The returns to entrepreneurship

I was at dinner the other night with a group of entrepreneurs. One told the story of a 27-year-old whiz kid whose company will likely exit for $500M – $1B – the business now being less than two years old. You can imagine the effect that this had on the brilliant, hardworking 35+ entrepreneurs in the group, who have had their share of hits, but not at that magnitude and not that quickly.

These stories are getting more commonplace. It seems that the entrepreneurs who “hit” these days are doing it more quickly, making more money, and doing it at a younger age. Back in the 70s, it took a decade plus to build a company and $10M, even in today’s dollars, was a big victory for an individual. Up until the late 90s dot-com boom, even though these stories existed, they were less common and took longer.

The storyteller explained that this 27-year-old is more brilliant and more hard-working than the previous entrepreneurs he’s seen.

That can’t be it. There are only so many hours in the day, and the entrepreneurs of yesteryear worked just as hard as the entrepreneurs of today. And the ones who came before were just as brilliant. Human intelligence has not evolved that dramatically in 10-20 years.

Rather, I posit that the amount of leverage available to a modern Internet entrepreneur is far, far greater than was available to entrepreneurs of previous generations. The number of entrants has dramatically increased as well. The overall hit rate might be lower, but the ones who win, win bigger and faster thanks to the leverage.

Gone are server farms, telesales and support, marcom material, tradeshow booths, direct sales forces, licensed software, mountains of code, reseller agreements, plane tickets, hotel rooms, printing CDs, voicemail systems, and so on and so forth.

Modern Internet entrepreneurship starts with a few engineers working for nothing and carrying latops and cellphones. They coordinate with Skype and GTalk and wikis and bug tracking sytems. The company itself is snapped together with outsourced HR, cookie-cutter incorporation, and outsourced finance / payroll. Marketing is done virally, or through SEO, or SEM. Customer service is handled via the community and forums. PR and outreach through tweets and blogging. Payments come via Paypal. Ads are served up by third-party ad networks. Storage goes on Amazon. Computation scales via Amazon, Softlayer or Rackspace. Code is built upon stacks of open source, SaaS, and $10/month services.

What used to cost $1M-$2M to set up, now costs $10K. What used to cost $5M to build, now costs $250K. What used to cost $20M to go to market now costs $1M.

But the upside hasn’t gone down. It has gone *up.* The 3 billionth person will be online shortly. They can all use the product. Network effects are stronger than ever, and some businesses become natural monopolies very quickly. Most web products have no marginal cost of replication, so adding a new customer is pure profit.

Less labor required. Less capital required. Less cost to scale. Larger markets. Cheaper marketing. No cost to ship more product.

No, people aren’t getting any smarter or harder-working. But the amount of leverage is obscene. The hits – Yahoo!, EBay, Google, Skype, MySpace, YouTube, Facebook, Twitter, Zynga, are each arriving faster than the previous one did. And the leverage is increasing, not decreasing.

The returns to scale for being smart, young, skilled, and high-energy have gone up tremendously, and that has profound implications for society. The smart are getting richer.

Update: An insightful comment on Hacker News: Basically, the Internet is a wide and deep place. The depth creates a few huge winners and the breadth creates a large number of small winners (who would have been losers in the old system, but due to the above-mentioned low costs, can still win). What’s missing is the traditionally fat middle. We’ve gone from a normally distributed set of outcomes, to a power-law distribution. The median is a small fraction of the mean. This is bad news for anyone who has built their business predicated on their achieving mean outcomes. That includes mid-stage VC funds, moderately-capitalized companies (traditionally speaking), and societies that care about “equal” outcomes.

Users bring you traffic

Duh.

But how?

I only know of four viable methods:

  • A simple core built-in feature, where by using the product, users invite / share it with others. This used to be mostly about email address import, although these days Digging, Tweeting, and of course, spreading on Facebook are very popular
  • Users embed the product onto their own blogs / pages / sites
  • Users create original content that gets picked up by GoogleBot, gets SEO’ed, and then brings in other users via Google search.
  • Users actually pay for your content, whether through subscriptions, or much more likely, virtual goods. This, in turn, allows you to buy traffic

If you don’t have one of these four methods in operation, and you’re building a web-based company, you’re going to find yourself begging for traffic a lot. 

The Aging Entrepreneur

Can older people be great entrepreneurs?

Marc Andreesen has a great post on this age-old question. In part I, he’s digging through the data. Some of his observations are powerful and worth summarizing:

"Generally, productivity — output — rises rapidly from the start of a career to a peak and then declines gradually until retirement.

This peak in productivity varies by field, from the late 20s to the early 50s, for reasons that are field-specific.

Precocity, longevity, and output rate are linked. "Those who are precocious also tend to display longevity, and both precocity and longevity are positively associated with high output rates per age unit." High producers produce highly, systematically, over time.

The odds of a hit versus a miss do not increase over time. The periods of one’s career with the most hits will also have the most misses. So maximizing quantity — taking more swings at the bat — is much higher payoff than trying to improve one’s batting average.

Intelligence, at least as measured by metrics such as IQ, is largely irrelevant."

I went through an evolution of sorts on this topic.

I started with a variation of the Beard Hypothesis (enthusiasm decreases with age but experience increases, and there’s an optimum cross-over point). This is the easiest viewpoint as you get older and look back at some of your earlier crazier ideas, but notice that that older crowd is very risk-averse. Douglas Adams had a great take on it:

  1. "everything that’s already in the world when you’re born is just normal;
  2. anything that gets invented between then and before you turn thirty is incredibly exciting and creative and with any luck you can make a career out of it;
  3. anything that gets invented after you’re thirty is against the natural order of things and the beginning of the end of civilisation as we know it until it’s been around for about ten years when it gradually turns out to be alright really.
  4. Apply this list to movies, rock music, word processors and mobile phones to work out how old you are."

 

I then moved on to Dean Simonton’s observations, beautifully covered in Marc’s article. My thinking was driven by books like "The Black Swan," "Fooled by Randomness," DeVany’s analysis of Hollywood Economics and Home-Run Hitting, and a casual observation of how Evolution creates things (massive trial and error). Basically, the number of swings at bat, poems attempted, paintings painted, etc. determine the success rate. The more you try, the more you learn, the faster you iterate, the better you get, and the more chances that you have of being productive. Your outcome scales more with the number of bets than the size of the bets. As the violinist Pablo De Sarasate put it, "For 37 years I’ve practiced 14 hours a day, and now they call me a genius. "

Now I prefer a slightly different hypothesis. More of the creative instinct is driven by the sublimated sex drive and the desire to attract a mate than we give it credit for. And more of it is squelched by the demands of family than anything else. An extreme take on it is presented by Kanazawa:

"Scientists tend to ‘desist’ from scientific research upon marriage, just like criminals desist from crime upon marriage."

 

Marc asks:

"So here’s my first challenge: to anyone who has an opinion on the role of age and entrepreneurship — see if you can fit your opinion into this model!"

When you are young, hungry, and single, you have

  • huge amounts of free time (more swings at the ball)
  • less to lose (more swings)
  • enthusiasm (more likely to swing)
  • sublimated sex drive (more likely to swing to stand out from your peers).

As you age, you have

  • less free time, more family demands, larger social networks (less swings)
  • more to lose (public embarrassment in front of an established social circle means you don’t want to start anything fresh) (less swings)
  • experience (if you’re probably going to miss, why bother swinging) (less swings)
  • fulfilled sex drive (have sex rather than swing)

"And here’s my second challenge: is entrepreneurship more like poetry, pure mathematics, and theoretical physics — which exhibit a peak age in one’s late 20s or early 30s — or novel writing, history, philosophy, medicine, and general scholarship — which exhibit a peak age in one’s late 40s or early 50s? And how, and why?"

 

Unfortunately for an aging me, anecdotal evidence aside, entrepreneurship favors the young.

The difference between poetry, pure math, theoretical physics, and novel writing, history, philosophy, medicine, scholarship, is that the former set requires huge (multi-year) intense, focused, almost isolated blocks of free time, whereas the latter set can be picked up and put down and resumed later without too much cost. The first set comprises problems that are solved by an emotional state (poetry, painting), by loading a very difficult single framework into your head (math, physics, coding), and / or competition (driven by sex drive and time-sensitive). The latter set are more rational, are systems problems rather than point problems, and don’t have time-sensitive competition.

Modern entrepreneurship, especially web entrepreneurship, is extremely competitive / time sensitive, requires enormous amounts of iteration even within a single product life-cycle, and often requires solving many challenging technical and business problems one after the other in a public view (with the opposite sex watching). So, it favors the young and single.

Which is not to say that one can’t do it if one is older and settled down. Mathematician Paul Erdos was famous for his prioritizing his work above all else (he remained single, by the way). There are many older successful entrepreneurs who spend tremendous amounts of time away from their families.

…and the rest give up and just become VCs…

 

Two More Hacks

 

The option pool shuffle: beat the game and raise your valuation:

Summary: Don’t let your investors determine the size of the option pool for you. Use a hiring plan to justify a small option pool, increase your share price, and increase your effective valuation.

Focus on your share price, not your valuation

Summary: Focus on your share price and the number of shares you own — metrics like valuation and percent ownership can fool you.

Hope you guys are finding these useful. Nivi is also talking and posting about them, usually faster than me…

 

Be Chaotic Neutral

The Google / YouTube looks like a win-win all around. Well, almost.


Google:

  • Acquire the future of video on the Internet for roughly 1% of your market cap.
  • Get $500M in escrow to protect against copyright lawsuits
  • These are lawsuits that Google would probably have to defend YouTube against anyway, even if Google didn’t own YouTube. Huh? Let’s see, YouTube stores and serves up copies of videos without copyright holders’ advance permission and removes them when removal is requested, under DMCA Safe Harbor. Google copies books, and serves up copies of pages without copyright holders’ advance permission…

Youtube and shareholders:

  • 1 Billion plus reasons to be thrilled
  • Uncle Google takes on monetization risk and legal risk

Major labels:

  • $50 Million each
  • A promise from YouTube that within 6 months, the copyrighted nasties will be gone

Losers:

  • Small Labels: Don’t have the money or the resources to mount a serious legal challenge to Google. Didn’t get paid.
  • Small video-sharing sites: The major labels are going to sue them out of existence to establish a precedent, doing the dirty work for Google et al.
  • Artists: Royalties? What royalties? The $50M to each label is structured as an equity investment, and not subject to royalty splits.

So, Google gets the prize, the labels get the money, YouTube gets the payout, and Google extends its one-time massive copyright violation to build critical mass, while using the labels as enforcers to make sure that no one can repeat the YouTube story.


Yes, you can make money without being evil. But for YouTube’s competitors, small labels, and the artists, evil is relative.

Something Vast This Way Comes

The Vast.com (developer) Preview is finally available! If you’ve been wondering what we’ve been up to, here it is, in a nutshell – we are building a search service that extracts classified ads from across the web, structures them, and then makes them available via an open REST API for commercial and non-commercial uses.

A little more detail:

- We are crawling the web and large parts of the blogosphere with a general crawler, similar to the ones operated by Yahoo!, Google, Ask, MSN, and Gigablast.

- The crawler activates forms, and digs deep to find even dynamic data (although it certainly doesn’t fill in any logins and passwords)

- We automatically recognize classifieds listings – currently cars for sale, job postings, and personals profiles, and extract and normalize the surrounding metadata (make, model, price, mileage, salary, location, title, age, gender, etc.).

Currently, we have some of the largest databases anywhere, of over 15 Million classified listings across these three categories, automatically extracted and structured with no human oversight, from nearly 50,000 web sites and blogs. (We actually crawled many, many times that number, but these are just the sites that have results to date).

If you are an end-user, you should be able to search for that hard-to-find listing without having to visit hundreds of sites, and compare cross-site results, with images, sorting, and statistics.

If you are a web-site owner or web developer, we’re offering a no-hassle API to show this data to your visitors, or to mash it up to your hearts content. You can use it build a huge destination site, an interesting application, or to supplement content and listings that you have today. You CAN use it for commercial purposes, and as long as it’s being shown to real end users, there’s NO LIMIT on the number of queries. Everything you see on the site is built on our API, so you should be able to replicate Vast.com on your own site or blog.

If you have a classifieds site or a blog and would like your ads to be included in our results, you shouldn’t have to do anything. Just post like you normally would, and we’ll find you. If we’re not getting your results or not getting them all, drop us a note at help – at – vast – dot – com and we’ll try and fix it.

We’re going to keep this site and the API as open as possible, and like a good net citizen, link directly back to the results. We don’t compete with the people that we crawl by taking direct listings. We don’t rely on explicit tagging. And we do an enormous amount of de-duplication and spam filtering to keep the results clean.

Of course, this is a search service, not a listing service, so you can expect some spam and mis-classified results will sneak through. Some links will break due to changes, expirations, and finicky databases that were not designed to be “deep crawled.” In those cases, the cache is your friend. There’re also rivers of pornographic content that had to be filtered out, and occasionally, we miss a few. Please help out by reporting bad results using the links next to each result.

We will be adding more sources, better crawling, improved classification, and many more categories over time – this is just a start. We want to support the web community that wants to take highly-structured content and build applications on top of these massive data flows. When we start making revenue through syndicating this data, we will share it with the developers and sites distributing it via the API.

What more would people like to see? How can we help or improve?

Update: Some coverage of the launch and reviews from TechCrunch, Paul Kedrosky, Peter Ripand CNet.

Web 2.0 + Web 2.0 = Web 3.0

"We’re a movin’ on up,
(We’re a movin on up.)
To the east side.
(Mo-vin on up.)
To a de-luxe apartment,
In the sky-.
Mo-vin’ on up
(Mo-vin on up.)
To the east side,
(Mo-vin on up.)
We finally got a piece of the pie."
 
That’s right, Vast.com is moving! If you have a Web 2.0 company somewhere in SOMA or Mission and would like to sublease about 2000-3000 square feet of space, please contact me at [myfirstname]@[mylastname].[com]. We’d prefer something well lit, near to shops / restaurants, etc., and populated with interesting people. 

Craigslist takes on Sand Hill Road

I like Venture Capital. I really do. And even in the current bubble, Vijay, the World’s Most Desperate Venture Capitalist is a little exaggerated.

But what am I supposed to do when I put a job posting on Craigslist and get the following response?

“My name is XXXX XXXX, and I am a Principal with XXXXX, a venture capital firm based in XXXXXXXX. I learned about your startup on Craig’s List. My firm manages just north of XXX million in active funds. We invest in early-stage software and Internet companies, and I would be interested in learning more about your project.”

You can’t make this stuff up.

Actually, I have to hand it to the guy. One of the three things you need to succeed in Venture Capital is proprietary deal-flow (the other two are access to capital and good judgement). By hitting Craigslist early, these guys are doing legwork that others eschew – they’re hunting for the next Skype actively rather then putting their feet up on Mahogany desks and waiting for the deals to come pouring in. Welcome!

Lawyers or Insurance Salesmen?

At some point when you have a startup, probably when raising money, you’ll HAVE to get a corporate lawyer. Most are hideously expensive and infuriating. A few tips:

  • Don’t just go with the lawyer that the VCs insist upon. These lawyers will work with the VC on a hundred financings and with you on only one. Where do you think their loyalties lie? Get your own lawyer, and don’t budge.
  • Watch out for the bait-and-switch – this is when you interview the gregarious, smart senior partner, who then swaps in the less popular, less experienced partner once you’ve signed them up. And the new person might be cheaper, but not much cheaper.
  • Put them on fixed-fee per job, especially for closing a financing, and especially for lawyers for the other side (one of the old great VC tricks is that startups pay for the VC’s attorneys in closings! A ridiculous practice justified as being “standard”)
  • If you have issues with the bill, resolve before paying. Possession is 9/10ths…
  • Make your lawyers do the heavy lifting of drafting the financing docs. The drafting side wins all of the small points, by default
  • Finally, good lawyers are advisors who weight pros and cons when giving advice that has a financial impact (which almost all of it does). Bad lawyers are whimpering insurance salesmen – and will encourage you to spend yourself to ruin by covering against every possible risk. Risks can and should be quantified whenever possible.

The 80-hour Myth

Let’s get serious. Nobody works eighty hours a week. Not eighty real, productive hours. Look closely at workaholics (and I’ve been one, and worked with ones), and a lot of the time is spent idling, re-charging, cycling, switching gears, etc. In the old days this was water-cooler talk. In Silicon Valley, it’s gaming, email, IM, lunches, and idle meetings. Let’s drop the farce, ok? Even when you had to work eighty hours, you didn’t, really. In economic terms, there is lower diminishing marginal productivity beyond some point. This point hits differently for different problems (some, like software engineering, require a lot of startup time to load a complex problem into your working memory).

In fact, your best work was probably done in tremendous, focused bursts, surrounded by long periods of dullness and inactivity. So, let’s try to figure out how to maximize the probability and productivity of such a burst, rather than try and force it to be predictable and prolonged.

First, measure outputs, not inputs, in yourself and your organization. Otherwise, you will be fooled by the modern knowledge worker, who is highly adapted to spend time at the office and manage upwards.

Second, measure productivity over a longer time-scale, say weeks and months rather than days. Some of the most creative and productive people that I have ever met work in multi-week bursts and then have weeks where they just idle with little done. It’s the nature of the human animal.

Third, introduce peer pressure into the mix. This is often done in software via “Extreme Programming” or in business by “Teamwork.” Whatever. Get two productive people in the same room on the same problem, and as soon as one hits the upward oscillation and is ready to work, odds are that he / she will inspire the other one and move them along.

Fourth, create a physical environment conducive to oscillatory productivity – eschew offices for non-traditional settings, let people have space, and let them keep their own hours.

Lastly, be ruthless on accountability and output over the long term. Nothing damages a startup like a mediocre and reliable performer.

Now go work harder…