Policy for Growth and Innovation

I get asked fairly often now by people in the US government what policy changes I would make to “fix innovation and drive economic growth” [1][2] (for some reason, it’s almost always that exact phrase).

Innovation is obviously important—the US has long been the world’s best exporter of new ideas, and it’d be disastrously bad if that were no longer the case.  Also, I don’t think our society will work very well without economic growth, and innovation is what will drive growth from where we are now.  While it’s true that people are better off in absolute sense than they were a few hundred years ago, most of us are more sensitive to our wealth increasing over short time-scales (i.e. life getting better every year) than how fortunate we are relative to people who lived a long time ago. [3]  Democracy works well in a society with lots of growth, but not a no-growth (i.e. zero-sum) society.  Very low growth and a democracy are a very bad combination.

So here is my answer:

1) Fix education.  We have to fix education in this country.  Yes, it will take a long time to have an effect on output, but that’s not an excuse for continuing not to take serious action.  We currently spend about 4% of the federal budget on education.  The problems with education are well-documented—teachers make far too little, it’s too difficult to fire bad teachers, some cultures don’t value education, etc.  Many of these are easy to fix—pay teachers a lot more in exchange for a change in the tenure rules, for example—and some issues (like cultural ones) are probably going to be very difficult to fix.

Without good education (including continuing education and re-training for older people), we will never have equality of opportunity.  And we will never have enough innovators.

I think it’s most important to fix the broken parts of the current system, but also to decide we need to spend more money on education.

One bright spot is that most of the world now has Internet access at least some of the time and there are truly remarkable resources available online to learn pretty much anything anyone could want.  It amazes me that I can become relatively proficient on any subject I want, for free, from a $50 smartphone nearly anywhere in the world.  There is probably a way to combine online education with real-world mentorship, activity, and group interaction in a way that makes the cost of quality education far lower than it is today.

Spending money on education, unlike most government spending, actually has an ROI—every dollar we spend on it ought to return more dollars in the future.  This is the sort of budget item that people should be able to agree on.  As I wrote in the above-linked post, we will likely need both entitlement spending reductions and revenue increases to make the budget work.

2) Invest in basic research and development.  Government spending on R&D keeps decreasing.  There are certain things that companies are really good at doing; basic research is usually not one of them.  If the government wants more innovation, then it should stop cutting the amount of money it spends producing it.  I think current policy is off by something like an order of magnitude here.

Like education, this is in the category of an “investment”, not an “expense”.

3) Reform immigration.  If talented people want to come start companies or develop new technologies in the US, we should let them.  Turning them away—willfully sending promising new companies to other countries—seems terribly shortsighted.  This will have an immediate positive effect on innovation and GDP growth.  Aside from the obvious and well-documented economic benefits (for high-skilled workers especially, but for immigration more generally), it’s a matter of justice—I don’t think I deserve special rights because I happened to be born here, and I think it’s unfair to discriminate on country of birth.  Other than Native Americans, all of our families are fairly recent immigrants.

We need reasonable limits, of course, but our current limits are not the answer.  On our current path, in the not-very-distant future, we will be begging the people we are currently turning away to come and create value in the US. 

Many people say we don’t need immigration reform because people can work remotely.  While remote working works well for a lot of companies, and I expect it to continue to work better as time goes on, it doesn’t work well for all companies (for example, it would not work for YC), and it shouldn’t be the only option.  It also sends money and competency out of our economy.  The common answer of “let the US companies open overseas offices” always sounds to me like “further slow US economic growth and long-term viability”.

Companies in the Bay Area already largely hire from elsewhere in country—companies are desperate for talented people, and there aren’t enough here to go around.  Even with this, tech wages keep going up, and good people who already live in the Bay Area keep getting jobs.

4) Cheaper housing.  This is not a problem everywhere in the US, but it is in a lot of places.  The cost of housing in SF and the Bay Area in general is horrific.  There just isn’t enough housing here, and so it’s really expensive (obviously, many people make the rational decision not to live here).  Expensive housing drives up the cost of everything else, and a lower cost of living gives people more flexibility (which will hopefully lead to more innovation) and more disposable income (which will hopefully stimulate economic growth).

Homeowners generally vote and want to preserve their property value; non-homeowners generally vote less often.  So efforts to build more housing, or make housing less attractive as an investment, usually fail when they go to a vote.  For example, a recent proposal to allow more house building in SF failed with an atrociously low voter turnout.

In general, I think policy should discourage speculation on real estate and encourage housing to be as inexpensive as possible.  I think most people would do better owning assets that drive growth anyway.

In the Bay Area specifically, I think policy should target an aggressive increase in the housing supply in the next 5 years and undo many of the regulations currently preventing this.

5) Reduce regulation.  I think some regulation is a good thing.  In certain areas (like development of AI) I’d like to see a lot more of it.  But I think it often goes too far—for example, an average of $2.5B and 10 years to bring a new drug to market strikes me as problematic.

Many of the companies I know that are innovating in the physical world struggle with regulatory challenges.  And they’re starting to leave.  The biggest problem, usually, is that they just can’t get clarity out of the massive and slow government bureaucracy.  In 2014, 4 companies that I work with chose to at least partially leave the US for more friendly regulatory environments (3 for regulatory violation or uncertainty, and 1 for concern about export restrictions).  Many more kept their headquarters here but chose somewhere else as their initial market (including, for example, nearly all medical device companies, but also drone companies, nuclear fission companies, pharmaceutical companies, bitcoin companies, etc etc etc).

This is not good.  We live in a global society now, and not all countries are as backward about immigration as we are.  If our best and brightest want to go start companies elsewhere, they will do so. [4] 

I think one interesting way to solve this would be with incentives.  Right now, as I understand it, regulators mostly get “career advancement” by saying “no” to things.  Though it would take a lot of careful thought, it might produce good results if regulators were compensated with some version of equity in what they regulate.

Again, I think some regulation is definitely good.  But the current situation is stifling innovation.

6) Make being a public company not be so terrible.  This point is related to the one above.  I’d hate to run a public company.  Public companies end up with a bunch of short-term stockholders who simultaneously criticize you for missing earnings by a penny this quarter and not making enough long-term investments.

Most companies stop innovating when they go public, because they need very predictable revenue and expenses.

In an ideal world, CEOs would ignore this sort of pressure and make long-term bets.  But the inanity on CNBC is distracting in all sorts of ways—for example, it’s always surprising to me how much employees react to what they hear about their company on the news.

I’ve seen CEOs do the wrong thing because they were scared of how “the market might react” if they do the right thing.  It’s a rare CEO (such as Zuckerberg, Page, Cook, and Bezos) who can stand up to public market investors and make the sort of bets that will produce long term innovation and growth at the expense of short term profits.

There are a lot of changes I’d make to improve the situation.  One easy one is that I’d pay public company directors in all stock and not let them sell it for 5 years.  That will produce a focus on real growth (in the current situation, making $200k a year for four days of work leads to directors focusing on preserving their own jobs).

Another is that I’d encourage exchanges that don’t trade every millisecond.  Liquidity is a good thing; I personally don’t see the value in the level of “fluidity” that we have.  It’s distracting to the companies and sucks up an enormous amount of human attention (one of the things I like about investing in startups is that I only have to think about the price once every 18 months or so).  If I had to take a company public, I’d love to only have my shares priced and traded once every month of quarter.

A third change would be something to incent people to hold shares for long periods of time.  One way to do this would be charge a decent-sized fee on every share traded (and have the fee go to the company); another would be a graduated tax rate that goes from something like 80% for day trades down to 10% for shares held for 5 years. 

Another thing the government could do is just make it much easier to stay private for a long time, though this would have undesirable side effects (especially around increasing wealth inequality).

7) Target a real GDP growth rate.  You build what you measure.  If the government wants more growth, set a target and focus everyone on hitting it.

GDP is not a perfect metric, especially as the software revolution drives cost of goods gets driven lower and lower.  What we really need is a measurement of “total quality of life”.  This will be tough to figure out, but it’s probably worth the time to invent some framework and then measure ourselves against it

There are obviously a lot of other policy changes I think we should make, but on the topics of growth and innovation, these 7 points are what I think are most important.  And I’m confident that if we don’t take action here, we are going to regret it.

[1] Incidentally, innovation does not always drive job growth, even when it drives GDP growth.  The industrial revolution was something of an anomaly in this regard.  I’ll write more about what this means later.

[2] There are a bunch of other policy changes I would make—for example, I’d increase the minimum wage to something like $15 an hour—that are important and somewhat related to this goal but not directly related enough to include here.

[3] While access to knowledge, healthcare, food, water, etc. for people in developed countries is far better now than any time in history, extreme inequality still feels unfair (I’ll save my social rant for another time, but I think the level of extreme poverty that still exists in the world is absolutely atrocious.  Traveling around the developing world is an incredible wake-up call.) 

[4] Sometimes the government people ask “Would you ever move YC out of the US?” with nervous laughter?  I really like it here and I sure hope we don’t, but never say never.

A new team at reddit

Last week, Yishan Wong resigned from reddit.

The reason was a disagreement with the board about a new office (location and amount of money to spend on a lease).  To be clear, though, we didn’t ask or suggest that he resign—he decided to when we didn’t approve the new office plan.

We wish him the best and we’re thankful for the work he’s done to grow reddit more than 5x.

I am delighted to announce the new team we have in place.  Ellen Pao will be stepping up to be interim CEO.  Because of her combination of vision, execution, and leadership, I expect that she’ll do an incredible job.

Alexis Ohanian, who cofounded reddit nine and a half years ago, is returning as full-time executive chairman (he will transition to a part-time partner role at Y Combinator).  He will be responsible for marketing, communications, strategy, and community.

There is a long history of founders returning to companies and doing great things.  Alexis probably knows the reddit community better than anyone else on the planet.  He had the original product vision for the company and I’m excited he’ll get to finish the job.  Founders are able to set the vision for their companies with an authority no one else can.

Dan McComas will become SVP Product.  Dan founded redditgifts, where in addition to building a great product he built a great culture, and has already been an integral part of the reddit team—I look forward to seeing him impact the company more broadly.

Although my 8 days as the CEO of reddit have been sort of fun, I am happy they are coming to a close and I am sure the new team will do a far better job and take reddit to great heights.  It’s interesting to note that during my very brief tenure, reddit added more users than Hacker News has in total.

A Question

I have a question for all the people that use their iPhone or Android to complain on Twitter, Facebook, or reddit about the lack of innovation… 

Or message their friends on WhatsApp or Snapchat about how Silicon Valley only builds toys for rich people in between looking at photos from their family across the world in Dropbox and listening to almost any song they want on Spotify while in an Uber to their Airbnb…

What were you doing 10 years ago?

I think it’s remarkable how much of what people do and use today didn’t exist 10 years ago.  And I hope that 10 years from now, we’re using things that today seem unimaginably fantastic. 

And while I’d like to see us turn up the pace on innovation in the world of atoms, I hope we keep up the current blistering progress in the world of bits.   I’ve really enjoyed working with some of the energy and biotech companies we’ve funded at YC and hope we see a lot more companies like SpaceX and Tesla get created.

There are some things technological innovation alone won’t help with and that we need to address in other ways—for example, I think massive wealth inequality is likely to be the biggest social problem of our time—but it seems to stretch credulity to claim that we have a lack of innovation.

I’m always in awe of the remarkable technological progress we make decade over decade.  I think it’s important to try not to lose your sense of wonder about this.

Board Members

Over the last five years, there has been an incredible shift in leverage from investors to founders.  It’s good in most ways, but bad in an important few.  Founders’ desire for control is good in moderation but hurts companies when it gets taken to extremes. 

Many founders (or at least, many of the founders I talk to) generally want few to no outsiders on their boards.  A popular way to win an A round in the current environment is to not ask for a board seat.  Some investors are happy to do this—it’s certainly easier to write a check and go hang out on the beach than it is to take a board seat.  And this trend is likely to continue, because these new investors are generally willing to pay much higher prices than investors that want to be involved with the company.

But great board members, with a lot of experience seeing companies get built, are the sort of people founders should want thinking about their companies every day.  There are a lot of roles where experience doesn’t matter in a startup, but board members usually aren’t one of them.  Board members are very useful in helping founders think big and hire executives. 

Board members are also a good forcing function to keep the company focused on execution.  In my experience, companies without any outsiders on their boards often have less discipline around operational cadence. 

Finally, board members stick with the company when things really go wrong, in a way that advisors usually don’t.

Board members certainly don't have to be investors.  If founders do choose to take money without an involved board member, I think it’s very important to get an advisor with a significant equity position that will play the role of a board member (or better, actually put them on the board). 

Personally, I think the ideal board structure for most early-stage companies is a 5-member board with 2 founders, 2 investors, and one outsider.  I think a 4-member board with 2 founders, 1 investor and 1 outsider is also good (in practice, the even number is almost never a problem).

As a side note, bad board members are disastrous.  You should check references thoroughly on someone before you let them join your board.

The companies that have had the biggest impact and created the most value have had excellent board members (and executives).  I don’t believe this is a coincidence.

It’s a good idea to keep enough control so that investors can’t fire you (there are a lot of different ways to do this), but beyond that, it’s important to bring in other people and trust them to help you build the company.


Thanks to Mike Moritz for reviewing a draft of this.

Why Silicon Valley Works

I wrote this for the FT, but it's behind a paywall.  Since I wrote it, I feel like it's probably ok for me to post it here.

The natural state of a start-up is to die; most start-ups require multiple miracles in their early days to escape this fate. But the density and breadth of the Silicon Valley network does sometimes let start-ups cheat death.

Silicon Valley works because there is such a high density of people working on start-ups and they are inclined to help each other. Other tech hubs have this as well but this is a case of Metcalfe’s law – the utility of a network is proportional to the square of the number of nodes on the network. Silicon Valley has far more nodes in the network than anywhere else.

One of the biggest misconceptions about us is that you need to have pre-existing connections to get value from the network. Remarkably, you don’t. Silicon Valley is a community of outsiders that have come together. If you build something good, people will help you. It’s standard practice to ask people you’ve just met for help – and as long as you aren’t annoying about it, they usually don’t mind.

I run Y Combinator, an investment firm that gives a small amount of money and a lot of advice to a large number of start-ups. We do this in batches twice a year. Our network works because it has very strong connections. Founders are generally closer to their earliest investors and less close to their later investors. They are closest of all to the peers they were around when struggling to get their start. Therefore, YC founders are typically willing to do anything they can to help another YC founder. Sometimes this is being a customer or investing, sometimes it’s referring a candidate, sometimes it’s advice and investor connections. Often it’s just moral support.

I often ask founders what surprised them most about going through YC, and a common answer is the degree to which YC is a “meta-company”. Yes, the approximately 700 YC companies are all totally independent legal entities – but the connection is so strong that alumni companies get significant benefits from each other. Most YC founders tell us they get more help from other YC founders than all other friends of the company, advisors and investors put together. Most will try a product from another YC company before deciding to use one outside the network.

This seems like the future to me – large groups of independent companies, loosely tied together.

One question I get asked a lot is how to replicate the success of Silicon Valley elsewhere. Most people realise that the world of start-ups benefits tremendously from network effects, and think it sounds impossible to replicate the necessary density anywhere else. But my experience suggests it’s probably doable with a few thousand people and a reasonable amount of capital.

I think you need two other things: an area where many ambitious people care most about start-ups and technology, and a focus on long-term compensation. In most cities, there’s one field that dominates the conversation – finance in New York, politics in DC, movies in LA and start-ups in San Francisco. If start-ups are second fiddle, it will be challenging to replicate the environment of Silicon Valley.

The focus in Silicon Valley on long-term compensation is also important. Nearly everyone wants to get rich but they’re willing to wait to do so. Conspicuous consumption isn’t that cool; not too many people drive Ferraris or talk about their vacation homes. Unlike other cities where people are mostly focused on cash compensation for this year, in Silicon Valley more people talk about equity than salaries (assuming, of course, that they can afford the wildly-out-of-control housing costs, which is probably the biggest weakness here right now). A focus on making a lot of money in the long term at the expense of short-term opportunities is essential to building companies that have a huge impact – they take a long time.


I’m very excited to share that I’m investing in reddit (personally, not via Y Combinator).

I have been a daily reddit user for 9 years—longer than pretty much any other service I still use besides Facebook, Google, and Amazon—and reddit's founders (Steve Huffman and Alexis Ohanian) were in the first YC batch with me.  I was probably in the first dozen people to use the site, and I shudder to imagine the number of hours I have spent there

reddit is an example of something that started out looking like a silly toy for wasting time and has become something very interesting.  It’s been an important community for me over the years—I can find like-minded people that I can’t always find in the real world.  For many people, it’s as important as their real-world communities (and reddit is very powerful when it comes to coordinating real-world action).  There are lots of challenges to address, of course, but I think the reddit team has the opportunity to build something amazing.

In several years, I think reddit could have close to a billion users.

Two other things I’d like to mention.

First, it’s always bothered me that users create so much of the value of sites like reddit but don’t own any of it.  So, the Series B Investors are giving 10% of our shares in this round to the people in the reddit community, and I hope we increase community ownership over time.  We have some creative thoughts about the mechanics of this, but it’ll take us awhile to sort through all the issues.  If it works as we hope, it’s going to be really cool and hopefully a new way to think about community ownership. 

Second, I’m giving the company a proxy on my Series B shares.  reddit will have voting control of the class and thus pretty significant protection against investors screwing it up by forcing an acquisition or blocking a future fundraise or whatever.

Yishan Wong has a big vision for what reddit can be.  I’m excited to watch it play out.  I believe we are still in the early days of importance of online communities, and that reddit will be among the great ones.

Applying to YC

One of the most common misconceptions startups have about applying to Y Combinator is thinking that they are too early or too late.

We have funded companies with only an idea; we’ve funded companies with millions of users, millions of dollars of revenue, and millions of dollars raised.  In nearly every case, the founders tell us they got a lot of value out of Y Combinator, and that the equity we take more than pays for itself.  We continue to add more features to YC to help later-stage companies--i.e., our alumni.  And of course, the YC alumni network is helpful at any stage.

We think we can help companies at any stage up to Series B, probably, and perhaps even later (but it gets difficult to convince later stage investors at that point, even if the founders themselves want to do YC).  We encourage prospective founders to reach out to alumni to get their opinion on if YC would be a good fit.

Even if you haven't gotten in previously, you should apply again.  Many of our successful founders applied multiple times before we funded them (including Drew Houston of Dropbox).

You also don’t need to have a pre-existing relationship with us.  A lot of founders seem to think they need to figure out a way to meet with us or talk to us outside of the application process because VCs traditionally don’t fund companies they meet without an introduction.  This is part of our model; we’re willing to do the work to look at thousands of companies that come to us without an introduction.  In fact, we love doing so—many (perhaps most) of the best companies get started by unknowns.

Stupid Apps and Changing the World

An article came out today in Businessweek about arrogance and Silicon Valley.  I thought it was good, but there was one more point I wanted to make. 

People often accuse people in Silicon Valley of working on things that don’t matter.  Often they’re right.  But many very important things start out looking as if they don’t matter, and so it’s a very bad mistake to dismiss everything that looks trivial.

The problem comes when people building something claim it’s going to change the world when it still looks like a toy.  That just pisses people off.

Facebook, Twitter, reddit, the Internet itself, the iPhone, and on and on and on—most people dismissed these things as incremental or trivial when they first came out.

I have a thought about why.  There’s the famous observation that the value of a network grows as a function of the square of the number of nodes, and also many of these services/products double their userbase every N months, with N decreasing as the service gets more valuable.  So the value/importance of the service grows hyperexponentially.  I’ve never met anyone in my life that has a good intuition for hyperexponential growth—most of us even struggle to comprehend exponential growth.

There is all sorts of emergent behavior as something grows in importance a millionfold in a short period of time.  If some users really love what you’re building, engage with the service or product as an important part of their daily lives, and interesting new behaviors keep emerging as you grow, keep working on it.

As an aside, pay no attention to market predictions—some of the worst predictions in the history of business (a market for 5 computers, a market for 900,000 cell phones) have been the most costly.

There are two time-tested strategies to change the world with technology.  One is to build something that some people love but most people think is a toy; the other is to be hyperambitious and start an electric car company or a rocket company.  Most of the “intermediate” companies, although it would take a separate long post to explain why, end up not having a big impact.

In closing, I have two pieces of advice for the “arrogant fucks” who make the world go round.  One, don’t claim you’re changing the world until you’ve changed it.  Two, ignore the haters and work on whatever you find interesting.  The internet commenters and journalists that say you’re working on something that doesn’t matter are probably not building anything at all themselves.

Uber vs Car Ownership

Taking uberX everywhere is now cheaper for me than owning a car (I have an expensive car, so it's not a super fair comparison, but I still think it's interesting).

I first played around with one of those web calculators and was so surprised by the result I sharpened my pencil and did it myself with more precise numbers.  It was not quite as dramatic as the rough calculation but Uber still wins.  I linked to the spreadsheet below for anyone curious; change the yellow fields to your own numbers if you'd like.

A few notes:

*I live in San Francisco and drive a Tesla Roadster.  It costs about $10 to charge (on average, sometimes I pay peak rates and sometimes not) for about 200 miles of range.

If I can easily take the Caltrain to the south bay (about half the time), then I do, otherwise I drive or take Uber.  My total annual spend on Caltrain is a few hundred dollars.

*My cost per mile is probably lower than most peoples', but is somewhat neutralized by the higher depreciation which is partly due to battery pack degradation.

*Uber may raise the rates on uberX, which could swing my particular calculation back in favor of ownership.

*I used an average cost per mile for uberX of $2, which is a good average for me including time and minimum fares (it's much more on short trips, but a little under $1.50 on long trips).

This of course leaves out the huge intangible of how much nicer it is not to drive and instead work/text/think/whatever.

This calculation is why I think Uber is still undervalued.  The people who say Uber is only worth $4 billion or whatever don't think enough about people like me who will go from spending ~$500 a year on taxis and car service to ~$12,000 now that the experience and cost have reached a tipping point.

Black Swan Seed Rounds

I started seed investing in 2010 (and much more actively in 2012) before becoming a full-time YC partner.  In this period, I invested in about 40 companies.  So far, five of them are in the “really good” category—a current value of ~100x or more, based on the valuation of the last round or last offer.

I’ve been thinking a lot about what these investments have in common, and what about them was different from other investments.  The most striking observation is that, in my experience, the “hot seed rounds” that everyone is fighting to get in are anti-correlated with very successful investments. (It’s probably different for A and B rounds because the best companies often have exponential growth at that point.)  The hotly-competed seed investments I’ve made have underperformed. 

For all of the really good seed investments I’ve made, other investors I respected thought they were bad ideas.  Stripe started before it was cool for very young founders to take on very established industries, and the prevailing thoughts from people I asked about were that it was never going to work (the initial plan was to be a bank) because Patrick knew nothing about the industry.  Teespring got passed on by most investors, saying “It’s just a t-shirt company.”

Right before I invested in Zenefits, a prominent investor told me I didn’t understand the health insurance market at all and that the company was unlikely to survive another 3 months.  When I made this investment, the company was worried about imminently running out of cash.  I almost got talked out of investing by the other investor.

The one major exception is Optimizely—the prevailing sentiment was that Optimizely was going to be great, and it was a competitive seed round.  It was the only high-return company where I had to fight for an allocation—in the other four, I could have put more money in.

There is a general exception to this observation when the founders are already well-known and have impressive track records.  Those seed rounds are almost always competitive.

Note that other investors thinking an investment is bad does not guarantee success.  For the total write-offs I’ve had so far, other investors also told me they were going to be terrible.  Being contrarian and wrong is still bad—you have to be contrarian and right.  I think the only takeaway about what other investors think is that you should ignore it.

Great companies often look like bad ideas at the beginning—at a minimum, if it looks great, the seed round is likely to be overpriced, and there are likely to be a lot of other people starting similar companies.  But even when I attempt to adjust for price, the hot-round investments still have underperformed.

I asked a few other investors about their experiences, and most are roughly similar.  Most of the really big hits never had TechCrunch writing about their super competitive seed round everyone was trying to get in.

I think there are a lot of reasons for this.  A big one is that being good at fundraising has very little to do with running a good company.  Another is that most investors are actually very risk-averse despite what they say, and the great companies look really risky at the seed stage.  And a major third is that it’s just very hard to pick well at the seed stage, and most companies don’t have hot seed rounds, so most successful companies don’t either (though I don’t think this random distribution fully explains the phenomenon).  But in any case, founders shouldn’t worry if their seed round isn’t massively oversubscribed.