Essays

I realize startups are not the main target of those who want to eliminate economic inequality. What they really dislike is the sort of wealth that becomes self-perpetuating through an alliance with power. For example, construction firms that fund politicians' campaigns in return for government contracts, or rich parents who get their children into good colleges by sending them to expensive schools designed for that purpose. But if you try to attack this type of wealth through economic policy, it's hard to hit without destroying startups as collateral damage.

The problem here is not wealth, but corruption. So why not go after corruption?

We don't need to prevent people from being rich if we can prevent wealth from translating into power. And there has been progress on that front. Before he died of drink in 1925, Commodore Vanderbilt's wastrel grandson Reggie ran down pedestrians on five separate occasions, killing two of them. By 1969, when Ted Ke

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A friend of mine who knows a lot about computer security says the single most important step is to log everything. Back when he was a kid trying to break into computers, what worried him most was the idea of leaving a trail. He was more inconvenienced by the need to avoid that than by any obstacle deliberately put in his path.

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If you try to attack wealth, you end up nailing risk as well, and with it growth. If we want a fairer world, I think we're better off attacking one step downstream, where wealth turns into power.

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

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

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

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

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

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

What I Did this Summer

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

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

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

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

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

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

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

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

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

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

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