Here’s what we do:

• Keep the team small. All doers, no talkers. Absolutely no middle managers. All BD via APIs.
• Outsource everything that isn’t core. Resist the urge to pick up that last dollar. Founders do Customer Service.
• People choose what to work on. Better they ship what they want than not ship what you want.
• No tasks longer than one week. You have to ship something into live production every week – worst case, two weeks. If you just joined, ship something.
• Peer-management. Promise what you’ll do in the coming week on internal Yammer. Deliver – or publicly break your promise – next week.
• One person per project. Get help from others, but you and you alone are accountable.

If they can’t ship, release them. Our environment is wrong for them. They should go find someplace where they can thrive. There’s someplace for everyone.

It’s not perfect. We ship too many features, many half-baked. The product is complex, with many blind alleys. It’s hard to integrate non-engineers – they aren’t valued.

But, we ship.

The cost of starting a company has collapsed. It’s now just (minimal) salaries. For entrepreneurs, desks are free, hosting is free, marketing is online, and company setup is cheap.

Raising the first $25K for product development is easy – join an incubator. Raising the next $100K is easy – investors are following the incubators with automatic notes. Building a product and launching a product are easy – develop on Open Source Stacks, host on Amazon, launch on Facebook, Android or iOS, get your early traction.*

Getting real traction is hard. Raising millions of dollars is hard. Building a sustainable, long-term company is hard.

Yammer can hire. Square can hire. Twitter can hire. These companies have achieved product / market fit. Your pre-traction company has not, and so it has a hard time hiring.

If the costs of founding a pre-traction company have gone down, then returns to pre-traction founders must go down.

Throw out the old cap tables. A founder doesn’t get 30% and an early engineer shouldn’t get 0.25%. Those are old numbers from when you had to raise VC capital before you could build a product. Before everyone could and did start a company.

Post-traction companies can use the old numbers – you can’t. Your first two engineers? They’re just late founders. Treat them as such. Expect as much.

Your next five designers and developers? Your cap table probably can’t even afford them until you have traction, and the cash that follows it.

Close the equity gap, and hiring will get a lot easier.

* Of course nothing is ever “easy” – but it’s a lot easier than it used to be.

** This is just my opinion, not that of my employer. But you can see what they’re doing to help at AngelList Talent. Coincidentally, the lead hacker on that project put up this related must-read post on his own blog yesterday.

“Give me a lever long enough, and a place to stand, and I will move the earth”

- Archimedes

To reduce unemployment, we need to lever up.

Not like Wall Street did, through debt, but like Silicon Valley does, with tools.

Leverage magnifies your actions and increases your productivity. You can get leverage through:

• labor (people work for you)
• capital (money works for you)
• tools (machines work for you)

We’re trying to help labor. We don’t have much capital. We must give tools to the people.

All of the great modern tools for productivity – the printing press, the factory, the movie studio – require capital and coordination to use. The computer is the first tool since maybe the stone axe, that an individual can use to gain massive leverage, without permission from anyone else.

The modern computer can help in every endeavor – even if you don’t use a computer at work, you’ll soon carry a $50 smartphone in your pocket. You’re banking online, learning online, communicating online. The computer, and now the smartphone, make everyone more productive.

This is why Silicon Valley doesn’t have enough people, when the rest of the nation doesn’t have enough jobs.

Now computers are simpler. More ubiquitous. Cheaper. More accessible.

And we can teach people how to use computers, through computers, using tools like ShowMe, CodeAcademy, Bloc, and so on.

Let’s create the world’s first, completely Digitally Literate Society. Not a nation of programmers (maybe someday) but a nation of people who are comfortable with the most powerful tool ever invented by mankind.

Let’s do it quickly – train them in three months from start to finish. And cheaply – for free.

We can create the program at Stanford, MIT, Berkeley, Harvard, etc. We can teach basic proficiency – use online applications like Google Apps, Search, DropBox, Email, Online Banking, Travel, Ordering supplies, etc. Some basic creation – create your own web-site. Research questions. Solve problems. Learn to learn.

Google, Amazon, and Apple will loan us the tablets. Companies will pay us to have people learn to use their apps. An app marketplace where companies pay society to educate society.

Apple, Square, DropBox, Twitter have created beautiful software interfaces. iPad and Android have made the hardware accessible. Today, it is not just cheap to build a company. It is cheap to re-build a person.

Let’s create the world’s first digitally literate society. The world’s most desirable workforce. If that won’t generate employment, nothing will.

Facebook developers face two major problems. Firstly, to attract them, Facebook concocted and gave the developers access to artificial virality channels. Then, to prevent spam, they had to take them back. But the enforcement seems capricious and arbitrary to developers, with some (i.e., the offerwall providers) being punished, and some (check a certain game company’s S-1) being rewarded. Secondly, Facebook is still figuring out its own business model, so what’s allowed and what’s not is subject to change – look at the graveyard of social ad companies and payments companies, and the recent introduction and mandates on Facebook credits.

Google should tell developers – “Here’s a simple set of rules that will never change. Here’s a simple API that we will always keep backward compatibility with. Here’s an incentive and a reward for creating an application that brings more users into G+. Here’s a simple and clear way for users to export their information and their social graph. Here’s the standard small cut that we take on everything – it will never go up.”

Right now, the only true open platforms for any startup are email and the web. Android is a close third. Facebook, iOS, SMS, etc., while beautiful and elegant, forget at their peril that there was a time when AOL, Compuserve, WAP, and other walled gardens were beautiful and elegant too.

An army of 100,000 developers is Google’s best chance against Facebook.

In the sense that an enormous amount of capital is being placed at risk, and its popping will have grave macro-economic consequences, No.

The total amount of additional capital flowing through the Silicon Valley early-stage ecosystem, thanks to Super-Angels and newly minted millionaires, is on the order of half-a-billion dollars or so. It’s no more than a middling-sized VC fund. Would the emergence of a new VC fund be considered a bubble? Would the collapse of one signal disaster?

Furthermore, most of this capital is replacing traditional Series A deals. As we say around here, “Seed is the New Series A.” The same companies that needed $3M to launch now need $30K-$300K to launch. So, it’s not surprising that there are many more of them.

Ok, but could that mean that the amount of capital for funding startups in the old environment is too much for the new environment? That the total supply of early-stage funding dollars should come down by a factor of ten rather than the number of companies being funded go up by a factor of ten?

This one is harder to ascertain, but my sense is that if there’s too much capital, it’s not an overwhelming overhang. Most of the small companies being funded will fail, but the ones that hit will generate fantastic returns. And because of their small size and operating costs, a greater percentage will be able to get “ramen profitable” than was traditionally possible. Of course, actual exits might still be rare. The volume of small M&A deals hasn’t scaled with the volume of Angel investments in small companies. I think we’re all going to have to become even more comfortable with failures, re-starts, and the kind of team re-combination that one sees from one Y Combinator Demo Day to the next.

One thing that has been happening is that Angel investment valuations have been climbing very quickly – un-sustainably so. Twenty companies in an Investors’ portfolio carried at a valuation of X might now suddenly be twenty small bubbles at a valuation of 2x. They may not be able to clear their valuation in a micro-acquisition, or lead to a down-round in a VC financing, or just give a sub-par return for what might otherwise have been a hit. Prices on the margin *have* been rising, and that will hurt returns.

Prices have been rising not because of a huge influx of money (no big, macro bubble), but because of a modest influx of price-insensitive money. Prices get set on the margin. On Wall Street, it doesn’t take an influx of $5 Trillion into the stock market to move the total market capitalization of all of the companies from $15 Trillion to $20 Trillion. (In fact, money never moves into the stock market – it moves *through* the stock market, but that’s another post). Rather, a small series of secondary transactions at the margin, done by price-insensitive buyers at high prices, can move the quotational value of each stock considerably higher. Similarly, a small number of high-profile Angel investments, moving small amounts of capital but at very high valuations, can make the entire market look overvalued.

So what’s driving the new, price-insensitive bidders? It’s three things:

1) VC Funds – Every VC that announces a $20M seed fund is basically a price-insensitive Super-Angel. They’re buying first looks and options to finance companies in the future, so they’re not particularly price sensitive. When you have $1B under management, $20M is pocket change.

2) Entrepreneurs Set Pricing – Leaderless “party” rounds often end up with the entrepreneurs setting the valuation. And clever entrepreneurs are getting the less price sensitive investors to sign off on the initial terms, and then taking those terms, social proof in hand, to Investors who would have been traditionally more price sensitive.

3) New Angels – People who have had modest exits and are now angels are just building their portfolios. They don’t have enough exits under their belts to understand that price does matter. Not as much as in other businesses, because a Power Law distribution here means that one winner can dominate your whole portfolio. But it still matters because a lower price allows you to pick more startups in the hope of finding that one winner. New angels often hear that “If it’s the right company, price is irrelevant.” That’s true, but that gives too much credence in your own ability to pick the right company. If you’re informed just enough to know how un-informed you are, then you doubt your ability to consistently pick winners, and a low price will give you more attempts to figure it out.

So does this always end in tears?

For VCs, they will look back at these seed funds and find that (a) their seed efforts didn’t have the best returns and that (b) they didn’t always get the first look options that they always wanted. But it will probably still pay off. Seed is the new Series A, and if you don’t do Seed, you’re basically retreating to later stage.

For Angels who are price-disciplined, things will be fine – we are undergoing an incredible renaissance in technology, with smart phones taking computing to local arenas and social networks taking it into the mainstream populace. There’s a lot of opportunity and great companies will be built. For un-discplined Angels, there will be pain (unless they find their one big winner early), but it’s part of the learning curve inherent in the business.

Entrepreneurs win big, all-around. There has been some concern that all of these small companies are going to get orphaned – who will fund them downstream? I don’t necessarily view this as a negative, though. Even failed, these entrepreneurs are going to be much more employable than those who never tried or had the opportunity, and given that the minimum efficient scale of businesses is getting smaller and smaller, more of them will succeed than in any previous generation.

Entrepreneurs sticking to the old model of hiring are getting hurt. The old model used to be that after a Series A, you could hire an engineer and give him 0.25% of the company. Good luck hiring a great engineer for that in Silicon Valley now, for a freshly-minted startup with a small seed round in your pocket. The opportunity cost for that engineer is now to go join a Seed Combinator or raise some Angel funding. So, we’re going to see the equity gap narrow between the founders of raw startups and early key team members. Only the best startups with high valuations and tremendous traction can recruit under the old formulas anymore.

I will propose, however, that whose money you’re investing is less relevant than on what terms it comes on. Venture Hacks was created to educate entrepreneurs when the Angel market was much less robust. At the time, if you wanted anything more than $250K, you basically had to go to Venture Capital.

Venture Capital, at the time, was a bundle of three things – Advice, Control, and Money.

The money is obvious – you want money, you go get it. But in the case of VC, it came with control – because the amounts being disbursed were large enough, it made sense that they needed to be actively managed. And finally, because it was actively managed, you cared about how well it was managed, and thus the advice.

Now, thanks to increased dissemination of information on the web, Venture Hacks and many others (Series Seed, A VC, Feld Thoughts, The Funded, etc.) have helped entrepreneurs understand the control layer. Y Combinator and other seed incubators have essentially helped “union-ize” the startup workforce, and via reputation and standardized documents, reduce the control that VCs have over startups. Lower capital requirements have opened up the playing field of investors, and reduced the need or even the ability of early-stage investors to do active portfolio management.

So Angels are investors who leave out the control. They essentially bundle just Advice and Money.

The amount of money invested and whose money it is are factors that play into it, but most Super-Angels eschew control. Similarly, some seed funds (i.e., True Ventures), and some larger funds (i.e., Andreessen-Horowitz) make entrepreneur-friendliness a core part of their ethos, and as such often leave out classic control provisions (M&A vetos) or mechanisms (Board seats). Conversely, you’ll see some Super-Angels or even traditional angels asking for more control if they’re investing a significant portion of their investable capital.

We are also seeing the emergence of Seed Combinators and Pure Money plays. Y Combinator, TechStars, I/O Ventures, AngelPad, Founder Institute, etc., are basically giving advice – if you’re going there for the funding, then you’re not doing the math. DST and later stage funds are pure sources of money.

The net effect is that the Venture Capital is slowly being un-bundled, as mature industries often are.

One side effect of all of this is that reputation matters a lot less. It used to be that VC reputation was built on their ability to pick winners (this has signaling value to other investors and potential employees), the advice that they gave, and how friendly they were to the entrepreneurs, given that they essentially had Board control. Most of this doesn’t matter anymore – it’s only the signaling and advice that carries much value for savvy entrepreneurs, and even the advice part is gradually being augmented and possibly replaced.

There is one thing that the new unbundled model can’t replace – which is the subtle influence of incentives. You may be able to get advice from the best advisors, money from the cheapest source, and keep control for yourself, but the one thing that an experienced VC partner can *uniquely* provide you is someone who has a strong incentive (because they own a lot of your company), and a very different perspective and experience base. That’s the old-fashioned “Investor as a Partner” model. It will always survive, to some extent, but it’s not the model that any but the best firms practice.

So, it’s especially disappointing when we get promising startups pitching on AngelList from remote locations. Some we’ve managed to get funded – including ones in Canada and Europe. Others are harder – especially in Russia, Latin America, and Asia.

The problem, as I’ve come to realize, is that funding markets develop in reverse.

In any given geographic region, the first companies that get funded are the ones that least need funding. They have strong operating histories, auditable financials, predictable cash flows, etc.. Funding these companies is less risky, and so a secondary, and then a primary, market forms around them. Call these the public markets.

After the public markets come the mezzanine investors, investing just before a company goes public. And because the mezzanines now exist to pick up risk, late stage private investors start forming behind them. And so on and so forth until you end up with Seed incubators and Angel investors.

Essentially, the single biggest risk that you have as an investor is “downstream financing risk.” The risk that the company won’t be able to raise more money once it has spent all of your cash.

This explains the apparent paradox that in less mature innovation cities, you’ll have an easier time finding VCs who will invest $10M in a mature business, than Angels who’ll invest $100K in a raw startup.

It’s a measure of the incredible strength of the Silicon Valley ecosystem that Y Combinator has chosen it as its hometown. YC and its brethren can only exist because of the rich Angel ecosystem. Paul Graham was smart enough to realize that his graduates couldn’t function without a rich Angel ecosystem, and went to great pains (such as AngelConf) to foster it.

Similarly, the true evidence that the NY Angel market has finally blossomed is that TechStars and a number of other seed combinators are choosing to do business there.

As an entrepreneur choosing your base of operations, take a careful look around. If you don’t see many VCs, you’re not likely to find many Angels either. Even though the VCs invest more money, they actually take less risk.

Similarly, Angels should realize how this whole pyramid functions. Investing in companies that won’t have access to Venture is incredibly risky. Investing at Venture valuations in Angel-stage companies means that your portfolio will likely generate negative returns.

Finally, if you are one of these talented entrepreneurs in a “frontier” location where there aren’t enough angels around, you have two choices. You’re either going to have to bootstrap to the point that you can show real financial returns, which will attract local and foreign investors. Or, you should consider relocating your headquarters (although not necessarily the whole company) to a funding hub.

Flickr violated the assumption that you wanted your photos private by default. Before Flickr came along, the default photo sharing model, espoused by Shutterfly, Snapfish etc., was that of private photo sharing.

LinkedIn violates the assumption that your resumé is private.

FourSquare violates the assumption that your location is private.

Twitter violates the assumption that some of your thoughts are private.

Instagr.am violates the assumption that your mobile photos are private.

Blippy is testing the assumption that some of your financial transactions are private.

All of these services take your original notion and need for privacy, and trade them off against your need for fame and recognition.

What’s next?

There’s some truth to it – it is human nature, after all, to look for social proof and authority when making decisions. However, that’s not the whole story.

In public markets, Investors make their decisions to invest in parallel, and in theory, most of the relevant information about a company is publicly disclosed, by law. Businesses are also much more mature, and therefore easier to value. Finally, the market is very liquid and very deep, so there isn’t much uncertainty about the supply of money available and availability of money in the future.

In a public market, it’s unlikely that I have access to private data about a company’s prospects, and if I do, I buy or sell the stock and move the price. Your ability to act on my knowledge is zero – by the time you learn about it, it will already be built into the price.

By contrast, in private markets, there is a lot more non-public information scattered across many individuals, and they have the luxury of deciding in series. Businesses are brand new and immature, and very difficult to value. The market is shallow and illiquid, and a “Keynesian Beauty Contest” means that you want to finance a company now just because it is likely to be financed in the future.

Therefore, when you see other investors piling into a company, you can infer: – They probably know something about the company or the market that you don’t, given that a lot of the information (quality of founders, state of competition, true size of market, etc.) is private and scattered across many minds
- This company is more likely to get financed in the future, since it seems able to attract many, high quality investors (the aforementioned Keynesian Beauty Contest)
- And you *still have time to act at the same price* on this new information

That last fact more than any other causes Investors to move in herds.

It is rational for private investors to move in herds. They have the strong incentive – limited and diffuse knowledge. More importantly, they have the means – financings in which the price doesn’t change as the investors decide in series.

Synchronous activities, such as phone calls, screencasts, videos, and webex conferences are almost as bad. If you’re trying to get the attention of an investor or exec at a major company, and don’t want to waste either your time or their time, pay very, very close attention to the cost of their time and you’ll fare better. In order of escalation, one should proceed as follows:

- Introduction – have your introducer send them an email *without putting you in the to or cc line.* That way, if the target does not wish to engage, you haven’t put them in the awkward position of having to supply an excuse or a turndown. The introducer protects their ability to be taken seriously this way.

- Once you have a response / interest, send something written for them to look over and offer a phone call, webex, or meeting as next steps. Written always beats a video or screencast, since most intelligent people can read a lot faster than they can listen. A webex demo is a crutch – if your product has to be explained, it probably isn’t ready for the average consumer. And if it’s in beta, you should at least know how to open up a password-protected demo version.

- If the target displays interest in learning more, then you can move to a call or in-person meeting.

People who insist on a webex demo or in-person meeting at the outset are forcing the target to make a high-cost decision, and are subtly signaling that they don’t value their own time, and certainly don’t value the targets’ time. They might think that they are demonstrating persistence, but one wants to see persistence in chasing the product, not in chasing dead-ends.

In short, your high-value targets don’t have time for meetings between un-screened parties, and since you’re busy building a company, you shouldn’t have time for them either.

I’m also throwing a meetup on SundayMarch 14 5-7pm in the Four Seasons Lobby Lounge at 98 San Jacinto Blvd.

If you’re a Venture Hacker, please come talk to me about your startup and venture hacking at these two events. I’m looking forward to pressing the flesh and kissing some babies.

Please RSVP on Facebook xor Plancast so we can get a headcount. Gracias.

- It’s the first computing device that’s social in the real world. The iPhone is something that one person uses at a time. The Laptop screen faces you – two people using it at one time is awkward. iPad style devices can be shared in the real world – imagine laying it flat and playing multiplayer games facing each other, or watching a movie together, or even showing someone a web page – far easier than on any other device.

- It runs the iPhone OS. Why do users need to know what a file system is? Or map the interactions of a moving block of plastic onto a screen (mice)? Or worry about memory management? Or multiple levels of trash-delete? Or the concept of multiple, mounted volumes? Or which network you’re connected to?

Basically, the iPad is (a) usable by the other 5.5 Billion humans, and (b) it can enhance real, physical human interactions. These two facts alone make it a worthy successor to the iPod and iPhone. Steve isn’t ready to start filling niche markets just yet. He’s still looking to rule the world.

In some ways, it’s better:

- You pay to go to graduate school. YC pays you.
- After school, you get a job. After YC, you create jobs.
- You repeat the works of the greats in school. YC expects you to do original work.
- In school, you are graded on an arbitrary scale by arbitrary people. After YC, you are graded by the real world.

Some day, most schools in most disciplines will be like this.

* – Of course, “Y Combinator” is a generic term for Techstars, I/O Ventures, SeedCamp, Capital Factory, Founders Institute, and all of the other similar pre-angel incubators.

I won’t belabor the obvious reasons – the Investors are here, the best engineers and entrepreneurs self-select and come here, Stanford and Berkeley, yadda yadda.

Instead, here are some points that you may not have considered:

- Especially on the Consumer Internet, modern businesses are becoming winner-take-all (thanks to leverage and network effects). Therefore, if you’re 10% better than the competition, you win, likely the whole market. You need every possible edge…

- All of the companies that you need to partner with are out here. Business development doesn’t happen in formal meetings. It happens in informal coffees, parties, and relationships.

- If you are here, your network will be using all of the latest tools – Twitter, Foursquare, Quora, Nexus One, etc., before other networks in other cities will. These networks hit critical mass here earlier and are thus more valuable to the early adopters here. You’ll have a 3-month+ head start on people outside to see what’s coming next. Imagine trying to design next year’s clothing without firsthand immersion in this year’s fashion, in Milan or Paris.

Sure, it’s possible to build a great Consumer Internet business starting out somewhere else, but given that these are winner-take-all businesses, do you want to start out that far behind the curve?

I’ll be on a panel at the “Future of Funding” event in San Mateo on February 18th.

More information here:

The Growth of Small Firms
February 18, 2010
11:00-12:00pm

Description: There are an increasing number of venture capital firms with smaller and smaller fund sizes. These firms are starting to see some interesting returns, while remaining popular with entrepreneurs. What is working? What is not? This panel will explore how some of the small firms are investing and looking for big wins.

Fellow Panelists:
- Moderator: Matt Marshall, CEO and Editor, VentureBeat
- Mike Maples Jr., Managing Partner, Maples Investments
- Rob Hayes, Partner, First Round Capital
- Reid Hoffman, Partner, Greylock Partners

If you’d like to attend and if we know each other, please contact me and I might be able to obtain a discounted pass for you.

http://venturehacks.com/articles/pick-cofounder

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.

Then everyone got a desktop. And the desktop is where you did most of your computing. And you carried around your underpowered laptop, which had to be synced with your desktop, or docked to a big screen, keyboard and mouse to be usable. The laptop had less power, but it was more mobile than the desktop.

Now most early adopters have a laptop as their main computer. And are carrying around their underpowered smartphone, which has to be synced with their laptop on a regular basis. The smartphone has less power, but well, it’s more mobile.

We’ll dock our smartphones to our laptops for a while. But, if we can extrapolate from the history of computing, the laptop is headed for the dustbin.

Which means that Apple will be ok. Google will be ok. But if Windows Mobile is any indicator, Microsoft is in deep, deep trouble.

http://feeds.startupboy.com/startupboy

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. 

We get these questions a lot from the enterprising young. It’s a very intelligent question: You look at some old guy who’s rich and you ask,

“How can I become like you, except faster?”;

Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Step by step you get ahead, but not necessarily in fast spurts. But you build discipline by preparing for fast spurts… Slug it out one inch at a time, day by day, at the end of the day – if you live long enough – most people get what they deserve.

- Charlie Munger

Out of school I offered to work for [Benjamin] Graham for free and he said I was overpriced.

– Warren Buffett

If you love wealth more than liberty, the tranquility of servitude better than the animating contest of freedom, depart from us in peace. We ask not your counsel nor your arms. Crouch down and lick the hand that feeds you. May your chains rest lightly upon you and may posterity forget that you were our countrymen.

- Samuel Adams

There is no subtler, surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and it does it in a manner which not one man in a million is able to diagnose.

– John Maynard Keynes

——-Original Message——-
Date: Sat, 16 Feb 2008 14:05:25 -0800
To: support@tumblr.com
Subject: Migrating from squarespace

>I’m abandoning my squarespace blog and moving to Tumblr. I have my own
>custom domain. My old RSS feed is at:
>
>http://www.startupboy.com/journal/rss.xml
>
>How do I set my tumblr RSS feed to be at the same address! I don’t
>want to lose all of my subscribers in the move… Can I map the domain
>to tumblr and then set the feed URL from somewhere inside Tumblr? Can
>I use a third-party service like Feedburner to do it?
>
>Thanks,
>
>Naval
>

 Hi, Naval. Tumblr doesn’t allow the creation of a custom RSS feed address. You might try burning your Tumblr feed in FeedBurner, using FeedBurner’s MyBrand feature to associate the burned feed with your custom domain, and then editing the Custom HTML of your Tumblr theme to point browsers/RSS readers to the RSS feed from FeedBurner MyBrand rather than to Tumblr’s default RSS feed.

I know MyBrand will let you keep http://www.startupboy.com in your feed address. I’m not sure if it will let you keep /journal/rss.xml. You’d have to experiment or ask the FeedBurner folks.

Info from FeedBurner:

http://www.feedburner.com/fb/a/publishers/mybrand

Sorry that I can’t be of more help on this issue. Please let me know if there’s anything else I can help you with. Thanks for using Tumblr!

Marc  :-)

—
Tumblr Support
support@tumblr.com

Turns out that Yahoo! search can’t find the Pirate Bay. Between moves like this and forcing page inclusion instead of crawling, I as a user, have moved on from Yahoo!. The other day I needed to go back to Yahoo! search to use their backlink checker, and instinctively did this… (see image)

• SquareSpace is annoying

• I was writing long, infrequent posts

I’ll post more frequently on my new WordPress blog – shorter, mor wide-ranging topics, and more as notes to self than anything else.

Where is the $150B going to come from? Reduced spending elsewhere (wash), increased taxes (same as reducing spending from the private sector – worse than a wash), borrowing from abroad (raises the price of capital for private businesses, or causes inflation, resulting in a wash), or printing more money (inflation / reduced purchasing power, which depending on what it does to inflation expectations, can be worse than a wash).

The fact that hundreds of millions of people believe this and that journalists and politicians constantly spout something so egregiously false at face value is a disappointing indictment of the masses.

In their honor, let us create the Perpetual Stimulation Machine! The government should inject more and more money into the economy. As it injects more, the economy will be stimulated, GDP will increase, government tax receipts will rise, and more stimuli can be injected!

In fact, I think just such economies are underway in North Korea and Cuba.

Note: Those who argue that money will be moved in a stimulus package from savers to spenders skipped Econ 102. Savings get loaned out and spent as well. Savings = Investment

Note 2: The stimulus is probably the oldest fallacy in Economics – the Broken Window Fallacy, which is also the same as the “Wars spur Growth” fallacy.

1. want sex. If they can’t have sex, they
2. want food. If they can’t have food, they
3. want fun. If they can’t have fun, they
4. leave

When going through hell, keep going

– Winston Churchill

Happiness = Health + Wealth + Good Relationships

Health = Exercise + Diet + Sleep 

Exercise = High Intensity Resistance Training + Sports + Rest

Diet = Natural Foods + Intermittent Fasting + Plants

Sleep = No alarms +  8-9 hours + Circadian Rhythms

Wealth = Income + Wealth * (Return on Investment) 

Income = Accountability + Leverage + Specific Knowledge

Accountability = Personal Branding + Personal Platform + Taking Risk?

Leverage = Capital + People + Intellectual Property

Specific Knowledge = Knowing how to do something that society cannot yet easily train other people to do  

RoI = Buy-and-Hold + Valuation + Margin of Safety

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…

At STIRR events, VCs fly business class, but entrepreneurs fly coach I have a similar rule – whenever I go to coffee / lunch / dinner for business, the person who has raised more money pays…

 Full description on Nivi’s blog here.

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…

Read all about it here.

Update: Coverage at VentureBeat, Brad Feld, Bart Decrem, GigaOm, etc.

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.

There are two kinds of animals – those who move and those who don’t.

Animals who don’t move count on a stable and predictable environment and replicate like crazy to compete for scarce resources, and to outlast environmental changes.

Animals who do move have to adapt to ever-changing environments, and therefore need a central nervous system.

We call the first set of animals "plants."

If you move, your environment changes a lot, which means you need a nervous system to detect and respond to those changes. So, your brain exists to protect your body as it moves, and it does this by constantly trying to predict the environment around it.

Stop predicting, and you may as well be a plant, except unlike that plant you haven’t cloned yourself a million times. You were counting on one shot at reproduction with sexual mutation to make up for one million shots with random mutation…and you lose.

So, keep moving, and be alert.

“Rael Dornfest and Tim O’Reilly heard about it and, not to be outdone, declared Web 4.0 over pizza last night at Il Fornio.”

As they say, read the whole thing.

 <iframe src=’http://www.mobber.com/embed/ajax?v=c’ width=775 height=115 frameborder=0 scrolling=no></iframe>

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.

If the Genie of the Market were to offer you all of the future earnings from EBay or Craigslist, which would you take? I’d take Craigslist.

Note that I’m talking about the strengths of the business models here. I’m fully aware that EBay owns 25% of Craigslist, so to say that Craigslist the company is worth more than EBay the company, I’d be saying that the capitalized Craigslist business model earnings are equal to twice the capitalized EBay business model earnings, and that is not what I’m saying. For evaluating the above numbers, look at the earnings generated by the business models, or assume that EBay owns 0% of Craigslist.

Estimating Valuation by listings

Craigslist currently carries 6M ads per month. At least 200,000 of these listings are job postings. They are in close to 200 cities (looking at their home page). They probably only have critical mass in about ten of those cities or less (from some casual browsing).

Currently, Craigslist charges only for Job postings, and only in three cities. Taken from Craigslist itself, we can see the rates:

And now they are adding fees for apartments in NY, and jobs in Washington DC, San Diego, Boston, and Seattle. Basically, as soon as a category in a city hits unassailable critical mass, look out!

So, jobs alone is today worth about $5 Million per month ($25 * 200K). Craigslist isn’t monetizing it all, but the direction and the intent are both clear.

Of course, Craigslist will eventually be able to charge for jobs, apartments, real estate, cars, a little bit for personals, vacation rentals, services, big local items, and in some countries, small EBay items. Notice that online, each of those 7-8 other categories is on the same order of magnitude as jobs, or bigger. The EBay items part may need some clarification – in countries where the development of the Internet precedes the development of a reliable postal system, more product commerce will happen over a Craigslist-style local system than over an EBay-style national system.

If Craigslist only monetizes half of these, that’s $20M per month. All of them and it’s $40M per month.

But Craigslist is still growing. A LOT.

Here are some stats that Craigslist itself has been handing out (these are about three months old):

Growth

Overall Page View Growth Rate (all cities combined) for last 12 months: 195%

Raleigh, NC: 13M pages/month +800% last 12 mos
Vancouver, BC: 21M pages/month +675% last 12 mos
Dallas, TX: 22M pages/month +650% last 12 mos
Minneapolis: 21M pages/month +625% last 12 mos

Can they double in size within a year? Easily. More likely, Craigslist will triple or quadruple in size before growth starts slowing significantly. Our previous range of $20-$40M / month now goes to $40 – $160M / month (as we make more guesses, our accuracy goes down, of course). The midpoint has us at $100M in revenue per month, or about $1.2B per year!

Try it another way: Take 6M listings a month. Multiply by 10 as they hit critical mass in 100 cities, as opposed to approximately 10 cities today. Multiply by 2 since existing cities like NY, LA, SF will continue to grow. Charge for a mere 10% of the listings, and charge $10 per listing (that’s a steal compared to the newspapers, and lower than Craigslist’s current rates. It’s also an average charge of $1 per listing). That’s $1.4 Billion in revenue per year. Their cost is near-zero (no content, no marketing, community-based customer service, a dozen engineers). After taxes, that’s still $1B in profit per year. Give them EBay’s P/E and it’s worth $50+ Billion.

I’m not adjusting the P/E for the fact that they are growing much, much faster than EBay (although that will inevitably slow down), or that their international opportunity is larger than EBay’s (that pesky postal system thing again).

Traffic Check:

Here’s another fun way to look at it. Alexa and other ranking sites mis-classify Craigslist as a community site. It has a traffic rank of 33 on Alexa (up from #40 when I wrote my first draft of this article last November!!), but if you were to consider it as a commerce site (it’s classifieds, after all), it would be the 4th largest one, right behind Amazon, Ebay, and Yahoo.

Craigslist’s growth has actually picked UP. How many big, successful companies are doing that?

2005 has been a great year for Craigslist.

Of course, for the other classifieds sites, it’s a massacre:

So, will Craig take the money? Well, 25% of the company already belongs to EBay (they bought it from a co-founder of Craig’s). Of the remainder, undoubtedly some is in the hands of employees. Craig is probably somewhere between 50% and 60%. He may want to give some of it to charity. Or family. Inevitably, he will own less than 50%. At that point, you can bet that the company will embrace capitalism and the virtues of liquidity.

Craigslist is a dot-org no more. It’s a supercharged monopoly in the making for the single most monetizable category in the world (high-ticket items and classifieds), tripling or better year-over-year. And Craig Newmark, Customer Service Representative, is worth more than Larry Page or Sergei Brin.

The real story is that Craig is well on his way to building an EBay / Yahoo! sized business with no venture capital, no big-shot management, no marketing, no patents, no real technology, etc. He’s taken all the value from newspapers with none of the cost. And everyone loves him for it (probably because he’s leaving the money on the table). That’s the power of the Internet.

Sneak peek of IE7 Dialog

Ok, so I Photoshopped this. But, when Microsoft decides that it doesn’t want Google’s revenue stream as much as it wants Google gone, why wouldn’t it do this? And what’s wrong with helping consumers filter out unwanted content on the Internet? 

Update – I’ve created a monster. Abhishek ran off and wrote a Firefox extension to do this. Then again, Customize Google has been around for a while. Actually, this is hitting Mozilla, not Google. You know the Firefox default home page with Google search inside? Well, rumor has it that all of the ad revenue from it goes to the Mozilla foundation – that’s over a billion dollars to fund their fight against IE 7!

Update 2 – IE 7 breaks Adsense! (Hat tip to Ram).

Antoine de Saint-Exupery

Job Title: Senior Software Engineer
Salary: Competitive
Location: San Francisco, CA

Cute young startup seeks dashing hacker to work on large-scale computing problems.

Candidates must be:

Brilliant
Architecturally oriented
Driven to succeed
Self-motivated
Addicted to the web
Precise industry experience, languages used, and years spent slaving away are far less important.

In exchange, we offer:

Great team
Ridiculous levels of responsibility
Fun travel
San Francisco location
Lots of stock, market or above market salary
No face-time
Broad roles
Training to start your own company after this.

Send code, links to sites that you have built, and pointers to projects that you have contributed to, to myfirstname at mylastname dot com.

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!

At 1024×768, the UI differences are glaring. I’ve marked the ads in red and the information of dubious value in blue. The green checks indicate relevant, high-quality results.

To the average surfer, the info in white is all that matters. Note to everyone else except Google – fix the UI first – it’s the low-hanging fruit.

Web 1.0 was the time period between Netscape’s IPO and the March 2000 dot-com crash. It was exemplified by irrational exuberance, over-funding, and massive hype, but also by the mass-deployment of fundamental consumer-facing technologies, the birth of huge, high-margin businesses overnight, and a massive creation and transfer of wealth. In short Web 1.0 was the first bubble.

Web 2.0 is the second bubble.

There’re a lot of things being mish-mashed under the Web 2.0 umbrella, but it’s a sense in the air, a time, not a place. It’s that air of optimism (a little more cautious), that river of funding (a little less), the startup hype machine (slightly more subtle), and the birth of huge, high margin businesses (a few less).

This is a bit of a navel-gazing bubble though. We collectively thought that the biggest effect of the Internet was the consumer web – it wasn’t. It was the doubling of the global labor force that Internet-enabled offshoring enabled. It seemed like the real monetary pain came from bursting dot-com stocks. It didn’t – it came from the overleveraged telecom sector.

In the same vein, the real bubble to be afraid of is not the Web Bubble 2.0 – it’s the massive run-up in asset prices, real estate and stocks, post the Fed-driven increase in liquidity of the last five years. If that one pops, watch out.

• MSN Search has to be as good as Google search (not there yet, but possible)

• Microsoft is willing to forego the Google ad revenue stream in exchange for severely crippling Google. Right now, it seems like MS wants the revenue stream rather than to eliminate it, but that seems unlikely.

Want Cash? It comes bundled with an Advisor on your Board of Directors, like it or not. And they take Control.

Want Advice? VCs won’t take Board seats without putting in Cash – it’s the only way to get enough leverage. And they take Control. Always the Control.

Smart entrepreneurs in times of plenty (like our current financing bubblet), serial entrepreneurs, and those with profitable businesses break apart these bundles. To un-bundle, you must have multiple bidders (that’s a longer entry), and you must have the ability to refuse capital (on Sand Hill Road, collusion is just a lunch away).

Let’s break apart the bundle.

• Cash – you want this on the best terms possible. The brand is irrelevant here. Kleiner Perkins and Sequoia have built their brands by generating huge returns for their investors first and foremost, but at least a portion of that comes from undervaluing your startup. Best terms means a great valuation, small up-front option pool (you can always issue more later, diluting everyone, not just the pre-money common), small liquidation preference (1X, non-participating), and weak anti-dilution. You do have to be careful in that your investors will block exits that don’t make them a certain minimum rate-of-return on their investment, so you probably shouldn’t take money at a valuation higher than 1/3 of what a modest exit looks like.

• Advice – Suppose that you have a brilliant investor on your Board. The in-demand investors are on about 8-10 Boards. They spend about half their time looking for new deals. And being older and having money, they usually spend more of their time on philanthropy, social events, vacations. Meaning that, if you’re lucky, they allocate one solid business day per company per month, and usually not even that. That’s barely enough time to keep up-to-date with what you’re doing, let alone “build the company.” Be pragmatic and select your investors for good judgement, unity of vision, and for their humility and willingness to treat you as peers (you’ll have to look long and hard for that last one). If you want “Value Add,” that can be purchased more cheaply elsewhere – an external Board member can be hand picked and will cost a small fraction of what an expensive VC will, and comes without the Control. If you’re looking for someone to “open doors,” that almost never works. Big companies deal with you based on your merits, momementum and timing, not based on which big-shot happened to introduce you. A side-note: the individual VC partner on your Board matters a lot more than the firm’s name does, so write the partner’s name into the termsheet, and if that partner leaves the firm, make sure that you have to consent to the replacement.

• Control – Ay, here’s the rub. A once-a-month part-timer with mis-aligned incentives (different class of stock) and an MBA, who controls your destiny. To minimize control, assemble your investor syndicates yourself, retain Board majority if you can, or at least give the outsider seat to a truly unbiased advisor, and don’t be afraid to exert independence when needed. If you’re moving around Powerpoint formats to please your Board members, you’ve already lost this one… Realize that even minority shareholders can sink future financings by not participating, so VC investors will always have more control over the company than you might like, so you have to constantly work at keeping an alignment of incentives.

Google did a masterful job with this – Larry Page and Sergei Brin raised money at a high valuation, insisted on the best advisors (Doerr and Moritz – no unbundling here), and kept control of the company, the CEO recruiting, and the going-public process throughout. Rumor has it that at one point, the VC investors, un-accustomed to taking a back seat, were offered their money back! Needless to say, they didn’t take it.

I realize that I’ve used a lot of industry jargon here. If you’re unsure of the meaning of something, or have questions, just post a comment below.

• 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.

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…

Suppose that we gave every US citizen an extra passport – a blank one. Within certain common-sense restrictions (i.e., no terrorists) each person could sell their extra passport to a would-be immigrant. You could give it to someone deserving, or patriotic, or brilliant, or whoever would just pay you a lot of cash. You could perhaps exchange it for a foreign one. Likely, markets would emerge to value and trade these things, and people would pay or promise future earnings streams (personal IPOs in the best case, indentured servitude in the worst) to get into desirable countries.

But now think what would happen if a country enacted bad trade or tax policy. The sum of all of the value of the passports would equal the capitalized value of the government of the country. Poor policy that reduced this value would result in the demand, and therefore the price, of passports falling. Your passport and your extra one would probably be your most valuable possessions, worth millions of dollars. Poor government policy would lead to massive negative feedback from the citizen-shareholders.

In fact, certain un-monetizable policies would now reveal their costs, and we could see the value of pro-choice v. pro-life, certain environmental policies, etc. If your government isn’t doing things the way that you want, you can always sell your passport and get out, but likely the poor government would be ousted by citizen-shareholders first.

Finally, in the fanciful stretch case, countries that have shown themselves to be astute economic managers could engage in hostile yet peaceful takeovers of the publicly-traded passports of poorly managed countries. If each passport entitled you to one vote in a democracy, China could buy India, put it on the same economic program that has worked well for the Chinese, and perhaps even sell it off for a profit later!

The problem with starting one of these businesses as an entrepreneur is that you basically have to get up the adoption curve before any rational VC will think about investing in you. Sure, if it works out, these businesses can have phenomenal network effects, but in advance of user adoption, it is nearly impossible to quantify the adoption risk in any way, and so it becomes a very very hard sell to VCs. Even if one partner believes that service will be adopted, he / she cannot convince the rest of the partnership with any data. As such, the few of these kinds of companies that get funded tend to either get funded because of a celebrity entrepreneur, or because of bubble-investing mania.

Basically, if you don’t have a track record and are starting a Web 2.0 company which requires a critical mass of users to do something that there is little evidence of people on the web doing to date, then you’re either going to have to bootstrap it for a while, give VCs some other proxy to go on (celebrity entrepreneur, core technology development), or find an individual angel who believes (easier said than done).

The flip side of this is that entrepreneurs who are doing hard-core technology development with relatively deterministic value tend to look at the successful businesses in social networks / P2P with tremendous envy. The latter seem to have unbreakable monopolies, organic growth, and no complex development requirements. However, this is just survivor bias at work. The odds of complete failure in the social / P2P businesses is much higher, which is not obvious just by looking at the winners.

The best guesses that I have:

• Humor signals contextual intelligence in quick, bite-size forms. You have to know about the local social environment and be intelligent to be spontaneously funny.

• Humor is the mechanism via which the brain can engage in some self-observation (nearly impossible for the brain to do otherwise) by noticing how much of our environment is actually predictive guesses based on pattern matching. Obviously false pattern matches (which a lot of humor is based on) show that we can be wrong about serious things, and so we take them, well, less seriously. This can reduce stress.

• To make jokes, you must play with patterns and make them incomplete on purpose. To do so, you have to be able to complete patterns as well – the ability to reason. Therefore a humorous animal is a reasoning animal. Do non-human animals laugh and joke around?

• Any others?

By the way, this is also what mathematicians mean by an “elegant” solution – a simple formula that encodes much complexity and variance underneath.

Of course, beauty is relative because we have different patterns stored that we can match against. Therefore it’s possible for a pattern that seems elegant and simple to one versed in Middle-Eastern art to appear overly complex and non-recursive to one who is mostly used to Western Art.

The brain loves to complete patterns. We do it for survival value all the time to predict the environment around us. But it also completes patterns for play (I suspect that we can’t turn this ability off). There is something aesthetic in completing a pattern in a casual, easy way. That’s why we enjoy listening to music – we can predict the next note, which seems just right, before it occurs. Once we know the song too well and the thrill of completion goes away, the music is “stale,” and we have to move on. Some of the best music is recursive on many levels, so that the patterns extend in time, amplitude / volume, across instruments, across sections, etc.. Engaging multiple senses heightens the experience – for people who know how to dance to a given beat, their brain can complete the patterns across the aural and corporal senses simultaneously. For those of us who can’t dance, the frustration of one pattern which cannot be completed overwhelms the joy from the other.

I still don’t get a lot of modern art though. It seems that after the invention of photography, painting lost its objective measure (realism) and devolved into inbred conversations between generations of artists and successive responses (as philosophy has been doing for centuries).