Busi­ness

In­ter­net guru Paul Gra­ham runs a boot­camp in Sil­i­con Val­ley that nur­tures nerds.

Friday - - Contents -

Paul Gra­ham is stand­ing on the edge of a large din­ing hall in an anony­mous com­mer­cial build­ing in a Cal­i­for­nian cul-de-sac. In front of him, an army of pro­tégés – scores of vir­tu­oso com­puter pro­gram­mers – are sit­ting at benches, pick­ing at bowls of pasta, tap­ping at MacBook Airs and chew­ing over plans for world dom­i­na­tion. The dress code is pro­gram­mer chic: crum­pled T-shirts, flip-flops, Ber­muda shorts. Ghostly com­plex­ions sug­gest long pe­ri­ods spent in­doors.

Gra­ham, a 48-year-old Bri­tish-born in­ter­net guru with a bull­dog build and the ex­cite­ment thresh­old of a Labrador puppy, is scan­ning the room. You can al­most see the thought bub­ble form­ing above his head: “Is one of th­ese kids worth $1 bil­lion?” Wealthy in­di­vid­u­als, known as “an­gel in­vestors”, have long funded em­bry­onic soft­ware com­pa­nies, but Gra­ham through his com­pany Y Com­bi­na­tor has sought to do to this process what Adam Smith’s pin fac­tory did to man­u­fac­tur­ing. In­stead of in­vest­ing in one com­pany at a time, he shov­els cash into dozens si­mul­ta­ne­ously.

“We have ap­plied clas­sic mass-pro­duc­tion tech­niques,” he says. “Be­fore this, most of the peo­ple who put money into start-ups were fi­nance types. We went about it like hack­ers.”

Twice a year, he sifts through thou­sands of ap­pli­ca­tions to pick a fresh co­hort of en­trepreneurs. There are 126 in the present batch, the aver­age age is 26, and they’ve formed 53 nascent com­pa­nies. Some will have ditched lu­cra­tive jobs at Ap­ple or McKin­sey; oth­ers are

barely out of col­lege. But th­ese “founders” all have one thing in com­mon: they’ve agreed to move to Sil­i­con Val­ley for three months, to im­merse them­selves in start-up life. Each com­pany gets $100,000 (Dh 367,280) in seed cap­i­tal. (Y Com­bi­na­tor pro­vides $20,000 in ex­change for a stake, usu­ally 6-7 per cent. The rest of the cash comes from out­side in­vestors “on ridicu­lously gen­er­ous terms”.) But the fi­nanc­ing is prob­a­bly the least sig­nif­i­cant part of the deal – the real draw is what Wired mag­a­zine called “an un­match­able en­trée into the oth­er­wise closed world of high-stakes in­ter­net en­trepreneur­ship”.

And then there’s Gra­ham him­self. Learn­ing how to build a start-up un­der his wing has been likened to hav­ing Robert De Niro as an act­ing coach – with the added bonus that he might just help you to pro­duce your own bil­lion dol­lar block­buster.

Dur­ing the 100 days they spend at YC (as Y Com­bi­na­tor is known in ‘the Val­ley’), the founders will work fu­ri­ously, try­ing to de­velop some­thing re­sem­bling a fully fledged busi­ness. I ask Zefi Hen­nessy Hol­land, a 23-year-old Brit who started out work­ing in the City of Lon­don, what hours he’s been putting in. “We start at per­haps 9 or 10 in the morn­ing...” he says. His co-founder, Leo An­thias, con­tin­ues: “...and yes­ter­day we fin­ished at 5am.”

The in­sane hours are the prod­uct of the con­stant dead­lines, all of which lead up to “Demo Day”, where the founders pitch their com­pa­nies to a crowd of tech­nol­ogy ty­coons,

the odd celebrity (Ash­ton Kutcher is a reg­u­lar) and a swarm of ven­ture cap­i­tal­ists. Demo Day is a po­ten­tial gate­way to mil­lions of dollars in in­vest­ment. For some of those pale, pasta-eat­ing wannabes, it will be the spring­board to stu­pen­dous wealth. It’s also a neat dis­til­la­tion of how Sil­i­con Val­ley works at its most clois­tered and in­no­va­tive lev­els. When I meet Alexis Oha­nian, who co-founded the so­cial news site Red­dit while at Y Com­bi­na­tor, he’ll de­scribe the core of the tech in­dus­try as “gen­er­a­tions of nerds in­vest­ing in nerds. It’s great – but it’s kind of a mono­cul­ture.”

(In 2006, Condé Nast bought Red­dit, just a year af­ter its cre­ation. The price wasn’t an­nounced, but Gra­ham said that Oha­nian and his co-founder, Steve Huff­man, could live off the cash for the rest of their days – and they were only 23 at the time.)

The com­pa­nies spawned by YC are al­most ex­clu­sively soft­ware-driven, but th­ese days that cov­ers a vast swath of the econ­omy. I ar­rive on a Tues­day, be­cause on Tues­days the founders eat to­gether at the YC head­quar­ters and lis­ten to an off-the-record talk from a tech lu­mi­nary (Mark Zucker­berg is to at­tend this month). The first founder I meet is Ben Sand, a 30-year-old Aus­tralian. I ask what he’s work­ing on.

“You know the holo­graphic com­puter in­ter­face from the Iron Man films?” he says, a ref­er­ence to the fu­tur­is­tic con­trols that al­low Tony Stark (Robert Downey Jr’s char­ac­ter) to com­mu­ni­cate with the suit that gives him su­per­pow­ers. “We’re build­ing it for real.”

Demo Day is a po­ten­tial gate­way to mil­lions of dollars in in­vest­ment. It’s also a neat dis­til­la­tion of how Sil­i­con Val­ley works... it’s gen­er­a­tions of nerds in­vest­ing in nerds

An­other founder, Yin Yin Wu, a 24-yearold Stan­ford com­puter science grad­u­ate, is launch­ing a laun­dry ser­vice – but the grand plan is to put FedEx out of busi­ness by per­fect­ing in­tra-city de­liv­er­ies. Alex Selig, 26, an­other Stan­ford alum­nus, is par­tially deaf; his part­ner Varun Srini­vasan, 25, who stud­ied in­for­ma­tion sys­tems at Carnegie Mel­lon, is a DJ. They’re de­vel­op­ing a tech­nol­ogy that will fine-tune sound sys­tems to the idio­syn­cra­sies of an in­di­vid­ual user’s ears. An­other founder, Travis Dredd, who at 42 seems a near pre­his­toric pres­ence, was the chief of staff for the Democrats’ 2012 con­ven­tion. He wants to rev­o­lu­tionise how large pub­lic events are run.

Mean­while, Gau­tam Si­vaku­mar, a for­mer Bri­tish doc­tor, is work­ing on a sys­tem that will han­dle pa­tients’ notes when hos­pi­tal doc­tors change shifts. Mix-ups in­volv­ing this pa­per­work are be­hind at least two thirds of all se­ri­ous med­i­cal er­rors, he says. Later, I’ll chat to Kirsty Nathoo, YC’s Bri­tish chief fi­nan­cial of­fi­cer. “Work­ing here is like liv­ing in the fu­ture,” she says. Be­daz­zled by am­bi­tion, I nod.

Al­ready, though, we’re liv­ing in a YC ac­cented world. Since it be­gan in 2005, YC has yielded 564 com­pa­nies. On pa­per, they are col­lec­tively worth more than $11.7 bil­lon. (Gra­ham’s share, in the­ory, is likely to amount to many tens, if not hun­dreds of mil­lions of dollars.) The YC poster chil­dren in­clude Drop­box, a cloud stor­age ser­vice val­ued at $4 bil­lion, and Airbnb, which ef­fec­tively lets peo­ple trans­form their homes into tem­po­rary ho­tels and is now reck­oned to be worth $1.3 bil­lion. Other YC com­pa­nies, such as Stripe, which en­ables com­pa­nies to process pay­ments on­line and is said to be worth as much as $500 mil­lion, are less vis­i­ble, but may ul­ti­mately usurp gi­ants such as MasterCard.

Twit­ter has bought four YC start-ups; Google has ac­quired seven; Face­book has snapped up six. But it’s hard not to feel that a big­ger, more pro­found game is be­ing played out here: that the trends that YC ex­ploit prom­ise to shape the com­ing cen­tury – and may dic­tate who runs it.

In per­son, ‘PG’ (even his wife, Jessica Liv­ingston, who is also a part­ner at YC, calls Paul Gra­ham PG) is a tanned dy­namo. He speaks very quickly but has a habit of clos­ing his eyes and paus­ing at the start of sen­tences, as if over­com­ing a stut­ter, or wait­ing for his com­puter-like brain to re­trieve a file. He has a PhD in com­puter science from Har­vard and a slightly abra­sive man­ner. Ask a ques­tion that he doesn’t want to an­swer – for in­stance: “Why are there so few women in YC?” – and he’ll com­plain of be­ing bored. Ask again and he’ll give an ex­as­per­ated, “I don’t re­ally care.” There’s just a whiff of a sus­pi­cion that his ca­sual garb (rather short shorts, a T-shirt, sporty san­dals and in­ex­pen­sive Timex watch) is as care­fully as­sem­bled as any Wall Street bro­ker’s bespoke suit. One thing, though, seems ut­terly can­did: his pas­sion for start-ups.

The Wikipedia def­i­ni­tion of a start-up is as good as any: an or­gan­i­sa­tion “de­signed to search for a re­peat­able and scal­able busi­ness model”. Google be­gan as one. So did Twit­ter, Mi­crosoft, Ap­ple, Face­book, In­sta­gram and Skype. In Gra­ham’s view, start-ups con­sti­tute a rev­o­lu­tion­ary eco­nomic force, com­pa­ra­ble in sig­nif­i­cance to the advent of agri­cul­ture or the In­dus­trial Rev­o­lu­tion. “Think what Larry [Page] and Sergey [Brin, Google’s founders] would have done be­fore it was nor­mal to start start-ups,” he says. “They would have been the em­ploy­ees in the white coats down the cor­ri­dor.”

Gra­ham was born in Wey­mouth, the son of a math­e­ma­ti­cian who de­signed nu­clear power sta­tions and who, in the Six­ties, be­came part of the brain drain from the UK to the US. He re­mem­bers vis­it­ing the land of his birth as a boy in the early Seven­ties, from his new home in Pitts­burg. “Eng­land would look re­ally grubby. The food was ter­ri­ble. Ev­ery­thing was small and dingy... Amer­ica seemed clean and bright.”

But he wouldn’t find his spir­i­tual home un­til 1998 – as the first dot-com bub­ble was reach­ing its peak, he sold his three-year-old soft­ware com­pany, Vi­aweb, to Ya­hoo!, for $49 mil­lion. He moved to the Bay Area of San Fran­cisco, aka Sil­i­con Val­ley, a ver­dant nook that has long at­tracted pi­o­neers. For Gra­ham, it seemed a Shangri-La. “I felt like im­mi­grants from Eastern

Europe must have felt com­ing to Amer­ica in the Twen­ties: ‘Ev­ery­one is so rich and healthy and life is like some kind of Utopia, but, boy, is it ex­pen­sive.’” In 2005, he started Y Com­bi­na­tor, the el­e­va­tor pitch for which would go some­thing like this: it is the world’s most suc­cess­ful at­tempt to mass-pro­duce tech­nol­ogy com­pa­nies. That he’s been de­scribed as a cross be­tween PT Bar­num and Ber­trand Rus­sell says some­thing about his re­la­tion­ship with hy­per­bole. But a lot of very smart, very rich peo­ple will tell you that Gra­ham is on to some­thing when it comes to start-ups.

Take, for in­stance, the no­tion that “soft­ware is eat­ing the world”. The phrase was coined by Marc An­dreessen, a Sil­i­con Val­ley uber-in­vestor, who be­lieves that no cor­ner of the econ­omy will re­main im­mune to com­puter code. The poster-child for this phe­nom­e­non is Ama­zon – which An­dreessen says is pri­mar­ily a soft­ware com­pany – and how it killed the tra­di­tional book­shop. But he can cite count­less other ex­am­ples. “The best new movie pro­duc­tion com­pany in many decades, Pixar, was a soft­ware com­pany,” An­dreessen ar­gued in The Wall Street Jour­nal in 2011. The most pow­er­ful en­tity in mu­sic? Ap­ple – a soft­ware com­pany. The dom­i­nant force in ad­ver­tis­ing? Google – a soft­ware com­pany. The fastest-grow­ing re­cruit­ment com­pany? LinkedIn – a soft­ware com­pany. Even farm­ing, he says, is pow­ered by soft­ware. And if soft­ware re­ally is eat­ing the world, it’s the YC co­hort who plan to grow fat. The se­lec­tion process sheds light on what makes them tick. First comes an ap­pli­ca­tion form that asks can­di­dates to “prove you’re an an­i­mal”. Ac­cord­ing to Gra­ham, that means “some­one who takes their work a lit­tle too se­ri­ously; some­one who does what they do so well that they pass right through pro­fes­sional and cross over into ob­ses­sive”.

Typ­i­cal win­ning an­swers in­clude tales of grad­u­at­ing at ab­surdly young ages, or of par­tic­i­pat­ing in “hackathons”, which in­volve do­ing noth­ing but fu­ri­ously writ­ing com­puter code, eat­ing and sleep­ing for days on end – an ideal pre­cur­sor, it emerges, for life in­side YC. While he was cre­at­ing his com­pany Vi­aweb (it al­lowed users to build on­line shops), Gra­ham be­came “a zom­bie for sev­eral years... I was not part of the or­di­nary world. I was sit­ting glued to a com­puter all day long, or asleep”.

There’s also an em­pha­sis on what might be de­scribed as the phi­los­o­phy of “hack­ing”. “A hack is when you break the rules,” he ex­plains. “It can be sur­pris­ingly el­e­gant. Ar­guably, Ein­stein broke the pre­ced­ing rules. Or it can be a cheesy trick – like stick­ing stuff on to your bi­cy­cle with duct tape.”

“Hack­ing”, it seems, com­bines gall with in­tel­lec­tual flair and an abil­ity to “get things done”. Ap­pli­cants are asked to de­scribe their most im­pres­sive hack not in­volv­ing a com­puter sys­tem. “One group had made mil­lions gam­ing the lot­tery sys­tem,” says Gra­ham. “It turns out that some­times it’s a good deal to buy lot­tery tick­ets... You have to buy an enor­mous num­ber. They had [fi­nan­cial] backers.”

If your ap­pli­ca­tion forms pass muster, you are in­vited to the YC head­quar­ters, which is in Moun­tain View, where Google also has its HQ. Ap­pli­cants meet Gra­ham for a 10-minute in­ter­view. They de­scribe their busi­ness ideas – but he’s much more in­ter­ested in the per­son than the pitch. Above all, he says, he’s look­ing for de­ter­mi­na­tion. Strong for­eign ac­cents are a turn-off, he adds – he sus­pects that a fail­ure to learn “id­iomatic Amer­i­can English” in­di­cates lazi­ness. He also prizes “earnest­ness”, a qual­ity he says that Bri­tish ap­pli­cants too of­ten lack. None of the Bri­tish founders he’s known has been a “pure, un­worldly nerd”, he com­plains. “They’re like kids who grew up in New York City: too so­phis­ti­cated.”

It helps if you get the name: “Y Com­bi­na­tor” is an in-joke, the ti­tle of a math­e­mat­i­cal func­tion used in com­puter science. Gra­ham chose it be­cause its ef­fects, in com­put­ing, are “coun­ter­in­tu­itive and cool... and be­cause the do­main name was avail­able”. (The web­site ad­dress be­ing avail­able is at least 50 per cent of the rea­son be­hind any start-up’s name.) It’s the equiv­a­lent of a hacker’s se­cret hand­shake.

It also ap­pears to be in­or­di­nately help­ful, if you want to be part of YC, to be male. Of the cur­rent batch of founders, only 7 per cent are women, and this is re­garded as a bumper crop. Gra­ham says that the pro­por­tion of fe­males who are ac­cepted is in line with the pro­por­tion who ap­ply. But if start-ups re­ally are as sig­nif­i­cant as the In­dus­trial Rev­o­lu­tion, isn’t it prob­lem­atic for 50 per cent of the

hu­man race to be so grossly un­der rep­re­sented? Gra­ham, though, re­fuses to en­gage. He mut­ters some­thing about males be­ing in the mi­nor­ity in fash­ion col­leges.

Oth­ers in­side YC sug­gest women are more risk-averse (most start-ups are doomed to fail), or less likely to em­brace the ex­is­tence that start-up life en­tails: work­ing and sleep­ing in the same small apart­ment; eat­ing ready-meals; see­ing lit­tle sun­shine. Ul­ti­mately, Gra­ham’s re­sponse on the mat­ter is un­char­ac­ter­is­ti­cally ap­a­thetic, “I don’t re­ally care.”

On ar­rival in Sil­i­con Val­ley, founders are given a T-shirt em­bla­zoned with “Make some­thing peo­ple want” – les­son No 1, says Gra­ham, in build­ing a soft­ware busi­ness.

“The big­gest mis­take peo­ple make is work­ing on made-up ideas,” he says. “The most suc­cess­ful start-ups were all made by peo­ple solv­ing their own prob­lems. Google, Ap­ple, Face­book, Mi­crosoft – all peo­ple solv­ing prob­lems they them­selves had.”

An un­solved prob­lem is “the world’s rarest com­mod­ity”, he adds. But once you have one, his sec­ond law comes into play: launch fast.

In the Nineties, a start-up might have taken a cou­ple of years to build a pro­to­type prod­uct; YC start-ups are urged to get some­thing work­ing within weeks, even days, both to en­sure they pro­duce some­thing be­fore they run out of fund­ing, and to get crit­i­cal feed­back from the wider world. As Reid Hoff­man, the LinkedIn co-founder, put it, “If you’re not em­bar­rassed by the first ver­sion of the prod­uct you’ve launched, you’ve launched too late.”

In­deed, much of what YC does is de­voted to ac­cel­er­a­tion, down to the weekly din­ners. Ac­cord­ing to Ran­dall Stross, a jour­nal­ist who wrote a book on YC, Gra­ham be­lieves “hav­ing the founders gather once a week, in per­son, prods them to work harder be­cause of the

Old-fash­ioned net­work­ing also plays a part. YC’s founders can rub shoul­ders with the world’s most pow­er­ful in­vestors

power of shame avoid­ance: they would not want to em­bar­rass them­selves by hav­ing lit­tle progress to re­port to their peers”.

Tech­no­log­i­cal ad­vances have helped fuel the frenzy. Cru­cially, the cost of com­put­ing power has plum­meted. The ca­pac­ity that a startup might have ac­quired in 1995 by buy­ing a server for, say, $20,000 can now be rented from Ama­zon by the month for loose change.

“This shift is what’s driv­ing YC,” says Gra­ham. Un­bur­dened by cap­i­tal costs, start-ups can be quicker than ever, up-end­ing the power bal­ance be­tween founders and in­vestors. “You don’t need the com­po­nent that in­vestors sup­ply – money – as much as the com­po­nent the founders sup­ply, which is their en­ergy and de­ter­mi­na­tion.”

But old-fash­ioned net­work­ing also plays a part. YC’s founders can rub shoul­ders with the world’s most pow­er­ful in­vestors and in­no­va­tors. They’ll in­herit a for­mi­da­ble old-boy net­work. Oha­nian, the Red­dit co-founder, likens the alumni to “the Mafia... If an in­vestor mis­treats a YC com­pany, peo­ple get to hear about it”.

Even so, Y Com­bi­na­tor has its de­trac­tors. Any­body who fol­lows the tech scene is used to tales of start-ups rais­ing pre­pos­ter­ous gobs of money for ideas that, in ret­ro­spect, turn out to be a bit silly. Take Omgpop, a games com­pany founded un­der YC’s wing in 2006 and bought last year for a whop­ping $180 mil­lion by an­other games com­pany, Zynga.

The deal made Charles For­man, a YC founder, tens of mil­lions of dollars. But Omgpop was a flash in the pan. Since buy­ing it, Zynga has been haem­or­rhag­ing cash and slash­ing jobs. The ac­qui­si­tion will be re­mem­bered as a panic buy – a prod­uct of greed, fear and the whirl­wind pace at which the Val­ley now works. The broader com­plaint goes like this: the Val­ley’s bright­est minds once in­vented things of im­mense sig­nif­i­cance – like the first PC. But then came the in­ter­net and the pur­suit of big ideas was eclipsed by a scram­ble for quick prof­its. The money pumped into hard tech­no­log­i­cal prob­lems plunged while in­ter­est in iPhone apps soared. In­stead of cures for can­cer, we got An­gry Birds.

It would not be hard to slot YC into this cri­tique. Gra­ham’s fetish for speed means that some founders will test-drive and then dump two or more busi­ness ideas in their three months at YC. The scat­ter-gun ap­proach may yield prof­its in the long term, but it would seem to dis­suade the tack­ling of big prob­lems.

Ul­ti­mately, Gra­ham will dis­miss this crit­i­cism as sour grapes. He be­lieves that YC will be re­mem­bered as a 21st-cen­tury equiv­a­lent to the Bauhaus or the Blooms­bury Set – as­ton­ish­ing col­lec­tions of re­mark­able peo­ple. He is ex­tremely proud of his re­boot of Adam Smith’s pin fac­tory. And why shouldn’t he be when he’s liv­ing the Amer­i­can Dream 2.0? “I worked for three years and be­came in­de­pen­dently wealthy for the rest ofmy life,” he tells me. “Beats work­ing for a salary for 50 years.” And with that, the in­ter­view draws to a close.

Next door, his army of hack­ers are still plot­ting over their sup­per.

Paul Gra­ham’s scheme has yielded

564 com­pa­nies, worth $11.7 bil­lon. His share could amount,

in the­ory, to many hun­dreds of mil­lions of dollars. Only 7 per cent

of his pro­tégés are women. Why so few? ‘I don’t re­ally care,’ is

his re­sponse

Gra­ham sold his three-year-old soft­ware com­pany, Vi­aweb, to Ya­hoo!, above, for $49 mil­lion

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