> 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.
I've heard this repeated dozens of times, and I believe it is just circular logic.
1. The success of the startup depends on the quality of the founder.
2. The quality of the founder is determined by whether or not their startup succeeds.
I think some people would argue that they aren't judging the quality of the founder by whether or not their startup succeeds. But I don't know if I buy that. If some "low quality founder" creates a billion dollar business people will just say "I mis-judged him. He's a great founder." If some "high quality founder" creates a startup that fails people will say "He just didn't have what it takes as a founder", until he eventually succeeds then they'll be back to "He was a great founder all along".
In other words, every founder of a successful startup is a "great founder". But only because that is baked in to the definition, despite the implication that you're actually judging their merit as a founder in some other (mysterious) way.
It's not something that's kosher to say out loud, but there is a huge spectrum of how "good" someone is at founding/running companies. We tend towards, "everyone can do it if they put their mind to it," which I'm not sure is healthy.
Here are some non-quantifiable things that matter:
1. Grit/High Pain Tolerance. People who do not give up, often to the detriment of their physical, mental, and/or emotional health.
2. Structure. People who can organize — whether in their head or on paper — their business. Who is the customer, what is their problem, how do we solve it, how do we find them, why is our thing better than their thing, etc.
3. Prioritization. People who can look at the things to be done and know which are more important.
4. Communication. You have to be able to talk to people. Not talk at people, but with them as an exchange of ideas. Growing your business (sales), your team (hiring), your brand (PR), and fundraising are all reliant on your communication skills
5. Intelligence. The bar here is lower than is assumed. You don't have to be galaxy brained, but basic smarts.
6. Willingness to seek, sort, and take action on advice. You have to ask for help, but not all offers of help are useful or relevant or correct. And then you have to actually do the thing.
7. Giving up control over things you're not good at. It's good to fire yourself when you're bad at something.
You can find a whole mix of these. I know founders with high grit who work on the wrong things. I know founders who prioritize incredibly well but don't have a full structure of the business in their heads and so get blindsided by an unknown unknown.
I know founders who are monetarily tremendously successful that lucked into a market (some of whom were dragged into that market by others), but, were things to take a turn, their boards would fire immediately.
There is certainly a scale. You don't have to be 10/10 on all of them to be "great".
But the thing is — and I think this is something people have a hard time wrapping their heads around — is that when you sum all of this up, you're only increasing your odds. The odds are still minuscule that you will get lucky enough (many times over) to be in a position to have a massive company. There are excellent founders who fail for things entirely outside of their control.
I've worked at some startups that were _very_ successful, despite the founders only having a couple of these skills. Number (1) Grit seems to be mandatory, the rest can be made up for by having the right team. The thing you don't list that seems to be important is _charisma_ - successful founders can _convince people_. Sometimes that's in opposition to (4) Communication, and as an engineer that causes me pain, but it seems like convincing people to believe in something often takes the place of understanding other people's thoughts. And somehow they succeed anyway.
I agree. I think there's such an interest in seeing the genius behind a work which actually involves the collaboration of a group to actually succeed. Just like in team sports. There are great players who are great because they won a lot of championships, had high scoring totals, etc. But in most cases, they also had the best teams. The genius lifts their collaborators up and the inverse is also true. I wonder sometimes about great players in my favorite sport and have doubts about the career outcomes of some of their peers that seems to have a lot to do with how good their teams were, as well as how fortunate they were to avoid injury, etc. There are analogies to those factors as well in business, but they don't garner as much fascination as the idea that there's one person who really makes the thing go.
I think there's such an interest in seeing the genius behind a work which actually involves the collaboration of a group to actually succeed
Walter Isaacson recognized this when he went to write his book The Innovators [0]. He intended it to be a more narrow autobiographical book like he is known for but quickly realized the technological revolution was brought about through an collaborative effort across time and space.
I feel like a lot of the things I've read from Paul Graham suffer from the survivor fallacy. The tech industry idolization of him is itself a form of survivor fallacy and its infatuation with "wealth makes right" is almost incestuous. Most of what he writes is just a one line fortune cookie drawn out into a 3 page essay.
I HIGHLY recommend tech workers to actually break out of your bubble. So much of our ethos is being "free thinkers", but most of the "thought" is just repeated business pep talk.
Do other folks agree with PG that the economy is a rounding error compared to the quality of the founders?
To me, it sounds like a hammer saying all that matters is the nail, not the substrate you're attempting to pierce. I think it's his job to believe in the "great man" theory, and to not credit circumstances, luck, etc. PG is in YC and their whole raison d'etre is attempting to choose great founders.
Is there a statistical analysis of YC and PG which shows they choose effectively?
> Do other folks agree with PG that the economy is a rounding error compared to the quality of the founders?
When I was in YC (in 2009, a few months after this essay was published), I remember PG saying that plenty of VCs, (specifically Marc Andreessen, as an example), pay just as much/more attention to market/macro conditions as they do to founder talent, but added that this is a luxury Andreessen has when all the very best companies want to be funded by Andreessen, so he can pick companies that have both great founders and favourable market conditions.
> I think it's his job to believe in the "great man" theory, and to not credit circumstances, luck, etc
PG acknowledges often that luck plays a critical role in success. But the point is that weak founders with all the luck in the world won't achieve much, whereas great founders with only a little bit of luck can be hugely successful.
He also points out that it's a long journey, much longer than a downturn will last, so better to start now when you're inspired, especially when the downturn can bring favourable conditions (like cheaper talent, rent, services, etc).
YC is also quite happy to back founders a second time. Off the top of my head, Stripe, Twitch and Cruise were all founded by 2nd or 3rd-time founders. So YC's approach is to find founders with potential, get them into their network, then support them for as long as they need to find success.
> Is there a statistical analysis of YC and PG which shows they choose effectively?
Some people have tried to evaluate this quantitively or qualitatively, but most miss the point, or can't evaluate it correctly without knowing YC's financials, which nobody outside YC management and their investors knows.
YC's approach isn't to try to "choose" only the good founders. Their approach is to cast a very wide net, to invest in a huge number of companies including some very crazy-looking ones, knowing that only a handful will win big but that will yield big enough returns to more than pay for all the losses.
So the question is not whether they chose good founders and rejected bad ones, but whether they backed a big enough and broad enough pool of companies to get a significant number of huge winners - like, say, Dropbox, Airbnb, Twitch, Segment, Cruise, Coinbase, Instacart, Flexport, Brex.
> ...weak founders with all the luck in the world won't achieve much, whereas great founders with only a little bit of luck can be hugely successful.
To clarify a bit here, it’s very hard to know in advance that a founder will be “great”, so I suspect that there are some rough proxies that investors use, and what you or I think of as “great” may not be what the marketplace of investors values when “shopping” for “great” founders to back.
For example, academic achievement. Is that something that makes a founder great? What about social connections? What about dogged determination? Each investor will have a theory, and one or two might even be right.
Probably the only thing that really matters is “the founder actually got the company to a point where it can generate revenue”, and the rest is wait and see.
Which leads back to your excellent summation:
> So the question is not whether they chose good founders and rejected bad ones, but whether they backed a big enough and broad enough pool of companies to get a significant number of huge winners...
PG said often back then that this is what they think matters most. I was there when he was taking about it in a casual chat with a group of the batch members after one Tuesday night dinner, and he said something along the line of “if only we could do something like coat the floor between the front door and the interview room in a highly slippery liquid, and the people who make it to the room get funded”.
It’s lame conduct to pick a single phrase out of a much longer comment, wrap that phrase in a new sentence to make it mean something entirely different to what was originally written, then deride that as “absurd”.
Luck is not objectively definable or measurable, and is highly contextual. Was the pandemic bad luck or good luck for Airbnb? It instantly caused hundreds of millions of dollars of lost bookings, forcing staff layoffs and requiring an emergency $1b loan to keep the company alive. But now it’s reported their bookings are stronger than ever, due to people’s different living/working arrangements in response to the pandemic. Maybe it would look like terrible luck if the company/founders hadn’t been formidable and skilled enough to navigate through the initial shock in March-April, leading to the company collapsing. Thanks to getting through to the point where they now have higher-than-ever bookings, it looks like great luck.
Anyway, clearly the point of my sentence about luck was that good luck is necessary but not sufficient; any amount of luck, however you define/measure it, is worthless without strong founders who can take full advantage of it.
If you are successful, it's gratifying to think that your circumstances are as much about things inside of your control as outside. If you are not, the opposite is a comfort. I find myself to be moderately successful due to a hearty helping of merit with an enormous mountain of luck.
I totally agree with this. In terms of academic achievement, it's more of "where you were" at the time and overall competency, but reality is much more brutal. The luck factor is well-known in financial circles and business circles alike (those two are tied to the hip). This is why the adages "Control what you can" and "Control your destiny" are still hold true today. As arrogant as they sound, at least they emphasize pushing towards making choice in the face of adversity. Accepting luck is an important piece of humility.
You can also argue that a recession is a better time than usual to start a company. Your opportunity cost is a little bit less (due to the job market), customers are a looking to save money are, perhaps, more willing to take on risk to reduce expenses, and finally there is more likely to be talent available at a cost you can pay due to layoffs and a slowdown in hiring among established businesses. Anecdotally there are lots of companies which got started in a recession, FedEx + the tech ones written in a sister comment.
Totally agree. And many bigger projects get canned or put on hold. Potentially making up room for smaller projects to implement a more compact product from a start up ( to get some quick wins ).
In my opinion, the thing pg & YC understood better than anyone before them is that Venture investing statistically has a very very long tail pay-off.
By micro investing in hundreds (by now thousands) of companies at the earliest possible stage (where they could fairly ask for a reasonable percentage at a very low dollar cost), they vastly reduced the risk of coming up with no big wins.
This is all basic betting strategy for professional gamblers. You also have to know the odds, so I'm not downplaying the importance of evaluating founders and business plans. That's like the Blackjack equivalent of basic strategy and counting the deck.
Without a betting strategy that reflects the statistics of the game you're playing, the likelihood is you will bottom out before you succeed.
I sorta kinda think that bad economy could actually help some startups grow.
In bad economy, businesses are looking to cut costs and optimize their processes. So do people. If you can come up with something that saves people money or hassle, the rate of adoption may be sky-high.
If we take AirBNB as an example, it helps both travellers save their money, as the lodgings are usually cheaper than classical hotels, and helps people with unused rooms make some money on them.
Ofc AirBNB evolved into a megabusiness in the meantime, and you will rarely meet your host in person, but the gist of the idea is clear.
Is there a tipping point at which capital is sufficiently concentrated that the capital advantage outweighs the leverage of a four-sigma founder (.99994)? I don't know, maybe, but the capital can certainly make a two-sigma (.95) founder competitive, and a three-sigma (.997) founder without capital is probably f'ed. Or maybe a two-sigma founder with access to capital is the definition of a four-sigma founder, because how could you be recognized as that without having the capital.
The economy in general, with the variability we've seen in our lifetimes so far: yes. But specific opportunities come and go, the current situation can certainly make some ideas sufficiently profitable to succeed in the long run when they otherwise wouldn't be.
He might not even believe in that great man theory. Just let them fight, I'll pick the winner. Without the push, there's not enough predators to hunt for him since chance for success for a founder is pretty low, he needs more numbers of them.
Some food for thought is that it takes time for a new business to achieve market penetration and that span of time is irrespective of and orthogonal to economic health.
If you're making software, you can achieve market penetration in an afternoon by signing a deal to bundle your app on a phone or social media platform.
This is relevant to only a small segment of the market. A substantial majority of software development, even VC-funded software development, isn't something that can meaningfully be sold as a consumer-facing phone app.
From reading the article, the main reason seems like having (way) less competition. Especially with cheaper acquisition channels (I've been doing research [1] on this topic for 2+ years and noticed this trend), where you have less businesses advertise on Facebook/Google, bringing CPC costs down.
I wonder if the "law of shitty clickthroughts" [2] applies here as well. What if you have a huge # of founders reading the advice; acting on it and starting new businesses just because Paul Graham told them so? Then starting a startup in a bad economy would no longer be an advantage. Somewhere in May Gumroad founder tweeted that they have record numbers of people signing up, and that may be an early sign that thing sort of thing is already happening.
Surely that's one of the many factors. The opposite is also true.
For instance, pre-election, for some niches US FB ads bids were totally out of whack. Or the fact that it's been high ever since the COVID caused eCommerce boom, globally.
Does anyone decide not to do a startup because of abstract assumptions about a collapsing economy like this? I find people don't do it for much more realistic material reasons, eg: the economy is so bad that I've lost my job, no one is giving out loans, I don't have the capital or infrastructure.
I would almost call this a straw man, but I guess there must be some people out there who make decisions this way.
It sounds like you answered your own question - people avoid doing businesses when they're not sure their products will sell, when it's harder to get loans and capital. And they link this to a bad economy.
But the idea behind the article is that these are mostly untrue - it's easier to hire talent and other resources during a bad economy.
There is another side of this. Unemployment. Unlike 2000 or 2008, right now would be a terrible time to start a software business because jobs in software are plentiful, wages are so high. So you have to take out bigger loans with more risk and paying wages doesn't produce assets that can be put as collateral. It's a great time to find ways to utilize lower skilled labor somehow, but not for anything that needs top talent.
FWIW, this essay had an impact on me in 2008, and I started my startup in early 2009.
I was working in NYC, and on Wall St (as a programmer). I was 2 years out of college, so 25 or so, and had only minimal savings and some college debt left to pay off.
The "conventional wisdom" in my circle of friends was, "This is a really bad time to quit a stable job and start a small company, because the entire economy might collapse." I had nothing but evidence in front of me: from my office window one day, I could see streams of hundreds of laid off people leaving the Lehman Brothers building, with cardboard boxes of personal office items in their hands. Friends of mine who were smart and hard workers were getting laid off from their NYC jobs left and right.
When I worked up the courage to quit and pursue the startup, and I announced it to my colleagues at work, quite a few of them took me aside and said, "I get that you already made this decision, but I'm really worried about you given what's going on in the economy."
I think pg's essay, as well as the general mindset of YCombinator, helped me and my co-founder have the attitude of, "We'll try this, and it might fail, but if it succeeds, it'll be awesome. And if it fails, despite how bad the economy is, we can still fall back on just working our butts off to find another job."
Anyway, it wasn't easy, for sure. Though we managed to get seed accelerator financing ($20K) from Dreamit Ventures in Philly in Summer 2009, we then bootstrapped for 2 years in the startup wilderness until our seed financing round of $800K in 2011. I don't think most people, young and frugal or not, would last that long on non-employer healthcare or with only consulting/freelance income to pay the bills. I wrote about that financial reality here:
Also, zooming forward to 2020, I think the current economy is much more startup friendly than 2008-2009. In the period we started in, seed financing was not very mature -- we were still living in the shadow of the 2000-2001 crash. NYC had a very small tech startup community in 2008-2009. The 2008 crash, being a "financial" crisis, also depressed venture capital investing at the same time. By contrast, this Covid-19 recession has split investors, where retail/consumer stocks are losing money, but tech stocks are growing by leaps and bounds, and many investors are now trained by the success of low valuation seed investments from the 2008-2010 era, which eventually led to IPOs and exits in our recent tech bull market. So, if I weren't still running my company and if I were working for a BigCo like I was in 2008, I would definitely start a company now, because there's really no downside whatsoever. That is, no downside except the opportunity cost of your salaried job. (One other counterintuitive aspect, though, is that, perhaps, starting a startup now is such an obvious decision that you'll be competing with a lot of other seed stage founders, assuming they are as rational as I describe here :-) ...)
Also, about a year ago I provided a little advice for how to bootstrap your company if you do get started and you are not of any means. Hope it helps someone:
The author suggests that the primary reason people don't want to start a startup in a bad economy is that no one will invest in them or that there wont be any customers, I think more consideration should be put into the fact that it's usually just that they simply cannot start a startup, not that they are iffy about it
It is in YC's financial interests for as many people to gamble everything on as startup as possible to collect a share of as many winnings as possible.
This remains true if the odds accross all startups of succeeding just halved.
If you are the founder and the odds just halved it may well affect your willingness to take that risk. YC simply needs enough of its funded ventures to succeed. You aren't diversified like that.
P.G.s interest are _not_ yours.
Take that on board and know that it can affect P.G.s reasoning through uncoscious bias then adjust for that according to your own and /then/ it's a good article. Take it a face value at your peril.
> As those examples suggest, a recession may not be such a bad time to start a startup.
I don't see how they suggest that at all. The fact that a couple tech unicorns managed to survive during the beginning of a major technology boom says absolutely nothing about the probability of any other startup surviving. That's like me winning the lottery on a Thursday and then saying "Always buy your lottery tickets on Thursdays!"
And didn't Bill Gates come from a very wealthy, very well-connected family that could easily support him for the rest of his life if Microsoft failed? If I remember correctly, his mother was on the board of IBM and got Microsoft its first major contract for DOS.
Lol. Now you're getting to the core of macroeconomics within our existing infrastructure. The Fed is cutting (again!) investors are chilling (again!). I don't want to burn money with some sort of hopeful expectation of profit in the future, but goodness gracious money is so friggen cheap right now.
I think the essence of this is taelent is more important than capital. Better to start something when talent is plentiful and money scarce than the other way around.
"The reasonable man adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the #unreasonable man" --George Bernard Shaw (b. 1856)
I think in the broader sense this is true and there are some concrete advantages to starting in the midst of a (normal) downturn.
As usual there are exceptions to the rule. In particular, you should be wary of starting a business in a sector or industry in a recession that is caused by broader macroeconomic trends that may not be short lived. For example, right now I’d be extremely hesitant to start a company in the oil and gas industry. That sector has been in a recession pretty much continuously since 2014, and was in bad shape before the pandemic hit. It will likely stay depressed for a few more years.
The other thing I would caution against is starting a company today based on the perceived change in the world due to Covid. As vaccines and therapies are coming online it’s becoming clear that we are likely headed for one of the best possible outcomes. A lot of people have convinced themselves that Covid has permanently changed things and I think they’re going to be shocked when the world goes pretty much back to the way it was in a year or so.
I did lose a job this year. When I was on the phone with my family I said - I could get hungry and that typically is fuel for the best startup ideas. :)
We haven’t really had a bad economy for tech in the past 10 years. Ever since the mobile App Stores opened up and cloud computing began to take off, tech entrepreneurship entered a boom cycle and it’s been eternal September since then.
The ease of getting investment throughout the years has varied, notably the hardest point to raise money was around the middle of the decade, but for the most part if you have not made a lot of money from tech in the past 10 years you have done something wrong.
Furthermore startups aside, there's a subset of people in tech who are convinced that, if you know how to turn on a computer, you can quit your job today and by the end of the week you'll have five competing offers for $300K+. Which really doesn't represent reality for the vast bulk of people for all sorts of reasons.
I agree that "the economy" has relatively little to do with the ability for "a" startup to succeed, given the right startup, with the right technology, in the right political environment, in the right social environment...
But further up you basically said "if you haven't made a lot of money in tech in the last 10 years then you're doing something wrong"
Which is a tautology, independent of how you define success. If you don't succeed, you did something wrong. But define "a lot of money"
Is a "lot of money" a six figure personal income? A six figure income is easy to get. Just work hard and be good at your job for a few years, and don't be afraid to negotiate. Set your terms, if you're valuable they'll pay for your time.
Or are we talking on the scale of companies? I helped build up a small garage operation into a multi-million dollar turnover enterprise - is that a lot of money? Probably to some people, but not compared to the multi-billion dollar companies.
Some random nobody made a website that lets people post 140 characters and we all lol'ed and now it's worth more than twenty billion dollars. There were millions of web forums experimenting with different modes of communication. Did everyone who tried to start a social media website at the same time as twitter do "something wrong" because they didn't understand the magic formula?
If you're talking on a personal level, then yes, making money in "tech" is easy. I've made "a lot" of money in "tech." I live more comfortably than my peers. But I would not say it's been easy, or it's just been some fluke.
The tech job will get you the six figure income easily. At the same time, you should have been investing in tech stocks all throughout the past decade. I invested $25k into FB at ipo, no need to say what that position is worth today. Other companies: Twilio, AMD, Amazon, Netflix, Google, Microsoft, Cloudflare, etc. have also brought massive gains that make a value investor’s face blanche.
The next step for the ambitious tech person, would be to take some of that money and fund a new startup, staying away from venture capital as long as you can, and then when the time is right, opening up to investment and growing an even larger business rapidly and keeping as much equity as possible.
Or, you can continue to simply accumulate income and grow your investments, working your way toward more prestigious positions.
I'm going to make a half joke. So you want to start a software product/business, like web app? First things first, evaluate frontend technology, try a bunch of them, for a week, and lost all the vibe all together.
I've heard this repeated dozens of times, and I believe it is just circular logic.
1. The success of the startup depends on the quality of the founder.
2. The quality of the founder is determined by whether or not their startup succeeds.
I think some people would argue that they aren't judging the quality of the founder by whether or not their startup succeeds. But I don't know if I buy that. If some "low quality founder" creates a billion dollar business people will just say "I mis-judged him. He's a great founder." If some "high quality founder" creates a startup that fails people will say "He just didn't have what it takes as a founder", until he eventually succeeds then they'll be back to "He was a great founder all along".
In other words, every founder of a successful startup is a "great founder". But only because that is baked in to the definition, despite the implication that you're actually judging their merit as a founder in some other (mysterious) way.