Approval Extraction Advertised as Productionpost by Benquo · 2019-12-15T14:51:44.878Z · score: 85 (39 votes) · LW · GW · 28 comments
This is a link post for http://benjaminrosshoffman.com/approval-extraction-advertised-as-production/
The Desire to Pass Tests hypothesis: a Brief Recap Y Combinator is the apex predator of the real-life Stanford Marshmallow Prison Experiment Selection Effects Anxious Preoccupied Conventionally Successful A High Health Score is Better Than Health Treatment Effects Moloch Blindness None 28 comments
Paul Graham has a new essay out, The Lesson to Unlearn, on the desire to pass tests. It covers the basic points made in Hotel Concierge's The Stanford Marshmallow Prison Experiment. But something must be missing from the theory, because what Paul Graham did with his life was start Y Combinator, the apex predator of the real-life Stanford Marshmallow Prison Experiment. Or it's just false advertising.
As a matter of basic epistemic self-defense, the conscientious reader will want to read the main source texts for this essay before seeing what I do to them:
- The Lesson to Unlearn
- The Stanford Marshmallow Prison Experiment
- Sam Altman's Manifest Destiny
- Black Swan Farming
- Sam Altman on Loving Community, Hating Coworking, and the Hunt for Talent
The first four are recommended on their own merits as well. For the less conscientious reader, I've summarized below according to my own ends, biases, and blind spots. You get what you pay for.
The Desire to Pass Tests hypothesis: a Brief Recap
The common thesis of The Lesson to Unlearn and The Stanford Marshmallow Prison Experiment is:
Our society is organized around tests imposed by authorities; we're trained and conditioned to jump through arbitrary hoops and pretend that's what we wanted to do all along, and the upper-middle, administrative class is strongly selected for the desire to do this. This is why we're so unhappy and so incapable of authentic living.
Graham goes further and points out that this procedure doesn't know how to figure out new and good things, only how to perform for the system the things it already knows to ask for. But he also talks about trying to teach startup founders to focus on real problems rather than passing Venture Capitalists' tests.
The rhetoric of Graham's essay puts his young advisees in the role of the unenlightened who are having a puzzling amount of trouble understanding advice like "the way you get lots of users is to make the product really great." Graham casts himself in the role of someone who has unlearned the lesson that you should just try to pass the test of whoever you're interacting with, implying that the startup accelerator (i.e. combination Venture Capital firm and cult) he co-founded, Y Combinator, is trying to do something outside the domain of Tests.
In fact, Graham's behavior as an investor has perpetuated and continues to perpetuate exactly the problem he describes in the essay. Graham is not behaving exceptionally poorly here - he got rich by doing better than the norm on this dimension - except by persuasively advertising himself as the Real Thing, confusing those looking for the actual real thing.
Y Combinator is the apex predator of the real-life Stanford Marshmallow Prison Experiment
If you know anyone in the SF Bay Area startup scene, you know that Y Combinator is the place to go if you're an ambitious startup founder who wants a hand up. Here's a relevant quote from Tad Friend's excellent New Yorker profile of Sam Altman, the current head of Y Combinator:
Paul Graham considered the founders of Instacart, DoorDash, Docker, and Stripe, in their hoodies and black jeans, and said, “This is Silicon Valley, right here.” All the founders were graduates of Y Combinator, the startup “accelerator” that Graham co-founded: a three-month boot camp, run twice a year, in how to become a “unicorn”—Valleyspeak for a billion-dollar company. Thirteen thousand fledgling software companies applied to Y Combinator this year, and two hundred and forty were accepted, making it more than twice as hard to get into as Stanford University.
Perhaps the most dispositive theory about YC is that the power of its network obviates other theories. Alumni view themselves as a kind of keiretsu, a network of interlocking companies that help one another succeed. “YC is its own economy,” Harj Taggar, the co-founder of Triplebyte, which matches coders’ applications with YC companies, said. Each spring, founders gather at Camp YC, in a redwood forest north of San Francisco, just to network—tech’s version of the Bohemian Grove, only with more vigorous outdoor urination. When Altman first approached Kyle Vogt, the C.E.O. of Cruise, Vogt had been through YC with an earlier company, so he already knew its lessons. He told me, “I talked to five of my friends who had done YC more than once and said, ‘Was it worth it the second time? Are you likely to receive higher valuations because of the brand, and because you’re plugging into the network?’ Across the board, they said yes.”
There really is no counter-theory. “The knock on YC,” Andy Weissman, a managing partner at Union Square Ventures, told me, “is that on Demo Day their users are just YC companies, which entirely explains why they’re all growing so fast. But how great to have more than a thousand companies willing to use your product!” It’s not just that YC startups can get Airbnb and Stripe to use their apps; it’s that the network’s alumni honeycomb the Valley’s largest companies. Many of the hundred and twenty-one YC startups that have been acquired over the years have been absorbed by Facebook, Apple, and Google.
This matches the impression I've gotten from most of the people I've talked to about their startups, that Y Combinator is singularly important as a certifier of potential, and therefore gatekeeper to the kinds of network connections that can enable a fledgling business - especially one building business tools, the ostensible means of production - get off the ground.
When interviewed by Tyler Cowen, Altman expressed a desire to move from being a singularly important gatekeeper to being the exclusive gatekeeper:
Someday we will fund all the companies in the world, all the good ones at least.
Given Graham's values, one might have expected a sort of proactive talent scouting, to find people who've deeply invested in interesting ventures that don't fit the mold, and offer them some help scaling up. But the actual process is very different.
Y Combinator, like the prestigious colleges Graham criticizes in his essay, has a formal application process. It receives many more applications for admission than it can accept, so it has to apply some strong screening filters. It seems to filter for people who are anxiously obsessed with quickly obtaining the approval of the test evaluators, who have been acculturated into upper-middle-class test-passing norms, and who are so obsessed with numbers going the "right" way that they'll distort the shape of their own bodies to satisfy an arbitrary success metric.
In his interview with Sam Altman, Tyler Cowen asked about the profile of successful Y Combinator founders:
COWEN: Why is being quick and decisive such an important personality trait in a founder?
ALTMAN: That is a great question. I have thought a lot about this because the correlation is clear, that one of the most fun things about YC is that, I think, we have more data points on what successful founders and bad founders look like than any other organization has had in the history of the world. We have that all in our heads, and that’s great. So I can say, with a high degree of confidence, that this correlation is true.
Being a fast mover and being decisive — it is very hard to be successful and not have those traits as a founder. Why that is, I’m not perfectly clear on, but I think it is something . . . about the only advantage that startups have or the biggest advantage that startups have over large companies is agility, speed, willing to make nonconsensus, concentrated bets, incredible focus. That’s really how you get to beat a big company.
COWEN: How quickly should someone answer your email to count as quick and decisive?
ALTMAN: You know, years ago I wrote a little program to look at this, like how quickly our best founders — the founders that run billion-plus companies — answer my emails versus our bad founders. I don’t remember the exact data, but it was mind-blowingly different. It was a difference of minutes versus days on average response times.
The kind of "decisiveness" Altman is talking about doesn't involve making research or business decisions that matter on the scale of months or weeks, but responding to emails in a few minutes. In other words, the minds Altman is looking for are not just generically decisive, but quickly responsive - not spending long slow cycles doing a new thing and following their own interest, but anxiously attentive to new inputs, jumping through his hoops fast. Similarly telling is the ten-minute interview in which he mainly looks for how responsive the interviewee is to cues from the interviewer:
This gets to the question . . . the most common question I get about Y Combinator is how can you make a decision in a 10-minute interview about who to fund? Where we might miss her is the upper filters of our application process.
We have far more qualified people that want to do YC each year than we can fund, but by the time we get someone in the room, by the time we can sit across the table and spend 10 minutes with somebody, as far as I know, we have never made a big mistake at that stage of the process. We’ve looked at tens of thousands — well, in person we’ve maybe looked at 10,000 companies.
These personality traits of determination and communication and the ability to articulate a vision for the world and explain how you’re going to get that done — I used to think that that was so hard to assess in 10 minutes, it was maybe impossible to try, and YC interviews used to be like an hour. I now think that most of the time, we could get it right in five minutes.
When you have enough data points, when you meet enough people and get to watch what they go on to do — because the one thing that’s hard in a 10-minute interview and the most important thing about evaluating someone is their rate of improvement. It’s a little bit hard when you only get a single sample. But when you do this enough times, and you get to learn what to look for, it is incredible how good you can get at that.
While responsiveness is doubtless a valid test of some sort of intellectual aliveness and ability, it could easily take hours or days to integrate real, substantive new information; in ten minutes all one may be able to do is perform responsiveness.
In case there was any doubt as to whether this attitude is consistent with supporting technical innovation, later in the interview he says unconditionally that Y Combinator would fund a startup founded by James Bond (a masculine wish-fulfillment fantasy, whose spy work is mostly interpersonal intrigue), but not by Q (the guy in the Bond movies who develops cool gadgets for Bond to use), unless he has a "good cofounder."
Then consider the kinds of backgrounds that make a good Y Combinator founder:
COWEN: I come from northern Virginia, the Washington, DC, area. We have very few geniuses. The few that we have tend to be crazy and sometimes destructive. We have what I would call —
ALTMAN: They’re very stable, though.
COWEN: —a lot of upper-middle-class intellectual talent. People who are pretty smart and good at something. When it comes to spotting good upper-middle-class intellectual talent, do you think you have the same competitive edge as with spotting geniuses who will make rapidly scalable tech companies?
ALTMAN: I think that’s how I’d characterize myself: upper middle class, pretty smart, not a super genius by any means. It turns out I’ve met many people smarter than me, but I would say I’ve only ever met a handful of people that are obviously more curious than me.
I don’t think raw IQ is my biggest strength — pretty good, to be clear, but the chances of me winning a Nobel Prize in physics are low. I think physics is a bad field at this point, unfortunately. What we spot — you do have to be pretty smart to be a successful founder, but that is not where I look for people to be true outliers.
COWEN: Given that self-description — assuming that I accept it, and I’m not sure I do — do you think you’re as good at spotting upper-middle-class intellectual talent as superstar founders? Let’s say we put you in charge —
ALTMAN: There’s a statement here that’s just bad about the world, but I think if you look at most successful founders, they are pretty smart, upper-middle-class people. They are very rarely the children of super successful people. They are very rarely born in real poverty. They are very rarely the absolute smartest people who otherwise would win a Fields Medal. They are never dumb, but upper-middle-class, pretty smart people that have grit and drive and creativity and vision and edge and a different way of thinking about the world. That is what I think I’m good at spotting, and that is what I think are good founders. There’s a whole bunch of reasons why that’s a sad statement about the world, but there it is.
If you look at most successful founders, they are pretty smart, upper-middle-class people. They are very rarely the children of super successful people. They are very rarely born in real poverty. They are very rarely the absolute smartest people who otherwise would win a Fields Medal. They are never dumb, but upper-middle-class, pretty smart people that have grit and drive and creativity and vision and edge and a different way of thinking about the world. That is what I think I’m good at spotting, and that is what I think are good founders.
COWEN: So someone else has to find the geniuses.
ALTMAN: Again, I don’t want to go for false modesty here. I think I’m a smart person. The founders we fund are smart people. I would have maybe said 10 years ago that raw IQ is the thing that matters most for founders. I’ve updated my view on that.
In other words, the people who best succeed at Y Combinator's screening process are exactly the people you'd expect to score highest at Desire To Pass Tests.
A High Health Score is Better Than Health
Then consider this little detail:
COWEN: In the world of tech startups, venture capital, what is weight lifting correlated with?
ALTMAN: Weight lifting?
COWEN: Weight lifting. Taleb tells us, in New York City, weight lifting is correlated with supporting Trump, but I doubt if that’s true in —
ALTMAN: It’s not true here.
ALTMAN: I think it’s correlated with successful founders. It’s fun to have numbers that go up and to the right. The most fun thing for me about weight lifting is . . . I’m basically financially illiterate. I can’t build an Excel model for anything. I can’t read a balance sheet. But my Excel model for weight lifting is beautiful because they’re numbers that go up and to the right, and it’s really fun to play around with that.
(For context, Taleb's attitude towards weightlifting is that it builds a kind of "antifragile" robustness to small perturbations, which is consistent with the sort of risk-bearing behavior that builds a sustainable society. See Strength Training is Learning from Tail Events for Taleb's own account. By contrast, Altman's idea of a weightlifter is someone who just likes to see the numbers go in the correct direction - what Taleb would call an Intellectual Yet Idiot, the exact "academico-bureaucrat" class from which Y Combinator draws its founders, who pretend that their measurements capture more about what they study than they do, and offload the risks their models can't account for onto others. For more on Taleb's outlook, read Skin in the Game.)
Hotel Concierge's story about weight in The Stanford Marshmallow Prison Test makes an interesting comparison:
MTV CONFESSION CAM: I was an accidental anorexic.
I was 17 years old when I moved into the college dorms and decided that I wanted a six-pack. I had never thought about my body too much before that—I didn’t play sports, I didn’t care about fashion, and I spent most of my time daydreaming about fantasy novels and videogames. In the dorms, however, I finally realized that girls existed. I wasn’t sure about how to get a girlfriend on purpose, but I was pretty sure it had something to do with “abs.” So I decided to work on that.
I began running for 45 minutes three times a week, along with daily stretching, push-ups, and crunches. After hearing a fire-and-brimstone “Talk About Nutrition!” presentation in the dining commons, I decided that I would have to change my diet as well. I stopped eating sweets of any sort. Increased lean protein intake. All breaded objects became whole wheat. But this didn’t seem enough. Food, I decided, was an ephemeral pleasure, whereas a well-sculpted body was a constant joy to live in and behold. Why bother with anything but the healthiest of foods? After some trial and error, I decided upon the optimal meal plan.
Breakfast: Oatmeal, one orange, one kiwi.
Lunch: Salad (lettuce with kidney & garbanzo beans), PB&J, hardboiled egg.
Dinner: Cheerios and milk, salad, orange.
I was proud of my discipline, and the nights when I went to sleep hungry only intensified my pride, as I first ignored and then began to appreciate the sharp jabs of an empty stomach. I was no longer getting fit to attract girls—I was getting fit for me. After a month of running, my progress seemed to flatline. I added weights to my regimen. I wasn’t sure how many reps to do, so I decided to just lift until my arms went limp. After another month, I had developed only mild abdominal definition. I decided to step it up: 200 push-ups upon waking every day, stretches and crunches in the evening. I wasn’t perfect. Sometimes I would give in to temptation and eat something off-diet—if someone took me out to lunch, or if I had a cookie at a school event—and I would feel guilty and sad for a while, but before long I would regain my composure and vow to increase my exercise regimen in the next few days to make up for my setback.
After three months, I went home for winter break. My mom said that I looked like an Auschwitz survivor. I said that was a huge overreaction. I asked my dad what he thought. My dad said that I looked a little skinny but that there was nothing wrong with getting into shape. I went back to school and kept up my routine. My strength declined. I wasn’t sure why. My ribs could be individually grasped. I visited home and weighed myself at 107 pounds.
“That’s really low,” my mom said.
“It’s not that bad,” I said.
My mom convinced me to go to the campus nutritionist. The nutritionist, who was middle-aged, and blonde, and wore glasses, and smiled a lot, told me that I had lost 35 pounds in four and half months, and that remaining at this weight could be dangerous.
“I was just trying to be fit,” I explained to her.
“Your current weight isn’t fit,” she said. “It’s not healthy.”
“I really don’t want to be fat,” I said.
“You’re not going to be fat,” she said. “That’s not your body type.”
“I guess. I didn’t mean to. I was just trying to eat healthy.”
“Right now, you can eat whatever you want,” she said. “You need to gain some weight. Back into the 140s, at least.”
“I’m never sure what to eat. I don’t want to eat too much.”
“I’ll help you come up with a meal plan,” she said. “We can figure out what you need to do.”
I felt tremendous relief. This was a test I could pass.
The admissions process is not the end of the acculturation. In Even artichokes have doubts, Martina Keegan wrote about how people admitted to Yale don't stop the sort of anxious approval-seeking that got them in. Instead, having been conditioned into that behavior pattern, they're easy targets for recruitment by further generic prestige-awarders like McKinsey or investment banks, even though they know it won't get them much they actually want, and report that they expect it will cause their future behavior to drift farther from what they see as the optimum.
At Y Combinator, the situation is even worse. According to Friend's New Yorker article, the founders are deliberately forced into situations where short-run survival depends on getting approval now:
A founder’s first goal, Graham wrote, is becoming “ramen profitable”: spending thriftily and making just enough to afford ramen noodles for dinner. “You don’t want to give the founders more than they need to survive,” Jessica Livingston said. “Being lean forces you to focus. If a fund offered us three hundred thousand dollars to give the founders, we wouldn’t take it.” (Many of YC’s seventeen partners, wealthy from their own startups, receive a salary of just twenty-four thousand dollars and get most of their compensation in stock.) This logic, followed to its extreme, would suggest that you shouldn’t even take YC’s money, and many successful startups don’t. Only twenty per cent of the Inc. 500, the five hundred fastest-growing private companies, raised outside funding. But the YC credential, and the promise that it will turn you into a juggernaut, can be hard to resist.
Y Combinator forces a focus on "growth" feedback short-run even though this isn't a good proxy for long-run success. Friend continues:
Nearly all YC startups enter the program with the same funding, and thus the same valuation: $1.7 million. After Demo Day, their mean valuation is ten million. There are several theories about why this estimation jumps nearly sixfold in three months. One is that the best founders apply to the best accelerator, and that YC excels at picking formidable founders who would become successful anyway. Paul Buchheit, who ran the past few batches, said, “It’s all about founders. Facebook had Mark Zuckerberg, and MySpace had a bunch of monkeys.”
The corollary is that Y Combinator makes its companies more desirable by teaching them how to tell their story on Demo Day. The venture capitalist Chris Dixon, who admires YC, said, “The founders are so well coached that they know exactly how to reverse-engineer us, down to demonstrating domain expertise and telling anecdotes about their backgrounds that show perseverance and courage.”
In the winter batch, the pitches followed an invariable narrative of imminent magnitude: link yourself to a name-brand unicorn (“We’re Uber for babysitting . . . Stripe for Africa . . . Slack for health care”), or, if there’s no apt analogue, say, “X is broken. In the future, Y will fix X. We’re already doing Y.” Then express your premise as a chewy buzzword sandwich: We “leverage technology to achieve personalization in a fully automated way” (translation: individuated shampoo). Paul Graham cheerfully acknowledged that, by instilling message discipline, “we help the bad founders look indistinguishable from the good ones.”
The counter-theory is that YC actually does make its companies better, by teaching them to focus on growth above all, thereby eliminating distractions such as talking to the tech press or speaking at conferences or making cosmetic coding tweaks. YC’s gold standard for revenue growth is ten per cent a week, which compounds to 142x a year. Failing that, well, tell a story of some other kind of growth. On Demo Day, one company announced that it had enjoyed “fifty-per-cent word-of-mouth growth,” whatever that might be. Sebastian Wallin told me that his security company, Castle, raised $1.8 million because “we managed to find a good metric to show growth. We tried tracking installations of our product, but it didn’t look good. So we used accounts protected, a number that showed roughly thirty-per-cent growth through the course of YC—and about forty per cent of the accounts were YC companies. It was a perfect fairy-tale story.”
The truth is that rapid growth over a long period is rare, that the repeated innovation required to sustain it is nearly impossible, and that certain kinds of uncontrollable growth turn out to be cancers. Last year, after a series of crises at Reddit, Altman, who is on its board, convinced Steve Huffman, the co-founder of the company, to return as C.E.O. Huffman said, “I immediately told Sam, ‘Don’t get on my ass about growth. I’m not in control of it.’ Every great startup—Facebook, Airbnb—has no idea why it’s growing at first, and has to figure that out before the growth stalls. Growth masks all problems.”
This despite knowing that the intervention could well be doing more harm than good. From the interview with Cowen, a comment on growth:
COWEN: You once said, “Growth masks all problems.” Are there exceptions to that?
ALTMAN: I mean, clearly, yes. I don’t mean that so flippantly. There is —
COWEN: There’s an article in the Jerusalem Post today: someone credible claiming that cancer has been cured. I don’t know if you saw that.
ALTMAN: I didn’t see that, but I do — having talked to many biologists working in the field, I will say there is a surprising amount of optimism that we are within a decade or two of that being true.
It’s not an area where I feel anywhere near expert enough to comment on the validity of that statement, and I think it’s always dangerous to just trust what other smart people say, especially when they have an incentive to hawk their own book, but it does seem like a lot of people believe that.
Growth is bad in plenty of times, but it does mask a lot of problems. A statement that I wouldn’t make is that growth is always an inherent good, although I do think — I think you’ve said something like this, too — that sustainable economic growth is almost always a moral good.
Something that I think a lot of the current problems in the country can be traced to is the decline in that. And part of what motivates me to work on Y Combinator and OpenAI is getting back to that, getting back to sustainable economic growth, getting back to a world where most people’s lives get better every year and that we feel the shared spirit of success is really important.
And growth feels good. It does mask a lot of problems, but there definitely are individual instances where you’d be better off with slower growth for whatever reason.
Obviously, in any enterprise trying to do a specific thing, some kinds of measurable activity will have to increase at some point. But this obsession with measured revenue growth (or analogues to it) early on leads to performative absurdities like “fifty-per-cent word-of-mouth growth," which are not words that would come out of the mouth of someone trying to, as Paul Graham advises in his essay, "make the product really great."
Altman knows he's not doing the right thing, or the thing that would make him the most money. But he's doing the fastest-growing thing.
How is it that someone like Graham could hold so strongly and express so eloquently the opinion that the most important lesson to unlearn is the desire to pass tests, and then create an institution like Y Combinator?
This isn't the only such contradiction in Graham's words and actions. Friend's New Yorker article describes Graham's attitude towards meanness, and contrasts this with Altman's actual character, revealing a similar pattern:
YC prides itself on rejecting jerks and bullies. “We’re good at screening out assholes,” Graham told me. “In fact, we’re better at screening out assholes than losers. All of them start off as losers—and some evolve.” The accelerator also suggests that great wealth is a happy by-product of solving an urgent problem. This braiding of altruism and ambition is a signal feature of the Valley’s self-image. Graham wrote an essay, “Mean People Fail,” in which—ignoring such possible counterexamples as Jeff Bezos and Larry Ellison—he declared that “being mean makes you stupid” and discourages good people from working for you. Thus, in startups, “people with a desire to improve the world have a natural advantage.” Win-win.
[Altman] attended Stanford University, where he spent two years studying computer science, until he and two classmates dropped out to work full time on Loopt, a mobile app that told your friends where you were. Loopt got into Y Combinator’s first batch because Altman in particular passed what would become known at YC as the young founders’ test: Can this stripling manage adults? He was a formidable operator: quick to smile, but also quick to anger. If you cross him, he’ll joke about slipping ice-nine into your food. (Ice-nine, in Kurt Vonnegut’s “Cat’s Cradle,” annihilates everything it touches that contains water.) Paul Graham, noting Altman’s early aura of consequence, told me, “Sam is extremely good at becoming powerful.”
So, Graham claimed that mean people fail, and then selected someone with a noticeable mean streak to run Y Combinator. Likewise, he wrote that test-passing isn't good for growing a business, and then promoting an obligate test-passer, who then remade his institution to optimize for test-passing.
I think the root process generating this sort of bait-and switch must be something like the following:
There's a way to succeed (i.e. become a larger share of what exists) through production, and a way to succeed through purely adversarial (i.e. zero-sum) competition. These are incompatible strategies, so that productive people will do poorly in zero-sum systems, and vice versa. The productive strategy really is good, and in production-oriented contexts, a zero-sum attitude really is a disadvantage.
Graham has a natural affinity for production-based strategies which allowed him to acquire various kinds of capital. He blinds himself to the existence of adversarial strategies, so he's able to authentically claim to think that e.g. mean people fail - he just forgets about Jeff Bezos, Larry Ellison, Steve Jobs, and Travis Kalanick because they are too anomalous in his model, and don't feel to him like central cases of success.
This is a case of fooling oneself to avoid confronting malevolent power. It's the path towards the true death, so if you want to stay aligned with truth and life, you'll have to look for alternatives. To keep track of anomalies, at least in your internal bookkeeping; to conceal and lie, if you have to, to protect yourself.
If, to participate in higher growth rates, you have to turn into something else, then in what sense is it you that's getting to grow faster? Moloch, as Scott Alexander points out, offers "you" power in exchange for giving up what you actually care about - but this means, offering you no substantive concessions. For what is a person profited, if they shall gain the whole world, and lose their own soul?
Thus blinded, Graham writes about the virtues of production-based strategies as though they were the only way to succeed. He then sets up an institution optimizing for "success" directly, rather than specifically for production-based strategies. But in the environment in which he's operating, adversarial strategies can scale faster. Of course, just because adversarial strategies scale faster doesn't mean they make you richer faster - and as we'll see below, selling out is not, according to Graham's perspective, the way to maximize returns. But faster growth feels more successful. So he ends up selling out his credibility to the growth machine. Or, as Hotel Concierge called it, the Stanford Marshmallow Prison Experiment. (It's perhaps not a coincidence that the Stanford brand is most prestigious in the startup / "tech" scene.)
Here's the thing, though. Graham knows he's doing the wrong thing. He confessed in Black Swan Farming that even though doing the right thing would work out better for him in the long run, he just isn't getting enough positive feedback, so it's psychologically intolerable:
The one thing we can track precisely is how well the startups in each batch do at fundraising after Demo Day. But we know that's the wrong metric. There's no correlation between the percentage of startups that raise money and the metric that does matter financially, whether that batch of startups contains a big winner or not.
Except an inverse one. That's the scary thing: fundraising is not merely a useless metric, but positively misleading. We're in a business where we need to pick unpromising-looking outliers, and the huge scale of the successes means we can afford to spread our net very widely. The big winners could generate 10,000x returns. That means for each big winner we could pick a thousand companies that returned nothing and still end up 10x ahead.
We can afford to take at least 10x as much risk as Demo Day investors. And since risk is usually proportionate to reward, if you can afford to take more risk you should. What would it mean to take 10x more risk than Demo Day investors? We'd have to be willing to fund 10x more startups than they would. Which means that even if we're generous to ourselves and assume that YC can on average triple a startup's expected value, we'd be taking the right amount of risk if only 30% of the startups were able to raise significant funding after Demo Day.
I don't know what fraction of them currently raise more after Demo Day. I deliberately avoid calculating that number, because if you start measuring something you start optimizing it, and I know it's the wrong thing to optimize. But the percentage is certainly way over 30%. And frankly the thought of a 30% success rate at fundraising makes my stomach clench. A Demo Day where only 30% of the startups were fundable would be a shambles...
For better or worse that's never going to be more than a thought experiment. We could never stand it. How about that for counterintuitive? I can lay out what I know to be the right thing to do, and still not do it.
So instead, he does the wrong thing, knowingly, on purpose, but tries to pretend otherwise to himself. Sad!
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