Didn't Ronald Coase's theory of the firm predict this, right after the first world war?
(As transaction costs (search costs, costs to contract, costs to outsource, etc.) go down, optimal firm size goes down. In an efficient market for contracting, like IT, tiny startups turn into long-term profitable small-headcount companies (dropbox has, what, 70 people?). In inefficient markets, you end up with huge or state-owned companies, like in natural resource exploitation or the third world.)
I've been told Coase not only foresaw the present trend towards more, smaller companies but also figured out the underlying dynamics. But I admit I haven't actually gotten around to reading "The Nature of the Firm."
He also predicted the first Gulf War, the election of Obama and the Great Fire of London. Wait, wrong guy...
In all seriousness though, while the technology factors certainly enable some 'shrinkage' of the firm, human factors change less, which to me indicates that YC like agglomerations will not replace the corporation in many circumstances. In other words, it's easier to find people these days, but as contractors, are they really still going to slog it out for a company day in and day out for years? Most people out there are not like YC founders, would be my bet, and are reasonably happy with their 9/5 jobs, and with not having to hustle to find the next gig. On the positive side, these people will also retain the tacit knowledge inherent in many human activities, and provide a sense of continuity that a shifting network might have trouble fostering outside a small core. Apple, for instance, has 60,000+ employees, according to the web page - that's not what I'd consider a small core + network, even though they certainly outsource a lot. So... trend, yes, but fairly slow once the low-hanging fruit that tech can provide has been integrated.
The other big question I have in this vein is whether it will remain so cheap to create a company, or if it's an anomaly, and in the future more capital will be required for anything serious. My guess is that the long term is towards cheaper, but who knows what may happen.
BTW, Wikipedia says it's just an article, and here's the summary for those interested:
There are definitely arguments against "everyone an independent contractor", but ending up with a bunch of 1-50 person sized companies instead of a much smaller number of 50k person companies seems very likely. This is a net win for everyone in that failure happens faster, thus allowing resources to be allocated more efficiently -- it also allows high performing individuals and teams to be accurately compensated for their success, vs. the strict seniority or internal-politics systems in larger organizations.
There's an argument for internal communications costs vs. external communications costs (Coase's thing) -- if it's more efficient to communicate within a trusted firm vs. between firms, you end up with huge firms. Things like tight-knit social networks outside of the firm (college alumni, things like YC, sites like hn, various ethnic diaspora in history, ...) would create some kind of hybrid, too, where a lot of interconnected small firms would work, so each firm could be smaller than otherwise. This would actually be interesting research for someone in economics or sociology -- I'd look at formal networks like YC and informal networks like casual coworking and web forums.)
Yes, I think it's an absolutely fascinating subject, and while I have some instincts, who knows which way it could go.
To have some predictive value, what other industries besides web companies that are super cheap and easy to start, might morph towards this kind of structure? Or, here's another one: this industry has long been dominated by giants: IBM, Microsoft, Google, and so on. Will we see the end of that?
(And just to be clear, I think what pg has done is fantastic, and he/them are quite praiseworthy, etc... I'm just pushing back a bit on the idea. I can't foresee doing business with PG or YC, so I have no interest in not calling it like I see it)
I think being a big companies allows you to have a better access to authorities and actual IP laws prevent any meaningful competition to emerge. Our current system provides huge incentive to be a megacorp.
I'll save you the book. The theory basically is that there is a tension between internal corporate stupidity, and transaction costs between different companies. The boundary between "one big company" and "a bunch of interacting small companies" is drawn by which is economically more efficient.
Note that for any particular technology area, at first it makes sense to have a single integrated company which can redesign everything. But once the market knows roughly how to achieve the result and has standardized pieces, cooperation is much easier to achieve, and you naturally get a fragmentation into smaller, specialized, companies.
I've seen nice illustrations of the exact mechanics using examples from the computer industry. I think it was in Clayton Christensen's The Innovator's Solution, but I can't swear to that. (However that's a good book regardless.)
The point is that a shipyard could also be run by a number of smaller companies, each doing part of the job, if only they can collaborate effectively. Capital and manpower can be divided between firms.
There are a lot of big construction projects (and even factories) where you get exactly that. Some of the staff on-site at the same facility work for sub-contractors (they may be small companies, or may be a detachment from a huge company). e.g. the guys running IT are a legacy company are probably employees of a big enterprise IT vendor (ITT, IBM, ...), not Big Steel Company. The guys maintaining the radiation camera are probably with a specialist industrial radiography company, not the big company.
RDL already pointed out that shipyards (and other large manufacturing sites) do operate this way.
There is one problem with a y-combinator approach to capital intensive work: someone has to be in charge. There is 'a' party responsible for delivering the product to the customer, and that drives everything else.
Put ycombinator in charge of a shipyard and a lot of cool stuff will happen, but delivering a finished boat on time and on-cost is not one of them.
I'm aware that there are unmanned stations -- not only oil platforms but regular leases. I live in oil & natural gas country (Northern Alberta). What you don't see are the thousands and thousands of guys running around keeping it all ticking.
There are some things that you can automate -- but a lot of things in the oil & gas industry cannot be automated. Specifically, the leg work required to get things started & keep them maintained. Automating those sorts of things requires a pretty advanced AI and I don't see that coming around the corner anytime soon.
You can make things simpler for dumber AIs (or dumber workers) by designing field-replaceable-units with that in mind. It is going to cost more/be less efficient, so as long as a human costs $300k/yr or less, no need, but when that isn't the case, you see "forklift upgrades", etc.
I don't hold out a lot of hope for actual AI. AI has been promised 'real soon' as long as I've been doing computer stuff, haven't seen it yet.
Automation can get us close. Already has, but this just moves the labor out of the field and into a cube.
But (I think others have pointed out downthread by now) capital intensive projects are always going to need someone to go out and kick the tires, work a nut loose, apply some ingenuity.
If you don't have those guys hanging around to kick the tires and whack a lug nut things will stop until you send a guy out to do that.
The probes we have on Mars .. you can wait a few months for the guys at mission control to work out a problem. You can't do that with an oil well.
The third world has tiny average firm size, and the theory correctly predicts that in the developing world firms will get larger rather than smaller.
Consider the small proprietor in a third world who spends tons of time bargaining with vendors and customers. As people's time becomes more valuable and more products become available, the cost of bargaining increases, and larger stores replace vendors because it reduces total negotiation costs.
The third world has tiny companies and huge (often state-owned) companies; it mostly is missing stuff in the middle. The huge state owned companies are the main ones which contribute to international trade (with the exception of agriculture, and even there, the farmers are organized into various kinds of reseller/cooperative/buyer arrangements.) I think international trade usually ignores the domestic markets of these countries, so only their primary exporters are counted.
Third world isn't really the right term; it's more like "mostly undeveloped" vs. "developing" -- China (at least the urbanized parts) has more in common in firm size with the US, Japan, and Europe than it does with Nigeria.
Brazil FWIW is estimated to have approximately 5 million businesses with fewer than 100 employees according to the IBGE. That's like 99.5%+ of the businesses in country or something like that.
The developing world has an extreme power law distribution curve. Almost all the large businesses are capital intensive. Things are probably more skewed in Brazil than in other countries due to a risk-free rate of ~11%, meaning that any business with high working capital can't rely on outside capital if it doesn't want to end up handing over all its revenue to the banks.
Firm size in Brazil is probably more related to capital costs than transaction costs. High capital costs "hollows out" the middle. Capital is often used to reduce rising transaction costs within a firm once the firm size surpasses approximately Dunbar's number. However those businesses at that are mid-sized instead of large don't have enough scale to justify the investment of capital to reduce transaction costs. Many smaller mid-sized companies will hobble along with high internal transaction costs as a result, much higher than would be tolerated in the US.
Because of this, SaaS products are likely to have a transformative effect on Brazilian businesses. There is a lot of unmet demand because traditional transaction cost reducing solutions have required too much capital to implement.
A lot of small businesses doesn't necessarily mean there's a lot of independent subcontractors, as we know it in the west. In South Korea there's a lot of independent "software consultants", however, these are employed by a single firm. It makes it easier for the firm to pay them less and be able to fire them at will.
True, but independent contractors like this are a target market just like any other. Look at any successful software developer in the US and you'll find that they pay a couple of hundred to one or two thousand in SaaS services each year.
No. Stick to HN. Trust me. Most domestic portuguese language forums are inevitably full of bike shedders. Most of those that want a higher level of discourse stick to HN and IRC channels for their respective technology. This results in a vicious cycle of brain drain in the domestic forums, suppressing the level of discussion further.
My suggestion is to stick to HN and intl technology channels on IRC and Github and keep an eye out for telltale signs of a Brazilian by the name or other identifying info and reach out to them one by one. You may want to try out HackerNewsers to seed the network initially. http://hackernewsers.com/
Also, get in contact with Diego Remus of Startupi and Diego Gomes of EverWrite.
This was an interesting point in the context of comparing YC to a large company:
Comparing himself to an air-traffic controller, Graham says much of his time is spend making introductions and helping the YC community solve problems within the network
Most of the large companies I've worked with are missing somebody in the "air-traffic controller" role. It can be very difficult for individual employees to understand all the resources that are available within the company, or who they should contact with a particular question. YC might actually have an advantage in this area.
> Most of the large companies I've worked with are missing somebody in the "air-traffic controller" role.
I've worked for 3 large companies, and have had the opposite experience. The problem is that everyone is trying to be an air-traffic controller. So much so, that honest work is being avoided.
Deep corporate hierarchies encourage politics and associated power struggles. Part of moving up in that environment is to have others perceive you as an "air-traffic controller" of a segment of the company, a master of your domain. This sometimes results in people in "manager" roles with 1 or 2 direct reports, where the "manager" does no actual work, but spends inordinate amounts of time coordinating with other teams or politicking. Honest work avoided.
I'm not excusing that behaviour but if you've spent enough time at a big company, you'll see motivations for it.
Contrast that to pg's air-traffic controller role in the YC network, providing value to all the startup people he connects.
It will be interesting to see how well pg's positive influence scales as YC continues to grow.
One reason for this is that many companies review and reward employees based on their "influence" or "visibility" -- what better way to maximize both than be in the air-traffic controller role?
I can attest to this firsthand at both Microsoft and IBM.
We're also working on software to make this process better. Garry built a private version of Facebook for YC founders which is tremendously useful. We have ideas for more software to make the knowledge contained within the alumni network more accessible.
I'm curious about the software, because in my experience these kinds of things are doomed projects.
Yahoo had at least four internal websites devoted to companywide skill-sharing. Google had a couple of these too. I don't recall them ever being useful.
They are started by naive new engineers who get frustrated because they can't get anything done. They think everyone's going to be thrilled to create a profile, say publicly what they are good at, and to answer questions from effective strangers. But it never works.
A year later they have personal relationships within the company, and know how to use those instead. And this is what motivates people to really help.
So do you think software is going to work better within the YC community? Maybe there's some communal spirit there that can overcome that tendency, due to all the dinners together or everyone knowing the YC partners. Or maybe your network is just small enough, and has higher-than-average quality people, so people would care about their reputation for helping strangers.
Agreed. Seen so many of these initiatives come and go at various companies.
The only thing that worked, and people reverted back to wasn't the "sexiest" of solutions - An email list. Data gets pushed to you, you don't have to be logged into a specific application or site to view it.
Setup some tags in the subject header, and some rules to filter on those tags.
Github in a way solves a lot of these issues of finding the right person because it revolves around the work (i.e. code) and skills and not the person and position.
YC has nothing to do with replacing the traditional corporation. To do that YC companies would have to have sustainable business models and actually make a profit.
How many YC companies have ever made a real profit before being bought? How is the YC model sustainable without existing large corporations like Google or Yahoo or Linkedin waiting to buy out the startups?
YC is about grooming startups ready to be bought out in talent acquisitions after a period of rapid growth, not about creating sustainable businesses with viable products.
I remember people saying things like this in the first few years but it's surprising to encounter it now.
If people who think we're in the business of grooming startups for HR acquisitions stopped to do the math, they'd realize we'd be acting against our own interests if we focused on that. Essentially all the returns in startup investing (for us as for any investor) come from the big successes. Whereas we often make zero from early acquisitions.
Ok, I'll bite Mr. Corporation Replacer. Where does the long-term R&D investment come from?
Microsoft Research alone outspends Y Combinator by a factor of 50,000,000. And they're thinking 10+ years out. Money aside, their internal expertise and contact network far exceeds "the guy who made Django."
Kudos for what you've done, but when you start talking this way I feel obligated to point out that you're a grain of sand on the beach compared to the Fortune 50--or even CMU/Berkeley/MIT.
You're doing something totally different. Own it. Say what you're for, not what you're against. Say what you're building, not what you're killing.
The fact that people who interview you keep painting you into these corners means that the general public still doesn't understand what's going on with YC. Less hyperbole, more concise vision. Your essays often achieve this, your PR should too.
Microsoft Research was founded in 1991, 16 years after Microsoft itself was founded in 1975 (1, 2). Y Combinator was founded in 2005, 30 years after Microsoft. So I'd be surprised if with a 30 year head start Microsoft didn't have more long-term R&D investment, for pretty much any definition one chooses.
Much of what he does may eventually filter down to the rest of the company, but there's a real risk that some of it won't, or that it'll be picked up by someone outside of Microsoft, etc...
How does that sort of thing work out with a number of small companies networked together?
While Etherpad is somewhat research-y, it is a product. The difference between Etherpad and what SPJ does is about as big as between a mathematician working on car collision simulation and one working on abstract algebra.
Dunno, Paul. While SPJ does have a lot of relevance to current computing, his work is not a product like Etherpad was. I haven't seen YC companies moving towards or staying with fringe languages -- not that I criticize that business decision.
Maybe the YC model will reach that "how will we be computing in 10 years" phase at some point. But (perhaps with good reason?) it does not seem to be there yet.
Etherpad came and went pretty quickly though, at least in its initial incarnation - correct? Simon has been at Microsoft for quite a while. You can certainly do interesting things in a brief period, but some stuff requires just requires more time/capital/materials.
I think a startup is pretty much 100% R&D. It's just not pure research.
Maybe you can't build a fusion reactor on a YC-style seed investment, but Etherpad, AirBnB, and Reddit have done more for my life than fusion research has, so far.
That's too bad. I mean, yes, MSR is notorious for being a black hole for great talent. But look at PARC. They innovated the next 40 years yet didn't really ship any of it. Personally, I spent 15 years on my own research without knowing how to productize it until the end, and it needed all of that time.
You, personally, were able to innovate and productize immediately, but that's not the norm. For most people the choice comes down to: Do you want a nice car or you want to change the world?
Big successes and sustainable businesses aren't necessarily the same thing. This is an important distinction because a sustainable business is a viable option for many, and "big success" isn't. And the biggest ones are going to leapfrog such schemes anyway. It's like American Idol for programmers. What you're doing is interesting, but it's questionable whether it's promoting the right values.
Seems more like the big goal is to become a big success in their own right. If that doesn't come about then either a fairly big exit or a talent acquisition is much better for all parties than calling it quits.
The comments in this thread are painful and seem to be based on a lack of understanding of investor motivations and basic spreadsheet math. YC (and the rest of Silicon Valley)'s biggest successes are companies that make money and have real, innovative business models and products. Talent acquisitions almost always happen before companies reach this stage, and while they get a lot of attention because they are "news", they aren't where investors make the most money.
Investors aren't investing in technology companies in the hopes they get acquired for $10m in Google or Facebook stock -- they are looking for large sustainable companies that generate revenue (and profits). The difference between YC and traditional investors is that YC doesn't block founders from taking talent acquisitions, which may be one reason it seems like there are more of them.
Did you even read the article? The "replacement" part is replacing the large internal network of connections at a company with the network of connections to YC alumni.
The most successful (profitable) YC "products", Heroku, Dropbox and Airbnb, have very sound business models with tens of thousands of customers that are not "traditional corporations".
Is the fact that Heroku was acquired the rationale for calling it the 'product' purchased by 'traditional corporations'? If so, what threshold would you apply for when a company can be considered successful before it gets acquired? As companies of all sizes get acquired, aren't they all then 'product' that wasn't successful until a real company bought them?
I'd like to add that I think and hope that the trend is for traditional corporations to keep getting replaced by a larger number of lean companies (where's it's possible). The larger the corporation (by total employee count) the less nimble they become. I think companies consisting of a small number of highly skilled individuals can focus on what they do best and work with other small companies on the work they need.
For example, traditional corporations I've worked for have had large HR departments. Now where I work (with 40 employees) we use another company to handle most of the HR functions. This allows us to focus on our core business model.
"The larger the corporation (by total employee count) the less nimble they become."
That's because of antiquated management structures. Look at Gore and Associates (makers of Goretex) for a modern corporate structure. Elements of a corporation should be almost completely independent and the only reason they are part of one entity is because of synergies and cooperation.
To give a toy example, McDonalds might grow and slaughter their own cows because they can better place them near their distribution facilities. Buying from a third party might create unnecessary overhead.
I'm sorta oversimplifying things, but I'd recommend reading
"Re-Creating the Corporation" by the late Russell Ackoff to appreciate why corporations exist (and why sometimes they shouldn't)
In-n-Out Burgers does run their own butcher department. The company structure worked pretty well too, since the company did not stumble when a big chunk of the executive team and the CEO died in a plane crash. see http://fora.tv/2009/07/14/In-N-Out_Burger_Stacy_Perman#Histo...
Thanks for the book reference. Looks interesting. If it's one thing I believe it's that there is not a single approach to anything. This seems like a good book for me
I do believe there are things that large corporations can do well and they do have their place. I hope that with technology advancements smaller companies can compete is some spaces traditionally well suited to these larger organizations.
"Graham is the cofounder of Y Combinator, the investment firm that plugs seed money ($18,000 on average) into early stage startups in exchange for mentorship and access to its ever-growing network of alumni."
Maybe I'm not understanding this right, but the phrase "in exchange for", seems like it should have read "in addition to". Can someone please clarify?
Maybe not the most clear sentence since it leaves out the equity part; it's conveying that it provides seed money plus mentorship/networking in exchange for a modest equity from the startup.
Could be better organized as:
"... Y Combinator, the investment firm that plugs seed money (~$18,800) into early stage startups and offers mentorship and access to its ever-growing network of alumni, in exchange for a modest equity (~7%) of the startup."
Being part of community of talented people is a great thing. In addition to having a large pool of people to ask for help though, I think a great benefit is that YC companies help each other out without being directly asked. For example, other YC companies might try to make a conscious effort to use Hipmunk to buy flights, or Airbnb.
In addition to trying to use each others' services, YC companies will probably often give each other feedback about what could be improved about each other's services.
Compare this to the alternative of trying to launch a new service, gain customers, and get feedback on your own.
I wouldn't bet against the underlying trend (keiretsu collectives of innovative, smaller companies outcompeting traditional corporations), but Y Combinator is the wrong posterchild for this movement, for a couple of reasons:
1. Y Combinator's success criteria for its startups involves a liquidity event - there's no mention of a company staying privately owned and profitable as being a successful outcome (http://ycombinator.com/about.html). This is unsurpising given that pg himself exited to Yahoo
2. To date, YC liquidity events have all been sales to medium-to-large companies (http://yclist.com/). There may be a couple of big IPOs on the horizon, which is great, but the general trend is for Y Combinator-funded startups to be acquired by big corporations, which boosts those large companies' competitiveness and innovation capability
So I would certainly say that Y Combinator's structure is unusual and admirable - but de facto it acts much more like a pilot fish for traditional corporations (creating some kind of new, syncretic innovation model for them), rather than as a replacement for them.
Do I think a r/evolution of the Y Combinator model could replace the traditional corporation? Certainly, but this will be done by "slowcubators" rather than by traditional incubators. A slowcubator looks like this:
1. No expectation of a liquidity event in the child companies. It's expected instead for the child companies to become self-sustaining, profitable businesses a la GitHub or Plenty of Fish
2. Significant shared tech IP - this is something a Y Combinator can't do, because shared tech IP makes it impossible to acquire a startup. But it makes huge sense for a slowcubator, because a) acquisitions are the exception, not the norm, and b) there are huge cost savings to be made by sharing tech IP across properties (think private PAAS, Chef recipes, AdWords automation tools etc). Joltid is the posterchild of shared tech IP driving multiple successful startups
3. Staff incentives which are not structured around focusing 100% on one product until it exits or dies, but instead encourage staff to rotate within the slowcubator's companies to where they are currently needed most. It's great that the Django creator can answer a YCfounder's questions over some beer and pizza, but in a slowcubator he would be hands-on helping multiple products to be as good as they can be (as DHH does at 37signals)
In the same way that the startup acquisitions of the past decade shaped the incubator model that we see today (and is exemplified by YC), I fully expect the bootstrapped successes that we are seeing today to give rise to a wave of slowcubators - the best of which will indeed rival (if not replace) the big corporation.
the general trend is for Y Combinator-funded startups to be acquired by big corporations
This is the mistake. It's the general trend only by number of companies, not by valuation or number of people. Measured by valuation, the majority of our portfolio is not interested in being acquired.
So does that mean that you've done a survey of all the companies in your portfolio, and classified them by whether they are interested in IPO or acquisition (or no liquidity event at all)? And then have you attached a current valuation to each of these companies - what's that valuation based on in the absence of a liquidity event?
Can you share the % splits? Would be a really interesting (and yet still anonymous) snapshot of the portfolio companies' intents in the aggregate...
Plus those large companies have a major challenge of not only trying to keep those innovative employees that they acquire, but to keep those employees innovating within a very different environment. There is a serious lack of managers in the world that can pull this off.
The moment the golden handcuffs are off, there will be flight back to creating a startup in most instances. This means that the big companies can only remain competitive by throwing money at the problem.
You mean the flight to startups from Google or the ability to maintain a big company that supports innovate? Google appears to embody both situations near as I can tell.
Some areas/departments areas are great and keep innovating and others lose people once the golden handcuffs are off.
The description given reminds me somewhat of Keiretsu, the successors of the old Zaibatsu. The Keiretsu are families of companies interlocked through personal relationships between executives, mutual interlocking share holdings and secondment of workers -- tied together around a bank or finance company.
I believe KPCB were referred to as a Keiretsu for encouraging their portfolio to buy from each other -- eg, getting Netscape to buy servers from Sun etc.
There was a time when it was fashionable to imitate Japanese business, so VCs actively pursued this type of PR. So it's more likely that KPCB issued PR about itself calling itself a Keiretsu, having the added benefit of seeming much larger than they are. (The Keiretsu were large conglomerations.)
Now, not so much of that PR is being created.
EDIT: I thought I remembered them self-referencing keiretsu. This is from 2001, look at the bottom:
Maybe I don't know what it's like to be a YC founder, but couldn't you say the exact same thing about just being in San Francisco?
What's more, the SF network extends to people who are not just in startups, but also established companies, universities, and even unrelated things (like the Because We Can people, who are making a business out of custom CNC products.)
Or do YC people collaborate more closely than that? Give up their time more freely to a fellow YC'er?
I feel a personal obligation to meet with any YC company that wants to meet with me, the same way I would if a good friend asked me to meet with someone. I've taken enough from that network that I want to give back.
If someone cold-emails me, or has a mutual acquantance do an introduction, I usually don't feel as obliged.
But I'm not talking about cold-emailing -- I'm talking about personal relationships. They just aren't defined by having the same seed funder.
When I walk down the street in SOMA or the Mission, I too am likely to run into a developer that I know. And I'm not even a very social person. But I've been around the Valley & SF for almost six years now.
Maybe YC gets you off the ground faster, maybe you get that in year one. Still, I hope you are also reaching out to make connections with non-YCers.
I like the idea of replacing traditional corporations, and YC is certainly good at what they do, but how much of this success is just a result of internet startups having no physical products?
I'd like to see more places like Incubation Station come about - http://www.theincubationstation.com - or hear about similar incubators for consumer products if anyone knows any.
(As transaction costs (search costs, costs to contract, costs to outsource, etc.) go down, optimal firm size goes down. In an efficient market for contracting, like IT, tiny startups turn into long-term profitable small-headcount companies (dropbox has, what, 70 people?). In inefficient markets, you end up with huge or state-owned companies, like in natural resource exploitation or the third world.)