An interview with investor Paul Graham of Y Combinator

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1. NeoTechie
   

   September 2nd, 2006 at 8:09 pm

   Thanks for the insight Paul. We are not in a bubble. Rather, we are in a great era; companies have realized that they have to build services for various communities that visit and patronize them. In Web 2.0, everyone has the opportunity to offer something useful on the web. The innovation must not and should not only come from big companies.

   What will you offer to Web 2.0?

2. David G
   

   September 2nd, 2006 at 8:36 pm

   Good interview Marshall,

   I would love to see more of these VC interviews. Though it may not appeal to your core audience. As an entrepreneur I find these conversations fascinating, especially when it goes counter to current thinking (Bubble or not, Business model or not). Perhaps you should have a VC Crunch!

   Best,
   David Gratton

3. Jawad Shuaib
   

   September 2nd, 2006 at 8:38 pm

   I agree. I don’t think we will ever hit a bubble again since each time a company gets funded, alarms go off. Investors are too cautious to make the same kinds of mistakes they made in the past.

4. Jessep
   

   September 2nd, 2006 at 9:26 pm

   After this article/interview, I hereby forgive you, Marshall, for that story you did a couple of weeks ago that got everyone worked up .

5. Ryan Nichols
   

   September 2nd, 2006 at 9:27 pm

   Yeah the VC interview is great. Best quote: “The easiest way to make something people want is to make something you want.” I’ve seen the CEO’s who are ‘passionate’ about building something they won’t even use themselves.

6. Skeptic
   

   September 2nd, 2006 at 9:32 pm

   Paul, I have no business model but I think I can take on Microsoft since they are so established. Can I have some money now please?

7. Jessep
   

   September 2nd, 2006 at 9:33 pm

   Their funding cycle seems a bit slow. The application for Winter 2007 funding is in Oct 06. By the time any one group gets funding for an idea, the freshness will have long been passed.

   I’m very interested in seeing more VC companies like this, though, that want to seed young startups.

   One novel idea (started by http://www.flucid.com I believe) is to take the incubation and collaboration process online. How cheap would *that* make it?

8. Startups.in/India
   

   September 2nd, 2006 at 11:02 pm

   “That means they’re unlikely to do anything so novel that it frightens the bureaucrats. So a startup could compete with Google if they had an idea so wild that it would freak out the internal gatekeepers, no matter what area it was in.”

   such as? Any examples?

9. Skeptic Too
   

   September 2nd, 2006 at 11:40 pm

   No business model != business
   No business model == gamble

   I think it’s quite dumb to tell a founder that they don’t need to worry about the business model when they get started. Building something popular isn’t that difficult when you give stuff away for free. I have millions of great ideas that could never be monetized. Having 20 million people using your service is worthless if you have no idea on how to monetize them. As such, a service with a smaller number of users led by a management team that knows how to monetize those users is, in a sane world, worth a lot more than a service with a large number of users that has no idea how to monetize them.

   Apple, Microsoft, Google. Nice names to rattle off. These are the exception, not the rule. And while it’s true that many companies change business models several times, it takes an experienced (or intelligent) management team to adapt quickly. The barrier to entry in Web 2.0 doesn’t exist. You may not have time to change your business model when a new competitor that did think develop a business model comes along. Starting off with nothing is not way to start a BUSINESS. There are plenty of great ideas out there. Not all of them are great BUSINESS ideas. And don’t VCs invest in businesses, not ideas?

   “Frankly, even though I’m supposed to be an investor, the ideas that excite me most are not necessarily the ones that make the most money, but the ones that blow away evil old monopolies. For example, I love collaborative news sites not so much because they make a lot of money– though they might– but because they’ve shown what a bad job the “old media” were doing.”

   Isn’t every VCs wet dream to fund a company that becomes an evil monopoly? Maybe Paul should become a philanthropist. In any case, when speaking of collaborative news sites I’m assuming he’s talking about Digg and Reddit. From my use of these services, many of the news stories being “dug” are written by old media. Quite funny isn’t it?

   I love how Paul completely sidesteps Marshall’s question about the criticisms that most Web 2.0 services are too niche. Paul apparently doesn’t understand the concept of niche and tries to obfuscate the fact that for most people Web 2.0 does not translate to “web technologies” as a whole. Here’s an example Paul:

   Online photo sharing: appeals to a huge number of people
   Online photo sharing 2.0 (tagclouds, geotagging, portals, etc.): appeals to a very small subset of the photo sharing market

   Flickr is a perfect example. It’s a cool service but in the overall photo sharing market, it has a very small marketshare. Many of its features only appeal to a small niche of mostly techies.

   Let’s take Paul’s example: web-based email. Very popular. This isn’t a Web 2.0 service, but I have an idea for a Web 2.0 email client. I’ll take Hotmail, add AJAX, tagclouds, geotagging, a built-in wiki for all the topics I’ve ever discussed in my emails, etc. Think I’m going to overtake Hotmail? Write me a check and I’ll build it for you.

   “Make something people want.”

   The problem, Paul, is that too many of these startups are creating things that the majority of the people don’t want. Let’s look at 3 of the investments I know you have made:

   Kiko: Enough people didn’t use it.

   Wufoo: Online form builder. 1998 called. This is a commodity.

   YouOS: Your site links to the Slate article on this startup. Look at all the comments. Slate and the comments people posted point out the flaw: very few people will use this. How’d you invest in something that broke your golden rule?

   There are an infinite number of things people want. Many VCs are investing in things most people don’t want. And when a VC does invest in something people want, shouldn’t they be investing in a business that knows how to make money off of it?

10. Peter
    

    September 3rd, 2006 at 12:35 am

    Good interview.

    Paul doesn’t seem like a bad dude, in spite of the fact that he’s a VC. Like a lot of situations, it’s an institutional problem - why do movie stars start acting like Tom Cruise? Because. So, Paul’s down-to-earthiness was a relief to me - not that it was an extensive interview. I listened to a couple of entre-types at the Stanford Startup School that YCombinator has/had something to do with and I was like ‘click’ - enough. I suspect it’s extremely difficult to remain grounded after you’re a multimillionaire, but still - a couple of those dudes were just living on another planet.

    I dig Paul’s advice, too. A bit generic, but true. One of the taglines floating around in my head these past few months - something I was planning on using for my next astounding product launch was this: “Web 2.0, but useful.” Clever, huh?! Yeah - it’s trademarked, so don’t even try it!

    The best option, afaic, is to build something that you yourself want/need, so you’ll know better/longer, even after you’re deeply involved in your own project, whether or not it sucks.

    YCombintor? YAskY?

    Check these new search engines. I make a million dollars for each click-thru:
    http://clusty.com/
    http://www.kartoo.com/

    That’d be a cool way to promote stuff, huh? Be like the Amway of the internets. Pimp this search engine, and earn multi-level marketing-type ad revenue for all ad revenue earned through your initial referral - for as long as your devotees manage to hang onto their search-engine-set cookies. So, if you get 100,000 TC readers to try the search engine, and they each get one of _their_ geek friends to try it…and so on. You’ll be like a Platinum level in no time! Developing…

11. nat.
    

    September 3rd, 2006 at 12:35 am

    I think people need to take affordability into consideration.

    if, i’m saying if there’s an economic crash somewhere down the road…
    then many pros of web 2.0 or even the entire web….would become less influential.. what do you think?

12. Peter
    

    September 3rd, 2006 at 12:36 am

    my bad. i thought i’d read the “make something you want” part, but couldn’t find it when i went back to re-read.

13. nat.
    

    September 3rd, 2006 at 12:43 am

    there should be some more “solid” stuff on internet….not just ideas, ideas won’t worth a lot to you when you are having trouble finding things to eat.

    i think in my lifetime there’s definitly 1~2 economic crash….

    but if we can link cryonic with the internet…or quantum computer, then things may be a little different.

    I know this is too crazy but this is what I do or at least heading to do…

14. nat.
    

    September 3rd, 2006 at 12:48 am

    I quite agree with [Skeptic Too] post #9, it’s good to be idealistic but bad to be optimistic about idealism….

15. Marshall Kirkpatrick
    

    September 3rd, 2006 at 12:50 am

    “it’s good to be idealistic but bad to be optimistic about idealism….” a person could chew on that one for a long time!

16. Sal
    

    September 3rd, 2006 at 1:35 am

    Anyone can trade a $100 bill for a $99. A VC on a major tech site saying to founders no need to worry about a business model when starting a business is the best indication how big and fragile the bubble is.

17. gazzle
    

    September 3rd, 2006 at 2:34 am

    Skeptic Too. Love your points. I have a few to add.
    Paul loves to mince his words (as you have pointed out that Web2.0 = Web when in fact Web2.0 it is not). Heck I’m a Techcrunch junkie and I don’t even use Flickr or Delicious.

    Regarding bubbles… sure we may not be having an investment led bubble, but the idea of getting customers without a business model reeks of the previous dot.com bubble. Remember the 2000-ish mantra “as long as we got eyeballs, making money is not important”?… well how do you get eyeballs? Build something people want and give it away for free!

    Bubbles are formed when people do crazy things that they can’t really explain but can refer to some other crazy people who just happen to have it go their way.

    i) Buy a stock of a company because it ends with a ‘.com’… because it could be the next Amazon.com and eBay.com.

    ii) Buy houses in inflated markets with outrageous mortgages because ‘home values will only go up’.

    iii) Start a business without any clue how to make money because “Apple and Google” did it.

18. Vincent van Wylick
    

    September 3rd, 2006 at 4:37 am

    I think there’s a difference between no business model and really no business model. What Paul Graham wants is radical ideas, which can then be transformed into a business. Anything too radical will be rejected, of course. The reason why venture capitalists exist is not only to fund but also to give business advice. If every start-up had a valid business model, venture capitalists wouldn’t exist and banks would be funding a lot more start-ups.

19. Sheamus
    

    September 3rd, 2006 at 5:24 am

    Terrific interview… Wonderful questions (kudos) and thoughtful answers (kudos). It is intersting to note that this morning Hugh MacLeod’s Gaping Void referenced this interview and quoted Paul’s comments. On a separate note, I value Techcruch and read it daily as it introduces (on a very timely basis) fresh technological ideas and innovations and… The writing is first-rate!

20. me
    

    September 3rd, 2006 at 5:28 am

    Con artist, he sold a product to Yahoo that was junk and acquires geek karma by talking about his ARC, which no one has seen.

    Just another business type pretending to be a geek so he can enslave your sorry ass.

21. Get Bought
    

    September 3rd, 2006 at 5:36 am

    I think people are likely missing another path out for Paul to make money on his investments: getting bought.

    When he brings up flickr and delicious, those sites weren’t making any money, but they were ramping up at tens of thousands of users per month at the end of their indy days. The lights at Yahoo then went a buzzin’ and they both got bought. I think this model is actually more predominant in his head than “long term viable business” with a business model. Build something people want, ramp up your user base, and have someone buy you because they are in a holy war with the other media companies and want users.

    But let’s get real. This model too is indeed a risky proposition because out of the thousands of start-ups, how many are getting bought by Google/Yahoo, etc.? Most likely a lot of the start-ups now WILL flame out in 12-24 months, but in Paul’s world, the folks in motion are in their early twenties and will live to tell about it. His model wouldn’t work with a bunch of 40-something married with kids types.

22. Alan Wilensky
    

    September 3rd, 2006 at 5:55 am

    What’s it like working with Paul Graham and Ycombinator?

    See:

    http://bizcast.podbus.com/kiko/kiko2.mov

23. Alan Wilensky
    

    September 3rd, 2006 at 5:57 am

    oops wrong segment:

    Working with Ycombinator:

    http://bizcast.podbus.com/kiko/kiko4.mov

24. dH
    

    September 3rd, 2006 at 6:04 am

    Kiko.com could be the best online calendar.
    But, these times, Google Calendar is that. Poor Kiko.

25. Alan Wilensky
    

    September 3rd, 2006 at 6:20 am

    Some of the longer and more pessimistic, vitriolic comments regarding Mr. Graham exhibit a quality of transparent jealousy that I haven’t seen in a while.

    Providing mentorship and seed funding to small teams who work directly on their own code and working prototypes, helping transitioning them to fully realized works, is a laudatory, Johnny Appleseed model for the VC community.

    A small direct investment in teams that do the work themselves, in an environment of innovation, is just like a greenhouse for great things of the next web.

    I really get kick out the folks here who pooh pooh Paul Graham and Ycombinator - picking out each venture and flippantly disparaging each startup like a Monday morning quarterback; feh on you.

    This is what we need - the freedom for small teams to get the rent paid, buy food and office supplies, hire that one other team member - this is what Ycombinator does.

    One only has to walk down that tree-lined neighborhood in Cambridge MA, and walk through te doors of Paul’s incredible incubator of ideas, and breath in, deeply, the aroma of new and great ideas.

    Here’s to you, Paul Graham, here;s to you.

26. Dimitar Vesselinov
    

    September 3rd, 2006 at 6:52 am

    Should we listen to Paul Graham? When was his last big hit? 1998?

27. Alan Wilensky
    

    September 3rd, 2006 at 7:06 am

    The above comment as to whether we should “listen” to Mr. Graham is to narrow the scope of the issue of technology incubation and completely ignore the viability and wider dispersion of great ideas that are fostered in environments like Ycombinator.

    It’s not the top 40, it’s not all about IPO’s, it IS about successful products, teams, and companies; a longer view should take into account the total legacy and genealogy of all the startups and the intellectual capital that is spun off - no matter where they started from.

28. Philip Tadros
    

    September 3rd, 2006 at 7:33 am

    “The easiest way to make something people want is to make something you want.”

    even better, cause i want a site that isn’t myspace but everyones on, i want a site that’s craigslist with faces, an interactive yellow pages and digg in my backyard with feeds and seeds all pointing to metroproper’

    long story short, i like what you said, thanks for sharing;]

    the proper network

29. Paul Graham
    

    September 3rd, 2006 at 7:41 am

    Though the intro calls me a VC, that’s not really accurate. In the business, “VC” has a very specific meaning. VCs run funds, like mutual funds; they invest on behalf of the investors in their funds. At Y Combinator we invest our own money, which makes us closer to angel investors.

    VCs and angels have very different personalities. VCs are mostly MBAs, while angels are generally tech people.

30. Marshall Kirkpatrick
    

    September 3rd, 2006 at 9:00 am

    Thanks Paul, got that corrected.

31. Business2.0
    

    September 3rd, 2006 at 9:06 am

    I tend to agree that you definately need at least some sort of business model when you set out to start any start up you are building and I definately thinking that going into the start-up environment with the whole “advertising is my revenue model” is not the best way to go.

    Im sure that Google or Yahoo didn’t rock up on a VC door and go “oh yeah we have created this awesome search technology and we believe it will be driven by advertising”. Somehow, I think they got there search technology right, then the everything else was a spin-off from this. I read a post off Blogger.com from a start up in Australia that I found, named Ayamae, and their CEO seems to have an interesting strategy to Web 2.0 on his “Bus Adventure”. Not sure what you guys think? http://www.ayamae.com/blog/

    Either way, I’m all for innovation, just not for getting there with no clear strategy.

    My 2 cents anyways.

32. Skeptic Three
    

    September 3rd, 2006 at 10:58 am

    Alan: I don’t think people are jealous of Paul or trying to be disparaging. But there seems to be a disconnect between what he’s invested in and his “make something people want” criteria. 3 startups he’s invested in clearly failed to be things people wanted. So the question is whether this is just a nice line or whether he failed to analyze these startups carefully.

    You say:

    “Providing mentorship and seed funding to small teams who work directly on their own code and working prototypes, helping transitioning them to fully realized works, is a laudatory, Johnny Appleseed model for the VC community.”

    “It’s not the top 40, it’s not all about IPO’s, it IS about successful products, teams, and companies; a longer view should take into account the total legacy and genealogy of all the startups and the intellectual capital that is spun off - no matter where they started from.”

    Is Paul an investor or a philanthropist? Money may not be the only measure of success, but in terms of investing, making a ROI on your investments is.
    An investor doesn’t care about the “legacy and genealogy of all the startups and intellectual capital that is spun off” if they didn’t make money on it. In fact, it’s a nightmare to fund something that loses money for you but the concept/technology then goes on to make big money for someone else. It means you had a business that was viable but you funded a team that was unable to execute.

    If Paul is in this to mentor young tech entrepreneurs regardless of their business acumen or business plan, or to fund “crazy” ideas that he thinks might destroy “evil” monopolies, then he’s not an angel or VC. He’s a philanthropist.

    How about this Paul: if News Corp. (a big evil corporation) came to you and wanted to buy out one of the firms you funded at $25,000 for $3 million, would you encourage the founders to take it?

    Get Bought:

    You are absolutely correct that acquisition is the exit strategy on every investor’s mind these days. Bubble 1.0 was fueled by IPOs. Bubble 2.0 is fueled by acquisitions. When Bubble 2.0 bursts, it likely won’t cause a recession because the public markets aren’t affected, so it won’t be as noticable. But lots of companies will disappear when the funding dries up.

    As you said, out of the 1000s of new startups, very few will be acquired. Those that have the best opportunity are those which didn’t take on funding because they can be reasonable with valuation.

    Large corporations (media companies, etc.) have big pockets, but they do not have an endless supply of money. As publicly traded companies, they need to justify the money they spend on acquisitions to shareholders. We haven’t seen any mega-acquisitions like MySpace in the past year. The Bebo and Facebook acquisitions haven’t happened. Maybe they will, but maybe media companies have realized that they can wait this out, refuse to acquire and slowly bleed these unprofitable companies to death. They’ll then be able to swoop in an acquire them in firesales or build their own services. Remember the barrier to entry in Web 2.0 doesn’t exist so if the price isn’t right, there’s no reason not to build it yourself.

33. Mark Murphy
    

    September 3rd, 2006 at 11:37 am

    Skeptic Three, you’ve made an error in your analysis, where you say “Money may not be the only measure of success, but in terms of investing, making a ROI on your investments is.”

    As a statement one might find in a microeconomics textbook, your analysis is perfectly fine. In other words, in general, as measured across all possible investors, “making [an] ROI on your investments” is effectively the only measure of success…that a microeconomics textbook will probably care about. In reality, the only measure of success is “whatever the investors think success is”. Again, on the whole, measured across all investors, that pretty much trends towards ROI.

    However, for any individual investor or small enough investment group (e.g., Y-Combinator), “whatever the investors think success is” might not be purely ROI. For example, many people invest in businesses in part to spend time schmoozing with “the beautiful people”, such as those who focus on Hollywood, the music industry, professional sports, etc. Getting to go to parties and meet Jay-Z, J-Lo, or Jay Cutler (damn, I need a better sports J…) might make them perfectly happy with their investments, even if they aren’t maximizing ROI. You might think they’re idiots. Heck, sometimes *I* think they’re idiots. But, it’s their money and their definition of “success”, so we can’t rightfully complain.

    If Paul Graham and Y-Combinator measure success as a mix of ROI and other criteria, such as knocking a leg out from under a monopolist’s support structure, so be it. You state that “An investor doesn’t care about the ‘legacy and genealogy of all the startups and intellectual capital that is spun off’ if they didn’t make money on it.”…but some investors might, and Paul Graham and Y-Combinator might. That’s their call, and only time (not you and not I) will determine if they’re happy with their approach or not.

34. Alan Wilensky
    

    September 3rd, 2006 at 11:52 am

    Dear Skeptic #3:

    Whether Mr. Graham is an investor or philanthropist can only be revealed at the bottom line of his personal and corporate financial statements. Institutional investors have a distinct calculus for their placements of equity - these funds in various instances might be called failed philanthropists.

    My central point regarding the enumeration of the ycombinator portfolio’s win/loss ratio is that such a model, fostered by a visionary, wealthy, and thoughtful angel investor, lends a quality of ‘breathing space’, for the flourishing of ideas that might not have a chance if left to the wiles of the typical VC.

    I don’t think there is one here that would disagree that acquisition is the penultimate goal of any technology based venture - that or sustainable growth over the long haul, however, I stand by my core premise that there are far too few like Paul Graham and Ycombinator,

    It was great to see my words thoughtfully rreplied to and in quotes……I mean…lil’ ol’ me!

35. Dimitar Vesselinov
    

    September 3rd, 2006 at 12:09 pm

    1999: eyeballs, eyeballs, eyeballs…
    2006: AJAX, AJAX, AJAX…

    More “masterpieces”:
    - create AJAX-enabled podcasts
    - incentivize blogging network effects
    - integrate user-centred ad delivery
    - undefined citizen-media widgets
    - integrate rich-client tagclouds
    - post Cluetrain synergies
    - share standards-compliant folksonomies
    - beta-test A-list life-hacks
    - remix data-driven web services
    - post blogging blogospheres
    http://www.emptybottle.org/bullshit/

    Stop this madness! Solve real problems! There are lots of them… Create useful services!

36. Steve
    

    September 3rd, 2006 at 1:18 pm

    Paul claims that money is not being invented on lame startup companies, but what about the $4 million invested in Groxis? That company must be about 20 sales/marketing people, and 1 engineer that read an intro to clustering.

37. RisingSunofNihon
    

    September 3rd, 2006 at 1:46 pm

    I thought this was a very interesting interview. Though I don’t agree with everything Paul said, I still thought his comments were very helpful for would-be entrepreneurs. It’s nice to see how the other side thinks every once in a while!

38. Skeptic
    

    September 3rd, 2006 at 5:51 pm

    Hey, no fair using my name!

39. Michael Urlocker
    

    September 3rd, 2006 at 6:32 pm

    I agree with part of the premise that Graham communicates: that it is right to start with something users want. But they have to want it enough to allow profitability.

    I think worrying about the business model .. and to be specific, worrying about profitability, is crucial.

    Many so-called market disruptors ignore business basics to their peril. The great challenge in disrupting a market, as in all business, is to ensure that the customer is offered a service or product of value. The only sustainable indicator of meeting such customer needs is profitability.

    My bias is to avoid the following eight traps of disruption, each linked to a struggling or now-dead business:

    * Excessive initial investment
    * Excessive startup losses
    * Using a big company approach in new markets
    * Preventing management learning by betting heavily on a ’sure thing’
    * Counting on ‘educating the market’
    * Focussing too heavily on being first to market
    * Excessive focus on the growth of non-financial metrics
    * Putting a premium on growth instead of profit
    * Focussing on masterminding a new world order or grandiose ecosystem instead of facing the well defined immediate needs of well defined customers.

    Detailed examples of “innovative” companies struggling (or dead) from these traps at:

    http://www.ondisruption.com/my.....tivei.html

40. Mark Devlin
    

    September 3rd, 2006 at 7:37 pm

    I think so much of this comes from the idea that an entrepreneur is someone who “starts a business”. It’s easy to make a product but far more difficult to make a business succeed from creativity to profit.

41. Peter
    

    September 3rd, 2006 at 7:55 pm

    I agree with part of the premise that Graham communicates: that it is right to start with something users want. But they have to want it enough to allow profitability.

    Might just be a matter of definition, but if I come up with a great idea, it alone does not have to be profitable as a business entity - it merely has to be viable as an acquisition offer.

    p.s. where’s the ‘comment preview’ functionality? what good is web 2.0 if i can’t preview my TechCrunch comment, with all its glorious formatting?

42. Trcruncher2
    

    September 3rd, 2006 at 8:15 pm

    @Business2.0

    Not a bad link - where did you find the link to that site? I have never heard of them and I am constantly on the lookout for new start-ups.

    The post regarding team collaboration and the ‘bus’ makes good sense and was a great analogy in my opinion.

43. pdanforth
    

    September 3rd, 2006 at 8:50 pm

    I was surprised Kiko got bought for $250k.

    Not too shabby for a few kids in a garage and a year’s worth of work.

44. J. Jeffryes
    

    September 3rd, 2006 at 9:00 pm

    How do you become a great artist? You paint what you believe in. If you are lucky, you are Picasso. You’re probably not though. But if millions of artists didn’t do this, there never would have been a Picasso.

    The same holds true for startups. It’s cheap enough now that it’s almost trivial to microfund dozens of startups. If most of them fail, and only one succeeds big, you make a profit. Letting them build what they are passionate about makes the big hit more likely. Better to have 50 passionate companies and 1 that hits big than 50 mediocre companies and no hits at all.

45. Bootstrapper
    

    September 3rd, 2006 at 9:58 pm

    I had posted earlier but my post hasn’t gone through. Here’s a key point I wanted to make:

    YCombinator says it invests