Interview

Whenever I interview someone for a job, I like to ask this question: "What important truth do very few people agree with you on?" A good answer takes the following form: "Most people believe in x, but the truth is the opposite of x."

Startup

Positively defined, a Startup is the largest group of people you can convince of a plan to build a different future.

Dot-com crash

The entrepreneurs who stuck with Silicon Valley learned four big lessons from the dot-com crash that still guide business thinking today:

• Make incremental advances
• Stay lean and flexible
• Improve on the competition
• Focus on product, not sales

Fight

Sometimes you do have to fight. Where that's true, you should fight and win. There is no middle ground: either don't throw any punches, or strike hard and end it quickly.

Cash flows in the future

But a great business is defined by its ability to generate cash flows in the future. Investors expect Twitter will be able to capture monopoly profits over the next decade, while newspapers' monopoly days are over.

Characteristics of Monopoly

• Proprietary Technology: As a good rule of thumb, proprietary technology must be at least 10 times better than its closest substitute in some important dimension to lead to a real monopolistic advantage.
• Network Effects
• Economics of Scale
• Branding: Apple has a complex suite of proprietary technologies, both in hardware and software. It manufactures products at a scale large enough to dominate pricing for the materials it buys. And it enjoys strong network effects from its content ecosystem: thousands of developers write software for Apple devices because that's where hundreds of millions of users are, and those users stay on the platform because it's where the apps are. These other monopolistic advantages are less obvious than Apple's sparkling brand, but they are the fundamentals that let the branding effectively reinforce Apple's monopoly.**

Rules for VCs

This implies two very strange rules for VCs. First, only invest in companies that have the potential to return the value of the entire fund. This is a scary rule, because it eliminates the vast majority of possible investments. (Even quite successful companies usually succeed on a more humble scale.) This leads to rule number two: because rule number one is so restrictive, there can't be any other rules.

False

"It doesn't matter what you do, as long as you do it well." That is completely false.

Monopoly Secret

Consider the monopoly secret again: competition and capitalism are opposites.

Investing in a Startup

Now when I consider investing in a startup, I study the founding teams. Technical abilities and complementary skill sets matter, but how well the founders know each other and how well they work together matter just as much. Founders should share a prehistory before they start a company together - otherwise they're just rolling dice.

Three Concepts

To anticipate likely sources of misalignment in any company, it's useful to distinguish between three concepts:

• Ownership: who legally owns a company's equity?
• Possession: who actually runs the company on a day-to-day basis?
• Control: who formally governs the company's affairs?

A typical startup allocates ownership among founders, employees, and investors. The managers and employees who operate the company enjou possession. And a board of directors, usually comprising founders and investors, exercises control.

Culture

A startup is a team of people on a mission, and a good culture is just what that looks like on the inside.

PayPal Mafia

They had to be talented, but even more than that they had to be excited about working specifically with us. That was the start of the PayPal Mafia.

Interview

But there are two general kinds of good answers: answers about your mission and answers about your team.

Definition

People who sell advertising are call "account executives." People who sell customers work in "business development." People who sell companies are "investment bankers." And people who sell themselves are called "politicians."

T-shirts and jeans

These salesman-executives were good at raising capital and securing government subsides, but they were less good at building products that customers wanted to buy. At Founders Fund, we saw this coming. The most obvious clue was sartorial: cleantech executives were running around wearing suits and ties. This was a hug red flag, because real technologists wear T-shirts and jeans.

Seven Questions

They rode the social buzz of cleantech better than anyone, but they got the seven questions right, so their success is intructive:

• Technology
• Timing
• Monopoly
• Team
• Distribution
• Durability
• Secrets

Unusual

The lesson for business is that we need founders. If anything, we should be more tolerant of founders who seem strange or extreme; we need unusual individuals to lead companies beyond mere incrementalism.