May 2005

(This essay is derived from a talk at the Berkeley CSUA.)

The three big powers on the Internet now are Yahoo, Google, and Microsoft.

Average age of their founders: 24.

So it is pretty well established now that grad students can start successful companies.

And if grad students can do it, why not undergrads?

Like everything else in technology, the cost of starting a startup has decreased dramatically.

Now it's so low that it has disappeared into the noise.

The main cost of starting a Web-based startup is food and rent.

Which means it doesn't cost much more to start a company than to be a total slacker.

You can probably start a startup on ten thousand dollars of seed funding, if you're prepared to live on ramen.

The less it costs to start a company, the less you need the permission of investors to do it.

So a lot of people will be able to start companies now who never could have before.

The most interesting subset may be those in their early twenties.

I'm not so excited about founders who have everything investors want except intelligence, or everything except energy.

The most promising group to be liberated by the new, lower threshold are those who have everything investors want except experience.

The three big powers on the Internet — Yahoo, Google, Microsoft — have founders whose average age is 24. If grad students can do it, why not undergrads?

The cost of starting a startup has disappeared into the noise: the main cost is food and rent. You can start one on ten thousand dollars, if you're prepared to live on ramen.

The less it costs, the less you need investors' permission — and the most interesting group liberated are those who have everything investors want except experience.

The big Internet powers were founded by people whose average age was 24, so if grad students can start companies, undergrads can too — now that starting one costs almost nothing.

Market Rate

I once claimed that nerds [blocked] were unpopular in secondary school mainly because they had better things to do than work full-time at being popular.

Some said I was just telling people what they wanted to hear.

Well, I'm now about to do that in a spectacular way: I think undergraduates are undervalued.

Or more precisely, I think few realize the huge spread in the value of 20 year olds.

Some, it's true, are not very capable.

But others are more capable than all but a handful of 30 year olds. [1]

Till now the problem has always been that it's difficult to pick them out.

Every VC in the world, if they could go back in time, would try to invest in Microsoft.

But which would have then?

How many would have understood that this particular 19 year old was Bill Gates?

It's hard to judge the young because (a) they change rapidly, (b) there is great variation between them, and (c) they're individually inconsistent.

That last one is a big problem.

When you're young, you occasionally say and do stupid things even when you're smart.

So if the algorithm is to filter out people who say stupid things, as many investors and employers unconsciously do, you're going to get a lot of false positives.

Most organizations who hire people right out of college are only aware of the average value of 22 year olds, which is not that high.

And so the idea for most of the twentieth century was that everyone had to begin as a trainee in some entry-level job.

Organizations realized there was a lot of variation in the incoming stream, but instead of pursuing this thought they tended to suppress it, in the belief that it was good for even the most promising kids to start at the bottom, so they didn't get swelled heads.

The most productive young people will always be undervalued by large organizations, because the young have no performance to measure yet, and any error in guessing their ability will tend toward the mean.

What's an especially productive 22 year old to do?

One thing you can do is go over the heads of organizations, directly to the users.

Any company that hires you is, economically, acting as a proxy for the customer.

The rate at which they value you (though they may not consciously realize it) is an attempt to guess your value to the user.

But there's a way to appeal their judgement.

If you want, you can opt to be valued directly by users, by starting your own company.

The market is a lot more discerning than any employer.

And it is completely non-discriminatory.

On the Internet, nobody knows you're a dog.

And more to the point, nobody knows you're 22.

All users care about is whether your site or software gives them what they want.

They don't care if the person behind it is a high school kid.

If you're really productive, why not make employers pay market rate for you?

Why go work as an ordinary employee for a big company, when you could start a startup and make them buy it to get you?

When most people hear the word "startup," they think of the famous ones that have gone public.

But most startups that succeed do it by getting bought.

And usually the acquirer doesn't just want the technology, but the people who created it as well.

Often big companies buy startups before they're profitable.

Obviously in such cases they're not after revenues.

What they want is the development team and the software they've built so far.

When a startup gets bought for 2 or 3 million six months in, it's really more of a hiring bonus than an acquisition.

I think this sort of thing will happen more and more, and that it will be better for everyone.

It's obviously better for the people who start the startup, because they get a big chunk of money up front.

But I think it will be better for the acquirers too.

The central problem in big companies, and the main reason they're so much less productive than small companies, is the difficulty of valuing each person's work.

Buying larval startups solves that problem for them: the acquirer doesn't pay till the developers have proven themselves.

Acquirers are protected on the downside, but still get most of the upside.

I think undergraduates are undervalued. Few realize the spread in the value of 20 year olds: some aren't capable, but others are more capable than all but a handful of 30 year olds.

The problem has always been picking them out. Every VC would go back in time and invest in Microsoft — but how many would have understood that this particular 19 year old was Bill Gates?

The young are hard to judge because they change rapidly, vary enormously, and are individually inconsistent. An algorithm that filters out people who say stupid things gets a lot of false positives.

Organizations see only the average value of 22 year olds, so everyone began as a trainee at the bottom — they suppressed the variation they sensed, lest promising kids get swelled heads.

The most productive young people will always be undervalued by large organizations, because the young have no performance to measure yet, and any error in guessing their ability tends toward the mean.

Any company that hires you is just a proxy guessing your value to the user — but you can be valued directly by users, by starting your own company.

The market is more discerning than any employer, and non-discriminatory. On the Internet, nobody knows you're a dog — and nobody knows you're 22.

If you're really productive, why work as an ordinary employee, when you could start a startup and make them buy it to get you?

Most startups that succeed do it by getting bought, the acquirer wanting the people as much as the technology. A startup bought for 2 or 3 million six months in is really more a hiring bonus than an acquisition.

This is better for everyone. Big companies can't value each person's work; buying larval startups solves that, since the acquirer doesn't pay till developers have proven themselves.

Undergrads are undervalued because the young are hard to pick out, and big organizations only see the average. The fix is to go over their heads to users by starting a company and making acquirers buy you.

Product Development

Buying startups also solves another problem afflicting big companies: they can't do product development.

Big companies are good at extracting the value from existing products, but bad at creating new ones.

Why?

It's worth studying this phenomenon in detail, because this is the raison d'etre of startups.

To start with, most big companies have some kind of turf to protect, and this tends to warp their development decisions.

For example, Web-based [blocked] applications are hot now, but within Microsoft there must be a lot of ambivalence about them, because the very idea of Web-based software threatens the desktop.

So any Web-based application that Microsoft ends up with, will probably, like Hotmail, be something developed outside the company.

Another reason big companies are bad at developing new products is that the kind of people who do that tend not to have much power in big companies (unless they happen to be the CEO).

Disruptive technologies are developed by disruptive people.

And they either don't work for the big company, or have been outmaneuvered by yes-men and have comparatively little influence.

Big companies also lose because they usually only build one of each thing.

When you only have one Web browser, you can't do anything really risky with it.

If ten different startups design ten different Web browsers and you take the best, you'll probably get something better.

The more general version of this problem is that there are too many new ideas for companies to explore them all.

There might be 500 startups right now who think they're making something Microsoft might buy.

Even Microsoft probably couldn't manage 500 development projects in-house.

Big companies also don't pay people the right way.

People developing a new product at a big company get paid roughly the same whether it succeeds or fails.

People at a startup expect to get rich if the product succeeds, and get nothing if it fails. [2] So naturally the people at the startup work a lot harder.

The mere bigness of big companies is an obstacle.

In startups, developers are often forced to talk directly to users, whether they want to or not, because there is no one else to do sales and support.

It's painful doing sales, but you learn much more from trying to sell people something than reading what they said in focus groups.

And then of course, big companies are bad at product development because they're bad at everything.

Everything happens slower in big companies than small ones, and product development is something that has to happen fast, because you have to go through a lot of iterations to get something good.

Buying startups also solves another problem: big companies extract value from existing products but can't create new ones — which is the raison d'etre of startups.

Most have turf to protect, which warps their decisions. Web-based applications threaten the desktop, so any Web app Microsoft ends up with will probably, like Hotmail, be developed outside the company.

Big companies build only one of each thing, so they can't be risky with it. If ten startups design ten Web browsers and you take the best, you'll probably get something better.

There are too many new ideas for any company to explore. Even Microsoft couldn't manage the 500 development projects of the 500 startups who think it might buy them.

They don't pay people right: at a big company you're paid the same whether your product succeeds or fails, while people at a startup get rich if it succeeds and nothing if it fails — so naturally they work harder.

Bigness itself is an obstacle: everything happens slow, when product development has to happen fast. And in startups, developers are forced to talk directly to users — painful, but you learn much more from trying to sell something than from focus groups.

Buying startups also fixes big companies' inability to develop new products — a failure rooted in turf-protection, powerless innovators, building one of each thing, too many ideas, and bad incentives.

Trend

I think the trend of big companies buying startups will only accelerate.

One of the biggest remaining obstacles is pride.

Most companies, at least unconsciously, feel they ought to be able to develop stuff in house, and that buying startups is to some degree an admission of failure.

And so, as people generally do with admissions of failure, they put it off for as long as possible.

That makes the acquisition very expensive when it finally happens.

What companies should do is go out and discover startups when they're young, before VCs have puffed them up into something that costs hundreds of millions to acquire.

Much of what VCs add, the acquirer doesn't need anyway.

Why don't acquirers try to predict the companies they're going to have to buy for hundreds of millions, and grab them early for a tenth or a twentieth of that?

Because they can't predict the winners in advance?

If they're only paying a twentieth as much, they only have to predict a twentieth as well.

Surely they can manage that.

I think companies that acquire technology will gradually learn to go after earlier stage startups.

They won't necessarily buy them outright.

The solution may be some hybrid of investment and acquisition: for example, to buy a chunk of the company and get an option to buy the rest later.

When companies buy startups, they're effectively fusing recruiting and product development.

And I think that's more efficient than doing the two separately, because you always get people who are really committed to what they're working on.

Plus this method yields teams of developers who already work well together.

Any conflicts between them have been ironed out under the very hot iron of running a startup.

By the time the acquirer gets them, they're finishing one another's sentences.

That's valuable in software, because so many bugs occur at the boundaries between different people's code.

The trend will only accelerate. The biggest obstacle is pride: companies feel buying startups admits failure, so they put it off — which makes the acquisition very expensive when it finally happens.

Companies should discover startups young, before VCs puff them up to hundreds of millions. If acquirers are only paying a twentieth as much, they only have to predict a twentieth as well. Surely they can manage that.

The solution may be a hybrid of investment and acquisition. Either way, buying startups fuses recruiting and product development, and yields teams already working well together, conflicts ironed out under the hot iron of running a startup — valuable in software, because so many bugs occur at the boundaries between people's code.

The trend of acquisitions will accelerate, and companies should learn to buy startups young — fusing recruiting and product development, getting teams that already work well together.

Investors

The increasing cheapness of starting a company doesn't just give hackers more power relative to employers.

It also gives them more power relative to investors.

The conventional wisdom among VCs is that hackers shouldn't be allowed to run their own companies.

The founders are supposed to accept MBAs as their bosses, and themselves take on some title like Chief Technical Officer.

There may be cases where this is a good idea.

But I think founders will increasingly be able to push back in the matter of control, because they just don't need the investors' money as much as they used to.

Startups are a comparatively new phenomenon.

Fairchild Semiconductor is considered the first VC-backed startup, and they were founded in 1959, less than fifty years ago.

Measured on the time scale of social change, what we have now is pre-beta.

So we shouldn't assume the way startups work now is the way they have to work.

Fairchild needed a lot of money to get started.

They had to build actual factories.

What does the first round of venture funding for a Web-based startup get spent on today?

More money can't get software written faster; it isn't needed for facilities, because those can now be quite cheap; all money can really buy you is sales and marketing.

A sales force is worth something, I'll admit.

But marketing is increasingly irrelevant.

On the Internet, anything genuinely good will spread by word of mouth.

Investors' power comes from money.

When startups need less money, investors have less power over them.

So future founders may not have to accept new CEOs if they don't want them.

The VCs will have to be dragged kicking and screaming down this road, but like many things people have to be dragged kicking and screaming toward, it may actually be good for them.

Google is a sign of the way things are going.

As a condition of funding, their investors insisted they hire someone old and experienced as CEO.

But from what I've heard the founders didn't just give in and take whoever the VCs wanted.

They delayed for an entire year, and when they did finally take a CEO, they chose a guy with a PhD in computer science.

It sounds to me as if the founders are still the most powerful people in the company, and judging by Google's performance, their youth and inexperience doesn't seem to have hurt them.

Indeed, I suspect Google has done better than they would have if the founders had given the VCs what they wanted, when they wanted it, and let some MBA take over as soon as they got their first round of funding.

I'm not claiming the business guys installed by VCs have no value.

Certainly they have.

But they don't need to become the founders' bosses, which is what that title CEO means.

I predict that in the future the executives installed by VCs will increasingly be COOs rather than CEOs.

The founders will run engineering directly, and the rest of the company through the COO.

Cheap startups give hackers more power over investors too. The conventional VC wisdom is that founders should accept MBAs as bosses — but founders will increasingly push back, because they don't need investors' money as much.

Fairchild Semiconductor, the first VC-backed startup, was founded in 1959. On the time scale of social change, startups are pre-beta — so we shouldn't assume the way they work now is the way they have to work.

Fairchild needed money for actual factories. What does a Web-based startup's first round buy today? Only sales and marketing — and marketing is increasingly irrelevant, since on the Internet anything genuinely good spreads by word of mouth.

When startups need less money, future founders may not have to accept new CEOs. The VCs will have to be dragged kicking and screaming down this road — but it may be good for them.

Google is a sign of where things are going. Their investors insisted they hire an experienced CEO, but the founders delayed a year and chose a guy with a PhD in computer science. The founders are still the most powerful people there, and Google probably did better than if some MBA had taken over after the first round.

The business guys VCs install have value, but they don't need to become the founders' bosses. I predict they'll increasingly be COOs, not CEOs.

Cheap startups give hackers more power over investors too. Since money now only buys sales and marketing, founders can push back on control — as Google's founders did, keeping power and choosing their own CEO.

The Open Cage

With both employers and investors, the balance of power is slowly shifting towards the young.

And yet they seem the last to realize it.

Only the most ambitious undergrads even consider starting their own company when they graduate.

Most just want to get a job.

Maybe this is as it should be.

Maybe if the idea of starting a startup is intimidating, you filter out the uncommitted.

But I suspect the filter is set a little too high.

I think there are people who could, if they tried, start successful startups, and who instead let themselves be swept into the intake ducts of big companies.

Have you ever noticed that when animals are let out of cages, they don't always realize at first that the door's open?

Often they have to be poked with a stick to get them out.

Something similar happened with blogs.

People could have been publishing online in 1995, and yet blogging has only really taken off in the last couple years.

In 1995 we thought only professional writers were entitled to publish their ideas, and that anyone else who did was a crank.

Now publishing online is becoming so popular that everyone wants to do it, even print journalists.

But blogging has not taken off recently because of any technical innovation; it just took eight years for everyone to realize the cage was open.

I think most undergrads don't realize yet that the economic cage is open.

A lot have been told by their parents that the route to success is to get a good job.

This was true when their parents were in college, but it's less true now.

The route to success is to build something valuable, and you don't have to be working for an existing company to do that.

Indeed, you can often do it better if you're not.

When I talk to undergrads, what surprises me most about them is how conservative they are.

Not politically, of course.

I mean they don't seem to want to take risks.

This is a mistake, because the younger you are, the more risk you can take.

With both employers and investors, the balance of power is slowly shifting toward the young — and yet they seem the last to realize it. Maybe an intimidating idea filters out the uncommitted, but the filter is set too high: there are people who could start successful startups, who instead let themselves be swept into the intake ducts of big companies.

When animals are let out of cages, they don't always realize the door's open; often they have to be poked with a stick. Something similar happened with blogs: people could have published online in 1995, but it took eight years to realize the cage was open.

Most undergrads don't realize the economic cage is open. They've been told the route to success is a good job — true when their parents were in college, less true now. The real route is to build something valuable, which you can often do better outside a company.

When I talk to undergrads, what surprises me most is how conservative they are. Not politically — they don't want to take risks. This is a mistake, because the younger you are, the more risk you can take.

The balance of power is shifting to the young, yet they're the last to realize it. Like animals that don't notice the cage is open, undergrads haven't realized the economic cage is — they're too conservative.

Risk

Risk and reward are always proportionate.

For example, stocks are riskier than bonds, and over time always have greater returns.

So why does anyone invest in bonds?

The catch is that phrase "over time."

Stocks will generate greater returns over thirty years, but they might lose value from year to year.

So what you should invest in depends on how soon you need the money.

If you're young, you should take the riskiest investments you can find.

All this talk about investing may seem very theoretical.

Most undergrads probably have more debts than assets.

They may feel they have nothing to invest. But that's not true: they have their time to invest, and the same rule about risk applies there.

Your early twenties are exactly the time to take insane career risks.

The reason risk is always proportionate to reward is that market forces make it so.

People will pay extra for stability.

So if you choose stability-- by buying bonds, or by going to work for a big company-- it's going to cost you.

Riskier career moves pay better on average, because there is less demand for them.

Extreme choices like starting a startup are so frightening that most people won't even try.

So you don't end up having as much competition as you might expect, considering the prizes at stake.

The math is brutal.

While perhaps 9 out of 10 startups fail, the one that succeeds will pay the founders more than 10 times what they would have made in an ordinary job. [3] That's the sense in which startups pay better "on average."

Remember that.

If you start a startup, you'll probably fail.

Most startups fail.

It's the nature of the business.

But it's not necessarily a mistake to try something that has a 90% chance of failing, if you can afford the risk.

Failing at 40, when you have a family to support, could be serious.

But if you fail at 22, so what?

If you try to start a startup right out of college and it tanks, you'll end up at 23 broke and a lot smarter.

Which, if you think about it, is roughly what you hope to get from a graduate program.

Even if your startup does tank, you won't harm your prospects with employers.

To make sure I asked some friends who work for big companies.

I asked managers at Yahoo, Google, Amazon, Cisco and Microsoft how they'd feel about two candidates, both 24, with equal ability, one who'd tried to start a startup that tanked, and another who'd spent the two years since college working as a developer at a big company.

Every one responded that they'd prefer the guy who'd tried to start his own company.

Zod Nazem, who's in charge of engineering at Yahoo, said:

I actually put more value on the guy with the failed startup. And you can quote me!

So there you have it.

Want to get hired by Yahoo?

Start your own company.

Risk and reward are always proportionate. Stocks are riskier than bonds but over time have greater returns — the catch is "over time." So what you invest in depends on how soon you need the money: if you're young, take the riskiest investments you can find.

Most undergrads feel they have nothing to invest, but they have their time, and the same rule applies. Your early twenties are exactly the time to take insane career risks.

People pay extra for stability, so choosing it costs you. And starting a startup is so frightening that most won't even try, so you don't have as much competition as you'd expect.

The math is brutal. While perhaps 9 out of 10 startups fail, the one that succeeds pays the founders more than 10 times what they'd have made in an ordinary job. That's the sense in which startups pay better "on average."

You'll probably fail. But it's not necessarily a mistake to try something with a 90% chance of failing, if you can afford the risk. Fail at 40 with a family and it's serious; fail at 22 and you'll end up at 23 broke and a lot smarter — roughly what you hope to get from a graduate program.

Even a tanked startup won't harm your prospects. I asked managers at Yahoo, Google, Amazon, Cisco and Microsoft about two equally able 24 year olds — one who'd tried a startup that tanked, one who'd worked two years as a developer. Every one preferred the one who'd tried his own company. Zod Nazem, in charge of engineering at Yahoo, said:

So there you have it. Want to get hired by Yahoo? Start your own company.

Risk and reward are proportionate, and the young can afford the most risk, since their time is their asset. Even a failed startup makes you smarter and more hireable — managers prefer the founder who tried.

The Man is the Customer

If even big employers think highly of young hackers who start companies, why don't more do it?

Why are undergrads so conservative?

I think it's because they've spent so much time in institutions.

The first twenty years of everyone's life consists of being piped from one institution to another.

You probably didn't have much choice about the secondary schools you went to.

And after high school it was probably understood that you were supposed to go to college.

You may have had a few different colleges to choose between, but they were probably pretty similar.

So by this point you've been riding on a subway line for twenty years, and the next stop seems to be a job.

Actually college is where the line ends.

Superficially, going to work for a company may feel like just the next in a series of institutions, but underneath, everything is different.

The end of school is the fulcrum of your life, the point where you go from net consumer to net producer.

The other big change is that now, you're steering.

You can go anywhere you want.

So it may be worth standing back and understanding what's going on, instead of just doing the default thing.

All through college, and probably long before that, most undergrads have been thinking about what employers want.

But what really matters is what customers want, because they're the ones who give employers the money to pay you.

So instead of thinking about what employers want, you're probably better off thinking directly about what users want.

To the extent there's any difference between the two, you can even use that to your advantage if you start a company of your own.

For example, big companies like docile conformists.

But this is merely an artifact of their bigness, not something customers need.

If even big employers think highly of young hackers who start companies, why don't more do it? I think it's because they've spent so much time in institutions.

The first twenty years of life consist of being piped from one institution to another — school, then college. You've been riding a subway line for twenty years, and the next stop seems to be a job.

Actually college is where the line ends. Going to work may feel like the next institution, but underneath everything is different: the end of school is the fulcrum of your life, where you go from net consumer to net producer.

And now you're steering — you can go anywhere you want. All through college you've thought about what employers want, but what really matters is what customers want, because they give employers the money to pay you.

For example, big companies like docile conformists. But this is merely an artifact of their bigness, not something customers need.

Undergrads are conservative because they've spent twenty years being piped through institutions. But college is where that line ends — and what really matters isn't what employers want, but what users want.

Grad School

I didn't consciously realize all this when I was graduating from college-- partly because I went straight to grad school.

Grad school can be a pretty good deal, even if you think of one day starting a startup.

You can start one when you're done, or even pull the ripcord part way through, like the founders of Yahoo and Google.

Grad school makes a good launch pad for startups, because you're collected together with a lot of smart people, and you have bigger chunks of time to work on your own projects than an undergrad or corporate employee would.

As long as you have a fairly tolerant advisor, you can take your time developing an idea before turning it into a company.

David Filo and Jerry Yang started the Yahoo directory in February 1994 and were getting a million hits a day by the fall, but they didn't actually drop out of grad school and start a company till March 1995.

You could also try the startup first, and if it doesn't work, then go to grad school.

When startups tank they usually do it fairly quickly.

Within a year you'll know if you're wasting your time.

If it fails, that is.

If it succeeds, you may have to delay grad school a little longer.

But you'll have a much more enjoyable life once there than you would on a regular grad student stipend.

I went straight to grad school, which can be a good deal even if you think of starting a startup: you can start one when done, or pull the ripcord part way through, like the founders of Yahoo and Google.

It's a good launch pad because you're collected with smart people and have bigger chunks of time for your own projects. Filo and Yang started the Yahoo directory in February 1994 but didn't drop out till March 1995.

You could also try the startup first — they tank quickly, so within a year you'll know. If it succeeds, you'll have a much more enjoyable life in grad school later than on a regular stipend.

Grad school makes a good launch pad for startups — smart people, big chunks of time, a tolerant advisor — and you can start one when done or pull the ripcord partway through, like Yahoo and Google's founders.

Experience

Another reason people in their early twenties don't start startups is that they feel they don't have enough experience.

Most investors feel the same.

I remember hearing a lot of that word "experience" when I was in college.

What do people really mean by it?

Obviously it's not the experience itself that's valuable, but something it changes in your brain.

What's different about your brain after you have "experience," and can you make that change happen faster?

I now have some data on this, and I can tell you what tends to be missing when people lack experience.

I've said that every startup [blocked] needs three things: to start with good people, to make something users want, and not to spend too much money.

It's the middle one you get wrong when you're inexperienced.

There are plenty of undergrads with enough technical skill to write good software, and undergrads are not especially prone to waste money.

If they get something wrong, it's usually not realizing they have to make something people want [blocked].

This is not exclusively a failing of the young.

It's common for startup founders of all ages to build things no one wants.

Fortunately, this flaw should be easy to fix.

If undergrads were all bad programmers, the problem would be a lot harder.

It can take years to learn how to program.

But I don't think it takes years to learn how to make things people want.

My hypothesis is that all you have to do is smack hackers on the side of the head and tell them: Wake up.

Don't sit here making up a priori theories about what users need.

Go find some users and see what they need.

Most successful startups not only do something very specific, but solve a problem people already know they have.

The big change that "experience" causes in your brain is learning that you need to solve people's problems. Once you grasp that, you advance quickly to the next step, which is figuring out what those problems are.

And that takes some effort, because the way software actually gets used, especially by the people who pay the most for it, is not at all what you might expect.

For example, the stated purpose of Powerpoint is to present ideas.

Its real role is to overcome people's fear of public speaking.

It allows you to give an impressive-looking talk about nothing, and it causes the audience to sit in a dark room looking at slides, instead of a bright one looking at you.

This kind of thing is out there for anyone to see.

The key is to know to look for it-- to realize that having an idea for a startup is not like having an idea for a class project.

The goal in a startup is not to write a cool piece of software.

It's to make something people want.

And to do that you have to look at users-- forget about hacking, and just look at users.

This can be quite a mental adjustment, because little if any of the software you write in school even has users.

A few steps before a Rubik's Cube is solved, it still looks like a mess.

I think there are a lot of undergrads whose brains are in a similar position: they're only a few steps away from being able to start successful startups, if they wanted to, but they don't realize it.

They have more than enough technical skill.

They just haven't realized yet that the way to create wealth is to make what users want, and that employers are just proxies for users in which risk is pooled.

If you're young and smart, you don't need either of those.

You don't need someone else to tell you what users want, because you can figure it out yourself.

And you don't want to pool risk, because the younger you are, the more risk you should take.

People in their early twenties feel they lack experience. But it's not the experience itself that's valuable, just something it changes in your brain — and can you make that change faster?

Every startup needs three things: good people, to make something users want, and not to spend too much money. It's the middle one you get wrong when inexperienced — not realizing you have to make something people want. And that's common for founders of all ages, not just the young.

Fortunately, this should be easy to fix. My hypothesis is that all you have to do is smack hackers on the side of the head and tell them: Wake up. Don't make up a priori theories about what users need. Go find some users and see what they need.

Most successful startups not only do something very specific, but solve a problem people already know they have.

Software gets used in ways you wouldn't expect. Powerpoint's stated purpose is to present ideas; its real role is to overcome fear of public speaking, letting you give an impressive-looking talk about nothing while the audience looks at slides instead of at you.

Having an idea for a startup is not like having one for a class project: the goal isn't cool software but something people want. So forget about hacking and just look at users — a mental adjustment, because little of the software you write in school even has users.

A few steps before a Rubik's Cube is solved, it still looks like a mess. A lot of undergrads' brains are in that position: a few steps from starting successful startups, but they don't realize it. They just haven't realized that the way to create wealth is to make what users want, and that employers are just proxies for users in which risk is pooled.

If you're young and smart, you need neither: you can figure out what users want yourself, and the younger you are, the more risk you should take.

What inexperience really costs you is knowing you must make something people want — not write cool software. That flaw is easy to fix: stop theorizing about users, and go look at them.

A Public Service Message

I'd like to conclude with a joint message from me and your parents.

Don't drop out of college to start a startup.

There's no rush.

There will be plenty of time to start companies after you graduate.

In fact, it may be just as well to go work for an existing company for a couple years after you graduate, to learn how companies work.

And yet, when I think about it, I can't imagine telling Bill Gates at 19 that he should wait till he graduated to start a company.

He'd have told me to get lost. And could I have honestly claimed that he was harming his future-- that he was learning less by working at ground zero of the microcomputer revolution than he would have if he'd been taking classes back at Harvard?

No, probably not.

And yes, while it is probably true that you'll learn some valuable things by going to work for an existing company for a couple years before starting your own, you'd learn a thing or two running your own company during that time too.

The advice about going to work for someone else would get an even colder reception from the 19 year old Bill Gates.

So I'm supposed to finish college, then go work for another company for two years, and then I can start my own?

I have to wait till I'm 23?

That's four years.

That's more than twenty percent of my life so far.

Plus in four years it will be way too late to make money writing a Basic interpreter for the Altair.

And he'd be right.

The Apple II was launched just two years later.

In fact, if Bill had finished college and gone to work for another company as we're suggesting, he might well have gone to work for Apple.

And while that would probably have been better for all of us, it wouldn't have been better for him.

So while I stand by our responsible advice to finish college and then go work for a while before starting a startup, I have to admit it's one of those things the old tell the young, but don't expect them to listen to.

We say this sort of thing mainly so we can claim we warned you.

So don't say I didn't warn you.

A joint message from me and your parents: don't drop out of college to start a startup. There's no rush — it may be just as well to work for an existing company for a couple years first, to learn how companies work.

And yet I can't imagine telling Bill Gates at 19 to wait till he graduated. Could I have honestly claimed he was learning less at ground zero of the microcomputer revolution than taking classes back at Harvard? No, probably not — you'd learn a thing or two running your own company too.

The advice would get an even colder reception from the 19 year old Bill Gates. Finish college, work two years, then start my own? Wait till I'm 23? That's four years — more than twenty percent of my life so far. Plus by then it'll be way too late to write a Basic interpreter for the Altair.

And he'd be right. The Apple II launched just two years later. Had Bill gone to work for another company as we suggest, he might well have gone to Apple — better for all of us, but not for him.

So while I stand by our responsible advice, I admit it's one of those things the old tell the young but don't expect them to listen to. We say it mainly so we can claim we warned you. So don't say I didn't warn you.

The responsible advice is to finish college and work a while before starting a startup. But I can't imagine telling the 19-year-old Bill Gates to wait — and he'd have been right not to listen.

Notes

[1] The average B-17 pilot in World War II was in his early twenties. (Thanks to Tad Marko for pointing this out.)

[2] If a company tried to pay employees this way, they'd be called unfair. And yet when they buy some startups and not others, no one thinks of calling that unfair.

[3] The 1/10 success rate for startups is a bit of an urban legend. It's suspiciously neat. My guess is the odds are slightly worse.

Thanks to Jessica Livingston for reading drafts of this, to the friends I promised anonymity to for their opinions about hiring, and to Karen Nguyen and the Berkeley CSUA for organizing this talk.

The average B-17 pilot in World War II was in his early twenties.

If a company tried to pay employees this way, they'd be called unfair. Yet when they buy some startups and not others, no one calls that unfair.

The 1/10 success rate for startups is a bit of an urban legend. It's suspiciously neat; my guess is the odds are slightly worse.

Three notes: B-17 pilots were in their early twenties; paying employees like startup acquisitions would be called unfair; and the 1-in-10 success rate is an urban legend, probably optimistic.