The Book of Graham

Posted with permission from Leveraged Sellout.

I emailed my 22 year old cousin Eric, who's graduating Summa in Economics from Harvard, to see if he needed any help getting interviews at prestigious financial institutions. I was sure there would be recruiters on campus, but I didn't want to run the risk.

"Paul Graham says prestige is for suckers," he emailed back within 2 minutes. "Paul Graham says I should follow my passion."

"Who's Paul Graham?" I asked. No response.

It turns out Paul Graham runs a "startup accelerator" located on 320 Pioneer Way in Mountain View, CA called Y-Combinator. Y-Combinator makes micro investments into very early stage companies and then helps these companies raise venture capital. Thousands apply for a few slots in two "classes" per year. AirBnB, Dropbox, and Reddit are among its alumni.

The accelerator takes small amounts of risk and offloads that aggregate risk onto a market of investors (the VC's). Its Demo Day, which first showcases its companies, is a coming out event, like an IPO. And it attracts top young graduates, like my cousin, from across the world. I spent nearly a decade on Wall Street, and let's be clear: that's our model. Employing Type A personalities to shuffle around amorphous blobs of questionable value is not called a "startup accelerator"; it's called Investment Banking.

And this guy Paul was about to steal Eric, brainwash him into thinking he was doing something else, and pay him next to nothing.

I could picture Eric at our east coast Christmas dinner in his startup T-Shirt, his sunglasses still on his head. "Every day we wake up and tell ourselves we have to just fail faster," he'd say. My father would have a stroke. In six generations, our family had not failed once. Many Y-Combinator founders pay themselves less than $60k a year, about half of what you make your first year in finance. When I saw my cousin a few weeks later, he was flicking through his iPad. He raised his open hand in the air when I walked over to try to talk some sense into him. "Reading Paul Graham," he said. "YC results in a week."

I didn't have much time.

I looked up Paul Graham's essays. He attacks finance head on. "Prestige is like a powerful magnet that warps even your beliefs about what you enjoy," he says. "It causes you to work not on what you like, but what you’d like to like." Instead, he encourages: "Do what you love."

I researched Y-Combinator companies and found ones like HomeJoy and Prim. "Eric – what do you love more, house cleaning or laundry?" I emailed.

That day, I sent Eric a business class train ticket to come down to New York. We went out to dinner and then to PH-D. Two girls joined us at our table, and Eric asked which one he should go after. "Follow your heart," I encouraged. And when the check came, I passed it to Eric and watched his eyes widen at the total. The host came over, expecting his card. I could see Eric sweat. "Oh, this shouldn't be a problem," I assured him. I turned to the host: "You accept equity, right?" Her face contorted. I elbowed my cousin. "Eric – tell her about your startup."

That night, we were out until 5am, and at 8am, I woke up and saw Eric on his knees on the floor of my living room. His "love" was asleep in a t-shirt on the sofa, and he was hunched over his iPad, rocking back and forth, mumbling to himself. As I got closer, I saw Eric flipping through and reading Paul Graham's essays out loud.

"The danger is when money is combined with prestige," he said. "Odds are you just think whatever you’re told." "Hackers and Painters are both makers." He repeated that: "Hackers and painters are both makers."

I kicked him with the side of my foot. "What are you doing, dude?" I said. The girl on the sofa rustled, but Eric stayed in his trance. I went back to sleep, and when I woke up, I found Eric in the exact same position, still studying his iPad.

"Your cousin is really…passionate," sofa-girl said, yanking on her boots.

It was then that I started to realize just how formidable an adversary Paul Graham was. Eric had been ensnared in Paul's net and now, wrapped in its warmth, all he and Paul's militia of "hackers" felt they needed to survive was an Internet connection and a cup of Four Barrel drip coffee. Paul had actually convinced my cousin that he would be more than just a cog in Paul's low risk (but Eric's high risk) brokerage machine. I could feel him slipping away.

I texted a friend who still had YC '11 in her email signature even though her company failed miserably. "What the hell goes on over there?" I asked. "What doesn't?" she replied. I learned that Y-Combinator goes beyond just being a brand. It's a community. In finance, we had a blowout holiday party and a liberal corporate card policy. Y-Combinator hosts weekly office hours and dinners and online forums. Constantly brainstorming and discussing and ideating their never-ending list of impractical concepts, Paul's disciples begin to feel a shared identity, like they are part of something bigger than themselves. It becomes their religion.

"Eric!" I shouted. I snapped my fingers in front his face.

I had put together my own presentation for him. I called it: "Science." I slid my iPad in place of his and began my pitch. Slides 1-5 were dedicated to the complete failure of venture capital as an asset class over its entire history. I had charts and quotes from the world's most famous economists. Slides 6-10 listed all the defunct Y-Combinator companies, laid out in three columns in size 6 font. Next to them, the handful of wins looked insignificant. In my last slide, I showed Eric Y-Combinator's hypocritical homepage, where it calls itself "the most prestigious program for budding digital entrepreneurs."

Paul-Graham-Y-Combinator

"Do you see?" I asked.

Eric looked up at me, and for a moment, I thought I saw recognition. Through his eyes, I swore I could make out the gears slowly turning into place. Finally, I thought. My body started to relax. Then Eric picked up his iPad, turned it towards me so I was staring directly at his guru's face, and said:

"But Paul Graham says I must create."

I grabbed Eric's iPad from his hands, lifted it over my head, and hurled it down towards the floor as hard as I could. The screen smashed, and a piece of Gorilla Glass spun out and cut the top of my foot.

"ENOUGH!" I screamed.

The iPad was still on, and through the cracks in screen, I could see Paul staring up at me, smiling.

I went back to my room and slammed the door.

A few days later, my family received a group email with the subject line: "Changing the world!" My head sunk into my hands. Eric wouldn't be going into finance. He and his co-founders had gotten accepted into Y-Combinator for their startup. "The pest control industry has no idea what it's in for!!" he wrote. He quoted Paul Graham quoting Steve Jobs and assured us that everything they would do would be "insanely great." No one responded.

Congratulations, Paul.

The legacy infrastructure to snatch young talent was built on the basic human desire of greed. But you, you leverage a much deeper insight. In constructing your 2%-10% value capture contraption, you've utilized something that didn't even cross our minds in banking. You're able to drive people to risk their lives and work long hours on your behalf with no Seamless account, no black car, all under the guise that it's their idea. And to achieve this, you play upon a much more powerful human emotion, one that every successful campaign to delude America's youth and lasting institution throughout history has had at its core:

Hope

This is a syndication from http://www.leveragedsellout.com | http://www.leveragedsellout.com/2014/02/the-book-of-graham/

Comments (32)

Feb 19, 2014 - 11:46am
Matayo, what's your opinion? Comment below:

surprisingly well written LSO strikes again

.
Feb 19, 2014 - 12:21pm
heister, what's your opinion? Comment below:

The irony that VC funds are actually quite amazing at what they do.

What do they do you ask? Get a bunch of lackeys to foam at the mouth over the "next world changing start up" to invest the majority of the money that VCs invest in start ups while the partners take a out-sized equity stake compared to their actual investment. This is how they keep the ball rolling with the insane failure rate. So when they do hit pay dirt their 25% of the VC investment now turns into 60% of the VC payout.

Follow the shit your fellow monkeys say @shitWSOsays

Life is hard, it's even harder when you're stupid - John Wayne

  • 2
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Best Response
Feb 19, 2014 - 12:40pm
TheKing, what's your opinion? Comment below:

Oh my god. The Y-Combinator window is being viewed using Incognito Browsing. Incredible.

Feb 19, 2014 - 9:03pm
brandon st randy, what's your opinion? Comment below:
Bondarb:

the fact that this guy is back and writing about tech startups now should scare silicon valley...his banking book came out about two weeks before lehman went bust.

Another indications that the tech bubble 2.0 might be bursting soon is the fact that as of 2013 rents in SF have skyrocketed past that of Manhattan. This is reminiscent of the last bubble when Silicon Valley office spaces rents exceeded Midtown Manhattan at one point. The difference is this time around many more tech startups and employees are located in SF than South Bay. I suspect that SOMA and surrounding areas in particular would likely to get hit most as those areas appear to be the center of lots of startup activities.

Too late for second-guessing Too late to go back to sleep.
  • 2
Feb 27, 2014 - 12:16am
UFOinsider, what's your opinion? Comment below:
Bondarb:

the fact that this guy is back and writing about tech startups now should scare silicon valley...his banking book came out about two weeks before lehman went bust.

+1 good fucking call! Silicon valley is once again exploiting people's naive greed, not selling hope or anything remotely close. I'm just a tiny bit averse to anyone who mutters the word "hope" like it's a bad word because of Obama....this has nothing to do with politics, it's another tech bubble.
Get busy living
  • 1
Feb 19, 2014 - 12:52pm
TopChedder, what's your opinion? Comment below:

Seems a little exaggerated at times but I got the picture.

I was involved in the startup scene for a few years in university. The amount of passion and conviction they have for their idea's is so admirable and contagious that it's easy to get sucked up in their hype train. At the end of the day entrepreneurs are just glorified salesmen. It's all about selling others on your beliefs until those beliefs change.

Feb 19, 2014 - 1:06pm
brandon st randy, what's your opinion? Comment below:

"We went out to dinner and then to PH-D. Two girls joined us at our table, and Eric asked which one he should go after... The host came over, expecting his card. I could see Eric sweat. "Oh, this shouldn't be a problem," I assured him. I turned to the host: "You accept equity, right?" Her face contorted. I elbowed my cousin. "Eric – tell her about your startup

...

"I woke up and saw Eric on his knees on the floor of my living room. His "love" was asleep in a t-shirt on the sofa...

"Your cousin is really…passionate," sofa-girl said, yanking on her boots."

I wonder what price did the sofa girl quote them for the club date and overnight stay. I believe the market rate for this type of services among reputable Manhattan escorts is around 2K. Judging from the last sentence it looked like his cousin sold her on his pest control startup business plan and she probably took a 20% preferred equity position at pest management 2.0 Inc. in lieu of an envelope stuffed with 100 dollar bills.

Too late for second-guessing Too late to go back to sleep.
  • 3
Feb 19, 2014 - 1:09pm
PeterMullersKeyboard, what's your opinion? Comment below:

Read this the other night...laughed out loud several times. And it's spot-on. Really looking forward to the new stuff.

"When you stop striving for perfection, you might as well be dead."
Feb 19, 2014 - 6:07pm
Kejsaren, what's your opinion? Comment below:

I must say I enjoyed this post. However, I am not sure I feel comfortable enjoying this post since that's often the case when someone has managed to express something that I was really thinking myself...

Feb 19, 2014 - 11:38pm
prospie, what's your opinion? Comment below:

Fucking awesome. I love Paul Graham but agreed with a lot of this. Absolutely loved the "prestigious" screenshot.

Feb 20, 2014 - 6:41am
In The Flesh, what's your opinion? Comment below:

Awesome take-down. I laughed when he said, "Oh what, you only accept cash, not equity? Tell her about your startup!"

Metal. Music. Life. www.headofmetal.com
Feb 20, 2014 - 8:36pm
AndyLouis, what's your opinion? Comment below:

what like you haven't offered to buy a girl a drink with banana points?

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Feb 20, 2014 - 8:41pm
In The Flesh, what's your opinion? Comment below:

It may or may not have worked...

Metal. Music. Life. www.headofmetal.com
Feb 20, 2014 - 2:42pm
Rhys da Vinci, what's your opinion? Comment below:

The writer lacks a basic understanding of the startup and venture capital industry. Accelerators are not the alternative to an IB job; they are the alternative to an MBA. Leaving opportunity costs out of the picture, the average cost of a top MBA is over $100k. The average Y Combinator company is worth $45M. (Skewed by the big successes, but still a valid comparison.)

The goal of accelerators like Y Combinator is to institutionalize the process of successful entrepreneurship. Before accelerators, the average success rate of startups (defined by a successful and profitable exit or IPO) was well under 1%. Y Combinator's rate right now is around 15%, and will continue to get higher as more of its companies mature to the place where they are ready to exit/IPO. That is an amazing accomplishment.

Feb 21, 2014 - 12:39pm
heister, what's your opinion? Comment below:

Valuation of most start ups after 5 years. $0.

Follow the shit your fellow monkeys say @shitWSOsays

Life is hard, it's even harder when you're stupid - John Wayne

Feb 21, 2014 - 5:48pm
Rhys da Vinci, what's your opinion? Comment below:

Very true, over 50% will be worth nothing. But if you got into an accelerator, you're still ahead of the MBA by over $100k, probably learned a lot more, and got to do something rewarding.

Also, I would think about it this way: if I offered you a 100% chance to make $1,000 or a 1% chance to make $10 million, which one would you take? From a statistical standpoint, the payoff of the second choice is far larger (by a factor of 100), but most people would take the first choice. We're inherently bad at that type of decision, because we're risk averse. To be honest, I'd probably make the first choice, too, because $1,000 is a good amount of money, and it's extremely unlikely that I would get the $10M. This is the choice that most people make with their careers.

Now imagine that I was going to let you make that same choice 100 times in a row, and keep the money from each one. If that is the scenario, you have an extremely good chance of getting that $10 million, or even $20 million.

That's the scenario that every startup in Y Combinator is trying to create. They are trying to make as many iterations of a business as they can - "failing" as fast as they can, over and over - by changing the business, testing out the new approach, discarding the pieces that don't work and keeping the pieces that do. If your chances of success are 1% but you are able to essentially test a new business once a week, by the end of two years you are pretty likely to have a success.

It's the Nassim Taleb approach to your career.

Feb 22, 2014 - 10:30pm
DickFuld, what's your opinion? Comment below:
Going Concern:

Patrick should formalize wso credits and SBs as competition for Bitcoin

I would tend to agree, but we seem to have significant bananaflation happening right now. If wso credits/SBs were proposed as an alternative to Bitcoin, I suspect we could get Zimbabwe style hyper-bananaflation.
Feb 27, 2014 - 12:35am
UFOinsider, what's your opinion? Comment below:
DickFuld:
I would tend to agree, but we seem to have significant bananaflation happening right now.
The only major bananaflation I recall is when I jacked about a thousand points a couple years ago during a system upgrade, when the regulating mechanism was down. Otherwise, it seems the increase in banana point circulation is more related to increased activity on the site. I can't imagine people are spending huge amounts of money for SBs.

I do agree that if Patrick formalized a relationship between banana points and BTC that I'd be posting about a thousand times an hour hahaha

Get busy living
  • 1
Feb 21, 2014 - 12:19pm
In The Flesh, what's your opinion? Comment below:

@AndyLouis I can see it now..."WSO Banana Points Rewards Card! Never leave the office without it!"

Metal. Music. Life. www.headofmetal.com
Mar 3, 2014 - 12:24am
clerville, what's your opinion? Comment below:

Fuga non est architecto voluptatem optio autem. Similique velit facilis nisi aperiam. Cum exercitationem delectus fugiat autem nihil.

Mar 18, 2014 - 9:55am
GoodBread, what's your opinion? Comment below:

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