I think this is predicted in part by Coase's theory of the firm.

As the transactional cost of coordinating between firms falls, the size of a firm necessary to sustain complex projects and processes shrinks.

For example, it used to be that getting computing done meant leasing mainframe time. IBM wouldn't deal with small-fry, just too much work for too little return. So to get started, you needed mondo capital.

Later, provisioning a server meant some faxes, phonecalls and maybe some emails; followed by sending some staff to a data centre to meet a shipment from the manufacturer and install it. This meant that you needed several actual people in the company to do this. Usually the founders and a few other people, on a weekend.

These days? I type a command. My computer talks to a remote computer and they set up any amount of computing that I need.

Now I need to jump in here and point out that it's not simply sticker cost. It's the full transactional cost -- cost of search, cost of integration, cost of coordination etc etc -- that is falling on many fundamental inputs to software development.

The other thing that predicts the fall in firm size is the increasing productivity of developers. One of the principal ways to improve the productivity of labour is to use capital, and the past decade has seen an accumulation of capital that is stunning in its breadth and scope.

For example, a decade ago, Rails didn't exist outside of 37signals. Neither did the vast ecosystem of tools that has grown up around it. Collectively these represent amazing amounts of capital that any individual can access and apply.

To be pedantic, it has to fall faster than the transactional cost of coordinating within a firm. Your point stands though.

Google is the best example here. They are across so many markets (payments, local, social, mobile, video, cloud storage, big data, cloud computing, ad's, etc, etc).

Sure Google are cutting services left and right atm (rss, google+ games) but then they just spread the empire further by moving into more new territory they really don't have any business in (eg Google Keep, competing with Evernote).

People talk about Google, Amazon, Apple and Facebook all having more or less all the same competing products and services. Ie, all in social, mobile, etc.

I bet there is not one start-up starting today who is not the least bit worried about being crushed by one of the above tech giants should they want to move into the same space.

I mean, I do truly hope we are not moving towards the William Gibson Dystopian "Megacorp" - http://en.wikipedia.org/wiki/Megacorporation but some days it seems that's what we could be heading towards if we didn't have any anti-trust laws in place.

Sure, the big corps, are going to become more agile, module and Startup-like. But they are still ultra powerful and not everyone wants to build a accusation target.

(yes I am aware there is still probably thousands of niches/areas where you can be competitive)

Oh lord yes.

Having been through the fundraising process a few times, it's hard to describe the sheer relief when you find an investor willing to give a quick yes or no. The best I can describe it is like the feeling of getting a Christmas present you really, really wanted but didn't think to ask for.

SV Angel and a16z are two of the best I've ever interacted with in this regard. It's clear both firms deeply respect entrepreneurs' time.

For that reason, whenever my friends give me a pitch deck and are looking for recommendations, I'll usually pass them along to Kevin from SVA, who is not only an awesome person but has always acted quickly. When I think of the slow investors, I never recommend them to friends.

Decisiveness may be the new proxy for judging how good investors are (aside from their portfolio, which currently acts as the main signal).

Thanks!

Cheap money on an unprecedented scale has affected just about every asset class, including VC, so to discuss the future of startup investing without even considering the extraordinary monetary policies we've seen implemented since 2008 is interesting to say the least.

In Australia, for example, superannuation funds hold about AU$1.5 trillion under management (not a large number by global standards, but Australia is a country of only 23 million). That amount will continue to rise steadily, and the rate at which it will rise is being pushed up by laws increasing the level of compulsory retirement savings.

In the USA, retirement funds, hedge funds, college endowments and so on and so forth all invest in VCs. A few percent.

How much do Australia's superannuation funds invest in venture?

So far as I am able to determine -- nothing. We have venture funds here, but they're not really venture funds at all. They were seeded with government money; no such fund has an incentive to take true risks.

The other problem with a pure monetary explanation is that it predicts that all other asset classes should have moved in the same direction. One of the reason VCs got so much money is because shares were flat for a long time; the unadorned Austrian interpretation says that shares should've risen too.

Silicon Valley-specific example: Facebook goes public during what many believe is a Fed-supported bull market. Insiders sell stock at close to a $100 billion valuation; it's estimated that more than 1,000 employees get to sell stock worth at least $1 million a few months later. Some of the gains realized by insiders and employees will be funneled back into startup investments as those insiders and employees become limited partners in venture funds or angel investors themselves.

Now consider this dynamic across the entire tech industry. Numerous companies have taken advantage of the IPO window of the past several years, and have been able to go public at rich valuations. Many employees with equity compensation at established publicly traded tech companies have done very well too, and ironically some of the most exorbitant valuations are at large companies lacking earnings.

It would be foolish to believe that none of this has impacted the amount of money being thrown at VC firms, super angel funds and startups through direct angel investment, which in turn impacts valuations, deal terms, etc.

The big question: when the great experiment of the central banks ends, how will this affect the landscape for investments in startups? I have some ideas which may or may not be right, but it's simply not credible to believe that there will be no change. The fact that few investors in Silicon Valley seem to be talking about this, however, suggests that they believe they live in a vacuum completely disconnected from the rest of the economy and global financial system. The last time this happened, it didn't end well.

As for IPOs, I'm not sure that what we saw in the first boom should be used as a baseline for anything. The IPO window has most certainly been open and Facebook's IPO was an historic one.

In any case, I'm not sure I understand the point you're making. Even if you believe that bubbles can be created without extraordinary central bank action, which is true, the injection of trillions of dollars into the financial system in a few short years and what happens when it has to come out should be top of mind for any investor in any asset class, particularly now that it appears we are closer to the end of this phase of the experiment.

Listen to people in just about every corner of the financial markets, from equities to credit, and this is the topic. But it's striking that instead, Silicon Valley startup investors seem more interested in how they can get in on the hottest deals, convince founders they're friendly, etc. That should be of concern to everybody in Silicon Valley, including the entrepreneurs who will likely find themselves in a much different world sooner than they expect.

Stuff like "large capital institutions in the USA are comfortable with venture investing", "shares have underperformed for most of the past 6 years", "it has never been cheaper or easier to launch a web startup" and "there are now billions of people connected to the internet" deserve billing alongside "the money supply is expanding", especially since monetary expansion has such lumpy and unpredictable effects on different asset classes at different times.

Oh, but of course. I mean, it's crazy non linear system and we don't even know all the variables. Any cause in particular will be insufficient to account for the whole.

So, yeah, startups are doing so well because software is eating the world, but amidst all of the narratives most people go with rarely to people seem to consider the role that the economy is having on the industry. Of course it's non the single systemic driver, but it's certainly a catalyst if not a multiplier - and it's rarely discussed.

But the financial system rarely rewards those who choose to be ignorant. Individuals and institutions investing large sums of money in any asset class today who are not thinking about the unprecedented experiment that is taking place and considering how their investments could be affected by changes in policy are more than likely to end up losing money, perhaps far more of it than they ever could have anticipated. And in some cases, far more of it than they actually have.

How sure are you about this?.. ;)

Do we have a way for measuring how much money has been funneled into the funds? What about the whole, firms now stockpiling cash?

But most angels and VC firms investing larger sums in fewer deals, and competing harder to get into those deals, have much greater risk. The intriguing/disturbing thing is that as far as I can see, those investors seem to be completely ignoring how the injection of trillions of dollars into the financial system has impacted the asset class they're investing in. I can't name any other asset class in which professionals haven't been publicly discussing this topic for some time.

What's the competitive pressure for VCs/funders to invest at higher valuations?

However, given the increasingly lower cost of starting a company, I can't see a substantial impact to the sub $100k funding arena with the inevitable end to cheap money. $100k just ain't what it used to be, but the infrastructure ooomph it buys is just going to keep getting more astounding.

When the number of people with $100,000 to throw at twenty-something founders fresh out of college drops and/or interest rates rise to the point where you can eventually get a 5-year FDIC-insured CD yielding as much as investment grade corporate debt in 2012, the impact on the angel market might not be insignificant.

investing in the stock market is a lot less risky than angel investing. especially if you keep it safe with index funds and don't look at individual stocks.

you have close to zero liquidity investing in private companies. you're buying something you can't sell, for years, if ever. with stocks and bonds, I can always get out.

I think Paul Graham's point's are interesting, but they are based on a world that he lives in, the world of tech startups and VCs, which is not the same as the wider business world.

Granted, the low interest rate environment has essentially forced some of these investments and the money fueling them is cheaper than ever, but I don't see any evidence that there's a large contingent of professional investors fearful of public markets who are plowing their cash into illiquid startup stock instead.

If anything, the growth of markets like Second Market suggests that investors are increasingly eager to buy shares of private companies likely to go public in the not too distant future. Recall that there were investors snapping up Facebook shares before the IPO (the latest to the party hoping for a double-digit IPO pop lost a lot of money) and somewhat amazingly, there were even funds dedicated entirely to accumulating pre-IPO shares.

Even if you're not banking on an IPO as a startup investor, the other liquidity event you're looking for (acquisition) typically comes at the hands of a publicly-traded company, particularly if it's big, so you have stock market exposure there too. It's usually a lot easier for a public company to make a big acquisition when its stock is flying high.

Because the cost of building a startup is going down, and assuming the opportunity lies in early stage investments, VCs are going to have to make more early stage investments than they are now.

VC operating expenses are covered by a 2% management fee levied on assets under management. This incentivizes VCs to create megafunds so that they can have proportionally mega salaries.

Seed stage investments come at a totally different operating cost.

Seed-stage investing is pretty hard with a megafund because they are so expensive operationally. VCs would much rather write a 50M check in a growth round for 33% of a company than a 100 $500K checks for 5% of each company. They might have to talk to 20 companies for the growth rounds to make 1 investment, but they'd probably have to talk to thousands to make the 100 investments in seed rounds. That means they need a bigger staff and that 2% model won't work.

In fact, I've heard VCs say that the only reason they write small checks in seed rounds is so that they have a strong relationship with the founders and pro-rata rights if the company happens to blow up.

I suspect that VC salaries will go down like crazy, and they'll be forced to rely on carry for the funds earnings. Which is probably a good direction for VCs to go.

Chris Dixon outlined the problem here too: http://cdixon.org/2009/08/26/the-other-problem-with-venture-...

What economic evidence is there to support this claim about the causes of economic inequality?

Found this survey article: http://www.nber.org/papers/w13982

Their findings are that labor's share of overall income hasn't declined, but that wages/salaries have gotten much more unequal within the sector of employment-based income. Some of the factors they point to are: a greater polarization along skill lines; a decline in high-wage, skilled blue-collar labor; and a rise in the pay and number of high-end salaried jobs such as investment banking and C-level officers.

It's a bit long, but worth at least a skim.

There's nothing incorrect in his statement, although it does give an idea of the bubble of the world he lives in. Income inequality clearly all is at the level of VCs and founders in his world - even the upper middle class programming minions don't come into consideration. Income inequality connections clearly do not come to mind in the case of, say, the US army marching into Los Angeles in 1992 to restore order among the poor and working poor there. It's a kind of solipsism you can read about in the unofficial minutes of the councils of the Czar's ministers in 1916. The earthquake in class relations coming is not in minor percentage differences between enormously wealthy VC limited partners and upper middle class founders. It's what happens when the world economy comes to a stop like it did in the late 1920s. We got a small preview of it in 2007 and 2008. In the years and decades ahead, financial shenanigans on Wall Street will eventually lead to an economy that will not start up again, no matter how much priming. THEN is when we will start seeing real shifts in the relations of production.

And I observe this perspective has spread out among the startup community. It always surprises me that people who are so intelligent in many ways can be so narrow in their social and economic context.

Mark Cuban does that, and you can email him at will. I've dealt with him and his team, he's extremely fast in deciding (an email or two), and his team is extraordinarily easy to work with. Cuban also doesn't care where you're located. The only catch is that he has to be personally interested, generally speaking, in what you're doing.

However I don't think Cuban gets access to all the best deals. Being located in San Francisco or Silicon Valley is clearly a substantial benefit to having access to a lot of the best new startups. I think location will continue to matter in that regard.

Sounds like a classic intermediation problem.

The classic intermediation solution is a market maker who defaults to funding any start-up that meets pre-posted requirements. The intention would be to off-load the illiquid stake as soon as possible. The thesis is that liquidity conditions are restraining venture capital flows more than any shortage of risk capital. The plan may still achieve escape velocity if net transaction efficiencies outweigh the information asymmetry costs, i.e. the "6 weeks" liberated from fund-raising enhances valuations fast enough to make up for the duds accepted in the name of speediness. ROFRs and other anti-transfer mechanisms diminish the appeal of this idea.

    Right now, VCs often knowingly invest too much money at the series A 
    stage. They do it because they feel they need to get a big chunk of 
    each series A company to compensate for the opportunity cost of the 
    board seat it consumes. Which means when there is a lot of competition 
    for a deal, the number that moves is the valuation (and thus amount 
    invested) rather than the percentage of the company being sold. Which 
    means, especially in the case of more promising startups, that series 
    A investors often make companies take more money than they want.

Also, I rather enjoyed reading:

    Which means the first VC to break ranks and start to do series A
    rounds for as much equity as founders want to sell (and with no
    "option pool" that comes only from the founders' shares) stands to
    reap huge benefits.

If you've ever been to a major VCs office you'll know exactly what I mean. The decor is all marble and old money. It's designed to let visitors know that the VCs are rich, powerful and important, more so than the founder who is coming to seek capital. It's not that the VCs are bad people, trying to manipulate founders with psychological mind games. It's that this is the way things were done for most of the 20th century and most VC firms are still playing by the old rules.

Most of the things that pg complained about specifically fall into this category of social dynamic reinforcement. Why do VCs make raising money into a ridiculously drawn out process of months of email after email? Because only the powerful side of the negotiation can do that. Those who are serious about getting a deal done answer the phone when it rings. The boss can afford to wait until they have time on their schedule.

Why do VCs compel founders to accept more investment money than they might need? Again, it's a power thing. When you go to the bank and ask for a loan they don't convince you to take $5MM more than you asked for. This is because bank loans have become a commodity and they need your business as much as you need their money. VCs are fighting commoditization with everything they have. They like a system that makes them much more important than the other side.

The kind of VC that pg said would get "all the best deals" is one that valued founder's time as much as their time. That placed the founders financial needs on the same level of their financial needs. Well, what VC wants to play that game? It's smarter to preserve a system that you are firmly at the top of than it is to lower standards to get more deal flow. Right now the Sequoia brand is worth it's weight in platinum, which means that they get to dictate terms entirely. It will be a long time before they change the way that they do business in order to cater to the needs of any given founder.

I'm not saying that VCs are malicious or evil. They are generally very intelligent, capable and good people. It's just that they are they are caught up in an antiquated system that places too much value on social status and position. Most VCs worked their lives to get there, they aren't going to give it up even if it's the right thing to do.

I think the real question is: Why doesn't Paul Graham start this mythical founders first VC firm? People trust him with money and he's proven that he can put common sense over his ego. He has the respect of the community and as he said himself, if he followed his own advice he could get all the best deals.

Partly because it would conflict with YC, partly because I wouldn't be good at it, but most of all because I don't want to. I like dealing with early stage startups, because at that stage the big problem is what to build. I wouldn't be any good at advising founders how to organize an executive team, or how to prepare the company's finances for an IPO.

Incidentally, VCs are not nearly as bad as this comment suggests. The best ones are nice people and genuinely helpful. When they take a long time to make up their minds, it's because they're afraid—not just of the risk of investing in a particular startup, but because that startup has to be the only one of its type they invest in.

Like a boss.

pg - I know you mentioned increading idea conflicts in the essay, but in your comment you touched on it again in a slightly different way. VCs can only invest in one of a given type of company. The increasing ease of starting a company should result in more startups in more obscure markets where previously would-be founders only saw employment and academia as their two paths. These new investable markets should present VCs with new and less saturated opportunities.

Are VCs and other investors going to be ready to jump into previously uninvestable markets? Feels like they weren't with hardware. Do you expect it to be different this time?

Given that the corruption is minor - petty abuses like not returning emails or stealing a few percent equity or inserting terms at the last minute - and the amount of power so large (giving tens of millions to people who are often broke, with zero appeal or oversight), I'd be surprised if it didn't happen.

I learned a lot about writing by reading what you write. Thank you.)

That's surprising. Would anyone mind explaining why that's the case? YC has no such restriction, and it seems to work out ok. Why wouldn't later stage investors do deals with multiple startups in the same space?

In terms of why YC can get away with this, companies are so early that it's not clear what they will ultimately be doing in the end. Many of the internal competitors ended up that way by accident. Moreover, YC doesn't make singular large bets, while later stage investors do. As a result, they aren't nearly as diversified as YC is and so a duplicate represents a much greater overall risk (essentially guaranteeing a loss before you even start).

Hmm. YC does, and it seems to work ok. Why wouldn't it work for later stage VCs? Or rather, why does it work for YC?

A later-stage VC, though, you might be having conversations with portfolio company A about how to entice sales people from portfolio company B, or portfolio company B might be getting ready to expand internationally and you're advising them on the best way to capture market share in Asia, where company A is stronger.

It's much more specific, targeted advice and consultation vs. "here's how we're going to help you get off the ground"

YC doesn't have to give up the best of its limited resources to competing startups. They just help get you to a Series A round. They can do this for competing companies without any issues.

VC's help assemble an executive team, provide critical business relationships, etc., and it's not in anyone's interests if they have to divide their best contacts and resources between two competing companies. They should want to go all-out in providing one company all their best resources.

At latter stages it might arise if a company pivots into another space. See this on how Andreessen-Horowitz dealt with a conflict (Instagram v. PicPlz):

http://bhorowitz.com/2012/04/22/instagram/

This is mostly wrong. Banks have all the power in the vast majority of business lending situations. The reason they don't throw extra money at you, is not due to the borrower having the power (not even remotely close).

A typical bank only wants your business if it's good business. Their returns are modest on a standard business loan, and they don't like to have even one bad loan if they can help it. They never get a surprise windfall (think: Instagram); the return is well set ahead of time. Their business model is so radically different that it's not very useful to compare to the VC business and its money or style.

A bank doesn't normally convince you to take more money, because they fund very strictly for sound operating practices ideally, because their returns are thin. Their ideal loan is the exact amount a business needs, because that business has to pay on that loan monthly or similar (whereas with most VC that is not the case). The bank loan adds to the operating cost, and has to then be factored into the business equation. They can't afford to lose 90% of their portfolio because one grandslam will make up for it.

Where a bank gets the money it's going to lend out is also radically different from VC, and the conservative nature of that money properly requires conservative lending practices.

And it's not true that banks won't try to throw extra money at you. They do, and I've seen it. But they only do it for 'perfect' customers that present nearly zero chance of default or failure (which describes very few business borrowers).

I'm sorry, which banks are we talking about here?

My question is why would he? I can only come up with two reasons: 1) more money 2) a sense of altruism (we have to help startups succeed even more!)

In terms of the first, YC seems to be doing pretty darn well by the numbers, how much more money do you need? The second is nice in theory, but I wonder if it would actually have a negative effect.

The value provided by an early investor and a later stage investor is different in the same way that young companies need very different things than they do later in life. In the beginning what companies need is largely the same, and so advice and such can scale relatively cleanly (as YC has shown). As you grow, though, what is needed more and more is specific, individual advice - the answer won't always be the simple "don't die".

There's no question that YC (and PG himself) represents one of the most authoritative sources of information on early stage investments, but it's not clear if that will directly translate as companies progress. If not, he'd essentially have to start over, refiguring out what it means to succeed and who knows, maybe he wouldn't be any good at it. Either way, if you tried to master both, I think one of two things would happen: you'd either lose your grip and be good at neither, or you'll "succeed" with the end result being homogeny. You'll seed companies and direct them into being what you want them to be for the next fund. That kind of "vertical integration" easily leads to a rules oriented echo chamber - the exact kind of stagnation that lets some scrappy "startup" come in and eat your lunch.

Could he do it and make it work? If anyone could, I'd bet on him, but I actually think there's value in having YC stay at the stage they are. It's better to have multiple forces at work, pushing and pulling against each other.

But the question is whether the VCs see it that way. By which I mean: cartels disintegrate when there is a clear profit to cheating. But the VCs might not see the "cheating" as very profitable.

What seems more likely is that this role would be fulfilled by an outsider; once the new model is proved, then the decision to cheat on the cartel is more obvious. aka "Disruption".

Paul isn't going to be doing this idea. But he does sound pretty positive about it.

Maybe there aren't that many VC-class high net worth individuals reading here, but it only takes one.

Who's going to be the first? (Apologies for the obvious slant...)

I don't think he wants to. Even though I think he'd argue otherwise, he's a genuinely good guy. Not in the way that you think of when you think of the class clown / extroverted nice guy, but more like the kind of good that he sees the potential in people sometimes before they see it. In his current situation, he provides help really broadly for a lot of founders, thereby helping the entire ecosystem. If he ran a traditional-ish VC fund, he'd probably have to be on boards, learn what it's like to run a huge company, etc. It just doesn't seem like it's as perfect of a fit.

I think PG has found his way to influence the startup world for the better, and it's through essays and through YC. He gets to spend a few months at a time working really hard to help startups succeed, and then he takes some time for his family.

I think a lot of people forget how much work it is to try something new and different. Given the numbers he references, YC is, at this point, basically a proven startup. If he were to try to switch his model, he'd have to essentially start over, which means lots of guessing, hits and misses, etc. I know I wouldn't want to try to start over from scratch when the thing I'm working on now has so much potential.

That is, unless, raising a fund / swinging for the fences would be a way to broadly change the startup ecosystem. (jury is out on whether that'd be the case, imo)

1. Don't grow pessimistic over the growing number of startups because there will be a growing number of great founders. If you focus on finding them, you can make more money than before.

2. To find them, you need a competitive advantage which could be doing what founders want/need: smaller Series A rounds and quick decisions.

He's practically daring the VC community to see who will step up.

I'm not necessarily disagreeing, I just wonder why he thinks so. That there will be more startups in general seems obvious, but "good" startups seem to be increasingly more elusive, at least to me.

The number of good startups will grow with the number of overall startups.

So often it could be the case that the competition to dominate a particular market will just be more intense.

Of course in some spaces the quality of product/ service from more startups might alter the capital distribution of customers to create a much larger pie.

This is also true of a lot of writers; I wrote some about it here (http://jseliger.wordpress.com/2012/07/29/links-the-time-for-...), and will quote from Tim Parks’s “Does Money Make Us Write Better?“:

When they are starting out writers rarely make anything at all for what they do. I wrote seven novels over a period of six years before one was accepted for publication. Rejected by some twenty publishers that seventh eventually earned me an advance of £1,000 for world rights. Evidently, I wasn’t working for money. What then? Pleasure? I don’t think so; I remember I was on the point of giving up when that book was accepted. I’d had enough. However much I enjoyed trying to get the world into words, the rejections were disheartening; and the writing habit was keeping me from a “proper” career elsewhere.

John Barth and William Goldman almost quit too and have written about it. How many anonymous but important artists got within a hair of success but couldn't make it over that line, who, instead of being artists who "almost didn't happen," didn't happen? The Internet is enabling a much more direct way of judging artists, much as it does startups, and I'm struck by the comparisons between artists and startup founders that run throughout pg's essays.

Doing two seed rounds (maybe one for $1-2mm, and a later one for $5-10mm) seems like an easier way for this to "just happen without conscious thought" than redefining A rounds themselves.

I've certainly heard of people raising <$500k early on genuine seed terms, and then $5mm+ on "seed rounds" which are essentially Series A minus control. Then you end up with crazy $100mm Series A rounds happening later.

"There might be 10x or even 50x more good founders out there. As more of them go ahead and start startups, those 15 big hits a year could easily become 50 or even 100."

I wonder how those two things work together. The first predicts a world with more, but smaller businesses. The second seems to predict no change in the threshold for success. If the future really does allocate a larger portion of the pie to medium seized companies (say, 100 - 500 employees to take an arbitrary definition of 'medium'), isn't that definition of success and associated financing model problematic? There isn't much of a market for medium sized tech companies that have moved past rapid growth. Without that market, VCs can't get their money back.

The essay talks about opportunities for more risk tolerant investors at the bottom of the pyramid (earlier stage, smaller investments). That seems to cover the idea of more, cheaper, riskier startups. But, the other idea about a higher resolution economy implies (I think) a need for smaller lower risk investments too.

I'm a developer myself, but if I was an entrepreneur with no coding skills, I'd hire some guys in India to crank out my lo-fi MVP and use that to find a product/market fit and then raise money. I suppose it's not that easy though, is it?

The feedback loop is frequently difficult to get right. Communication barriers don't help (fwiw I grew up in India so have some sort of limited advantage but not by much). The time zone difference does actually slow things down a tad bit more.

You talk about 2 rather different milestones in your comment - building a lo-fi MVP is certainly possible with an offshore team. But lo-fi MVP != product/market fit on any reasonable definition of p/m fit (Sean Ellis' formulation of 40% of users/customers) being disappointed with your disappearance, say). Getting to p/m fit may require lots of rapid experimentation, iteration, brainstorming and so forth...and that's when you can run into trouble with offshore contractors.

These outsourcing companies will also only do exactly what you have specified. This means the specs have to be very precise, in a way that I think would be difficult to do if you weren't a programmer already

(1) are you paying market salaries?

(1a) are you really paying market salaries, or are employees supposed to join your company because you're a special snowflake

(1b) even if you are paying market, why should an employee go to your firm? What is the upside to them for leaving a boss and company that they know? Because it would be really convenient for you, the hirer, is not a good answer.

(2) do you make the interviewing process decent, or do you scatter caltrops in front of potential employees

(2a) good employees do not need to crash study then regurgitate graph algorithms that your company never uses on the whiteboard. They also have jobs and value their vacation time and don't care to spend a week consulting for you

(2b) how long does it take you to respond to resumes that come in? You should be able to say yes/no/maybe within 2 business days. Do your recruiters / interviewers actually read the cover letters / resumes? Last time I changed job a big sf / yc startup let my first interviewer roll into the interview room just shy of 20 minutes late without having read my resume. That's a complete fucking dick move, and it's part of why I turned them down.

(2c) when potential employees send you github links, do you have an engineer actually bloody look at them (almost never in my experience)

(2d) do you actually expend effort to meet potential employees / grow a bunch of warm leads, or do you wait until 3 weeks before you want someone to start then gripe because you can't convert cold leads in 1 week plus a 2 week resignation period for their current employee?

(2e) do you use shit software like that jobvite bullshit that badly ocrs then expects me to hand proof their shitty ocr job? Or do you directly accept pdf resumes.

(2f) for the love of god, I do not have a copy of ms word and wouldn't take one if it were free. I will not put my resume into word format.

(3) do you take some pains to grow employees? Hire people out of university? Take a chance on people?

(3b) Like one of my former employers, do you do a good job hiring new grads from schools besides stanford / berkeley / mit / cmu, but then 18 months in after employees have demonstrated their value refuse to bring them up to market rates and lose them?

(4) when you send out offers, do you actually put out a good offer or do you throw numbers out that are 10% or more under your ceiling then expect employees to negotiate hard with you? I just turned down an sf startup because they did this; the ceo who hired me said, "x0x0: when I was an employee I hated negotiating, so I'm going to make you a great offer. This also means I'm not going to negotiate." And you know what? It was a great offer, and I said yes the next morning. It also avoids starting your new job after a confrontational exercise.

(5) if you have recruiters contacting people, do you have them make clear they're internal not external?

(5b) do your recruiters actually read peoples' linkedin profiles before contacting them? I used rails a bit 3 employers ago and had to remove that word from my profile because I got spammed with rails stuff.

(6) do your job postings on LI/craigslist/message boards tell potential employees why he or she should work for you, or is it simply a long list of desiderata like the vast majority?

(7) like Rand says, do you know off the top of your head the career goals of your employees? What are you doing to help them get there?

(7b) just like the easiest sale is an upsell to a customer you have, the easiest recruit is the good employee you already have that you keep happy and prevent from leaving

(7c) do you give your employees raises to keep them at or above market, or can they get a $20k raise by swapping companies? If that raise is on offer, exactly why should they continue to work for you?

(7d) on that note... 0.2% of an A round company isn't golden handcuffs. It's more like paper handcuffs.

If you can find and take a chance on the right student from the "wrong" school, you can get some great employees.

Large companies in particular love butt-in-seat time as a predictor of value. Sure 6 months experience is probably better than 3. But 6 years doesn't buy you much more than 3 years.

The other thing big companies love is prior experience in the industry. I have never understood that tendency. You already have 10 people with 10 years experience... Why is adding more of the same important? Years in industry isn't anywhere on my framework for hiring.

I'm going play the role of semantics really quick. I like how PG differentiates between a startup and a company. What I've learned while coding, and dealing with Angels are the differences in stages...so I'll share my definitions (with dev examples)

  1. Idea: just a concept, like an app
  2. Project: the investment (usually time) we as entrepreneurs put in, like coding an app
  3. Startup: just launched/deployed and ready to improvise as you grow, now your in the App Store and are out of beta
  4. Business: your in the black, or at least have a projected growth rate of being there (u made angry birds)

Why does it take some VCs so long to make a decision? Ron Conway makes a decision to fund a founder within 10min of meeting them.

So while pg clearly illustrates a situation in which founders are gaining power over investors, I think we're looking at another, worrisome situation where potential buyers have more power over startups. Competition will be up, and prices will be down. Worse, handing more power to the relatively slow, cautious big corporations will encourage their already bad habits of dithering.

YC doesn't select stones to set on top of other stones. It filters a stream. It amplifies what makes it past the interviews. It reduces friction to help companies keep moving.

There's less statefullness than in pyramid construction. HN is a scouting network, not a quarry. The process doesn't chisel companies to the desired batter. It develops talent and sells it on. Like Ajax.

A pyramid is an anti-pattern for disruption.

The problem is it will be difficult for the crowd-funding websites to organize and adapt with regulations and the new marketplace that is being created.

For instance, if there are 1,500 investors in the Seed round, how do you decide who the official advisors are? Will people be wary investing in companies without a known advisor or investor already "in?" And if so, will that mean that crowd funding won't be necessarily all that helpful to companies struggling to find that first investor?

As an outsider, it was surprising to me that seed investors don't have access to a company's revenue numbers. I would think there would be some kind of quarterly report that goes to all investors.

This is an important observation. 20 years ago, the smartest people went to large companies. Now it's a question of "Join someone else's startup or start my own?" The alternative of career paths at large companies no longer exist. It isn't just social acceptance and lower cost of entry, it's that the alternative is long gone.

Among my own acquaintances it seems to have more to do with people's strengths and lifestyle interests. People who are strong techies but entirely uninterested in business would rather go to Google, or even to somewhere like NASA or Boeing or IBM or Intel. People who are a bit more into entrepreneurship, and/or don't like having a boss, would rather go into starting a business. Depends on the specific technology as well: a lot more web-tech people go the startup route than hardware engineers, and certainly compared to aerospace engineers.

Rather, I suspect that the 'about 15 big hits a year' is actually more about the public (and how many 'new' things the masses will actually adopt a year) than it is about the overall number of new startups each year.

I do share this opinion. Creating value has no limits. You can create as much value and wealth as you can.

It won't affect the next A or B rounds, but exits in about 3-5 years are going to dry up much like they did the last time the Fed tightened.

[1]http://www.marketoracle.co.uk/Article40113.html

Monetary base in red (you can see where they started printing in the past few years), Money supply in blue http://research.stlouisfed.org/fred2/graph/?g=kcD#

From the post we know ~2% will grow to a ~billion usd valuation.

I actually have a theory that the software running paulgraham.com is a sort of stripped down version of the original Viaweb content management system. You can see in the view-source that there is still "Y! Store" JavaScript running on his pages, and that, for example, the titles of each essay on his site are actually images hosted at yimg.com (e.g. for this essay, http://ep.yimg.com/ca/I/paulgraham_2270_385).

pg has spoken about how one of Viaweb's major features early-on was that it worked around the limitations of browser fonts by auto-generating images (GIFs) with rendered anti-aliased fonts and served those in the browser. Looks like his site continues to do the same thing to this day.

If my theory is true, I really hope pg never redesigns it. It serves as a pretty cool historical reference to the company he founded, that made him wealthy in the sale to Yahoo, and that ultimately allowed him to start YC / HN.

The left-side navbar is also an image map! (remember those?) My guess: Viaweb generated a single image out of the navbar description and markup for an image map. In those days, browsers didn't handle parallel downloading well. A single navigation element with an image map probably loaded faster in browsers than several navigation image buttons.

Yes, image maps are out of vogue and text-as-images is unnecessary with modern browsers. But, if the software running paulgraham.com truly has lineage to Viaweb, then that is so much cooler than any modern redesign could possibly be.

Boy, is this a load of bollocks. I guess the 20th century war against socialism ("the means of production in the hands of those who work it") and worker's organizations and parties doesn't come much into play into these analyses. Up to the bickering a few months ago in Wisconsin with Walker - although we're so far down the road, that example isn't very useful as a specific case.

Yes, the entrepreneurial middle manager starting his own business, this is the source of income inequality! Meanwhile, half the Forbes 400 inherited their way onto the list. Where's the plucky entrepreneur in that equation? Even "self-made" people like Warren Buffett had a congressman father and a grandfather with a chain of stores. Not exactly a guy pulling himself up by his bootstraps.

I mean, the fact that this speech was made to investors is a signal. Not the tone, but the fact that it's investors who are the ones who sit and hear these things. The programmer in the trenches, working 50-60 hours a week creating wealth is not a part of these decisions on production.

There's a good documentary called "Born Rich" that is on Youtube right now. I would recommend people watch it. This is who the money goes to, not the plucky, hard-working entrepreneur. Blogs are filled with stories of angels and VCs backstabbing founders. As is HN. And the founders usually get the best deal in the company, far better than schlub programmers. Even hackers of the caliber of Jamie Zawinski have attested to this.

This idea of income inequality happening because some hard-working founder gets all of the money is a complete farce. Propaganda even.

If we want to really get into a discussion of this - just who are the "limited partners" the VCs are raising money from, and where did they get their money? We always see a fresh-faced Mark Zuckerberg or Drew Houston, or a Paul Graham or even a Ron Conway, or John Doerr or Michael Moritz. But who are the limited partners they're raising money from? Who is calling the shots on how money gets spent?

Hall of Fame quote right there.