Of the Silicon Valley founders I know who went on some of the psychedelic self-discovery trips, almost 100% quit their jobs as CEO within a year.
I'll note that there's an obvious reason to expect a giant selection effect here. (If things are going great for you at the company, why go on a psychedelic self-discovery trip?) I'm inclined to agree with the conclusion, though (but don't have great evidence for it).
Figuring out what a startup should say to investors is strangely useful for figuring out what it should actually do. Most people treat these questions as separate, but ideally they converge. If you can cook up a plausible plan to become huge, you should go ahead and do it.
If you're not a software company, and what you want to do requires steel in the ground, then any workable plan to become huge will realistically require 3-4 years each in the lab, pilot, demo, and FOAK phases, largely in series, and will often benefit from the founders stepping down as CEO quite early in favor of someone with much more direct industry experience, and if you're honest about that many VCs will run away.
As in, because you might have to raise at a lower number in the future, you should raise at a lower number than that now, so you don’t have a ‘down round.’ Or because you couldn’t handle having the cash.
As you explain later, the first part of this would be nonsense if the second part weren't so important. AKA, if only the founders have the discipline to not increase spend rate beyond necessity and instead use the money to increase runway and still follow an optimal path to growth, instead of inefficiently chasing faster growth by spending more and just assuming more funding will be available when needed, this would not be such a problem.
Also it's not about having a down round, necessarily. It's sometimes about needing one at all. I've met people whose shareholders forced their companies to wind down instead of allowing a down round, even if the down round would likely have led to a successful exit later, because e.g. the shareholder was trying to raise their own next fund and a down round on their record would have made it harder.
Startup Roundups (#1, #2) look like they’re settling in as an annual tradition.
I’ve been catching up on queued roundups this week as the family was on vacation. I am back now but the weekly may be pushed to Friday as I dig out from the backlog.
The Central Themes
There is a common theme to the vignettes offered across the years. The central perspective has not much changed.
I would summarize the perspective this way, first in brief and then with more words:
Or, with more words:
Here are some vignettes on this theme from the past year.
How To Interpret Advice From Paul Graham
Emmett Shear offers advice on how to interpret advice from Paul Graham.
According to Emmett:
My reactions based on what I know, keeping in mind I’ve never met him:
Given the overall skill and knowledge levels, with that level of trustworthiness, that’s still an amazingly great source of information. One of the best. Use it if you have access to it.
One common pattern of advice from Paul Graham has been talking up the UK.
Graham agrees the regulatory burdens of being in Europe are extreme, so for now he sees a mixed strategy as appropriate. Those who are worried about being in America can be recruited to the UK or Europe, which justifies (in his mind) more UK-or-Europe-based startups than we currently have.
Paul Graham is the best case scenario. When you see advice from other venture capitalists, assume they are less informed and skilled, and also more self-interested, until proven otherwise.
Martin Casado has been on an absolute ‘saying the quiet part out loud’ tear recently. No matter how vile and bad faith I find his statements about AI policy and existential risk and everything surrounding effective altruism and so on, he’s got the Trump-style honest liar thing going especially on the venture side, and yes it is refreshing.
Investor Meetings Do Not Create Optimal Strategic Choices
Never conflate the medium and the message, or the map and the territory, or the margin and the limit.
I don’t think Paul is being naive here.
I think he is doing a combination of thinking on the margin and talking his book:
Should you be thinking big, and about what scales, and taking big swings? Absolutely, although the VCs want you to do it more than you should want to do it due to different incentives.
On the margin, founders benefit from VCs pushing founders to do more of the things that VCs want to hear, as a lot of why they want to hear them is that those actions correlate with big success. The danger is when you are not on the margin, and stop being grounded in reality and start to believe your own hype and stories.
Y-Combinator Is A Great Deal
If you have the option to do YC, rest assured that as long as you’re not collapsing a huge bunch of SAFEs the valuation boost from YC’s reputation is worth vastly more than the share of your company YC takes. You’ll be net ahead on cash and equity very quickly.
Avoiding Marking to Market
Matt Levine has often mentioned how valuable it can be to not have to mark your investments to market. Early stage VCs are experts at controlling how and when their investments are marked to different numbers.
Yes, that would be only by 2x, but that’s a 50% markdown.
This is purely not marking to market and strategic ignorance about market prices. It is price fixing by a VC cabal via norms. It is a conspiracy in restraint of trade and collective fiction.
Sure, the best founders might increase value by 1000x, but the best founders under bad conditions are then worth 500x of what the bad founders were worth under good conditions, rather than 1000x. Still counts.
What Paul Graham is effectively saying here is that VCs are a conspiracy in restraint of trade, that (among other things) refuses to pay fair prices for top startups, instead setting what are effectively highly constrained norm-based prices to avoid the best founders charging what they are worth, so top VCs can bid with reputations and connections and capture that surplus rather than bidding against each other with dollars.
I do believe this is true. The top VCs are in collusion to bid with reputation and services and connections and future promises rather than with dollars, such that the top investments are both obvious to most VCs and also vastly cheaper than their expected value. And they persuade the founders involved that this is good, actually, because of things like worries about a down round.
Graham himself has noted that the difference in price for the best startups is dwarfed by how much better their prospects are, that the smart VC mostly ignores price. That indicates the prices for the good prospects are way too low.
Whereas if a top founder actually got what they were on average worth, VCs who invest would be unsure if they were getting a great deal.
Why should the VCs get that deep discount to actual value, despite the fact that if the founder insisted plenty of those same VCs would pay up happily? Because they tell a story that the company isn’t entitled?
And if you can get away with that, then yeah, who cares if the exit value is down by half, I guess? It doesn’t change any of the norm-based prices? And for worse founders, instead of the prices dropping so the market clears, a few survive and lot of those deals die.
Worse Deals Are Worse
One of the best reasons to distrust VCs is that they make a lot of arguments that you should beware when they give you ‘too good’ a deal, including but not limited to them paying more money to get less, and instead you should give away additional large stakes in your company or other things specifically in order to ensure the vibes remain good and you can tell a story to future other VCs.
As in, because you might have to raise at a lower number in the future, you should raise at a lower number than that now, so you don’t have a ‘down round.’ Or because you couldn’t handle having the cash.
I do agree that ‘down rounds’ can kill companies and that is bad, but come on.
That last paragraph is a partial answer to an importantly different question: ‘Why are founders sometimes ABLE to raise so much money, at such a high valuation, that it becomes difficult to have an ‘up round’ next?’
Yes, the answer is that VCs are ‘not price sensitive’ when deciding to invest (there are limits, eventually, of course, at least one hopes), they are ‘vibe sensitive’ to whether it all feels right and how it would look. And they have heuristics that say, if the deal is great, you do not care about the price, the real danger is missing out. The ultimate case of FOMO. So in many cases you can kind of ‘name your price.’
It is also a hell of a thing to frame getting a great deal that way.
The second paragraph points to the real danger. You cannot afford to let what happened go to your head. You cannot afford to then spend money like you are actually worth what the VCs paid, and that you will soon be able to raise more at an even higher number.
Instead, you need to do something rarely done, which is to understand that the number was ‘too high’ and that you might face a down round.
You know what I’ve never heard of being done? A founder CEO says, after a round, ‘these VCs went completely crazy bidding against each other. We raised $20m at a $100m valuation, and realistically it should have been less than half of that. We made damn sure the terms were airtight, so we can safety do a down round if needed, and we are setting aside the extra money so we don’t go too big or spend too much, and we’re setting your options deals accordingly.’
This also makes good trading sense. Most startups have high failure risk at each step, so if you survive you should be worth more. But if you’re the ‘super hot’ startup, in a great spot, the chance of (unrecoverable) failure in the short term could be quite low. If you do great, you’ll gain tons of value. So if you do only okay, it seems perfectly fine to say the expected value is modestly down from before.
There is the danger that you overspend, grow too big, your burn rate skyrockets, your focus is lost and so on, if you’re not careful. So… don’t do that? I know, easier said than done, but not as hard as they make it sound.
Convincing founders they should give up 10% of their company so that the round isn’t technically ‘down’ is one of the great cons of history. One can also call it an illegal conspiracy in restraint of trade.
Avoiding Having A Market At All
Europe in general and Germany in particular have long been doing a natural experiment to see how annoying and expensive you can make startups before you kill them entirely. The answer is quite a lot.
Eventually Be Hustling
A fun story about correlation and causation.
I do think responding quickly is the best play whenever possible. But consider that the firms might be responding more optimally than you might think.
Say you’re at a low-tier firm. If you take the meeting tomorrow, and they give you that meeting, and you love it, and it closes next week, guess what?
You still probably didn’t make the round, because the startup has better options and turns down your money. In a different world you’d be able to compete on price, but that’s not how this works, so you lose. Good day, sir.
By scheduling two weeks out, you’re saving everyone time – that’s the point at which the round is likely actually available and so the meeting is worthwhile.
That’s not to discount that hustle and fast response also make a difference, but in general if you see a contrast this stark there’s an actually good reason for it.
Whereas if you are a top firm, your entire job is to quickly find the best offers like this, and lock them down before the mid-tier firms or ideally even your top-tier competitors can do an evaluation and try to box you out. You have to hustle.
Without Selection Venture Capital Loses Money
The question is why anyone puts their money in, it’s obvious why you would want to do the job with other people’s money:
My hunch is that a lot of this is people not understanding adverse selection. They don’t get how much those top funds are cherry picking the best deals, and how much this leaves everyone else in VC at a severe disadvantage. And more of that is thinking that oh, I’m smarter or I’ve found the smart one, we will make it work, or people simply not realizing that ‘non-elite’ VCs on net lose. Or simply wanting to be part of the action.
Another explanation is that this is not accounting for the potential future elite premiums you might be able to collect. So you invest now at an economic loss, to try and gain a reputation later that would let you extract rents.
Part of the story is almost surely that those involved don’t believe or understand that the industry overall loses money.
And part of the story has to be that investors want in on the action, it is a status marker, it is fun, it provides inside information and connections and so on.
Finding Your Startup Idea
How to come up with your next great startup idea, according to YC?
It starts with not demanding too great a startup idea? There’s a list and also a video.
I agree with the first two. You shouldn’t ‘wait’ for a brilliant idea, but neither should you settle for one that is not great. It’s more that the great ideas often won’t ‘feel brilliant.’
The third is more interesting. I half buy it. Certainly ‘solution in search of a problem’ is an issue, but problems are a dime a dozen even more than startup ideas. Good solutions are not, and can be the relatively scarce resource.
The theory here, as I understand it, is that the way to get to a solution that solves a problem people will pay to solve is to solve a problem. YC especially preaches to look for a solution to your own problems, a ‘fine I will solve this myself just for me’ idea. That can of course still not be a market fit at all (see MetaMed), but you have a shot.
Whereas if you have a solution in search of a problem, you’ll invent some story of why your solution is useful, but you won’t have product-market fit. I buy that this is a common trap, and plausibly one of the key things that went wrong at MetaMed.
If you do have a solution in search of a problem, it is definitely worth doing a search for problems that it solves, so long as if you don’t find a good one you then give up.
The fourth is another ‘yes and no,’ finding any idea at all is easy, finding the best ones is hard, and is especially hard if you are not someone with lots of relevant connections and experience.
This seems like one of those ‘these things should not be equal weight’ situations, even if they are the top four criteria. At minimum the average should be more like… the product? These are all failure points, not success points.
As usual there is the conflict, if it wasn’t possible before how do similar companies exist? So you need to get the details right on what those mean.
I’ve grown more skeptical of ‘only possible recently’ as being too important. Certainly it helps that ‘without AI from this year this wouldn’t work’ but also… people don’t do things. Ideas just sit there. Yes, most good Magic: the Gathering decks involve something you couldn’t do until very recently, but also there was a Pro Tour where Trix (which went on to completely dominate the same format) was legal and no one had it.
The first two feel like ‘marginal’ advice. As in, true on the margin, but not overall.
Sure, that all makes sense.
Standard stuff here. Mostly, yeah, I agree.
Some Ideas And Builders Are Bad
A culture that cannot criticize itself cannot fix its mistakes.
If Silicon Valley is to take its rightful place as a true part of Nate Silver’s The River, or simply it wants to make good decisions, this requires a desire to understand the world and be accurate. Short selling needs to exist, at minimum rhetorically. Instead, they have largely hooked their wagon to a combination of enforced optimism, consensus zeightgeisting and collaborative vibe warfare. They think this is good for them, and that tells you a lot about who they are and what to expect from them and how to evaluate their claims.
Whatever Sucks A Lot For You Will Suck A Lot For You
So much this:
A startup does not offer you the luxury of choosing which things to do versus not do. You have to do all of it. Which means you are doing whichever part you think sucks.
A lot of what you are being paid for it the willingness and ability to do that.
Stay Away From Ayahuasca
A huge percentage of the time that I hear about someone trying Ayahuasca, it results in them royally screwing up their life, sometimes irrevocably. This is true for public stories and also for private stories. Even when that doesn’t happen, the experiences seem to usually have been pretty miserable, without much positive change afterwards.
By all accounts this is a no-good-very-bad drug. Avoid.