Hiring is Obsolete

****

| Want to start a startup? Get funded by
Y Combinator. |

May 2005

(This essay is derived from a talk at the Berkeley CSUA.)

The three big powers on the Internet now are Yahoo, Google, and
Microsoft. Average age of their founders: 24. So it is pretty
well established now that grad students can start successful
companies. And if grad students can do it, why not undergrads?

Like everything else in technology, the cost of starting a startup
has decreased dramatically. Now it's so low that it has disappeared
into the noise. The main cost of starting a Web-based
startup is food and rent. Which means it doesn't cost much more
to start a company than to be a total slacker. You can probably
start a startup on ten thousand dollars of seed funding, if you're
prepared to live on ramen.

The less it costs to start a company, the less you need the permission
of investors to do it. So a lot of people will be able to start
companies now who never could have before.

The most interesting subset may be those in their early twenties.
I'm not so excited about founders who have everything investors
want except intelligence, or everything except energy. The most
promising group to be liberated by the new, lower threshold are
those who have everything investors want except experience.

Market Rate

I once claimed that nerds were unpopular
in secondary school mainly because they had better things to do
than work full-time at being popular. Some said I was just telling
people what they wanted to hear. Well, I'm now about to do that
in a spectacular way: I think undergraduates are undervalued.

Or more precisely, I think few realize the huge
spread in the value of 20 year olds. Some, it's true, are not very
capable. But others are more capable than all but a handful of 30
year olds. [1]

Till now the problem has always been that it's difficult to pick
them out. Every VC in the world, if they could go back in time,
would try to invest in Microsoft. But which would have then? How
many would have understood that this particular 19 year old was
Bill Gates?

It's hard to judge the young because (a) they change rapidly, (b)
there is great variation between them, and (c) they're individually
inconsistent. That last one is a big problem. When you're young,
you occasionally say and do stupid things even when you're smart.
So if the algorithm is to filter out people who say stupid things,
as many investors and employers unconsciously do, you're going to
get a lot of false positives.

Most organizations who hire people right out of college are only
aware of the average value of 22 year olds, which is not that high.
And so the idea for most of the twentieth century was that everyone
had to begin as a trainee in some
entry-level job. Organizations
realized there was a lot of variation in the incoming stream, but
instead of pursuing this thought they tended to suppress it, in the
belief that it was good for even the most promising kids to start
at the bottom, so they didn't get swelled heads.

The most productive young people will always be undervalued
by large organizations, because the young have no performance to
measure yet, and any error in guessing their ability will tend
toward the mean.

What's an especially productive 22 year old to do? One thing you
can do is go over the heads of organizations, directly to the users.
Any company that hires you is, economically, acting as a proxy for
the customer. The rate at which they value you (though they may
not consciously realize it) is an attempt to guess your value to
the user. But there's a way to appeal their judgement. If you
want, you can opt to be valued directly by users, by starting your
own company.

The market is a lot more discerning than any employer. And it is
completely non-discriminatory. On the Internet, nobody knows you're
a dog. And more to the point, nobody knows you're 22. All users
care about is whether your site or software gives them what they
want. They don't care if the person behind it is a high school
kid.

If you're really productive, why not make employers pay market rate
for you? Why go work as an ordinary employee for a big
company, when you could start a startup and make them buy it to get
you?

When most people hear the word "startup," they think of the famous
ones that have gone public. But most startups that succeed do it
by getting bought. And usually the acquirer doesn't just want the
technology, but the people who created it as well.

Often big companies buy startups before they're profitable. Obviously
in such cases they're not after revenues. What they want is the
development team and the software they've built so far. When a
startup gets bought for 2 or 3 million six months in, it's really
more of a hiring bonus than an acquisition.

I think this sort of thing will happen more and more, and that it
will be better for everyone. It's obviously better for the people
who start the startup, because they get a big chunk of money up
front. But I think it will be better for the acquirers too. The
central problem in big companies, and the main reason they're so
much less productive than small companies, is the difficulty of
valuing each person's work. Buying larval startups solves that
problem for them: the acquirer doesn't pay till the developers have
proven themselves. Acquirers are protected on the downside, but
still get most of the upside.

Product Development

Buying startups also solves another problem afflicting big companies:
they can't do product development. Big companies are good at
extracting the value from existing products, but bad at creating
new ones.

Why? It's worth studying this phenomenon in detail, because this
is the raison d'etre of startups.

To start with, most big companies have some kind of turf to protect,
and this tends to warp their development decisions. For example,
Web-based applications are hot now, but
within Microsoft there must
be a lot of ambivalence about them, because the very idea of Web-based
software threatens the desktop. So any Web-based application that
Microsoft ends up with, will probably, like Hotmail, be something
developed outside the company.

Another reason big companies are bad at developing new products is
that the kind of people who do that tend not to have much power in
big companies (unless they happen to be the CEO). Disruptive
technologies are developed by disruptive people. And they either
don't work for the big company, or have been outmaneuvered by yes-men
and have comparatively little influence.

Big companies also lose because they usually only build one of each
thing. When you only have one Web browser, you can't do anything
really risky with it. If ten different startups design ten different
Web browsers and you take the best, you'll probably get something
better.

The more general version of this problem is that there are too many
new ideas for companies to explore them all. There might be 500
startups right now who think they're making something Microsoft
might buy. Even Microsoft probably couldn't manage 500 development
projects in-house.

Big companies also don't pay people the right way. People developing
a new product at a big company get paid roughly the same whether
it succeeds or fails. People at a startup expect to get rich if
the product succeeds, and get nothing if it fails. [2] So naturally
the people at the startup work a lot harder.

The mere bigness of big companies is an obstacle. In startups,
developers are often forced to talk directly to users, whether they
want to or not, because there is no one else to do sales and support.
trying to sell people something than reading what
they said in focus groups.

[...]

Original source