Things Investors Believe
When VCs teach you how to do a startup, you learn a fascinatingly skewed perspective on the business world. In the first two weeks of CS183C at Stanford, we’ve heard from some of the best in the business: two partners at Greylock, a founding partner of Floodgate Ventures, the founder of Harrison Metal, the president of Y Combinator, and other investors who similarly spend a lot of time with early stage startups. A few debatable themes have emerged from our lectures:
Silicon Valley is special.
There are 2,500 startup accelerators in the world. Of the startups coming out of accelerators, eight have $1bn+ valuations. All eight of those startups are from Y Combinator.
Of the top 60 privately-held companies with $1bn+ valuations, 28 are based in the bay area. The bay area has a population of 7 million people. That is one top-60 unicorn for every 250,000 people. New York has one top-60 unicorn for every 2,700,000 people. Los Angeles has one top-60 unicorn for every 6,300,000 people.
It’s not even close — looking at these numbers, you’d be hard pressed to believe your startup can exist anywhere else. The advice people take from these statistics is clear: if you want to be the founder of a successful startup, time to pack up and move to Silicon Valley.
Good startup ideas have to be controversial.
The venture capital world is one of outsized returns. Each VC invests in dozens of startups but makes its returns on just a couple of very, very large exits. Even Greylock doesn’t escape this statistic — they have been an early investor in only three companies with a valuation of $1bn+.
As such, it makes sense that VCs aren’t always looking for the most valuable companies — they are looking for the most undervalued companies. And there’s only two ways for a startup to be undervalued: either nobody has heard of it or nobody thinks it matters. The latter is where VCs make their returns.
If Airbnb wasn’t a controversial idea, Greylock would likely not have had the opportunity to invest at such an early stage. There would be dozens of VCs willing to invest at a much worse deal.
When it comes to VCs, there is little room for the solid, slam-dunk, but non-disruptive business. For example, there was no room for Pebble — a company that was almost guaranteed to bring positive returns but pretty unlikely to be the 100x unicorn that VCs depends on.
Good founders have to have an unhealthy obsession with their idea.
When asked about when a founder should decide to do a startup, each of our teachers responded thusly:
Entrepreneurs can’t keep it inside them and the idea just bursts out.
…we look for founders who don’t take no for an answer and bend the world to their will.
…if this is one of 10 ideas you whiteboarded in your office, you’re more likely to flee the scene. We like it when the idea is the only one that they wanted to do.
Sure. If you are not obsessed with your idea, then perhaps it is worth considering why you are working on it. But there are plenty of successful founders who weren’t completely consumed by their idea.
Perhaps it is harder to be obsessed with a bad idea than a good one. But then, let’s call this advice what it is: a plea to Silicon Valley to stop working on stupid ideas. If you were an investor who had to hear another wantrepreneur pitch for the tenth time today, you’d probably advise people to dismiss their indifferent ideas too.
The early stage of startups is hard.
Make a product that users love, get some people on board who share your vision, and graduate to the next level of organizational scale. More on that scale in two weeks.
