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We write a lot about Paul Graham, the man behind the uber successful Y Combinator. Graham’s incubator, which has spawned rock star startups such as AirBnb, Reddit and Dropbox, has funded over 500 companies which have gone on to raise more than US$1.7 billion in funding. Y combinator is considered, by some, the top startup incubator in the world.
Naturally, Graham’s latest interview for Inc. magazine piqued our interest. It’s long, but worth a bookmark. Still, we dug into the interview and created a TL;DR version that outlines some of Graham’s views on startups.
Startups die because they make things people don’t want
The main reason for startup failures? Sometimes it’s related to bad marketing, but most often, says Graham, it’s that fledgling ventures produce products or services that people don’t want. The explanation seems simple, but it’s easy to lose focus.
Most startups die of starvation, a handful of overeating
Commenting on the rise and fall of Groupon and Zynga, Graham talks about overeating — Groupon’s treacherously sharp rise burnt out its prospects and alienated its users — but that happens infrequently. Most ailing companies grow too slowly and fizzle as a result of too little revenue.
Most startups are train wrecks on the inside
Running a startup is not glamorous. It’s hard, and as the roller coaster of starting a new business sprints forward, things often get rather challenging for their intrepid founders. Yet, reading about startups in the press, you don’t always get that impression — some manage to keep their best foot forward, but it’s probably wise to trust Graham when he says, “one thing I know about startups is that, internally, they’re all train wrecks.”
Startups are really, really hard
Graham says that people are often surprised how hard it is to be an entrepreneur. “Maybe half a percent of people have the brains and sheer determination to do this kind of thing. Startups are hard but doable, in the way that running a five-minute mile is hard but doable,” he says.
Don’t be put off by entrepreneurial challenges however. Incubators are there to lend support to the “promising and earnest”, and it’s hard for people to know what they’re capable of, unless they try, says Graham.
Some people are meant to be employees
From an early age we are told what to. It’s a type of conditioning that, once removed, can prove unnerving to new business owners. “Some people are meant to be employees. Other people discover they have wings and start flapping them. There’s nothing like being thrown off a cliff to make you discover that you have wings,” says Graham.
It’s OK to start with a small idea
It’s really hard to execute big ideas, well, from the start, says Graham. It’s better to start small, do it well, and gradually grow the idea into something larger. Graham says that from experience, starting something really big, fumbling, and gradually making it better, is not as effective.
Pop quiz: what’s most important to investors?
The people. No matter how good or bad an idea seems on paper, it’s ultimately the people behind the idea that will sway investor attention.
There is no bubble
Graham says that despite Instagram’s billion dollar valuation, there is no tech bubble — “No one is thinking that they’re going to fund this company and it’s going to go public and stupid retail investors are going to buy these overpriced stocks at an even higher price. I know these people,” says Graham.
He does however say that valuations are high, but that they will continue to rise and fall. According to him, one of the reasons for the high valuations is that companies are taking longer to IPO. Speaking specifically about Instagram, Graham reckons Facebook genuinely believed Instagram’s threat was worth US$1-billion to the company.
Don’t forget to sell
Offering a counterbalance to his first point, the problem isn’t always with the product. There might be a marketing issue. Apple became successful because of the combination of Steve Wozniak’s engineering talent and Steve Jobs’s salesmanship.
Read the full interview.
Photo: Dave Thomas