October 2005The first Summer Founders Program has just finished. We weresurprised how well it went. Overall only about 10% of startups succeed, but if I had to guess now, I'd predict three or four of the eight startups we funded will make it.Of the startups that needed further funding, I believe all haveeither closed a round or are likely to soon. Two have alreadyturned down (lowball) acquisition offers.We would have been happy if just one of the eight seemed promisingby the end of the summer. What's going on? Did some kind of anomalymake this summer's applicants especially good? We worry about that,but we can't think of one. We'll find out this winter.The whole summer was full of surprises. The best was that the hypothesis we were testing seems to becorrect. Young hackers can start viable companies. This is goodnews for two reasons: (a) it's an encouraging thought, and (b) it means that Y Combinator, which is predicated on the idea, is nothosed.AgeMore precisely, the hypothesis was that success in a startup dependsmainly on how smart and energetic you are, and much less on how oldyou are or how much business experience you have. The results sofar bear this out. The 2005 summer founders ranged in age from 18 to 28 (average 23), and there is no correlation between their agesand how well they're doing.This should not really be surprising. Bill Gates and Michael Dell were both 19 when they started the companies that made them famous.Young founders are not a new phenomenon: the trend began as soonas computers got cheap enough for college kids to afford them.Another of our hypotheses was that you can start a startup on lessmoney than most people think. Other investors were surprised tohear the most we gave any group was $20,000. But we knew it waspossible to start on that little because we started Viaweb on$10,000.And so it proved this summer. Three months' funding is enough toget into second gear. We had a demo day for potential investorsten weeks in, and seven of the eight groups had a prototype readyby that time. One, Reddit, hadalready launched, and were able to give a demo of their live site.A researcher who studied the SFP startups said the one thing they had in common was that they all worked ridiculously hard. Peoplethis age are commonly seen as lazy. I think in some cases it's notso much that they lack the appetite for work, but that the workthey're offered is unappetizing.The experience of the SFP suggests that if you let motivated peopledo real work, they work hard, whatever their age. As one of thefounders said "I'd read that starting a startup consumed your life, but I had no idea what that meant until I did it."I'd feel guilty if I were a boss making people work this hard. Butwe're not these people's bosses. They're working on their ownprojects. And what makes them work is not us but their competitors.Like good athletes, they don't work hard because the coach yellsat them, but because they want to win.We have less power than bosses, and yet the founders work harder than employees. It seems like a win for everyone. The only catchis that we get on average only about 5-7% of the upside, while anemployer gets nearly all of it. (We're counting on it being 5-7%of a much larger number.)As well as working hard, the groups all turned out to be extraordinarilyresponsible. I can't think of a time when one failed to do somethingthey'd promised to, even by being late for an appointment. Thisis another lesson the world has yet to learn. One of the foundersdiscovered that the hardest part of arranging a meeting withexecutives at a big cell phone carrier was getting a rental companyto rent him a car, because he was too young.I think the problem here is much the same as with the apparentlaziness of people this age. They seem lazy because the work they'regiven is pointless, and they act irresponsible because they're notgiven any power. Some of them, anyway. We only have a sample sizeof about twenty, but it seems so far that if you let people in theirearly twenties be their own bosses, they rise to the occasion.MoraleThe summer founders were as a rule very idealistic. They also wanted very much to get rich. These qualities might seem incompatible,but they're not. These guys want to get rich, but they want to doit by changing the world. They wouldn't (well, seven of the eightgroups wouldn't) be interested in making money by speculating instocks. They want to make something people use.I think this makes them more effective as founders. As hard as people will work for money, they'll work harder for a cause. And since success in a startup depends so much on motivation, theparadoxical result is that the people likely to make the most moneyare those who aren't in it just for the money.The founders of Kiko, for example, are working on an Ajax calendar. They want to get rich, but theypay more attention to design than they would if that were theironly motivation. You can tell just by looking at it.I never considered it till this summer, but this might be anotherreason startups run by hackers tend to do better than those run byMBAs. Perhaps it's not just that hackers understand technologybetter, but that they're driven by more powerful motivations.Microsoft, as I've said before, is a dangerously misleading example. Their mean corporate culture only works for monopolies. Google is a better model.Considering that the summer founders are the sharks in this ocean,we were surprised how frightened most of them were of competitors.But now that I think of it, we were just as frightened when westarted Viaweb. For the first year, our initial reaction to news of a competitor was always: we're doomed. Just as a hypochondriacmagnifies his symptoms till he's convinced he has some terribledisease, when you're not used to competitors you magnify them intomonsters.Here's a handy rule for startups: competitors are rarely as dangerousas they seem. Most will self-destruct before you can destroy them.And it certainly doesn't matter how many of them there are, anymore than it matters to the winner of a marathon how many runnersare behind him."It's a crowded market," I remember one founder saying worriedly."Are you the current leader?" I asked."Yes.""Is anyone able to develop software faster than you?""Probably not.""Well, if you're ahead now, and you're the fastest, then you'llstay ahead. What difference does it make how many others thereare?"Another group was worried when they realized they had to rewritetheir software from scratch. I told them it would be a bad signif they didn't. The main function of your initial version is to be rewritten.That's why we advise groups to ignore issues like scalability,internationalization, and heavy-duty security at first. [1] I canimagine an advocate of "best practices" saying these ought to beconsidered from the start. And he'd be right, except that theyinterfere with the primary function of software in a startup: to be a vehicle for experimenting with its own design. Having toretrofit internationalization or scalability is a pain, certainly. The only bigger pain is not needing to, because your initial versionwas too big and rigid to evolve into something users wanted.I suspect this is another reason startups beat big companies.Startups can be irresponsible and release version 1s that are lightenough to evolve. In big companies, all the pressure is in the direction of over-engineering.What Got LearnedOne thing we were curious about this summer was where these groups would need help. That turned out to vary a lot. Some we helpedwith technical advice-- for example, about how to set up an applicationto run on multiple servers. Most we helped with strategy questions,like what to patent, and what to charge for and what to give away.Nearly all wanted advice about dealing with future investors: how much money should they take and what kind of terms should theyexpect?However, all the groups quickly learned how to deal with stuff likepatents and investors. These problems aren't intrinsically difficult,just unfamiliar.It was surprising-- slightly frightening even-- how fast theylearned. The weekend before the demo day for investors, we had a practice session where all the groups gave their presentations. They were all terrible. We tried to explain how to make them better,but we didn't have much hope. So on demo day I told the assembledangels and VCs that these guys were hackers, not MBAs, and so whiletheir software was good, we should not expect slick presentations from them.The groups then proceeded to give fabulously slick presentations. Gone were the mumbling recitations of lists of features. It wasas if they'd spent the past week at acting school. I still don't know how they did it.Perhaps watching each others' presentations helped them see whatthey'd been doing wrong. Just as happens in college, the summer founders learned a lot from one another-- maybe more than theylearned from us. A lot of the problems they face are the same, from dealing with investors to hacking Javascript.I don't want to give the impression there were no problems this summer. A lot went wrong, as usually happens with startups. Onegroup got an "explodingterm-sheet" from some VCs. Pretty much all the groups who haddealings with big companies found that big companies do everythinginfinitely slowly. (This is to be expected. If big companiesweren't incapable, there would be no room for startups to exist.)And of course there were the usual nightmares associated withservers. In short, the disasters this summer were just the usual childhooddiseases. Some of this summer's eight startups will probably die eventually; it would be extraordinary if all eight succeeded. But what kills them will not be dramatic, external threats, but a mundane, internal one: not getting enough done.So far, though, the news is all good. In fact, we were surprisedhow much fun the summer was for us. The main reason was how muchwe liked the founders. They're so earnest and hard-working. Theyseem to like us too. And this illustrates another advantage ofinvesting over hiring: our relationship with them is way better than it would be between a boss and an employee. Y Combinator endsup being more like an older brother than a parent.I was surprised how much time I spent making introductions.Fortunately I discovered that when a startup needed to talk tosomeone, I could usually get to the right person by at most onehop. I remember wondering, how did my friends get to be so eminent?and a second later realizing: shit, I'm forty.Another surprise was that the three-month batch format,which we were forced into by the constraints of the summer, turnedout to be an advantage. When we started Y Combinator, we plannedto invest the way other venture firms do: as proposals came in, we'd evaluate them and decide yes or no. The SFPwas just an experiment to get things started. But it worked sowell that we plan to do all our investing this way, one cycle inthe summer and one in winter. It's more efficient for us, andbetter for the startups too.Several groups said our weekly dinners saved them from a commonproblem afflicting startups: working so hard that one has no sociallife. (I remember that part all too well.) This way, they wereguaranteed a social event at least once a week.IndependenceI've heard Y Combinator described as an "incubator." Actually we'rethe opposite: incubators exert more control than ordinary VCs, andwe make a point of exerting less. Among other things, incubatorsusually make you work in their office-- that's where the word "incubator" comes from. That seems the wrong model. Ifinvestors get too involved, they smother one of the most powerful forces in a startup: the feeling that it's your own company.Incubators were conspicuous failures during the Bubble. There's still debate about whether this was because of the Bubble, or becausethey're a bad idea. My vote is they're a bad idea. I think they fail because they select for the wrong people. When we were startinga startup, we would never have taken funding from an "incubator."We can find office space, thanks; just give us the money. And people with that attitude are the ones likely to succeed in startups.Indeed, one quality all the founders shared this summer was a spiritof independence. I've been wondering about that. Are some peoplejust a lot more independent than others, or would everyone be thisway if they were allowed to?As with most nature/nurture questions, the answer is probably: someof each. But my main conclusion from the summer is that there'smore environment in the mix than most people realize. I could seethat from how the founders' attitudes changed during the summer. Most were emerging from twenty or so years of being toldwhat to do. They seemed a little surprised at having total freedom.But they grew into it really quickly; some of these guys now seemabout four inches taller (metaphorically) than they did at thebeginning of the summer.When we asked the summer founders what surprised them most aboutstarting a company, one said "the most shocking thing is that it worked."It will take more experience to know for sure, but my guess is thata lot of hackers could do this-- that if you put people in a positionof independence, they develop the qualities they need. Throw themoff a cliff, and most will find on the way down that they have wings.The reason this is news to anyone is that the same forces work inthe other direction too. Most hackers are employees, and this moldsyou into someone to whom starting a startup seems impossible assurely as starting a startup molds you into someone who can handleit.If I'm right, "hacker" will mean something different in twenty yearsthan it does now. Increasingly it will mean the people who run thecompany. Y Combinator is just accelerating a process that wouldhave happened anyway. Power is shifting from the people who dealwith money to the people who create technology, and if our experiencethis summer is any guide, this will be a good thing.Notes[1] By heavy-duty security I mean efforts to protect against trulydetermined attackers.The imageshows us, the 2005 summer founders, and Smartleafco-founders Mark Nitzberg and Olin Shivers at the 30-foot table Kate Courteau designed for us. Photo by Alex Lewin.Thanks to Sarah Harlin, Steve Huffman, Jessica Livingston,Zak Stone, and Aaron Swartz for reading drafts of this.
