Tuesday, November 13, 2012

"The Aha! Moments That Made Paul Graham's Y Combinator Possible"

Paul Graham

From Fast Company:

When it comes to funding startups, Y Combinator is an incubation machine. And behind it all are founder Paul Graham's unique insights about what constitutes true innovation.

In the summer of 1995, Paul Graham heard a story on the radio promoting the endless possibilities of online commerce, which at the time hardly existed. The promotion came from Netscape, which was trying to drum up interest in its business on the eve of its IPO. The story sounded so promising, yet so vague. At the time, Graham was at a bit of a crossroads. After graduating from Harvard with a PhD in computer science, he had fallen into a pattern: he would find some part-time consulting job in the software business; then, with enough money saved, he would quit the job and devote his time to his real love--art and painting--until the money ran out, and then he would scramble for another job. Now 30 years old, he was getting tired of the pattern, and he hated consulting. The prospect of making a lot of money quickly by developing something for the Internet suddenly seemed very appealing.

He called up his old programming partner from Harvard, Robert Morris, and interested him in the idea of collaborating on their own startup, even though Graham had no clue where they would start or what they would develop; eventually, they decided they would try to write software that would enable a business to generate an online store. Once they were clear about the concept, they had to confront a very large obstacle in their way. In those days, for a program to be popular enough it would have to be written for Windows. As consummate hackers, they loathed everything about Windows and had never bothered to learn how to develop applications for it. They preferred to write in Lisp and have the program run on Unix, the open-source operating system.

They decided to postpone the inevitable and wrote the program for Unix anyway. To translate this later into Windows would be easy, but as they contemplated doing this, they realized the terrible consequences it would lead to--once the program was launched in Windows, they would have to deal with users and perfect the program based on their feedback. This would mean they would be forced to think and program in Windows for months, perhaps years. This was too awful a prospect, and they seriously considered giving up.
One morning Graham woke up with the idea that they might be able to control the software on the server by clicking on links. He suddenly sat bolt upright, as he realized what these words could mean--the possibility of creating a program to set up an online store that would run on the web server itself. People would download and use it through Netscape, clicking various links on the web page to set it up. This would mean he and Morris would bypass the usual route of writing a program that users would download to their desktop. It would cut out the need ever to have to dabble in Windows. There was nothing out there like this, and yet it seemed like such an obvious solution. In a state of excitement he explained his epiphany to Morris, and they agreed to give it a try. Within a few days they finished the first version, and it functioned beautifully. Clearly, the concept of a web application would work.

Over the next few weeks they refined the software, and found their own angel investor who put up an initial $10,000 for a 10 percent share in the business. In the beginning, it was quite hard to interest merchants in the concept. Their application server provider was the very first Internet-run program for starting a business, at the very frontier of online commerce. Slowly, however, it began to take off.

As it panned out, the novelty of their idea, which Graham and Morris had come upon largely because of their distaste for Windows, proved to have all kinds of unforeseen advantages. Working directly on the Internet, they could generate a continuous stream of new releases of the software and test them right away. They could interact directly with consumers, getting instant feedback on their program and improving it in days rather than the months it could take with desktop software. With no experience running a business, they did not think to hire salespeople to do the pitching; instead, they made the phone calls to potential clients themselves. But as they were the de facto salespeople, they were also the first to hear complaints or suggestions from consumers, and this gave them a real feel for the program’s weaknesses and how to improve it. Because it was so unique and came out of left field, they had no competitors to worry about; nobody could steal the idea because they were the only ones who were insane enough to attempt it.

Naturally, they made several mistakes along the way, but the idea was too strong to fail (though Graham notes the company came close several times anyway); and in 1998 they sold their company, named Viaweb, to Yahoo! for $50 million....MORE
HT: Execupundit
Attention Brainiacs: Y Combinator on What They're Funding Now (not yet a brainiac? become one in ten days)
YCombinator's Paul Graham on "Startup = Growth"
"Frighteningly Ambitious Startup Ideas"
Venture Capital: Behind the Scenes at Y Combinator