Tuesday, February 11, 2014

The Book of Graham

Paul-Graham-Y-Combinator

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.
 


65 comments for this post.

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  1. +17 votes + -
    Bro Said:

    Well, now we know why machine learning algorithms can’t understand human language. Thanks for the insight, “Eric” and classmates.

    Welcome back, kid.

  2. +24 votes + -
    Anonymous Said:

    Amazing how many YC apologists here don’t even understand the whole concept of this blog.

    Go start a social media company and leave the reading comp to the grownups.

  3. +19 votes + -
    Anonymous Said:

    You end up scoring with the other chick?

  4. -7 votes + -
    one eyed man Said:

    This would be a whole lot more convincing without the references to seamless and black cars. Also the entire acela train is business class but really cool of you to emphasize that the prestigious world of finance allows you to pay like 40 dollars extra for a train.

  5. +9 votes + -
    Anonymous Said:

    Lol at all the SF kids coming out in support of Graham/Y combinator/tech startups.

    Welcome back LSO!

  6. +16 votes + -
    The Grim Banker Said:

    Hey YC/SF/Tech/Start upper…

    I just made $7.3MM today shorting your precious twitter, facebook, & tesla. How about you take your skinny jeans, cardigans, and flipflop’s back to urbanoutfitters.com and “blog” about how even your hipster uniform store is damaging the environment. Tonight while your trying to sext with dudes on vine, I’ll be out in Manhattan with a girl who is a 10.

    The Grim Banker

  7. +3 votes + -
    JohnnyO Said:

    Dear LSO,

    After reading the comments for the last two posts I am beginning to think the tech/vc scene out west might be too fertile an area for you. Kind of like sending John Belushi to Columbia. Be careful.

  8. -4 votes + -
    Anon Said:

    What does VC’s failure as an asset class have to do with whether he should be an entrepreneur?

  9. +4 votes + -
    Luis Said:

    The YC 11 convention, Ashton Kuthcer and everything: http://upload.wikimedia.org/wikipedia/commons/7/79/Ashton_Kutcher_speaking_at_Y_Combinators_Startup_School_in_October_2011.jpg

  10. +3 votes + -
    Anonymous Said:

    I love it – YC preys on ‘hope’. Whereas Finance says, ‘abandon hope all ye who enter here’!!!

  11. +8 votes + -
    anon Said:

    It seems the techies in the bay have a much poorer sense of humor and ability to discern satire compared to the readership from 7-9 years ago

  12. +2 votes + -
    Londoner Said:

    My linguistic abilities are far too limited to describe my appreciation for you and the whole of LSO. I have a strong urge to share these posts with my friends, but then I also want you to remain my little secret bonanza of entertainment. Like your favourite unknown band that you don’t want to grow too mainstream.

  13. 0 votes + -
    Ali Said:

    The point is “hope.”

    Hope is priceless–and while most companies won’t succeed (I also don’t know that YC is for everyone, and startups certainly aren’t for everyone) the idea of hope is so powerful it can trump money.

    I do think that hero worship is a little silly though… the people who build great companies would think Paul Graham would be lucky to have them in their program, not worship him.

  14. +15 votes + -
    Anonymous Said:

    The sheer number of YC/Paul Graham defending imbiciles who failed to recognize the satire in the piece is simply hilarious. A perfect demonstratuion of why 99% of people involved in tech startups are completely devoid of even the slightest morsel of intelligence(with the respectable and intelligent 1% actually creating value and changing the world).

  15. +18 votes + -
    DPG Said:

    The startup motto: Smart enough to get into YC. Aspy enough to duped by satire.

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