October 2007(This essay is derived from a keynote at FOWA in October 2007.)There's something interesting happening right now. Startups areundergoing the same transformation that technology does when it becomescheaper.It's a pattern we see over and over in technology. Initiallythere's some device that's very expensive and madein small quantities. Then someone discovers how to make them cheaply; many more get built; and as a result they can be used in new ways.Computers are a familiar example. When I was a kid, computers werebig, expensive machines built one at a time. Now they're a commodity.Now we can stick computers in everything.This pattern is very old. Most of the turningpoints in economic history are instances of it. It happened tosteel in the 1850s, and to power in the 1780s.It happened to cloth manufacture in the thirteenth century, generatingthe wealth that later brought about the Renaissance. Agricultureitself was an instance of this pattern.Now as well as being produced by startups, this patternis happening to startups. It's so cheap to start web startupsthat orders of magnitudes more will be started. If the patternholds true, that should cause dramatic changes.1. Lots of StartupsSo my first prediction about the future of web startups is prettystraightforward: there will be a lot of them. When starting astartup was expensive, you had to get the permission of investorsto do it. Now the only threshold is courage.Even that threshold is getting lower, as people watch others takethe plunge and survive. In the last batch of startups we funded,we had several founders who said they'd thought of applying before,but weren't sure and got jobs instead. It was only after hearingreports of friends who'd done it that they decided to try itthemselves.Starting a startup is hard, but having a 9 to 5 job is hard too,and in some ways a worse kind of hard. In a startup you have lotsof worries, but you don't have that feeling that your life is flyingby like you do in a big company. Plus in a startup you could makemuch more money.As word spreads that startups work, the number may growto a point that would now seem surprising.We now think of it as normal to have a job at a company, but thisis the thinnest of historical veneers. Just two or threelifetimes ago, most people in what are now called industrializedcountries lived by farming. So while it may seem surprising topropose that large numbers of people will change the way they makea living, it would be more surprising if they didn't.2. StandardizationWhen technology makes something dramatically cheaper, standardizationalways follows. When you make things in large volumes you tendto standardize everything that doesn't need to change.At Y Combinator we still only have four people, so we try tostandardize everything. We could hire employees, but we want to beforced to figure out how to scale investing.We often tell startups to release a minimal version one quickly, then let the needs of the users determine what to donext. In essense, let the market design the product. We'vedone the same thing ourselves. We think of the techniques we'redeveloping for dealing with large numbers of startups as likesoftware. Sometimes it literally is software, like Hacker News andour application system.One of the most important things we've been working on standardizingare investment terms. Till now investment terms have beenindividually negotiated.This is a problem for founders, because it makes raising moneytake longer and cost more in legal fees. So as well as using thesame paperwork for every deal we do, we've commissioned genericangel paperwork that all the startups we fund can use for futurerounds.Some investors will still want to cook up their own deal terms.Series A rounds, where you raise a million dollars or more, willbe custom deals for the forseeable future. But I think angel roundswill start to be done mostly with standardized agreements. An angelwho wants to insert a bunch of complicated terms into the agreementis probably not one you want anyway.3. New Attitude to AcquisitionAnother thing I see starting to get standardized is acquisitions.As the volume of startups increases, big companies will start todevelop standardized procedures that make acquisitions littlemore work than hiring someone.Google is the leader here, as in so many areas of technology. Theybuy a lot of startups— more than most people realize, because theyonly announce a fraction of them. And being Google, they'refiguring out how to do it efficiently.One problem they've solved is how to think about acquisitions. Formost companies, acquisitions still carry some stigma of inadequacy.Companies do them because they have to, but there's usually somefeeling they shouldn't have to—that their own programmers shouldbe able to build everything they need.Google's example should cure the rest of the world of this idea.Google has by far the best programmers of any public technologycompany. If they don't have a problem doing acquisitions, theothers should have even less problem. However many Google does,Microsoft should do ten times as many.One reason Google doesn't have a problem with acquisitionsis that they know first-hand the quality of the people they can getthat way. Larry and Sergey only started Google after making therounds of the search engines trying to sell their idea and findingno takers. They've been the guys coming in to visit the bigcompany, so they know who might be sitting across that conferencetable from them.4. Riskier Strategies are PossibleRisk is always proportionate to reward. The way to get really bigreturns is to do things that seem crazy, like starting a new searchengine in 1998, or turning down a billion dollar acquisition offer.This has traditionally been a problem in venture funding. Foundersand investors have different attitudes to risk. Knowing that riskis on average proportionate to reward, investors like risky strategies,while founders, who don't have a big enough sample size to carewhat's true on average, tend to be more conservative.If startups are easy to start, this conflict goes away, becausefounders can start them younger, when it's rational to take morerisk, and can start more startups total in their careers. Whenfounders can do lots of startups, they can start to look at theworld in the same portfolio-optimizing way as investors. And thatmeans the overall amount of wealth created can be greater, becausestrategies can be riskier.5. Younger, Nerdier FoundersIf startups become a cheap commodity, more people will be able tohave them, just as more people could have computers once microprocessorsmade them cheap. And in particular, younger and more technicalfounders will be able to start startups than could before.Back when it cost a lot to start a startup, you had to convinceinvestors to let you do it. And that required very different skillsfrom actually doing the startup. If investors were perfect judges,the two would require exactly the same skills. But unfortunatelymost investors are terrible judges. I know because I see behindthe scenes what an enormous amount of work it takes to raise money,and the amount of selling required in an industry is always inverselyproportional to the judgement of the buyers.Fortunately, if startups get cheaper to start, there's another wayto convince investors. Instead of going to venture capitalistswith a business plan and trying to convince them to fund it, youcan get a product launched on a few tens of thousands of dollarsof seed money from us or your uncle, and approach them with aworking company instead of a plan for one. Then instead ofhaving to seem smooth and confident, you can just point them toAlexa.This way of convincing investors is better suited to hackers, whooften went into technology in part because they felt uncomfortablewith the amount of fakeness required in other fields.6. Startup Hubs Will PersistIt might seem that if startups get cheap to start, it will mean theend of startup hubs like Silicon Valley. If all you need to starta startup is rent money, you should be able to do it anywhere.This is kind of true and kind of false. It's true that you can nowstart a startup anywhere. But you have to do more with astartup than just start it. You have to make it succeed. And thatis more likely to happen in a startup hub.I've thought a lot about this question, and it seems to me theincreasing cheapness of web startups will if anything increase theimportance of startup hubs. The value of startup hubs, like centersfor any kind of business, lies in something very old-fashioned:face to face meetings. No technology in the immediate future willreplace walking down University Ave and running into a friend whotells you how to fix a bug that's been bothering you all weekend,or visiting a friend's startup down the street and ending up in aconversation with one of their investors.The question of whether to be in a startup hub is like the questionof whether to take outside investment. The question is not whetheryou need it, but whether it brings any advantage at all.Because anything that brings an advantage will give your competitorsan advantage over you if they do it and you don't. So if you hearsomeone saying "we don't need to be in Silicon Valley," that useof the word "need" is a sign they're not even thinking about thequestion right.And while startup hubs are as powerful magnets as ever, the increasingcheapness of starting a startup means the particles they're attractingare getting lighter. A startup now can be just a pair of 22 yearold guys. A company like that can move much more easily than onewith 10 people, half of whom have kids.We know because we make people move for Y Combinator, and it doesn'tseem to be a problem. The advantage of being able to work togetherface to face for three months outweighs the inconvenience of moving.Ask anyone who's done it.The mobility of seed-stage startups means that seed funding is anational business. One of the most common emails we get is frompeople asking if we can help them set up a local clone of Y Combinator.But this just wouldn't work. Seed funding isn't regional, just asbig research universities aren't.Is seed funding not merely national, but international? Interestingquestion. There are signs it may be. We've had an ongoingstream of founders from outside the US, and they tend to doparticularly well, because they're all people who were so determinedto succeed that they were willing to move to another country to doit.The more mobile startups get, the harder it would be to start new silicon valleys. If startups are mobile, the best local talent will go to the real Silicon Valley,and all they'll get at the local one will be the people who didn'thave the energy to move.This is not a nationalistic idea, incidentally. It's cities thatcompete, not countries. Atlanta is just as hosed as Munich.7. Better Judgement NeededIf the number of startups increases dramatically, then the peoplewhose job is to judge them are going to have to get better atit. I'm thinking particularly of investors and acquirers. We nowget on the order of 1000 applications a year. What are we goingto do if we get 10,000?That's actually an alarming idea. But we'll figure out some kindof answer. We'll have to. It will probably involve writing somesoftware, but fortunately we can do that.Acquirers will also have to get better at picking winners. They generally do better than investors, because they picklater, when there's more performance to measure. But even at themost advanced acquirers, identifying companies tobuy is extremely ad hoc, and completing the acquisition ofteninvolves a great deal of unneccessary friction.I think acquirers may eventually have chief acquisition officerswho will both identify good acquisitions and make the deals happen.At the moment those two functions are separate. Promising newstartups are often discovered by developers. If someone powerfulenough wants to buy them, the deal is handed over to corp dev guysto negotiate. It would be better if both were combined inone group, headed by someone with a technical background and somevision of what they wanted to accomplish. Maybe in the future bigcompanies will have both a VP of Engineering responsible fortechnology developed in-house, and a CAO responsible for bringingtechnology in from outside.At the moment, there is no one within big companies who gets introuble when they buy a startup for $200 million that they couldhave bought earlier for $20 million. There should start to besomeone who gets in trouble for that.8. College Will ChangeIf the best hackers start their own companies after collegeinstead of getting jobs, that will change what happens in college.Most of these changes will be for the better. I think the experienceof college is warped in a bad way by the expectation that afterwardyou'll be judged by potential employers.One change will be in the meaning of "aftercollege," which will switch from when one graduates from collegeto when one leaves it. If you're starting your own company, whydo you need a degree? We don't encourage people to start startupsduring college, but the best founders are certainlycapable of it. Some of the most successful companies we've fundedwere started by undergrads.I grew up in a time where college degrees seemed really important,so I'm alarmed to be saying things like this, but there's nothingmagical about a degree. There's nothing that magically changesafter you take that last exam. The importance of degrees is duesolely to the administrative needs of large organizations. Thesecan certainly affect your life—it's hard to get into gradschool, or to get a work visa in the US, without an undergraduatedegree—but tests like this will matter less andless.As well as mattering less whether students get degrees, it willalso start to matter less where they go to college. In a startupyou're judged by users, and they don't care where you went tocollege. So in a world of startups, elite universities will playless of a role as gatekeepers. In the US it's a national scandalhow easily children of rich parents game college admissions.But the way this problem ultimately gets solved may not be byreforming the universities but by going around them. We in thetechnology world are used to that sort of solution: you don't beatthe incumbents; you redefine the problem to make them irrelevant.The greatest value of universities is not the brand name or perhapseven the classes so much as the people you meet. Ifit becomes common to start a startup after college, students may starttrying to maximize this. Instead of focusing on gettinginternships at companies they want to work for, they may startto focus on working with other students they want as cofounders.What students do in their classes will change too. Instead oftrying to get good grades to impress future employers, studentswill try to learn things. We're talking about some pretty dramaticchanges here.9. Lots of CompetitorsIf it gets easier to start a startup, it's easier for competitors too. That doesn't erase the advantage ofincreased cheapness, however. You're not all playing a zero-sumgame. There's not some fixed number of startups that can succeed,regardless of how many are started.In fact, I don't think there's any limit to the number of startupsthat could succeed. Startups succeed by creating wealth, which isthe satisfaction of people's desires. And people's desires seemto be effectively infinite, at least in the short term.What the increasing number of startups does mean is that you won'tbe able to sit on a good idea. Other people have your idea, andthey'll be increasingly likely to do something about it.10. Faster AdvancesThere's a good side to that, at least for consumers oftechnology. If people get right to work implementing ideas insteadof sitting on them, technology will evolve faster.Some kinds of innovations happen a company at a time, like thepunctuated equilibrium model of evolution. There are some kindsof ideas that are so threatening that it's hard for big companieseven to think of them. Look at what a hard time Microsoft ishaving discovering web apps. They're like a character in a moviethat everyone in the audience can see something bad is about tohappen to, but who can't see it himself. The big innovationsthat happen a company at a time will obviously happen faster ifthe rate of new companies increases.But in fact there will be a double speed increase. People won'twait as long to act on new ideas, but also those ideas willincreasingly be developed within startups rather than big companies.Which means technology will evolve faster per company as well.Big companies are just not a good place to make things happen fast.I talked recently to a founder whose startup had been acquired bya big company. He was a precise sort of guy, so he'd measured theirproductivity before and after. He counted lines of code, which canbe a dubious measure, but in this case was meaningful because itwas the same group of programmers. He found they were one thirteenthas productive after the acquisition.The company that bought them was not a particularly stupid one.I think what he was measuring was mostly the cost of bigness. Iexperienced this myself, and his number sounds about right. There'ssomething about big companies that just sucks the energy out ofyou.Imagine what all that energy could do if it were put to use. Thereis an enormous latent capacity in the world's hackers that mostpeople don't even realize is there. That's the main reason we doY Combinator: to let loose all this energy by making it easy forhackers to start their own startups.A Series of TubesThe process of starting startups is currently like the plumbing inan old house. The pipes are narrow and twisty, and there are leaksin every joint. In the future this mess will gradually be replacedby a single, huge pipe. The water will still have to get from Ato B, but it will get there faster and without the risk of sprayingout through some random leak.This will change a lot of things for the better. In a big, straightpipe like that, the force of being measured by one's performancewill propagate back through the whole system. Performance is alwaysthe ultimate test, but there are so many kinks in the plumbing nowthat most people are insulated from it most of the time. So youend up with a world in which high school students think they needto get good grades to get into elite colleges, and college studentsthink they need to get good grades to impress employers, withinwhich the employees waste most of their time in political battles,and from which consumers have to buy anyway because there are sofew choices. Imagine if that sequence became a big, straight pipe.Then the effects of being measured by performance would propagateall the way back to high school, flushing out all the arbitrarystuff people are measured by now. That is the future of web startups.Thanks to Brian Oberkirch and Simon Willison for inviting me to speak, and the crew at Carson Systems for making everything run smoothly.
