Paul Graham, Startup = Growth

This is a discussion of Paul Graham's classic essay Startup=Growth (Sep 2012). It is part of a series of discussions of foundational texts on What is a startup business?

Paul Graham

Paul Graham is the founder of Ycombinator, one of the earliest, and certainly most successful, of the accelerators, and the one that all others copy.

Ycombinator also gave us Hacker News, which is the best aggregator of startup links.

Startup=Growth

But let us turn to his seminal essay, Startup=Growth, and spoiler alert, he thinks the distinguishing feature of a startup is high growth.

Graham summarizes his thesis in the opening:

A startup is a company designed to grow fast. Being newly founded does not in itself make a company a startup. Nor is it necessary for a startup to work on technology, or take venture funding, or have some sort of "exit." The only essential thing is growth. Everything else we associate with startups follows from growth. (Paul Graham)

The rest of the essay is broken up into sections, to point out the various features that follow from the central growth thesis. Along the way he points out why certain types of certain features of companies seem to reoccur in startups. For instance, why they tend to be software companies.

Contrast: This seems compatible but not identical with Thiel's view that startups should "earn a monopoly by solving a unique problem", and with Andreessen's view that startups should be discover product market fit. You might claim that growth will follow from the monopoly, or the product market fit, depending on which other theory you believe. Would be interested if readers know of another theory of startups that is incompatible with the growth definition.

Redwoods

The central idea of this section is that it is not enough just to serve customers -- that is what a business is after all -- but it must also scale, and to scale by design from their inception. Many startups or software companies because software scales so easily. The challenge for these companies to find something that delights users.

Ideas

First, Graham points out that because the startups are after such huge markets, and the rewards are so high, the solution space has been well explored, and there is a lot of competition.

However, in some areas, technology moves so fast that it produces new opportunities ("Rapid change in one area uncovers big, soluble problems in other areas"), and new solutions to problems, ("startups create new ways of doing things, and new ways of doing things are, in the broader sense of the word, new technology.")

Contrast It would be instructive to compare this to Peter Thiel's advice on ideas, which is to ask yourself what facts you know to be true, but with which most people disagree. Graham's advice seems to be forward looking having to do with new technologies, and new opportunities. Thiel's advice seems to be more introspective because you aren't told to look for an unpopular truth. Q: Do readers think they disagree with each other, agree with each other, or have different opinions that are fundamentally compatible?

Rate

This section is about the growth rate, which is what the whole essay is really about. Graham makes the point that the growth is S shaped and the middle high growth area is what startups aspire to achieve. The best part though is concrete numbers and what they measure:

A good growth rate during YC is 5-7% a week. If you can hit 10% a week you're doing exceptionally well. If you can only manage 1%, it's a sign you haven't yet figured out what you're doing.

The best thing to measure the growth rate of is revenue. The next best, for startups that aren't charging initially, is active users. That's a reasonable proxy for revenue growth because whenever the startup does start trying to make money, their revenues will probably be a constant multiple of active users. (Paul Graham)

When Graham talks about the finding the growth part of the S curve, he sounds closest to Marc Andreessen talking about product market fit.

Q: I would think that the value of a growth rate would depend on the stage of the company. However, he is correct in that any example where I tried 1% per week, I didn't come up with a viable company when the starting point is, say, 10,000 users.

Compass

Graham asserts that the centrality of growth as the metric for success allows founders to focus, and quickly decide between competing claims on their time and attention. He also finds it to be a good way to come up with new ideas en route to solving problems.

Value

Growth rates compound so our intuitions are usually wrong about how fast things can grow and how large they can become:

weekly	yearly
1%	1.7x
2%	2.8x
5%	12.6x
7%	33.7x
10%	142.0x

Deals

Graham describes the motivations for the various actors in a startup story.

Investors get a good risk to return ratio with the added benefit of closely aligned goals because, he claims, capital gains are harder to game than dividends because it is down the waterfall after expenses, salaries etc are paid out.

Founders get to more control of their startup by accepting venture funding.

Finally, acquirers get access to growth.

Understand

Graham summarizes his own argument so well, I'll just quote him again:

If you want to understand startups, understand growth. Growth drives everything in this world. Growth is why startups usually work on technology—because ideas for fast growing companies are so rare that the best way to find new ones is to discover those recently made viable by change, and technology is the best source of rapid change. Growth is why it's a rational choice economically for so many founders to try starting a startup: growth makes the successful companies so valuable that the expected value is high even though the risk is too. Growth is why VCs want to invest in startups: not just because the returns are high but also because generating returns from capital gains is easier to manage than generating returns from dividends. Growth explains why the most successful startups take VC money even if they don't need to: it lets them choose their growth rate. And growth explains why successful startups almost invariably get acquisition offers. To acquirers a fast-growing company is not merely valuable but dangerous too. (Paul Graham)

Eric Reis, What is a startup?

This is a discussion of Eric Reis' esay What is a startup?. It is part of a series of discussions of foundational texts on What is a startup business?

You can purchase Eric's book by clicking on this link:

Eric Reis

Eric Reis has worked for several startups, and has worked with Steve Blank. He is most closely associated with "Lean Startup," which itself is associated with Steve Blank's work.

What is a startup?

Reis' gets to the point early:

A startup is a human institution designed to deliver a new product or service under conditions of extreme uncertainty. (Reis)

He goes on to take that sentence apart, and defends the use of key phrases, arguing that they are critical. The words that he explains are "human," "new" and "uncertainty."

Human institutions

Reis correctly points out that all institutions are human institutions, except in the narrow sense made up for the sake of argument. However, he goes on to say.

Even for companies that essentially have only one product, the value the company creates is located not in the product itself but with the people and their organization who built it. (Reis)

And the point he makes here is that the systems and habits that a company generates may be as valuable as a piece of technology. Paul Graham explicitly calls new ways of doing this a new technology in the "broad" sense:

The other connection between startups and technology is that startups create new ways of doing things, and new ways of doing things are, in the broader sense of the word, new technology. (Graham)

Although Thiel positions himself contra the lean startup, I don't think he would disagree with this component. One alternative view, however, may come form Marc Andreessen who specifically thinks that a market can pull a product form a mediocre team. Reis is closely aligned with Blank, who acknowledges the centrality of the product market fit in the lean model.

Newness

Reis

And yet the newness of a startup’s product or service is also a key part of the definition. This is a tricky part of the definition, too. I prefer to take the most expansive possible definition of product, one that encompasses any source of value for a set of people who voluntarily choose to become customers. (Reis)

In his emphasis on novelty, Reis sounds closest to Thiel who emphasizes novelty more than almost anyone else we look at. However, Reis has a different idea of novelty:

Even the most radical new inventions always build upon previous technology. Many startups don’t innovate at all in the product dimension, but use other kinds of innovation: repurposing an existing technology for a new use, devising a new business model that unlocks value that was previously hidden, or even simply bringing a product or service to a new location or set of customers previously underserved. (Reis)

Contrast: This may contrasts with Thiel's notion of a startup because I suspect other improvements would count as 1 to n improvements for Thiel. These improvements would not lend themselves to sufficient differentiation to earn a monopoly.

Uncertainty

Reis has the most expansive notion of a startup of any definition I have seen, and the result is that he may define a traditional business very narrowly.

Startups are designed to confront situations of extreme uncertainty. To open up a new business that is an exact clone of an existing business, all the way down to the business model, pricing, target customer, and specific product may, under many circumstances, be an attractive economic investment. But it is not a startup... (Reis)

However, his emphasis on the uncertainty again echoes Thiel's view of a startup taking on a novel problem:

Thus, the land of startups is a unique place, where the risks themselves are unknown. ... Startups are designed for the situations that cannot be modeled, are not clear-cut, and where the risk is not necessarily large – it’s just not yet known. (Reis)

Q: Although uncertainty is where Reis and Thiel agree, it is also where Graham and Andreessen seem to agree with them. Graham considers good ideas to occur in the space where change happens because other spaces are already picked over. Andreessen considers the question of product/market fit to be the big question that is being explored. Is this the area that all definitions converge? Is there anyone that doesn't consider uncertainty to be a hallmark of startups? Or is uncertainty simply the hallmark of all business?


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