tag:,2008:/1/tag:72.47.210.69,2006://1.5200- 2008-07-07T14:34:02Z Comments for Paul Graham - Under the Microscope Movable Type 4.1 tag:72.47.210.69,2006://1.5200 2006-12-10T21:59:59Z 2007-12-16T23:16:36Z Paul Graham - Under the Microscope Written by Emre Sokullu and edited by Richard MacManus. Paul Graham, as a combination of investor and uber geek, is a unique figure in the web industry. There's an increasing trend of entrepreneur-friendly blogging among investors; Guy Kawasaki, Baris Karadogan and Fred Wilson are perhaps the best examples of this. But Paul Graham has always... Emre Sokullu Written by Emre Sokullu and edited by Richard MacManus.

paul grahamPaul Graham, as a combination of investor and uber geek, is a unique figure in the web industry. There's an increasing trend of entrepreneur-friendly blogging among investors; Guy Kawasaki, Baris Karadogan and Fred Wilson are perhaps the best examples of this. But Paul Graham has always been seamlessly close to the entrepreneurs, especially young and inexperienced ones. His essays and books have been the best friends of wannabes and his seminars enlighten many students with entrepreneurial flame. Possibly that's why his investment company, Y Combinator, specifically targets young entrepreneurs - albeit their investment size is generally much lower than the standard. In this article, we look closer at Paul Graham and examine the current status of his investments, his investment patterns and discuss some of the effects of his essays.

]]> About Paul Graham & Y Combinator

Paul Graham is an interesting personality. He became well known after his startup Viaweb was sold to Yahoo in 1998, for the neat sum of $50M . Viaweb later became Yahoo Stores. Paul is a Harvard grad who spent some of his youth in Florence, Italy, studying painting. He's a great Lisp hacker who is creating an alternative Lisp dialect, Arc [Wikipedia fact: Lisp is the second-oldest high-level programming language in widespread use today; only Fortran is older].

Y Combinator is the investment company Graham co-founded with hackers like himself - Trevor Blackwell, Jessica Livingston, Robert Morris. Y Combinator makes seasonal investments twice a year and their investment size is initially lower than $30,000. 

Y Combinator Investment Pattern

Their recent investments indicate that Y Combinator invests not in the next Googles or YouTubes, but in the next Flickrs and OddPosts. In other words, they don't invest in ventures with high intellectual property or which require heavy investments. This is also because these kinds of ventures probably don't prefer Y Combinator and demand higher valuations. In general, the barrier to entry in their investment areas are low; Paul seems to believe in good marketing and originality, aka the Aspirin effect. Y Combinator loves to invest in simple ideas.

First and foremost, you need to be in your early twenties to receive Paul's funding. Because according to him, web businesses are risky and require real commitment, so it's best to start them while you have less to lose.

Also if you are not studying at an Ivy League college or Stanford, your chances of getting funded are lower.  If you are a single founder or outside the USA, it's again very difficult. Finally, Y Combinator prefers real geeks who have a history with open source.

And now let's check out some of their previous investments...

Investments

reddit has been the most successful investment of Y Combinator so far. The team consisted of 2 University of Virginia, 1 Harvard and 1 Stanford grads/drop-outs. The personalized news site quickly became popular in the geek community. They licensed their code and finally sold their company to Conde Nast for an undisclosed sum - apparently under $5M. The site was criticized by some because its personalization engine did not appear to work properly. See Read/WriteWeb's article Personalized News: A Market Overview for more details on this.

Kiko is an online calendar and was one of Y Combinator's first investments. It was redesigned several times and ended up being sold on eBay for $260K - which probably covered their expenses.

YouOS was founded by 2 MIT, 1 Cal-Tech, 1 Stanford grads. YouOS aims to create the leading WebOS - and it has received a lot of attention from geeks for this reason. However, like most of the other sites in Graham's portfolio, YouOS lacks stability and is currently an early stage product.

Flagr is a mapping startup and is a very good example of what Paul Graham's investment pattern is. The idea is simple and the site is trying to create a new consumer behaviour - which is to map and write about places you visit. A noteworthy marketing tactic of Flagr was to send free stickers to their fans. The founders dropped out of college to pursue their dreams.

Wufoo is another typical Paul Graham investment with a talented team (Particletree and TreeHouse), focused on a very simple and narrow idea - form building.

Other investments include:

  • loopt - a mobile service that was subsequently co-invested in by Sequoia Capital, the leading VC company.
  • snipshot - a very nice, but currently too basic, online picture editing site.
  • clickfacts - fraud protection.
  • thinkature - real time collaboration board.

Although there has been no big decisive success so far in the Y Combinator portfolio, there have been no big losses either. Most sites have good potential and are growing fast. The full list of their investments can be seen here.

Criticism

There are a few general criticisms that have followed Paul Graham and Y Combinator.

Firstly, in his essays Paul Graham calls for young smart people to start their own startups. So in some sense, he's offering quick cash dreams against a long academic career. These dreams may cause young people to drop out of college for a very risky web business.

Another criticism Graham gets is the high equity stake he typically takes in return for a very low investment, like $20K. But the Paul Graham name is more than enough for most startups to be taken more seriously - so besides the money he puts in, he also injects his business and marketing power to these startups.

And the final criticism some people throw at Graham is a perceived lack of quality in many of his Y Combinator ventures - due to inexperienced, very young teams. This could also be a result of Graham's "release early, release often" principle.

Conclusion

Paul Graham's model is now being taken on by many others. For example Charles River Ventures offers a CRV QuickStart Seed Funding Program (essentially a loan of up to $250k, but with equity options). VC companies have started to make small but many investments, instead of just spending millions on a few high risk ventures. The reasoning behind this is the decreasing development costs of new startups. This is arguable though, because from another point of view the costs are increasing - due to technologies getting more complex and the increasing cost of things like video streaming.

All in all, if you are a young entrepreneur, bookmark this: http://paulgraham.com. Paul Graham's company may not satisfy your investment needs, but his theories and wise words can help you a lot.

]]> tag:72.47.210.69,2006://1.5200-comment:41066 Comment from Jason on 2006-12-10 Jason I like Paul's essays.

However, I think that he is simply investing in junk companies. Pretty much all of them do not add any real value to our lives... they are just odd ideas for yet another way to waste our time.

]]> 2006-12-10T23:41:09Z tag:72.47.210.69,2006://1.5200-comment:41067 Comment from Emre Sokullu on 2006-12-10 Emre Sokullu http://emresokullu.com I need to disclose that I have Y Combinator application experience and I was rejected - http://urlsnip.com/743044

]]> 2006-12-11T00:37:20Z tag:72.47.210.69,2006://1.5200-comment:41068 Comment from Dharmesh Shah on 2006-12-10 Dharmesh Shah http://onstartups.com Though I have been critical of a couple of aspects of Y Combinator and Paul Graham in the past, I think they provide some much needed creativity into the early-stage investment process.

Fact is, there's really nobody out there making small bets on young, hacker-types and helping them build something interesting. His investment thesis is not for everyone, but I think it's a brilliant idea.

]]> 2006-12-11T01:45:00Z tag:72.47.210.69,2006://1.5200-comment:41069 Comment from Emre Sokullu on 2006-12-10 Emre Sokullu http://emresokullu.com @Dharmesh, definitely..
@Jason, Snipshots and Thinkature are great web based apps. ClickFacts, dedicated to solve click fraud problem in Google/Yahoo ads, I haven't test it yet, but sounds promising. The reason they look unstable is the "release early, release often" principle.

]]> 2006-12-11T01:51:31Z tag:72.47.210.69,2006://1.5200-comment:41070 Comment from Alex Iskold on 2006-12-10 Alex Iskold http://www.adaptiveblue.com Emre - awesome post!

My take is that 20K - 30K is low. This is basically a bet on the fact that people are young and experienced. I call this free ride and it is not cool.

I like first half of Paul's book, its very insightful. The second half about how LISP rocks and everything else sucks is simply annoying.

My overall take, as an enterprenuer is that Y Combinator's approach would be fine, but only if they do not take a lot of equity from startups for just 20-30K. Otherwise it is extremely unfair.

I do think there is a market now for firms to target Flickr/del.icio.us like exists. However, most VCs are not interested unless you can show 100+M exit. So in my mind this lends itself well onto smart angels, which invest 500K - 1M range.


Alex

]]> 2006-12-11T04:44:02Z tag:72.47.210.69,2006://1.5200-comment:41071 Comment from Emre Sokullu on 2006-12-10 Emre Sokullu http://emresokullu.com @Alex :) I haven't even read the LISP ones ;)

]]> 2006-12-11T05:55:37Z tag:72.47.210.69,2006://1.5200-comment:41072 Comment from Paul Graham on 2006-12-11 Paul Graham http://paulgraham.com The most successful startup so far is probably Loopt, not Reddit.

We'd be delighted to invest in the next Google. The reason most startups we've funded aren't Googles is not due to anything about YC. It just reflects the distribution of Googles in nature.

As for taking a large percentage of the companies we fund: all investors supply a combination of money, advice, and connections. As the round size varies, the other two remain nearly constant. So in seed investing, the ratio of advice and connections to money is higher. In other words, we're "paid" for our advice and connections in the form of low valuations. It's rational to sell YC 6% of your company if we can improve your prospects by 7% or more (.94 * 1.07 > 1). I think I can say we usually do that.

]]> 2006-12-11T21:30:13Z tag:72.47.210.69,2006://1.5200-comment:41073 Comment from Alex Iskold on 2006-12-11 Alex Iskold http://www.adaptiveblue.com Paul,

Are you saying that you typically take 6% of the company for 25K?

Alex

]]> 2006-12-11T21:36:29Z tag:72.47.210.69,2006://1.5200-comment:41074 Comment from Jason on 2006-12-11 Jason LOL... That 6% answer will probably confuse enough readers. Well done Paul :)

]]> 2006-12-12T00:52:38Z tag:72.47.210.69,2006://1.5200-comment:41075 Comment from Jason on 2006-12-11 Jason Yes, hardware is cheap these days. Yes, software is mostly free. Yes, it's not as expensive as it used to be to launch a startup.

But still, for $30K you're not going to get to incubate the next Google... LOL. Or anything remotely close to that, for that matter.

Loopt has been the most successful? What the heck is it? Just a pretty site with a completely useless service. Man, are people willing to fill up their day with such crap? They should be reading a book or something... LOL

]]> 2006-12-12T00:56:32Z tag:72.47.210.69,2006://1.5200-comment:41076 Comment from Emre Sokullu on 2006-12-12 Emre Sokullu http://emresokullu.com @Paul Graham: (.94 * 1.07 > 1) :) great comment, thanks, and that's what I tried to say with this sentence:

But the Paul Graham name is more than enough for most startups to be taken more seriously - so besides the money he puts in, he also injects his business and marketing power to these startups.

]]> 2006-12-12T10:07:09Z