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.

Net neutrality

When there is a structural reason consumers don’t have freedom of choice, and the free market can’t work, consumers need minimal protection from the government so that they don’t get abused. 

We need protection from the cable companies to keep the Internet fair and open.

I think that most people misunderstand the net neutrality issue; the Internet backbone isn’t neutral anyway.  But that’s ok; there are multiple paths to traverse it. 

This is not the case for the “last mile”.  Consumers often can only buy Internet access from a single provider; there is no choice.  These providers would like to be able to make some traffic more equal than others and accept payment for it. [1]  This isn’t allowed for voice, and it shouldn’t be allowed for data. 

Municipalities, often for good reason, gave these edge providers a monopoly (the bad kind of monopoly where consumers can’t choose to leave) and often used tax dollars to fund the development.  At this point, the Internet is a public service and fair access should be a basic right.

I would love to see a world where the companies that own last-mile infrastructure are required to lease the lines to any ISP the end consumer wants; this would create a competitive market and mostly eliminate the problem. [2]

The Internet has been the great bright spot in US innovation in the last decade.  It’s mostly been a free and open platform, where anyone can get something started.  When the great companies start, they often look like very fragile projects.  Any additional barriers, however small, could easily have stopped Google or Facebook from getting going.

I have met with the Chairman of the FCC, Tom Wheeler, and I believe he is a good actor who wants to do the right thing.  But he is fighting against very powerful lobbyists and large companies that want to disrupt the freedom of the Internet.  We should help him defend it.

As long as consumers don’t have freedom of choice, last-mile traffic discrimination should be per se illegal.  Please go to fcc.gov and file in support of this by tomorrow.  Alexis Ohanian will be filing on behalf of Y Combinator shortly.

[1] Unpaid prioritization is sometimes necessary; if everyone in a neighborhood is trying to stream 4k video, something is going to get prioritized.

[2] One reason wireless Internet is good that is that it doesn’t face the last-mile challenge; consumers can choose among Verizon, ATT, Sprint, etc.

The Economy

I wrote a post a couple of weeks ago in which I said macroeconomic collapse “may happen” and a few friends asked me why.  To be clear, I don’t think it’s the likely outcome—I think we’ll find a way to address our challenges.  But here is what some of the challenges are.

Most of these issues would be not so bad by themselves; the problem is that we have all of them in aggregate.

1)   US GDP growth in real dollars is low (and trending down).  It was -2.9% for Q1 2014 after the second official revision [1].  If it’s down again for Q2, we’ll be in a recession.

(I wrote about this in more detail here.)

2)   Government debt is high.  In fact, it’s quietly crossed over 100% of GDP for the first time since post-World War II.  Debt like this is maybe ok if the economy is growing fast, but ours is not.  And given demographic headwinds, etc., debt levels are likely to face further challenges.  Here is a graph of our government debt to GDP. [2]

3)   Government spending is high. Here are graphs of total government spending and federal spending as a share of GDP. [3] Total government spending has risen from about 8% of GDP to above 40% of GDP.  Spending on social support programs has grown the fastest.  Defense spending has been on a reasonable decline since WWII.  Personally, I think that current levels of social support spending are ok (though maybe the spending should be distributed differently), and we should probably do more.  But I think we need to plan for it.  In addition to thinking about new sorts of jobs to replace lost jobs that aren’t coming back, we should probably think about things like some version of a basic income.  I'm not sure it's the optimal solution (in fact, I have a strong intuitive bias against it) but I can't come up with a better suggestion, and I think it would probably lead to less waste than current social safety net systems.


4)   Interest rates are low—in fact, we’ve been near zero for 5 years, and on a steady trajectory down for 30.  This is historically highly unusual.   In fact, with quantitative easing, rates are really less than zero (and they are officially negative in Europe).  On the positive side, but as you’d expect with near-zero rates, US equities are at record levels.

5)   Personal savings rates are low.

On the other hand, corporate savings rates are high.  US corporations hold 2.3x as much cash as they held 20 years ago, after adjusting for inflation.  Individuals aren’t saving as much, and companies aren’t investing as much.

As I said at the beginning, all of this interrelates.  Any one data point could be fine in isolation, but if, for example, interest rates are zero (or government spending is high), you’d like to see growth be high because people should be borrowing money and investing it.

I think that startups and venture capital will continue to do well.  Most investors don’t want to hold cash, for obvious reasons, and so they’re looking for high-growth places to invest.  But I’m a little unsure how much the startup world and the rest of the economy can decouple.

To reiterate, I think we’ll find a way through these economic challenges.  But I think it’s important we not ignore it and pretend it will magically get better, which seems to be the current plan.  Personally, I think that innovation and new technology is what will save us.

We need to get back to natural economic growth.  The US has been very fortunate to have a long history of growth—we had roughly 100 years of territory expansion and then roughly 100 years of incredible technological innovation.  I think the path from our troubles will involve finding a way for economic growth to continue.


[1] http://blogs.wsj.com/economics/2014/06/25/economists-react-to-2-9-q1-gdp-revision-different-shades-of-nasty/

[2] http://useconomy.about.com/od/usdebtanddeficit/a/National-Debt-by-Year.htm

[3] http://fivethirtyeight.blogs.nytimes.com/2013/01/16/what-is-driving-growth-in-government-spending/