Paul Graham

Money and Wealth in Startups
If you wanted to get rich, how would you do it?
Startups are not magic.
Wealth is not the same thing as money.
Money is a side effect of specialization.
Wealth is stuff we want: food, clothes, houses, cars.
The Pie Fallacy. Wealth has been getting created and destroyed
Craftsmen: programmers.
Wealth can be created without being sold: open source.
Jobs: group of people working together to do something people want.
Working Harder: Companies are not set up to reward people effort.
Measurement and Leverage
Be part of a small group working on a hard problem.
Smallness = Measurement
Technology = Leverage
Entry Barriers: how hard would this be for someone else to develop?
The Catch: Startups, like mosquitos, tend to be an all-or-nothing proposition.
How do you get bought? Being profitable. Get users.
Startups try to solve problems that users care about.
Wealth and Power
The first rule of law: allowing those who made a lot of money to keep it.
Conclusion: If you have two choices, choose the harder.

How to Get Startup Ideas
The way to get startup ideas is not to try to think of startup ideas. It’s to look for problems, preferably problems you have yourself.

The very best startup ideas tend to have three things in common: they’re something the founders themselves want, that they themselves can build, and that few others realize are worth doing. Microsoft, Apple, Yahoo, Google, and Facebook all began this way.

Problems to Solve
Occasionally it’s obvious from the beginning when there’s a path out of the initial niche.
So if you can’t predict whether there’s a path out of an idea, how do you choose between ideas? The truth is disappointing but interesting: if you’re the right sort of person, you have the right sort of hunches. If you’re at the leading edge of a field that’s changing fast, when you have a hunch that something is worth doing, you’re more likely to be right.

Live in the future, then build what’s missing.
Drew Houston realizes he’s forgotten his USB stick and thinks “I really need to make my files live online.” Dropbox.

Noticing
Once you’re living in the future in some respect, the way to notice startup ideas is to look for things that seem to be missing.

School
Entrepreneurship is something you learn best by doing it
Instead of taking a class on entrepreneurship you’re better off taking a class on, say, genetics. Or better still, go work for a biotech company.
Produce organic ideas with organic teams.

Competitors
You don’t need to worry about entering a “crowded market” so long as you have a thesis about what everyone else in it is overlooking.
A crowded market is actually a good sign, because it means both that there’s demand and that none of the existing solutions are good enough.

Organic
Live in the future and build what seems interesting. Strange as it sounds, that’s the real recipe.

AirBnB
Email exchange between VC and founder´s hustler.

Future of startup funding
Less investors to allow more control in founder`s vision.

Organic Startup Ideas
The best way to come up with startup ideas is to ask yourself the question: what do you wish someone would make for you?
There are two types of startup ideas: those that grow organically out of your own life, and those that you decide, from afar, are going to be necessary to some class of users other than you.
The most successful startups seem to be closer to the Apple type
There’s nothing more valuable than an unmet need that is just becoming fixable. If you find something broken that you can fix for a lot of people, you’ve found a gold mine. As with an actual gold mine, you still have to work hard to get the gold out of it. But at least you know where the seam is, and that’s the hard part.

How to Be an Angel Investor
Angel investors often syndicate deals, which means they join together to invest on the same terms. In a syndicate there is usually a “lead” investor who negotiates the terms with the startup. But not always: sometimes the startup cobbles together a syndicate of investors who approach them independently, and the startup’s lawyer supplies the paperwork.

How do you decide what valuation to offer? If you’re part of a round led by someone else, that problem is solved for you. But what if you’re investing by yourself? There’s no real answer. There is no rational way to value an early stage startup. The valuation reflects nothing more than the strength of the company’s bargaining position.

Don’t get hung up on mechanics or deal terms. What you should spend your time thinking about is whether the company is good.

There’s a second less obvious component of an angel investment: how much you’re expected to help the startup.

If you can recognize good startup founders by empathizing with them—if you both resonate at the same frequency—then you may already be a better startup picker than the median professional VC.

What makes a good founder? see reality, very resourceful, flexible for better ideas and better markets.

Startups in 13 Sentences
1. Pick good cofounders.
2. Launch fast.
3. Let your idea evolve.
4. Understand your users.
5. Better to make a few users love you than a lot ambivalent.
6. Offer surprisingly good customer service.
7. You make what you measure. Be careful then what you measure.
8. Spend little.
9. Get ramen profitable, just enough to pay the founders’ living expenses.
10. Avoid distractions, side projects.
11. Don’t get demoralized when getting out of money.
12. Don’t give up.
13. Deals fall through, deals are background processes

The Equity Equation
An investor wants to give you money for a certain percentage of your startup. Should you take it? You’re about to hire your first employee. How much stock should you give him?
These are some of the hardest questions founders face. And yet both have the same answer: 1/(1 – n)
You should give up n% of your company if what you trade it for improves your average outcome enough that the (100 – n)% you have left is worth more than the whole company was before.

For example, if an investor wants to buy half your company, how much does that investment have to improve your average outcome for you to break even? Obviously it has to double: if you trade half your company for something that more than doubles the company’s average outcome, you’re net ahead. You have half as big a share of something worth more than twice as much.
For example, suppose Y Combinator offers to fund you in return for 6% of your company. In this case, n is .06 and 1/(1 – n) is 1.064. So you should take the deal if you believe we can improve your average outcome by more than 6.4%. If we improve your outcome by 10%, you’re net ahead, because the remaining .94 you hold is worth .94 x 1.1 = 1.034.

You can use the same formula when giving stock to employees, but it works in the other direction. If i is the average outcome for the company with the addition of some new person, then they’re worth n such that i = 1/(1 – n). Which means n = (i – 1)/i.
For example, suppose you’re just two founders and you want to hire an additional hacker who’s so good you feel he’ll increase the average outcome of the whole company by 20%. n = (1.2 – 1)/1.2 = .167. So you’ll break even if you trade 16.7% of the company for him.
That doesn’t mean 16.7% is the right amount of stock to give him. Stock is not the only cost of hiring someone: there’s usually salary and overhead as well. And if the company merely breaks even on the deal, there’s no reason to do it.

Let the Other 95% of Great Programmers In
American technology companies want the government to make immigration easier.
Anti-immigration people say that instead of letting foreigners take these jobs, we should train more Americans. Who is right+
Exceptional programmers have an aptitude for and interest in programming that is not merely the product of training.
The US has less than 5% of the world’s population.
95% of great programmers are born outside the US.
The anti-immigration people have to invent some explanation.
So they claim it’s because corporations want to drive down salaries.
The truth: there are just not enough great programmers to go around.
What if most of the great programmers collected in one hub, and it wasn’t the US anymore?
The potential to ensure that the US remains a technology superpower just by letting in a few thousand great programmers a year.

How You Know
A perfect formulation of a problem is already half its solution.
Reading and experience train your model of the world. And even if you forget the experience or what you read, its effect on your model of the world persists. Your mind is like a compiled program you’ve lost the source of. It works, but you don’t know why.

For example, reading and experience are usually “compiled” at the time they happen, using the state of your brain at that time. The same book would get compiled differently at different points in your life. Which means it is very much worth reading important books multiple times.

Intriguingly, this implication isn’t limited to books.
e.g. when Stephen Fry succeeded in remembering the childhood trauma that prevented him from singing

How to Be an Expert in a Changing World
When experts are wrong, it’s often because they’re experts on an earlier version of the world.
Is it possible to avoid that? Can you protect yourself against obsolete beliefs?
Most really good startup ideas look like bad ideas at first, and many of those look bad specifically because some change in the world just switched them from bad to good.
If you’re sufficiently expert in a field, any weird idea or apparently irrelevant question that occurs to you is ipso facto worth exploring
The investors who say no to a Google (and there were several) will remember it for the rest of their lives.
Another trick I’ve found to protect myself against obsolete beliefs is to focus initially on people rather than ideas.
Good new ideas come from earnest, energetic, independent-minded people.

How to Raise Money
Don’t raise money unless you want it and it wants you.
Most companies in a position to grow rapidly find that (a) taking outside money helps them grow faster, and (b) their growth potential makes it easy to attract such money.

Get introductions to investors.
Hear no till you hear yes.

If you believe an investor has committed, get them to confirm it. If you and they have different views of reality, whether the source of the discrepancy is their sketchiness or your wishful thinking, the prospect of confirming a commitment in writing will flush it out. And till they confirm, regard them as saying no.

You should always talk to investors in parallel rather than serially. You can’t afford the time it takes to talk to investors serially, plus if you only talk to one investor at a time, they don’t have the pressure of other investors to make them act.

Every investor has some track process they need to move along from the first conversation.
Never leave a meeting with an investor without asking what happens next. What more do they need in order to decide? Do they need another meeting with you? To talk about what? And how soon? Do they need to do something internally, like talk to their partners, or investigate some issue? How long do they expect it to take?

It’s often hard to get the first commitment.
Getting the first substantial offer can be half the total difficulty of fundraising. What counts as a substantial offer depends on who it’s from and how much it is.

Avoid investors who don’t “lead.”
Have multiple plans.
Different plans match different investors. If you’re talking to a VC firm that only does series A rounds (though there are few of those left), it would be a waste of time talking about any but your most expensive plan. Whereas if you’re talking to an angel who invests $20k at a time and you haven’t raised any money yet, you probably want to focus on your least expensive plan.

Underestimate how much you want.
Be profitable if you can.
You will be in a much stronger position if your collection of plans includes one for raising zero dollars
No one wants you if you seem desperate. And the best way not to seem desperate is not to be desperate.

Don’t optimize for valuation.
The most important thing to understand about valuation is that it’s not that important.
The number one thing you want from phase 2 fundraising is to get the money you need, so you can get back to focusing on the real test, the success of your company. Number two is good investors. Valuation is at best third.
Some investors want to know what your valuation is before they even talk to you about investing.
Tell them that valuation is not the most important thing to you and that you haven’t thought much about it, that you are looking for investors you want to partner with and who want to partner with you, and that you should talk first about whether they want to invest at all.

Don’t sell more than 25% in phase 2.
Have one person handle fundraising.
You’ll need an executive summary and (maybe) a deck.
Stop fundraising when it stops working.
Don’t get addicted to fundraising.
Fundraising is not what will make you successful.
Making things and talking to users is the key.

Do Things that Don’t Scale
The most common unscalable thing founders have to do at the start is to recruit users manually. Will you try our beta?
Almost all startups are fragile initially. And that’s one of the biggest things inexperienced founders and investors get wrong. Dont judge a startup with the standard of a established one.
How big could this company get if the founders did the right things?

Recruiting
How do you find users to recruit manually? If you build something to solve your own problems, then you only have to find your peers, which is usually straightforward.

Fire
Sometimes the right unscalable trick is to focus on a deliberately narrow market.
It’s like keeping a fire contained at first to get it really hot before adding more logs.

Consulting
Sometimes we advise founders of B2B startups to take over-engagement to an extreme, and to pick a single user and act as if they were consultants building something just for that one user.

Avoid Launches
So why do founders think launches matter? A combination of solipsism and laziness. They think what they’re building is so great that everyone who hears about it will immediately sign up.

Avoid Partnerships
Partnerships too usually don’t work. They don’t work for startups in general, but they especially don’t work as a way to get growth started. It’s a common mistake among inexperienced founders to believe that a partnership with a big company will be their big break.