Could I have passed muster with YC?

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Paul Graham describes what Y-Combinator looks for in business founders, and he explains why you become a billionaire by building a great product, not by being a bad person. Pointer from Tyler Cowen.

I would bet that the chances that you are a bad, exploitative person are much less if you work at a profit-seeking firm than at a non-profit. Within a profit-seeking firm, I would also bet that the chances that you are a bad, exploitative person are much less if you have a stake in the enterprise as a whole than if you are highly compensated based on individual performance. To be clear, what I am saying is that the non-profit sector is more likely to unintentionally select for bad people than is the for-profit sector. And within the for-profit sector, high compensation without skin in the overall game is more likely to unintentionally select for bad people than is an ownership stake in the overall enterprise.

On the topic of what YC looks for, how would I have done in 1994, when I first started Homefair?

Graham writes,

People’s motives for starting startups are usually mixed. They’re usually doing it from some combination of the desire to make money, the desire to seem cool, genuine interest in the problem, and unwillingness to work for someone else.

He prefers the latter motivations, and I had them. For me, it went beyond just an unwillingness to work for someone else. It was a desire to prove that the people for whom I had been working had wronged me. They said I had ideas but I could not execute them. But the way I saw it, the reason I could not execute was that they wouldn’t let me try. To execute, I had to fight the corporate bureaucracy to get approval. With the Internet, I saw an opportunity to skip that step and just get going.

In 1994, I had dreams of really changing the homebuying process and/or the mortgage lending process. Those are not ridiculous dreams to have. But after a while I was more willing to succeed by working with the existing ecosystem than to fail trying to displace it.

So my motivation died out without ever getting anywhere close to the billionaire stage. One reason was that an opportunity to sell out came in 1999, and that was the right time to sell. In hindsight, for sure. But even at the time, my partners and I had a lot of foreboding about all the baloney sandwich going on with the Dotcom boom of that era.

Graham writes,

The crucial feature of the initial market is that it exist. That may seem like an obvious point, but the lack of it is the biggest flaw in most startup ideas.

In April of 1994, the only honest answer for me would have been to say that there was no market for information about homes and mortgages on the Internet. I was “living in the future” a bit too much. As one of the first curious visitors to my site put it, “Congratulations. You’ve set up your lemonade stand on the moon. Now you just have to wait for the astronauts to get there.”

When the Web started to go mainstream, I had partners, and we pretty quickly figured out what people wanted and how to give it to them. So I would say that in 1996 I could have satisfied YC on that score.

Another question YC asks is what could go wrong. I think I could have handled that question–I surely would not have been tongue-tied. For example, for a long time, I was asking what if Microsoft never includes a TCP stack in Windows? (they finally did in August of 1995). The only thing more threatening than the Web not going mainstream was having it go mainstream and watch well-heeled competitors sprout up. Ironically, Microsoft HomeAdvisor was probably the competitor I admired the most, but fortunately Seattle never put its heart into that project.

16 thoughts on “Could I have passed muster with YC?”

  1. I would love to take that profit/non-profit bet.

    Maybe for founders, but for *workers*?

    How might one adjudicate this bet?

    Setting aside the limits on Arnold’s time, what if we

    a. Found 100 people from each type of work place in a clever process including some randomization

    b. Had Arnold interview them about their lives, somehow with agreed-upon fencing so they wouldn’t reveal their jobs, perhaps just by questioning their non-work lives (nights, weekends, etc)?

    c. Then he would judge who is bad and exploitative.

    My guess is the median 3 jobs in nonprofit: nurse, hospital or health insurance admin, and child care worker. Nurse Jackie was exploitative, true.

    • If you include government workers in the non-profit mix, now you have millions of K12 unionized teachers, DMV clerks, transit system workers, unionized cops, firemen, and prison guards, and untold numbers of bureaucrats. Still want to take the bet?

      • The moral dispersion among bureaucrats is very broad and the distribution is intriguingly bifurcated.

  2. YC is making two strong claims. The first is that there is a set founder traits that causes startup success, stable across the range of startups in which they invest and across tine. The second is that they can successfully select for those traits.

    In contrast, my firm assumes the null hypothesis on both. We assume that the necessary founder traits are context depend, it’s hard to have the full context, and it’s difficult to assess many of them in any case. The literature on personnel selection is actually pretty strong on the last, especially if interviews are the tool you use to make key distinctions.

    YC has 2000 companies since 2005. We have 1150 since 2012. So over the next 10 years or so, we may collectively have the data necessary to at least partially answer this question.

    Now, creating a mythology of the founder may give YC some other advantages, but in principle, it might be possible to disentangle them.

    Note that I have nothing against YC. We invest in YC companies and companies we’ve invested in go through YC.

  3. The essay was very good, but mostly I look at it as a helpful corrective to the classic leftist Narrative Game which is basically to use every lever of influence over public opinion, beliefs, and attitudes to turn people against “the wealthy” by essentially defaming them as terrible, evil, greedy, exploitative people (who are of course much worse morally than we normal, salt-of-the-earth people like Ivy League journalists). The wealthy capitalists don’t ‘deserve’ their obscene levels of wealth and only got it by means of lying, cheating, stealing, bribing, corrupting, polluting, and oppressing or perhaps they are lazy, idle rich, hedonistic trustafarians who inherited their money from those who did. They would sell their own mother to a brothel if it meant another gold shingle on the roof of their palace.

    Therefore we deserve to steal all their dirty money and spread it out among ourselves, the good people.

    Now, when it comes to the finance sector …. just kidding … kind of … I think.

    But when it comes to “tech billionaires”, like Cowen keeps saying, the truth is usually that they are *better* than the average person along *many* dimensions. And what Graham is saying is that there is perhaps no one on earth who has better opportunity to observe and assess people who did and did not become recent super-rich by founding business and companies, and he offers a useful corrective, which is to say that not only is the slander story not true – it most likely *can’t be true*, because those kinds of terrible people wouldn’t have the right stuff to make it big.

    Elizabeth Holmes was a terrible person. She could fake it, but she couldn’t make it, so she was inevitably weeded out. Elon Musk was a better person, could fake it until he made it, but he actually could make it, and so is now one of the richest men in the world.

    The trouble is, “Billionaires are often impressive and inspiring people who work insanely hard and deserve their wealth, while most of us normal people are kind of lame and lazy and completely dependent on what those people and businesses create for us” does not really jive well with the narrative that is supposed to legitimate the political formula of “So elect leftists to punish those bad rich people and grab all their stuff”.

    So, thanks Paul Graham!

  4. It seems to me that you become a billionaire by doing three things:

    1) Make a great product.
    2) Build an organization that can make the product cost-effectively.
    3) Keep control of the organization as it scales up.

    Being a “bad person” isn’t useful for #1, but it is pretty useful for #s 2 and 3. Y-combinator mostly deals with early stage startups where the focus is still on #1.

    Venkat Rao has much more to say on this topic: https://www.ribbonfarm.com/2009/10/07/the-gervais-principle-or-the-office-according-to-the-office/

  5. Sam Altman has this to say about being a successful founder (*):

    Being a fast mover and being decisive — it is very hard to be successful and not have those traits as a founder. Why that is, I’m not perfectly clear on, but I think it is something . . . about the only advantage that startups have or the biggest advantage that startups have over large companies is agility, speed, willing to make nonconsensus, concentrated bets, incredible focus. That’s really how you get to beat a big company.

    You know, years ago I wrote a little program to look at this, like how quickly our best founders — the founders that run billion-plus companies — answer my emails versus our bad founders. I don’t remember the exact data, but it was mind-blowingly different. It was a difference of minutes versus days on average response times.

    Maybe being a good person is not about generosity or lip service to any social cause. Maybe being a good person is about answering to other people’s needs in a prompt and thorough manner.

    (*) https://medium.com/conversations-with-tyler/tyler-cowen-sam-altman-ai-tech-business-58f530417522

  6. This is not my experience. I have worked in both the for-profit and nonprofit sector, primarily in healthcare. No question I agree with Arnold that the for-profit sector is much more likely to be successful, and honestly, I prefer it. The nonprofit sector is easily distracted, sometimes petty and sanctimonious. There’s nothing like the profit motive to sharpen the senses and keep you focused on smaller goals that serve the larger goal.

    But, without question the worst people I’ve ever met are high-level executives in for-profit ventures, with the possible exception of venture investors. This has been true for me whether they are wildly successful or horribly inept. Maybe it is different in big tech, or at the very most successful companies. But almost to a person, these people appear to have sociopathic traits and tendencies, high-functioning and dynamic though they are. They are prone to making enormous ego-based mistakes, and their failure to acknowledge human impacts has led (in my experience) to some striking corporate misery and some occasional whopping failures. I’m not saying they can’t be incredibly capable, just that compared to the leadership of the large non-profits I’ve been involved with, I’d much rather have a beer with the non-profit guys or live next door to them. They might be feckless and pious at work, for sure, but their intentions and interactions are kinder.

    Which of course gets down to the intentions vs outcomes heuristic that this blog has often entertained. I get it. For me, working in for-profit is a revealed preference for outcomes-oriented people and structure. Living with non-profit style people is the same, I guess. Just a thought…

    • Thanks for your observations. It is much to the credit of capitalism that it harnesses the efforts of the sociopaths you observed to (mostly) productive entrepreneurial activities.

  7. How to please the public – that’s the test,
    But nowadays I find I’m in a fix;
    I know they’re not accustomed to the best,
    But they’ve all read so much they know the tricks.
    How can we give then something fresh and new
    That’s serious, but entertaining too?
    -Johann Wolfgang von Goethe

    • In my world, the big start-up news is Athletes Unlimited Volleyball, a professional women’s volleyball league scheduled to begin play next year.
      The interests of the workers/players and the owners/investors might seem to be fairly well aligned as it appears it will be player managed and there is a Player Executive Committee. I am guessing that the people involved love the sport and know that USA volleyball is very special. So they tick those YC boxes and there is undoubtedly a growing audience for women’s sports. And the USA produces players audiences around the world are willing to pay to see. For example the player of the game the other day in the Stuttgart vs Moscow match I watched was Krystal Rivers out of Alabama, who beat out my all time favorite player Natalia Pereira and my favorite team in Brazil starts Americans Meghan Hodge Easy and Danielle Cuttino. Undoubtedly some of the people involved are players like Kling who want to show that they can do things that they have not been given the opportunity to do so.

      Nevertheless Graham and Kling raise good questions that suggest we might anticipate failure. Graham talks about playing well together. One wonders how the many, many excellent players playing professionally abroad ( https://www.teamusa.org/USA-Volleyball/Features/2020/December/08/Despite-Pandemic-US-Players-Find-Jobs-Overseas )
      can be attracted to play back in the USA if they have to be paid commensurate with what they are making now? With such strong player involvement will personnel decisions reflect self-interest or putting the best possible competition in front of the public? Will the potential of millions of viewers be realized if the top tier players are not playing here? From Kling I project that the interests of the welfare of the league itself might actually be better served by the discipline brought by exploitative outsider profit seeking venture capitalists who might assure a better product while costing some of the startup players play time/positions. Sure establishing a new pro-sports league is a difficult challenge that would scare off most venture capitalists at first, but buying out the founders in a year or two might ultimately lead to league success. So, the best conclusion I think I might draw, however nebulous it might be, is that both trade-offs and context matter.

  8. “It was a desire to prove that the people for whom I had been working had wronged me.”

    Does anything taste sweeter than this?

    Thanks for your post.

  10. I’ve found for profit people to be better then non-profit people, but the correlation between being a good productive person and being elite management has not been that strong. However, I’ve only ever worked for large established institutions where there is no real meaningful ownership stake amongst executives or managers.

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