My views on the market, tech, and everything else

A Dozen Things I’ve Learned from Jessica Livingston About Business and Investing


Jessica Livingston co-founded Y Combinator in March of 2005. The goal of Y Combinator is to provide seed funding for startups and help get the business to a point where they have “built something impressive enough to raise money on a larger scale.” The next goal is to “introduce the founders to later stage investors—or occasionally even acquirers.”

Livingston has written a book, “Founders at Work” (2007) based on interviews with startup founders including Steve Wozniak (Apple), Caterina Fake (Flickr), Mitch Kapor (Lotus), Max Levchin (PayPal), and Sabeer Bhatia (Hotmail). You can find my post on Y Combinator co-founder Paul Graham (and Livingston’s husband) as well as current Y Combinator President Sam Altman in the Notes.

Prior to co-founding Y Combinator, Livingston was vice president of marketing at Adams Harkness Financial Group. In addition to her work with startups at Y Combinator, she organizes Startup School. She has a BA in English from Bucknell.


  1. “I definitely think of Y Combinator as a startup in many ways. There are origin stories very similar to the way a startup would get started. We were kind of thinking about a problem, and thinking we could do some cool things to solve it.”“We started talking about the brokenness of the funding world in 2004 and it was.” The venture capital business is itself a business. There are many ways that the venture capital business has and will continue to evolve and innovate. Livingston is saying that Y Combinator’s evolution is an example of what a startup must go through to be successful. At the core of sustainable success for a business is always a real solution to a real customer problem. Livingston and the other co-founders of Y Combinator found 1) core product value, 2) a way to successfully deliver it to customers and 3) a significant barrier to entry against competitors from network effects and cumulative advantage. The manner in which firms like Sequoia, Y Combinator, Baseline Ventures, Benchmark Capital and Andreessen Horowitz operate in the venture capital business share elements in terms of the way they operate but also vary in significant ways. That is a good thing since diversity makes the system more resilient and productive. It is through experimentation and trial and error that new value is best discovered. Since most humans like to do what other humans are already doing progress requires that a few outliers exist who will try new things and harvest optionality. Why? Most people would rather fail conventionally, than succeed conventionally. Staying close to the warmth of the herd was a good strategy for most of human evolution. Fortunately, the evolutionary process produces enough oddballs that progress continues to happen. The great entrepreneurs I have worked with in my life are not normal people. They are oddballs in the best sense of the word. That is a very good thing. And no two of them are exactly alike.


  1. “Originally we were targeting programmers and wanted to teach them the business side of running a startup.” What Livingston describes is a noble calling. Huge value is locked up and lost to society when engineers with great ideas can’t bring them successfully to market. I have spent most of my professional life working with engineers who are sometimes challenged when it comes to business. I have seen the full spectrum from people who are business savants to engineers who know just about nothing and have zero desire to do so. The best business mind I have ever seen up close is Bill Gates. Gates ran the business side of the house at Microsoft from the time the business was first established in Albuquerque. He was the CFO and the CEO for many years. Contracts with customers were his responsibility. Gates was able to make these decisions intelligently because he grew up with a lawyer as a dad. His mom Mary was the smartest person in the family and was on many business and nonprofit boards. Mary was a genuine force of nature and would have loved to meet Livingston had she lived longer. It was incredibly fortunate that someone with scarce programming skills like Bill Gates also knew a lot about the law, business, and contracts. He learned these things at places like the dinner table with his mom, dad, two super smart sisters, his grandmother and the many guests who visited. Because of the many conversations that happened at this table and elsewhere Bill Gates understood the difference between a license and an outright sale in the early IBM negotiations which changed business history. Gates also sufficiently understood business, economics, and science that was needed to recognize the value of positive feedback and the likely rise of a new industry based on software. A young man with the right skills and knowledge took IBM in its prime to the cleaners. The types of things that Bill Gates learned at places like the dinner table when growing up, is what engineers learn at a place like Y Combinator. If you want to know a bit more about Mary Gates as a pioneering business leader read #12 in my post on Ann Winblad linked to in the Notes below. Anyone who knew Mary Gates knows that she was amazing.


  1. “What we wanted to do was create a standardized branded form of funding. Y Combinator wanted to be the ‘first gear’ for startups.” “We’re not expecting the money we invest to be the last a startup ever raises.  It’s just to get them going.  And we want to get as many startups going as we can.” Livingston is describing decisions that illustrate the power of focus in creating a valuable business. The founders of Y Combinator decided to focus on a specific problem many startups were facing. In the blog post I wrote on Ann Winblad I quote her as quoting Mary Gates: “Hey, it’s not about how fast you pedal, it’s about how clearly you focus.” The focus of Y Combinator not only creates specialized skills but enables the business to scale. Because of this focus and specialization other later stage venture capital firms view Y Combinator as a partner, which can create a self-reinforcing positive feedback loop which reinforces the moat.


  1. “Our motto is to make something that people want. If you create something and no one uses it, you’re dead. Nothing else you do is going to matter if people don’t like your product.”What guided the founders through this process was their empathy for the users. They never lost sight of making things that people would want.”  The point Livingston is making is so obvious, and yet so often forgotten. If the customers is not having the “A-ha moment” in relation to a product the business will not be sustainably successful. Creating this value in new ways that have a barrier to entry is a rare thing. Creating systems that allow more businesses to do so is also a good. Any successful business like Y Combinator will have imitators and there are many. That is good for society but fortunately, success breeds success and a set of network effects creates enough of a barrier to entry that the business of Y Combinator is attractive.


  1. “At the time we were realizing, ‘Hey, it’s a lot cheaper to start a software company. I mean, all you need is a computer and to pay some of your server costs.’ So we thought, ‘Why don’t VCs write smaller checks?” And finally we said, ‘Let’s do something. Let’s create an investment company that does standardized branded funding. We’ll have an application process and this will be a new thing.’ But we always had thought that we’d do asynchronous investing just like every other investor. But then we said, ‘Neither of us know anything about angel investing. Let’s learn quickly by funding a bunch of startups at once.’” The idea of creating a system that runs startups through a synchronous process is efficient and logical. It reminds me of the many years I spent in school, especially in college and graduate school. There is no question that I learned more from my classmates than I did from my professors. As I interact with accelerators I see just this going on, with founders teaching each other in addition to learning from the program itself. Micro VCs are proliferating to a point where there are more than 350 in the US alone. This means more people are getting funded and that these people are more diverse in every sense. And founders are getting to keep a greater ownership stake in the businesses which increases the probability that the startup will survive the process. Founders who must sell 60 percent of their business at seed stage don’t have the same incentive to persevere in tough times. Cloud services substantially lowering the capital required to start a business also means that founders hold on to a larger stake as they go through the funding process.


  1. “Even Y Combinator got rejected at first. Nowadays there are a lot of groups that do the kind of investing we do, but when we started no one was. Even our own lawyers tried to talk us out of it.”[It’s] really important for people to remember was how often startup founders, that are hugely successful now, get rejected early on will say, “This is a dumb idea. You shouldn’t be working on that. No investor will invest in them.” “I mean, there are countless examples of people trying to raise funding and they just got turned down by investors because they thought it was a bad idea or didn’t think the person was formidable enough. That’s important because it’s hard to start a startup. If you’re a first time founder, you’re going to get rejected a lot in a lot of different ways, and it’s really hard.” Livingston is arguing that the non-consensus, contrarian view is powerful and significant. Howard Marks too argued that to earn more than the market return you must adopt a non-consensus view and that view must be sometimes correct in a significant way. This is all provable with mathematics. If you read even a few of the many posts in this series you see that same point made again and again in different ways. If your idea is not a little crazy then other people are very likely to be working on it. And there is unlikely to be undiscovered optionality which is what drives venture capital returns.


  1. “Perseverance is important because in a startup nothing goes according to plan. Founders live day to day with a sense of uncertainty, isolation, and sometimes lack of progress. Plus startups, by their nature, are doing new things, and when you do new things people often reject you.” “In general, your best weapon is determination. Even though we usually use one word for it, it’s actually two – Resilience and Drive. One reason you need resilience is that you’ll get rejected a lot. Everyone you encounter will have doubts about what you’re doing.” This drives home the point I have made repeatedly in this series of blog posts: missionaries are far more likely to survive than mercenaries. Steve Jobs said in 1995: “I’m convinced that about half of what separates successful entrepreneurs from the non-successful ones is pure perseverance.” Bill Gates has said similarly: “Perseverance has been characteristic of our great success.”


  1. “The media often glamorizes successful founders and makes their paths seem easier than they actually were.” “Just be determined, and have a little luck.” There is way more luck involved in life than people imagine. And yet the lucky have often gone through a not very glamorous crucible. You will hear people say sometimes that they worked hard to get lucky. The reality is that there is no way to increase your luck because anything you do to improve the probability of a positive outcome is skill. On luck, always read Michael Mauboussin. Then read him again. There is seldom a substitute for hard work and perseverance in the life cycle of a startup.


  1. “Starting a startup is a process of trial and error. “A lot of the startups in the book, and I see this again in Y Combinator startups, they start out saying, “We’re going to do this.” They try to do it and it doesn’t really stick, and so they think, “Oh, gosh. The users are actually more interested in this aspect of our site,” and they work on that. So there’s a lot of trial and error, and it gets glamorized, I think, in the press with these successful startups. They say, ‘Oh, he had this brilliant idea. We knew this was going to be big and it was great.’ That’s not the way it usually is. It’s usually a lot of testing one thing out, if not working, and then happening up on the right thing.” “People think startups grow out of some brilliant initial idea like a plant from a seed. But almost all the founders I interviewed changed their idea as they developed it.” I have written several posts on the importance and value of optionality for business and society. The first post is on the ideas of Nassim Taleb, the second on who venture capitalist harvest optionality and the third is on Jeff Bezos. Mistakes are essential to harvesting optionality since that is how information is acquired which enables the benefits of optionality to be captured. In his most recent shareholder letter Jeff Bezos writes: “I believe we are the best place in the world to fail (we have plenty of practice!), and failure and invention are inseparable twins. To invent you have to experiment, and if you know in advance that it’s going to work, it’s not an experiment. Most large organizations embrace the idea of invention, but are not willing to suffer the string of failed experiments necessary to get there. Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right. Given a 10 percent chance of a 100 times payoff, you should take that bet every time.”


  1. “Innovations seem inevitable in retrospect, but at the time it’s an uphill battle.”  Wikipedia describes hindsight bias well: “Sometimes called the ‘I- knew-it-all-along’ effect, the tendency to see past events as being predictable at the time those events happened.” Most people say to themselves as they go through life: “Hey I thought of that idea a long time ago.” OK, what the hell did you do actually about it then? Read Kahneman and Thaler on this tendency and you will greatly benefit. People are not always rational and they are not always fully informed. The more you understand this about yourself the fewer mistakes you will make. You can, by paying attention, sometimes find ways to profit when other people act like boneheads.
  1. “People like the idea of innovation in the abstract, but when you present them with any specific innovation, they tend to reject it because it doesn’t fit with what they already know.” Livingston is describing how powerful “person-with-a-hammer-syndrome” can be. The most interesting example I ever saw was how AT&T saw mobile in what I call the early days of mobile telephones. The mobile phone was definitely an innovation. McKinsey in its famous botched study vastly underestimated demand for mobile phones service thinking that no one would use them when they had access to a land line. As Livingston observers, mobile phones did not fit with what McKinsey and AT&T already knew. Even when AT&T bought McCaw Cellular in 1995 they thought they were doing so to save the long distance business. I’m not joking about this. I remember at the time Craig McCaw laughing at this fact and lamenting that he had to sell AT&T the entire business since you can’t partner with a firm that does not understand core product value and the industry itself. AT&T had the cash from its legacy business to pay off the debt used to build the industry so it was felt that the deal needed to be done. AT&T bought McCaw Cellular for the wrong reasons but it was the right decision anyway. Better to be lucky than good, as they say.

  1. “Investors, most of them, have a herd mentality. They want to invest only if other people are investing. It’s like a Catch-22 like not being able to get a job because you don’t have enough experience.” The best and most experienced founders and the better venture capitalist know how to harness this aspect of human nature. People like to do what other people are doing. It is efficient from an informational standpoint. They also like to get in the side car of people who they see as successful. Richard Zeckhauser has written a great paper on this which is well worth reading. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2205821 Key bits from the Zeckhauser include: “Most big investment payouts come when money is combined with complementary skills, such as knowing how to develop real estate or new technologies. Those who lack these skills can look for ‘sidecar’ investments that allow them to put their money alongside that of people they know to be both capable and honest.” The critical point is to know when to deviate from the herd. Most of the time the herd is right. The trick is to know when the herd is wrong. Always being a contrarian is suicidal. You must be contrarian and you must also be right about that contrarian view to out-perform the market average.



Founders at Work:  http://www.amazon.com/Founders-Work-Stories-Startups-Early/dp/1590597141

Most Memorable Quotes from Startup School 2012 http://www.jasonshen.com/2012/the-most-memorable-quotes-from-startup-school-2012

Fortune http://fortune.com/2016/04/04/y-combinator-jessica-livingston/

Founders at Work http://foundersatwork.posthaven.com/what-makes-founders-succeed

Venture Beat http://venturebeat.com/2015/08/23/sam-altman-and-jessica-livingston-explain-y-combinators-success/

TechCrunch Interview http://techcrunch.com/2011/01/26/yc-co-founder-jessica-livingston-on-the-dearth-of-women-in-tech-and-some-steps-to-fix-it /

Business Insider http://www.businessinsider.com/the-advice-for-any-woman-who-wants-to-found-a-startup-2011-1

Interview: The Next Women http://www.thenextwomen.com/?q=2009/05/01/interview-y-combinator-founder-jessica-livingston

Mixergy Interview  https://mixergy.com/interviews/y-combinator-jessica-livingston-interview/

Bloomberg Interview: http://www.bloomberg.com/news/videos/2014-10-10/paul-graham-jessica-livingston-studio-10-1009

The Macro: http://themacro.com/articles/2015/11/jessica-livingston-startup-school-radio/

Paul Graham on Jessica Livingston:  http://paulgraham.com/jessica.html

Startup Grind Interview:   https://www.youtube.com/watch?v=zMZZPiJrBo0

Stanford Interview: https://www.youtube.com/watch?v=syEVbr_2KXQ

Women 2.0 Interview https://www.youtube.com/watch?v=qEceEtgkZFg

Mauboussin: http://www.michaelmauboussin.com/

My post on Paul Graham  https://25iq.com/2014/08/16/a-dozen-things-ive-learned-from-paul-graham-2/

My post on Sam Altman  https://25iq.com/2015/07/17/a-dozen-things-ive-learned-from-sam-altman-about-venture-capital-startups-and-business/

My post on Ann Winblad in which she refers to Mary Gates: https://25iq.com/2014/08/02/a-dozen-things-ive-learned-from-ann-winblad/


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