Welcome to E Con Talk, part of the Library of Economics and Liberty. I'm your host, Russ Roberts of George Mason University and Stanford University's Hoover Institution. Our website is e con talk dot org's where you can subscribe, find other episodes, comment on this podcast and find links and other information related to today's conversation. Our email address is male Addie Con talk dot org's We'd Love to Hear From You Today's July 17th and my guest is Paul Graham, essayist, programmer and programming language designer. He's the author of, among other books, Hackers and painters and a partner in the Y Combinator. Paul welcomed a contract. Oh, thank you. We'll start with a Y Combinator, Tell us what that is. It's a venture capital firm, but what's different about it? Why did you get involved

in? Uh, we wouldn't We wouldn't use the term venture capital firm to describe it, because in the business venture capital firm means something very specific. It means like you raised a couple $100 million from university endowments or something like that. And you know you have a bunch of him, like venture partners who sit on boards and stuff like that What we do is seed funding, and there's not really any name for us yet because what we do is sort of new. Um, I'm actually glad I have. I have encouraged there to be no name for us, because what that means is whenever whenever anybody start some kind of new thing copying us, the only way they can describe it is to mention us. They have to say why Combinator like pin right? Sure is. If there were a general noun for, they could just say a new blank. That's true, right? Some. I'm happy that there's no name for what we are.

So tell us what it does, right? So we're at the risk of creating, uh, opportunity for somebody, then create a name for it, but take

a chance. You know, they've been trying to use the name incubator, but that already meant something else quite different. Okay, what we do is the big difference between us and Venture Capital Fund is that Venture Capital fund makes a small number of large bets, right? The Venture capital fund will invest on the order of one or two million at a time. And they will do maybe two deals per partner per year. We invest $20,000 on. We might invest in 50 or 60 startups in a year with just four partners, right? So 15 deals per partner, seven times the volume and 100 the amount.

And what's what's the likely success rate? You know, we don't have a relative term. Another model?

Well, it's not gonna be a high. In fact, if our success rate was this high as a good VC funds that would that would worry me, because it would mean we were being too conservative, right? There oughta be a lot of failures or we're being too careful. So, although I don't know yet what the success rate will be, I would be happy if it were 1/3. Right. Um, which means most of the start ups he fund will fail And that Xander Yeah,

and so you're giving a small amount. And how do you screen them? And and is there any pattern to what kind of firms? They're kind of ideas there.

Um, there are patterns, but not not in ideas, huh? We screen them. We do everything in batch. What computer people call batch mood. Um what we're doing. If you wantto if you wanna understand what we're doing in one sentence, it is. We are applying mass production techniques to venture funding. Right now, we didn't set out to be doing this. We realized about six months in. You know, what we've been doing is we've been flying mass production to venture funding, right?

There's this pattern they see over and over get in economic history where there is something that's made one at a time, very expensively and unreliably, right. And someone comes along and figures out how to, like, rationalize the process and produce a whole bunch of them all at once using standardized press procedures

and stuff like that. Actually, by adding a lot of technology to the process or did

yes. And that is what we do. That is what we do. We fund a whole bunch of startups at once. We bring them here Thio, you know, Mountain View. Um, and they all start at the same time. 30 smell. 26 startups. Saul's? Yes,

like a camp, you sort of say, or maybe a horse race. Opening day Here is the starting

line about a graduate program. Okay, because that's what it's really most like. It's really like some kind of graduate program. If you have to find something else that already existed in the world to stick it, too. It's more like that in a boot camp. Maybe more people have been de boot camps and graduate programs, and so they prefer that metaphor, right? But it's not like boot camp. We don't make people do pushups right. We don't have fierce and drill instructors. You teach them stuff. Yes.

Oh, yes. So what's the what's the common theme that are the common materials? That's the mass production. Well,

you remember, you said it always involves introduction of technology, right? Whenever. Whenever I can write software for y Combinator, I'm always happy because that means I can take something that we're doing manually, and I can embody it in software and bang, bang, bang. It just happens, right? And so we have a bunch of software internally that we use one of the things you asked us how we screen people. Um, we get many hundreds of applications for every every batch. We do two batches a year when starting in June and one in January, right and every time we get, like hundreds and hundreds of applications,

you might actually get 1000 for this next batch because we're getting close to 1000 last time. Um, I'm like if we did this with printed forms, that if we had to read, if we had to look at People's Power Point, Dex, we could look 1000 power point deaths. We just couldn't do

it right and good. But you have to have a lot of people in any depth, a bond for the people. Make sure they're giving you e

mail me the Y Combinator partners. There's only four of us, right? We have to read all these things ourselves, and we have other things to do. Like Robert's. A professor at M i t. Um, So what we do is we have an application form. We're not gonna look at anybody's Power point presentations. We have an application form. Everybody feels that the same questions and then we have software online that way. Used to blow through these applications and read them quickly and rank them grade them. Look at the top ones. Um, the ones that do best in the application form we invite to meet us in person. We have interviews in this next batch.

The interviews with the weekend of November 20th 3 20 seconds. Right. And we will talk to maybe 60 startups in one weekend. 20 a day, right? We talked to them for 10 minutes each. We decide whether to fund them or not after 10 minutes. Because that's what you have to dio

elevator pitch with a long, tall

building. Well, no, actually, we don't like it when people pitch us. Um, we don't have time to be pitched right. We do. Is we ask questions. We just ask them questions. They walk in and sit down and we start asking questions. We just ask questions for 10 minutes before you're participating. Yes, yes, they come in and it's sort of like a court martial. All four of us sitting there, and they come in and sit down.

Um, and we try and encourage them not to be nervous, actually, but I think the situation inevitably makes him nervous. But you

know what? That's like graduate school. Yeah, I hate it

that it makes people nervous, Actually, not just cause I sympathize with them, but because it makes the interview so much harder. And it's fun. We're Yeah, we're trying to ask these guys questions. Then they're like, stumbling over their words, right? We just want to get the information out of him that they're nervous. It makes it go worse. So we try as much as we can to calm everybody down. Very friendly. And they're you know, they're nervous regardless.

Um, how long you been doing it?

Four years. We started the summer 2005. So this summer's batches, the ninth batch of startups and house the first batch doing the first batch actually did. Amis, in fact, probably did anomalous Lee. Well, we probably just completely lucked out. Right? But the first batch included Looped. I don't know if you've heard of them. They're probably mostly popular in a different demographic. They're this application that shows you on your cell phone a map showing where all your friends are, right? Like for high school kids? This is the most important thing in the entire world.

Where your friends. Right now? Yeah, right. Feel like dots. You can see the moving around stuff. Um, I like having an ant colony. Yeah. Yeah. Form. So that is looped is very successful. On another start up in the first batch was Read it, Do you read it? The Social news site, right?

That was in the first batch and in the first batch were the founders of Justin dot TV. Do you know about Justin dot t? Justin dot TV is the leading live streaming video site. Um, it is the number one. There's some astonishing statistic about their traffic. Like they get more viewers than who loo or something like that. I don't know. You can look it up. The Justin dot TV guys were doing a different startup that failed, but then we liked them. And so we funded them again for their next startup, which turned out to be Justin dot TV. And there was a start up in the first batch. That was the 1st 1 the gut bought actually was called text pay me and no one's heard of it because it got bought so quickly. He got bought like, almost instantly

out of that batch. But I interrupted you before. So you bring these guys in interview him, and then you say, OK, then tell me what happens after that, okay, okay. I'll just blow through it. They all played 10 minutes, or I'm gonna cut you off. Right? Okay.

Apply online. We invite 50 or 60 to meet us in person. We talked to them for 10 minutes apiece over one grueling weekend. Let me tell you that evening we tell everybody yes or no. At the end of the weekend, the ones he said yes to come back and we'd like, explain some basic stuff. And then we tell them Show up here in Mountain View Inn. Either January or June, depending on which one it is. Right?

And what about doing a TV

show? By the way? Uh, you mean like a reality

show? Like American Idol's People love to watch a girl. These guys have learnt a lot. Yeah, there's a lot of opportunities. Maybe

Sorry, people have, like from the beginning, people reality show producers like this. But it would be one of these things where arose Measuring what happened would really effect. So you bring him back, you don't come back. And the thing is, I don't even know if y Combinator is gonna work. Right. So why don't I mean it seems promising. So far, but I don't know for sure what our returns. We're gonna be like, We're certainly not making lots of money yet. Great. Um, and if we're just like on the borderline of working or not working, I don't want to mess with something that might kick us over into not

working right or vice versa. Keep you from becoming Well, that's successful. So

we've accepted a new batch of startup state 25 30 of them. Um, they all go back home and, like, you know, pack all our stuff or whatever and come back here. Um, uh, no, They come from all over all over the world. The last winter Batch seven out of 16 start ups were from overseas, right? It is. So it is such a huge market, the, uh, sort of seed funding market.

That's one big thing that people don't understand. They do not understand that the seed funding market isn't regional. You know, they think I'm going to start the y Combinator of you know ST Louis or something like that. Um, and then they discover when they dio Well, everybody's all competing for the same pool of applicants, right? They don't The people in ST Louis don't not apply to us just cause this other things in ST Louis. And meanwhile, they get applications from all over the country, not just ST Louis, right? It's all the same people because the founders at this stage, they're completely mobile. They're two guys with laptops who were,

like used to sleeping on sofas and eating takeout pizza, right? They could go anywhere, um, and do right that is actually economically, if you're if you're interested, the economic aspects of that, that is actually historically quite interesting that these people were so mobile, right? It means that if a city was like a little bit better than other cities for start ups, they would just vacuum all the good people out of the other city after some stuff, right? Well, it's been happening, but now it's gonna happen much more than it did 20 or 30 years ago because it's now so much easier to start. A startup 20 or 30

is because it's cheaper. It's cheaper to start a startup.

Okay, I can tell you, I've thought a lot about this. There's four reasons it's cheaper to start a startup. I hope I can remember them. All right, On the fly. Um, I get it. All right. Okay, So one of them is hardware, right? Moore's law has made computers effectively free in the sense that you know, you used to if you started to start up before, it used to have to go out and buy a fancy computers to do it. And now,

like the computer you've already got for playing World of Warcraft is good enough. So Moore's law has made computers effectively free. The Internet has made promotion free. It used to be if you made a product you had to, like, buy advertising or hire a PR firm at least to get word out. Right. And now word can spread so much more quickly, not just through word of mouth, but through new publications on

the internet. Surgical that work just easier to find. Cool stuff used.

Yes. So, basically, you build it, they will come. And that didn't used to be is true as it is now. Right? Okay, we're up to, uh, another one is programming languages have gotten more advanced. Um, programming languages have gotten more abstract in the sense that you sort of build programs out of bigger Lego blocks, right? And that means you don't have to do is much work to get a given amount of program done. Um, and in that case,

what's happened is there's actually been a qualitative change because it used to be. Most people, you know, to build a startup as if they were all seem out of work, right? But just assuming they are, uh, you know, you would have to have, like, a team of developers like five or six people writing code and c++. Right. And it doesn't work to have five or six founders and its startup. So probably what that means is you have to hire people now using a language like ruby or python or something like that that's more abstract and C plus plus. Ah, you can do it with just the founders if you have to.

Programmers among the founders, like you have two founders and they've been both program or three founders of two of more programmers, right? You don't have to hire anyone. You could just do it yourself and write all the codes. The first version yourselves, which means you don't need to raise money because hiring people like that suddenly shockingly expensive. You know, like that for cash. It's just you. The founders like living on ramen and working out of their apartments. And they already had computers and network connection, right? I mean, it's no more expensive than just like hanging out, doing nothing for a summer.

But when you have to hire people, man, suddenly it gets much more expensive, right? So you don't have to hire people. That's what it comes down to you.

That's three out of four, but there's another. But anyway, the point is, it's gotten shaper, and I forgot why we were interested in that.

But there was. That's why there's so many more start ups, right? The reason there are so many more.

I know there's any mobility of that was what was important.

Yes, well, they're mobile, their mobile

for the just two guys.

Same reason that there are so many right when it's very cheap to start a startup. What that means is anyone could do it right, like back in the days when a startup meant like our hardware company and you had to get raised money to build a an actual factory. Theo only people, you know, you needed millions of dollars to do this. And to get those millions of dollars, you have to be plausible. You have to be old and well dressed and have this long list of publications. And maybe you could be a complete, useless fraud. But as long as you look plausible, you know you could raise this money. Now, Anybody who wants to do it can't. Doesn't cost anything. Doesn't cost anything more than just hang out first number anyway,

right? And so what that means is there's this huge, much larger pool of people, and there's much more variation in it, actually. I mean, if, uh, yeah, reward is proportionate to risk, then the fact that people can do so many more risky ideas than they used to be able to autumn. And the technology will now progress faster. All right, pull

of the right hand. You have a better shot, maybe getting some people out of the writing until all right, The high return highest return people. As you expand the pool, you're gonna have it. You're always gonna lop off the losers anyway, so volume is gonna be very important, you know, pure numbers

is gonna be good. And you know, the two. You see it already like the two hottest startups right now. Facebook and Google, right? If you still can't Google is a start up, both of them. We're so risky. When they first started that venture capitalists wouldn't hear of it, they both initially had to raise money from angels because, veces told him, both know, explain the distinction. NBC's an Angel's veces invest large amounts of other people's money and angels invest smaller amounts of their own money, right? So Ron Conway Ron Conway is a famous angel. In fact, he was he, didn't he? Angel invested in both Google and Facebook?

Why would it be that? Angels? I think the common guess would be that when you're investing other people's money, you could be riskier. Rather, when you're investing your run.

Oh, no, it's the other way around.

So explain why

that ISS veces have to worry if they invest if they invest in a startup that sucks but looks plausible, like the guy's air famous and old and responsible looking, You know, um, then if the startup tanks, they can say to the people whose money they were investing. But look, it looked so solid. Everybody else, you know, these guys were evident. They had all is good press, right? Whereas if they invest in some 19 year old with some wacko idea and tanks, all their limited partners will be saying, How could you invest in this 19 year old with this stupid idea? And then what did they say?

Right? Where is an angel? An angel can just let go with his gut, right? Also, angels tend to be a different kind of person. Angels are very often people who were startup founders themselves. That was where they got the money to do. Angel investing, right. Where's VC is rarely our startup founders. They're people who have come up through this parallel courses. NBA's stuff, right, This parallel track, a few of them are, and they tend to make really good veces. But most aren't Most are money managers.

So you would say that the two hottest Google and Facebook We're both angel

investments initially? Yeah, yeah, veces

because the founders were not old guys with long track records

and resume. And the idea seemed wacko, right? Like there was known the word social networking hadn't been invented When when Facebook was found. Just like fantasy as a genre didn't exist when Tolkien wrote Lord of the Rings. Right. So what was the Lord of the Rings? This weird like fairy tale? What was it right? Same for any really new idea, you know, creates the genre, so there's no name for it.

Whatever it is, the social networking thing is so fascinating. Partly because of that, right? It's It's saying that's taken over thousands of people's lives that didn't exist three

years ago. Yeah. Makes you wonder what

that's right. Makes you wonder what it is. And the impulsive as well. There won't be a thing like that, Damn it. But of course, there will be in about three years problem,

whatever it is is probably being built now. Just you can't tell what it is. And you know what? I can't tell either you I remember. You asked me earlier much earlier if there were any patterns and ideas. Right? Um and you know, there was a line in the ST Yeah, the TV show? The saint where? Roger Moore. If you shouldn't, I would recommend the Saint. Actually, you'll have a new respect for Roger Moore. He's not just like the bad Bond. Um,

he was great in the seat. Ah, there's a line where someone says, You know your shears, You're disappointed by me or something like that And he goes, I'm never disappointed by anything. Basically, he's learned he's never surprised by anything anymore, right? And I've I've learned that, too, because we've now we've now funded 100 and 44 startups, right? And even before that, like practically everybody I knew was a startup founder with some point or other right. So I have seen so much stuff happened,

and I have been surprised so many times by people who seem super promising and produced nothing and other people who seemed lame priest, amazing stuff. At this point, I just, like, sit back and watch things happening, you know? I mean, there are things I look for, but not certain kinds of ideas.

You're not trying to anticipate

the next big thing. No, By definition, you can't write. By definition, you can't. If it's a really good idea, then you know it'll seem kind

of stupid. What's cool about capitalism should be cool about it anyway. Yeah, so I pulled you off track. Just

imagine if you had to do central planning for this, right? I've just said here I am. I'm a TTE the heart of this. And I have an explicit policy of not even trying to plan. If I even tried to think about think ahead about idea about type types of projects anyway, right? It would only add it would only dilute my thinking with crap. You know, You see, and there's this story in Europe where the French and German governments are cooperating to make some kind of Google. They're gonna spend, like, $100 million making their own ghoul. And it's so stupid, right? That was a good idea in 1997.

Missed it. Just completely missed it. Like that window closed it.

If they want to have a Google of France, it shouldn't be a search engine, right? It should be something else. What should it be? Well, let's think. What was Google? What? What Google was with something that at the time, looked like a stupid idea to most people proposed by a bunch of outsiders, right? What are the odds that some government project is gonna end up working on a stupid idea of the type proposed by outsiders. You know, worse than average worse than random.

You know, it's a beautiful example of the hiking and idea of trial, and error is where progress comes from. It's not centrally planned. It's planned by individuals who many from fail and the market leads the mound before.

Well, in fact, the way we advise startups to operate is to do this individually on a per startup basis to what we advise. And it's not like some magic secret of ours. This is pretty much standard procedure with Web abs. We tell people released something as soon as you possibly can, because the point of releasing is to start learning from your users what you should have actually been building, right? So you release something as soon as you have anything that's like good enough that even 10 people would care. And then you watch really carefully what those 10 people do, and that's when you start actually building your product, whatever

it is. Yeah, way had a conversation with a marble day about how information cut goes up rather than down in that in that in a minute, the American economy and lots of lots of places. The craters, the products learn from the user's it. So we have a form of our date.

There's nothing better than to have sort of sophisticated users, right. And in Carson. And conversely, it's dangerous to build a product for giant corporations or God help you for the Defense Department. Because then the stupidity of your customer well, like, make you stupid factor. Yeah, right. You want to build a product, you want to build a product for clever, impoverished outsiders,

right? Right. Hoping that people somewhat like them with their tastes

out there to sell. Well, if you know, the point is the clever, impoverished outsiders are leaders there. Harbingers,

you know, in

the medieval symbol, almost by definition, when it comes to technology right there, sophisticated and they're cheap. So they're willing. They're looking for something new and less expensive and better, and they're willing to switch right there, not just driven by inertia like large corporations.

Okay, so you bring these folks in, okay?

So we bring these folks in, and then for three months, we work intensively with them to get something that they condemn O to the next round of investors. We describe ourselves like first year venture venture funding actually tends to operate in sort of several separate levels, like gears, right? Andi. It's rare for people to participate in multiple levels.

There's introduces the incubator. That's the word people like. It has a certain there's an embryo or fetus, whatever it's gonna grow. And, well, the reason I don't know the

reason the word incubator doesn't applies because what it always used to mean back in the bubble in the Internet bubble when this term first started to be used is that all the startups work on your

premises, right under your gifts and building.

All startups work there, and I think that's actually a terrible idea. It makes the start everything well, Also, it makes the start of feel like employees very often if you think of very successful startups. They all have these stories about what things were like in their first office when they were working out of the garage like they were working until two o'clock in the morning and surrounded by pizza boxes. And they're like, you know, in this garage with this washing machine that they would turn on to keep warm when it got cold or some crap like that, right? It's not a coincidence. It's good for the startup to be off on their own. They confined space. They can work out of their apartments faces. Not the hard part. Right. So we don't We don't do that.

OK, so for those three months, but they do have to be a little bit nearby. Were.

So this is what we do. We have dinner once a week. They don't live with us,

but they come over for dinner. Okay, so once we get to use the wash is very important. You

know, I don't think we have a washer, but people do use bizarre, bizarrely large amounts of our infrastructure for various things at various times. It's true. Um okay, so we have these dinners once a week, and we invite some expert and start ups to speak. Usually some famous startup founder, right? And these guys give a talk about like, how things really work. These talks, I swear, like maybe 60% of the interesting gossip than I know about Silicon Valley. I have learned in these talks because they're completely off the record and these. These guys like they're speaking founder to founder,

and they really give you the goods on how things really work. They're just fascinating. Unfortunately, we could never publish them. I mean, if we ever broadcast them, they would just disappear, right? The speakers would clam up. Um, but, boy, the talks very interesting. Okay, so then at the end of, uh,

roughly 10 weeks, you have this big event called Demo Day, which is now in this no more. Because it's two days we can't fit everybody in our building all once anymore. We have this big event called Demo Day where, uh, we invite all the investors in Silicon Valley and the rest of the country. They come in from some other places and start ups. All presented them for five minutes apiece. Right? That's it. Everything's fast, everything's efficient. And, uh, you know,

bang, bang, bang. All 26 startups present. And then that's sort of the beginning of the conversation about raising the next round of money. Um, at the end of three months, the dinner stop. But nothing else stops. I have regular office hours. I meet with startups. Um, and like, I'm still having office hours of start ups we found in 23 years ago. So there's the only formal thing that ends after three months is the dinners.

So it's Ah, there's a formal counseling and mentoring experience that's part of this that might be missing for a lot of other. Or now

Oh, yeah, yeah, Bert. Oh, no, That's what it's mainly about. It's not about the money. It's not about

the minds about the knowledge. Yeah, you helped with the deal making Yeah,

the two big things that we work with start ups on our what they're building in talking to investors, that is the biggest things. And then there's a bunch of other peripheral

things that they don't know how to talk to investors. Most of all right, we'll have to teach them, teach them how to negotiate and structure that next deal. Because that's a huge negotiation isn't the hard part. You wish right? The hard part is to get an investor toe

even is to convince the investors that your startup it's worth investing in, right? So that's the main thing we talked about. And what about the details of negotiation to

and what your share, what do you guys get out of this experience? Equity? Same amount. Different amounts to go, Jerry. Oh, my deal

varies from 2 to 10% but on average, 67

and, uh, the common stock when it gets diluted in later rounds, just like the founders do. And what people think of this, the Y Combinator idea. People flex

your reputation. I think it's good. I'll tell you one evidence. One sign that I have that it's good is that when, uh when people are applying to us, you know, I feel confident telling them that they can just pick any y Combinator funded start up and ask them what they think of us. It's right before, if I thought people, if there if I thought there were significant number of people who didn't like us, I would feel nervous about doing so. Either our reputation is good or I'm deleted, but I think it's good. I think it's good. I would I would be horrified if it wasn't because in this in this kind of business, your reputation is everything.

So let's let's turn to the times we live in two issues as a player in this deeply embedded player in this world. What have you noticed to be? The impact of the macroeconomic recession going back to December of seven and then California particular has Kevin some problems? Fiscally, you noticed. Has it affected your life? It's ah y Combinator person in terms of anything,

California's fiscal troubles. I have not noticed any sign off that doesn't seem to affect anything at all. Um, you will, if the Aqueduct stop,

raise taxes a lot or might be less fun. Deliver. Yeah, could affect things. But taxes here already hideously high? Rightly so. Just think. What? It's

good income tax already.

I don't think it's gonna be a tire. Still, it could have some effects. That would be it's

true lesson. It's true. The scary thing. It's scary to think how high they could raise taxes before people would start to leave Silicon Valley. They're like, I don't want the government

to know that. What about the economy at large? The economy large.

If we were worried, actually, we're very worried that in the investors would just slap their wallets shut and nobody would be investing. But people kept investing and, I say, kept in the past tense because for? For startups, at least, the bad days are over for startups. Unless there's some second wave of disaster. If, like the Chinese stock market text or something like that, knock on wood. Unless there's some new wave of disaster. For startups, at least the badness is bottomed. Um,

when it was bad, what you noticed

evaluations were lower. People were still investing, but valuations were like half what they had been

made for. You ask what opportunities would

be, you know, evaluations. When people invest in a startup, if people invest in a start up, if they invest, like a $1,000,000 at a pre money evaluation of two million, what that means is, the post money evaluation is two million plus two million they put in or three million. So they're gonna own 1/3 of the company, right? So effectively, When I say evaluations were lower, what I mean is, investors were asking for more of the company.

They were scared. You know, I don't want to think about the

future. I honestly don't think the investors were scared. I think they just that investors just sensed that everyone was more desperate, and so people, so it was just supply and demand. There were some people who were sort of thrown off by the economy. And so there were fewer people investing and the people who were still investing thought all right, we can We can push things on terms. Let's run, will get away with what

we Yeah, well, they always right. It's question competition. When there's less competition, they're going to get a better deal. Yeah, but so

that not everybody ran out of money, right? There were some VC funds that were, like, really through structurally messed up because their LPs couldn't come up with their capital commitments and stuff like that. And they literally couldn't keep writing checks, right? LPs are limited partners. Yeah, but there were plenty of other investors like big angels and the more you know, the top VC funds. They had no problem. They kept investing. They just basically took advantage of the bag. May to get

more of everyone's company. You'd think there'd be some people who were thrown out of work who might turn to a startup is away toe, do the next thing they were might have done otherwise and

something they were gonna down there we didn't see a lot of evidence of that. I wouldn't say for sure that it hadn't happened. We haven't seen a lot of it. That's the H typically of the people that you're working 25 26 you know, a couple of years out of college. So either they have been working for some big company for a couple of years and realize, you know, Oh, this sucks or they're in grad school and drop out or something like that.

We were talking earlier about how cities and you wrote about this in a recent s. House cities might be able to capture, um, the start of market or a tractor Be a magnet for startups, venture money. Uh, I think economic development in the nineties in particular went through urban economic development. Went through a rather bizarre phase where people thought, we need to be more like Seattle, and it's a permission

for U. S cities. That would be a good thing,

right? It would be, except that you can't get there from here is the problem. So, for example, you mentioned ST Louis earlier is a possible place toe start, a competitive for the Y Combinator used to be a washing diversity in ST Louis in the city of ST Louis. Thought were a lot like Seattle. They have a world class university, which was University of Washington. We have a world class university, Washington University in ST Louis. They have building. We have booing. They have gone. We have McDonald Douglas now that wasn't part of the combination, but they had an entrepreneurial company called Microsoft and ST Louis head Monsanto,

which was a biotech health type company. And we could create the same kind of synergies. Except for one thing. More people want to live in Seattle than ST Louis, so that little geographic challenges that signal this is flat and not interesting geographically is an insurmountable problem.

It's interesting. Question of flatness is an insurmountable problem. You mean literally

typographical? Yeah, no, it's boring. It's visually boring, saying It's like it's a lovely city. I raised four kids there for a long time, and we had a great time there, and I don't want any of our listeners to think that ST Louis is Ah is a bad place. I liked living there a lot, and it's an unappreciated city for many things. but as a place for 22 year olds and 18 year olds. A 27 year olds developed a life. It's not as attractive as Seattle or Silicon Valley or Boston or Austin, Texas, Portland, Portland,

Oregon. So they're gonna always have that inherent advantage. And so the road to development isn't to try to say we're gonna become and by the way, a lot. One of the ways that the city work to create this entrepreneurial startup culture was they funded a lot of incubators, which I'm sure did terribly behind. We were talking about earlier public private partnerships. It's the same kind of strange idea you say Might is the

following. It's the kind of thing politicians

like they love it. They can have some ribbon cutting way open an actual building. My tech incubator, where we've got t one lines was a big thing. We have a lab for your again economies of scale.

Whereas if you look at all our startups, they're not even working in our space. They're all working in some kitchen of some rented apartment is a mountain view with a bunch of pizza. But that's what start ups really look like Sergei in their garage.

It's a bizarre did and it didn't. I suspect it didn't turn out very well. There's some fine biotech research coming out of watch University and Monsanto's done some extraordinary

things. But biotech is a completely different world, right? Biotech versus, like software and Web service is. They call them both startups. But there's structure of how things were so different, right? Biotech. It really is about commercializing research. You have some guys principal investigator who's like the lead guy, regular tourist. Is it all? There's so much less risk, you know, And it costs so much more money. No,

there is less risk. I mean, your chances. You're not like one in 10 right? I mean, you know who to back. You know, if someone's gonna if someone's gonna make the next new heart drug or something like that, you can probably narrow it down to 20 people, right? That is way not true for whoever is gonna make the next people,

I don't know. Anyway, it's interesting question. I literally don't but back to what we were talking about, which was this sort of interesting geographical role that cities and regions and areas play in innovation in America. So we have right now a handful places where bright, ambitious people go to start businesses because there's money in those places. There's people like them who, if they could, eventually successful, they can hire and the pleasant places to live. The weather's nice, the weather size. Or there's just a lot of people like them who are fun to be around because they want to be around people like himself. Usually because of a university often right, could be where they went. They want to stay, and we live those glory days and live. You know, similar

areas. The university gets them there in the first place, like neither Larry nor Sergei or from the Bay Area, right? They came. They went to the University of Michigan and Maryland, respectively. And then they came to grad school at Stanford, and that was where they met. Stanford was like this magnet that brought him in, like, you know, and then these

about surrogate Brenda Aziz. You're on a first name basis with the Google founders. But it does lead to this because, as you said, because it is possible to create a magnet that draws people It does seduce cities and politicians and the thinking that they can capture some of those folks through some through right public policy. But it's very hard to do,

obviously. Well, they don't seem these cities that try to do this sort of thing. They don't seem to be critical about their own plans. They have some plan that's gonna be some sort of technology revitalized downtown or something like that. And they never seem to start a stop and ask themselves, Is this plan actually going to work? They produced this thing as a result of some political compromise, but they don't actually think well. Is this what they did in the other cities that were successful? Is this how they did it

or or they do that? They said, Well, and that's the other thing that that's fascinating. They send a delegation to Seattle. They really did. Lewis. Did this many cities do it? I'm sure they send it. So what did you do? And then they think we'll we'll just do that now, forgetting the fact that it's like the Google of France two years ago, it was a good idea. Now it's a waste

of money or what works in Seattle might not work somewhere else

because of you. Can't see Mount Rainier from ST Louis on a clear day, even a very clear day. What? Let's shift gears. I want to talk about a wonderful essay that you wrote that became the title of a collection of essays, which is hackers and painters. You still think about that metaphor money? Tell our listeners with what you had in mind about the similarities between Ackerson painters. Very interesting. Well,

when I was in college studying programming, there was this idea floating around that programming was supposed to be like math, right? It was all formalism, improving things. What I found actually is, uh, that the interesting parts of programming you can't really make scientific, even scientific, little old mathematical, right? People wish you could. You would make great research papers if you could call computer science. Yeah, well, you know everything. Science.

Back at Cornell, I think they had a department of poultry science. That might be real science, actually. Expect more than science. Probably a bunch of angry chicken farmer showed my door. Now, um, So, uh, it turned out it seemed to me that programming at least like writing software. Um, what made you good at it was not what would make a scientist good at science. It was more like it was more like what would make a painter good at painting? Um, we're most closely.

Probably What would make an architect good architecture, right? Like what makes an architect good is not a command of statics. You know, it's something a little less, uh, organized in that, um, you know, I mean, it's taste. There's an aesthetic taste in a sense of design, you know, on a certain knack, right? It's very hard to say exactly what it is.

But, you know, people write whole books about what makes a good artists good. Ah, but I had studied painting at one point, and I found hacking and painting had a lot in common, like you're trying to make stuff right? And so, uh, you know that the people who make stuff great are really all have much more in common with one another. Then, regardless of what sort of vertical silo of the world they're in, right, there's this sort of horizontal brotherhood of people who make stuff right and that they might not have realized it, but the programmers and painters were next door neighbors, you

know? Interesting. So you studied painting, did it other than making the observation that they have something in common? Did you find that that studying, painting and painting itself made you a better

hacker? Well, I find that I can, like, uh, look a hex color and know what it's gonna look like in HTML. You express colors and Hexi decimal numbers and based 16 right? The RGB components and I could when html came along, I could look at these colors and guess what it would look like

A pleasant benefit. That's the most literal

example. Actually, though, Ah, I mean, a lot of what makes Web startups succeed is to have a sense of design. So I learned, you know what does what a good design sense is from studying this kind of thing? Um, and also arm our model for cheapness is the artist's model for cheapness, right? Like artists managed to live cheaply in a way that's not squalid, right? Like like people who are poor but uneducated tend to live a sort of caricature of rich people's lives. They have the same kind of things. But if you look up close, they're like,

made out of plastic and, you know, tawdry. And it's just grim, right? Whereas an artist will say, I'm not even gonna try to live like that. I'll just live in an industrial space. I'm not even gonna live in a fake mansion, right? I'll just like rent a loft manufacturing space on all the paint, Everything white. It'll be super cheap and cheery, and I'll put some cool, bright colored things on the wall, right,

you know, and that's what we do with startups. We tell people like Don't even try to do like a tawdry fake imitation of like Microsoft. Just like work out of your apartment, you know, but make your software really good, right?

That's interesting question. You said they could be poor but not squalid up immediately saw, ah, production of love. Oh, I am in my mind, which was, you know, somewhat squalid. But it's the TB, I guess the tuberculosis that Brexit consumption

Well, you know, the poverty, poverty in squalor are getting more separated, probably as time went on, like, you know, in 1300 if you were poor You probably live squalid, Lee. Right? But nowadays, the baselines, like society, has gotten so much Richard that even, you know, beggars air rich now. Bye.

Buying standards. You know, the standards of 1000 80. Right? Um, so, uh,

70. Sometimes you have to go back 2000 day.

Yeah, right. So, uh, the baseline is just so high now that, um, there are many more opportunities to live, like, super cheaply in a way that's completely different from the way people live expensively and yet still nice, right?

You want anything else about hacking and painting? Um, we talked. We talked in the program about this left brain right brain division, which is, of course, somewhat arbitrary, but somewhat true. It's useful way to think about things. Sometimes people think of captures is left brain and painters his right brain. And obviously there's a both. There's a right brain aspect of hacking, and there's also assume a visionary aspect, right? There's a There's an ah ha. There's, uh I'm gonna look at this the way no one's looked at it before. It must be somewhat similar. Creativity.

I'll tell you. Yes. Actually, there isn't there. Isn't there is a sort of comparison here. That's true for both hacking and painting. In the world of painting, there are some people who are just fabulously talented at drawing. You've taken Sit down. You know, these were like the kids who could draw in high school, right? At age 15. They can sit down, you know, with pencil just in front of you, like,

wow, looks just like me. Right. But then when you say to these guys, okay, use this amazing skill to just produce anything, just put it on the wall. That's gonna look great on you. Then they lose right on down within programming. There is this distinction to right. There are some people who are really, really good at implementing code. Like if you give them a speck, you give them a spec for a programming language, and man can they will just implement it the hardest stuff. As long as you tell them precisely what to do,

they will just do it right. But you say okay, make up a product, you know, make up some kind of new product that people want, and they're just utterly lost. Right? Um, this is actually a big mistake that companies make. There's a lot of companies who think that what the programmers are basically implementers, that products are supposed to be designed by product managers. They're supposed to be designed with. The products do and, you know, they make you know, mock ups or something like that.

Then they handed the programmers and programmers translate their ideas into code, like you know, this one way process. No loop back, right? And that loses, right? The best programmers are the ones who combined in one head both the ability to translate ideas into code and having the ideas just like the best artists you know, have both the ability. You have, like a great hand. They can make their hand, do what they want, but they also know what to tell it to do, right? Actually,

between the two between the two, I would take the Cezanne's right like Cezanne could not draw. He makes the same drawing mistakes that everyone makes. An introductory drawing class that's really Kockums, Razor said. He couldn't draw, you know, not that he was like trying to transcend three Dimension super, but but what he was good at was the other half like deciding what to produce, right, and it's really was terribly frustrated. He was like this guy who had all kinds of ideas, and he couldn't articulate them with his hand. But when you put the stuff on the wall in a room full of other paintings, it looks like there's a spotlight shining on his paintings and the other ones have been sprayed with a light coating of mud. It's just amazing when you look at side by side paintings,

Um, so I'll take the season. That's actually. And one interesting thing that's been happening is because programming languages have gotten so powerful. You don't have to be that good and implementer

to get something. Built it out there. Let me ask you about a related stereotype that you hear sometime. I cares whether you think it's true or not. One standard view is that technical people like bells and whistles, and so they create products that air technologically cool or fun or show off their skills. But they're not with the user. Wants is that is only to that

stereotype. Yeah, yeah, if you're a hacker, you like, you tend to like gadgets, right? Sure. Um and so It's a tendency you have to fight, just like if you're gonna be a good football player, you might have a tendency to get in fights also on the field. And you probably and you have to keep that under control, right? You're an aggressive kind of guy. If you're a hacker, you're definitely into. I mean, that's what a hack means. A hack is like when someone does something stupid like gratuitously cool. You know, like almost like a practical

joke. And did you see that in your startups that you've got up? Bring that in.

Well, it's not too much of a problem because they have so little time to get something done. They didn't have time to waste any kind of fragility quality, so it hasn't been a problem. But I'll tell you, every hacker has to fight this,

uh, you wrote recently in an essay that Facebook killed TV. What did you mean? Well, um what I mean, literally What

I meant is, that's what people are doing instead of watching TV, right? Um I meant I didn't mean that to be absolutely true, right? That is not nice. What I said was that Z about as true as you could get in three words.

Great. Yeah. I mean, you were talking about this sort, Of course, raises it

bad writing that because that's the kind of thing like that's the kind

of thing that journalists write. I know, you know, because TV is dead and you know, who knows with Facebook will turn out to be right. But what you were talking about a more interesting, deeper issue, which is there's a, uh, people

like to talk to one another, right, and that maybe maybe you didn't realize it, but what what TV Iwas like The Brady Bunch or something like that? What that was was a fake, a fake family produced for everybody and broadcast the same episodes to everyone, right? You might have preferred to be talking to your own riel group of friends, but there just wasn't the mechanism for it. There was just the telephone where you could talkto one at once until your parents got mad. Right now, you can talk to them all the time, you know, and so maybe you don't need the Brady Bunch anymore.

So that's an interesting observation about social networking, but was also what you're also saying something about gadgetry about TV versus computer versus and you got cell phone versus camera. We have all these these

questions is what got people to use computers, even though they're really hard to use, right? Like, Yeah, but that's why everybody has to have a computer now, even like 14 year old girls like they gotta have computers exist. How the exchange pictures with their friends,

people who are over a certain age, Let's pick 50. It's actually a smaller number, people who are over the age of 50 and it's probably maybe 39. But we'll say 50. They don't get this at all, right? I'm over 50 and 54. So the Facebook phenomenon, the Twitter phenomenon among I do both, but not very aggressively. Whereas people under the age of 25 it's a central organizing feature of their life. And when you talk to the people who were over 50 they say they throw up their hands and they because their kids are doing it. They say, I don't get it. Why do I care that your feed your dog right now? To them, it's like the celebration of minutia. What's really going on in that world. Maybe that's all it is. And then when you're 18 that is your life is minutia.

So, you know, I think is the first approximation that Z, like teenagers, basically waste all their time hanging out with their friends. And this is the current way. They do it.

Yeah. You just leaned on cars, cars just to be the hardware. Now we moved to cell phones or smaller.

I mean, I don't use Facebook. I don't have a Facebook account. I don't tweet. No, no, I mean, I tried.

I tried blogging that you're missing out Family People seem to enjoy it. A great deal,

e. I don't want it. I already have enough distraction. Yeah, it's a big distraction. Um, I look at these things and they just seem like a time sync, right? I lightly need less times,

things not more. Right. But that's a feature, not a bug, right? For a certain

demographic. Not for me, right? I mean, if it's the new TV, that means I should avoid it, because I certainly avoided the old TV, right. Like I kicked that habit at age 15 and now it is snuck back into my computer through the Internet, like True. Like someone stuck a television in my typewriter,

all right, but I was asking if it's a nice report. But when you said something strange, you said That's why you have to have a TV. That's why you have to have a computer now, whereas for people over a certain age, in my experience people over over 70 say, 70 plus, maybe they have no cell phone, many of them don't use it, Not made them. Some of them still don't use email. They certainly don't use it regularly. But Twitter and Facebook, the social networking experiences. I mean, it's not just over 70 it's over 50.

Those books don't need a computer for those because they don't do that stuff. Yeah, sure, right. It's the younger people who quote have to have a computer now, or a cell phone.

Or for the interesting question is whether it's the younger people, because these things are four young people or whether it's the younger people, cause the younger people are using the new technology and will, you know, 30 years from now, are there gonna be a bunch of 70 year old Facebook users, right? Um but I honestly don't know. I honestly don't know. I mean, I feel like most people like to waste a lot of their time at most. Age's great. You're rich

and wealthy, wealthy society,

if you can afford to You. Yeah, actually, poor society spent a lot of time hanging around chatting to That's true. Just hurry while they're doing it. Yeah, so I would guess. Yes, I would guess that. I mean, the reason 70 year olds don't do it is because their peers don't do it right.

Yeah, but there's another problem, which is that this is what I find fascinating act. My dad is 78 he was just a computer, right? He's an email or he does lots of things, but lots of things. You're hurt for him because the technology is moving quickly, and he's 78 he grew up with they didn't grow up with it. But our kids, my kids, they're gonna have grown up with it. But there's a new thing coming along that they won't have grown up with. They're gonna end up just like I'm gonna end up like my dad. And if so,

were they? The interesting thing is, if if technology keeps changing faster and faster, people will be younger and younger when they're left behind. All right?

Yeah, that's what I'm thinking.

Right? So maybe maybe there will come a time when 30 year olds are, like, left behind, Because 18 year olds were doing

the new thing that ended cell phone in the nasal passage. Right. Well, we're almost out of time. I ask you about two more things Where we before we stop. Why do you think the U. S. Has such a vibrant startup culture? And it like your thoughts on how immigration a source of ideas affects the start up market?

Well, actually, did those were busy both with the same question. Partly the reason the United States has such a vibrant startup culture because there are so many immigrants. Immigrants start startups, right? Um, disproportionately. So I was some statistic that something like more than half of the Hypo Hypo startups were founded by immigrants.

Having an open door might be our best economic balls. Oh, yeah. Smart has yes, I think perhaps for my people as well, just generally, but And when you're experiencing, you noticed it.

Oh, God, Yes. I would say the single biggest problem that kills startups that we fund is visa problems. People from overseas who, like, you know, get kicked out of the United States can come back, can't raise money because the investors at home suck can't reach the investors here anymore. It's like the government's working as hard as it can thio, you know, to keep people from coming here and, like, making the economy

better. Yeah, well, that's an interesting political problem. Um, you wrote, uh, a commencement address for high school students. It wasn't a commencement address. It was just to talk talking at a high school. Yeah, but he ended up not giving the because they dis invited you. I think

what happened with some student wanted to invite me or something like that, but then they didn't get permission to do it. They get by, given the impression that I wise. So I wrote this whole thing, right? I thought, Well, I've written this thing. I can't actually give it. So I might as well put it online.

And it's a lovely essay. Maybe it has some very good advice for surviving high school and adolescents, General. And if you'd like to share any of that advice, is we close? I'd like to hear

because I thought it was wonderful. Well, in the main thing I remember saying was that, uh, you should treat high school is a day job that I didn't realize when I was in high school. They told me like this is what I did. And I thought, Well, my father goes after his job designing nuclear plants, right? And my job is to go be in school, and I'm supposed to do what they tell me, and I'm good if I do well at that right there, you better grades, the better you've succeeded. Yeah, like,

you know, you're you have to do this because if you do badly, you won't get into college, right? Get into a good college on day. Realize now, looking back really functionally, what high school really was was a holding pen. And so what do you do in that situation? Well, basically, welcome to the real world hit because even in the real world, plenty of people have to spend a lot of their time doing stuff they don't want to do. And what do you do? Well, you realize you have to.

You have to be in charge, like deciding what you're really gonna do. What's gonna be your real life that people are gonna, you know, judge, you based on, um And so actually, high school isn't so bad from that point of view, right? Compared to someone who, like is out in the working world 25 years old and wants to be a painter or a poet or something unremitting like that, right? And has to work all day as a waiter, high school is actually a pretty good gig. You have a great deal of free time. The work is not demanding at all.

You could even get away with doing your riel work at at school. And like if they were sympathetic teachers, they probably let you do it. I mean, it's a sweet deal, right? If you look at it that way, um, it's like long as you're in prison, you might as well like, you know, learn to be a great chess players. Yeah.

No, There you go. It's a bit harsh, but there's some truth to it. I was fined. It's striking how I went to a vory high reputation public high school. I went to high school in Lexington, Massachusetts. Yes, good reputation is a is a public school. I want Somethinto Lex in high school,

and I went to high school with a really good reputation for football. Uh huh. Well, you take

that would make a difference, but maybe not. I find it fascinating how little I remember my high school experience that just could be the nature of our brains.

Every day is the same. What you remember is change.

That's part of it. But it was rather unremarkable. That doesn't mean I didn't learn anything right, But it's striking how little I can remember that. I learned out of that. How immense number of hours that was spent in in the classroom. If you compare it to college, you remember much more, much more. Although college is also there's quite a bit of un remembered stuff there. I have a handful of classes that I remember vividly list many, many things that I that I physically mentally complaint to. And again, it doesn't mean that my brain wasn't working in different ways and learning channels of learning that were important but I find it fascinating how little of it occurred in high school. What I could remember.

That's a good college at least. I mean, you remember classes, right? You don't remember classes from high school. You're in class, but you don't weigh. You

never say. Yeah, Cash. That 10th grade English class was like Mr Mole. Karen did a good job I wanted. Didn't want anyone to think my 10th grade English class Wells are good, but but it's not. What you remember is the teacher. Yeah. I don't know what you mean. Well, to make handicapped, you have to read the Scarlet letter. You know, that kind of takes some of the fun out of it automatically. Why do we do that to people? Such a boring

book? I actually I actually wrote an essay about why, uh, why high school students were forced to read.

Yeah, that's a That's a nice essay to books. It's interesting of a lot of deep insights and into those the challenge of that, that that experience

when I was in high school, I remember thinking, one day

I'm going to tell people about this

and like, you know, the web didn't even exist. Then I didn't think I was gonna publish essays online. I don't know how I was gonna do it, but I remember thinking it was like someone you know in some prison camp, remembering it all

socialists and bearing his manuscript are dropping and get it out. Yeah, my guest today has been Paul Graham. Paul. Thanks for being part of the con talk. Thank you. This is E contact part of the Library of Economics and Liberty for Maury. Contact body contact dot org's where you can also comment on today's podcast and find links and readings related to today's conversation. Sound engineer. Free contact is rich guy yet I'm your host, Russ Roberts. Thanks for listening. Talk to you on Monday.