When technology makes something dramatically cheaper, standardization always follows. When you make things in large volumes you tend to standardize everything that doesn't need to change.
At Y Combinator we still only have four people, so we try to standardize everything. We could hire employees, but we want to be forced to figure out how to scale investing.
We often tell startups to release a minimal version one quickly, then let the needs of the users determine what to do next. In essense, let the market design the product. We've done the same thing ourselves. We think of the techniques we're developing for dealing with large numbers of startups as like software. Sometimes it literally is software, like Hacker News and our application system.
One of the most important things we've been working on standardizing are investment terms. Till now investment terms have been individually negotiated. This is a problem for founders, because it makes raising money take longer and cost more in legal fees. So as well as using the same paperwork for every deal we do, we've commissioned generic angel paperwork that all the startups we fund can use for future rounds.
Some investors will still want to cook up their own deal terms. Series A rounds, where you raise a million dollars or more, will be custom deals for the forseeable future. But I think angel rounds will start to be done mostly with standardized agreements. An angel who wants to insert a bunch of complicated terms into the agreement is probably not one you want anyway.
Another thing I see starting to get standardized is acquisitions. As the volume of startups increases, big companies will start to develop standardized procedures that make acquisitions little more work than hiring someone.
Google is the leader here, as in so many areas of technology. They buy a lot of startups— more than most people realize, because they only announce a fraction of them. And being Google, they're figuring out how to do it efficiently.
One problem they've solved is how to think about acquisitions. For most companies, acquisitions still carry some stigma of inadequacy. Companies do them because they have to, but there's usually some feeling they shouldn't have to—that their own programmers should be able to build everything they need.
Google's example should cure the rest of the world of this idea. Google has by far the best programmers of any public technology company. If they don't have a problem doing acquisitions, the others should have even less problem. However many Google does, Microsoft should do ten times as many.
One reason Google doesn't have a problem with acquisitions is that they know first-hand the quality of the people they can get that way. Larry and Sergey only started Google after making the rounds of the search engines trying to sell their idea and finding no takers. They've been the guys coming in to visit the big company, so they know who might be sitting across that conference table from them.
Risk is always proportionate to reward. The way to get really big returns is to do things that seem crazy, like starting a new search engine in 1998, or turning down a billion dollar acquisition offer.
This has traditionally been a problem in venture funding. Founders and investors have different attitudes to risk. Knowing that risk is on average proportionate to reward, investors like risky strategies, while founders, who don't have a big enough sample size to care what's true on average, tend to be more conservative.
If startups are easy to start, this conflict goes away, because founders can start them younger, when it's rational to take more risk, and can start more startups total in their careers. When founders can do lots of startups, they can start to look at the world in the same portfolio-optimizing way as investors. And that means the overall amount of wealth created can be greater, because strategies can be riskier.
If startups become a cheap commodity, more people will be able to have them, just as more people could have computers once microprocessors made them cheap. And in particular, younger and more technical founders will be able to start startups than could before.
Back when it cost a lot to start a startup, you had to convince investors to let you do it. And that required very different skills from actually doing the startup. If investors were perfect judges, the two would require exactly the same skills. But unfortunately most investors are terrible judges. I know because I see behind the scenes what an enormous amount of work it takes to raise money, and the amount of selling required in an industry is always inversely proportional to the judgement of the buyers.
Fortunately, if startups get cheaper to start, there's another way to convince investors. Instead of going to venture capitalists with a business plan and trying to convince them to fund it, you can get a product launched on a few tens of thousands of dollars of seed money from us or your uncle, and approach them with a working company instead of a plan for one. Then instead of having to seem smooth and confident, you can just point them to Alexa.
This way of convincing investors is better suited to hackers, who often went into technology in part because they felt uncomfortable with the amount of fakeness required in other fields.
It might seem that if startups get cheap to start, it will mean the end of startup hubs like Silicon Valley. If all you need to start a startup is rent money, you should be able to do it anywhere.
This is kind of true and kind of false. It's true that you can now start a startup anywhere. But you have to do more with a startup than just start it. You have to make it succeed. And that is more likely to happen in a startup hub.
I've thought a lot about this question, and it seems to me the increasing cheapness of web startups will if anything increase the importance of startup hubs. The value of startup hubs, like centers for any kind of business, lies in something very old-fashioned: face to face meetings. No technology in the immediate future will replace walking down University Ave and running into a friend who tells you how to fix a bug that's been bothering you all weekend, or visiting a friend's startup down the street and ending up in a conversation with one of their investors.
The question of whether to be in a startup hub is like the question of whether to take outside investment. The question is not whether you need it, but whether it brings any advantage at all. Because anything that brings an advantage will give your competitors an advantage over you if they do it and you don't. So if you hear someone saying "we don't need to be in Silicon Valley," that use of the word "need" is a sign they're not even thinking about the question right.
And while startup hubs are as powerful magnets as ever, the increasing cheapness of starting a startup means the particles they're attracting are getting lighter. A startup now can be just a pair of 22 year old guys. A company like that can move much more easily than one with 10 people, half of whom have kids.
We know because we make people move for Y Combinator, and it doesn't seem to be a problem. The advantage of being able to work together face to face for three months outweighs the inconvenience of moving. Ask anyone who's done it.
The mobility of seed-stage startups means that seed funding is a national business. One of the most common emails we get is from people asking if we can help them set up a local clone of Y Combinator. But this just wouldn't work. Seed funding isn't regional, just as big research universities aren't.