Startup = Growth

- Venture Capital pouring millions into untried businesses.<p>- The crazy valuations.<p>- The recent complains of VCs that "Entrepreneurs aren't working on enough big ideas".<p>It all actually makes sense now. It's all in the name of Big Risk = Big Reward style ventures. Especially after defining a "startup" as a company meant to grow rapidly and to massive proportions. Not necessarily a tech business. Not an online store for your company. But instead an extreme-expantion-potential style company. I wish Startups were defined like this from the beginning.<p>It also further pushes me away from the whole Startup / Silicon Valley thing. Growing that fast means a lot can go wrong and there's very little time to learn from mistakes. I'm a slower thinker, I like to analyze and enjoy, learn and understand, build and live, not sacrifice my life and grow my company like a lunatic.<p>Thank you Paul. You've actually freed me from a dream that I now realize will never make me happy. I can finally let go of my plan to abandon my family, move to the bay area, drain my life savings, live in a shoebox, stumble from one conference and event to the next hoping to network and find my messiah &#38; co-founder, try to get funded, grow my business to someone else's expectations, all for a tiny fraction of a chance to succeed and be either a slave to my own company or lose control of my baby and walk away with diluted equity. I think I'll stay here in St. Louis with my aging family and build my businesses slowly and calmly.<p>You freed me Paul. You gave me back my life, my real one.

A few thoughts:<p>1. This is a superb essay delineating the attributes of a fast-growth, all-or-nothing type of startup. No surprise here. Who besides pg has had the depth and breadth of <i>quality</i> first-hand experience with such ventures over such a sustained period and in such an explosive context as that of recent years? He has here given us a classic analysis of the prototypical, Google-style startup.<p>2. I think the idea of a startup should not be so narrowly defined, however, and the big reason is this: many founders set out to build ventures that are tech-based, innovative, aimed at winning key niches via hoped-for rapid growth and scaling, positioned for outside funding as suited to their needs, and aimed at liquidity via capital gains as the primary ROI for their efforts . . . <i>but</i> who also place a huge premium on minimizing dilution and maximizing founder control. These are the independents. The ones who, by design, want to defer or even avoid VC funding so as to build their ventures on their own timing and on their own terms. Now this is not the Google startup model. It is, in a sense, its opposite. But it is not the model of a small business either. It is just a different type of startup.<p>3. The trend over this past decade has moved decidedly toward greater founder independence in the startup world. Back in the bubble days, as a founder, you had very little information available to learn how startups worked, you often had heavy capital needs (e.g., $2M to $4M) right up front to do such things as build your own server banks, and you would almost certainly have little leverage by which to minimize dilution or loss of control at the time of first funding. Today, this has completely flipped. Vast resources are extant teaching founders how startups work. Initial capital needs are often minimal. And it is relatively easy to get reasonable funding on founder-friendly terms. What this means is that, today more than ever, the independent-style startup is more open to founders than ever before.<p>4. Given the above, it seems to me that this is not the time to say that the <i>only</i> style of startup worthy of the name is that of the super-rapid-growth type. The rapid-growth type may be more glamorous by far but it really defines only the tip of the startup world. Beneath it is a vast world offering incredible opportunities to founders who want more control over the timing, scale, and management of their ventures and who seek to realize gains and manage risks accordingly.

<i>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.</i><p>This is, to me, the most interesting thing here: I've seen lots of people talk about "traction", but this is the first time I've seen someone in the startup world give hard numbers for what a "good growth rate" is.<p>Another way to look at these numbers: A good growth rate during YC means that you're doubling every 10-14 weeks. An exceptional growth rate is doubling every 7 weeks, and if your doubling time is more than a year, it's a sign you haven't yet figured out what you're doing.<p>This fits pretty well with the rather imprecise commentary that "a startup measures the time to double in size in months, except for wildly successful ones, which measure it in weeks".

Am I the only one who think pg's view points appear to be getting more and more extreme, in some sense rather biased compared to his previous essays?<p>Zynga is definitely all about growth. It is fiercely focused on metrics, fiercely focused on growth. But as someone from game industry, we cannot agree that this model is THE model that gives the world and everyone value. If the game industry worked like the way pg describes in the essay decades ago, we would never have Diablo, Baldur's Gate, Grim Fandango or Minecraft. We would all be left with choices like Farmville, Monsterville, Mineville, forever and ever.<p>"Growth drives everything in this world."? Does it? All fads grow like wildfire too, but does it drive everything in world? Or a better question would be: should we allow it to?

The discussion of expected return sounds good from an investors perspective, but founders have no diversification, so a 1% chance of $100m or 99% chance of wasting five years sounds pretty lousy. This is my biggest issue with the VC world from a founder's standpoint. The situation gets even worse once you throw the decreasing marginal utility of money into the mix, because now the expected value of $100m is not worth 10x as much to me as $10m. In terms of ability to change my life, $10m provides probably 50-70% of the value that $100m provides.<p>So if my odds of succeeding with a $10m payout from a bootstrapped business are 10%, and my odds of succeeding with a $100m payout from a VC business are 1%, those expected returns are equal in math terms, but not utility terms, and I'd be crazy to raise money.

This article is, for me, more proof of a general phenomenon that's happening recently - startups are no longer considered the best vehicle for hackers to become wealthy.<p>Maybe it's just my own history and confirmation bias speaking here (recently switched from startups to a Consulting business). But lately, the whole "bootstrap" movement is getting much more popular around here. More and more, I'm seeing articles and comments from tptacek, patio11, and others talking about how programmers could make vastly more money, especially by doing freelancing. I think the message is starting to sink in - the kind of people who read this site can start <i>very profitable businesses</i>, make loads of cash, and do this <i>without</i> the high risk of startups. No chance of a working 5 years and then striking a goldmine of an exit, but much higher chance of working 5 years and putting aside large amounts of money.<p>This pg article is a great one, and a very honest one too. To me it reflects the changing times, and the changing understanding of what a startup means. No longer, like in previous articles on wealth, is pg very clearly advocating that all hackers should be starting startups. This essay, to me, reads as a much more precise explanation of what someone can expect if they start a startup. And it makes it much clearer when people should <i>not</i> start a startup.

One of my favorite pg essays of all time. Loved this:<p>"Almost every company needs some amount of funding to get started. But startups often raise money even when they are or could be profitable. It might seem foolish to sell stock in a profitable company for less than you think it will later be worth, but it's no more foolish than buying insurance. Fundamentally that's how the most successful startups view fundraising. They could grow the company on its own revenues, but the extra money and help supplied by VCs will let them grow even faster."<p>Took me awhile to realize this as a founder.<p>Profitability is a great goal (and makes the business very "real" by cutting away vanity metrics), but self-funding growth from profitability pretty much guarantees you are locked into a relatively slow growth rate. pg's simple charts show why being locked into a lower growth rate could mean being blown away by your competitors.

I gotta say, "a company designed to grow fast" is not only more concise, but broader and more on point than Steve Blanks' definition ("an organization formed to search for a repeatable and scalable business model"[1])<p>An epic essay with tremendous depth. Love the ending:<p>"A startup founder is in effect an economic research scientist. Most don't discover anything that remarkable, but some discover relativity."<p>[1] <a href="http://steveblank.com/2010/01/25/whats-a-startup-first-principles/" rel="nofollow">http://steveblank.com/2010/01/25/whats-a-startup-first-princ...</a>

Based on required growth rates and measurement intervals (5-10% per week), there would seem to be a pretty heavy bias towards the consumer space.<p>B2B or so-called Enterprise Companies, especially industry-specific new companies, would have a hard time qualifying on several fronts (market size, growth rate, growth interval). I am particularly interested in the B2B style of startup because I run an Enterprise Startu-er... Enterprise New Company focused on serving the insurance industry. A B2B Startup, it would seem, would have to link customer charges to something that can grow without a new sales contract. I guess, the trick to achieving high growth rates is to create viral growth inside an existing account. Growth in the B2B space will be large jumps (with a new contract) followed by organic growth or not (within the bounds of the existing sales contract). It seems to follow then that since the purchase agreement is the painful and tough and slow part, a B2B Startup would want to have a Freemium or some other type of contract with low/no startup costs and higher per user/GB/account/server/unit costs.<p>Gives me some new direction on pricing.<p>On an unrelated note, I'll disagree with other comments of "favorite pg essays" and say that "Wealth" was the best by an order of magnitude. <a href="http://paulgraham.com/wealth.html" rel="nofollow">http://paulgraham.com/wealth.html</a>

I think seeing it put so clearly, it's convinced me that I don't even want to found a startup. I'd like to own a business, but that's different, and I should behave accordingly. That might make it the most useful thing I've read in years.

I'll admit that I was a little bummed after reading this article. Every single PG essay I've read left me feeling stoked, lit on fire like I could take on the world. I felt I could identify with the man, and like I belonged here.<p>This essay, on the other hand, left me feeling like I don't belong here. I feel as if the YC philosophy has evolved into something different than it was, or perhaps, that this is more honesty than we've ever seen before.<p>Either way, I couldn't be happier to use revenue as my measuring tool, and not free users. Racing to give my product away at a rate of 5-7% weekly growth would require me to completely change my product development philosophy. I build what I build because I see something missing, not because I hope to flip it in a year.

Recently there was an article floating around where a VC asked why there aren't more B2B startups. This mindset is why - there's simply no way you can grow at these rates in the early days with most B2B products, particularly the ones in very hard to solve areas like ERP or the like. Anything with a longer sales cycles seems to be instantly disqualified by this definition, which is why we're relegated to so many photo apps and twitter thingies.

Consider an alternate universe with far worse odds: 1 startup in a field of 100,000 makes $100 billion, the rest make zero. Expected value is $1 million.<p>Should you be one of the 100,000 founders who "rationally" choose to buy a startup lottery ticket for $100b?<p>Well of course! <i>If</i> you could live for long enough to run through thousands of iterations of the startup game, that is.<p>In the real world, - Founders are typically limited to 1 startup at a time - It takes time - years perhaps - for a startup to fail - Founders can do only a few startups in their lifetimes<p>Given low odds like 1%, with &#60; 10 iterations per lifetime, expected value is the wrong metric. From a purely financial POV then, it appears only rational to do growth startups - If you are on the investing side (a "parallel" entrepreneur, running tens or hundreds of iterations in your lifetime) - You are a founder (a "serial" entrepreneur) with reasonable financial security and none of your life goals would be irrevocably damaged by the most likely outcome - a string of failures.<p>(There are of course several non-financial reasons and payoffs. For instance, an Idea takes demonic possession of you, and the only way to exorcise from your tortured brain is to do a startup..)

This essay highlighted something for me, you actually end up having a 2x2 matrix for "work for" vs "invest in" and "startup" vs "non-startup."<p>For example, a certain person may try increasing their wealth by investing in startups, but prefer working in a non-startup. Or another person may prefer investing in non-startups (safe, dividend paying stocks or bonds), but try increasing their wealth by working for startups.<p>For people with talent in creating products, best to focus their investing in safe, low maintenance non-startup investments and their wealth creation in working for startups. For people who have access to capital and a knack for choosing winners, they should work for non-startups (or philanthropy, or whatever, since they are probably already fairly wealthy) and invest in startups they think can win.<p>For the really talented, who both know a thing or two about building products, and also can pick winners, then you should work for a startup that invests in startups. See: pg.

"We usually advise startups to pick a growth rate they think they can hit, and then just try to hit it every week. The key word here is "just." If they decide to grow at 7% a week and they hit that number, they're successful for that week. There's nothing more they need to do. But if they don't hit it, they've failed in the only thing that mattered, and should be correspondingly alarmed."<p>This is the gem.

<i>"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"</i><p>This, for me, is the weak point in an otherwise excellent article. A lot of investments, valuations and jobs rest on this assumption. Facebook's PE ratio is currently 127, this assumption is the reason that it isn't around the same level as other entertainment companies like, say, Disney (17) or News Corp (56). And when Facebook's valuation rises like that and people invest at that level then there's a whole lot of money for paying engineers &#62;$100k salaries and buying up pre-revenue businesses like Instagram. So, even if you're Google and you're bringing in real money, the application of this assumption to a few big cases permeates through the whole system and means that you too have to pay engineers &#62;$100k and you too have to pay more to get hold of someone like Nik (makers of Snapseed).<p>PG logic appears flawless, but as a seed fund manager in the middle of this ecosystem, he's working several layers of abstraction up from some big applications of this assumption. So much so that it probably doesn't feel like an assumption to him. After all, he didn't value Facebook[1] at that level.<p>I genuinely hope this assumption is correct, because a lot of people and livelihoods are depending on it.<p>[1] I'm using Facebook here as an exemplar, I'm sure there are lots of other companies out there with valuations that are due in part to the assumption that users = revenue. My argument is that when someone sets a valuation based on this assumption it has a knock on effect to the whole ecosystem.

So, is "b) reaching all the people in the Market" a function of converting a decentralised market to a centralised model?<p>Facebook is a successful startup because it took a decentralised model (talking to your friends) and centralised it.<p>Barbers are decentralised - but after I build a robo-barber for every home, then suddenly one company can cut everyones hair.<p>So is it possible that growing a startup fast is about increasing the slope between a decentralised (diffuse players, low margins) and a centralised model.<p>I suspect there are good counter examples but really startups that grow fast seem to optimise for one central point for doing what they do - dropbox, airbnb readthedocs

PG's definition of startup is self selecting. Increasingly, startups do not need VCs nor Angels as the cloud (Azure, outsourcing what used to be IT for pennies, etc.) quashes the cost curve of startups.<p>This is pushing angels, seed round, and VCs farther and farther up the enterprise growth curve where costs become something that the founders can't bootstrap. For virtual enterprises, this is leaving them with a smaller and smaller set of companies as software eats all of the historical infrastructure costs.<p>Basically, he is defining startup in a way that YC is a necessary component - but increasingly, it isn't.

Not a fan of praise for the sake of it either, but having said that, this is one of the most succinct and focused essays I've read on startups, in a long time, and hard to fault it's fundamental message.<p>As founders it's easy to do things other than push every day to get customers and/or <i>active</i> users. Some founders are so focused on other less stressful activities, that they outsource the entire function to a <i>'growth hacker'</i>. Let someone else deal with it... Yikes!<p>Grow is <i>core</i> to the startup's success, and happy to be reminded of it.

So basically a startup is a company whose goal is not to create a profitable business, but a company whose goal is to grow a large userbase rapidly and lure VCs to pump more money into it, because VCs just <i>dream</i> about finding the next google or apple and funding it in an early stage.<p>This just emphasizes why I do <i>not</i> want to be a part of this scene.<p>As DHH says: fuck doing a startup.<p><a href="http://vimeo.com/3899696#t=1290" rel="nofollow">http://vimeo.com/3899696#t=1290</a>

Excellent piece. A few comments:<p>&#62; The constraints that limit ordinary companies also protect them. That's the tradeoff. If you start a barbershop, you only have to compete with other local barbers. If you start a search engine you have to compete with the whole world.<p>This is one of the reasons why 37 Signals' "small Italian restaurant" is not pertinent to many web businesses.<p>On PG's concept of startup, which I feel is spot on:<p>At this stage in my life, I'm more interested in... the "stay small" type of business, ala Rob Walling or patio11's bingo card thing. I think there's something to be said for a niche that's small enough that it's not interesting to larger companies, but can be served with a business that's mostly automated enough to mostly run itself. Perhaps you won't make zillions of dollars, but if it works, it's a good path to more freedom, which for some of is, is what it's about.

"For a company to grow really big, it must (a) make something lots of people want, and (b) reach and serve all those people"<p>Very valuable insight.<p>However, (b) in its own right, can serve as a fast growth business model - where the delivery or "clearing" of value between those who demand and those who supply is the value proposition itself - because everyone wants delivery (making it, by default, a big market).<p>Most banks work on this principle, in an abstract sense. A business like FedEx or UPS is a more physical example of this.<p>Online takeout-ordering services are examples of this - the customer wants the food and the "online ordering website" startup does not produce food - but what it produces is "clearing" ie matching demand to supply.<p>This - as an idea, in my experience, always scales and grows fast as well while falling into the category (b) that pg mentions.

I don't think good ideas are ideas that are overlooked. I think we saw many times that being second is better. Google vs Altavista, Facebook vs Myspace, Github vs SourceForge, Google maps vs Mapquest, Foursquare vs Yelp, Stackoverflow vs ExpertsExchange, and the list goes on.<p>I think the ideas are overrated, what matters is the small twist in the idea that makes you better than the competition, and most importantly, execution. Once you are out with your product, getting the right talent, getting the right design, getting features out there faster than your competition (like your own company in the past based on one of your posts) is what matters.<p>I think there are not that many ideas that are overlooked, just people that don't think they can do something with them. the chance that an idea was not thought by someone else, that reads the same blogs, have a similar lifestyle, and is a smart person like you, is very low (or the problem you are trying to solve is not a real problem), but the chances of that person to have the courage, time, effort and perhaps money to start a business, and find good co-founders, (and willing to risk his marriage and apply to YC) is what's a bit more rare in my opinion.<p>On the other hand, I have zero experience relative to you, and it's a little weird for me to disagree with one of the biggest startup mentors of our time, but still, this is just my opinion.

What about in my case, where I run a free service that currently has served over 9.3 million requests in the last month? (That service is <a href="http://jsonip.com" rel="nofollow">http://jsonip.com</a>)<p>Its a utility service that a lot of people are finding useful and has a lot of traction, but no way that I can see to monetize it. Not even sure I have a <i>desire</i> to try and monetize it, since it costs me almost nothing to run.<p>I would love to be able to build that resource into something more, but I'm not even sure where to start. It has a lot of usage and growth, but its not something I would remotely call a startup.<p>I made a short post a few hours ago about the current state: <a href="http://news.ycombinator.com/edit?id=4556711" rel="nofollow">http://news.ycombinator.com/edit?id=4556711</a>

OK. But remember the old Paul Graham, who talked about things like this:<p><a href="http://www.avc.com/a_vc/2012/03/the-startup-curve.html" rel="nofollow">http://www.avc.com/a_vc/2012/03/the-startup-curve.html</a><p>Seems like there's a lot of non-startup in that startup curve, if we are using the new Paul Graham's definitions.

Seminal article - fantastic. I immediately calculated growth rate for Mightbuy.it - posted them here: <a href="http://blog.mightbuy.it/2012/09/22/user-growth/" rel="nofollow">http://blog.mightbuy.it/2012/09/22/user-growth/</a><p>The total #s are pretty embarrassing but the growth rate actually looks good, at around 10% currently - except the rate of growth of the growth is decreasing.. how meaningful is growth rate for such short time periods?<p>In my case I'm closer to the first stage of just making a product people want, but seems useful to keep track of this rate already.<p>PS - please sign up and help a brother out.

It may be sacrilege round here to disagree with pg but I dislike the appropriation of the word startup for this niche of companies. I think of all new businesses as startups for the first couple of years. I think a better name for speculative high growth companies would be 'venture companies' which could have venture founders to go with the VCs that may fund them.<p>That way the term would make sense for older companies if they hit a high growth phase.

I did not think about the definition of a startup too much but in fact I always thought about it as 'product business' as opposed to 'service business'.<p>Given this definition of a startup I don't want to start a startup anymore. My aim is a product business. I am into products which make me money when I sleep. Even if the income rate stops growing at $100.000 per year because of the relatively small market.

pg makes his point clearly at the cost of oversimplifying his definition. Scalability is a continuum. There is a continuum between barbershop and search engine.<p>VCs have every incentive to hit the far high end of the continuum. But a young, hungry entrepreneur probably gets higher expected value by not straying quite so far out.

&#62; <i>And the probability of a group of sufficiently smart and determined founders succeeding on that scale might be significantly over 1%. For the right people—e.g. the young Bill Gates—the probability might be 20% or even 50%. So it's not surprising that so many want to take a shot at it.</i><p>Which means that even Bill Gates may have failed repeatedly at creating a successful startup.<p>Just as in poker even great players will lose if it's not in the cards and even the mediocre player can win big on occasion.<p>The lesson is that even a founder as good as Bill Gates can only <i>expect</i> to succeed if she is willing to make multiple attempts.

A 'startup' is simply a new business. That's what the word means. You can't just take a word that has an existing meaning and say it means something else.

"It's the same with other high-beta vocations, like being an actor or a novelist. I've long since gotten used to it. But it seems to bother a lot of people, particularly those who've started ordinary businesses. Many are annoyed that these so-called startups get all the attention, when hardly any of them will amount to anything."<p>I see so many comments on HN poking fun at VC backed startups with underdeveloped business models. Sure, a lot of the criticisms are well deserved, but I wonder if a part of it is because people are bothered by the power law phenomenon.

&#62; But the two connections are distinct and in principle one could start a startup that was neither driven by technological change, nor whose product consisted of technology except in the broader sense.<p>Arguably Netflix was one of these. DVD's may have been the "technological change" driving the company, but in principle you possibly could have done the same thing with VHS.<p>Most logistics-based big companies, like Fedex, Walmart, or even Costco, could be cited as examples. Jetliners predated Fedex by decades, for instance. Aside from the novelty of selling PC's, Dell was a similar instance.<p>This indicates that, just as in war, solving logistical problems often provides the biggest wins in business as well.<p>Combining innovation and logistics was powerful enough to make humble Apple erupt into the world's most valuable business. In fact, Apple's growth rate during Jobs' tenure as CEO was ultimately exponential despite the company's age--does Jobs-era Apple somehow qualify as a startup due to this?<p>&#62; I once explained this to some founders who had recently arrived from Russia. They found it novel that if you threatened a company they'd pay a premium for you. "In Russia they just kill you," they said, and they were only partly joking.<p>I remember that in the 90's, many of Microsoft's acquisitions had this same sinister undertone to it. I'm reminded of a Simpsons episode where Microsoft "buys out" Homer's startup, but all that happens is a bunch of goons smash up the house while Bill Gates quips, "I don't get rich by writing a lot of checks."

This is a foundational essay. It's hard to believe the whole Y Combinator ecosystem has gone on for so long without it.

If this essay had an <i>abstract</i>, this would be it:<p>"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."

pg, just out of curiosity what was the (approximate) weekly growth rate of Viaweb ? Did you focus on this metric when you were building Viaweb?<p>Just curious if you were aware of this factor when building Viaweb.

<i>If you write software to teach Tibetan to Hungarian speakers, you'll be able to reach most of the people who want it, but there won't be many of them.</i><p>It may not scale, but the chances of it making (any/more) money are much higher ("riches are in the niches") than a "fast startup" as it's very rare for a startup to grow fast and monetize quickly at the same time, because most people just won't buy immediately, sometimes even if it solves a problem for them.<p>For example, I've been using Evernote and Dropbox for years, but haven't had the need to buy a premium account. I believe there are many others like me who are happy with the free (or open source) software that does solve an itch. Are these "fast startups"? Is their business model (freemium) scalable?

I've read most of the points made here in an essay Joel Spolsky wrote a while back: <a href="http://www.joelonsoftware.com/articles/fog0000000056.html" rel="nofollow">http://www.joelonsoftware.com/articles/fog0000000056.html</a><p>It was very insightful at the time I read it.

One of the things we don't see often, and I wonder about are situations where the Angel funds 40% of the company at a seed round at one valuation, and then contributes half their interest in exchange for cash in the series A.<p>From a practical standpoint this means that the company needs to raise n + A where the "+ A" part pays back a return to the angel. But it allows the Angels to shoulder risk early to weed out the non-viable players and still make money at it.<p>So imagine this scenario. Alice wants to start Woohoo and Bob funds 40% at a $250K valuation (since Alice is the only person so far, that is $100K invested. Alice works hard and gets out an MVP and goes for a Series A where she wants to raise $1.5M at a post raise valuation of $5M. Bob sells into the round half his shares (its taking money off the table for him) with a contractual net return of xx% (probably anywhere from 20 - 100, that being the negotiating rub) and does not participate in future rounds, he retains y% at the end of the series A (optionally converted to Common stock) and dilutes going forward. (remember he's got 'free' stock at this point, he's made his bit with the angel round)<p>The two negotiation points on Bobs term sheet are the net return and the retained interest portion. The people coming in after Bob are Ok with it because Bob is out now and paid his 'finders fee' or however ever you want to describe his return. The net return will affect the series A amount needed by the founder, the retained interest would be a function of how many rounds the founders think they will need to exit.<p>Given the seed to series A or bust cycle is usually at most 24months, Bob has a good idea of his risk profile, and by stepping out from an equity point at the Series A he's not an obstruction to new partners coming in, more of an adviser at that point.

This article might just be my point of reference whenever I get a bit too much "valley hate". Like, when I start reading a bunch of the ideas coming out of the blog from 37 Signals.<p>I still think that for every serious genius, there are a lot of copycats. These copycats create this gigantic echo chamber of ideas. It's a ton of noise from a lot of likely failures. That noise can feel dishonest.<p>After reading this essay, I'm left with a sense that startup land is probably the best, dare I say more honest way, of turning investment money into new technology and jobs.<p>I'm actually left wondering about the relationship between "normal small businesses" and bankers. It feels adversarial in comparison.

What defines a startup for me is utilizing technology with a very good chance it will be a spectacular failure. You have a great feeling that you'll have users but there's a very real chance that you'll get none to 10 and go down in tremendous flames. You're swinging for the fences. That's because you're doing something that no one has done or your entering a market with huge dominant players whom you hope to usurp. It's either very audacious or insane. Your 10 professional friends split down the middle when asked.<p>You know if you open a barber shop you will get people come in off the street to cut their hair. You just worry you'll have enough over time to sustain it. If you start a consulting business you know you'll get clients (at least I assume you do) as your skills are in demand. You probably got commitments from at least 3 before you made the plunge. It's just whether you'll get enough and a steady flow to go with. If you're bootstrapping a lifestyle tech company it's probably because you know exactly what the market needs and have your first 5 customers from your previous gig so you know you can get through the first year. All of these still have a large amount of risk but they're not really true startups to me.<p>It's true it's very hard to have a startup without (rapid) growth as the central tenant . And you can have many businesses that are not startups that aren't focused on growth over anything else. However, you can have many businesses that are not startups hyper focused on growth (SuperCuts, Pappa Johns) to make the definition in this essay too weak for me.

I thought 'startup' was defined as a business-like organization in search of a business model. Once it finds/chooses one, it becomes a business.<p>The essay seems to define 'venture-backed startup'.

Question: w.r.t. weekly revenue growth, are we talking about growth rate of monthly revenue run rate (assuming billing happens monthly) or something else? For instance, something like this: new signup revenue in the current week x historical conversion to paid divided by revenue of paying customers + sum of estimated revenue of recent previous weeks who haven't yet hit the date of conversion? (if that makes sense)<p>I'd love to hear thoughts on how to calculate the referenced number.

It's a little Pop Science, but as Geoffrey West notes, other things that follow an S-curve growth are people. We start small and weak, at some point start rapidly growing, and as we reach a certain age we level off. West then extends this to the inevitable deaths of corporations:<p><a href="http://www.ted.com/talks/geoffrey_west_the_surprising_math_of_cities_and_corporations.html" rel="nofollow">http://www.ted.com/talks/geoffrey_west_the_surprising_math_o...</a>

Fred Wilson's followup on PG's growth essay: <a href="http://www.avc.com/a_vc/2012/09/growth.html" rel="nofollow">http://www.avc.com/a_vc/2012/09/growth.html</a>

For a startup measuring users (not revenue), what's the right thing to measure to know your growth rate?<p>Is is DAUs, MAUs, daily sessions, length of session, total signups?

Question about measuring weekly growth rate: A lot of YC startups are centered around an iPhone app. If it rides up the charts, it will likely get a huge bump in whatever metric you are trying to measure. But the bump's very often temporary, since more than likely the app will slide back down the charts in a week. How do you measure growth when this happens?

I think it's missing the idea of bootstrapping. I think it makes a much rougher environment for fledgling startups, but I think it should be considered more like a hot forge. The more the odds are stacked against you, the better you get. I guess people sometimes miss that when they are aiming for Twitter/Facebook level revenue accountability.

Lot of insight, but I'd rather breath outside the bubble and build a slow company, and I'll still call it a startup - <a href="http://www.fastcompany.com/3000852/37signals-earns-millions-each-year-its-ceo%E2%80%99s-model-his-cleaning-lady" rel="nofollow">http://www.fastcompany.com/3000852/37signals-earns-millions-...</a>

Some community-oriented/UGC startups nowadays seem to prefer modest growth, at least for a while, to make sure the right standards/user-expectations can be maintained. (Hypergrowth can mean a change in community makeup faster than desireable norms can be maintained, which can spoil the dynamics in a way that's hard to un-spoil.)<p>Compare HN's own revealed preference for limiting certain surges of new users. (Corollary: HN is not a 'startup'.) In a way, even Facebook's initial campus limitations served this purpose, getting certain mechanics (and corporate practices right) before facing the challenges of a larger userbase.<p>I wonder: have YC companies had to face an explicit decision: grow faster or defend/consolidate the culture of the existing userbase, and if so what advice would PG and the other partners be likely to give?

Paul Graham is a hero all technology startup founders need to look up to. Who else can say "the constraint of growing at a certain rate can help define a startup", so well?<p>It is rare to find a blog post that has so much insight that you will need to read it slowly and then read it again even more slowly.

The problem is a barber shop can be a startup. It can have fierce local competition and global aspirations (Supercuts anyone?) It feels like a brave attempt to solve the question that regularly to torments these boards but I don't feel any closer.

spellcheck: abolute<p>My favorites were the last paragraph and the last footnote.<p>How did those Russians get on anyway?<p>The only other thing I would add is that these high growth companies, so-called startups, are all utilizing the web. They are relying on what it provides. I guess that's implicit, maybe it need not be stated, but historically could older forms of media have supported the type of growth rates discussed? How popular was the term "startup" before the web? And did it mean the same thing?<p>The startup: 1. Trying to solve a harder problem than existing businesses are willing to take on. 2. Being equipped for rapid growth. 3. Utilizing the web.

I don't understand this part: "For founders who are younger or more ambitious the utility function is flatter." Does flat mean O(1) or O($)? I'd guess the former, but the latter seems to fit more with the conclusion.

I'd be interested to know the volatility of these growth rates. PG talked as if the might be fairly constant over the course of one or two years, but my gut feeling is that they'd be anything but.

I don't understand why he chose restaurants and barbershops as examples of non-startups. Both make things lots of people want, and some of them are big chains that have wide reach, so they fulfill criteria a and b. Either these are startups, or there are more criteria pg didn't include, such as rate of growth - even the most successful chains usually have 10 years or so from the opening of the first store to becoming huge (inter)national chains.

<i>But at the moment when successful startups get started, much of the innovation is unconscious.</i><p>-- This is an interesting bit. The notion of what is intelligence.<p>At any given time, there are 1001 questions that may be [intelligent]. But ask <i>right</i> question, and the answer is often [easy] to see. So Framing. Observation. Caring. Passion. Perserverence. Non-ovious. Yet invaluable. Forms of intelligence.

This is probably the most insightful article on startups ever written. I was blind, and now I see. Thank you, Paul.

The part "and how to reach those people" should be written in bold. It seems like the difference between lifestyle business and startup is sometimes (or in majority of cases?) just in figuring out scalable way to acquire new customers.

Isn't a start-up that's bootstrapped and designed with a clear path to monetization desirable anymore? You can obviously design something to grow quickly, but doesn't that also increase the risk of it being a flash-in-the-pan?

Indeed, this cogent essay has been a long time coming and should be a pre-requisite for anyone thinking of getting in the game. "A barbershop isn't designed to grow fast. Whereas a search engine, for example, is." Brilliant.

Illustrated over nearly 75 years of growth for Hewlett-Packard here: <a href="http://www.youtube.com/watch?v=FCOt03Y_0SM" rel="nofollow">http://www.youtube.com/watch?v=FCOt03Y_0SM</a>.

pg listed writing novels and tech startups as "high-beta" occupations.What are other high beta and high alpha occupations?

follow up articles:<p><a href="http://www.bothsidesofthetable.com/2012/09/22/is-going-for-rapid-growth-always-good-arent-startups-so-much-more/" rel="nofollow">http://www.bothsidesofthetable.com/2012/09/22/is-going-for-r...</a><p>Any others?

minor corrections:<p>"What matters is not the abolute number of new customers ..." should be "absolute"<p>in footnote 13:<p>"Though nominally acquisitions and sometimes on a scale …" should be "acquisitions ARE sometimes" I guess?

I learned a lot, thx pg!

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more blah, blah on what made google, fb, etc. great,<p>what's the point?

"the same thing that makes" -&#62; "the same thing makes"