The Worst Part of YC

We are going to send out YC summer 2014 interview decisions (both yes and no) before 10 pm PDT tonight.

The worst part of our job at YC is rejecting companies.  It leaves me feeling down for many days after our application process.  I experienced plenty of rejection from investors while running my own startup, and I remember well how bad it is.  Starting a startup is such a hard thing that we wish we could help everyone doing so.

Some day, we hope to be able to fund almost all the good startups.  In the meantime, we still have capacity constraints as we figure out how to scale, and that means we’re stuck saying no to potentially good companies.

The best startups often look bad at this stage, and we make mistakes.  We could easily miss something great.  If you’re working on something that users love, you like working on it, and you have a plan for how to build a business around it, then please don’t let us deter you.  (It's sometimes useful to ask friends for an outside perspective on how you're doing.)

Although we had nearly 20% more applications than a year ago, it was really striking how much higher the average quality of applications was for this batch compared to any previous batch.  Most of the partners independently mentioned this to me.

Anyway, to everyone we’re unable to fund: Best of luck, and don’t give up.  We love to see founders and companies reapply—companies that look bad now can look great with 6 months of progress.

Startups, Role Models, Risk, and Y Combinator

The YC application deadline is this Friday, and you can apply here.

People often tell us they think they want to start a company but just aren’t sure, so I thought I’d share some thoughts.  Although it’s true that most people aren’t well suited to start startups, a lot of people that could be great at it are afraid to make the leap.  They look at super successful founders who now seem impossibly impressive.

The first time I met the Airbnb founders they were clearly smart and fairly impressive, but nothing like what they are today.  We met at a coffeeshop in Mountain View, and they were stumbling over their words and talking about how things weren’t going that well.  Now they are taking over the world.  This improvement is not a special case—the same thing happened for the Collison brothers at Stripe, and the founders of Homejoy, Weebly, Coinbase, Teespring, Pebble, and on and on and on.

Here’s the secret: everyone starting a startup for the first time is scared, and everyone feels like a bit of an imposter.  Even the most successful founders doubt themselves and their startups many times in the early days.  But founders improve very quickly.

So when you’re thinking about whether or not you can start a startup, remember that you shouldn’t compare yourself to these people now.  They became much more impressive in the course of running of their startup, and so can you.

Starting a startup is very hard and very painful.  Success usually requires a level of determination and commitment for which most people don’t have a mental model.

For example, when Adora Cheung was starting Homejoy, she would work all day as a cleaner to learn the business, drive an hour back to Mountain View, stay up as late as she could coding, then drive back to San Francisco at ~3am to beat traffic, sleep in her car, and do it again.  She also gave both her apartment and her car to early cleaners so that they could partner up with Homejoy.  We don’t want to delude anyone about what running a startup is like—it’s a rational decision to decide you don’t want to start a startup.  

But there are lots of great reasons to start a company, and a lot of people are willing to accept the pain. The unfortunate situation is when people who want to start startups don’t actually get started—they feel like the great startup founders are too impressive, or they don’t know what to do, or it’s too risky.

It’s really not that risky—in general, few things are as risky as they seem.  And Y Combinator makes it even less risky—we don’t invest much money, but it’s enough to live on (even with a family in most cases).  If the startup doesn’t work out, one of the advantages of the alumni network is that most YC founders find something interesting to do next.

The only thing you have to know how to do is build something people want.  If you can do this, and you are sufficiently relentless, you can probably create more value and have more impact than you could in a regular job.  YC can teach you nearly everything else—in fact, most of what we do is give startups one-on-one advice.

Founders are usually amazed by how much they get done over the three months of YC, and how much they change.  The structure of YC helps startups focus on the few things that matter, and a group of people that mostly start out feeling like they don’t belong transform to some of the best founders out there.

If you’re still on the fence about applying for the Summer 2014 YC batch, we hope you’ll make the leap!  And don’t worry if you’re not as far along as you’d like of if your application isn’t polished enough.  We’ve gotten very good at looking past this, and also it doesn’t hurt you if you don’t get in the first time you apply (we rejected Drew Houston from Dropbox the first time he applied).  We fund companies at all stages, from just the faintest idea to post-Series B. 

Here is some advice other people have written about how to apply:


How to Apply to Y Combinator by Paul Graham

Last Minute Advice for YC Applicants by Garry Tan

Harj Taggar on Quora answering "What is the best advice for a startup applying to Y Combinator?"

Michelle Crosby on her YC experience

Drew Houston's Dropbox Application

Harry Zhang's (Lob YC S13) Advice for YC Applicants 

 Y Combinator Applicant Advice by Zain Shah

What I've Learned From Female Founders So Far

On the whole, I got a great response to my request for feedback about how YC could encourage female founders.  It's clear there are two separate problems: 

1) Some women already starting startups aren't interested in doing Y Combinator.

2) Some women who could be great founders don't start startups. 

I realize it's always a bit ridiculous for a guy to talk about what it's like for female founders, but I'm interested in doing whatever I can to help, because the venture business has definitely been unfair to women.  The women on our team also care deeply about this issue, and in fact can probably do more than I can to address it.

For point #1, one of the most consistent messages was that we need to make it clear that we care about the issue and want to fund more female founders.  So I'll say that now: we want to fund more women.  And we'll keep saying this in the outreach we do.

We want to fund more women because it's the right thing to do, but we're not doing this for diversity's sake alone.  We want to fund more women because we are greedy in the good way--we want to fund the most successful startups, and many of those are going to be founded by women.

Many are also going to be founded by people of different races, different religions, from different countries, straight, gay, in their 20s, or in their 50s.  All of those apply to people in the current YC batch.  In fact, they all apply to the YC partnership as well.  Again, we don't do this for the sake of diversity. We do it because we want to get the best people, whatever they're like.

In the current YC batch, 24% of the companies we funded have one or more female founders, and there will be a lot of companies out of those with the potential to serve as role models.  We hope that as the number of female YC alumni continues to rise, more women will feel YC is a place that supports and respects them.

Another message was that we should do more to make women feel welcome.  Many emails pointed out that our website shows nearly all men; we'll fix that.  We'll also continue to work with our most successful female founders to talk about their experiences and mentor women that could be future founders.  We'll continue to ask women to come speak at dinners. In this batch, two of my four favorite speakers were women (Adora Cheung and Julia Hartz).  And we're working on something to improve the quality of Hacker News comments.

A very common request was for us to have women in the interviews we do before funding companies.  In the last batch, we had a woman in 2 of the 3 interview tracks.  We now have more female YC partners, so for this upcoming batch, we'll have a woman in every track.

Nearly all women who emailed me suggested that we keep the exact same bar for women as for men (anything else wouldn't be fair to the incredible women we fund every batch), but many pointed out that women are often good in different ways and at different things than men--for example, that men and women express confidence differently--and that we should make sure our criteria catch that.

A specific issue that came up is a belief that we look for founders that look like Mark Zuckerberg.  Actually that meme began as a self-deprecating joke. We funded a guy once who looked like Mark but ended up doing badly, and when PG was asked by a reporter how to fool him, he said that apparently this was one way. His real point was that looking like Zuckerberg means nothing--that you can look remarkably like him and still fail miserably.  I think it's more accurate to say we look for founders that have some of the qualities that have made Zuckerberg so successful.

Finally, I heard a lot of support for events like the Female Founders Conference and a belief that they could help change the industry.  And if YC continues to fund more women, many people believe VCs will follow.

For point #2, I think we can do a lot to reach young women earlier and help teach them about startups and coding.  Many women pointed out that you don't have to be a coder to be a founder.  That's definitely true, and it was a good reminder for me personally.  But I think it's good to at least present learning to code as an option worth considering.

As we do more events, we'll continue to reach out to women.  Kat, our director of outreach, Jessica, our founding partner, and I will all specifically work on this.  For example, we're thinking about holding a hackathon later this year.  It'd be great to have a lot of women attend.

We're also going to ask some of our successful female founders to do more outreach.  I believe we have already funded at least one female founder/CEO who will produce a multibillion dollar company. She and others are outstanding role models.

There's lots of work still to do, but we're on it.  I hope other investors will join us.

New RFS -- Breakthrough Technologies

We’d like for Y Combinator to fund more breakthrough technology companies—companies that solve an important problem, have a very long time horizon, and are based on an underlying technological or scientific breakthrough.  Not many people try to start these companies, so starting a company that will require a huge amount of time and money is an automatic competitive advantage.  SpaceX and Tesla are great examples of what is possible.

It used to be the case that governments funded a lot of development of breakthrough technologies.  The bad news is that they have mostly stopped; the good news is that the leverage of technology is such that now small startups can do what used to take the resources of nations. [1]

We think the YC model works well for these companies.  We invest with infinite time horizon and are not afraid of risky-looking companies. [2] We understand software, which will be central to many of these companies.  We are good at getting companies to focus on solving real problems for real customers, and not just developing technology for its own sake.  And our model helps companies figure out a right-sized initial project achievable with a small amount of time and money—great companies get built with a series of small wins that compound over time, and early momentum is critical.  A common failure mode of many ambitious companies is to bite off an initial project that is far too big and expensive.  Finally, we know a lot about raising money, which will be a big part of the challenge for many of these companies as they mature.

Here is a list (we’ll add to it over time) of some areas we’re particularly interested in, but more generally, we’ll pay attention to any area where technology can make the world much better.

Energy.  There is a remarkable correlation between the cost of energy and quality of life.  Throughout history, when the cost of energy has come down a lot (for example, with the steam engine) the quality of life goes up a lot.

Cheap energy would do a huge amount to reduce poverty.  New energy sources could also help the environment, the economy, reduce war, ensure a stable future, make food and water more abundant, and much more.

We believe economics will dominate—new sources must be cheaper than old ones, without subsidies, and be able to scale to global demand.

Nuclear energy can hit the bid, and possibly so can renewables.  But pricing is the first order question.

In addition to generation, we’re also interested in energy storage and transmission.  10x better batteries would enable great new things, as would the ability to easily move energy around. 

AI. Relative to the potential impact, it doesn’t seem like enough smart people are working on this.

A lot of smart people talk about AI with a combination of awe and fear, both for good reasons.  But it feels like it could be one of the dividing lines in the history of technology, where before and after look totally different.

Robotics. Robots will be a major way we get things done in the physical world.  Our definition is pretty broad—for example, we count a self-driving car as a robot.  Robots are how we’ll likely explore space and maybe even the human body.

Biotech. It’s still early, but it seems like we’re finally making real progress hacking biology.  There are so many directions this can go—fighting disease, slowing aging, merging humans and computers, downloading memories, genetic programming, etc.   We are certain that this is going to be a surprising, powerful and controversial field over the next several decades—it feels a little bit like microcomputers in the 1970s. 

Healthcare. Healthcare in the United States is badly broken.  We are getting close to spending 20% of our GDP on healthcare; this is unsustainable.

We’re interested in ways to make healthcare better for less money, not in companies that are able to exploit the system by overcharging.  We’re especially interested in preventative healthcare, as this is probably the highest-leverage way to improve health.  Sensors and data are interesting in lots of different areas, but especially for healthcare.

Food and water. At some point, we are going to have problems with food and water availability.  Technology can almost certainly improve this.  Great innovations are possible—we will need another advancement on the scale of what Norman Borlaug did. 

Education. If we can fix education, we can eventually do everything else on this list.  The first attempts to use technology to fix education have focused on using the Internet to distribute traditional content to a wider audience.  This is good, but the Internet is a fundamentally different medium and capable of much more.

Solutions that combine the mass scale of technology with one-on-one in-person interaction are particularly interesting to us.

This may not require a “breakthrough technology” in the classical sense, but at a minimum it will require very new ways of doing things. 

Internet Infrastructure.  We can’t imagine life without the Internet.  We need to be sure it keeps working—this includes everything from security to free and open communication to infrastructure.  The Internet is a transformative power, and we’re particularly interested in applications that transform the big underpinnings of society (bitcoin is a great example!).  The Internet lets people around the world coordinate action—there are almost certainly important businesses to be built around this concept.

Of particular interest to us are ways to use the Internet to fix government—for example, crowdfunding social services.

An important trend is the API-ification of everything.  As more and more businesses are accessible with a web API, the Internet becomes more and more powerful. 

Levers.  We’re interested in technology that multiplies the efforts and productivity of individuals.  Robots are a great example, but this also includes areas like new programming languages, powered exoskeletons, augmented reality, etc.

Science.  Science seems broken.  The current funding models are broken and favor political skill over scientific genius.  We need new business models for basic research.  There are a lot of areas where scientific developments can have huge commercial applications—materials, neuroscience, climate engineering, and cheaper/better ways to get to space, just to name a few—and we’d love to figure out a way for it to happen.  Bell Labs worked a long time ago but would probably not work in today’s world.

Transportation and housing.  About half of all energy is used on transportation, and people spend a huge amount of time unhappily commuting.  Face-to-face interaction is still really important; people still need to move around.  And housing continues to get more expensive, partially due to difficulties in transportation.  We’re interested in better ways for people to live somewhere nice, work together, and have easier commutes.


As a side note, you shouldn’t start a company just because it’s on this list.  Our hope is that someone already working on a company in one of these areas that might not have otherwise applied to YC will now consider it.  The great majority of the startups we fund will continue to be the sort of Internet and mobile companies we’ve funded in the past, so if that’s what you wanted to do before this post, keep doing it.  Traditional-looking startups like Google and Facebook are obviously as important as any company one could imagine, and clearly are breakthrough technologies. 



[1] To be clear, we are not interested in funding patent trolls.  We only want to fund businesses that actually solve problems and create value. 

[2] Related to long time horizons, if a company needs to raise a billion dollars of funding over the course of its life, that doesn’t scare us—in fact, that’s a plus.

The Founder Visa (again)

Nearly 5 years ago, Paul Graham first proposed the founder visa.  There has been a lot of discussion since, but nothing has happened. 

Maybe he was too ambitious in asking for 10,000 startup visas per year.  So here is a proposal for the US government: please let Y Combinator help allocate up to 100 visas to founders per year.  We’ll continue to take applications for funding from around the world, and work with whatever process you’d like—we just need to be able to get the founders visas quickly (None of the current paths works well enough for this, but a slight reworking of the O1 visa around criteria and timing could be sufficient.).  If the test works with us, you could expand it to other investment firms.  We’re happy to be the beta tester, and we’re confident we’ll prove that it’s a good idea.

100 visas a year is nothing.  But 50 new startups a year could be a huge deal. Many will fail, of course, but one could be the next Google, Facebook, Airbnb, or Dropbox. Though this is almost an immeasurably small number of visas, it could have a measurably large effect on the number of jobs created in the United States.

Startups are what the US is the best in the world at.  We figure out new businesses faster than anyone else.  It would be disastrous if that stopped being the case.

If founders from elsewhere want to pay taxes and create jobs in the US, we should let them.  Other countries are already encouraging this.  If you believe that intelligence and determination are evenly distributed, less than 5% of the best founders are born in the US.  But it’d be great if many of them started their companies here.

This is just a start. We are also in need of broad-based immigration reform, and I believe more immigrants will help our country.  But I also understand that the founder visa got tangled up with full-scale immigration reform, which may take a long time.  This is an easy way to have an immediate effect, and it’s good to move the ball down the field with small, incremental experiments.

Let us show you what we can do with 100 visas.  This will be measurable, and in 5 years, we can tell you exactly how many jobs get created.

Fundraising Mistakes Founders Make

There’s a lot written about what you should do when you raise money, but there hasn’t been as much written about the common mistakes founders make. Here is a list of mistakes I often see: 

• Over-optimizing the process
A lot of founders try to get way too fancy with tricks that they think will help them raise money.  It’s actually quite simple; if you have a good company, you will probably be able to raise money.  You’re better off working to make you company better than working on fundraising jiu jitsu.
 
The process is simple:
  1. Get intros to investors you want to talk to and reach out to them, in parallel, not in series - this is important, see (3).
  2. Explain to them why your company is likely to make them a lot of money. This usually includes the company’s mission, the product, current traction, future vision, the market, the competition, why you’re going to win, what the long-term competitive advantage will be, how you’re going to make money, and the team.
  3. Set up a competitive environment. You'll (unsurprisingly) get the best terms when multiple investors compete with one another for space in your round.  This is the one rule of "the game" that is really important--I'll talk about it more later on.
Some founders try things like carefully timing news articles, casually mentioning to one investor that they'll be having dinner with another investor, claiming their schedule is really packed except for one specific hour, and other tricks - but if you just build a good company, you generally won’t need to.
 
Many little things simply don't matter very much--for example, the "signal" sent when an early investor chooses not to participate in a later round. If the company is doing well stuff like this is easily overlooked, and if the company's not doing it will struggle to raise money anyway.
 
Unless you do it perfectly, game-playing will hurt you with most good investors. And you should be trustworthy and honest no matter what. Investors won't back you if they can't trust you.
 
• Over-optimizing the terms
Startups are usually a pass-fail course -- either you succeed or you don't.  If you fail, maybe you get acqui-hired, but that's happening less frequently and is usually little better than just getting a job at the acquiring company instead.
 
The important thing is to get good investors, clean terms, and not spend too much time fundraising. The biggest problem comes from chasing high valuations. Contrary to what many people think, at YC we encourage companies to seek out reasonable valuations. Valuations are something quantitative for founders to measure themselves on, and there are lots of investors willing to pay high prices, so they don’t always listen. But I’ll say it again: trying to get really high valuations is a mistake.

If you’re clearly in a position of leverage, it’s fine to push for a high valuation, but don’t jerk investors around. Just say what you want and don’t get into a lot of back and forth or term complexity. Also remember that very high valuations often push out good investors.
 
And don’t forget the prime directive of fundraising strategy: set things up so that you never do a down round. The badness of a down round is difficult to overstate; in fact, the threat of that is the best reason not to take a super high price when you’re offered one.  If you raise at such a price, everything has to go perfectly in order for your next round to be an up one.
 
• Failing to create a competitive environment
Ok, here is the one part of the game I really believe is critical.  You generally need to set up a competitive environment to get a good outcome in fundraising (or, for that matter, any big deal).
 
The hard part is getting the first offer. Once you have this, you have the leverage -- if other investors don’t act fast, you have an offer you can take, and they risk missing a potentially great opportunity (and maybe looking stupid to their partners, etc etc.) Until then, they can procrastinate and wait as long as they want. It’s remarkable how long it can take the first offer to come in, and how quickly the next ten can materialize.
 
So sometimes you have the hack the process a little bit to get this first offer. The best way is to find someone who loves what you’re doing and is willing to act. Although it’s ok to use that offer to get others, you should be nice to anyone willing to act first by prioritizing their offer, finding a way to get them into the round even if someone else leads it, etc.
 
There are a lot of other tactics for this that I should write a separate post on at some point.
 
Beware, though, that saying things like “our round is closing really fast” when you have no offers usually backfires. Investors talk and will call your bluff.
 
When you have a good competitive environment the leverage shifts to you - you will be astonished at how much things change. Firms that previously couldn’t meet you for three weeks will suddenly be able to schedule full partner meetings on a Sunday. And when multiple bidders really want to invest, a lot of the "non-negotiable" terms like 20% ownership and board seats go away.
 
• Coming across as arrogant, antagonistic, disrespectful, etc.
Somehow, a myth got started that investors like this and nerdy founders sometimes put on an affectation.  Don’t do it.  Be respectful (which includes things like not asking investors to make a decision after a first meeting unless you really are about to close your round).
 
Remember that investors are people too. They want to feel loved. The first time I raised money, I was hesitant to tell the investors I really liked that I really liked them because I thought I was giving up leverage. But it turns out telling the investors you really like that you especially want to work with them makes them more positively inclined to you, not less.
 
• Not hearing no
Investors don’t want to kill option value; founders are optimistic people.  This leads to investors saying a very nice version of "no" and founders hearing "with just a few more conversations, I may get to a yes."  Anything other than a term sheet is a "no", and all the reasons don’t matter.  Move on and talk to other investors.
 
• Not having a lead investor
A lot of founders put together party rounds comprised of dozens of investors and congratulate themselves that no single investor has much power over them.  But in practice investors have little power over companies that are doing well anyway, and what they actually have is no investor that is super invested in their success.
 
It turns out it’s really valuable to have one investor that you meet with every month and report progress to. This forcing function creates an operational cadence in the company that is a big net positive. It’s remarkable to me how much more frequently the party round companies go off into the weeds.
 
• Pitching poorly
A lot of founders get caught up in trying to follow a perfect template, and drone on and on about their competitors, the market evolution, etc.  They’re bored and it shows.
 
The way to pitch well is to focus on the parts of the business that truly excite you. That will shine through, and it will get the investors excited. Conveying your passion for the business is almost as important as what you say, and it’s almost impossible to fake.
 
Even if you’re an introvert, it will usually come through to a sophisticated investor. So start with the parts you’re really excited about.
 
Investors want to hear a good story, and that includes things like how you decided to work on this idea, why it matters, how you met your cofounders, etc. So don’t leave those parts out of the pitch.
 
Also, remember that smart investors are looking for the really big hits. So don’t do obviously dumb things like talk about potential acquirers in a seed round pitch - that will suggest you’re not trying to build a really big company.

• Not reference-checking major investors
Great investors can add a huge amount of value; bad investors can make your life miserable.  Before signing up to work with someone for the better part of a decade, spend an hour calling founders they have worked with to get a sense of what's in store for you.
 
• Lacking a clear vision
If you don’t seem to have any strong feelings or conviction, and you agree with every suggestion the investor makes about your business, you'll risk coming across as lacking a clear vision.  You should always listen to what someone smart has to say, but you should be firm on the things you really believe.
 
Founders with a clear vision can usually explain what they’re doing and why it matters in just a handful of words. Clear vision also usually entails at least one big new idea. Even if it’s a familiar problem, there should be something important the investor hasn’t heard before.
 
It’s ok to have some big unknowns, of course. You’re not expected to have all the answers, but you should have clear theses to start with.
 
• Not knowing key metrics
There are two questions I really look at in early stage investments:
  1. Does the team know what to do?
  2. Can the team do it?
The first question is addressed by the bullet point above.  The second is addressed by showing that the team cares about operational quality.  I’ve found that teams that execute well always know their numbers (or current status if in R+D mode) cold, and that it’s one of the best predictors of execution quality.  It’s surprising how many companies pitch investors without knowing this information.

AI

Yesterday at lunch a friend asked me what tech trend he should pay attention to but was probably ignoring.

Without thinking much I said “artificial intelligence”, but having thought about that a bit more, I think it’s probably right.
 
To be clear, AI (under the common scientific definition) likely won’t work. You can say that about any new technology, and it’s a generally correct statement. But I think most people are far too pessimistic about its chances - AI has not worked for so long that it’s acquired a bad reputation. CS professors mention it with a smirk. Neural networks failed the first time around, the logic goes, and so they won’t work this time either.
 
But artificial general intelligence might work, and if it does, it will be the biggest development in technology ever.

I’d argue we’ve gotten closer in lots of specific domains - for example, computers are now better than humans at lots of impressive things like playing chess and flying airplanes. But rather than call these examples of AIs, we just say that they weren’t really that hard in the first place.  And to be fair, none of these really feel anything like a computer that can think like a human.
 
There are a number of private (or recently acquired) companies, plus some large public ones, that are making impressive progress towards artificial general intelligence, but the good ones are very secretive about it.

There are certainly some reasons to be optimistic. Andrew Ng, who worked or works on Google’s AI, has said that he believes learning comes from a single algorithm - the part of your brain that processes input from your ears is also capable of learning to process input from your eyes. If we can just figure out this one general-purpose algorithm, programs may be able to learn general-purpose things.
 
There have been promising early results published from this sort of work, but because the brain is such a complex system so dependent on emergent behavior it’s difficult to say how close to the goal we really are. We understand how individual neurons work pretty well, and it’s possible that’s all we need to know to model how intelligence works. But the emergent behavior of 100 billion of them working together on the same principles gets extraordinarily complex, and difficult to model in software. Or, as Nick Sivo says, "it's like reverse engineering the latest Intel processor with only the basic knowledge of how a transistor works."  It’s also possible that there’s some other phenomenon responsible for intelligence, and the people working on this are on the wrong track.

The biggest question for me is not about artificial intelligence, but instead about artificial consciousness, or creativity, or desire, or whatever you want to call it. I am quite confident that we’ll be able to make computer programs that perform specific complex tasks very well. But how do we make a computer program that decides what it wants to do? How do we make a computer decide to care on its own about learning to drive a car? Or write a novel?
 
It’s possible that this sort of creativity will be an emergent property of learning in some non-intuitive way. Something happened in the course of evolution to make the human brain different from the reptile brain, which is closer to a computer that plays pong. (I originally was going to say a computer that plays chess, but computers play chess with no intuition or instinct--they just search a gigantic solution space very quickly.)  I haven’t heard good theories for how current AI projects are going to be like humans in this regard.

And maybe we don't want to build machines that are concious in this sense.  The most positive outcome I can think of is one where computers get really good at doing, and humans get really good at thinking.  If we never figure out how to make computers creative, then there will be a very natural division of labor between man and machine.

The Engineer Crunch

For most startups in the bay area, the engineer crunch is a bigger problem than the Series A crunch (this somewhat applies to designers as well, but most startups need far more developers than designers). The difference in difficulty between hiring developers and hiring everyone else is remarkable--I frequently hear startups say that for a non-engineering position they can find multiple great candidates without really looking but can't find a single great candidate for an engineering role no matter how hard they look. 

Sometimes this difficulty is self-inflicted.
 
First, of all the canonical terrible advice investors give, being cheap with equity grants is among the worst. I’m not quite sure why so many investors (and some founders) get this so wrong, but when startups complain about being unable to hire engineers and in the next breath tell me they are offering 0.1% to 0.2% as a very early stage company, I lose a lot of sympathy fast.
 
Granting equity should be easy to do. If someone performs and earns their grant over four years, they are likely to increase the value of the company far more than the 1% or whatever you give them. If you’ve made a hiring mistake, you ought to fire them well before they hit their cliff anyway.
 
I have never seen a startup regret being generous with equity for their early employees. I have seen a lot of failed startups proud of how well they managed their option pool budgeting.
 
For most engineers, this is as much about fairness and feeling valued as it is about the money. And of course, if people are going to turn down the certainty of a huge salary at Google, they should get a reward for taking that risk.
 
On the positive side, average equity grants for engineers at early stage companies seem to be moving up, but still not as much as they should given the supply/demand mechanics.
 
Second, I've noticed that mission-oriented companies have a much easier time recruiting engineers. It’s a cliché that great engineers want to change the world, but it’s generally true. If the best part of your recruiting pitch is about how much money the company is going to make, you’ll have a harder time recruiting talent than if you can talk about why it’s so critical for the world that your startup fulfills its mission. That said, if you’re the 17th food delivery startup, don’t make up some story about how you’re going to change the world--it won’t work.  You can still find ways to hire great people, but an embellished mission isn't one of them.
 
Great hackers also want the opportunity to work with really smart people and the opportunity to work on interesting problems, and the nature of mission-oriented companies is such that they usually end up offering these as well.
 
If you are not a mission-oriented company, then I think the best strategy is to think about how to make do with a much smaller engineering team than you might have originally wanted. Teams of two or three engineers can accomplish amazing things, and there are plenty of great businesses that need small engineering teams and very large operations/sales teams. Also, in this case, you pretty much have to have a hacker cofounder, because hiring good developers will be so hard.
 
Third, if you’re going to recruit outside of your network (usually a mistake, but sometimes there are truly no other options), focus on recruiting outside of the valley. There are great hackers all over the country, and many of them can be talked into moving to the valley. In fact, probably less than 5% of the best hackers are even in the United States. [1]

Finally, most founders are not willing to spend the time it takes to source engineering candidates and convince them to come interview.  You can't outsource this to a recruiter until the company is fairly well-established--you have to do it yourself.
 
[1] Every time someone from the government asks me what they can do to help startups, I always say a version of “The only thing you need to do is fix immigration for founders and engineers. This will likely have far more of an impact than all of the government innovation programs put together.”

Anonymity

I, like everyone else in Silicon Valley, downloaded Secret last week.  It's incredibly well done, certainly the best yet of any of the gossip/anonymous apps.

Unlike most others, I deleted it, and have thus far resisted reinstalling it (which has been tough!).  Unlike Facebook or Twitter, I felt worse--though entertained--after each use.  At the point I deleted it, three of my friends had been on the receiving end of super nasty comments.

I've often thought about the need for an anonymous social network to go along with the fully public and the friends-only ones.  But I can't figure out a way to stop an anonymous network from decaying into a Mean Girls-style burn book.  If I were running Secret, my number one focus would be to kill every comment about a specific person or company.  If Secret becomes more of a confessional than a burn-book, it can probably thrive.

Anonymity breeds meanness--the Internet has proven this time and time again.  People are willing to say nice or neutral things with their name attached--they need anonymity for mean things and things they are embarrassed about.  In fact, the closer to real identity internet forums get, the less they seem to decay.  Anonymous social networks have been (thus far, anyway) in the category of services that get worse as they get bigger--unlike services like Facebook or Twitter that get better as they get bigger.

People love gossip until it's about themselves.  My prediction for Secret is that it gets very popular (like the previous gossip services) and then eventually the rancor gets untenably bad and people stop using it (like the previous gossip services).  But until we reach that point, I assume we'll see some really nasty things that people can't stop reading.

Technology and wealth inequality

Thanks to technology, people can create more wealth now than ever before, and in twenty years they’ll be able to create more wealth than they can today.  Even though this leads to more total wealth, it skews it toward fewer people.  This disparity has probably been growing since the beginning of technology, in the broadest sense of the word.

Technology makes wealth inequality worse by giving people leverage and compounding differences in ability and amount of work.  It also often replaces human jobs with machines.  A long time ago, differences in ability and work ethic had a linear effect on wealth; now it’s exponential. [1] Technology leads to increasing wealth inequality for lots of other reasons, too—for example, it makes it much easier to reach large audiences all at once, and a great product can be sold immediately worldwide instead of in just one area.

Without intervention, technology will probably lead to an untenable disparity—so we probably need some amount of intervention.  Technology also increases the total wealth in a way that mostly benefits everyone, but at some point the disparity just feels so unfair it doesn’t matter.

Wealth inequality today in the United States is extreme and growing, and we talk about it a lot when someone throws a brick through the window of a Google bus.  Lots of smart people have already written about this, but here are two images to quickly show what the skew looks like: 


[0]

As the following table shows, wealth inequality has been growing in America for some time, not just the last few years.  It’s noticeable between the top 20% and bottom 80%, and particularly noticeable between the top 1% and bottom 99%.

And here is a graph that shows the income share of the top 1% over time:

The best thing one can probably say about this widening inequality is that it means we are making technological progress—if it were not happening, something would be going wrong with innovation.  But it’s a problem for obvious reasons (and the traditional endings to extreme wealth inequality in a society are never good).

We are becoming a nation of haves and have-nots—of prosperous San Francisco vs. bankrupt Detroit.  In San Francisco, the average house costs around $1mm.  In Detroit, the average house costs less than a Chevy Malibu made there. [2] And yet, I’d view a $1mm house in San Francisco as a better investment than 20 $50k houses in Detroit.  As the relentless march of technology continues, whole classes of jobs lost are never coming back, and cities dependent on those lost jobs are in bad shape. [3]

This widening wealth divide is happening at all levels—people, companies, and countries.  And either it will keep going, or innovation will stop.

But it feels really unfair.  People seem to be more sensitive to relative economic status than absolute.  So even if people are much better off being poor today than king 500 years ago, most people compare themselves to the richest people today, and not the richest people from the past.

And importantly, it really is unfair.  Trying to live on minimum wage in the United States is atrocious (http://www.forbes.com/sites/laurashin/2013/07/18/why-mcdonalds-employee-budget-has-everyone-up-in-arms/).  That budget, incidentally, assumes that the worker is working two jobs.  Even though they’re outputting less value, that person is certainly working harder than I am.  We should do more to help people like this.

Real minimum wage has declined, failing to track real averages wages and massively failing to track the wages of the top 1%.

In a world where ideas and networks are what matter, and manufacturing costs trend towards zero, we are going to have to get comfortable with a smaller and smaller number of people creating more and more of the wealth.   And we need a new solution for the people not creating most of the wealth—many of the minimum wage jobs are going to get innovated away anyway.

There are no obvious/easy solutions, or this would all be resolved.  I don’t have any great answers, so I’ll just throw out some thoughts.

We should assume that computers will replace effectively all manufacturing, and also most “rote work” of any kind.  So we have to figure out what humans are better at than computers.  If really great AI comes along, all bets are off, but at least for now, humans still have the market cornered on new ideas.   In an ideal world, we’d divide labor among humans and computer so that we can both focus on what we’re good at. 

There is reason to be optimistic.   When the steam engine came along, a lot of people lost their manual labor jobs.  But they found other things to do.  And when factories came along, the picture looked much worse.   And yet, again, we found new kinds of jobs.  This time around, we may see lots more programmers and startups.

Better education—in the right areas—is probably the best way to solve this.  I am skeptical of many current education startups, but I do believe this is a solvable problem.  A rapid change in what and how we teach people is critical—if everything is changing, we cannot keep the same model for education and expect it to continue to work.  If large classes of jobs get eliminated, hopefully we can teach people new skills and encourage them to do new things. 

Education, unlike a lot of other government spending, is actually an investment—we ought to get an ROI on it in terms of increased GDP (but of course it takes a long time to pay back). 

However, if we cannot find a new kind of work for billions of people, we’ll be faced with a new idle class.  The obvious conclusion is that the government will just have to give these people money, and there’s been increasing talk about a “basic income”—i.e, any adult who wanted it could have, say, $15,000 a year.

You can run the numbers in a way that sort of makes sense—if we did this for every adult in the US, it’d be about $3.5 trillion a year, or a little more than 20% of our GDP.  However, we’d knock out a lot of existing entitlement spending, maybe 10% of GDP.  And we’d probably phase it out for people making over a certain threshold, which could cut it substantially. 

There are benefits to this—we’d end up helping truly poor people more and middle class people less, and we’d presumably cut a ton of government bureaucracy.  We could perhaps end poverty overnight (although, no doubt, anything like this would cause prices to rise).  And likely most of this money would be spent, providing some boost to the economy.  We could require 10 hours a week of work for the government, or not.  A big problem with this strategy is that I don’t think it’ll do much to address the feeling of inequality.

Many people have a visceral dislike to the idea of giving away money (though I think some redistribution of wealth is required to reasonably equalize opportunity), and certainly the default worry is that people would just sit around and waste time on the Internet.  But maybe, if everyone knew they had a safety net, we’d get more startups, or more new research, or more novels.  Even if only a small percentage of people were productive, in a world where some people create 10,000x more value than others, that’d be ok.  The main point I’m trying to make is that we’re likely going to have to do something new and uncomfortable, and we should be open to any new ideas.

But this still doesn’t address the fundamental issue—I believe most people want to be productive.  And I think figuring out a much better way to teach a lot more people about technology is likely the best way to make that happen.



Thanks to Nick Sivo for reading a draft of this.

Follow me on Twitter here: http://twitter.com/sama


[0] http://www.youtube.com/watch?v=QPKKQnijnsM

[1] There are lots of other significant factors that cause wealth inequality—for example, having money makes it easier to make more money—but technology is an important and often-overlooked piece

[2] http://www.huffingtonpost.com/2012/07/20/home-cost_n_1690109.html

[3] I was recently in Detroit and was curious to see some of the neighborhoods where you can buy houses for $10-20k.  Here are some pictures: