American programmer and entrepreneur Paul Buchheit has a CV that reads like Silicon Valley by numbers in terms of employers. Prior to joining Google in 1999, Buchheit worked at Intel, Sun Microsystems and Microsoft. When he joined Google, he was employee number 23 and is credited with the creation and initial development of Gmail, as well as the prototype of AdSense.
Buchheit left Google in 2007 and Gmail and AdSense are much evolved from the solutions he first created. But he has left a lasting mark on the company in the shape of its motto, “Don’t be evil,” which he suggested during a meeting of company values in 2000.
If Buchheit’s claim that he was just “in the right place at the right time,” is accurate, then he has an uncanny sense of location and timing. His first startup, Friendfeed, created in 2007, was snapped up by Facebook in 2009 in a private transaction and he readily admits his experience was quite different to how most start-ups begin life.
“As I’d already spent seven years at Google, fundraising was the opposite of how it should be. Instead of trying to get people to give us money, we were trying to avoid fundraising as we wanted to just focus on the product and not have any distractions from investors. So Friendfeed was unusual in that we were primarily self funded,” he says. “It was entirely our company and we could run it how we wanted.”
Having worked briefly for Facebook, it seems amiss to not ask Buchheit whether he thinks the Social Network movie is responsible for motivating a multitude of Mark Zuckerberg wannabees? “Well, the Social Network is more dramatic than reality but I think the movie has inspired a generation of people,” he says.
Buchheit clearly finds the birth of a startup an exciting prospect and has been funding new companies since 2006, investing millions of his own dollars. “The environment has more to do with innovation a lot of times than the individual. There are these great opportunities for profit and for general societal improvement, so I just try to find places where I think that exciting things are going on,” he says. Right now, that place is Y Combinator, an incubator and venture capital firm he joined as a partner in 2010.
“We fund large numbers of start-ups so I get to be there at the dorm room stage of these companies and it’s exciting to see what might turn into giant companies when they were just two people with an idea.”
But Buchheit had his reservations to start with. Y Combinator incubates start-ups in ‘batches’ for three month periods, twice a year. The idea is to create an environment where innovation can thrive. “I’ve only witnessed my first two batches, but I was a little pessimistic to start with and thought a batch didn’t seem so good. But at the end of the three month period, I thought they were the best batch ever,” Buchheit says. “It’s like a nuclear reactor. You bring these start-ups together and get them to critical mass then they feed off each other and learn from each other. It’s like they have an ecological advantage over other start-ups because they are learning and developing at a much greater pace.”
Now Buchheit maintains that the strength of Y Combinator comes from the fact that all its attendees are founders. “So when were looking for something to fund we’re not necessarily looking at the idea but more at the people and in particular were looking for great founders.” People can be very smart and have great credentials but if they’re an employee, then employees just do their job. But founders need to be more self directed and more responsible. So if something goes wrong an employee will say ‘I ran into a roadblock’ but for a founder it’s a different mindset in your approach to problems.
“If the front door is locked you try the side door and if that is locked too you break a window,” Buchheit says. “That perfectly captures the difference between founder and employee. In an employee it’s an undesirable trait to get things done by any means necessary but in a founder it’s a sign that they’re unstoppable. Sometimes you get into trouble as a consequence – take Mark Zuckerberg, he’s a controversial character but he’s also unstoppable with a singular focus and vision that you do not want to compete with. You don’t want to be in the way of a force of nature. You wouldn’t want to obstruct Steve Jobs’ vision for example.”
Buchheit says it’s also important to know how to deal with failure. “It’s a difficult thing – not being afraid to fail – we are social animals and we are more affected by our environment than we often admit so it makes it difficult to be in an environment where other human beings are doing similar things.” But he says the nature of Y Combinator turns that environment to the start-ups advantage.
“The issue is that if there’s a ten per cent chance of creating a billion dollar business and 90 per cent chance that you’ll look foolish, most people won’t risk it because they don’t want to look foolish. Moreover, your bosses and their bosses also don’t want to look foolish. But a startup will like those odds because a ten per cent chance at a billion dollars is pretty good odds,” he says.
Start-up AirBnB, which puts travellers in touch with prospective private residences, had launched three times before joining Y Combinator, and was on the verge of giving up. Yet the founders got some key advice which put them on the right track. Now AirBnB is the incubator’s second most valuable investment, valued at $1.3bn. The biggest is Dropbox, valued at $5bn, and third is cloud application platform Heroku, which sold for $250m.
“You have to consider that the number one company is worth more than next 199 companies combined, while number two is worth more than next 198 combined and so on,” says Buchheit. “So there are these crazy outliers and you need to be an environment where you can cultivate this. We look for that one company, that Dropbox that can help support all the others. It’s the economics of innovation. You have to place a lot of bets. Something with high returns also has a high chance of failure. About 33 per cent of these companies just go straight to zero – they are worthless. Then there’s another third that are in the middle. You maybe get your money back or double your money and then you get the rest which give you a good return. Heroku gave a 20x return which is not bad,” he says.
Buchheit is very philosophical about the whole approach. “At its root what we do is philosophy. We study how the world works. The more deeply we understand things the more we understand what it takes to make companies successful,” he says.
It’s what happens afterwards that keeps Buchheit thinking. “The story of every big company is that they start off being fast and aggressive. But as a company grows, the incentives, the people, the culture and the environment inevitably slow down. Some things can be done structurally and through leadership to avoid sluggishness, but companies driven by their founder are more successful.” Again we come back to Apple and the return of Steve Jobs to the company he founded. “He was the only person who could have taken the company forward. Founders bring credibility and his intense vision aligned all the people in the company like a magnet aligns iron filings.”