexperienced that we
were appalled at the idea. In practice this turned out to be
good, because it made us harder to push around.

Our experience was unusual; vesting is the norm for

amounts that size. Y Combinator doesn't require vesting,
because (a) we invest such small amounts, and (b) we think
it's unnecessary, and that the hope of getting rich is enough
motivation to keep founders at work. But maybe if we were
investing millions we would think differently.

I should add that vesting is also a way for founders to

protect themselves against one another. It solves the
problem of what to do if one of the founders quits. So some
founders impose it on themselves when they start the
company.

The angel deal takes two weeks to close, so we are now

three months into the life of the company.

The point after you get the first big chunk of angel money
will usually be the happiest phase in a startup's life. It's a lot
like being a postdoc: you have no immediate financial
worries, and few responsibilities. You get to work on juicy
kinds of work, like designing software. You don't have to
spend time on bureaucratic stuff, because you haven't hired
any bureaucrats yet. Enjoy it while it lasts, and get as much
done as you can, because you will never again be so
productive.

With an apparently inexhaustible sum of money sitting safely

in the bank, the founders happily set to work turning their
prototype into something they can release. They hire one of
their friends—at first just as a consultant, so they can try
him out—and then a month later as employee #1. They pay
him the smallest salary he can live on, plus 3% of the
company in restricted stock, vesting over four years. (So
after this the option pool is down to 13.7%). [7] They also
spend a little money on a freelance graphic designer.

How much stock do you give early employees? That varies

so much that there's no conventional number. If you get
someone really good, really early, it might be wise to give
him as much stock as the founders. The one universal rule is
that the amount of stock an employee gets decreases
polynomially with the age of the company. In other words,
you get rich as a power of how early you were. So if some
friends want you to come work for their startup, don't wait
several months before deciding.

A month later, at the end of month four, our group of

founders have something they can launch. Gradually through
word of mouth they start to get users. Seeing the system in
use by real users—people they don't know—gives them lots
of new ideas. Also they find they now worry obsessively
about the status of their server. (How relaxing founders'
lives must have been when startups wrote VisiCalc.)

By the end of month six, the system is starting to have a

solid core of features, and a small but devoted following.
People start to write about it, and the founders are starting
to feel like experts in their field.

We'll assume that their startup is one that could put millions
more to use. Perhaps they need to spend a lot on
marketing, or build some kind of expensive infrastructure, or
hire highly paid salesmen. So they decide to start talking to
VCs. They get introductions to VCs from various sources:
their angel investor connects them with a couple; they meet
a few at conferences; a couple VCs call them after reading
about them.

Step 3: Series A Round

Armed with their now somewhat fleshed-out business plan

and able to demo a real, working system, the founders visit
the VCs they have introductions to. They find the VCs
intimidating and inscrutable. They all ask the same question:
who else have you pitched to? (VCs are like high school
girls: they're acutely aware of their position in the VC
pecking order, and their interest in a company is a function
of the interest other VCs show in it.)

One of the VC firms says they want to invest and offers the
founders a term sheet. A term sheet is a summary of what
the deal terms will be when and if they do a deal; lawyers
will fill in the details later. By accepting the term sheet, the
startup agrees to turn away other VCs for some set amount
of time while this firm does the "due diligence" required for
the deal. Due diligence is the corporate equivalent of a
background check: the purpose is to uncover any hidden
bombs that might sink the company later, like serious
design flaws in the product, pending lawsuits against the
company, intellectual property issues, and so on. VCs' legal
and financial due diligence is pretty thorough, but the
technical due diligence is generally a joke. [8]

The due diligence discloses no ticking bombs, and six weeks

later they go ahead with the deal. Here are the terms: a $2
million investment at a pre-money valuation of $4 million,
meaning that after the deal closes the VCs will own a third
of the company (2 / (4 + 2)). The VCs also insist that prior
to the deal the option pool be enlarged by an additional
hundred shares. So the total number of new shares issued is
750, and the cap table becomes:

shareholder shares percent

-------------------------------
VCs 650 33.3
angel 200 10.3
uncle 50 2.6
each founder 250 12.8
employee 36* 1.8 *unvested
option pool 264 13.5
---- -----
total 1950 100

This picture is unrealistic in several respects. For example,

while the percentages might end up looking like this, it's
unlikely that the VCs would keep the existing numbers of
shares. In fact, every bit of the startup's paperwork would
probably be replaced, as if the company were being founded
anew. Also, the money might come in several tranches, the
later ones subject to various conditions—though this is
apparently more common in deals with lower-tier VCs
(whose lot in life is to fund more dubious startups) than with
the top firms.

And of course any VCs reading this are probably rolling on

the floor laughing at how my hypothetical VCs let the angel
keep his 10.3 of the company. I admit, this is the Bambi
version; in simplifying the picture, I've also made everyone
nicer. In the real world, VCs regard angels the way a jealous
husband feels about his wife's previous boyfriends. To them
the company didn't exist before they invested in it. [9]

I don't want to give the impression you have to do an angel

round before going to VCs. In this example I stretched
things out to show multiple sources of funding in action.
Some startups could go directly from seed funding to a VC
round; several of the companies we've funded have.

The founders are required to vest their shares over four

years, and the board is now reconstituted to consist of two
VCs, two founders, and a fifth person acceptable to both.
The angel investor cheerfully surrenders his board seat.

At this point there is nothing new our startup can teach us

about funding—or at least, nothing good. [10] The startup
will almost certainly hire more people at this point; those
millions must be put to work, after all. The company may do
additional funding rounds, presumably at higher valuations.
They may if they are extraordinarily fortunate do an IPO,
which we should remember is also in principle a round of
funding, regardless of its de facto purpose. But that, if not
beyond the bounds of possibility, is beyond the scope of this
article.

Deals Fall Through

Anyone who's been through a startup will find the preceding

portrait to be missing something: disasters. If there's one
thing all startups have in common, it's that something is
always going wrong. And nowhere more than in matters of
funding.

For example, our hypothetical startup never spent more than

half of one round before securing the next. That's more ideal
than typical. Many startups—even successful ones—come
close to running out of money at some point. Terrible things
happen to startups when they run out of money, because
they're designed for growth, not adversity.
But the most unrealistic thing about the series of deals I've
described is that they all closed. In the startup world, closing
is not what deals do. What deals do is fall through. If you're
starting a startup you would do well to remember that. Birds
fly; fish swim; deals fall through.

Why? Partly the reason deals seem to fall through so often

is that you lie to yourself. You want the deal to close, so
you start to believe it will. But even correcting for this,
startup deals fall through alarmingly often—far more often
than, say, deals to buy real estate. The reason is that it's
such a risky environment. People about to fund or acquire a
startup are prone to wicked cases of buyer's remorse. They
don't really grasp the risk they're taking till the deal's about
to close. And then they panic. And not just inexperienced
angel investors, but big companies too.

So if you're a startup founder wondering why some angel

investor isn't returning your phone calls, you can at least
take comfort in the thought that the same thing is
happening to other deals a hundred times the size.

The example of a startup's history that I've presented is like

a skeleton—accurate so far as it goes, but needing to be
fleshed out to be a complete picture. To get a complete
picture, just add in every possible disaster.

A frightening prospect? In a way. And yet also in a way

encouraging. The very uncertainty of startups frightens away
almost everyone. People overvalue stability—especially
young people, who ironically need it least. And so in starting
a startup, as in any really bold undertaking, merely deciding
to do it gets you halfway there. On the day of the race,
most of the other runners won't show up.

Notes

[1] The aim of such regulations is to protect widows and

orphans from crooked investment schemes; people with a
million dollars in liquid assets are assumed to be able to
protect themselves. The unintended consequence is that the
investments that generate the highest returns, like hedge
funds, are available only to the rich.

[2] Consulting is where product companies go to die. IBM is

the most famous example. So starting as a consulting
company is like starting out in the grave and trying to work
your way up into the world of the living.

[3] If "near you" doesn't mean the Bay Area, Boston, or

Seattle, consider moving. It's not a coincidence you haven't
heard of many startups from Philadelphia.

[4] Investors are often compared to sheep. And they are

like sheep, but that's a rational response to their situation.
Sheep act the way they do for a reason. If all the other
sheep head for a certain field, it's probably good grazing.
And when a wolf appears, is he going to eat a sheep in the
middle of the flock, or one near the edge?

[5] This was partly confidence, and partly simple ignorance.

We didn't know ourselves which VC firms were the
impressive ones. We thought software was all that mattered.
But that turned out to be the right direction to be naive in:
it's much better to overestimate than underestimate the
importance of making a good product.

[6] I've omitted one source: government grants. I don't

think these are even worth thinking about for the average
startup. Governments may mean well when they set up
grant programs to encourage startups, but what they give
with one hand they take away with the other: the process of
applying is inevitably so arduous, and the restrictions on
what you can do with the money so burdensome, that it
would be easier to take a job to get the money.

You should be especially suspicious of grants whose purpose

is some kind of social engineering-- e.g. to encourage more
startups to be started in Mississippi. Free money to start a
startup in a place where few succeed is hardly free.

Some government agencies run venture funding groups,

which make investments rather than giving grants. For
example, the CIA runs a venture fund called In-Q-Tel that is
modelled on private sector funds and apparently generates
good returns. They would probably be worth approaching—if
you don't mind taking money from the CIA.

[7] Options have largely been replaced with restricted stock,

which amounts to the same thing. Instead of earning the
right to buy stock, the employee gets the stock up front,
and earns the right not to have to give it back. The shares
set aside for this purpose are still called the "option pool."

[8] First-rate technical people do not generally hire

themselves out to do due diligence for VCs. So the most
difficult part for startup founders is often responding politely
to the inane questions of the "expert" they send to look you
over.

[9] VCs regularly wipe out angels by issuing arbitrary

amounts of new stock. They seem to have a standard piece
of casuistry for this situation: that the angels are no longer
working to help the company, and so don't deserve to keep
their stock. This of course reflects a willful misunderstanding
of what investment means; like any investor, the angel is
being compensated for risks he took earlier. By a similar
logic, one could argue that the VCs should be deprived of
their shares when the company goes public.

[10] One new thing the company might encounter is a down

round, or a funding round at valuation lower than the
previous round. Down rounds are bad news; it is generally
the common stock holders who take the hit. Some of the
most fearsome provisions in VC deal terms have to do with
down rounds—like "full ratchet anti-dilution," which is as
frightening as it sounds.
Founders are tempted to ignore these clauses, because they
think the company will either be a big success or a complete
bust. VCs know otherwise: it's not uncommon for startups to
have moments of adversity before they ultimately succeed.
So it's worth negotiating anti-dilution provisions, even
though you don't think you need to, and VCs will try to
make you feel that you're being gratuitously troublesome.

Thanks to Sam Altman, Hutch Fishman, Steve Huffman,

Jessica Livingston, Sesha Pratap, Stan Reiss, Andy Singleton,
Zak Stone, and Aaron Swartz for reading drafts of this.
April 2007

(This essay is derived from a keynote talk at the 2007 ASES

Summit at Stanford.)

The world of investors is a foreign one to most hackers—

partly because investors are so unlike hackers, and partly
because they tend to operate in secret. I've been dealing
with this world for many years, both as a founder and an
investor, and I still don't fully understand it.

In this essay I'm going to list some of the more surprising

things I've learned about investors. Some I only learned in
the past year.

Teaching hackers how to deal with investors is probably the

second most important thing we do at Y Combinator. The
most important thing for a startup is to make something
good. But everyone knows that's important. The dangerous
thing about investors is that hackers don't know how little
they know about this strange world.

1. The investors are what make a startup hub.

About a year ago I tried to figure out what you'd need to

reproduce Silicon Valley. I decided the critical ingredients
were rich people and nerds—investors and founders. People
are all you need to make technology, and all the other
people will move.

If I had to narrow that down, I'd say investors are the

limiting factor. Not because they contribute more to the
startup, but simply because they're least willing to move.
They're rich. They're not going to move to Albuquerque just
because there are some smart hackers there they could
invest in. Whereas hackers will move to the Bay Area to find
investors.

2. Angel investors are the most critical.

There are several types of investors. The two main

categories are angels and VCs: VCs invest other people's
money, and angels invest their own.

Though they're less well known, the angel investors are

probably the more critical ingredient in creating a silicon
valley. Most companies that VCs invest in would never have
made it that far if angels hadn't invested first. VCs say
between half and three quarters of companies that raise
series A rounds have taken some outside investment
already. [1]

Angels are willing to fund riskier projects than VCs. They

also give valuable advice, because (unlike VCs) many have
been startup founders themselves.

Google's story shows the key role angels play. A lot of

people know Google raised money from Kleiner and Sequoia.
What most don't realize is how late. That VC round was a
series B round; the premoney valuation was $75 million.
Google was already a successful company at that point.
Really, Google was funded with angel money.

It may seem odd that the canonical Silicon Valley startup

was funded by angels, but this is not so surprising. Risk is
always proportionate to reward. So the most successful
startup of all is likely to have seemed an extremely risky bet
at first, and that is exactly the kind VCs won't touch.

Where do angel investors come from? From other startups.

So startup hubs like Silicon Valley benefit from something
like the marketplace effect, but shifted in time: startups are
there because startups were there.

3. Angels don't like publicity.

If angels are so important, why do we hear more about

VCs? Because VCs like publicity. They need to market
themselves to the investors who are their "customers"—the
endowments and pension funds and rich families whose
money they invest—and also to founders who might come
to them for funding.

Angels don't need to market themselves to investors

because they invest their own money. Nor do they want to
market themselves to founders: they don't want random
people pestering them with business plans. Actually, neither
do VCs. Both angels and VCs get deals almost exclusively
through personal introductions. [2]

The reason VCs want a strong brand is not to draw in more

business plans over the transom, but so they win deals when
competing against other VCs. Whereas angels are rarely in
direct competition, because (a) they do fewer deals, (b)
they're happy to split them, and (c) they invest at a point
where the stream is broader.

4. Most investors, especially VCs, are not like founders.

Some angels are, or were, hackers. But most VCs are a

different type of people: they're dealmakers.

If you're a hacker, here's a thought experiment you can run

to understand why there are basically no hacker VCs: How
would you like a job where you never got to make anything,
but instead spent all your time listening to other people
pitch (mostly terrible) projects, deciding whether to fund
them, and sitting on their boards if you did? That would not
be fun for most hackers. Hackers like to make things. This
would be like being an administrator.

Because most VCs are a different species of people from

founders, it's hard to know what they're thinking. If you're a
hacker, the last time you had to deal with these guys was in
high school. Maybe in college you walked past their
fraternity on your way to the lab. But don't underestimate
them. They're as expert in their world as you are in yours.
What they're good at is reading people, and making deals
work to their advantage. Think twice before you try to beat
them at that.

5. Most investors are momentum investors.

Because most investors are dealmakers rather than

technology people, they generally don't understand what
you're doing. I knew as a founder that most VCs didn't get
technology. I also knew some made a lot of money. And yet
it never occurred to me till recently to put those two ideas
together and ask "How can VCs make money by investing in
stuff they don't understand?"

The answer is that they're like momentum investors. You

can (or could once) make a lot of money by noticing sudden
changes in stock prices. When a stock jumps upward, you
buy, and when it suddenly drops, you sell. In effect you're
insider trading, without knowing what you know. You just
know someone knows something, and that's making the
stock move.

This is how most venture investors operate. They don't try

to look at something and predict whether it will take off.
They win by noticing that something is taking off a little
sooner than everyone else. That generates almost as good
returns as actually being able to pick winners. They may
have to pay a little more than they would if they got in at
the very beginning, but only a little.

Investors always say what they really care about is the

team. Actually what they care most about is your traffic,
then what other investors think, then the team. If you don't
yet have any traffic, they fall back on number 2, what other
investors think. And this, as you can imagine, produces wild
oscillations in the "stock price" of a startup. One week
everyone wants you, and they're begging not to be cut out
of the deal. But all it takes is for one big investor to cool on
you, and the next week no one will return your phone calls.
We regularly have startups go from hot to cold or cold to
hot in a matter of days, and literally nothing has changed.

There are two ways to deal with this phenomenon. If you're

feeling really confident, you can try to ride it. You can start
by asking a comparatively lowly VC for a small amount of
money, and then after generating interest there, ask more
prestigious VCs for larger amounts, stirring up a crescendo
of buzz, and then "sell" at the top. This is extremely risky,
and takes months even if you succeed. I wouldn't try it
myself. My advice is to err on the side of safety: when
someone offers you a decent deal, just take it and get on
with building the company. Startups win or lose based on
the quality of their product, not the quality of their funding
deals.

6. Most investors are looking for big hits.

Venture investors like companies that could go public. That's
where the big returns are. They know the odds of any
individual startup going public are small, but they want to
invest in those that at least have a chance of going public.

Currently the way VCs seem to operate is to invest in a

bunch of companies, most of which fail, and one of which is
Google. Those few big wins compensate for losses on their
other investments. What this means is that most VCs will
only invest in you if you're a potential Google. They don't
care about companies that are a safe bet to be acquired for
$20 million. There needs to be a chance, however small, of
the company becoming really big.

Angels are different in this respect. They're happy to invest

in a company where the most likely outcome is a $20 million
acquisition if they can do it at a low enough valuation. But of
course they like companies that could go public too. So
having an ambitious long-term plan pleases everyone.

If you take VC money, you have to mean it, because the

structure of VC deals prevents early acquisitions. If you take
VC money, they won't let you sell early.

7. VCs want to invest large amounts.

The fact that they're running investment funds makes VCs

want to invest large amounts. A typical VC fund is now
hundreds of millions of dollars. If $400 million has to be
invested by 10 partners, they have to invest $40 million
each. VCs usually sit on the boards of companies they fund.
If the average deal size was $1 million, each partner would
have to sit on 40 boards, which would not be fun. So they
prefer bigger deals, where they can put a lot of money to
work at once.

VCs don't regard you as a bargain if you don't need a lot of

money. That may even make you less attractive, because it
means their investment creates less of a barrier to entry for
competitors.

Angels are in a different position because they're investing

their own money. They're happy to invest small amounts—
sometimes as little as $20,000—as long as the potential
returns look good enough. So if you're doing something
inexpensive, go to angels.

8. Valuations are fiction.

VCs admit that valuations are an artifact. They decide how

much money you need and how much of the company they
want, and those two constraints yield a valuation.

Valuations increase as the size of the investment does. A

company that an angel is willing to put $50,000 into at a
valuation of a million can't take $6 million from VCs at that
valuation. That would leave the founders less than a seventh
of the company between them (since the option pool would
also come out of that seventh). Most VCs wouldn't want
that, which is why you never hear of deals where a VC
invests $6 million at a premoney valuation of $1 million.

If valuations change depending on the amount invested, that

shows how far they are from reflecting any kind of value of
the company.

Since valuations are made up, founders shouldn't care too

much about them. That's not the part to focus on. In fact, a
high valuation can be a bad thing. If you take funding at a
premoney valuation of $10 million, you won't be selling the
company for 20. You'll have to sell for over 50 for the VCs
to get even a 5x return, which is low to them. More likely
they'll want you to hold out for 100. But needing to get a
high price decreases the chance of getting bought at all;
many companies can buy you for $10 million, but only a
handful for 100. And since a startup is like a pass/fail course
for the founders, what you want to optimize is your chance
of a good outcome, not the percentage of the company you
keep.

So why do founders chase high valuations? They're tricked

by misplaced ambition. They feel they've achieved more if
they get a higher valuation. They usually know other
founders, and if they get a higher valuation they can say
"mine is bigger than yours." But funding is not the real test.
The real test is the final outcome for the founder, and
getting too high a valuation may just make a good outcome
less likely.

The one advantage of a high valuation is that you get less

dilution. But there is another less sexy way to achieve that:
just take less money.

9. Investors look for founders like the current stars.

Ten years ago investors were looking for the next Bill Gates.
This was a mistake, because Microsoft was a very
anomalous startup. They started almost as a contract
programming operation, and the reason they became huge
was that IBM happened to drop the PC standard in their lap.

Now all the VCs are looking for the next Larry and Sergey.
This is a good trend, because Larry and Sergey are closer to
the ideal startup founders.

Historically investors thought it was important for a founder

to be an expert in business. So they were willing to fund
teams of MBAs who planned to use the money to pay
programmers to build their product for them. This is like
funding Steve Ballmer in the hope that the programmer he'll
hire is Bill Gates—kind of backward, as the events of the
Bubble showed. Now most VCs know they should be funding
technical guys. This is more pronounced among the very top
funds; the lamer ones still want to fund MBAs.

If you're a hacker, it's good news that investors are looking

for Larry and Sergey. The bad news is, the only investors
who can do it right are the ones who knew them when they
were a couple of CS grad students, not the confident media
stars they are today. What investors still don't get is how
clueless and tentative great founders can seem at the very
beginning.

10. The contribution of investors tends to be

underestimated.

Investors do more for startups than give them money.

They're helpful in doing deals and arranging introductions,
and some of the smarter ones, particularly angels, can give
good advice about the product.

In fact, I'd say what separates the great investors from the
mediocre ones is the quality of their advice. Most investors
give advice, but the top ones give good advice.

Whatever help investors give a startup tends to be

underestimated. It's to everyone's advantage to let the
world think the founders thought of everything. The goal of
the investors is for the company to become valuable, and
the company seems more valuable if it seems like all the
good ideas came from within.

This trend is compounded by the obsession that the press

has with founders. In a company founded by two people,
10% of the ideas might come from the first guy they hire.
Arguably they've done a bad job of hiring otherwise. And yet
this guy will be almost entirely overlooked by the press.

I say this as a founder: the contribution of founders is

always overestimated. The danger here is that new
founders, looking at existing founders, will think that they're
supermen that one couldn't possibly equal oneself. Actually
they have a hundred different types of support people just
offscreen making the whole show possible. [3]

11. VCs are afraid of looking bad.

I've been very surprised to discover how timid most VCs

are. They seem to be afraid of looking bad to their partners,
and perhaps also to the limited partners—the people whose
money they invest.

You can measure this fear in how much less risk VCs are
willing to take. You can tell they won't make investments for
their fund that they might be willing to make themselves as
angels. Though it's not quite accurate to say that VCs are
less willing to take risks. They're less willing to do things
that might look bad. That's not the same thing.

For example, most VCs would be very reluctant to invest in

a startup founded by a pair of 18 year old hackers, no
matter how brilliant, because if the startup failed their
partners could turn on them and say "What, you invested $x
million of our money in a pair of 18 year olds?" Whereas if a
VC invested in a startup founded by three former banking
executives in their 40s who planned to outsource their
product development—which to my mind is actually a lot
riskier than investing in a pair of really smart 18 year olds—
he couldn't be faulted, if it failed, for making such an
apparently prudent investment.
As a friend of mine said, "Most VCs can't do anything that
would sound bad to the kind of doofuses who run pension
funds." Angels can take greater risks because they don't
have to answer to anyone.

12. Being turned down by investors doesn't mean

much.

Some founders are quite dejected when they get turned

down by investors. They shouldn't take it so much to heart.
To start with, investors are often wrong. It's hard to think of
a successful startup that wasn't turned down by investors at
some point. Lots of VCs rejected Google. So obviously the
reaction of investors is not a very meaningful test.

Investors will often reject you for what seem to be

superficial reasons. I read of one VC who turned down a
startup simply because they'd given away so many little bits
of stock that the deal required too many signatures to close.
[4] The reason investors can get away with this is that they
see so many deals. It doesn't matter if they underestimate
you because of some surface imperfection, because the next
best deal will be almost as good. Imagine picking out apples
at a grocery store. You grab one with a little bruise. Maybe
it's just a surface bruise, but why even bother checking
when there are so many other unbruised apples to choose
from?

Investors would be the first to admit they're often wrong. So

when you get rejected by investors, don't think "we suck,"
but instead ask "do we suck?" Rejection is a question, not
an answer.

13. Investors are emotional.

I've been surprised to discover how emotional investors can

be. You'd expect them to be cold and calculating, or at least
businesslike, but often they're not. I'm not sure if it's their
position of power that makes them this way, or the large
sums of money involved, but investment negotiations can
easily turn personal. If you offend investors, they'll leave in
a huff.

A while ago an eminent VC firm offered a series A round to

a startup we'd seed funded. Then they heard a rival VC firm
was also interested. They were so afraid that they'd be
rejected in favor of this other firm that they gave the
startup what's known as an "exploding termsheet." They
had, I think, 24 hours to say yes or no, or the deal was off.
Exploding termsheets are a somewhat dubious device, but
not uncommon. What surprised me was their reaction when
I called to talk about it. I asked if they'd still be interested
in the startup if the rival VC didn't end up making an offer,
and they said no. What rational basis could they have had
for saying that? If they thought the startup was worth
investing in, what difference should it make what some other
VC thought? Surely it was their duty to their limited partners
simply to invest in the best opportunities they found; they
should be delighted if the other VC said no, because it would
mean they'd overlooked a good opportunity. But of course
there was no rational basis for their decision. They just
couldn't stand the idea of taking this rival firm's rejects.

In this case the exploding termsheet was not (or not only) a
tactic to pressure the startup. It was more like the high
school trick of breaking up with someone before they can
break up with you. In an earlier essay I said that VCs were
a lot like high school girls. A few VCs have joked about that
characterization, but none have disputed it.

14. The negotiation never stops till the closing.

Most deals, for investment or acquisition, happen in two

phases. There's an initial phase of negotiation about the big
questions. If this succeeds you get a termsheet, so called
because it outlines the key terms of a deal. A termsheet is
not legally binding, but it is a definite step. It's supposed to
mean that a deal is going to happen, once the lawyers work
out all the details. In theory these details are minor ones;
by definition all the important points are supposed to be
covered in the termsheet.

Inexperience and wishful thinking combine to make founders

feel that when they have a termsheet, they have a deal.
They want there to be a deal; everyone acts like they have
a deal; so there must be a deal. But there isn't and may not
be for several months. A lot can change for a startup in
several months. It's not uncommon for investors and
acquirers to get buyer's remorse. So you have to keep
pushing, keep selling, all the way to the close. Otherwise all
the "minor" details left unspecified in the termsheet will be
interpreted to your disadvantage. The other side may even
break the deal; if they do that, they'll usually seize on some
technicality or claim you misled them, rather than admitting
they changed their minds.

It can be hard to keep the pressure on an investor or

acquirer all the way to the closing, because the most
effective pressure is competition from other investors or
acquirers, and these tend to drop away when you get a
termsheet. You should try to stay as close friends as you
can with these rivals, but the most important thing is just to
keep up the momentum in your startup. The investors or
acquirers chose you because you seemed hot. Keep doing
whatever made you seem hot. Keep releasing new features;
keep getting new users; keep getting mentioned in the press
and in blogs.

15. Investors like to co-invest.

I've been surprised how willing investors are to split deals.

You might think that if they found a good deal they'd want it
all to themselves, but they seem positively eager to
syndicate. This is understandable with angels; they invest on
a smaller scale and don't like to have too much money tied
up in any one deal. But VCs also share deals a lot. Why?

Partly I think this is an artifact of the rule I quoted earlier:

after traffic, VCs care most what other VCs think. A deal that
has multiple VCs interested in it is more likely to close, so of
deals that close, more will have multiple investors.

There is one rational reason to want multiple VCs in a deal:

Any investor who co-invests with you is one less investor
who could fund a competitor. Apparently Kleiner and
Sequoia didn't like splitting the Google deal, but it did at
least have the advantage, from each one's point of view,
that there probably wouldn't be a competitor funded by the
other. Splitting deals thus has similar advantages to
confusing paternity.

But I think the main reason VCs like splitting deals is the
fear of looking bad. If another firm shares the deal, then in
the event of failure it will seem to have been a prudent
choice—a consensus decision, rather than just the whim of
an individual partner.

16. Investors collude.

Investing is not covered by antitrust law. At least, it better

not be, because investors regularly do things that would be
illegal otherwise. I know personally of cases where one
investor has talked another out of making a competitive
offer, using the promise of sharing future deals.

In principle investors are all competing for the same deals,

but the spirit of cooperation is stronger than the spirit of
competition. The reason, again, is that there are so many
deals. Though a professional investor may have a closer
relationship with a founder he invests in than with other
investors, his relationship with the founder is only going to
last a couple years, whereas his relationship with other firms
will last his whole career. There isn't so much at stake in his
interactions with other investors, but there will be a lot of
them. Professional investors are constantly trading little
favors.

Another reason investors stick together is to preserve the

power of investors as a whole. So you will not, as of this
writing, be able to get investors into an auction for your
series A round. They'd rather lose the deal than establish a
precedent of VCs competitively bidding against one another.
An efficient startup funding market may be coming in the
distant future; things tend to move in that direction; but it's
certainly not here now.

17. Large-scale investors care about their portfolio, not

any individual company.

The reason startups work so well is that everyone with

power also has equity. The only way any of them can
succeed is if they all do. This makes everyone naturally pull
in the same direction, subject to differences of opinion about
tactics.

The problem is, larger scale investors don't have exactly the
same motivation. Close, but not identical. They don't need
any given startup to succeed, like founders do, just their
portfolio as a whole to. So in borderline cases the rational
thing for them to do is to sacrifice unpromising startups.

Large-scale investors tend to put startups in three

categories: successes, failures, and the "living dead"—
companies that are plugging along but don't seem likely in
the immediate future to get bought or go public. To the
founders, "living dead" sounds harsh. These companies may
be far from failures by ordinary standards. But they might as
well be from a venture investor's point of view, and they
suck up just as much time and attention as the successes.
So if such a company has two possible strategies, a
conservative one that's slightly more likely to work in the
end, or a risky one that within a short time will either yield a
giant success or kill the company, VCs will push for the kill-
or-cure option. To them the company is already a write-off.
Better to have resolution, one way or the other, as soon as
possible.

If a startup gets into real trouble, instead of trying to save it

VCs may just sell it at a low price to another of their
portfolio companies. Philip Greenspun said in Founders at
Work that Ars Digita's VCs did this to them.

18. Investors have different risk profiles from

founders.

Most people would rather a 100% chance of $1 million than

a 20% chance of $10 million. Investors are rich enough to
be rational and prefer the latter. So they'll always tend to
encourage founders to keep rolling the dice. If a company is
doing well, investors will want founders to turn down most
acquisition offers. And indeed, most startups that turn down
acquisition offers ultimately do better. But it's still hair-
raising for the founders, because they might end up with
nothing. When someone's offering to buy you for a price at
which your stock is worth $5 million, saying no is equivalent
to having $5 million and betting it all on one spin of the
roulette wheel.

Investors will tell you the company is worth more. And they
may be right. But that doesn't mean it's wrong to sell. Any
financial advisor who put all his client's assets in the stock of
a single, private company would probably lose his license for
it.

More and more, investors are letting founders cash out

partially. That should correct the problem. Most founders
have such low standards that they'll feel rich with a sum
that doesn't seem huge to investors. But this custom is
spreading too slowly, because VCs are afraid of seeming
irresponsible. No one wants to be the first VC to give
someone fuck-you money and then actually get told "fuck
you." But until this does start to happen, we know VCs are
being too conservative.

19. Investors vary greatly.

Back when I was a founder I used to think all VCs were the
same. And in fact they do all look the same. They're all what
hackers call "suits." But since I've been dealing with VCs
more I've learned that some suits are smarter than others.

They're also in a business where winners tend to keep

winning and losers to keep losing. When a VC firm has been
successful in the past, everyone wants funding from them,
so they get the pick of all the new deals. The self-reinforcing
nature of the venture funding market means that the top
ten firms live in a completely different world from, say, the
hundredth. As well as being smarter, they tend to be calmer
and more upstanding; they don't need to do iffy things to
get an edge, and don't want to because they have more
brand to protect.

There are only two kinds of VCs you want to take money
from, if you have the luxury of choosing: the "top tier" VCs,
meaning about the top 20 or so firms, plus a few new ones
that are not among the top 20 only because they haven't
been around long enough.

It's particularly important to raise money from a top firm if

you're a hacker, because they're more confident. That
means they're less likely to stick you with a business guy as
CEO, like VCs used to do in the 90s. If you seem smart and
want to do it, they'll let you run the company.

20. Investors don't realize how much it costs to raise

money from them.

Raising money is a huge time suck at just the point where

startups can least afford it. It's not unusual for it to take
five or six months to close a funding round. Six weeks is
fast. And raising money is not just something you can leave
running as a background process. When you're raising
money, it's inevitably the main focus of the company. Which
means building the product isn't.

Suppose a Y Combinator company starts talking to VCs after

demo day, and is successful in raising money from them,
closing the deal after a comparatively short 8 weeks. Since
demo day occurs after 10 weeks, the company is now 18
weeks old. Raising money, rather than working on the
product, has been the company's main focus for 44% of its
existence. And mind you, this an example where things
turned out well.

When a startup does return to working on the product after

a funding round finally closes, it's as if they were returning
to work after a months-long illness. They've lost most of
their momentum.

Investors have no idea how much they damage the

companies they invest in by taking so long to do it. But
companies do. So there is a big opportunity here for a new
kind of venture fund that invests smaller amounts at lower
valuations, but promises to either close or say no very
quickly. If there were such a firm, I'd recommend it to
startups in preference to any other, no matter how
prestigious. Startups live on speed and momentum.

21. Investors don't like to say no.

The reason funding deals take so long to close is mainly that
investors can't make up their minds. VCs are not big
companies; they can do a deal in 24 hours if they need to.
But they usually let the initial meetings stretch out over a
couple weeks. The reason is the selection algorithm I
mentioned earlier. Most don't try to predict whether a
startup will win, but to notice quickly that it already is
winning. They care what the market thinks of you and what
other VCs think of you, and they can't judge those just from
meeting you.

Because they're investing in things that (a) change fast and

(b) they don't understand, a lot of investors will reject you in
a way that can later be claimed not to have been a
rejection. Unless you know this world, you may not even
realize you've been rejected. Here's a VC saying no:

We're really excited about your project, and we

want to keep in close touch as you develop it
further.

Translated into more straightforward language, this means:

We're not investing in you, but we may change our minds if
it looks like you're taking off. Sometimes they're more
candid and say explicitly that they need to "see some
traction." They'll invest in you if you start to get lots of
users. But so would any VC. So all they're saying is that
you're still at square 1.

Here's a test for deciding whether a VC's response was yes

or no. Look down at your hands. Are you holding a
termsheet?

22. You need investors.

Some founders say "Who needs investors?" Empirically the

answer seems to be: everyone who wants to succeed.
Practically every successful startup takes outside investment
at some point.

Why? What the people who think they don't need investors
forget is that they will have competitors. The question is not
whether you need outside investment, but whether it could
help you at all. If the answer is yes, and you don't take
investment, then competitors who do will have an advantage
over you. And in the startup world a little advantage can
expand into a lot.

Mike Moritz famously said that he invested in Yahoo because

he thought they had a few weeks' lead over their
competitors. That may not have mattered quite so much as
he thought, because Google came along three years later
and kicked Yahoo's ass. But there is something in what he
said. Sometimes a small lead can grow into the yes half of a
binary choice.

Maybe as it gets cheaper to start a startup, it will start to be

possible to succeed in a competitive market without outside
funding. There are certainly costs to raising money. But as
of this writing the empirical evidence says it's a net win.
23. Investors like it when you don't need them.

A lot of founders approach investors as if they needed their

permission to start a company—as if it were like getting into
college. But you don't need investors to start most
companies; they just make it easier.

And in fact, investors greatly prefer it if you don't need

them. What excites them, both consciously and
unconsciously, is the sort of startup that approaches them
saying "the train's leaving the station; are you in or out?"
not the one saying "please can we have some money to
start a company?"

Most investors are "bottoms" in the sense that the startups

they like most are those that are rough with them. When
Google stuck Kleiner and Sequoia with a $75 million
premoney valuation, their reaction was probably "Ouch! That
feels so good." And they were right, weren't they? That deal
probably made them more than any other they've done.

The thing is, VCs are pretty good at reading people. So don't
try to act tough with them unless you really are the next
Google, or they'll see through you in a second. Instead of
acting tough, what most startups should do is simply always
have a backup plan. Always have some alternative plan for
getting started if any given investor says no. Having one is
the best insurance against needing one.

So you shouldn't start a startup that's expensive to start,

because then you'll be at the mercy of investors. If you
ultimately want to do something that will cost a lot, start by
doing a cheaper subset of it, and expand your ambitions
when and if you raise more money.

Apparently the most likely animals to be left alive after a

nuclear war are cockroaches, because they're so hard to kill.
That's what you want to be as a startup, initially. Instead of
a beautiful but fragile flower that needs to have its stem in a
plastic tube to support itself, better to be small, ugly, and
indestructible.

Notes

[1] I may be underestimating VCs. They may play some

behind the scenes role in IPOs, which you ultimately need if
you want to create a silicon valley.

[2] A few VCs have an email address you can send your
business plan to, but the number of startups that get funded
this way is basically zero. You should always get a personal
introduction—and to a partner, not an associate.

[3] Several people have told us that the most valuable thing
about startup school was that they got to see famous
startup founders and realized they were just ordinary guys.
Though we're happy to provide this service, this is not
generally the way we pitch startup school to potential
speakers.

[4] Actually this sounds to me like a VC who got buyer's

remorse, then used a technicality to get out of the deal. But
it's telling that it even seemed a plausible excuse.

Thanks to Sam Altman, Paul Buchheit, Hutch Fishman, and

Robert Morris for reading drafts of this, and to Kenneth King
of ASES for inviting me to speak.

Comment on this essay.

August 2006, rev. April 2007

In a few days it will be Demo Day, when the startups we

funded this summer present to investors. Y Combinator
funds startups twice a year, in January and June. Ten weeks
later we invite all the investors we know to hear them
present what they've built so far.

Ten weeks is not much time. The average startup probably

doesn't have much to show for itself after ten weeks. But
the average startup fails. When you look at the ones that
went on to do great things, you find a lot that began with
someone pounding out a prototype in a week or two of
nonstop work. Startups are a counterexample to the rule
that haste makes waste.

(Too much money seems to be as bad for startups as too

much time, so we don't give them much money either.)

A week before Demo Day, we have a dress rehearsal called

Rehearsal Day. At other Y Combinator events we allow
outside guests, but not at Rehearsal Day. No one except the
other founders gets to see the rehearsals.

The presentations on Rehearsal Day are often pretty rough.

But this is to be expected. We try to pick founders who are
good at building things, not ones who are slick presenters.
Some of the founders are just out of college, or even still in
it, and have never spoken to a group of people they didn't
already know.

So we concentrate on the basics. On Demo Day each startup

will only get ten minutes, so we encourage them to focus on
just two goals: (a) explain what you're doing, and (b)
explain why users will want it.

That might sound easy, but it's not when the speakers have
no experience presenting, and they're explaining technical
matters to an audience that's mostly non-technical.

This situation is constantly repeated when startups present

to investors: people who are bad at explaining, talking to
people who are bad at understanding. Practically every
successful startup, including stars like Google, presented at
some point to investors who didn't get it and turned them
down. Was it because the founders were bad at presenting,
or because the investors were obtuse? It's probably always
some of both.

At the most recent Rehearsal Day, we four Y Combinator

partners found ourselves saying a lot of the same things we
said at the last two. So at dinner afterward we collected all
our tips about presenting to investors. Most startups face
similar challenges, so we hope these will be useful to a
wider audience.

1. Explain what you're doing.

Investors' main question when judging a very early startup

is whether you've made a compelling product. Before they
can judge whether you've built a good x, they have to
understand what kind of x you've built. They will get very
frustrated if instead of telling them what you do, you make
them sit through some kind of preamble.

Say what you're doing as soon as possible, preferably in the

first sentence. "We're Jeff and Bob and we've built an easy
to use web-based database. Now we'll show it to you and
explain why people need this."

If you're a great public speaker you may be able to violate

this rule. Last year one founder spent the whole first half of
his talk on a fascinating analysis of the limits of the
conventional desktop metaphor. He got away with it, but
unless you're a captivating speaker, which most hackers
aren't, it's better to play it safe.

2. Get rapidly to demo.

A demo explains what you've made more effectively than

any verbal description. The only thing worth talking about
first is the problem you're trying to solve and why it's
important. But don't spend more than a tenth of your time
on that. Then demo.

When you demo, don't run through a catalog of features.

Instead start with the problem you're solving, and then
show how your product solves it. Show features in an order
driven by some kind of purpose, rather than the order in
which they happen to appear on the screen.

If you're demoing something web-based, assume that the

network connection will mysteriously die 30 seconds into
your presentation, and come prepared with a copy of the
server software running on your laptop.

3. Better a narrow description than a vague one.

One reason founders resist describing their projects

concisely is that, at this early stage, there are all kinds of
possibilities. The most concise descriptions seem
misleadingly narrow. So for example a group that has built
an easy web-based database might resist calling their
applicaton that, because it could be so much more. In fact,
it could be anything...

The problem is, as you approach (in the calculus sense) a

description of something that could be anything, the content
of your description approaches zero. If you describe your
web-based database as "a system to allow people to
collaboratively leverage the value of information," it will go
in one investor ear and out the other. They'll just discard
that sentence as meaningless boilerplate, and hope, with
increasing impatience, that in the next sentence you'll
actually explain what you've made.

Your primary goal is not to describe everything your system

might one day become, but simply to convince investors
you're worth talking to further. So approach this like an
algorithm that gets the right answer by successive
approximations. Begin with a description that's gripping but
perhaps overly narrow, then flesh it out to the extent you
can. It's the same principle as incremental development:
start with a simple prototype, then add features, but at
every point have working code. In this case, "working code"
means a working description in the investor's head.

4. Don't talk and drive.

Have one person talk while another uses the computer. If

the same person does both, they'll inevitably mumble
downwards at the computer screen instead of talking clearly
at the audience.

As long as you're standing near the audience and looking at

them, politeness (and habit) compel them to pay attention
to you. Once you stop looking at them to fuss with
something on your computer, their minds drift off to the
errands they have to run later.

5. Don't talk about secondary matters at length.

If you only have a few minutes, spend them explaining what

your product does and why it's great. Second order issues
like competitors or resumes should be single slides you go
through quickly at the end. If you have impressive resumes,
just flash them on the screen for 15 seconds and say a few
words. For competitors, list the top 3 and explain in one
sentence each what they lack that you have. And put this
kind of thing at the end, after you've made it clear what
you've built.

6. Don't get too deeply into business models.

It's good to talk about how you plan to make money, but
mainly because it shows you care about that and have
thought about it. Don't go into detail about your business
model, because (a) that's not what smart investors care
about in a brief presentation, and (b) any business model
you have at this point is probably wrong anyway.

Recently a VC who came to speak at Y Combinator talked

about a company he just invested in. He said their business
model was wrong and would probably change three times
before they got it right. The founders were experienced guys
who'd done startups before and who'd just succeeded in
getting millions from one of the top VC firms, and even their
business model was crap. (And yet he invested anyway,
because he expected it to be crap at this stage.)

If you're solving an important problem, you're going to

sound a lot smarter talking about that than the business
model. The business model is just a bunch of guesses, and
guesses about stuff that's probably not your area of
expertise. So don't spend your precious few minutes talking
about crap when you could be talking about solid, interesting
things you know a lot about: the problem you're solving and
what you've built so far.

As well as being a bad use of time, if your business model

seems spectacularly wrong, that will push the stuff you want
investors to remember out of their heads. They'll just
remember you as the company with the boneheaded plan
for making money, rather than the company that solved that
important problem.

7. Talk slowly and clearly at the audience.

Everyone at Rehearsal Day could see the difference between

the people who'd been out in the world for a while and had
presented to groups, and those who hadn't.

You need to use a completely different voice and manner

talking to a roomful of people than you would in
conversation. Everyday life gives you no practice in this. If
you can't already do it, the best solution is to treat it as a
consciously artificial trick, like juggling.

However, that doesn't mean you should talk like some kind
of announcer. Audiences tune that out. What you need to do
is talk in this artificial way, and yet make it seem
conversational. (Writing is the same. Good writing is an
elaborate effort to seem spontaneous.)

If you want to write out your whole presentation beforehand

and memorize it, that's ok. That has worked for some
groups in the past. But make sure to write something that
sounds like spontaneous, informal speech, and deliver it that
way too.

Err on the side of speaking slowly. At Rehearsal Day, one of

the founders mentioned a rule actors use: if you feel you're
speaking too slowly, you're speaking at about the right
speed.

8. Have one person talk.

Startups often want to show that all the founders are equal
partners. This is a good instinct; investors dislike unbalanced
teams. But trying to show it by partitioning the presentation
is going too far. It's distracting. You can demonstrate your
respect for one another in more subtle ways. For example,
when one of the groups presented at Demo Day, the more
extroverted of the two founders did most of the talking, but
he described his co-founder as the best hacker he'd ever
met, and you could tell he meant it.

Pick the one or at most two best speakers, and have them
do most of the talking.

Exception: If one of the founders is an expert in some

specific technical field, it can be good for them to talk about
that for a minute or so. This kind of "expert witness" can
add credibility, even if the audience doesn't understand all
the details. If Jobs and Wozniak had 10 minutes to present
the Apple II, it might be a good plan to have Jobs speak for
9 minutes and have Woz speak for a minute in the middle
about some of the technical feats he'd pulled off in the
design. (Though of course if it were actually those two, Jobs
would speak for the entire 10 minutes.)

9. Seem confident.

Between the brief time available and their lack of technical

background, many in the audience will have a hard time
evaluating what you're doing. Probably the single biggest
piece of evidence, initially, will be your own confidence in it.
You have to show you're impressed with what you've made.

And I mean show, not tell. Never say "we're passionate" or

"our product is great." People just ignore that—or worse,
write you off as bullshitters. Such messages must be
implicit.

What you must not do is seem nervous and apologetic. If

you've truly made something good, you're doing investors a
favor by telling them about it. If you don't genuinely believe
that, perhaps you ought to change what your company is
doing. If you don't believe your startup has such promise
that you'd be doing them a favor by letting them invest, why
are you investing your time in it?

10. Don't try to seem more than you are.

Don't worry if your company is just a few months old and

doesn't have an office yet, or your founders are technical
people with no business experience. Google was like that
once, and they turned out ok. Smart investors can see past
such superficial flaws. They're not looking for finished,
smooth presentations. They're looking for raw talent. All you
need to convince them of is that you're smart and that
you're onto something good. If you try too hard to conceal
your rawness—by trying to seem corporate, or pretending to
know about stuff you don't—you may just conceal your
talent.

You can afford to be candid about what you haven't figured

out yet. Don't go out of your way to bring it up (e.g. by
having a slide about what might go wrong), but don't try to
pretend either that you're further along than you are. If
you're a hacker and you're presenting to experienced
investors, they're probably better at detecting bullshit than
you are at producing it.
11. Don't put too many words on slides.

When there are a lot of words on a slide, people just skip

reading it. So look at your slides and ask of each word
"could I cross this out?" This includes gratuitous clip art. Try
to get your slides under 20 words if you can.

Don't read your slides. They should be something in the

background as you face the audience and talk to them, not
something you face and read to an audience sitting behind
you.

Cluttered sites don't do well in demos, especially when

they're projected onto a screen. At the very least, crank up
the font size big enough to make all the text legible. But
cluttered sites are bad anyway, so perhaps you should use
this opportunity to make your design simpler.

12. Specific numbers are good.

If you have any kind of data, however preliminary, tell the

audience. Numbers stick in people's heads. If you can claim
that the median visitor generates 12 page views, that's
great.

But don't give them more than four or five numbers, and
only give them numbers specific to you. You don't need to
tell them the size of the market you're in. Who cares, really,
if it's 500 million or 5 billion a year? Talking about that is
like an actor at the beginning of his career telling his
parents how much Tom Hanks makes. Yeah, sure, but first
you have to become Tom Hanks. The important part is not
whether he makes ten million a year or a hundred, but how
you get there.

13. Tell stories about users.

The biggest fear of investors looking at early stage startups

is that you've built something based on your own a priori
theories of what the world needs, but that no one will
actually want. So it's good if you can talk about problems
specific users have and how you solve them.

Greg Mcadoo said one thing Sequoia looks for is the "proxy
for demand." What are people doing now, using inadequate
tools, that shows they need what you're making?

Another sign of user need is when people pay a lot for

something. It's easy to convince investors there will be
demand for a cheaper alternative to something popular, if
you preserve the qualities that made it popular.

The best stories about user needs are about your own. A
remarkable number of famous startups grew out of some
need the founders had: Apple, Microsoft, Yahoo, Google.
Experienced investors know that, so stories of this type will
get their attention. The next best thing is to talk about the
needs of people you know personally, like your friends or
siblings.
14. Make a soundbite stick in their heads.

Professional investors hear a lot of pitches. After a while

they all blur together. The first cut is simply to be one of
those they remember. And the way to ensure that is to
create a descriptive phrase about yourself that sticks in their
heads.

In Hollywood, these phrases seem to be of the form "x

meets y." In the startup world, they're usually "the x of y"
or "the x y." Viaweb's was "the Microsoft Word of
ecommerce."

Find one and launch it clearly (but apparently casually) in

your talk, preferably near the beginning.

It's a good exercise for you, too, to sit down and try to
figure out how to describe your startup in one compelling
phrase. If you can't, your plans may not be sufficiently
focused.

How to Fund a Startup Hackers' Guide to

Investors

Spanish Translation Japanese Translation

Russian Translation

Image: Casey Muller: Trevor Blackwell at Rehearsal Day, summer 2006

July 2007

An investor wants to give you money for a certain

percentage of your startup. Should you take it? You're about
to hire your first employee. How much stock should you give
him?

These are some of the hardest questions founders face. And

yet both have the same answer:

1/(1 - n)

Whenever you're trading stock in your company for

anything, whether it's money or an employee or a deal with
another company, the test for whether to do it is the same.
You should give up n% of your company if what you trade it
for improves your average outcome enough that the (100 -
n)% you have left is worth more than the whole company
was before.

For example, if an investor wants to buy half your company,

how much does that investment have to improve your
average outcome for you to break even? Obviously it has to
double: if you trade half your company for something that
more than doubles the company's average outcome, you're
net ahead. You have half as big a share of something worth
more than twice as much.

In the general case, if n is the fraction of the company

you're giving up, the deal is a good one if it makes the
company worth more than 1/(1 - n).

For example, suppose Y Combinator offers to fund you in

return for 6% of your company. In this case, n is .06 and
1/(1 - n) is 1.064. So you should take the deal if you
believe we can improve your average outcome by more than
6.4%. If we improve your outcome by 10%, you're net
ahead, because the remaining .94 you hold is worth .94 x
1.1 = 1.034. [1]

One of the things the equity equation shows us is that,

financially at least, taking money from a top VC firm can be
a really good deal. Greg Mcadoo from Sequoia recently said
at a YC dinner that when Sequoia invests alone they like to
take about 30% of a company. 1/.7 = 1.43, meaning that
deal is worth taking if they can improve your outcome by
more than 43%. For the average startup, that would be an
extraordinary bargain. It would improve the average
startup's prospects by more than 43% just to be able to say
they were funded by Sequoia, even if they never actually got
the money.

The reason Sequoia is such a good deal is that the

percentage of the company they take is artificially low. They
don't even try to get market price for their investment; they
limit their holdings to leave the founders enough stock to
feel the company is still theirs.

The catch is that Sequoia gets about 6000 business plans a

year and funds about 20 of them, so the odds of getting this
great deal are 1 in 300. The companies that make it through
are not average startups.

Of course, there are other factors to consider in a VC deal.

It's never just a straight trade of money for stock. But if it
were, taking money from a top firm would generally be a
bargain.

You can use the same formula when giving stock to

employees, but it works in the other direction. If i is the
average outcome for the company with the addition of some
new person, then they're worth n such that i = 1/(1 - n).
Which means n = (i - 1)/i.

For example, suppose you're just two founders and you want
to hire an additional hacker who's so good you feel he'll
increase the average outcome of the whole company by
20%. n = (1.2 - 1)/1.2 = .167. So you'll break even if you
trade 16.7% of the company for him.

That doesn't mean 16.7% is the right amount of stock to

give him. Stock is not the only cost of hiring someone:
there's usually salary and overhead as well. And if the
company merely breaks even on the deal, there's no reason
to do it.

I think to translate salary and overhead into stock you

should multiply the annual rate by about 1.5. Most startups
grow fast or die; if you die you don't have to pay the guy,
and if you grow fast you'll be paying next year's salary out
of next year's valuation, which should be 3x this year's. If
your valuation grows 3x a year, the total cost in stock of a
new hire's salary and overhead is 1.5 years' cost at the
present valuation. [2]

How much of an additional margin should the company need

as the "activation energy" for the deal? Since this is in
effect the company's profit on a hire, the market will
determine that: if you're a hot opportunity, you can charge
more.

Let's run through an example. Suppose the company wants

to make a "profit" of 50% on the new hire mentioned above.
So subtract a third from 16.7% and we have 11.1% as his
"retail" price. Suppose further that he's going to cost $60k a
year in salary and overhead, x 1.5 = $90k total. If the
company's valuation is $2 million, $90k is 4.5%. 11.1% -
4.5% = an offer of 6.6%.

Incidentally, notice how important it is for early employees

to take little salary. It comes right out of stock that could
otherwise be given to them.

Obviously there is a great deal of play in these numbers. I'm

not claiming that stock grants can now be reduced to a
formula. Ultimately you always have to guess. But at least
know what you're guessing. If you choose a number based
on your gut feel, or a table of typical grant sizes supplied by
a VC firm, understand what those are estimates of.

And more generally, when you make any decision involving

equity, run it through 1/(1 - n) to see if it makes sense. You
should always feel richer after trading equity. If the trade
didn't increase the value of your remaining shares enough to
put you net ahead, you wouldn't have (or shouldn't have)
done it.

Notes

[1] This is why we can't believe anyone would think Y

Combinator was a bad deal. Does anyone really think we're
so useless that in three months we can't improve a startup's
prospects by 6.4%?

[2] The obvious choice for your present valuation is the

post-money valuation of your last funding round. This
probably undervalues the company, though, because (a)
unless your last round just happened, the company is
presumably worth more, and (b) the valuation of an early
funding round usually reflects some other contribution by the
investors.

Thanks to Sam Altman, Trevor Blackwell, Paul Buchheit,

Hutch Fishman, David Hornik, Paul Kedrosky, Jessica
Livingston, Gary Sabot, and Joshua Schachter for reading
drafts of this.

Comment on this essay.

August 2008

Raising money is the second hardest part of starting a

startup. The hardest part is making something people want:
most startups that die, die because they didn't do that. But
the second biggest cause of death is probably the difficulty
of raising money. Fundraising is brutal.

One reason it's so brutal is simply the brutality of markets.

People who've spent most of their lives in schools or big
companies may not have been exposed to that. Professors
and bosses usually feel some sense of responsibility toward
you; if you make a valiant effort and fail, they'll cut you a
break. Markets are less forgiving. Customers don't care how
hard you worked, only whether you solved their problems.

Investors evaluate startups the way customers evaluate

products, not the way bosses evaluate employees. If you're
making a valiant effort and failing, maybe they'll invest in
your next startup, but not this one.

But raising money from investors is harder than selling to

customers, because there are so few of them. There's
nothing like an efficient market. You're unlikely to have
more than 10 who are interested; it's difficult to talk to
more. So the randomness of any one investor's behavior can
really affect you.

Problem number 3: investors are very random. All investors,

including us, are by ordinary standards incompetent. We
constantly have to make decisions about things we don't
understand, and more often than not we're wrong.

And yet a lot is at stake. The amounts invested by different

types of investors vary from five thousand dollars to fifty
million, but the amount usually seems large for whatever
type of investor it is. Investment decisions are big decisions.

That combination—making big decisions about things they

don't understand—tends to make investors very skittish. VCs
are notorious for leading founders on. Some of the more
unscrupulous do it deliberately. But even the most well-
intentioned investors can behave in a way that would seem
crazy in everyday life. One day they're full of enthusiasm
and seem ready to write you a check on the spot; the next
they won't return your phone calls. They're not playing
games with you. They just can't make up their minds. [1]

If that weren't bad enough, these wildly fluctuating nodes

are all linked together. Startup investors all know one
another, and (though they hate to admit it) the biggest
factor in their opinion of you is the opinion of other
investors. [2] Talk about a recipe for an unstable system.
You get the opposite of the damping that the fear/greed
balance usually produces in markets. No one is interested in
a startup that's a "bargain" because everyone else hates it.

So the inefficient market you get because there are so few

players is exacerbated by the fact that they act less than
independently. The result is a system like some kind of
primitive, multi-celled sea creature, where you irritate one
extremity and the whole thing contracts violently.

Y Combinator is working to fix this. We're trying to increase

the number of investors just as we're increasing the number
of startups. We hope that as the number of both increases
we'll get something more like an efficient market. As t
approaches infinity, Demo Day approaches an auction.

Unfortunately, t is still very far from infinity. What does a

startup do now, in the imperfect world we currently inhabit?
The most important thing is not to let fundraising get you
down. Startups live or die on morale. If you let the difficulty
of raising money destroy your morale, it will become a self-
fulfilling prophecy.

Bootstrapping (= Consulting)

Some would-be founders may by now be thinking, why deal

with investors at all? If raising money is so painful, why do
it?

One answer to that is obvious: because you need money to

live on. It's a fine idea in principle to finance your startup
with its own revenues, but you can't create instant
customers. Whatever you make, you have to sell a certain
amount to break even. It will take time to grow your sales
to that point, and it's hard to predict, till you try, how long it
will take.

We could not have bootstrapped Viaweb, for example. We

charged quite a lot for our software—about $140 per user
per month—but it was at least a year before our revenues
would have covered even our paltry costs. We didn't have
enough saved to live on for a year.

If you factor out the "bootstrapped" companies that were

actually funded by their founders through savings or a day
job, the remainder either (a) got really lucky, which is hard
to do on demand, or (b) began life as consulting companies
and gradually transformed themselves into product
companies.

Consulting is the only option you can count on. But

consulting is far from free money. It's not as painful as
raising money from investors, perhaps, but the pain is
spread over a longer period. Years, probably. And for many
types of startup, that delay could be fatal. If you're working
on something so unusual that no one else is likely to think
of it, you can take your time. Joshua Schachter gradually
built Delicious on the side while working on Wall Street. He
got away with it because no one else realized it was a good
idea. But if you were building something as obviously
necessary as online store software at about the same time
as Viaweb, and you were working on it on the side while
spending most of your time on client work, you were not in
a good position.

Bootstrapping sounds great in principle, but this apparently

verdant territory is one from which few startups emerge
alive. The mere fact that bootstrapped startups tend to be
famous on that account should set off alarm bells. If it
worked so well, it would be the norm. [3]

Bootstrapping may get easier, because starting a company is

getting cheaper. But I don't think we'll ever reach the point
where most startups can do without outside funding.
Technology tends to get dramatically cheaper, but living
expenses don't.

The upshot is, you can choose your pain: either the short,
sharp pain of raising money, or the chronic ache of
consulting. For a given total amount of pain, raising money
is the better choice, because new technology is usually more
valuable now than later.

But although for most startups raising money will be the

lesser evil, it's still a pretty big evil—so big that it can easily
kill you. Not merely in the obvious sense that if you fail to
raise money you might have to shut the company down, but
because the process of raising money itself can kill you.

To survive it you need a set of techniques mostly orthogonal

to the ones used in convincing investors, just as mountain
climbers need to know survival techniques that are mostly
orthogonal to those used in physically getting up and down
mountains.

1. Have low expectations.

The reason raising money destroys so many startups' morale

is not simply that it's hard, but that it's so much harder than
they expected. What kills you is the disappointment. And the
lower your expectations, the harder it is to be disappointed.

Startup founders tend to be optimistic. This can work well in

technology, at least some of the time, but it's the wrong
way to approach raising money. Better to assume investors
will always let you down. Acquirers too, while we're at it. At
YC one of our secondary mantras is "Deals fall through." No
matter what deal you have going on, assume it will fall
through. The predictive power of this simple rule is amazing.

There will be a tendency, as a deal progresses, to start to

believe it will happen, and then to depend on it happening.
You must resist this. Tie yourself to the mast. This is what
kills you. Deals do not have a trajectory like most other
human interactions, where shared plans solidify linearly over
time. Deals often fall through at the last moment. Often the
other party doesn't really think about what they want till the
last moment. So you can't use your everyday intuitions
about shared plans as a guide. When it comes to deals, you
have to consciously turn them off and become pathologically
cynical.
This is harder to do than it sounds. It's very flattering when
eminent investors seem interested in funding you. It's easy
to start to believe that raising money will be quick and
straightforward. But it hardly ever is.

2. Keep working on your startup.

It sounds obvious to say that you should keep working on

your startup while raising money. Actually this is hard to do.
Most startups don't manage to.

Raising money has a mysterious capacity to suck up all your

attention. Even if you only have one meeting a day with
investors, somehow that one meeting will burn up your
whole day. It costs not just the time of the actual meeting,
but the time getting there and back, and the time preparing
for it beforehand and thinking about it afterward.

The best way to survive the distraction of meeting with

investors is probably to partition the company: to pick one
founder to deal with investors while the others keep the
company going. This works better when a startup has 3
founders than 2, and better when the leader of the company
is not also the lead developer. In the best case, the
company keeps moving forward at about half speed.

That's the best case, though. More often than not the
company comes to a standstill while raising money. And that
is dangerous for so many reasons. Raising money always
takes longer than you expect. What seems like it's going to
be a 2 week interruption turns into a 4 month interruption.
That can be very demoralizing. And worse still, it can make
you less attractive to investors. They want to invest in
companies that are dynamic. A company that hasn't done
anything new in 4 months doesn't seem dynamic, so they
start to lose interest. Investors rarely grasp this, but much
of what they're responding to when they lose interest in a
startup is the damage done by their own indecision.

The solution: put the startup first. Fit meetings with

investors into the spare moments in your development
schedule, rather than doing development in the spare
moments between meetings with investors. If you keep the
company moving forward—releasing new features,
increasing traffic, doing deals, getting written about—those
investor meetings are more likely to be productive. Not just
because your startup will seem more alive, but also because
it will be better for your own morale, which is one of the
main ways investors judge you.

3. Be conservative.

As conditions get worse, the optimal strategy becomes more

conservative. When things go well you can take risks; when
things are bad you want to play it safe.

I advise approaching fundraising as if it were always going

badly. The reason is that between your ability to delude
yourself and the wildly unstable nature of the system you're
dealing with, things probably either already are or could
easily become much worse than they seem.

What I tell most startups we fund is that if someone

reputable offers you funding on reasonable terms, take it.
There have been startups that ignored this advice and got
away with it—startups that ignored a good offer in the hope
of getting a better one, and actually did. But in the same
position I'd give the same advice again. Who knows how
many bullets were in the gun they were playing Russian
roulette with?

Corollary: if an investor seems interested, don't just let

them sit. You can't assume someone interested in investing
will stay interested. In fact, you can't even tell (they can't
even tell) if they're really interested till you try to convert
that interest into money. So if you have hot prospect, either
close them now or write them off. And unless you already
have enough funding, that reduces to: close them now.

Startups don't win by getting great funding rounds, but by

making great products. So finish raising money and get back
to work.

4. Be flexible.

There are two questions VCs ask that you shouldn't answer:
"Who else are you talking to?" and "How much are you
trying to raise?"

VCs don't expect you to answer the first question. They ask
it just in case. [4] They do seem to expect an answer to the
second. But I don't think you should just tell them a
number. Not as a way to play games with them, but
because you shouldn't have a fixed amount you need to
raise.

The custom of a startup needing a fixed amount of funding

is an obsolete one left over from the days when startups
were more expensive. A company that needed to build a
factory or hire 50 people obviously needed to raise a certain
minimum amount. But few technology startups are in that
position today.

We advise startups to tell investors there are several

different routes they could take depending on how much
they raised. As little as $50k could pay for food and rent for
the founders for a year. A couple hundred thousand would
let them get office space and hire some smart people they
know from school. A couple million would let them really
blow this thing out. The message (and not just the message,
but the fact) should be: we're going to succeed no matter
what. Raising more money just lets us do it faster.

If you're raising an angel round, the size of the round can

even change on the fly. In fact, it's just as well to make the
round small initially, then expand as needed, rather than
trying to raise a large round and risk losing the investors
you already have if you can't raise the full amount. You may
even want to do a "rolling close," where the round has no
predetermined size, but instead you sell stock to investors
one at a time as they say yes. That helps break deadlocks,
because you can start as soon as the first one is ready to
buy. [5]

5. Be independent.

A startup with a couple founders in their early twenties can

have expenses so low that they could be profitable on as
little as $2000 per month. That's negligible as corporate
revenues go, but the effect on your morale and your
bargaining position is anything but. At YC we use the phrase
"ramen profitable" to describe the situation where you're
making just enough to pay your living expenses. Once you
cross into ramen profitable, everything changes. You may
still need investment to make it big, but you don't need it
this month.

You can't plan when you start a startup how long it will take
to become profitable. But if you find yourself in a position
where a little more effort expended on sales would carry you
over the threshold of ramen profitable, do it.

Investors like it when you're ramen profitable. It shows

you've thought about making money, instead of just working
on amusing technical problems; it shows you have the
discipline to keep your expenses low; but above all, it means
you don't need them.

There is nothing investors like more than a startup that

seems like it's going to succeed even without them.
Investors like it when they can help a startup, but they don't
like startups that would die without that help.

At YC we spend a lot of time trying to predict how the

startups we've funded will do, because we're trying to learn
how to pick winners. We've now watched the trajectories of
so many startups that we're getting better at predicting
them. And when we're talking about startups we think are
likely to succeed, what we find ourselves saying is things
like "Oh, those guys can take care of themselves. They'll be
fine." Not "those guys are really smart" or "those guys are
working on a great idea." [6] When we predict good
outcomes for startups, the qualities that come up in the
supporting arguments are toughness, adaptability,
determination. Which means to the extent we're correct,
those are the qualities you need to win.

Investors know this, at least unconsciously. The reason they

like it when you don't need them is not simply that they like
what they can't have, but because that quality is what
makes founders succeed.

Sam Altman has it. You could parachute him into an island
full of cannibals and come back in 5 years and he'd be the
king. If you're Sam Altman, you don't have to be profitable
to convey to investors that you'll succeed with or without
them. (He wasn't, and he did.) Not everyone has Sam's
deal-making ability. I myself don't. But if you don't, you can
let the numbers speak for you.
6. Don't take rejection personally.

Getting rejected by investors can make you start to doubt

yourself. After all, they're more experienced than you. If
they think your startup is lame, aren't they probably right?

Maybe, maybe not. The way to handle rejection is with

precision. You shouldn't simply ignore rejection. It might
mean something. But you shouldn't automatically get
demoralized either.

To understand what rejection means, you have to

understand first of all how common it is. Statistically, the
average VC is a rejection machine. David Hornik, a partner
at August, told me:

The numbers for me ended up being something

like 500 to 800 plans received and read,
somewhere between 50 and 100 initial 1 hour
meetings held, about 20 companies that I got
interested in, about 5 that I got serious about
and did a bunch of work, 1 to 2 deals done in a
year. So the odds are against you. You may be
a great entrepreneur, working on interesting
stuff, etc. but it is still incredibly unlikely that
you get funded.

This is less true with angels, but VCs reject practically

everyone. The structure of their business means a partner
does at most 2 new investments a year, no matter how
many good startups approach him.

In addition to the odds being terrible, the average investor

is, as I mentioned, a pretty bad judge of startups. It's
harder to judge startups than most other things, because
great startup ideas tend to seem wrong. A good startup idea
has to be not just good but novel. And to be both good and
novel, an idea probably has to seem bad to most people, or
someone would already be doing it and it wouldn't be novel.

That makes judging startups harder than most other things

one judges. You have to be an intellectual contrarian to be a
good startup investor. That's a problem for VCs, most of
whom are not particularly imaginative. VCs are mostly
money guys, not people who make things. [7] Angels are
better at appreciating novel ideas, because most were
founders themselves.

So when you get a rejection, use the data that's in it, and
not what's not. If an investor gives you specific reasons for
not investing, look at your startup and ask if they're right. If
they're real problems, fix them. But don't just take their
word for it. You're supposed to be the domain expert; you
have to decide.

Though a rejection doesn't necessarily tell you anything

about your startup, it does suggest your pitch could be
improved. Figure out what's not working and change it.
Don't just think "investors are stupid." Often they are, but
figure out precisely where you lose them.
Don't let rejections pile up as a depressing, undifferentiated
heap. Sort them and analyze them, and then instead of
thinking "no one likes us," you'll know precisely how big a
problem you have, and what to do about it.

7. Be able to downshift into consulting (if appropriate).

Consulting, as I mentioned, is a dangerous way to finance a

startup. But it's better than dying. It's a bit like anaerobic
respiration: not the optimum solution for the long term, but
it can save you from an immediate threat. If you're having
trouble raising money from investors at all, it could save you
to be able to shift toward consulting.

This works better for some startups than others. It wouldn't

have been a natural fit for, say, Google, but if your
company was making software for building web sites, you
could degrade fairly gracefully into consulting by building
sites for clients with it.

So long as you were careful not to get sucked permanently

into consulting, this could even have advantages. You'd
understand your users well if you were using the software
for them. Plus as a consulting company you might be able to
get big-name users using your software that you wouldn't
have gotten as a product company.

At Viaweb we were forced to operate like a consulting

company initially, because we were so desperate for users
that we'd offer to build merchants' sites for them if they'd
sign up. But we never charged for such work, because we
didn't want them to start treating us like actual consultants,
and calling us every time they wanted something changed
on their site. We knew we had to stay a product company,
because only that scales.

8. Avoid inexperienced investors.

Though novice investors seem unthreatening they can be the

most dangerous sort, because they're so nervous. Especially
in proportion to the amount they invest. Raising $20,000
from a first-time angel investor can be as much work as
raising $2 million from a VC fund.

Their lawyers are generally inexperienced too. But while the

investors can admit they don't know what they're doing,
their lawyers can't. One YC startup negotiated terms for a
tiny round with an angel, only to receive a 70-page
agreement from his lawyer. And since the lawyer could
never admit, in front of his client, that he'd screwed up, he
instead had to insist on retaining all the draconian terms in
it, so the deal fell through.

Of course, someone has to take money from novice

investors, or there would never be any experienced ones.
But if you do, either (a) drive the process yourself, including
supplying the paperwork, or (b) use them only to fill up a
larger round led by someone else.
9. Know where you stand.

The most dangerous thing about investors is their

indecisiveness. The worst case scenario is the long no, the
no that comes after months of meetings. Rejections from
investors are like design flaws: inevitable, but much less
costly if you discover them early.

So while you're talking to investors, constantly look for signs

of where you stand. How likely are they to offer you a term
sheet? What do they have to be convinced of first? You
shouldn't necessarily always be asking these questions
outright—that could get annoying—but you should always be
collecting data about them.

Investors tend to resist committing except to the extent you

push them to. It's in their interest to collect the maximum
amount of information while making the minimum number of
decisions. The best way to force them to act is, of course,
competing investors. But you can also apply some force by
focusing the discussion: by asking what specific questions
they need answered to make up their minds, and then
answering them. If you get through several obstacles and
they keep raising new ones, assume that ultimately they're
going to flake.

You have to be disciplined when collecting data about

investors' intentions. Otherwise their desire to lead you on
will combine with your own desire to be led on to produce
completely inaccurate impressions.

Use the data to weight your strategy. You'll probably be

talking to several investors. Focus on the ones that are
most likely to say yes. The value of a potential investor is a
combination of how good it would be if they said yes, and
how likely they are to say it. Put the most weight on the
second factor. Partly because the most important quality in
an investor is simply investing. But also because, as I
mentioned, the biggest factor in investors' opinion of you is
other investors' opinion of you. If you're talking to several
investors and you manage to get one over the threshold of
saying yes, it will make the others much more interested. So
you're not sacrificing the lukewarm investors if you focus on
the hot ones; convincing the hot investors is the best way
to convince the lukewarm ones.

Future

I'm hopeful things won't always be so awkward. I hope that

as startups get cheaper and the number of investors
increases, raising money will become, if not easy, at least
straightforward.

In the meantime, the brokenness of the funding process

offers a big opportunity. Most investors have no idea how
dangerous they are. They'd be surprised to hear that raising
money from them is something that has to be treated as a
threat to a company's survival. They just think they need a
little more information to make up their minds. They don't
get that there are 10 other investors who also want a little
more information, and that the process of talking to them all
can bring a startup to a standstill for months.

Because investors don't understand the cost of dealing with

them, they don't realize how much room there is for a
potential competitor to undercut them. I know from my own
experience how much faster investors could decide, because
we've brought our own time down to 20 minutes (5 minutes
of reading an application plus a 10 minute interview plus 5
minutes of discussion). If you were investing more money
you'd want to take longer, of course. But if we can decide in
20 minutes, should it take anyone longer than a couple
days?

Opportunities like this don't sit unexploited forever, even in

an industry as conservative as venture capital. So either
existing investors will start to make up their minds faster, or
new investors will emerge who do.

In the meantime founders have to treat raising money as a

dangerous process. Fortunately, I can fix the biggest danger
right here. The biggest danger is surprise. It's that startups
will underestimate the difficulty of raising money—that
they'll cruise through all the initial steps, but when they turn
to raising money they'll find it surprisingly hard, get
demoralized, and give up. So I'm telling you in advance:
raising money is hard.

Notes

[1] When investors can't make up their minds, they

sometimes describe it as if it were a property of the startup.
"You're too early for us," they sometimes say. But which of
them, if they were taken back in a time machine to the hour
Google was founded, wouldn't offer to invest at any
valuation the founders chose? An hour old is not too early if
it's the right startup. What "you're too early" really means is
"we can't figure out yet whether you'll succeed."

[2] Investors influence one another both directly and

indirectly. They influence one another directly through the
"buzz" that surrounds a hot startup. But they also influence
one another indirectly through the founders. When a lot of
investors are interested in you, it increases your confidence
in a way that makes you much more attractive to investors.

No VC will admit they're influenced by buzz. Some genuinely

aren't. But there are few who can say they're not influenced
by confidence.

[3] One VC who read this essay wrote:

"We try to avoid companies that got bootstrapped with

consulting. It creates very bad behaviors/instincts that are
hard to erase from a company's culture."
[4] The optimal way to answer the first question is to say
that it would be improper to name names, while
simultaneously implying that you're talking to a bunch of
other VCs who are all about to give you term sheets. If
you're the sort of person who understands how to do that,
go ahead. If not, don't even try. Nothing annoys VCs more
than clumsy efforts to manipulate them.

[5] The disadvantage of expanding a round on the fly is that

the valuation is fixed at the start, so if you get a sudden
rush of interest, you may have to decide between turning
some investors away and selling more of the company than
you meant to. That's a good problem to have, however.

[6] I wouldn't say that intelligence doesn't matter in

startups. We're only comparing YC startups, who've already
made it over a certain threshold.

[7] But not all are. Though most VCs are suits at heart, the
most successful ones tend not to be. Oddly enough, the best
VCs tend to be the least VC-like.

Thanks to Trevor Blackwell, David Hornik, Jessica

Livingston, Robert Morris, and Fred Wilson for reading drafts
of this.

Comment on this essay.

Russian Translation
November 2005

In the next few years, venture capital funds will find

themselves squeezed from four directions. They're already
stuck with a seller's market, because of the huge amounts
they raised at the end of the Bubble and still haven't
invested. This by itself is not the end of the world. In fact,
it's just a more extreme version of the norm in the VC
business: too much money chasing too few deals.

Unfortunately, those few deals now want less and less

money, because it's getting so cheap to start a startup. The
four causes: open source, which makes software free;
Moore's law, which makes hardware geometrically closer to
free; the Web, which makes promotion free if you're good;
and better languages, which make development a lot
cheaper.

When we started our startup in 1995, the first three were

our biggest expenses. We had to pay $5000 for the
Netscape Commerce Server, the only software that then
supported secure http connections. We paid $3000 for a
server with a 90 MHz processor and 32 meg of memory.
And we paid a PR firm about $30,000 to promote our
launch.

Now you could get all three for nothing. You can get the
software for free; people throw away computers more
powerful than our first server; and if you make something
good you can generate ten times as much traffic by word of
mouth online than our first PR firm got through the print
media.

And of course another big change for the average startup is

that programming languages have improved-- or rather, the
median language has. At most startups ten years ago,
software development meant ten programmers writing code
in C++. Now the same work might be done by one or two
using Python or Ruby.

During the Bubble, a lot of people predicted that startups

would outsource their development to India. I think a better
model for the future is David Heinemeier Hansson, who
outsourced his development to a more powerful language
instead. A lot of well-known applications are now, like
BaseCamp, written by just one programmer. And one guy is
more than 10x cheaper than ten, because (a) he won't
waste any time in meetings, and (b) since he's probably a
founder, he can pay himself nothing.

Because starting a startup is so cheap, venture capitalists

now often want to give startups more money than the
startups want to take. VCs like to invest several million at a
time. But as one VC told me after a startup he funded would
only take about half a million, "I don't know what we're
going to do. Maybe we'll just have to give some of it back."
Meaning give some of the fund back to the institutional
investors who supplied it, because it wasn't going to be
possible to invest it all.

Into this already bad situation comes the third problem:

Sarbanes-Oxley. Sarbanes-Oxley is a law, passed after the
Bubble, that drastically increases the regulatory burden on
public companies. And in addition to the cost of compliance,
which is at least two million dollars a year, the law
introduces frightening legal exposure for corporate officers.
An experienced CFO I know said flatly: "I would not want to
be CFO of a public company now."

You might think that responsible corporate governance is an

area where you can't go too far. But you can go too far in
any law, and this remark convinced me that Sarbanes-Oxley
must have. This CFO is both the smartest and the most
upstanding money guy I know. If Sarbanes-Oxley deters
people like him from being CFOs of public companies, that's
proof enough that it's broken.

Largely because of Sarbanes-Oxley, few startups go public

now. For all practical purposes, succeeding now equals
getting bought. Which means VCs are now in the business of
finding promising little 2-3 man startups and pumping them
up into companies that cost $100 million to acquire. They
didn't mean to be in this business; it's just what their
business has evolved into.

Hence the fourth problem: the acquirers have begun to

realize they can buy wholesale. Why should they wait for
VCs to make the startups they want more expensive? Most
of what the VCs add, acquirers don't want anyway. The
acquirers already have brand recognition and HR
departments. What they really want is the software and the
developers, and that's what the startup is in the early
phase: concentrated software and developers.

Google, typically, seems to have been the first to figure this

out. "Bring us your startups early," said Google's speaker at
the Startup School. They're quite explicit about it: they like
to acquire startups at just the point where they would do a
Series A round. (The Series A round is the first round of real
VC funding; it usually happens in the first year.) It is a
brilliant strategy, and one that other big technology
companies will no doubt try to duplicate. Unless they want
to have still more of their lunch eaten by Google.

Of course, Google has an advantage in buying startups: a lot

of the people there are rich, or expect to be when their
options vest. Ordinary employees find it very hard to
recommend an acquisition; it's just too annoying to see a
bunch of twenty year olds get rich when you're still working
for salary. Even if it's the right thing for your company to
do.

The Solution(s)
Bad as things look now, there is a way for VCs to save
themselves. They need to do two things, one of which won't
surprise them, and another that will seem an anathema.

Let's start with the obvious one: lobby to get Sarbanes-

Oxley loosened. This law was created to prevent future
Enrons, not to destroy the IPO market. Since the IPO
market was practically dead when it passed, few saw what
bad effects it would have. But now that technology has
recovered from the last bust, we can see clearly what a
bottleneck Sarbanes-Oxley has become.

Startups are fragile plants—seedlings, in fact. These

seedlings are worth protecting, because they grow into the
trees of the economy. Much of the economy's growth is their
growth. I think most politicians realize that. But they don't
realize just how fragile startups are, and how easily they can
become collateral damage of laws meant to fix some other
problem.

Still more dangerously, when you destroy startups, they

make very little noise. If you step on the toes of the coal
industry, you'll hear about it. But if you inadvertantly squash
the startup industry, all that happens is that the founders of
the next Google stay in grad school instead of starting a
company.

My second suggestion will seem shocking to VCs: let

founders cash out partially in the Series A round. At the
moment, when VCs invest in a startup, all the stock they get
is newly issued and all the money goes to the company.
They could buy some stock directly from the founders as
well.

Most VCs have an almost religious rule against doing this.

They don't want founders to get a penny till the company is
sold or goes public. VCs are obsessed with control, and they
worry that they'll have less leverage over the founders if the
founders have any money.

This is a dumb plan. In fact, letting the founders sell a little

stock early would generally be better for the company,
because it would cause the founders' attitudes toward risk to
be aligned with the VCs'. As things currently work, their
attitudes toward risk tend to be diametrically opposed: the
founders, who have nothing, would prefer a 100% chance of
$1 million to a 20% chance of $10 million, while the VCs can
afford to be "rational" and prefer the latter.

Whatever they say, the reason founders are selling their

companies early instead of doing Series A rounds is that
they get paid up front. That first million is just worth so
much more than the subsequent ones. If founders could sell
a little stock early, they'd be happy to take VC money and
bet the rest on a bigger outcome.

So why not let the founders have that first million, or at

least half million? The VCs would get same number of shares
for the money. So what if some of the money would go to
the founders instead of the company?
Some VCs will say this is unthinkable—that they want all
their money to be put to work growing the company. But
the fact is, the huge size of current VC investments is
dictated by the structure of VC funds, not the needs of
startups. Often as not these large investments go to work
destroying the company rather than growing it.

The angel investors who funded our startup let the founders
sell some stock directly to them, and it was a good deal for
everyone. The angels made a huge return on that
investment, so they're happy. And for us founders it blunted
the terrifying all-or-nothingness of a startup, which in its raw
form is more a distraction than a motivator.

If VCs are frightened at the idea of letting founders partially

cash out, let me tell them something still more frightening:
you are now competing directly with Google.

Thanks to Trevor Blackwell, Sarah Harlin, Jessica

Livingston, and Robert Morris for reading drafts of this.

Romanian Translation Hebrew Translation

Japanese Translation

If you liked this, you may also like Hackers & Painters.
September 2001

(This article explains why much of the next generation of

software may be server-based, what that will mean for
programmers, and why this new kind of software is a great
opportunity for startups. It's derived from a talk at BBN
Labs.)

In the summer of 1995, my friend Robert Morris and I

decided to start a startup. The PR campaign leading up to
Netscape's IPO was running full blast then, and there was a
lot of talk in the press about online commerce. At the time
there might have been thirty actual stores on the Web, all
made by hand. If there were going to be a lot of online
stores, there would need to be software for making them, so
we decided to write some.

For the first week or so we intended to make this an

ordinary desktop application. Then one day we had the idea
of making the software run on our Web server, using the
browser as an interface. We tried rewriting the software to
work over the Web, and it was clear that this was the way
to go. If we wrote our software to run on the server, it
would be a lot easier for the users and for us as well.

This turned out to be a good plan. Now, as Yahoo Store, this

software is the most popular online store builder, with about
14,000 users.

When we started Viaweb, hardly anyone understood what we

meant when we said that the software ran on the server. It
was not until Hotmail was launched a year later that people
started to get it. Now everyone knows that this is a valid
approach. There is a name now for what we were: an
Application Service Provider, or ASP.

I think that a lot of the next generation of software will be

written on this model. Even Microsoft, who have the most to
lose, seem to see the inevitablity of moving some things off
the desktop. If software moves off the desktop and onto
servers, it will mean a very different world for developers.
This article describes the surprising things we saw, as some
of the first visitors to this new world. To the extent software
does move onto servers, what I'm describing here is the
future.

The Next Thing?

When we look back on the desktop software era, I think

we'll marvel at the inconveniences people put up with, just
as we marvel now at what early car owners put up with. For
the first twenty or thirty years, you had to be a car expert
to own a car. But cars were such a big win that lots of
people who weren't car experts wanted to have them as
well.

Computers are in this phase now. When you own a desktop

computer, you end up learning a lot more than you wanted
to know about what's happening inside it. But more than
half the households in the US own one. My mother has a
computer that she uses for email and for keeping accounts.
About a year ago she was alarmed to receive a letter from
Apple, offering her a discount on a new version of the
operating system. There's something wrong when a sixty-
five year old woman who wants to use a computer for email
and accounts has to think about installing new operating
sytems. Ordinary users shouldn't even know the words
"operating system," much less "device driver" or "patch."

There is now another way to deliver software that will save

users from becoming system administrators. Web-based
applications are programs that run on Web servers and use
Web pages as the user interface. For the average user this
new kind of software will be easier, cheaper, more mobile,
more reliable, and often more powerful than desktop
software.

With Web-based software, most users won't have to think

about anything except the applications they use. All the
messy, changing stuff will be sitting on a server somewhere,
maintained by the kind of people who are good at that kind
of thing. And so you won't ordinarily need a computer, per
se, to use software. All you'll need will be something with a
keyboard, a screen, and a Web browser. Maybe it will have
wireless Internet access. Maybe it will also be your cell
phone. Whatever it is, it will be consumer electronics:
something that costs about $200, and that people choose
mostly based on how the case looks. You'll pay more for
Internet services than you do for the hardware, just as you
do now with telephones. [1]

It will take about a tenth of a second for a click to get to

the server and back, so users of heavily interactive
software, like Photoshop, will still want to have the
computations happening on the desktop. But if you look at
the kind of things most people use computers for, a tenth of
a second latency would not be a problem. My mother doesn't
really need a desktop computer, and there are a lot of
people like her.

The Win for Users

Near my house there is a car with a bumper sticker that

reads "death before inconvenience." Most people, most of
the time, will take whatever choice requires least work. If
Web-based software wins, it will be because it's more
convenient. And it looks as if it will be, for users and
developers both.

To use a purely Web-based application, all you need is a

browser connected to the Internet. So you can use a Web-
based application anywhere. When you install software on
your desktop computer, you can only use it on that
computer. Worse still, your files are trapped on that
computer. The inconvenience of this model becomes more
and more evident as people get used to networks.

The thin end of the wedge here was Web-based email.

Millions of people now realize that you should have access to
email messages no matter where you are. And if you can
see your email, why not your calendar? If you can discuss a
document with your colleagues, why can't you edit it? Why
should any of your data be trapped on some computer
sitting on a faraway desk?

The whole idea of "your computer" is going away, and being

replaced with "your data." You should be able to get at your
data from any computer. Or rather, any client, and a client
doesn't have to be a computer.

Clients shouldn't store data; they should be like telephones.

In fact they may become telephones, or vice versa. And as
clients get smaller, you have another reason not to keep
your data on them: something you carry around with you
can be lost or stolen. Leaving your PDA in a taxi is like a
disk crash, except that your data is handed to someone else
instead of being vaporized.

With purely Web-based software, neither your data nor the

applications are kept on the client. So you don't have to
install anything to use it. And when there's no installation,
you don't have to worry about installation going wrong.
There can't be incompatibilities between the application and
your operating system, because the software doesn't run on
your operating system.

Because it needs no installation, it will be easy, and

common, to try Web-based software before you "buy" it.
You should expect to be able to test-drive any Web-based
application for free, just by going to the site where it's
offered. At Viaweb our whole site was like a big arrow
pointing users to the test drive.

After trying the demo, signing up for the service should

require nothing more than filling out a brief form (the briefer
the better). And that should be the last work the user has
to do. With Web-based software, you should get new
releases without paying extra, or doing any work, or possibly
even knowing about it.

Upgrades won't be the big shocks they are now. Over time
applications will quietly grow more powerful. This will take
some effort on the part of the developers. They will have to
design software so that it can be updated without confusing
the users. That's a new problem, but there are ways to
solve it.

With Web-based applications, everyone uses the same

version, and bugs can be fixed as soon as they're
discovered. So Web-based software should have far fewer
bugs than desktop software. At Viaweb, I doubt we ever had
ten known bugs at any one time. That's orders of magnitude
better than desktop software.
Web-based applications can be used by several people at the
same time. This is an obvious win for collaborative
applications, but I bet users will start to want this in most
applications once they realize it's possible. It will often be
useful to let two people edit the same document, for
example. Viaweb let multiple users edit a site
simultaneously, more because that was the right way to
write the software than because we expected users to want
to, but it turned out that many did.

When you use a Web-based application, your data will be

safer. Disk crashes won't be a thing of the past, but users
won't hear about them anymore. They'll happen within
server farms. And companies offering Web-based
applications will actually do backups-- not only because
they'll have real system administrators worrying about such
things, but because an ASP that does lose people's data will
be in big, big trouble. When people lose their own data in a
disk crash, they can't get that mad, because they only have
themselves to be mad at. When a company loses their data
for them, they'll get a lot madder.

Finally, Web-based software should be less vulnerable to

viruses. If the client doesn't run anything except a browser,
there's less chance of running viruses, and no data locally to
damage. And a program that attacked the servers
themselves should find them very well defended. [2]

For users, Web-based software will be less stressful. I think

if you looked inside the average Windows user you'd find a
huge and pretty much untapped desire for software meeting
that description. Unleashed, it could be a powerful force.

City of Code

To developers, the most conspicuous difference between

Web-based and desktop software is that a Web-based
application is not a single piece of code. It will be a
collection of programs of different types rather than a single
big binary. And so designing Web-based software is like
desiging a city rather than a building: as well as buildings
you need roads, street signs, utilities, police and fire
departments, and plans for both growth and various kinds of
disasters.

At Viaweb, software included fairly big applications that

users talked to directly, programs that those programs used,
programs that ran constantly in the background looking for
problems, programs that tried to restart things if they
broke, programs that ran occasionally to compile statistics or
build indexes for searches, programs we ran explicitly to
garbage-collect resources or to move or restore data,
programs that pretended to be users (to measure
performance or expose bugs), programs for diagnosing
network troubles, programs for doing backups, interfaces to
outside services, software that drove an impressive
collection of dials displaying real-time server statistics (a hit
with visitors, but indispensable for us too), modifications
(including bug fixes) to open-source software, and a great
many configuration files and settings. Trevor Blackwell wrote
a spectacular program for moving stores to new servers
across the country, without shutting them down, after we
were bought by Yahoo. Programs paged us, sent faxes and
email to users, conducted transactions with credit card
processors, and talked to one another through sockets,
pipes, http requests, ssh, udp packets, shared memory, and
files. Some of Viaweb even consisted of the absence of
programs, since one of the keys to Unix security is not to
run unnecessary utilities that people might use to break into
your servers.

It did not end with software. We spent a lot of time thinking

about server configurations. We built the servers ourselves,
from components-- partly to save money, and partly to get
exactly what we wanted. We had to think about whether our
upstream ISP had fast enough connections to all the
backbones. We serially dated RAID suppliers.

But hardware is not just something to worry about. When

you control it you can do more for users. With a desktop
application, you can specify certain minimum hardware, but
you can't add more. If you administer the servers, you can
in one step enable all your users to page people, or send
faxes, or send commands by phone, or process credit cards,
etc, just by installing the relevant hardware. We always
looked for new ways to add features with hardware, not just
because it pleased users, but also as a way to distinguish
ourselves from competitors who (either because they sold
desktop software, or resold Web-based applications through
ISPs) didn't have direct control over the hardware.

Because the software in a Web-based application will be a

collection of programs rather than a single binary, it can be
written in any number of different languages. When you're
writing desktop software, you're practically forced to write
the application in the same language as the underlying
operating system-- meaning C and C++. And so these
languages (especially among nontechnical people like
managers and VCs) got to be considered as the languages
for "serious" software development. But that was just an
artifact of the way desktop software had to be delivered. For
server-based software you can use any language you want.
[3] Today a lot of the top hackers are using languages far
removed from C and C++: Perl, Python, and even Lisp.

With server-based software, no one can tell you what

language to use, because you control the whole system,
right down to the hardware. Different languages are good
for different tasks. You can use whichever is best for each.
And when you have competitors, "you can" means "you
must" (we'll return to this later), because if you don't take
advantage of this possibility, your competitors will.

Most of our competitors used C and C++, and this made

their software visibly inferior because (among other things),
they had no way around the statelessness of CGI scripts. If
you were going to change something, all the changes had to
happen on one page, with an Update button at the bottom.
As I've written elsewhere, by using Lisp, which many people
still consider a research language, we could make the
Viaweb editor behave more like desktop software.

Releases

One of the most important changes in this new world is the

way you do releases. In the desktop software business,
doing a release is a huge trauma, in which the whole
company sweats and strains to push out a single, giant piece
of code. Obvious comparisons suggest themselves, both to
the process and the resulting product.

With server-based software, you can make changes almost

as you would in a program you were writing for yourself.
You release software as a series of incremental changes
instead of an occasional big explosion. A typical desktop
software company might do one or two releases a year. At
Viaweb we often did three to five releases a day.

When you switch to this new model, you realize how much
software development is affected by the way it is released.
Many of the nastiest problems you see in the desktop
software business are due to catastrophic nature of releases.

When you release only one new version a year, you tend to
deal with bugs wholesale. Some time before the release date
you assemble a new version in which half the code has been
torn out and replaced, introducing countless bugs. Then a
squad of QA people step in and start counting them, and
the programmers work down the list, fixing them. They do
not generally get to the end of the list, and indeed, no one
is sure where the end is. It's like fishing rubble out of a
pond. You never really know what's happening inside the
software. At best you end up with a statistical sort of
correctness.

With server-based software, most of the change is small and

incremental. That in itself is less likely to introduce bugs. It
also means you know what to test most carefully when
you're about to release software: the last thing you
changed. You end up with a much firmer grip on the code.
As a general rule, you do know what's happening inside it.
You don't have the source code memorized, of course, but
when you read the source you do it like a pilot scanning the
instrument panel, not like a detective trying to unravel some
mystery.

Desktop software breeds a certain fatalism about bugs. You

know that you're shipping something loaded with bugs, and
you've even set up mechanisms to compensate for it (e.g.
patch releases). So why worry about a few more? Soon
you're releasing whole features you know are broken. Apple
did this earlier this year. They felt under pressure to release
their new OS, whose release date had already slipped four
times, but some of the software (support for CDs and DVDs)
wasn't ready. The solution? They released the OS without
the unfinished parts, and users will have to install them
later.

With Web-based software, you never have to release

software before it works, and you can release it as soon as it
does work.

The industry veteran may be thinking, it's a fine-sounding

idea to say that you never have to release software before it
works, but what happens when you've promised to deliver a
new version of your software by a certain date? With Web-
based software, you wouldn't make such a promise, because
there are no versions. Your software changes gradually and
continuously. Some changes might be bigger than others,
but the idea of versions just doesn't naturally fit onto Web-
based software.

If anyone remembers Viaweb this might sound odd, because

we were always announcing new versions. This was done
entirely for PR purposes. The trade press, we learned, thinks
in version numbers. They will give you major coverage for a
major release, meaning a new first digit on the version
number, and generally a paragraph at most for a point
release, meaning a new digit after the decimal point.

Some of our competitors were offering desktop software and

actually had version numbers. And for these releases, the
mere fact of which seemed to us evidence of their
backwardness, they would get all kinds of publicity. We
didn't want to miss out, so we started giving version
numbers to our software too. When we wanted some
publicity, we'd make a list of all the features we'd added
since the last "release," stick a new version number on the
software, and issue a press release saying that the new
version was available immediately. Amazingly, no one ever
called us on it.

By the time we were bought, we had done this three times,

so we were on Version 4. Version 4.1 if I remember
correctly. After Viaweb became Yahoo Store, there was no
longer such a desperate need for publicity, so although the
software continued to evolve, the whole idea of version
numbers was quietly dropped.

Bugs

The other major technical advantage of Web-based software

is that you can reproduce most bugs. You have the users'
data right there on your disk. If someone breaks your
software, you don't have to try to guess what's going on, as
you would with desktop software: you should be able to
reproduce the error while they're on the phone with you.
You might even know about it already, if you have code for
noticing errors built into your application.

Web-based software gets used round the clock, so

everything you do is immediately put through the wringer.
Bugs turn up quickly.

Software companies are sometimes accused of letting the

users debug their software. And that is just what I'm
advocating. For Web-based software it's actually a good
plan, because the bugs are fewer and transient. When you
release software gradually you get far fewer bugs to start
with. And when you can reproduce errors and release
changes instantly, you can find and fix most bugs as soon as
they appear. We never had enough bugs at any one time to
bother with a formal bug-tracking system.

You should test changes before you release them, of course,

so no major bugs should get released. Those few that
inevitably slip through will involve borderline cases and will
only affect the few users that encounter them before
someone calls in to complain. As long as you fix bugs right
away, the net effect, for the average user, is far fewer bugs.
I doubt the average Viaweb user ever saw a bug.

Fixing fresh bugs is easier than fixing old ones. It's usually
fairly quick to find a bug in code you just wrote. When it
turns up you often know what's wrong before you even look
at the source, because you were already worrying about it
subconsciously. Fixing a bug in something you wrote six
months ago (the average case if you release once a year) is
a lot more work. And since you don't understand the code as
well, you're more likely to fix it in an ugly way, or even
introduce more bugs. [4]

When you catch bugs early, you also get fewer compound
bugs. Compound bugs are two separate bugs that interact:
you trip going downstairs, and when you reach for the
handrail it comes off in your hand. In software this kind of
bug is the hardest to find, and also tends to have the worst
consequences. [5] The traditional "break everything and
then filter out the bugs" approach inherently yields a lot of
compound bugs. And software that's released in a series of
small changes inherently tends not to. The floors are
constantly being swept clean of any loose objects that might
later get stuck in something.

It helps if you use a technique called functional

programming. Functional programming means avoiding side-
effects. It's something you're more likely to see in research
papers than commercial software, but for Web-based
applications it turns out to be really useful. It's hard to write
entire programs as purely functional code, but you can write
substantial chunks this way. It makes those parts of your
software easier to test, because they have no state, and
that is very convenient in a situation where you are
constantly making and testing small modifications. I wrote
much of Viaweb's editor in this style, and we made our
scripting language, RTML, a purely functional language.

People from the desktop software business will find this hard
to credit, but at Viaweb bugs became almost a game. Since
most released bugs involved borderline cases, the users who
encountered them were likely to be advanced users, pushing
the envelope. Advanced users are more forgiving about
bugs, especially since you probably introduced them in the
course of adding some feature they were asking for. In fact,
because bugs were rare and you had to be doing
sophisticated things to see them, advanced users were often
proud to catch one. They would call support in a spirit more
of triumph than anger, as if they had scored points off us.

Support
When you can reproduce errors, it changes your approach to
customer support. At most software companies, support is
offered as a way to make customers feel better. They're
either calling you about a known bug, or they're just doing
something wrong and you have to figure out what. In either
case there's not much you can learn from them. And so you
tend to view support calls as a pain in the ass that you want
to isolate from your developers as much as possible.

This was not how things worked at Viaweb. At Viaweb,

support was free, because we wanted to hear from
customers. If someone had a problem, we wanted to know
about it right away so that we could reproduce the error and
release a fix.

So at Viaweb the developers were always in close contact

with support. The customer support people were about thirty
feet away from the programmers, and knew that they could
always interrupt anything with a report of a genuine bug. We
would leave a board meeting to fix a serious bug.

Our approach to support made everyone happier. The

customers were delighted. Just imagine how it would feel to
call a support line and be treated as someone bringing
important news. The customer support people liked it
because it meant they could help the users, instead of
reading scripts to them. And the programmers liked it
because they could reproduce bugs instead of just hearing
vague second-hand reports about them.

Our policy of fixing bugs on the fly changed the relationship

between customer support people and hackers. At most
software companies, support people are underpaid human
shields, and hackers are little copies of God the Father,
creators of the world. Whatever the procedure for reporting
bugs, it is likely to be one-directional: support people who
hear about bugs fill out some form that eventually gets
passed on (possibly via QA) to programmers, who put it on
their list of things to do. It was very different at Viaweb.
Within a minute of hearing about a bug from a customer,
the support people could be standing next to a programmer
hearing him say "Shit, you're right, it's a bug." It delighted
the support people to hear that "you're right" from the
hackers. They used to bring us bugs with the same
expectant air as a cat bringing you a mouse it has just
killed. It also made them more careful in judging the
seriousness of a bug, because now their honor was on the
line.

After we were bought by Yahoo, the customer support

people were moved far away from the programmers. It was
only then that we realized that they were effectively QA and
to some extent marketing as well. In addition to catching
bugs, they were the keepers of the knowledge of vaguer,
buglike things, like features that confused users. [6] They
were also a kind of proxy focus group; we could ask them
which of two new features users wanted more, and they
were always right.
Morale

Being able to release software immediately is a big

motivator. Often as I was walking to work I would think of
some change I wanted to make to the software, and do it
that day. This worked for bigger features as well. Even if
something was going to take two weeks to write (few
projects took longer), I knew I could see the effect in the
software as soon as it was done.

If I'd had to wait a year for the next release, I would have
shelved most of these ideas, for a while at least. The thing
about ideas, though, is that they lead to more ideas. Have
you ever noticed that when you sit down to write something,
half the ideas that end up in it are ones you thought of
while writing it? The same thing happens with software.
Working to implement one idea gives you more ideas. So
shelving an idea costs you not only that delay in
implementing it, but also all the ideas that implementing it
would have led to. In fact, shelving an idea probably even
inhibits new ideas: as you start to think of some new
feature, you catch sight of the shelf and think "but I already
have a lot of new things I want to do for the next release."

What big companies do instead of implementing features is

plan them. At Viaweb we sometimes ran into trouble on this
account. Investors and analysts would ask us what we had
planned for the future. The truthful answer would have
been, we didn't have any plans. We had general ideas about
things we wanted to improve, but if we knew how we would
have done it already. What were we going to do in the next
six months? Whatever looked like the biggest win. I don't
know if I ever dared give this answer, but that was the
truth. Plans are just another word for ideas on the shelf.
When we thought of good ideas, we implemented them.

At Viaweb, as at many software companies, most code had

one definite owner. But when you owned something you
really owned it: no one except the owner of a piece of
software had to approve (or even know about) a release.
There was no protection against breakage except the fear of
looking like an idiot to one's peers, and that was more than
enough. I may have given the impression that we just
blithely plowed forward writing code. We did go fast, but we
thought very carefully before we released software onto
those servers. And paying attention is more important to
reliability than moving slowly. Because he pays close
attention, a Navy pilot can land a 40,000 lb. aircraft at 140
miles per hour on a pitching carrier deck, at night, more
safely than the average teenager can cut a bagel.

This way of writing software is a double-edged sword of

course. It works a lot better for a small team of good,
trusted programmers than it would for a big company of
mediocre ones, where bad ideas are caught by committees
instead of the people that had them.

Brooks in Reverse

Fortunately, Web-based software does require fewer

programmers. I once worked for a medium-sized desktop
software company that had over 100 people working in
engineering as a whole. Only 13 of these were in product
development. All the rest were working on releases, ports,
and so on. With Web-based software, all you need (at most)
are the 13 people, because there are no releases, ports, and
so on.

Viaweb was written by just three people. [7] I was always

under pressure to hire more, because we wanted to get
bought, and we knew that buyers would have a hard time
paying a high price for a company with only three
programmers. (Solution: we hired more, but created new
projects for them.)

When you can write software with fewer programmers, it

saves you more than money. As Fred Brooks pointed out in
The Mythical Man-Month, adding people to a project tends to
slow it down. The number of possible connections between
developers grows exponentially with the size of the group.
The larger the group, the more time they'll spend in
meetings negotiating how their software will work together,
and the more bugs they'll get from unforseen interactions.
Fortunately, this process also works in reverse: as groups
get smaller, software development gets exponentially more
efficient. I can't remember the programmers at Viaweb ever
having an actual meeting. We never had more to say at any
one time than we could say as we were walking to lunch.

If there is a downside here, it is that all the programmers

have to be to some degree system administrators as well.
When you're hosting software, someone has to be watching
the servers, and in practice the only people who can do this
properly are the ones who wrote the software. At Viaweb
our system had so many components and changed so
frequently that there was no definite border between
software and infrastructure. Arbitrarily declaring such a
border would have constrained our design choices. And so
although we were constantly hoping that one day ("in a
couple months") everything would be stable enough that we
could hire someone whose job was just to worry about the
servers, it never happened.

I don't think it could be any other way, as long as you're still

actively developing the product. Web-based software is
never going to be something you write, check in, and go
home. It's a live thing, running on your servers right now. A
bad bug might not just crash one user's process; it could
crash them all. If a bug in your code corrupts some data on
disk, you have to fix it. And so on. We found that you don't
have to watch the servers every minute (after the first year
or so), but you definitely want to keep an eye on things
you've changed recently. You don't release code late at night
and then go home.

Watching Users

With server-based software, you're in closer touch with your

code. You can also be in closer touch with your users. Intuit
is famous for introducing themselves to customers at retail
stores and asking to follow them home. If you've ever
watched someone use your software for the first time, you
know what surprises must have awaited them.

Software should do what users think it will. But you can't

have any idea what users will be thinking, believe me, until
you watch them. And server-based software gives you
unprecedented information about their behavior. You're not
limited to small, artificial focus groups. You can see every
click made by every user. You have to consider carefully
what you're going to look at, because you don't want to
violate users' privacy, but even the most general statistical
sampling can be very useful.

When you have the users on your server, you don't have to
rely on benchmarks, for example. Benchmarks are simulated
users. With server-based software, you can watch actual
users. To decide what to optimize, just log into a server and
see what's consuming all the CPU. And you know when to
stop optimizing too: we eventually got the Viaweb editor to
the point where it was memory-bound rather than CPU-
bound, and since there was nothing we could do to decrease
the size of users' data (well, nothing easy), we knew we
might as well stop there.

Efficiency matters for server-based software, because you're

paying for the hardware. The number of users you can
support per server is the divisor of your capital cost, so if
you can make your software very efficient you can undersell
competitors and still make a profit. At Viaweb we got the
capital cost per user down to about $5. It would be less
now, probably less than the cost of sending them the first
month's bill. Hardware is free now, if your software is
reasonably efficient.

Watching users can guide you in design as well as

optimization. Viaweb had a scripting language called RTML
that let advanced users define their own page styles. We
found that RTML became a kind of suggestion box, because
users only used it when the predefined page styles couldn't
do what they wanted. Originally the editor put button bars
across the page, for example, but after a number of users
used RTML to put buttons down the left side, we made that
an option (in fact the default) in the predefined page styles.

Finally, by watching users you can often tell when they're in

trouble. And since the customer is always right, that's a sign
of something you need to fix. At Viaweb the key to getting
users was the online test drive. It was not just a series of
slides built by marketing people. In our test drive, users
actually used the software. It took about five minutes, and
at the end of it they had built a real, working store.

The test drive was the way we got nearly all our new users.
I think it will be the same for most Web-based applications.
If users can get through a test drive successfully, they'll like
the product. If they get confused or bored, they won't. So
anything we could do to get more people through the test
drive would increase our growth rate.
I studied click trails of people taking the test drive and
found that at a certain step they would get confused and
click on the browser's Back button. (If you try writing Web-
based applications, you'll find that the Back button becomes
one of your most interesting philosophical problems.) So I
added a message at that point, telling users that they were
nearly finished, and reminding them not to click on the Back
button. Another great thing about Web-based software is
that you get instant feedback from changes: the number of
people completing the test drive rose immediately from 60%
to 90%. And since the number of new users was a function
of the number of completed test drives, our revenue growth
increased by 50%, just from that change.

Money

In the early 1990s I read an article in which someone said

that software was a subscription business. At first this
seemed a very cynical statement. But later I realized that it
reflects reality: software development is an ongoing process.
I think it's cleaner if you openly charge subscription fees,
instead of forcing people to keep buying and installing new
versions so that they'll keep paying you. And fortunately,
subscriptions are the natural way to bill for Web-based
applications.

Hosting applications is an area where companies will play a

role that is not likely to be filled by freeware. Hosting
applications is a lot of stress, and has real expenses. No one
is going to want to do it for free.

For companies, Web-based applications are an ideal source

of revenue. Instead of starting each quarter with a blank
slate, you have a recurring revenue stream. Because your
software evolves gradually, you don't have to worry that a
new model will flop; there never need be a new model, per
se, and if you do something to the software that users hate,
you'll know right away. You have no trouble with
uncollectable bills; if someone won't pay you can just turn
off the service. And there is no possibility of piracy.

That last "advantage" may turn out to be a problem. Some

amount of piracy is to the advantage of software companies.
If some user really would not have bought your software at
any price, you haven't lost anything if he uses a pirated
copy. In fact you gain, because he is one more user helping
to make your software the standard-- or who might buy a
copy later, when he graduates from high school.

When they can, companies like to do something called price

discrimination, which means charging each customer as
much as they can afford. [8] Software is particularly suitable
for price discrimination, because the marginal cost is close
to zero. This is why some software costs more to run on
Suns than on Intel boxes: a company that uses Suns is not
interested in saving money and can safely be charged more.
Piracy is effectively the lowest tier of price discrimination. I
think that software companies understand this and
deliberately turn a blind eye to some kinds of piracy. [9]
With server-based software they are going to have to come
up with some other solution.

Web-based software sells well, especially in comparison to

desktop software, because it's easy to buy. You might think
that people decide to buy something, and then buy it, as
two separate steps. That's what I thought before Viaweb, to
the extent I thought about the question at all. In fact the
second step can propagate back into the first: if something
is hard to buy, people will change their mind about whether
they wanted it. And vice versa: you'll sell more of something
when it's easy to buy. I buy more books because Amazon
exists. Web-based software is just about the easiest thing in
the world to buy, especially if you have just done an online
demo. Users should not have to do much more than enter a
credit card number. (Make them do more at your peril.)

Sometimes Web-based software is offered through ISPs

acting as resellers. This is a bad idea. You have to be
administering the servers, because you need to be
constantly improving both hardware and software. If you
give up direct control of the servers, you give up most of
the advantages of developing Web-based applications.

Several of our competitors shot themselves in the foot this

way-- usually, I think, because they were overrun by suits
who were excited about this huge potential channel, and
didn't realize that it would ruin the product they hoped to
sell through it. Selling Web-based software through ISPs is
like selling sushi through vending machines.

Customers

Who will the customers be? At Viaweb they were initially

individuals and smaller companies, and I think this will be
the rule with Web-based applications. These are the users
who are ready to try new things, partly because they're
more flexible, and partly because they want the lower costs
of new technology.

Web-based applications will often be the best thing for big

companies too (though they'll be slow to realize it). The best
intranet is the Internet. If a company uses true Web-based
applications, the software will work better, the servers will
be better administered, and employees will have access to
the system from anywhere.

The argument against this approach usually hinges on

security: if access is easier for employees, it will be for bad
guys too. Some larger merchants were reluctant to use
Viaweb because they thought customers' credit card
information would be safer on their own servers. It was not
easy to make this point diplomatically, but in fact the data
was almost certainly safer in our hands than theirs. Who can
hire better people to manage security, a technology startup
whose whole business is running servers, or a clothing
retailer? Not only did we have better people worrying about
security, we worried more about it. If someone broke into
the clothing retailer's servers, it would affect at most one
merchant, could probably be hushed up, and in the worst
case might get one person fired. If someone broke into ours,
it could affect thousands of merchants, would probably end
up as news on CNet, and could put us out of business.

If you want to keep your money safe, do you keep it under

your mattress at home, or put it in a bank? This argument
applies to every aspect of server administration: not just
security, but uptime, bandwidth, load management,
backups, etc. Our existence depended on doing these things
right. Server problems were the big no-no for us, like a
dangerous toy would be for a toy maker, or a salmonella
outbreak for a food processor.

A big company that uses Web-based applications is to that

extent outsourcing IT. Drastic as it sounds, I think this is
generally a good idea. Companies are likely to get better
service this way than they would from in-house system
administrators. System administrators can become cranky
and unresponsive because they're not directly exposed to
competitive pressure: a salesman has to deal with
customers, and a developer has to deal with competitors'
software, but a system administrator, like an old bachelor,
has few external forces to keep him in line. [10] At Viaweb
we had external forces in plenty to keep us in line. The
people calling us were customers, not just co-workers. If a
server got wedged, we jumped; just thinking about it gives
me a jolt of adrenaline, years later.

So Web-based applications will ordinarily be the right answer

for big companies too. They will be the last to realize it,
however, just as they were with desktop computers. And
partly for the same reason: it will be worth a lot of money
to convince big companies that they need something more
expensive.

There is always a tendency for rich customers to buy

expensive solutions, even when cheap solutions are better,
because the people offering expensive solutions can spend
more to sell them. At Viaweb we were always up against
this. We lost several high-end merchants to Web consulting
firms who convinced them they'd be better off if they paid
half a million dollars for a custom-made online store on
their own server. They were, as a rule, not better off, as
more than one discovered when Christmas shopping season
came around and loads rose on their server. Viaweb was a
lot more sophisticated than what most of these merchants
got, but we couldn't afford to tell them. At $300 a month,
we couldn't afford to send a team of well-dressed and
authoritative-sounding people to make presentations to
customers.

A large part of what big companies pay extra for is the cost
of selling expensive things to them. (If the Defense
Department pays a thousand dollars for toilet seats, it's
partly because it costs a lot to sell toilet seats for a
thousand dollars.) And this is one reason intranet software
will continue to thrive, even though it is probably a bad idea.
It's simply more expensive. There is nothing you can do
about this conundrum, so the best plan is to go for the
smaller customers first. The rest will come in time.
Son of Server

Running software on the server is nothing new. In fact it's

the old model: mainframe applications are all server-based.
If server-based software is such a good idea, why did it lose
last time? Why did desktop computers eclipse mainframes?

At first desktop computers didn't look like much of a threat.

The first users were all hackers-- or hobbyists, as they were
called then. They liked microcomputers because they were
cheap. For the first time, you could have your own
computer. The phrase "personal computer" is part of the
language now, but when it was first used it had a
deliberately audacious sound, like the phrase "personal
satellite" would today.

Why did desktop computers take over? I think it was

because they had better software. And I think the reason
microcomputer software was better was that it could be
written by small companies.

I don't think many people realize how fragile and tentative

startups are in the earliest stage. Many startups begin
almost by accident-- as a couple guys, either with day jobs
or in school, writing a prototype of something that might, if
it looks promising, turn into a company. At this larval stage,
any significant obstacle will stop the startup dead in its
tracks. Writing mainframe software required too much
commitment up front. Development machines were
expensive, and because the customers would be big
companies, you'd need an impressive-looking sales force to
sell it to them. Starting a startup to write mainframe
software would be a much more serious undertaking than
just hacking something together on your Apple II in the
evenings. And so you didn't get a lot of startups writing
mainframe applications.

The arrival of desktop computers inspired a lot of new

software, because writing applications for them seemed an
attainable goal to larval startups. Development was cheap,
and the customers would be individual people that you could
reach through computer stores or even by mail-order.

The application that pushed desktop computers out into the

mainstream was VisiCalc, the first spreadsheet. It was
written by two guys working in an attic, and yet did things
no mainframe software could do. [11] VisiCalc was such an
advance, in its time, that people bought Apple IIs just to run
it. And this was the beginning of a trend: desktop computers
won because startups wrote software for them.

It looks as if server-based software will be good this time

around, because startups will write it. Computers are so
cheap now that you can get started, as we did, using a
desktop computer as a server. Inexpensive processors have
eaten the workstation market (you rarely even hear the
word now) and are most of the way through the server
market; Yahoo's servers, which deal with loads as high as
any on the Internet, all have the same inexpensive Intel
processors that you have in your desktop machine. And once
you've written the software, all you need to sell it is a Web
site. Nearly all our users came direct to our site through
word of mouth and references in the press. [12]

Viaweb was a typical larval startup. We were terrified of

starting a company, and for the first few months comforted
ourselves by treating the whole thing as an experiment that
we might call off at any moment. Fortunately, there were
few obstacles except technical ones. While we were writing
the software, our Web server was the same desktop
machine we used for development, connected to the outside
world by a dialup line. Our only expenses in that phase were
food and rent.

There is all the more reason for startups to write Web-based

software now, because writing desktop software has become
a lot less fun. If you want to write desktop software now you
do it on Microsoft's terms, calling their APIs and working
around their buggy OS. And if you manage to write
something that takes off, you may find that you were merely
doing market research for Microsoft.

If a company wants to make a platform that startups will

build on, they have to make it something that hackers
themselves will want to use. That means it has to be
inexpensive and well-designed. The Mac was popular with
hackers when it first came out, and a lot of them wrote
software for it. [13] You see this less with Windows,
because hackers don't use it. The kind of people who are
good at writing software tend to be running Linux or
FreeBSD now.

I don't think we would have started a startup to write

desktop software, because desktop software has to run on
Windows, and before we could write software for Windows
we'd have to use it. The Web let us do an end-run around
Windows, and deliver software running on Unix direct to
users through the browser. That is a liberating prospect, a
lot like the arrival of PCs twenty-five years ago.

Microsoft

Back when desktop computers arrived, IBM was the giant

that everyone was afraid of. It's hard to imagine now, but I
remember the feeling very well. Now the frightening giant is
Microsoft, and I don't think they are as blind to the threat
facing them as IBM was. After all, Microsoft deliberately built
their business in IBM's blind spot.

I mentioned earlier that my mother doesn't really need a

desktop computer. Most users probably don't. That's a
problem for Microsoft, and they know it. If applications run
on remote servers, no one needs Windows. What will
Microsoft do? Will they be able to use their control of the
desktop to prevent, or constrain, this new generation of
software?

My guess is that Microsoft will develop some kind of

server/desktop hybrid, where the operating system works
together with servers they control. At a minimum, files will
be centrally available for users who want that. I don't expect
Microsoft to go all the way to the extreme of doing the
computations on the server, with only a browser for a client,
if they can avoid it. If you only need a browser for a client,
you don't need Microsoft on the client, and if Microsoft
doesn't control the client, they can't push users towards
their server-based applications.

I think Microsoft will have a hard time keeping the genie in

the bottle. There will be too many different types of clients
for them to control them all. And if Microsoft's applications
only work with some clients, competitors will be able to
trump them by offering applications that work from any
client. [14]

In a world of Web-based applications, there is no automatic

place for Microsoft. They may succeed in making themselves
a place, but I don't think they'll dominate this new world as
they did the world of desktop applications.

It's not so much that a competitor will trip them up as that

they will trip over themselves. With the rise of Web-based
software, they will be facing not just technical problems but
their own wishful thinking. What they need to do is
cannibalize their existing business, and I can't see them
facing that. The same single-mindedness that has brought
them this far will now be working against them. IBM was in
exactly the same situation, and they could not master it.
IBM made a late and half-hearted entry into the
microcomputer business because they were ambivalent
about threatening their cash cow, mainframe computing.
Microsoft will likewise be hampered by wanting to save the
desktop. A cash cow can be a damned heavy monkey on
your back.

I'm not saying that no one will dominate server-based

applications. Someone probably will eventually. But I think
that there will be a good long period of cheerful chaos, just
as there was in the early days of microcomputers. That was
a good time for startups. Lots of small companies flourished,
and did it by making cool things.

Startups but More So

The classic startup is fast and informal, with few people and
little money. Those few people work very hard, and
technology magnifies the effect of the decisions they make.
If they win, they win big.

In a startup writing Web-based applications, everything you

associate with startups is taken to an extreme. You can
write and launch a product with even fewer people and even
less money. You have to be even faster, and you can get
away with being more informal. You can literally launch your
product as three guys sitting in the living room of an
apartment, and a server collocated at an ISP. We did.

Over time the teams have gotten smaller, faster, and more
informal. In 1960, software development meant a roomful of
men with horn rimmed glasses and narrow black neckties,
industriously writing ten lines of code a day on IBM coding
forms. In 1980, it was a team of eight to ten people wearing
jeans to the office and typing into vt100s. Now it's a couple
of guys sitting in a living room with laptops. (And jeans turn
out not to be the last word in informality.)

Startups are stressful, and this, unfortunately, is also taken

to an extreme with Web-based applications. Many software
companies, especially at the beginning, have periods where
the developers slept under their desks and so on. The
alarming thing about Web-based software is that there is
nothing to prevent this becoming the default. The stories
about sleeping under desks usually end: then at last we
shipped it and we all went home and slept for a week. Web-
based software never ships. You can work 16-hour days for
as long as you want to. And because you can, and your
competitors can, you tend to be forced to. You can, so you
must. It's Parkinson's Law running in reverse.

The worst thing is not the hours but the responsibility.

Programmers and system administrators traditionally each
have their own separate worries. Programmers have to
worry about bugs, and system administrators have to worry
about infrastructure. Programmers may spend a long day up
to their elbows in source code, but at some point they get to
go home and forget about it. System administrators never
quite leave the job behind, but when they do get paged at
4:00 AM, they don't usually have to do anything very
complicated. With Web-based applications, these two kinds
of stress get combined. The programmers become system
administrators, but without the sharply defined limits that
ordinarily make the job bearable.

At Viaweb we spent the first six months just writing

software. We worked the usual long hours of an early
startup. In a desktop software company, this would have
been the part where we were working hard, but it felt like a
vacation compared to the next phase, when we took users
onto our server. The second biggest benefit of selling Viaweb
to Yahoo (after the money) was to be able to dump ultimate
responsibility for the whole thing onto the shoulders of a big
company.

Desktop software forces users to become system

administrators. Web-based software forces programmers to.
There is less stress in total, but more for the programmers.
That's not necessarily bad news. If you're a startup
competing with a big company, it's good news. [15] Web-
based applications offer a straightforward way to outwork
your competitors. No startup asks for more.

Just Good Enough

One thing that might deter you from writing Web-based

applications is the lameness of Web pages as a UI. That is a
problem, I admit. There were a few things we would have
really liked to add to HTML and HTTP. What matters,
though, is that Web pages are just good enough.

There is a parallel here with the first microcomputers. The

processors in those machines weren't actually intended to be
the CPUs of computers. They were designed to be used in
things like traffic lights. But guys like Ed Roberts, who
designed the Altair, realized that they were just good
enough. You could combine one of these chips with some
memory (256 bytes in the first Altair), and front panel
switches, and you'd have a working computer. Being able to
have your own computer was so exciting that there were
plenty of people who wanted to buy them, however limited.

Web pages weren't designed to be a UI for applications, but

they're just good enough. And for a significant number of
users, software that you can use from any browser will be
enough of a win in itself to outweigh any awkwardness in
the UI. Maybe you can't write the best-looking spreadsheet
using HTML, but you can write a spreadsheet that several
people can use simultaneously from different locations
without special client software, or that can incorporate live
data feeds, or that can page you when certain conditions are
triggered. More importantly, you can write new kinds of
applications that don't even have names yet. VisiCalc was
not merely a microcomputer version of a mainframe
application, after all-- it was a new type of application.

Of course, server-based applications don't have to be Web-

based. You could have some other kind of client. But I'm
pretty sure that's a bad idea. It would be very convenient if
you could assume that everyone would install your client--
so convenient that you could easily convince yourself that
they all would-- but if they don't, you're hosed. Because
Web-based software assumes nothing about the client, it will
work anywhere the Web works. That's a big advantage
already, and the advantage will grow as new Web devices
proliferate. Users will like you because your software just
works, and your life will be easier because you won't have
to tweak it for every new client. [16]

I feel like I've watched the evolution of the Web as closely

as anyone, and I can't predict what's going to happen with
clients. Convergence is probably coming, but where? I can't
pick a winner. One thing I can predict is conflict between
AOL and Microsoft. Whatever Microsoft's .NET turns out to
be, it will probably involve connecting the desktop to
servers. Unless AOL fights back, they will either be pushed
aside or turned into a pipe between Microsoft client and
server software. If Microsoft and AOL get into a client war,
the only thing sure to work on both will be browsing the
Web, meaning Web-based applications will be the only kind
that work everywhere.

How will it all play out? I don't know. And you don't have to
know if you bet on Web-based applications. No one can
break that without breaking browsing. The Web may not be
the only way to deliver software, but it's one that works now
and will continue to work for a long time. Web-based
applications are cheap to develop, and easy for even the
smallest startup to deliver. They're a lot of work, and of a
particularly stressful kind, but that only makes the odds
better for startups.
Why Not?

E. B. White was amused to learn from a farmer friend that

many electrified fences don't have any current running
through them. The cows apparently learn to stay away from
them, and after that you don't need the current. "Rise up,
cows!" he wrote, "Take your liberty while despots snore!"

If you're a hacker who has thought of one day starting a

startup, there are probably two things keeping you from
doing it. One is that you don't know anything about
business. The other is that you're afraid of competition.
Neither of these fences have any current in them.

There are only two things you have to know about business:
build something users love, and make more than you spend.
If you get these two right, you'll be ahead of most startups.
You can figure out the rest as you go.

You may not at first make more than you spend, but as long
as the gap is closing fast enough you'll be ok. If you start
out underfunded, it will at least encourage a habit of
frugality. The less you spend, the easier it is to make more
than you spend. Fortunately, it can be very cheap to launch
a Web-based application. We launched on under $10,000,
and it would be even cheaper today. We had to spend
thousands on a server, and thousands more to get SSL.
(The only company selling SSL software at the time was
Netscape.) Now you can rent a much more powerful server,
with SSL included, for less than we paid for bandwidth
alone. You could launch a Web-based application now for
less than the cost of a fancy office chair.

As for building something users love, here are some general

tips. Start by making something clean and simple that you
would want to use yourself. Get a version 1.0 out fast, then
continue to improve the software, listening closely to the
users as you do. The customer is always right, but different
customers are right about different things; the least
sophisticated users show you what you need to simplify and
clarify, and the most sophisticated tell you what features
you need to add. The best thing software can be is easy, but
the way to do this is to get the defaults right, not to limit
users' choices. Don't get complacent if your competitors'
software is lame; the standard to compare your software to
is what it could be, not what your current competitors
happen to have. Use your software yourself, all the time.
Viaweb was supposed to be an online store builder, but we
used it to make our own site too. Don't listen to marketing
people or designers or product managers just because of
their job titles. If they have good ideas, use them, but it's
up to you to decide; software has to be designed by hackers
who understand design, not designers who know a little
about software. If you can't design software as well as
implement it, don't start a startup.

Now let's talk about competition. What you're afraid of is

not presumably groups of hackers like you, but actual
companies, with offices and business plans and salesmen
and so on, right? Well, they are more afraid of you than you
are of them, and they're right. It's a lot easier for a couple
of hackers to figure out how to rent office space or hire
sales people than it is for a company of any size to get
software written. I've been on both sides, and I know. When
Viaweb was bought by Yahoo, I suddenly found myself
working for a big company, and it was like trying to run
through waist-deep water.

I don't mean to disparage Yahoo. They had some good

hackers, and the top management were real butt-kickers.
For a big company, they were exceptional. But they were still
only about a tenth as productive as a small startup. No big
company can do much better than that. What's scary about
Microsoft is that a company so big can develop software at
all. They're like a mountain that can walk.

Don't be intimidated. You can do as much that Microsoft

can't as they can do that you can't. And no one can stop
you. You don't have to ask anyone's permission to develop
Web-based applications. You don't have to do licensing
deals, or get shelf space in retail stores, or grovel to have
your application bundled with the OS. You can deliver
software right to the browser, and no one can get between
you and potential users without preventing them from
browsing the Web.

You may not believe it, but I promise you, Microsoft is

scared of you. The complacent middle managers may not be,
but Bill is, because he was you once, back in 1975, the last
time a new way of delivering software appeared.

Notes

[1] Realizing that much of the money is in the services,

companies building lightweight clients have usually tried to
combine the hardware with an online service. This approach
has not worked well, partly because you need two different
kinds of companies to build consumer electronics and to run
an online service, and partly because users hate the idea.
Giving away the razor and making money on the blades
may work for Gillette, but a razor is much smaller
commitment than a Web terminal. Cell phone handset
makers are satisfied to sell hardware without trying to
capture the service revenue as well. That should probably be
the model for Internet clients too. If someone just sold a
nice-looking little box with a Web browser that you could use
to connect through any ISP, every technophobe in the
country would buy one.

[2] Security always depends more on not screwing up than

any design decision, but the nature of server-based software
will make developers pay more attention to not screwing up.
Compromising a server could cause such damage that ASPs
(that want to stay in business) are likely to be careful about
security.
[3] In 1995, when we started Viaweb, Java applets were
supposed to be the technology everyone was going to use to
develop server-based applications. Applets seemed to us an
old-fashioned idea. Download programs to run on the client?
Simpler just to go all the way and run the programs on the
server. We wasted little time on applets, but countless other
startups must have been lured into this tar pit. Few can
have escaped alive, or Microsoft could not have gotten away
with dropping Java in the most recent version of Explorer.

[4] This point is due to Trevor Blackwell, who adds "the cost
of writing software goes up more than linearly with its size.
Perhaps this is mainly due to fixing old bugs, and the cost
can be more linear if all bugs are found quickly."

[5] The hardest kind of bug to find may be a variant of

compound bug where one bug happens to compensate for
another. When you fix one bug, the other becomes visible.
But it will seem as if the fix is at fault, since that was the
last thing you changed.

[6] Within Viaweb we once had a contest to describe the

worst thing about our software. Two customer support
people tied for first prize with entries I still shiver to recall.
We fixed both problems immediately.

[7] Robert Morris wrote the ordering system, which shoppers

used to place orders. Trevor Blackwell wrote the image
generator and the manager, which merchants used to
retrieve orders, view statistics, and configure domain names
etc. I wrote the editor, which merchants used to build their
sites. The ordering system and image generator were written
in C and C++, the manager mostly in Perl, and the editor in
Lisp.

[8] Price discrimination is so pervasive (how often have you

heard a retailer claim that their buying power meant lower
prices for you?) that I was surprised to find it was outlawed
in the U.S. by the Robinson-Patman Act of 1936. This law
does not appear to be vigorously enforced.

[9] In No Logo, Naomi Klein says that clothing brands

favored by "urban youth" do not try too hard to prevent
shoplifting because in their target market the shoplifters are
also the fashion leaders.

[10] Companies often wonder what to outsource and what

not to. One possible answer: outsource any job that's not
directly exposed to competitive pressure, because
outsourcing it will thereby expose it to competitive pressure.

[11] The two guys were Dan Bricklin and Bob Frankston.
Dan wrote a prototype in Basic in a couple days, then over
the course of the next year they worked together (mostly at
night) to make a more powerful version written in 6502
machine language. Dan was at Harvard Business School at
the time and Bob nominally had a day job writing software.
"There was no great risk in doing a business," Bob wrote, "If
it failed it failed. No big deal."
[12] It's not quite as easy as I make it sound. It took a
painfully long time for word of mouth to get going, and we
did not start to get a lot of press coverage until we hired a
PR firm (admittedly the best in the business) for $16,000
per month. However, it was true that the only significant
channel was our own Web site.

[13] If the Mac was so great, why did it lose? Cost, again.
Microsoft concentrated on the software business, and
unleashed a swarm of cheap component suppliers on Apple
hardware. It did not help, either, that suits took over during
a critical period.

[14] One thing that would help Web-based applications, and

help keep the next generation of software from being
overshadowed by Microsoft, would be a good open-source
browser. Mozilla is open-source but seems to have suffered
from having been corporate software for so long. A small,
fast browser that was actively maintained would be a great
thing in itself, and would probably also encourage companies
to build little Web appliances.

Among other things, a proper open-source browser would

cause HTTP and HTML to continue to evolve (as e.g. Perl
has). It would help Web-based applications greatly to be
able to distinguish between selecting a link and following it;
all you'd need to do this would be a trivial enhancement of
HTTP, to allow multiple urls in a request. Cascading menus
would also be good.

If you want to change the world, write a new Mosaic. Think

it's too late? In 1998 a lot of people thought it was too late
to launch a new search engine, but Google proved them
wrong. There is always room for something new if the
current options suck enough. Make sure it works on all the
free OSes first-- new things start with their users.

[15] Trevor Blackwell, who probably knows more about this

from personal experience than anyone, writes:

"I would go farther in saying that because server-based

software is so hard on the programmers, it causes a
fundamental economic shift away from large companies. It
requires the kind of intensity and dedication from
programmers that they will only be willing to provide when
it's their own company. Software companies can hire skilled
people to work in a not-too-demanding environment, and
can hire unskilled people to endure hardships, but they can't
hire highly skilled people to bust their asses. Since capital is
no longer needed, big companies have little to bring to the
table."

[16] In the original version of this essay, I advised avoiding

Javascript. That was a good plan in 2001, but Javascript now
works.

Thanks to Sarah Harlin, Trevor Blackwell, Robert Morris,

Eric Raymond, Ken Anderson, and Dan Giffin for reading
drafts of this paper; to Dan Bricklin and Bob Frankston for
information about VisiCalc; and again to Ken Anderson for
inviting me to speak at BBN.

You'll find this essay and 14 others in Hackers & Painters.

Some Technical Details Japanese Translation

Microsoft finally agrees Gates Email

August 2007

(This is a talk I gave at the last Y Combinator dinner of the

summer. Usually we don't have a speaker at the last dinner;
it's more of a party. But it seemed worth spoiling the
atmosphere if I could save some of the startups from
preventable deaths. So at the last minute I cooked up this
rather grim talk. I didn't mean this as an essay; I wrote it
down because I only had two hours before dinner and think
fastest while writing.)

A couple days ago I told a reporter that we expected about

a third of the companies we funded to succeed. Actually I
was being conservative. I'm hoping it might be as much as a
half. Wouldn't it be amazing if we could achieve a 50%
success rate?

Another way of saying that is that half of you are going to

die. Phrased that way, it doesn't sound good at all. In fact,
it's kind of weird when you think about it, because our
definition of success is that the founders get rich. If half the
startups we fund succeed, then half of you are going to get
rich and the other half are going to get nothing.

If you can just avoid dying, you get rich. That sounds like a
joke, but it's actually a pretty good description of what
happens in a typical startup. It certainly describes what
happened in Viaweb. We avoided dying till we got rich.

It was really close, too. When we were visiting Yahoo to talk

about being acquired, we had to interrupt everything and
borrow one of their conference rooms to talk down an
investor who was about to back out of a new funding round
we needed to stay alive. So even in the middle of getting
rich we were fighting off the grim reaper.

You may have heard that quote about luck consisting of

opportunity meeting preparation. You've now done the
preparation. The work you've done so far has, in effect, put
you in a position to get lucky: you can now get rich by not
letting your company die. That's more than most people
have. So let's talk about how not to die.

We've done this five times now, and we've seen a bunch of
startups die. About 10 of them so far. We don't know
exactly what happens when they die, because they generally
don't die loudly and heroically. Mostly they crawl off
somewhere and die.

For us the main indication of impending doom is when we

don't hear from you. When we haven't heard from, or about,
a startup for a couple months, that's a bad sign. If we send
them an email asking what's up, and they don't reply, that's
a really bad sign. So far that is a 100% accurate predictor of
death.

Whereas if a startup regularly does new deals and releases

and either sends us mail or shows up at YC events, they're
probably going to live.

I realize this will sound naive, but maybe the linkage works
in both directions. Maybe if you can arrange that we keep
hearing from you, you won't die.

That may not be so naive as it sounds. You've probably

noticed that having dinners every Tuesday with us and the
other founders causes you to get more done than you would
otherwise, because every dinner is a mini Demo Day. Every
dinner is a kind of a deadline. So the mere constraint of
staying in regular contact with us will push you to make
things happen, because otherwise you'll be embarrassed to
tell us that you haven't done anything new since the last
time we talked.

If this works, it would be an amazing hack. It would be

pretty cool if merely by staying in regular contact with us
you could get rich. It sounds crazy, but there's a good
chance that would work.

A variant is to stay in touch with other YC-funded startups.

There is now a whole neighborhood of them in San
Franscisco. If you move there, the peer pressure that made
you work harder all summer will continue to operate.

When startups die, the official cause of death is always

either running out of money or a critical founder bailing.
Often the two occur simultaneously. But I think the
underlying cause is usually that they've become demoralized.
You rarely hear of a startup that's working around the clock
doing deals and pumping out new features, and dies
because they can't pay their bills and their ISP unplugs their
server.

Startups rarely die in mid keystroke. So keep typing!

If so many startups get demoralized and fail when merely by

hanging on they could get rich, you have to assume that
running a startup can be demoralizing. That is certainly true.
I've been there, and that's why I've never done another
startup. The low points in a startup are just unbelievably
low. I bet even Google had moments where things seemed
hopeless.

Knowing that should help. If you know it's going to feel

terrible sometimes, then when it feels terrible you won't
think "ouch, this feels terrible, I give up." It feels that way
for everyone. And if you just hang on, things will probably
get better. The metaphor people use to describe the way a
startup feels is at least a roller coaster and not drowning.
You don't just sink and sink; there are ups after the downs.

Another feeling that seems alarming but is in fact normal in

a startup is the feeling that what you're doing isn't working.
The reason you can expect to feel this is that what you do
probably won't work. Startups almost never get it right the
first time. Much more commonly you launch something, and
no one cares. Don't assume when this happens that you've
failed. That's normal for startups. But don't sit around doing
nothing. Iterate.

I like Paul Buchheit's suggestion of trying to make

something that at least someone really loves. As long as
you've made something that a few users are ecstatic about,
you're on the right track. It will be good for your morale to
have even a handful of users who really love you, and
startups run on morale. But also it will tell you what to
focus on. What is it about you that they love? Can you do
more of that? Where can you find more people who love
that sort of thing? As long as you have some core of users
who love you, all you have to do is expand it. It may take a
while, but as long as you keep plugging away, you'll win in
the end. Both Blogger and Delicious did that. Both took
years to succeed. But both began with a core of fanatically
devoted users, and all Evan and Joshua had to do was grow
that core incrementally. Wufoo is on the same trajectory
now.

So when you release something and it seems like no one

cares, look more closely. Are there zero users who really
love you, or is there at least some little group that does?
It's quite possible there will be zero. In that case, tweak
your product and try again. Every one of you is working on
a space that contains at least one winning permutation
somewhere in it. If you just keep trying, you'll find it.

Let me mention some things not to do. The number one

thing not to do is other things. If you find yourself saying a
sentence that ends with "but we're going to keep working on
the startup," you are in big trouble. Bob's going to grad
school, but we're going to keep working on the startup.
We're moving back to Minnesota, but we're going to keep
working on the startup. We're taking on some consulting
projects, but we're going to keep working on the startup.
You may as well just translate these to "we're giving up on
the startup, but we're not willing to admit that to
ourselves," because that's what it means most of the time. A
startup is so hard that working on it can't be preceded by
"but."

In particular, don't go to graduate school, and don't start

other projects. Distraction is fatal to startups. Going to (or
back to) school is a huge predictor of death because in
addition to the distraction it gives you something to say
you're doing. If you're only doing a startup, then if the
startup fails, you fail. If you're in grad school and your
startup fails, you can say later "Oh yeah, we had this
startup on the side when I was in grad school, but it didn't
go anywhere."

You can't use euphemisms like "didn't go anywhere" for

something that's your only occupation. People won't let you.

One of the most interesting things we've discovered from

working on Y Combinator is that founders are more
motivated by the fear of looking bad than by the hope of
getting millions of dollars. So if you want to get millions of
dollars, put yourself in a position where failure will be public
and humiliating.

When we first met the founders of Octopart, they seemed

very smart, but not a great bet to succeed, because they
didn't seem especially committed. One of the two founders
was still in grad school. It was the usual story: he'd drop out
if it looked like the startup was taking off. Since then he has
not only dropped out of grad school, but appeared full length
in Newsweek with the word "Billionaire" printed across his
chest. He just cannot fail now. Everyone he knows has seen
that picture. Girls who dissed him in high school have seen
it. His mom probably has it on the fridge. It would be
unthinkably humiliating to fail now. At this point he is
committed to fight to the death.

I wish every startup we funded could appear in a Newsweek

article describing them as the next generation of billionaires,
because then none of them would be able to give up. The
success rate would be 90%. I'm not kidding.

When we first knew the Octoparts they were lighthearted,

cheery guys. Now when we talk to them they seem grimly
determined. The electronic parts distributors are trying to
squash them to keep their monopoly pricing. (If it strikes
you as odd that people still order electronic parts out of
thick paper catalogs in 2007, there's a reason for that. The
distributors want to prevent the transparency that comes
from having prices online.) I feel kind of bad that we've
transformed these guys from lighthearted to grimly
determined. But that comes with the territory. If a startup
succeeds, you get millions of dollars, and you don't get that
kind of money just by asking for it. You have to assume it
takes some amount of pain.

And however tough things get for the Octoparts, I predict

they'll succeed. They may have to morph themselves into
something totally different, but they won't just crawl off and
die. They're smart; they're working in a promising field; and
they just cannot give up.

All of you guys already have the first two. You're all smart
and working on promising ideas. Whether you end up among
the living or the dead comes down to the third ingredient,
not giving up.

So I'll tell you now: bad shit is coming. It always is in a

startup. The odds of getting from launch to liquidity without
some kind of disaster happening are one in a thousand. So
don't get demoralized. When the disaster strikes, just say to
yourself, ok, this was what Paul was talking about. What did
he say to do? Oh, yeah. Don't give up.

Comment on this essay.

Japanese Translation
August 2005

(This essay is derived from a talk at Oscon 2005.)

Lately companies have been paying more attention to open

source. Ten years ago there seemed a real danger Microsoft
would extend its monopoly to servers. It seems safe to say
now that open source has prevented that. A recent survey
found 52% of companies are replacing Windows servers with
Linux servers. [1]

More significant, I think, is which 52% they are. At this

point, anyone proposing to run Windows on servers should
be prepared to explain what they know about servers that
Google, Yahoo, and Amazon don't.

But the biggest thing business has to learn from open source
is not about Linux or Firefox, but about the forces that
produced them. Ultimately these will affect a lot more than
what software you use.

We may be able to get a fix on these underlying forces by

triangulating from open source and blogging. As you've
probably noticed, they have a lot in common.

Like open source, blogging is something people do

themselves, for free, because they enjoy it. Like open source
hackers, bloggers compete with people working for money,
and often win. The method of ensuring quality is also the
same: Darwinian. Companies ensure quality through rules to
prevent employees from screwing up. But you don't need
that when the audience can communicate with one another.
People just produce whatever they want; the good stuff
spreads, and the bad gets ignored. And in both cases,
feedback from the audience improves the best work.

Another thing blogging and open source have in common is

the Web. People have always been willing to do great work
for free, but before the Web it was harder to reach an
audience or collaborate on projects.

Amateurs

I think the most important of the new principles business

has to learn is that people work a lot harder on stuff they
like. Well, that's news to no one. So how can I claim
business has to learn it? When I say business doesn't know
this, I mean the structure of business doesn't reflect it.

Business still reflects an older model, exemplified by the

French word for working: travailler. It has an English cousin,
travail, and what it means is torture. [2]

This turns out not to be the last word on work, however. As

societies get richer, they learn something about work that's
a lot like what they learn about diet. We know now that the
healthiest diet is the one our peasant ancestors were forced
to eat because they were poor. Like rich food, idleness only
seems desirable when you don't get enough of it. I think we
were designed to work, just as we were designed to eat a
certain amount of fiber, and we feel bad if we don't.

There's a name for people who work for the love of it:
amateurs. The word now has such bad connotations that we
forget its etymology, though it's staring us in the face.
"Amateur" was originally rather a complimentary word. But
the thing to be in the twentieth century was professional,
which amateurs, by definition, are not.

That's why the business world was so surprised by one

lesson from open source: that people working for love often
surpass those working for money. Users don't switch from
Explorer to Firefox because they want to hack the source.
They switch because it's a better browser.

It's not that Microsoft isn't trying. They know controlling the
browser is one of the keys to retaining their monopoly. The
problem is the same they face in operating systems: they
can't pay people enough to build something better than a
group of inspired hackers will build for free.

I suspect professionalism was always overrated-- not just in

the literal sense of working for money, but also connotations
like formality and detachment. Inconceivable as it would
have seemed in, say, 1970, I think professionalism was
largely a fashion, driven by conditions that happened to
exist in the twentieth century.

One of the most powerful of those was the existence of

"channels." Revealingly, the same term was used for both
products and information: there were distribution channels,
and TV and radio channels.

It was the narrowness of such channels that made

professionals seem so superior to amateurs. There were only
a few jobs as professional journalists, for example, so
competition ensured the average journalist was fairly good.
Whereas anyone can express opinions about current events
in a bar. And so the average person expressing his opinions
in a bar sounds like an idiot compared to a journalist writing
about the subject.

On the Web, the barrier for publishing your ideas is even

lower. You don't have to buy a drink, and they even let kids
in. Millions of people are publishing online, and the average
level of what they're writing, as you might expect, is not
very good. This has led some in the media to conclude that
blogs don't present much of a threat-- that blogs are just a
fad.

Actually, the fad is the word "blog," at least the way the
print media now use it. What they mean by "blogger" is not
someone who publishes in a weblog format, but anyone who
publishes online. That's going to become a problem as the
Web becomes the default medium for publication. So I'd like
to suggest an alternative word for someone who publishes
online. How about "writer?"

Those in the print media who dismiss the writing online

because of its low average quality are missing an important
point: no one reads the average blog. In the old world of
channels, it meant something to talk about average quality,
because that's what you were getting whether you liked it or
not. But now you can read any writer you want. So the
average quality of writing online isn't what the print media
are competing against. They're competing against the best
writing online. And, like Microsoft, they're losing.

I know that from my own experience as a reader. Though

most print publications are online, I probably read two or
three articles on individual people's sites for every one I
read on the site of a newspaper or magazine.

And when I read, say, New York Times stories, I never

reach them through the Times front page. Most I find
through aggregators like Google News or Slashdot or
Delicious. Aggregators show how much better you can do
than the channel. The New York Times front page is a list of
articles written by people who work for the New York Times.
Delicious is a list of articles that are interesting. And it's only
now that you can see the two side by side that you notice
how little overlap there is.

Most articles in the print media are boring. For example, the
president notices that a majority of voters now think
invading Iraq was a mistake, so he makes an address to the
nation to drum up support. Where is the man bites dog in
that? I didn't hear the speech, but I could probably tell you
exactly what he said. A speech like that is, in the most
literal sense, not news: there is nothing new in it. [3]

Nor is there anything new, except the names and places, in

most "news" about things going wrong. A child is abducted;
there's a tornado; a ferry sinks; someone gets bitten by a
shark; a small plane crashes. And what do you learn about
the world from these stories? Absolutely nothing. They're
outlying data points; what makes them gripping also makes
them irrelevant.

As in software, when professionals produce such crap, it's

not surprising if amateurs can do better. Live by the
channel, die by the channel: if you depend on an oligopoly,
you sink into bad habits that are hard to overcome when
you suddenly get competition. [4]

Workplaces

Another thing blogs and open source software have in

common is that they're often made by people working at
home. That may not seem surprising. But it should be. It's
the architectural equivalent of a home-made aircraft
shooting down an F-18. Companies spend millions to build
office buildings for a single purpose: to be a place to work.
And yet people working in their own homes, which aren't
even designed to be workplaces, end up being more
productive.

This proves something a lot of us have suspected. The

average office is a miserable place to get work done. And a
lot of what makes offices bad are the very qualities we
associate with professionalism. The sterility of offices is
supposed to suggest efficiency. But suggesting efficiency is a
different thing from actually being efficient.

The atmosphere of the average workplace is to productivity

what flames painted on the side of a car are to speed. And
it's not just the way offices look that's bleak. The way
people act is just as bad.

Things are different in a startup. Often as not a startup

begins in an apartment. Instead of matching beige cubicles
they have an assortment of furniture they bought used. They
work odd hours, wearing the most casual of clothing. They
look at whatever they want online without worrying whether
it's "work safe." The cheery, bland language of the office is
replaced by wicked humor. And you know what? The
company at this stage is probably the most productive it's
ever going to be.

Maybe it's not a coincidence. Maybe some aspects of

professionalism are actually a net lose.

To me the most demoralizing aspect of the traditional office

is that you're supposed to be there at certain times. There
are usually a few people in a company who really have to,
but the reason most employees work fixed hours is that the
company can't measure their productivity.

The basic idea behind office hours is that if you can't make
people work, you can at least prevent them from having fun.
If employees have to be in the building a certain number of
hours a day, and are forbidden to do non-work things while
there, then they must be working. In theory. In practice
they spend a lot of their time in a no-man's land, where
they're neither working nor having fun.

If you could measure how much work people did, many

companies wouldn't need any fixed workday. You could just
say: this is what you have to do. Do it whenever you like,
wherever you like. If your work requires you to talk to other
people in the company, then you may need to be here a
certain amount. Otherwise we don't care.

That may seem utopian, but it's what we told people who
came to work for our company. There were no fixed office
hours. I never showed up before 11 in the morning. But we
weren't saying this to be benevolent. We were saying: if you
work here we expect you to get a lot done. Don't try to fool
us just by being here a lot.

The problem with the facetime model is not just that it's
demoralizing, but that the people pretending to work
interrupt the ones actually working. I'm convinced the
facetime model is the main reason large organizations have
so many meetings. Per capita, large organizations
accomplish very little. And yet all those people have to be
on site at least eight hours a day. When so much time goes
in one end and so little achievement comes out the other,
something has to give. And meetings are the main
mechanism for taking up the slack.

For one year I worked at a regular nine to five job, and I

remember well the strange, cozy feeling that comes over
one during meetings. I was very aware, because of the
novelty, that I was being paid for programming. It seemed
just amazing, as if there was a machine on my desk that
spat out a dollar bill every two minutes no matter what I
did. Even while I was in the bathroom! But because the
imaginary machine was always running, I felt I always ought
to be working. And so meetings felt wonderfully relaxing.
They counted as work, just like programming, but they were
so much easier. All you had to do was sit and look attentive.

Meetings are like an opiate with a network effect. So is

email, on a smaller scale. And in addition to the direct cost
in time, there's the cost in fragmentation-- breaking people's
day up into bits too small to be useful.

You can see how dependent you've become on something by

removing it suddenly. So for big companies I propose the
following experiment. Set aside one day where meetings are
forbidden-- where everyone has to sit at their desk all day
and work without interruption on things they can do without
talking to anyone else. Some amount of communication is
necessary in most jobs, but I'm sure many employees could
find eight hours worth of stuff they could do by themselves.
You could call it "Work Day."

The other problem with pretend work is that it often looks

better than real work. When I'm writing or hacking I spend
as much time just thinking as I do actually typing. Half the
time I'm sitting drinking a cup of tea, or walking around the
neighborhood. This is a critical phase-- this is where ideas
come from-- and yet I'd feel guilty doing this in most
offices, with everyone else looking busy.

It's hard to see how bad some practice is till you have
something to compare it to. And that's one reason open
source, and even blogging in some cases, are so important.
They show us what real work looks like.

We're funding eight new startups at the moment. A friend

asked what they were doing for office space, and seemed
surprised when I said we expected them to work out of
whatever apartments they found to live in. But we didn't
propose that to save money. We did it because we want
their software to be good. Working in crappy informal spaces
is one of the things startups do right without realizing it. As
soon as you get into an office, work and life start to drift
apart.

That is one of the key tenets of professionalism. Work and

life are supposed to be separate. But that part, I'm
convinced, is a mistake.
Bottom-Up

The third big lesson we can learn from open source and
blogging is that ideas can bubble up from the bottom,
instead of flowing down from the top. Open source and
blogging both work bottom-up: people make what they
want, and the best stuff prevails.

Does this sound familiar? It's the principle of a market

economy. Ironically, though open source and blogs are done
for free, those worlds resemble market economies, while
most companies, for all their talk about the value of free
markets, are run internally like communist states.

There are two forces that together steer design: ideas about
what to do next, and the enforcement of quality. In the
channel era, both flowed down from the top. For example,
newspaper editors assigned stories to reporters, then edited
what they wrote.

Open source and blogging show us things don't have to work

that way. Ideas and even the enforcement of quality can
flow bottom-up. And in both cases the results are not
merely acceptable, but better. For example, open source
software is more reliable precisely because it's open source;
anyone can find mistakes.

The same happens with writing. As we got close to

publication, I found I was very worried about the essays in
Hackers & Painters that hadn't been online. Once an essay
has had a couple thousand page views I feel reasonably
confident about it. But these had had literally orders of
magnitude less scrutiny. It felt like releasing software
without testing it.

That's what all publishing used to be like. If you got ten

people to read a manuscript, you were lucky. But I'd
become so used to publishing online that the old method
now seemed alarmingly unreliable, like navigating by dead
reckoning once you'd gotten used to a GPS.

The other thing I like about publishing online is that you can
write what you want and publish when you want. Earlier this
year I wrote something that seemed suitable for a magazine,
so I sent it to an editor I know. As I was waiting to hear
back, I found to my surprise that I was hoping they'd reject
it. Then I could put it online right away. If they accepted it,
it wouldn't be read by anyone for months, and in the
meantime I'd have to fight word-by-word to save it from
being mangled by some twenty five year old copy editor. [5]

Many employees would like to build great things for the

companies they work for, but more often than not
management won't let them. How many of us have heard
stories of employees going to management and saying,
please let us build this thing to make money for you-- and
the company saying no? The most famous example is
probably Steve Wozniak, who originally wanted to build
microcomputers for his then-employer, HP. And they turned
him down. On the blunderometer, this episode ranks with
IBM accepting a non-exclusive license for DOS. But I think
this happens all the time. We just don't hear about it
usually, because to prove yourself right you have to quit
and start your own company, like Wozniak did.

Startups

So these, I think, are the three big lessons open source and
blogging have to teach business: (1) that people work
harder on stuff they like, (2) that the standard office
environment is very unproductive, and (3) that bottom-up
often works better than top-down.

I can imagine managers at this point saying: what is this

guy talking about? What good does it do me to know that
my programmers would be more productive working at home
on their own projects? I need their asses in here working on
version 3.2 of our software, or we're never going to make
the release date.

And it's true, the benefit that specific manager could derive
from the forces I've described is near zero. When I say
business can learn from open source, I don't mean any
specific business can. I mean business can learn about new
conditions the same way a gene pool does. I'm not claiming
companies can get smarter, just that dumb ones will die.

So what will business look like when it has assimilated the

lessons of open source and blogging? I think the big obstacle
preventing us from seeing the future of business is the
assumption that people working for you have to be
employees. But think about what's going on underneath: the
company has some money, and they pay it to the employee
in the hope that he'll make something worth more than they
paid him. Well, there are other ways to arrange that
relationship. Instead of paying the guy money as a salary,
why not give it to him as investment? Then instead of
coming to your office to work on your projects, he can work
wherever he wants on projects of his own.

Because few of us know any alternative, we have no idea

how much better we could do than the traditional employer-
employee relationship. Such customs evolve with glacial
slowness. Our employer-employee relationship still retains a
big chunk of master-servant DNA. [6]

I dislike being on either end of it. I'll work my ass off for a
customer, but I resent being told what to do by a boss. And
being a boss is also horribly frustrating; half the time it's
easier just to do stuff yourself than to get someone else to
do it for you. I'd rather do almost anything than give or
receive a performance review.

On top of its unpromising origins, employment has

accumulated a lot of cruft over the years. The list of what
you can't ask in job interviews is now so long that for
convenience I assume it's infinite. Within the office you now
have to walk on eggshells lest anyone say or do something
that makes the company prey to a lawsuit. And God help
you if you fire anyone.

Nothing shows more clearly that employment is not an

ordinary economic relationship than companies being sued
for firing people. In any purely economic relationship you're
free to do what you want. If you want to stop buying steel
pipe from one supplier and start buying it from another, you
don't have to explain why. No one can accuse you of
unjustly switching pipe suppliers. Justice implies some kind
of paternal obligation that isn't there in transactions between
equals.

Most of the legal restrictions on employers are intended to

protect employees. But you can't have action without an
equal and opposite reaction. You can't expect employers to
have some kind of paternal responsibility toward employees
without putting employees in the position of children. And
that seems a bad road to go down.

Next time you're in a moderately large city, drop by the

main post office and watch the body language of the people
working there. They have the same sullen resentment as
children made to do something they don't want to. Their
union has exacted pay increases and work restrictions that
would have been the envy of previous generations of postal
workers, and yet they don't seem any happier for it. It's
demoralizing to be on the receiving end of a paternalistic
relationship, no matter how cozy the terms. Just ask any
teenager.

I see the disadvantages of the employer-employee

relationship because I've been on both sides of a better one:
the investor-founder relationship. I wouldn't claim it's
painless. When I was running a startup, the thought of our
investors used to keep me up at night. And now that I'm an
investor, the thought of our startups keeps me up at night.
All the pain of whatever problem you're trying to solve is
still there. But the pain hurts less when it isn't mixed with
resentment.

I had the misfortune to participate in what amounted to a

controlled experiment to prove that. After Yahoo bought our
startup I went to work for them. I was doing exactly the
same work, except with bosses. And to my horror I started
acting like a child. The situation pushed buttons I'd forgotten
I had.

The big advantage of investment over employment, as the

examples of open source and blogging suggest, is that
people working on projects of their own are enormously
more productive. And a startup is a project of one's own in
two senses, both of them important: it's creatively one's
own, and also economically ones's own.

Google is a rare example of a big company in tune with the

forces I've described. They've tried hard to make their
offices less sterile than the usual cube farm. They give
employees who do great work large grants of stock to
simulate the rewards of a startup. They even let hackers
spend 20% of their time on their own projects.
Why not let people spend 100% of their time on their own
projects, and instead of trying to approximate the value of
what they create, give them the actual market value?
Impossible? That is in fact what venture capitalists do.

So am I claiming that no one is going to be an employee

anymore-- that everyone should go and start a startup? Of
course not. But more people could do it than do it now. At
the moment, even the smartest students leave school
thinking they have to get a job. Actually what they need to
do is make something valuable. A job is one way to do that,
but the more ambitious ones will ordinarily be better off
taking money from an investor than an employer.

Hackers tend to think business is for MBAs. But business

administration is not what you're doing in a startup. What
you're doing is business creation. And the first phase of that
is mostly product creation-- that is, hacking. That's the hard
part. It's a lot harder to create something people love than
to take something people love and figure out how to make
money from it.

Another thing that keeps people away from starting startups

is the risk. Someone with kids and a mortgage should think
twice before doing it. But most young hackers have neither.

And as the example of open source and blogging suggests,

you'll enjoy it more, even if you fail. You'll be working on
your own thing, instead of going to some office and doing
what you're told. There may be more pain in your own
company, but it won't hurt as much.

That may be the greatest effect, in the long run, of the

forces underlying open source and blogging: finally ditching
the old paternalistic employer-employee relationship, and
replacing it with a purely economic one, between equals.

Notes

[1] Survey by Forrester Research reported in the cover story

of Business Week, 31 Jan 2005. Apparently someone
believed you have to replace the actual server in order to
switch the operating system.

[2] It derives from the late Latin tripalium, a torture device

so called because it consisted of three stakes. I don't know
how the stakes were used. "Travel" has the same root.

[3] It would be much bigger news, in that sense, if the

president faced unscripted questions by giving a press
conference.

[4] One measure of the incompetence of newspapers is that

so many still make you register to read stories. I have yet
to find a blog that tried that.

[5] They accepted the article, but I took so long to send

them the final version that by the time I did the section of
the magazine they'd accepted it for had disappeared in a
reorganization.

[6] The word "boss" is derived from the Dutch baas,

meaning "master."

Thanks to Sarah Harlin, Jessica Livingston, and Robert

Morris for reading drafts of this.

French Translation Russian Translation

Japanese Translation
September 2004

(This essay is derived from an invited talk at ICFP 2004.)

I had a front row seat for the Internet Bubble, because I

worked at Yahoo during 1998 and 1999. One day, when the
stock was trading around $200, I sat down and calculated
what I thought the price should be. The answer I got was
$12. I went to the next cubicle and told my friend Trevor.
"Twelve!" he said. He tried to sound indignant, but he didn't
quite manage it. He knew as well as I did that our valuation
was crazy.

Yahoo was a special case. It was not just our price to

earnings ratio that was bogus. Half our earnings were too.
Not in the Enron way, of course. The finance guys seemed
scrupulous about reporting earnings. What made our
earnings bogus was that Yahoo was, in effect, the center of
a pyramid scheme. Investors looked at Yahoo's earnings and
said to themselves, here is proof that Internet companies
can make money. So they invested in new startups that
promised to be the next Yahoo. And as soon as these
startups got the money, what did they do with it? Buy
millions of dollars worth of advertising on Yahoo to promote
their brand. Result: a capital investment in a startup this
quarter shows up as Yahoo earnings next quarter—
stimulating another round of investments in startups.

As in a pyramid scheme, what seemed to be the returns of

this system were simply the latest round of investments in
it. What made it not a pyramid scheme was that it was
unintentional. At least, I think it was. The venture capital
business is pretty incestuous, and there were presumably
people in a position, if not to create this situation, to realize
what was happening and to milk it.

A year later the game was up. Starting in January 2000,

Yahoo's stock price began to crash, ultimately losing 95% of
its value.

Notice, though, that even with all the fat trimmed off its
market cap, Yahoo was still worth a lot. Even at the
morning-after valuations of March and April 2001, the
people at Yahoo had managed to create a company worth
about $8 billion in just six years.

The fact is, despite all the nonsense we heard during the
Bubble about the "new economy," there was a core of truth.
You need that to get a really big bubble: you need to have
something solid at the center, so that even smart people are
sucked in. (Isaac Newton and Jonathan Swift both lost
money in the South Sea Bubble of 1720.)

Now the pendulum has swung the other way. Now anything
that became fashionable during the Bubble is ipso facto
unfashionable. But that's a mistake—an even bigger mistake
than believing what everyone was saying in 1999. Over the
long term, what the Bubble got right will be more important
than what it got wrong.

1. Retail VC

After the excesses of the Bubble, it's now considered

dubious to take companies public before they have earnings.
But there is nothing intrinsically wrong with that idea.
Taking a company public at an early stage is simply retail
VC: instead of going to venture capital firms for the last
round of funding, you go to the public markets.

By the end of the Bubble, companies going public with no

earnings were being derided as "concept stocks," as if it
were inherently stupid to invest in them. But investing in
concepts isn't stupid; it's what VCs do, and the best of them
are far from stupid.

The stock of a company that doesn't yet have earnings is

worth something. It may take a while for the market to
learn how to value such companies, just as it had to learn to
value common stocks in the early 20th century. But markets
are good at solving that kind of problem. I wouldn't be
surprised if the market ultimately did a better job than VCs
do now.

Going public early will not be the right plan for every
company. And it can of course be disruptive—by distracting
the management, or by making the early employees
suddenly rich. But just as the market will learn how to value
startups, startups will learn how to minimize the damage of
going public.

2. The Internet

The Internet genuinely is a big deal. That was one reason

even smart people were fooled by the Bubble. Obviously it
was going to have a huge effect. Enough of an effect to
triple the value of Nasdaq companies in two years? No, as it
turned out. But it was hard to say for certain at the time.
[1]

The same thing happened during the Mississippi and South

Sea Bubbles. What drove them was the invention of
organized public finance (the South Sea Company, despite
its name, was really a competitor of the Bank of England).
And that did turn out to be a big deal, in the long run.

Recognizing an important trend turns out to be easier than

figuring out how to profit from it. The mistake investors
always seem to make is to take the trend too literally. Since
the Internet was the big new thing, investors supposed that
the more Internettish the company, the better. Hence such
parodies as Pets.Com.

In fact most of the money to be made from big trends is

made indirectly. It was not the railroads themselves that
made the most money during the railroad boom, but the
companies on either side, like Carnegie's steelworks, which
made the rails, and Standard Oil, which used railroads to get
oil to the East Coast, where it could be shipped to Europe.

I think the Internet will have great effects, and that what
we've seen so far is nothing compared to what's coming. But
most of the winners will only indirectly be Internet
companies; for every Google there will be ten JetBlues.

3. Choices

Why will the Internet have great effects? The general

argument is that new forms of communication always do.
They happen rarely (till industrial times there were just
speech, writing, and printing), but when they do, they
always cause a big splash.

The specific argument, or one of them, is the Internet gives

us more choices. In the "old" economy, the high cost of
presenting information to people meant they had only a
narrow range of options to choose from. The tiny, expensive
pipeline to consumers was tellingly named "the channel."
Control the channel and you could feed them what you
wanted, on your terms. And it was not just big corporations
that depended on this principle. So, in their way, did labor
unions, the traditional news media, and the art and literary
establishments. Winning depended not on doing good work,
but on gaining control of some bottleneck.

There are signs that this is changing. Google has over 82

million unique users a month and annual revenues of about
three billion dollars. [2] And yet have you ever seen a
Google ad? Something is going on here.

Admittedly, Google is an extreme case. It's very easy for

people to switch to a new search engine. It costs little effort
and no money to try a new one, and it's easy to see if the
results are better. And so Google doesn't have to advertise.
In a business like theirs, being the best is enough.

The exciting thing about the Internet is that it's shifting

everything in that direction. The hard part, if you want to
win by making the best stuff, is the beginning. Eventually
everyone will learn by word of mouth that you're the best,
but how do you survive to that point? And it is in this crucial
stage that the Internet has the most effect. First, the
Internet lets anyone find you at almost zero cost. Second, it
dramatically speeds up the rate at which reputation spreads
by word of mouth. Together these mean that in many fields
the rule will be: Build it, and they will come. Make
something great and put it online. That is a big change from
the recipe for winning in the past century.

4. Youth
The aspect of the Internet Bubble that the press seemed
most taken with was the youth of some of the startup
founders. This too is a trend that will last. There is a huge
standard deviation among 26 year olds. Some are fit only
for entry level jobs, but others are ready to rule the world if
they can find someone to handle the paperwork for them.

A 26 year old may not be very good at managing people or

dealing with the SEC. Those require experience. But those
are also commodities, which can be handed off to some
lieutenant. The most important quality in a CEO is his vision
for the company's future. What will they build next? And in
that department, there are 26 year olds who can compete
with anyone.

In 1970 a company president meant someone in his fifties,

at least. If he had technologists working for him, they were
treated like a racing stable: prized, but not powerful. But as
technology has grown more important, the power of nerds
has grown to reflect it. Now it's not enough for a CEO to
have someone smart he can ask about technical matters.
Increasingly, he has to be that person himself.

As always, business has clung to old forms. VCs still seem to

want to install a legitimate-looking talking head as the CEO.
But increasingly the founders of the company are the real
powers, and the grey-headed man installed by the VCs more
like a music group's manager than a general.

5. Informality

In New York, the Bubble had dramatic consequences: suits

went out of fashion. They made one seem old. So in 1998
powerful New York types were suddenly wearing open-
necked shirts and khakis and oval wire-rimmed glasses, just
like guys in Santa Clara.

The pendulum has swung back a bit, driven in part by a

panicked reaction by the clothing industry. But I'm betting
on the open-necked shirts. And this is not as frivolous a
question as it might seem. Clothes are important, as all
nerds can sense, though they may not realize it consciously.

If you're a nerd, you can understand how important clothes

are by asking yourself how you'd feel about a company that
made you wear a suit and tie to work. The idea sounds
horrible, doesn't it? In fact, horrible far out of proportion to
the mere discomfort of wearing such clothes. A company
that made programmers wear suits would have something
deeply wrong with it.

And what would be wrong would be that how one presented

oneself counted more than the quality of one's ideas. That's
the problem with formality. Dressing up is not so much bad
in itself. The problem is the receptor it binds to: dressing up
is inevitably a substitute for good ideas. It is no coincidence
that technically inept business types are known as "suits."

Nerds don't just happen to dress informally. They do it too

consistently. Consciously or not, they dress informally as a
prophylactic measure against stupidity.

6. Nerds

Clothing is only the most visible battleground in the war

against formality. Nerds tend to eschew formality of any
sort. They're not impressed by one's job title, for example,
or any of the other appurtenances of authority.

Indeed, that's practically the definition of a nerd. I found

myself talking recently to someone from Hollywood who was
planning a show about nerds. I thought it would be useful if
I explained what a nerd was. What I came up with was:
someone who doesn't expend any effort on marketing
himself.

A nerd, in other words, is someone who concentrates on

substance. So what's the connection between nerds and
technology? Roughly that you can't fool mother nature. In
technical matters, you have to get the right answers. If your
software miscalculates the path of a space probe, you can't
finesse your way out of trouble by saying that your code is
patriotic, or avant-garde, or any of the other dodges people
use in nontechnical fields.

And as technology becomes increasingly important in the

economy, nerd culture is rising with it. Nerds are already a
lot cooler than they were when I was a kid. When I was in
college in the mid-1980s, "nerd" was still an insult. People
who majored in computer science generally tried to conceal
it. Now women ask me where they can meet nerds. (The
answer that springs to mind is "Usenix," but that would be
like drinking from a firehose.)

I have no illusions about why nerd culture is becoming more

accepted. It's not because people are realizing that
substance is more important than marketing. It's because
the nerds are getting rich. But that is not going to change.

7. Options

What makes the nerds rich, usually, is stock options. Now

there are moves afoot to make it harder for companies to
grant options. To the extent there's some genuine
accounting abuse going on, by all means correct it. But don't
kill the golden goose. Equity is the fuel that drives technical
innovation.

Options are a good idea because (a) they're fair, and (b)
they work. Someone who goes to work for a company is
(one hopes) adding to its value, and it's only fair to give
them a share of it. And as a purely practical measure,
people work a lot harder when they have options. I've seen
that first hand.

The fact that a few crooks during the Bubble robbed their
companies by granting themselves options doesn't mean
options are a bad idea. During the railroad boom, some
executives enriched themselves by selling watered stock—by
issuing more shares than they said were outstanding. But
that doesn't make common stock a bad idea. Crooks just
use whatever means are available.

If there is a problem with options, it's that they reward

slightly the wrong thing. Not surprisingly, people do what
you pay them to. If you pay them by the hour, they'll work
a lot of hours. If you pay them by the volume of work done,
they'll get a lot of work done (but only as you defined work).
And if you pay them to raise the stock price, which is what
options amount to, they'll raise the stock price.

But that's not quite what you want. What you want is to
increase the actual value of the company, not its market
cap. Over time the two inevitably meet, but not always as
quickly as options vest. Which means options tempt
employees, if only unconsciously, to "pump and dump"—to
do things that will make the company seem valuable. I
found that when I was at Yahoo, I couldn't help thinking,
"how will this sound to investors?" when I should have been
thinking "is this a good idea?"

So maybe the standard option deal needs to be tweaked

slightly. Maybe options should be replaced with something
tied more directly to earnings. It's still early days.

8. Startups

What made the options valuable, for the most part, is that
they were options on the stock of startups. Startups were
not of course a creation of the Bubble, but they were more
visible during the Bubble than ever before.

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.
9. California

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.

10. Productivity

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.

What's New

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."

Notes

[1] Actually it's hard to say now. As Jeremy Siegel 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.

Siegel, 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.

Thanks to Chris Anderson, Trevor Blackwell, Sarah Harlin,

Jessica Livingston, and Robert Morris for reading drafts of
this.

The Long Tail Russian Translation

Japanese Translation
December 2008

For nearly all of history the success of a society was

proportionate to its ability to assemble large and disciplined
organizations. Those who bet on economies of scale
generally won, which meant the largest organizations were
the most successful ones.

Things have already changed so much that this is hard for

us to believe, but till just a few decades ago the largest
organizations tended to be the most progressive. An
ambitious kid graduating from college in 1960 wanted to
work in the huge, gleaming offices of Ford, or General
Electric, or NASA. Small meant small-time. Small in 1960
didn't mean a cool little startup. It meant uncle Sid's shoe
store.

When I grew up in the 1970s, the idea of the "corporate

ladder" was still very much alive. The standard plan was to
try to get into a good college, from which one would be
drafted into some organization and then rise to positions of
gradually increasing responsibility. The more ambitious
merely hoped to climb the same ladder faster. [1]

But in the late twentieth century something changed. It

turned out that economies of scale were not the only force
at work. Particularly in technology, the increase in speed one
could get from smaller groups started to trump the
advantages of size.

The future turned out to be different from the one we were

expecting in 1970. The domed cities and flying cars we
expected have failed to materialize. But fortunately so have
the jumpsuits with badges indicating our specialty and rank.
Instead of being dominated by a few, giant tree-structured
organizations, it's now looking like the economy of the future
will be a fluid network of smaller, independent units.

It's not so much that large organizations stopped working.

There's no evidence that famously successful organizations
like the Roman army or the British East India Company were
any less afflicted by protocol and politics than organizations
of the same size today. But they were competing against
opponents who couldn't change the rules on the fly by
discovering new technology. Now it turns out the rule "large
and disciplined organizations win" needs to have a
qualification appended: "at games that change slowly." No
one knew till change reached a sufficient speed.

Large organizations will start to do worse now, though,

because for the first time in history they're no longer getting
the best people. An ambitious kid graduating from college
now doesn't want to work for a big company. They want to
work for the hot startup that's rapidly growing into one. If
they're really ambitious, they want to start it. [2]

This doesn't mean big companies will disappear. To say that

startups will succeed implies that big companies will exist,
because startups that succeed either become big companies
or are acquired by them. [3] But large organizations will
probably never again play the leading role they did up till
the last quarter of the twentieth century.

It's kind of surprising that a trend that lasted so long would

ever run out. How often does it happen that a rule works for
thousands of years, then switches polarity?

The millennia-long run of bigger-is-better left us with a lot

of traditions that are now obsolete, but extremely deeply
rooted. Which means the ambitious can now do arbitrage on
them. It will be very valuable to understand precisely which
ideas to keep and which can now be discarded.

The place to look is where the spread of smallness began: in

the world of startups.

There have always been occasional cases, particularly in the

US, of ambitious people who grew the ladder under them
instead of climbing it. But till recently this was an anomalous
route that tended to be followed only by outsiders. It was no
coincidence that the great industrialists of the nineteenth
century had so little formal education. As huge as their
companies eventually became, they were all essentially
mechanics and shopkeepers at first. That was a social step
no one with a college education would take if they could
avoid it. Till the rise of technology startups, and in
particular, Internet startups, it was very unusual for
educated people to start their own businesses.

The eight men who left Shockley Semiconductor to found

Fairchild Semiconductor, the original Silicon Valley startup,
weren't even trying to start a company at first. They were
just looking for a company willing to hire them as a group.
Then one of their parents introduced them to a small
investment bank that offered to find funding for them to
start their own, so they did. But starting a company was an
alien idea to them; it was something they backed into. [4]

Now I would guess that practically every Stanford or

Berkeley undergrad who knows how to program has at least
considered the idea of starting a startup. East Coast
universities are not far behind, and British universities only a
little behind them. This pattern suggests that attitudes at
Stanford and Berkeley are not an anomaly, but a leading
indicator. This is the way the world is going.

Of course, Internet startups are still only a fraction of the

world's economy. Could a trend based on them be that
powerful?

I think so. There's no reason to suppose there's any limit to

the amount of work that could be done in this area. Like
science, wealth seems to expand fractally. Steam power was
a sliver of the British economy when Watt started working
on it. But his work led to more work till that sliver had
expanded into something bigger than the whole economy of
which it had initially been a part.

The same thing could happen with the Internet. If Internet

startups offer the best opportunity for ambitious people,
then a lot of ambitious people will start them, and this bit of
the economy will balloon in the usual fractal way.

Even if Internet-related applications only become a tenth of

the world's economy, this component will set the tone for
the rest. The most dynamic part of the economy always
does, in everything from salaries to standards of dress. Not
just because of its prestige, but because the principles
underlying the most dynamic part of the economy tend to be
ones that work.

For the future, the trend to bet on seems to be networks of

small, autonomous groups whose performance is measured
individually. And the societies that win will be the ones with
the least impedance.

As with the original industrial revolution, some societies are

going to be better at this than others. Within a generation of
its birth in England, the Industrial Revolution had spread to
continental Europe and North America. But it didn't spread
everywhere. This new way of doing things could only take
root in places that were prepared for it. It could only spread
to places that already had a vigorous middle class.

There is a similar social component to the transformation

that began in Silicon Valley in the 1960s. Two new kinds of
techniques were developed there: techniques for building
integrated circuits, and techniques for building a new type of
company designed to grow fast by creating new technology.
The techniques for building integrated circuits spread rapidly
to other countries. But the techniques for building startups
didn't. Fifty years later, startups are ubiquitous in Silicon
Valley and common in a handful of other US cities, but
they're still an anomaly in most of the world.

Part of the reason—possibly the main reason—that startups

have not spread as broadly as the Industrial Revolution did
is their social disruptiveness. Though it brought many social
changes, the Industrial Revolution was not fighting the
principle that bigger is better. Quite the opposite: the two
dovetailed beautifully. The new industrial companies adapted
the customs of existing large organizations like the military
and the civil service, and the resulting hybrid worked well.
"Captains of industry" issued orders to "armies of workers,"
and everyone knew what they were supposed to do.

Startups seem to go more against the grain, socially. It's

hard for them to flourish in societies that value hierarchy
and stability, just as it was hard for industrialization to
flourish in societies ruled by people who stole at will from
the merchant class. But there were already a handful of
countries past that stage when the Industrial Revolution
happened. There do not seem to be that many ready this
time.
Notes

[1] One of the bizarre consequences of this model was that

the usual way to make more money was to become a
manager. This is one of the things startups fix.

[2] There are a lot of reasons American car companies have

been doing so much worse than Japanese car companies,
but at least one of them is a cause for optimism: American
graduates have more options.

[3] It's possible that companies will one day be able to grow
big in revenues without growing big in people, but we are
not very far along that trend yet.

[4] Lecuyer, Christophe, Making Silicon Valley, MIT Press,

2006.

Thanks to Trevor Blackwell, Paul Buchheit, Jessica

Livingston, and Robert Morris for reading drafts of this.

Comment on this essay.

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Issue 14.02 - February 2006

Subscribe to WIRED magazine and receive a FREE gift!

The New Boom

Silicon Valley is roaring back to life, as startups mint millionaires and Web dreams take flight. But, no, this
is not another bubble. Here's why.

By Chris Anderson Page 1 of 1

Be careful what you wish for, all of you with the "Please, God, just one more bubble!" bumper
stickers. It's getting wild again in Silicon Valley. In recent months, the breathtaking ascent of Google
has lit a fire under its competitors, which include practically everyone in the online world. The result is
all too familiar: seven-figure recruiting packages, snarled traffic on Highway 101, and a general sense
that the boom is back.

A boom perhaps, but not (phew!) a bubble. There's a

Story Tools
difference. Bubbles are inflated with hot air and speculation.
They end with a wet pop, leaving behind messy splatters.
Booms, on the other hand, tend to have strong foundations
Story Images and gentle conclusions. Bubbles can be good: They spark a
huge amount of investment that can make things easier for
Click thumbnails for full-size image:
the next generation, even as they bankrupt the current one.
But booms - with their more rational allocation of capital - are
better. The problem is that exuberance can make it hard to
tell one from the other.

Six years ago, people were likewise making the case that the
dotcom frenzy was more boom than bubble, built as it was on
the legitimate ground of the Internet revolution. And until late
1999 or so, maybe that was true. Then the Wall Street
speculators gained the upper hand, and growth became
malignant.
Rants + raves
It's hard to know what "normal" prosperity looks like in Silicon
More » Valley. This is, after all, the land of boom and bust - it's been
alternating between greed and grief ever since the gold rush.
Start
But if there is such a thing as a healthy boom, we're living it
Books that would be blockbusters now. Google may be trading above $400, but the Nasdaq as a
Kicking it at the Best Buy spa whole has hardly budged in five years. Companies are once
Atlas: How crawdads got to Brazil again minting millionaires, but venture capitalists are investing
Inforporn: Raw data. less than a fifth of what they were at the 2000 peak. About 50
More » technology companies went public last year, but more than
300 went public in 1999.
Play
Of course, abundant venture capital and plentiful IPOs were
The musician with a knack for
hacks once seen as evidence of vitality. Now, however, we know
Ice cubists get artsy in the Alps their true cost: The promise of heady valuations encourages
8 killer concepts for cars venture capitalists to shower startups with money. And having
Fetish: Technolust placed such large bets, the VCs naturally want to fatten those
Test: Consumer Reviews startups for market. Fast cash and accelerated growth make a
More » company lose touch with reality, the simplest explanation for
the bubble's most notorious flameouts.
Posts
So why is the froth missing from the wave this time? Because
Team USA's gold-medal physicist
the underlying economics are so much healthier, in three main
Method acting for robots
ways.
Sterling on the rootkit of all evil
More » First, technology adoption has continued at a torrid pace (and
even accelerated at times) despite the bust. The dotcom
business models of the 1990s may have been based on wild projections of broadband, advertising,
 and ecommerce trends. But the funny thing is, even after the bubble burst, those trends continued.
These days, it's hard to find a technology-adoption projection from 1999 that hasn't come true.
Meanwhile, the digital-media boom sparked by the iPod and iTunes has blown through even the most
aggressive forecasts.

Today, broadband is mainstream, online shopping is commonplace, everyone has a wireless device or
two, and Apple's latest music player was - for the fifth season in a row - the must-have holiday gift.
The Internet and digital media are clearly not fads. Over the past decade, we've started to live a life
only imagined in mid-'90s business plans. As a result, some silly bubble-era ideas are starting to
actually make sense - perhaps a lot of sense.

Free phone calls over the Internet? That's Skype, which eBay just bought for nearly $4 billion. Online
virtual communities? Now a global phenomenon in the form of massively multiplayer online games.
Free music sites? MySpace, which rivals Google in traffic. (The boom's ultimate echo: The owner of
Dog.com just paid $1 million for Fish.com, in hopes of starting what amounts to a new Pets.com. Just
so long as it doesn't ship 50-pound bags of chow.)

The second reason that this boom is so different from the last is that the sunk costs of the dotcom era
make the economics of entrepreneurship more favorable. In the bad old days, companies bankrupted
themselves building out their fiber-optic networks. Bad for investors, good for everyone else: We're
now enjoying supercheap bandwidth. So, too, for storage, screens, and a host of other technologies
that are benefiting from profligate '90s-era investment and research.

Meanwhile, open source software has come of age, and computer hardware will soon cost less than
the electricity it takes to run it. The result: industrial-strength servers that are cheaper than desktop
PCs (sorry, Sun). Or, if you prefer, you can buy hardware and software even more cheaply as a
hosted service (there's that inexpensive bandwidth again).

The result is that you can start a company today for a tiny fraction of what people spent five years
ago. Joe Kraus, cofounder of the bubble-era search engine Excite, estimates that his new company,
JotSpot, will make it to first revenues with a total investment of about $100,000 - less than
5 percent of what Excite burned through a decade earlier. Today companies are starting small and
lean and staying that way - no more blowing all the first-round funding on PR stunts and rooftop
parties. As a result, they're hitting break-even sooner.

In this new environment, startups can grow organically. That means less venture capital is needed -
and that's the third reason this boom is different. Less venture capital leads to fewer venture
capitalists hustling for early exits at high valuations. That, in turn, reduces the pressure to go public
and translates to fewer undercooked companies launching IPOs on hype alone.

So there you have the recipe for a healthy boom, not a fragile bubble: a more receptive marketplace,
lower costs, and lighter pressure from investors. Today, the typical exit strategy is to sell your startup
to Yahoo! for a few million, not to maneuver for a rowdy IPO and an appearance on CNBC. Highway
101 is jammed with Prius-driving engineers, not biz-dev guys in Beemers. And most New York cab
drivers are happily ignorant of what's hot in the Valley, just as they should be.

Chris Anderson ([email protected]) is Wired's editor in chief.

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Meebo, begun by Elaine Wherry, left; Sandy Jen; and Seth Sternberg, was financed with credit cards.
1. Mining the Web for Feelings, Not Facts
By MIGUEL HELFT
Published: November 9, 2006 2. For Sports Obsessed, a Site Tries to Please Every Fan
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MAIL THIS 3. Wikipedia to Limit Changes to Articles on People
SAN FRANCISCO, Nov. 8 — When Seth J. Sternberg and two
PRINT 4. Bits: Study Finds That Online Education Beats the
colleagues started Meebo, a Web-based instant-messaging service, Classroom
they didn’t go looking for venture capitalists. Using their credit REPRINTS
5. European Opposition Mounts Against Google’s Selling
cards, they financed the company themselves to the tune of $2,000 Digitized Books

apiece. It was enough to cover their biggest expense — leasing a few 6. For Today’s Graduate, Just One Word: Statistics
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computer servers at $120 a month each.
8. From the Desk of David Pogue: A Better Way to
Manage Receipts for Business Travel
Within a month of its introduction in September 2005, Meebo was
9. Dollar by Dollar, Patrons Find Artists on the Web
getting as many as 50,000 log-ins a day, and it needed more
10. Bits: More Employers Use Social Networks to Check
servers. It decided to take a modest $100,000 from three angel investors, wealthy Out Applicants
individuals who typically contribute small amounts but do not get involved in
Go to Complete List »
management decisions.

“We had a bunch of V.C.’s talking to us about potentially putting more money in,” Mr.
Sternberg said. “We said no. A lot of things happen when you raise a V.C. round, and
they really slow you down.”

Eventually, Meebo did raise money from venture investors — about $3.5 million from
Sequoia Capital. But that was after the company was well on its way to showing that its
service was a hit; Meebo had about 200,000 daily log-ins.

In the last couple of years, hundreds of other Internet start-up companies in Silicon
Saving the world's women
Valley and elsewhere have followed a similar trajectory. Unlike most companies formed
during the first Internet boom, which were built on costly technology and marketing Also on NYTimes.com
Is golf unethical?
budgets, many of the current crop of Internet start-ups have gone from zero to 60 on a
Fighting alongside men, and fitting in
shoestring.

Some have gone without venture capital altogether or have raised far smaller sums than
venture investors would have liked. Many were sold for millions before venture
capitalists could even get in. That has been a challenge for venture capitalists, who have ADVERTISEMENTS
raised record amounts in recent years and need places to put that money to work.

“V.C.’s hate it; they want you to take big money,” said Jay Adelson, who is the chief
executive of two start-ups, Digg and Revision3. Digg took some venture money, but far
less than backers offered, and Revision3 has been running on about $850,000 raised
from a group of angel investors.

Several venture firms are seeking to adapt. Just last week, Charles River Ventures
announced it would offer loans of $250,000 to entrepreneurs as a way to gain access to Puss in Boots: Puss and The Marquis'
promising start-ups. Other firms are also giving out small loans, albeit not as a part of New Wardrobe; artwork by Fred
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For its part, Mohr Davidow Ventures has increased the number of “seed” investments —
small sums given to embryonic companies — to about 10 a year from 5. And Union
Square Ventures, which was formed in 2003, has made nearly half of its investments at
$1 million or less, a departure from its initial plan to make first-round bets of $1 million
to $3 million, according to its Web site.

“I think there is in the V.C. community a sense that the rules have changed or are
changing,” said John Battelle, a journalist and entrepreneur, who is a host of a
technology conference in San Francisco this week that will include a panel on the
subject. “How does the V.C. who is set up for a model that requires millions, if not tens
of millions, revamp for a different scale?”

And as large firms try to go small, they are encountering a new crop of competitors who
are happy to bankroll start-ups on the cheap and are fueling the current Internet boom.
They include a large pool of angel investors and a number of small venture funds whose
specialty is to invest tens of thousands of dollars, or hundreds of thousands at most.

There is even a group called Y Combinator, whose rule of thumb for investing in start-
ups is $6,000 per employee. One of its investments, Reddit, was acquired last week by
Wired Digital, which is owned by Condé Nast Publications, for an undisclosed sum.

“I came to the conclusion that $500,000 was the new $5 million,” said Michael Maples
Jr., an entrepreneur who created a $15 million venture fund aimed at investing in
companies that required little capital. Mr. Maples sees himself not so much as a
competitor to venture capitalists, but as someone who is filling the gap between angels,
who may invest $250,000 or so in a start-up, and venture investors, whose typical early-
stage bet is closer to $5 million.

Several forces are allowing companies to operate cheaply compared with the first
Internet boom. They include the declining costs of hardware and bandwidth, the wide
availability of open-source software, and the ability to generate revenue through online
ads.

“It’s a great time to be an entrepreneur,” Joe Kraus, a veteran of the dot-com boom,
wrote in a widely noted blog posting last year. Mr. Kraus said it took $3 million to get
his first start-up, Excite.com, from idea to product, much of it spent on servers and
software, which have since become much cheaper or even free. His new start-up,
JotSpot, was started on just $100,000.

With the notable exception of YouTube, many recent acquisitions involved Internet start-
ups that simply could not effectively use large amounts from venture capitalists or
produce large returns, said Paul Kedrosky, a venture capitalist and blogger.

“The problem is that as a V.C., these companies don’t soak up enough capital,” Mr.
Kedrosky said.

To succeed, a firm with a $250 million fund needs a handful of investments from $10
million to $15 million that can return payouts of $150 million or more, Mr. Kedrosky
said. But even a twentyfold return on a $1 million investment will not do much for the
success of a large fund, Mr. Kedrosky said.

For smaller funds, the economics are far different. For starters, those who manage them
do not earn huge management fees. Instead, they are almost always among the largest
investors in the fund, so they will earn a return if the investments pay off.

“I think large venture funds in this economic model have a challenge,” said Josh
Kopelman, managing director of First Round Capital. Since starting First Round in
2004, Mr. Kopelman has made about 30 investments that range from $250,000 to
$500,000. Mr. Kopelman, who made a fortune as a serial entrepreneur, is the largest
investor in First Round’s $50 million fund.

Y Combinator is aiming at even smaller firms, and its approach is decidedly unorthodox.
It chooses companies for financing in two batches of 8 to 12; one batch is selected in the
winter from companies based in Silicon Valley, the other in the summer from those in
Cambridge, Mass.

“When you change the amount of money, a lot of things change,” said Paul Graham, one
of four partners in Y Combinator, who made millions when his company, Viaweb, was
sold to Yahoo in 1998. “We have to mass-produce things. We can be more risky. We are
like mice, and V.C.’s are more like elephants. They can only make a few deals, so each
one has a whole amount of weight and worry attached to it.”

As for the target investment of $6,000 for each employee, an explanation on Y

Combinator’s Web site makes it clear that Mr. Graham and his colleagues are not
looking for computer science entrepreneurs who want to be pampered: “C.S. grad
students at M.I.T. currently get $2,000/month to live on, so this represents three
months’ living expenses. Though in fact most groups make it last longer.”

Established venture capitalists, however, say the new crop of capital-efficient start-ups
represents an opportunity, not a problem.

“Companies have bootstrapped themselves in earlier eras,” said Gary Morgenthaler, a

general partner at Morgenthaler Ventures. “There is no shortage of companies that need
venture capital and company-building skills.”

Jon Feiber, a general partner at Mohr Davidow Ventures, said it was “incredibly good
and healthy” that many Internet start-ups were able to do more with less.

“A small percentage of those companies will lend themselves to the model of a larger
fund,” Mr. Feiber said. “If your goal is to generate something of huge value and scale, it
is going to take more than $300,000 or $400,000.”

JotSpot, the company that Mr. Kraus started on $100,000, may fit that mold. The
company eventually took in $4.5 million from a pair of venture capital firms, and last
week it was acquired by Google for an undisclosed sum.
“I think it could be a great time to be a venture capitalist,” Mr. Kraus said in an
interview. “Like in any competitive market, fear and hope are the two competing forces.”
And for venture capitalists, the success of scrappy start-ups may simply be heightening
the fear. “I think there is a lot of fear that people won’t get into the best deals,” Mr.
Kraus said.

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 ArsDigita: From Start-Up to Bust-Up
by Philip Greenspun

If you've been hanging out around courthouses in Delaware lately, you may have heard about some legal
acrimony involving ArsDigita's venture capitalists versus the ArsDigita co-founders. This letter explains how
it came about (from the perspective of one of the defendants).

Note that 99 percent of the information in this document is irrelevant to the lawsuit. The lawsuit has to do
with the rights of the shareholders to control management based on some technical points of law and
contract. In other words, the questions of who is best qualified to run the company and whether business
decisions have been correct are largely irrelevant.

Background
Let's go back to 1993. That's when we started developing the domain
knowledge that led to the ArsDigita Community System product. Most people
who've made money in the software business are those who wrapped their
minds around a problem earlier than others. You can't base a business on
"we'll be better programmers than the folks at Microsoft and Oracle"; each
company has enough computer science PhDs and expert software engineers
to bury 100 competitors. You can, however, base a business on "we'll attack
this problem a few years before Microsoft and Oracle notice it and recognize
it as a problem."

Adobe is a good example of a small software company that has thrived despite possible competition from
much larger companies. Check out
http://www.adobe.com/aboutadobe/pressroom/executivebios/johnwarnock.html and
http://www.adobe.com/aboutadobe/pressroom/executivebios/charlesgeschke.html You can see that these
two guys, who have managed Adobe since its inception, spent a lot of time at Xerox PARC and Evans and
Sutherland grappling with substantially the same kinds of problems for which Adobe provides solutions.

Adobe's engineers and founders aren't smarter than Microsoft's; they merely started thinking about graphics
and publishing before the Microsoft folks did.

Fast forward to 1998. We have contracts with a few big companies: AOL, HP, Levi Strauss, Oracle. We are
recognized as thought leaders (publication by Macmillan of Database Backed Web Sites ) and market leaders
(our open source software for online learning communities). As GE's Jack Welch will tell you, it is a lot
easier and more fun working for a company that is #1 or #2 in its market. For one thing, customers will
knock on your door.

By 1999, customers were knocking like crazy. A good example was Siemens. They had a critical business
problem that could be solved by the ArsDigita Community System. Recognizing the goodness of fit between
our product and Siemens's problem, Boston Consulting Group brought them to our old HQ (603 Franklin)
and within two weeks we had a contract.

We expanded. We were still small, though, and we avoided direct confrontations with heavily financed
competitors. They were closed-source; we were open source. We'd undermine them by creating a world-
wide open-source standard rather than try to outshout them with full-page ads in Business 2.0. We laughed
at most of the small closed-source companies, asking "What's their marketing slogan? We're just like
Microsoft and Oracle but without the market leadership and profits? And how does that slogan work for
recruiting?"

By March 2000 we had grown to 80 people. I was still CEO and beginning to feel nervous that, for every
task in the company, I could not say exactly who was supposed to do what and by when. But we were
profitable, with monthly service contract revenue coming in at a $20 million/year rate. We'd paid nearly $1
million in income tax on our profits for calendar year 1999. Not so bad considering that we built everything
from a $10,000 investment.

We'd never sought venture capital but our revenue and profits were bringing some of the top East Coast
firms to our door. Most of the time these guys were being forced by the frenzied times into investment in a
company and figuring out how to get revenues later (and profits much much later). ArsDigita looked a lot
better than than the typical "wing and a prayer" bunch of guys with a fancy spreadsheet. Despite 1000
percent annual growth, we had cash. Most of our revenue was recurring. Most of our customers were
happy and loyal.

Companies don't like to rely on enterprise software from small companies. There is too much risk that the
vendor will go bankrupt. Open source ameliorates this risk to some extent but the tendency to stick to IBM,
Microsoft, and Oracle is strong. We tried to present a face of financial invincibility to the world. We bought
a Ferrari to give away to any employee who recruited 10 friends. In reality the car only cost $2,000 per
month, the person who won it only got to drive it for as long as he or she was employed, and the cost of a
Ferrari is much lower than 10 headhunter commissions. But sitting in the parking lot it gave us the
appearance of extravagance while inside the building we were living the frugal life--in a world starved for
software development talent, it would have been hard to lose money paying MIT-educated programmers
$50-85,000 base salaries plus an end-of-year bonus based on accomplishment and the firm's performance.
We had a couple of other Ferrari-like schemes up our sleeves. One was a beach house on Cape Cod where
teams of programmers would go to work and write. Another was ArsDigita University, a tuition-free post-
baccalaureate one-year computer science program. These things sounded outrageous, gave people a way
to remember who we were, gave journalists a reason to write about us (and they did), all while costing no
more in total than our 1999 profit (i.e., practically nothing if our revenue had continued to grow).

At the end of March 2000 we closed a venture capital financing with Greylock and General Atlantic. By the
time a couple of small checks arrived we had an extra $38 million to put in the bank. We figured that we
could use the extra money to place some bets on product development and marketing. Under the product
development rubric we thought we'd not make the client teams carry the full weight of ACS development on
their shoulders. If they found a client whose needs were similar to what we wanted in the product, we'd do
the job for a low-ish price to get experience with that problem (see the "domain knowledge" sentence
above) and develop reusable code to enhance ACS. Under the marketing rubric we'd expand our "education
marketing" program. Finally, we wanted working capital. A company with $20 million in revenue really
needs to have about $10 million in the bank in case a customer doesn't pay, the economy turns soft, an
important project is late, etc. Because we'd been growing 1000 percent per year we never had more than a
couple of million dollars in the bank.

The terms of the venture capital investment were that the VCs purchased stock that gave them about 30%
of the issued shares. Under standard corporate governance, a minority ownership interest such as this
would give the VCs little or no control over the direction of the company. So we also had a stockholder's
agreement that required the existing shareholders (myself and Jin Choi) to vote for a board of directors
that consisted of

1 Greylock person
1 General Atlantic person
3 senior officers from ArsDigita, including the CEO
2 outsiders

So the VCs would have 2 out of 7 board seats. The shareholders would elect the rest. Plus the VCs got veto
power over certain kinds of big transactions, such as the buying of expensive capital equipment, the selling
of the company, the acquiring of another company. Finally in the event that the company was sold, they
were entitled to the first $38 million off the top of the deal (note that this makes all of the common shares
theoretically worthless in the event of a sale for less than $38 million). The terms we'd been offered from
the three other serious venture capitalist bidders were similar. They wanted "a seat at the table" but
nobody was asking for absolute power over the company going forward; the firms proposed to help
ArsDigita's founders do what we'd been doing successful already.

In parallel to all of this VC stuff we'd been trying to recruit an "outside CEO". Based on my conversations
with successful business people around the world, I now believe this is a fundamentally bad idea. Even the
most able person will need a few years to learn about a company's market, challenge, mission, culture, and
people. A fresh-from-the-outside CEO might be successful at a 50-year-old company with a huge
bureaucracy that manages itself (cf. George W. Bush taking over the Federal Government). But young
enterprises don't have that kind of inherent stability.

Anyway, as it happens we recruited Allen Shaheen on the recommendation of Chip Hazard, a Greylock
employee who would ultimately represent the firm on our Board. Allen came from Cambridge Technology
Partners (CTP) where he managed a large group of consultants in the overseas division of this IT services
firm. I knew that Allen had no background in the software products business and that he had not been
responsible for establishing overall strategy and thought leadership at CTP. In short, he had always worked
for someone else and in a less competitive business than software products. Still, the other candidates we'd
interviewed had been either very poorly prepared (one from Lotus) or were very aggressive and in-your-
face and my top managers at the time didn't think that they could work with them. Allen seemed like the
kind of guy who would work well with the difficult personalities populating the companies' far-flung offices.
He had experience managing a multi-national services business. So the plan was that I'd keep responsibility
for engineering, education, and evangelism; Allen would build the rest of the business.

Within a few weeks of Allen's arrival, I found people telling me that I had no power at all, pointing out that
Allen and the two VCs could vote as a bloc on the Board. We had not yet filled the two outsider positions so
this point was tough to argue. 3 out of 5 = absolute power. Period.

April 2000 through March 2001

For roughly one year Peter Bloom (General Atlantic), Chip Hazard (Greylock), and Allen Shaheen (CEO)
exercised absolute power over ArsDigita Corporation. During this year they

1. spent $20 million to get back to the same revenue that I had when I was CEO
2. declined Microsoft's offer (summer 2000) to be the first enterprise software company with a .NET
product (a Microsoft employee came back from a follow-up meeting with Allen and said "He reminds
me of a lot of CEOs of companies that we've worked with... that have gone bankrupt.")
3. deprecated the old feature-complete product (ACS 3.4) before finishing the new product (ACS 4.x);
note that this is a well-known way to kill a company among people with software products
experience; Informix self-destructed because people couldn't figure out whether to run the old proven
version 7 or the new fancy version 9 so they converted to Oracle instead)
4. created a vastly higher cost structure; I had 80 people mostly on base salaries under $100,000 and
was bringing in revenue at the rate of $20 million annually. The ArsDigita of Greylock, General
Atlantic, and Allen had nearly 200 with lots of new executive positions at $200,000 or over,
programmers at base salaries of $125,000, etc. Contributing to the high cost structure was the new
culture of working 9-5 Monday through Friday. Allen, Greylock, and General Atlantic wouldn't be in the
building on weekends and neither would the employees bother to come in.
5. surrendered market leadership and thought leadership

How could these three guys have achieved such dreadful results? For that it is worth looking at what kind
of leadership is required for a software products company. First, you probably want someone who has
previously founded and run a company or been CEO at a company founded by others (i.e., not someone
who has been an employee his or her whole life). Second, you probably want someone who has previous
experience as an executive in the software products business. Third, you probably want someone with
domain knowledge. Fourth, you probably want someone with technical knowledge.

Whatever strengths Peter, Chip, and Allen may have, all three were 0 for 4 on the qualifications listed
above.

Software products is a rough business because it moves fast and attracts smart people. Furthermore you
have companies like Microsoft where people work nights and weekends backed up by a cash hoard of $20
billion and a global brand. As an investor, you never want to send your company up against the Microsofts
of the world unless your managers are smart, hard-working, and have the right experience. If they don't,
you need to look for a less competitive business. Maybe you can offer training or admin services for a
Microsoft or Oracle product. Or maybe you should get out of the IT business altogether and apply your
capital and employees to something like party equipment rental (you don't see too many table and chair
rental companies with $20 billion in the bank and MIT PhDs working nights and weekends trying to put
their competitors out of business).

At this point you might ask "Hey, weren't you still on the Board?" Sure. But for most of this year Chip,
Peter, and Allen didn't want to listen to me. They even developed a theory for why they didn't have to
listen to me: I'd hurt their feelings by criticizing their performance and capabilities; self-esteem was the
most important thing in running a business; ergo, because I was injuring their self-esteem it was better if
they just turned a deaf ear. I'm not sure how much time these three guys had ever spent with engineers.
Chuck Vest, the president of MIT, in a private communication to some faculty, once described MIT as "a no-
praise zone". My first week as an electrical engineering and computer science graduate student I asked a
professor for help with a problem. He talked to me for a bit and then said "You're having trouble with this
problem because you don't know anything and you're not working very hard."

A seat on a Board of Directors that never meets

After December 2000 they stopped having board meetings altogether. Instead they had
"investor meetings" that were attended by Allen, Ern Blackwelder (the COO, who'd
already been told that he was going to be replaced), Greylock, and General Atlantic. In
other words, all five board members except me would meet.

Board-level decisions were made not only without the chairman having an opportunity
to vote but without the chairman (me) even being given notice. For example, after that
final December 2000 board meeting, Allen, Ern, and the VCs (a) decided how much
bonus to pay the CEO and COO for 2000, (b) named Jim Jordan to be Chief Financial
Officer (see http://www.arsdigita.com/news/), (c) decided to eliminate me as Chairman
and announced to the press that I was already gone (implying that I'd resigned though
it was untrue), (d) hired and appointed Richard Buck as Senior Vice President of
Engineering, (e) hired and appointed Dave Menninger as Senior Vice President of
Marketing (again, see http://www.arsdigita.com/news/ ), etc.

What about the two outsider seats?

At this point you might ask "Hey, what about those two outsider seats?" At various times during the rule of
Greylock, General Atlantic, and Allen I would push for the nomination of someone with software products
experience. Nobody was ever approved. On November 22, 2000 I emailed Bill Helman and Bill Kaiser, two
other Greylock employees who'd pitched ArsDigita, trying to set up a meeting to discuss getting a couple of
good outsider board members:
... As an investor in the company, though, I'm concerned that ArsDigita is
left without a single engineering expert on the board or on the
management team. I'm not sure what your experience is but mine is
that it is tough for tech companies to succeed without some
engineering expertise at or near the top. ...

They were reluctant to get involved, saying that normally everything should be piped through the Greylock
employee actually sitting on a portfolio company's board, in this case Chip Hazard, the very person whose
lack of engineering experience was contributing to ArsDigita's bleed. Kaiser agreed to meet me, however,
after a couple of weeks. We walked around the MIT campus for 30 minutes. When I explained the problems
with the product and the financials, Kaiser said "Isn't it possible that this is just your opinion, that Allen and
Chip would see it differently?"

Relativism. It was impressive in a way to see Protagoras's sophism alive and well after 2500 years. But the
"all points of view are equally valid and supported only by someone's opinion" ignores the fact that it is
easy to measure the correctness of business beliefs: some people are losing money and some are making
money; some companies are gaining market share while others are losing market share.

We gave up on the idea of finding any help from the Greylock corner.

With no voice in company operations and with a board seat in a company that did not have board
meetings, it seemed that there was no longer anything that I could do to express the co-founders' wills as
shareholders. Keep in mind that ArsDigita had been running in exactly the opposite direction from the way
that we wanted it run. We started aD slowly and carefully. We ran it profitably. We placed small bets. We
handled money conservatively (though we tried to give the appearance of wildness and fantastic prosperity
to the outside world there is actually nothing extravagant about having a fancy beach retreat for a team of
programmers that is excited and working 6 days/week, 12 hours/day). We made sure that we were working
as hard as teams at Microsoft and startup companies.

By contrast, Allen, Greylock, and General Atlantic presented us (Common shareholders) with a strategy of
"here's this spreadsheet that shows us going bankrupt in one year unless a big stream of license revenue
starts coming in." And, oh yes, the revenue would be coming from a product that had never been built,
purchased by customers to whom we'd never sold anything.

Do these kinds of risks bother venture capitalists? Having a first-time CEO with zero experience in the
industry? Staking everything on a to-be-finished software product? Perhaps not. General Atlantic has $10
billion under management, according to their Web site (gapartners.com). If they point ArsDigita in a
direction that leads to tankage, they can fall back on their $9.98 billion in other investments. What about
the Common shareholders, though? We never signed up for this kind of risk and we don't have substantial
other investments. I put 8 years of my life into ArsDigita Community System. Jin put in 4 years. We would
be unhappy to see the company spend through its accumulated profits plus $38 million in capital merely so
that three guys in suits could learn a little something about what it is like to run a software products
company.

March 2001: The Final Shove

March 2001 was a dark time from our shareholder perspective. Some of our greatest
assets were pushed out the door. David Rodriguez, for example, a man who had
worked like a monster and delivered huge projects to happy clients. Did he refuse to
implement abstract URL on the World Bank knowledge management system until I
nagged him via email from Australia? Yes. Did he say that ACS 4.0 was unusable? Yes.
Did he tell Allen "You talk like a press release"? Yes. These things disqualify dvr from
diplomatic service. But as shareholders we didn't like to see someone who had
personally delivered more than $1 million in revenue while costing us perhaps $200,000
being pushed out the door. To a non-owner manager, it might make sense to get rid
of someone who'd offended you with a harsh word. You're still going to get more than
a third of a million dollars in base plus bonus, even if the shareholders take a beating.
But as an owner-CEO I would let an employee vent his spleen at me, secure in the
knowledge that at the end of the day this guy was building the value of my shares.

Our co-founder Aurelius Prochazka was also axed in the March 2001 massacre. Have Jin and I had to clean
up some of his code in the past? Yes. Was Aure rather discouraged and unproductive in the past few
months as ArsDigita's financial and market position slid and he reflected on the fact that unqualified people
were managing the firm? Yes. Was Aure too quick to criticize highly paid executives whose intellectual
abilities fell short of the standards he absorbed at Caltech? Yes. But what kind of a company can you have
when you fire someone who is (a) a founder, one of the people who built a $20 million profitable enterprise
on capital of $10,000, (b) someone who'd previously built a successful business and sold it, and (c)
responsible for the innovative ideas and interface behind some of the ACS's most interesting modules (e.g.,
file storage)? Aure's PhD is in engineering and not in charm. But if shareholder value were related to
average employee charm, Microsoft shareholders would be rather poor indeed.

So what were the shareholders doing in March 2001? Planning some research projects at MIT and
Orange/France Telecom. Giving some one-day courses in Thailand and India. Revamping our Software
Engineering for Internet Applications course at MIT (recently accepted by the faculty into the core
curriculum and renumbered 6.171). In short, getting on with our lives and personal technical goals, working
full-time for other companies. We cried if we thought about ArsDigita's financial performance but mostly we
tried not to think about it.

Sing, O goddess, the anger of Achilles son of Peleus, that brought countless ills upon the
Achaeans. Many a brave soul did it send hurrying down to Hades, and many a hero did it yield a
prey to dogs and vultures, for so were the counsels of Jove fulfilled from the day on which the
son of Atreus, king of men, and great Achilles, first fell out with one another.
-- Iliad, Book I

Peter Bloom, the General Atlantic employee representing their interest on our board, was not crying in
March 2001. He was angry, as he had been for many months. Though Agamemnon had not taken his prize
girl Briseis to replace the daughter of the priest Chryses, Bloom's anger was not less than that of the great
son of Peleus. My habit of pointing out that he'd accomplish more if he picked more important opponents
(e.g., Microsoft and Oracle rather than a 37-year-old living in a 2-bedroom apartment in Cambridge) did not
cool him down. What really sent him over the edge, as far as I can tell, was when I related my response to
a member of the Harvard faculty who asked me what it was like to watch venture capitalists and
professional managers run ArsDigita (I replied "like watching a group of nursery school children who've
stolen a Boeing 747 and are now flipping all the switches trying to get it to take off").

Peter Bloom sent me an email message on March 28, 2001: "Since you are so troubled by the direction that
the company has taken, you can choose to resign from the board before our next meeting. This is your
decision to make, but it is a course of action open to you to avoid the public humiliation and significant
professional impairment of being removed as Chairman from a board of directors. ... The actions you have
taken and the written communication you have directed at individuals has now gotten you in very serious
trouble and you need to turn to someone you trust for counsel. I sincerely hope that your trusted
confidants will tell you the truth about the impending consequences of your recent communications and
accusations before you irreparably impair your reputation and financial future."

Shortly after I received the email message, I stopped by ArsDigita HQ to pick up Alex from Eve. My card
key no longer opened the door.

When a company with $10 billion in assets threatens "irreparable impairment of one's financial future" it is
time to see a lawyer. So, thanks to Peter's initiative, I trundled down to see Sam Mawn-Mahlau and Paul
Mahoney at Edwards and Angell. They prepared a "shareholder's consent" that would change the company
by-laws so that, until ArsDigita went public, the CEO and president would be directly elected by the
shareholders. The next item on the list was the election of Philip Greenspun as CEO. Another item in this
shareholder's consent was to elect two existing vice-presidents of the firm, Tracy Adams and Eve
Andersson, to the board. The stockholder's agreement said that the three insiders on the Board had to be
"senior executives" so we promoted them to "Executive Vice President" just to be safe.

The effect of this shareholder consent was to trim the venture capitalists back to what they'd bargained for,
i.e., two board seats plus veto power over major transactions.

Our shareholder vote happened to occur on the same day that CNET carried a story about how ArsDigita
would henceforth abandon its open-source strategy in favor of traditional licensed software and how Philip
Greenspun, the "former chairman", had left the company. The next morning, April 6, a courier arrived at 80
Prospect Street (ArsDigita HQ) with a letter for Allen notifying him that he'd been demoted from "President
and CEO" to "President". I telephoned Allen to assure him that I didn't want to make any major personnel
changes immediately, that I'd be happy to consider the entire last year as water under the bridge and work
with him under our original agreement (I'd keep responsibility for engineering, education, and evangelism;
Allen would build the rest of the business). I said that I wanted to spend the next few weeks just coming
up to speed on the status of the product, the customers, and the company. Allen told me just what I
wanted to hear and I was encouraged by the idea of working through him.

April 2001: Allen and the Venture Capitalists File Suit

On April 11, 2001, the following lawsuit was filed in Delaware chancery court:
ALLEN SHAHEEN, ERNEST )
BLACKWELDER, GENERAL ATLANTIC )
PARTNERS 64, L.P., a Delaware )
limited partnership, GREYLOCK )
X LIMITED PARTNERSHIP, a )
Delaware limited partnership )
and ARSDIGITA CORPORATION, )
a Delaware corporation, )
)
Plaintiffs, )
)
v. ) Civil Action No. 18821
)
PHILIP GREENSPUN, EVE A. )
ANDERSSON and TRACY E. ADAMS )
)
Defendants. )

As you see from the caption of the case, the lawsuit was filed by Allen, Ern, the VCs, and the corporation
itself. We were quite confused by the form of the case, given that this is fundamentally a dispute between
two groups of shareholders (the VCs versus the founders). So we'd not expected the corporation itself to
have any interest in the case one way or the other.

A conversation with ArsDigita Corporation's corporate counsel, Jay Hachigian from Gunderson, shed some
light on the matter. It seems that Allen dipped his hands into the company checking account and scooped
out a quarter million dollars to pay the venture capitalists' attorneys in this matter. Jay cautioned the group
that this was perhaps not the best idea but they apparently went ahead anyway. Thus we now have the
spectacle of a group of shareholders trying to increase the level of accountability of a management team
who has, in their view, been doing a bad job. That group of shareholders is being sued by the managers
who want to avoid accountability. The lawsuit is being funded with the defendants' own money!

The crux of the plaintiffs' case is that Jin and I signed various agreements promising to do various things,
e.g., always vote for a Greylock and General Atlantic representative on the board. The closing documents
for our financing formed a stack about the size of a Manhattan Yellow Pages. Supposedly somewhere within
this stack it is said that the Board of Directors of ArsDigita won't amend the corporate by-laws without the
consent of the venture capitalist members. Nowhere does it prohibit the shareholders from doing this,
however. Greylock and General Atlantic would like to read this interpretation into the documents. If memory
serves, those documents were drafted by Paul, Weiss (paulweiss.com), General Atlantic's lawyers. So under
standard legal doctrines, ambiguity ought to be construed against them. Of course, I'm not a lawyer and
nobody can say what another human being, in this case a Delaware judge, is going to do. I personally think
it would be a bit shocking for the judge to rule in favor of Greylock and General Atlantic. The effect of such
a ruling would be to make the shareholders' voting rights worthless, i.e., the judge would be saying that the
VC firms could exercise absolute power forever as if they'd bought the voting rights on our Common shares
at the time of the investment.

So, that's the story. Keep in mind that most of what is in this document may well be irrelevant to the
outcome of the lawsuit. A court generally does not want to decide which group of people is likely to make
better business decisions. A court looks at issues such as "What rights do the owners of a majority of the
shares of a company have to control its direction?" or "Can the venture capitalists add extra restrictions, a
year later, to an agreement that they made and that is reflected in documents drafted by their own
lawyers?"

It will take a couple of months to take everyone's deposition and get through discovery. Then we'll have a
trial, maybe in June 2001, in front of a judge in Delaware. The judge might decide the case based on just a
few documents, in which case all of the discovery will have been a waste of time.

Why I wrote this

Generally people try to say as little as possible during litigation. However, I've
been getting progressively more and more annoyed listening to other folks'
characterizations of the lawsuit. ArsDigita management was running around
the building telling folks that "Philip sued the company", something that was
plainly false. Allen was telling people "the venture capitalists have a very
strong case" (how come he needed to pay a retainer of $250,000 of the
shareholders' money to defeat a couple of individuals if the venture capitalists
have such a strong case?). Reporters were making it sound like this was a
dispute about ego and control. In a way that was true; Allen, Chip, and Peter
did not like being characterized as fools whose ignorance was costing the company $millions. But as far as
Jin and I were concerned, the reporters' spin was not true. We'd have been delighted to be passive
shareholders in a successful profitable company. What we didn't like was being passive shareholders in a
company bleeding cash.

There were some simple practical motivations for writing this article. One of the beauties of the Web is that
it can save one from having to repeat oneself. On any normal day, I get 50 email messages from readers of
photo.net and philip.greenspun.com asking various questions. A few times every week, a reporter will email
or telephone to ask a question. After Greylock and General Atlantic filed suit, the stream of questions about
photography and computer science was supplemented by a flood of questions about the lawsuit. If I hadn't
written this article I might have gotten RSI in my wrists simply from typing "no comment" 200 times every
day.

Finally, there are customers who've adopted ArsDigita Community System to consider and friends that we
recruited to work at ArsDigita, the company that made a profit every month. These folks have a right to a
better explanation than they're going to get from a 500-word newspaper story or a corporate press release.
The company's birth and growth were public, chronicled in Chapter 2 of Philip and Alex's Guide to Web
Publishing . The folks who were kind enough to pay attention and support us are entitled to know how the
rest of the story unfolds.

More
http://unicast.org/arsdigita/ (full text of the legal filings in this case)
Greylock corporate site: http://www.greylock.com/
General Atlantic corporate site: http://www.gapartners.com/
Charles Dicken's Bleak House: Project Gutenberg | Amazon

Text and pictures copyright 2001 Philip Greenspun. Most of the photos are from India and were taken with
Nikon D1.

[email protected]

Reader's Comments
The story from the outside:

It was sad to see the company slowly being destroyed. It was as if all the life was being sucked
out of the company and we had no idea why. Everything that made ArsDigita what it was slowly
disappeared until all that was left was just another buzzword-spewing faceless corporation. ACS
users moved on, joining in support for projects like OpenACS that still had the spirit of the
former ArsDigita.

Meanwhile, aD corporate slowly began to shut down programs, including the one that got me to
be an ACS user in the first place: ArsDigita Prize. One day a small message appeared that said
simply "The prize has been cancelled for 2001." That was the last straw.

I emailed Philip to ask what had happened. He said that despite his pleas, the board had
cancelled the program. I emailed Allen (the CEO at the time) he said that they were working
hard to bring the program back. This went back and forth several more times without a clear
resolution. Finally, aD Corp decided to take the program over from the foundation. They seem to
be providing the funding, but volunteers are ending up doing the judging.

I sure hope that aD gets put back together. Best of luck, Philip.

-- Aaron Swartz, April 24, 2001

I think it's sad when a company and its founder don't get along. That's one of the reasons I
counsel entrepreneurs to really get to know the VCs before they take the money. Too often they
don't and assume that the VCs are investing in their vision. Later on it's a surprise when they
have to fight for the right to do what they wanted to do when they got the VCs backing. I wish
Greenspun the best of luck, and hope they get back on track at Ars Digita.

-- Dave Winer, April 24, 2001

The story from a student/developer's point of view:

I started following ArsDigita in 1999 through recommendation of a friend who had been
following the company and using its products for years. Read Philip's book in a couple weeks.
Read through the teaching materials, and learned a lot.

I wanted to use ACS, but couldn't afford Oracle, so I asked about porting it to PostgreSQL, and
from there, Ben Adida, Don Baccus, Lamar Owens and Dan Wickstrom joined in and OpenACS
was born.

In our Free Software & GNU/Linux Forum, ArsDigita was present and I was happy to see it, and
I gladly spoke for it, made advertisement for its products and gave away aD briefs to those
attending our Building Reliable Web Services With Free Software workshop, where I spoke
alongside with Uday Mathur (an aD employee, and very nice person, along with Adam Farkas).

ArsDigita was the company I dreamed of working for when I graduated. I was (still am as of
April 2001) a CS undergrad student, and ArsDigita's philosophy, culture and products fascinated
me. It put it apart from other brochure-ware but product-less companies, or companies that
didn't have such a culture, such goals, and that were not as developer-friendly as aD.

In 2000 everything began shifting. ACS 4 seemed an excellent thing, and everybody was
excited, but it was never finished and then everything just turned to Java. Nothing against Java,
but even I know that you can't sell a product that's not here yet. What happenned to the
culture? None of the names and faces we knew posted to the bboards anymore. A few aD faces
posted regularly, but mostly we saw a bunch of people only posting questions about the
products they should be familiar with, and sporadically. Allan Shaheen only addressed
developers twice, in what seemed to be posts typed by his secretary. ArsDigita's website turned
to being a brochure more than anything else, which is not bad if you don't forget other things.

I wish you best luck Philip, and hope aD can get back on track.
-- Roberto Mello, April 24, 2001

I do not know the facts of this case except as presented here. However, the form and nature
conform precisely to the pattern one expects from the venture capital process, and therefore is
likely to be entirely accurate in its details. (Read High Stakes, No Prisoners, for a similar account
- eerily similar, in fact.)

What I'd like to publicly question is: can anyone cite instances in which venture capital
companies took control, brought in outsiders, and turned a business into a rousing success?
There must be such cases, but the literature lacks richness in this area.

If you read any of the biographical tomes (High Stakes, Burnout, Startup, etc.), the central
figure of the founder admits their own hubris, but marvels at the behavior of the VCs. And
rightly so.

I look at Amazon.com as a wonderful case to the contrary: Bezos got Kleiner Perkins to take a
board seat, bring in other good board members (Scott Cook, etc.), and give them a tiny bit of
money which helped establish their reputation at the IPO. They never put themselves even
barely in a position in which a VC could try to take over.

I guess the lesson learned from this tale is to be sure that the power structures are in place
before signing the deal. The two shareholder board members should have been elected by bylaw
and never had those positions free. That would have precluded the situation that occurred.

-- Glenn Fleishman, April 24, 2001

At the risk of sticking my neck in the guillotine, I'd just like to remind everyone that there are
two sides to this story. Yes, this is Philip's site, and he can write whatever he likes. And he does
paint a descriptive portrait of the happenings at aD over the past year.

But I think that it's important that this case not be tried in the court of public opinion, especially
because the other side is keeping mum (as is typical protocol when a case is in litigation..)

Again, I have no interest, personal or financial, in seeing either side win. It makes zero
difference to me, as i'm just watching this from a distance like everyone else. (Though it does
sadden me to realize that there probably won't be any winners here, regardless of the outcome
of the case.) I've admired much of philip's work, and I also have a great deal of respect for
many of the folks that I worked with at aD.

I just don't like to watch lynchings, virtual or otherwise. Please consider keeping an open mind,
until everything is laid on the table.

I'll get off my soapbox now.

-- Adam Farkas, April 24, 2001

FWIW,

I don't know how issues related to Arsdigita will turn out. And it's certianly none of my business.

However, I **DO** want to share that I for one think Mr. Greenspun has performed a
distinguished public service in sharing the fruits of his intellect and efforts as he has -- many
many times over many many years. He is certianly one who I think quite highly of and admire.

Just today, like many days, I printed off some of his writings at work -- to bring home and read
to further my IT education and understanding. Earlier this evening, as I was reading his writing,
I was impressed at how well he gets his major conceptual points across -- with flair, class AND
in a lively and entertaining manner.

As a professional programmer/analyst for the last 12 years, I've always found that it was having
a good conceptual framework and understanding that has helped me to do so well in IT
compared to many of my peers who simply try to remember commands and "how to's".
Communicating and sharing such is a major theme that flows forth thru his prose as I read his
writtings.

This goes beyond just being admirable. I'm not even sure what words to use.

Like many here, I am much better off due to Mr. Greenspun's sharing with the world. Besides
what I've had the pleasure to learn from his works, I also met and married my wife -- who I
met thru his software. She and I are very, very happy.

I don't know you personally, Mr. Greenspun. But I **do** thank you -- for lots of things -- and
so does my sweet, wonderful wife, whom I dearly love...

Lots of people have and will post many things thru this time period. I for one wanted to weigh
in with a thank you and my support for Mr. Greenspun -- because he deserves it -- and has
earned it!!

Sincerely,

Louis Gabriel

-- Louis Gabriel, April 24, 2001

What I'd like to publicly question is: can anyone cite instances in which venture
capital companies took control, brought in outsiders, and turned a business into a
rousing success?

If I'm not mistaken, Cisco is in fact such a case: VCs came in, the founders got kicked out,
and despite their troubles in the first few months of this year I'd still consider the company a
moderate, if not rousing, success.

Funny thing is, at one point, Philip read The Cisco Connection, a book about Cisco the business,
and talked a lot about the lessons from Cisco that ArsDigita should copy. But he never seemed
to mention this little fact :-)

-- Lars Pind, April 24, 2001

Philip,

I've been horrified by the news from aD since the rumblings started a few weeks ago. Having
had the opportunity to meet Eve and Tracy and Aure back in 1999 and have you teach a half-
day class at my former employer (a very large Japanese car company in SoCal) I count myself
very lucky indeed. I fondly remember dinner in Pasadena and meetings at Aure's house.

Realizing that I'm only hearing one perspective on this situation, I can report that my best friend
who's net startup was funded by VCs is thoroughly disgusted by the VC firm's actions since last
fall. While his experience may not mirror yours, the end result is the same: broken hearts and
broken dreams. However, the VC partners walk away relatively unscathed. I don't know how
those people sleep at night, personally.

I have noticed that great companies (and I don't mean that necessarily by Wall Street
standards) get started by passionate individuals. VC firms seem to be made up of people with a
love for money above all else. The two cultures don't seem to mix well often (certainly not in the
financial environment post April 2000.)

Please know that I think of you & Eve and Tracy & Aure often and I hope for the best for all of
you personally first and aD second.

Your impact (individually) and legacy was formed long before you ever started aD and I just
wanted to voice my support for you in what may be trying times.

Best wishes,

Gen Kanai

-- Gen Kanai, April 24, 2001

I think it's fairly clear when you read a lot of content on Photo.Net and Philip.Greenspun.Com
what sort of person Philip Greenspun is.

He regularly gives to charity and encourages others to do the same.

He regularly gives credit where credit is due.

He sees incompetence fairly clearly and isn't afraid to point it out when public opinion goes
another direction (see Bill Gates).

When it comes right down to it, I know Philip Greenspun is honest with himself and the people
that admire him. This so-called 'one-sided' account of affairs is (I'd put my reputation on the
line to back it up) very, very accurate.

Full disclosure: I have sent email to Philip Greenspun about 5 times, and have gotten at least
three responses. I've sent email to Eve Andersson about three times and have gotten at least
one response. Maybe this means I'm so close to them I'd put my reputation on the line for
them. Or maybe, just maybe, they're decent people in a nation of greedy bottom-feeders.

-- Philo Vivero, April 24, 2001

Philip, thanks for telling us your side of the story. It is all too similar to most of the other VC
stories one hears.

I heartily agree with you about the unfinished condition of ACS 4.x. We (furfly) have lost at least
one prospective client because of it, perhaps more, and the project we're working on now is
waaaay behind schedule, much of which is due to our stumbling over ACS 4.x issues. This is not
to say that it is unusable, or unfixable, but only that it is unfinished - I don't want to disrespect
the hard work that went into it, only the decision to release it before it was ready.

-- Janine Sisk, April 25, 2001

First, let me express my thanks to you, Tracy, Eve, Jin and the other arsDigitans who helped
create the ACS community. I've enjoyed working with the ACS, and I've learned a great deal
from your writing in particular.

With respect to the current conflict, have you considered splitting aD in two? Please note that
what follows comes from a sympathetic, but ignorant, outsider. Take it for what it's worth.

Here's the scenario: you form a second company--let's call it aD2. Any current aD employees
may come and join your company. aD2 would also get some seed capital (perhaps equivalent to
aD's capitalization before the VC's came on board plus interest). aD2 would also get any existing
clients who wanted to switch to the new company. Both companies would get equivalent
copyright ownership rights to the existing code base.

In exchange, you would drop your fight for control of aD. aD would also get, say, a 20% non-
controlling stake in the new company.

If you're right, then aD2, under your leadership, should be profitable and grow. The value of
your shares in aD2 will depend on your own abilities, not the abilities of managers you believe to
be incompetent. The VC's still win though, because they will own 20% of the new company.

If you're wrong, and the original aD goes on to grow and become profitable, then you still win--
you will still presumably retain your 60% ownership of aD.

If you're both right, then you will both expand the community as a whole.

If you're both wrong, well, perhaps one of the other ACS based companies will take up the lead.

Why split the company? As it stands now, it seems to me, whoever wins the outcome of this
battle for control of the company will likely enjoy a Pyhrric victory. While the fighting goes on, it
seems likely that aD employees, instead of putting their energy into writing high-quality code,
seeking new clients, and providing excellent service to existing clients, will be distracted by
clashes between management, and contradictory directives from the competing factions. Under
such conditions, how willing will potential customers be to trust their web services to aD?

Why might the VC's go for a split? To date, aD has been almost a 100% service company--as
far as I know, it has very few capital assets to speak of, and those that it does have (primarily
computer hardware) depreciate rapidly. Therefore, the principal value of the company derives
primarily from the people who work there.

Already, you, Aure, David Eison, Adam Farkas and others have left--all individuals who, from the
outside, seem to have been very valuable assets for the company. If Shaheen and Co. win, even
more employees will likely exit. What's the point of purchasing a services company, if you drive
out the people whose services led you to fund the company in the first place? With a non-
controlling interest in aD2, they still benefit from your unquestioned skills, without having to deal
with the differences of opinion that led to the split in the first place.

Why might you go for this? Let's assume that you win this particular lawsuit. I still don't see the
VC's giving up control--there's too much money at stake. I would expect even more lawsuits. (I
would also bet on the VC's to win this lawsuit--after all, the VC firms have probably funded
dozens of companies in their history. No doubt problems like this have arisen before. It seems
unlikely that they would've signed a contract which did not give them the legal control they're
now exerting.)

I also don't see you and Shaheen working together well in the future--whatever differences in
competence, management style, vision, or personality caused you to split initially will likely arise
again. And there's no guarantee that a new VC-appointed manager would do any better. Even if
you can override the VC-appointed people, it will likely be an ongoing source of friction.

With a new company, you get to build it the way you think it should be, with people that you
trust, instead of watching helplessly as the VC-appointed management drives aD into the
ground. (Assuming that your assessment is correct.)

Whatever happens, I wish both you and the people at aD success.

-- Christopher Rasch, April 25, 2001

This is definitely a sad story. But it seems to be the norm from the VC and acquisition world
since the burst of the Internet bubble. What I find sad about it, is that they assume that since
some of the business models were bad then all of them were bad including the profitable ones!
So they quickly resort to the known failures of corporate culture because they ooze of CEO
control. My favorite form of CEO interference is hiring freezes when you have lots of openings
with paying customers. And then they give you shit for not realizing their sales goals. What am I
shipping? Promises? They sell real well right now!!

-- Bill Thecat, April 25, 2001

Thanks Philip!

First, I have been a Philip and Alex fan since the first few chapters were posted and I have a lot
of respect and admiration for Phillip but I have to question whether this suit is worth winning.
Phillip paints a pretty clear picture of what it takes to survive in the software world. I wonder
how many 6 day programmer weeks have been lost or wasted so far. I wonder what the
competition has been doing during this time. I wonder if this is an itch that has been suficiently
scratched. Then I wonder what is the "next big thing" and whether it's best developed by
ArsDigita or by something else like PhAlexCo? I wonder if there will be any cash left to resurect
ArsDigita when this is over? My guess is that ArsDigita management won't be very popular if
ArsDigita tanks. This may make ArsDigita management do irrational things. There may not be
much left of the company once this has played out. I don't want to suggest that ArsDigita is
doomed. I just hope it has a fighting chance once this is through because whoever controls
ArsDigita when this case is over will likely be blamed for its final outcome.

-- Scott Patten, April 25, 2001

I admire companies that have motives other than just pure profit. Having goals other than
maximizing shareholder returns can often be an impediment to a company's competitiveness,
but that doesn't mean that it is not useful or good in the greater context. I support the culture
and goals that I think ArsDigita used to support: open source software, a free and open
dialogue between people. The aD university sounded like a great idea.

However, it is only possible for a company to maintain that kind of ulterior (i.e. non-profit)
motive so long as the people in control of the company share those motives. The average
shareholder, and even more, the average VC, I think has only one goal in mind: making money.

In some ways, I think aD was a victim of it's own success. Explosive growth necessitated
bringing in outside management and capital to keep up, and control was lost. I wonder if this
really could have gone any other way? Could you have held on to the company without external
support? Would turning away business because you couldn't keep up with demand have killed
the company as effectively as bringing in outside capital and management? I'd like to think so,
but I'm not completely sure...

(I'm mostly interested in this saga because I knew Eve when we were both undergrads at
Caltech)

-- Zane Crawford, April 25, 2001

From Tokyo, Spring Rain day.

Life is more interest than Novel. I had received the e-mail from philg on July 1999, after knew
aD bootcamp through photo.net. Can I join the Boston bootcamp? Philip reply me OK. So I made
a business trip plan, and got approval to USA from my boss, of cource, my itinerary was not to
Boston.

Ohh, I asked him the recommendation to find the Hotel in Cambridge, he replied me "I am not a
travel agency".

The BootCamp was very impressed me, there were Free Lunch. What for serving us Free Lunch?

May 2000, I had visited Boston again, with CEO, so this time is OK, 250 USD Hotel.

Nice aD office and Piano, photo. How come these nice place to work!!!

Oct.2000, Philip Sensei come to Tokyo, we had two seminars and visited Waseda Univ., and
Toshiba, Nikon,etc. Folks!!, the Philg's secret is Diet Coke, 'cause sugar make him thirsty.

Don't give hime a "Piece of Cake" life with sugar.

Good Luck and Arigatou Gozaimasu

-- Teruo Miyagawa, April 25, 2001

The question that comes to my mind is why VCs were brought in at all if aD was making
$20M/year. If additional management was necessary to track projects and tasks, then hire it.
The careful, controlled growth that built aD originally could have been sustained in spite of
market downturns. The typical reason for taking VC money is to expand quickly - scale the
business and make the really big money. That's the gamble and that appears to be what did not
pan out. The danger of taking someone else's money is their-nose-in-your-business to protect
their investment. In spite of the way it was supposed to work out with this arrangement, it
obviously did not. I have read and love Philip's online work but I've also been to a CalTech
seminar so I know that this article paints a slightly rosy picture of running a tight ship (I heard
Philip say that he paid "22 year olds $100,000/year and give them 5 weeks of vacation...").
Perhaps it was just a recruiting statement. If the company had continued privately though, it
really wouldn't be anyone's business but Philip's and aD employees. As much as I like and
respect Philip's writings, work, and ethics, I do hope his ego loses a bit of volume from this
fiasco. It's naive, but I also hope the lawsuit goes away and aD becomes what it had the
potential to become: a great open-source design/development company with smart people
making good money doing what they love and contributing to the open-source movement. But if
Philip isn't there to guide it, I won't be buying any stock.

-- Lee Le Clair, April 25, 2001

For months now, I've been trying to figure out how aD's management can just ignore the ACS
community (and the ACSish market) they way they have. Barely speaking to us; releasing
incomplete, unscalable, untested software to us; and finally just abandoning the whole thing
midstream. And the only thing I can think of is that they are trying to clear out the community,
get rid of the community memory, for when they rollout their closed source, java solution.

Maybe I'm just too conspiratorial minded, but how else to explain current management's
squandering of a product, of customers, of some of their best developers, and of a wonderfully
supportive community? The community. Was there ever a better way to cross the chasm? Was
there ever a better way to create/maintain relationships? So was this Plan or Incompetence?
The current ArsDigita is VC deadwood. The current ArsDigita will be rolled into a CRM or
ecommerce company in General Atlantic or Greylock's portfolio, or M&A'ed into a Fortune 1000's
java unit. Exit by acquisition: it's not kind to any but the top executives. (To current employees:
it's okay, your special decorative non-equity stock will still look good hanging on your walls.)

Go Philip, and thanks once more for everything, the online education, the conversation with the
community, and your sense of life.

-- jerry asher, April 25, 2001

Unfortunate that a promising company and its founders landed in this. But to the founders, as
the common adage goes:

"If it isn't broke why fix it !" , why go VC ?

On the same note an article on a company which also confronted growth, and has managed it
WELL, a few words from Lionel Poilane:
It's important in business to be able to say no
when you feel like saying yes would mean losing your soul.

Does that strike a chord with Arsdigita ? The curious thing is that Lionel Poilane is not a PhD
from MIT nor a High-Tech executive from Microsoft or Oracle , he is a BAKER! as in Flour, Water
and Yeast.

http://www.fastcompany.com/online/44/poilane.html

-- Daniel Rubio, April 25, 2001

Your experience, Philip, mirrors my own experience with VCs coming in and destroying the
atmosphere, intelligence and innovation in a company.

While I'm sure it's painful to see your baby go down the toilet, you'll have no trouble starting up
ArsDigita2 and getting zillions of clients. The beauty of the GPL is that you can take ACS and
move it forward in the direction you desire. Failing that, I'm sure there would be hundreds of
companies that would take you on as an independent board member, just in case you enjoy
wearing a suit and never coding.

-- Simon Rumble, April 25, 2001

As so many other programmers, every now and then I dream of starting my own firm. So far, I
have learned a lot from Philip's writings, but I think now I am learning even more from his
writings about starting aD, growing it, and bringing VCs in. If I ever get to start my own
company, I know what not to do. A very valuable lesson.

-- Carsten Kuckuk, April 25, 2001

Based on Philip's comments above and others' elsewhere, I'm speculating that part of the reason
for going VC was a belief that he was ill-prepared to oversee a company this size and outside
execs might do better - but this decision was based on scant to no evidence that the new execs
would be competent at running this particular business. (Hiring based on evidence rather than
"touchy-feely" intution alone?! Radical concept, isn't it? It'll never catch on.) This is a little like
hiring a programmer to work on a critical project without any evidence that they are able to
write code - only much worse, because of the control aspect. How can you gather evidence that
someone is competent to run a software company? I don't know - but as Philip now recognises,
if they have never run a software company before that is one red flag.

Other obvious ones would be if they have caused many key staff to resign in previous
businesses, or if they seem clueless about basic principles of customer relationship management
in this kind and size of business (as in this case - at least as Philip tells it).

(Being at a much larger, big-name consultancy can lead to an arrogancy about certain client
relationships, because some clients *cough*governments*cough* seem to come back again and
again to the big contractors no matter how crap their record is. Of course, corruption has
absolutely nothing to do with it! [sarcasm] Without much of a corrective in terms of loss of
reputation, being turned down for the next project etc., there are plenty of incentives to
overcharge, turn in projects late *and* full of bugs - which, surprise surprise, is exactly what we
see.)

-- Robin Green, April 25, 2001

This is close to an chapter in a book by Richard P. Gabriel called "Patterns of Software: Tales
from the Software Community" where he talks about a compiler company and what happened
when they changed upper managment.

celer

-- David Tyree, April 25, 2001

For some histories about why everyone seems to need more and more capital, and so go for
venture capitalists' money like ArsDigita did, it is nice to read the articles by Bill Parish,
especially summaries like Microsoft Fraud Facts or Microsoft Pyramid Collapsing AOL.

It is a lot of reading and understanding business concepts, but I've found it quite worthwhile.

-- Leandro Dutra, April 25, 2001

I would like to wish you good luck in the upcoming legal wrangle. In my opinion, you are dealing
with egotistical bullies who are incapable of understanding or accepting the cluelessness of what
they are doing. They are damaging themselves financially, but are clearly prepared to bite off
their own nose to spite their face.

This kind of behaviour, which is not untypical in the world of business and high finance, is
hopefully a transient blip in the development of humanity. The sooner this kind of thinking is
consigned to the dustbin of history where it belongs, the better. The values which you and
indeed the open source community espouse constitute a positive step forward and indeed make
good commercial sense for humanity as a whole. The entrenched conservative forces of power
and money only win at the expense of others. They will not let go without a fight but there are
alternative ways for people to do business which create win-win situations.

The open source community are leading the way toward a better future for the majority, not just
the select few. The Internet is a real force for political change and can nurture the innate
positive and cooperative aspects of human nature. A small portion of overly privileged and
intellectually underpowered individuals strive to stop this development but unfortunately for
them the forces of evolution are much stronger than they. Leave them to their evolutionary cul-
de-sac, the network shall route around. Onwards and upwards.

-- Paddy Ryan, April 25, 2001

Pursuing knowledge in childhood we rise

Until we become masterful and wise
But if we look through the disguise
We see the ties of worldly lies.

Omar Khayyam

-- Sveinn Valfells, April 25, 2001

My summary -- "service companies" can make you rich, but "product companies" can make you
obscenely rich, and they thought that their productization of aD would make them obscenely
rich because they didn't understand the huge obstacles to such a conversion, being clueless
about both the software services business and the software product business.

Actually, the old aD had a product, but it was an open-source product, so they made money on
the associated services. To go to closed-source, and expect to make money from directly selling
a product that hadn't been developed yet, in the face of entrenched competition, was quite
remarkably unwise even by the standards of the dot-com industry.

One lesson I have learned from this is that the most valuable product anyone could possibly
invent would be a foolproof evil-detector for evaluating prospective business partners.
(Stupidity-detectors already exist, and Philip made the mistake of not using them seriously
enough, but the reason he is really screwed now is that the current aD management was not
simply clueless but deceptive and vicious. My favorite Dilbert comic strips are the ones where
the pointy-haired boss shows that, though he is brain-dead regarding anything technical, he
understands corporate infighting and power-grasping far better than the naive engineers who
work for him. It's too bad Philip didn't see the Greylock/GeneralAtlantic suits in this light early
enough.)
Image: dilbert2001040261058.gif

-- Joe Shipman, April 25, 2001

I take strong exception to Warnock's contention that Greylock is usually right. I think his choice
of words is poor - my experience is that Greylock is rarely insightful (right?) but ALWAYS
arrogant. They never have any ideas, they just follow the money.

I did technical due dilligence on several occasions for one of the partners at Greylock back in the
early 90s (Roger Evans) and I helped put him into several deals that helped make him millions.
I have also heard him downplay and even deny that I played any role and later he wouldn't
even take my phone calls (he acted like he didn't know who I was!). But these guys are not
unique, it has been my experience, to a person, that VC are scum. Sometimes they are polite
and well-heeled scum - but always scum.

-- Mark Bennett, April 25, 2001

Just the other day I was lending a co-worker a copy of Richard Gabriel's Patterns of Software,
with reference to his essays "Into the Ground: Lisp" and "Into the Ground: C++", which discuss
the career of Lucid. A different market, a different world, but some of the same lessons.

-- George Jansen, April 25, 2001

From Philip's writing above, it appears that the reason for accepting outside investment was to
give AD greater credibility as an "enterprise software vendor".

I don't have enough knowledge about the kind of work AD was seeking to be able to confirm
that this was necessary. Philip compares AD to Microsoft, IBM, and Oracle in terms of needing
to be perceived as "safe". But given that he was in a pretty different market (certainly from the
latter 2), I'm not sure I agree with him.
A big part of the issue is what different people's goals and expectations were. Would they have
been met running a smallish yet profitable consulting company? Would those MIT guys have
continued working 6 days a week without a financial windfall (which would probably only come
from an IPO, which is where the enterprise/scale/VC thing starts...)? Did Philip want a more
external proof of his "success"? Or a desire to see some liquid benefit of his ownership of a
"profitable" company? (Note that with a small, growing, private company, being "profitable"
doesn't help the owner much if all the profit goes back into working capital to handle the
growth.)

Difficult questions, difficult choices. As much as I'm wary of outside money, it would have been
a tough call...

-- Bill Seitz, April 25, 2001

As another who has followed the fortunes of ArsDigita I have found myself a bit depressed about
the turn of events. Although as Adam says, there are two sides to any story, the evidence of
what has happened has been apparent for a while. In the end it seems that the quest for
"growth" has been yet the downfall of another promising company. At least Philip is in good
company; after all, Steve Jobs brought in outside help for the same reasons and ended up on
the street.. but came back too.

The truth is MBA's and other business school trained people suck at running companies but are
very good at running up their fortunes. They pursue the big lie, which is "profit is the goal".
Even though I am too far out of the Boston/NYC/LA/SF mainstream to have found a position at
aD , it was a company which was founded on a set of strong fair principles and operated that
way, like Philip himself. (well, except for the non-compete clause which may now come back to
haunt them). Since there are so very few companies that are not run on the pure pursuit of
management profit (notice I didnt say shareholder), aD was a shining light that we could look
to. I worked at Vignette which also aimed for "hypergrowth" but then axed left and right when
reality hit. They are the closed software vendor that the current aD management seeks to
emulate even though they still have yet to turn a solid profit. Of course Greg Peters and
company made millions off of shareholders which is why Shaheen seeks to emulate them.

I believe that a service revenue based company with open soure software and education is a
good and successful business model as Philip demonstrated and one I hope we see more of. I
have always believed though that the staff should work reasonable hours and build the company
as a enjoyable , profitable and worthwhile place to work and drop the idea of big windfalls. It is
often things like greed which drive us to do wrong things.. and by sticking to those principles of
software professionalism that Philip so ablely stated, we can build long term strong successful
companies, even if they are small companies.

In the meantime, I see the OpenACS project as the future of ACS and I hope to see the
developer community move there. I was always a bit uncomfortable when the developer stuff
left photo.net for ASJ.. seems like the development community site should not be the arm of a
profit driven company.

-- Jamie Ross, April 25, 2001

Philip: You took aD from $10,000 ($'93) to $20M in Revenues ('00), right? I'd bet you could get
over $100,000 to restart, you'd already have a sterling reputation, you could probably get a few
REALLY good programmers to work for you, and (the key part) keep the current Open Source
version of ACS to build upon!

Then, let ArsDigitsSpent keep doing what they are doing with what they have, do what you
would love, and kick their butt!

Sounds like the aD episode is a case of spreadsheet-blindness: the numbers that one can
produce on a spreadsheet are not necessarily rooted in reality. When the numbers fail to take
into account "irrational" or "touchy-feely" aspects (such as relationship building, trust, a sense of
community, educational opportunities, or charitable giving), then the numbers are random in
nature. The sad thing is many companies/people use these numbers to bet the firm every day...

-- Donald Wynn, April 25, 2001

Two points: first, when comparing his managment year against the VC's, Philip needs to
acknowledge the change in economic conditions between 1999 and 2000. I'm sure he still did a
good job, and the VCs still did a lousy job, but the comparison he gives is not valid.

Second, VCs have a different vision than founders. Founders are like parents, saying "keep my
baby alive!" VCs swing for the fences, and hit alot of outs along with the homers. To the VC it's
not a baby, it's just another baseball.

The reason for a successful $20 million a year company to hire a VC is to position itself to grow
to $20 billion a year. So my guess is the reason Philip went to the VCs was because his
ambitions included growth on that scale. Those who know Philip know he has an enormous ego,
so it wouldn't surprise me if he wanted to join the ranks of Steve Jobs and Larry Ellison.

Now I'm not arguing Philip's facts or his evaluation of the management they put in place - my
guess is he's right about all that - but it's much easier to see the disconnect in light of the
differing goals. Philip says "you're taking on all this risk!" The VC says "swinging for the fences is
inherently risky!" Philip says "you're running the company completely differently!" The VC says
"we have different economic conditions, and anyway you only know how to run a small
company!" Philip says "don't kill my baby!" The VC says "maybe if I swing even harder I can hit
the home run. And if not with your company, maybe with the next!"

So I'm not saying the VCs made the right decisions, only that it's not so hard to see how they
could ignore Philip - different goals, different conditions, different notions of what's at risk
(Philip's note touched on the risk issue, but not the other two). And I suspect that part of the
disconnect here is that Philip, understandably, wanted to have it both ways. He wanted to keep
his baby alive, and he wanted to swing for the fences. The VCs should have understood this, of
course, and they should have understood that they have no company without the vision and the
culture built by the founders.

Personally I'm a "keep my baby alive" kinda guy, so now I know to make that abundantly clear,
should I ever be in Philip's position. But my main point is that even the most talented VCs might
have ignored Philip's advice and taken on a lot more risk than he liked. But any VCs ought to
make that clear from the outset.

-- Lee Campbell, April 25, 2001

I think what might become one of the more interesting points from this lawsuit is how Graylock
and General Atlantic's reputations come out of this. Their actions may very well serve to sour the
attitutes of the multitude of engineers out there that actually start companies. Graylock and GA
peeving a whole class of people that have brought them all this wealth can't be good for a long-
term business perspective. When another engineer has an interesting idea for a startup and
needs funding, he or she may think two, three, even five times before taking money from either
of these firms.

Then again, maybe that's just my naivete and a lot of wishful thinking.

I wish Philip and Eve and Jin (and the rest of the crew) good luck!

-- Nicholas Barry, April 25, 2001

I think Mr.Greenspun's article on aD was interesting, but I think the U.S. would like him to stop
fooling around with aD, and figure out what he's going to do with interest rates during the next
Fed meeting.

Thank you.

-- Mook Merkin, April 25, 2001

Ok.. had more thoughts on the way into work which might be a separate topic if Philip is
interested (after all this is his site)

I was struck by how close aD was to being the model engineer's company and how the "growth"
issue was ultimately its downfall. So I was thinking there are other models for growing a
business other than the VC approach (with its obvious pitfalls).. its just we are looking in the
wrong place. I think what we need to do is use the VERY successful "franchise" approach. In a
sense Philip did most of the key elements anyway, developed a basic toolkit/procedures,
provided free education etc.. What was missing was the final step. While we have several
consulting groups based on ACS development (FurFly, Ybors, OpenForce) we are all still seen as
small separate vendors and lack credibility in the enterprise space. If aD or its sucessor grew by
franchising its name and marketing in return for a percent of the revenue for instance to
qualified groups , then it could grow as a collection of independently operated consulting groups
using a common approach, principles and toolkit while providing lots of developer input back
into the ACS development itself. Criteria could be set (such as completing bootcamp course etc
and demonstrating some project management experience etc) to get a franchise as seems
appropriate but it would harness the opensource developer community and give us a larger
"footprint" which would provide more credibility.

Its just a thought.. but I wanted to put it out there as a follow-up to the "Bust-Up" on how we
can take advantages of the lessons learned

-- Jamie Ross, April 25, 2001

I just wanted to say thanks to PG for his contributions to the photographic community. I
remember reading "Travels with Samantha" in 1994-5, then being turned on to photo.net a few
years later. Good luck.

-- Chris Meiering, April 25, 2001

I've always admired ArsDigita for their refreshingly pragmatic and solidly technical approach to
the software business. How unfortunate that a poster child for enlightened open source software
product development could be so badly mangled unenlightened executives.

MBA wielding morons like these guys are the scourge of corporate America. They calcify the
operation of large corporations with their incessant empire building and wreak havoc in small
ones as illustrated in Philip's depressingly sad tale. I wonder if Shakespeare would have gone
easier on lawyers if MBAs had existed in Merry Old England.

-- Ward Harold, April 25, 2001

I'd like to agree with the previous posters on their positive comments about Phil. At the same
time, it could be that Phil can benefit from the following observations.

Phil Greenspun looks at the world differently from most of us. Everyone would agree that he's a
very smart guy and gets a lot done. He made a mistake with VC. Often VC is a mistake. On the
other hand, I've seen firsthand the devastation caused by a certain types of leaders in an
organization. Many times such leaders neglect lesser talented team members in favor of the
highly talented few. The true measure of a coach is his ability to take a group of ordinary people
and make them into an extraordinary team. I don't know whether that was a problem for Phil or
not, but it can be a real problem that causes all sorts of organizational pathologies. I thought
this might be a problem for Phil because of comments I've read that extol selected staff. That's
a tip-off.

This was a timely email for me. I didn't know that all this was going on and was preparing to
invest time into using the ArsDigita platform for some development.

-- Greg Wilde, April 25, 2001

....and Atlas shrugged...

-- chris barney, April 25, 2001

So, there Philip is, exploiting his employees with long hours and low wages, seducing them with
gimmicky benefits and the opportunity to do something cool. Rather than be satisfied with a
small, successful, profitable company, he decides, for whatever reasons, to play with the big
boys (Gates). So he starts growing the company by getting more wage slaves. Soon, he feels a
bit out of control. The Invisible Hand is tapping on the shoulder, reminding him that you can't be
a colleague and a feudal lord at the same time. Rather than getting the message, Philip decides
to grow harder and faster. He brings in the evil VCs, who, in a ridiculously simple maneuver
enshrined in countless Hollywood movies, wrest control of the company using a ploy that Gates
would have seen through when he was still in the womb. The Invisible Hand has just bitch-
slapped him back into the Ivory Tower. Now he wants to regain what he lost. But the old aD
was just another exploitative company with a veneer of geeky Open Source coolness. You reap
what you sow.

-- Bruce LeSourd, April 25, 2001

Some of the above comments seem to be critical of Allen Shaheen for being a slimy,
incompetent, "MBA-weilding moron" with no qualifications whatsoever to run a software product
company. As someone who has worked with him, I'd just like to set the record straight: Allen
does not have an MBA.

-- Ex ArsDigita, April 25, 2001

I've always wondered, and hearing this saga I wonder more, about the "swing for the fences"
versus bootstrap tradeoff.

If you build a company and enjoy what you're doing enough to do it for twenty years, isn't slow
growth a reasonable option? You do have to grow a bit to accumulate some capital to survive
the lean years (or a change in the business environment requiring re-direction of effort and
capital expenditure), but maybe not that much.

I suspect that "swing for the fences," "get big or go home" mentality comes from those who
don't really enjoy (or maybe even understand) the real business their company deals in but just
want to build empires, then move on after a while to build another (see Jim Clark).

After hearing about a furniture-making co-op where the members buy an (equal) share & pay
dues for upkeep, equipment purchase, etc. but keep the profit themselves, I began to think of a
software co-op. Not a body shop owned by the bodies (though that's not a bad idea) doing
consulting, but a software company (I have my head stuck in 1986) where marketing and the
photocopier lease are handled by the co-op but the software is written by the member/owners.

Along those lines, I'd love to use a word processor written by one person who took three years
to do it and it going to maintain it for the next 10. Likewise for a web browser, etc. I know this
flies in the face of open-source/bazaar collaboration, but I think that for projects small enough
for one person to handle if at all possible, that might be the best approach. I feel that all
software I've worked on with others has been compromised by lack of solid work in the
interfaces (usually due to time pressure).

I know a fellow who writes software sold by a publisher who gives him royalties. On a particular
project, they gave him a library written by another programmer. The library already existed, was
tested and lived to be a generally-useful lib, not a hacked-together module for one product.
That's the kind of collaboration that could work in a PC application co-op. It reminds me of the
furniture guys: when one of them has a large job (a BIG conference table), they can pay the
others to help (with planing and sanding), but they're generally independent.

I'm impressed that ars managed to wow a bunch of people into thinking that if they couldn't
work there, they'd want to work somewhere like it. When I was burning out @ PowerTV
(http://biz.yahoo.com/prnews/010314/atw009_2.html), I'd ask my co-workers "if you ran a
company like this, what would you do differently?" CVS instead of SourceSafe (they've since
switched to Perforce), development on Linux PCs with maybe a few Alpha servers, a real
sustaining team to get the new-development guys productive, etc. and 21" monitors for
everyone and a flatter management structure. Some companies aren't even that far from being
a great place to work, but have the broken parts fossilized so they can never be fixed.

-- Morgan Woodson, April 25, 2001

I whish to thank Phillip for all the work he has put out on the internet. I started looking at
photo.net in 1999 and has learned a great deal since.

I have had my own dreams of starting a business on the internet, and recently I stumpled upon
the book below.

LLOYD, T 1992 Entrepreneur! Bloomsbury Publishing Ltd., 1992

The part below is a quote ( p. 132) where one entrepreneur recounts a conference about
entrepreneurs. ...being invited to a conference about entrepreneurs by the head of the venture
capital division of one of the banks that had backed him. The plan was to subject a group of
entrepreneurs and a group of bankers to a series of personality tests and then to compare the
results to see if there were any significants contrasts.
'He came to me and said, "We know venture capital is about entrepreneurs, so that means that
after due diligence it's all about backing horses. We want to analyse entrepreneurs to see if we
can improve the odds. Will you help ?"
'..When I arrived on Sunday morning I parked my Montego next to rows of Porsches.' 'The
results of the study were the opposite of what had been expected. Entrepreneurs emerged as
very steady, reliable, trustworthy, risk-averse people. Bankers were the opposite.'

Seems like people investing in venture capital funds, should start wondering if they are doing the
smart thing...

-- finn knudsen, April 26, 2001

Hey Phil,

From Jeremy Zucker and myself. Sorry you got fucked. Once again, we see the "Triumph of
Mediocrity".

YT, Adam

-- Adam McClure, April 26, 2001

It's very sad to see the dreams of Philip go up in smoke by some heartless VCs who don't
understand what he was trying to accomplish. I got the sense from the early days of ArsDigita
that making $millions was an aside. I recall a soft spoken Philip on web cast talking about how
web servers were objects; how better software could make a better society; how training kids to
make useful web services was important; how open sourcing his ideas was helping us all to
made great strides forward. Those were exciting times! Why must it still come down to $money
money money? It's sad that of all the people Philip has evangelized - he couldn't convince the
people who needed to love the dream most. I think what the Plaintiffs in the law suit are doing
is despicable and I wish they would drop their suit, rehire the people who made ArsDigita what
it was and get out of the way.

-- Phillip Harrington, April 26, 2001

This just goes to show: If you want to run a company, you need to run the company. It would
be nice to give control to another entity and sit back on your laurels and do nothing, but
unfortunately that's not the way the world works.

If you have a blockbuster idea, and the above is your intent, I hope I have the fortune to know
you because I will exploit the hell out of you too.

-- FirstName LastName, April 26, 2001

I was a client of aD from September, 1999 to February, 2001. I have been building large web
sites since 1993, and had built over 50 substantial sites prior to my experience with aD.

Our first meeting with Philip was in a small house in Cambridge where Tracy had to kick all the
Diet Coke cans off the sofa for us (the senior management team of a new startup) to sit down. I
came away with four conclusions after several hours of conversation with Philip and Tracy:

1. These people really knew what they were talking about and were practical - no litany of
industry buzzword BS from them
2. arsDigita operated by hiring very smart people, expecting a lot from them without
burdening them with lots of process, and providing real technical mentorship
3. Philip is highly opinionated, but can be communicated with readily if you have something
worthwhile to say
4. Suits were not comfortable with Philip (or Tracy)

Once in the cab, I told the CEO we should hire them immediately - the other VPs in the car
looked at me in disbelief. Eight weeks later we went live with a pretty complex web application
that won many awards and at its peak received ~650,000 visitors per month.

My main concerns about aD were that the "smart people without process" model would only
scale to about 30 or so engineers and that Philip seemed disinclined to change things himself. I
was glad they were bringing in outside talent to help them augment the skills in the company. I
hoped they would find talent that would understand the need to guide what the founders had
built in a humble way.

By the middle of 2000, it was clear that the new management did not understand the mission in
front of them. New engineers at our company were routinely complaining about the level of
competence and experience we were provided by aD. Communications with the new CEO were
unreasonable and frustrating. Contacts at aD went from programmers to project managers to
sales VPs. All these people were trying hard, and in some cases doing pretty well - but aD had
lost the things that made it unique and successful.

Finally, in fall of 2000, the bottom really fell out of the dotcom sector and VC funds dried up as
the Nasdaq cratered. I think that no matter who was running aD, they would have downsized
and run into cash flow issues during these difficult times in the private equity markets. That
said, aD is left with little to build from without the core team that got the thing in motion.

BTW - I had not heard about the MS/dotnet opportunity before. That is really an inexcusable
error...

Good luck Philip with pulling things back together!

-- Josh Stella, April 26, 2001

VC's aren't the sole force that can distort a company out of its original shape. Boom-engendered
greed can be such, as can be timid reversion-to-the-mean (in all senses) corporate behaviour
once a company has gone public.

I see any of these as a crisis in sincerity: from the point of view of the law, the purpose of a for-
profit company is to make money 1 . If you don't, or if you merely don't do the things other
people do in the apparent pursuit of making money (no matter how little sense they make) you
can be sued.

If, however, your company should also have other purposes of some sort enshrined in its
articles, say "writing cool software and treating employees as if they were human beings" and
an officer of the corporation acts in such a way as to obviously undermine them, I really doubt
that he [usually] could be successfully sued or otherwise legally sanctioned. I'm sure there will
eventually be a test-case where the executive in question has publicly stated, "I don't think we
can make any money being cool, let's do boring stuff and be mean to our employees to boot." If
the suit in question has instituted obviously profitogenic directives such as being at one's desk
by 9a.m., or never insulting an executive, he 'd probably be well-insulated from effective legal
action (and would be able to use the company's resources for his defence)2 .

However, the upshot of it is that it is very hard for a company to be sincere about anything
beside being greedy; maybe that's why one reason why Redmond does so well. It is a problem,
though, when what one does directly affects people's lives, programmers or cleaning staff or
open-heart surgery patients. You can talk all you wish about the Most Holy Market sanctioning
awful behaviour and correcting itself, but It can't correct the permanent damage it has
encouraged in the first place--there is such a thing as human hysteresis.

Then again, even though I can't remember which rabbi (Hebrew for 'sifu' or 'sensei') said
something like, "Even though you can't succeed, you are not exempted from the obligation to
try," I still think it bears repeating. In any event, Eve (uh, "DEI") and Phil and all, I'm sorry to
hear of aD's problems, and I hope it or some heir or assign thereof prospers and develops into
its own best self. The market could use a good example, for morale's sake but also to use as
evidence that right action can lead to profit.
---M.T..
1 If I wanted to sound more hard-headed than I am, or as if I really knew of what I spoke, I
would say "to turn a profit."
2 Perhaps this is as it should be: I don't know that I want the courts to decide who's cool and
nice and who isn't. However, they regularly decide whether someone has financially mismanaged
a company without any notable competence in that sphere, either....

-- Michael Turyn, April 26, 2001

As someone who has a succesful consulting company I looked long and hard at taking VC $$$ in
the last couple of years. I could never come up with a business model that made sense to the
VC's. They want home runs--not a series of singles and doubles that will win the game.

As the crash of last year has shown the VC's model of Start-Spend-Explode does not replace
Start-Learn-Grow. Money is not a substitute for industry knowledge, customer knowledge,
methodical testing of markets.

-- Sanjay Nasta, April 26, 2001

Sorry to hear about the mess, Philip. I've been friends with Jin Choi now for 10 years, and I've
also admired you and aD for several years, and so I'm sorry to hear how it all turned out.

-- Mark Hurst, April 26, 2001

With regard to this comment:

"deprecated the old feature-complete product (ACS 3.4) before finishing the new product (ACS
4.x); note that this is a well-known way to kill a company among people with software products
experience; Informix self-destructed because people couldn't figure out whether to run the old
proven version 7 or the new fancy version 9 so they converted to Oracle instead)"

Philip is absolutely correct as my experience with aD confirms. I went to the website recently
trying to decide between various systems including ACS and Enhydra. When I saw the rather
uninformed choice between the 3.x and 4.x products on the aD site that I was going to have to
make, I went with Enhydra. Having worked for 3 sizable software companies previously and
grappled with this issue, the point is particularly poignant and should not fall on deaf ears.

Also, having participated in the (startup) development of similar software products in the past
and then having to watch some gigantic corporate monolith destroy the product reminds me of
how painful it is. It's often the emotional attachment to the product and the process that keeps
you there till 3am and that makes it that much harder to see it killed.

Keep up the good work. The web design book is the most compelling read I've had in ten years
and I'd be using ACS right now if it weren't for these VC people getting in the way.

-- David Watson, April 26, 2001

I went to one of aD's one-day seminars last year (where they gave the awards to the kids
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It's August 19, Going Public Day for Google, and Larry Page and his comrades are eyeing
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preside over the ceremonial opening of the market, then he’ll troop up the street to Morgan July 2009
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Stanley to watch Google’s stock start trading. At 31, Larry is about to cross the threshold May 2009
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but he doesn’t really look it. Buttoned up in a suit from Macy’s, strangled by a stiff white March 2009
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stay back in Silicon Valley. Or maybe he’s just exhausted. But even when his elders All 2006 issues >
approach and kiss his ass, Larry’s at a loss for words. All 2005 issues >

“Congratulations, congratulations,” says NASDAQ president Robert Greifeld. “This offering

is great for all of us. Great for Google, great for the NASDAQ. It’s going to be a great
success!”

Larry mumbles, “It will be interesting to see what happens.”

A few feet away, Google’s CEO, Eric Schmidt, is chatting with John Doerr, one of the
company’s venture-capital investors and a member of its board. At 49 and 53, A life-altering guide to
respectively, they are senior members of the Silicon Valley patriarchy. Schmidt is the the world's best stuff
former CEO of the software firm Novell and, before that, was a longtime executive at Sun
Microsystems. Doerr, the marquee partner in the VC firm Kleiner Perkins Caufield &
Byers, is the financier who bankrolled Netscape, Amazon.com, Compaq, and Sun. We pick Fall 2009's ✔

Between them, Schmidt and Doerr have spent more than fifty years in the Valley. But as three key trends
both will attest, they have never encountered a pair of founders quite like Larry and ✔

Sergey—or an IPO quite like this one.

What started out at the founders’ instigation as a grand experiment in popular capitalism enter e-mail

has turned into what this morning’s Wall Street Journal described as “a rather messy
affair.” There have been inquiries by the Securities and Exchange Commission, acid
criticism in the media, and investor skittishness about the price of the stock and about the
auction by which it’s being sold. (And let us not forget the pièce d’incompetence: a Playboy
interview with Larry and Sergey that came out during the SEC-mandated “quiet period”
and made the Google PR team look like a bunch of, well, boobs.)

So while Schmidt and Doerr must surely be taking comfort in the fact that they’re about to
make a bundle, they must also be praying silently that nothing else goes wrong. Suddenly,
there’s a flurry of activity, a scurrying of factotums. Two pretty young women in short black
skirts cry out for sparkling water and napkins. Schmidt and Doerr glance around the room,
finally clocking the cause of the commotion: Larry has planted his billion-dollar butt in a
plateful of crème fraîche.

As the young ladies gamely dab his bottom, trying to rid him of his stain, Larry stands
stiffly, his face the color of claret. Schmidt turns to me and rolls his eyes. “These things
happen,” he says. “We’ve seen worse.”

***

The rise of Google is a tale often told as a Silicon Valley classic. Two precocious Stanford
grad-student nerds swept up in the fever of the Internet boom invent technology that
profoundly changes the experience of the Web; they drop out and start a company (in a
garage) that achieves iconic status; they stage a historic public offering, achieving vast
wealth and fame.

But beneath these familiar surface details, the Google story is more nuanced and
compelling. It’s a story about the clash between youth and experience, more a messy
ensemble drama than a simple buddy flick—one whose main characters have persistently
deviated from any script, resulting in unexpected twists and turns that haven’t come to light
until now.

Through boom and bust, the prevailing plotline in Silicon Valley has revolved around
fathers and sons. And despite the caricature of the Valley as a realm where the latter are
constantly cudgeling the former, the relationship has often been more traditional than
outsiders assume.

Like every other precinct of the business world, the Valley has long been in thrall to the
Serious American Executive, the seasoned CEO, valued for his maturity and credibility with
Wall Street. At the height of the dot-com bubble especially, the importing of bosses with
top-heavy CVs became the fashion in the Valley, even as the image of the place was
centered on its pizza-munching, Rollerblading tyros. At Netscape, Yahoo, eBay, and many
other start-ups, twentysomething founders were soon reporting to executives old enough
to be their parents. Netscape phenom Marc Andreessen had CEO Jim Barksdale. Yahoo’s
Jerry Yang and David Filo first had CEO Tim Koogle and later Terry Semel. Frequently,
these executives had no experience in technology. They were typically, however
patronizingly, referred to as the “adult supervision,” and their job was to engender a
semblance of corporate sanity and discipline—in other words, to keep the kids in line.
Their presence also highlighted where the real power in the Valley rested: with the venture
capitalists who had installed them in the first place.

Larry Page and Sergey Brin are, in Silicon Valley terms, of a different generation than
Andreessen, Yang, and Filo. Which is to say, they started their company four years later.
By then the pair had determined they had no use for many of the Valley’s customs. At
every stage in their quest to build what Larry describes as “not a conventional company,”
they have ignored the adamant advice of Google’s designated grown-ups. They’ve
accepted a middle-aged CEO but denied him full authority. They’ve displayed indifference,
even contempt, for Wall Street, their stockholders, and the press.

And while the Google IPO provided some of the most vivid scenes so far in the company’s
patricidal drama, those tense enactments weren’t the first, and they won’t be the last.
Michael Moritz, the other venture capitalist behind Google, once told me, “Most people
think that IPOs are the climax of a company’s story, but in fact they’re just the first
chapter.” He went on to say that a company’s genetic code gets set in its first eighteen
months. “After that,” he said, “companies are impossible to change; their cultures are
hardwired in. If the DNA is right, you’re golden. If not, you’re screwed.”

In January 1996, Larry, a reticent midwesterner who had gained renown in college by
building an ink-jet printer out of LEGOs, and Sergey, a Muscovite by birth and an amateur
trapeze artist, started working together on technology to search the Internet. At the time,
most search engines based their results on the number of times a search-for term
appeared on a given Web site. Larry and Sergey, both in the midst of pursuing their
Ph.D.’s in computer science, surmised that it would be better to base searches on
relevance; they believed popularity mattered—that the more often a site was linked to, the
more relevant it was likely to be. Using complex algorithms, they devised a system they
called Page-Rank, after Larry, and they put it at the heart of their search engine, first
dubbed BackRub and soon thereafter, Google.

Within two years, Google was the rage among the online cognoscenti, and Larry and
Sergey were toying with the idea of starting a company. In August 1998, on a porch in
Palo Alto, they delivered a demo to Sun cofounder Andy Bechtolsheim, a legend in the
Valley for his engineering prowess and his nose for talent. He took one look at the demo
and ambled off toward his car, then came back with a $100,000 check made out to
Google, Inc.

In Bechtolsheim, Larry and Sergey had found their first big brother. In short order, they
found several others, from whom they collected $1 million in seed money. But Larry and
Sergey knew that a million bucks wouldn’t last long in the boom-era Valley, so they made
their way up to Sand Hill Road, where the Valley’s venture capitalists cluster in a kind of
multimillionaires’ ghetto.

But two VCs felt differently: John Doerr, of Kleiner Perkins, and Mike Moritz, of Sequoia
Capital. Doerr was arguably the most important venture capitalist in the Valley, and Moritz
was the VC who’d backed Yahoo. With Moritz behind them, Larry and Sergey reasoned,
Google would have a line into a company they badly wanted to do business with. Similarly,
they saw Doerr and his firm as an avenue into AOL, which Kleiner had financed. For their
parts, Doerr and Moritz were as smitten with Google’s product as Bechtolsheim had been.
The absence of a business plan didn’t faze them; nor did the price. Indeed, Doerr was
known to advise novice VCs, “If you like the founders and you like the technology, price
doesn’t matter.”

By May 1999, Doerr had decided he wanted to invest in Google, and so had Moritz. Given
the connections each could provide, Larry and Sergey were keen, even adamant, about
snagging both as backers. There was just one hitch: Neither father was inclined to share
custody of his new favorite sons.

Before the internet bubble, it was common for venture firms to team up on deals in order to
spread risks and defray costs. By 1999, however, the size of many VC funds had swollen
to $1 billion or more, and the venture capitalists had more money than they knew what to
do with. Not only was collaboration no longer necessary; it wasn’t desirable.

Nowhere was the every-VC-for-himself ethos more ingrained than at Sequoia and Kleiner
Perkins. Two of the oldest venture firms in Silicon Valley, they were also the most powerful
and influential. But in outlook and demeanor, they were diametric opposites. Kleiner was
flashy, promotional, profligate; Sequoia was low-key, gritty, frugal. In the words of one
Kleiner partner, William Randolph Hearst III, “KP is Athens; Sequoia is Sparta.”

Doerr and Moritz were as different as their firms. Doerr: midwestern, Catholic, schooled as
an engineer at Rice University. Moritz: Welsh, Jewish, schooled in history at Oxford.
Doerr’s introduction to Silicon Valley was selling microchips at Intel. Mor-itz’s intro was
covering the Valley for Time. Where Doerr was an enthusiast prone to hyperbole (“the
largest legal creation of wealth in the history of the planet” was how he famously described
the Valley during the boom), Moritz was a skeptic and a cynic (his view of the Valley in
1998: “There’s going to be a lot of flesh on a lot of windshields”). And although no overt
animosity existed between them, they were rivals who only rarely worked together.

Taking on the task of getting the VCs to commingle were a pair of Google advisers, Ram
Shriram and Ron Conway. Shriram, a former Netscape executive and one of Google’s
seed-money suppliers, had known Doerr for years; and Conway, a Silicon Valley angel
investor (one who puts small sums into start-ups before they’re ripe for VC funding), was
friendly with Moritz. Day after day, Shriram and Conway wheedled and romanced the
venture capitalists, all to no avail. “You had to convince both sides that Larry and Sergey
were really serious about wanting two VCs,” an early Google insider says. “John and Mike
both wanted to do the deal alone. It turned into a fight. They didn’t realize how headstrong
the founders were.”

Larry and Sergey couldn’t believe what was happening. Neither could Doerr or Moritz.
During the dot-com melee, the VCs were constantly confronted with money-hungry
children wanting to be taken care of. But here the kids were saying, “You guys have to
learn to share.”

About a month into the standoff, Larry and Sergey called Conway and said, “Get a list
together of your angel friends—we might just do the whole deal with angel money. KP and
Sequoia don’t get it.... We’re gonna give them another couple of days, and then it’s over.”

Conway and Shriram delivered the message. The next Saturday morning, Conway was
sitting in a Starbucks parking lot when he got a call from Shriram. “The fight is over,”
Shriram said. “They’re both going to invest, and it’s going to be fifty-fifty.”

On June 7, 1999, Google announced the financing: a $25 million infusion, led by Kleiner
Perkins and Sequoia. The VCs each now owned roughly 10 percent of Google, and
Google now had all the money it would need to pursue its ambitions. But Larry and Sergey
had acquired something more valuable than money, and potentially more problematic: a
sense that, unlike so many young founders before them, they could defy the grown-ups’
wishes and not be punished for it.

***

Despite their differences, Moritz and Doerr agreed emphatically about one thing: Google
needed to hire an A-list CEO, and quickly. Before investing, they had elicited a verbal
commitment from Larry and Sergey that they would do just that.

But while Larry and Sergey had assured the VCs that they agreed, they did nothing about
it. To be fair, they were busy moving Google and its sixty-odd employees into a new
headquarters in Mountain View, which they dubbed the Googleplex; they were coping with
skyrocketing popularity, to the tune of 4 million queries a day; and they were striking their
first major licensing deal, to provide Web search for AOL/Netscape.

Still, as months rolled by and 2000 approached with no CEO on the horizon, it was clear
that the boys were balking about bringing in someone above them. Eventually, they began
to make the case ardently against adult supervision, citing Bill Gates, Jeff Bezos, and
Michael Dell as precedents. “They saw the founders who had retained control as CEOs as
the best, most creative, and most successful,” says Dave Whorton, a venture capitalist
who was then Doerr’s protégé. “What they didn’t see were all the others who had failed.
That wasn’t in their data set.”

Moritz monitored the situation with mounting frustration. Suspicious by nature, he’d doubted
all along that Larry and Sergey would honor their commitment. Confronting them, he
threatened to pull Sequoia’s money if they refused to yield. “It was not a pleasant
conversation,” Moritz recalls. “In the heat of things, I rattled my saber loudly.”
Doerr told me at the time that he, too, was contemplating such a threat. But instead he
chose a different tack. What Doerr was hearing from Larry and Sergey was a combination
of the engineer’s demand for logic and the adolescent’s impulse to challenge parental
authority. “Because we say so” or “because that’s how it’s done” would never convince the
boys of anything, and that was what the VC’s arguments sounded like to them.

So Doerr proposed that the boys take a little tour around Silicon Valley. He would arrange
for them to meet and discuss the matter with some of the industry executives they had
long admired. The names on Larry and Sergey’s itinerary comprised a high-tech murderer’s
row: Intel chairman Andy Grove; Amazon.com’s Bezos; Sun chairman and CEO Scott
McNealy; Intuit founder and former chairman Scott Cook—the list went on and on.

Doerr discreetly kept tabs on the meetings as they stretched out over several weeks. At
one point, he asked Bezos what he thought of the boys’ obstinacy.

“Hey, some people just want to paddle across the Atlantic Ocean in a rubber raft,” Doerr
recalls Bezos replying. “That’s fine for them. The question is whether you want to put up
with it.”

The prospect of putting up with it became more palatable when Doerr heard back from
Larry and Sergey. Having gotten Socratic with their heroes, they were finally prepared to
acquiesce in the hiring of a CEO. Their definition of acquiescence, however, was neither
unconditional nor expeditious. “If Larry and Sergey were given clear instructions by a divine
presence, they would still have questions,” Moritz says.

For more than a year, in fact, Doerr and Moritz would continue to tear at their hair. But
Larry and Sergey refused to be rushed; they took their own sweet time.

“Most young people starting companies are afraid,” says Joe Kraus, who at 21 was a
founder of Excite. “They’re afraid of failing. Afraid of getting it wrong. Afraid of missing their
chance. Afraid, especially, of saying no to John Doerr. But these guys weren’t afraid.”

***

When Google announced in early 2001 that Eric Schmidt was becoming its chairman—a
move followed a few months later by his installation as CEO—Silicon Valley was puzzled.
For the past four years, Schmidt had served as CEO of Novell, and for nearly fifteen before
that he was a senior executive at Sun. So his decision, in the midst of the NASDAQ
meltdown, to join a dot-com start-up—a search-engine start-up, no less—simply did not
compute.

Actually, it did. Schmidt’s tenure at Novell had been decidedly less than joyful. Novell was
a company in steep decline when he arrived, and his labors had only modestly reversed it.
Worse, hardly anyone gave a damn if Novell lived or died; its software was boring even to
software freaks.

For Schmidt, working at Google was an ideal solution to a high-tech midlife crisis. It put him
back at the center of the action while letting him kick it with the boys. Describing his
attraction to Larry and Sergey, Schmidt says, “We’re not just three random guys. We’re all
computer scientists with the same interests and backgrounds. The first time we met, we
argued for an hour and a half over pretty much everything—and it was a really good
argument.”

Schmidt met all of Larry and Sergey’s stringent criteria. He had a credible name, a Ph.D.
(from Berkeley), and he promised not to push the boys aside or dismantle the quirky
culture they’d engendered. “The board members told me, basically, ‘Don’t screw this thing
up!’ ” Schmidt says. “They said, ‘It needs some infrastructure, some growing, but the gem
here is very real.’ ”

At a glance, the culture Schmidt pledged not to replace seemed a relic of the just- bygone
era: The Googleplex looked like a dot-com wax museum. There were lava lamps, beanbag
chairs, an on-site masseuse. But beneath the comically clichéd trappings, Google was
becoming something interesting—and powerful. Having cut deals with an array of
companies, most critically Yahoo, Google was processing more than 100 million searches
a day and indexing an unprecedented 1 billion Web pages. Fueling this growth was a
relentlessness about innovation. Larry and Sergey were openly, brutally elitist when it
came to hiring engineers. (Job applicants, no matter their age, had to submit their college
transcripts.) In software and hardware, Google’s innovation was remarkable. Using off-the-
shelf components, the company was building what was, in effect, the planet’s largest
computing system. And its official mission—“to organize the world’s information and make
it universally accessible and useful”—extended far beyond searching the Internet.

“I did not understand when I came to the company how broad Larry and Sergey’s vision
was,” Schmidt says. “It took me six months of talking to them to really understand it. I
remember sitting with Larry, saying, ‘Tell me again what our strategy is,’ and writing it
down.”
At the same time, the boys had fostered an environment that was flamboyantly idealistic.
Search was all, profit peripheral, “Don’t be evil” the corporate motto. (Asked later what the
slogan meant, Schmidt would say, “Evil is what Sergey says is evil.”)

In short, Larry and Sergey had already encoded the DNA of the company Schmidt was
supposed to run. The character they instilled in Google could be summed up in three
phrases: Technology matters. We make our own rules. We’ll grow up when we’re damn
good and ready.

The boys’ reality took some getting used to for Schmidt. It wasn’t just the dot-com
fripperies that fazed him or the dogs trotting up and down the halls. It was the squatter in
his office. (The interloper was an engineer frustrated with the bustle in his own shared
quarters. After first attempting to evict him, Schmidt gave up and endured the situation for
several months.) He also found himself frequently occupied with grounding Larry and
Sergey’s flights of fancy. There was the time the boys suggested having Google enter the
business of low-cost space launchings. And the time Larry reportedly tried to ban
telephones from a new Google office building.

Even so, Schmidt now looks back fondly on the genesis of the relationship. “Our roles
evolved quickly,” he says. “Sergey is the master dealmaker, Larry is the deep technologist,
and I make the trains run on time.” Seizing on a different analogy, he adds, “We developed
the equivalent of what’s known in basketball as a run-and-shoot offense: Larry and
Sergey’s only goal is to run to the other end of the court as fast as possible, so they’re
always ahead of everyone else, strategically, technologically, culturally. I’m the not-running-
ahead person. I stay back and get the rebounds.”

Others, however, viewed the apparent anarchy at Google more skeptically. Stewart Alsop,
a venture capitalist and former journalist, recalls interviewing Schmidt onstage at an
industry conference. “I asked him, ‘How the hell do you make decisions? From the outside,
it seems crazy.’ Eric spent forty-five minutes trying to answer, but he couldn’t describe it.
And the thing was, he was proud of that. He said it was a new way of doing business.
There was no hierarchy; they acted as a triumvirate of equals. They were breaking all the
rules. I thought it was a disaster in the making.”

Doerr’s views were less apocalyptic, but he harbored some concerns. “The company
wasn’t falling apart,” says one of his Kleiner partners, “but it could have been headed in the
wrong direction. The situation was unstable.”

Seeking to stabilize it, Doerr picked up the phone and sought an intercession from Bill
Campbell. Campbell, former CEO and current chairman of Intuit, as well as an Apple board
member and Steve Jobs confidant, was one of the most respected executives in Silicon
Valley. His nickname was the Coach—a reference both to his past as a college-football
field general and his present sideline as an informal management adviser.

Now, in late 2001, Campbell started logging hours at Google, visiting the company several
times a week, playing mentor to Larry, Sergey, and Schmidt—a relationship that has only
grown over time, though it has never been publicly disclosed before in any detail. “Don’t
overdramatize my role,” Campbell urges me. “I’m just another set of eyes, another person
in the room.”

Hardly. “I think John Doerr would say Bill Campbell saved Google,” says Kleiner partner
Will Hearst. “He coached Eric on what it means to be a CEO—not the CEO of Novell but of
a company like Google. He taught Eric it’s a lot like being a janitor: There’s a lot of shit you
have to do. And he spent a lot of time with Larry and Sergey, explaining the difference
between being a cool company or a smart company and being a successful company. It
didn’t happen overnight, but Bill Campbell won.”

“God bless that man” is what Doerr says. “I don’t know where the company would be
without him.”

Moritz concurs: “He is the quiet, behind-the-scenes, unsung hero in this whole epic.”

Even Schmidt, who might have felt undermined by Campbell’s presence, has nothing but
praise for him. “At first we tried to integrate him just a little bit, but we eventually decided
our only goal was to get as much of Bill’s time as possible. Our basic strategy is to invite
him to everything. He’s priceless beyond belief.”

***

Google’s embrace of Campbell marked a turning point for Larry and Sergey. It was a
symbol of their dawning awareness that they had some things to learn—and that with age
occasionally comes wisdom. Campbell’s arrival also signaled Google’s transition from a
glorified research lab into a proper company, one that cared about management and, yes,
even making money.

Since its founding, Google’s financial condition had been, as Moritz describes it, “lots of
cash outgoing, very little incoming, and we were trying to pin the tail on the donkey as to
what the business was.”

In 2000, Google started experimenting with advertising. Because Larry and Sergey had
long been vehemently opposed to banner and pop-up ads, the company’s approach was
minimalist: unobtrusive, text-based messages on the right side of the page. Late the next
year, the company unveiled a program called AdWords, which let advertisers bid for
keywords, with higher bidders getting better placement and being charged a fee only when
users clicked on the ads. (In much of this, Google was following a path blazed by rival
Overture Services, which later sued for patent infringement. The case was ultimately
settled out of court.) In 2003, Google launched AdSense, a program extending its ad
system to non-search sites, in effect making Google a media broker for Web operators
ranging from The New York Times and AOL to countless humble bloggers.

Advertising turned Google into a commercial juggernaut. In 2001 the company had $87
million in revenues and was barely in the black; two years later, its sales had soared to
$1.5 billion and its operating profit to more than $340 million. The company had introduced
Google Image Search, Google News, and Froogle, and its name made the syntactical leap
from noun to verb. The only question now was when, not whether, the company would
cross the Rubicon. All eyes in the Valley and on Wall Street turned to the Google IPO.

***

Larry and Sergey were never wild about going public. The main rationale for doing it was
to raise money, and Google already had plenty. The boys knew that past IPOs had
unleashed tidal forces of greed and envy that wreaked havoc on promising start-ups. They
also knew that being a public company meant acquiring a new and demanding set of
masters: Wall Street analysts, shareholders, securities regulators, the press. Your ability to
keep commercial secrets diminished dramatically. If this was what it meant to be an adult
company, who wouldn’t prefer perpetual adolescence?

But the end of Google’s adolescence wasn’t optional. The boys had obligations to their
investors and underlings. Doerr and Moritz, both sitting on funds that had been hammered
by the collapse of the bubble, were keen to cash in their Google chips, while employees
who’d been slaving for years were eager for a payday that would put rental housing behind
them. On top of that, there was an SEC rule that would require Google (due to the number
of shares it had given out) to start publishing its financials in April 2004. Public or private,
the veil of fiscal secrecy was about to be lifted.

In the fall of 2003, the Google high command began discussing the IPO in earnest. Almost
immediately it was apparent that Larry and Sergey had no intention of staging a traditional
offering where Wall Street underwriters ran the show—setting the price of the shares and
doling them out to favored investors, who could then expect a windfall from a first-day run-
up in the stock. Instead, the boys wanted to conduct the IPO through a Dutch auction, a
novel process allowing anyone who wanted to own a piece of the company to bid for its
newly minted stock in the days before it started trading. They also wanted to issue two
classes of shares, giving Larry, Sergey, and Google’s executives and directors ten-to-one
voting power over ordinary investors. And they wanted to make it clear that Google
wouldn’t accede to Wall Street’s congenital short-termitis. Its executives would focus on the
long term, not be slaves to quarterly profits.

Each of these positions had its virtues. Dutch auctions promised to let small investors in on
the IPO action; to reduce the power of underwriters to game the system, as they had done
so flagrantly during the bubble; and to maximize the financial return from the offering to
Google—as opposed to Wall Street. Dual-class voting structures, too, had advantages,
which is why they were used by media giants like The New York Times and by the sainted
Warren Buffett’s Berkshire Hathaway. With two share classes in place, the chances of a
hostile takeover of Google would be virtually nil. As for short-termitis, who could deny that
pressure to “make the quarter” had led to much corporate mischief?

“None of this was ill-considered,” says maverick San Francisco banker William Hambrecht,
a vocal proponent of Dutch auctions and an underwriter of the Google IPO. “They had
talked to Buffett, talked to Steve Jobs, talked to lots of people. They were trying to do the
right thing for the company—to avoid the mistakes of the past.”

But taken together, Larry and Sergey’s plans sent a different message: They intended for
Google to be a public company that operated as if it were private. “They said, ‘If we have to
go public, we’ll go public,’ ” says a pre-IPO Google investor. “ ‘But we’re going public on our
terms—we’re going to have our cake and eat it, too.’ ” The Wall Street bankers who would
wind up leading the deal, at Morgan Stanley and Credit Suisse First Boston, privately
issued dire warnings about proceeding with an auction. They argued that unsophisticated
individual investors might bid up the stock on opening day to a stratospheric level—to a
market value as high as $100 billion, they said—only to have it come quickly crashing
down, a costly embarrassment.

Moritz, who had done an auction IPO previously with Hambrecht, thought these warnings
were overblown. But Doerr and others were swayed. The fear that the IPO might “run
away from us,” as Doerr put it, led to various maneuvers designed to dampen demand
from individual investors: an offering in August, when the market was usually slow; a
complex registration process for bidders; a high price on the stock. The result was a kind of
bastard deal, a compromise between Larry and Sergey’s mold-breaking aspirations and
the conservative instincts of the grown-ups, forged in an atmosphere suffused with Sturm
und Drang.

“We said, ‘If you want to do an auction, do a fucking auction,’ ” says a partner in one of the
VC firms. “ ‘But why don’t you also try listening to us? We’re not new to this, you know.
Warren Buffett is your guru? Is this the same Warren Buffett who doesn’t want anything to
do with tech stocks? Are we talking about the same Warren Buffett?’ ”

Apparently, yes. Early in the last week of April, just days before Google was set to file its
IPO paperwork, Larry told the board he’d decided to write an open letter, à la Buffett, to be
included in the document. Nervously, the board consented, but time was running short. The
night before the deadline, Doerr drove to the Googleplex. It was after midnight, and Larry
was laboring like a college student on speed crashing a term paper. Doerr read Larry’s
manifesto: “ ‘An Owner’s Manual’ for Google’s Shareholders.” And then, as gently as
possible, Doerr said, “We need an editor.”

Even after being edited, the letter, like the IPO itself, debuted to mixed reviews. From Wall
Street, with its antipathy toward auctions, came a torrent of unattributed sniping. Corporate-
governance mavens pilloried the dual-share structure, which seemed starkly at odds with
the populist tone of Larry’s letter. Then came the news that, of the 24.6 million shares
being offered, 10.5 million were being sold by Google insiders, including Larry and Sergey.
For the first time in the boys’ careers, they were tarred by the brush of greed.

By early August, when Larry, Sergey, and Schmidt set off on the IPO road show, the
offering was reeling. With the NASDAQ down 15 percent from its January high, the stock
price—projected by the company at $108 to $135 a share—looked excessive. Wall Street
piled on the criticism; mistakes piled up left and right. Investors attending the road show
described the Google troika as unprepared, uncommunicative, and smug. As the press
turned nasty, Google, throttled by the quiet period, could do nothing to stanch the bleeding,
which only grew more profuse with the appearance of the Playboy interview. Though what
the boys said in the interview wasn’t controversial, its appearance at a time when they
were required to be silent indicated either disregard for the rules or screaming
incompetence.

Was the backlash fair? Bill Hambrecht thinks not. “The biggest frustration among
institutions was that they weren’t getting inside information from Eric, Larry, and Sergey.
Normally, a company says, ‘We can’t give you forward projections, but talk to our bankers.’
But Google didn’t do that. They followed the rules. They got a bum rap.”

Bum or not, the rap took its toll. On August 13—a Friday, note—Google opened its auction.
For five days, bids flowed in across the Internet. Soon it was clear that the efforts to tamp
down retail demand had worked all too well; more than 80 percent of the buyers turned out
to be institutions. What those institutions wanted, naturally, was a first-day pop in the
stock. With striking consistency, they bid just below the price range Google had initially set.
In effect, the institutions were demanding a discount—and they got one. On August 18,
Google announced it was scaling back the offering to 19.6 million shares and selling them
for $85, 37 percent below the top of the original range.

The next day, Google’s stock opened trading just before noon at $100. Among the
Googlers surrounding Larry and Schmidt on the Morgan Stanley trading floor, the sense of
relief was palpable, the celebration muted. Within a half hour, the Google guys were gone,
and I found myself asking Doerr if he considered the IPO a success. “Absolutely,” he
replied. “We raised $1.6 billion for the company—a record for a technology IPO—and the
investors all made money.”

But what about the pummeling of Google in the press? The damage to its image? “I think
six months from now the bad press will be forgotten. The company, its merits, what it’s
doing, how it’s doing, will be the only things that matter.”

Have Larry and Sergey learned anything? I asked. Have they been humbled, even
humiliated?

Doerr thought for a minute. “I don’t know,” he finally said. “They may feel humbled and
humiliated—or they may feel differently as of the last half hour. What I don’t think will
change is how they run the company. They both have—” he chuckled “—incredibly strong
points of view. But I do think they’re learning all the time. I also think they’re growing. Not
growing up—I hate it when people call them ‘the boys.’ Please don’t ever put those words
in my mouth. I don’t think of them that way. And if I ever did, I sure don’t anymore.”

***

Today, there’s no disputing that Doerr was right about one thing: Google’s affliction with
negative press was temporary. Since the IPO, headlines have heralded an avalanche of
Google products and projects, each intriguing, some truly thrilling: Google Library. Google
Print. Google Scholar. Google Desktop Search. Wall Street, meanwhile, has embraced
Google as if it were the new Microsoft—and maybe it is. In the first three quarters of last
year, its sales surpassed $2 billion, and its operating profit margin, of more than 60
percent, was greater than that of the Beast from Redmond at its zenith.

Even so, a corps of doubters remains. Skeptical moneymen point out that the company’s
market value, of roughly $50 billion, is possibly a mirage, artificially inflated by the scarcity
of tradable Google stock. In November, December, and January, fresh tranches of shares
hit the market as company insiders were gradually allowed to sell their holdings. But by far
the biggest flood of new shares, 177 million, were unlocked on February 14. (Larry and
Sergey plan to sell roughly 19 percent of their holdings in the next fifteen months.) At the
same time, Google’s rivals are swarming. Amazon has plunged into search. Yahoo has
redoubled its efforts. And Microsoft makes no bones of its aim to turn Google into the next
Netscape.

But to those who know Google best, these are not the stickiest issues. John Battelle,
author of a forthcoming book on the company, observes, “I’m not saying that Microsoft—or
AOL, or Yahoo—can’t prosper, or even ‘win’ in the long term. But crush Google à la
Netscape? No friggin’ way. The only thing that can kill Google is Google itself.”

In Silicon Valley, few people think the ungainly triumvirate at Google is heading off a cliff.
The perception instead is that they’ve figured out an agreeable modus vivendi. “If you gave
Eric sufficient alcohol,” says Stewart Alsop, “he would tell you, ‘I’m not here to run the
company; I’m here to get along with Larry and Sergey. I’m here to make the trains run on
time, collect my money, and go home.’ ” Alsop adds, “Eric doesn’t have a huge ego. He’s
willing to suffer the myriad small indignities of being a pet CEO.”

But when I had lunch with Schmidt last fall at the Googleplex, it didn’t seem quite that
simple. He had just returned from attending the Forstmann Little conference in Aspen.
Though he’s been going for the past ten years, he explained, this was the first time he’d
been seated for dinner at the head table—next to Elizabeth Hurley. “I guess I’ve finally
made it,” he said with a grin.

As it happened, the boys were away on a round-the-world business trip. The previous day,
Schmidt said, they had been in Dublin, where they’d met Ireland’s Deputy Prime Minister
Mary Harney—and presented her with a Slinky. “We are in the presence of greatness
here,” Schmidt remarked in perfect deadpan. “Even if we can’t always see it.”

With evident trepidation, a Google PR specialist asked if Larry and Sergey were going to
participate in the upcoming third-quarter-earnings call to analysts, the company’s first chat
with Wall Street since going public. Schmidt replied that the boys were planning to “lurk”
silently on the call with him and the chief financial officer. “They said they’d only interject if
something ‘interesting’ is said. I told them, ‘Larry, Sergey, the whole thing is going to be
scripted and vetted by the lawyers—that’s our new world. Nothing interesting is going to be
said. Is that clear?’ ”

Two weeks later, on the call, Larry and Sergey gave detailed presentations that were as
lengthy as Schmidt’s.

The truth is, Schmidt finds himself in a supremely confounding, if not impossible, position.
All along, he’s been torn between wanting to run with the boys and wanting to take away
their allowance. But now that Google is public, this balancing act is immeasurably more
difficult.

“The question is, What’s the best way to run a company?” he says on a balmy January
afternoon in Mountain View. “In the last ten years, we had this notion of the all-knowing
celebrity CEO, with his picture on the magazine covers. And I don’t think that’s the right
way. There’s a book by this guy James Surowiecki. It’s called The Wisdom of Crowds, and
he’s got, like, 500 examples of how, if you look at the decisions of big groups and
individuals, the groups do far better on average. So the way we actually run the company
is, we get everyone in the room, we encourage discussion and dissent, and then someone,
usually me, pushes for an outcome, even if I disagree with it. That’s how we get velocity,
and velocity is what matters in companies of size. You want to always be pedaling faster.”

As for the workings of the triumvirate, Schmidt says, “We have agreed to collaborate, and
we collaborate in a specific way: If one of us feels strongly about something, the others
can’t cut and run—they can’t just go and do whatever the hell they want.” He adds, “Every
successful company has ultimately had multiple decisionmakers, at least in their formative
stages: Bill Gates and Steve Ballmer at Microsoft. Bob Noyce, Gordon Moore, and Andy
Grove at Intel. Scott McNealy and Vinod Khosla at Sun. The difference is, we’re telling the
truth about it.”

Even so, formally, legally, Schmidt is the man in charge; he’s the one who will be the target
of Wall Street’s ire or any lawsuits filed by pissed-off shareholders. But Larry and Sergey
plainly hold all the cards at Google. They each have more than twice the voting power
Schmidt has as well as the loyalty of the engineers. (A telling reflection of this CEO’s status
 can be found in the official corporate history posted on Google’s Web site: In a document
of 3,756 words, which mentions Doerr, Moritz, Ram Shriram, Andy Bechtolsheim, and
others, Schmidt’s name appears not once.) Even if he takes away the boys’ allowance,
they have their own credit cards.

Which brings us back to Larry and Sergey and the question of what they’ve learned.
Having repeatedly ignored the prevailing wisdom in Silicon Valley—inventing a search
engine when everyone knew search was dead; building a business on Internet advertising
when everyone knew it was impossible; antagonizing two revered VCs whose rings they
should have been kissing—the boys have undoubtedly learned that conventional wisdom
often isn’t wisdom at all. But salutary as that lesson is, there’s also a danger to it. As Excite
founder Kraus puts it, “The risk is, they’ll think the hallmark of a good idea is that everyone
says it’s dumb.” Similarly, it would be easy for the boys to conclude that dissing Wall Street
carries no penalty. In the IPO, they told investment bankers and investors to go pound
sand—and they wound up happy billionaires. Today their message to shareholders
remains: Trust us, or put your money elsewhere.

All of that is fine for now. As long as Google is growing like gangbusters and making
money like the U.S. Mint, Wall Street, investors, and employees will be infinitely indulgent.

But if the history of the technology industry teaches us anything, it’s that no one is ever
that lucky—at least, not for long. Every important high-tech company has at some point
stumbled and fallen on its face. Microsoft, Intel, Oracle, Sun, Apple, Cisco—all have made
severe mistakes, paid a price, and then survived in large part because they understood
what being a public company is about. They learned that Wall Street matters. That
investors like transparency. That “trust us” isn’t enough.

When crisis eventually comes to Google— and it will—the company’s fate will depend on
whether they have absorbed a handful of lessons that apply as much to life as they do to
business: Adulthood happens. You can’t make all your own rules. And everyone fucks up.

John Heilemann has been writing about Silicon Valley for more than a decade and is the
author of Pride Before the Fall.

Want more breaking news like this, plus stories on top personalities, sports figures and
designers delivered to your door each month?

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[ Metro | Metroactive Central | Archives ]

A Couple of Yahoos

Christopher Gardner

Jerry Yang good-naturedly agrees to a photographer's request to

animate the company's Y-shaped corporate logo.

David Filo and Jerry Yang held fast to

their principles and refused to sell out.
Now, they're slated to become the
area's next decamillionaires, proving
that the valley's magic still exists.

By Hal Plotkin
Outside his barren, glamourless Mountian View
office, shoeless David Filo's tailpipe hangs from
his guano-encrusted, rust-spotted, dented 1981
Datsun 310, putty-sealed windshield, ripped
upholstery, bent antenna and all. "Yeah, I do need
to get the thing fixed," the 29-year-old Filo
admits. "But there is just no time." Partner and
onetime Stanford engineering school classmate
Jerry Yang, 27, rushes through the front door and
fixes mischievious eyes on his partner. "Sorry I'm
late," Yang deadpans as Filo's lips break into a
slight smile, "but I like to go home at night and
sleep in my own bed." Filo lets loose a sheepish
chuckle. At least he's on time for the 8am
interview, even if his hair's tousled from spending
the night blanketless on the carpeted floor near his
desk. "It was easier than going home," he reasons,
though his small apartment is just a few blocks
away. "Besides, my girlfriend is out of town."

Filo's sleeping habits are not surprising

considering that he and the Taiwan-born Yang,
who grew up in San Jose's Berryessa suburb, are
at the epicenter of one of the biggest battles the
high-tech world has seen since the first wave of
personal computer makers duked it out in the late
1970s and early 1980s. At stake is global
leadership in the Internet directory market, an
industry that did not even exist two years ago.
However, if market prognosticators are correct,
Internet-related commerce could grow to a more
than $100-billion market over the next two
decades, with Internet directories like the one
created by Yang and Filo serving as the point of
first contact. The winners will become the online
equivalent of IBM, Apple and Silicon Graphics.
The losers will take their place as asterisks in the
electronic industry history book, alongside once-
venerable names like Kaypro and Osborne. "It's a
real fight," Filo agrees.

Ye-haw for Yahoo! Here are more links, background

info., and pictures of the Internet's newest deca-
millionaires.

The two Yahoo! founders don't have to be in this

battle at all; they could have already strolled away
from the high-stress online battleground as big and
early winners, with millions of dollars in the bank
and reputations as technical wunderkinds. All they
had to do was accept any one of a number of
recent offers, from behemoths like America Online
or Netscape Communications, that would have
rewarded their less than two years of labor with
cash hoards sufficient to retire comfortably before
either of them hits the age of 30.

Although the Yahoo! founders won't confirm

specific numbers, sources close to the company
place the early takeover offers in a range that
would have netted Yang and Filo more than $3
million apiece. Instead, the two opted not to walk
away and live on a tropical isle.

"We're not in this for the fast money," Filo, who

hails from Wisconsin and Louisiana, explained in
his office the morning after spurned suitor
Netscape went public and the stock he and his
partner had been offered appreciated fourfold
virtually overnight. "Really, what we want," Filo
grimaced a few hours after watching the $3
million dollars in rejected Netscape stock reach
the $12 million mark, "is to be part of this
industry. And besides," he guessed correctly, "that
[Netscape] stock price can't possibly hold."

Which of course it didn't; it went up even further.

That difficult decision -- to remain independent

and not succumb to the affections of suitors who
hoped to lure them with fat cash offers--is about
to pay off in a very big way. Any day now, the
company plans to sell stock to the public for the
first time in an initial public offering handled by
Goldman, Sachs & Company. When that happens,
Yang's and Filo's shares in Yahoo!, 17.3 percent
each, are expected to be worth as much as $60
million apiece. A pretty handsome reward for two
talented and gutsy guys who, just months ago,
spent most of their time trying to figure out new
ways to avoid graduating.

"I was terribly bored," Filo recalls, as he discusses

the outline of his still-unfinished graduate thesis,
which entailed laborious tweaking of design
schemes for the automated production of computer
chips. To fight the boredom of their respective
studies, Filo and Yang began surfing the then-
nascent World Wide Web. "Really, we'd do
anything to keep from working on our theses,"
Yang adds. The students figured one good way to
burn time would be to compile a computerized list,
initially for their own use but later shared with
fellow students, of their favorite online
destinations. "And then, a funny thing happened,"
Yang smiles.

Without any advertising, the number of digital

visitors accessing their Stanford University
engineering-department student workstation
doubled in the first month and kept right on
doubling every month thereafter. Finally, Stanford
administrators became fed up. "They told us we
were crashing their system and that we'd have to
move the thing off campus," Yang recalls. Not
surprisingly, the partners quickly found a venture
capitalist who sensed commercial value in an
online enterprise that was already attracting a
million visitors each week. The students dropped
out of school, accepted an initial $1 million
investment from Sand Hill Road's Sequoia Capital,
spurned the early takeover offers, and set on the
path to become titans of the new media industry.

In doing so, they reconfirmed the Silicon Valley

myth and proved that, despite a decade in
hibernation, the magic is still alive. Throwbacks to
the era in Silicon Valley's PC revolution when
quick-thinking kids in blue jeans stumbled into
millions while just trying to have some high-tech
fun, Filo says he and Yang were looking for a
good time when they accidentally created Yahoo!,
which most industry sources now agree is the
most recognized online directory brand name on
the Internet's World Wide Web.

"It was the real early days of the Net," Filo recalls.
"We'd wander around the Net and find something
interesting, and then I'd ask Jerry, 'Hey, where was
that cool page we saw the other day,' and we could
never remember where it was. I mean, it could
take us hours to just get back there, to find it. So
we made ourselves a hot list, mostly to keep track
of little databases and categories." To
accommodate the requests of a few friends in the
engineering department, Yang agreed to make the
list available in HTTP format on his student
workstation, which allowed Internet users to log
on to Yang's page and then jump to any of the
places hotlinked on his list.

"This was in the very early days of hypertext

links," Yang recalls, and, at first, the few visitors
to Yang's unadvertised online directory were
mostly people the two students knew personally.
"It was a really gradual thing, but we'd find
ourselves spending more and more time on it. It
was getting to be a burden," Yang relates. By
March or April of 1995--the two can't remember
exactly when--the partners decided the time had
come to explore the idea of turning their hobby
into a business. The Stanford engineering
department was eager to reclaim its overtaxed
bandwidth and opportunity was clearly knocking.

As it turned out, Yang had a friend who was

finishing up at Harvard, and for one of his projects
he had to write a business plan. So during his
breaks from school, he spent some time putting
together a plan for Yang and Filo. "Actually,"
Yang notes, "we were doing him a favor: he
needed a real idea to work with."

Christopher Gardner

David Filo demonstrates his non-virtual menuing skills.

Although the plan was never actually circulated to

investors, the exercise did help the partners think
through their next moves. And it landed the plan's
author, Tim Brady, a job at Yahoo! "It seemed
like a natural move. He had all these ideas about
marketing our product so we made him director of
marketing," Yang says.

Mike Moritz sounds almost giddy as his voice

crackles over his car phone between horn blasts.
"It was a suicide impulse on our part," Moritz
jokes about his firm's sizable bet on Yahoo!
"Really, we saw it as a public service to rescue
those guys from Ph.D land," he continues like a
comic on a roll, conceding that his rescue plan is
not currently available to all struggling academics.

The Yahoo! partners first came across Moritz

while shopping around for a new home for their
directory. Randy Adams, an early Internet
commercial pioneer and Yahoo! fan who runs the
Internet Shopping Network, introduced the
Stanford students to the venture capitalist, whose
Menlo Park firm, Sequoia Capital, has provided
early financing for many leading Silicon Valley
companies, including Cisco Systems, Apple
Computer, Oracle and LSI Logic.

Just weeks after meeting Yang and Filo, Moritz

agreed to ante up Yahoo!'s first million in working
cash in exchange for a minority slice of the
business. That act of public service, as Moritz
jestfully describes it, stands to net Moritz's venture
capital firm a tidy paper profit well in excess of
$40 million as a result of the pending IPO.

In addition to the cash, Moritz also put Sequoia's

respected team of high-tech business experts to
work in support of the fledgling entrepreneurs as
would-be buyers and partners descended on the
company like mosquitoes at a picnic.

"We talked with all of them. America Online

offered to buy us outright and there were several
other offers," Yang recalls. In October of last year,
the San Francisco Chronicle even ran a story,
headlined "America Online Eyes Internet
Directory," that all but predicted an eventual sale
despite the fact that Filo and Yang had already
rejected the offer.

Since the Chronicle's erroneous report of an

impending sale, the San Francisco paper, led by
business columnist Herb Greenberg, has kept up a
steady, almost weekly, flow of skeptical stories
about Yahoo!'s prospects, including a recent jab at
the company that featured a series of emailed
reviews from anonymous readers touting the
supposed superiority of services offered by
Yahoo!'s growing legion of competitors. But
neither Yang nor Filo will be drawn into a
shouting match with Greenberg. "It's not the first
time I've seen something printed that was wrong,"
Yang says simply, referring to the Chron's report
of the nonexistent sale to America Online.

In the end, however, Filo notes, "there was no

bidding war. We liked the deal with Sequoia. For
us, the most important thing was that we could
hold onto it [Yahoo!]. We really weren't into this
for the money or for the fast payoff," Filo
maintains. "There is a great tradition of people
around here starting companies and then sticking
around long enough to grow them," he adds.
"That's what we are after. We hope to be around
for a long time."

The pair has already withstood some challenges

that others thought would surely sink them. For
example, late last year Netscape Communications,
which makes the Netscape Navigator and once
housed Yahoo!'s server on its Internet link,
bounced Yahoo! from the top slot on its directory
page and replaced it with a link to a competitor,
which paid top dollar for the space. It seemed like
Yahoo! might lose its position as the dominant
Web directory; Yahoo! was, critics said, a classic
flash in the pan. The Stanford kids, even with their
million dollars in working capital, could never
withstand the assault of at least a half-dozen
competitors with bigger computers, better funding
and the backing of huge corporations.

Although they restrained themselves from making

public attacks on Netscape during the ordeal, the
Yahoo! founders were clearly taken aback by
Netscape's mercenary move. Industry insiders
pointed out, for example, that Yahoo!'s directory
had contributed enormously to helping make the
World Wide Web and the Netscape browser so
popular in the first place. Without Yahoo's list of
destinations, for example, early users of Netscape's
browser would have found little to browse. In
typical fashion, however, Yang and Filo did not
give up or give in.

Instead, they maintained a close working

relationship with the Netscape business
development team, pushing hard to get Netscape's
leaders to reconsider their strategy of hooking up
with just one featured top-bidding directory.
"We're just going to concentrate on what we've
always done," Yang insisted the week after
Netscape dropped the Yahoo! link, "which is to
create the best possible online directory, adding
content and other features along the way when it
makes sense.

Christopher Gardner

Yang surfs a pre-digital information server.

"I'm pretty optimistic that we'll find a way to work

with Netscape again," he added, noting that "it
does take some money to maintain a good
directory," and contending that the entire industry
could be killed in its crib if Netscape's new fees
make it too tough for directory services to earn
profits.

Meanwhile, the two partners watched--nervously

at first, and then with great relief--as traffic to the
Yahoo! site dropped off by a small percentage
during the week following the Netscape demotion
late last year, but quickly bounced back to its
previous level and then resumed its upward
trajectory, now averaging more than 12 million
user hits per day. And last month, the informal
discussions with Netscape paid off with the
announcement that Netscape is changing its
procedures and will soon include several leading
directories, each of whom will pay Netscape $5
million apiece, rather than sell a single featured
directory location to one company for top dollar.

The strategy is a classic win-win, say officials at

both Netscape and Yahoo!, since it promises to
spur the growth of several companies at the same
time, rather than push most of the directory
companies into an online backwater while
simultaneously loading up one "winner" with
expenses that are so high financial success
becomes problematic. "We'll be working with
Netscape again," Yang vowed even during the
worst days of the Netscape affair. "They are good
people," he maintained stubbornly in a phone
interview during his upstart company's worst
week, "and they understand the importance of
building a strong industry," he said, forecasting the
more welcome developments that did occur some
months later.

One major advantage enjoyed by Yahoo!, the

founders note, is the goofy but memorable name.
"It is a pretty recognizable brand name," Yang
says about Yahoo! "Originally, it was Jerry's
Guide to the World Wide Web," Yang laughs,
"but we settled on Yahoo," a word they came up
with while lampooning the digitalese of the other
hierarchically organized lists they'd been looking
at. "This is 'Yet Another Hierarchically
Organized" list," Yang explains. "I was not crazy
about the name at first," Filo adds, "but it grew on
me." Now, he says, he is grateful the partners
selected a name that is "so memorable and that
conveys the sense of fun involved in all this, the
sense of adventure. That is what really
distinguishes our site. It is a place for adventures.
A place to discover things," he says.

Fortunately, Yang notes, the Netscape blackout

was not as bad as it could have been since many
Yahoo! users had already apparently set their own
browser bookmarks before the Netscape jilting,
explaining why user visits held steady.

Even so, Yang and Filo have no shortage of

competitors. Several contenders, such as the
McKinley online directory, are trying to outpace
Yahoo! by adding features, like reviews of Web
sites, in addition to noting their locations. These
more meaty offerings have already attracted the
attention of several key Internet service providers
(ISPs), including San Jose-based Netcom, the
largest ISP in the country. In fact, around the time
Netscape jettisoned Yahoo!, the directory was also
bounced from the Netcom homepage. "Netcom has
made a significant investment in McKinley," Yang
notes about Netcom's approximately 15 percent
stake in the Yahoo! competitor, "and besides,
there was never an agreement [between Yahoo!
and Netcom] to stick us on there. They just did it
and then they took us off. We wish them well,"
Yang adds diplomatically, noting that visits to
Yahoo! from Netcom users, like those coming
from the Netscape home page, also have continued
to grow.

The competition, though, does provide

ammunition for Yahoo!'s detractors. "The way
people are talking about Yahoo! is absolutely
ludicrous," charged McCabe Capital Partners fund
manager Steve Zenker in one of the Examiner's
more recent unflattering articles about Yahoo!
"The competition is way too fierce," Zenker said;
"they could be obsolete in two months," he
claimed, explaining why his fund is not investing
in the company. Similarly, just a few weeks
earlier, the Chron ran another disdainful story,
headlined "If You Think Yahoo! is Breathtaking,
You Haven't Seen Excite," that strongly cautioned
investors over the dangers of buying both the
Yahoo! legend and company's stock.

In fact, as Yang and Filo freely admit, a case can

be made for many of the competitive online
Internet directory services. Unlike Yahoo!, for
example, the McKinley directory offers reviews of
the Web sites it catalogs, not just lists, which do
seem to make it a more comprehensive online
utility. However, Yang contends that the review
feature, which he admits is "nice," is impractical
over the long haul.
"Okay, just think about it for a moment," he says,
mousing his way between competitor directories
on the workstation in the conference room of the
Yahoo! headquarters. "I mean, just look at this.
Web sites change all the time; this one is not the
same as it was yesterday. So how often are they
going to review their reviews? Will those reviews
really be current and meaningful? I mean, with a
few thousand sites it might be practical. But with
100,000 sites? How many sites can one reviewer
review in one day? I mean, it would take an army.
We get a thousand requests each day to have sites
added to our list. I think in this business you
really have to prepare for the scale involved. And
if the business model won't scale up, then in the
end it won't work," he says.

Similarly, Yang scoffs at an even more powerful

challenge being mounted by Silicon Valley's old
mainframe stalwart, Digital Equipment
Corporation, which bills its Alta Vista search
engine as the most powerful search engine and
directory on the Web. At DEC, where the
company motto is, "whatever it takes," strategists
have thrown the company's sizable computing
power at the task by using robot computers,
sometimes called spiders, to index every bit of
information they can find on the Web so that
content, as well as Web page titles, can be
searched for key words.

"It is pretty amazing," Yang concedes about the

technical arsenal DEC has unleashed on the task,
"but again, have you tried it? Already, you get
back a lot of stuff you don't want. And that is with
the current size of the Web. What about in five
years, ten years? Are people really going to want
to search through all of that to find what they
want? And how many computers will they need to
archive everything when there is 100 times, 1,000
times, more material on the Web?" Confirming
Yang's surmise, DEC officials conceded last week
that they were already experiencing a "temporary"
problem with Alta Vista due to insufficient
available disk space.
"Really," Yang says, catching himself, "I don't
want to say anything bad about those companies.
In fact," he quickly adds, reverting back to the
we're-in-this-together ethic that is already fading
elsewhere in the industry, "we have pointers to
many of those other directories right on our page. I
think there is room for several kinds of businesses
when it comes to searching the Internet," Yang
offers, noting that the other services don't have to
fail for Yahoo! to succeed. "But Yahoo!'s appeal
is a little different," he says. "We've designed this
for people who like to explore the Net, for people
who know what they want but also for people who
want to know what is there. And we've built it to
last."

With their IPO now imminent, Yang and Filo,

each of whom is listed in Security and Exchange
Commission filings as "Chief Yahoo," are clearly
pleased they stuck to their guns. "It will take at
least another two years, I think, for things to shake
out," Yang says. "We didn't want to hook up with
an Internet company, make a deal, and then find
out we've made a deal with a company that can't
survive. Eventually, some things will get sorted
out. But who will be the big Internet access
provider two years from now? AOL? Netcom? The
phone companies? It's just too early to tell. It'd be
great if we could pick the winner. But we might
pick the loser, if we try." In the meantime, Yang
notes, Yahoo! is already a profitable business,
taking in more than $300,000 in advertising
revenue each month, with more than 80 major
advertisers, including Bank of America, American
Express, Anheuser-Busch and Honda.

The fast growth in ad revenues surprised both

Yang and Filo, who vowed to maintain a
separation between the service's editorial function
and its advertising sales last May when they spoke
to a session organized by the nonprofit industry
group Smart Valley. "I'm sure we're going to face
issues when we start taking advertising," Yang
predicted, responding to a question about whether
Yahoo! would allow advertisers to influence the
structure of the directory or the prominence of
listings. "We plan to maintain control over that,"
he pledged. Since creating their editorial and
advertising strategy, which the founders say is
modeled more after The New York Times than the
Yellow Pages, the rush of new advertisers has left
Yang and Filo free to think about other things.

"We've already done better than all our

projections," Yang says, referring to the steady ad
growth and the recent $63.75 million investment
made in the company by Japanese publishing giant
Softbank and Ziff-Davis Publishing (which
Softbank just acquired). Like the earlier
investment from Open Text Corporation, which
offers a search engine similar to Alta Vista that is
linked to the Yahoo! page, these partners were
selected for their media savvy and staying power.
"Our major partners are not Internet companies,"
Yang notes. "We don't want to be gobbled up or
pick a loser. So we went looking for companies
that were interested in this market and who wanted
to grow with us."

Yang and Filo plan to roll out several new

products this year, including a print and online
magazine, localized versions of their service, such
as Yahoo! Japan, and a specialized offering
focused on computing topics. Last month, the
company introduced Yahooligans!, an Internet
navigational guide aimed at children from ages 8
to 14.

In the interim, while they wait to join legends like

Jobs and Wozniak, Hewlett and Packard and Clark
and Andreeson, Yang and Filo are still paying
themselves salaries of about $50,000 per year.
Yang, feeling frisky, has already splurged on a
new Isuzu Rodeo sport utility vehicle, although his
partner still tools around in the dilapidated old
Datsun with its muffler occasionally kicking the
ground like a sparkler on a warm summer day.

"I feel pretty lucky," Filo says, despite his

automotive handicap. "I mean I work all day and
sometimes all night," he concedes, "but I like the
people I work with and I'm doing exactly what I
want to be doing."
 [ Metro | Metroactive Central | Archives ]

From the April 11-17, 1996 issue of Metro

This page was designed and created by the Boulevards team.

Copyright © 1996 Metro Publishing and Virtual Valley, Inc.

Foreclosures - Real Estate Investing San Jose.com Real Estate

 Wanted: ASP.net (VB) Web
Joel on Software Developer at SAV London Ltd

Fixing Venture Capital (London, United Kingdom). See

this and other great job listings
by Joel Spolsky on the jobs page.

Tuesday, June 03, 2003

Many software companies these days are built using some form of
venture capital. But the VC industry has been hurting lately. A lot of
investments in dotcoms turned out to be spectacular flameouts. As a
result, VCs are becoming ever more selective about where to put their
money. To get funded these days, it's not enough to be a pet shop on
the web. Nope! You have to be a pet shop on the web with 802.11b
wireless hotspots, or your business plan is going right in the
dumpster.

The formerly secretive world of VC

has become a bit more transparent,
of late. VCs like Joi Ito, Andrew
Anker, David Hornik, and Naval
Ravikant have created weblogs
which are a great source of insight
into their thought process. That
dotcom thing resulted in three
great books by company founders
that look deep inside the process of
early stage financing (see footnote). But as I read this stuff, as a
founder of a company, I can't help but think that there's something
wrong with the VC model as it exists today. Almost every page of
these books makes me say, "yep, that's why Fog Creek doesn't want
venture capital." There are certain fundamental assumptions about
doing business in the VC world that make venture capital a bad fit
with entrepreneurship. And since it's the entrepreneurs who create
the businesses that the VCs fund, this is a major problem. Here's my
perspective on that, from a company founder's point of view.

When people ask me if they should seek venture capital for their
software startups, I usually say no. At Fog Creek Software, we have
never looked for venture capital. Here's why.

The fundamental reason is that VCs do not have goals that are aligned
with the goals of the company founders. This creates a built-in source
of stress in the relationship. Specifically, founders would prefer
reasonable success with high probability, while VCs are looking for
fantastic hit-it-out-of-the-ballpark success with low probability. A VC
fund will invest in a lot of startups. They expect about seven of them
to fail, two of them to trudge along, and one of them to be The
Next Netscape ("TNN"). It's OK if seven fail, because the terms of the
deal will be structured so that TNN makes them enough money to
make up for all the losers.

Although the real spreadsheets are many megabytes long and quite
detailed, this is the VC's calculation:

AProbability of Success 10%

BHow rich I would get $1,000,000,000
CExpected Return (A x B)$100,000,000
But founders are much more conservative than that. They are not
going to start ten companies in their lifetime, they're going to start,
maybe, two. A founder might prefer the following model:

AProbability of Success 80%

BHow rich I would get $100,000,000
CExpected Return (A x B)$80,000,000

Even though the second model has a lower expected return, it is

vastly preferable to most founders, who can't diversify away the risk,
while VCs who invest in dozens of businesses would prefer the first
model because it has a greater return. This is just Econ 101; it's the
same reason you buy car insurance and Hertz doesn't.

The difference in goals means that VCs are always going to want their
companies to do risky things. Oh, sure, they'll deny it, but if they were
really looking to do conservative risk-free things, they'd be investing
in U.S. Treasuries, not optical networking companies. But as an
entrepreneur, you're going to be forced at gunpoint to bet on three
cherries again and again and again. You know you're going to lose,
but the gunman doesn't care, he's got bets on all the slot machines
and one of them is going to pay off big time.

There's nothing controversial here. A VC would say, "that's what VC is

for: investing in risky ideas." Fair enough. As long as the
entrepreneur wants to take a 10% chance, VC may be the way to go.
The trouble here is that the VC is now doing a perverse kind of
selection. They are looking for the founders with business ideas where
the founders themselves think the idea probably won't work. The end
result is that VC money ends up being used in bet-the-farm kind of
ways. This kind of recklessness causes companies like WebVan to
blow $800,000,000 in a rather desperate attempt to buy a profitable
business model. The trouble is that they were going so fast that they
didn't have time to learn how to spend money in a way that has a
positive return, which is, by definition, what you have to do to be
profitable.

Here's my philosophy of company growth. A growing company looks

like this:

Oh, wait, I forgot to define the Y axis. Let's assume this curve is my
revenues:

There are some other things which grow at roughly the same speed.
For example, the number of employees:

And the number of people who have heard of your product, which
we'll call "PR":

There's also the "quality of your code" curve, based on the theory that
good software takes ten years .
I've drawn these curves moving up at roughly an equal rate. That's
not a coincidence. In a small company, you regulate each of these
curves so they stay roughly in sync. Why? Because if any two of those
curves get out of whack, you have a big problem on your hand—one
that can kill your company. For example:

1. Revenues grow faster than you can hire employees.

Result: customer service is inadequate. Let's tune in to Alex
Edelstein over at Cloudmark: “[Cloudmark Sales are] pretty
swamped, so they're not getting back properly to everyone....
What's happening here now at Cloudmark is a little like the
early days at Netscape when we just had too few people to
properly respond to the customer interest.”
2. Revenues grow slower than you hire employees. Result:
you burn cash at a ridiculous rate and go out of business. That's
an easy one.
3. PR grows faster than the quality of your code. Result:
everybody checks out your code, and it's not good yet. These
people will be permanently convinced that your code is simple
and inadequate, even if you improve it drastically later. I call
this the Marimba phenomenon . Or, you get PR before there's a
product people can buy, then when the product really comes out
the news outlets don't want to do the story again. We'll call this
the Segway phenomenon.
4. Employees grows faster than code: Result: too many cooks
working on code in the early days causes bad architecture.
Software development works best when a single person creates
the overall architecture and only later parcels out modules to
different developers. And if you add developers too fast,
development screeches to a halt, a phenomenon well
understood since 1975 .

And so on, and so on... A small company growing at a natural pace

has a reasonable chance of keeping these things in balance. But VCs
don't like the flat part of the curve at the beginning, because they
need an exit strategy in which the hockey-stick part of the curve
occurs before their fund needs to cash out, about six years according
to VC Joi Ito . This is in direct conflict with the fact that good
software can't really accomplish this kind of growth. Hockey stick,
there will be, but it will take longer than most VCs are willing to wait.
Remember my chart of Lotus Notes? Good heavens, I am repeating
myself.
VCs try to speed things up by spending more money. They spend it
on PR, and then you get problem 3 ("PR grows faster than code").
They spend it on employees, and then you get problem 4 ("too many
cooks") and problem 2 ("high burn rate"). They hire HR people,
marketing people, business development people. They spend money
on advertising. And the problem is, they spend all this money before
anyone has had a chance to learn what the best way to spend money
is. So the business development guy wanders around aimlessly and
accomplishes zilch. You advertise in magazines that VCs read, not
magazines that your customers read. And so on.

OK, that's the first part of the VC crisis.

The second part is the fact that VCs hear too many business plans,
and they need to reject 999 out of 1000. There appear to be an
infinite number of business plans looking for funding. A VC's biggest
problem is filtering the incoming heap to find what they consider to
be that needle in the haystack that's worth funding. So they get
pretty good at saying "no," but they're not so good at saying no to the
bad plans and yes to the good plans.

When you have to say “no” 999 times for every time you say “yes,”
your method becomes whack-a-mole. Find the flaw, say no. Find the
flaw, say no. The faster you find flaws, the more business plans you
can ding. Over at VentureBlog you can amuse yourself for an hour
with some of the trivial reasons VCs will ding you. PowerPoint too
complicated? Ding! Won't tell us your magic sauce? Ding! You didn't
research the VC before you came in? Ding! It's not their fault; they
are just trying to say no 999 times in as efficient a way as possible. All
of this reminds me too much of the old-school manager who hires
programmers based on what school they went to or whether they look
good in a suit.

Naval Ravikant, a VC at August Capital, reveals the classic VC myopia

of feeling like they just don't have time to get to know entrepreneurs
that aren't ready to pitch yet. “Most VCs are too busy to 'dance,'” he
wrote. They are too busy vetting serious proposals to shmooze with
interesting companies that might not need cash right now.
This is, roughly, the equivalent of the old joke about the guy searching
for his car keys under a streetlamp. "Did you lose them here?" asks
the cop. "No, I lost them over there, but the light's better here."

But the great companies are often not the ones that spend all their
time begging for investments. They may already be profitable. They
may be too busy to look for VC, something which is a full time job for
many entrepreneurs. Many excellent entrepreneurs feel that their
time is better spent pitching products to customers rather than
pitching stock to investors. It's bizarre that so many VCs are willing to
ignore these companies simply because they aren't playing
the traditional get-funded game. Get out there and pursue them!

Here's another funny thing that's happening. VCs are reacting to the
crash by demanding ever stricter conditions for investments. It's now
considered standard that the VC gets all their money back before
anyone else sees a dime, no matter what percent of the company they
actually own. VCs feel like this protects their interests. What they're
forgetting is that it reduces the quality of startups that are willing to
make deals. Here's one of VC Joi Ito's suggestion for VCs : “Sign a 'no
shop' and get a letter of intent (LOI) signed quickly so an auction
doesn't start jacking up the price.” A no shop is sometimes called an
exploding term sheet. It means that the company must either accept
the deal on the spot or it won't get funded at all. The theory is, we
don't want you going around to other VCs trying to get a better deal.
It's common among the second-tier VCs, but the best VCs are usually
willing to stand on their own merits.

It seems to me that a company that accepts an exploding offer is

demonstrating a remarkable lack of basic business aptitude. Every
building contractor in New York knows you request bids from five or
ten plumbers before you award the contract. If a plumber said, "I'll do
it for $x, but if you shop around, deal's off," the contractor would
laugh his head off and throw the plumber out on the street. Nothing
sends a stronger message that an offer is uncompetitive than refusing
to expose it to competition. And that's for a $6000 kitchen
installation. Getting $10 million in funding for a business is the
biggest and most important deal in the life of a company. You're
going to be stuck with this VC forever, they're going to want to
control your board of directors, they're going to push the founders
out and bring in some polished CEO as quickly as they can, someone
who will take the picture of the cat off your homepage and replace it
with the usual MBA jargon.
And now they want you to agree to all this in a matter of fifteen
minutes without talking to anyone else? Yeah, right.

VCs who make exploding offers are pretty much automatically

eliminating all the people with good business sense from their
potential universe of companies. Again, it does make it easier to say
no 999 times, but you're pretty much guaranteed to say no to all the
companies with a modicum of negotiating skills. This is not the
correlation you're looking for. In fact, just about everything the VCs
do to make their deals "tougher," like demanding more control, more
shares, more preferential shares, lower valuations, death spiral
convertible stock, etc., is pretty much guaranteed to be at the expense
of the founders in a very zero-sum kind of way. And this means that
smart founders, especially the ones with businesses that can survive a
lack of funding, are going to walk away. VCs must realize that if the
business flops, no matter how much control you have, the investor is
going to lose everything. Look at the story of arsDigita. A nasty fight
over control gives Phil Greenspun enough money to buy an airplane,
and the VCs still lost every penny when the company went down the
tubes. So all these tough deals are not really protecting the VCs,
they're just restricting the VCs' world of possible investments to
dumb companies and desperate companies. Sam Bhaumik, VC, says
“VCs are being aggressive, but most requests are legitimate.” The
capital belongs to public pension funds and university endowments,
he notes, using the standard widows-and-orphans sob story. Boo hoo
. Come on , public pension funds and university endowments are the
savviest investors out there; don't tell me they need coddling and
protecting. They're investing in risky venture funds for a reason: they
want to get paid for taking risk. If they wanted protection, they'd
invest in US Treasuries.

There are probably hundreds of software companies started every

day. Of that universe, there is a small number that are actively
looking for early stage investors. Of that small number, an even
smaller portion is willing to go along with the current harsh deals that
VCs are offering. Now slice away the founders who are afraid of being
arsDigita'd. The population shrinks even more as VCs reject
companies that don't match their—quite reasonable—criteria for
spotting a successful company. You wind up with a tiny number of
investment opportunities which, quite frankly, is vanishingly unlikely
to contain The Next Netscape.

More Reading

Considering VC? First read this article on the web:

An Engineer's View of Venture Capitalists , by Nick

Tredennick

Don't miss these three books by company founders:

High St@kes, No Prisoners: A Winner's Tale of Greed

and Glory in the Internet Wars by Charles Ferguson.
The Leap: A Memoir of Love and Madness in the
Internet Gold Rush by Tom Ashbrook
Burn Rate: How I Survived the Gold Rush Years on the
Internet by Michael Wolff
 Startup: A Silicon Valley Adventure by Jerry Kaplan

A movie about the process:

Startup.com

And don't forget:

Eboys: The First Inside Account of Venture Capitalists

at Work by Randall E. Stross

Weblogs by VCs:

VentureBlog
Joi Ito

Next: Rick Chapman is In Search of Stupidity

Want to know more? You’re reading Joel on Software, stuffed with Hoorah! FogBugz
years and years of completely raving mad articles about software 7 just shipped, and
it’s a huge new
development, managing software teams, designing user interfaces,
release. See what's
running successful software companies, and rubber duckies. new and try the online demo
today!
About the author. I’m Joel Spolsky, founder of Fog Creek Software, a
New York company that proves that you can treat programmers well
and still be highly profitable. Programmers get private offices, free
lunch, and work 40 hours a week. Customers only pay for software if
they’re delighted. We make FogBugz, an enlightened project
management system designed to help great teams develop brilliant
software, and Fog Creek Copilot, which makes remote desktop access
easy.

© 2000-2009 Joel Spolsky

[email protected]
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HOME >
BUSINESS >
TECHNOLOGY

For entrepreneurs,paranoia
might be wise
March 14, 2005

For technology entrepreneurs, the old line may be true: It's not
paranoia if everyone really is out to get you.

Brian Barth is an MIT alum who, in 1999, started SideStep out of his
house in Palo Alto, Calif. The company developed a downloadable
''toolbar" that allowed travelers to search dozens of websites
simultaneously to find the best air fares, car-rental deals, and hotel
rates. More than 8 million people downloaded it.

Barth isn't a vitriolic guy, and so in a matter-of-fact, ''nice weather

today" sort of way, he related a story to me last month that would
cause most entrepreneurs' blood to boil.

In 2003 and 2004, Barth had a series of more than 10 meetings and
phone conversations with partners at General Catalyst, a Cambridge
venture capital firm. (Barth remembers three meetings with Joel Cutler,
a founder of General Catalyst, and three with Terry Jones, a partner at
the firm who was formerly the chief executive of Travelocity.com.)

Barth says that Cutler and Jones never told him they were working on
a travel idea of their own, even when he asked them directly about a
rumor he'd heard through the grapevine. (In their version of the story,
Cutler and Jones were simply meeting with Barth to explore the
possibility of investing in SideStep, or possibly buying the company.) A
month after the last conversation Barth had with Jones, in March 2004,
General Catalyst announced it was investing $6 million in a company
that it had helped to form, Kayak.com, to help travelers search many
travel sites simultaneously. (Kayak.com wasn't an idea brought to
General Catalyst by an outside entrepreneur.) Jones would be
chairman, and Steve Hafner, a cofounder of Orbitz, would be the chief
executive.

It brings up a question that's constantly on the mind of an

entrepreneur: How much do you reveal about your business plan, and
to whom? How much entrepreneurial paranoia is healthy -- and at what
point does coyness and secrecy start to make you look like a nutcase
with a PowerPoint deck?

There are plenty of things for entrepreneurs to worry about. A venture

capital firm might decide not to invest, and either develop a company of
its own or fund one of your competitors. An important prospective
business partner, like IBM or Oracle, could decide to develop a product
just like yours after lengthy discussions. In one case that involved a
local company, Thomson Financial, which was an investor and had two
seats on the board of Boston-based CCBN, decided to start a
competing business, and allegedly used information from CCBN board
LATEST TECHNOLOGY NEWS
meetings to compete against it. (The suit was resolved last year when
Thomson decided to buy CCBN.) More technology news

Some entrepreneurs believe that you can't be too careful. When BOSTON.COM'S MOST E-MAILED
Jonathan Gaines and Joseph Spadea were working on SquareAnswer,
an anti-spam company in Westwood that was launched recently, they Study finds people who multitask often bad at it
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each business plan that they distributed, so that if one was Girl swept away in surf dies
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Later, their attorney asked them for a list of all the people who knew Limit newborns' time in car seats to travel, study
about their product, to make sure that everyone on the list had signed suggests
a nondisclosure agreement. Spadea's parents hadn't signed one.
See full list of most e-mailed
''My mom and dad looked at me kind of funny," he says, but they SEARCH THE ARCHIVES
complied.

But other entrepreneurs believe too much paranoia can backfire. Dev
Ittycheria is chief executive of BladeLogic, a server management Today (free)
software company in Waltham. Many entrepreneurs ''come across as Yesterday (free)
too amateurish," he says. ''They don't want to share any information. Past 30 days
It's like pulling teeth. That's a mistake, because a partnership has to be
Last 12 months
built on trust."
Advanced search / Historic Archives
But Ittycheria says it is important to know about the reputation of the
investor or prospective partner you're dealing with. With partners, ADVERTISEMENT

information exchange needs to take place on an I'll-show-you-mine-if-

you-show-me-yours basis.

''If you think the idea you have can be protected by an NDA, I don't
want to invest in it," says Bo Peabody, an entrepreneur-turned-venture
capitalist, using the abbreviation for nondisclosure agreement. ''Ninety
percent of success is about how you execute on your idea." Peabody's
first book, ''Lucky or Smart? Secrets to an Entrepreneurial Life," was
published this year.

I bumped into Peabody last week at the Mount Sunapee Ski Area in
New Hampshire, where entrepreneurs and venture capitalists were
schmoozing with one another on the slopes as part of the Start-Up
New Hampshire Business Plan Competition. Entrepreneurs there were
exhibiting no reluctance -- as usual -- in talking about their ideas with
VCs on the lifts; in the money game, it's VCs who hold the cards and
can establish whatever rules they want.

While it would clearly be unethical for a VC to hand over documents

from one company to a second company she'd decided to fund, nothing
prevents VCs from sharing with that second company what they've
learned from the five or 10 companies they've had meetings with that
occupy that same industry niche. Peabody and Ittycheria both say it's
standard operating procedure.

''Our investors have said, 'Here's how Company X thinks about this
problem, and here's how they're going to solve it. Here's how they're
going to build the distribution channel,' " says Ittycheria. ''That's pretty
useful information for us as the recipient."

To my eternal dismay, some entrepreneurs are paranoid about talking

to the press.
''There's no benefit of broadcasting your plan, so why do it?" asks Mort
Rosenthal, an entrepreneur who is working on a top-secret new
company called imo, with backing from Highland Capital Partners.
''There's a risk that someone else will start something similar, and a
risk of creating expectations you can't meet."

James Perkins, who was up at Mount Sunapee last week -- but not
skiing -- is the chief executive of Accentus, a New Hampshire start-up
that sells software to stock traders that can translate the twitches of the
Nasdaq into auditory cues.

Perkins told me he'd been paranoid about having discussions with

potential customers like Goldman Sachs and Bloomberg LP. Many
potential customers had in-house software developers who attended
meetings, and Perkins was concerned they might try to create their
own version of Accentus's product. Patent protection was important,
Perkins says, as were NDAs.

So back to SideStep and Kayak. Was Barth being naïve, or were the
General Catalyst partners being devious?

Cutler at General Catalyst says that he and the SideStep team in

Silicon Valley simply couldn't come to terms on what the company was
worth, and so General Catalyst didn't invest. Jones emphasizes that at
the time, SideStep was a downloadable application, and what General
Catalyst felt was needed was a system that travelers could use on the
Web.

''We weren't satisfied with what was there," Jones says. Since Kayak's
beta launch last year, SideStep has begun offering Web-based search.

''SideStep has morphed into Kayak," Jones argues.

Cutler adds: ''We have a huge amount of integrity here."

After our initial conversation, Barth told me he didn't want to talk

anymore about the past. But Phil Carpenter, the vice president of
corporate marketing at SideStep, says, ''They did a lot of poking
around to help educate themselves. It did not seem to us to be entirely
aboveboard." (SideStep eventually raised $8 million from Connecticut-
based Trident Capital.)

I doubt we'll ever know what actually happened: Was General Catalyst
doing detailed research for its own purposes, or is Barth just upset
about having a well-funded new competitor to deal with?

One thing's certain, though: Barth will be a little more paranoid the
next time around.

Scott Kirsner is a contributing editor at Fast Company. He can be

reached at [email protected].

© Copyright 2006 Globe Newspaper Company.

12

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Issue 12.10 - October 2004

Subscribe to WIRED magazine and receive a FREE gift!

The Long Tail

Forget squeezing millions from a few megahits at the top of the charts. The future of entertainment is in the
millions of niche markets at the shallow end of the bitstream.

By Chris Anderson Page 1 of 5 next »

Chris is expanding this article into a book, due out in May 2006. Follow his continuing coverage of the
subject on The Long Tail blog.

In 1988, a British mountain climber named Joe Simpson

Story Tools
wrote a book called Touching the Void, a harrowing account of
near death in the Peruvian Andes. It got good reviews but,
only a modest success, it was soon forgotten. Then, a decade
Story Images later, a strange thing happened. Jon Krakauer wrote Into Thin
Air, another book about a mountain-climbing tragedy, which
Click thumbnails for full-size image:
became a publishing sensation. Suddenly Touching the Void
started to sell again.

Random House rushed out a new edition to keep up with

demand. Booksellers began to promote it next to their Into
Thin Air displays, and sales rose further. A revised paperback
edition, which came out in January, spent 14 weeks on the
New York Times bestseller list. That same month, IFC Films
released a docudrama of the story to critical acclaim. Now
Touching the Void outsells Into Thin Air more than two to one.

What happened? In short, Amazon.com recommendations. The

online bookseller's software noted patterns in buying behavior
and suggested that readers who liked Into Thin Air would also
like Touching the Void. People took the suggestion, agreed
Rants + raves
wholeheartedly, wrote rhapsodic reviews. More sales, more
algorithm-fueled recommendations, and the positive feedback
More » loop kicked in.

Start Particularly notable is that when Krakauer's book hit shelves,

F*** the FCC! Set the airwaves Simpson's was nearly out of print. A few years ago, readers of
free! Krakauer would never even have learned about Simpson's
Hacking a 55-mile Wi-Fi signal book - and if they had, they wouldn't have been able to find it.
The science behind Mona's smile Amazon changed that. It created the Touching the Void
Gene therapy makes better lovers phenomenon by combining infinite shelf space with real-time
More » information about buying trends and public opinion. The
result: rising demand for an obscure book.
Play
This is not just a virtue of online booksellers; it is an example
Rock out with Fatboy Slim
of an entirely new economic model for the media and
South Park's big-screen puppet
regime entertainment industries, one that is just beginning to show its
Bruce Mau on his massive art power. Unlimited selection is revealing truths about what
attack consumers want and how they want to get it in service after
Fetish: Technolust service, from DVDs at Netflix to music videos on Yahoo!
Test: Consumer reviews Launch to songs in the iTunes Music Store and Rhapsody.
More » People are going deep into the catalog, down the long, long list
of available titles, far past what's available at Blockbuster
View Video, Tower Records, and Barnes & Noble. And the more they
find, the more they like. As they wander further from the
Do 'I Agree'? Ask my attorney-
bot. beaten path, they discover their taste is not as mainstream as
Hot Seat: Jeff Hawkins on they thought (or as they had been led to believe by marketing,
intelligence a lack of alternatives, and a hit-driven culture).
 Sterling: Tomorrow's smart object
is refreshingly dumb An analysis of the sales data and trends from these services
Lessig: The Me Generation is and others like them shows that the emerging digital
burdening kids - and it's all our entertainment economy is going to be radically different from
fault
today's mass market. If the 20th- century entertainment
More »
industry was about hits, the 21st will be equally about misses.

For too long we've been suffering the tyranny of lowest-common-denominator fare, subjected to
brain-dead summer blockbusters and manufactured pop. Why? Economics. Many of our assumptions
about popular taste are actually artifacts of poor supply-and-demand matching - a market response
to inefficient distribution.

The main problem, if that's the word, is that we live in the physical world and, until recently, most of
our entertainment media did, too. But that world puts two dramatic limitations on our entertainment.

The first is the need to find local audiences. An average movie theater will not show a film unless it
can attract at least 1,500 people over a two-week run; that's essentially the rent for a screen. An
average record store needs to sell at least two copies of a CD per year to make it worth carrying;
that's the rent for a half inch of shelf space. And so on for DVD rental shops, videogame stores,
booksellers, and newsstands.

In each case, retailers will carry only content that can generate sufficient demand to earn its keep.
But each can pull only from a limited local population - perhaps a 10-mile radius for a typical movie
theater, less than that for music and bookstores, and even less (just a mile or two) for video rental
shops. It's not enough for a great documentary to have a potential national audience of half a million;
what matters is how many it has in the northern part of Rockville, Maryland, and among the mall
shoppers of Walnut Creek, California.

There is plenty of great entertainment with potentially large, even rapturous, national audiences that
cannot clear that bar. For instance, The Triplets of Belleville, a critically acclaimed film that was
nominated for the best animated feature Oscar this year, opened on just six screens nationwide. An
even more striking example is the plight of Bollywood in America. Each year, India's film industry puts
out more than 800 feature films. There are an estimated 1.7 million Indians in the US. Yet the top-
rated (according to Amazon's Internet Movie Database) Hindi-language film, Lagaan: Once Upon a
Time in India, opened on just two screens, and it was one of only a handful of Indian films to get any
US distribution at all. In the tyranny of physical space, an audience too thinly spread is the same as
no audience at all.

The other constraint of the physical world is physics itself. The radio spectrum can carry only so many
stations, and a coaxial cable so many TV channels. And, of course, there are only 24 hours a day of
programming. The curse of broadcast technologies is that they are profligate users of limited
resources. The result is yet another instance of having to aggregate large audiences in one
geographic area - another high bar, above which only a fraction of potential content rises.

The past century of entertainment has offered an easy solution to these constraints. Hits fill theaters,
fly off shelves, and keep listeners and viewers from touching their dials and remotes. Nothing wrong
with that; indeed, sociologists will tell you that hits are hardwired into human psychology, the
combinatorial effect of conformity and word of mouth. And to be sure, a healthy share of hits earn
their place: Great songs, movies, and books attract big, broad audiences.

Page 1 of 5 next »

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« Personal - Joining the EFF Board | Main
JUNE 2005
June 29, 2005 Sun Mon Tue Wed Thu Fri Sat
1 2 3 4
It’s a great time to be an entrepreneur 5 6 7 8 9 10 11
12 13 14 15 16 17 18
There’s never been a better time to be an entrepreneur 19 20 21 22 23 24 25
because it’s never been cheaper to be one. Here’s one 26 27 28 29 30

example.

Excite.com took $3,000,000 to get from idea to launch. RECENT POSTS

JotSpot took $100,000.
It’s a great time to be an
Why on earth is there a 30X difference? There’s probably a lot entrepreneur

of reasons, but here are my top four. I’m interested in Personal - Joining the EFF Board
hearing about what other people think are factors as well.
Engineer Interview Triage?

Hardware is 100X cheaper Keeping Innovation Alive - The

In the 10 years between Excite and JotSpot, hardware has Hackathon

literally become 100X cheaper. It’s two factors – Moore’s law The long tail of software. Millions of
and the rise of Linux as an operating system designed to run Markets of Dozens.
on generic hardware. Back in the Excite days, we had to buy
Startups and the Stockdale Paradox
proprietary Sun hardware and Sun hard drive arrays. Believe
Flossing and startups
me, none of it was cheap.
Potting Plants
Today, we buy generic Intel boxes provided by one of a
Moons Over My Hammy
million different suppliers.
Potty Talk
Infrastructure software is free
Back in 1993 we had to buy and continue to pay for
Add me to your TypePad People list
maintenance on everything we needed just to build our
Check out the JotSpot wiki
service -- operating systems, compilers, web servers,
application servers, databases. You name it. If it was
LINKS
infrastructure, we paid for it. And, not only was it costly, the
need to negotiate licenses took time and energy. I remember ARCHIVES
having a deadline at Excite that required me to buy a Sun
compiler through their Japanese office because it was the June 2005

only office open at the time (probably midnight) and we May 2005
needed that compiler NOW.
March 2005

Compare that to today. Free, open source infrastructure is January 2005

the norm. Get it anytime and anywhere. At JotSpot, and
November 2004
startups everywhere you see Linux, Tomcat, Apache, MySQL,
October 2004
etc. No license cost, no maintenance.
September 2004
Access to Global Labor Markets
Startups today have unprecedented access to global labor
markets. Back in 1993, IBM had access to technical people in
India, but little Excite.com did not. Today, with rent-a-coder,
elance.com and just plain email, we have access to a world-
wide talent pool of experts on a temporary or permanent
basis.

SEM changes everything

Ten years ago to reach the market, we had to do expensive
distribution deals. We advertised on television and radio and
print. We spent a crap-load of money. There’s an old adage
in television advertising “I know half my money is wasted.
Trouble is, I don’t know what half”. That was us.

It’s an obvious statement to say that search engine marketing

changes everything. But the real revolution is the ability to
affordably reach small markets. You can know what works
and what doesn’t. And, search not only allows niche
marketing, it’s global popularity allows mass marketing as
well (if you can buy enough keywords).

So What?
It’s nice that it’s cheaper, but what does it mean to
entrepreneuring?

More people can and will be entrepreneurs than ever

before
A lot more people can raise $100,000 than raise $3,000,000.

Funding sources explode which enables more

entrepreneurs
The sources of funding capable of writing $100,000 checks are
a lot more plentiful than those capable of writing $3,000,000
checks. It’s a great time to be an angel investor because
there are real possibilities of substantial company progress on
so little money.

More bootstrapping to profitability

With costs so low, I think you’ll see many more companies
raise angel money and take it all the way to profitability.

Higher valuations for VCs.

And, for those that do raise venture capital, I think it means
better valuations because you can get far more mature on
your $100,000 before you go for the bigger round.

All in all, it’s a great time to be an entrepreneur.

June 29, 2005 | Permalink

TrackBack

TrackBack URL for this entry:

http://www.typepad.com/services/trackback/6a00d8341e781c53
Listed below are links to weblogs that reference It’s a great
time to be an entrepreneur:

» The era of the disposable startup ? from Software Only

Joe Kraus has a thoughtful post: [Read More]

Tracked on Jun 30, 2005 4:57:53 AM

» It's a great time to be an entrepreneur. from larry borsato

Joe Kraus posts his thoughts on why this is a great time to
start a new company:Excite.com took $3,000,000 to get from
idea to launch. JotSpot took $100,000. Why on earth is there
a 30X difference? Theres probably a lot... [Read More]

Tracked on Jun 30, 2005 5:59:03 AM

» It's a Great Time to be an Entrepreneur . . . from IPcentral

Weblog
says Bnoopy, because "it’s never been cheaper to be one."
Specifics follow. Infectious Greed adds: Granted, you still
need good ideas -- and maybe even better ideas if the
financial barriers to entrepreneurship have fallen -- but
people still haven't... [Read More]

Tracked on Jun 30, 2005 7:36:50 AM

» It's a Great Time to Be An Entrepreneur from

wingedpig.com - Mark Fletcher's Blog
Echoing many of the things I've been saying, Joe Kraus has a
great piece on how cheap it is to start a web company. I can
provide a couple of additional data points. I started ONElist
with $5K. That lasted... [Read More]

Tracked on Jun 30, 2005 8:35:16 AM

» Entrepreneurs, angels, and the cost of launch from Signal

vs. Noise
Joe Kraus from JotSpot has a great piece on how the last ten
years has reduced the price of doing a startup from three
million to a hundred thousand dollars for him. That’s
definitely an interesting development and Joe is... [Read
More]

Tracked on Jun 30, 2005 8:47:46 AM

» Entrepreneurs, angels, and the cost of launch from Signal

vs. Noise
Joe Kraus from JotSpot has a great piece on how the last ten
years has reduced the price of doing a startup from three
million to a hundred thousand dollars for him. That’s
definitely an interesting development and Joe is... [Read
More]
Tracked on Jun 30, 2005 8:48:26 AM

» New product development & entrepreneuship from

Emergence Marketing
Joe Kraus has a great post on how it took $3M to start Excite
and only $100K to launch Jotspot (here - via O'Reilly Radar).
The reasons he lists are hardware being 100X cheaper,
software infrastructure being free, greater access... [Read
More]

Tracked on Jun 30, 2005 9:10:57 AM

» New product development & entrepreneurship from

Emergence Marketing
Joe Kraus has a great post on how it took $3M to start Excite
and only $100K to launch Jotspot (here - via O'Reilly Radar).
The reasons he lists are hardware being 100X cheaper,
software infrastructure being free, greater access... [Read
More]

Tracked on Jun 30, 2005 9:33:09 AM

» Nano-corps? from What's Next?

One other driver that I think is important is that it is now
possible to add value in smaller doses than ever before.
[Read More]

Tracked on Jun 30, 2005 9:45:03 AM

» A Great Time to be an Entrepreneur from Changing Way

Here's something else I've seen several links to, but cannot
risk to urge to link to myself. It's Joe Kraus's post on the $
cost of entrepreneurship. Mark Fletcher links to the post, and
provides some detail on the companies he's started (and
subse... [Read More]

Tracked on Jun 30, 2005 10:14:04 AM

» Jon Kraus on entrepreneurship from WeBreakStuff - Blog

Jon Kraus has a great writeup on something I’ve been
preaching about lately - on how it is a great time to be a
entrepreneur. What he’s talking about now, I’ve talked about
many many times before. Expense cuts due to the usage of
ope... [Read More]

Tracked on Jun 30, 2005 11:12:09 AM

» Is it a great time to be an entrepreneur? from break the

frame
According to ex-Excite founder it is. And, yes, the argument
that costs are coming down is a great help to entrepreneurs.
Relative scarcity of initial VC still continues to be an issue
according to the New York Software Industry Association....
[Read More]

Tracked on Jun 30, 2005 12:57:19 PM

» Start-ups are cheaper and easier to start… from Texas

Venture Capital Blog
Great post from an entrepreneurship blog titled: It’s a great
time to be an entrepreneur. Reasoning: 1. Hardware is 100x
cheaper than the late 90s. 2. Infrastructure software is free.
3. Access to global labor markets. 4. SEM marketing. ... [Read
More]

Tracked on Jun 30, 2005 1:21:28 PM

» The cost of a start-up from SolutionJunkie -- Doug Giuliana

The biggest difference comes from the fact that we know
better now. We know that we aren't going to get one hundred
million dollar valuations just like that. We know that VC's are
going to probe much deeper. We learned that Super Bowl
commercials and... [Read More]

Tracked on Jun 30, 2005 1:41:08 PM

» Startups on the Cheap from Business Opportunities Weblog

Joe Kraus on why it's a great time to be an entrepreneur:
Theres never been a better time to be an entrepreneur
because its never been cheaper to be one. Heres one
example. Excite.com took $3,000,000 to get from idea...
[Read More]

Tracked on Jun 30, 2005 3:04:08 PM

» Audio: Start-Up Your Business Today from Entrepreneur's

Journey
Download the MP3 [ 11 Minutes - 2.5MB ] I’m doing a bit of
motivational podcasting for you today. As pointed out by Dane
Carlson from Business Opportunities and also Bnoopy, it’s a
great time to be an entrepreneur and you should start your
bu... [Read More]

Tracked on Jun 30, 2005 7:54:02 PM

» Give me $100,000 and I'll give you a Company from The

Wilk's Blog
This is so true, Joe Krauss has hit it on the nose... [Read
More]

Tracked on Jun 30, 2005 8:11:26 PM

» Speaking of Disruptive Technology... from The Wilk's Blog

Have an idea for a company? Have $100,000, or know where
to get some? If you build it, they will come... [Read More]

Tracked on Jun 30, 2005 8:56:22 PM

» Is it a Good Time to be a Netrepreneur? from HTNet

Joe Kraus has written an entry on why now is a great time to
be an entrepreneur. A good writeup, although the obvious
limitation would be that it’s a great article on the topic of
net entrepreneurship but not necessarily entrepreneurship in
gener... [Read More]

Tracked on Jun 30, 2005 10:26:05 PM

» Good time to be entrepreneur from lifehack.org

Joe Kraus at Bnoopy has a interesting post on why it is good
time to be entrepreneur now days. He came up couple of
reasons: “Excite.com took $3,000,000 to get from idea to
launch. JotSpot took $100,000.” Hardware is 100X cheaper
In... [Read More]

Tracked on Jul 1, 2005 4:59:42 AM

» "its a great time to be an entrepreneur" from gapingvoid

From Bnoopy:Its a great time to be an entrepreneur. Theres
never been a better time to be an entrepreneur because its
never been cheaper to be one. Heres one example.
Excite.com took $3,000,000 to get from idea to launch.
JotSpot... [Read More]

Tracked on Jul 1, 2005 5:53:25 AM

» links for 2005-07-01 from hexod.us

Covering The Story Of Your Life Camera Phones and special
Web sites allow mobile bloggers to record every detail (tags:
flickr) Font guide for webmasters So which fonts are installed
on everyone’s computers? Your best bets are the ones...
[Read More]

Tracked on Jul 1, 2005 6:20:48 AM

» Ninja Startups from Josh Owens, true confessions of a

cheesy techno-geek...
I figured, meh, why not weigh in on the latest topic to storm
the blogosphere (at least the small section I read) - Cheap
startups. Some heavy hitting names have been posting about
it... Joe Kraus, David Hansson, Om Malik, Mark Fletcher, &
Chris Sayl... [Read More]

Tracked on Jul 1, 2005 6:23:27 AM

» VC and Angel Funding from Just Hack

David over at 37Signals wrote a great little piece about VC
funding, Entrepreneurs, angels, and the cost of launch. His
article hit pretty close to home as I am involved in writing a
cool little web service with two of my friends. We are doing
it on virtu [Read More]

Tracked on Jul 1, 2005 6:29:47 AM

» It's cheap to be an entrepreneur from Estate Legacy Vaults

Blog

From the entrepreneur's channel and Boopy, It's a great time

to be an entrepreneur.... Access to Global Labor Markets 3.

[Read More]

Tracked on Jul 1, 2005 7:20:13 AM

» ���� - ��10� from keso

��� ��,����� �������� �������,���� ���������� ����,��� ���
���� ��. [Read More]

Tracked on Jul 1, 2005 10:42:53 AM

» On "It's a Great Time to Be An Entrepreneur" from Dru's

Blog
Mark fletcher was chiming in with Joe Kraus on the topic "It's
a Great Time to Be An Entrepreneur", so I thought I would
chime in as well. I haven't started any companies worth
noting, but I was an employee of Mark's back in the
Onelist/eGroups days.... [Read More]

Tracked on Jul 1, 2005 2:24:48 PM

» Back when bootstrapping wasn't from Notes from Classy's

Kitchen
Here's a little blast from the past - a story on entrepeneurship
during the bubble from '99. Of course from... [Read More]

Tracked on Jul 1, 2005 4:08:17 PM

» links for 2005-07-02 from medmusings

Cisco: Paging Dr. Info Tech "Cisco already has taken steps in
this direction. Employees who go to Palo Alto Medical
Foundation, a 650-doctor practice that serves 10% of Cisco
workers, can use an early version of secure messaging. This
year, Cisco star... [Read More]

Tracked on Jul 1, 2005 11:18:42 PM

» “It’s a great time to be an entrepreneur” - Really hope so!

;) from Sometimes Silent
Bnoopy: It’s a great time to be an entrepreneur I really hope
this guy’s right! Seriously, I went to the bank today to
transfer my checking account into a different once since I was
originally getting free checking because I was getting my ...
[Read More]

Tracked on Jul 2, 2005 1:09:28 AM

» It's a great time to be an entrepreneur! from

shooperman.com | reboot
Joe Kraus talks about how much cheaper (30x!) it is to do a
startup today. However, I thought that this is probably
something only people who have done a startup 10 years ago
would understand and, appreciate. Joe claims that his new
startup, JotSpot, i... [Read More]

Tracked on Jul 2, 2005 9:01:59 AM

» Web 2.0 This Week (June 26 - July 1) from TechCrunch

Beginning today, we are going to link to and summarize
important web 2.0 developments, essays, posts and
announcements over the previous week. Many of you may
read Richard McManus’ excellent web 2.0 Weekly Wrapup at
his site (link). Richard,... [Read More]

Tracked on Jul 2, 2005 4:37:48 PM

» Is it time to rethink about being an entrepreneur? from

Prosperity Train
We’re running out of excuses why we can’t get involved in
something . . . a view from a top dog (‘serial entrepreneur’
Joe Kraus) ... [Read More]

Tracked on Jul 3, 2005 7:23:16 AM

» It's a great time to be a entrepreneur! from Viamentis

Technologies
I've found these wonderful posts from two entrepreneurs.
They should know, coz they've been there. Precisely what I've
been thinking all these days. When I actually provide an off-
line presence for Viamentis, very little of the money will go
into buying s [Read More]

Tracked on Jul 3, 2005 7:43:35 AM

» Es un buen momento para ser emprendedor from Nada

importante sucedió hoy...
It’s a great time to be an entrepreneur. Partamos de la base
que este post es de un weblog del hemisferio Norte. Pero aún
así, hay un par de ideas interesantes. El comentario dice que
hoy en día, en general,... [Read More]

Tracked on Jul 3, 2005 7:22:39 PM

 » Small (the new big), continued. from GeekFun
A couple of weeks ago I wrote a couple of posts about the
opportunities for small organizations to do big things , and
the impact this might be having on the venture capital
industry. This past week, Joe Kraus, co-founder... [Read
More]

Tracked on Jul 3, 2005 11:07:06 PM

» Web 2.0 Weekly Wrap-up, 27 June - 3 July 2005 from

Read/Write Web
sponsored by: This week: Grokking Yahoo! My Web 2.0, What
is Where 2.0, Entrepreneurs start your engines, RSS VC fund
fever, Techie Post of the Week - Attention. Thoughts on
Yahoo! My Web 2.0 Yahoo's unveiling of a "social search...
[Read More]

Tracked on Jul 4, 2005 12:37:31 AM

» Web 2.0: It's a great time to be an investor from

Venturepreneur Partners
The Web is clearly changing before us. Most don’t have a
complete picture of what’s happening, but the media’s
attention to blogging is a clear sign to many that things are
different. Indeed they are! Blogging or weblogs have been...
[Read More]

Tracked on Jul 4, 2005 8:23:19 AM

» Web 2.0: It's a great time to be an investor from

Venturepreneur Partners
A lot has been said about Joe’s post during the past few days.
Which made me think — is it also a great time to be an
investor? I think so and provide reasons why in my post, Web
2.0: It’s a great time to be an investor. It would be great to
get feedb... [Read More]

Tracked on Jul 4, 2005 9:24:39 AM

» A big opening for little guys from Rough Type: Nicholas

Carr's Blog
Whether it's virtualization, grid computing, or software-as-a-
service, utility computing is creating attractive opportunities
for a new generation of tech entrepreneurs. [Read More]

Tracked on Jul 4, 2005 10:17:57 AM

» A golden age, except for the darkness from the habit of

wonder
It's a great time to be an entrepreneur...except that we're
entering a dark age for innovation. (The latter is from
someone at the Pentagon, and everyone else discredits it. So
it's still a great time to be an entrepreneur!) ... [Read More]

Tracked on Jul 4, 2005 4:39:24 PM

» ��������� from PODCAST PODIUM ��� �

Podcasting��� ������������� ��������� ������ �
���������������� ������������ ����������������� �����...
[Read More]

Tracked on Jul 4, 2005 8:56:51 PM

» Web 2.0: It's a great time to be an investor from

Venturepreneur Partners
A lot has been said about Joe’s post during the past few days.
Which made me think — is it also a great time to be an
investor? I think so and provide reasons why in my post, Web
2.0: It’s a great time to be an investor. It would be great to
get feedb... [Read More]

Tracked on Jul 5, 2005 6:32:26 AM

» Es un buen momento para ser emprendedor (II) from Nada

importante sucedió hoy...
Da para hacer una segunda parte del mismo comentario, Es
un buen momento para ser emprendedor (I). Encontré este
artículo, Best Time Ever to Start a Company, en otra
publicación, justamente a través de un link en el comentario
original,... [Read More]

Tracked on Jul 5, 2005 7:33:10 AM

» Es un buen momento para ser emprendedor (II) from Nada

importante sucedió hoy...
Creo que da para hacer una segunda parte del mismo
comentario, Es un buen momento para ser emprendedor (I),
porque el tema está interesante. Encontré este artículo, Best
Time Ever to Start a Company, en otra publicación,
justamente a través... [Read More]

Tracked on Jul 5, 2005 7:35:00 AM

» Great time to be an entrepreneur by Joe Krause from

NYBANKER blog about offshore outsourcing, software
development and online marketing
A great post from Joe Kraus of Jotspot on why this is a great
time to be an entrepreneur. Some ... [Read More]

Tracked on Jul 5, 2005 7:35:04 AM

» Es un buen momento para ser emprendedor (II) from Nada

importante sucedió hoy...
Creo que da para hacer una segunda parte del mismo
comentario, Es un buen momento para ser emprendedor (I),
porque el tema está interesante. Encontré este artículo, Best
Time Ever to Start a Company, en otra publicación,
justamente a través... [Read More]

Tracked on Jul 5, 2005 7:36:08 AM

» Great time to be an entrepreneur by Joe Krause from

NYBANKER blog about offshore outsourcing, software
development and online marketing
A great post from Joe Kraus of Jotspot on why this is a great
time to be an entrepreneur. Some ... [Read More]

Tracked on Jul 5, 2005 7:39:39 AM

» Great time to be an entrepreneur by Joe Krause from

NYBANKER blog about offshore outsourcing, software
development and online marketing
A great post from Joe Kraus of Jotspot on why this is a great
time to be an entrepreneur. Some ... [Read More]

Tracked on Jul 5, 2005 7:44:40 AM

» Great time to be an entrepreneur by Joe Krause from

NYBANKER blog about offshore outsourcing, software
development and online marketing
A great post from Joe Kraus of Jotspot on why this is a great
time to be an entrepreneur. Some ... [Read More]

Tracked on Jul 5, 2005 8:07:38 AM

Comments

Ok, I'm really curious about this. How could you possibly have
gotten to a launch on $100k? Please give some more details,
otherwise this just seems like an exaggeration. I mean, were
you paying anyone in the US? Because $100k will only get you
1/2 person-years.

Posted by: Anon | Jun 29, 2005 11:43:29 PM

another set of good reasons:

* down round financing went from >50% in 2002-3004 to <20%

in 2004. all the old crap is finally being flushed out.

* first round financing expanded 2 quarters in a row (Q4/04,

Q1/05), and seems to be on the way up. now that the old
crap is out of the way new crap can get funding! (ok, so
hopefully this time it's not crap...)

* Google's IPO created another major portal that can provide

acquisition liquidity for new ventures; so now with MSFT,
YHOO, GOOG (and also IAC, AOL, EBAY, AMZN et al), there
are a LOT of companies out there willing to buy startups with
solid technology -- and thus more optimistic entrepreneurs
and angel/VC investors.

* in addition to SEM creating instant traffic, AdSense & other

online advertising networks can create provide a new form of
instant revenue & monetization for startups (albeit limited in
most scenarios).

* a multiplicity of publicly available web services / hosted

ASPs are making "mashups" a lot more prevalent, and people
can now remix some very cool apps without having to build
the entire technology stack from the ground up. folks like
Paul Rademacher can be a one-man band & create
HousingMaps.com.
the technology DJ's time has come.

yep, gotta agree... time to buy shades :)

- dmc

Posted by: Dave McClure | Jun 30, 2005 2:46:32 AM

I am in hole hearted agreement with you but I have also

added my own reasons:

* Simpler services are more successful

* Big is no longer cool
* Better frameworks

Which I expand on on my blog post. I and many other people

are trying to bootstrap without Angel Investors, which is
something you will see a lot more of as well.

Posted by: Pelle | Jun 30, 2005 3:13:05 AM

Let's not forget the proliferation of broadband in the last 2-3

years...lowering the barriers to adoption for any number of
startup's service offerings.

Here in the UK, there's a direct correllation between the

broadband ISP price war and the adoption of broadband
services and content.

Posted by: Imran Ali | Jun 30, 2005 4:50:16 AM

Our experience at Revieworld and Reevoo concurrs with what

you are saying. There is a positive attitude amongst UK
investors at the moment. There is a realisation that a lot can
be done with little - "low cost model" is becoming a philosphy.
Everything can now be measured to maximise the benefit.

Technology (software and hardware) is cheaper but marketing

(a huge source of cost previously) can be better controlled
utilising the best of the old word off-line techniques
combined with modern marketing (adwords, viral, word of
mouth etc).

Posted by: Richard Anson | Jun 30, 2005 6:02:31 AM

I mean, were you paying anyone in the US? Because $100k will
only get you 1/2 person-years.

That's just not true. You'd be surprised how many people out
there are working for peanuts on projects. A lot of people
balance their regular work with working on more
entrepreneurial dreams, and $100K would go a very long way
indeed, especially for the young (and most entrepreneurs
these days are younger than ever before).

Posted by: Peter Cooper | Jun 30, 2005 9:31:10 AM

it’s global popularity

>>
its global popularity

Posted by: Emma | Jun 30, 2005 11:18:49 AM

Joe,

I'd love to have you give a talk on this topic, either for the
Harvard Business School High Tech Alumni Association, or for
SDForum. I know that your schedule is busy, but is there any
chance you might be able to carve out an hour or two?

--Chris

Posted by: Chris Yeh | Jun 30, 2005 2:18:14 PM

Interesting article.

i agree with most of what you said except on advertising ,

search engines will bring you qualified visitors but it will not
give you massive reach , and definitely will not make your
service popular like what the traditional media (TV , etc) did
to Excite.

Thanks

Faisal
Posted by: Faisal | Jun 30, 2005 2:48:39 PM

Yes it is a good time to be an entrepreneur.

I agree that net startups can be done on the cheap, and they
should. But wages still cost, and good talent is expensive.
Yes, you can offshore some of it, but you have better have a
solid core base built before you go down that path. Software
development outsourcing is difficult, from the start you've got
cultural, communication and timezone issues. Not to mention
usually a misalignment of macro understanding of what the
product is and how it should function.

I am just curious, if you really believe you can bootstrap the

entire operation from start to exit, then why did you take in
$6MM in venture? Why dilute your equity more than you have
to?

I dont fault you for taking the cash, I would take as much
money as I could raise (you never know when/if your going to
need it.)

Posted by: John | Jun 30, 2005 11:17:16 PM

Another great way to save on advertising costs is to

concentrate on Internet Adversiting. I just posted on my
website all about that area after attending a great marketing
course.

Check it out here....

http://componentfactory.blogspot.com

Posted by: Phil Wright | Jul 1, 2005 1:12:55 AM

It appears that the people best positioned to startup a new

venture on $100k are the ones that are already rich from
their previous venture and thus can work for no salary. I've
seen it first hand, a friend is starting (co-founding) a company
and wanted me to join, and all his partner can argue back at
me is, "See all these people working for me? They're all
working for just stock because at the last company they all
made a million dollars." Great for them, super. But I didn't
(yet), I want a salary. Does that mean no startups for me?

Posted by: Duane | Jul 1, 2005 5:46:44 AM

I am surprised at the comparison drawn between Excite and

Jotspot. No offense, but to me, a search engine is a hell of a
lot more algorithmic, tuning and systems work than a
customisable wiki is!
Posted by: Ashwin Bharambe | Jul 1, 2005 8:21:25 AM

I agree that it is a great time to be an entrepneur. Aside from

the lower cost of equipment there are more avenues to sell
products and more ways to market your products. With
proven marketplaces like ebay and amazon.com, many people
are starting their own small business to supplement their
income whereas 10 years ago, a lot of these things were still
grey area and were only for the strong willed. Word of mouth
marketing has never been better. With the advent of blogs
and popdcasting, getting a post on one popular blog can spark
a firestorm of sales and increased visibility.

The internet now is not just the latest "new" thing, it's just
another outlet, which means that people have become more
comfortable with it that has allowed them to embrace
starting an online venture.

Posted by: adam | Jul 1, 2005 8:39:50 AM

much of this has been in place for some time. yahoo was
bootstrapped with free software...in 1995. cheap hardware
too. david filo was way ahead of his time, he was doing
"cheap" when it was actually novel and often disputed (you
can't do this without sun boxes!). i credit him for the cheap
revolution.

also note that these conditions draw many more players into
the game and reduce margins. when it costs $0 to start a
business, you can likely expect $0 returns.

Posted by: b7j0c | Jul 1, 2005 8:44:52 AM

@Ashwin:
"I am surprised at the comparison drawn between Excite and
Jotspot. No offense, but to me, a search engine is a hell of a
lot more algorithmic, tuning and systems work than a
customisable wiki is!"

That may true for some wiki projects out there, but it's not
true in the case of Jot. If you had taken more than a cursory
look at what Jot is doing, you would have realized that it is
more than a "customizable wiki". It's a large-scale hosted
service that is a platform for building applications.

Posted by: Paul | Jul 1, 2005 8:54:21 AM

Hello Duane,

I do not think so. Here in Canada, I can leave with 15k$ CND
a year (small accommodation, no car, some food and a
monthly subscription for a place to train). Could you? If so,
you can easily bring 15k or 20k a year with small consultant
contracts that will take only a part of your working time
during a year. The other part of your working time could then
be use to start that dam startup :)

I do not think that the problem is cash, but much more one
of work, hard work and patience.

Take care,

Salutations,

Fred

Posted by: Fred | Jul 1, 2005 9:55:22 AM

I couldn't agree more. Now is a great time to be an

entrepreneur. I have been using Rentacoder, adsense,
adwords, and SEO to build and market content online.

So much infrastructure is available today that used to be

prohibitively expensive and difficult to build. I can accept
payments using the new Paypal payments API, and I can
promote my sites in a few minutes using adwords and other
advertising programs.

It does take some money and know how to get started. If

you're a business person with a great idea, it's still
fundamentally difficult to translate your vision for the
business (a web site, a community, a lead generation system,
etc.) into a product specification that engineers on services
like elance and rentacoder can implement.

That said, the cost of getting things up and running is

fundamentally several orders of magnitude lower than it was
just a few years ago.

How do you get running on $100K? You have most of your

development done offshore using services like rentacoder and
elance. You hire contractors offshore as well as students to
help write the content and marketing text for your sites. You
buy hosting at low cost from any of the many hosting
providers (so you own no hardware). You promote your site or
sites via advertising and organic search (SEO).

It truly is a great time to be an entrepreneur.

Posted by: David Feinleib | Jul 1, 2005 10:37:35 AM

"So much infrastructure is available today that used to be

prohibitively expensive and difficult to build. I can accept
payments using the new Paypal payments API, and I can
promote my sites in a few minutes using adwords and other
advertising programs."

this is a decent way to build a small business, a second

income etc., but thats about it.

"How do you get running on $100K? You have most of your

development done offshore using services like rentacoder and
elance."

this is just clueless. no 24/7 web service can live without

oncall staff who know the code. i don't care if they are in
sunnyvale or bangalore, you need someone on payroll who
can solve mission critical issues asap. oh yeah you can
outsource your colo, but they aren't going to fix your mysql
bugs.

all of these comments in any case revolve not around general

entrepreneurial activity but setting up small-time websites.
duh! this has been cheap for a long time. also 99,999 people
are your competitors, once again this approach is great if you
want to make $20k a year reselling purses.

tell me how i do advanced materials, alternative energy,

biotech etc on the cheap.

Posted by: GrumpY! | Jul 1, 2005 2:07:53 PM

Right on! I've done a variety of podcasts with entrepreneurs

and VCs in Silicon Valley and Joe's points are echoed by many.
This is the new model and YES it's great for entrepreneurs. My
company was funded entirely by myself and customers. We
paid nothing for technology to get the business off the
ground. Open source is changing everything every day.

John Furrier
Founder of PodTech.net
Joe - "Lets Podcast"

Posted by: John Furrier | Jul 1, 2005 2:09:15 PM

Joe,

I'm with John on this. It'd be great if you could create your
own podcast for business development stuff and talk about
your trials through excite as well as with jotspot.

After starting my company, I have found that I have loads of

info about "what not to do" when starting a business when my
friends think about jumping into the foray.

Good luck to everyone that have started or are thinking about

your own ventures. Its rough out there but HIGHLY rewarding.

Posted by: adam | Jul 1, 2005 2:32:16 PM

Hey Joe - my apologies, i didn't mean anything negative by

my comment on SVN. It was meant to be a metaphor. I love
Jot Spot. you guys are doing great work. I don't think there is
anyway you could be doing Jot Spot with just 3 people.

Posted by: ed Fladung | Jul 1, 2005 3:00:26 PM

Nice post.

Add to the list:

Employees who've done it before

We take 10s of cycles off of projects these days because we
have a core group of people that have built similar
technologies before. The hardware/software costs have
diminished a lot, but so have the personnel costs. Some of
the time savings is because they have better tools. Most of
the time savings is because they are walking along well-worn
paths.

Cheers,
John

Posted by: John Girard | Jul 1, 2005 3:25:42 PM

See a similar article by Utah entrepreneur Paul Allen at

Connect Utah magazine: http://www.connect-
utah.com/article.asp?r=1050&iid=34&sid=4

He gives 8 similar reasons why now is the best time in the

history of the world to start a company.

Posted by: Richard Miller | Jul 2, 2005 10:26:45 AM

I definitely concur that it's an opportune and excellent time

to be an entrepreneur and\or a startup.

In our case, we're defying odds in spite of the fact that we're
located in a region of the world most people assume has

1)No innovation
2)Low penetration of technology.

My company, NEO(New Enterprise Objects), is a budding

startup specializing in levaraging mobile technology to
explode the enterprise and provide an efficient distributed
collaboration infrastructure.
Currently, 100% of our staff(5 members) are either consulting
or employed full time. All time spent coding ,having meetings
or strategising is derived from what I fondly call, "the night
shift", where the real hacking begins.

In addition, none of us is being paid any salary but is fueled

by

1)The vision
2)The increasing value of the startup and our stake\stock in
it.

Who could have thought that a startup in an LDC could be

accelerating in the enterprise space with very little capital
(even much less than you've indicated above) and no full time
employees?

This truly is a wondeful time to be an entrepreneur.

Posted by: Nicholas Ochiel | Jul 5, 2005 9:33:59 AM

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Net start-ups face odd problem: more VC cash than they need

Matt Marshall
San Jose Mercury News, 14 October 2005

One thing common to new Internet companies in Silicon Valley these days is that they
don't need a lot of money to get off the ground.

But venture capitalists are eagerly stuffing cash anyway into the hands of some Internet
entrepreneurs who have been getting buzz—and who are willing to take it.

That has put some start-ups in a tricky position. Many Internet entrepreneurs don't
need the cash, because they're building products cheaply—using open Web
technologies, often with two or three developers. So in return, they're demanding that
VCs have a lot more to offer than just cash.

Take Marc Andreessen, the co-founder of Netscape, the Internet browser that helped
usher in a new Internet era in the mid-1990s.

Andreessen is now apparently sinking much of his time in Ning, a new Palo Alto start-
up. Ning last week launched its product, a company that offers easy tools for people to
build more sophisticated Web sites themselves.

Launching Ning

It has cost so little to launch Ning that so far it hasn't needed to take much, if any,
money from venture capitalists. It employs 14 people, mostly developers.

That may be prudent for Andreessen, who has enough name recognition and likely
enough wealth, to pull it off without help. But there are other, less-known
entrepreneurs who are taking a second tack.

One is John Roberts, 38, who founded a Cupertino Internet company, SugarCRM, last
year. The company helps businesses manage their relationships with customers.
SugarCRM's software was done dirt cheap. Roberts and his small team worked out of
their homes, chatted through the night via computer on Yahoo's Instant Messenger,
only meeting once a week at a small borrowed office. Within four months, they had
launched a test version and had 1,000 people downloading the software. "I was a total
neophyte," Roberts recalls.

And as a newbie to the cutthroat start-up world, he decided to take venture capital,
even if he didn't need as much as he eventually accepted. VCs first wrote him checks
for $7.75 million in two earlier rounds, and then they injected $18.77 million more two
months ago, in a round led by New Enterprise Associates.

"We weren't actively looking for money," Roberts explains, adding that he had hardly
touched the cash from the second round. But there were other reasons to work with
VCs—namely contacts.

Scott Sandell, an investor at NEA, had approached him, and Sandell was special. He had
invested earlier in Salesforce.com, the company that SugarCRM is competing against,
and Sandell could help give him some advice and connections firepower.

Indeed, 10 companies already have switched over from Salesforce.com to SugarCRM,

says Roberts. One is Walnut Creek's Covalent, a software company, where co-founder
Ryan Lindsay said he found SugarCRM much cheaper to use.
Indeed, most other Internet companies seem to fall between those two extremes in
deciding whether to take venture capital.

Another company built on the cheap is San Francisco's Sphere, which soon will unveil a
new search engine to find and filter blog information. Founder and Chief Executive Tony
Conrad, previously an entrepreneur and venture capitalist, says his team of three built
the company on $200,000. That's way under the budget of $500,000 that he had taken
from about seven individual investors.

"Pocket change"

At the time, he carefully selected each of his investors, he explains, based on their
experience. The money was trivial. "You have the ability to build a product on pocket
change," he says.

Sphere's situation reveals another aspect of the changing behavior among VCs. Conrad
selected Doug Mackenzie, a venture capitalist from big-name venture firm Kleiner
Perkins Caufield & Byers. Interestingly, though, Mackenzie invested so little money that
he did so out of his own side fund, called Radar Ventures—out of which he doesn't
usually invest in Internet companies.

He still worked hard, explains Conrad, citing how Mackenzie got some Stanford graduate
students to test Sphere early on, comparing it with other blog searches. "There's just
no way we could have gotten to that," Conrad says of his small team. But Conrad said
it showed how investors need to put in time early with a small start-up—even if they
can't invest as much money as they like, which would assure them a bigger return in
the event of success. Firms such as Kleiner traditionally like to put millions to work.

But at least Mackenzie's early work ensured him a position where he could help pick the
team and make a larger investment later, when the company needs to expand.

"If you really want to have a seat at the table," Conrad says of venture capitalists,
"you've got to be involved at an earlier stage—putting in little dollars, and then really
work the deal."

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An Engineer's View of Venture Capitalists
Nick Tredennick, with Brion Shimamoto
IEEE Spectrum, September 2001

I first encountered venture capitalists (VCs) in 1987. Despite a bad start, I caught the
start-up bug. In the years since, I have worked with more than 30 start-ups as founder,
advisor, engineer, executive, and board member. It's a lot more than that if you count
all the times I've tried to help "nerd" friends (engineers) connect with the "rich guys"
(VCs). Naturally, I've formed opinions along the way. Many books and articles eulogize
VCs. But here I want to present an engineer's view of VCs. It may sound like I'm
maligning VCs. That's not my intent. And I'm not trying to change human nature. VCs
know how to deal with engineers, but engineers don't know how to deal with VCs. VCs
take advantage of this situation to maximize the return for the venture fund's investors.
Engineers are getting short-changed.

Fortunately, engineers are trained problem-solvers-- I want to harness that power.

Engineers, armed with better information about how VCs operate, can work for more
equitable solutions. I'm not offering detailed solutions-- that would be a book. Rather,
this is a wake-up call for engineers.

My first experience with VCs was as an engineer starting a microprocessor-design

company; VCs were the gods of money. The other founders and I told the VCs what we
thought we could do and how long it would take. We believed it; they believed it; we
were all naive. I had designed two microprocessors, had written a textbook on the topic,
and had taught at a well-known university. They thought I knew what I was talking
about. We landed money from premiere firms on Sand Hill Road in Palo Alto, Calif. We
told them a year; it took something like seven years and it took major changes in
strategy to get there.

I wasn't the CEO; I hired and managed the engineering teams that eventually reached
the goal. I wasn't there for the finish. I had a run-in with the other founders, including
the CEO, over how to manage engineers. It was micromanagement versus laissez faire.
(Their attitude: "Turn your back on them and they'll sit on their hands." My attitude:
"Turn these particular engineers loose and they'll work themselves to physical ruin.")
We were in danger of losing good engineers to morale problems. I suggested to the
board that firing all of the founders, including me, might solve the problem. A new team
might manage more consistently.

The board member from our largest VC firm invited me to his house in Woodside for a
chat about the morale problems. Acres, opulence, wealth. We sat in leather chairs on a
black marble floor. Behind him, through the glass wall, I saw major excavation and
construction work going on up the hillside. "It's too bad someone is building a resort
hotel so close to your house," I said. "That's my new house," he said. "This one will be
torn down when that one's finished."

We talked about the situation at the start-up. I outlined my concerns. I handed him a
list of names. "Here's contact information for some of the project engineers. The first
four will tell you what I have told you. The fifth will say the following things...." To his
credit, he interviewed the engineers. Also to his credit, he called to tell me the result.
"Everything you said is as you said it was." I felt relief. I had struggled with a
deteriorating situation for a year and a half.

We agreed on the problem; we agreed on the circumstances-- a solution was on the

way. They told me: "We think you should resign." I left; the problems didn't.

Guide to Venture Capitalists

The VC connects wealthy investors to nerds. There are few alternatives. You can self-
fund by consulting and by setting aside money for your venture. That doesn't work. You
could go to friends and family, but that risks friendships. You could find "angel"
investors, but that only delays going to VCs.

The VC community is a closed one. It caters to a restricted audience. In fact, you don't
get to meet a VC unless you have a personal introduction. Don't send them your
business plan unless the VC has personally requested it.

VCs don't sign nondisclosure agreements.

That affords them protection if they like your ideas, but they want to fund someone else
to do them. At least two of my friends have had their ideas stolen and funded
separately. One case was blatant theft-- sections of the original business plan were
crudely copied and taped into the VC-sponsored plan. My friend sued and won a moral
victory and a little money. The start-up based on the stolen idea went public and made
lots of money for that start-up's VCs. Most entrepreneurs don't have the time, the
means, or the proof to sue. In the second case, venture firm D sent its expert several
times for additional "due diligence" regarding the possible investment. My friend got
funding elsewhere, but D funded its expert with the same ideas.

VCs are sheep.

The electronics industry is driven by fads, just as the fashion and toy industries are.
The industry is periodically swept by programming language fads: Forth, C++, Java,
and so on. It's swept by design fads such as RISC, VLIW, and network processors. It's
even swept by technical business fads such as the dot-coms. No area is immune. If one
big-name VC firm funds reconfigurable electronic blanket weavers, the others follow.
VCs either all fund something or none of them will. If you ride the crest of a fad, you've
a good chance of getting funded. If you have an idea that's too new and too different,
you will struggle for funding.

VCs aren't technical.

Mostly, they aren't engineers-- even the ones with engineering degrees. An engineering
degree is a starting point. If you design and build things, you can become an engineer;
if you work on your career, you can become an executive or a venture capitalist. VCs in
Silicon Valley are as technically sophisticated as VCs come. As you get geographically
farther from technical-industry concentration, investors become more finance-oriented
and less technically-oriented.

Like all people, they dismiss what they don't understand, your novel ideas, and they
focus on what they know, usually irrelevant marketing terms or growth predictions.

Experts aren't very good.

The VC will send at least one "expert" to evaluate your ideas. Don't expect the expert
to understand what you are doing. Suppose your idea implements a cell phone. The VC
will send an expert who may know all there is to know about how cell phones have
been built for the last 10 years. As long as your idea doesn't take you far from
traditional implementations, the expert will understand it. If you step too far from
tradition-- say, with a novel approach using programmable logic devices instead of
digital signal processors-- the expert will not understand or appreciate your approach.

One company I worked with had an innovative idea for a firewall: build it with
programmable logic and it works at wire speed. Wire speed meant no buffering, no data
storage, and therefore no need for a microprocessor or for an IP (Internet Protocol)
address. Simple installation, simple management, but so different that experts-- even
those from programmable logic companies-- didn't understand it. To them, proposing a
firewall without a microprocessor and an IP address was like proposing a car without an
engine. No funding. Back to work at a big company. Worse for them; worse for us. The
industry loses. Progress is delayed.

VCs don't take risks.

VCs have a reputation as the gun-slinging risk-takers of the electronics frontier. They're
not. VCs collect money from rich people to build their investment funds. Answering to
their investors contributes to a sheep mentality. It must be a good idea if a top-tier
fund invested in a similar business. VCs like to invest in pedigrees, not in ideas. They
are looking for a team or an idea that has made money. Just as Hollywood would rather
make a sequel than produce an original movie, VCs look for a formula that has brought
success. They're not building long-lasting businesses; they're looking to make many
times the original investment after a few years.
When VCs build a venture fund, they charge the fund's investors a management fee and
a "carry." The carry, which is typically 20 to 30 percent, is the percent of the investors'
profit that goes directly to the VC. The VC, who gets a healthy chunk of any venture-
fund profits, may have no money in the fund. Even a small venture fund will be
invested across a dozen or so companies, spreading risk. Also, the VC, as a board
member, will collect stock options from each start-up the fund invests in.

The rich investors take some risk, though their risk is spread across the fund's
investments. The real risk-takers are the entrepreneurial engineers who invest time and
brain power in a single start-up.

Venture funds are big.

Too big. If your idea needs a lot of money, say $100 million, then you have a better
chance of getting money than an idea that promises the same rate of return for $1
million. The VCs running a $1 billion fund don't have the time to manage one thousand
$1 million investments. It won't even be possible to manage two hundred $5 million
investments. It's better to have fewer, bigger investments. In such an environment, if
you need only $5 million, your idea will struggle for funding.

VCs collude.
VCs collect in "bake-offs" that are the VC's version of price fixing. They discuss among
themselves funding and "pricing" for candidate start-ups. Pricing sets the number of
shares and the value of a share, and is typically expressed in a "term sheet" from the
VC to the start-up. VCs optimize locally. It wouldn't do for several of them to fund, say,
six companies in an industry wedge. Limiting the options to two or three limits
competition and makes the success of the few more likely. The downside: limiting
competition stifles innovation and slows progress. As in nature, competitive
environments foster healthier organisms. Innovation is the beneficial gene mutation to
the current technology's DNA.

I attended a recent talk by a VC luminary, who gloated over the state of the venture
industry, after money for technology start-ups was scarce. Here's my summary of the
VC's view:

"A year ago there was too much money available, so there was too much competition
to fund good ideas. Valuations for pre-IPO (initial public offering) start-ups were too
high. Start-ups could get term sheets from several venture firms and select the most
favorable. Too many ideas were getting funded. With too many rivals, markets might
never develop. The current market is much better. Valuations are reasonable and, with
few rivals in each sector, new markets will develop-- as they might not have with many
rivals."

This is nonsense. Look, for example, at hard disks and floppy disks. In the hard-disk
business, there have been as many as 41 rivals fighting for market share. Only three
major manufacturers competed in floppy disks. The hard disk has improved much faster
technically; the floppy disk is stagnant by comparison. I'm not talking about market size
or market opportunity (the hard-disk business versus the floppy-disk business); I'm
talking about rates of innovation.

VCs don't say no.

If the VC is interested, you can expect a call and, eventually, a check. If the VC is not
interested, you won't get an answer. Saying "no" encourages you to look elsewhere--
that's not good for the VC, who prefers to have you hanging around rather than going
elsewhere for funding. Fads change; the herd turns; your proposal may look better next
year. In addition, the VC may want more due diligence from you-- to add your ideas to
a different start-up's plan.

If VCs think you have few alternatives, they will string you along:

"I love the deal, but it'll take time to bring the other partners along."

"We need more time to get expert opinions."

"We're definitely going to fund you, but we're closing a $500 million fund, and that's
taking all our time."

"I'll call you Monday."

Once your alternatives are gone, they negotiate their terms.

VCs have pets.

The VC's version of a pet is the "executive in residence." Many venture firms keep a
cache of start-up executives on staff at $10 000 to $20 000 per month (a princely sum
to an engineer, but just enough to keep people in these circles out of the soup
kitchens). Start-up executives, loitering for an opportunity, may collect these fees from
more than one venture firm, since the position entails no more than casual advising.
These executives have "experience" in start-ups. When you show your start-up to the
VCs, they will grill you about the "experience" of your executive team. It won't be good
enough, but not to worry, the VC supplies the necessary talent. You get a CEO. The
CEO replaces your friends with cronies.

The VCs' pets are like Hollywood's superstars. Just like Julia Roberts and Tom Cruise,
the superstar CEOs command big bucks and big percentages (of equity)-- driving up the
cost of the start-up-- but are "worth it" because they give investors and VCs a sense of
security.

Your idea, your work, their company.

The VC's CEO gets 10 percent of the company. VC-placed board members get 1 percent
each. Your entire technical team gets as much as 15 percent. Venture firms get the
rest. Subsequent funding rounds lower ("dilute") the amount owned by the technical
team. Venture firms control the board seats. The VC on your board sits on 11 other
boards. Board members visit once a month or once a quarter, listen to the start-up's
executives, make demands, offer suggestions, and collect personal stock options
greater than all of the company's engineers hold, with the possible exceptions of the
chief technology officer and the vice president of engineering. The VC's executives
control the company. You and the rest of the engineers do the work.

One company I know got a good valuation a year ago. Over the year, it grew rapidly,
developed its product, met or exceeded its milestones, and spent its money according
to plan. When it was time to get money again, the funding environment had changed.
Last year's main investor wouldn't "price" the shares or "lead" the new funding round.
The "price" declares the number of shares and the valuation of the company. Think of
the company as a pie. It is a certain size (valuation) and it is cut into a number of slices
(shares). An investor "leads" by offering a specific price for shares for a large
percentage of the next round. Other investors follow at the same price. Even though the
company's engineers had executed flawlessly, the round came in at less than a third of
last year's valuation.

As a part of closing this "down" round, the last year's investors renegotiated the
previous round, effectively saying, "Since this round is lower, we must have overpaid in
the last round. We want more equity for the last investment." If there had been fraud
by the entrepreneurs instead of flawless execution, renegotiating the previous round
might have been reasonable. Imagine the opposite scenario: "In light of market
developments, it's obvious that your idea is worth much more than we thought, so
we're returning half the equity we took for last year's funding." It's so ridiculously
improbable that you can't read it without laughing out loud. That we accept the
converse highlights the entrepreneur's weak position.

Values at Variance

The VCs know money and they don't care about the technology; the entrepreneurs
know technology and they need money. Money knowledge applies across all the start-
ups; the technical knowledge is unique to each. The VCs don't care about any single
technology because they spread their investments across the opportunities. Knowing
money isn't the same as knowing value. A year ago, VCs were lining up to give money
to Internet dog-food companies; this year, they wouldn't back an inventor with a
working Star Trek transporter.

It's financial; it's not technical or personal. To the VC, the engineer and the ideas are
commodities. The venture firm squeezes the technical team because it can. VCs believe
that they are exercising their responsibility to maximize return for themselves and for
the fund's investors.

Reducing the engineers' share of the pie is counterproductive, however: they become
demoralized; productivity suffers; eventually, they leave. Engineers are not
commodities. Replacing a chip designer one year into a complex design delays the
project six months while the replacement engineer learns and then redesigns the work-
in-progress.

VCs don't appreciate that the electronics revolution is built on the backs and brains of
engineers, not of executives. Moore's law and engineering talent drive the electronics
revolution. Tremendous market pull for its products builds momentum. The pull is so
great that the revolution is indifferent to the talents and decisions of its executives
(legendary blundering causes only ripples), but it depends on the talent and the work of
its engineers. The engineers are the creators of wealth; the VCs are the beneficiaries.

Fixing the Problem

The engineers building the future deserve a fair equity share in the value they create;
today they don't get one. For them to get their share, wealthy engineers must fund
start-ups. And they don't have to be Bill Gates to do so. "Qualified investors" can
participate in pre-IPO funding. This means your net worth (exclusive of your home)
must be at least a million dollars or you must meet minimum annual income
requirements. These days, the millionaire's club isn't all that exclusive. Many engineers
are qualified investors.

If you are a qualified investor, participate in start-ups as an "angel" investor. An angel

investor participates in early or "seed" funding rounds. Don't do it with more money
than you can afford to lose, however, because it is risky. To change the situation I'm
describing, start-ups need your money and they need your advice. More money and
more start-ups bring faster progress and create more wealth. Creating wealth isn't only
about money; it's about quality of life and it's about raising the standard of living for
everyone (but that's another essay).

Engineers should band together to form venture funds. Start-ups need more angel
funding and they need better-organized angel funding. I'd like to see a dozen or so
$100 million venture funds run by nerds. These nerd-based venture firms would work at
the seed round and at the next funding round (called the A round). They provide initial
funding and advice and they, with the benefit of professional financial advice, represent
their start-ups in future funding negotiations with traditional venture firms.

Here's a third suggestion. I'd like to see an engineer-run start-up whose goal is to raise
$100 million in a public offering. The money becomes a fund for sponsoring start-ups.
It's a public venture firm and it sells shares to raise money. Investing in start-ups
wouldn't be exclusively for rich people; anyone who could buy stock could be investing
in start-ups. Ideally, the public VC firm would be managed and run by nerds with
empathy for nerds in the start-ups.

I wanted to publicly thank more than a dozen people for help on this essay, but they all
said "NO!" None can afford to have the VCs find out that they contributed.

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August 2, 2004 4:00 AM PDT

Breaking the rules with open source

By Martin LaMonica
Staff Writer, CNET News 3 comments

In the space of five months, John Roberts started a software company

Related Stories
and delivered its first product to thousands of potential customers--a
process that could easily have taken years. His secret? Open-source
JBoss airs expansion plans development.
July 16, 2004
On Monday, Roberts' new company, SugarCRM, will officially launch and
CA open-sources Ingres announce that it has landed $2 million in outside investment, becoming one of
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The announcement is timed to coincide with News.context
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April 14, 2004 SugarCRM announced
Monday that it has landed
JBoss lands $10 million in
"Open source is just a more efficient, effective
$2 million in outside Most Popular
software business model," Roberts says. "It's
funding funding, making it one of
more than just cheaper software. It's a shift, a
February 19, 2004 the first open-source Living with Office 2010
movement reshaping the dynamics of a
business application
modern software company." companies to be funded. New LED tech promises more flexible displays
Pandora's box for open source
February 12, 2004
Increasingly, entrepreneurs like Roberts, along Bottom line: Apple to ship Mac OS X Snow Leopard Aug. 28
with investors, are eyeing open source as a Increasingly,
better way to build software companies. Rather than incur huge start-up costs and investors are The shrinking game console: A history
recruit high-priced software sales executives, smaller companies are building their eyeing open
businesses around an open-source business model, where software source code Ellison's salary drops to $1
source as a better way to
can be viewed and enhanced by others. build software companies.
Not only does this model
By tapping into the open-source world, fledgling software outfits can assemble their
give companies access to Latest tech news headlines
software products from freely available components. Volunteer programmers not
freely available
only help develop the product, they also create a pool of potential customers for Cisco wireless LANs at risk of attack, 'skyjacking'
components, but using the
starting companies. In return, programmers develop new skills and get free Posted in InSecurity Complex by Elinor Mills
community-based
software. August 24, 2009 10:00 PM PDT
development process often
means that such firms'
Roberts' company faces an uphill battle against established giants like Oracle, SAP Mobile phones are enough for Japan's Net users
products have a built-in
and Siebel Systems. But with a lower up-front investment, entrepreneurs and Posted in Software, Interrupted by Dave Rosenberg
user base. In other words,
venture capital firms are willing to take a risk. August 24, 2009 9:01 PM PDT
"this is a way to break the
rules," says one investor. SmarterFox packs a productivity wallop
"Entrepreneurs are figuring out that this is a way to break the rules," said David
Skok, a partner at venture capital firm Matrix Partners, who led investment in open- Posted in The Download Blog by Jessica Dolcourt
More stories on this topic August 24, 2009 6:32 PM PDT
source company JBoss. "Open-source is a way to get broad acceptance with lots
and lots of users quickly."
See all headlines
Growing customer interest is helping create more favorable market conditions for companies that tap into open-
source development. In a March report titled "Open Source Goes into the Mainstream," Forrester Research said
that over 60 percent of 140 companies surveyed plan to use, or are using, open-source products. Companies GIVE YOUR IDEAS A COMPETITIVE EDGE
surveyed use Linux on servers as well as open-source Web servers, databases, development tools and, to a lesser WITH ACROBAT 9
degree, desktop software.
Combine video, audio,
interactive content and
The traditional model for starting a high-tech company is to assemble a strong engineering and management team, R
documents of any kind, all in
garner some funding and try to land customers seeking cutting-edge technology that their existing providers can't
a single PDF.
give them.
Learn More >
Open-source development makes that process shorter, accelerating the time to market and reducing the overhead
Learn about Adobe Acrobat 9 PDF Portfolio
required to run the company, proponents say. And open-source projects can yield high-quality products,
Did you know you can add video to an Adobe
comparable to "closed source" software, because a large group of contributors can view the source code and spot
Acrobat 9 PDF?
bugs.
Give yourself a competitive edge. Try Adobe
SugarCRM, for example, built its sales application entirely around the popular "stack" of open-source infrastructure Acrobat 9 Pro.
software that includes the Linux server operating system, Apache Web server, MySQL database and the PHP Web
development language. The Cupertino, Calif.-based company didn't even have to purchase a hardware server to
build its software; a hosting company in Connecticut provides that service more cheaply. Add headlines from CNET News to your homepage
or feedreader.
Going the traditional route of acquiring commercial software licenses and "I really don't think we're
buying new hardware can easily add up to hundreds of thousands of going to see companies
dollars. Commercial open-source companies can also have dramatically like SAP and Oracle being More feeds available in our RSS feed index.
lower operating costs than traditional software companies, experts say. created anymore, because
Rather than plow half of a company's budget into sales and marketing, the price points that
commercial open-source outfits can rely on the word of mouth generated sustain those companies Markets
from open-source projects. Lower operating costs, combined with low-cost will be shrunk by open Market news, charts, SEC filings, and
or free products, allows open-source companies to compete aggressively on source."
price, adherents say. -- Josh Stein,
more
Draper Fisher Jurvetson Related quotes
Many enterprise software companies are already struggling to stimulate new
license sales, despite a general upturn in technology spending. SAP 47.46 -0.23 (-0.48%)
IBM 119.32 -0.58 (-0.48%)
"Software today is ridiculously overpriced," said Josh Stein, an associate at Draper Fisher Jurvetson, which invested Oracle 22.32 0.21 (0.95%)
in SugarCRM. "I really don't think we're going to see companies like SAP and Oracle being created anymore,
Dow Jones 9,509.28 3.32 (0.03%)
because the price points that sustain those companies will be shrunk by open source." Industrials
S&P 500 1,025.57 -0.56 (-0.05%)
There are various business models for capitalizing on free software. One model, used by Red Hat, is to charge
customers subscription fees for services and support around free software. Open-source database company NASDAQ 2,017.98 -2.92 (-0.14%)

MySQL has a commercial license for customers who want a support contract and a separate open-source license. CNET TECH 1,442.24 1.11 (0.08%)
Other companies, such as toolmaker Zend Technologies, charge for commercial products that are more functional Enter Symbol Go! Symbol Lookup
than the open-source versions of their software. SugarCRM plans to charge for services around its software and will
also offer its product on a hosted basis.

Still some rough edges

But despite its advantages, the open-source development business model still has significant challenges.

Software providers with a predominantly "closed source" model--Microsoft, Oracle and the like--can closely guard
their intellectual property. But with different contributors to a single project, open-source development has the
potential to introduce legal snags, something both software companies and their customers need to address.

"You need to get the proper licensing and identify all the open source code with proper documentation, including
copyrights and other attributions," said Doug Levin, the CEO of Black Duck Software, which sells software to
automate the process of separating open-source from proprietary source code. In an indication of the importance of
legal protection, Black Duck last week Eclipse open-source foundation, for example, was founded with a $40 million
investment by IBM and is staffed largely by commercial software companies, not volunteers.

Indeed, established software companies, such as BEA Systems, Computer Associates International, IBM and
Novell, have spearheaded open-source projects as a way of vetting new code and getting their products into the
hands of potential customers.

"Investors, VCs and (customer) companies will start to recognize that open source is a great way to complement
existing commercial efforts," said Dave Cotter, director of developer marketing at BEA Systems. "Good code is
good code."

Until now, open source has had its biggest impact in the market for infrastructure software components, because
software programmers who contribute to open-source projects are also potential customers. Developers, for
example, have helped popularize open-source databases, Java application servers and development tools.

Matrix's Skok said that open source is best suited for breaking into mature markets, where cheaper open-source
alternatives have the potential to steal customers from incumbents. New companies are already looking to expand
the breadth of products offered in an open-source model.

Gluecode Software, for instance, is offering typically high-ticket infrastructure software for Web portals and
business process management on an open-source basis. The model allows it to heavily undercut market
heavyweights BEA, IBM and Oracle on price, said Gluecode CEO Winston Damarillo.

SugarCRM's is one of the few commercial open-source companies to take on open-source business applications,
which is still a largely unproven market. But CEO Roberts, who has been bowled over by rapid adoption of his
company's product, vows to stay committed to the open-source community his company helped form.

"The power of the commercial open-source business model is that you're tapping into the collective intelligence of
your community," Roberts said.

See more CNET content tagged:

SugarCRM, business application company, open source, application company, entrepreneur

Add a Comment (Log in or register)

(3 Comments)
1

maybe the problem with Open Source is...

by arthur-b August 2, 2004 1:41 PM PDT
that others can get rich as well rather then just the usual ones.

Reply to this comment

yup
by August 3, 2004 7:03 AM PDT
And ask the volunteers how much they got paid, to help make this man rich....

a Universal Model
by August 19, 2004 3:32 AM PDT
We found our company, INTELLIQUE, a french storage system builder and software editor, on the same model one
year ago. We can confirm this is the model to follow-up for building a software company: Low-cost, reliability and
modularity are the concurrential advantages which will make the difference with the old and expensive software
world.

Reply to this comment

(3 Comments)
1

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Scientists at MIT have be best health There will definitely be an Japan's Net users
created low-cost robot
fish that can swim just
care stimulus option to download some
basic games, but
Japanese mobile phones
are sophisticated enough
like the real thing. The Microsoft is hedging on
fish could be used for
Duo turns laptops Government may be
whether it will offer more
Sony touts Altus that consumers aren't too
overlooking an open-
concerned about other
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evhead
A blog by Evan Williams

SATURDAY, SEP 21 ∞

Ten Rules for Web Startups

POSTED AT 1:08 PM #1: Be Narrow
LINKS TO THIS POST Focus on the smallest possible problem you could sol
useful. Most companies start out trying to do too man
difficult and turns you into a me-too. Focusing on a sm
advantages: With much less work, you can be the bes
things, like a microscopic world, almost always turn ou
think when you zoom in. You can much more easily p
when more focused. And when it comes to partnering
less chance for conflict. This is all so logical and, yet,
focusing. I think it comes from a fear of being trivial. J
be #1 in your category, but your category is too small
your scope—and you can do so with leverage.

#2: Be Different
Ideas are in the air. There are lots of people thinking
working on—the same thing you are. And one of them
How? First of all, realize that no sufficiently interesting
one player. In a sense, competition actually is good—
markets. Second, see #1—the specialist will almost a
ass. Third, consider doing something that's not so cut
successful companies—the aforementioned big G bei
taking on areas that everyone thought were done and
Get a good, non-generic name. Easier said than done
common mistake in naming is trying to be too descrip
hard-to-distinguish names. How many blogging comp
name, RSS companies "feed," or podcasting compani
are they the ones that stand out.

#3: Be Casual
We're moving into what I call the era of the "Casual W
creation). This is much bigger than the hobbyist web o
Why? Because people have lives. And now, people w
broadband. If you want to hit the really big home runs
with—and, indeed, help—people's everyday lives with
commitment or identity change. Flickr enables persona
millions of folks who would never consider themselves
they're just sharing pictures with friends and family, a
games are huge. Skype enables casual conversations

#4: Be Picky
Another perennial business rule, and it applies to ever
employees, investors, partners, press opportunities. S
to accept people or ideas into their world. You can alm
something doesn't feel just right, and false negatives a
positives. One of Google's biggest strengths—and sou
outsiders—was their willingness to say no to opportun
employees, and deals.

#5: Be User-Centric
User experience is everything. It always has been, bu
under-invested in. If you don't know user-centered de
who know it. Obsess over it. Live and breathe it. Get
board. Better to iterate a hundred times to get the righ
a hundred more. The point of Ajax is that it can make
not that it's sexy. Tags can make things easier to find
not in your application. The point of an API is so deve
users, not to impress the geeks. Don't get sidetracked
blog-worthiness of your next feature. Always focus on
well.

#6: Be Self-Centered
Great products almost always come from someone sc
Create something you want to exist in the world. Be a
Hire people who are users of your product. Make it be
desires. (But don't trick yourself into thinking you are y
usability.) Another aspect of this is to not get seduced
companies at the expense or your users or at the exp
product better. When you're small and they're big, it's

#7: Be Greedy
It's always good to have options. One of the best way
income. While it's true that traffic is now again actually
give-everything-away-and-make-it-up-on-volume strat
date on your company's ass. In other words, design s
your product and start taking money within 6 months
Done right, charging money can actually accelerate gr
because then you have something to fuel marketing c
having money coming in the door puts you in a much
when it comes to your next round of funding or acquis
whether you need to have a free version at all. The Ty
the high-end position in the market—makes for a grea
right market. Less support. Less scalability concerns.
higher margins.

#8: Be Tiny
It's standard web startup wisdom by now that with the
starting something on the web, the difficulty of IPOs, a
big guys to shell out for small teams doing innovative
game if you're successful is acquisition. Acquisitions a
small. And small acquisitions are possible if valuations
go. And keeping valuations low is possible because it
something anymore (especially if you keep the scope
obvious techniques, one way to do this is to use turnk
overhead—Administaff, ServerBeach, web apps, may

#9: Be Agile
You know that old saw about a plane flying from Califo
course 99% of the time—but constantly correcting? Th
successful startups—except they may start out headin
dot-com bubble companies that died could have even
they been able to adjust and change their plans instea
they could until they burned out, based on their initial
started to build a project-management app, not Blogg
 building a game. Ebay was going to sell auction softw
almost always wrong. That's why the waterfall approa
obsolete in favor agile techniques. The same philosop
building a company.

#10: Be Balanced
What is a startup without bleary-eyed, junk-food-fuele
and sleepless, caffeine-fueled, relationship-stressing n
more enjoyable place to work. Yes, high levels of com
yes, crunch times come and sometimes require an ino
to-the-SO amount of work. But it can't be all the time.
for health—as do the bodies and minds who work for
your company will be worthless. There is no better wa
lower your stress that I've found than David Allen's GT
it. Make it a part of your company, and you'll have a s

#11 (bonus!): Be Wary

Overgeneralized lists of business "rules" are not to be
are exceptions to everything.

BLOGROLL ABOUT

kottke.org
High Scalability - Building bigger, faster,
more reliable websites.
Paul Kedrosky's Infectious Greed
A VC
The Blog of Author Tim Ferriss
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Adam Bosworth's Weblog
Rands In Repose
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Susan Wu - Venture Capital
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Biz Stone, Genius
 A VC
Musings of a VC in NYC Home / Archives / Tumblog / Radio / About

« Kerry/Edwards | Main | Valuation (Continued) »

Valuation Fred Wilson is a VC and principal of

Union Square Ventures. His wife is
There’s this dance that entrepreneurs and venture capitalists do Gotham Gal and his daughters Jessica
Wilson and Emily Wilson blog too.
when it comes time to negotiate the economic terms of an
investment. And it all revolves around valuation. Fred's social networks | Contact | Full Bio→

The question is what is the fair value of the business? This

supposedly establishes how much of the company the venture
capitalists will own for their investment.

But I think the concept of valuation is often misunderstood by the

people engaged in this process. And it’s particularly true in early
stage investing. Fred Wilson Ads
fredwilson
I do not believe that negotiating a valuation on an early stage
Continuing my
venture investment has much to do with the current value of the vacation wardrobe of
business. If it did, why would a venture capitalist agree to a $10 vintage startup tees
http://bit.ly/k2wTI
million value for a business that will lose money for the next 2-4 2 days ago

years and has little, if any, revenue?

sweet. @zburt
created a wiki with
all of the suggested
The fact is that almost all venture capital deals are done as
books for
convertible preferred stock investments. That means that the money entrepreneurs from
my post on the
we invest is more like a debt instrument in the event the business
subject yesterday
doesn’t work out very well. We get our money out before the http://bit.ly/16HydA
yesterday
entrepreneurs do if the deal goes sideways or down.
Watching my wife
teach my daughter
It’s only in the event that the deal works out that the percentage of to drive a stick. I'm
the business (the thing that valuation is supposed to determine) proud of both of
them. I tried
matters in terms of how much money we make. teaching but couldn't
handle it
14 hours ago
Another important factor to consider is that only a relatively small
portion of early stage venture investments really work out in the way some thoughts on
The Funded's "Ideal
they were supposed to when the investment was made. In my First Round Term
experience, which is based on 17 years in the business and over 100 Sheet"
http://bit.ly/2Pn8pf
different early stage investments over that time period, there is a 10 hours ago

1/3 rule. http://twitpic.com/f62t

- Diane Birch at
Click Stephen Talkhouse powered by STREAMPAD
Theto1/3
launch FredWilson.FM
rule music player
goes as follows: with @steviegpro,
 @jeffpulver and
@venueczar
1/3 of the deals really work out the way you thought they would and 4 hours ago
produce great gains. These gains are often in the 5-10x range. The
entrepreneurs generally do very well on these deals.

1/3 of the deals end up going mostly sideways. They turn into Translate
businesses, but not businesses that can produce significant gains. Select
Select Language
Language
The gains on these deals are in the range of 1-2x and the venture
Gadgets powered by Goo
capitalists get most to all of the money generated in these deals.

1/3 of the deals turn out badly. They are shut down or sold for less
than the money invested. In these deals the venture capitalists get all
the money even though it isn’t much.

So if you take the 1/3 rule and add to it the typical structure of a
venture capital deal, you’ll quickly see that the venture capitalist is
not really negotiating a value at all. We are negotiating how much of
the upside we are going to in the 1/3 of our deals that actually
produce real gains. Our deal structure provides most of the
downside protection that protects our capital.

I think it is much better to think of a venture capital deal as a loan

plus an option. The loan will be repaid on 2/3 of our investments
BlogRollr
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and partially repaid on some of the rest. The option comes into play
in a big way on something like 1/3 of our investments and probably You!
Join Now. Most Viewed Rece
no more than half of all of our investments.

jonathanhstrau gothamgal
There is more to this whole issue of valuation because there are om
often follow-on rounds where the deal between the venture techcrunc
capitalists and entrepreneurs gets renegotiated. I’ll save that for ihearditon om
another post. bijansabet
om
BWJones businessin
Comments (8) | | TrackBack (7) der.com
jessicasar
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Listed below are links to weblogs that reference Valuation: son.com
Maggie W
venturebe
» To VC or not to VC from Marketing a start-up in the 21st century com B
AVC talks about the intricacies of valuing a business for funding. A Keenan
very interesting and honest post, especially for a company like ours.
We've been debating if we should approach VC firms for funding. On
the one hand, like most [Read More] jamie f
Tracked on Jul 7, 2004 1:03:02 AM Eric Friedman

» Venture Capital Deal Algebra from Feld Thoughts

Fred Wilson wrote a useful post on valuation today. It reminded me simondodson
of a document I had Dave Jilk write when he was doing some work
for me. I decided to write this "bladon" (Blog Add-on) post - inspired
by Fred. Please read Fred's post first - it lays t... [Read More]
See all 3,925 members..

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Tracked on Jul 7, 2004 7:47:46 AM

» Valuation Explained from Business Opportunities Weblog

Fred Wilson, the venture capitalist, explained valuation today on A
VC: The question is what is the fair value of the business? This
supposedly establishes how much of the company the venture
capitalists will own for their investment. But I... [Read More]
Stories within 6 Months

Tracked on Jul 7, 2004 1:04:23 PM

» To VC or not to VC from Marketing a start-up in the 21st century

AVC talks about the intricacies of valuing a business for funding. A
very interesting and honest post, interesting especially for a
company like ours. We've been debating if we should approach VC
firms for funding. On the one hand, like [Read More]

Tracked on Jul 8, 2004 3:53:57 AM

» Valuación de la empresa y capital de riesgo from Nada importante

sucedió hoy... Map data ©2009 Tele Atlas - Terms of Use
Navegando por weblogs del mundo del Venture Capital he podido
encontrar algunos comentarios interesantes, principalmente porque
los mismos están escritos por gente que está vinculada a esa Most popular pages on
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» Dissecting the VC deal from Greek Complexity
Read an old-ish post on A VC about how to value a company. The /a_vc/2009/04/celebrating-aggr...
currently 2 people
post doesn't really go into specifics of how to value a company but I
came across a comment that I found really interesting as a financial /a_vc/2009/08/books-for-entrep...
[Read More] currently 2 people

/ currently 2 people

Tracked on Mar 20, 2005 10:02:43 PM powered by chartbeat

Posted July 6, 2004 in Venture Capital and Technology

Comments

Nice to see these rough numbers. I would have said that the last part
would comprise more than 1/3 and the first part would comprise
less than 1/3. But maybe that's just my 2001-2 nightmares.

Posted by: Randy Charles Morin | Jul 6, 2004 8:35:02 PM

That's a really interesting post, thanks.

We're currently debating if we should approach VC firms for our own

start-up. Part of me is being sick of being poor and underfunded,
part of me wants to build the business slowly and keep total control.
We attended 'Show me the money' in London a couple of weeks back
and got a lot of attention. Unfortunately all that did was to make me
feel like a sheep surrounded by wolves.
I, and this is not a statement meant to cause offence, still have to
meet a VC I trust to have my best interest in mind.

Posted by: Andreas Duess | Jul 7, 2004 12:49:05 AM

Hi Fred,

Just started trawling the VC/entrepreneur blogs as my co's in the

midst of a raise...looking for useful info. and I've found much thanks
to you, Brad Feld, Matt Blumberg and Ed Sim!

Anyway, I came across something interesting not too long ago that
relates to this Valuation post you wrote last July.

An analysis of by a local (Chicago) F500 consumer products company

of its most recent 26 strategic investments yielded the following
metrics (these are multiples on investment):

* MAX = 7.4
* MIN = 1.3
* MEAN = 3.2
* STD DEV = 1.7

What seems noteworthy to me is that they never wound-up

underwater. True, you don't see any Google-like gains, but -- at
least over the time period / basket analyzed -- still seems like
returns with which, were this a VC versus SI, the LPs would be happy.

So, my question is: Why aren't there any VCs pitching prospective LPs
on a lower fallout model; i.e., why stick with 1/3, 1/3, 1/3 always
going/hoping for the outsized gains?

I must be missing something, because I'm sure I haven't thought of

anything that hasn't already been considered; e.g., are these stat's
an aberation -- or do strategics have more influence to keep things
from going sideways/down so as to make these numbers
inapplicable to a VC model?

Sorry for the long response, but I sadly enjoy spending my Saturdays
thinking about such questions :)

Posted by: Robb Hendrickson | Sep 24, 2005 12:04:43 PM

Do you know of any good public sites with average multiples for
early-stage investments listed by sector? I'm a student and trying to
value a tecnology company that in the early stages. Thanks.

Posted by: Tyler Jones | Apr 6, 2006 11:21:03 PM

We are in the midst of raising funds from a VC for our auto

classifieds portal and this post has given us an insight into the
valuation for an early stage startup like ours.

Posted by: Anil Tandon | Jul 16, 2006 1:18:54 PM

I was wondering if you could send me information or direct me

where I could find some information with venture capitalism with the
video/computer game industry. A couple main questions I choose to
address is:

1. What entry/exit strategies are most common for VC's investing in

game vendors?

2. How do VC's in the US invest in European/Swedish game vendors?

(directly, via partners, not at all, ect.)
Posted by: James P. | Mar 30, 2007 6:30:30 PM

I really like the idea of looking at VCs proffering a Debt Instrument

or a Loan + Option. This is the most realistic approach to evaluating
VC investment.

One difference, though, is that early stage companies rarely, if ever,

qualify for debt or lines of credits (much less loans) so VC amounts
are usually a few orders of magnitude higher than what a
"conventional loan or debt instrument" could have ever been.

Debt and loans+options, are usually sub-$500k (more often in the

sub $150k) for early stage companies. Series A and even Seed
investments can easily be in the $500k - $1.5mm range. These are
amounts that start-ups could never raise with debt with just an idea.

So, its not entirely an apples to apples comparison.

Not to mention that....with the exception of fraud, VCs don't

normally ask their founders to personally guarantee their capital
("loan"). At least, not yet they don't.

Posted by: IsaacGarcia | Apr 2, 2008 11:22:13 AM

What do you do if the company was never really a VC company to

begin with. The VC owners/capitalists never put a dime into it, yet
you gave them 40%. There was a personal investor who invested the
initial seed money and agreed to 40% shares and no salary for 2
years.

Later, the VC owner ousts the original investor "for cause" and 1M no
interest over 60 months. Then, the founder dies and the VC owner
attempts to exercise options to buy the founder's share 26%, while
he, big-time VC guy has 66% and there is only one other remarkable
shareholder of about 9%. VC$guy has a plan and wants to undervalue
shares and buy out founder's 26--hiding the fact the company has
become his one that laid the golden egg and is not effected by the
market fluctuations. Additionally, there is no mention that company
had formal buyout proposal 2+ years ago and widow/3 children of
founder are not adverserial nor majority shareholders -- just desire
to let their shares ride until M/A or IPO? Nodoubt you know this
upstanding group of greedy grunts....?????

Posted by: jk callum | Dec 10, 2008 6:33:54 AM

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Who Will Google Buy Next? Sponsors

By Andrevan in Internet
Tue Jun 14, 2005 at 02:05:53 AM EST
Tags: Technology (all tags)
Managed Hosting
Google is the new Internet behemoth, snatching up small companies left VoxCAST Content Delivery
and right. So, in this article, I ask: what tech gems are in the running for Raw Infrastructure
Google's growing subsidiary menagerie? To help predict, I will first take a
look at who Google has acquired in the past and what Google has done
for them, and then I'll throw out a few possibilities for Googlification and
discuss where they might fit into Google's strategy.

Google's past conquests have been varied, but they

have all been smallish Internet companies that are
doing cool stuff. I'll go through them here, with a
Virtual Machine brief blurb about how they were acquired, and what
See the Benefits has changed in the post-Google era.
of Virtualization.
Virtual Machine, Deja News (Google Groups) - This web-based
Info & Tips. Usenet archive started life in 1995. Between 1999
www.discovervirtualizatio and 2000, Deja overexpanded into a comparison
shopping portal. Losing money, Deja sold the
shopping component to eBay in late 2000, and it
became part of Half.com. In February 2001, the big
Cheap Prague G entered the game and snatched up the Usenet
Hostels archives, reintroducing them as Google Groups and Login
Compare Hostels extending them back to 1981 with the help of Make a new account
In Prague. Find private collections. Today, Google Groups features
The Cheapest Username:
Deja's Usenet, mailing lists, and Yahoo! Groups-
Hostels Online. esque features with a Gmail-like interface. Password:
CheapEurope.com/Pragu

Outride - Outride, Inc. was an information retrieval Login Mail Password

spin-off from Xerox Palo Alto Research Center

Cheap Prague (PARC). Google acquired certain technology assets in Note: You must accept a cookie to
Hotels September 2001 and quickly integrated them into its log in.
Research Prague search engine. Outride.net currently forwards to
Hotels. Low Google.
Rates, Expert
Applied Semantics - Google bought up this Advertising by
Travel Advice.
EuropeUpClose.com/Prag contextual advertising company in April 2003 and Blogads
Advertise here
used it for its AdSense/AdWords services, allowing it
to compete with Yahoo!'s Overture.

Submit CV to Kaltix - This 3-person personalized search startup Related Links

Find Jobs company was quickly picked up by Google in Yahoo
in top MNCs 100s September 2003. Kaltix formed the foundation of Google
of Software Jobs Google Personalized Search. Kaltix.com currently Deja News
Listed forwards to Google. Google Groups
MonsterIndia.com
eBay
Blogger - Blogger was the flagship product of Pyra
Half.com
Labs. For a long time, Blogger was free of fees and
 Yahoo! Groups
ads, but it wasn't making money. After the original
Gmail
capital for Pyra dried up, a number of employees resigned, including the
AdSense
co-founder. In an effort to become profitable, Pyra introduced the ad-
AdWords
powered Blogspot hosting and the pay Blogger Pro service. It wasn't quite
Yahoo!
enough, and Pyra needed more resources, so Google stepped in during
Overture
2003. Blogger was redesigned by professional web designers in May 2004,
Google Personalized Search
and is now one of the most-used blogging tools.
Blogger
Picasa - Picasa, a $30 photo organizer program, was first released in Pyra Labs
October 2001. In May 2004, Picasa announced integration with the Picasa
Google-owned Blogger, and in July 2004, Google bought the company. Keyhole
Soon, Picasa was free, and it featured Google trademarks like an "I'm Google Maps
Feeling Lucky" button. The software routinely wins awards from leading PC Zipdash
publications. Urchin
Dodgeball
Keyhole - Keyhole is a digital mapping company founded in 2001. Google Mobile
Presumably to cut out the middleman for the not-yet-released Google Technorati
Maps, Google bought them in October 2004. Since then, there has been Personaliz ed Homepage
an immediate price reduction for the Keyhole software (from $69.95 to Bloglines
$29.95), and integrated satellite photos in Google Maps. Ask Jeeves
Buzznet
Zipdash - Google acquired this traffic/mapping company in 2004 and put Orkut
it to work in Google Maps. Although the acquisition was not publicized, Koders
Zipdash is mentioned in Google's 2004 annual report. plugins for Google Desktop
search
Where2 - This Australian mapping company was also mentioned in the Google Code
2004 annual report, but not much is known about it. It also had Google Linux Search
something to do with Google Maps. GuruNet
Answers.co m
Urchin - In March 2005, Google acquired Urchin, a web analytics and
Google Q&amp;A
statistics company. Though we haven't yet seen what they're up to with
del.icio.u s
it, it will probably be used with AdWords/AdSense, with statistics about
StumbleUpo n
clickthroughs and such.
Google Toolbar
Dodgeball - Google acquired this two-person cell phone social networking Propel
company in May 2005. The company was looking for investors, and Audioscrob bler
Google apparently fit the bill. So far, nothing has happened with this Last.fm
company, but it will probably have something to do with Google Mobile. TiVo
Google Video
So those are the companies Google has acquired. A common Apple Computer
misconception is that Google has only been acquisitive since its Icosystem
(in)famous IPO. As shown here, however, the IPO has only made it easier Monster
for Google to buy companies it likes. Pre-IPO, from 2001 to August 2004, Coral
Google acquired 6 companies. Post-IPO, from August 2004 on, Google has The Open Directory Project
acquired 5 companies. In the year since the IPO, Google has almost Google Directory
matched the number of companies it acquired in the prior three years. Stayhealth y
Fitness Expert
Now that we've taken a good look at the past, here are my picks for the WebMD
companies Google should, could, will, may, perhaps is considering to, World66
would be cool if they were to, might acquire. My Way
The Internet Archive
Sensible Acquisitions Wikipedia
These companies are tossed around quite a bit by bloggers as possible IMDb
Google fodder, and they would integrate well with Google's current BitTorrent
offerings and its future strategy. They're all pretty small companies, but the Mozilla Foundation
quickly becoming popular among web users in the know. No surprises Microsoft
here. Apple
Amazon.com
Technorati - If Google is the average person's homepage, Technorati is
Adobe
the homepage of the underground, tech-savvy web user. Technorati is a
Also by Andrevan
blog portal whose average visitor enjoys podcasts, Wikipedia, and the
Daily Show with Jon Stewart. Providing more cutting edge results than a
normal search engine, Technorati would integrate well with Google News
and/or Blogger, and could perhaps feature blogs on the Google
Personalized Homepage. Technorati is somewhat similar to Bloglines,
which was purchased by Ask Jeeves recently.

Buzznet - Yahoo! beat Google to the punch by acquiring Flickr, one of my

candidates in the first draft of this article. Like Flickr, Buzznet is a photo
hosting and sharing service that features unique tagging features. It is
possible to browse by tag and see all sorts of interesting stuff. Buzznet
would probably jibe with Picasa's Hello photo posting service, perhaps
include some sort of photo-Blogger, and integrate well with Orkut.

Koders - Koders is a search engine for open source code that works
remarkably well. With the recent push for plugins for Google Desktop
search, Koders would be an interesting addition to Google's software
initiatives. It would make sense to combine with Google Code and Google
Linux Search in some way.

GuruNet (Answers.com) - Recently, Google stopped linking to

definitions on Dictionary.com, and started linking to Answers.com instead.
Answers features a wealth of information about different topics, and uses
Wikipedia for much of it. Since Wikipedia's non-profit status rules it out as
a potential Google acquisition, Answers.com would be the next best thing.
It also would help improve Google Q&A quite a bit. Interestingly, GuruNet
is a publicly traded company (AMEX: GRU) with a market cap of about
$100 million.

del.icio.us - This social bookmarking and tagging application could be

used to improve Google search results, and perhaps integrate with Orkut
in some way. Were Google to buy Buzznet as suggested above, this would
work well with it.

StumbleUpon - This unique browser plugin and service would probably

improve Google results and add a new level to the venerable search
engine. It would probably combine with the Google Toolbar in some
fashion, since the two have some similar functions.

Propel - Similar to Google Web Accelerator, Propel claims to speed up

your browsing experience. The company is run by optical mouse inventor
Steven T. Kirsch, who is no stranger to buyouts: his Frame Technology
Corp. was purchased by Adobe, and his Infoseek was bought by Disney.
This could help Google out with Web Accelerator, which it has been having
trouble with.

From Left Field

Here are some companies you probably haven't heard of, and some
companies you know very well that fit in less well with the Google plan. It
is not too likely that any of these will be bought by Google, but keep in
mind, most of Google's past acquisitions have been unexpected.

Audioscrobbler/Last.fm - So far, Google hasn't made any inroads into

the music industry. However, these sites together form an interesting,
Google-ish service that uses algorithms reminiscent of PageRank to
calculate the top artists and similar info.

TiVo - TiVo is a little too big and a little too well-known to be bought by
Google. Also, Google's experience with hardware is limited to Google
Search Appliances and similar. But, TiVo would work well with Google
Video. TiVo seems to fit better with Apple Computer's media plans than it
does with Google's geek mentality, though.

Icosystem - This swarm intelligence company might be useful for radical

 new spidering algorithms or some new form of PageRank. It's only
peripherally Google-ish, though.

Monster - Monster is the most popular job search site. Some bloggers
have tossed this idea around, touting various forms of integration with
other Google services. They also mention that Yahoo! owns HotJobs.
However, one wonders whether Google is interested in this market at all.

Coral - This caching service would probably be interesting and useful for
Google's own cache. However, it is run by NYU, so it's not a commercial
company, and may not be up for grabs.

The Open Directory Project - The definitive web directory has long been
partnered with Google for the Google Directory. But the Google Directory
hasn't been updated in a very long time, and it still sports the old tabbed
Google design, which lacks links to Froogle and Google Local. Although
the ODP is owned by Netscape, Google should have sufficient cash to
acquire it since the IPO.

Stayhealthy/Fitness Expert - This online health company doesn't offer

content a la WebMD, instead providing health and fitness hardware, self-
test kits, and a kiosk joint-ventured with IBM. The hardware interface is
web-based. As with TiVo, Google's limited hardware experience may be a
problem, and one wonders whether Google is interested in the health and
fitness space.

World66 - World66 could be Google's answer to Yahoo! Travel, with some

work. Its Wiki style, however, might be too wild for Google's liking.

My Way - This image ad and popup-free page is very Google-like.

However, it's redundant to existing Google offerings, and these days
having no popups isn't as big a deal as it was 3 years ago. It might
compete with Yahoo!'s portal, though.

So there you have it, my picks for Google's next additions, and some less
likely, but nonetheless interesting, possibilities.

There are also a number of other companies that would appear to be a

good match for Google, but cannot be for various reasons. Many of these
include non-profits like The Internet Archive or Wikipedia. Others like
IMDb are owned by other larger companies which would not sell them (in
this case Amazon.com), and still others are open-source driven like
BitTorrent or the Mozilla Foundation (also a non-profit) and would not
make a good fit in a corporate environment.

Many of the companies listed above might not be considered by Google

alone. Microsoft, Apple, Amazon.com, Adobe, and Yahoo! are just a few of
the web giants that have made it a habit of buying attractive Internet
companies. I bet they're regretting that they never approached Google
itself with an offer!

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Who Will Google Buy Next? | 78 comments (70 topical, 8 editorial, 0 hidden)

No health/fitness (3.00 / 4) (#4)

by elver on Sun Jun 12, 2005 at 04:50:08 PM EST

Health/fitness stuff isn't "googley", for the lack of a better word. Monster and Wikipedia, however, are. And
Wikipedia's been having server issues in the past. I wouldn't be surprised if Google were to at least donate some
servers to them.

The problem with Google "buying" Wikipedia is that it's got nowhere to put it. The "definition" links already point to
answers.com and adding a "wikipedia" link to it would add too much visual noise for the average user. It wouldn't
look clean.

However, as for Wikipedia links on the answers.com page then yeah, I can see that happening.

Googlepedia by rusty, 06/13/2005 03:09:51 AM EST (3.00 / 3)

Google + Wikipedia = Google Answers by malfunct, 06/14/2005 08:01:48 PM EST (none / 0)
Google answers by Wikipedia by rusty, 06/15/2005 10:04:19 PM EST (none / 0)

Technorati. Ugh. (3.00 / 5) (#6)

by Kasreyn on Sun Jun 12, 2005 at 05:24:16 PM EST

I don't think I've seen that much concentrated pretentiousness in one place since... umm... since... help me out
here, I think it may be a new record.

"Extenuating circumstance to be mentioned on Judgement Day:

We never asked to be born in the first place."
R.I.P. Kurt. You will be missed.

Since K5. by Driusan, 06/13/2005 03:41:17 PM EST (none / 1)

Forest, meet trees. :P -nt by Kasreyn, 06/14/2005 04:40:03 AM EST (none / 1)
seconded by Delirium, 06/15/2005 04:13:15 AM EST (none / 0)

No. (3.00 / 2) (#7)

by forgotten on Sun Jun 12, 2005 at 07:38:34 PM EST

Page and Brin didnt get rich by writing a whole lotta checks.

--

I know you've edited but... (3.00 / 2) (#8)

by alex fittyfives on Sun Jun 12, 2005 at 07:51:44 PM EST

...I do find it strange that you've written an article that mentions all sorts of stuff that I didn't know yet someone
missed the bit about Yahoo buying flickr.

Yeah by Andrevan, 06/12/2005 10:04:27 PM EST (none / 0)

kuro5hin nt (2.40 / 5) (#11)

by jleedev on Sun Jun 12, 2005 at 11:07:23 PM EST
 rusty would have to pay google by army of phred, 06/13/2005 11:37:56 AM EST (none / 0)
they already do comment search by forgotten, 06/14/2005 07:24:53 AM EST (3.00 / 2)

Multimedia and social networking (3.00 / 3) (#13)

by thsant on Mon Jun 13, 2005 at 08:51:36 AM EST

Andrevan,

Page has shown interest in multimedia production, organization and searching by common people. He is up to date
with the multimedia academic/industry goals:

make authoring complex multimedia titles as easy as using a word processor or drawing program. and
make capturing, storing, finding, and using digital media an everyday occurrence in our computing
environment.

Picasa, Blogger, Google Video Search and, possibly, your opinion about TiVo are some items of Google's multimedia
agenda. See the ACM SIGMM Retreat Report on Future Directions in Multimedia Research for some useful insights.
th

-1 Not GNU/Hippies. (1.80 / 5) (#18)

by tweetsybefore on Mon Jun 13, 2005 at 06:45:01 PM EST

Google is hostile to our four GNU/Freedoms.

The freedom to run the program, for any purpose (GNU/freedom 0).
The freedom to study how the program works, and adapt it to your needs (GNU/freedom 1). Access to the
source code is a precondition for this.
The freedom to redistribute copies so you can help your neighbor (GNU/freedom 2).
The freedom to improve the program, and release your improvements to the public, so that the whole
community benefits (GNU/freedom 3). Access to the source code is a precondition for this.

Look at gmail/groups/maps etc... The Javascript code used is not free software. We must have free javascript for
gmail or it is a great proprietary evil.

Free the GNU/World

Write GNU/Software.

I'm racist and I hate niggers.

Template #0 by evilmeow, 06/13/2005 08:07:08 PM EST (none / 1)

More data, access to more data. (3.00 / 2) (#20)

by vhold on Mon Jun 13, 2005 at 09:14:07 PM EST

I think the key to acquisitions is going to revolve around extending their hand's grasp of data.

I think in general they want to process and represent data, but starting from scratch acquiring data in domains
where there are decades of experience acquiring it doesn't make a lot of sense.

There are old companies that do things like read the print publications of the entire country as a kind of manual
search engine for celebrity agents and politicians.

There are politically oriented companies that just gather as much voting data as they can and sell queries to
produce mailing lists and foot campaign maps.
These are entire worlds of this kind of data that most people aren't even aware of because it exists nowhere
online. Bringing together these kinds of things out of left field as opposed to just crawling the web is a monopoly
advantage.

Watch this flash-u-mentary about Google.. (2.00 / 2) (#21)

by The Amazing Idiot on Mon Jun 13, 2005 at 09:35:56 PM EST

http://oak.psych.gatech.edu/~epic/

Kinda corny, but in line with the thought of this article.

Oh boy that is corny by yaksox, 06/14/2005 05:14:34 AM EST (none / 0)

Repeat after me... by rusty, 06/15/2005 10:15:48 PM EST (none / 0)

Facebook (2.50 / 2) (#22)

by pHatidic on Tue Jun 14, 2005 at 12:28:19 AM EST

I think Facebook would be the best company they could aquire. Even though they are clearly the best search
engine, yahoo still has way more traffic. Thus if they want to grow over time they have to continually capture the
younger market, because most of the average adults who started using yahoo have just kept using it. Yahoo's
traffic still dwarfs Google's and always has even despite all the hype, so I think Google's best bet would be to go
for kid friendly sites.

Distributed searching (none / 1) (#24)

by Armada on Tue Jun 14, 2005 at 02:39:39 AM EST

I don't know of any companies that are looking at this technology, but distributed searching (as per the one built
into Azureus, for example) has a lot of potential to reduce overhead. And much like Adwords, Google could actually
pay users for their CPU and bandwidth.

Proprietary technology wouldn't necessarily work well with such a system, but Google Labs might be up for giving it
a spin. Especially with the time vested in Google Web Accelerator. If you can queue it, why not index it as well?

So basically a legal zombie network? by Russell Dovey, 06/14/2005 08:22:54 AM EST (none / 0)

Auction (3.00 / 4) (#25)

by dogeye on Tue Jun 14, 2005 at 03:10:57 AM EST

I think the online auction market is badly in need of a competitor. eBay has a virtual monopoly and only a
behemoth like Google could provide meaningful competition. Google could design their own software or buy a
competitor, it doesn't matter. It's their online muscle that will make the difference.

Not to mention by rusty, 06/15/2005 10:01:55 PM EST (none / 1)

Skype (2.50 / 2) (#27)

by jbond on Tue Jun 14, 2005 at 05:08:01 AM EST

Not sure why but it would give them a great IM/VoIP client to match the other portals.
 Google & Skype by coolhunter, 06/14/2005 04:57:03 PM EST (none / 0)

lol internets. (1.50 / 2) (#31)

by Mylakovich on Tue Jun 14, 2005 at 10:21:38 AM EST

It certainly is serious business.

Buy? Google Will Eat Itself... (1.50 / 4) (#32)

by Pnarp on Tue Jun 14, 2005 at 01:45:05 PM EST

Google Will Eat Itself.

— Phillip Norbert Årp (Pnårp)

TinyURL (2.50 / 2) (#35)

by pdrap on Tue Jun 14, 2005 at 09:29:14 PM EST

I think they might buy TinyURL.com or MakeAShorterLink.com. Those are really useful services, and Google could
build tiny URL's into many places in their websites.

They could also use them in marketing and advertizing somehow I'm sure.

makeashorterlink by cpyder, 06/15/2005 04:27:20 AM EST (none / 0)

I think I speak for all K5ers when I say... (1.86 / 15) (#36)

by NaCh0 on Tue Jun 14, 2005 at 10:00:38 PM EST

Dear Slashdotters:

Go eat a cock.

k, thx.

--
K5: Your daily dose of socialism.

Ummm... (3.00 / 3) (#37)

by sparque on Tue Jun 14, 2005 at 10:18:28 PM EST

AskJeeves already owns MyWay...

Oops. by Andrevan, 06/14/2005 10:48:30 PM EST (none / 0)

Craigslist (3.00 / 2) (#38)

by ad1 on Tue Jun 14, 2005 at 10:19:32 PM EST

Buy Craiglist and give free alternatives other than eBay

On the Other Site now. [nt] (1.75 / 4) (#39)
by BJH on Tue Jun 14, 2005 at 10:24:02 PM EST

--
Roses are red, violets are blue.
I'm schizophrenic, and so am I. -- Oscar Levant

Welcome slashdot (1.00 / 5) (#40)

by benna on Tue Jun 14, 2005 at 10:47:41 PM EST

-
"It is not how things are in the world that is mystical, but that it exists." -Ludwig Wittgenstein

Googles moves (none / 1) (#42)

by VitaminJunky on Tue Jun 14, 2005 at 11:09:40 PM EST

I could see google going toward releasing a net appliance type device for checking email (gmail), browsing (while
displaying adwords), directions (google maps), news (google news). Not really something I'd buy but for my mom
it'd be perfect.

instant messengers?? (3.00 / 3) (#43)

by pojo vazquez on Tue Jun 14, 2005 at 11:57:35 PM EST

What about google buying into an instant messaging company? Something like a Miranda, or Trillian? Or what
about some company that is doing cutting edge location based IM like Meetro since they're making that big push
for 'local'? -pojo

Jabber by Shii, 06/15/2005 02:07:05 AM EST (none / 1)

I think they've already got one by cpyder, 06/15/2005 04:23:13 AM EST (none / 1)
Hello by jacoplane, 06/17/2005 12:57:58 PM EST (none / 0)

Audioscrobbler :: RIAA fodder? (1.50 / 2) (#44)

by The Devil on Wed Jun 15, 2005 at 12:52:33 AM EST

Hey is it just me but what if the RIAA got a hold of the Audioscrobbler servers??????? ?

I hope they systemically designed their software to:

A) Protect Identity
B) Obfuscate track info

Why? by muggy, 06/15/2005 04:38:13 AM EST (none / 0)

Not at all. by heresiarch, 06/15/2005 09:35:26 AM EST (none / 0)

fr1st ps0t (1.12 / 8) (#45)

by I HATE TROLLS on Wed Jun 15, 2005 at 01:06:22 AM EST
del.icio.us is worthless (2.50 / 2) (#46)
by Shii on Wed Jun 15, 2005 at 02:04:12 AM EST

Google won't buy del.icio.us. It would disturb the site users, and they don't have a patent on public bookmarking.
Google can make its own damn bookmarks service.

Paedophiles get off K5 please. by I HATE TROLLS, 06/15/2005 02:16:29 AM EST (1.00 / 3)
He is? by GreyGhost, 06/15/2005 03:58:40 AM EST (none / 1)

Skype, anybody ? (3.00 / 2) (#49)

by max73 on Wed Jun 15, 2005 at 02:19:00 AM EST

Skype (and LinkedIn, perhaps) seem to make much more senso to me than most of the companies you list.

Also, they won't buy MyWay.com because MayWay.com is now part of Ask Jeeves / InterActive Corporation.

Skype? Only if they get there before Yahoo (none / 1) (#55)

by Rys on Wed Jun 15, 2005 at 06:33:44 AM EST

Some investor BBs are tingling with rumours that Yahoo are going to pickup Skype, apparently.

LungExpress | CodeFactory

Wikipedia for Yahoo! (none / 1) (#56)

by guillaumeb on Wed Jun 15, 2005 at 07:24:22 AM EST

Yahoo already made a deal with Wikipedia. http://www.ysearchblog.com/archives/000099.html

Guillaume www.guillaumeb.com

enLighter for sure (none / 1) (#57)

by electricthought on Wed Jun 15, 2005 at 08:20:24 AM EST

This company has a very unique "after search" system that will be picked up.

webIm/voip? (none / 1) (#58)

by Dream on Wed Jun 15, 2005 at 09:04:14 AM EST

I remember seeing a voip webapp a couple of years ago would this kind of thing make a bit more sense to google's
business scheme than actually buying client software like skype (also if they do pull this off lets hope it involves
the speex codec (and wouldn't this be possible with the mozilla/xul (i believe) as an extension to firefox
(considering how much they put into it and how its designed to have a core that can be ported across platforms
and the rest scripted around that core (the gecko engine) altough building another auction site would be truly
brilliant for google altough wouldn't it start to become a monopoly?
http://dream.n3rds.net

What about Yahoo? (3.00 / 2) (#60)

by howzat on Wed Jun 15, 2005 at 12:16:26 PM EST

Does anyone know of a similar list of Yahoo's acquisitions, preferably with $ amounts? It would be interesting to
compare their trajectory of acquisitions with that of Google's.
Get into radio (3.00 / 2) (#61)
by khaladan on Wed Jun 15, 2005 at 12:47:21 PM EST

Buy Clear Channel. De-evil it.

Don't forget Sprinks (3.00 / 2) (#62)

by webconnoisseur on Wed Jun 15, 2005 at 02:37:22 PM EST

You forgot Sprinks on your acquisition list. Sprinks, the contextual advertising arm of About.com, was purchased
on October 24th. It extended Google's advertising base by 150,000 advertisers and gave Google an exclusive deal
to serve up ads on About.com (a top-ten Web property).

I like your list of possible targets, but I think Google's next purchases may surprise again. I expect Google to start
purchasing Web applications or software - for example, imagine Web-equivalents of Excel or Photoshop. More and
more people recognize the convenience of online email (hence Gmail) and the speed of Google maps shows that
software may be ready to go online. Imagine being able to use photoshop or Excel-like software from any
computer that has access to the Web.

year by webconnoisseur, 06/15/2005 02:40:30 PM EST (none / 0)

Important reason for Google to buy good companies (none / 0) (#64)

by nutate on Wed Jun 15, 2005 at 04:04:58 PM EST

is to change their silly names so that people will take them seriously. Not to say google wasn't a silly name when
in first started. The name technorati has put me off so much I've never even visited their home page despite many
times thinking about it. It's like calling your site elitewebsite, or worse 31337w3bs173... oh... wait.

Why Propel? Why not SlipStream? (none / 1) (#68)

by Joseph Fung on Thu Jun 16, 2005 at 01:05:50 PM EST

I find it interesting that the author selected Propel over SlipStream (www.slipstream.com), an arguably better
purchase who has superior technology (confirmed by independent testing solutions provider VeriTest).

This would do well to augment Google's current technology, as well as being perhaps a little more in line with
Google's culture: Slipstream was founded by a pair of electrical & computer engineering professors at the
University of Waterloo - a university from which Google hires many grads.

What ever happened to image search? (none / 0) (#69)

by atrerra on Thu Jun 16, 2005 at 01:11:50 PM EST

Since image search seems to be going nowhere (as far as being properly monetized), how about Yotophoto image
search?

Or maybe it will be Yahoo who's interested (yahotophoto?) as it nicely compliments their Creative Commons
search.

Google will go for MOBILE acquisitions (none / 0) (#70)

by iwaxx on Fri Jun 17, 2005 at 11:54:44 AM EST

motionbridge is a provider they should / could seriously consider !

They should buy a.. (1.00 / 6) (#72)

by koehlerminator on Thu Jun 23, 2005 at 05:20:48 PM EST

..voice over ip company and provide a service like "Google Voice Search". For example, when your wife is cheating
(or in case you think she will act like this) then you can search for calls made by your female (in case you are
using only vonage or nikotel or something similar at your home) .. okok .. just kidding..
sipsurf.de - the german internet telephony garage + many voice over ip tool here + always the newest news of all
voip news from my personal point of view + voip device firmware files http://www.sipsurf.de

a lot of business... (none / 0) (#73)

by Neokit on Fri Jul 01, 2005 at 08:51:01 PM EST

Google is for sure looking in a lot of web business...

First, webhosting. There's a lot of companies out there, but the biggest is doing a lot of money even if they start
later. See the examples of domain name registrar who start doing webhosting.

Second, domain names...

Third, pay systems... like paypal or 2co.

fourth, auctions...

The best of it, they all can be joint together so they each bring customers to the others...

And maybe he's looking outside the web... say walmart ? :)

---

---
Hebergement Internet en francais.
Webhosting in french!

My New Blog - From the Author (none / 0) (#74)

by Andrevan on Sun Jul 03, 2005 at 10:04:42 PM EST

Inspired by the success of this article, I have created a new blog based on it.

a (none / 0) (#75)
by kingshao66 on Sun Aug 07, 2005 at 02:11:43 AM EST

`ÅÜŠ÷*[

d (none / 0) (#76)
by kingshao66 on Sun Aug 07, 2005 at 09:27:22 AM EST

»úƱÁªÃËÍø

spam? (none / 0) (#78)

by Servus on Sun Sep 04, 2005 at 04:54:04 AM EST

Is this spam?. Lets flood the phonelines using skype!

hmm (none / 0) (#80)
by RickJamez on Thu Apr 27, 2006 at 11:11:09 PM EST

I dont get it, why did google acquire so many mapping/traffic related company? Didn't Keyhole (now Google Earth)
do all of it? and p.s. now del.ici.ous is a part of Yahoo! Alota acquisitions.
free cell phone wallpapers

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Forget old-school R&D. These companies purchase their ideas one startup at a time.

By Josh McHugh Page 1 of 1

Corporate research and development is like exercise: It takes time, Six Trends
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But while humans have to put in time on the treadmill to keep that paunch at Global Economy:
bay, more and more companies are paying someone else to do the sweaty
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Corporations are always trying to grow Personalize It

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development, requires dedicated staff and a fair amount of
experimentation.

What a bother! Why not just buy a smaller firm that’s already
Rants + Raves succeeding in a new market? Cisco long ago adopted this
approach – acquiring 107 companies over a 12-year period
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ending in 2005 – and along the way became one of the most
valuable tech companies in the world. The network equipment
START
manufacturer continues to deal its way into new markets.
MLB.com levels baseball’s playing
field To expand its presence in the digital living room, Cisco spent
The 1,350-hp, jet-turbine Beetle $6.9 billion last year– nearly twice its entire R&D budget – to
really flies buy cable-box maker Scientific-Atlanta.
Phew! The best apocalyptic near-
misses.
Other Wired 40 companies are also opening their wallets. In
More »
2005, News Corp. entered the social networking fray with a
$580 million buyout of MySpace’s parent company. In May of
PLAY
this year, it bought online karaoke player kSolo.com and news
Sufjan Stevens’ avalanche of odes aggregator Newroo. eBay last year dropped $2.6 billion on
to Illinois voice-over-IP phenom Skype. Pfizer spent almost $2 billion –
A mecha makeover for Japanese more than a quarter of its total 2005 R&D outlay – to get its
monster flicks
hands on Vicuron Pharmaceuticals, a biotech firm with two
Online craft faire – Linux blankie,
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Meet your next favorite game
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Nowhere has the M&A-as-R&D trend been deeper than in
POSTS online search. Thanks to booming ad revenue, Google and
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Monk ebusiness
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Superheroes go ape for Stan Lee
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 the last year or so, including bookmarking startup Onfolio.

Small firms, meanwhile, are eager to step up to the auction block. The dream of every office park
startup used to be a blockbuster initial public offering. But the market for IPOs has weakened since
the bubble burst, and post-Enron regulations have made that exit strategy costly and cumbersome.
So the new endgame is acquisition. Companies seem to be forming with the sole intent of selling out
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companies and would never rule out anything.” Did you hear that, Mr. Schmidt?

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eBay
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Pfizer
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Microsoft
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Cisco
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OnlyOnce
A first-time CEO writes about entrepreneurship and email (by Matt Blumberg of Return Path, Inc.)

« Whatever Happened to "The Customer is King"? | Main | RETURN PATH - MY

COMPANY - EMAIL
Challenge Response: Oy! » PERFORMANCE

How to Negotiate a Term Sheet

with a VC (Updated)
This is another in a series of postings that relate to Fred’s
5 WAYS TO SUBSCRIBE and Brad’s various postings about venture capital funding.
1. Enter Your Email Address (now (Please note I have added an 11th item in response to a
powered by Feedburner) comment by Jack Sinclair, Return Path's VP of Finance and
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I think the most important part of the venture financing
About me
2. Get RSS from Feedburner process is negotiating the term sheet. Although they’re only
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title/mission)
critical aspects of a financing, and once they’re signed, the
3. Get Real-time MSN Alerts
remainder of the financing process is significantly more Posting #2 (explains the picture)

“automatic.” Based on the financings I’ve seen and worked

on – both as a VC and as an entrepreneur – my Top 10 (now Email Me
4. Subscribe in Newsgator
11) biggest takeaways for entrepreneurs are as follows (not in
any particular order): COPYRIGHT
5. Subscribe in My Yahoo!
1. Get a good lawyer. I mean a really good one. Not just one
who you are comfortable with and who is productive and © 2004-2009 by Matt Blumberg

doesn’t charge you too much (as Brad says, your wife’s
FEEDCOUNT brother’s friend’s neighbor), but one who knows venture SEARCH THIS SITE
WITH LIJIT
financings like the back of his or her hand. They’re out
there, many of them have worked on both sides of these Search this Site with Lijit

transactions – for VCs and for entrepreneurs, and they can

save your ass. No matter how many deals you’ve worked on,
Popular Searches
TRANSLATE THIS PAGE your lawyer has worked on more of them. Return Path’s
lawyer, David Albin from Finn Dixon & Herling, is great if you bilbrey "professional...
Translate need one.
comments on book...
SelectLanguage
Select Language 2. Focus on terms that matter, otherwise known as Pick covey development plan
your battles. A typical VC term sheet will have at least 20 feedback is a gift how to
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terms spelled out in it. There are only a few that really
negotiate a... meetings
matter in the end, although you should at least make sure
monkey search engine...
your lawyer is comfortable that the others are reasonable and
BUSINESS BOOKS seth matheson slinging
somewhat standard. Spend time on valuation, the type of
Below are the 10 most recent security, the option pool, Board composition, and your own hash stuck in legal
business books I've read. Here is a
compensation and rights. techstars venture
complete list of business books I've
read in recent years. Here are all
2a (new). Sacrifice valuation for a clean security. Everyone capital...
the short book reviews on this blog.
always thinks that price/valuation is the most important thing
Chris Anderson - Free
to maximize in a deal. However, the structure of the security
Explore
Andrew Winston - Green Recovery can be much more important in the long run. Whether the
VCs buy 33% of your company or 30% of your company is much
Jameson W. Doig, ed. - Leadership
and Innovation: Entrepreneurs in less important than having a capital structure that's easy for
Government an outsider to understand and want to join (e.g., investment
banker or later-stage VC). Acumen Fund
W. Chan Kim and Renee Mauborgne -
Blue Ocean Strategy
3. Always have a BATNA (Best Alternative to a Negotiated Building
Steve McKee - When Growth Stalls Agreement – a fancy way of saying Plan B). This is probably transformative
Patrick Lencioni - A Field Guide: the most important piece of advice I can offer, and it extends businesses to
Overcoming the Five Dysfunctions of to any negotiation, not just term sheets. If you have two or solve the
a Team
three VCs who are interested in funding you, I can guarantee problems of
Jack Trout - Differentiate or Die you will end up with better terms from the highest quality poverty
investor in the group if you play the negotiation well. If you
Al Ries & Jack Trout - Bottom-up
Marketing have one term sheet, you have zero leverage in your Public Service Ads
negotiation. Yes, you will spend 2-3x the amount of time on by Google
Al Ries & Jack Trout - The 22
Immutable Laws of Marketing the process, but it’s well worth it.
RECENT POSTS
Al & Laura Ries - The 22 Immutable 4. Be prepared to pay up for high quality investors. There is
Laws of Branding a world of difference between good VCs and bad VCs (both Good Meeting Behavior
the individual partners and the firms) that will ultimately
Stuck In Legal, Responses
MY DEL.ICIO.US have a lot to do with how successful your company can
LINKROLL Stuck in Legal
become. The quality of your VC isn’t more important than the
quality of your product or your team, but it’s right up there. Techstars Roundup: Why I Mentor
But – and this is an important but – you should expect to Other Entrepreneurs
My del.icio.us
Linkroll “pay” for quality in the form of slightly weaker terms Return Path Makes The List of "Best
(whether valuation or type of security). This is where having a Places to Work" in Colorado
» Feld Thoughts: Falling Down and
Getting Back Up / Entrepreneur VC BATNA really comes in handy. Book Short: Worth Buying Free
Brad's colorful, quick posting on "how
running is like entrepreneurship."
5. Ask for references. Don’t be shy – prospective VCs are A David Allen nightmare

» Fractals of Change: Are You an checking up on you…you have every right to do the same with
Book Short: A Twofer
Entrepreneur? / Entrepreneur VC them. Ask them for references of CEOs they’ve worked with.
Tom Evslin's entertaining Top 10 Ways Self-Discipline: Broken Windows
Ask them for a CEO they’ve had to fire as a reference. The
You Know You're an Entrepreneur. Some Applied to You
good ones will give you the full roster of everyone they’ve
may dovetail nicely if I ever write up my
ever funded and tell you to call anyone. The bad ones will New Shoes
read of The Fountainhead through
entrepreneurial lens! give you two names and ask for time to prep them ahead of
» Techdirt: India Says No Thanks To time. FAVORITE POSTS
The $100 Laptop / india Technology
It's kind of a "Let Them Eat Cake!" 6. Don’t let the VC get away with negotiating a point by Academic Inspiration
response -- which kind of makes sense,
saying “we always do it this way.” That’s just not true. VCs Voting in Manhattan
given our recent trip to India.
may have a preferred way of doing deals or handling a
» The dangers of relying on Closer to the Front Lines
collective intelligence revealed! / specific term, but every deal they’ve ever done is different,
Sometimes You Just Need a 2x4
Humor Social_Networking wikipedia and they know it. If there’s a compelling reason for them to
Technology history onion Between the Eyes
insist on a particular term, you have the right to hear it (if
Wikipedia Celebrates 750 Years Of
it’s important to you). Hands in the Cookie Jar
American Independence Founding
Fathers, Patriots, Mr. T. Honored (From We Media Deal
7. If you have multiple investors in the syndicate, insist on
The Onion -- hilarious)
» A VC: Scars From The Last Bubble a single investor counsel and a lead investor. This is Why French Fries are Like Marketing

/ Entrepreneur VC Management essential to (a) protect your sanity, and (b) prevent you from Turning Lemons into Lemonade
Fred has a good posting on some of the paying zillions of dollars in legal fees. You have to make the
downsides of having managed through Morning in Tribeca
VCs stick to it, though – they can’t come back and re-trade
the bubble bursting. I wrote about this
(a little bit) last year in Ratcheting Up the deal after it’s been negotiated. This is also helpful in The Rumors of Email's Demise Have
Been Greatly Exaggerated
is Hard to Do getting a syndicate cooperating with each other and aligning
(http://onlyonce.blogs.com/onlyonce/200 the members’ interests, particularly if it has investors who
but Fred's posti
have participated in different rounds of the company’s CATEGORIES
» Seth's Blog: Nine things marketers
ought to know about salespeople financing. Do expect to play moderator constantly throughout Books
(and two bonuses) / Sales Marketing the process, however, to ensure that it goes smoothly.
 Business
Management selling
Great blog posting from Seth Godin on 8. Try do deal in advance with follow-on financings. When Current Affairs
things the rest of us need to remember an investor doesn’t participate in a follow-on financing, it
about how challenging it is to sell...and Email/Web/Tech
creates a total nightmare for you. Other investors will want
a couple pointers for the sales team
about how to handle the rest of us!
to punish their wayward colleague and can create massive Entrepreneurship

» Kevin Menzie / Entrepreneur collateral damage in the process to common shareholders and Leadership/Management
Slice of Lime, Inc. CEO Kevin Menzie, management. Just as VCs will insist on something called
who I have known for years, writes a Marketing
“pre-emptive rights” (the right to invest in future financings
good summary of his thoughts on the
early days of getting a startup off the
if they want), you and your lawyer should insist on some Music

ground and growing fast! protection in the event that one of your investors abandons Sports
» Not all successful CEOs are you when you are raising more capital.
extroverts: Financial News - Yahoo! Travel
Finance / Books Entrepreneur 9. Handle the term sheet negotiation carefully. Whether Web/Tech
Management it’s an initial round or a follow-on round, how you handle
Brad tipped me off to this article -- it's Weblogs
yourself in this negotiation sets the tone for the next stage of
a good one and draws on a lot of the
work and thinking done by Jim Collins in your relationship with the VC. The financing is the line of
both Good to Great and Built to Last demarcation between you and the VC courting each other, ARCHIVES
(links to both books on my blog in the and the VC joining your board and effectively becoming your August 2009
books sidebar).
boss.
» Why I think ClickFraud is far July 2009
greater than imagined. - Blog
10. Finally don’t forget to say thank you at the end of the June 2009
Maverick - www.blogmaverick.com _
/ Email Technology Media Marketing
process. Whether you send a formal email, a handwritten
May 2009
Dallas Mavs owner and Internet note, or a token gift, be sure to thank your VCs after a
entrepreneur Mark Cuban on Click financing. They’re putting their butt on the line for your April 2009
Fraud, a notorious member of the
company, they're investing in YOU, and they’re making it March 2009
Internet Axis of Evil
possible for you to pursue your dream. That deserves a
» WSJ.com - Heard on the Street / February 2009
Marketing Media Technology thoughtful thanks in my book.
Amazon, Microsoft, and Google on big January 2009
marketing spend Sorry for the long posting. The next one or ones in this series
December 2008
will be on valuation, preferences, and “Venture Capital deal
algebra.” November 2008
BLOGS I READ
August 04, 2004 in Entrepreneurship | Permalink
A VC SITEMETER

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Andy Sack - entrepreneur

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MailChimp Blog
» Bootstrapping from Flow Of Time
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Marketing with Technology and More Tracked on Aug 17, 2004 5:44:14 AM

Maximizing Deliverability
» Counter Cliche: Good Choices Are Made From Good Options
Multi-Channel Messaging from OnlyOnce
Not That You Asked... Counter Cliche: Good Choices Are Made From Good Options
The Counter Cliche to Fred's VC Cliche of the Week this week,
Official AOL Postmaster Blog
the Walk Away, is that Good Choices Are Made From Good
Outlook Tips Options. Fred's right -- sometimes you do have to walk away
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what to do next: jobs, careers,
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internships... and life, if we have
time.
» USA TODAY Archives Search from USA Search Engine
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Cooler information, feature stories, personal finance and investment
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Seth's Blog

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The Email Wars

Would be remiss if I didn't add my favorite expectation-
The Forrester Blog For Interactive setting phrase:
Marketing Professionals
"Be prepared: There are only two speeds of term sheets:
The New Republic Weblogs: The
Onerous and very onerous!"
Plank
Posted by: Royal | August 09, 2004 at 09:45 PM
The Spam Weblog

This is going to be BIG.

Thoughts in Random Patterns Hi,

read Brad's bit on the cliches, and followed the link.
Tom Evslin - Entrepreneur

Union Square Ventures: A New York Thanks for the advice.

Venture Capital Fund Focused on I'm still in the concept/prototype stage of the
Early Stage & Startup Investing
product/business, but the more savvy I gain the better.
VerticalResponse Email Marketing
Blog for Small Business
Point 2a clarifys an idea I had lurking at the back of my mind.
The cleaner, the simpler and quicker the break/transition the
Wallstrip » Episodes
better.
WhiteNoise
Ciao
Word to the Wise
Gordon
Posted by: Gordon | February 09, 2005 at 06:17 PM

Magazine New hair style - New hair style

Thanks so very much for taking your time to create this very
useful and informative site
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Many Internet Start-Ups Are Telling Venture Capitalists: 'We Don't Need You'
Wall Street Journal, October 31, 2005

SAN FRANCISCO—Internet start-ups and venture capitalists are back in vogue in Silicon
Valley. But now the two don't necessarily go together.

Consider Flickr, the innovative online-photo service launched by a small Canadian

company early last year. Like many Web start-ups today, it was built on a dime:
Husband-and-wife founders Stewart Butterfield and Caterina Fake used cheap software
to construct the Flickr site, eschewing pricey computers. Some gear, such as computer
storage, was "about 100 times cheaper" than it would have been even five years ago,
says Mr. Butterfield. It cost only about $200,000 to pay salaries and get the site up and
running, he says.

By last year, several top venture-capital firms were clamoring to invest in Flickr through
its parent company, Ludicorp Research & Development Ltd. In December, Mr.
Butterfield had a funding offer from Accel Partners of Palo Alto, Calif. But the
entrepreneur decided instead to sell to Internet giant Yahoo Inc. for what people
familiar with the matter say was about $25 million, significantly higher than the value
Accel had put on the company and Accel's proposed investment.

"It was a very complicated decision," Mr. Butterfield says. But since Flickr already had a
large user base and plenty of buzz, selling to Yahoo with its "hundreds of millions of
customers" seemed like a better plan.

It's a scenario playing out all over Silicon Valley—and one with potentially big
ramifications for venture capitalists. A new generation of Internet companies—many
offering online photo and blogging services or downloadable software for businesses—
have been built for a fraction of the cost just a few years ago. That's mainly due to the
increasing popularity of cheap "open source" software and programming tools, as well
as dramatic cost reductions in computer memory, storage and Internet bandwidth.

And all this is happening at a very inconvenient time for the venture-capital industry: It
raised more money in the first three quarters of this year than it did in 2004—and
needs places to park it.

Many Internet companies attending a Web-business conference here earlier this month
described venture money as "almost superfluous," says Jason Pressman, a principal at
Shasta Ventures in Menlo Park, Calif. Venture capitalists generally say their money and
expertise are still needed to build large-scale businesses, and they don't mind investing
a little bit less in companies that have built businesses on the cheap but still want some
venture money.

But some entrepreneurs believe the balance of power in Silicon Valley is shifting for at
least a subset of Internet-focused start-ups. "There is magic in independence," says
Chris MacAskill, co-founder of online-photo site Smugmug Inc., which has no venture
funding—and, according to Mr. MacAskill, doesn't want any.

Start-ups also are becoming easier to build without venture cash because entrepreneurs
can now outsource programming chores to cheap, offshore engineers. Brad Silverberg,
a partner with Seattle-area venture-capital firm Ignition Partners, says his son recently
introduced him to a classmate from the University of Southern California who had built
a sophisticated Web-storage company, called Box.net Inc. "It's two kids, and [some]
development was outsourced to some Russian guys they met on the Internet," says Mr.
Silverberg.

Some entrepreneurs can now get their start-ups off the ground for less than one-10th
of what it used to cost. Former Excite Inc. President Joe Kraus, for example, has
publicly talked about how he started his new Web-media company, JotSpot Inc., for
about $100,000 two years ago. That's far less than the $3 million it cost to launch
Excite in the 1990s. "The cost of getting out to market [today] is so low," and "that
spells a different time for venture capitalists," he says.

Besides Flickr, companies that decided to forego venture money include Weblogs Inc., a
blogging company bought by Time Warner Inc.'s America Online unit earlier this month,
and Android Inc., a wireless firm snapped up by Google Inc. earlier this year.

Shasta's Mr. Pressman says a two-tiered start-up market is now developing, with some
Web companies focused on long-term expansion with venture money and others looking
to a quick sale—for perhaps $20 million to $50 million—to big Internet brands like
Yahoo, Google, AOL, or Microsoft Corp.'s MSN service. Indeed, many of the modest Web
start-ups operating today offer products and services that seem more like Web-site
features than standalone businesses.

For many companies, "that's sort of their plan—get acquired for a decent amount of
money," says Evan Williams, who founded Blogger.com, a Web site he sold to Google in
early 2003 for an undisclosed sum. Mr. Williams didn't take any venture money to build
Blogger.com. [1] But he received an undisclosed amount from Charles River Partners
for his new venture, a San Francisco podcasting company called Odeo Inc. With Odeo,
"we thought we had the opportunity to do something more substantial," and that
required venture capital, he says.

As for Flickr, Peter Fenton, a partner at Accel Partners, maintains it could have been a
"breakout" company that fundamentally changed the way people view and share photos
on the Internet. "I really wish we had made the investment," he says.

[1] Editor's note: This isn't strictly true. The company had seed funding from O'Reilly,
just not from VCs per se.

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A Lesson on Elementary, Worldly Wisdom As It Relates To Investment
Management & Business
Charles Munger, USC Business School, 1994

I'm going to play a minor trick on you today because the subject of my talk is the art of
stock picking as a subdivision of the art of worldly wisdom. That enables me to start
talking about worldly wisdom—a much broader topic that interests me because I think
all too little of it is delivered by modern educational systems, at least in an effective
way.

And therefore, the talk is sort of along the lines that some behaviorist psychologists call
Grandma's rule after the wisdom of Grandma when she said that you have to eat the
carrots before you get the dessert.

The carrot part of this talk is about the general subject of worldly wisdom which is a
pretty good way to start. After all, the theory of modern education is that you need a
general education before you specialize. And I think to some extent, before you're
going to be a great stock picker, you need some general education.

So, emphasizing what I sometimes waggishly call remedial worldly wisdom, I'm going to
start by waltzing you through a few basic notions.

What is elementary, worldly wisdom? Well, the first rule is that you can't really know
anything if you just remember isolated facts and try and bang 'em back. If the facts
don't hang together on a latticework of theory, you don't have them in a usable form.

You've got to have models in your head. And you've got to array your experience—both
vicarious and direct—on this latticework of models. You may have noticed students who
just try to remember and pound back what is remembered. Well, they fail in school and
in life. You've got to hang experience on a latticework of models in your head.

What are the models? Well, the first rule is that you've got to have multiple models—
because if you just have one or two that you're using, the nature of human psychology
is such that you'll torture reality so that it fits your models, or at least you'll think it
does. You become the equivalent of a chiropractor who, of course, is the great boob in
medicine.

It's like the old saying, "To the man with only a hammer, every problem looks like a
nail." And of course, that's the way the chiropractor goes about practicing medicine. But
that's a perfectly disastrous way to think and a perfectly disastrous way to operate in
the world. So you've got to have multiple models.

And the models have to come from multiple disciplines—because all the wisdom of the
world is not to be found in one little academic department. That's why poetry
professors, by and large, are so unwise in a worldly sense. They don't have enough
models in their heads. So you've got to have models across a fair array of disciplines.

You may say, "My God, this is already getting way too tough." But, fortunately, it isn't
that tough—because 80 or 90 important models will carry about 90% of the freight in
making you a worldly-wise person. And, of those, only a mere handful really carry very
heavy freight.

So let's briefly review what kind of models and techniques constitute this basic
knowledge that everybody has to have before they proceed to being really good at a
narrow art like stock picking.
First there's mathematics. Obviously, you've got to be able to handle numbers and
quantities—basic arithmetic. And the great useful model, after compound interest, is the
elementary math of permutations and combinations. And that was taught in my day in
the sophomore year in high school. I suppose by now in great private schools, it's
probably down to the eighth grade or so.

It's very simple algebra. It was all worked out in the course of about one year between
Pascal and Fermat. They worked it out casually in a series of letters.

It's not that hard to learn. What is hard is to get so you use it routinely almost
everyday of your life. The Fermat/Pascal system is dramatically consonant with the way
that the world works. And it's fundamental truth. So you simply have to have the
technique.

Many educational institutions—although not nearly enough—have realized this. At

Harvard Business School, the great quantitative thing that bonds the first-year class
together is what they call decision tree theory. All they do is take high school algebra
and apply it to real life problems. And the students love it. They're amazed to find that
high school algebra works in life....

By and large, as it works out, people can't naturally and automatically do this. If you
understand elementary psychology, the reason they can't is really quite simple: The
basic neural network of the brain is there through broad genetic and cultural evolution.
And it's not Fermat/Pascal. It uses a very crude, shortcut-type of approximation. It's got
elements of Fermat/Pascal in it. However, it's not good.

So you have to learn in a very usable way this very elementary math and use it
routinely in life—just the way if you want to become a golfer, you can't use the natural
swing that broad evolution gave you. You have to learn—to have a certain grip and
swing in a different way to realize your full potential as a golfer.

If you don't get this elementary, but mildly unnatural, mathematics of elementary
probability into your repertoire, then you go through a long life like a onelegged man in
an asskicking contest. You're giving a huge advantage to everybody else.

One of the advantages of a fellow like Buffett, whom I've worked with all these years,
is that he automatically thinks in terms of decision trees and the elementary math of
permutations and combinations....

Obviously, you have to know accounting. It's the language of practical business life. It
was a very useful thing to deliver to civilization. I've heard it came to civilization
through Venice which of course was once the great commercial power in the
Mediterranean. However, double-entry bookkeeping was a hell of an invention.

And it's not that hard to understand.

But you have to know enough about it to understand its limitations—because although
accounting is the starting place, it's only a crude approximation. And it's not very hard
to understand its limitations. For example, everyone can see that you have to more or
less just guess at the useful life of a jet airplane or anything like that. Just because you
express the depreciation rate in neat numbers doesn't make it anything you really
know.

In terms of the limitations of accounting, one of my favorite stories involves a very

great businessman named Carl Braun who created the CF Braun Engineering Company.
It designed and built oil refineries—which is very hard to do. And Braun would get them
to come in on time and not blow up and have efficiencies and so forth. This is a major
art.

And Braun, being the thorough Teutonic type that he was, had a number of quirks. And
one of them was that he took a look at standard accounting and the way it was applied
to building oil refineries and he said, "This is asinine."

So he threw all of his accountants out and he took his engineers and said, "Now, we'll
devise our own system of accounting to handle this process." And in due time,
accounting adopted a lot of Carl Braun's notions. So he was a formidably willful and
talented man who demonstrated both the importance of accounting and the importance
of knowing its limitations.
He had another rule, from psychology, which, if you're interested in wisdom, ought to
be part of your repertoire—like the elementary mathematics of permutations and
combinations.

His rule for all the Braun Company's communications was called the five W's—you had
to tell who was going to do what, where, when and why. And if you wrote a letter or
directive in the Braun Company telling somebody to do something, and you didn't tell
him why, you could get fired. In fact, you would get fired if you did it twice.

You might ask why that is so important? Well, again that's a rule of psychology. Just as
you think better if you array knowledge on a bunch of models that are basically
answers to the question, why, why, why, if you always tell people why, they'll
understand it better, they'll consider it more important, and they'll be more likely to
comply. Even if they don't understand your reason, they'll be more likely to comply.

So there's an iron rule that just as you want to start getting worldly wisdom by asking
why, why, why, in communicating with other people about everything, you want to
include why, why, why. Even if it's obvious, it's wise to stick in the why.

Which models are the most reliable? Well, obviously, the models that come from hard
science and engineering are the most reliable models on this Earth. And engineering
quality control—at least the guts of it that matters to you and me and people who are
not professional engineers—is very much based on the elementary mathematics of
Fermat and Pascal:

It costs so much and you get so much less likelihood of it breaking if you spend this
much. It's all elementary high school mathematics. And an elaboration of that is what
Deming brought to Japan for all of that quality control stuff.

I don't think it's necessary for most people to be terribly facile in statistics. For
example, I'm not sure that I can even pronounce the Poisson distribution. But I know
what a Gaussian or normal distribution looks like and I know that events and huge
aspects of reality end up distributed that way. So I can do a rough calculation.

But if you ask me to work out something involving a Gaussian distribution to ten
decimal points, I can't sit down and do the math. I'm like a poker player who's learned
to play pretty well without mastering Pascal.

And by the way, that works well enough. But you have to understand that bellshaped
curve at least roughly as well as I do.

And, of course, the engineering idea of a backup system is a very powerful idea. The
engineering idea of breakpoints—that's a very powerful model, too. The notion of a
critical mass—that comes out of physics—is a very powerful model.

All of these things have great utility in looking at ordinary reality. And all of this cost-
benefit analysis—hell, that's all elementary high school algebra, too. It's just been dolled
up a little bit with fancy lingo.

I suppose the next most reliable models are from biology/ physiology because, after all,
all of us are programmed by our genetic makeup to be much the same.

And then when you get into psychology, of course, it gets very much more complicated.
But it's an ungodly important subject if you're going to have any worldly wisdom.

And you can demonstrate that point quite simply: There's not a person in this room
viewing the work of a very ordinary professional magician who doesn't see a lot of
things happening that aren't happening and not see a lot of things happening that are
happening.

And the reason why is that the perceptual apparatus of man has shortcuts in it. The
brain cannot have unlimited circuitry. So someone who knows how to take advantage of
those shortcuts and cause the brain to miscalculate in certain ways can cause you to
see things that aren't there.

Now you get into the cognitive function as distinguished from the perceptual function.
And there, you are equally—more than equally in fact—likely to be misled. Again, your
brain has a shortage of circuitry and so forth—and it's taking all kinds of little automatic
shortcuts.

So when circumstances combine in certain ways—or more commonly, your fellow man
starts acting like the magician and manipulates you on purpose by causing your
cognitive dysfunction—you're a patsy.

And so just as a man working with a tool has to know its limitations, a man working
with his cognitive apparatus has to know its limitations. And this knowledge, by the
way, can be used to control and motivate other people....

So the most useful and practical part of psychology—which I personally think can be
taught to any intelligent person in a week—is ungodly important. And nobody taught it
to me by the way. I had to learn it later in life, one piece at a time. And it was fairly
laborious. It's so elementary though that, when it was all over, I felt like a fool.

And yeah, I'd been educated at Cal Tech and the Harvard Law School and so forth. So
very eminent places miseducated people like you and me.

The elementary part of psychology—the psychology of misjudgment, as I call it—is a

terribly important thing to learn. There are about 20 little principles. And they interact,
so it gets slightly complicated. But the guts of it is unbelievably important.

Terribly smart people make totally bonkers mistakes by failing to pay heed to it. In
fact, I've done it several times during the last two or three years in a very important
way. You never get totally over making silly mistakes.

There's another saying that comes from Pascal which I've always considered one of the
really accurate observations in the history of thought. Pascal said in essence, "The mind
of man at one and the same time is both the glory and the shame of the universe."

And that's exactly right. It has this enormous power. However, it also has these
standard misfunctions that often cause it to reach wrong conclusions. It also makes
man extraordinarily subject to manipulation by others. For example, roughly half of the
army of Adolf Hitler was composed of believing Catholics. Given enough clever
psychological manipulation, what human beings will do is quite interesting.

Personally, I've gotten so that I now use a kind of two-track analysis. First, what are
the factors that really govern the interests involved, rationally considered? And second,
what are the subconscious influences where the brain at a subconscious level is
automatically doing these things—which by and large are useful, but which often
misfunction.

One approach is rationality—the way you'd work out a bridge problem: by evaluating
the real interests, the real probabilities and so forth. And the other is to evaluate the
psychological factors that cause subconscious conclusions—many of which are wrong.

Now we come to another somewhat less reliable form of human wisdom—

microeconomics. And here, I find it quite useful to think of a free market economy—or
partly free market economy—as sort of the equivalent of an ecosystem....

This is a very unfashionable way of thinking because early in the days after Darwin
came along, people like the robber barons assumed that the doctrine of the survival of
the fittest authenticated them as deserving power—you know, "I'm the richest.
Therefore, I'm the best. God's in his heaven, etc."

And that reaction of the robber barons was so irritating to people that it made it
unfashionable to think of an economy as an ecosystem. But the truth is that it is a lot
like an ecosystem. And you get many of the same results.

Just as in an ecosystem, people who narrowly specialize can get terribly good at
occupying some little niche. Just as animals flourish in niches, similarly, people who
specialize in the business world—and get very good because they specialize—frequently
find good economics that they wouldn't get any other way.

And once we get into microeconomics, we get into the concept of advantages of scale.
Now we're getting closer to investment analysis—because in terms of which businesses
succeed and which businesses fail, advantages of scale are ungodly important.
For example, one great advantage of scale taught in all of the business schools of the
world is cost reductions along the so-called experience curve. Just doing something
complicated in more and more volume enables human beings, who are trying to
improve and are motivated by the incentives of capitalism, to do it more and more
efficiently.

The very nature of things is that if you get a whole lot of volume through your joint,
you get better at processing that volume. That's an enormous advantage. And it has a
lot to do with which businesses succeed and fail....

Let's go through a list—albeit an incomplete one—of possible advantages of scale. Some

come from simple geometry. If you're building a great spherical tank, obviously as you
build it bigger, the amount of steel you use in the surface goes up with the square and
the cubic volume goes up with the cube. So as you increase the dimensions, you can
hold a lot more volume per unit area of steel.

And there are all kinds of things like that where the simple geometry—the simple reality
—gives you an advantage of scale.

For example, you can get advantages of scale from TV advertising. When TV advertising
first arrived—when talking color pictures first came into our living rooms—it was an
unbelievably powerful thing. And in the early days, we had three networks that had
whatever it was—say 90% of the audience.

Well, if you were Procter & Gamble, you could afford to use this new method of
advertising. You could afford the very expensive cost of network television because you
were selling so many cans and bottles. Some little guy couldn't. And there was no way
of buying it in part. Therefore, he couldn't use it. In effect, if you didn't have a big
volume, you couldn't use network TV advertising which was the most effective
technique.

So when TV came in, the branded companies that were already big got a huge tail wind.
Indeed, they prospered and prospered and prospered until some of them got fat and
foolish, which happens with prosperity—at least to some people....

And your advantage of scale can be an informational advantage. If I go to some remote

place, I may see Wrigley chewing gum alongside Glotz's chewing gum. Well, I know
that Wrigley is a satisfactory product, whereas I don't know anything about Glotz's. So
if one is 40 cents and the other is 30 cents, am I going to take something I don't know
and put it in my mouth—which is a pretty personal place, after all—for a lousy dime?

So, in effect, Wrigley , simply by being so well known, has advantages of scale—what
you might call an informational advantage.

Another advantage of scale comes from psychology. The psychologists use the term
social proof. We are all influenced—subconsciously and to some extent consciously—by
what we see others do and approve. Therefore, if everybody's buying something, we
think it's better. We don't like to be the one guy who's out of step.

Again, some of this is at a subconscious level and some of it isn't. Sometimes, we

consciously and rationally think, "Gee, I don't know much about this. They know more
than I do. Therefore, why shouldn't I follow them?"

The social proof phenomenon which comes right out of psychology gives huge
advantages to scale—for example, with very wide distribution, which of course is hard
to get. One advantage of Coca-Cola is that it's available almost everywhere in the
world.

Well, suppose you have a little soft drink. Exactly how do you make it available all over
the Earth? The worldwide distribution setup—which is slowly won by a big enterprise—
gets to be a huge advantage.... And if you think about it, once you get enough
advantages of that type, it can become very hard for anybody to dislodge you.

There's another kind of advantage to scale. In some businesses, the very nature of
things is to sort of cascade toward the overwhelming dominance of one firm.

The most obvious one is daily newspapers. There's practically no city left in the U.S.,
aside from a few very big ones, where there's more than one daily newspaper.
And again, that's a scale thing. Once I get most of the circulation, I get most of the
advertising. And once I get most of the advertising and circulation, why would anyone
want the thinner paper with less information in it? So it tends to cascade to a
winnertakeall situation. And that's a separate form of the advantages of scale
phenomenon.

Similarly, all these huge advantages of scale allow greater specialization within the firm.
Therefore, each person can be better at what he does.

And these advantages of scale are so great, for example, that when Jack Welch came
into General Electric, he just said, "To hell with it. We're either going to be # 1 or #2 in
every field we're in or we're going to be out. I don't care how many people I have to
fire and what I have to sell. We're going to be #1 or #2 or out."

That was a very toughminded thing to do, but I think it was a very correct decision if
you're thinking about maximizing shareholder wealth. And I don't think it's a bad thing
to do for a civilization either, because I think that General Electric is stronger for having
Jack Welch there.

And there are also disadvantages of scale. For example, we—by which I mean Berkshire
Hathaway—are the largest shareholder in Capital Cities/ABC. And we had trade
publications there that got murdered where our competitors beat us. And the way they
beat us was by going to a narrower specialization.

We'd have a travel magazine for business travel. So somebody would create one which
was addressed solely at corporate travel departments. Like an ecosystem, you're getting
a narrower and narrower specialization.

Well, they got much more efficient. They could tell more to the guys who ran corporate
travel departments. Plus, they didn't have to waste the ink and paper mailing out stuff
that corporate travel departments weren't interested in reading. It was a more efficient
system. And they beat our brains out as we relied on our broader magazine.

That's what happened to The Saturday Evening Post and all those things. They're gone.
What we have now is Motocross—which is read by a bunch of nuts who like to
participate in tournaments where they turn somersaults on their motorcycles. But they
care about it. For them, it's the principal purpose of life. A magazine called Motocross is
a total necessity to those people. And its profit margins would make you salivate.

Just think of how narrowcast that kind of publishing is. So occasionally, scaling down
and intensifying gives you the big advantage. Bigger is not always better.

The great defect of scale, of course, which makes the game interesting—so that the big
people don't always win—is that as you get big, you get the bureaucracy. And with the
bureaucracy comes the territoriality—which is again grounded in human nature.

And the incentives are perverse. For example, if you worked for AT&T in my day, it was
a great bureaucracy. Who in the hell was really thinking about the shareholder or
anything else? And in a bureaucracy, you think the work is done when it goes out of
your in-basket into somebody else's in-basket. But, of course, it isn't. It's not done until
AT&T delivers what it's supposed to deliver. So you get big, fat, dumb, unmotivated
bureaucracies.

They also tend to become somewhat corrupt. In other words, if I've got a department
and you've got a department and we kind of share power running this thing, there's
sort of an unwritten rule: "If you won't bother me, I won't bother you and we're both
happy." So you get layers of management and associated costs that nobody needs.
Then, while people are justifying all these layers, it takes forever to get anything done.
They're too slow to make decisions and nimbler people run circles around them.

The constant curse of scale is that it leads to big, dumb bureaucracy—which, of course,
reaches its highest and worst form in government where the incentives are really awful.
That doesn't mean we don't need governments—because we do. But it's a terrible
problem to get big bureaucracies to behave.

So people go to stratagems. They create little decentralized units and fancy motivation
and training programs. For example, for a big company, General Electric has fought
bureaucracy with amazing skill. But that's because they have a combination of a genius
and a fanatic running it. And they put him in young enough so he gets a long run. Of
course, that's Jack Welch.

But bureaucracy is terrible.... And as things get very powerful and very big, you can get
some really dysfunctional behavior. Look at Westinghouse. They blew billions of dollars
on a bunch of dumb loans to real estate developers. They put some guy who'd come up
by some career path—I don't know exactly what it was, but it could have been
refrigerators or something—and all of a sudden, he's loaning money to real estate
developers building hotels. It's a very unequal contest. And in due time, they lost all
those billions of dollars.

CBS provides an interesting example of another rule of psychology—namely, Pavlovian

association. If people tell you what you really don't want to hear what's unpleasant—
there's an almost automatic reaction of antipathy. You have to train yourself out of it. It
isn't foredestined that you have to be this way. But you will tend to be this way if you
don't think about it.

Television was dominated by one network—CBS in its early days. And Paley was a god.
But he didn't like to hear what he didn't like to hear. And people soon learned that. So
they told Paley only what he liked to hear. Therefore, he was soon living in a little
cocoon of unreality and everything else was corrupt—although it was a great business.

So the idiocy that crept into the system was carried along by this huge tide. It was a
Mad Hatter's tea party the last ten years under Bill Paley.

And that is not the only example by any means. You can get severe misfunction in the
high ranks of business. And of course, if you're investing, it can make a lot of
difference. If you take all the acquisitions that CBS made under Paley, after the
acquisition of the network itself, with all his advisors—his investment bankers,
management consultants and so forth who were getting paid very handsomely—it was
absolutely terrible.

For example, he gave something like 20% of CBS to the Dumont Company for a
television set manufacturer which was destined to go broke. I think it lasted all of two
or three years or something like that. So very soon after he'd issued all of that stock,
Dumont was history. You get a lot of dysfunction in a big fat, powerful place where no
one will bring unwelcome reality to the boss.

So life is an everlasting battle between those two forces—to get these advantages of
scale on one side and a tendency to get a lot like the U.S. Agriculture Department on
the other side—where they just sit around and so forth. I don't know exactly what they
do. However, I do know that they do very little useful work.

On the subject of advantages of economies of scale, I find chain stores quite interesting.
Just think about it. The concept of a chain store was a fascinating invention. You get
this huge purchasing power—which means that you have lower merchandise costs. You
get a whole bunch of little laboratories out there in which you can conduct experiments.
And you get specialization.

If one little guy is trying to buy across 27 different merchandise categories influenced
by traveling salesmen, he's going to make a lot of poor decisions. But if your buying is
done in headquarters for a huge bunch of stores, you can get very bright people that
know a lot about refrigerators and so forth to do the buying.

The reverse is demonstrated by the little store where one guy is doing all the buying.
It's like the old story about the little store with salt all over its walls. And a stranger
comes in and says to the storeowner, "You must sell a lot of salt." And he replies, "No,
I don't. But you should see the guy who sells me salt."

So there are huge purchasing advantages. And then there are the slick systems of
forcing everyone to do what works. So a chain store can be a fantastic enterprise.

It's quite interesting to think about Wal-Mart starting from a single store in Bentonville,
Arkansas against Sears, Roebuck with its name, reputation and all of its billions. How
does a guy in Bentonville, Arkansas with no money blow right by Sears, Roebuck? And
he does it in his own lifetime—in fact, during his own late lifetime because he was
already pretty old by the time he started out with one little store....
He played the chain store game harder and better than anyone else. Walton invented
practically nothing. But he copied everything anybody else ever did that was smart—and
he did it with more fanaticism and better employee manipulation. So he just blew right
by them all.

He also had a very interesting competitive strategy in the early days. He was like a
prizefighter who wanted a great record so he could be in the finals and make a big TV
hit. So what did he do? He went out and fought 42 palookas. Right? And the result was
knockout, knockout, knockout—42 times.

Walton, being as shrewd as he was, basically broke other small town merchants in the
early days. With his more efficient system, he might not have been able to tackle some
titan head-on at the time. But with his better system, he could destroy those small
town merchants. And he went around doing it time after time after time. Then, as he
got bigger, he started destroying the big boys.

Well, that was a very, very shrewd strategy.

You can say, "Is this a nice way to behave?" Well, capitalism is a pretty brutal place.
But I personally think that the world is better for having Wal-Mart. I mean you can
idealize small town life. But I've spent a fair amount of time in small towns. And let me
tell you you shouldn't get too idealistic about all those businesses he destroyed.

Plus, a lot of people who work at Wal-Mart are very high grade, bouncy people who are
raising nice children. I have no feeling that an inferior culture destroyed a superior
culture. I think that is nothing more than nostalgia and delusion. But, at any rate, it's
an interesting model of how the scale of things and fanaticism combine to be very
powerful.

And it's also an interesting model on the other side—how with all its great advantages,
the disadvantages of bureaucracy did such terrible damage to Sears, Roebuck. Sears
had layers and layers of people it didn't need. It was very bureaucratic. It was slow to
think. And there was an established way of thinking. If you poked your head up with a
new thought, the system kind of turned against you. It was everything in the way of a
dysfunctional big bureaucracy that you would expect.

In all fairness, there was also much that was good about it. But it just wasn't as lean
and mean and shrewd and effective as Sam Walton. And, in due time, all its advantages
of scale were not enough to prevent Sears from losing heavily to Wal-Mart and other
similar retailers.

Here's a model that we've had trouble with. Maybe you'll be able to figure it out better.
Many markets get down to two or three big competitors—or five or six. And in some of
those markets, nobody makes any money to speak of. But in others, everybody does
very well.

Over the years, we've tried to figure out why the competition in some markets gets sort
of rational from the investor's point of view so that the shareholders do well, and in
other markets, there's destructive competition that destroys shareholder wealth.

If it's a pure commodity like airline seats, you can understand why no one makes any
money. As we sit here, just think of what airlines have given to the world—safe travel,
greater experience, time with your loved ones, you name it. Yet, the net amount of
money that's been made by the shareholders of airlines since Kitty Hawk, is now a
negative figure—a substantial negative figure. Competition was so intense that, once it
was unleashed by deregulation, it ravaged shareholder wealth in the airline business.

Yet, in other fields—like cereals, for example—almost all the big boys make out. If
you're some kind of a medium grade cereal maker, you might make 15% on your
capital. And if you're really good, you might make 40%. But why are cereals so
profitable—despite the fact that it looks to me like they're competing like crazy with
promotions, coupons and everything else? I don't fully understand it.

Obviously, there's a brand identity factor in cereals that doesn't exist in airlines. That
must be the main factor that accounts for it.

And maybe the cereal makers by and large have learned to be less crazy about fighting
for market share—because if you get even one person who's hell-bent on gaining
market share.... For example, if I were Kellogg and I decided that I had to have 60% of
the market, I think I could take most of the profit out of cereals. I'd ruin Kellogg in the
process. But I think I could do it.

In some businesses, the participants behave like a demented Kellogg. In other

businesses, they don't. Unfortunately, I do not have a perfect model for predicting how
that's going to happen.

For example, if you look around at bottler markets, you'll find many markets where
bottlers of Pepsi and Coke both make a lot of money and many others where they
destroy most of the profitability of the two franchises. That must get down to the
peculiarities of individual adjustment to market capitalism. I think you'd have to know
the people involved to fully understand what was happening.

In microeconomics, of course, you've got the concept of patents, trademarks, exclusive

franchises and so forth. Patents are quite interesting. When I was young, I think more
money went into patents than came out. Judges tended to throw them out—based on
arguments about what was really invented and what relied on prior art. That isn't
altogether clear.

But they changed that. They didn't change the laws. They just changed the
administration—so that it all goes to one patent court. And that court is now very much
more pro-patent. So I think people are now starting to make a lot of money out of
owning patents.

Trademarks, of course, have always made people a lot of money. A trademark system
is a wonderful thing for a big operation if it's well known.

The exclusive franchise can also be wonderful. If there were only three television
channels awarded in a big city and you owned one of them, there were only so many
hours a day that you could be on. So you had a natural position in an oligopoly in the
pre-cable days.

And if you get the franchise for the only food stand in an airport, you have a captive
clientele and you have a small monopoly of a sort.

The great lesson in microeconomics is to discriminate between when technology is going

to help you and when it's going to kill you. And most people do not get this straight in
their heads. But a fellow like Buffett does.

For example, when we were in the textile business, which is a terrible commodity
business, we were making low-end textiles—which are a real commodity product. And
one day, the people came to Warren and said, "They've invented a new loom that we
think will do twice as much work as our old ones."

And Warren said, "Gee, I hope this doesn't work because if it does, I'm going to close
the mill." And he meant it.

What was he thinking? He was thinking, "It's a lousy business. We're earning
substandard returns and keeping it open just to be nice to the elderly workers. But
we're not going to put huge amounts of new capital into a lousy business."

And he knew that the huge productivity increases that would come from a better
machine introduced into the production of a commodity product would all go to the
benefit of the buyers of the textiles. Nothing was going to stick to our ribs as owners.

That's such an obvious concept—that there are all kinds of wonderful new inventions
that give you nothing as owners except the opportunity to spend a lot more money in a
business that's still going to be lousy. The money still won't come to you. All of the
advantages from great improvements are going to flow through to the customers.

Conversely, if you own the only newspaper in Oshkosh and they were to invent more
efficient ways of composing the whole newspaper, then when you got rid of the old
technology and got new fancy computers and so forth, all of the savings would come
right through to the bottom line.

In all cases, the people who sell the machinery—and, by and large, even the internal
bureaucrats urging you to buy the equipment—show you projections with the amount
you'll save at current prices with the new technology. However, they don't do the
second step of the analysis which is to determine how much is going stay home and
how much is just going to flow through to the customer. I've never seen a single
projection incorporating that second step in my life. And I see them all the time.
Rather, they always read: "This capital outlay will save you so much money that it will
pay for itself in three years."

So you keep buying things that will pay for themselves in three years. And after 20
years of doing it, somehow you've earned a return of only about 4% per annum. That's
the textile business.

And it isn't that the machines weren't better. It's just that the savings didn't go to you.
The cost reductions came through all right. But the benefit of the cost reductions didn't
go to the guy who bought the equipment. It's such a simple idea. It's so basic. And yet
it's so often forgotten.

Then there's another model from microeconomics which I find very interesting. When
technology moves as fast as it does in a civilization like ours, you get a phenomenon
which I call competitive destruction. You know, you have the finest buggy whip factory
and all of a sudden in comes this little horseless carriage. And before too many years
go by, your buggy whip business is dead. You either get into a different business or
you're dead—you're destroyed. It happens again and again and again.

And when these new businesses come in, there are huge advantages for the early birds.
And when you're an early bird, there's a model that I call "surfing"—when a surfer gets
up and catches the wave and just stays there, he can go a long, long time. But if he
gets off the wave, he becomes mired in shallows....

But people get long runs when they're right on the edge of the wave—whether it's
Microsoft or Intel or all kinds of people, including National Cash Register in the early
days.

The cash register was one of the great contributions to civilization. It's a wonderful
story. Patterson was a small retail merchant who didn't make any money. One day,
somebody sold him a crude cash register which he put into his retail operation. And it
instantly changed from losing money to earning a profit because it made it so much
harder for the employees to steal....

But Patterson, having the kind of mind that he did, didn't think, "Oh, good for my retail
business." He thought, "I'm going into the cash register business." And, of course, he
created National Cash Register.

And he "surfed". He got the best distribution system, the biggest collection of patents
and the best of everything. He was a fanatic about everything important as the
technology developed. I have in my files an early National Cash Register Company
report in which Patterson described his methods and objectives. And a well-educated
orangutan could see that buying into partnership with Patterson in those early days,
given his notions about the cash register business, was a total 100% cinch.

And, of course, that's exactly what an investor should be looking for. In a long life, you
can expect to profit heavily from at least a few of those opportunities if you develop the
wisdom and will to seize them. At any rate, "surfing" is a very powerful model.

However, Berkshire Hathaway , by and large, does not invest in these people that are
"surfing" on complicated technology. After all, we're cranky and idiosyncratic—as you
may have noticed.

And Warren and I don't feel like we have any great advantage in the high-tech sector.
In fact, we feel like we're at a big disadvantage in trying to understand the nature of
technical developments in software, computer chips or what have you. So we tend to
avoid that stuff, based on our personal inadequacies.

Again, that is a very, very powerful idea. Every person is going to have a circle of
competence. And it's going to be very hard to advance that circle. If I had to make my
living as a musician.... I can't even think of a level low enough to describe where I
would be sorted out to if music were the measuring standard of the civilization.

So you have to figure out what your own aptitudes are. If you play games where other
people have the aptitudes and you don't, you're going to lose. And that's as close to
certain as any prediction that you can make. You have to figure out where you've got
an edge. And you've got to play within your own circle of competence.

If you want to be the best tennis player in the world, you may start out trying and soon
find out that it's hopeless—that other people blow right by you. However, if you want to
become the best plumbing contractor in Bemidji, that is probably doable by two-thirds
of you. It takes a will. It takes the intelligence. But after a while, you'd gradually know
all about the plumbing business in Bemidji and master the art. That is an attainable
objective, given enough discipline. And people who could never win a chess tournament
or stand in center court in a respectable tennis tournament can rise quite high in life by
slowly developing a circle of competence—which results partly from what they were
born with and partly from what they slowly develop through work.

So some edges can be acquired. And the game of life to some extent for most of us is
trying to be something like a good plumbing contractor in Bemidji. Very few of us are
chosen to win the world's chess tournaments.

Some of you may find opportunities "surfing" along in the new high-tech fields—the
Intels, the Microsofts and so on. The fact that we don't think we're very good at it and
have pretty well stayed out of it doesn't mean that it's irrational for you to do it.

Well, so much for the basic microeconomics models, a little bit of psychology, a little bit
of mathematics, helping create what I call the general substructure of worldly wisdom.
Now, if you want to go on from carrots to dessert, I'll turn to stock picking—trying to
draw on this general worldly wisdom as we go.

I don't want to get into emerging markets, bond arbitrage and so forth. I'm talking
about nothing but plain vanilla stock picking. That, believe me, is complicated enough.
And I'm talking about common stock picking.

The first question is, "What is the nature of the stock market?" And that gets you
directly to this efficient market theory that got to be the rage—a total rage—long after I
graduated from law school.

And it's rather interesting because one of the greatest economists of the world is a
substantial shareholder in Berkshire Hathaway and has been for a long time. His
textbook always taught that the stock market was perfectly efficient and that nobody
could beat it. But his own money went into Berkshire and made him wealthy. So, like
Pascal in his famous wager, he hedged his bet.

Is the stock market so efficient that people can't beat it? Well, the efficient market
theory is obviously roughly right—meaning that markets are quite efficient and it's quite
hard for anybody to beat the market by significant margins as a stock picker by just
being intelligent and working in a disciplined way.

Indeed, the average result has to be the average result. By definition, everybody can't
beat the market. As I always say, the iron rule of life is that only 20% of the people
can be in the top fifth. That's just the way it is. So the answer is that it's partly efficient
and partly inefficient.

And, by the way, I have a name for people who went to the extreme efficient market
theory—which is "bonkers". It was an intellectually consistent theory that enabled them
to do pretty mathematics. So I understand its seductiveness to people with large
mathematical gifts. It just had a difficulty in that the fundamental assumption did not tie
properly to reality.

Again, to the man with a hammer, every problem looks like a nail. If you're good at
manipulating higher mathematics in a consistent way, why not make an assumption
which enables you to use your tool?

The model I like—to sort of simplify the notion of what goes on in a market for common
stocks—is the pari-mutuel system at the racetrack. If you stop to think about it, a pari-
mutuel system is a market. Everybody goes there and bets and the odds change based
on what's bet. That's what happens in the stock market.

Any damn fool can see that a horse carrying a light weight with a wonderful win rate
and a good post position etc., etc. is way more likely to win than a horse with a terrible
record and extra weight and so on and so on. But if you look at the odds, the bad horse
pays 100 to 1, whereas the good horse pays 3 to 2. Then it's not clear which is
statistically the best bet using the mathematics of Fermat and Pascal. The prices have
changed in such a way that it's very hard to beat the system.

And then the track is taking 17% off the top. So not only do you have to outwit all the
other betters, but you've got to outwit them by such a big margin that on average, you
can afford to take 17% of your gross bets off the top and give it to the house before
the rest of your money can be put to work.

Given those mathematics, is it possible to beat the horses only using one's intelligence?
Intelligence should give some edge, because lots of people who don't know anything go
out and bet lucky numbers and so forth. Therefore, somebody who really thinks about
nothing but horse performance and is shrewd and mathematical could have a very
considerable edge, in the absence of the frictional cost caused by the house take.

Unfortunately, what a shrewd horseplayer's edge does in most cases is to reduce his
average loss over a season of betting from the 17% that he would lose if he got the
average result to maybe 10%. However, there are actually a few people who can beat
the game after paying the full 17%.

I used to play poker when I was young with a guy who made a substantial living doing
nothing but bet harness races.... Now, harness racing is a relatively inefficient market.
You don't have the depth of intelligence betting on harness races that you do on regular
races. What my poker pal would do was to think about harness races as his main
profession. And he would bet only occasionally when he saw some mispriced bet
available. And by doing that, after paying the full handle to the house—which I presume
was around 17%—he made a substantial living.

You have to say that's rare. However, the market was not perfectly efficient. And if it
weren't for that big 17% handle, lots of people would regularly be beating lots of other
people at the horse races. It's efficient, yes. But it's not perfectly efficient. And with
enough shrewdness and fanaticism, some people will get better results than others.

The stock market is the same way—except that the house handle is so much lower. If
you take transaction costs—the spread between the bid and the ask plus the
commissions—and if you don't trade too actively, you're talking about fairly low
transaction costs. So that with enough fanaticism and enough discipline, some of the
shrewd people are going to get way better results than average in the nature of things.

It is not a bit easy. And, of course, 50% will end up in the bottom half and 70% will
end up in the bottom 70%. But some people will have an advantage. And in a fairly low
transaction cost operation, they will get better than average results in stock picking.

How do you get to be one of those who is a winner—in a relative sense—instead of a

loser?

Here again, look at the pari-mutuel system. I had dinner last night by absolute accident
with the president of Santa Anita. He says that there are two or three betters who have
a credit arrangement with them, now that they have off-track betting, who are actually
beating the house. They're sending money out net after the full handle—a lot of it to
Las Vegas, by the way—to people who are actually winning slightly, net, after paying
the full handle. They're that shrewd about something with as much unpredictability as
horse racing.

And the one thing that all those winning betters in the whole history of people who've
beaten the pari-mutuel system have is quite simple. They bet very seldom.

It's not given to human beings to have such talent that they can just know everything
about everything all the time. But it is given to human beings who work hard at it—who
look and sift the world for a mispriced be—that they can occasionally find one.

And the wise ones bet heavily when the world offers them that opportunity. They bet
big when they have the odds. And the rest of the time, they don't. It's just that simple.

That is a very simple concept. And to me it's obviously right—based on experience not
only from the pari-mutuel system, but everywhere else.
And yet, in investment management, practically nobody operates that way. We operate
that way—I'm talking about Buffett and Munger. And we're not alone in the world. But a
huge majority of people have some other crazy construct in their heads. And instead of
waiting for a near cinch and loading up, they apparently ascribe to the theory that if
they work a little harder or hire more business school students, they'll come to know
everything about everything all the time.

To me, that's totally insane. The way to win is to work, work, work, work and hope to
have a few insights.

How many insights do you need? Well, I'd argue: that you don't need many in a
lifetime. If you look at Berkshire Hathaway and all of its accumulated billions, the top
ten insights account for most of it. And that's with a very brilliant man—Warren's a lot
more able than I am and very disciplined—devoting his lifetime to it. I don't mean to
say that he's only had ten insights. I'm just saying, that most of the money came from
ten insights.

So you can get very remarkable investment results if you think more like a winning
pari-mutuel player. Just think of it as a heavy odds against game full of craziness with
an occasional mispriced something or other. And you're probably not going to be smart
enough to find thousands in a lifetime. And when you get a few, you really load up. It's
just that simple.

When Warren lectures at business schools, he says, "I could improve your ultimate
financial welfare by giving you a ticket with only 20 slots in it so that you had 20
punches—representing all the investments that you got to make in a lifetime. And once
you'd punched through the card, you couldn't make any more investments at all."

He says, "Under those rules, you'd really think carefully about what you did and you'd
be forced to load up on what you'd really thought about. So you'd do so much better."

Again, this is a concept that seems perfectly obvious to me. And to Warren it seems
perfectly obvious. But this is one of the very few business classes in the U.S. where
anybody will be saying so. It just isn't the conventional wisdom.

To me, it's obvious that the winner has to bet very selectively. It's been obvious to me
since very early in life. I don't know why it's not obvious to very many other people.

I think the reason why we got into such idiocy in investment management is best
illustrated by a story that I tell about the guy who sold fishing tackle. I asked him, "My
God, they're purple and green. Do fish really take these lures?" And he said, "Mister, I
don't sell to fish."

Investment managers are in the position of that fishing tackle salesman. They're like
the guy who was selling salt to the guy who already had too much salt. And as long as
the guy will buy salt, why they'll sell salt. But that isn't what ordinarily works for the
buyer of investment advice.

If you invested Berkshire Hathaway-style, it would be hard to get paid as an

investment manager as well as they're currently paid—because you'd be holding a block
of Wal-Mart and a block of Coca-Cola and a block of something else. You'd just sit
there. And the client would be getting rich. And, after a while, the client would think,
"Why am I paying this guy half a percent a year on my wonderful passive holdings?"

So what makes sense for the investor is different from what makes sense for the
manager. And, as usual in human affairs, what determines the behavior are incentives
for the decision maker.

From all business, my favorite case on incentives is Federal Express. The heart and soul
of their system—which creates the integrity of the product—is having all their airplanes
come to one place in the middle of the night and shift all the packages from plane to
plane. If there are delays, the whole operation can't deliver a product full of integrity to
Federal Express customers.

And it was always screwed up. They could never get it done on time. They tried
everything—moral suasion, threats, you name it. And nothing worked.

Finally, somebody got the idea to pay all these people not so much an hour, but so
much a shift—and when it's all done, they can all go home. Well, their problems cleared
up overnight.

So getting the incentives right is a very, very important lesson. It was not obvious to
Federal Express what the solution was. But maybe now, it will hereafter more often be
obvious to you.

All right, we've now recognized that the market is efficient as a pari-mutuel system is
efficient with the favorite more likely than the long shot to do well in racing, but not
necessarily give any betting advantage to those that bet on the favorite.

In the stock market, some railroad that's beset by better competitors and tough unions
may be available at one-third of its book value. In contrast, IBM in its heyday might be
selling at 6 times book value. So it's just like the pari-mutuel system. Any damn fool
could plainly see that IBM had better business prospects than the railroad. But once you
put the price into the formula, it wasn't so clear anymore what was going to work best
for a buyer choosing between the stocks. So it's a lot like a pari-mutuel system. And,
therefore, it gets very hard to beat.

What style should the investor use as a picker of common stocks in order to try to beat
the market—in other words, to get an above average long-term result? A standard
technique that appeals to a lot of people is called "sector rotation". You simply figure
out when oils are going to outperform retailers, etc., etc., etc. You just kind of flit
around being in the hot sector of the market making better choices than other people.
And presumably, over a long period of time, you get ahead.

However, I know of no really rich sector rotator. Maybe some people can do it. I'm not
saying they can't. All I know is that all the people I know who got rich—and I know a
lot of them—did not do it that way.

The second basic approach is the one that Ben Graham used—much admired by Warren
and me. As one factor, Graham had this concept of value to a private owner—what the
whole enterprise would sell for if it were available. And that was calculable in many
cases.

Then, if you could take the stock price and multiply it by the number of shares and get
something that was one third or less of sellout value, he would say that you've got a lot
of edge going for you. Even with an elderly alcoholic running a stodgy business, this
significant excess of real value per share working for you means that all kinds of good
things can happen to you. You had a huge margin of safety—as he put it—by having
this big excess value going for you.

But he was, by and large, operating when the world was in shell shock from the 1930s
—which was the worst contraction in the English-speaking world in about 600 years.
Wheat in Liverpool, I believe, got down to something like a 600-year low, adjusted for
inflation. People were so shell-shocked for a long time thereafter that Ben Graham
could run his Geiger counter over this detritus from the collapse of the 1930s and find
things selling below their working capital per share and so on.

And in those days, working capital actually belonged to the shareholders. If the
employees were no longer useful, you just sacked them all, took the working capital
and stuck it in the owners' pockets. That was the way capitalism then worked.

Nowadays, of course, the accounting is not realistic because the minute the business
starts contracting, significant assets are not there. Under social norms and the new
legal rules of the civilization, so much is owed to the employees that, the minute the
enterprise goes into reverse, some of the assets on the balance sheet aren't there
anymore.

Now, that might not be true if you run a little auto dealership yourself. You may be able
to run it in such a way that there's no health plan and this and that so that if the
business gets lousy, you can take your working capital and go home. But IBM can't, or
at least didn't. Just look at what disappeared from its balance sheet when it decided
that it had to change size both because the world had changed technologically and
because its market position had deteriorated.

And in terms of blowing it, IBM is some example. Those were brilliant, disciplined
people. But there was enough turmoil in technological change that IBM got bounced off
the wave after "surfing" successfully for 60 years. And that was some collapse—an
object lesson in the difficulties of technology and one of the reasons why Buffett and
Munger don't like technology very much. We don't think we're any good at it, and
strange things can happen.

At any rate, the trouble with what I call the classic Ben Graham concept is that
gradually the world wised up and those real obvious bargains disappeared. You could
run your Geiger counter over the rubble and it wouldn't click.

But such is the nature of people who have a hammer—to whom, as I mentioned, every
problem looks like a nail that the Ben Graham followers responded by changing the
calibration on their Geiger counters. In effect, they started defining a bargain in a
different way. And they kept changing the definition so that they could keep doing what
they'd always done. And it still worked pretty well. So the Ben Graham intellectual
system was a very good one.

Of course, the best part of it all was his concept of "Mr. Market". Instead of thinking the
market was efficient, he treated it as a manic-depressive who comes by every day. And
some days he says, "I'll sell you some of my interest for way less than you think it's
worth." And other days, "Mr. Market" comes by and says, "I'll buy your interest at a
price that's way higher than you think it's worth." And you get the option of deciding
whether you want to buy more, sell part of what you already have or do nothing at all.

To Graham, it was a blessing to be in business with a manic-depressive who gave you

this series of options all the time. That was a very significant mental construct. And it's
been very useful to Buffett, for instance, over his whole adult lifetime.

However, if we'd stayed with classic Graham the way Ben Graham did it, we would
never have had the record we have. And that's because Graham wasn't trying to do
what we did.

For example, Graham didn't want to ever talk to management. And his reason was that,
like the best sort of professor aiming his teaching at a mass audience, he was trying to
invent a system that anybody could use. And he didn't feel that the man in the street
could run around and talk to managements and learn things. He also had a concept that
the management would often couch the information very shrewdly to mislead.
Therefore, it was very difficult. And that is still true, of course—human nature being
what it is.

And so having started out as Grahamites which, by the way, worked fine—we gradually
got what I would call better insights. And we realized that some company that was
selling at 2 or 3 times book value could still be a hell of a bargain because of
momentums implicit in its position, sometimes combined with an unusual managerial
skill plainly present in some individual or other, or some system or other.

And once we'd gotten over the hurdle of recognizing that a thing could be a bargain
based on quantitative measures that would have horrified Graham, we started thinking
about better businesses.

And, by the way, the bulk of the billions in Berkshire Hathaway have come from the
better businesses. Much of the first $200 or $300 million came from scrambling around
with our Geiger counter. But the great bulk of the money has come from the great
businesses.

And even some of the early money was made by being temporarily present in great
businesses. Buffett Partnership, for example, owned American Express and Disney when
they got pounded down.

Most investment managers are in a game where the clients expect them to know a lot
about a lot of things. We didn't have any clients who could fire us at Berkshire
Hathaway. So we didn't have to be governed by any such construct. And we came to
this notion of finding a mispriced bet and loading up when we were very confident that
we were right. So we're way less diversified. And I think our system is miles better.

However, in all fairness, I don't think a lot of money managers could successfully sell
their services if they used our system. But if you're investing for 40 years in some
pension fund, what difference does it make if the path from start to finish is a little
more bumpy or a little different than everybody else's so long as it's all going to work
out well in the end? So what if there's a little extra volatility.

In investment management today, everybody wants not only to win, but to have a
yearly outcome path that never diverges very much from a standard path except on the
upside. Well, that is a very artificial, crazy construct. That's the equivalent in investment
management to the custom of binding the feet of Chinese women. It's the equivalent of
what Nietzsche meant when he criticized the man who had a lame leg and was proud of
it.

That is really hobbling yourself. Now, investment managers would say, "We have to be
that way. That's how we're measured." And they may be right in terms of the way the
business is now constructed. But from the viewpoint of a rational consumer, the whole
system's "bonkers" and draws a lot of talented people into socially useless activity.

And the Berkshire system is not "bonkers". It's so damned elementary that even bright
people are going to have limited, really valuable insights in a very competitive world
when they're fighting against other very bright, hardworking people.

And it makes sense to load up on the very few good insights you have instead of
pretending to know everything about everything at all times. You're much more likely to
do well if you start out to do something feasible instead of something that isn't feasible.
Isn't that perfectly obvious?

How many of you have 56 brilliant ideas in which you have equal confidence? Raise your
hands, please. How many of you have two or three insights that you have some
confidence in? I rest my case.

I'd say that Berkshire Hathaway's system is adapting to the nature of the investment
problem as it really is.

We've really made the money out of high quality businesses. In some cases, we bought
the whole business. And in some cases, we just bought a big block of stock. But when
you analyze what happened, the big money's been made in the high quality businesses.
And most of the other people who've made a lot of money have done so in high quality
businesses.

Over the long term, it's hard for a stock to earn a much better return than the business
which underlies it earns. If the business earns 6% on capital over 40 years and you
hold it for that 40 years, you're not going to make much different than a 6% return—
even if you originally buy it at a huge discount. Conversely, if a business earns 18% on
capital over 20 or 30 years, even if you pay an expensive looking price, you'll end up
with a fine result.

So the trick is getting into better businesses. And that involves all of these advantages
of scale that you could consider momentum effects.

How do you get into these great companies? One method is what I'd call the method of
finding them small get 'em when they're little. For example, buy Wal-Mart when Sam
Walton first goes public and so forth. And a lot of people try to do just that. And it's a
very beguiling idea. If I were a young man, I might actually go into it.

But it doesn't work for Berkshire Hathaway anymore because we've got too much
money. We can't find anything that fits our size parameter that way. Besides, we're set
in our ways. But I regard finding them small as a perfectly intelligent approach for
somebody to try with discipline. It's just not something that I've done.

Finding 'em big obviously is very hard because of the competition. So far, Berkshire's
managed to do it. But can we continue to do it? What's the next Coca-Cola investment
for us? Well, the answer to that is I don't know. I think it gets harder for us all the
time....

And ideally and we've done a lot of this—you get into a great business which also has a
great manager because management matters. For example, it's made a great difference
to General Electric that Jack Welch came in instead of the guy who took over
Westinghouse—a very great difference. So management matters, too.

And some of it is predictable. I do not think it takes a genius to understand that Jack
Welch was a more insightful person and a better manager than his peers in other
companies. Nor do I think it took tremendous genius to understand that Disney had
basic momentums in place which are very powerful and that Eisner and Wells were very
unusual managers.

So you do get an occasional opportunity to get into a wonderful business that's being
run by a wonderful manager. And, of course, that's hog heaven day. If you don't load
up when you get those opportunities, it's a big mistake.

Occasionally, you'll find a human being who's so talented that he can do things that
ordinary skilled mortals can't. I would argue that Simon Marks—who was second
generation in Marks & Spencer of England—was such a man. Patterson was such a man
at National Cash Register. And Sam Walton was such a man.

These people do come along—and in many cases, they're not all that hard to identify. If
they've got a reasonable hand—with the fanaticism and intelligence and so on that
these people generally bring to the party—then management can matter much.

However, averaged out, betting on the quality of a business is better than betting on
the quality of management. In other words, if you have to choose one, bet on the
business momentum, not the brilliance of the manager.

But, very rarely, you find a manager who's so good that you're wise to follow him into
what looks like a mediocre business.

Another very simple effect I very seldom see discussed either by investment managers
or anybody else is the effect of taxes. If you're going to buy something which
compounds for 30 years at 15% per annum and you pay one 35% tax at the very end,
the way that works out is that after taxes, you keep 13.3% per annum.

In contrast, if you bought the same investment, but had to pay taxes every year of
35% out of the 15% that you earned, then your return would be 15% minus 35% of
15%—or only 9.75% per year compounded. So the difference there is over 3.5%. And
what 3.5% does to the numbers over long holding periods like 30 years is truly eye-
opening. If you sit back for long, long stretches in great companies, you can get a huge
edge from nothing but the way that income taxes work.

Even with a 10% per annum investment, paying a 35% tax at the end gives you 8.3%
after taxes as an annual compounded result after 30 years. In contrast, if you pay the
35% each year instead of at the end, your annual result goes down to 6.5%. So you
add nearly 2% of after-tax return per annum if you only achieve an average return by
historical standards from common stock investments in companies with tiny dividend
payout ratios.

But in terms of business mistakes that I've seen over a long lifetime, I would say that
trying to minimize taxes too much is one of the great standard causes of really dumb
mistakes. I see terrible mistakes from people being overly motivated by tax
considerations.

Warren and I personally don't drill oil wells. We pay our taxes. And we've done pretty
well, so far. Anytime somebody offers you a tax shelter from here on in life, my advice
would be don't buy it.

In fact, any time anybody offers you anything with a big commission and a 200-page
prospectus, don't buy it. Occasionally, you'll be wrong if you adopt "Munger's Rule".
However, over a lifetime, you'll be a long way ahead—and you will miss a lot of
unhappy experiences that might otherwise reduce your love for your fellow man.

There are huge advantages for an individual to get into a position where you make a
few great investments and just sit back and wait: You're paying less to brokers. You're
listening to less nonsense. And if it works, the governmental tax system gives you an
extra 1, 2 or 3 percentage points per annum compounded.

And you think that most of you are going to get that much advantage by hiring
investment counselors and paying them 1% to run around, incurring a lot of taxes on
your behalf'? Lots of luck.

Are there any dangers in this philosophy? Yes. Everything in life has dangers. Since it's
so obvious that investing in great companies works, it gets horribly overdone from time
to time. In the "Nifty-Fifty" days, everybody could tell which companies were the great
ones. So they got up to 50, 60 and 70 times earnings. And just as IBM fell off the
wave, other companies did, too. Thus, a large investment disaster resulted from too
high prices. And you've got to be aware of that danger....

So there are risks. Nothing is automatic and easy. But if you can find some fairly-priced
great company and buy it and sit, that tends to work out very, very well indeed—
especially for an individual,

Within the growth stock model, there's a sub-position: There are actually businesses,
that you will find a few times in a lifetime, where any manager could raise the return
enormously just by raising prices—and yet they haven't done it. So they have huge
untapped pricing power that they're not using. That is the ultimate no-brainer.

That existed in Disney. It's such a unique experience to take your grandchild to
Disneyland. You're not doing it that often. And there are lots of people in the country.
And Disney found that it could raise those prices a lot and the attendance stayed right
up.

So a lot of the great record of Eisner and Wells was utter brilliance but the rest came
from just raising prices at Disneyland and Disneyworld and through video cassette sales
of classic animated movies.

At Berkshire Hathaway, Warren and I raised the prices of See's Candy a little faster
than others might have. And, of course, we invested in Coca-Cola—which had some
untapped pricing power. And it also had brilliant management. So a Goizueta and
Keough could do much more than raise prices. It was perfect.

You will get a few opportunities to profit from finding underpricing. There are actually
people out there who don't price everything as high as the market will easily stand. And
once you figure that out, it's like finding in the street—if you have the courage of your
convictions.

If you look at Berkshire's investments where a lot of the money's been made and you
look for the models, you can see that we twice bought into twonewspaper towns which
have since become onenewspaper towns. So we made a bet to some extent....

In one of those—The Washington Post—we bought it at about 20% of the value to a

private owner. So we bought it on a Ben Grahamstyle basis—at onefifth of obvious
value—and, in addition, we faced a situation where you had both the top hand in a
game that was clearly going to end up with one winner and a management with a lot of
integrity and intelligence. That one was a real dream. They're very high class people—
the Katharine Graham family. That's why it was a dream—an absolute, damn dream.

Of course, that came about back in '73-74. And that was almost like 1932. That was
probably a once-in-40-yearstype denouement in the markets. That investment's up
about 50 times over our cost.

If I were you, I wouldn't count on getting any investment in your lifetime quite as good
as The Washington Post was in '73 and '74.

But it doesn't have to be that good to take care of you.

Let me mention another model. Of course, Gillette and Coke make fairly lowpriced
items and have a tremendous marketing advantage all over the world. And in Gillette's
case, they keep surfing along new technology which is fairly simple by the standards of
microchips. But it's hard for competitors to do.

So they've been able to stay constantly near the edge of improvements in shaving.
There are whole countries where Gillette has more than 90% of the shaving market.

GEICO is a very interesting model. It's another one of the 100 or so models you ought
to have in your head. I've had many friends in the sick business fixup game over a long
lifetime. And they practically all use the following formula—I call it the cancer surgery
formula:

They look at this mess. And they figure out if there's anything sound left that can live
on its own if they cut away everything else. And if they find anything sound, they just
cut away everything else. Of course, if that doesn't work, they liquidate the business.
But it frequently does work.

And GEICO had a perfectly magnificent business submerged in a mess, but still working.
Misled by success, GEICO had done some foolish things. They got to thinking that,
because they were making a lot of money, they knew everything. And they suffered
huge losses.

All they had to do was to cut out all the folly and go back to the perfectly wonderful
business that was lying there. And when you think about it, that's a very simple model.
And it's repeated over and over again.

And, in GEICO's case, think about all the money we passively made.... It was a
wonderful business combined with a bunch of foolishness that could easily be cut out.
And people were coming in who were temperamentally and intellectually designed so
they were going to cut it out. That is a model you want to look for.

And you may find one or two or three in a long lifetime that are very good. And you
may find 20 or 30 that are good enough to be quite useful.

Finally, I'd like to once again talk about investment management. That is a funny
business because on a net basis, the whole investment management business together
gives no value added to all buyers combined. That's the way it has to work.

Of course, that isn't true of plumbing and it isn't true of medicine. If you're going to
make your careers in the investment management business, you face a very peculiar
situation. And most investment managers handle it with psychological denial just like a
chiropractor. That is the standard method of handling the limitations of the investment
management process. But if you want to live the best sort of life, I would urge each of
you not to use the psychological denial mode.

I think a select few—a small percentage of the investment managers—can deliver value
added. But I don't think brilliance alone is enough to do it. I think that you have to
have a little of this discipline of calling your shots and loading up—you want to
maximize your chances of becoming one who provides above average real returns for
clients over the long pull.

But I'm just talking about investment managers engaged in common stock picking. I am
agnostic elsewhere. I think there may well be people who are so shrewd about
currencies and this, that and the other thing that they can achieve good longterm
records operating on a pretty big scale in that way. But that doesn't happen to be my
milieu. I'm talking about stock picking in American stocks.

I think it's hard to provide a lot of value added to the investment management client,
but it's not impossible.

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It also helps that I am writing while sipping a very fine wine (a

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Across the valley, far, far below me, palm trees fringe the fishing
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I am in Mustique, a tiny island in the Windward Islands of the

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1. HOW TO WIN FRIENDS AND INFLUENCE PEOPLE

CARNEGIE, DALE
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2. How to Win Friends and Influence People (Cedar Books) (ISBN: 0437950069 / 0-437-95006-9)
Dale Carnegie
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3. how To Win Friends And Influence People

Carnegie, Dale
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4. How to Win friends and Influence People

Dale Carnegie
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5. How to Win Friends and Influence People (Revised Edition) (ISBN: 9780671723651)
Dale Carnegie
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6. How to Win Friends and Influence People
Carnegie, Dale
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7. How to Win Friends and Influence People (ISBN: 0671355007 / 0-671-35500-7)

Carnegie, Dale
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8. HOW TO WIN FRIENDS AND INFLUENCE PEOPLE

Carnegie, Dale
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9. How to Win Friends and Influence People

Carnegie, Dale
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10. How to Win Friends and Influence People

Carnegie, Dale
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11. How to Win Friends and Influence People

Dale Carnegie
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12. Wie man Freunde gewinnt. Aus d. [amerik.] Engl. ("How to win friends and influence people") v. H[ans] von Wedderkop.
1.-5.Tsd.d.österr.Ausgabe (51.-55.Tsd.d.Gesamtausg.)
Carnegie, Dale
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13. How to Win Friends and Influence People
Carnegie, Dale
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The Visual Display of Quantitative Information, 2nd Quantity: 11

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This item: The Visual Display of Quantitative Information, 2nd edition by Edward R. Tufte
✔
Envisioning Information by Edward R. Tufte
✔
Visual Explanations: Images and Quantities, Evidence and Narrative by Edward R. Tufte
✔

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Editorial Reviews
Amazon.com Review
A timeless classic in how complex information should be presented graphically. The Strunk & White of visual design. Should occupy a
place of honor--within arm's reach--of everyone attempting to understand or depict numerical data graphically. The design of the
book is an exemplar of the principles it espouses: elegant typography and layout, and seamless integration of lucid text and
perfectly chosen graphical examples. Very Highly Recommended. --This text refers to an out of print or unavailable edition of this
title.

Review
A tour de force. -- John Tukey, Bell Laboratories and Princeton University

One of the best books you will ever see. -- Datamation

The century's best book on statistical graphics. -- Computing Reviews --This text refers to an out of print or unavailable edition of
this title.

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Product Details
Hardcover: 197 pages
Publisher: Graphics Press; 2 edition (May 2001)
Language: English
ISBN-10: 0961392142
ISBN-13: 978-0961392147
Product Dimensions: 11 x 9.1 x 1.3 inches
Shipping Weight: 2 pounds (View shipping rates and policies)
Average Customer Review: (105 customer reviews)
Amazon.com Sales Rank: #2,001 in Books (See Bestsellers in Books)
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#1 in Books > Science > Mathematics > Mathematical Analysis
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Inside This Book (learn more)

First Sentence:
Excellence in statistical graphics consists of complex ideas communicated with clarity, precision, and efficiency. Read the first page
Key Phrases - Statistically Improbable Phrases (SIPs): (learn more)
multifunctioning graphical elements, graphical integrity, moiré vibration, graphical excellence, graphical sophistication,
relational graphics, quartile plot, franked mail, statistical graphics, data graphics
Key Phrases - Capitalized Phrases (CAPs): (learn more)
New York, United States, World War, Business Week, Wall Street Journal, Charles Joseph Minard, American Statistician,
Golden Rectangle, New Haven, William Playfair, The Times, Nationale des Ponts, The Statistical Breviary, Lie Factor, Jacques Bertin,
Gray Funkhouser, John Tukey, Robert Venturi, Mary Eleanor Spear, Edmond Halley, Charting Statistics, Bureau of the Census,
Statistical Association, Washington Post
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Citations (learn more)

This book cites 38 books:

Envisioning Information by Edward R. Tufte on 5 pages
General Chemistry by Linus Pauling on page 85, and page 102
Graphic Idea Notebook: A Treasury of Solutions to Visual Problems by Jan White on page 79, and page 80
Thermal Conductivity of the Elements: A Comprehensive Review (Jpcrd - Supplements, 3) by C. Y. Ho on page 49, and page 150
Quantitative Analysis of Social Problems (Behavioral Science) by Edward R. Tufte on page 53, and page 75

See all 38 books this book cites

100 books cite this book:

Your Guide to Survey Research Using the SAS System by Archer R. Gravely on 6 pages
Getting into Print: A guide for scientists and technologists by Prof P Sprent on page 20, page 90, and Back Matter
Teaching Graphic Design: Course Offerings and Class Projects from the Leading Graduate and Undergraduate Programs by Steven
Heller on page 82, page 104, and page 155
Handbook of Statistics, Volume 24: Data Mining and Data Visualization by C.R. Rao on page 46, page 436, and page 536
Programming for Design: From Theory to Practice by Edith Cherry in Back Matter (1), and Back Matter (2)

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Customer Reviews
105 Reviews
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Most Helpful Customer Reviews

225 of 230 people found the following review helpful:
Extremely well researched book on what makes good
design., February 7, 2000
By Durand Sinclair (Sydney, Australia) - See all my reviews
This review is from: The Visual Display of Quantitative Information (Hardcover)
You know what's so good about this book? The research, that's what. In
showing both good and bad graphic design, Tufte has examples from as
far back as 1686, and many examples from the 18th,19th & 20th
centuries and from many different countries.

Good graphic design, he argues, reveals the greatest number of ideas in

the shortest time with the least ink in the smallest space. Interestingly,
some of the best examples of this come from the pre-computer era,
when graphics had to be drawn by hand (and therefore more thought
had to go into their design, rather than the author just calling up the
Bar Graph template on the desktop.) For example, that picture you can Ad feedback
see on the front cover of the book is actually a train timetable that
packs a whole list of arrivals and departures at many different stations
into a single little picture. A better example (and the "best statistical
graphic ever drawn") shows Napoleon's route through Europe. It shows Most Recent Customer Reviews
a) the map b) where he went c) how many people were in his army at Towards Legibility Standards
each point and d) the temperature on the way back that killed off his for the Display of Data
army. At a glance you can see the factors that led to his army losing. Tufte's volumes is an iconic volume for
AND it was drawn by hand in 1885 and is little more than a line graphic design that unites legibility with
drawing! efficiency and beauty in a cogent and
stimulating manner. Read more
He also gives examples of really bad design, (including "the worst
Published 1 month ago by Daniel Lobo
graphic ever to make it to print"), and shows what makes it so bad. His
examples prove that information-less, counter-intuitive graphics can still Dissapointed Scientist
look dazzlingly pretty, even though they're useless. In some examples, Because of the reviews, I was really excited
he shows how small changes can make the difference between an awful to read this book. I am a scientist with a
graphic and a really good one. My favourite example of this is how he graphic arts background that I am told I
drew the inter-quartile ranges on the x and y axes of a scatterplot, thus use to great effect. Read more
adding more information to the graphic without cluttering it up. Published 2 months ago by Science Professor

In summary, there's a lot more to good graphic design than being an Don't buy this book. Buy a
Adobe guru. Reading this book made me feel like a more discerning book on Visual Statistics.
viewer of graphics! I wasted my money on this obsolete book. I
truly don't know where these positive
reviews are coming from, when the content
Comment (1) | Permalink | Was this review helpful to you? of the book solely focuses different types of
(Report this) charts,... Read more
Published 3 months ago by D. Park
 Illustrated History of Good &
147 of 154 people found the following review helpful:
Bad Data Graphics, with Guidelines for
1st edition compared to 2nd, March 1, 2002 Great Graphics.
By S. M Marson (Lumberton, NC) - See all my reviews Statistician Edward R. Tufte makes a case
for data graphics as respectable tools for
representing and understanding data, not
Years ago, I purchased the first edition of VISUAL DISPLAY OF dumbed-down pictures for unsophisticated
QUANTITATIVE INFORMATION. The second edition provides high- audiences in... Read more
resolution color reproductions of the several graphics found in the first
Published 3 months ago by mirasreviews
edition. In addition, corrections were made. However, to most
readers/users, I doubt that the changes would be worthy of purchasing Tufte's first design book
the second edition if one already owns the first edition. The title might lead you to think that this is
a dry book, of interest only to stuffy
Edward R. Tufte is a noteworthy scholar and the presentation of the academics in statistics-heavy fields. It isn't.
material presented in this book is awe-inspiring. Tufte has also compiled Read more
two other books that can be best described as quite remarkable. These Published 5 months ago by Trevor Burnham
additional books are entitled, ENVISIONING INFORMATION and VISUAL
EXPLANATIONS. All three of these volumes are not merely supplemental Excellent book!
textbooks; they are works of art. Highly recommended! This book has been
extremely important for understanding the
My intent was to use VISUAL DISPLAY OF QUANTITATIVE INFORMATION way quantitative information should be
as part of teaching my statistics course. Students, but mostly faculty, displayed.
are overly impressed with inferential statistics. Graphics play an One of the best books I have ever read.
important role in the understanding and interpretation of statistical Published 5 months ago by Ana R. Hernandez
findings. Tufte makes this point unambiguously clear in his books.
Required reading, yet fun!
Two features of VISUAL DISPLAY OF QUANTITATIVE INFORMATION are This gorgeous, entertaining, and
particularly salient in teaching a statistics course. First, the concept of fantastically helpful book needs to be
normal distribution is wonderfully illustrated on page 140. Here the required reading for all students and
reader is reinforced with the notion that in the normal course of human practitioners of science and engineering.
events, cultural/social/behavioral/ psychological phenomena usually fall Read it! Read more
into the shape of a normal distribution. The constant appearance of this Published 6 months ago by Sophie Lagace
distribution borders on miraculous. Just as importantly, it is the basis for Read This Tufte First
accurate predications in all areas of science. Tufte's illustration (page I have attended one of the author's talks
140) speaks to this issue much more clearly than a one-hour lecture on (easy to find on the web), and have all four
the importance of the normal distribution. Which goes to show -- once books. One criticism of Tufte is that it is not
again -- "a picture is worth a thousand words." Sadly, the illustration on obvious how to go about doing many of
page 140 is small and in black and white. I wish the second edition the... Read more
included a larger reproduction of this photo. A color presentation would Published 7 months ago by Keith McCormick
have been helpful.
Interesting and enjoyable
Second, Tufte continues his unrelenting pattern to reinforce the Stimulates the visualisation of information
importance and impact of illustrations in understanding complex with illustrations on every page and easy to
concepts. In particular, page 176 demonstrates the impact of Napoleon's read text. Provides many helpful ideas, as
march to Moscow. The illustration is both profound and eerie. The reader well as some `do and don't's. Read more
is left with a feeling of death and pain for the foot soldiers... Published 8 months ago by User313

Great !
Comment (1) | Permalink | Was this review helpful to you? This book is great. It has a lot of useful
(Report this) insights. However I was expecting
something more practical... Read more
Published 9 months ago by Thomas Reneau
51 of 53 people found the following review helpful:
The essential guide to avoiding graphical lies, Search Customer Reviews
March 19, 1997
By A Customer ✔ Only search this product's reviews
This review is from: The Visual Display of Quantitative Information (Hardcover)
This book, and the two companion volumes ("Envisioning Information" › See all 105 customer reviews...
and "Visual Explanations") are must-haves for anyone who is in the
business or producing or interpreting statistical information.

Tufte starts with a simple proposition: graphs and graphics that

represent statistical data should tell the truth. It's amazing how often
designers of such graphics miss this basic point. Tufte clearly and
entertainingly elucidates the most common "graphical lies" and how to
avoid them.

Read this book and you'll never look at a newspaper or presentation

graphics the same way again -- you'll be left wondering if the author
*intended* to lie about what the data were saying, or if he/she just
didn't know any better.
 Another reviewer claimed that this book talks about how to make
graphics accurate, not beautiful. He's right in some sense, but who
cares? There are a million books on how to make "pretty" graphical
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Editorial Reviews
Product Description
"The computer world is like an intellectual Wild West, in which you can shoot anyone you wish with your ideas, if you're willing to
risk the consequences. "
--from Hackers & Painters: Big Ideas from the Computer Age, by Paul Graham

We are living in the computer age, in a world increasingly designed and engineered by computer programmers and software
designers, by people who call themselves hackers. Who are these people, what motivates them, and why should you care?

Consider these facts: Everything around us is turning into computers. Your typewriter is gone, replaced by a computer. Your phone
has turned into a computer. So has your camera. Soon your TV will. Your car was not only designed on computers, but has more
processing power in it than a room-sized mainframe did in 1970. Letters, encyclopedias, newspapers, and even your local store are
being replaced by the Internet.

Hackers & Painters: Big Ideas from the Computer Age, by Paul Graham, explains this world and the motivations of the people who
occupy it. In clear, thoughtful prose that draws on illuminating historical examples, Graham takes readers on an unflinching
exploration into what he calls "an intellectual Wild West."

The ideas discussed in this book will have a powerful and lasting impact on how we think, how we work, how we develop technology,
and how we live. Topics include the importance of beauty in software design, how to make wealth, heresy and free speech, the
programming language renaissance, the open-source movement, digital design, Internet startups, and more.

And here's a taste of what you'll find in Hackers & Painters:

"In most fields the great work is done early on. The paintings made between 1430 and 1500 are still unsurpassed. Shakespeare
appeared just as professional theater was being born, and pushed the medium so far that every playwright since has had to live in
his shadow. Albrecht Durer did the same thing with engraving, and Jane Austen with the novel.

Over and over we see the same pattern. A new medium appears, and people are so excited about it that they explore most of its
possibilities in the first couple generations. Hacking seems to be in this phase now.

Painting was not, in Leonardo's time, as cool as his work helped make it. How cool hacking turns out to be will depend on what we
can do with this new medium."

Andy Hertzfeld, co-creator of the Macintosh computer, says about Hackers & Painters: "Paul Graham is a hacker, painter and a
terrific writer. His lucid, humorous prose is brimming with contrarian insight and practical wisdom on writing great code at the
intersection of art, science and commerce."

Paul Graham, designer of the new Arc language, was the creator of Yahoo Store, the first web-based application. In addition to his
PhD in Computer Science from Harvard, Graham also studied painting at the Rhode Island School of Design and the Accademia di
Belle Arti in Florence.

About the Author

Paul Graham, designer of the new Arc language, was the creator of Yahoo Store, the first web-based application. His technique for
spam filtering inspired most current filters. He has a PhD in Computer Science from Harvard and studied painting at RISD and the
Accademia in Florence.

Product Details
Hardcover: 271 pages
Publisher: O'Reilly Media, Inc. (May 2004)
Language: English
ISBN-10: 0596006624
ISBN-13: 978-0596006624
Product Dimensions: 8.6 x 5.8 x 1.1 inches
Shipping Weight: 1.1 pounds (View shipping rates and policies)
Average Customer Review: (56 customer reviews)
Amazon.com Sales Rank: #37,560 in Books (See Bestsellers in Books)
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Customer Reviews
56 Reviews
5 star: (28) Average Customer Review Share your thoughts with other customers:
4 star: (13) (56 customer reviews)
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Most Helpful Customer Reviews

87 of 91 people found the following review helpful:
Excellent essay writing on topical subjects,
August 8, 2004
By A Williams "honestpuck" (Neutral Bay, NSW Australia) - See all
my reviews

Paul Graham has delivered final proof that he is a marvelous essayist

with his volume of fairly diverse writings, Hackers & Painters. I first
came across his writing with his article, "A Plan For Spam," on using
Bayesian filtering to block spam and found it a well written and
informative technical article. I next came across him some time later
when he wrote an essay on his web site entitled "Hackers & Painters,"
and once again it was well written, informative and (more importantly
for an essayist) thought provoking. I was excited to hear he had
published a volume of writing and pleased with the copy I received.
Ad feedback
Literature has a long history of the essayist; since those famous theses
on the church door at Wittenberg a well written and thought provoking
essay on a topic has provided power and focus for important discussions.
Graham has either learnt or discovered the important points in writing a Most Recent Customer Reviews
good essay; brevity, quality writing and thought. Cannot finish it
This book looks like a "bar rant" like J.
In this volume Graham covers a range of topics, though all are, Fuentes said. The book has a very bad
understandably, centered on computers. Why nerds are unpopular at format and flow. A couple of good ideas
school, and what this demonstrates about our eduction system; why here and there (that is why I give it an
program in Lisp; the importance of "startups", programming languages extra star); but... Read more
and web development are all touched on. At the same time he covers Published 29 days ago by Ankur Patwa
topics less techno-centric such as heretical thinking and speech. wealth
creation and unequal income distribution. Opinionated
This is a mixed bag, I grew up in a different
I found myself disagreeing with him often while reading the book, culture, so I found the chapter "Why Nerds
though every time I did I found his argument compelling. I agree with Are unpopular" very eye-opening, however,
Andy Hertzfeld, quoted on the back cover of the book, "He may even the following chapter "What You Can't Say"
make you want to start programming in Lisp." Graham is politically more is... Read more
conservative and right wing than me, he is also a fervent supporter of Published 4 months ago by Yong Zhi
Lisp, while I'm a C and Perl advocate. It is telling that at no time did I A fun read
find myself railing at his views, rather I was reading his arguments and
giving them meme space. A good sign of a writer that does not indulge Paul Graham's "Hackers and Painters" is a
in unnecessary or extreme polemic. collection of separate articles from Paul. The
articles are well written and funny, though I
Graham also tends to concentrate on a single point in each essay, frequently did not agree with the...
allowing for both good coverage and a brief essay. Where he covers a Read more
larger context, such as high school education in "Why Nerds Are Published 7 months ago by Bas Vodde
Unpopular" that opens the book, he seems to focus on just one or two
good points of discussion. Informative and Enjoyable
Hackers and Painters is a good read. I
The title essay is the second in the collection and provides an interesting enjoyed learning about the author's
look at hacking and some lessons we can learn by analogy to the work perspective on programming trends. I really
and life of Rennaissance painters, particularly in how it is done and how enjoyed learning about his enthusiasm for
it can be funded. The third, "What You Can't Say" is social commentary Lisp. Read more
on heretical thinking. Four, "Good Bad Attitude" is on the benefits of Published 16 months ago by Averill Cate Jr
breaking rules, both in life and hacking. Five, "The Other Road Ahead", is Unconventional book,
an excellent look at web based software and why it offers benefits to unconventional author, surprising points
both user and developer with Graham examining some lessons he learnt made
while building ViaWeb. Six, "How To Make Wealth", is a look at becoming The book particularly deals with the nexus
wealthy and how a 'startup' might be the best way to do it. The seventh, between programming, creativity, social
"Mind The Gap", is an argument that we should not worry so much commentary, wealth-generation, business-
about 'unequal wealth distribution' and why it might actually be a good personal-entrepreneurial psychology (his
thing. From this list, and a look at the table of contents (available as a specialty! Read more
PDF on the O'Reilly page for the book), you can see that Graham covers
Published 22 months ago by Nikola Tesla's Pet Hamster
a wide spectrum while never straying from topics he knows.
Interesting
If I was forced to identify a weakness in this book it may well be that Paul Graham is very clever (and rich - is
Graham does not evince doubt or uncertainty in his arguments, on a few that relevant?), however light also bends
occasions he may admit to a narrow view or knowledge but doubt or around his ego. Whether the sum of these
uncertainty don't seem to enter his field of vision while he writes. This qualities is positive is not absolutely clear to
coupled with a single viewpoint makes the book less than all- me... Read more
encompassing in discussion. However, I must admit that it is almost Published 23 months ago by S. Matthews
impossible to be anything more with a single author and Graham may
Interesting but don't believe
well be more honest than others who pick and choose the alternatives
too much
they present.
I was entertained and greatly appreciated
the view of the author but the many times I
Most of the essays are available at Graham's website, but frankly I am a
completely disagreed (due to very
fan of dead trees and appreciated that this book could be read on the
substantiated reasons) made me skeptical
bus or in bed. If you would prefer something you can read on the bus
of several ideas... Read more
then a PDF of the second chapter, "Hackers & Painters" is available from
Published on July 28, 2007 by C. Wingrave
the O'Reilly page.
Nice, but dont expect to learn
I would recommend this book to anyone who wants to think about a much
number of topics important to the culture of our tiny corner of the This is a nice little, light book that you can
world, computers and the net, while not ignoring the rest. read after a hard day's coding and yet keep
smiling. The language and style of writing is
Comment | Permalink | Was this review helpful to you? really good and makes reading quiet...
(Report this)
Read more
Published on July 19, 2007 by Ganesh Ramanathan

47 of 51 people found the following review helpful: Excellent book

As an insider in the development world I
An astonishingly good book of essays, July 4, 2004
never seen such a blunt and clear view of
By David Bridgeland (Sterling, VA USA) - See all my reviews this world. I of course do not agree on all
perspectives of the author's claims but I
This is an astonishingly good collection of essays. In lesser hands, any of think that... Read more
the 15 essays here could have been a book by itself --- each packs more Published on June 26, 2007 by Zvi Schutz
content than you can find in a typical one idea business book, or a Dormant power packed ideas
typical one technology book for geeks. Yet his book is not dense or I live in the heart of silicon valley and
difficult: Graham's graceful style is a pleasure to read. moved here for creative reasons.
But what is it? Is it a business book, or a technical book? A bit of both
In 2003, I got this book and let it sit on my
actually, with a pinch of social criticism thrown in. There are essays on
shelf until I heard about a Y combinator...
business --- particularly startups --- and essays on programming
Read more
languages and how to combat spam, and one delightful one on the
difficulty being a nerd in American public schools. Published on April 4, 2007 by Larry Chiang

My favorite essay of the 15 --- and picking a favorite is itself a challenge Search Customer Reviews
--- is called "What you can't say". It is about heresy, not historical
Middle Ages burned-at-the-stake heresy, but heresy today in 2004. And
if you believe nothing is heretical today, that no idea today is so beyond ✔ Only search this product's reviews

the pale that it would provoke a purely emotional reaction to its very
utterance, then read some of the other reviews. Graham's idea is not › See all 56 customer reviews...
that all heresies are worth challenging publicly, or even that all heresies
are wrong, but merely that there is value is being aware of what is
heretical, so one can notice where the blind spots are.

Astonishingly good.

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(Report this)

19 of 19 people found the following review helpful:

Various Sizes of Idea, November 1, 2005
By David Chaplin-loebell (Philadelphia, PA USA) - See all my reviews
 In "Hackers and Painters," Paul Graham presents 15 essays on topics
that are variously related to computer programming. Graham has two
major accomplishments to his name in the hacking world: He was one of
the architects of Viaweb, an internet startup which ultimately became
Yahoo Shops, and one of the first succesful hosted web applications. He
was also one of the first to talk about applying Bayesian filtering to the
spam problem; Bayesian filtering has arguably been the most successful
technique for reducing spam in individual mailboxes.

I'd advise prospective readers of this book to skip chapters 1, 3, 6 and

7, at least until after you've read the rest of the book. These four essays
are the weakest in the book, and having them clustered near the
beginning almost made me put the book down and stop reading.

I'm glad I didn't stop, though. The chapters on software development

are excellent; Graham provides some of the best insight I've seen into
how programmers think. Programmers will find useful ideas that can be
applied to their work; non-programmers may get an insight into how
programmers think.

The last seven chapters are particularly well done; in these, Graham
discusses the nitty-gritty details of program design, choice of
programming languages, and design of programming languages. Graham
is occasionally arrogant, but his arrogance here comes from experience
and success; although not everyone may agree with his arguments
about the superiority of LISP over every other programming language,
one can at least recognize the thoroughness of the discussion and draw
one's own conclusions.

The four essays I mentioned above, by contrast, are much more poorly
edited. In particular, I found Graham's economic arguments to be
particularly clumsy in their lack of acknowledgement of any other points
of view. It's not that Graham's wrong-- I agree with many of his ideas--
but particularly in these somewhat political chapters, he wields his words
more like a blunt instrument than like a musical one.

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For would-be entrepreneurs, innovation managers or just anyone fascinated by the special chemistry and drive that
created some of the best technology companies in the world, this book offers both wisdom and engaging insights—
straight from the source.

— Chris Anderson, editor-in-chief of Wired Magazine, and author of The Long Tail

"All the best things that I did at Apple came from (a) not having money and (b) not having done it before, ever." —
Steve Wozniak, Apple

Founders at Work: Stories of Startups' Early Days is a collection of interviews with founders of famous technology companies about
what happened in the very earliest days. These people are celebrities now. What was it like when they were just a couple friends
with an idea? Founders like Steve Wozniak (Apple), Caterina Fake (Flickr), Mitch Kapor (Lotus), Max Levchin (PayPal), and Sabeer
Bhatia (Hotmail) tell you in their own words about their surprising and often very funny discoveries as they learned how to build a
company.

Where did they get the ideas that made them rich? How did they convince investors to back them? What went wrong, and how did
they recover?

Nearly all technical people have thought of one day starting or working for a startup. For them, this book is the closest you can
come to being a fly on the wall at a successful startup, to learn how it's done.

But ultimately these interviews are required reading for anyone who wants to understand business, because startups are business
reduced to its essence. The reason their founders become rich is that startups do what businessesdo—create value—more intensively
than almost any other part of the economy. How? What are the secrets that make successful startups so insanely productive? Read
this book, and let the founders themselves tell you.

About the Author

Jessica Livingston is a founding partner at Y Combinator, a seed-stage venture firm based in Cambridge, MA, and Mountain View,
CA. She was previously VP of marketing at investment bank Adams Harkness. In addition to her work with startups at Y Combinator,
she organizes Startup School. She has a BA in English from Bucknell.

Product Details
Hardcover: 500 pages
Publisher: Apress (January 22, 2007)
Language: English
ISBN-10: 1590597141
ISBN-13: 978-1590597149
Product Dimensions: 9.1 x 6.1 x 1.3 inches
Shipping Weight: 1.7 pounds (View shipping rates and policies)
Average Customer Review: (81 customer reviews)
Amazon.com Sales Rank: #75,178 in Books (See Bestsellers in Books)
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Customer Reviews
81 Reviews
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Most Helpful Customer Reviews

48 of 49 people found the following review helpful:
Real advice from the frontline trenches of software
start-ups, June 3, 2007
By K. Sampanthar "Inventor of ThinkCube" (Boston, MA) - See all
my reviews

The Summary
Jessica Livingston has written an amazing book. If you want to read the
stories behind some of the most well known software companies in the
last 30 years, you will find it in this book. But Livingston hasn't just
covered the usual suspects (Google, Microsoft), she has included a
diverse collection from Steve Wozniak (Apple) to David Heinemeier
Hansson (37 Signals), Dan Bricklin (Visicalc) to Blake Ross (Firefox). It
covers a lot of ground from the early 80's software boom to the Web 2.0
starts ups. But there is more than just stories about starting companies,
there is real advice from the frontline trenches of software start-ups. Ad feedback
Keep your post-it notes and highlighter handy, if you are like me you will
be annotating and highlighting a lot!

The Audience Most Recent Customer Reviews

If you have ever considered a start-up you should definitely read this Good, but a little more
book. It's like picking the brains of some very experienced diversity would be nice
entrepreneurs. Anybody that has already tried their hand at start-ups This book was good, however, it was a little
will recognize the value of this book. Most will probably feel like I did, repetitive at points and lacked examples of
and wish that they had had this book before they started their first start ups in industries other than software.
company. It could have saved me many painful lessons (both financially Read more
and personally). Reading these interviews is like having 32 mentors. Published 11 days ago by N. Little

The Details At the Heart of the

Like many people I am always a little skeptical of `success stories'. Just Entrepreneurial Audience
because someone did x, y and z, doesn't mean that I could follow these I started reading Founders at Work before I
very steps and be as successful. Just because Aunt Ethel, who lived to flew out to California for my Y-Combinator
be a 100, attributes her long life to drinking a glass of whisky every day, interview (Jessica Livingston is a part of this
doesn't mean I can drink a glass of whisky every day and live to be a group along with Paul Graham). Read more
100. Instead of a collection of fluffy `creation myth' stories written about Published 18 days ago by Kevin Vogelsang
software companies, Livingston has put a lot of thought into how she How interviews uncover new
approached these interviews and has collected some real gems of truths
insights from these entrepreneurs. She has uncovered a gold mine of The thing I like most about interviews in
valuable advice and information about starting a company. As you read general are that some new truths are often
these stories you start to see some patterns emerging. Some of these uncovered and the chance to dispel
patterns I recognize from my own experiences, but others were new to common myths is revealed. Read more
me. Sometimes you see contradictory advice from different founders; Published 3 months ago by Brian Schwartz
one tells you, you need to focus on the technology and somebody else
explains that it's more important to focus on business/market Very informative but also
opportunity. There are definitely multiple paths to starting a company, starting to show it's age
but some advice is repeated story after story, and these seem to be There are several good interviews here but
universal truths. some of them are getting quite old in
internet years. For example, Ev Williams is
The Ideas interviewed about Bloggr even though now
Here are some of the universal truths that I culled from the interviews: most people... Read more
- Iterate through ideas, the first idea isn't always the best Published 3 months ago by Evan Jacobs
- Business plans are important - but be prepared to change it many Awesome book
times This book provided great insights into the
- You need to be naïve - "unencumbered by reality" minds of many famous (and not so
- Persistence makes all the difference famous), successful entrepreneurs.
- Passion - you need to be really excited about what you are doing and Read more
think it's really important
Published 4 months ago by Imran A. Karim
- Understand and listen to your end users
A great and inspiring read
The book is full of ideas and advice like this. This is a very readable book that will give
anyone interested in founding or working for
The Take-Aways a startup a lot of food for thought.
Overall, I can't say enough good things about this book. Obviously it's Read more
aimed at entrepreneurs, but I know there are going to be many people Published 4 months ago by Gareth Bowles
just interested in the stories behind their favorite companies or people.
Personal observations of
Personally I loved the interviews with Ray Ozzie, Joel Spolsky, Joe Kraus
founders - learn your own lessons from
and Steve Wozniak. I was also fascinated by the stories behind
them
companies like: 37 Signals, Six Apart, del.icio.us and Craigslist. I was
Founders and co-founders talk about their
even surprised by the story behind `Hot or Not', it's not as shallow as
ventures, the early days, learnings,
you might think.
tribulations, and life at startups. There are
32 interviews here. Read more
Entrepreneurs -- wanna-be, new and experienced -- you NEED to read,
Published 5 months ago by Abhinav Agarwal
think, digest and act on the advice in this book and your next/current
entrepreneurial venture will go much smoother. Unique in its class
Normally, I'd be bored by a collection of
Kes Sampanthar interviews. But this one is exceptional, filled
Inventor of ThinkCube with exciting tales from the boom era of
Silicon Valley, told by some exceptional...
Comment | Permalink | Was this review helpful to you? Read more
(Report this)
Published 5 months ago by Trevor Burnham

Not bad -- but read

30 of 32 people found the following review helpful: Programmers at Work first
After reading the classic Programmers at
Amazing stories & truly inspiring, February 7, 2007
Work (see below) back in the 1980s, then
By Bryan Kennedy "likebetter.com" (San Francisco, CA) - See all re-reading it again last year, I was a little
my reviews disappointed with Founders at Work...
Read more
I'm the founder of an early-stage startup, and I can wholeheartedly say Published 6 months ago by Craig Cecil
that this book has enlightened me. The usual problem with books of this Founders at Work: Useful,
vein is that the author only has one core idea and then fluffs it up to get inspiring
300 pages. Founders@Work however is like reading a pile of books This is quite a treasure trove of inspiration
written by successful founders, each with their own insights and tidbits and advice. It kept me going during some
of useful advice. of the hard times while I was working on
our startup. Read more
You end up reading these real-life, down-to-earth stories about the early
Published 7 months ago by CA Hofmeyr
days at Apple and Yahoo and PayPal, and you're seeing you and your
co-founder right there. Hey! I code in a towel sometimes too! They
aren't telling you the glorified stories their PR guys tell them to say. This Search Customer Reviews
is the real deal. It's awfully inspiring.
✔ Only search this product's reviews
I would HIGHLY recommend this book to anyone who is thinking of
starting, or is currently running a startup.
› See all 81 customer reviews...
Comment | Permalink | Was this review helpful to you?
(Report this)

21 of 22 people found the following review helpful:

A must read for anyone involved with technology,
February 19, 2007
By Thomas Beck "www.beckshome.com" (Mechanicsburg, PA) -
See all my reviews

This is an absolute must read if you're job, your passion, or both (if
you're lucky) has anything to do with creating technical innovation.
"Founders at Work" is a wonderfully meander through the stories of
successful company founders - across several decades. Far from focusing
on just those who made it big during the first dot-com boom or those
 who are profiting from Web 2.0, Jessica also includes some of the true
pioneers in the field. She recognizes that, not only do these industry
veterans have valuable stories to convey but, since many of them are
helping to steer companies and venture capital funds to this day, their
advice is quite topical and current.

From the great introduction right through the final interview, this book is
packed with great anecdotes, advice, and information and inspiration.
Makes you wonder as to what the story is behind the story - how did
Jessica get unfettered access to such a broad array of the founding
fathers?

I've included some illustrative quotes from the book below. Give them a
read and then go pick up this book. The printed copy is a bargain and
the e-book version is a steal. It may turn out to be one of the best
investments you ever make.

* "You guys are nuts. Throw out your business plan. Your customers--or
potential customers - are telling you what your business should be. The
business plan was only used to get you the money. Why don't you
rewrite a business plan that is focused just on providing what your
customers want?" - Q.T. Wiles advice to Charles Geschke (Cofounder,
Adobe) on the real purpose of a business plan
* "There were some warning signs. Consider McKinsey, which holds itself
out as one of the world's leading repositories of knowledge on how to
manage a business. They say they'll never grow their company by more
than 25 percent per year, because otherwise it's just too hard to
transmit the corporate culture. So if you're growing faster than 25
percent a year, you have to ask yourself, `What do I know about
management that McKinsey doesn't know?'" - Philip Greenspun
(Cofounder, ArsDigita) on scaling corporate culture
* That [not improving core product quality] was probably the biggest
mistake we made. And that's the advice I give everybody. All those little
coupon schemes, this is what General Motors does. They figure out new
rebate schemes because they forgot all about how to design cars people
want to buy. But when you still remember how to make software people
want, great, just improve it. - Joel Spolsky (Cofounder, Fog Creek
Software)
* "I think some people slept; I know I didn't sleep at all." - Max Levchin
(Cofounder, PayPal)
* "There were times when we were really broke before we had our angel
investment, when only one guy who had children was getting paid." -
Caterina Fake (Cofounder, Flickr)

With nearly 21 of the 32 interviewees having the term "Cofounder" in

their titles, Joel Spolsky's advice seems perhaps to reflect best on what
was critical to the success of these companies. "But because they never
really take the leap and quit their job, they can give up their dream at
any time. And 99.9 percent of them will actually give up their dream. If
they take the leap, quit their job, go do it full-time--no matter how
much it sucks--and convince one other person to do the same thing with
them, they're going to have a much, much higher chance of actually
getting somewhere."

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July 26, 2009

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If you checked out today’s New York Times Book Review section, you’ll see
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that FREE made the list in its first week of eligibility. It’s #12, tied for #11
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Posted at 11:29 PM in FREE | Permalink | Comments (26) | TrackBack (1)
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Shannon said Del Rey has had
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For those of you outside the US, local free versions will be determined by the
publisher in each region. Please stay tuned.

Sat, 01 Aug 2009 01:09:38

Criminalizing Free (French
Posted at 07:30 PM in FREE | Permalink | Comments (19) | TrackBack (0)
edition)
A few weeks ago, I speculated in a MY OTHER BLOG
CNN editorial that antitrust
authorities could make it illegal for
July 15, 2009
dominant companies (read: Google)
FREE audiobook on iTunes (free, natch) on the web to use Free, because it’s
effectively offering a product below
cost and subsidized by monopoly rent
from another product. If that felt a bit ARCHIVES
far-fetched, consider this: Google is
July 2009
being sued in France for making
Google Maps free. A French June 2009
company wants to charge for a May 2009
similar product. March 2009
February 2009

Mon, 27 Jul 2009 20:37:31 January 2009

Ex-NYT exec: Newpapers' December 2008
"mass delusion" about paid November 2008
content
October 2008
Nytimes.com general manager Vivian
September 2008
Schiller, now at NPR, tells
Newsweek that “news is a More...
commodity”: “I am a staunch
believer that people will not in large
numbers pay for news content online.
It’s almost like there’s mass delusion CATEGORIES
going on in the industry-They’re
The free audiobook of FREE is now on iTunes, with some very nice front page
saying we really really need it, that Appearances
promotion. Podcast serialized version coming up soon.
we didn’t put up a pay wall 15 years Blockbuster RIP
For those outside the US, you can stream or download the MP3s at wired.com. ago, so let’s do it now. In other Economics
The Kindle version should be out later this week, along with some other ebook words, they think that wanting it so
FAQ
readers. badly will automatically actually
FREE
change the behavior of the audience.
The world doesn’t work that way. Freebits
Frankly, if all the news organizations Friday Fanboy
Posted at 12:00 AM | Permalink | Comments (33) | TrackBack (0)
locked pinkies, and said we’re all
Long Tail
going to put up a big fat pay wall,
Media Meltdown
you know what, more traffic for us.
News is a commodity; I’m sorry to Off-topic
July 08, 2009
say.” (from Gawker) On-topic
The priceless rollout continues: Google Books Short Tail

Wed, 15 Jul 2009 03:26:19

Felix Salmon on why opinion
should be free
Reuters columnist Felix Salmon on
why his company shouldn’t buy
Breakingviews, with its paywall-only
model: “The genius of Reuters setting
up a commentary team is that we can
offer our content at a marginal cost
of zero. Once the commentary is
available on the wire, for the benefit
of subscribers to the terminals, those
subscribers want it made available as
widely as possible for free —
because that way it becomes
maximally influential. (That’s my
argument, anyway, we’ll see how
FREE is now available for free on Google Books, too. Like Scribd, this one is a
much traction it gets.) In that sense,
web-based screen reading experience, but it has the added advantage of a live
commentary is the opposite of news.”
Table of Contents (see above), so you can easily get from chapter to chapter or
pull up sidebars without having to page through the book.

Like the other free text versions, the Google Books one will be time-limted: one Wed, 15 Jul 2009 02:42:05
month. (The audiobook versions are the only ones that will remain free forever). 5 business models for social
Next up, in the coming week: free FREE on Kindle and other ebook readers,
media startups
including the iPhone. A good roundup of revenue models
from Mashable, with examples and
[UPDATE: many of these versions, including Google, are US-only. This is just
interviews with entrepreneurs in each.
a function of the way global book rights work, and the fragmentation thereof. I
The five are: Freemium, Affiliate,
wish it were different and we’re working to release free versions in other
Subscription, Advertising and Virtual
languages when those editions of the book comes out, but in the meantime my
Goods.
apologies to readers outside the US if you’re not getting full text.]

Mon, 13 Jul 2009 00:57:00

Posted at 06:10 AM in FREE | Permalink | Comments (30) | TrackBack (0) Free news aggregators

Want more Free news than I’m

collecting here? You’re in luck—two
July 06, 2009 services have started providing it.

Eqentia, a new semantic news

FREE for free: first ebook and audiobook aggregator, has a very good page on
versions released “Freeconomics”. You have to sign
FREE (full book) by Chris Anderson the first time to read the stories, but
after that it’s quick and, yes, free.

Meanwhile, Seth Godin has set up a

Squidoo page on “The Free Debate”,
which has collected a lot of great
 articles and opinion.

Mon, 13 Jul 2009 00:34:18

Interesting responses to my
CNN op-ed on Google, Free
and Antitrust
Last week I wrote a piece for CNN
wondering if the Obama
adminstration’s tough new line on
antitrust could end up limiting
Google’s use of Free to gain share in
new markets (because it’s subsidizing
that entry with monopoly profits from
search ads). Dana Wagner, Google’s
chief antitrust council, replied on the
Google policy blog. Sample: “It is
true that if a company has a dominant
product, it may run afoul of antitrust
laws if it “ties” that product to
We’re going to be rolling out the free digital forms of FREE over the next two
another — for instance, by requiring
weeks. First up: the Scribd form, right here on the blog (and anywhere else you
customers who buy that product to
want—it’s embeddable). This is the whole book!
buy another product as well. When a
(click “full screen” for a better reading experience). company provides products for free
on a stand-alone basis, however, it’s
Also released today: the free unabridged audiobook. You can either download
not requiring anyone to buy anything.
the whole things as zipped MP3 files, or play them on the Wired.com microsite.
It may take business away from other
companies trying to charge users for
similar products, but that’s hardly an
antitrust issue.” eWeek’s Google
Watch has a good roundup of the
arguments on both sides.

Sat, 11 Jul 2009 22:11:11

NYT reviews FREE again,
this time with feeling
Virginia Postrel, who is smart and
both techno- and econo-literate, has a
You can also get the audiobook from Audible.com in two forms long review of FREE in the the
Sunday NY Times Book Review
1) Unabridged (six hours; free)
section. She describes it as
2) Abridged (three hours; $7.49) “stimulating but not uncomfortably
Why is the whole book free in audio form, but half the book is $7.49? Because, challenging,” concluding: ““No man
as the Audible.com listing explains,“Get the point in half the time! In this but a blockhead ever wrote except for
abridged edition, the author handpicked the most important and engaging money,” Samuel Johnson said, and
chapters and points, cutting three hours from the length without losing key that attitude has had a good two-
concepts. Time is money!” century run. But the Web is full of
blockheads, whether they’re rate-
Over the next week or so, we’ll be releasing other versions, including iTunes busting amateurs or professionals
podcast and download, Kindle, Google Books and more. All free, for varying trawling for speaking gigs. All this
lengths of time (from a week to forever). I’ll be tracking the stats for everything free stuff raises the real standard of
and sharing the results of these experiments here over the next month. living, by making it ever easier for
people to find entertainment,
information and communication that
Posted at 07:44 PM in FREE | Permalink | Comments (68) | TrackBack (0) pleases them.vBusiness strategy,
however, seeks not only to create but
to capture value. Free is about a
 phenomenon in which almost all the
July 05, 2009 new value goes to consumers, not
producers. It is false to assume that
Making a physical book free, too no price means no value. But it is
equally false to argue that value
implies profitability. “

Wed, 08 Jul 2009 13:38:56

Good WSJ review of FREE
Long and thoughtful review in the
WSJ by Jeremy Philips, vice
president of News Corp: Sample: “To
be sure, businesses with pricing
power don’t always exercise it.
Millions of people would be willing
to pay for their favorite social
networks, but the potent network
effect that derives from scale has
FREE will be released in the US this week (July 7th in hardcover; July 9th in made free an irresistible strategy. In
ebooks) and I’ll be updating this blog with the various ways you can get it for the future, the “freemium” model that
free as they come online. But in the meantime, here’s how we made the Skype and others use today will be
physical book free in the UK. increasingly important. It may allow
businesses to preserve most of free’s
Above, you can see the UK hardcover on the right and a special sponsored
scale benefits and advertising dollars
paperback on the left.
while also building additional
Here’s the description of the paperback give-away from Random House, the revenue streams.”
UK publisher, which will kick off at the end of the week.

Adobe and Brand Republic

Mon, 06 Jul 2009 21:52:00
We have concluded a sponsorship partnership with Adobe - who, You know what's really
like Spotify [which is distributing the free audiobook, UK only], "reckless and lazy"?
adopt a freemium model with both free and paid for goods and A Janet Maslin NYT review of FREE
services. In association with Adobe we will be offering a limited and CHEAP (by Ellen Ruppel Shell)
number of abridged sponsored versions of FREE in paperback and makes much of the fact that we
e-Book through BrandRepublic.com. describe Dan Ariely experiments
The free paperbacks and e-Book will be promoted to an audience differently, proving us to be
of over 689,000 unique users through Brand Republic’s website, untrustworthy. Or, perhaps, they
the leading online business portal for the advertising, media, were different experiments. A simple
marketing and PR industries. UK users will be directed to a page Google search would have revealed
where they will be presented with a choice to download their free that it’s the latter.
abridged ebook, register and receive a free abridged paperback, or
buy the full ‘premium’ hardback version (at a discount).
Wed, 01 Jul 2009 20:58:48
Brand Republic’s considerable user audience is a great fit for Moby's best selling track is
FREE’s target market, attracting consumers across the media his free one
industry. Through Brand Republic the promotion will be
Moby writes to Bob Lefsetz: “Here’s
supported by over £30,000 of online advertising.
something funny: the best selling
This special sponsored paperback edition is the entire book minus, if memory itunes track is ‘shot in the back of the
serves, the appendixes. head’. Why is that funny? Because
its the track we’ve been giving away
for free for the last 2 months and that
Posted at 06:11 PM | Permalink | Comments (19) | TrackBack (0) we’re still givng away for free.”
(thanks to Mitch Joel for the link)

Mon, 29 Jun 2009 09:42:00

June 29, 2009
Malcolm Gladwell review of
Dear Malcolm: Why so threatened? Free in The New Yorker
A long review of Free by Malcolm
It’s now clear that the bane of my next year
Gladwell. Like many journalists, he
will be questions about the future of the
finds Free unsettling: “Anderson is
newspaper industry from journalists. I don’t
very good at paragraphs like this—
blame them—newspapers are indeed one of the
with its reassuring arc from
industries most affected by Free (although
“bloodbath” to “salvation.” His
that’s just one manifestation of their larger
advice is pithy, his tone
problem: having lost their monopoly on
uncompromising, and his subject
consumer attention). And neither I nor anybody
matter perfectly timed for a moment
else has any good answers, other than the
when old-line content providers are
newspaper business is probably going to shrink
desperate for answers. That said, it is
but not go away, and that the business model
not entirely clear what distinction is
will have to change.
being marked between “paying
But since journalist Malcolm Gladwell has somewhat parochially decided to people to get other people to write”
make the Future of Paid Journalism the focus of his review of Free (which is, and paying people to write.”“
ironically, free on the New Yorker’s website; perhaps this is something
Gladwell should take up with David Remnick?), I’ll try to respond in a bit more
detail. Sun, 28 Jun 2009 19:25:45
Boston Globe's excellent
Gladwell (who, by the way, I both like and admire, so let’s call this an
Ideas section reviews Free
intellectual debate between corporate cousins) writes:
Drake Bennett writes a long,
“[Anderson argues that] newspapers need to accept that content is never again
thoughtful and, well, mixed review of
going to be worth what they want it to be worth, and reinvent their business.
Free. Sample: “Duncan Watts, a
“Out of the bloodbath will come a new role for professional journalists,”
network theorist and a principal
[Anderson] predicts, and he goes on:
research scientist at Yahoo! Research
“There may be more of them, not fewer, as the ability to [says] “He’s taking perfectly
participate in journalism extends beyond the credentialed halls of reasonable and in themselves
traditional media. But they may be paid far less, and for many it interesting and valid observations and
won’t be a full time job at all. Journalism as a profession will expanding them into a grand theory,
share the stage with journalism as an avocation. Meanwhile, others but it turns out that the grand theory
may use their skills to teach and organize amateurs to do a better can’t sustain itself,” Watts says. “To
job covering their own communities, becoming more editor/coach the extent that what he’s saying is
than writer. If so, leveraging the Free—paying people to get other true it’s not new and to the extent
people to write for non-monetary rewards—may not be the enemy that it’s new it’s not true.””
of professional journalists. Instead, it may be their salvation.”

Anderson is very good at paragraphs like this—with its reassuring arc from Sun, 28 Jun 2009 19:09:13
“bloodbath” to “salvation.” His advice is pithy, his tone uncompromising, and Turning digital pennies into
his subject matter perfectly timed for a moment when old-line content providers dimes
are desperate for answers. That said, it is not entirely clear what distinction is
NBC’s Jeff Zucker once complained
being marked between “paying people to get other people to write” and paying
about having to trade “analog dollars
people to write. If you can afford to pay someone to get other people to write,
for digital pennies”. Now at least it’s
why can’t you pay people to write? It would be nice to know, as well, just how
dimes. Bloomberg reports that top
a business goes about reorganizing itself around getting people to work for
shows such as the Simpson now get
“non-monetary rewards.””
higher ad rates on Hulu than
Well, I wouldn’t propose this as the future of all newspapers, but my model broadcast. From the article: ““This is
comes from personal experience. About three years ago, I started a parenting about scarcity,” Poltrack said. “All of
blog called GeekDad, and invited a few friends to join in. We soon attracted a the networks who are now streaming
large enough audience that it became apparent that we couldn’t post enough to online have multiple advertisers
satisfy the demand, so I put out an open call for contributors. Out of the scores competing for a small supply of
who replied, I picked a dozen and one of them was Ken Denmead (at right, with premium programs. That premium
Penn of Penn & Teller). content is what advertisers want.””

Ken is, by day, a civil engineer

working on the BART extension in
Sun, 28 Jun 2009 00:25:04
the SF Bay Area. But by night he is
"Is Free News Really Worth
an amazing community manager.
the Price?"
His leadership skills impressed me
so much that I turned GeekDad over An NYT appeal from the “last
to him entirely about a year ago. Reuters correspondent known to have
Since then he’s recruited a team of to sent dispatches by carrier pigeon
volunteers who have grown the many years ago from Matabeleland”:
traffic ten-fold, to a million page views a month. Please pay for your newspaper. It’s
better than Twitter.
So here’s the calculus:

Wired.com makes good money selling ads on GeekDad (it’s very popular
Fri, 26 Jun 2009 16:30:19
with advertisers)
Ken gets a nominal retainer, but has also managed to parlay GeekDad
How Free vs. Paid is playing
into a book deal and a lifelong dream of being a writer
out in personal finance
The other contributors largely write for free, although if one of their posts PaidContent has a good piece
becomes insanely popular they’ll get a few bucks. None of them are analyzing the various free and
doing it for the money, but instead for the fun, audience and satisfaction freemium models on the personal
of writing about something they love and getting read by a lot of people. finance sites: “In the battle for the
online personal finance market, free
So that’s the difference between “paying people to write” and “paying people to
has become the status quo. Both
get other people to write”. Somewhere down the chain, the incentives go from
startup Mint.com and rival Quicken
monetary to nonmonetary (attention, reputation, expression, etc).
Online have amassed more than one
It works great for all involved. Is it the model for the newspaper industry? million members each by charging
Maybe not all of it, but it is the only way I can think of to scale the economics zilch for their services. Now, though,
of media down to the hyperlocal level. And I can imagine far more subjects that both companies are seriously
are better handled by well-coordinated amateurs than those that can support exploring charging for some
professional journalists. My business card says “Editor in Chief”, but if one of features.”
my children follows in my footsteps, I suspect their business card will say ….
“Community Manager.” Both can be good careers. “For Quicken, charging would
represent something of a turnabout.
Malcolm, does this answer your question?
In October, the company dropped the
[Image at top from The New Yorker. Photo of Ken Denmead from GeekDad.] $2.99 a month subscription fee that
was part of the launch of Quicken
Online. Stanley says the company
Posted at 03:31 PM in FREE | Permalink | Comments (76) | TrackBack (0) discovered that there was an
“overwhelming bias” towards a free
offering and decided to embrace it.
There’s no question, however, that
June 24, 2009 while Quicken was charging for its
product, Mint managed to capture
Corrections in the digital editions of Free much of the buzz around the online
personal-money-management
As some of you may have seen, VQR rightly spotted that I failed to cite
market.”
Wikipedia in some passages in Free. This is entirely my own screwup, and will
be corrected in the ebook and digital forms before publication (and in the notes,
which will be posted online at the same time the hardcover is released), but I
Tue, 23 Jun 2009 10:53:44
did want to explain a bit more how it happened and what we’re doing about it.
Socialtext now free for up to
First, as readers of my writings know, I’m a supporter of using Wikipedia as a 50 users
source (not the only one, of course, and checking the original source material From the press release: “Socialtext,
whenever possible). I disagree with those who say it should never be used. But the leading provider of Enterprise 2.0
the question is how to use it. solutions, today announced the
In my drafts, I had intended to blockquote Wikipedia passages, footnoting their availability of Socialtext Free 50, a
URL. But my publisher, like many others, was uncomfortable with the changing new free offering aimed at
nature of Wikipedia, and wanted me to timestamp each URL (something like mainstream use for up to 50 people
this: http://en.wikipedia.org/wiki/Chris_Anderson page viewed on July 8th, within an organization to collaborate
2008), which struck me as clumsy and archaic. So at the 11th hour we decided using Socialtext’s social software
to kill the notes and footnotes entirely and I integrated the attributions into the platform. Employees can join or
copy. create their own private collaboration
networks by using their work email
In doing so, I went through the document and redid all the attributions, in three
address at Socialtext.com. In addition
groups:
to the new free offering, the company
Long passages of direct quotes (indent, with source) announced the immediate availability
Intellectual debts, phrases and other credit due (author credited inline, as of SocialCalc, the first social
with Michael Pollan) spreadsheet program that simplifies
In the case of source material without an individual author to credit (as in version control, reduces errors and
the case of Wikipedia), do a write-through. increases productivity for distributed
teams.”
Obviously in my rush at the end I missed a few of that last category, which is
bad. As you’ll note, these are mostly on the margins of the book’s focus, mostly
on historical asides, but that’s no excuse. I should have had a better process to Tue, 23 Jun 2009 10:52:32
make sure the write-through covered all the text that was not directly sourced. Good Freemium examples
Also note the VQR is not saying that all the highlighted text is plagiarism; much A roundup of Freemium best practice
of is actually properly cited and quoted excerpts of old NY Times articles and on the web: “Here are a couple of
other historical sources. And as you’ll see, in most cases I did do a writethrough services that have found the right
of the non-quoted Wikipedia text, although clearly I didn’t go nearly far enough formula for success when it comes to
and too much of the original Wikipedia authors’ language remained (in a few charging their members. There might
cases I missed it entirely, such as that short Catholic church usury example, be some valuable lessons learned by
which was a total oversight). This was sloppy and inexcusable, but the part I examining these successful services
feel worst about is that in our failure to find a good way to cite Wikipedia as the to see how they managed to get their
source we ended up not crediting it at all. That is, among other things, an users to take out their wallets rather
injustice to the authors of the Wikipedia entry who had done such fine research than their pitchforks and torches.”
in the first place, and I’d like to extend a special apology to them.

So now we’ve fixed the digital editions before publication, and we’ll publish
Tue, 23 Jun 2009 02:23:26
those notes after all, online as they should have been to begin with. [UPDATE:
What to do with "infinite
A draft version is here. The final version will live in the right column of this
bandwidth"
blog permanently] That way the links are live and we don’t have to wrestle with
how to freeze them in time, which is what threw me in the first place. A Boston Consulting Group analyst
describes how to apply abundance
Here’s the statement that my publisher, Hyperion, released yesterday: thinking to bandwidth: “Today, for
We are completely satisfied with Chris Anderson’s response. It example, radiologists don’t need to
was an unfortunate mistake, and we are working with the author be located where the image is
to correct these errors both in the electronic edition before it posts, created. Images taken at a clinic
and in all future editions of the book. where the patient is located are
transmitted from the imaging
machine to a distant image-analysis
Posted at 10:36 AM in FREE | Permalink | Comments (100) | TrackBack (0)
centre - an entirely new business
made possible by increasing
bandwidth at ever-falling costs. Other
new businesses will follow: As the
June 22, 2009 best physicians are brought online,
diagnostic accuracy will improve; as
“Waste is Good”. FREE excerpt in Wired researchers mine data history, the
profession’s overall diagnostic skills
We published an excerpt from the
will improve; and organizations that
book in Wired this month. Here’s
have the strongest network of
how it starts:
specialists will gain the edge, because
“In 1969, the Neiman Marcus hospitals will be reluctant to switch to
catalog offered the first home PC, another network. Each is a revenue-
a stylish stand-up model called the generating opportunity.” [via
Honeywell Kitchen Computer, TechCrunch]
priced at $10,600. The picture
shows an aproned housewife
caressing the machine, with this
tag line: "If she can only cook as
well as Honeywell can compute."
That image should be on every
cubicle in Silicon Valley; it's a
testament both to what technologists get right and what they get badly wrong.

To their credit, they understood that Moore's law would bring computing within
the reach of regular people. But they had no idea why anyone would want it.
Despite countless brainstorming sessions and meetings on the subject, the only
application the Honeywell team could think of for a home computer (aside from
the perennial checkbook balancing) was recipe card management. So the
Kitchen Computer was aimed at housewives and featured integrated counter
space. Those housewives would, however, require a programming course
(included in the price), since the only way to enter data was with binary toggle
switches, and the machine's only display was binary lights. Needless to say, not
a single Kitchen Computer is recorded as having sold.

Today, of course, we have computers in every home—and in every pocket and

car and practically everywhere else. But one of the few things the average
person doesn't use them for is managing recipe cards.

Don't blame Honeywell—blame the computing world of the 1960s. In those

days, computers were expensive mainframes. Because processing power was so
scarce and valuable, it was reserved for use by IT professionals, mostly working
for big companies and the government. Engineers both built the computers and
decided how to use them—no wonder they couldn't think of nonengineering
applications.

But as the Kitchen Computer hinted, computers would soon get smaller and
cheaper. This would take them out of the glass boxes of the mainframe world—
and away from the IT establishment—and put them in the hands of consumers.
And the real transformation would come when those regular folks found new
ways to use computers, revealing their true potential.

All this was possible because Alan Kay, an engineer at Xerox's Palo Alto
Research Center in the 1970s, understood what Moore's law was doing to the
cost of computing. He decided to do what writer George Gilder calls "wasting
transistors." Rather than reserve computing power for core information
processing, Kay used outrageous amounts of it for frivolous stuff like drawing
cartoons on the screen. Those cartoons—icons, windows, pointers, and
animations—became the graphical user interface and eventually the Mac. By
1970s IT standards, Kay had "wasted" computing power. But in doing so he
made computers simple enough for all of us to use. And then we changed the
world by finding applications for them that the technologists had never dreamed
of.

This is the power of waste. When scarce resources become abundant, smart
people treat them differently, exploiting them rather than conserving them. It
feels wrong, but done right it can change the world.”

Read the rest here

Posted at 10:33 PM in FREE | Permalink | Comments (8) | TrackBack (0)

My Free speech from last week’s Wired

Business Conference

I cover competing with free, free gaming models, the newspaper free vs paid
debated (actually free vs. freemium) and the antitrust implications of free

The slides are below, with apologies for the messed up typeface. It didn’t look
that way on the day:

Other speeches from the conference are here

Posted at 01:50 PM | Permalink | Comments (2) | TrackBack (0)

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Don't Be A Fan Platform Hater August 19, 2009

BY JOHN BATTELLE

Regarding this story in the New York Times:

With Bloggers in the Bleachers, Leagues See a Threat

to Profits § FROM TWITTER

On ferry heading back home-

(and related, my post on "Don't Be a Player Platform Hater"): coast gaurd escort tx to obama
being here

I have such a rant in me on this topic but I simply cannot write it now, I'm way too Supposed
to Be On Vacation. But suffice to say, you can do two things if you "own content" - like, say,
football games (yep, that's content). One, you can cut it all off and hoard it. Or two, you can 11 hours ago

be the oxygen in the ecosystem. The first allows you to profit but it kills your long-term follow me at twitter
community ecosystem and prevents, entirely, your product from growing as your supporting
community wants it to grow - because in essence, you are refusing to allow your community
§ COMMENT SPOTLIGHT
to have a voice and point of view about your product. It's YOURS, and you'll LIKE IT THE
WAY I WANT TO GIVE IT TO YOU! Reader Ed Brenegar writes:
This is a year to change the
customer relations game. With
The second makes you a crucial, life giving element of an ecosystem, but one that is as
less commerce happening,
dependent on that ecosystem as it is upon you. Yes, air is unbreathable without oxygen, but presumably, there is more time
then again, it ain't air if it's ONLY oxygen. for interaction. That interaction
»
has to build the relationships...

Anyway. Read this piece, and really think about it. Cutting fans off from blogging (or Tweeting,
since there are ads there now and will be more*) about the games they go to because they
§ RECENT COMMENTS
might be getting paid by SBN, or AdSense, or whoever? Are you F'ING NUTS?
Neil says
Pull your head out, sports guys. It's way better to be the oxygen in the ecosystem. It's a “ Great comments. What I got out
bigger profit opportunity, for one. And it's just a way more fun approach to business, one that of watching the video more than
anything else is the fact t ...” »
feeds more than just your bottom line.
Joelchrist says
OK, back to vacation. “ Interesting blog. Thanks for
sharing. Loved reading this blog
and ofcourse interesting com» ...”
*PS, oh yeah, and Facebooking, because, shit, Water Cooler is on Facebook, isn't it?! Yikes,
thousands of people talking about football AND WE'RE NOT MAKING MONEY ON IT Peterson says
“ Social Media will develop and
DAMNIT! And doesn't Facebook show ads next to fans' personal pages? Time to get me a
discover important application,
cut of that revenue too, I hear Facebook is making hundreds of millions! but I'll sure anyone any amo »...”

SEOFTW says CLASSIFIEDS

** PPS I am NOT saying that businesses who make it their business to cover and profit from
“ Some amazing insights into
covering sports should not have a revenue model that pays content owners, far from it. I AM business and humanity in Buy Text Ads On
saying that content should have an API - and a set of business rules around use of that API. general by looking at what Searchblog!
Duh. people are ...” » Hey, It's Cheap, and
They're On Every
Ric says Page of My Site
“ Man, these guys are a riot! I battellemedia.com
SHARE POST
2 COMMENTS wonder if they have seen the
debacle the music and movie
Click Here to Buy
ind ...” » Classifieds On
 Searchblog, less
Cait says
ACTIVE TOPICS than $150 a week
“ Sorry to interrupt your holiday ;)
Your last comment made me
38 08.05 Apple: Is The Worm Turning? »
immediately think of the "Li ...”

Alex says
14 07.28 New Twitter Homepage Related FM Sites:
“ I couldn't agree more with
Hardware Secrets »
John's post. I think there is a Street Use »
tremendous opportunity for sma Boy Genius Report »
13 08.07 Bartz: Yahoo Was "Never a
Search Company". Me: Bullsh*t. ...” »
preetam mukherjee says SEARCHBLOG, IN
13 07.29 Yahoo and Microsoft Announce PAPERBACK
“ @billh- I have to agree with you
Deal
to a great degree. Just saw an
unnatural spike in our T ...” »
12 07.28 Is Being In the Mobile Biz License
to Ignore the Internet?

§ CATEGORIES

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All Business Starts With A Community August 19, 2009

Future of Search
Best Price $0.01
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BY JOHN BATTELLE
Joints After Midnight & Rants

Media/Tech Business Models

Privacy Information
Of Note in Search Biz

Policy
See Your Ads on
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Google
RoundUps In Just Minutes.
Immediate posting.
Site Related Instant Traffic. Instant
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The Conversation Economy
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Sem Brand
Today I was on my way back to our house after dropping my kids off to camp, and I decided Awareness
to stop by a local cafe for a quick coffee-n-chat. Now, in August, "our house" means a Free search marketing
whitepaper on how to
century-old family place on an island, an island that rather pugnaciously refuses to allow large
build your online
chain stores to set down roots. So it's fair to say that this island is sort of a Galapagos of brand.
small business. There are no Mickey D's, no Safeways, and no Starbucks. It's all locally Business.com/Branding

owned - nearly every single "year rounder" who lives here is a small business person. Choose Great News
Service
The local cafe I stopped by is a hangout - a place where the community comes to eat and Distribute your news
Yup, it makes the perfect gift for to millions w/ PRWeb.
drink coffee, to gossip and share information, to learn the latest, to connect. It's a social See how we compare!
that officemate or colleague
network in its truest sense. It's driven by content - the conversations and knowledge of the www.PRWeb.com
who you thought had
staff and customers, and it's driven by community. Commerce is a by product of the two. everything... including you! If
you order here, I promise to
sign it, assuming we can figure
But the commerce is not limited to just the coffee and egg sandwiches on the menu. Not by a
out the shipping...
long shot. Like nearly every other cafe and community restaurant on the island, there's a
You can also buy the audio
bulletin board, and everyone who has something to promote puts up their business card or
version here.
their flyer. And you know what? It works.
Check my book page for more
info.
I love this picture. If you really think about it, it tells you just about everything you need to
know to succeed as a business in the digital age.

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Social Media Is Important, The Video August 18, 2009 Subscribe

BY JOHN BATTELLE

Hey, I really like the soundtrack. And it's f*ing true as well.

My beef with this is this simple statement, about 3:42 in. "Social Media isn't a fad, it's a
fundamental shift in how we communicate."

True, to a point. What it really is, is the release of how we already communicate, but now at
scale. It's not a shift in *how* we communicate, it's a step function in our *ability* to
communicate. There's an important difference there. One could argue that means a
fundamental shift, but such a statement can be easily misinterpreted as meaning "something
totally new in how humans think/work/communicate", and I think that's not quite right. It's us,
squared.

(Special thanks to @dveneski)

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Search Trends August 18, 2009

BY JOHN BATTELLE

I'm not going to grok this tonight, I'm too sea-addled (on vacation). But it seems a worthy
read:

On the Predictability of Search Trends by Google Research.

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What's Up With Feedburner? August 18, 2009

BY JOHN BATTELLE
 For the best few days, I've
been trying to edit the
settings in my Feedburner
account - the RSS feeds
service that was once so
useful, but since its
purchase by Google, seems
to have languished.
Unfortunately, it seems I've
forgotten my password
(though I used the same
one for Feedburner as
many other similar
services), and the user
name I thought I always
used is getting bounced
back to me as not
recognized. I've tried nearly
every single variation of a user name, password, and email address I've ever had, and none
work. Without user name or email, I can't retrieve my password.

Now the fun begins.

Searchblog's feed was moved, I think, to Google by the deadline of late Feb. of this year. My
engineering group at FM did it for me, which was very kind. Given that the user name and
passwords they used to do the move seem to not work anymore, we started looking for some
kind of help - it's sort of odd that while my feeds seem to work, no one can log in to manage
them. I read through the FAQ, and it said that if I was an AdSense publisher, my feed would
be there. I am, so I logged in, but there was no feed I could find. Odd.

SO I asked my crack engineering team to try and make sense of it. They couldn't. Here's
Ivan's response:

This is wild, the Feedburner site is like a labyrinth, I don't see any way to contact a human.
People in the forums are also complaining about inability to find any type of contact form.
Dozens of recent posts in the support group of people saying they can't recover their
password to migrate to Google Account -- no response from anyone.

It feels like a dead product.

Anyone have any ideas on how to fix this issue?

Beyond the irritation of a broken or non-communicative service, I've come to realize that
Feedburner simply isn't very useful to me anymore. Two years ago, when Google bought the
company for $100 million, it was a crucial and growing service. I'd log in nearly every day.
What value is it providing to them - or any of you - now?

UPDATE: A nice fellow from Google pinged me this morning offering to help. Thanks!

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On Using Search for Decisions August 17, 2009

BY JOHN BATTELLE

As part of BingTweets, an FM/Microsoft promotion blending the two services, I was asked to
opine on the idea of how we use the web to make decisions. My first post has been up for a
while but I managed to lose track of time and forgot to let you all know about it. I wrote a
piece called "Decisions are Never Easy - So Far" - and have already written a followup piece,
though that one is yet to be published. (And yes, I've asked them to make that picture
smaller. Migod.)

From the first post:

If what you are looking for is a hotel room, a plane ticket, or something else in the “head end”
of search results, plenty of sites aggregate tons of results for you. But as soon as you go a bit
down the tail - like my example for classic cars - search becomes a pivot point for an ongoing
and often taxing decision process. The opportunity, I think, is to figure out a way to support
that process down the tail - saving us time, clicks, and frustration along the way. I see two
paths toward that goal: one is creating applications on top of “ten blue links” which help me
organize and aggregate the knowledge I process while pursuing a search query, and the
second is making my searches social, so I can share the process of learning and learn from
those who have shared - not unlike Vannevar Bush’s “Memex” concept.

When the second piece is up, I'll post an excerpt here as well.

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Google Search Share Declines August 17, 2009

BY JOHN BATTELLE

Back when I predicted this in January, I recall worrying I was calling it too early. Now it
appears the timing was about right. From Mashable:

...while Google grew from June to July, it still lost market share to its competitors – from
66.1% in June to 64.8% in July, a 1.3 percentage point drop.

From my prediction: 3. Google will see search share decline significantly for the first time
ever. It will also struggle to find an answer to the question of how it diversifies its revenue in
2009.

There's more to be said on that second point, revenue diversification. More on that after the
summer break I'm supposedly on.

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Caffeine: A Fundamental Rewrite of Google, August 13, 2009

A Shift to Real Time

BY JOHN BATTELLE
Matt Cutts points to a video interview (embedded above) on Google's Caffeine infrastructure
update.

"It's a pretty fundamentally big change" Matt says. What I'd like to know is why and in
response to what changes on the web. Of course, the major changes in how the web works
are clear: Real Time Search.

In this post (and/or this one) I said:

In short, Google represents a remarkable achievement: the ability to query the static web.
But it remains to be seen if it can shift into a new phase: querying the realtime web.

It's inarguable that the web is shifting into a new time axis. Blogging was the first real
indication of this, but blogging, while much faster than the traditional HTML-driven web, is,
in the end, still the HTML-driven web.

Part and parcel to this shift is the web's adoption of Flash/Silverlight/Ajax - a shift to assuming
the web works in real time, like an application on your desktop. That makes it damn hard to
index stuff, because pages are not static, they are created in real time in response to user
demand. This is a new framework for how the web works, and if Google doesn't respond to it,
Google basically will become relegated to a card catalog archive of static HTML pages. No
way will Google let that happen...

(By the way, one of the reasons I was impressed with Wowd was exactly because of its ability
to, at scale, track a new signal in the web - the signal of what we are actually doing in real
time...as opposed to the signal of the link...but more on that later.

Matt was asked if Caffeine was specifically about Real Time, and he was not totally specific
about this but it's pretty obvious it is all about this shift.

Oh, and Matt says it's not because of Bing. In one way, I agree. But let's be real. Microsoft
and Yahoo did this deal because Yahoo alone could never sustain the infrastructure costs
associated with indexing and processing the Real Time Web. So in truth, Google did this
because it had to, just like Microsoft and Yahoo did what they did because they have to. If
you want to play, you have to get the infrastructure right.

Here's SEL's take on it.

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Tell Me This Ain't Facebook, Er, Twitter, Er, August 13, 2009

Both.
BY JOHN BATTELLE

Google's new iGoogle upgrades smacks of Facebook. Read this:

we're excited to introduce social gadgets for iGoogle. Social gadgets let you share,
collaborate and play games with your friends on top of all the things you can already do on
your homepage. The 19 social gadgets we're debuting today offer many new ways to make
your homepage more useful and fun. If you're a gaming fanatic, compete with others in Who
has the biggest brain? or challenge your fellow Chess or Scrabble enthusiasts to a quick
match. Stay tuned in to the latest buzz with media-sharing gadgets from NPR, The Huffington
Post, and YouTube. To manage your day-to-day more efficiently, check things off alongside
your friends with the social To-Do list gadget. Your friends are able to see what you share or
do in your social gadgets either by having the same gadgets on their homepages, or through
a new feed called Updates. Updates can include your recently shared photo albums, your
favorite comics strips, your travel plans for the weekend and more.

Updates, Status Updates, Tweets....whathaveya. It's all the same play - a social platform for
connecting to others. More:

It's developers who have really made iGoogle into the rich experience it is — growing our
gadget directory to over 60,000 gadgets today — and we know iGoogle developers will help
us quickly expand our collection of social gadgets. You can get information about how to build
social gadgets for iGoogle on our developer site: code.google.com/igoogle. We introduced
these new social features recently to Australia users and are gradually rolling them out to
users in the U.S. over the next week.

Developers developers developers developers....

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Early July Data: Twitter Growing, but August 12, 2009

Slowly
BY JOHN BATTELLE

A month ago I posted that Twitter was back to strong growth after a weak month of June. I
just took at look at the numbers for August, which you can see in the screen shot here (I'm
using Compete's data, but you can check out Quantcast, which is a "rough estimate" and has
not posted any July data yet.)

Twitter is still growing, according to this data, but not at the breakneck pace of the past.
Compete has it at 23.2mm US uniques, up just 1.25% from the month before. Visits are up
1.64% month to month. Most interesting to me is the breakdown of referral traffic: 11.44% is
from Facebook (see below). Now that Facebook Lite move is starting to make sense....
 SHARE POST
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Facebook Lite? August 12, 2009

BY JOHN BATTELLE

Multiple sources are reporting Facebook is testing "Facebook Lite" - what some are calling a
Twitter version of Facebook. Mashable, RWW have more, TC got an official response from
Facebook, which makes it sound like it's not a Twitter competitor. Interesting. Reminds me of
my prediction on the two companies back in January:

Facebook will build a Twitter competitor, but it will never leave beta and will ultimately be
abandoned as not worth the time. Instead, Facebook will "friend" Twitter and the two
companies will become strong partners.

There's still time for this one to come true. If this is indeed a response to Twitter, it strikes me
as a bit of an overreaction.

Update: Or maybe it's not, given that Facebook delivers 11.44% of traffic to Twitter...

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Two Big News Events in Search: Google To August 11, 2009

Revise Its Engine, Facebook Launches

Realtime
BY JOHN BATTELLE

Facebook's previously announced realtime engine has been released, coverage from
Mashable:

Fast forward to today: Facebook just announced that it is rolling out the new
Facebook search. With realtime search and FriendFeed in its pocket, Facebook
is gunning directly for Twitter .

Also for Mashable, a story on Google's "major revision" of its engine. I plan to dig into this
one, as I sense it has a lot to do with crossing the infrastructure chasm to real time:

Secretly, they’ve been working on a new project:the next generation of

Google Search. This isn’t just some minor upgrade, but an entire new
infrastructure for the world’s largest search engine. In other words: it’s a new
version of Google.

The project’s still under construction, but Google’s now confident enough in the
new version of its search engine that it has released the development version for
public consumption.
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Don't Be A Player Platform Hater August 9, 2009

BY JOHN BATTELLE

I've been meaning to post a

long-ish rant on the
importance of celebrities
taking control of their own
platforms, but never gotten to
it, in part because I'm not
that enamored with the incessant selling of celebrity that occurs in our culture. Yeah, I sound
like a grumpy old man, but I can't help myself. It bums me out - not because I don't like
celebrities, but because the current approach strikes me as driven by short term thinking.

If, instead, more celebrities actually used their fame to take control of their own destiny and
build a platform for themselves, they'd last longer, be happier, and make more money -
perhaps not as much all at once, but more over the long term. And what do I mean by "taking
control of their own destiny"? Well, in a phrase, I mean "building themselves a platform
through which they effectively communicate with, build, and deliver value to their fan base."

Until recently, those platforms were controlled by others. But now, celebrities can roll their
own. And that changes the game, if they chose to play.

Before I explain what I mean by that, let me state for the record that I believe the same is
true for all marketing brands. But I get ahead of myself (more on what it means to build a
platform for brands in a future post.)

Let's start at the beginning. What, after all, is a celebrity? Well, if you do a Google Image
search for the term, you're bound to believe a celebrity is an attractive, well endowed woman.
Wikipedia defines the concept thusly: "A celebrity is a person who is famously recognized in a
society....There are degrees of celebrity status which vary based on an individual's region or
field of notoriety. While someone might be a celebrity to some people, to others he may be
completely unknown."

That last part is important when it comes to social media. I've noticed that the class of folks
we might call "minor celebrities" have taken to social media far more quickly than those who
Wikipedia calls "global celebrities." In fact, the extraordinary embrace of Twitter by A-lister
Ashton Kutcher (there, I wrote his name for the first time ever) serves as the rule proving
exception - big time celebrities don't often expose themselves in an honest dialog with their
fans. Instead, they are handled. They are managed, marketed and controlled like packaged
goods, sold through the supermarket aisle distribution outlets of sports arenas, movie
theatres, network television, and arena tours.

And because they are treated as product by their managers, they are discouraged to do
anything that might smack of honest dialog with their fan base - anything that might feel like
"routing around" the manicured image laid out by the business of celebrity.

Case in point is the approach major sports leagues have taken toward both Facebook and
Twitter. Recently the NFL and ESPN have banned or curtailed use of either Twitter or
blogging or both. (As much as I appreciate ESPN's product, I consider it to be a product of the
leagues, not an independent platform for players. From their policy: "The first and only priority
is to serve ESPN sanctioned efforts..." Follow the money, after all...).

Following that money explains why these new policies are being put in place. Leagues like
the NFL and distribution outlets like ESPN make their money by controlling the output of the
product on the field. If that product starts to have a conversation outside of those lines,
money, connection, and reputation might be made on those conversations, value that is not
being harvested by the NFL or ESPN. That's a threat, and they are treating it as such.

It's no coincidence that the most prolific and natural celebrity users of social media platforms
exist outside those manicured boundaries - in sports like tennis (Roger Federer) and cycling
(Lance Armstrong, who started tweeting around the time of his appearance at last year's Web
2 conference). These are celebrities who are not handcuffed by powerful leagues or
networks, and who naturally gravitate toward platforms that allow them to connect directly to
their fanbase.

Does this sound familiar? It should if you're a marketer struggling with how to take your brand
online. After decades of manicuring your brands through one-way mass media platforms like
television, it turns out millions of people are now talking about your prized possessions
online, and you can't directly control the conversation. But a new set of brands have sprung
up who seem agile in this environment, and they feel threatening: Think JetBlue and Virgin,
over American and Delta. Whole Foods over Lucky. Comcast over AT&T. These "new"
brands have taken to social media and are embracing it, warts and all.

I think when it comes to celebrity, the same is also be true. The celebrities who are "minor"
now are swarming to Twitter and Facebook, much as unknown bands swarmed to MySpace.
Those who have direct, honest connections with their fans will endure. Those who don't might
catch the flame of fame briefly, but they will not endure as brands. Why? Because no matter
what, the "packaged goods" platforms of movies, networks, and sports leagues are still
important, and it will soon be the players and celebrities with a guaranteed base of hard core
fans - or followers - who can call the shots with those powers that be. You think Brooke Burke
won't get a better deal now that she's in dialog with over a million fans on Twitter? Owning
and cultivating your own platform means you no longer are in thrall to "star makers" - together
with your community, you make your own star. That's a kind of celebrity I can get behind.

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Bartz: Yahoo Was "Never a Search August 7, 2009

Company". Me: Bullsh*t.

BY JOHN BATTELLE

Sorry, it's late, and I just saw this piece in the NYT. But for Bartz to say that Yahoo was never
a search company is simply not true.

Yahoo was the original search destination, and a place folks first learned to "search" for stuff
on the Web. As the original directory of things worth paying attention on the Web, Yahoo was
- and remains for many - the definitive place to start a search query. And also, in the history
of Yahoo, let us not forget the entire homepage was redesigned around search just three
years ago.

Feh.

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13 COMMENTS
Google Adds Sense To Maps August 6, 2009
BY JOHN BATTELLE

Google yesterday announced it is adding more information to Google Maps:

"(We've added) icons and labels of prominent businesses and places of interest directly on
the map itself. We've found it super useful for checking out what's nearby a hotel we'll be
staying at, orienting ourselves, getting the feel for a neighborhood, or just browsing around for
fun."

Wait a minute, let me rewrite that for you, with a business model attached:

"(We've added) icons and labels of prominent businesses and places of interest directly on
the map itself. We've found it super useful for leveraging our Adwords algorithm!"

There ya go! Actually, I think this is a great move by Google, and in line with the concept of
AdWords being useful to the information ecosystem.

For instance, if you're looking to check out Martha's Vineyard, the hotels link up on the left
might be a link you are actually interested in.

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Flickr Gets A SearchLift August 6, 2009

BY JOHN BATTELLE
Flickr has upgraded its search, and I like the results. Funny how we are all talking about
Yahoo ceding search to Microsoft, but we all forget there's a lot of other search to be done on
Yahoo - like Flickr search. I wonder who Flickr will be integrated into Bing, by the way?
Anyway, from the post announcing the news:

Note the new “View” controls at the top of the page, these allow you to display the results in
different sizes and formats. Both small and medium views have an ‘i’ icon on every thumbnail
— click it to see more detailed information about a particular photo. We’re also doing some
whiz bang stuff in the small view to take advantage of as much space as you have on your
screen, just try resizing your browser to see.

On the right side of the page we try to provide a new perspective on your search. Based upon
how our members are tagging their photos and participating in the Flickrverse, you’ll see links
to the groups, photographers, tag clusters and places that are most closely related what
you’re looking for. We hope these will occasionally provide a little extra inspiration for your
search.

Lastly, we’re exposing simple summary information on the page as you refine your search.

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Apple: Is The Worm Turning? August 5, 2009

BY JOHN BATTELLE

Early this year, well, January 1, to be exact, I made this prediction about
our friends at Apple:

Apple will see a significant reversal of recent fortunes. I sense this will
happen for a number of reasons ... but I think the main one will be brand
related - a brand based on being cooler than the other guy simply does
not scale past a certain point. I sense Apple has hit that point.

Now, "brand" is a very tricky concept. A brand lives or dies by how others speak of it. And
lately, in the circles of folks who I'd call "brand influencers" in the digital space, the
conversation has turned negative.

Not only has Apple taken a major hit from both observers and the FCC for its hamhanded
rejection of Google's iPhone application (among others), the company's ongoing refusal to
engage in a dialog with its customers (no Twitter account, no participation in industry
conferences) is starting to wear thin. For more than a few folks I talk to on a daily basis, the
Apple brand means "great products, but the company really couldn't care less about you as a
person, and frankly, is smarter than you, better looking than you, and above your station."

Call it a gut feeling, but my favorite maker of computer products is starting to feel, well, out of
touch. Am I off here?

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38 COMMENTS

Schmidt Leaves Apple Board August 3, 2009

BY JOHN BATTELLE

What a total surprise (kidding!).

In a statement, Apple CEO Steve Jobs said that "as Google enters more of Apple's core
businesses, with Android and now Chrome OS, Eric's effectiveness as an Apple Board
member will be significantly diminished, since he will have to recuse himself from even larger
portions of our meetings due to potential conflicts of interest."

That Chrome OS was the last straw, I'd warrant. From my earlier coverage:

" At the very least, it feels like it's time for Eric Schmidt to leave Apple's board."

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Yahoo Microsoft Deal Overview August 3, 2009

BY JOHN BATTELLE

The NYT has a good background piece from Carol Bartz's POV. Carol will be at Web 2 this
Fall, so will Qi Lu, the man who will own the deal and the search fight with Google.

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The FCC No Likey What Apple Did to July 31, 2009

Google, Either
BY JOHN BATTELLE

And they are opening an investigation into it.

According to a Dow Jones Newswire report, on Friday afternoon the FCC sent letters to
Apple, AT&T, and Google. The federal inquiry asks Apple why the Google Voice application
was rejected from its App Store for the iPhone and iPod Touch, and why it removed third-
party applications built on the Google app that had been previously approved. The federal
commission also asks whether AT&T was allowed to weigh in on the application before it was
rejected, and seeks a description of the application from its creator, Google, according to the
report.

For background, see my piece chastising Apple here.

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who has time for this?

A VENTURE CAPITALIST'S OBSERVATIONS OF SCIENCE, STARTUPS, AND SECURITY.

Monday, July 13, 2009 library

Apple: Great Products, Awful Support
Science, Scams, Superstition
At the risk of provoking the wrath of the Created by a School Teacher!
“iTelligentsia” I must rant about my experiences BLINK: "Thinking Without
getting cheated by Apple. Thinking"
The iPhone’s dandy accelerometer reports the Standing at the Foot of the Mount
device’s orientation to iPhone apps. Except that my MORE ARTICLES ==>
iPhone is calibrated 6 to 7 degrees off kilter, as
shown in this photo on a flat horizontal surface
(taken by my reliable Blackberry). Within a month For Entrepreneurs
of purchase I demonstrated this problem to an Best Startup Advice I Have
Apple store Genius who replied that sorry, my The Art of Pitchcraft
phone is operating within spec, nothing he can do. How to NOT Write A Business
Plan
In my second encounter I rented a movie from
iTunes that would never finish downloading. I tried MORE ARTICLES ==>
to report the problem but the Apple site does not
offer up an email address for support. I tried to follow Apple’s protocol for reporting the problem, but the
Report-A-Problem button failed to launch the helpful reporting wizard that iTunes Help promised. I finally Personal Stuff
found a form I could fill out on the web site seeking help with my bill, but a week later I’ve still had no Heracles' Marathon
response. A Sky Spectacle
A Benign Addiction
You know, I get better service from the Romanian Viagra suppliers who spam my inbox. Is this a fluke? If
And a Child Shall Lead Them
not, has Apple always been so incompetent and uncaring about customer problems, or do you think this is a
TED Speaker Reviews
temporary casualty of the iPhone’s hyper growth?
MORE ARTICLES ==>
Blogged with the Flock browser

Bessemer
Carbon Reduction Plan
// posted by David Cowan @ 12:00 PM 3 comments Bessemer Tops Midas List
SaaSy Security
MORE ARTICLES ==>
Sunday, July 05, 2009
BHS Keeps the Whole Word Singing
Information Security
Last week my son and I read a great book from Andrew Clement's Jake Drake Internet: Threat Level Red
series titled Know-It-All about a school science fair. A know-it-all scares his Too Many Security Startups?
classmates away from the competition by touting his great work -- an expensive Preventing ID Theft
project really put together by his father. But the hero Jake Drake persists on his SPIT and SPAM
science project, working diligently and quietly. Of course I expected Jake to win MORE ARTICLES ==>
the science fair (hey, this is a kids' book), but Clements throws us for a loop. Jake
places second, the know-it-all places third, and first prize goes to a kid who had
tested the impact of sunlight on grasshopper eggs over 3 months, which means Cool, New Stuff
he had started his experiment months before the science fair was even A Sinfully Joyful Shave
announced. Jake ended up feeling okay about losing, because the winner really
Favorite Gadget
deserved it.
WhoHas Awards 2008
More WhoHas Awards
That's how I felt this weekend at the annual Barbershop Harmony Contest which was in Anaheim this year. Zero Gravity
The BHS has 34,000 members worldwide who compete annually in their districts for a chance to represent It's a Smule World
their regions in the international contest. My chorus Voices In Harmony once again won the Far Western Dwight Schrute Bobbleheads!
U.S. District and placed third last year internationally so we had aspirations to win. Cyber Street-Walkers
Peak at Microsoft Surface
Shopping in Vegas
Wyse Up At Home
Cost Reduction Headphones
Filling in for Walt Mossberg
 Picked Up in the Blogosphere
Favorite Car Gadgets
Haunted by Blackberry Buzz
Crashed Your Car?

But this year the competition was just too good. Actually, great. The winners, Missouri's Ambassadors of
Harmony, racked up the best score in the history of the contest dating back to the 50's. The music was
damned near pefect, and their showmanship stunning. About halfway through their uptune 76 Trombones,
about me
the front line of singers suddenly and magically transformed in a flash from black tuxedo to a glistening Name: David Cowan
white and gold marching band, pulling 8,000 spectators out of their seats. It will be a classic number (that
Location: Menlo Park,
unfortunately isn't available yet on YouTube).
California, United
States

Father of 3, raised in New

Rochelle NY, atheist, married
to a beautiful French girl... Also
a venture capital investor at
Bessemer Venture Partners,
and a performing member of
Voices in Harmony.
But the highlight of the contest took place in the hallways of the Anaheim hotels where a thousand singers
mingled and grouped into ad hoc quartets, singing into the wee hours of each morning. (Above are my View my complete profile
chorus-mates Will, Jeff, Greg, and Kevin who still came to BHS in his wheelchair after literally breaking his
back 3 weeks ago.) There were various parties, but the best is always the Rainbow Party hosted by the Recent Tweets:
association's gay contingency. Here some of the best groups -- like Zero8 from Sweden in the photo below With VIH in St Petersburg. Last
(music sample) -- perform raunchy versions of their barbershop numbers. It's a particularly funny spectacle concert was in Capella Hall, built by
since barbershop singers love to cloak themselves in Jesus Christ and America. In fact the Jesus worship catherine the great (best acoustics
and borderline jingoism at BHS can border on creepy, so it was somehow gratifying to hear XXX songs in Europe). Standing room only! 2
(with lots of on-stage writhing and humping) from a clean-cut baritone who had -- just 6 hours earlier on days ago
stage at Honda Center -- righteously credited Our Savior the Lord for his quartet's gold medal.
Ate w/ locals so I now see why the
menus call them Vodka Appetizers:
before each bite of caviar & blintz,
you down a shot. 8 days ago
Skype bowling with my boys 8 days
ago
I'm drenched. Now I know why the
weather in St Petersburg is
described as 9 months of
Expectation and 3 months of
Disappointment. 8 days ago
BHS is an international association and so the contest begins with national anthems from all the countries Uppity atheists. http://bit.ly/12kiwf
represented. But unlike other Honda Center events in which a performer sings the Star Spangled Banner, 8 days ago
instead a musical director led 8,000 barbershop singers in song. Instinctively, this massive crowd of semi- St Petersburg has beautiful
professional singers performed our anthem in perfect pitch and four part harmony as I've never heard it buildings and people, but steer
before. (I tried to bootleg a recording using my Blackberry's measly microphone, which you can download clear of the sushi. 9 days ago
and listen to if you don't mind the repeating "voice logo" of the free converter I used.) Frankfurt airport has clean
bathrooms. 9 days ago
If you're a singer and this event sounds like fun to you, come join Voices in Harmony for our next tuesday Camping out tonight (in the
night rehearsal -- we audition new members all year round, and we're your best shot outside of Missouri for backyard)! 10 days ago
making it to the international stage! Shooting stars!!! 11 days ago
Hurray for Nathalie! RT
Blogged with the Flock browser
@ nathaliecowan I am now scuba
diving certified! 12 days ago
// posted by David Cowan @ 5:34 PM 1 comments

follow me on Twitter
portfolio
Tuesday, June 02, 2009
Israel Venture Keynote: When Failure Is An
Option
This year the Israel Venture Association invited me to deliver the keynote talk at their annual conference. I
goodies
agreed, since our 15 investments in Israel have outperformed our overall portfolio, and I wish to support
Bessemer's office in Herzliya. After the talk a lot of people asked me for the slides, so I'm publishing them
here.

View more OpenOffice presentations from dcowan.

But SlideShare doesn't include notes, so here's the gist of what I said:

The world lost $100 trillion in the last 6 months. That effects LPs, who have generally told their VCs to slow
down, and now have to re-think how to allocate what's left. The venture industry has underperformed as an
asset class for over 10 years, and so only the very top performing funds will raise more capital in this
climate. [I have to say that at this point in the talk, the folks didn't seem to be enjoying it much.]

But then I talked about the opportunities for innovation, and showed the 2 slides below. I had stolen the first
one from someone else's presentation in 2001, and I updated it for today. These illustrate that innovation is Recent Readers
decoupled from economic cycles.
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Jumping forward, I believe that Slide 17 demonstrates my theory as to why Israeli VC has underperformed

science
the venture industry this decade. In Israeli culture, failure is not an option. So look at all the money going
into the 276 active companies among the 325 Israeli startups funded since 2002 (acc. to VentureSource).
Wow, imagine how much more valuable that portolio would be without that big blue bar. The little grey bar
of failed companies is inconsequential to the portfolio's result, but the blue bar is killing it. They need more Michael Shermer
grey. Pharyngula
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Slide 18 is a prettied up version of my Internet Law that shows why internet investing is the most capital efficient opportunity in venture capital.

As an example, I shared screenshots of Votizen, a fully functional site that my

friend Dave Binetti designed (and he's not a programmer) that operates a
social network of registered voters who can share ideas, circulate petitions, and
generally assemble online for political purposes. By utilizing contractors around
the world, Dave got this site up and running -- fully operational with some nice
polish -- for $1203. (That includes the costs of hosting and legally
incorporating.)

The rest of the talk was about investing in a capital efficient manner across
sectors. My general advice was to plan for failure -- write small checks to test
ideas, and assume that many will fail, so you and the entrepeneurs will
approach the question of continued funding scientifically, without defensiveness
or shame. The truth is that today, sometimes the cheapest -- and certainly the
most accurate -- form of due diligence is to just build the damned thing and see
what it happens.

In case that didn't pick up their spirits, I demonstrated capital efficiency at work
in my portfolio by describing how Smule partially validated its business on an
initial round of $500k from Bessemer, Maples, and Jeff Smith. Showing off my
Leaf Trombone, I played an Israeli favorite by Naomi Shemer titled "Al Kol Eleh" (from which I borrowed the title for my talk "..on the bitter and the
sweet"). Here's DocJazz playing it on both Trombone and Ocarina. I think this was the part that drew the standing ovation. At least it made an
impression on The Globes, Israel's business daily, which ran a full centerfold on my talk and translated it to Hebrew.
My conclusion: Israel invests more of its GDP in venture capital than any other country, and her economy depends upon technology innovation more
than any other nation's. While failure is hard for them to admit, Israelis understand the need for resource efficiency. If they can make the desert
bloom, they can save a shekel in their startups.

// posted by David Cowan @ 12:44 AM 1 comments

Thursday, April 23, 2009

Voices in Harmony
Since I last blogged about the international 3rd place medalist a capella chorus Voices in Harmony, I’ve so enjoyed their performances that I went
ahead and joined the chorus as a performing lead singer. To hear why, come out for our annual spring show, 7:30pm May 30 at the Center for
Performing Arts in San Jose. Two awesome quartets -- Boyz Nite Out and Metropolis -- will perform with us. General admission tickets are available
for only $12 at www.VIHchorus.org or by calling at 1.877.684.3844. I promise you a great time!

Blogged with the Flock Browser

// posted by David Cowan @ 12:43 AM 1 comments

Thursday, April 16, 2009

PR Firms: Adapt to the Social Web, or Die
I lunched today with PR agent extraordinaire Abigail Johnson, who gave me great tips for my upcoming trip to Russia. I reciprocated with a lesson I
learned from a recent exercise in amateur PR.

I had wanted to tell the world about an exciting development at MashLogic -- a startup we're incubating at Bessemer -- so I blogged about it. Having
posted the article, I congratulated myself on a job well done. But weeks later I noticed a blog post titled Why I Uninstalled MashLogic from a user
(Zoli Erdos) spooked by privacy concerns. Our mission at MashLogic centers on user empowerment and privacy, so this negative post might have
easily erupted into a contagious meme on the web -- a potentially fatal backlash against our young product.

Fortunately, though, MashLogic's architect and co-founder Ranjit Padmanabhan (photo right) had been combing the
blogosphere, so minutes after Zoli posted, Ranjit responded with a very open acknowledgment of the issue, a full explanation
of our privacy policy, why we think our approach is right for users, and what we're doing to improve it. Ranjit showed genuine
appreciation for the feedback. Zoli's response: "Kudos to you guys for recognizing the issue :-)" and then he updated his blog
post with a commendation of MashLogic for the immediate response.

The conclusion here is probably obvious and intuitive to some readers, but it may bear elaboration for those among us
saddled with more outdated expectations of the PR process...

As everyone knows, PR agencies cultivate relationships with journalists and editors who are in
a position to generate product awareness among their readers and viewers. In a world where
most people were reading a concentrated set of newspapers and magazines, these agency
relationships -- combined with diligent follow-through to address the journalists' questions --
promised significant value to companies who wish to get their message out. Plant the story in a
few key chokepoints, and everyone would read it more or less as pitched to the media outlets.

But in today's world, it's not enough to hit the major news sources. For every story printed in
the New York Times, hundreds or thousands of reader comments, blogs, emails, and tweets
react to the story. Indeed, user-generated content now dominates professional content in both
volume and mindshare, and so the tenor of user-generated commentary is far more important to the agency's client than the tenor of the original
article.

For almost all agencies, though, favorable press hits represent the end of the PR process, not the beginning. But favorable press hits themselves
should not be the metric of success. Rather, PR firms today should document an intense followup in the two or three days following press hits to
actively engage the market through comment pages, blogs and Twitter.

Specifically, a great PR firm should help its client companies address the inevitable questions and reactions that skeptical readers should and do
express, and to do so quickly while the public reaction is still forming through social echoes of the story. Responding to a "backlash" a week later is
much more difficult than pre-empting the backlash in the first place.

Really I'm just talking about listening to customers, giving them straight answers, and doing it quickly. In today's transparent world, spin doesn't work.
Questions must be addressed with humility and honesty (just as Amazon did yesterday); today more than ever, a great PR firm must help its clients
respond fast, without defensive thinking.

I hope Abigail appreciated the advice as much as I appreciated her pointers to the Czar's palaces near St. Petersburg. I do
hope to see her agency and others adapting to the dynamic, transparent PR requirements of social media.

Blogged with the Flock Browser

// posted by David Cowan @ 1:24 AM 3 comments

Wednesday, April 15, 2009

Best Product Teaser Video Ever?
Congrats to the Smule team on launching Leaf Trombone World Stage!

Blogged with the Flock Browser

Labels: leaftrombone, rhettandlink, smule, teaservideo

// posted by David Cowan @ 8:00 AM 0 comments

Monday, April 06, 2009

Carless for a Year
I didn't mean to become carless -- it just kind of happened.

The 2004 Mercedes E500 has a poor track record for quality, so a week before the warranty expired on mine, I sold it. I couldn't figure out what to
buy, and there are so many cars to test drive. (Who Has Time For This?) That was 14 months ago.

It hasn't been so bad, really. I hitch rides with my wife and my colleagues, and sometimes I bike to work. I borrow my friend's car when he's away on
travel, and I joined ZipCar. And when I'm not traveling for a whole month, I pay Hertz $600 to rent an Audi, BMW, or Infiniti .For regular customers
like me, Farshid at Hertz Palo Alto drops off and picks up the car and -- here's the best part -- It turns out that renting is actually cheaper than
either buying or leasing.
View Larger Map

Here's why it works for me (and maybe for you): my wife drives an old Odyseey minivan (winner of the WhoHas award), for which the liability
insurance has got to be cheaper than for any other car. But still the policy covers my liability for rentals up to one month, and AmEx covers any
damage to the rental car (as I now know first hand). I don't have to pay for insurance, registration, sales tax, maintenance, depreciation, cost of
capital or even car washing. (I still pay for gas, but less than before, thanks to BillShrink.) Even if I rent the car 7 or 8 months a year, it's still way
cheaper than owning the same luxury car, and I get to feel just a tiny bit greener.

So when the hell are you going to buy your own car? they ask me at work as I bum rides home. Well, I did put down a deposit on a Fisker Karma,
so that pretty much guarantees I won't own a car any time soon!

Blogged with the Flock Browser

// posted by David Cowan @ 12:01 AM 3 comments

Sunday, April 05, 2009

CertifiedVideo: GoodMail has a Tiger by the Tail
On Friday Twitter was abuzz about GoodMail's new CertifiedVideo service.

For those who missed my post on Why I Invested in GoodMail, GoodMail shifts the onus and cost of email security from individuals like us to the
commercial senders who have the budget and motivation to pay for authentication, cryptography, scanning, and monitoring. And the need for trusted
email has never been higher, as scammers exploit the economic crisis to deploy phshing attacks of unprecedented sophistication. GoodMail already
delivers billions of Certified Emails every month (look for the blue ribbon icon in your inbox to spot the authenticated, unphishy messages).

GoodMail's latest service enables senders to present full playback video inside email with cryptographic proof that the video is safe and the source is
trusted. According to yesterday's Wall Street Journal, CertifiedVideo opens up for media companies and permission-based marketers a compelling
new channel that promises much higher engagement and response rates. Studies show users 4X as likely to play video that is embedded rather than
linked to. That's why the NY Times, Turner, Fox, NBC, Target and LiveNation are already on board.

Play ABC News segment:

Blogged with the Flock Browser

// posted by David Cowan @ 9:39 PM 0 comments

Monday, February 09, 2009

TED 2009 Friday: Talking Bacteria
<-- Previous TED Post

40-year-old Ray Zahab talked about his recent record-breaking 33-day expedition to the South Pole. Along the way he stayed online and in touch
with kids around the world along the way. His previous adventure was running 110 miles through the Sahara Desert. The punchline is that 5 years
ago he was sedentary, smoking a pack a day.
 Score: 6 (out of 10) Balloons

Golan Levin generates art from images and voices. Foofy.

Score: 3 Balloons

Nina Jablonski delivered a good talk on the evolution of skin pigmentations. It's clear why pigmented skin protects equatorial populations, but I
hadn't known why Eurasians evolved lighter skins during the three hominid migrations out of Africa (once Neanderthal, twice homo sapiens).
Apparently less pigmented skin is better able to generate Vitamin D when needed, which preserves bone integrity and protects us from the kinds of
radiation that penetrates at higher latitudes. So not only is it unhealthful for light skinned people to live in tropical climates, but there are also risks for
dark skinned people who live far from the equator.

Score: 7 Balloons

Arthur Benjamin is a math professor who performs mathemagics on the side. (Below is a prior demonstration at TED.) Instead of performing mental
tricks this year, Art delivered an intriguing message about math education in the US:

Instead of building up to calculus as the epitome of math education, we should instead sequence our lessons so that every high school graduate
understands statistics and probability. Calculus is nice for scientists to know, but statistics inform most complex decisions that people have to make
both at work and at home. Undoubtedly, Benjamin is right that most people don't understand simple concepts like expected value, which perhaps
explains the success of lotteries and casinos.

Score: 8 Balloons

Hans Rosling came back to TED with his compelling data visualization techniques, using them to illustrate drivers of the AIDS epidemic in Africa.
(Instead of a laser pointer he used a chair and pole.)

Score: 8 Balloons

Margeret Wertheim is a writer of science history who, together with her sister, crocheted
a coral reef. The reef became a surprise hit on the museum circuit, as 30 to 40 volunteer
crocheters attracted through the web added to the now extensive reef. Many TEDsters
seemed to think this was all cool for the sole reason that coral reefs are so important and
yet endangered. Frankly I thought the whole thing was a silly waste of time until Margeret
explained the relationship between coral reefs and crochet...

In 1997 Dr. Daina Tamina at Cornell discovered that thanks to its undulating curved
surfaces, crochet is the only straight-forward way to model hyperbolic structures.
Hyperbolic surfaces exhibit non-Euclidean and even non-Lobochevskian geometries.
Unlike Euclidean flat surfaces and Lobachevskian globes, on a hyperbolic surface there
are infinity lines to be drawn through any given point that are parallel to an external line.
You can see this on a crocheted fabric, where multiple contour lines can run through a
single point.

Score: 9 Balloons
Jennifer Mather gave a talk on octopus intelligence. She set forth parameters of intelligence and documented anecdotal evidence of octopus
intelligence, such as "playing" with a floating object. Unfortunately she did so with no scientific rigor, explaining that somehow the experimental
method doesn't work in this context. Once she convinced herself that octopi have personalities, she posed the profound question:

"Will they crawl out of the ocean and compete with us? No, that's physiologically impossible."

Oy, who has time for this?

Score: 1 Balloon

Nalini Nadkarni loves and studies the forest canopy. She talked about epiphytes and other organisms that have adapted to this
ecosystem. To staff one of her research projects involving the categorization of different mosses, she recruited prisoners, who have
the time, the room, and the interest to study mosses (fortunately they didn't need any sharp tools to do the work). Now she's using
them to raise the endangered Oregon Spotted Frog, "in captivity" of course. To promote the field, Nalini's team collected hundreds of
old Barbie dolls and converted them into Treetop Barbie, to get girls excited about the field. Lots of TED points here for inter-
disciplinary collaboration.

Score: 7 Balloons

Friday's highlight was certainly Bonnie Brassler from Princeton. She and her grad students have discovered that bacteria communicate extensively,
and she explained how and why they do it. She began her talk by pointing out that 90% of the cells in a human being -- and 99% of the genes -- are
bacterial, so we ought to pay attention to the critters.

Four years ago Hawaiian researchers discovered a squid in shallow waters that uses luminescent bacteria
to counteract its shadow in order to hide itself from predators. It has two lobes full of luminescent bacteria
that glow only at night when it's awake and hunting, and just enough of the lobes are exposed downward
to offset the right amount of moonlight and starlight of the particular evening. What an amazing
adaptation.

But a curious property of the squid caught Bassler's attention. The squid can essentially turn the light on
and off (no dimming), so the lobes glow only at night. What makes the bacteria all start and stop glowing
at once?

Bassler's team discovered a mechanism in the bacteria -- and subsequently in all bacteria -- that allows
them to communicate. Specifically, each bacteria emits a stream of enzymes for which it also has a
receptor. The receptor acts like a switch in the bacteria, so that when the enzyme reaches a certain
density in the solution around the bacteria, something inside the bacteria responds, perhaps by starting to glow. Therefore the bacteria doesn't start
to glow until there is a sufficient concentration of bacteria around it. And when it starts to glow, it also accelerates its enzyme emission so that all the
bacteria in the colony get the signal at roughly the same time. The squid flushes 95% of the bacteria each morning, which turns off the light, and
during the day the colony grows until it reaches critical mass at night.

This mechanism explains how bacterial infections are able to overcome our immune defenses. They enter our bodies in a slow-growing relatively
harmless state, and only after amassing a sizable cluster of agents do they suddenly, simultaneously attack.

Bassler also discovered an inter-species communication systems, so that bacteria know when there are other bacteria around outside their species.
Essentially there is a universal enzyme that they all emit and receive, so that they can behave differently depending upon the presence of other
strains.

With this awareness of bacterial communication networks, Bassler's team is pursuing a novel approach to fighting infection. Instead of trying to kill the
cells one at a time, which often leads to resistance, we can develop molecules that bind to the communication enzyme, immediately shutting down
the attack. It's like turning off the light in the squid.

Beautiful!

Score: 10 Balloons

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// posted by David Cowan @ 10:38 PM 0 comments

Saturday, February 07, 2009

TED 2009 Thursday: Hallucincation and Illusion
<== Previous TED Post Next Ted Post ==> Talking Bacteria

I awoke early on Thursday to ensure I wouldn't miss the first speaker, Dr. Oliver Sacks. Sacks wrote the great study of neural
disorders, The Man Who Mistook His Wife For a Hat, as well as Awakenings (adapted to film with Robin Williams). Recently
he wrote Musicophilia, documenting music-related brain disorders that yield a glimpse of how the brain understands and
creates music. At TED he talked about the visual hallucinations that plagued many of his older patients. Sacks described the
hallucinations in detail, and explained his diagnosis of Charles Bonnie Syndrome, named for the scientist who first observed the
incidence of hallucinations in his own grandfather as well as about 10% of people with any kind of sensory impairment (even
partial). Part of Sacks' charm is that he respects his patients enough to understand the details of their hallucinations (they tend
to be repetitive and often feature staircases and deformed faces), assuring them that despite a tangible neural condition, theyr'e
not demented. Sacks lamented that only 10% of people who suffer this syndrome tell anyone for fear of derision.

Sacks ended by disclosing that he himself is partially blind in one eye, and that he himself experiences a mild form of these
hallucinations (geometric shapes). Like Jill Bolte Taylor's "stroke of luck", Sacks now has a subject he can study at all times.

Score: 9 (out of 10) Balloons

The other highlight from Thursday was Ed Ulbrich from Digital Domain who has won more than one Oscar for his digital effects. Ulbrich walked us
through the story behind The Curious Case of Benjamin Button movie, and how his team achieved what everyone had thought was impossible: for
the first hour of that film, Benjamin Button is represented by a digitized head imposed upon a different (much shorter) human actor. The head must
appear genuinely old, and still capture all the facial gestures, nuances, and actins (cry, sweat, vomit...) performed by the actor Brad Pitt.

When Ulbrich took on the job he had no idea how they would tackle this challenge, but he and his team applied a "stew of solutions" that utterly
pulled off the illusion on time and on budget:

1) Animators have conventionally applied radio receptors to the face to track the movement of facial muscles. This generates about a hundred
polygons that can be rendered to simulate human expressions. But to render the resolution of a human face without any hint that it is digitized, 100
polygons is not detailed enough. So Ulbrich pioneered the use of a radio-reflective particulate (?), mixing it into Brad Pitt's makeup so that they could
track the movement of the entire facial surface, generating 100,000 polygons.

2) With the particulate in place, they recorded the execution of every possible facial gesture one can perform. every twitch of the eyebrow, flare of the
nostril, quiver of the lip. On demand, their digital face could now re-produce those gestures.

3) They sculpted and scanned three replicas of Brad Pitt with all the aging that he will show at 60, 70 and 80 years of age. They mapped the
surfaces of these scans to the gestures in their database, so now they could render every facial gesture that Brad PItt will present in his senior years.

4) The short actor who played the elderly (er, I mean infantile) Benjamin wore a blue head mask -- sort of a human green screen upon which Digital
Brad's face could be inserted.

5) Brad then acted his part, while a computer recorded and identified each and every gesture to render it digitally upon the other actor's head. We
watched Brad on one screen acting his part while on the other half of the screen older Digital Brad was duplicating his facial gestures. Obviously
Brad Pitt is a very talented actor, whose every expression had to genuinely carry through to his character. They did, and the result was compelling.

I must admit I did see one tiny flaw in the process. Benjamin was saying that due to his condition he might die or might not die while he was still
young. In a wonderfully childlike manner, Brad Pitt quickly glanced to the upper left corner of his eye and then forward again -- but it happened so
fast that Digital Brad missed it.

This was a great talk that incorporated all three original meanings of TED: Technology, Education and Design.

Score: 10 Balloons

Elizabeth Gilbert is the author of the bestseller Eat. Pray. Love. Her talk was well received, so you may wish to watch it,
especially if you liked the book. Indeed, she did make me laugh out loud a few times. But the message
-- how to tap into your muse and unleash your creativity -- was sufficiently foofy that it wasn't one of my favorites.

Score: 6 Balloons

Louise Fresco, an international expert on hunger, walked us through the history and economics of bread-making across centuries and cultures.

Score: 4 Balloons

I normally don't expect to like the design-oriented talks, but Jacek Utko was worth watching. Here's a young guy who got the job
as "art director" at a tiny struggling newspaper in Poland, and attacked the job with such passion that he transformed the
newspaper into an award-winning, fast-growing regional magazine. He started with a re-design of the layout to provoke the
interest of readers, much the way web designers do, and compelled the editors to fit their stories into his format. It's a nice story
of an underdog's success.

Score: 8 Balloons

Unfortunately I couldn't make it to the Thursday afternoon sessions.

Blogged with the Flock Browser

// posted by David Cowan @ 11:59 PM 0 comments

Friday, February 06, 2009

TED 2009 Wednesday (cont.): "Reframe"
<= Previous TED post Next TED Post =>

TED is just too intense to blog – I can’t keep up. I’ll try to at least keep reporting on the highlights…

But first, some more brushes with celebrity: Paul Simon, Daniel Dennett, Nathan Myhrvold, Meg Ryan.

Wednesday afternoon’s session was titled Reframe. Ben Zander came back to TED to kick off the session, conducting the best rendition ever of
Happy Birthday To You. I don’t know if it will make the DVD but if so he’s great to watch -- he always leaves shining eyes.

Tim Berners-Lee thanked the world for uploading documents to his HTML project and asked that we please
follow up now by uploading our data. His new vision for the web centers around Linked Data – tables of
structured information that can be linked to other tables enabling massive joins. His database in the sky is
object-oriented, with a URL identifying each object (person place, etc). Tim led the audience in a chant of “Raw
Data Now!” to compel the world (especially the US government) to publish raw data that anyone can access,
rather than waiting for completed applications.

Score: 9 (out of 10) Balloons

We heard a funny interlude by Cindy Gallop who complained that hard core pornography is now so easily
accessible online that young people have twisted ideas of what most people consider to be normal in bed. So
she unveiled her educational site MakeLoveNotPorn.com, debunking myths perpetuated by pornography.
Definitely rated R, so I'll leave it at that.
Al Gore delivered a very short talk on climate change -- careful not to rehash old slides. He presented an update on the rate of arctic melting along
with other ominous metrics of global warming. The focus of his talk, though, was "clean coal" which Al says is a myth promoted by the coal industry.
He played a cartoon commercial developed as part of a shocking campaign to promote clean coal, that Al understandably compared to Joe Camel:

Gore also played the clip of a commercial meant to fight back the coal
industry's campaign on clean coal.

Score: 10 Balloons

Tribes author Seth Godin gave a rousing and entertaining talk about leadership, and taking the initiative to
activate groups of people around whatever cause that moves you. His basic point is that it’s easy to connect with
people on the internet, so lots of micro-communities form.

Having said that let me caution you away from his book Tribes. If you read the paragraph I wrote above, then you
get the gist. And if you get the gist, well then you’ve pretty much read the book. At least Seth doesn’t pretend
that his conclusions are based on scientific data, so his books are better than Malcolm Gladwell’s.

Score: 6 Balloons

Nandan Nilekani, co-founder of InfoSys spoke well about the changes thrusting India's economy into a major world player. Unfortunately, I misplaced
my notes today on this and several other lectures!

I may have also lost my notes on MIT Media Lab Professor Pattie Maes' talk but the highlight was unforgettable: a personal, wearable mobile
system (cam, phone, battery-powered projector...) that scans the world around you, and in real time projects helpful video on any surface. For
example, when you're looking at products in the store (books, paper towels, whatever), it will project information right onto the product such as a
green rating, price comparisons, and consumer reviews. Presumably it could also scan the buildings around to tell me who and what is in them.
Presumably, it could also "speak" to me through headphones so I can hear private tips such as the name of a person I run into and his/her spouse
and kids!

It was an impressive demonstration. Pattie introduced the student behind it, and he evoked a standing ovation.

Score: 9 Balloons

Next we all danced, led by Matt Harding the guy who dances around the world in his famous YouTube videos. He tried to teach us a Bollywood
dance, but he’s not really an expert. Chris compared the exercise to “learning science from George Bush.”
The day closed with a strange performance (and really, I mean that in a bad way) by Regina Spektor.

// posted by David Cowan @ 5:38 PM 0 comments

TED 2009 Wednesday: "Reboot"

<-- Previous TED Post Next TED Post -->

To help prioritize your viewing of TED talks, I offer a TED score of each 18-minute presenter, ranging from one to ten TED Balloons. If I fail to score
a presenter, either I missed the session, I quickly gave up on it and checked my email, or didn’t score it because it wasn’t a full-fledged 18-minute
TED Talk. The factors I consider: interest, importance, clarity, entertainment, and the speaker’s personal connection to the content. For example,
based on these factors I would have given 10 balloons last year to Jill Bolte Taylor (whom I met yesterday in Google Café) and Ben Zander.

The opening session of TED, called “Reboot,” had a strong lineup…

Juan Enriquez was introduced as a man of many diverse accomplishments, ranging from a professorship at Harvard Business School to an
experience he had once holding off a crowd of armed rebels (though presumably not at Harvard). He was entertaining – chock full of interesting data,
jokes and advice regarding the economic hardships now challenging the world. He warned of “losing the dollar” to the kind of inflation that grips
Zimbabwe unless we rein in our dependency on credit to support entitlement programs. He recognized venture-backed companies for generating 17%
of our economy’s growth on only .02% of our invested capital. And he pointed to areas of innovation that have the potential to generate disruptive
opportunities:

• Biological engineering parts. There are catalogs of these components from which you can engineer biological machines like “cancer
fighting beer” fortified with resveratrol.

• Stem cell therapies that have already been used to grow human parts like teeth, windpipes, and portions of the heart; and the
potential to generate these stem sells from normal, adult skin cells.

• Robotic implants (e.g. cochlar) that will match and exceed human capability; he shared a great video of Boston Dynamics’ “Big Dog”
quadraped robot on legs running around snowy hillsides (though it suspiciously resembled two people under a blanket). In recognition of
Darwin’s 200th birthday this month, Enriquez observed that for most of the history of hominids there were multiple species in various
stages of evolution, and mused that we may now be on the cusp of Homo Evolutis, a new species of humanity enhanced by synthetic
parts that will ultimately eclipse homo sapiens. “What was the point of 13.7 billion years of history – to create what’s in this room here
at TED? That’s a mildly arrogant viewpoint.”

Watch the video here.

Score: 8 Balloons.
Enriquez is definitely worth watching (but not a 10 because there was neither a coherent theme to the talk, nor
much of a personal connection for the speaker).
Next, Jill Sobule chimed in by video from TED’s Palm Springs venue with her familiar, quirky songs that always put a smile on your face. Worth
listening to. Here’s one of her earlier TED songs with a cameo by TED curator Chris Andersen:

The next speaker, PW Singer, presented the robotics revolution in warfare. He shared interesting clips and tidbits on the rapid growth of robotic
warfare, like the new drones and OED robots in Iraq that clearly save human lives, and are genuinely missed by their platoons when they fall in
battle. Anyone can compete on this new battlefield (even Hezbollah has launched drones against Israel), so while the US is ahead in robotic warfare,
Singer warns that our weak primary educational system jeopardizes our future ability to compete against Japan, China and Russia for robotic
supremacy.

Singer shared examples of new phenomena that stem from robotic warfare: remote warriors in San Diego and elsewhere who kill during the day go
home at night to their families; “war porn” on YouTube fed by on-board cameras; and “oops moments” in which software glitches kill with friendly fire.

Score: 6 Balloons.
If you’re interested in military or robotic developments, watch Singer. But for others, he’s not the most gripping
speaker, and he tried to make weighty insights that missed their targets.

Here’s a great commercial TED displayed for sponsor Comcast:

The best music at TED so far was performed by Naturally 7, who surpass even M-pact in their mastery of vocal play. Here’s one of the songs they
performed -- if nothing else listen to the one minute starting 40 seconds into the video.
Next Dave Hanson briefly demonstrated his startup’s invention of robots with personality. His Einstein head finds a face,
locks in on the eyes, reads the facial expression and mirrors a similar emotion exercising an impressive array of facial
movements. Einstein has been on display in the lobby so anyone can talk to him. Interestingly, pretty much everyone I
watched decided it was very important to make Einstein laugh and smile, as though he were a little kid. I must have been
the only sicko trying to piss him off, as shown on right. (Hello, he’s a machine!)

The session wrapped up with Bill Gates, introduced as "the biggest giver ever." Bill quipped that he hoped he wasn't in the Reboot session because
of his affiliation with Windows... But he didn't show much interest in software--he seems quite focused now on philanthropy. He posed two tough
problems for humanity that he hopes to address through his foundation:

1. How do you stop the spread of disease (malaria) that is spread by mosquito? Bill mentioned a mish mash of preventive strategies (bed nets
and DDT) and therapies (quinine and experimental vaccines), but there's no coherent road map. Of his foundation's $3.8 billion annual budget, he
allocates about $100 million to malaria. Still there's more money spent on fighting baldness than malaria because, Bill says, baldness afflicts rich,
white men. For drama Bill released mosquitoes into the room, at which point Chris Andersen complained that Bill just can't stop releasing bugs into
the world.

2. How do you make teachers great? Here he had more ideas relating to the collection of data that can identify characteristics of success. For one
thing, he presented data showing that neither a teacher's experience nor graduate education correllates with student success. Rather, the only
important variable is the teacher's past performance. So teachers who somehow develop a successful strategy consistently outperform, graduating
students who regularly score 10% higher than average. That's why schools need an entrepeneurial, open culture that invites regular review and
scrutiny of teaching methods, identifying best practices and sharing them with everyone. Obviously unionized school resist this (they'd never allow
filming of classes, and unions even prevailed upon New York State to disqualify teaching success as a factor in tenure decisions). But one charter
school in Texas named KIP has taken this approach with reportedly spectacular results (98% matriculation into 4 year colleges among a very poor
student body), and so there is a model.
There was a great moment at the end when Chris Andersen opened his laptop to ask Bill some questions, and the Apple logo shone ever so brightly
and prominently. The laptop case faced the audience and so neither of them understood why the audience was laughing.

Score: 8 Balloons

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Thursday, February 05, 2009

TED 2009: "The Great Unveiling"
Next TED post -->

Here I am once again at TED, the fabulous conference (now 25 years old) that attracts some
incredible minds to tackle the big issues facing our species. (The celebrities I've seen so far
include Al Gore, Larry Page, Forest Whitaker, Tim Berners-Lee, Oliver Sacks, John Doerr,
Ben Affleck and Bill Gates.)

This year I'll try to share some details on the highlights of the conference. I will be more
detailed than I was two years ago, but not as comprehensive as I was last year, when I
covered just about every speaker (in part because work forces me to miss some of this
year's sessions). My objective in blogging it is to give a taste of TED to those who haven't
followed the phenomenon, and to give the loyal TED fans somewhat of a road map as to
which sessions are worth watching online or on DVD.

Yesterday, as a warm-up for the formal agenda we had our first session of Ted University, in which 20 or so TED attendees have 8 minutes
each to teach something or share a message. Here were the highlights:

Ray Kurzweil, with characteristic panache, defended his thesis that innovation proceeds at an exponential rate, not just when it comes to
semiconductor density but to all aspects of technology, such as computing, labor productivity, and solar energy. To help sustain these curves,
he announced that he and Peter Diamandis (X Prize and Zero-G Flight) have launched the Singularity University he started with backing from
NASA and Google. The university is supposed to apply these exponential technology curves to solve problems of the world, but I'm not sure I
really understand the scope, since I thought that other universities already do that. (Later, sipping java in the Google Cafe, Peter
acknowledged to me that the whole thing is still experimental).

Matt Childs' rules of mountain climbing (delivered with an implication that these rules apply to life in general): Don't let go. Keep moving
forward. Plan ahead. Stay in the present. Know how to rest. Fear sucks. Strength doesn't always equal success. Know how to let go (plan your
fall).

Jonathan Drori told the story of his Millenium Seed Bank, which aims to protect the integrity of earth's
natural ecosystem by preserving enough seeds to guarantee that we can study plant life and restore extinct
species. The bank is located in a remote English facility shielded from nuclear radiation and situated
outside flood zones. So far they have collected 3 billion seeds from volunteers around the world, covering
24,000 species, or 10% of Earth's plant life at a cost of $2,800 per species. By 2010 they aim to reach
25% coverage. This was the first of many TED sessions that implicitly pose the question, so what have
YOU done lately?

Kokoe Johnson taught us how to make cheese. Right in front of us he fixed up some lebneh -- dried Greek
yogurt cheese. He apparently acquired the skill while living in "a queer hippie commune."

Dave Bolinsky was back at TED, this time to share his educational visualization of the Dengue virus infecting a healthy cell. Definitely worth
seeing.

More TED to come...

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Wednesday, February 04, 2009
Mash Feeds Syndicate Content to the Browser, Linking the Web to
Your Site

Today MashLogic released Mash Feeds, a free service that pushes your links and content to every relevant page on the web.

Repeat traffic is critical to the success of any web site, so most publishers today like to offer an RSS feed -- a stream of content intended to keep the
user engaged and coming back. This worked for a while among the early adopter crowd, but most people never use an RSS reader, and those who
do often complain of RSS overload as they find themselves overwhelmed by content that seldom gets read.

Mash feeds are an alternate way to syndicate content, pushing it into the browser rather than an RSS reader. Subscribers to your mash feed will get
your links with rich callouts embedded into every relevant page they visit. There's no longer any need for them to install, learn and regularly check
their RSS readers. It's the simple, ultimate way to engage your audience.

When you install a mash feed on your site (we recommend you put it near the RSS icon, as shown on
the right), MashLogic starts indexing the keywords in your RSS feed (it may currently take MashLogic
6 hours to build the complete index). Visitors to your site can now subscribe to your mash feed by
clicking on the mash feed icon, which installs a mash in their Firefox or Flock browser. (IE is coming
soon, and in the meantime IE users will not see the mash feed icon.) Even if your users never run an
RSS reader, links to your site -- with your content in the callouts -- will follow them to semantically
relevant pages on other sites. It's as if you had free rein to hyperlink the web as you want.

Of course, the user retains ultimate control of and visibility into the mash. MashLogic's mission is to
empower people to Take Back the Web, so we always respect the user's choices -- whether that
means embedding links to your site in the web or, at any point, de-activating the mash. And we never
insert ads into the user's web experience.

By subscribing to mash feeds that you

like, you no longer have to read every
news feed "cover to cover" (Who Has
Time For This?). MashLogic does it
for you, and lets you know when that
content is relevant to something else
you're doing on the web (or, soon, in
other applications as well). For
example, I've subscribed to so many
science and health news feeds that I
can no longer keep up; but now I let
MashLogic link me to the news (or
auctions, or media, or job listings...)
from sources I trust right when I'm
most interested in those topics. For
another example, see on the right
how my blog's mash feed pushed
topical, relevant content to the Forbes
web site.

So if you like WhoHasTimeForThis?

please subscribe to my mash feed,
and try adding a mash feed to your own site (unless, of course, you hate free traffic...).

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Tuesday, February 03, 2009

You Know You're an Anti-Semite When...
Hey, Pope Benedict: When you've been criticized as unfair to the Jews by the Chancellor of Germany, it's time
to consider that maybe you're an Anti-Semite.

Just to be helpful, here some other signs for my readers that you just may be an Anti-Semite:

-- When stopped for drunk driving by the LAPD, if you guess that the arresting officer must be a Jew,
 you might be an Anti-Semite.

-- If the address on your checkbook is "Unknown Cave, Pakistan" then just maybe you're an Anti-
Semite.

-- If President Ahmindejad invites you to be keynote speaker at his next conference, then you should
consider the possibility that you're an Anti-Semite.

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Thursday, January 29, 2009

Bessemer Tops Midas List... Again?
Hurray for Bessemer Venture Partners! Forbes recognized six of our partners on this year's Midas List, more
than any other firm. This is the third year running that Bessemer boasts the highest number of investors on the list.

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Thursday, January 15, 2009

A Keck-Ass Birthday
Today I was on top of the world. A cadre of my CEO’s joined me atop the tallest mountain on Earth -- Mauna Kea -- with great views of both our
planet and others. This summit is the site of about a dozen observatories operated by universities and agencies from Japan, Canada, France, and
other nations whose astronomers seek a thin, and accessible atmosphere unpolluted by light (not to mention a nice island to visit).

A geodesic dome housing one of Caltech’s observatories.

The jewel of the summit is the Keck Observatory, a joint venture of UCLA and Caltech that operates the world's two largest telescopic lenses with
diameters of 8 and 10 meters each. In fact the effective resolution is much greater because the two lenses can be individually adjusted by
interferometers for atmospheric distortion (primarily from light-bending air turbulence) and then combined to present a highly precise parallax and
panoply of data points. Researchers apply up to a year advance for the chance to use Keck’s equipment on just the right night, but only 20% of the
many applications can be accommodated, and even the winners of the peer-reviewed selection process can be stymied by cloudy weather, only to
get in line again. It was here at Keck that astronomers discovered most of the several hundred known exo-planets, as well as observable properties
of the black hole anchoring our galaxy.
Now we had started the day 14,000 feet below the top of the world -- racing our stand-up paddleboards in the warm Pacific, and snorkeling the reef.
Coming off Sunday’s storm, the waves were higher than any the locals had seen. We were a tad reckless, and sure enough it ended in injury as
Mike Fitzsimmons kayak-surfed a wave right into shallow coral and a dozen sea urchins. (Ouch! Not my most value-added day as a VC.)

Debbie Goodwin at Keck drove us up the mountain grade as we passed through several micro-climates (the Big Island of Hawaii has 11 of the
planet’s 13 climates). At 9,000 feet we stopped for lunch at base camp to acclimate ourselves to the thin air. At 12,000 feet we started seeing the
snowboarders and skiers on the slopes around us, and a man filling his pickup truck with snow to bring back down the mountain for fun. As we finally
reached the top, we all felt the effects of a 60% atmosphere – nausea, dizziness, forgetfulness, and freezing temperatures. It was great! (Though we
did have to stop now and then to tap the oxygen tanks.) Unfortunately the effects of high altitude are more dangerous children, who are restricted
from the summit until age 16.

To achieve such high resolution imaging, Keck pioneered a scalable design of segmented mirrors driven by actuators. The mirrors form a parabolic
surface that directs all the waves to a secondary mirror opposite them, which bounces the waves back into the center of the parabola where a tertiary
mirror bounces them into the interferometers along the side. The entire mechanism -- which we watched in awe as its 300 tons glided into proper
viewing position for its next target -- floats on a ring of hydrostatic oil that enables a single person to move it!
With such a segmented design one can theoretically build a mirror of any size to catch photons and indeed there are even larger telescopes in the
works. Keck is hoping to house a project planning a 30m lens, but the island's residents have interceded on behalf of Poli'Ahu the snow goddess, so
the project may be headed for Chile. (Who has time for this?) Here’s one of the 2 spare glass segments, which rotate off the telescope periodically
for maintenance. In this picture, the mirrored aluminum coating has been chemically removed, so you can see the sensors and actuators.

Here’s the second spare segment that has been re-coated with a layer of aluminum 1% as thick as a human hair.

In this photo below from the Keck web site you can see the laser beam they emit into the atmosphere to measure atmospheric disturbances to their
observations.
At the end of the day our friends at Keck surprised me with a birthday cake and song. I got to discuss multiverses with the astronomers while
downing layers of chocolate and coconut. Yeah!

When we were back at sea level we shed the layers to enjoy barbeque, spa, poker and pool. Among other lessons today, I learned how to shear off
the top of a bottle Dom Perignon by swiping a butcher’s knife along the bottleneck, just as Napolean’s cavalary did with their sabres. (Don’t try this at
home.)

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Saturday, January 10, 2009

Sister Goddesses of the Big Island
Blessed be Namakaokahai who revealed majestic whales to us today as they crested the waves of Her sea.

May She protect the feeble minded snorkelers who obliviously explore Her watery canyons below the ball path of the picturesque 15th hole on Mauna
Lani South. Oh, Namakaokahai, did I not try to call out to them over the clamor of Your crashing surf? I did furiously wave my hat in a move-your-
ass gesture, to which the surely oxygen-deprived bathers simply smiled and waved back before resuming their ill fated swim only a cubit from where
one of our foursome's wayward tee shots soon splashed in.

And Blessed be Her Sister, the Mighty Pele, who smiled upon me today at the base of Her volcano, bestowing upon me the totally chillin' score of 81!

And may She bring wisdom to the waiter who, when asked at lunch today if the pea soup is vegetarian, responded, "Yes... mostly."

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 Goodbye Travel Book, Hello iPhone
earch
By David Hornik on August 12, 2009 7:49 AM | Permalink | Comments (3)
Search

I've just returned from a trip to Paris with my family and have to say that I found the use of my iPhone on the trip
pretty transformative. For those of you who haven't travelled as a tourist in a foreign city before the iPhone, it used
to go something like this -- buy a travel book (or two or three) and plan out what you'd like to see, as best you
can. Email your friends and gather as much advice from them as possible to assist in the process of picking out
things to see and places to eat. Get a tourist map when you arrive in the city and mark down the locations of the
things you want to see and the places you want to eat. Go to your closest subway station and get a subway map,
then try to match it up with your tourist map. Commence touring around city with tourist map and subway map
scrunched in your back pocket and guide book in hand, periodically pulling out unwieldy maps and books to try
and figure out where the heck you are and what you are seeing. At all times look like a dorky tourist.

Enter the iPhone. No need for those paper maps. No need for those heavy guide books. This one little device in
Categories your pocket literally does it all.
onferences (76)
onsumer Electronics & Gadgets Before heading to Paris I did two things that set me up for smooth traveling. First, I called up AT&T and pre-paid
39)
for international data. Data doesn't come cheap in Europe but it is cheaper if you pre-pay. I never made a phone
onsumer Internet & Media (91)
ntrepreneurial Success (46) call while in Paris, but I used plenty of data. The second thing I did was loaded up on a bunch of useful apps. I
ardware & Systems (21) got a good translation app -- invaluable when stuck on a menu item -- and a French Tutor app. Sadly, no amount
ternet Infrastructure (33)
egal Issues (33) of listening to the proper pronunciations of French phrases could help my accent (just ask my kids, who teased
anagement Issues (68) me mercilessly every time I attempted a French word). I also dowloaded a French Metro app that had a full
odcast (8)
resenting Your Company (45)
subway map and would use GPS to find the closest Metro station from anywhere in the city. Along with those
emiconductors (7) apps, I spent five bucks on a Rick Steve's Paris Tour but didn't really ever use it. It had some good histroical info
oftware (36)
but I tended to use Wikipedia for that, rather than Rick. Ok, ready to cross the pond, as my dad would say.
he Deal (21)
he Economy & Finance (62)
While in Paris, I could count on the iPhone to answer two questions reliably: 1) where am I? and 2) how old is
Cs Around The Web (39)
entureBlog Administrative (16) that? While that may not seem like much, I would say it accounts for more than 50% of inquiries while traveling
entureCast (11) around Europe. I can't understate the power of pulling up Google Maps on the iPhone when you emerge from the
ireless & Telecom (25)
Metro. No more trying to orient yourself on a paper map. Just launch Google Maps and there you are. Better yet, if
you have the new iPhone, you can even see which direction you are pointing, so you won't have to walk a block
Archives just to realize that you are walking in the wrong direction. Looking for a particular museum or restaurant? Search
for it on maps and, voila, there it is located with a red pin. The iPhone takes out all the gueswork in navigation.
Select
Select aaMonth...
Month...

"How old is that?" isn't the only question the iPhone can answer. It can also answer "Where did Picaso live?" or
"Who's burried in Père Lachaise?" or "is the Louvre open on Tuesday?" If you are looking for a good crepe in the
About VentureBlog Marais, the iPhone will pull up all the crepe restaurants around, along with ratings and reviews. If you're
egal Notice wondering when's the best time to visit the Eiffel Tower, no problem.
ontributors
Admittedly, the iPhone isn't the only device that can help you find your way around Paris. Nearly any smart phone
will do some or all of the things that made my experience with the iPhone so satisfying. I am not a an iPhone
Other VCs To Read zealot by any means. I still carry a Treo in one pocket and iPhone in the other (give me an iPhone with a
eff Bussgang keyboard and I may think about carry just one phone). But the combination of useful apps, smart map and GPS
avid Cowan integration and powerful web browsing made traveling in a foreign city with the iPhone a joy.
hris Douvos
avid Feinleib
rad Feld
san Gabbay
ll Gurley
teve Hall Welcome Marc Andreessen and Ben Horowitz to the
hristine Herron
ike Hirshland
teve Jurvetson
Wonderful World of Venture Capital
aj Kapoor
osh Kopelman By David Hornik on July 6, 2009 7:55 AM | Permalink | Comments (1)
ascal Levensohn
ghtspeed Venture Partners I would like to take this opportunity to welcome Marc Andreessen and Ben Horowitz to the Venture Capital fold. In
len Morgan
oward Morgan
a time when venture investors are often criticized by the entrepreneurial community, it is a pleasure to have two of
eff Nolan the greatest entrepreneurs of our day join the VC business. I am often asked by my business school and law
d Sim
school students what the best path is to becoming a Venture Capitalist. My answer has been pretty consistent
ony Tjan
red Wilson over the last decade -- start or join a wildly successful startup and add a lot of value. It is hard to argue that Marc
and Ben haven't done that in spades. They have touched some of the most important technology companies of
Podcasts We Listen To the last decade and continue to play an influential role in Silicon Valley. As such, they have seen all sides of

C-IO (Levensohn Venture Partners)

startup creation and financing. They bring perspective, intellect, integrity and energy to Venture investing and I
odtech couldn't be happier to have them join the industry.
entureVoice
entureWeek As I understand it, the Andreessen Horowitz firm and August Capital share a number of the same Limited
Partners. That doesn't surprise me. As I read Marc's blog post this morning about his new firm, I was struck by the
What We Read similarity of our focus. He lays out a vision that is nearly identical to ours at August Capital. When we were out
axian raising our current fund at the beginning of this year we articulated to our limited partners our continued belief in
attelle's Searchblog great technical founders who are building game changing technology and we made clear that we remain bullish on
runchNotes
avenetics
the future of technology and the ongoing capacity to make a lot of money investing in information technology
eedBurner Weblog startups.
oe Kraus
cott Loftesness I would urge you to read Marc's blog post about his new fund. As I said when Marc first started blogging, he is one
he Long Tail
oss Mayfield
of the most articulate voices in the technology industry. And he is now one of the most articulate voices in the
ena's Corner Venture Capital industry. Just to hit on a few of the highlights of the Andreessen Horowitz philosophy:
m Malik on Broadband
Reilly's Radar Technology and its advancement is absolutely central to human progress. Entrepreneurs who create new
ay Shirky
technologies and technology companies are improving the standard of living of people worldwide and
liconBeat
x Apart News unlocking amazing new levels of human potential.
ashdot
oftware Only A technology startup is all about the entrepreneurial team and their vision. Our job as venture capitalists is
echCrunch
primarily to support entrepreneurs by helping them build great companies around their ideas.
ech Dirt
eff Veen
And, while there are many extremely bright and capable entrepreneurs all over the world, there continues to
evin Werbach
ired News be a special magic to Silicon Valley -- which is where we will focus.

Above all else, we are looking for the brilliant and motivated entrepreneur or entrepreneurial team with a
clear vision of what they want to build and how they will create or attack a big market. We cannot substitute
for entrepreneurial vision and drive, but we can help such entrepreneurs build great companies around their
Subscribe to this blog's feed ideas.
Subscribe to VentureCast
We are hugely in favor of the founder who intends to be CEO. Not all founders can become great CEOs, but
most of the great companies in our industry were run by a founder for a long period of time, often decades,
and we believe that pattern will continue. We cannot guarantee that a founder can be a great CEO, but we
can help that founder develop the skills necessary to reach his or her full CEO potential.

As I said at the outset, I don't know that I could articulate it better myself. I welcome Marc and Ben to the Venture
industry and look forward to working with them.

Rajeev Motwani, you are missed already!

By David Hornik on June 5, 2009 11:59 PM | Permalink | Comments (3)

I have spent the better part of this afternoon and evening trying to do anything other than think about the passing
of my good friend Rajeev Motwani. But I have failed. The thought that Rajeev has left us is hard to fathom. Rajeev
was part of the fabric of Silicon Valley. He was part of the fabric of Stanford. And he was part of the fabric of
August Capital.

For a number of years now, Rajeev has attended our partners meetings every Monday afternoon. As a tenured
professor, Rajeev could not join us as a partner of August Capital. But he enjoyed participating in the back and
forth of the partnership discussions. He enjoyed debating the merits of every new innovation. And he was quick to
share his point of view on each technology or company or entrepreneur. But he particularly enjoyed that when
partner meeting talk turned to the mundane or administrative, he could give us a sly smile and quietly slip out the
door.

Rajeev didn't have time for the mundane. He was too busy talking with everyone about everything. You would be
hard pressed to find a more connected or more informed professor, technologist or investor than Rajeev Motwani.
He worked tirelessly, meeting anyone and everyone who requested an audience with him. Students sought his
advice on grad school. Entrepreneurs sought his advice on financing strategy. Investors sought his advice on
technology trends. We all just wanted a little bit of Rajeev's time. And he always seemed to have that little more to
give us.

For those of you who didn't know Rajeev, you might get the impression that he was your typical Silicon Valley
insider -- loud, brash, full of bravado. He was anything but. Rajeev was soft spoken and gentle. He was self-
confident but didn't feel the need to prove anything. He didn't speak to hear his own voice. And he didn't need to
be the center of attention. Rajeev just wanted to be helpful. And he was. To so many of us.

Perhaps that is why so many of us thought of Rajeev as a friend. It is one thing to be friendly with someone in the
business world. It is another thing altogether to consider them a friend. Rajeev genuinely liked people and people
genuinely liked him. So it is no surprise to me that testimonials about people's friendships with Rajeev Motwani are
popping up all over the Web (here are the words of friendship and admiration from Sergey Brin, Om Malik and
Dave Morin, to point to just a few). I am sure that the testimonials will keep on coming in for days and weeks to
come.

While I could certainly go on about Rajeev's intellect, his curiosity, his business acumen, let me just say one more
thing about him and his character. Rajeev was a wonderful family man. I say that as the very highest form of
praise. Rajeev loved his wife Asha (as do all of us who know her) and he adored his children. Rajeev's face lit up
when he talked about his family. And he prioritized them above all else. No one will miss Rajeev more than his
wife and kids and, while I can only feel some small piece of their pain, my love and support goes out to them
during this tough time.

Rajeev Motwani, you are missed already. And you will be missed for years and years to come. You have left us
far too soon.

So Many Media Channels, So Little Time

By David Hornik on May 30, 2009 6:31 PM | Permalink | Comments (3)

Today TechCrunch posted a list of the "Top VC Blogs (According to Google Reader)." I was very pleased to find
out that I came in at number three, sandwiched between Fred Wilson and Brad Feld. But I have to admit, the
ranking makes me feel a little guilty. Not because I don't think there's good content on VentureBlog (after six years
of blogging, there must be some good stuff in there somewhere). But because I really don't blog enough. Every
couple of weeks or so, something jumps out at me that demands a blog post. In stark contrast, Fred and Brad
post all the time. I have huge respect for them for that. And not just because of the quantity, but because they
post great quality stuff day in and day out. So my hat is off Fred and Brad, who are the rightful owners of the top
two VC blog spots without any questions.

The challenges posed by trying to maintain an active blog are only further exacerbated by the incredible
proliferation of "media channels" these days. I don't mean professional media channels. I mean user-controlled
media channels. Blogs. Podcasts. Twitter updates. Facebook and LinkedIn status messages. YouTube channels.
Etc. The list is daunting. Yet anyone who takes seriously the idea of communicating directly with his or her
"customers" really can't ignore the opportunities posed by each and every one of these channels.

What's more, each of these media channels serves a different purpose. Podcasting can not replace blogging,
which can not replace tweeting. A jogger isn't going to read my blog while taking a morning run, but may well
listen to VentureCast. An entrepreneur trying to quickly get up to speed on the state of Venture Capital is not likely
to listen through 30 hours of VentureCast, but could easily browse through VentureBlog for relevant content. And
anyone foolish enough to care what I'm doing on a day to day basis will not likely find that out on VentureBlog or
VentureCast, but could certainly subscribe to my Twitter feed and get the latest and "greatest."

The more I think about the relevance of each of these media channels, the more I realize that it is important for
me to engage on each and every one of them. To that end, I have recently revived VentureCast -- now with my
partner Howard Hartenbaum. We intend to record a new show about twice a month. The first two we've recorded
are already available on iTunes, so check it out. It also means that I need to share more thoughts on
entrepreneurship and Venture Capital on Twitter, which I will surely continue to do. And, of course, it means that I
need to blog about the world of Venture Capital more frequently. If nothing else, this post is a good start.

Customer Service Matters

By David Hornik on May 8, 2009 9:34 AM | Permalink | Comments (7)

Just yesterday I had breakfast with Rene Lacerte, the founder of PayCycle, and we discussed the power of great
customer service. When Rene first pitched me on the idea of PayCycle, the service was not yet built. Nonetheless,
he was already discussing how he would integrate the customer support experience into the overall service
offering. He rightfully pointed out that every change you make to an online service will have implications for the
customer support team -- whether it is training, navigation, speed to resolution, etc. So from its inception,
PayCycle's product management and customer support went hand in hand. Rene is now building his second
customer-focused service called Bill.com and it too has been built from the bottom up with customer support in
mind.

As we ate breakfast yesterday, Rene and I had a long discussion about the fact that despite being called Software
as a Service, very few SaaS organizations put any emphasis on the "service" piece. Sure, you could argue that
the "service" in SaaS is all about delivery and not about customer support. But that would be a mistake. Service
businesses live and die based upon the satisfaction of their customers. While it is conceivable that your software
could be sufficiently foolproof that customer support is limited to receiving "thank you"s from your happy
customers, so far no one has quite found that Holy Grail. Customer support remains a significant piece of all SaaS
organizations and the more a company recognizes that going into building their service, the more likely they will
succeed.

So what does that have to do with the Rosewood Hotel? I was reminded of the importance of customer service
this morning as I experienced the Rosewood Hotel's stunning disregard for their customers. For those of you who
have not yet been to the Rosewood Hotel (and I would not recommend that you go), it is the new "high-end" hotel
that was just built on Sand Hill Road in Menlo Park. For those of us parked in VC-land here on Sand Hill Road, it
was a welcomed new place for breakfasts and lunches and, in fact, I have eaten breakfast there 12 times in the
little over a month that it has been open. But never again. (Warning: herein begins a rant -- a well-deserved rant,
but a rant nonetheless.)

Three weeks ago, when parking for breakfast, I was surprised to see broken glass in one of the parking spaces.
As I left breakfast, I pointed the glass out to a maintenance person driving his golf cart by. I assumed it would be
cleaned up. Two weeks later, the glass had still not been picked up, so when the manager of the Madera
restaurant came by to say hello to me (after all, I was there every other day), I pointed out to him that there was
broken glass in the parking lot that had not been picked up despite the fact that I had pointed it out two weeks
earlier. The restaurant manager apologized and assured me that it would be picked up. To my shock, it was not.
Undaunted, I figured I'd give it a third try. Two days ago, on my way to an event in a conference room in the
hotel, I asked to speak to the hotel manager. A nice young man named Daniel came to talk with me and I
recounted my tale of woes. I explained to him that while the glass hadn't particularly inconvenience me, that I
thought it didn't reflect well on his hotel and that he might want to take care of it. He assured me that it would be
cleaned up by the next time I visited, which I told him would be two days later.

I must say I was surprised to see the glass still there two hours later when I got out of my meeting, but I figured
I'd give him the benefit of the doubt and assumed that it would be picked up by my breakfast on Friday (today). I
was wrong. To my horror, as I drove up to breakfast this morning, the glass was still there. Was I cut by the
glass? No. Did I get a flat tire from the glass? No. So why do I care? Because I think that customer service
matters. I think that if you care about your customers, you should do more than pretend to listen to them. So rather
than park, I drove up to the front of the hotel and explained to them (amidst a fair amount of swearing) why it was
that I would not be eating breakfast there any more. The same manager, Daniel, was there and fell on his sword,
taking full responsibility for the incident. But as far as I am concerned, it is too little too late. Such blatant
disregard for your customers maybe deserves a second chance. And, if you are feeing extremely generous, a third
change (particularly when the restaurant is so convenient). But not a fourth chance. So I guess I'm heading back
to Il Fornaio for breakfast.

Customer service matters. And it matters more than ever in this age of blogs, and Facebook and Twitter. If you
search for PayCycle, you'll find a whole lot of happy customers. And if you search for Rosewood Hotel, I'm
guessing you'll see a whole lot of dissatisfied customers. You'll certainly find me there.

Update: Shortly after I posted this rant about the Rosewood Hotel, I got a call from Managing Director of the hotel.
Through the power of blogging, twitter and facebook, the Rosewood's MD had read my complaint moments after I
had posted it and promptly called a staff meeting to address the situation. He then came over to my office to offer
up his apologies for what had happened and his commitment to make customer service a priority of the hotel.
While I wish it had not escalated to the point of needing such attention, I certainly appreciate that the hotel's MD
took it seriously enough to come to my office and have the discussion.

StumbleUpon Brings Serendipity Back to The Web

By David Hornik on April 13, 2009 7:08 AM | Permalink | Comments (3)

A short time ago I wrote about my investment in Aardvark. As I said in that post, I believe that in many ways
search is broken and getting worse. Not only are there voracious efforts at Search Engine Optimization (SEO)
throughout the Web, but the scale of the Internet is monumental today and getting larger by leaps and bounds
virtually every minute.

The massive scale of the Web not only creates huge challenges for search, it also cripples discovery. Gone are
the good old days in which fortuity would lead to the unearthing of interesting new Websites. Remember when
Web directors would lead you to great sites on the topic of your choice (you may not recall but, in the early days,
"Yahoo" stood for "Yet Another Hierarchical Officious Oracle" and Srinija Srinivasan, Yahoo's chief of ontology,
was one of the most powerful people on the Web). Better yet, remember the good old days of browsing libraries --
the Dewey Decimal System created the propensity for discovering new and interesting books as a result of their
being shelved next to related categories -- while looking at one book, other books in its general vicinity would likely
pique your interest.

That sort of accidental discovery was driven out of the Web a long time ago. The only sorts of chance Internet
encounters most of us have these days are a result of mistyped URLs -- not exactly a recipe for exciting new
discoveries. Thankfully, one company has made it their mission to bring back discovery to the Web. StumbleUpon
delivers nearly half a billion recommendations per month. Those recommendations can be across broad categories
(e.g., photography, video, etc.) or in very focused niches (e.g., electric violins, VC blogs, Alice in Wonderland,
etc.). The StumbleUpon experience brings the unforeseen and unexpected back to your browser. I like to think of
StumbleUpon as a discovery engine bringing fortuity back to the Web.

Enthralled by what StumbleUpon was doing, a couple years ago I began chatting with the founders about their
business. The more I learned, the more excited I got about the prospects for assisted discovery at StumbleUpon.
But before I had an opportunity to propose financing the company, it was purchased by Ebay.

Nonetheless, I've stayed in touch with Garrett and Geoff and continued to talk with them about the power of
StumbleUpon. So when they began discussing the possibility of spinning StumbleUpon out of Ebay, I was grateful
to have the conversation. The need for discovery on the web has not gone away since Ebay bought StumbleUpon.
To the contrary, the problem has continued to grow more acute. And StumbleUpon continues to be the best
solution to the problem. Over 7.5 Million registered members discover, categorize and review Web pages, making
StumbleUpon the Internet's most powerful recommendation engine.

I am thrilled to join the original StumbleUpon team in spinning the company out of Ebay. Along with Garrett and
Geoff, Ram Shriram is reinvesting in the company and going back on the board. The primary financial backers of
the spinout will be August Capital and Accel Partners and Sameer Gandhi and I will go on the board as well. I
look forward to working with Garrett, Geoff, Ram and Sameer to continuing to build StumbleUpon into a large and
important piece of the Web's infrastructure.

More Than Just Writing a Check

By David Hornik on March 24, 2009 2:05 AM | Permalink | Comments (2)

As one of the leading analysts and Web Strategists in the social computing space, Jeremiah Owyang meets with a
lot of companies. He has the luxury of talking with big companies and small companies, public companies and
private companies, venture-backed startups and bootstrapped companies. He is constantly looking at what makes
one company successful and another one less so. Not only is Jeremiah a really smart guy, but he has a ton of
data to support the conclusions he draws both in his day job with Forrester and in his role as confidant and
advisor to numerous startups.

Given all that, I was thrilled to read Jeremiah's post "Beyond the Money: Some VCs Provide Startups With A
Competitive Edge." In his post, Jeremiah asserts that VCs (at least the better VCs) are good for more than just
money. What are we good for? Jeremiah lists a number of categories: Thought Leadership, Strategic Guidance,
Being Part of the Family (e.g., Keiretsu), Ancillary Services (marketing, recruiting, etc.), Umbrella Branding (e.g.,
"an August Capital company"), and Networking. I would probably add to this high level list Recruiting and Capital
Raising, both of which VCs can be very helpful with. Jeremiah concludes that "What [VCs] do beyond the
investment makes a different - I can see it."

Thank you, Jeremiah! While I recognize that my job as a Venture Capitalist is to invest other people's money and,
if all goes well, turn it into more money, I have a hard time thinking of Venture Capital as a "financial services" job.
It is certainly the case that the financial services aspect of the job isn't what gets VCs up in the morning. What
gets us up in the morning is the prospect of working with really smart people to build new and exciting businesses.
And Jeremiah does a great job of listing the fun parts of our job -- advising, connecting, recruiting, etc.
All too often I fear that VCs are thought of as fungible -- one VC's as good as the next. It is certainly true that our
money is fungible -- a dollar from any other VC will buy as much as a dollar from August Capital. But the
aggregate value of taking money from another VC will be vastly different from taking money from an August
Capital. My partners and I work hard to deliver value to our entrepreneurs on all the fronts Jeremiah describes.
And those efforts can have a big impact for a company. VCs don't build companies, entrepreneurs do. But good
VCs can do a whole lot more than simply write a check.

August Capital V: We Are Long on Human Innovation

By David Hornik on March 19, 2009 11:02 AM | Permalink | Comments (2)

It is a challenging fundraising environment out there for sure. And that is not just for startups. This economic crisis
has far reaching-tentacles. As the public markets have declined, so too have the liquid portfolios of universities,
endowments, foundations. And it is those institutions who are among the most significant investors in Venture
Capital. As a result, VCs are finding it equally challenging to raise money of their own.

With that as a backdrop, we at August Capital went out to raise a new fund at the end of last year. And I believe
that our experience mimicked that which startups are seeing in the market today. No matter how good your track
record. No matter how good your progress to date. Fundraising is hard. Investors are swayed and distracted by
external factors that may or may not have anything to do with your business or the likelihood of your success.

That said, just as the strongest startups today are managing to get funding (sometimes even in up rounds), so too
are the strongest venture funds. The partners at August Capital have been in the venture business for as long as
three decades and have consistently delivered positive returns to our investors in up markets and down. Just as
we remain bullish about investing in great companies in these challenging times, our investors remain confident in
our ability to make great investments in these challenging times.

As a result, my partners Dave Marquardt, John Johnston, Andy Rappaport, Vivek Mehra, Howard Hartenbaum and
I have recently closed August Capital V, a $650 Million fund. We remain focused on early stage high tech startups
throughout the technology landscape (software, hardware, chips, etc.). But we also believe that this economic
environment will result in a number of larger opportunities -- spinouts, PIPEs, buyouts, etc. -- that will prove to be
extremely attractive investments. Thus, we have the flexibility within our new fund to invest as much as several
hundred million dollars in a single deal, should a sufficiently compelling opportunity become available. We look
forward to investing on both ends of the company spectrum and now have significant resources to bet on the
great companies we see, big and small alike.

We certainly consider ourselves very fortunate to have such steadfast support from our investors. And lucky to
have the flexibility in our new fund to take full advantage of the opportunities that will arise out of these
challenging times. As we said repeatedly during the fundraising process, we believe that an investment in August
Capital is a bet on the future of human innovation, and we are very long on human innovation. We have already
made four investments out of our new fund and look forward to continuing to invest in the great entrepreneurs we
meet every day. We are certain that important new companies will be born during this economic downturn and we
look forward to providing the funding they need to grow and prosper.

Aardvark: Answering the Tough Questions

By David Hornik on March 12, 2009 1:48 AM | Permalink | Comments (4)

When Google was out pitching their business to VCs, the reaction of many was "search? isn't that problem already
solved?" And, in many ways, it was. Yahoo was well established. AltaVista and HotBot had all the geek cred. And
there were plenty of other search options out there. So why in the world would you fund another search engine?
(answer: to get really really rich.)

Today, more than a decade after Google got started, one once again could reasonably make the assumption that
search is a solved problem. Why would a VC invest in search when Google has virtually cornered the market?
The short answer is that many VCs are deeply afraid of missing the next Google (and who can blame them --
Google was the best venture investment EVER). But that's a crappy reason to invest in search. (In fact, it is a
crappy reason to invest in anything.) There are plenty of other reasons to look for yet another paradigm shift in
search.

I believe that the best reason to continue to invest in search is that search engines are getting worse by the day.
Why is that? For one, the amount of content on the Web continues to grow at a staggering rate. While there may
once have been a mere handful of definitive sources for any given search, there are now thousands of relevant
results for virtually any topic. That problem is exacerbated by the explosion of user generated content.

Far more problematic for search, however, are the economic incentives around the whole search eco-system.
There is huge money to be made in search and all savvy online businesses are acutely aware of that fact.
Because so much money is at stake, herculean efforts are put into gaming the system. Search Engine
Optimization (SEO) has become an economic imperative for all businesses. And the object of SEO is not to get
people the most relevant search results to their queries. The object of SEO is to drive the greatest amount of
traffic possible to the optimized websites. In other words, the economic incentives of the search business assure
that huge efforts are put into making search results less relevant, not more so.

Given those realities, it has been clear to me for some time that important new search technologies would have to
emerge to help solve the "decreasing quality of search results" problem. Enter Aardvark. The Aardvark founders --
a group of entrepreneurs hailing largely from none other than the Google mother ship -- pitched me on the power
of injecting human knowledge and relationships into the search process. By drawing upon the knowledge of your
friends and their friends, the Aardvark founders surmised that you would be able to get more accurate, more
relevant, better tailored answers to a huge range of subjective questions (e.g., "Where's the best place to eat sushi
in Palo Alto?" "How can I best convert my VHS tapes to a digital format?" "I love The Decemberists -- any other
bands out there that I should be listening to?" etc. etc.) Thus, the Aardvark team went about building the
necessary technology to solve that problem, and I had the good fortune to fund them in that quest.

This week the Aardvark team is launching the fruits of that labor at South By Southwest (SXSW). They have built
a "social search engine" that lives inside your IM and email. It allows you to ask questions of Aardvark, which then
goes about determining who among your friends and friends of friends is most qualified to answer those questions.
As the Aardvark team point out in their blog, Social Search is particularly well suited to answer subjective
questions where "context" is important. Aardvark allows you to gather that context, both implicitly through the
relationships you have with the answerers, and explicitly through the conversations between questioners and
answerers. The resulting answers prove stunningly well-tailored to the person asking the question. And they avoid
the pitfalls of the current search engines -- they are not subject to the vagaries of the proliferating user generated
content, nor of the economic manipulation of search results.

I'm certain that there will be ongoing innovation in and around search. Getting the best possible answer to any
question -- objective or subjective -- that can be arbitrarily posed, is a monumentally challenging problem.
Aardvark goes a long way to addressing the shortcomings of search today and I am excited to see it roll out to a
larger group of people.

Fantastic Advice for Angel Investors

By David Hornik on March 6, 2009 3:08 AM | Permalink | Comments (0)

I had the good fortune of participating in the first (hopefully of many) AngelConf today. AngleConf was the
brainchild of Paul Graham of YCombinator fame (although, you never know, it may well have been the brainchild of
Jessica Livingston, so my apologies if that's the case Jessica). Not only is Paul a prolific angel investor, but he is
also a thought leader and a mentor by nature. His AngelConf was an attempt to share the collective wisdom of the
angel investor community with would-be angel investors.

The speakers at AngelConf were a veritable who's who of the angel world. Among those speaking were Ron
Conway (Angel Investors, Baseline Ventures), Dave McClure (500Hats, Founders Fund), Paul Buchheit (Google,
FriendFeed), Andrea Zurek (Google, XG Ventures), Naval Ravikant (The Hit Forge), Michael Dearing (Ebay,
Stanford Design School), Mike Maples (Maples Investments), Ariel Poler (Textmarks, numerous startups), Aydin
Senkut (Google, Felicis Ventures), Jeff Clavier (SoftechVC), and Jim Young (HotOrNot). Like YCombinator's rapid-
fire demo days in which companies are given only a few minutes to present, each angel investor was given seven
minutes to share his or her wisdom with the crowd. And this impressive group did not disappoint.

AngelConf was part training session, part confessional, part group therapy. Virtually all the speakers were in
agreement that angel investing is not for the faint of heart. As one investor after the next stated, you have to be
prepared to lose all your money. If losing your money is going to keep you up at night, perhaps angel investing
isn't the thing for you to do. That said, there were plenty in the speakers lineup who have every intention of
making money. Folks like Jeff Clavier and Mike Maples are investing other people's money. For them, the goal is
assuredly to make money. For many of the others it was a fantastic mix of geeky pleasure at building great things,
the need to stay engaged in the tech world, a desire to give back to the entrepreneurial community, etc. While for
most of the speakers angel investing is essentially a full time job (even if they have another full time job),
everyone in the room seemed to be there for the love of the game.

What was some of the most interesting advice imparted? Here are a few thoughts from the speakers:

* It's a small community -- if you screw one entrepreneur, you'll be out of the angel business because
entrepreneurs talk (Conway)
* Angel investing is about learning on the job, which means that you can plan on screwing up your first 10
deals at least (McClure)

* If you assume that the money is gone once you've invested it -- that it is like a lottery ticket -- then you will
have a better time angel investing (Buchheit)

* Work with other angel investors so that you can get the advantage of their expertise (Zurich)

* There is no rational way to arrive at valuation, so don't be overly concerned about getting it right (Graham)

* Don't worry if the idea seems crazy -- if it didn't seem crazy, it would be too late to invest as an angel
(Graham)

* The lifeblood of angel investors is deal flow -- you need huge deal flow to find enough stuff that is worth
investing in (Ravikant)

* The best deals come from other angels (Ravikant)

* Don't be afraid to throw a little dynamite into the status quo and see what comes out of it -- often times
interesting stuff emerges (and sometimes nothing does) (Dearing)

* The Rule of 12 -- you need to invest in 12 companies to have statistical diversity -- invest in fewer than 12
deals and you run the risk of them all failing (Maples)

* Like in the movie "Oceans 11," you want to pull together the best team of angel specialists there are out
there -- it increases the likelihood that the company will succeed (Maples)

* Help bring your entrepreneurs together so that they can learn from one another (Poler)

* By being a connector, you will see the most interesting stuff and work with the most interesting people
(Senkut)

* Angel investing is all about the syndicate -- you can lead if you want to but it can be lonely until others join
in the syndicate (Clavier)

* Angel investors need to distinguish themselves from others with money -- what do you bring to the table?
Contacts. Experience. Advice. (Young)

* Only invest in stuff you actually know something about -- otherwise you're just buying a lottery ticket
(Young)

All in all, a pretty jam packed few hours. The energy in the room was great. It felt very much like being in a room
full of entrepreneurs. Because, in the end, like entrepreneurs, angel investors are company builders. They love
technology. They love company creation. And, like me, they thrive on the fun and excitement of the startup world.

I hope that Paul will have another AngelConf some time in the future. It was a fantastic way to spend the
afternoon.

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By Paul Kedrosky · Monday, August 24, 2009 · Discuss (3) · ShareThis

The Distinct Dystopian Possibility (Growthology)

The end of Mexico’s Cantarell oil, and the future of Mexico (Gregor)
The Federal Reserve must die (James Quinn)
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China’s Employment Gap: 12-million People

By Paul Kedrosky · Saturday, August 22, 2009 · Discuss (2) · ShareThis

In this latest release from China’s Human Resources, the country’s planners worry about finding 12-million jobs.
That is the gap between the number of positions required to support 8% planned GDP growth, and the number
the economy actually seems to want. (The following translation is via Google Translate, with some minor tweaks
from me.)

Present and future, China is faced with the employment situation remains very grim. ?????????????????
?????? First, from a total point of view, the contradiction between labor supply exceeds demand even
further. 2009 ?????????????? The 2009 full-year total number of persons in need of employment is more
 than 24 millionpeople.???? 8% ???????????????????????????? 1200 ???????? 2008 ??????????
If, in accordance with 8% economic growth rate estimates, the year’s total number of new jobs is only about
12 million, the employment supply and demand gap compared to 2008 will further increase.

This sort of thing gives a sense of how top-down growth remains in China, with a growing middle-class
pursuing its own interests sometimes at odds with massive government spending that is largely disconnected
from organic economic growth. Thus, of course, this 12-million jobs figure.
[Source]

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Sorry. This is just wrong. "Genius is 1% inspiration,
By Paul Kedrosky · Friday, August 21, 2009 · Discuss (2) · ShareThis 99% perspiration", isolated academic...
» 59 minutes ago
Fed chair Ben Bernanke’s speech from the Jackson Hole KC Fed event today. Titled a “A year of crisis”, it’s a
bgul
good overview read -- even if there is little in the way self-criticism. For its part the NYT calls it an upbeat
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Mapping U.S. Payday Lenders

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Mapping U.S. Payday Lenders

By Paul Kedrosky · Friday, August 21, 2009 · Discuss (8) · ShareThis

While legislation is increasingly clamping down on payday lenders and other such financial piranha, they are still
widespread in the U.S. There is a fascinating new paper FRB paper looking at their distribution, pointing out, as
you might expect, that their locations are tied to income, race, age and education.

A large and growing number of low-to-moderate income U.S. households rely upon alternative financial
service providers (AFSPs) for a variety of credit products and transaction services, including payday loans,
pawn loans, automobile title loans, tax refund anticipation loans and check-cashing services. The rapid
 growth of this segment of the financial services industry over the past decade has been quite controversial.
One aspect of the controversy involves the location decisions of AFSPs. This study examines the
determinants of the locations of three types of AFSPs--payday lenders, pawnshops, and check-cashing
outlets. Using county-level data for the entire country, I find that the number of AFSP outlets per capita is
significantly related to demographic characteristics of the county population (e.g., racial/ethnic composition,
age, and education level), measures of the population's credit worthiness, and the stringency of state laws
and regulations governing AFSPs.

From the paper, here is a map the concentration of payday lenders by U.S. county:

Source:

Determinants of the Locations of Payday Lenders, Pawnshops and Check-Cashing Outlets

Robin A. Prager
Federal Reserve Board 2009-33

Readings
By Paul Kedrosky · Friday, August 21, 2009 · Discuss · ShareThis

Puma feels benefit of Usain Bolt’s world record-setting wins (Bloomberg)

The Incredible Shrinking Boomer Economy (Peak Watch)
MBA Forecasts Foreclosures to Peak at End of 2010 (Calculated Risk)
Grant’s Interest Rate Observer goes (partially) free (Ritholtz)
Talking to a designer of weapons of mass financial destructions (BBC)
Dresdner/Commerzbank blames oil speculators for oil spike (FT)
Traders wears jeans on NYSE floor for first time ever (AP)
Menu bar clock replacement for procrastinators: time changes randomly (DS)
2009 Volkswagen Jetta TDI: 700-miles per tank (Edmunds' Inside Line)
Top Gear team immortalised in Lego (Telegraph)

Can the Super-Rich Be Made Sober by a Wall?

By Paul Kedrosky · Friday, August 21, 2009 · Discuss (5) · ShareThis

Apologies in advance for this, but a minor mixed metaphor bleat. Today’s NYT carries a (worth-reading) David
Leonhardt piece titled “Rise of the Super-Rich Hits a Sobering Wall”. Now, it is possible that the NYT believes
that people can be made sober, even rich ones, by smashing into a wall. It is a testable hypothesis, and I’m
sure we could find volunteers to smash a few drunk super-rich into walls (for which I bet we’d have the IgNobel
Prize people calling), but in the absence of new data this was a lousy choice of words.
There, I feel better now.

Seven Impossible Things About Chinese Economic Data

Before Breakfast
By Paul Kedrosky · Friday, August 21, 2009 · Discuss (1) · ShareThis

I’m a part-time collector of contradictory China economy statistics. For example, there is the data showing a
recent decline in gasoil consumption in the face of a recovery, or the similar decline in electricity consumption,
etc. All good fun.
Here is my latest find:

A Chinese government estimate that inflation may be 2 percent for 2009 is puzzling economists after prices
fell for six of the past seven months.

The Ministry of Commerce made the estimate in a statement on its Web site yesterday, citing rising demand
and gains in commodity prices.
“It’s just impossible,” Wang Qian, a Hong Kong-based economist at JPMorgan Chase & Co., said today.
Inflation would have to jump to more than 6 percent for the rest of the year to bring the average to that level,
said Wang, who forecasts a 0.5 percent decline in prices for 2009.

More here.

Your Moment of SEC Allegation Zen

By Paul Kedrosky · Thursday, August 20, 2009 · Discuss (3) · ShareThis

From an SEC complaint today against a San Diego company it accuses of perpetrating a $50m scheme, your
moment of SEC allegation Zen:

During this period, Khanna represented different annual rates of returns ranging from 17% to 27% per·year
and 40% to 55% for terms ranging from 14 to 30 days. In some instances, he promised an additional 10%
annual dividend. Khanna promised investors orally and through the prospectus that these returns were
guaranteed. He even confirmed the inflated returns and the fact that they were guaranteed in each of the
Notes given to investors.

Khanna further deceived investors by highlighting MAK l's positive performance history in the prospectus
which showed MAK 1's purported monthly returns between 17% and 26% for mid-2004 to the present (with
a cumulative 18 return of 321 % in 2008 alone). The prospectus also boasted MAK 1's "proven" performance
record over the past six years and particularly, its consistent double-digit returns, even during down markets.

Contrary to Khanna's representations, several investors never received these returns. For some other
investors; Khanna rolled over their ostensible returns upon expiration of the term of the Note. In early 2009,
Khanna stopped making the promised payments to investors.

Gosh, but it sounded so good, right up until that last paragraph.

More here.

Banks, Micturiton and Failure

By Paul Kedrosky · Thursday, August 20, 2009 · Discuss (8) · ShareThis

The Big Lebowski: I just want to understand this, sir. Every time a rug is micturated upon in this fair city, I
have to compensate the owner?
-- The Big Lebowski (1998)

Good new Floyd Norris column at the NYT pointing out that most of the banks that are failing in the U.S. aren't
doing so because they were over-exposed to debt exotica like CDOs, SIVs, or CDO-squareds. Instead, they are
failing because they made bad loans, which new regulations won't change, of course.

The severity of the current string of bank failures shows that many of the proposed remedies batted about
since the financial crisis erupted would have done nothing to stem this wave of closures. These banks did
not get in over their heads with derivatives or hide their bad assets in off-balance sheet vehicles. Nor did
their traders make bad bets; they generally had no traders. They did not make loans that they expected to
quickly sell, so they had plenty of reason to care that the loans would be repaid.
 What they did do is see loans go bad, in some cases with stunning rapidity, in volumes that they never
thought possible.

The takeaway is that stability breeds instability, as Minsky wrote, and Norris reminds us. Fair comment, and
true, as far as it goes.

But the reason why all these banks had the opportunity to so quickly make so many bad loans, and why so
many banks and loans failed so fast, is because of the systemic problems in banking, many of which were tied
to loan exotica. In other words, it didn't matter that the failing banks didn't pee in the pool, other banks did. And
in banking, like life, the notion of a peeing and a non-peeing section in a swimming pool is meaningless.

Going in Circles: Thomson and Thompson Weren't So Dumb

By Paul Kedrosky · Thursday, August 20, 2009 · Discuss (4) · ShareThis

One of my favorite Tintin books is The Land of Black Gold. I am particularly fond
of the part where Tintin's hapless friends Thomson and Thompson ("Thompson
with a 'p', like in 'psychology'") drive in circles in the desert, repeatedly re-
encountering their own tracks, thus convinced themselves they are on a freeway
-- until they run into their own gas tank, thus alerting them to their error.

Going in circles is a common problem. And not just in Tintin books, but among
hikers and climbers, and politicians and central bankers too. In the absence of
obvious signposts and while on unknown ground, our brains get confused and
we have the bad habit of doubling back on ourselves -- and then denying that
we have.

There is a fascinating new paper in Current Biology on the subject, one that
confirms that it's far easier to go in circles than most of us think, with all sorts of
unhappy consequences.

Walking Straight into Circles

Jan L. Souman, Ilja Frissen, Manish N. Sreenivasa, and Marc O. Ernst

Summary
Common belief has it that people who get lost in unfamiliar terrain often end up walking in circles. Although
uncorroborated by empirical data, this belief has widely permeated popular culture. Here, we tested the
ability of humans to walk on a straight course through unfamiliar terrain in two different environments: a
large forest area and the Sahara desert. Walking trajectories of several hours were captured via global
positioning system, showing that participants repeatedly walked in circles when they could not see the
sun. Conversely, when the sun was visible, participants sometimes veered from a straight course but did
not walk in circles. We tested various explanations for this walking behavior by assessing the ability of
people to maintain a fixed course while blindfolded. Under these conditions, participants walked in often
surprisingly small circles (diameter < 20 m), though rarely in a systematic direction. These results rule
out a general explanation in terms of biomechanical asymmetries or other general biases. Instead, they
suggest that veering from a straight course is the result of accumulating noise in the sensorimotor system,
which, without an external directional reference to recalibrate the subjective straight ahead, may cause
people to walk in circles.

More here.

Taibbi Takes on Healthcare (and Maria Bartiromo)

By Paul Kedrosky · Thursday, August 20, 2009 · Discuss (14) · ShareThis

Matt "Goldman Sachs slayer" Taibbi takes on healthcare (and Maria Bartiromo) in a clip today on MSNBC. It's
all based on a new article of his in Rolling Stone, the summary of which is here.
 Visit msnbc.com for Breaking News, World News, and News about the Economy

Updated: Usain Bolt Lights Up Berlin for WR in 200m --

19.19s(!)
By Paul Kedrosky · Thursday, August 20, 2009 · Discuss (12) · ShareThis

Astonishing. Usain Bolt has lit up Berlin for a second world record, this time in the 200m with a 19.19s time. In
doing so he has taken 0.11s off the former world record of 19.30s, a huge feat in itself. And he did it against a
negative 0.3 m/s head wind. Words fail me. (I just hope he is clean.)

For the data geeks out there, check the 200m world record progression at Wikipedia. And here it is in graphical
form:

Finally, it's worth noting that Bolt's reaction time out of the blocks was much improved in the 200m over what he
did in the 100m in Berlin. This time he was the fastest man away, as the following table shows:
 << 1 2 3 4 5 6 7 8 9 10 11 12 13 14 >>

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Software Engineering (GAO) for a report on the high cost of college textbooks. The
GAO report was recently released, and confirmed the fact that Ask Tim
The Web the price of college textbooks has nearly tripled from 1986 to
2004. I wrote this letter to Congressman Wu referencing Why Is the Web the Way It Is Today? -- December 2005. In
NEWS TOPICS O'Reilly's solution: SafariU. what direction could the internet have gone if it were not for
the FSF/GNU movement and how would the internet have
The O'Reilly Radar 2005 -- March 2005. The opening keynote looked today? Tim O'Reilly offers his perspective.
analysis2009
for the O'Reilly Emerging Technology Conference was
cloudcomputing delivered jointly with Rael Dornfest. It opens with Rael's "rules Is Perl Still Relevant? -- July 2005. With the emergence of
economics economy for remixing," segues into an abbreviated version of my .NET, J2EE, Python, PHP, et. al, has Perl lost its niche as a
"internet era business model design patterns" talk (which I scripting glue language? Tim O'Reilly comments.
freesoftware google also gave at Eclipsecon), and then finishes with some other
government iphone things that are on our radar. The slides (PDF) are on the When will Perl 6 ever get done? -- August 2004. It's difficult
javascript linux microsoft ETech presentations page. There's also a good summary of to make predictions about when Perl 6 will be released. For
my comments on Alice Taylor's blog. one thing, Perl is still and always under development; for
mobile ooxml
another, there's no rush. perl.com editor Simon Cozens writes
opensource oscon perl Get Your Hands Dirty! -- January 2005. Hackers of all stripes that if you have a pressing need for Perl 6, more developers
refuse to just take what they’re given. They’re driven to are welcome.
politics privacy python rails
remake it, and getting there is more than half the fun. In the
ruby security latest O'Reilly catalog, Tim writes about the host of new books RepKover Binding -- March 2004. O'Reilly has good--no,
great news about RepKover lay-flat binding, the very durable
socialnetworking and products within that celebrate the hacker impulse. We've
got the information you need to hack, remix, and master and flexible binding method that allows the interior of a book
standards twitter web20 technology at home and at work. So go on, get your hands to "float" free from its cover and lay flat open on your table.

xml xquery xrx xslt dirty!

Amazon and Open Source -- February 2004. Amazon realized
early on that amazon.com was more than just a book site,
Read/Write Web Interview: Web 2.0 -- November 2004. In
Part 1 of this Read/Write Web interview, I talk with Richard more in fact than just an e-commerce site. It was beginning
INTERNATIONAL SITES to become an e-commerce platform. Open source has been a
MacManus about the Web 2.0 Conference, the relationships
between Apple and the web and Microsoft and the web, and key part of the Amazon story, and although Amazon has
data ownership and lock-in. In Part 2, we explore business closed code, it has created its own "architecture of
models for web content, including discussion of RSS. And Part participation" that may be even richer than that of many open
3 focuses on eBooks, social networking, collaboration, and source software development communities.
Remix culture.
Did Amazon Listen? -- December 2003. After all that
Pick the Hat to Fit the Head -- October 2004. Larry Wall once controversy over Amazon's 1-Click patent, what's this about
said, “Information wants to be valuable,” and the form in them receiving a patent for new features on their ordering
which information is presented contributes to that value. At forms? Tim explains that Jeff Bezos never said he'd stop filing
O'Reilly Media, we offer a variety of ways to get your technical for patents, but that he'd think twice before enforcing them in
information. Tim O'Reilly talks about it in his quarterly letter a potentially offensive way.
for the O'Reilly Catalog.
 O'Reilly's E-Book Strategy -- November 2003. O'Reilly's e-
MacDirectory Interview: Tim Loves His G4! -- September book strategy is to build a flexible data repository supporting
2004. I talked with Simon Hayes at MacDirectory.com about XML web services that will allow us to deliver content into a
the success of the Mac platform, Apple's innovative support of variety of channels. The O'Reilly Network, which offers online
digital media and networking (exemplifying David Stutz's content in bite-size chunks, is the "smaller" part of the
"software above the level of a single device"), and what strategy; Safari, a database of thousands of books that you
O'Reilly Media has in store for Mac users and administrators. can search across, is the "bigger" part.

Technology and Tools of Change -- June 2004. Building the Are "how to" books archaic? -- November 2003. A reader
next generation of technology won't be easy, and will require asked us about O'Reilly's vision for future books given the
developers, entrepreneurs, and the customers they serve to rate of change in technology and the growth of the Internet
learn new skills. O'Reilly has a collection of new and favorite as an information source. Tim says "how to" books will only
tools for building the future, including a new "Technology & become more important as the paradigm shift that's taking
Society" book series, a new "Web 2.0--Web as Platform" place in computing leads us into uncharted territory.
conference, and a new print-on-demand, custom books
What happened to BountyQuest? -- October 2003. What ever
service called SafariU.
happened to BountyQuest, the web site where people could
Open Source Paradigm Shift -- June 2004. This article is based post large rewards for documents proving prior art on a
on a talk that I first gave at Warburg-Pincus' annual patent, thus proving a patented invention is not really new?
technology conference in May of 2003. Since then, I have
E-Books and P2P -- September 2003. Why doesn't O'Reilly
delivered versions of the talk more than twenty times, at
offer stand-alone e-books? As an advocate for P2P, wouldn't it
locations ranging from the O'Reilly Open Source Convention,
follow that Tim would make O'Reilly books available for
the UK Unix User's Group, Microsoft Research in the UK, IBM
download? Tim talks about P2P, copyright, the value of giving
Hursley, British Telecom, Red Hat's internal "all-hands"
away content, e-books as a business model, and the potential
meeting, and BEA's eWorld conference. I finally wrote it down
of O'Reilly's Safari Bookshelf.
as an article for an upcoming book on open
source,"Perspectives on Free and Open Source Software," More Ask Tim
edited by J. Feller, B. Fitzgerald, S. Hissam, and K. R. Lakhani
and to be published by MIT Press in 2005.

State of the Computer Book Market -- February 2004. We've

launched a new market research group at O'Reilly. Its mission
is to develop quantifiable metrics for the state of technology
adoption. Aided by Nielsen BookScan sales data, which shows
us trends in what people are buying, we're able to evaluate
trends in technology adoption that should help us do a better
job of forecasting technology growth patterns. In this letter I
wrote for O'Reilly's Spring 2004 Catalog, I share some of our
analysis, something I expect to do more of in the coming
year.

A FOSDEM Interview: Reinventing Open Source -- February

2004. I'll be speaking at FOSDEM this year on the subject of
how next-generation applications are changing the rules of the
computing game. In this interview, I talk about O'Reilly's book
publishing program, past and present, and my goal to create
the maximum value for users, developers, and everyone in
the software ecosystem. Today that means coming to grips
with the way the computer landscape is changing, giving up
old open source battles from the 1980s and 1990s, and
focusing on how we might reinvent open source in this age of
the Internet. (Slides from my talk are now available in PDF:
The Open Source Paradigm Shift [4.4MB].)

My fundamental premise is that the world we all

grew up in--the world of both Microsoft and the
Free Software Foundation--is fundamentally
challenged by the Internet. The Internet (not
Linux) is the greatest triumph to date of the
open source approach, yet it has changed the
rules of software deployment so fundamentally
that many of the techniques embraced by the
open source community as first principles don't
necessarily give the desired results. We need to
reinvent open source in the age of the Internet.
My talk gives some suggestions for what we
need to think about.

We're All Mac Users Now -- January 2004. Wired News talked
to a bunch of folks (including me) for comments on the 20th
anniversary of the Mac. Nice words from all of us about just
how important the Mac has been to the computer industry.

Apple has been able to reinvent itself because it

has what is, at bottom, an aesthetic vision,
rather than one that is solely based on profit
and loss. Like Shaw's proverbial "unreasonable
man," they try to bend the world to their vision.
And they articulate that vision consistently, and
persistently.

The Future of Technology and Proprietary Software --

December 2003. In celebration of its 25th anniversary,
InfoWorld did a feature on where technology has been and
where it's headed: 25 Years of Technology. Tim O'Reilly
answered some questions for that piece about the future of
technology and proprietary software. Many of his comments
were included in the article, but here they are in their entirety,
as well.

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Test
FogBugz into Ukrainian
too complicated Usability Testing with Morae
two separate Set Your Priorities
products and two separate teams. How to be a program manager
We had done a lot of work on the
architecture that made the product Software designer
much more modular, but we had Controlling Your Environment Makes
this goofy plan to do a major You Happy
release containing virtually no new Figuring Out What They Expected
features, just to let the new Choices
architecture shake out, a plan which Affordances and Metaphors
Consistency and Other Hobgoblins
nobody was very excited about.
Designing for People Who Have
Better Things To Do With Their Lives
So, on July 31, 2008, we reset our
Designing for People Who Have
plans. We gave up on the idea of Better Things To Do With Their
shipping a standalone Wiki product, Lives, Part Two
and merged the Wiki team with the Designing for People Who Have
Better Things To Do With Their
FogBugz team. And we nailed down Lives, Part Three
a new vision for FogBugz 7 that’s a The Process of Designing a Product
lot easier to understand and a much Painless Functional Specifications -
Part 1: Why Bother?
better product: something we could
Painless Functional Specifications -
ship in one year. Part 2: What's a Spec?
Painless Functional Specifications -
Then the development team Part 3: But... How?
shipped it. Exactly on schedule. Painless Functional Specifications -
Well, maybe a week or two early. Part 4: Tips
Humane Programming
They used Evidence Based
The Iceberg Secret, Revealed
Scheduling religiously on this large
Nothing is as Simple as it Seems
one year project and it worked Building Communities with Software
amazingly well. Yes, they had to cut It's Not Just Usability
and trim features as they went The Project Aardvark Spec
along, but the accuracy of the Introduction to Great Design (Second
estimates also gave them the Draft, In Progress)
Great Design: What is Design? (First
confidence to add a couple of major Draft)
features (like Scrum support) that What Makes It Great? (First Draft)
you’ll love. Amazing X-Ray Glasses from Sprint!
Choices = Headaches
One of the best things we did as a Simplicity
development team was to write a Elegance
short, concise, comprehensible The Big Picture
vision statement that got everybody Font smoothing, anti-aliasing, and
exactly on the same page about sub-pixel rendering

what we were going to do over the

course of a year. The vision Product manager
statement made it easy to prioritize. How Many Lies Can You Find In
One Direct Mail Piece?
Instead of just telling us what was
Mouth Wide Shut
in the product, it also gave us a way Camels and Rubber Duckies
to know what was out. How to demo software
Where there's muck, there's brass
Here’s the vision statement, in its
entirety, which is a pretty good
description of what we are actually
Recruiter
Whaddaya Mean, You Can't Find
shipping today. Please excuse the Programmers?
tone of voice; remember that this Hitting the High Notes
was an internal document to Finding Great Developers
galvanize the team. A Field Guide to Developers
Sorting Resumes
FOG CREEK CONFIDENTIAL The Phone Screen
The Guerrilla Guide to Interviewing
(version 3.0)
FogBugz 7
As of August, 2008, the entire Now that you've
FogBugz and Weeble teams
are working towards a single
read all that —
There’s a software company in New
major new release of FogBugz York City dedicated to doing things
the right way and proving that it can
that will blow away our be done profitably and successfully.
customers (real and Fog Creek Software. Here’s the
story:
imaginary). When they see it
they will grow weak in the More on Sabbaticals...
knees. Competitors will shiver Command and Conquer and the
in fear at the monumental Herd of Coconuts
Spring in Cambridge
amount of win in this release.
What is the Work of Dogs in this
As customers evaluate the Country?
software, they will simply Working on CityDesk, Part One
never find a reason not to Working on CityDesk, Part Two
use FogBugz to run their Working on CityDesk, Part Three
software teams. No matter Working on CityDesk, Part Four
what the grumpy people on Working on CityDesk, Part Five
Rub a dub dub
their team come up with,
New Server at Peer 1 Network
they'll find that not only have
Finding an Office in New York City
we implemented it in
Bionic Office
FogBugz, we've done it in a Colo Expansion Version 2.0
FULL-ASSED way. No more The Road to FogBugz 4.0: Part I
HALF-ASSED features (I'm The Road to FogBugz 4.0: Part II
looking at you, logo The Road to FogBugz 4.0: Part III
customization in FogBugz The Road to FogBugz 4.0: Part IV
6.1). The Road to FogBugz 4.0: Part V
Project Aardvark Midterm Report
This release has three How to Ship Anything
important focus areas FogBugz 4½ and Subjective Well-
Being
with friendly catchnames.
Copilot 2.0 ships!

1. fruity treats A game of inches

 Five whys
2. customization
The new Fog Creek office
3. supersonics
New, faster Copilot
Fruity treats, customization, and
If it's NOT ON THAT LIST supersonics: FogBugz 7 is here
it's NOT IN THE PRODUCT.
Get used to it.

fruity treats
FogBugz
7.0 will
include a
long list of
simple
improvements that will make
life dramatically easier for
people trying to get things
done, especially when they
want to do things just a wee
bit differently than we do
here in the Land of the Fog.
Every little feature will be a
delight for somebody,
especially that person who
keeps emailing us because he
can't believe that the feature
he wants which is obviously
only six lines of code hasn't
been implemented in
FogBugz 1.0, 2.0, 3.0, 4.0,
"4.5", or 6.0, and if we don't
get it soon he JUST MIGHT
HAVE TO GO OVER TO THE
AUSTRALIANS.

Collectively, though, fruity

treats will make FogBugz
friggin' amazing, and they'll
help us win more sales
because we won't have so
many showstopper reasons
why people choose another
so-called bug "tracker."

What's a fruity treat? It must

fit these three rules to get into
the 7.0 orchard:

1. It must be something
customers and
potential customers are
asking about all the
time
2. There must not be a
trivial, easy
workaround in 6.1
3. It must be relatively
easy for us to
implement. No big
earth-shaking new
features will sneak in.
4. "Three rules," I said.
Not four. Why is there a
4 here?

Visit the shared filter

FogBugz 7 Fruity Treats to
see what's coming up.

customization
FogBugz
7.0 will
include
our
smashingly
powerful new plug-in
archicture, which,
combined with the FogBugz
API, will give people
complete confidence that
if there's anything FogBugz
can't do out of the FogBox,
you can write it yourself. No
more will we tell customers
"you get the source code, so
you can modify it!" That's BS.
They know perfectly well that
if they modify our source
code, terribobble tragedies
 will occur the minute we
release a service pack. From
now on, we can say, "there's a
great plug in architecture and
a whole online cornucopia of
righteous plug-ins available
for download."

So you can trick out your

FogBugz installation like a
lowrider or an off-road dune
buggy. You can make it into a
Cadillac or a space shuttle.
It's up to you.

supersonics
Thanks
to the

newfangled, all-electronic
compilation machine
("Wasabi") that we had
installed at great expense,
FogBugz will be running on
the CLR and Mono for greatly
improved performance and
compatibility. Whiz zip blip!
bleep! You'll be able to run
1000s of users on one server.
Long queries will finish faster.
Laundry will be brighter.

and that is it.

Nothing else. Go fix yourself
an icy lemonade.

The team got pretty excited. Having

a sharp focused vision statement
like that, and having the whole
team working towards a single
shared goal, really helped us get our
house in order. We scrubbed
through thousands of backlogged
ideas, feature requests, and
comments, and came up with a set
of fruity treats that will eliminate
virtually every customer objection
that we hear during the sales
process. We developed a
comprehensive plug-in architecture
that’s pretty amazing, and had
interns develop a slew of slick plug-
ins. And the fact that Wasabi is now
a genuine .NET language made for
substantial performance
improvements over running on the
VBScript “runtime.”

I’ll let the team give you a

comprehensive look at what’s new
in FogBugz 7, but here are some of
the highlights:

Subcases:
organize
your work
hierarchically
EBS can track the schedule of
developers who work on
multiple projects
EBS also now has
dependencies (work on X
can’t start until Y is complete)
Scrum is fully supported, with
project backlogs and EBS-
powered burndown charts
Just about the slickest
implementation of tags you’ve
ever seen
Plug-ins, with comprehensive
support throughout the
product
Customizable workflow
 Lots of visual improvements
and small usability
enhancements
A context menu in the grid
saves steps
Easier case entry right from
the grid
Auto complete in case fields,
so you don’t have to
remember case numbers
Custom fields (Yes. They tied
me up in a closet.)
URL triggers (FogBugz will hit
a URL you specify when
certain events happen)
Easier administration,
through an administrator
dashboard, and a feature for
cloning users and creating a
list of new users all at once
Much better performance,
including substantial caching
that speeds up display of
email, EBS calculations, and
more

Those are just the big-ticket items.

FogBugz 7 is rife with little areas
where the development team put a
ridiculous amount of attention to
detail. For example, the signup
process, which is actually very
complicated on the backend,
became much simpler on the front
end, due to a heroic amount of
work that every user will only see
once. If you do nothing else, check
out the signup process to see the
effort that went into making signup
just a tiny bit faster. Another
example: we completely replaced
the entire email processing
infrastructure, just because there
were tiny corner case bugs that
simply could not be solved with the
commercial class library we had
been using.

I wish I could
take more
credit for it, but
the truth is, Fog
Creek has
grown. We have
Tyler Griffin Hicks-Wright
a very
professional team with testers,
program managers, and developers,
and I just sort of sit here agog at
what a brilliant job they’re doing.
All of the credit for this fantastic
new product goes to them. I’m just
the Michael Scott character who
wastes everybody’s time whenever I
venture out of my office.

FogBugz 7 is shipping today for

Windows servers and on our own,
hosted infrastructure. The Mono
version (for Macintosh and Linux)
will be in beta soon. To try it, go to
try.fogbugz.com.

If you’re currently using FogBugz

on Demand, you’re already using
7.0.

If you run FogBugz on your own

server and have an up-to-date
support contract, the upgrade is
free, otherwise, bring your support
contract up-to-date and you’ll be
good to go.

Why Wolfram Alpha

fails 09 Jul
Mencius Moldbug: “They create an
incomplete model of the giant
electronic brain in their own, non-
giant, non-electronic brains. Of
course, since the giant electronic
brain is a million lines of code
which is constantly changing, this is
a painful, inadequate and error-
prone task.”

The eternal
optimism of the
Clear mind 23 Jun
Clear just closed down.

Here’s how it worked while it was

in business. You paid $200 for a
one-year membership. You
underwent a big, complicated
background check to prove that you
were extra-super-trustworthy.

In exchange, in a few big airports,

you got to skip to the front of the
TSA line for screening.

Now, you didn’t skip the screening

itself. You still went through the X-
ray machine and had to remove
your shoes, belt, pocket contents,
laptops, and plastic quart ziplock
bag of toiletries.

You just got to cut to the front of

the line.

A few people signed up. In certain

airports, it was, indeed, worth
actual money to cut to the front of
the line.

This wasn’t Clear’s actual business

plan. The actual business plan was
that Clear would do detailed
background checks on travellers,
who would then be trusted to
bypass security completely because
they were extra-super-trustworthy.

Now, the TSA doesn’t even trust

pilots, who go through the same
screening as the rest of us to make
sure they’re not bringing something
extraordinarily dangerous onto a
plane like a 3.5 oz bottle of
shampoo. Because, of course, with a
little bottle of shampoo, they could
make a bomb, which they could use
to fly the plane they are piloting
into a building, something that is
impossible for mere pilots sitting at
the controls of the jet.

So as it turns out, the TSA never

actually agreed to go along with this
skipping-the-screening thing, and
ultimately, all Clear was allowed to
do was get you to the front of the
line.

At this point,
and here’s the
interesting part,
at this point, a
rational
businessperson
would say, “Well, does the Clear
idea still make sense if we can’t
actually let you skip the screening?”

OK, maybe it still makes sense to

charge to skip to the front of the
line. Maybe there’s a business
model in that.

In that case, though, why did they

still do background checks? It
doesn’t make any sense.

The environment changed. It turns

out that Clear’s business model of
prescreening wasn’t going to be
possible. But they kept doing it
anyway. What kind of
organizational dysfunction does it
take to completely ignore the
changed circumstances and keep at
a money-losing business?

What’s even funnier is that Clear

could probably have been profitable
if they had just skipped the one
unnecessarily stupid part of their
business model: the detailed
background checks on all their
customers.

Nobody at Clear did any thinking.

They had a business model, the
business model wasn’t actually
possible, everybody knew it, and
they still plugged away at it.
Thoughtless optimism. I don’t know
whether to salute ‘em or laugh.

Platform vendors
10 Jun
Dave Winer (in 2007): “Sometimes
developers choose a niche that’s
either directly in the path of the
vendor, or even worse, on the
roadmap of the vendor. In those
cases, they don’t really deserve our
sympathy.”

iSmashPhone: 15 Apps Rendered

Obsolete By The New iPhone 3GS

When
independent
software
developers
create utilities,
add-ons, or
applications that fill a hole in their
platform vendor’s offering, they like
to think that they’re doing the
vendor a huge favor. Oh, look, the
iPhone doesn’t have cut and paste,
they say. Business opportunity!
They might imagine that this
business will be around forever.
Some of them even like to
daydream about the platform
vendor buying them up. Payday!

The trouble is that only a tiny

percentage of iPhone users are
going to pay for that little cut and
paste application. With any kind of
add-on, selling to 1% of the
platform is a huge success.

For Apple, that’s a problem. That

means that the cut and paste
problem isn’t solved for 99% of
their customers. They will solve it,
if it’s really a problem. And you’ll be
out of business.

Filling little gaps in another

company’s product lineup is
snatching nickels from the path of
an oncoming steam roller.

A good platform always has

opportunities for applications that
aren’t just gap-fillers. These are the
kind of application that the vendor
is unlikely ever to consider a core
feature, usually because it’s vertical
— it’s not something everyone is
going to want. There is exactly zero
chance that Apple is ever going to
add a feature to the iPhone for
dentists. Zero.

A visit to Microsoft
and Google 10 Jun
From my latest Inc. column: “Giant
corporations such as Google and
Microsoft are like cities full of
relatively anonymous people: You
don't actually expect to see anyone
you know as you walk around.
Going to lunch on either campus is
like going to the cafeteria at a huge
university. The other 2,000
students seem nice, but you don't
know most of them well enough to
sit with them. Meanwhile, a typical
lunchtime at my company is like
Thanksgiving dinner: There's a big
meal you get to share with a bunch
of people you know and like.”

Old News >>

© 2000-2009 Joel Spolsky
[email protected]
 A VC
Musings of a VC in NYC Home / Archives / Tumblog / Radio / About

The Ideal First Round Term Sheet

(continued)
Fred Wilson is a VC and principal of
So Adeo Ressi of The Funded has posted his version of the idea first
Union Square Ventures. His wife is
round term sheet. TechCrunch blogged about it here. Gotham Gal and his daughters Jessica
Wilson and Emily Wilson blog too.
I have not had a chance to go through the term sheet line by line and Fred's social networks | Contact | Full Bio→
evaluate it against other versions I've seen. I do think it is progress
that we've got a discussion going on about this issue and I hope we'll
coalesce around something standard that we can all use.

But I thought I'd address the three terms that TechCrunch highlights
about The Funded's term sheet:

- A 1X liquidation preference - I am all for this. I cannot imagine why

anyone would want a multiple liquidation preference in a first round Fred Wilson Ads
fredwilson
term sheet. There are reasons why that might make sense in a late
round financing, but not in a first round. Continuing my
vacation wardrobe of
vintage startup tees
- Elimination of participating preferred - I prefer a straight preferred http://bit.ly/k2wTI
2 days ago
but there are times when a participating preferred makes sense, even
in a first round. When the valuation gets bidded up to a price that sweet. @zburt
created a wiki with
would not allow the investors to make a return on an exit in the short all of the suggested
term, and when the entrepreneur wants to control the exit, it makes books for
entrepreneurs from
to issue a participating preferred so that the investors can still get a my post on the
return on their capital in the event of an early exit (the quick flip). If a subject yesterday
http://bit.ly/16HydA
participating preferred is used, it should go away at some multiple of yesterday
the price paid (I prefer 3x).
Watching my wife
teach my daughter
- Single trigger acceleration - I don't like this provision for a lot of to drive a stick. I'm
proud of both of
reasons. Chris Dixon, who started this whole discussion off last them. I tried
week, describes it well in this blog post. Chris recommends a double teaching but couldn't
handle it
trigger with a partial single trigger acceleration: 14 hours ago

some thoughts on
you should have full acceleration on “double trigger” (company The Funded's "Ideal
First Round Term
is acquired and you are fired). In addition you should have Sheet"
partial acceleration on “single trigger” (company is acquired http://bit.ly/2Pn8pf
10 hours ago
and you remain at company). I prefer a structure where you
accelerate such that you have N months remaining (N=12 is a http://twitpic.com/f62t
- Diane Birch at
good FredWilson.FM
Click to launch number). This gives
music the acquirer comfort that the key
player Stephen Talkhouse powered by STREAMPAD
people will be around for a reasonable period of time but also with @steviegpro,
 @jeffpulver and
lets the founders get the equity they deserve without spending @venueczar
4 hours ago
years and years at the acquirer.

Chris also has some thoughts on his blog today regarding The
Funded's proposed term sheet. Translate
Select
Select Language
Language
There are now about a half dozen templates out there for the ideal
first round term sheet. There is the Y Combinator version, the Wilson Gadgets powered by Goo
Sonsini version, the Cooley version, the Gunderson version, and now
the Funded's version. I am on vacation today and trying to unplug as
much as possible so I am not going to hunt all these down and link
to them. Maybe someone will do that in the comments.

The bottom line is this is a great conversation and we are headed to

a place where we will see more standardization of terms, lower legal
fees, and better terms for entrepreneurs. But there are times when
you need to veer off the standard form and it's important to
recognize when that is and why.

8 Comments | Posted August 24, 2009 in Venture Capital and

Technology

BlogRollr
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to this feed

Edward Vielme gothamgal

om
Books For Entrepreneurs (continued) techcrunc
jonathanhstrau om
bijansabet
As usual, the comments to yesterday's post about suggested books om
for entrepreneurs (132 comments so far) are way better than the ihearditon businessin
post itself. der.com
jessicasar
At some point yesterday, when the suggestions were coming hot and BWJones ilson.com
heavy, I commented that we ought to create a wiki with all of these blog.boxe
v
great suggestions on it.
Stephanie S producerp
s.com
Zachary Burt did just that on PB Wiki. Here it is. Please feel free to emilyjanew
add any other books you think deserve to be on the list. josephslima
son.com
venturebe
com B
28 Comments | Posted August 23, 2009
Maggie W
Email this • Tweet and Track! • Share on Facebook • Digg This! • Save to del.icio.us (2
saves) • outside.in: geotag this story • Technorati Links • Take our new survey •
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Keenan
Books For Entrepreneurs jamie f

Last week an entrepreneur named Stephen who reads this blog

Eric Friedman
regularly asked me for recommendations that budding entrepreneurs
should read. I gave him a list and then forwarded it to my friends
Brad Feld and Jerry Colonna who I knew would appreciate the list.

That led to this post by Brad where he lists his top three book See all 3,925 members..

suggestions for entrepreneurs. Go read that post. It's great. Grab This! MyBlog

As I was reading Brad's post, I realized that I should have shared my

Flickr Photostream more →
list with everyone, not just Stephen.

So here it is:

Kavalier and Clay

Atlas Shrugged

The Prince (Machiavelli)

Stories within 6 Months

any and all of shakespeare's tragedies and histories

Brad's suggestion of Zen and the Art of Motorcyle Maintenance is a

great one and I'll include that in the future when asked this question.

The point of this list is that there is way more insight to be gained
from stories than from business books. And these are some amazing
stories.

If you've got suggestions to add to the list, please leave them in the
brand new comment section.

Terms of Use
176 Comments | Posted August 22, 2009 in Venture Capital and
Technology
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saves, tagged: books entrepreneurship business) • outside.in: See more stories nearby Most popular pages on
in • Technorati Links • Take our new survey • Advertise Here • View CC license • avc.com
Subscribe to this feed
/a_vc/2009/08/the-ideal-first-...
currently 11 people

From Wall Street Analyst to Game /a_vc/2009/08/books-for-entrep...

currently 4 people
Producer?
The Ideal First Round Term Sheet
currently 3 people
Our portfolio company Zynga is looking to hire a bunch of new
product managers for their social games. And they are looking for /a_vc/2009/04/celebrating-aggr...
them in an interesting place - Wall Street. currently 2 people

A VC currently 2 people
As founder/CEO Mark Pincus explained to me in an email, the powered by chartbeat
product manager position requires strong analytical skills and a
desire to do whatever it takes to get it right. They are finding that
young people coming out of two year analyst programs (both
consulting and investment banking) who are passionate about
games and social networking are doing very well in this position. So
they are looking for more.

Here's the spec:

Zynga’s Product Manager will be responsible for creating a list of

features to one of our hit games! This person will have to work
independently to provide a detailed roadmap on the implementation
process. The implementation process should include designing,
executing, and optimizing the feature(s).They’ll own the outcome of
these new features by working with our talented team of engineers
to get the features implemented.
Required Skills:
• We are looking for an enthusiastic, performance-driven self-
starter and team player
• Demonstrated capacity for developing and understanding
strategy
• Strong aptitude for determining the optimal way to position
products in the market
• Strong passion for games
• Strong organizational and analytical skills & attention to detail
• BA/BS degree – CS/EE/Engineering degree preferred
• 2-5 years of experience in product management in consumer
web or game development OR another extremely analytical
workplace!
• Passion for creating fun, compelling and addictive user
experiences
• Passion for writing product specifications, white papers
• Outstanding written and oral communication skills
• Previous start-up experience is a strong plus, especially in
social networking

Apply by sending your resume to [email protected] !

11 Comments | Posted August 21, 2009 in Venture Capital and

Technology
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Disqus V3 Is Live On This Blog

Sometime in the past twelve hours, Disqus flipped a switch
somewhere and this blog is now running V3. You can check it by
leaving a comment to this post. Let me know what you think.

I believe it will be rolled out to the entire user base in the next week.
Hopefully Daniel will stop by and leave a comment with a more
specific time frame for the rollout.

162 Comments | Posted August 21, 2009 in Weblogs

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117 points by mrduncan 16 hours ago | 112 comments

15. Poverty Kills (aaronsw.com)

21 points by ph0rque 3 hours ago | 31 comments

16. Prosper is Back (prosper.com)

36 points by bdr 8 hours ago | 14 comments

17. Typedia: A Shared Encyclopedia of Typefaces (typedia.com)

10 points by nreece 4 hours ago | 3 comments

18. Dan Pink on the surprising science of motivation [video] (ted.com)

82 points by ashishk 14 hours ago | 40 comments

19. An Angel Investor Group Move That Makes Me Vomit (feld.com)

38 points by keltecp11 10 hours ago | 16 comments

20. Fuck the Fortune 500, It’s All About the Fortune 5,000,000 (quicksprout.com)
20 points by webtickle 6 hours ago | 15 comments

21. The Man Who Sells America’s I.O.U.’s (nytimes.com)

3 points by Maven911 1 hour ago | discuss

22. Open source, not $19 billion, may be best health care stimulus (cnet.com)
9 points by edw519 4 hours ago | 10 comments

23. Why I'm Quitting Gmail (archlinux.me)

132 points by etherealG 20 hours ago | 48 comments

24. Living root bridges (atlasobscura.com)

68 points by ambulatorybird 15 hours ago | 15 comments

25. Acoustic Monitor Turns Any Surface into An Input Device (singularityhub.com)
22 points by kkleiner 8 hours ago | 2 comments

26. thesixtyone (YC W09) is hiring software engineers (thesixtyone.com)

66 points by JMiao 10 hours ago

27. Yehuda Katz's 10 Favorite Things About Ruby (yehudakatz.com)

38 points by wifelette 11 hours ago | 22 comments

28. What We Know About Evan Ratliff, So Far (wired.com)

21 points by edw519 8 hours ago | 7 comments

29. David Foster Wallace on Life and Work (unabridged) (archive.org)

 18 points by rms 7 hours ago | 13 comments

30. The End of Innocence (steveblank.com)

58 points by bentoner 15 hours ago | 12 comments

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Where: Wheeler Auditorium, UC Berkeley.
When: 24 October 2009, 9:00 am.
Application Deadline: 1 October 2009.

Are you a hacker who has thought about one day starting a
startup? Have you already started it? Then you're invited
to a free, one-day startup school this October 24 at
Berkeley. We'll have a range of experts speaking about
startups from their own experience.

The atmosphere of energy in the room at startup school is

something you have to experience to believe. Many
founders have told us that this event was what finally
made them take the leap.

The event is free, but because more people may want to

come than we have room for, we ask you to fill out a brief
application form if you want to attend. The application
deadline is noon PT on October 1, and we'll issue
acceptances by October 8.

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STATUS-CASTING? MUSIC WANTS TO BE FREE NOT A LOVE STORY

Live From Yahoo's "What Apple Will Approve (500) Days Of Apple And
Matters Most" Event » Rhapsody's iPhone App, But It Google »
Will Still Be A Dud »

Brazen Careerist: A Professional Network That

Realizes You’re More Than Just A Resume
by Jason Kincaid on August 24, 2009 1 Comment 57 retweet

The job market is absolutely brutal right now in many areas of

the country — a fact that’s doubly true for recent graduates
whose resumes are still a little light on actual job experience.
This isn’t helped by the fact that many career sites like LinkedIn
place a heavy emphasis on past jobs and workplace
connections. Tonight, Brazen Careerist is launching a new
professional social network for Generation Y that’s looking to solve this problem.

Brazen Careerist launched over a year ago as a blog network, and has since grown to include over
1000 bloggers. Now, the site is also launching its own social network that’s centered around
Generation Y — adults who were born from the mid 70’s through the mid 90’s. Unlike LinkedIn,
Brazen Careerist is trying to focus on the human side of these potential employees, offering an
environment where users can share their thoughts and activities alongside their resumes.

Read More

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StyleRays Lets You Share Your Personal Style With
The Masses
by Leena Rao on August 24, 2009 68 retweet

Fashion has long had a place in the Web 2.0 arena. There are online
sample sale clubs, social networks around fashion and even fashion
microblogging networks. StyleRays is jumping on the bandwagon by
launching a microblogging site focused less on the actual fashion and
more on style. What’s the difference you ask?

According to StyleRays, the site is focused on how you put clothes

together and integrate brands into certain “looks.” Instead of answering
Twitter’s question of “what are you doing?”, StyleRays looks to answer
the question “what are you wearing now?” On the site, users can upload
photos of what they are wearing, then tag the photos with the brands of
clothes that they have on and publish their photos. Similar to Twitter,
you can follow other users and their photos will appear in your stream. You can also comment on
users’ photos and Tweet photos to Twitter and publish links to Facebook as well.

Read More

David Recordon Leaves Six Apart To Join Facebook

by Daniel Brusilovsky on August 24, 2009 20 Comments 127 retweet

David Recordon , the Director of Corporate Development at Six

Apart, is leaving the company to join Facebook after two years at the
company. Recordon made the announcement on his blog , where he
writes that he is joining Facebook’s Engineering team as a Senior Open
Programs Manager, and will continue to work on open source and open The CrunchBoard
standards inside Facebook. Over the last two years at Six Apart,
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most popular decentralized single-sign-on protocol on the web. Search Specialist
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Welcome To The Stream. Yahoo Adds “Status- Product Manager

Bazaar Voice
casting” To Mail And Messenger
See all Post
by Erick Schonfeld on August 24, 2009 14 Comments 132 retweet

Powered by Personforce
When you are late to the game, trying to rename it doesn’t win
you any points. Today, Yahoo announced that it is finally
adding basic status updates to its Mail and Messenger
products, which it is calling “status-casting.” In both Yahoo
Mail and Messenger 10, you can update your status and all of
your contacts who also use either of those two products can
see your updates. You can also choose to see your friends’
updates from a variety of social media sites across the Web—
such as Yelp, YouTube, and Twitter— right in your Mail
homepage or IM stream.

Yahoo is making its communications products more social by combining private and public
message streams in much the same way that AOL added lifestreaming to AIM last month. (That’s
right, AOL beat Yahoo to this feature set by more than a month).

On the one hand, Yahoo wants to use the popularity of Yahoo Mail (which is the No. 1 Web mail
service with 300 million people using it worldwide) to get into the micro-messaging game. Just like
it did with Yahoo profiles at the beginning of the year, you can now add 140-character updates
via Yahoo Mail to other people on Yahoo. It also lets you and keep track of what your contacts are
doing across other social sites. These appear under a new updates section on the Yahoo Mail
landing page.

Yahoo Messenger lets you do the same things—create updates across your Yahoo network and see
updates from your IM buddies happening elsewhere. But it doesn’t appear to be a two-way
connection.

Read More

Bing Doesn’t Have Much Zing Yet Outside The U.S.

(comScore)
by Erick Schonfeld on August 24, 2009 19 Comments 94 retweet

In the two months since Microsoft launched Bing, its new search
engine has taken nearly a full point in market share in the U.S.
But overseas, the Bing effect is not really being felt yet. The latest
global search market share numbers (as opposed to U.S.) from
comScore show Microsoft’s share of search queries actually
declining by 0.1 percent in between June and July to 2.9 percent.
(See chart below).

Maybe this is because most of Bing’s $100 million marketing

budget is being spent in the U.S., and that is driving much of the
initial market share movement we are seeing here. Microsoft’s
global market share is also so much smaller than its 8.9 percent
share in the U.S., so making serious inroads overseas will take much longer.

Read More

Wondering How Seriously Apple Is Taking The FCC

Inquiry? Check Out Their Home Page
by Michael Arrington on August 24, 2009 44 Comments 106 retweet

Wondering just how seriously Apple is taking this FCC inquiry

about their rejection of the Google Voice application for the
iPhone? Just check out their home page , which is promoting
the response they sent to the FCC last Friday.

Apple’s website draws 94 million unique visitors a month

(Comscore worldwide, June 2009), and the home page is
generally reserved for selling stuff. Today for example, they’re
pushing the upcoming operating system release of Snow
Leopard, as well as Final Cut, Macbooks and a promotion to
give an iPod Touch to students who buy Macs.

The area reserved for “Apple answers the FCC’s questions” just seems out of place, and gives us a
hint about how seriously they’re taking this whole situation. This is a PR war they’re engaged in,
and they are using everything they have to spread their side of the story.

Read More

The Top Query At Today’s Yahoo Event? Bing.

by MG Siegler on August 24, 2009 3 Comments 85 retweet

The Q&A session following Yahoo’s “What Matters Most” event

today was interesting. That is, interesting if you’re confused by
the whole Bing/Yahoo strategy going forward. And it would
certainly be understandable if you were — especially after an
event in which Yahoo did a lot to highlight changes to its
search product. You know, the one everyone thought
 Microsoft was now running.

But there’s an important distinction between Yahoo’s plans for

its own search product going forward, and Microsoft’s plans for it. The easiest way to think about
it is that Yahoo will be in charge of the frontend side of things for Yahoo Search, while Microsoft
will be in charge of the backend — though not all of it. And Yahoo didn’t shy away from questions
today as to whether that means that essentially, Yahoo is still competing with Microsoft in search?
From a frontend perspective, which is all most users will ever see, it is, says Yahoo.

Read More

Facebook Still Pondering Whether To Let Users

Syndicate Status Updates To Twitter
by Jason Kincaid on August 24, 2009 17 Comments 184 retweet

Last week Facebook added a major new feature that some

users had been begging for for months: the ability to syndicate
Facebook status updates from Pages to Twitter. The
announcement was a departure for the social network, which
has long been regarded as something of a blackhole for user
data. But Facebook only went half way with this release — it
restricted the feature to brands and celebrities with Facebook
Pages, leaving out the many millions of Facebook users who
only have normal profiles. Some have proposed that it’s only a
matter of time before Facebook opens this up to everyone, but
we’ve learned this is hardly a sure thing.

From what we’ve been hearing, Facebook is still internally debating if and when they’d release the
feature, and they’re going to take their time in making the decision. The reasons for the slow
progress are obvious: Facebook only recently began offering the ‘everyone‘ sharing option to
users, and it still hasn’t released the privacy overhaul that will promote it.

Read More

Facebook Events Now Creates Automatic Guest Lists

From Your Most Recent Parties
by Leena Rao on August 24, 2009 9 Comments 139 retweet

Facebook just added the ability to invite friends to an event

based on who was invited to past events that you’ve been to.
The new feature basically lets you filter your friends by recent
events when creating an invitee list.

So when you create an event on Facebook, you will now see a

“Filter Friends” tab in the upper-left corner. The drop-down
menu will display the five most recent events you either created or attended in the past month. If
you click on one of these events, you can see the invitee list for this event. Of course, only your
friends will appear in this list; you will not be able to see or invite anyone who you aren’t friends
with from past lists. One drawback is that you can only access the lists from recent events and
can’t see the lists from older events.

Read More

What Matters Most To Yahoo Is “Taking Away”

People Search From Google
by Erick Schonfeld on August 24, 2009 24 Comments 116 retweet
 Yahoo CEO Carol Bartz may be under the impression that
Yahoo has “never been a search company,” but at its “What
Matters Most” product update today, search was definitely
front and center. One of the demos showed a new, upcoming
search homepage.

The new design will focus on making search more

personalized, and specifically going after Google in people
search . “We’re taking that away from them,” vows Yahoo’s VP
of Search Products and Design Larry Cornett. When you type in
a person’s name in Yahoo, it will do a better job of bringing up
links to their profiles on Facebook, LinkedIn, Twitter, and
FriendFeed—something Google already does exceedingly well. But Cornett throws down a
challenge for Google: “When we launch this, you’re going to come to Yahoo to search for people.”

Read More

The Old Fail Whale Was So Much Cuter

by MG Siegler on August 24, 2009 50 Comments 129 retweet

503 error? Are we serious, Twitter? Yes, the service with an

illustrious history of going down, is down again. But rather
than returning the cute, cuddly Fail Whale that we’ve all come
to know and love, everyone is getting a boring old 503 error.

For those not versed in server speak, 503 means :

Read More

SocialToo Launches App That Allows You To Publish

From Facebook To Twitter
by Leena Rao on August 24, 2009 32 Comments 271 retweet

SocialToo, a startup that lets you manage your personal

connections on Twitter and Facebook, has launched a new
Facebook application that lets you post updates to your Facebook
wall, to Twitter, and any Facebook Fan Page you manage. This
feature is particularly interesting after Facebook just released a
feature that will allow Facebook Page owners to syndicate their
updates from Facebook to Twitter — something that users have been
asking for for ages. At the moment, it’s unclear whether Facebook
will be extending this feature to Facebook Profiles.

Here’s how it works: after installing the application on your

Facebook profile, you will be given a prompt in the Publisher’s drop
down menu to publish via SocialToo Status. After authorizing your (via oAuth) Twitter accounts,
you will be able to select a publish to Twitter option each time you post an update on your
Facebook feed via the SocialToo Status option. You can also publish to various Facebook pages (if
you are the administrator). When you publish via SocialToo Status, your updates will appear in your
personal stream, along with a link to each destination, i.e. Twitter and Facebook Pages. There will
also be a little green SocialToo quote icon with each post, differentiating the posts from a regular
status update.

Read More

Microsoft Brings Twitter And Facebook To The

Emerging World With OneApp
by MG Siegler on August 24, 2009 23 Comments 316 retweet

Here in the U.S. (and especially in San Francisco), it’s easy to

forget that most of the world doesn’t have iPhones, BlackBerrys,
 Android phones, and the like. Much of the world doesn’t even
have access to them, and if they did, they are often way too
expensive to actually get one. Should those people be without
mobile access to services like Twitter and Facebook? Microsoft
doesn’t think so.

Today, it is launching OneApp , an app for people running J2ME on their phones with slow
processors and not a lot of memory. Basically, it’s a lightweight app that lets you run more
intensive apps by grabbing just the basics of that app that you need. And OneApp also offloads
some of the processes required to use the larger apps to Microsoft servers, which handle it over
the cloud.

Read More

Entire German City Bans Hand Shaking

by Michael Arrington on August 24, 2009 86 Comments 141 retweet

This no-hand shaking thing is really starting to get traction now.

Since my rant in May we’ve seen startups ban the medieval practice
at board meetings and mainstream press jump on board.

And now a city in Germany, Würzburg , has apparently banned

hand shaking within city walls. The translated version of the article is
here . If anyone speaks German and can do a better translation,
please let us know.

I say we start asking cities in Silicon Valley to ban handshakes, too. Or

at least lets get rid of the ridiculous National Handshake Day.

Read More

Live From Yahoo’s “What Matters Most” Event

by MG Siegler on August 24, 2009 56 Comments 96 retweet

We’re here in Sunnyvale at Yahoo’s headquarters for an event

Yahoo is calling “Connecting You to What Matters Most”. They
are using these event to go over several updates to the key
products that Yahoo offers.

Below find my live notes.

Read More

Henry McMaster (AKA “Craigslist Slayer”) Runs For

Governor Of South Carolina. God Help Those People.
by Michael Arrington on August 24, 2009 15 Comments 82 retweet

Well, it’s all official now. The next moron to run South Carolina
(current moron here) may well be Henry McMaster, the
disgraced Attorney General of that fine state.

Yes, the man who took on Craigslist, declared victory and then
ran away is now officially a candidate for the esteemed office
of Governor of South Carolina.

The state that our readers determined is less important than

Craigslist. And the residents of South Carolina agreed.

Links to the whole sorry mess are below in chronological order. In the meantime, watch his video,
follow him on Twitter or check out his official campaign site .

If you people in South Carolina vote this man into office again you deserve all the humiliation
that will continue to rain down on you.

Read More

Republic Project Launches, Allows Artists To Sell

Album Pre-Orders With Video Exclusives
by Daniel Brusilovsky on August 24, 2009 12 Comments 92 retweet

Republic Project , a new startup launching out of beta, is

allowing artists and labels to sell pre-orders of new music
directly to fans and receive 100% of the revenue from the
album.

Fans will have access to exclusive behind-the-scenes video

during the pre-order period which can include footage from
the studio, on the road, or elsewhere. Artists will receive an
embeddable widget that can be placed on their website, blog
and social sites like MySpace and Facebook. This widget will direct fans to the band page on
Republic Project where sample videos of footage can be seen, and more.

Read More

Now SpinVox’s Blogger-In-Chief Jumps Ship

by Milo Yiannopoulos on August 24, 2009 22 Comments 99 retweet

James Whatley, SpinVox’s head of digital and social media, has quit. Why
does that matter? Whatley’s job was to interact openly with the public and
the industry about the voicemail-to-text company, both on the company
blog and on Twitter. His departure - at a time when Spinvox is being
buffeted by a wave of bad press - suggests that he no longer feels able to
do so, having recently crossed swords with the media a number of
times. The company has already appointed, then lost, its CFO, former
Alcatel-Lucent CEO Patricia Russo, in the space of three months.

SpinVox is currently facing a tsunami of allegations about the way the

company has been run. The UK’s Sunday Times has seen a copy of the
company’s unaudited 2008 accounts, which suggests that SpinVox’s losses
widened by 30% that year. The four-year old company has more than $200m in backing from
private equity houses. In addition, a dossier is currently circulating that allegedly contains
explosive claims about misappropriated resources.

Read More

Apple Will Approve Rhapsody’s iPhone App, But It

Will Still Be A Dud
by Erick Schonfeld on August 24, 2009 56 Comments 82 retweet

This morning, subscription music service Rhapsody is

putting public pressure on Apple to approve its new music
streaming app by making its case directly to the press .
Unlike other streaming music apps already on the iPhone from
Pandora, Slacker, AOL Radio, imeem, and Sirius XM,
Rhapsody’s would allow users to individually select and listen to
any one of the 8 million songs in its catalog on-demand or
create their own streaming playlists, as opposed to listening to
a more radio-like, random assortment. It is in the same boat
as Spotify , which is also awaiting approval as an iPhone app.

In the wake of the Google Voice app rejection/indefinite

review and the resulting FCC investigation, Rhapsody is betting that Apple won’t reject its App,
 even if it does compete directly with iTunes. Rhapsody VP Neil Smith tells the NYT that “not
approving things for the app store is giving people a reason to say, ‘I’m not going to buy an
iPhone.’”

Smith gives Rhapsody a little too much credit. It is a great product, don’t get me wrong. But paying
$15 a month for unlimited access to Rhapsody’s Web jukebox appeals to a very limited niche
audience.

Read More

Nokia ‘Booklet 3G’ Netbook Details Coming In Early

September
by Doug Aamoth on August 24, 2009 21 Comments 88 retweet

Know what’s popular nowadays? Netbooks! Nokia is officially

jumping on the netbook bullet train with the “Booklet 3G” — an
Intel/Microsoft-based netbook that promises 12-hour battery
life, a weight of 2.75 pounds, and apparently built-in GPS. The
“3G” portion of the name indicates a wireless data connection
as well.

Actual specs and details will be announced by Nokia on

September 2nd, but it’s believed that the Booklet 3G will run
Windows 7. The 12-hour battery life is interesting, too, as that’s a full four hours longer than most
netbooks currently on the market. It’ll be interesting to see which Atom CPU is used in the
machine to obtain that kind of longevity. It may be a slower but less power-hungry Z-series CPU
since the 10-inch Booklet will have a higher-resolution screen (likely 1280×800 or 1366×768).

Read More

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Steve Jobs Is Laser Focused on the Apple
Tablet
August 24th, 2009 | by Adam Ostrow 1 Comment
Twitter RSS Daily Email Facebook

We know Steve Jobs is back working as Apple’s CEO. We 1333k Twitter Followers, 295k RSS Subscribers
358 also are fairly confident that the company plans to launch
tweets
More Subscription Options
an Apple Tablet device soon, although likely not at an
retweet upcoming event in early September. And now, we have
one of the more concrete reports to-date about the
importance of the device to Apple.

According to The Wall Street Journal, “since his return in

late June, [Jobs] has been pouring almost all of his attention into a new touch-screen gadget
that Apple is developing.” That in and of itself isn’t surprising – a Tablet would represent a huge new
product launch for Apple, which means Jobs would be intimately involved, per usual.

But it does indeed sound like confirmation that a Tablet is on the way, and that an iconic Steve Jobs
keynote to introduce the device it is likely waiting in the wings.

Galileo’s Telescope Debuted 400 Years Ago

Today Advertise Here

August 24th, 2009 | by Ben Parr 12 Comments

Mashable Mega
On August 25th, 1609, an Italian Lists
307 astronomer showed off his unique
tweets Tasty Tweets:
creation to a group of Venitian 55+ Foodies to
retweet merchants. The object was able to Follow on Twitter
magnify the night sky, revealing
celestial objects nobody could ever find Musicians on
or study before. Twitter: 100+
Artists That
By now you probably know that I’m referring to the telescope and that Italian astronomer Tweet
was none other than Galileo Galilei.
Green Tweets:
That invention forever changed the faces and foundations of science, philosophy, religion, society, and 75+
history. Now, exactly 400 years later, the web has begun its celebration of this monumental achievement, Environmentalists
most notably with a stylized Google logo. to Follow on
Twitter

85 Comedians to
Follow on Twitter

Space Shuttle Discovery Launch: Where to Nonfiction

Tweets: 70+
Follow it Online Authors to Follow
August 24th, 2009 | by Barb Dybwad 1 Comment on Twitter

Early Tuesday morning at 1:36 a.m. EST marks the next Literary Tweets:
199 100+ of the Best
 tweets
liftoff of the shuttle Discovery. Mission STS-128 has the
Authors on
crew heading to the International Space Station to install
retweet Twitter
new hardware and experimental equipment including the
supply module Leonardo, plus bringing new astronaut Nicole 85+ of the Best
Stott to the station. Twitterers
Designers Should
Also notably riding along with Discovery will be the COLBERT Follow
treadmill, named after famed fake newsman Stephen Colbert
of Comedy Central’s The Colbert Report. Below, Colbert gets the More Mega Lists
important news [video] and we give you the important news about where you can follow the shuttle »
launch using social media services online.

Advertise Here

Twitter Effect Redux: 78% of Tweets About

Inglourious Basterds Were Positive
August 24th, 2009 | by Jennifer Van Grove 5 Comments

Earlier this morning we reported that Twitter may have played a

218 role in generating box office revenue for Inglourious Basterds. The
tweets
so-called “Twitter Effect” has also been credited with sinking Bruno
retweet on day two and giving District 9 an added box office boost.
Advertise Here
While many of you may have your doubts about the trend, we now
have additional evidence that a majority of the tweets about
Inglourious Basterds were approving in nature. Most Popular Most Comments
Specifically, analytics provider Crimson Hexagon analyzed Twitter conversation
1. Wanna Ride With Lance Armstrong? Follow Him
over the weekend and found that a vast majority of tweets – 78% to be exact –
on Twitter
were favorable.
2. Browse the Reality on Your Android Phone With
Layar
3. HOW TO: See Twitter Like Someone Else
4. Google Street View Adds More International
No Hulu For UK Users Until 2010 Coverage
5. A Tweet and a Prayer: Student Posts Twitter
Prayers to Western Wall
August 24th, 2009 | by Jennifer Van Grove 8 Comments
6. Tumblr Launches Hashtags and Facebook
Integration
Those of you stateside have really come to appreciate
214 Hulu for watching shows from NBC, FOX, and ABC
7. Popular Artists Sell MP3s Starting at $0.15 on
tweets Amie Street
online. Many of you outside of the US, however, have
retweet 8. Brett Favre Signs With Vikings; NFL Stars
been anxiously awaiting the date when you too could
Tweet Reactions
reap the benefits of the free online video site.
9. Google Forced to Reveal Identity of Offensive
Unfortunately, we have bad news for you. According to The Daily Telegraph, the Hulu UK roll- Blogger
out was originally slated for September of this year, but has now been pushed backed to early 10. REAL OR FAKE: One Woman's Embarrassing
2010. This is likely a direct result of the fact that Hulu has yet to ink any deals with UK Facebook Message
content providers.

Sponsored By:
Wikipedia to Add New Level of Editorial
Oversight
August 24th, 2009 | by Ben Parr 18 Comments

Wikipedia is one of the most prominent cases for world

264 collaboration and social media in action. Unlike the standard
tweets
encyclopedia, often written by experts and sourced from the same,
retweet Wikipedia articles are entirely community-built, often without
restrictions. If you can create an account, you can write and edit
Wikipedia articles. It is that feature that as made it into one of the
world’s most popular websites.

Now a core feature, perhaps a core principal, of “the free

64 encyclopedia anyone can edit” is about to become restricted. According to The New York
diggs Times, editing articles about living people on Wikipedia will require approval from an
experienced editor first.
digg it
Twitter Brand Sponsors What's This?
Is this a fundamental shift to the Wikipedia philosophy, or a necessary step to assure that
quality reigns over misinformation? These brands would like to engage with our social
media community on Twitter. If you like them,
Tweet them!

livestrong : RT @geoffmoulton:
Free Music Monday: 10 Songs From Around #LIVESTRONG Challenge Philly local
new report Download and play
the Web http://bit.ly/26EZLi

August 24th, 2009 | by Barb Dybwad 6 Comments humanesociety : Wayne's Blog:

Teamwork to the Rescue
http://bit.ly/vKVFg
Hello music lovers! In celebration of the weekly #musicmonday
254 tradition on Twitter we bring you Free Music Monday, a
mailchimp : Have a Beautiful Email
tweets Newsletter? Submit it to the
compilation of some of this week’s best and brightest music @ben_approves newsletter gallery!
retweet available for free from around the web. http://bit.ly/V1l6w #BEN ^a
wwf_climate: WWF_Climate: RT
Because taste is subjective, we encourage your feedback and welcome @tcktcktck This looks like a really
your requests — do you want to see more of a particular genre or artist? moving film about the impact of
Let us know in the comments. climate change on the Carteret
Islands: http://bit.ly/5ET3W
oxfamamerica : Read the reflections
of one of our writers upon returning
from her third trip to Ethiopia
http://bit.ly/lp4l8

As Whole Foods Boycott Grows on Facebook,

Brand Perception Drops
August 24th, 2009 | by Jennifer Van Grove 23 Comments

As the Whole Foods Boycott on Facebook continues to swell — the

381 group now has over 27,000 members — we’re finding out that CEO
tweets
John Mackey’s statements in The Wall Street Journal are affecting
retweet more than just angry Facebookers, but consumers in general.

According to YouGov’s BrandIndex, which tracks the daily

consumer perception of brands, consumer opinion towards Whole
Foods has been falling fast on the Web since the editorial appeared.

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store barack obama blackberry blog blogging BLOGS business
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 Mashable’s Weekly Internet and Social Media messaging iphone iphone app iphone apps itunes jobs

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August 24th, 2009 | by Tamar Weinberg 0 Comments myspace obama ONLINE VIDEO open web awards owa
Photos politics privacy rss Search shopping SMS social

It’s a brand new week, which means it’s time for

media social network social networking social networks
216 Mashable’s guide to upcoming social media and Sponsors sports startups summermash travel tv twitter
tweets
web events, parties, and conferences. For more video widget
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retweet upcoming event listings, check out Mashable’s youtube
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Did Michael Beasley Twitter His Way into

Rehab?
August 24th, 2009 | by Ben Parr 8 Comments Jobs Recent Beta Invites

Did Twitter just play a major role in the Internet Programmer, Server Admin, IT
205 mental breakdown of a superstar at 1saleaday (Brooklyn, NY)
tweets
athlete? Social Media Marketing Manager
retweet at American Express (New York, NY)
Michael Beasley, star forward for the
Director, Content Distribution
Miami Heat NBA team, checked into a
at Beliefnet (fox Digital Media) (New York, NY)
Houston rehabilitation hospital this weekend, for what is being reported as substance abuse
and depression issues. He will apparently stay for at least 30 days and spend time with John VP of Engineering
at Mr Youth (New York, NY)
Lucas, a well-known former NBA player and coach who works with troubled players.
$50 for 30 days
What makes Beasley’s breakdown unique though, is that his admission to rehab was preceded by a
More Jobs | Post a Job
series of very disturbing Twitter posts, two deletions of his Twitter account, and a TwitPic that
reveals suspicious bags on a table in the background.

Mashable Partners

Facebook Movie to Start Production in October

August 24th, 2009 | by Christina Warren 13 Comments

Columbia Pictures has officially greenlit “The Social

342 Network” (unofficially known as the Facebook movie),
tweets
with production set to begin in October.
retweet
Aaron Sorkin (writer and creator of “The West Wing”
and “Sports Night”) has written the script, which is
based on Ben Mezrich’s book, “The Accidental
Billionaires.”

David Fincher (”Fight Club”) is directing the film. There isn’t any word about casting right now, but with
production starting in six to eight weeks, expect those details to be finalized soon.

Twitter and Facebook Mousepads Are No

Social Media Pillows
August 24th, 2009 | by Jennifer Van Grove 12 Comments

We instantly fell in love with Craftsquatch’s awesome social

206 media pillows, and the iPhone soap wasn’t too shabby either.
tweets
So when we heard about Twitter and Facebook mousepads,
retweet we had to check these social media tchotchkes out.
 Although cute in their own right, the unofficial Twitter and
Facebook mousepads are as basic and underwhelming as
Thanks to the above companies for helping
newbie Twitter and Facebook profiles. Priced at $17.99 for
Mashable to provide social media resources
the pair (or $11.99 each), you’ll get to scroll your mouse
every day.
around a pad that begs the question, “Where are you pointing?” or
“What’s on your mouse pad?”

YouTube Wants You to Predict TV’s Next Hit

Shows
August 24th, 2009 | by Christina Warren 3 Comments

As an avid-TV junkie, the Fall TV season is an exciting time.

122 It’s a great opportunity to find new shows and catch up on old
tweets
favorites. This year, YouTube is getting in on the action and
retweet they want your vote.

U.S. viewers (sorry international folks!), head over to

YouTube’s Fall TV Preview page and check out the previews for more than 80 new and
returning shows.

After viewing the previews, you can vote for what shows you think will be the biggest hit this fall. The
shows that get the most votes will be featured on the YouTube homepage.

Facebook Adds Ability to Invite Friends from

Recent Events
August 24th, 2009 | by Ben Parr 3 Comments

Facebook events are one of the best ways to reach

258 out to friends, colleagues, and the general public with
tweets
your cause, party, or project – simply because there
retweet are just so many people on Facebook. Still, Facebook
events are very basic and don’t boast the array of
features that event services like Eventbrite or Meetup
have.

Facebook’s making strides to bridge that gap though.

The social network has just launched a very useful (and long sought after) feature: the ability to invite
your friends from recent events. In the past, if you hosted a bi-weekly BBQ, you’d have to rebuild
your entire guest list for each event. Now you can just select your last event and invite everybody who
was on the guest list.

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On Mobiles, There’s No Stopping Webkit Sign up for our daily email:

By Om Malik | Monday, August 24, 2009 | 10 comments | 29 tweets [email protected]

There are a lot of brave souls out there making mobile browsers,
hoping to gain traction with the phone makers. But most of them
are fighting a losing battle, for the mobile browser war is
increasingly being fought between two camps — the Webkit-
based browsers camp, which includes Safari on the iPhone, the
Google Android Browser, the Palm browser and the Nokia
browser; and the Opera camp.

Today Research in Motion bought Touch Mobile, a Toronto-

based company developing a Webkit-based mobile browser.
Maybe it’s time for Microsoft to throw in the towel and officially get on the Webkit bandwagon as well.
With the BlackBerry still the reigning champion of the smartphone business, at least in North America,
the Webkit is about to get a big boost. Even Mozilla’s Firefox Mobile has an uphill climb ahead, though
one can’t blame them for trying. Many mobile industry insiders believe that the browser is one of the
biggest drivers of the mobile Internet boom.

Frankly, I can’t wait for my BlackBerry Tour to get some browser smarts and become more useful than its
current role of just a solid messaging device.

Amazon’s Camcorder Love Could Be ISPs’

New Nightmare
By Jordan Golson | Monday, August 24, 2009 | 4 comments | 18 tweets

Amazon.com is pushing small, inexpensive digital camcorders like the Flip and
Kodak’s new Zi8, naming them “shoot-and-share” and introducing a whole RECENT NETWORK POPULAR
category focused on the devices. Earlier today, Amazon sent me an email
touting the cams because I had “shopped for camcorders” on the site Look How Ubiquitous Wi-Fi Has Become
previously. The move is especially important because Amazon is a massive
Dunbar’s Number and the Future
retailer, and if the company pushes these devices significantly across the site, it of Communications
could lead to even broader adoption of them by consumers — and an even
greater demand for upstream bandwidth as people look to upload more videos. Talkin’ Bout a (Blogging) Revolution

Continue » Android This Week: A New App Store, But

No Updates for G1?

The Past, Present & Future of

Mobile Games

NEWNET FanFeedr Aims to Hit a Home Run

It’s Time to Get Real Time, Corporate With Comments
America
NEWNET

Why Facebook and Twitter Should

Work Together
 NEWNET

Google Wave Explained

INFRASTRUCTURE

Why Cloud is Not the Death Knell for

Managed Hosting

See more premium content »

Yahoo Unleashes New Features in Mail, Messenger

and Search
By Jennifer Martinez | Monday, August 24, 2009 | 0 comments | 34 tweets

Updated with additional details throughout: Yahoo is releasing a

series of updates today for its Mail and Messenger consumer web
products, and it plans to test features in search that will be launched later
this year. This follows the company’s debut of its new, cleaner homepage last month.

Mail now has a more streamlined interface that’s similar to the updated homepage and incorporates a
new Application Box that includes its Calendar application and third-party apps. In addition, a new Evite
application to be launched next month will let people create and view invites within Mail. Yahoo is also
Become a sponsor
expanding Mail’s attachment limits for photos and files to 25MB from 10MB, and you’ll be able to upload
and edit photos directly within an email. A new Mail mobile program is rolling out for Safari today and
will be available on more than 400 devices, starting Sept. 1. The new Mail mobile program looks similar Subscribe to the GigaOM feed
Get all the posts on this site
to Google’s Gmail interface on the iPhone. Continue »
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What to Read on The GigaOM Network

EDITORIAL
Monday, August 24, 2009
MASTHEAD
Twitter chatter boosts Tarantino’s box office take (NewTeeVee)
Carolyn Pritchard
Why an electromagnetic threat shouldn’t be a smart grid issue (Earth2Tech)
Managing Editor
Microsoft vs. i4i: Much ado about nothing? (OStatic)
Windows 7 on the Viliv S5 Premium UMPC (jkOnTheRun) Celeste LeCompte
Special Projects Editor
Overcoming my fear of social networking (WebWorkerDaily)
Macworld Expo is dead: Long live the Macworld Expo (TheAppleBlog) Desiree DeNunzio
Copyeditor

Om Malik
Why Nokia’s Service Efforts Have Fallen Flat Senior Writer

By Colin Gibbs | Monday, August 24, 2009 | 5 comments | 29 tweets Stacey Higginbotham
Staff Writer
Nokia’s struggles over the last couple of years are well-documented: The
Jennifer Martinez
Finnish handset manufacturer has watched its Symbian platform
Staff Writer
consistently lose market share in recent years, falling from a staggering
73 percent in 2006 to 51 percent in the second quarter of this year. And Wagner James Au
Contributing Editor
as the smartphone space has heated up, Nokia has spun its wheels in
North America while Apple and RIM produce enviable margins with their Liz Gannes
high-end devices. Staff Writer

Chris Albrecht
But Nokia’s attempt to morph from manufacturer to mobile Internet services provider has been even Staff Writer
more painful to watch. Continue »
 Katie Fehrenbacher
Staff Writer

Josie Garthwaite
Staff Writer
With Funding From Benchmark, Fanbase Steps Up
to the Plate
By Jennifer Martinez | Monday, August 24, 2009 | 2 comments | 15 tweets

Fanbase, a web directory of college and professional teams and athletes,

publicly launched today, joining FanFeedr, FanSnap, Yardbarker and a
host of other web sites that aim to cover sports in innovative ways.
Fanbase’s content is user-driven, similar to Wikipedia and IMDb, so
anyone can edit or add photos, articles and videos to an athlete or team profile. The company has
received $5 million in funding from Benchmark Capital, the original investor in Epinions, a startup co-
founded by Fanbase CEO Nirav Tolia that was shrouded in controversy and legal battles and ultimately
acquired by eBay. Continue »

Why It’s Too Early To Be Excited About Nokia’s

Late Netbook
By Kevin C. Tofel | Monday, August 24, 2009 | 5 comments | 13 tweets

As a netbook fanatic, you’d think Nokia’s unveiling of the Booklet 3G, its
first foray into the netbook world, today would have me doing my geeky
dance of joy. I’m waiting for Sept. 2nd — when the handset maker and
mobile service provider is expected to disclose the bulk of the device
details — before I decide whether to kick up my heels and do a little jig.

It’s difficult for me to get excited about the Booklet 3G as not only is it
late to the party, but it doesn’t appear to offer much more than the netbooks already on the market. Case
in point: The Booklet 3G will run Microsoft Windows using the Intel Atom platform. I originally thought
this might be the next-generation Atom — aka the PineTrail platform — but All About Symbian indicates
the CPU is a 1.6GHz Intel Atom Z530. That’s the same processor that’s been available in Dell’s Inspiron
Mini10 netbook for the past several months. Continue »

Introducing The NewNet

By Om Malik | Monday, August 24, 2009 | 1 comment | 30 tweets

Right in front of our eyes, the web (and by extension, the Internet) is
changing — specifically, the rise of social networking and the real-time
web are changing the way information on the Internet is created and
consumed. Indeed, the ability to disperse information through social
platforms and do it using real-time tools is shifting the focus of content
from “historical” news to real-time events.

Slowly but surely, the web is being disaggregated, dismembered and at the same time, becoming more
interactive. Some call it the Now Web, others are labeling it the Real-Time Web, while still others view it
as the Social Web. They all describe components of what we refer to as the NewNet. And that is precisely
the name of the latest addition to our GigaOM Pro research service. Continue »

Counting Down to Mac OS X Snow Leopard

By Om Malik | Monday, August 24, 2009 | 7 comments | 25 tweets

Looks like the much talked about Mac OS X,

 version 10.6, code-named Snow Leopard, will
make its debut Friday, Aug. 28. It is a faster,
smaller and supposedly smarter OS. OK, not
smarter, but it looks like a worthy upgrade. Snow
Leopard is half the size of the previous version
and frees up to 7GB of drive space once installed.

Most of the changes in the new version of the

operating system are under the hood. Our colleagues at TheAppleBlog have put together a series of posts
that explain in-depth some of the key OS features including: Grand Central Dispatch, Exchange and
Quicktime X. They also have prepared a handy guide that details how to upgrade to Snow Leopard.

Being a Mac user, I can’t wait for Friday to show up! Are you planning to spend $29 for the upgrade?

Clearwire Needs Money, So Hopes Cable

Needs WiMAX
By Stacey Higginbotham | Monday, August 24, 2009 | 4 comments | 26 tweets

Clearwire has enough money to provide 4G wireless broadband service to

75 million people this year, and hopes to raise enough to boost that to
120 million by 2010. Clearwire CEO Bill Morrow tells The Seattle Times
today that the $2.5 billion the company has allocated for expansion will
only go so far, however, and after that it will need more cash. Given that Verizon plans to cover 100
million people by the end of 2010 with a competing Long Term Evolution 4G network, a delay in
fundraising may leave Clearwire in the dust with regard to some of its ambitious plans to provide
wireless access for consumer devices — such as e-readers — that need a nationwide presence.
Continue »

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Mon Who's Winning the Smartphone Wars? listen
Aug 24 by Raven Zachary | @ravenme | comments: 4 print Subscribe to Radar
2009
The short answer - Microsoft and Nokia are slipping, RIM and Apple are gaining.
Follow Radar on Twitter
It's too early to tell with Google. This shouldn't come as a surprise to anyone.

Last week, UK-based analyst firm Canalys, released its findings on smartphone
market share based on Q2 2009 unit shipments (see "Smart phones defy MOST ACTIVE | MOST RECE
slowdown"). Before sharing Canalys' findings, there are two important points to
Touch Traveler: London, Paris a
understand:
only an iPod Touch
Who's Winning the Smartphone
How market share is defined is based on the numnber of units shipped during Wars?
a particular period of time, not the number of active users of a specific Four Short Links: 24 August 200
smartphone platform, which is the installed base. These are commonly In Defense of Social Media (At
misunderstood terms. To determine the share that any particular smartphone Least Some Of It)
The Google Alphabet, 2008 edit
platform has of worldwide active smartphone users would require aggregation
of data from all of the mobile network operators. Good luck with that.
RADAR TEAM
The results of these reports are not reflective of how well a company is
actually doing in terms of profit (see "A Visualized Look At The Estimated RADAR TOPICS
Revenues Of The Top Cell Phone Manufacturers" as an example).
book related copyright diy
Canalys covers a number of topics in their latest smartphone research, but the emerging tech energy ete
one topic are I want to focus on is "Global smart phone market by OS". Which geo google government
companies are shipping the largest number of plastic phones into the world is less iphone make mobile open
interesting to most of us than which mobile operating systems are winning. Dell source operations
vs. HP is not as compelling as Microsoft vs. Apple, in the personal computer programming publishing
market. LG, Fujitsu, and Samsung, three successful handset manufacturers,
generally are not fully part of the smartphone conversation as they have
twitter velocity videos we
historically licensed smartphone operating systems from companies such as 2.0
Microsoft (this trend is changing to include more diverse licensing partners and
increased in-house OS development).
RECOMMENDED FOR YOU

Release 2.0.12, OReilly

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 Symbian (Nokia) accounts for half of the smartphones shipped in Q2 2009, O'Reilly Training:
followed by RIM, Apple, and Microsoft. Compared to the same quarter in 2008, Developing Android
Applications: Build,
Symbian and Microsoft are losing smartphone market share, and RIM and Apple
Compile, and Test Your
are gaining significantly. Apple's growth percentage over the prior year is First Android Application
artifically inflated due to contraints in availability of the original iPhone just prior to
the release of the iPhone 3G in Q3 2008. Minus that event, it would have been
closer to RIM's annual growth percentage.

Even though Nokia has a 50% smartphone market share right now with Symbian, Gov 2.0 Summit,
September 09 - 10, 2009,
I think they are the most vulnerable of all the major players covered by Canalys. Washington, DC
Symbian is a mobile operating system struggling to be modern with a developer
ecosystem that seems to be far more fractured and unmotivated when compared
to the excitement I see regularly from Android, iPhone, and BlackBerry
developers. Microsoft's Windows CE and its variants have been in the market
since 1996, and on smartphones for nearly a decade, yet has not been able to Gov 2.0 Expo Showcase,
effectively remain competitive recently. And while Android has shipped on just September 08
Washington, DC
over a million smartphones during the quarter, that's still impressive considering
the small number of devices that it's currently available on, especially due to the
number of pre-announced devices that wil be coming over the next few quarters.

Surprisingly absent in this data are other Linux-based mobile operating systems,
which must fall into the ambiguous "Others" category, along with mobile operating
systems, such as Palm Pre. The fragmentation of the various Linux mobile
operating system efforts, including handset manufacturer specific implementations,
is doing more harm than good right now in terms of market share growth. Release 2.0.11, OReilly
Radar Release 2.0
$129.00

tags: apple, iphone, microsoft, mobility, smartphone | comments: 4

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CURRENT CONFERENCES

Mon Touch Traveler: London, Paris and only listen

Aug 24
2009
an iPod Touch print Government 2.0 is about bringin
the principles and value of the w
by Mark Sigal | @netgarden | comments: 8 as a platform to the business of
governing. Lots of people are
Recently, I spent two weeks vacationing in talking about it. Who's doing it?
London and Paris with only an iPod Touch for September 8 we'll hear from som
of those who've planned and/or
communications and connectivity.
deployed a Government 2.0 proj
As I wanted to honor the fact that the trip was and have lessons to share. Rea
more
to celebrate my 10th wedding anniversary,
my wife/I didn't bring either a mobile phone or
a PC/Mac.

Mind you, I am not suggesting that this was a

wise thing to do, but it's what I did, and this
post captures the good, bad and ugly of the
experience.

First off, the revelation (for me) was how

much the Google Mobile Maps App on iPod
Touch completely changes the equation when
traveling. Touch-based control with a virtual keyboard is the perfect UI for
zooming in and out of geo-locales, and Mobile Maps offers a workflow whose
predictability and logical structure both de-mystifies and anchors foreign travel.

Moreover, Maps allows you to visually navigate in Real-Time (very different from
the experience on my Blackberry), all the while push-pinning favorite destinations,
and determining routes in just a few clicks. It is the consummate reality
augmentation application for travel, a sort of "magic compass."

Case in point, is a context traversal function

whereby you search for and find a
destination. Right clicking on the pin reveals
listing info, and left clicking takes you into
Street View, revealing a 360-degree
panoramic view of the target destination.

Street View provided a form of error-

correction since you could visually confirm
that a given destination was indeed the right
destination, an extra bit of piece of mind
when visiting a new area.

Candidly, I wish that Maps was even more

autonomous about capturing my real-time
travels and indexing them, as then I would
never need to re-trace my steps, not to
mention the entertainment value of being able
to replay the day's travels at a later time.

Similarly, if you could somehow overlay your interaction data with that of locals,
professionals (e.g., Fodors) and other travelers, you could create a very potent
social fabric that is data rich, and can be filtered on parameters such as user-
generated, professionally mastered, crowd-sourced and/or curated.

To frame this one, let me give you a specific example from my trip. I was walking
through St-Germain in Paris when I had a flashback to the last time I was there
(eight years before).

Back then, I had eaten at this incredible sandwich place nearby St-Germain. The
restaurant made their own breads, had good sandwich combinations, and was an
earnest, warm place. Unfortunately, I couldn't remember its name or specific
location.

I remembered, however, that the sandwich place became a retail chain in New
York. (It's good, but nowhere near as good as the original shop.)

While I couldn't remember the name, I did remember them having a branch near
Rockefeller Center in Manhattan, so I opened the Yelp app on my iPod Touch,
and typed in "sandwiches" near the geo of Rockefeller Center, and up came Cosi.
(Note: Yelp had limited data for London and none for Paris).

Next, I fired up the Maps App,

typed in "Cosi," and a pin
dropped on the map.

I clicked on the pin, and it

confirmed that I had been
staying less than two blocks
from this place for the past
week! I then left-clicked, and
saw a picture that took me
back eight years.

Lunch? It was everything that

I remembered.

Meanwhile, another App that we used throughout the trip was Facebook. My wife
and I were sharing one iPod Touch, and Facebook really delivered in terms of
being very easy/seamless to log into and out of our respective accounts, not to
mention providing (relatively) full access to Facebook's services.

In fact, it was through Facebook that I loosely

tracked the vacation that my brother and his
family were currently taking in Israel, Jordan,
and Greece.

I had some short exchanges with my niece,

and there was a reference to a London
overlap, but it didn't seem like the times
meshed.

Days later, my wife and I are walking from the

Kensington Park area where we were staying
to Harrods in Knightsbridge.

45 minutes later, we are ogling over the

sweets and pastry section of Harrods (if you
have never been there, it is a spectacle; they
have everything). Suddenly, a voice chimes
out, "I didn't think they let your type in here." I
turn around, and it's my brother and his youngest son.

It turns out that he had tried to call me the night before to let me know that he had
changed his itinerary, and that they were going to be in London while we were
there. But, I brought no phone so I never got that message.

Similarly, he had emailed me, but it turned out that he sent it to an address that is
not received on my iPod Touch, so I never got that message.

Finally, he had gotten the wrong hotel information from my parents (we booked
our room just days before we left), and so he couldn't leave us a message at our
hotel either.

Yet, just hours after landing in London, here we were face to face at Harrods in
London.

Kismet, to be sure, but I am left wondering whether technology helped (the

Facebook exchange with my niece), hindered (wrong emails, unanswered phone
calls), or was simply a neutral observer in this outcome.

Keeping it real, one paradox presented by relying on the iPod Touch as the sole
connectivity device was that connectivity was, by definition, intermittent since the
iPod Touch depends upon ready access to Wi-Fi for connectivity, a sketchy bet
for mobile travelers.

In London, this meant that 99% of the time, I

had decent Wi-Fi connectivity at my hotel but
no connectivity when mobile. This was key as
we walked a ton, and took the Underground a
lot (it is a great service).

Not having reliable connectivity in mobile

contexts crippled some of the utility of Google
Mobile Maps since it essentially removed the
Real-Time goodness of the app. Moreover, it
crimped the ability to search for nearby restaurants when on the move.

By contrast, in Paris we were able to grab onto "gray" connectivity within 5-10
minutes of trying to do so. This, at the very least, gave us a sense of intermittent
connectivity being reliable.

Gray connectivity was captured two ways. One was via a discovery of Wi-Fi
connections within the Settings tab, and jumping from one connection to the next
until we found live access. Primitive, but fungible.

The second was that we discovered a service provider that offered different tiers
of Wi-Fi access on-demand, including a "20 Minutes Free" option, which was like
getting a lucky board game roll.

Armed with some sense of being able to queue up requests, messages, grab map
views and the like, geo navigation became tactile, a virtual, but distinct, overlay to
our physical navigation.

The ability to visually follow block-by-block,

and see the storefront of a business blocks or
miles away was very powerful.

At times, it felt like Mobile Maps was a

divining rod pulling us to our destination.

What was almost magical was how Maps

seemed designed to watch proactively in the
background for a live connection so it could
autonomously update location data when
connectivity was intermittent.

I was more than once surprised to discover

that Maps had used a sliver of momentary
connectivity, and updated location with no
prodding from me.
 That said, it seems that Apple could make
MobileMe even more essential for iPod Touch
owners by bundling into it a Boingo-like Wi-Fi Universal Pass so at least queue-
level store and forward services can autonomously be negotiated for the mobility-
oriented user.

A couple of final notes: One

is that my wife realized
tremendous utility in using the
Notes App to capture daily
food & water intake and other
related health data. This was
a simple, powerful, and
recurring workflow for her.

Two is that during the trip I

finished my first Kindle book
on the iPod Touch, 'Married
to the Mouse: Walt Disney
World and Orlando.'

I absolutely loved the fact that

when I found myself with a five-minute slug of time (waiting in lobby, bathroom, at
coffee), I could read a chunk of pages and click out as easily as I had clicked in
(since the Kindle App automatically bookmarks where you left off).

It, like the iPod Touch itself, was a perfect travel companion.

Related Posts:

1. "Right Here Now" services: weaving a real-time web around status

2. Nine Essential Truths for Entrepreneurial Success

3. iPhones, App Stores and Ecosystems

 tags: iphone, iphone app, iPod, mobile, mobility | comments: 8

submit:

Mon Four Short Links: 24 August 2009 listen

Aug 24 Distributed Version Control Systems, Ideas Tracking, OO print
2009
Survey Results, New Barcodes
by Nat Torkington | @gnat | comments: 1

1. Making Sense of Revision Control Systems (ACM Queue) -- good introduction

to the subject from Bryan O'Sullivan, author of Mercurial: The Definitive Guide
(aka Distributed Revision Control with Mercurial) that covers Subversion,
Mercurial, and git. Under the distributed view of revision control, every commit
is potentially a branch of its own. If Bob and Alice start from the exact same
view of history, and each one makes a commit, they have already created a
tiny anonymous fork in the history of the project. Neither will know about this
until one pulls the other's changes in, at which point they will have to merge
with them. These tiny branches and merges are so frequent with Mercurial and
Git that users of these tools look at branching and merging in a very different
way from Subversion users. The parallel and branchy nature of a project's
development is clearly visible in its history, making it obvious who made which
changes when, and exactly which other changes theirs were based upon.

2. Ideas Are Awesome -- Ideas Are Awesome is a web culture aggregator

tracking emerging marketing, design, and technology memes. We are currently
tracking: simplify, empower, give, inspire, connect, adapt. (via cheeky_geeky
on Twitter)

3. OO Concepts Survey Result -- There were 3785 people who completed the
survey. These charts show the proportion who gave the different possible
responses for each question. If you're an OO programmer, use this to
determine how aberrant your practices are (hint: most people are neither
zealous nor consistent).

4. Bokode -- a new camera based interaction solution where an ordinary camera

can detect small optical tags from a relatively large distance. Current optical
tags, such as barcodes, must be read within a short range and the codes
occupy valuable physical space on products. We present a new low-cost
optical design so that the tags can be shrunk to 3mm visible diameter, and
unmodified ordinary cameras several meters away can be set up to decode the
identity plus the relative distance and angle. The design exploits the bokeh
effect of ordinary cameras lenses, which maps rays exiting from an out of
focus scene point into a disk like blur on the camera sensor. (via waxy)

tags: mobile, programming, sync, trends, ui | comments: 1

submit:

Fri Four short links: 21 August 2009 listen

Aug 21
 Moody Twitter, Future Geohistory, News Sucks, Whyless in print
2009
Wonderland
by Nat Torkington | @gnat | comments: 3

1. TwitterMood -- using Twitter as a giant mood sensor for the world (see also
temporal correlations, via kellan on delicious).

2. What Will Remain of Us -- The sea that brought trade to Dunwich was not
entirely benevolent. The town was losing ground as early as 1086 when the
Domesday Book, a survey of all holdings in England, was published; between
1066 and 1086 more than half of Dunwich’s taxable farmland had washed
away. Major storms in 1287, 1328, 1347, and 1740 swallowed up more land.
By 1844, only 237 people lived in Dunwich. Today, less than half as many
reside there in a handful of ruins on dry land. (via blackbeltjones on Delicious)

3. The Three Key Parts of Stories You Don't Usually Get -- In reality, these
longstanding facts provide the true foundation of journalism. But in practice,
they play second-fiddle to the news, condensed beyond all meaning into a
paragraph halfway down in a news story, tucked away in a remote corner of
our news sites. Take a look at that WaPo page again. Currently, a link sits on
the far right side of the page, a third of the way down, labeled “What you need
to know.” Click on that link, and you’re taken here: a linkless, five-paragraph
blog post from May. This basically captures our approach to providing the
necessary background to follow the news.

4. Eulogy to _why -- a pseudonymous Ruby character, _why the Lucky Stiff,

recently vanished from the net: all his sites and accounts were deleted. It's
possible this is because someone tried to identify him, it's possible that his
accounts were hacked. Either way, this is a touching tribute to him from John
Resig. I for one would like to see more appreciation while the people are still
around. Today, tell two good people that you enjoy what they do. You know
you can.

tags: geo, history, journalism, news, people, sensor networks, twitter | comments: 3

submit:

Fri Seeing the Future of Mapping in listen

Aug 21
2009
Crimespotting print

by Brady Forrest | @brady | comments: 5

This week Stamen Design released San Francisco Crimespotting. It's a crime map
and notification system that allows for time and crime trend analysis. SF
Crimespotting has launched just over two years after the release Oakland
Crimespotting (Radar post). Stamen had been waiting for crime data all this time
and with the launch of DataSF they are able to use an official API for crime data.

SF Crimespotting is very similar to the initial release for Oakland. As I wrote in

2007:

Each type of crime is assigned a color-coded icon with an abbreviation. You

can highlight all of a crime type's markers with a mouseover. You can also
change the number of days for which crimes are shown. Each crime has a
detail page and that crime can then be viewed in context with others. You can
also slice the data by day, type and the intersection of the two. You can also
subscribe to get email alerts and RSS feeds for a specific place in Oakland.

The latest releases of the Crimespotting platform reflect several important trends
in online mapping:

1) Crowdsourced Maps - When Oakland Crimespotting launched it used

Microsoft Live maps (which would now be called Bing). They have switched to
Cloudmade maps which are based on Open Street Map data. The maps look
amazing and at initial glance they appear to be the same as any other major
provider's maps. Google's Mapmaker project (Radar posts) has also been seeing
more attention and just this week expanded into Mexico (I wonder how long until
they bring Mapmaker to the US). Waze (Radar post) is using user-generated
traces to create their realtime maps.

2) Temporal Mapping - Time is being added to online maps

and other visualizations. As data comes to use in realtime
there are new conventions that need to be developed.
Stamen, through this project and their work with Trulia
Hindsight (Radar post) and MySociety (Radar post), are at the
forefront of designing methods of dealing with varying scales
and types of time data. In their post The Pie of Time Stamen details their thinking
for how to represent hours, days and years in the project. The old Crimespotting
did not allow you to navigate to archival data. With the new UI there are now
permalinks to all crime reports The hours control is shown to the right. Only the
crimes that occurred during the highlighted times will appear on the map. Stamen
has included quick links to show specific times like "Commute" and "Nightlife".

The slider and dropdown used to navigate days, months and years are shown
above. Each day of the slider shows the total amount of crime that day. The
highlighted area dictates the crime shown on the map.

3) Government Data - The new federal administration has shown a renewed

interest in releasing data (most of this will have some geocomponent). The 2010
Census is around the corner and that will add to the data flow. As more data is
released you can expect an explosion of government mashups. You can also
expect more civic minded companies (especially after this week's exit by
Everyblock (Radar post)).
 4) Geo-Analysis - GIS used within enterprises, governments and universities are
designed to take massive geodata sets and simplify them so that decisions can be
made. Crimespotting may look like a slick consumer app and that's because it is.
However as you manipulate its many controls you'll realize that you can learn a lot
about a city and how a time of day or section of the city impacts the likelihood of
your being involved in a crime. You can determine if you're more likely to be
mugged in the Castro on Thursdays vs. Tuesdays. The only problem is that you
are limited to crime data. I'd love to have ability to add other layers like housing
prices or average income. Crimespotting has a read API; I hope Stamen adds
Write capabilities.

I'd ask the kind folks at Stamen (very nicely) to make a Crimespotting Seattle, but
unfortunately we don't publicly release our crime data. Here's to hoping that we
get a mayor in this Fall's election who will open the data coffers. Does your city
share its data? If so include a link in the comments.

All of these trends are going to be big topics at this year's Where 2.0 (3/31-4/2 in
San Jose). Submit your topic now!

tags: geo, google, government 2.0, stamen, web 2.0 | comments: 5

submit:

Thu Twitter: Your New Location Service listen

Aug 20
2009
Provider print

by Brady Forrest | @brady | comments: 6

Twitter has just

announced a
developer preview of
tweet by location.

We're gearing up
to launch a new
feature which
makes Twitter
truly location-
aware. A new API
will allow developers to add latitude and longitude to any tweet. Folks will
need to activate this new feature by choice because it will be off by default
and the exact location data won't be stored for an extended period of time.
However, if people do opt-in to sharing location on a tweet-by-tweet basis,
compelling context will be added to each burst of information.

By developer preview they mean that it will only be available by API calls. So if
you want to take advantage of the new location functionality petition your Twitter
client to support it. (Tweetdeck -- I am looking at you. Please immediately add
reverse geocoded (human-readable) locations that link to a map).

We're going to release geolocation to platform developers before we add the

feature to Twitter.com. Most of the mobile applications people use and love
are built by Twitter platform developers. Developers will have access to this
 new geolocation feature early which means it will most likely be available on
your app of choice before it's available on Twitter's web site. Later, we'll add it
to our mobile web site and Twitter.com as well.

What does this mean? At first it won't mean much of anything, but soon those
augmented reality twitter apps will become accurate, you'll be able to call up geo-
specific twitter searches for a restaurant review, mashups like Twittervision (image
above) will become easier) and services like DIY Traffic (Radar post) will be able
to more accurately vet data. And that's just as a consumer and not as a
contributor.

To fully support location in their data Twitter will have to add more support in their
search (right now "Near:<city>" is the only supported command). You can expect
lat: and long: to show up shortly.

Where it will really get interesting is if you opt-in. You will be creating a trail of
mini-reviews and news as you go through life. Initially Twitter will not have privacy
controls. Once you opt-in your lat-long will be shared with anyone who is pulling
your account via the API (and eventually the website). You'll start to announce
your location with each Tweet. Your friends will always know where you are. You
will be announcing when you are home and when you are in another country. I
hope that many Twitter clients (ahem, Tweetdeck again) let me opt-out of sharing
my location per Tweet. In time Twitter should definitely add the ability to choose
the level of granularity (exact, neighborhood, city, etc.) to expose.

Twitter recognizes that location is a sensitive and powerful data type. They will be
providing their devs with a handbook on how to deal with it:

As part of our Geolocation efforts we will soon be publishing "Geolocation

Best Pracitices" to guide everyone through issues like security and privacy as
well as discussing some ideal experiences for users. Topics will include
things like storage of location data, what to do with a user's historical data,
how to present the concept of geotagging and more. The guide will create a
framework from which we can address the challenges that come about when
dealing with something as sensitive as someone's location while hopefully
allowing everyone enough creative freedom to create their own experiences
around it.

This sensitivity to location comes from key-hire Ryan Sarver (@rsarver). Ryan
recently joined Twitter from Skyhook Wireless. He is an organizer of WhereCamp
and has spoken at Where 2.0 the past two years.

Twitter's location support puts it in competition with location-based social networks

like Loopt, Pelago and Brightkite. It gets even more interesting if services like Fire
Eagle (quite possible) or Latitude (not currently possible, but probable) start to
take in Twitter as a source. Or it's quite likely that Twitter will become the default
provider of location to other services (exactly Fire Eagle's purpose). Will location
become accessible via Twitter Connect? Will Twitter, the microblogging service
also become your location service?

(I've added developer information and links after the jump)

(continue reading)

tags: | comments: 6
 submit:

Thu APPLE is EVIL, You're All Fanboys and listen

Aug 20
2009
other half-truths print

by Mark Sigal | @netgarden | comments: 31

There is a meme afoot. Apple is evil. Its

arrogant ways and dependence on the cult of
personality are to be its demise. Developers
are said to be unhappy. And, Apple Secrecy
Doesn’t Scale.

Google-ification is the way, the RIGHT way.

The Apple Way can’t possibly persist ad

infinitum.

You Apple
fanboys; you
just don’t get
it. Ol’ Steve
(Jobs) is
fooling you
again into buying his sugar water.

You’re just too dumb to realize it.

But, you know what? It’s a crock of sh-t!

In the here and now, Apple's success is

unparalleled, and the engine is humming better
than ever on multiple vectors - products,
margins, developers, profits and consumer
engagement.

Simply put, the goodness of Google-style openness, and the good tidings it
provides for consumers and creators, does not in anyway invalidate, lessen or
neutralize the effectiveness of Apple's proprietary, integrated, secretive,
totalitarian-style approach.

Contrast Apple’s product birthing, operating discipline and

market realization process with…ANYONE. That speaks
volumes, I think.

That’s why in the burgeoning iPhone, iPod touch and

(soon) iPad Tablet mobile broadband device ecosystem
(46M units, 65K apps, 1.5B app downloads, 8B song
downloads, and counting), unless and until there is a
better alternative, the lion's share of developers will bitch in the morning and
double down in the afternoon...on all things Apple.

All of that said, a paradox for Apple is this. For Apple, it's never about total units.
It’s about value, differentiation, leverage and margins. Let others chase unit
counts at all costs.

For developers, however, at a certain point it DOES become about units, if for no
 other reason than once enough numbers are installed on a given platform, it’s
market share that is worth pursuing (by building native offerings for).

The part that is invisible is that at some point an Android gets ready for prime
time (John Gruber ponders this one well in his post 'The Android Opportunity'); or
a Pre-type of device establishes a real beachhead with developers; or RIM gets a
clue in terms of an apps/ecosystem strategy, and all of the sudden, Apple is
having to play defense. At the present, it is just running up the score.

We really can’t definitely say WHEN the alarm bell will

sound. But, to be sure, it’s a WHEN, not an IF.

Why? One size doesn’t fit all when it comes to mobile

broadband.

The day is coming, though, and that is a good thing,

inasmuch as lack of competition leads to sloth where product
innovation matters are concerned.

Disclaimer: I generally (but not always) prefer the type of

integrated, fully formed solution that Apple delivers to what feels like a more
'lowest common denominator' oriented approach by Google. Your mileage may
vary.

Related Posts:

1. Apple, the ‘Boomer’ Tablet and the Matrix

2. The Scorpion, the Frog and the iPhone SDK

3. Analysis: Apple June Quarter Earnings Call

tags: apple, google, iphone, iPod | comments: 31

submit:

Thu Four short links: 20 August 2009 listen

Aug 20 DIY SPY, Screencasting, Social Network Analysis, Term print
2009
Extraction
by Nat Torkington | @gnat | comments: 1

1. DIY SPY - a homebrew 2.4GHz wi-fi spectrum analyzer -- As proof of concept

(and a cool toy for anyone who has one of these lying around), I have
implemented a working Wi-Fi spectrum analyzer on TI’s ez430-RF2500
development kit ($50), a 2-part USB dongle which consists essentially of a
CC2500 radio strapped to an MSP430 low-power microcontroller (detachable
bottom half) and a USB interface which enumerates as a virtual serial port (top
half). The top half doubles as a standalone MSP430 programmer, so this kit is
a great cheap way to get started playing with them. (via joshua on Delicious)
 2. Screenr -- Instant screencasts for Twitter. Flash-based, uploads to their site
and tweets the URL. The whole "for Twitter" thing is going a little too far: who
records screencasts only for Twitter? It's like having a spellchecker only for
three-letter words.

3. Social Network Analysis in R -- video and slides for talk on doing social
network analysis with R.

4. We're Keeping the Term Extraction Service -- Yahoo!'s useful API gets a stay
of execution. OK, we heard you. You’ve made it clear to us that shutting down
the Term Extraction Service would be a mistake. So, we’ve changed our plans.
We're leaving the service up and running indefinitely. (via Simon Willison)

tags: diy, language, math, r, security, sensors, social graph, yahoo | comments: 1

submit:

Wed Peter Seibel's Coders at Work listen

Aug 19 by Marc Hedlund | comments: 1 print
2009
My friend Peter Seibel's new book Coders at Work
(published by Apress) went to press today. I've
been reading a preview copy he sent me, and it's
fantastic. The book follows the style of the earlier
Apress book Founders at Work, presenting
interviews with notable programmers, asking them
how they work, about their careers, their thoughts
on the software profession, and whatever other
topics come up along the way.

The book works in part because Peter is himself

an accomplished developer (his previous book,
Practical Common Lisp, won a Jolt Award), making
the conversations lively and topical. Beyond that,
 though, he chose as subjects (with help from a
Digg-like voting system he wrote while planning the book), and was able to get
interviews with, an incredibly interesting set of people who work on quite a wide
range of software projects. Some, like Jamie Zawinski, contribute what are
essentially battlefield memoirs (in Jamie's case, from the early development of
Netscape); others, such as Joshua Bloch (Chief Java Architect at Google), are
more contemplations on the art and science of programming. Many questions
come up repeatedly -- how people got started in programming, how they fix
difficult bugs, what working style they like with others, whether they've read Knuth
(himself an interviewee) -- and the breadth of the answers to these core questions
is fun to see. You're left feeling that you've spent several hours with a wonderful
group of mentors: some that you'd rush to agree with, others that push you away
from your habits and comfort.

One of the other core questions Peter asks is, what books would you recommend
to help a developer learn programming? For me, this book joins my short list -- it
takes you away from the limitations of learning within a single company or
community, and shows you the breadth of experiences that can make someone a
great developer. I'm very happy for my friend that his book came out so well, and
recommend it very highly for anyone who develops software. The book is
available for pre-order on Amazon.

tags: | comments: 1

submit:

Wed Four short links: 19 August 2009 listen

Aug 19 Survivor Bias, Algorithmic Trading, S3 Tools, DIY GSM print
2009 by Nat Torkington | @gnat | comments: 3

1. Business Advice Plagued by Survivor Bias -- "Burying the other evidence: [...]
Doesn't most business advice suffer from this fallacy? Harvard Business
School's famous case studies include only success stories. To paraphrase
Peter, what if twenty other coffee shops had the same ideas, same product,
and same dedication as Starbucks, but failed? How does that affect what we
can learn from Starbucks's success? (via Hacker News)

2. A Bestiary of Algorithmic Trading Strategies -- insight into the algorithms used

by quant traders. Statistical arbitrageurs are a sort of squishy area, similar to
arbs, but distinct from them. They find “pieces” of securities which are
theoretically equivalent. For example, they may notice a drift between prices of
oil companies which should revert to a mean value. This mean reversion
should happen if the drift doesn’t have anything to do with actual corporate
differences, like one company’s wells catching on fire. What you’re doing here
is buying and selling the idea of an oil company, or in other words, a sort of oil
company market spread risk. You’re assuming these two companies are
statistically the same, and so they’ll revert to some kind of mean when one of
the prices move. (via Hacker News)

3. s3cmd -- commandline tool for moving files into and out of Amazon S3.

4. DIY GSM Network -- wow. How to build your own GSM network. Bit by bit, the
 telcos are getting pressured by the hobbyists. This barbarian is looking forward
to the day when the walled gardens are sacked. (via Slashdot)

tags: amazon, business, diy, finance, make, mobile network, opensource, psychology
| comments: 3

submit:

Tue Where's the continuity? listen

Aug 18 by Brett McLaughlin | @oreillybrett | comments: 3 print
2009

I've recently resumed a childhood love affair with comics. In particular, I'm a fan of
the Uncanny X-Men. While they're not as edgy as the Dark Knight, and not as hip
as a Dark Horse mini-series, they're what got me started on comics, and what I
continually go back to. (Besides that, they're much more interesting and generally
less sucky than the movies and cartoons of the same name.)

Of course, it's been a while, so I hopped over to UncannyXMen.net to figure out

what's been going on. They have a nice primer to help you figure out how all the
various titles intersect, which is non-trivial to keep track of in the X-Universe.

Interestingly, I ran across this:

 This struck me: continuity. Readers loved the continuity of the story.

While it's easy to chalk this up as a function of good fiction, I don't think it's that
easy. Putting aside issues of story, I'm struck by how much looking back and forth
I tend to do in reading a comic. I'm scanning a bit ahead, and reflecting back on
what I just read and saw, even while reading the current panel. I've got this
constant sense of context; I have a continuity in which what I'm learning (about a
comic book character, about a love interest, about an island that's about to be
submerged by supersonic waves triggering earthquakes along fault lines, etc.) fits.

So why would we simply accept that in non-fiction--especially projects and

products that purport to actually teach something--we can't have continuity?

In many ways, this is the genius of visual series like Head First, and to a lesser
degree in this specific case, the Missing Manuals. I'd also argue that this visual
format does wonders for the Twitter Book and our new Best iPhone Apps book
and site. Without having to re-read a page or flip ahead, you have a sense of
visual context. You have a continuity that can be absorbed in a glance, even if
you're ready body text at the top of a right-hand page.

I could go on and on, but let's stop the exposition. Here's a simple question: in
your reading, your writing, your speaking, your programming, what are you doing
to create and absorb context and continuity? I believe there are ways to achieve
this in almost every field, and I believe this is an important part of what sets the
elite apart from the... well... non-elite, in terms of communication.

Where's your continuity?

tags: communication | comments: 3

submit:

Tue Compared to the US, Facebook is listen

Aug 18
2009
Younger in Asia and the Middle East print

by Ben Lorica | @dliman | comments: 1

Since my last post on the number of active Facebook users, the company once
again doubled in Asia, adding more than 14 million active users over the last 12
weeks† .

Through the latter part of last week, the company had over 266 million active
users.

As the company becomes more mainstream in the U.S., the share of users
under 25 years old continues to decline (it went from 45% to 37% in the last 12
weeks). Compare that to regions and countries where the company is growing
fastest: users 25 years old or younger accounted for 58% of users in Asia, 54% in
South America, and 60% in the Middle East/North Africa.

Over the last 12 weeks teens (13-17) was the second fastest-growing age group
in Asia.
Details, including active users by country and age group, can be found below:
 Active Facebook Users By Country & Region: August 2009

View more documents from oreillymedia.

(†) We maintain a data mart that contains the number of active Facebook users (dating back to May-
08), grouped using a variety of factors including age, country, and gender. Data for this post was
through 8/14/2009.

tags: | comments: 1

submit:

Older Posts

Recent Posts
Four short links: 18 August 2009 | by Nat Torkington on August 18, 2009

Is intimate personal information a toxic asset in cloud datacenters? | by Carl

Hewitt on August 17, 2009

Bravo, Snaptalent | by Marc Hedlund on August 17, 2009

Data Is Journalism: MSNBC.com Acquires Everyblock | by Brady Forrest on

August 17, 2009

Map/Territory: Augmented Reality Without the Phone | by Brady Forrest on

August 17, 2009

Dear DoD, the Web Itself is Social | by David Recordon on August 17, 2009

Four short links: 17 August 2009 | by Nat Torkington on August 17, 2009

Waze: Make Your Own Maps in Realtime | by Brady Forrest on August 14,
2009

Four short links: 14 August 2009 | by Nat Torkington on August 14, 2009

Ignites Around the World: Boston, Sydney, Gnomedex Plus Firsts in Atlanta,
Dublin and Missoula | by Brady Forrest on August 13, 2009
 Big Data and Real-time Structured Data Analytics | by Ben Lorica on August
13, 2009

Four short links: 13 August 2009 | by Nat Torkington on August 13, 2009

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Social Enterprise &
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August 24, 2009
Strategy
In her new book SuperCorp, professor Rosabeth Moss Kanter details how vanguard companies
– All Topics – such as IBM, Cemex, and Omron are rewriting the nature of the business enterprise and how
firms will gain sustainable prosperity in the 21st century. Read our excerpt.

Consumer Products First Look: August Business Summit: Why Can't

18 Real Estate Americans Get
Entertainment & Leisure August 18, 2009 July 28, 2009 Health Care Right?
August 7, 2009
Financial Services If giving to charity makes Experts discuss the global
people happy, should it be real estate crisis, the Online forum OPEN
Health Care an advertising slogan? … future of securitization, through August 27.
Encouraging children to and predictions for the Consumers and providers
Manufacturing
attend school, with a future of the U.S. real struggle to think rationally
Retail & Wholesale football … Case: "Spain: estate market. about this hot button
Can the House Resist the topic, says professor Jim
Technology Storm?" Heskett. What can
Americans learn from
Transportation
solutions implemented by
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Basic Steps to Write a Business Plan

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Age Start-Ups Are Poised For Latest Space Race

239 online.wsj.com — In America's latest space race, a new breed of scrappy entrepreneurs could be facing
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Espionage - Employee Spied On Microsoft For Startup

518 i.gizmodo.com — The guys at SeattlePi have uncovered a bit of espionage going on in
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Topics 36 Comments Share Bury gamers403 made popular Feb 1, 2009
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World & Business 4940 NASA gives space cargo contracts to start-up firms
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Wozniak Accepts Post at a Storage Systems Start-Up
1000+ 65 490 nytimes.com — Steve Wozniak, the co-founder of Apple, could ignore the call of the
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30 Comments Share Bury inactive made popular Feb 6, 2009
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News 17893 Yahoo Might Buy Tumblr, New York's Cutest Startup
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417 valleywag.gawker.com — Yahoo is rumored to be in talks to buy Tumblr, a blogging startup
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Images 91 run by 22-year-old David Karp for "low-to-mid eight figures" — which would translate to
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402 venturebeat.com — Hard economic times mean fewer consumers will shell out for
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Fmr Treasury Sec. Hank Paulson Joins Electric Car Startup
 210 greencarreports.com — Today, Coda said it has raised $24 million in its second round of
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extensive business and political experience in China More...
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Twitter vs. Facebook: Who Will Win in Real-time Search?

524 mashable.com — Just over a year ago, Twitter acquired a small startup, Summize, a
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Winter 2010 Funding

Application Form | What We Do | Applying Succesfully | FAQ | Questions

Application deadline for Winter 2010 funding: October 26, 2009.

Y Combinator is now accepting applications for the winter 2010 funding cycle. It will
take place in Mountain View, CA from January through March 2010.

1. If you want to apply, please submit your application online by 10 pm PST on

October 26, 2009. Groups that submit early have an advantage because we have
more time to read their applications.

2. On November 5, we'll invite the groups that seem most promising to meet us in
Mountain View on the weekend of November 20-22. We'll reimburse up to $600
per group for travel expenses.

3. We decide who to fund that weekend. Yes decisions will include the amount we'll
invest and the percent of the company we'd want for it. We usually invest
$11,000 + $3000n, where n is the number of participating founders, up to 3 (i.e.
2 founders get $17,000, 3 or more get $20,000), in return for between 2% and
10% of the company. The average is 6-7%.

4. If we invest in you, your group is expected to move to the Bay Area for January
through March 2010. (You can of course leave afterward if you want, but it's a
good place for a startup to be.)

5. After you're accepted, we'll immediately get to work helping you set up all your
company paperwork, including getting you incorporated.

6. As soon as your company exists, we'll write a check to it for the investment. You
can spend the money however you want.

7. Y Combinator is not an incubator. We have space you can use if you need to,
but we expect you to work out of wherever you find to live. It is no coincidence
that so many successful startups have started this way; it's the ideal setup for
the initial phase.

8. From January through March we'll have dinners every Tuesday for all the
founders. At each dinner we'll invite an expert in some aspect of startups to
speak.

9. We have regular office hours year round for startups who want to talk about
what they're building, or get advice on dealing with investors. We also have
occasional events at YC in the afternoons.

10. In addition to the speakers, we introduce startups individually to people we feel

will be able to help them. The founders of other YC-funded companies tend to
be especially helpful. There are now over 400 of them, and they're usually very
willing to give advice or make introductions.

11. About 10 weeks in, we'll organize a pair of investor days at which you can
present to later stage investors. You can of course seek additional funding from
any investor whenever you want.

12. YC doesn't really end after 3 months; only the dinners do. We continue to give
 advice and make introductions as long as founders need—and so does the
informal network of YC-funded companies.

How do we choose who to fund? The people in your group are what matter most to us.
We look for brains, motivation, and a sense of design. Experience is helpful but not
critical.

Your idea is important too, but mainly as evidence that you can have good ideas. Most
successful startups change their idea substantially.

We're more likely to fund people we know are smart from their submissions and
comments on Hacker News. In fact, that was one of the main reasons we wrote it: so
that we could get to know people before they applied.

The ideal company would have two or three founders. We'll consider those with four or
five. We're reluctant to accept one-person companies, though we have funded a couple.

We don't expect you to have a formal business plan yet. All you have to do is fill out
our application.

$11,000 + $3000n is not a lot, but it turns out to be enough. It will usually cover at
least 4 months' living expenses, and that is enough time to build something nontrivial.
It's in your interest to take little money in the earliest stages, because you give up less
control for it.

The original motivation for Y Combinator was benevolent, but this is not a charity. If our
investments pay off, we can invest in more startups, and if they don't, we can't keep
doing this indefinitely. So we're looking for startups we think will succeed.

Apply | What We Do | Blog | People | Jobs | Quotes | FAQ | Contact | Lib | Legal
What We Do

Y Combinator does seed funding for startups. Seed funding is the earliest stage of
venture funding. It pays your expenses while you're getting started.

Some companies may need no more than seed funding. Others will go through several
rounds. There is no right answer; how much funding you need depends on the kind of
company you start.

At Y Combinator, our goal is to get you through the first phase. This usually means: get
you to the point where you've built something impressive enough to raise money on a
larger scale. Then we introduce you to later stage investors—or occasionally even
acquirers.

More Than Money

We make small investments (rarely more than $20,000) in return for small stakes in
the companies we fund (usually 2-10%).

All venture investors supply some combination of money and help. In our case the
money is by far the smaller component. In fact, many of the startups we fund don't
need the money. We think of the money we invest as more like financial aid in college:
it's so people who do need the money can pay their living expenses while Y Combinator
is happening.

What happens at Y Combinator? The most important thing we do is work with startups
on their ideas. We're hackers ourselves, and we've spent a lot of time figuring out how
to make things people want. So we can usually see fairly quickly the direction in which a
small idea should be expanded, or the point at which to begin attacking a large but
vague one.

The questions at this stage range from apparently minor (what to call the company) to
frighteningly ambitious (the long-term plan for world domination). Over the course of
three months we usually manage to help founders come up with initial answers to all of
them.

Though we fund all types of computer startups, we're especially interested in web-based
applications. We've been thinking about that problem longer than anyone else, and by
now can visualize much of the space of possibilities.

The second most important thing we do is help founders deal with investors and
acquirers. Yes, we make introductions, but that part is easy. We spend much more time
teaching founders how to pitch their startups, and how to close a deal once they've
generated interest. In the second phase we supply not just advice but protection;
people are more likely to treat you well if you come from YC, because how they treat
you determines whether in the future we'll steer deals toward or away from them.

We also get the startups we fund incorporated properly with all the right paperwork,
avoiding legal time-bombs that could kill them later. We introduce founders to lawyers
who will often, because of the YC connection, agree to defer payment for legal work.
We regularly help startups find and hire their first employees. We advise about what to
patent, and when. One of the least publicized things we do, for obvious reasons, is
mediate disputes between founders. No startup thinks they're going to need that, but
most do at some point.

The kind of advice we give literally can't be bought, because anyone qualified to give it
is already rich. You can only get it from investors.

Format

Y Combinator has a novel approach to seed funding: we fund startups in batches. There
are two each year, one from January through March and one from June through August.
During each cycle we fund multiple startups. We've funded a total of 118 so far.

Applying for funding is also different at Y Combinator. Instead of submitting a business

plan or making a slide presentation, you just fill out an application form. We invite the
most promising groups to meet us in person, and we make funding decisions
immediately afterward.

Most of the founders in each startup we fund are expected to move to the Bay Area for
the duration of the three month cycle. During those three months we host a dinner
once a week at Y Combinator, and at each dinner we invite an expert in some aspect of
startups to speak. Typically speakers include startup founders, venture capitalists,
lawyers, accountants, journalists, investment bankers, and executives from big
technology companies. Speakers often end up advising or investing in startups they
meet at the dinners.

About ten weeks in, we host an investor day where all the startups can present to
potential investors. Ten weeks turns out to be enough for most groups to create a
convincing prototype. In fact, many launch in less than ten weeks.

Y Combinator is occasionally described as a boot camp, but this is not really accurate.
We probably get called that because we fund a lot of startups at once, and most have
to move to participate. But the similarities end there; the atmosphere is the opposite of
regimented.

Funding startups in batches works better for everyone than the usual approach. It's
more efficient for us, but also better for the startups, who probably end up helping one
another at least as much as we help them.

Because we fund such large numbers of startups, Y Combinator has a huge "alumni"
network, and there's a strong ethos of helping out fellow YC founders. So whatever
your problem, whether you need beta testers, a place to stay in another city, advice
about a browser bug, or a connection to a particular company, there's a good chance
someone in the network can help you.

Philosophy

We think hackers are most productive when they can spend most of their time hacking.
Our goal is to create an environment where you can focus exclusively on getting an
initial version built. In any startup, the first couple months tend to be the most
productive of all. Those first months define the company. So anything you can do to
maximize their effects is probably a good idea.

We seem to have succeeded in creating a good environment, because many founders

have told us that the first ten weeks of Y Combinator were the most productive period
of their lives.

We try to interfere as little as possible in the startups we fund. We don't want board
seats, rights to participate in future rounds, vetoes over strategic decisions, or any of
the other powers investors sometimes require. We offer lots of advice, but we can't
force anyone to take it. We realize that independence is one of the reasons people want
to start startups in the first place. And frankly, it's also one of the reasons startups
succeed. Investors who try to control the companies they fund often end up destroying
them.

One concrete consequence is that Y Combinator funding lets you sell early, if you want
to. It can sometimes make sense to sell yourself when you're small for a few million,
rather than take more funding and roll the dice again. Google likes to do early-stage
acquisitions, and we expect them to become increasingly common as other companies
learn what Google has.

If you take a large amount of money from an investor, you usually give up this option.
But we realize (having been there) that an early offer from an acquirer can be very
tempting for a group of young hackers. So if you want to sell early, that's ok. We'd
make more if you went for an IPO, but we're not going to force anyone to do anything
they don't want to.

Why are we so flexible? Not (just) because we're nice people. We realize that, as it gets
cheaper to start a company, the balance of power is shifting from investors to hackers.
We think the way of the future is simply to offer hackers the best possible deal.

Our goal is to be the preferred source of seed funding, and to be that we have to do
right by everyone. The good hackers all know one another, so if the groups we fund feel
they're getting a bad deal, no one will want funding from us in the future. And later
stage investors (especially VCs) also tend to know one another, so if the companies we
seed end up being broken in any way, no one will want to invest in them in the future.

So far we seem to be on track, because both the startups we've funded and their next
round of investors seem happy with us.

For more about startup funding generally, see How to Fund a Startup.

Apply | What We Do | Blog | People | Jobs | Quotes | FAQ | Contact | Lib | Legal
 Login Get your own Posterous »

Y Combinator Posterous

August 23, 2009 Picwing (YC S08) and the importance of print
photos
"Memory is pretty visual to me, and photography is kind of a way to freeze in time the
memories you may have of something," explained Edward Kim, co-founder of Picwing as
Early Posterous user.
he took me on a photo-shoot through his neighborhood near Pacific Bell Park in San
Francisco. "You can always look back at old photos and relive those moments from the Paul Graham's profile »

past, like going to Disneyland with your family when you were young."
Contributors
Enrique Rodriguez, co-founder of Picwing explained that there's something special about Jessica Livingston
receiving a real physical print as a opposed to a digital email version of a photo. People
take time to select the right photo they want to print for that exact reason.

Picwing is an online service that enables its subscribed users to send "their loved ones,"
print photos, basically with the click of an email. The user simply emails a photo to their Subscribe to this posterous »
Picwing account, and depending on whatever plan they've signed up for, that photo gets
mailed out to their selected recipients. The company launched last year after going
through Y-Combinator's three month incubator program, where the two co-founders spent
countless hours coding and developing their product.

It's interesting to see a company like this, which has figured out a way to combine
emerging technologies with those core physical human needs. In this case, digital
photography. I mean, if you really think about it, how many of our elderly relatives actually
make use of the modern world of communications for photo sharing? I know at least in my
family, my grandma has never had an email address or digital camera. The 90 year old
woman anxiously awaits family members to mail her post cards or send her photos from
afar.

Although Picwing competes with some giants like Kodak, Shutterfly and Snapfish, the
startup says they are a better alternative because of their product's ease of use. The co-
founders believe their product, Picwing, is innovating and making the process of printing
photos more fun by enabling its users a simple process to get their photos printed, while
the other "800 pound gorillas" continue to compete over prices.

Today, Picwing's userbase is growing and the company is seeing success. Picwing is not
in need of any funding and is getting ready to launch an Android application at the end of
the month, with an iPhone application shortly after.

Check out this segment of Startup Sessions for some insights on print photo sharing from
the founders of Picwing themselves.

via vator.tv
 Nice video by Vator.tv.

Posted by Jessica Livingston

August 23, 2009 FlightCaster: How to Get Early Notification on Flight

Delays - The Middle Seat Terminal - WSJ

By WSJ Staff

WSJ reporter Sarah Nassauer writes:

Sitting at a boarding gate, watching a storm roll in, waiting to take off in a plane that hasn’t
yet arrived from its previous destination, knowing that the airline’s promise of a ’15 min
delay’ is only taunting you, can make one feel pretty helpless.

A new company launched this week aims to give fliers a heads up on flight delays long
before the airline themselves makes an announcement, hoping that frequent fliers can
know to rebook flights earlier and occasional fliers can know if they will be home for
dinner.

FlightCaster Inc. aims to predict the likelihood of a flight arrival delay up to six hours
before airlines notify passengers by crunching data on weather, a flight’s prior inbound
airplane’s status, FAA updates, historical data and other information.

With flight number in hand, the predictions are free on the company’s Web site. Or get the
information on iPhones or Blackberrys for a $9.99 fee (discounted to $4.99 through Aug.
20, today).

Evan Konwiser, a co-founder at FlightCaster says the company’s early internal data shows
predictions on major delays — over an hour — are accurate about 85% of the time, with
accuracy getting better closer to departure time. The company plans to release more data
on accuracy in the coming week, he says.

The fact that airlines only tell flyers about a delay once they’re 100% sure to happen
makes FlightCaster useful, says Mr. Konwiser. For frequent travelers on the company’s
dime he hopes they use the earlier predictions to decided, “should I fly today or get into a
train today when getting in cab from client’s office.”

There are ways the savviest travelers already do some of this without a tool like
FlightCaster.
To start, airlines and many travel sites like Orbitz.com or TripIt.com offer to send out flight
delay alerts by email, text message or phone call.

Flyers can track airports with flight delays on Web sites like the Federal Aviation
Authorities Flight Delay Information site.

But the real sleuths track planes before they arrive for departure. If your plane hasn’t yet
left Chicago, you probably aren’t taking it from Miami to New York anytime soon. Check
the arrival board at the airport to get the inbound flight’s number or call the airline.

Then you can track that flight on an airline’s own Web sites or other flight tracking services
like FlightStats or Flight Aware.
 At least one airline has started providing similar information as part of its flight status alert
tool. Continental Airlines shows where a departure aircraft is coming from, gives that
flight’s number, and allows flyer to check the status of that flight on their Web site and in
the flight status mobile application.

For now, FlightCaster can only be used for U.S. flights, but the company hopes to add
international capability and information on available alternative flights in the future.

via blogs.wsj.com

Posted by Jessica Livingston

August 20, 2009 The Y Combinator list: Bump, Mixpanel, JobPic take
off with newest class | VentureBeat

via venturebeat.com

Posted by Jessica Livingston

August 20, 2009 JobSpice: The Solution to Your Resumé Nightmare

| Fast Company
Every idea has its time, and with the unemployment rate rising, JobSpice is right on
schedule. Think of it as Google Docs for your resumé: it's an online service that makes
creating and distributing resumes easy, without the hassle of cutting, pasting and tabbing
 yourself to death in Microsoft Word. Simply plug in your work and education info, and it will
let you choose from a litany of pre-made templates; better yet, it won't lose your formatting
if you submit the document online, and it makes tracking different versions of your resumé
easy.

It makes sense that you'd want your resumé available online from any computer; should
you get a job tip while you're out and about, getting your information to the right people is
as easy as finding a computer, making a few edits and sending a PDF. One caveat: no
smartphone access. Should you try and make edits to your resumé from your iPhone, the
site will politely tell you to go find a real computer. Let's hope there's a mobile app coming.

JobSpice is part of the latest round of Y-Combinator companies announced yesterday,

according to VentureBeat. The company plans to partner with university career services
and companies, which may be a source of revenue; for individual users, the service is
free.

Related Topics:
Stories: Innovation, Technology, jobspice, resume, work, job search, y-combinator,
Consumer Products, Enterprise, innovative products, it, products,
Control Your VentureBeat Inc., Word Processing Software, Productivity Software, Computer
House by Technology, Software
iPhone?
Seven
Entertaining
Things
Online This
Week
Android
Surpasses
Windows
Mobile in
Web Traffic

via fastcompany.com

Posted by Jessica Livingston

August 19, 2009 ‘Low Points and Screw-Ups’: Start-Ups Crave
Mentors’ Real Stories (WSJ)
http://blogs.wsj.com/venturecapital/2009/08/19/low-points-and-screw-ups-y-combinator-
graduates-laud-mentors-real-stories/#

Posted by Jessica Livingston

August 19, 2009 Silicon Valley Elite Flock To Y Combinator Demo

Day

via techcrunch.com

Great job today everyone!

Posted by Jessica Livingston

August 19, 2009 Olark (S09) Is A Dead Simple Chat Widget For Site
Owners
 via techcrunch.com

Posted by Jessica Livingston

August 18, 2009 140 Characters? That’s A Lot Of Writing. Just Post
A Picture On DailyBooth

via techcrunch.com

DailyBooth (S09) also launches!

Posted by Jessica Livingston

August 18, 2009 Flightcaster Tells You When Your Flight Is Delayed
Hours Before The Airline Will
 via techcrunch.com

Flightcaster (S09) launches!

Posted by Jessica Livingston

August 17, 2009 The Request for Startups

via ycombinator.com

We're trying a new experiment in the next funding cycle: we're suggesting specific ideas for
startups and we're building this into the application software.

Posted by Jessica Livingston

« Previous 1 2 3 4 5 6 Next »
Partners

Trevor Blackwell is the founder of Anybots, where he developed the first dynamically
balancing biped robot. He has published papers on congestion control in high speed
wide area networks, signalling protocol architecture, and file system performance. For
fun he reverse-engineered the Segway, writing all the software in one day. He has a
BEng from Carleton, and a PhD in Computer Science from Harvard.

Paul Graham is the author of On Lisp (1993), ANSI Common Lisp (1995), and Hackers
& Painters (2004). In 1995, he and Robert Morris started Viaweb, the first ASP, which in
1998 became Yahoo! Store. In 2002 he discovered a simple spam filtering algorithm
that inspired the current generation of filters. He has an AB from Cornell and a PhD in
Computer Science from Harvard.

Jessica Livingston was previously VP of marketing at investment bank Adams

Harkness, where she managed an award-winning rebranding of the company. She is the
author of Founders at Work (2007), a book of interviews with startup founders, and
writes regularly about YC on her blog. She has a BA in English from Bucknell.

Robert Morris is an associate professor of computer science at MIT, where he is a

member of the PDOS group. He has published extensively on wireless networks,
distributed operating systems, and peer-to-peer applications. In 1988 his discovery of
buffer overflow first brought the Internet to the attention of the general public. He has
an AB and PhD in Computer Science from Harvard.

Apply | What We Do | Blog | People | Jobs | Quotes | FAQ | Contact | Lib | Legal
 Hacker News new | comments | leaders | jobs | submit login

All the jobs listed here are at startups that were at some point funded by Y Combinator.
Some are now established companies. Others may be only a few weeks old.

1. thesixtyone (YC W09) is hiring software engineers (thesixtyone.com)

67 points by JMiao 10 hours ago

2. Poll Everywhere is hiring a Rubyist; Personality Requirement

20 points by jvyduna 4 days ago

3. Loopt Mix needs an iPhone Developer! (looptmix.com)

12 points by kogir 11 days ago

4. Justin.tv is hiring Fall interns! (justin.tv)

11 points by justin 13 days ago

5. Airbnb (YC W09) hiring crazy fun interns

9 points by brianchesky 14 days ago

Lists | RSS | Bookmarklet | Guidelines | FAQ | News News | Feature Requests | Y Combinator | Apply | Library
What They Say about Us

"The opportunity is unparalleled."

– Newsweek

"This is the new model."

– Bradley Horowitz, VP of Product Management, Google

"Y Combinator is a big change from the way business is usually done in tech circles."
– USA Today

"We love YC!"

– Fred Wilson, Managing Partner, Union Square Ventures

"If it is possible to systematize the archetypal two guys in a garage (and they are
generally guys), the year-old Y Combinator wants to do it."
– New York Times

"With us and many other angel groups, Y Combinator startups get moved to the top of
the list automatically."
– Ron Conway, Silicon Valley's most prominent angel investor

"Seed funding from Y Combinator is a seal of approval to us. Paul, Trevor, Jessica, and
Robert are remarkably good at helping smart young people develop their cool ideas into
businesses. They understand what it takes to make a startup successful."
– Stan Reiss, Partner, Matrix Ventures

"I love everything about Y Combinator. It captures the essence of Silicon Valley."
– Michael Arrington, Editor, TechCrunch

"Y Combinator has done a remarkable job of attracting a first rate flock of smart young
entrepreneurs by providing seed funding for a bunch of new startups."
– Joel Spolsky, Founder, Fog Creek Software

"Y Combinator gets it. When talented people are allowed to focus on their core
competency without distraction, cool things happen."
– Chris Sacca, Free Radical

"Y Combinator seems to attract the very best young entrepreneurs and helps them
organize their business ideas and present them to investors. They are fun to work
with."
– Bill Kaiser, Partner, Greylock

"I am impressed with what Y Combinator has created. There is a buzz and energy and a
true feeling of authentic warmth and caring that is rare."
– Page Mailliard, Partner, Wilson Sonsini

"Y Combinator really understands what a company needs in its first three months."
– Sam Altman, Founder, Loopt
"Y Combinator is all about bringing great ideas to the forefront, and doing so in a way
that helps build real companies. We are thrilled to work on projects with them."
– George Zachary, Partner, Charles River Ventures

"When I first heard about Y Combinator, it was one of those ideas that just seemed
forehead-slappingly obvious. Good ideas often do, in retrospect."
– Mark Fletcher, Founder, Bloglines

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Frequently Asked Questions

Which startups have you invested in?

The ones that are currently launched are: Reddit, Loopt, ClickFacts, Snipshot, Inkling
Markets, Wufoo, Thinkature, JamGlue, Scribd, Weebly, Virtualmin, Buxfer, Octopart,
Heysan, Justin.TV, OMGPOP, Xobni, Zecter, Adpinion, Fuzzwich, Bountii, Songkick,
Auctomatic, Disqus, Splashup, Draftmix, Etherpad, Webmynd, RescueTime, Heroku,
Tipjoy, Addmired, Socialbrowse, Wundrbar, Chatterous, Mixwit, Snaptalent, Clickpass,
Insoshi, MightyQuiz, 280 North, Dropbox, Posterous, Anyvite, TicketStumbler, PopCuts,
Ididwork, Startuply, Picwing, CO2Stats, PollEverywhere, Backtype, ContestMachine,
Frogmetrics, ZumoDrive, Heyzap, FathomDB, Foodoro, Divvyshot, Echodio, Cloudkick,
AirBnb, TheSixtyOne, Fliggo, Voxli, Bump, and RentHop.

How can we get funding for our startup?

Apply online for our next funding cycle. We fund startups twice a year.

We've already been working on our startup for a while. Is Y Combinator

appropriate for us?

We've funded quite a lot of startups like that. In fact, we especially like them. We can
probably help any startup that hasn't already raised a series A round from VCs.

Don't incorporate, though, if you can avoid it. Especially as an LLC: it is an expensive
distraction to convert an LLC to a C-Corp, which is what you need to be to take
investment.

We don't want funding, but will you give us advice?

Unfortunately we can't. We've invested in so many companies that helping them takes
up all our time. But we've collected some general advice in our library.

Can you recommend other investors who might be interested in our idea?

When you refer someone to an investor, you're also recommending them, and you can't
recommend people you don't know. If you're looking for investors, your best bet is to
find friends of friends who've started or worked for startups, and ask for intros to their
investors.

How much do you invest?

Usually $11,000 + $3000 per founder. So $17,000 for two founders, $20,000 for three
or more. Occasionally we invest more. The goal is usually to give you enough money to
build an impressive prototype or version 1, which you can then use to get further
funding.

What does Y Combinator get out of this?

Stock in the startup, from 2-10% of it. Usually about 6%.

We don't really need the money. Does it still make sense to apply?

Half (maybe more) of the startups we fund don't need the money. And in fact the
money is a only a small part of what YC does. The money we invest works more like
financial aid in college: it ensures that the people who do need money can cover their
living expenses while YC is happening.

What if we're doing something expensive?

We'll still fund you, but instead of trying to build something launchable in three months,
the goal becomes to build an impressive proof of concept to take to later stage
investors to raise more money.

Do we need to write a business plan?

Not for us. We make funding decisions based on our application form and personal
interviews. We love demos, but we never read business plans.

Can a single person apply for funding?

Yes, but the odds of being accepted are much lower. A startup is too much work for
one person.

I have a great idea for a startup, but I'm not technical. Will you still fund me?
Can you help me find programmers to implement my idea?

We'll consider funding you, but your chances are about ten times better if you find
yourself a technical cofounder.

It's much better if you find one yourself through friends of friends than if we introduce
you to someone. Teams thrown together for the purpose of starting a startup usually
fall apart under stress. You need some kind of personal connection.

Can we do it without moving to where you are?

Sorry, no. We tried this once, and by Demo Day that startup was way behind the rest.
What we do, we have to do in person. We would not be doing a startup a favor by not
making them move.

You can leave one founder at home, but the rest, including the CEO, have to live in the
Bay Area during the 3 month funding cycle.

Do we have to start a company in the US for you to invest in us?

Yes, but that's usually not a problem. It's easy for foreign nationals to start US
companies (much easier than remaining here physically), and investors and acquirers
prefer them.

Do we have to be US citizens?

No, as long as you can get here for at least three months. We've funded several
startups founded by non-citizens.

Can you get us visas?

No, sorry, we don't do that. You'll have to figure out visas for yourself. If you know
people from previous YC-funded companies who came from outside the US, we suggest
you ask them for advice. They understand the options better than we do.

Our group has two ideas. Can we submit two applications?

Ok. Just submit them from the YC accounts of different founders.

Do you only fund startups that write software?

We'll consider startups in any field, but odds are better for startups writing software,
because that's what we understand.

Will you sign an NDA? How do I know you won't steal my idea?

No, we won't sign an NDA. No venture firm would at this stage. The informal
commitment to secrecy on our application form is more than any VC would make.

In this connection you may want to read the first section of How to Start a Startup on
the value of mere ideas.

Why didn't you accept our application?

Strange as it may sound, the better your application was, the less likely there is to be
an answer to this question. So don't take it personally. The fact is, even the best
investors are quite bad at picking winners. VC firms consider themselves to be doing
well if 4 out of 10 companies they fund succeed.

Is Y Combinator an incubator?

No. The defining quality of incubators seems to be that companies work out of the
investor's space. We think that's a bad idea; it makes founders feel like employees.

What's the average age of people you fund?

About 25. A lot of people think it's younger because the press especially like to write
about young founders.

Will you help us set up something like Y Combinator in our town?

There already is a Y Combinator in your town: Y Combinator. The seed funding business
is national, not regional.

Will you help us set up something like Y Combinator in our country?

Actually, the seed funding business may even be international. We'll see. But for now at
least we're waiting to decide what to do about other countries.

Why did you choose the name "Y Combinator?"

The Y combinator is one of the coolest ideas in computer science. It's also a metaphor
for what we do. It's a program that runs programs; we're a company that helps start
companies.

Are you hiring?

We aren't, but companies we've funded are.

Are you looking for investors?

We're not looking for investors in Y Combinator itself, but you're welcome to invest in
the companies we fund. We have Demo Days twice a year (in March and August) at
which the latest batch of startups present to investors.

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FAQ. We may not always respond to questions already answered in the FAQ.

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down Pioneer on the right.

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