August 11, 2008 at 13:30Why do not new Google appear
Another recent article by Paul Graham, in which he asks a question from the headline (and answers it himself). If your startup does not want to invest, do not despair, maybe your company is the next Google.
Reader Level: Medium - High .
It is highly recommended for reading to both startups and Internet investors of all stages.
April 2008
Umair Haque recently wrote that the reason the new Google doesn’t appear is because most startups are bought before they can change the world.
Google, despite serious interest from Microsoft and Yahoo - which must have seemed profitable at the time - did not sell out. Google could be just a search engine for Yahoo or MSN.
Why didn’t this happen? Because Google had a clear and precise goal: a firm conviction to change the world for the better.
It sounds beautiful, but it's not true. The founders of Google wanted to sell their brainchild in the early stages. They just wanted more than the buyers suggested.
It was the same with Facebook. They would have sold out, but Yahoo paid off their dreams by offering too little.
A little advice to potential buyers: if a startup does not agree to your offer, think about what to offer more, because there are good chances that the excessive price that they are asking now will seem like a good deal in the future.
My experience is that startups that reject purchase offers often succeed afterwards. As a rule, although not always, then more profitable offers appear, and sometimes the company even places its shares on the stock exchange.
Of course, the reason startups are developing successfully after they reject the offer to buy is not necessarily because the price was too low. Rather, the reason is that founders who have the courage to reject a good offer are usually successful on their own. They have exactly the kind of spirit that a startup needs.
Although I am sure that Larry and Sergey really want to change the world, at least for now, the reason Google has survived and become a large independent company is the same one that Facebook remains independent: customers underestimated them.
Corporations engaged in buying companies conduct quite a strange business from this point of view. They constantly miss profitable deals, not realizing that refusal from a deal is the most reliable indicator that a startup will succeed, out of all the indicators that you could come up with.
Venture Capitalists
So, what is the reason that there are no other Google? Funnily, the reason is the same for which Google and Facebook remain independent: the money guys underestimate most innovative startups.
The reason we do not see the new Google is not because investors encourage new startups to sell, but because they don’t even invest in them. I learned a lot about venture capitalists over the past 3 years, working on Y Combinator, as we interacted with them quite tightly. What surprised me most was how conservative they are. Investment companies are often thought to support the most daring ideas. In reality, only a few companies do this, and even they are more conservative in reality than you might think when reading texts on their sites.
Previously, venture capitalists seemed to me like pirates: courageous and unprincipled. Upon closer acquaintance, they turned out to be more like bureaucrats. They are more honest than I thought (at least their best representatives), but less brave. Perhaps the investment industry has changed since then. Perhaps earlier investors were more courageous. But it seems to me that not they have changed, but the world of startups. The low cost of starting a startup means that the average “good bet” is a risky bet, but most venture capital firms continue to work as if they invested in startups manufacturing equipment in 1985.
Howard Aiken said: “Don't worry about the people who steal your ideas. If your ideas are any good, you will have to hammer them into other people. ” I get this feeling when I try to convince a venture capitalist to invest in startups founded by Y Combinator. Really new ideas cause horror in them, only if the founders do not compensate for this with their good skills of sellers.
But it is bold ideas that bring the most return. Any really good new idea will seem bad to most people; otherwise, someone would have done it already. Nevertheless, most venture capitalists are subject to “consensus”, not only within their firms, but throughout their entire community. The biggest factor that determines what the venture capitalist will feel about your startup is what other venture capitalists feel about it. I doubt that they are aware of this, but such an algorithm ensures that they miss all the best ideas. The more people like the new idea, the less dissent you will hear.
Whoever the future of Google is, most likely some investor is right now telling them to come again when they have a better chance of success.
Why are ventures so conservative? Perhaps a combination of factors plays a role here. The large size of their investment makes them conservative. In addition, they invest other people's money, which makes investors worry that they may have problems if they take a chance and the undertaking fails. In addition, most of them are financiers, not technical specialists, i.e. they don’t understand what they are actually investing in.
What's next
A remarkable feature of a market economy is that shortsightedness means opportunity. In this case, this is exactly so. There are huge, undiscovered opportunities for investing startups. Y Combinator finances startups at the very beginning of their activities. Venture capitalists would begin to finance them only after they began to bring tangible results. But between these two events there is a rather long period of time.
There are companies that can give $ 20,000 to a startup that hasn’t done anything yet, and there are companies that can give $ 2 million to a startup that has already succeeded, but there is a shortage of investors who can give $ 200,000 to a startup that looks promising. but with which everything is not yet clear. On this territory, mainly “angels” are found, private investors - people like Andy Bechtolsheim, who gave Google $ 100,000 at a time when it already looked promising, but it was still far from a profitable company. I like the "angels", but there are not many of them, and investing for them, as a rule, is just a part of their activity.
As startups get cheaper, this undeveloped area is becoming more and more valuable. Nowadays, a large number of startups do not want to conclude multimillion-dollar investment transactions at the first stage, in round A. They do not need so much money and they do not want to get involved in solving problems associated with such transactions. An average startup leaving Y Combinator wants to get 250-500 thousand dollars. But when they go to venture capitalists, they have to ask for more, because venture capitalists are not interested in dealing with such small amounts.
Venture capitalists manage money. They are looking for ways to make large sums work. But the startup world is evolving beyond their current model.
Startups have become cheaper. This means that they need less money, but it also means that their number is growing. Therefore, you can still get a big return on large cash investments, you just have to distribute it for a larger number of invested companies.
I tried to explain this to investment companies. Instead of one transaction for 2 million, make five transactions of 400 thousand each. Does this mean that you need to be present on too many boards of directors? Do not be present on their boards of directors. Isn't too much due diligence required? Spend less. If you invest a tenth of the cost, you need to be sure of success for only a tenth.
It looks obvious. But when I invited several venture capital companies to allocate some money and identify one partner who would make a lot of smaller investments, they reacted as if I suggested they put rings in their nose. It's amazing how they are tied to their investment standards.
This area is very promising, and one way or another it will be filled. Either existing venture capital firms will change and fill it, or, more likely, new investors will appear. It will be great when this happens, because these new investors, by the very structure of their investments, will be forced to be bolder than existing venture capitalists. And as a result, many new Google will appear. At least as long as buyers remain as narrow-minded as they are now.
Notes
[1] Another tip: If you really want to get a return, do not destroy the startup after the acquisition. Provide the founders with enough independence so that they can grow the acquisition into what it should become.
Thanks for reading the drafts of this note to Sam Altman, Paul Buchheit, David Hornik, Jessica Livingston, Robert Morris, and Fred Wilson.
This translation is in Translated.by: translated.by/you/why-there-aren-t-more-googles
This translation is on the JumpIDEA blog: spring.jumpidea.com/2008/08/paul-graham-googles.html
This translation is alive voice on Webdiktor: webdiktor.ru/translated/3258.mp3
Translation was initiated by JumpIDEA .
Thank you so much for the work on the translation to all participants! And personal thanks:
Reader Level: Medium - High .
It is highly recommended for reading to both startups and Internet investors of all stages.
April 2008
Umair Haque recently wrote that the reason the new Google doesn’t appear is because most startups are bought before they can change the world.
Google, despite serious interest from Microsoft and Yahoo - which must have seemed profitable at the time - did not sell out. Google could be just a search engine for Yahoo or MSN.
Why didn’t this happen? Because Google had a clear and precise goal: a firm conviction to change the world for the better.
It sounds beautiful, but it's not true. The founders of Google wanted to sell their brainchild in the early stages. They just wanted more than the buyers suggested.
It was the same with Facebook. They would have sold out, but Yahoo paid off their dreams by offering too little.
A little advice to potential buyers: if a startup does not agree to your offer, think about what to offer more, because there are good chances that the excessive price that they are asking now will seem like a good deal in the future.
My experience is that startups that reject purchase offers often succeed afterwards. As a rule, although not always, then more profitable offers appear, and sometimes the company even places its shares on the stock exchange.
Of course, the reason startups are developing successfully after they reject the offer to buy is not necessarily because the price was too low. Rather, the reason is that founders who have the courage to reject a good offer are usually successful on their own. They have exactly the kind of spirit that a startup needs.
Although I am sure that Larry and Sergey really want to change the world, at least for now, the reason Google has survived and become a large independent company is the same one that Facebook remains independent: customers underestimated them.
Corporations engaged in buying companies conduct quite a strange business from this point of view. They constantly miss profitable deals, not realizing that refusal from a deal is the most reliable indicator that a startup will succeed, out of all the indicators that you could come up with.
Venture Capitalists
So, what is the reason that there are no other Google? Funnily, the reason is the same for which Google and Facebook remain independent: the money guys underestimate most innovative startups.
The reason we do not see the new Google is not because investors encourage new startups to sell, but because they don’t even invest in them. I learned a lot about venture capitalists over the past 3 years, working on Y Combinator, as we interacted with them quite tightly. What surprised me most was how conservative they are. Investment companies are often thought to support the most daring ideas. In reality, only a few companies do this, and even they are more conservative in reality than you might think when reading texts on their sites.
Previously, venture capitalists seemed to me like pirates: courageous and unprincipled. Upon closer acquaintance, they turned out to be more like bureaucrats. They are more honest than I thought (at least their best representatives), but less brave. Perhaps the investment industry has changed since then. Perhaps earlier investors were more courageous. But it seems to me that not they have changed, but the world of startups. The low cost of starting a startup means that the average “good bet” is a risky bet, but most venture capital firms continue to work as if they invested in startups manufacturing equipment in 1985.
Howard Aiken said: “Don't worry about the people who steal your ideas. If your ideas are any good, you will have to hammer them into other people. ” I get this feeling when I try to convince a venture capitalist to invest in startups founded by Y Combinator. Really new ideas cause horror in them, only if the founders do not compensate for this with their good skills of sellers.
But it is bold ideas that bring the most return. Any really good new idea will seem bad to most people; otherwise, someone would have done it already. Nevertheless, most venture capitalists are subject to “consensus”, not only within their firms, but throughout their entire community. The biggest factor that determines what the venture capitalist will feel about your startup is what other venture capitalists feel about it. I doubt that they are aware of this, but such an algorithm ensures that they miss all the best ideas. The more people like the new idea, the less dissent you will hear.
Whoever the future of Google is, most likely some investor is right now telling them to come again when they have a better chance of success.
Why are ventures so conservative? Perhaps a combination of factors plays a role here. The large size of their investment makes them conservative. In addition, they invest other people's money, which makes investors worry that they may have problems if they take a chance and the undertaking fails. In addition, most of them are financiers, not technical specialists, i.e. they don’t understand what they are actually investing in.
What's next
A remarkable feature of a market economy is that shortsightedness means opportunity. In this case, this is exactly so. There are huge, undiscovered opportunities for investing startups. Y Combinator finances startups at the very beginning of their activities. Venture capitalists would begin to finance them only after they began to bring tangible results. But between these two events there is a rather long period of time.
There are companies that can give $ 20,000 to a startup that hasn’t done anything yet, and there are companies that can give $ 2 million to a startup that has already succeeded, but there is a shortage of investors who can give $ 200,000 to a startup that looks promising. but with which everything is not yet clear. On this territory, mainly “angels” are found, private investors - people like Andy Bechtolsheim, who gave Google $ 100,000 at a time when it already looked promising, but it was still far from a profitable company. I like the "angels", but there are not many of them, and investing for them, as a rule, is just a part of their activity.
As startups get cheaper, this undeveloped area is becoming more and more valuable. Nowadays, a large number of startups do not want to conclude multimillion-dollar investment transactions at the first stage, in round A. They do not need so much money and they do not want to get involved in solving problems associated with such transactions. An average startup leaving Y Combinator wants to get 250-500 thousand dollars. But when they go to venture capitalists, they have to ask for more, because venture capitalists are not interested in dealing with such small amounts.
Venture capitalists manage money. They are looking for ways to make large sums work. But the startup world is evolving beyond their current model.
Startups have become cheaper. This means that they need less money, but it also means that their number is growing. Therefore, you can still get a big return on large cash investments, you just have to distribute it for a larger number of invested companies.
I tried to explain this to investment companies. Instead of one transaction for 2 million, make five transactions of 400 thousand each. Does this mean that you need to be present on too many boards of directors? Do not be present on their boards of directors. Isn't too much due diligence required? Spend less. If you invest a tenth of the cost, you need to be sure of success for only a tenth.
It looks obvious. But when I invited several venture capital companies to allocate some money and identify one partner who would make a lot of smaller investments, they reacted as if I suggested they put rings in their nose. It's amazing how they are tied to their investment standards.
This area is very promising, and one way or another it will be filled. Either existing venture capital firms will change and fill it, or, more likely, new investors will appear. It will be great when this happens, because these new investors, by the very structure of their investments, will be forced to be bolder than existing venture capitalists. And as a result, many new Google will appear. At least as long as buyers remain as narrow-minded as they are now.
Notes
[1] Another tip: If you really want to get a return, do not destroy the startup after the acquisition. Provide the founders with enough independence so that they can grow the acquisition into what it should become.
Thanks for reading the drafts of this note to Sam Altman, Paul Buchheit, David Hornik, Jessica Livingston, Robert Morris, and Fred Wilson.
This translation is in Translated.by: translated.by/you/why-there-aren-t-more-googles
This translation is on the JumpIDEA blog: spring.jumpidea.com/2008/08/paul-graham-googles.html
This translation is alive voice on Webdiktor: webdiktor.ru/translated/3258.mp3
Translation was initiated by JumpIDEA .
Thank you so much for the work on the translation to all participants! And personal thanks:
- gribunin
- Gazelle,
- Julia,
- www2,
- avekir,
- RealMan.