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Notes Essay
Here is an essay version of my class notes from Class 1 of
CS183: Startup. Errors and omissions are my own. Credit
for good stuff is Peters entirely.
B. The Problems of 0 to 1
Maybe we focus so much on going from 1 to
n because thats easier to do. Theres little
doubt that going from 0 to 1 is qualitatively
different, and almost always harder, than
copying something n times. And even trying
to achieve vertical, 0 to 1 progress presents
the challenge of exceptionalism; any founder
or inventor doing something new must
wonder: am I sane? Or am I crazy?
Consider an analogy to politics. The United
States is often thought of as an exceptional
country. At least many Americans believe
that it is. So is the U.S. sane? Or is it crazy?
Everyone owns guns. No one believes in
climate change. And most people weigh 600
pounds. Of course, exceptionalism may cut
the other way. America is the land of
opportunity. It is the frontier country. It offers
new starts, meritocratic promises of riches.
V. Lessons Learned
A. By The World
The key takeaway for most people was that
the tech explosion of the late 90s was all a
bubble. A shift back to the real economy was
needed. If the expression in the 90s was
bricks to clicks, the 2000s demanded a
return from clicks back to bricks. People got
into housing and emerging markets. High
profile investors like Warren Buffet avoided
tech stocks in favor of old economy ones.
Profit alone mattered in evaluating
businesses. Globalization was favored over
technology. The general sense was that the
dot com crash taught us that the future was
fundamentally indeterminate. That all
prophets are false prophets. That we
B. By Silicon Valley
People in Silicon Valley learned that you
have to do things differently to survive in the
Schadenfreude world. First, you had to
believe and practice incrementalism. Grand
visions and moving quickly fell out of favor.
Second, your startup had to be lean. You
should not, in fact, know what youre going
to do. Instead, you should experiment, iterate,
and figure it out as time goes on.
Third, you should have zero advertising
spend. If your growth isnt viral, its fake.
Fourth, anti-social was the new social. People
wanted to withdraw into a new antisocial
modality. Google is the iconic cultural
version of this; a product for people whod
rather interact with computers than people.
The most common multiple is the priceearnings ratio, also known as P/E ratio or the
PER. The PER is equal to market value (per
share) / earnings (per share). In other words,
it is the price of a stock relative to a firms
B. Creators or Fighters?
In thinking about building good company
culture, it may be helpful to dichotomize two
extreme personality types: nerds and athletes.
Engineers and STEM people tend to be
highly intelligent, good at problem solving,
and naturally non zero-sum. Athletes tend to
be highly motivated fighters; you only win if
the other guy loses. Sports can be seen as
classically competitive, antagonistic, zerosum training. Sometimes, with martial arts
and such, the sport is literally fighting.
Even assuming everyone is technically
competent, the problem with company made
up of nothing but athletes is that it will be
biased towards competing. Athletes like
competition because, historically, theyve
been good at it. So theyll identify areas
where there is tons of competition and jump
into the fray.
Then say
you hire
some
people.
You bring
on 6
employees
, and,
because
you
werent
listening
earlier, 2
consultants
. Each of
these 8
people gets 100k shares. So you grant 800k
shares at $0.10/share.
Now you have 3m shares outstanding. The
company valuation is $3m, since the deal
price was $1/share. The angel owns 200k
There are a few different types of antidilution provisions. The most aggressive is
the full ratchet. It sounds like a form of
medieval torture because, in a way, it is. It
reprices a past investment as if the investor
had just invested in the down round. Thats
great for investors, and quite bad for
everyone else. More common is whats called
the broad-based weighted average, which
considers the down round size relative to the
companys total equity. Investors end up
getting somewhat more shares. Sometimes a
similar provision called a narrow-based
weighted average is used instead.
If there is one categorical rule, its that you
should never ever have a down round. With
few exceptions, down rounds are disastrous.
If there are tough anti-dilution provisions,
down rounds will wipe out founders and
employees. They also make the company less
appealing to other investors. The practical
a.
e.
f.
5) The Ask
a. How much do you need and what will
you use it for?
b. Whats your burn?
c. Valuation
6) Funding History/Syndication
a. Who else are you talking to? (This is the
pathos bit)
b. Why do you want to work with this VC?
c. What do you want from the VC besides
money?
B. Salesman as Actor
The big question about sales is whether all
salesmen are really just actors of one sort or
another. We are culturally biased to think of
salespeople as classically untrustworthy, and
unreliable. The used car dealer is the
archetypical example. Marc Andreessen has
noted that most engineers underestimate the
sales side of things because they are very
truth-oriented people. In engineering,
something either works or it doesnt. The
surface appearance is irrelevant. So engineers
tend to view attempts to change surface
appearance of thingsthat is, salesas
fundamentally dishonest.
What is tricky about sales is that, while we
know that it exists all around us, its not
always obvious who the real salesperson is.
Tom Sawyer convinced all the kids on the
block to whitewash the fence for him. None
E. Viral Marketing
Viral marketing is, of course, the classic
distribution channel that people tend to think
of as characteristic of Internet businesses.
There are certainly ways to get it to work.
But its easy to underestimate how hard it is
to do that. William Shatner and James
Doohan seemed similar. In fact they were a
world apart. Salesmen may seem similar. But
some get Cadillacs, while others get steak
knives. Still others get fired and end up as
characters in novels.
[Section on viral marketing math excluded.
You can learn about this stuff elsewhere, e.g.
here. The gist is twofold: first, viral cycle
time is important. Shorter is better. Second,
there is a metric called viral coefficient, and
you need it to be > 1 to have viral growth.]
G. PR and Media
PR and Media add yet another layer to the
distribution problem. How the message of
your company gets distributed is worth
thinking hard about. PR and media are very
linked to this. It is a sketchy and very
problematic world. But its also very
important because we live in a society where
people dont usually have a rational idea of
what they want.
Consider an example from the VC world. Its
almost never the case that a company finds
just one interested investor. There are always
zero or several. But if the world were
economically rational, this wouldnt be true
at all. In a perfectly rational world, youd see
single investor deals all the time. Shares
would be priced at the marginal price where
you get a single highest bidderyour most
bullish prospective investor. If you get more
H. On Uncertainty
Its fairly difficult to overestimate how
uncertain people are and how much they
dont know what they actually want. Of
course, people usually insist that they are
certain. People trick themselves into
believing that they do know what they want.
At the obvious level, Everyone wants what
everyone wants is just a meaningless
tautology. But on another level, it describes
the dynamic process in which people who
have poorly formed demand functions just
copy what they believe everyone else wants.
Thats how the fashion world works, for
instance.
V. Distribution is Inescapable
Engineers underestimate the problem of
distribution. Since they wish it didnt exist,
sometimes they ignore it entirely. Theres a
you literally never know when some 22 yearold is going to prove everybody wrong.
Question from audience: How do patents
relate to the software-eats-the-world
phenomenon?
Marc Andreessen: The core problem with
patents is that patent examiners dont get it
anymore. They simply dont and cant know
what is novel versus what isnt. So we get far
too many patents. As a tech company, you
have two extreme choices: you could spend
your entire life fighting patents, or you could
spend all your money licensing usage.
Neither of those extremes is good. You need
to find the balance that lets you think about
patents least. Its basically a distracting
regulatory tax.
Peter Thiel: In any litigation, you have four
parties. You have the two parties, and you
A. Anti-secret Extremism
The extreme representative of the
conventional view is Ted Kaczynski, more
infamously known as the Unabomber. He
was a child prodigy. IQ of 167. A top student
at Harvard. PhD in math from Michigan.
Professor of math at UC Berkeley. But then
he started a solo bombing campaign after
becoming disenchanted with science and
technology. He killed 3 people and injured 23
more. The victims included computer store
owners, technical grad students, geneticists,
etc. Finally he was found and arrested in
1996.
But in late 1995 the FBI didnt really have a
clue who or where the Unabomber was.
Kaczynski had written a manifesto and
anonymously mailed it to the press. The
government gave the go-ahead to print it,
hoping for a break in the case. That ended up
B. Psychology
But the Charles Atlas example illustrates
more than just the motivational aspect of war.
When people are myopically focused on
fighting, they lose sight of everything else.
They begin to look very much like their
enemy. The skinny kid bulks up. He becomes
the bully, which of course is exactly what he
had always hated. A working theory is thus
that you must choose your enemies well,
since youll soon become just like
them.
A. Determinate Optimism
Up until the 1950s and 60s, the prevailing
belief about the future was one of determinate
optimism. There had always been a relatively
well-defined way in which people thought the
future would be much better than the present.
You could go west and get 640 acres of land.
D. Financial Overlay
We can put a financial overlay on this to
illustrate things better. Well start with some
definitions. Investment is putting money in
specific things you believe in, like a stock or
a company. Youre looking for high returns.
Savings, by contrast, is when you hold onto
your money so that youre able to spend it in
the future. You typically get very low returns.
To the extent youre optimistic about the
future, youll have a low savings rate. There
is simply less need to save. The future will be
better, and things will take care of
themselves. But if youre pessimistic, your
savings rate will be higher. Since you expect
that the future will be worse than the present,
you want to have cash saved up for when that
day comes.
E. Savings
In a future
of definite
optimism,
you get
underwater
cities and
cities in
space. In a
world of
indefinite
optimism,
you get
finance.
The
contrast
couldnt be
starker. The
big idea in finance is that stock market is
fundamentally random. Its all Brownian
motion. All you can know is that you cant
know anything. Its all a matter of
diversification. There are clever ways to
On the heels
of Apple
has come
the theme of
welldesigned
products
being really
important.
Airbnb,
Pinterest,
Dropbox,
and Path all
have a very
antistatistical feel. Theres a sense in which
theres some telepathic link between these
products and what people want. That link
great designseems to work better and faster
than Darwinistic A/B testing or iteratively
searching through an incredibly large search
space. The return of design is a large part of
C. Designing Perspectives
Our society has been indeterminately
optimistic for the last quarter century. But
that quadrant is fraying at edges. Were
falling downwards towards pessimism. Can
we shift instead to definite optimism?
Computer Science is our best hope. CS is
about deterministic as you can get. Its
incredibly odd that we view tech startups
through such an indeterminate lens. But
where you go from hereand what lens you
useis up to you. An alternative title for this
lecture would be Control Alt Delete. The
best edit is often a complete re-write. And
maybe its time to start writing lots of things
from scratch.
C. Resource Constraints
There have always
been worries about
running out of
resources. Theres
the familiar Malthus
stuff. In the early
70s, a big global
think tank called the
Club of Rome
commissioned a
book called Limits
to Growth, which
became the biggest
environmental bestseller ever. The thesis was
that there are all sorts of ways to run out of
capacity either on a resource basis or on a
population basis.
Paul R. Ehrlich wrote a book called The
Population Bomb in 1968. In it he claimed
B. List of Mistakes
Enumerating all the mistakes that were made
in cleantech would be quite a project. But the
most important were mistakes about the
following:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
markets
mimesis and competition
secrets
incrementalism
durability
teams
distribution
timing
financing
luck
B. God of Thunder
But suppose we wanted to shift all the way to
optimistic, determinate solutions. How would
we do that? One suggestion is that we should
explore thorium power in a very serious way.
Thorium is a big
secret. When the
government became
very interested in
nuclear technology
in the 1940s, it
found that you could
get nuclear power
from three chemical
elements:
plutonium, uranium,
and thorium. The problem with Thorium was
that it contains no fissile isotopes, which
means you cant weaponize it. And the
government was interested in building
bombs, not generating power. Eisenhowers
2.
3.
4.
5.
6.
Durability comes
from thoriums
being an order of
magnitude
cheaper. Pull off
a move to
thorium and youll
own the energy
market.
The timing seems
right.
The venture
would be
expensive, but
not prohibitively so. Given all the investment in
cleantech, raising $250m over the course of
several years of hitting targeted milestones
seems reasonable.
People have
been
interested in
C. Robotics
In the 1950s and 60s people had all kinds of
ideas about how robots would improve things
in the future. A common vision was the
household butler/maid/cook/driver model,
where the robot would raise standards of
living by doing all these chores for free. That
obviously hasnt happened. There has been
There are many ways in which we can reimagine what robots can and should do.
RoboteX is a Silicon Valley-based robotics
company that is doing just that.
Modern robots fall into one of the four
quadrants on the following 2x2 matrix:
B. Shift to Determinacy?
Can we move biology away from the realm
of the statistical/probabilistic and toward
being something that is determinate and
solvable?
It depends.
You can think of death as an accident. There
are different kinds of accidents. You can lay
these out on a spectrum, from microscopic
accidents (genetic mutations) to macroscopic
accidents (car crashes) to cosmic accidents
(asteroid strikes). To solve the longevity
problem completely, you have to get rid of all
of these kinds of accidents. But theres a
sense in which certain macro and cosmic
accidents are and will continue to be pretty
probabilistic things. There is good reason to
take those on later; if we can just get to the
IV. Examples
Well highlight and then have a discussion
with people from 3 companies who are doing
very interesting things in biotech: Stem
CentRx, Counsyl, and Emerald Therapeutics.
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CS183 Startup Class
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