Author
Craig Cannon
Craig is the Director of Content at YC.
1:28 - Tomer describes Gusto Embedded and the complexities behind compliance.</p><ul><li>Gusto Embedded takes ten years of Gusto’s experience building payroll software and compliance and makes it available to any software company wanting to ship their own payroll product to the market. </li></ul><p><strong>5:00 </strong>- Why did you decide to pursue startups as the company’s first target audience? How did you think about customer segments in that first year? </p><p><em>Over the last ten years, Gusto has scaled to build for multiple customer segments – starting with startups, then SMBs, accountants, and now with Gusto Embedded Payroll, developers who are embedding payroll directly into their software. </em></p><ul><li>When you have a grand vision, where do you start as a founder? Choose a customer segment. Make sure you choose a segment where 1) they have an important customer problem, 2) the product you are building solves that problem, and 3) you can reach your customer. </li></ul><p><strong>9:30 </strong>- Who were your competitors in the early days? </p><ul><li>The old, traditional payroll solutions, which were complex. With Gusto, <em>anyone</em> can run payroll at <em>any time</em>. Gusto also focuses on employees, a critical part of the system, by building a great payroll experience for them. </li></ul><p><strong>11:30 </strong>- Why did you decide to build for SMBs after startups? </p><ul><li>Look at your current customer base and learn from customers adjacent to the market you want to expand into. When you do expand into another vertical, make sure you maintain that early customer love. </li></ul><p><strong>14:45</strong> - How did you maintain the customer love of the existing customer segment? </p><ul><li>Think about your long-term vision and don’t put yourself in a corner when you want to move to the next segment. </li></ul><p><strong>17:00</strong> - Most startups find it hard to tackle the SMB market. Why do you think this is the case? </p><ul><li>Traditionally SMBs are hard to reach and use incomplete or manual solutions. Since 2000 an entire generation of business owners had to learn to trust online financial services. Today, SMBs are online and looking for solutions.</li></ul><p><strong>22:25 </strong>- What is different about serving SMBs as a customer versus startups? </p><ul><li>Startups come and go, and the real economics come from the big winners. Focusing on startups is a good place to start your journey, but think about how to scale with them.</li><li>There are more small businesses than startups, and they are around for a long time – but most don’t grow to thousands of employees. You need to build a business model that works with that dynamic. </li></ul><p><strong>27:00 - </strong>Why did you pursue developers and how did you decide to service them? </p><ul><li>For many verticals, it is much better to have an all-in-one platform to run your small businesses. But payroll is really hard to build yourself. Gusto Embedded helps partners deliver a more integrated solution for customers without investing the several years and tens of millions of dollars.</li></ul><p><strong>29:00 </strong>- Gusto went from directly acquiring small businesses as customers to creating an embedded solution – essentially “giving up” the relationship with the customer. How did you think about that? </p><ul><li>Evaluate the future of the industry and don’t ignore reality. Be the one to create that future. In this case, many payroll customers want all-in-one solutions. We can either try to meet those needs directly, or empower hundreds of partners to customize unique solutions.</li></ul><p><strong>33:00 - </strong>How should founders think about who to partner with? When should founders build directly for the industry and when should they go the embedded route? </p><ul><li>Think about the unique insight you have in the business you’re creating and make sure you own your destiny around that insight.</li><li>For your customer, what does a successful product look like, and could you partner with a company to fulfill those needs.</li><li>Your product must be high-quality. You have to put enough resources behind whatever you own. For everything else, you must ensure you bring in the right partner. It’s all about the end-to-end experience. </li></ul><p><strong>39:30</strong> - Gusto now makes it easier for software providers to bake compliance into embedded payroll. Tomer, I think developers looking at a payroll API would assume that compliance is baked in. But there are often steps companies have to take beyond just calling APIs. Tell us if that assumption holds.</p><ul><li>Regulation can change every quarter and every year. This is built into the product. We protect the customer and make it easy for developers to ship something quickly that is compliant for the long term.</li><li>One third of the companies in the U.S. get fined for mistakes on payroll. </li></ul><p><strong>43:00 - </strong>Compliance is the hardest part of payroll to build and ultimately has to be right. It took ten years of experience in compliance to launch this into Gusto Embedded Payroll. What advice do you have for founders who are building complicated, yet essential, components for an industry?</p><ul><li>Determine the parts of your product that are highly regulated and which areas are not. Build a culture that ensures quality-first in those highly-regulated areas, as well as a culture where people can iterate quickly in other areas. You can’t build a monolithic culture.</li><li>Embrace cross functional work. </li></ul><p><strong>46:00 </strong>- In the early days of Gusto, what guidance did you provide to your engineers about building payroll? What areas could break and which areas could not break? </p><p><strong>48:40</strong> - Looking back, would you have done anything different? </p><ul><li>Start charging what you feel is the value you provide; fix downwards versus upwards. If you’re truly adding value, customers won’t hesitate moving forward at that price.</li><li>Have the humility to learn from the customer and how the market changes around you. </li></ul><p><strong>51:45 </strong>- How should founders be thinking about embedded finance and how does this market evolve over the next 5-10 years? </p><ul><li>When you build a new software system for your customer, the more connected the system is for your customer, the better it is. Embedded products enable you to do that quickly and in high quality.</li><li>Bring more solutions into your product that are driven by what your customer needs. Understand your customer’s day-to-day, and figure out how to build something that solves their entire flow instead of one segment.</li><li>If you are not making money on your product, you don’t know if there's a product market fit. If you can charge and retain a customer, then there is product market fit. </li></ul><p><strong>56:30</strong> - Outside of payroll, what are you seeing product wise offered by APIs? </p><ul><li>This space is brand new and there’s a ton of opportunity to create a product that helps customers go through the end-to-end journey successfully and solves multiple pain points – instead of the customer needing ten years of background to create a high-quality solution.</li></ul>","comment_id":"62fa7b87ab52db0001d3b656","feature_image":"/blog/content/images/2022/08/BlogTwitter-Image-Template--5-.jpg","featured":true,"visibility":"public","email_recipient_filter":"none","created_at":"2022-08-15T09:59:51.000-07:00","updated_at":"2022-08-15T11:48:12.000-07:00","published_at":"2022-08-15T11:32:19.000-07:00","custom_excerpt":"Today, more than 200,000 businesses use Gusto for payroll, employee benefits, talent management, and more. 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Today, more than 200,000 businesses use Gusto for payroll, employee benefits, talent management, and more. And with the recent addition of Gusto Embedded, developers now use Gusto’s APIs and pre-build UI flows to embed payroll, tax filing, and payments infrastructure into products. ","reading_time":5,"access":true,"og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"email_subject":null,"frontmatter":null,"feature_image_alt":null,"feature_image_caption":null},{"id":"61fe29f1c7139e0001a71af6","uuid":"686e1e7d-ad94-4ba6-9b90-31137e273ce7","title":"Hardware AMA with YC Partner Eric Migicovsky","slug":"hardware-ama-with-yc-partner-eric-migicovsky","html":"<!--kg-card-begin: html--><p>YC Partner <a href=https://www.ycombinator.com/"https://twitter.com/ericmigi/">Eric Migicovsky</a> recently did a Hardware AMA with Startup School founders. It was so good that we wanted to share it here.</p>\n<p>Enjoy!</p>\n<hr />\n<p><strong>Software is easy to release and sell as a beta, but we’re worried it will be hard to sell our hardware if it looks too “prototype-y.”</strong></p>\n<p><strong>How can Hardware startups sell product as early as possible?</strong></p>\n<p><strong>Are preorders usually required, or is there a way to can sell product before setting up high-volume manufacturing?</strong></p>\n<p>I could help more if you describe what you’re working on. But in general, you should try to be as hacky and prototype-y as possible. I wrote about this here: <a href=https://www.ycombinator.com/"https://techcrunch.com/2017/09/19/what-working-on-pebble-taught-me-about-building-hardware//">https://techcrunch.com/2017/09/19/what-working-on-pebble-taught-me-about-building-hardware/
/nFor example:<br />\n– Buy off the shelf hardware (eg RasPi + USB camera) and enclose it in a 3D printed case. Sell it. Many YC companies have done this in the past (eg Flock’s first gen device was exactly this – <a href=https://www.ycombinator.com/"https://www.flocksafety.com//">flocksafety.com, and Piccolo)<br />\n– Buy a device that already does 90% of what you want it to do, then work with the manufacturer to customize the last 10% (I explained it a bit in that TC post)</p>\n<p>You can sell preorders but I find it easier to simply build 2-3 units then actually sell them to early users. Then use the profits from that to build more units, sell them, repeat. That’s what we did for our first gen watch, inPulse. It worked great, we manufactured the first 1000 units one-by-one in the garage. Secondary benefit: you can immediately incorporate improvements into the product as you assemble them. Of the first 20 units we shipped – 4-5 were completely destroyed during shipping. We fixed that asap and never had the problem again.</p>\n<p><strong>Please tell your top must-read books for Hardware Startup entrepreneurs?</strong></p>\n<ul>\n<li>\n<p><a href=https://www.ycombinator.com/"https://www.amazon.com/Piloting-Palm-Handspring-Billion-dollar-Handheld/dp/075678798X/">Piloting Palm</a> is the best, most accurate book about starting a consumer electronics company. A bit dated, but still highly recommended.</p>\n</li>\n<li>\n<p>+1 for <a href=https://www.ycombinator.com/"https://www.amazon.com/Hardware-Hacker-Adventures-Making-Breaking/dp/159327758X/">The Hardware Hacker by Bunnie</a>.</p>\n</li>\n<li>\n<p>Also <a href=https://www.ycombinator.com/"https://www.imdb.com/title/tt0168122//">Pirates of Silicon Valley</a>!</p>\n</li>\n</ul>\n<p><strong>What tools/resources did you use to develop and manufacture prototype?</strong></p>\n<p>Our first prototype was just an Arduino (atmega) plus a screen from a Nokia 3310 smartphone. See the first proto here: <a href=https://www.ycombinator.com/"https://www.youtube.com/watch?v=qVZDx86Ft0o\%22>https://www.youtube.com/watch?v=qVZDx86Ft0o For the next gen (called inPulse), we made the watch case out of CNC milled aluminium and designed a custom PCB. We actually manufactured this in our garage and sold several thousand units.</p>\n<p><strong>What did you change in your product after YC W11?</strong></p>\n<p>Biggest feedback we received from inPulse users was: longer battery life (was 24 hours), outdoor readable display, needs to work with iPhone, support for fitness tracking apps. We took the feedback and incorporated it into the first Pebble watch</p>\n<p><strong>Would be great if you share your YC Application</strong></p>\n<p>Sure, here it is: <a href=https://www.ycombinator.com/"https://drive.google.com/file/d/1CemwTH8UpInp6wqyv822Usu_PQR_Ho8s/view?usp=sharing\%22>https://drive.google.com/file/d/1CemwTH8UpInp6wqyv822Usu_PQR_Ho8s/view?usp=sharing
\nHow much did you spend on the Kickstarter campaign?</strong></p>\n<p>We spent $5k on prototypes for the first campaign. Borrowed a camera and filmed the video ourselves. No other spend.</p>\n<p><strong>When did you find the market fit, and how did YC and Kickstarter help you and your team with this?</strong></p>\n<p>YC heavily encouraged me to talk to my users more. I had definitely been bad at this before YC. We also moved much quicker during YC. PG asked why we didn’t have an SDK for devs to write apps for inPulse. I gave all kinds of excuses but eventually he just asked ‘how long would it take to write one?’. We said 2 weeks, and he convinced us to just f’n do it. We did and it turned out to be a critical part of product development that lead us towards Pebble (which reached product market fit).</p>\n<p><strong>Topic: How to be defensible?</strong></p>\n<p><strong>I applied for HAX accelerator and they rejected me saying: “Your product is good and innovative but not defensible. It can easily be copied”.</strong></p>\n<p><strong>My product is a completely mechanical wheelchair. How to proceed in this case for being defensible. Anything other than patents that can help me here?</strong></p>\n<p><strong>As without any electronics/codes/app I can’t go for achieving network effects. And being completely mechanical product, anyone can reverse engineer it.</strong></p>\n<p><strong>There also comes the fear of getting copied by someone in the market (soon if the product starts selling good).</strong></p>\n<p>One thing I’ve learned about rejections: listen to the ‘no’ but not the ‘why’. Often times investor (including YC) have no idea whether a company is going to be successful or not, but it’s easier to reject than accept. We come up with vague reasons why we shouldn’t fund the company and then move on. From the entrepreneurs side, it’s hard to understand because usually the reasons sound logical but the crazy part is the VC probably will not fund you even if you fix the problems that they outlined.</p>\n<p>Defensibility is my view is the ability to build some sort of moat around your product that either:<br />\na) disincentivizes customers from leaving for a competitor or<br />\nb) reduces/eliminates competition. There are many ways to build this into hardware companies:<br />\n– strong brand or great customer service<br />\n– hw built on a software platform<br />\n– access to a better supply chain, or cheaper/faster logistics<br />\n– many more…</p>\n<p>In your case, I bet the most defensible thing you could do is truly care about your customers base and move quickly to build products or features that your customers want. While this is not perfectly defensible, you’ll be surprised by how few companies actually do this 🙂</p>\n<p><strong>Assuming that your MVP is a SaaS that receives feedback from a few devices: what are your thoughts on going to market with a hardware solution where your core piece is a commercial single-board computer (Raspberry Pi Zero W)?</strong></p>\n<p>You are on the perfect track. Do exactly that. I wish more people would follow your exact plan! There is a ton of money to be made by using off the shelf hardware, writing great software and solving a real business need.</p>\n<p><strong>I build a scripting framework for bash which may have use cases for companies building systems on embedded Linux devices. Where can I find companies or strategic partners that are building hardware/IOT products on embedded Linux?</strong></p>\n<p>I recommend reading about some past attempts in this space. Most recently the $9 computer people (Next Thing Co https://en.wikipedia.org/wiki/CHIP_(computer) tried to do this and it didn’t work out. Probably because they were making customer chips though.</p>\n<p>Honestly most hw companies are very resistant to using off the shelf software in their custom builds. Might be an extreme case of NIH. I am always surprised by few companies there are that make sw libraries or modules specifically for embedded systems.</p>\n<p>You can find potential customers on subreddits for embedded development, or on podcasts like EEVBlog or hackaday.</p>\n<p><strong>We’re a hardware startup building an interactive learning robot for kids. In the current funding environment, how much weight do you feel seed stage investors are assigning to a crowdfunding campaign?</strong></p>\n<p>I personally assign a lot more value to a company that has shipped <em>something</em> to paying customers. Doesn’t matter how many units, 1 is a great start! Shipping a product means the founders have:<br />\n– developed an idea into an actual solution to a problem<br />\n– figured out some basic marketing and found potential customers<br />\n– convinced those customers to part with their hard earned cash<br />\n– built and manufactured at least one working unit<br />\n– figured out the logistics of shipping and doing customer support<br />\n– have a happy customer</p>\n<p>It’s actually a lot cheaper (generally) to do this rather than execute a potentially expensive crowdfunding campaign. The best companies I’ve seen actually do the above, sell 50-100 units and then use the knowledge that they’ve gained from that process to create a fantastic crowdfunding campaign. They learn what potential customers actually want out of their product and how to correctly market it.</p>\n<p><strong>As you know, hardware startups are expensive. We are currently raising a SEED round and our ideal funding amount sometimes feels higher than we are comfortable asking for. When you are pitching your MVP product with a small number of users, how do you justify asking for the money required to take your hardware product from MVP to CVP? Especially when a software product can do it for so much less?</strong></p>\n<p>If you are already selling your product, why raise a seed round at all? Why not continue selling units to customers and grow your business organically off the profits from your sales? Raising money is super distracting from building product and talking to customers. I would recommend focusing on that.</p>\n<p>Hardware startups in general are slightly more expensive that sw startups, but actually not that much more. It does depend on what you’re making of course. We started shipping the first hundred units of the inPulse watch on total spend of less than $50k CAD in 2010.</p>\n<p><strong>We are also working on prototype of fitness band(Patch). We already released android fitness activity tracker app for the same with few active users.</strong></p>\n<p><strong>I want to know how to reduce the expenses while building an MVP & how to reach potential customers.</strong></p>\n<p><strong>Another question is what are the key points we have to consider while designing a hardware product?</strong></p>\n<p>What expenses do you have right now? Presumably not many. Hard to know what to reduce without knowing what you’re currently spending 🙂</p>\n<p>Key points: same as with a software product. Are you building something that people want? This above all is the most important thing you should be working on. Finding product-market fit. Everything (literally) else is secondary to this all important goal. Often times HW founders think that cost optimization, or beautiful industrial design, etc etc is important…at an early stage – it’s not. The only thing that truly matters is ‘do people want to pay for your product and do they like using it’</p>\n<p><strong>We are developing a 3Door device using 3D face reconstruction and recognition technology. 3Door will have features like video doorbell, video interphone, security camera and smart access system. In a one-liner, you will be able to unlock the door of your property using your face. We developed algorithm and now we are working on a hardware development. We have a prototype but now we are looking how to make it more <code>consumer friendly/fancy</code>.</strong></p>\n<p><strong>1) Do you have some advice on how to find a vendor for electronics and printed board instead of using Raspberry Pi3 or you think that Pi3 will work well in our case?</strong></p>\n<p><strong>2) Also about the design of hardware, do you have a suggestion how to find the person that can help us with that task and anything else (advice/suggestions) related to this part will be very helpful for us.</strong></p>\n<p>Cool! I love smart door stuff. I’ve had a Lockitron on my door since Sept 2011 and haven’t carried a key since then 🙂</p>\n<ol>\n<li>\n<p>Sounds like a Pi would be great for your use case. Just 3D print a nice case and make sure it can’t be easily stolen 🙂</p>\n</li>\n<li>\n<p>which part of the hardware design do you need help with? You could try posting on this forum, another startup may know someone who could help. For example there are many industrial designers who can do case design remotely</p>\n</li>\n</ol>\n<p><strong>Are there any resources you could recommend for quality control and do you have any tips for sourcing and working with manufacturers?</strong></p>\n<p><strong>I have an electronics client and they have ~10% return rate. Last batch they had a 24% return rate supposedly due to a defective batch. How can you tell between defective hardware and bad design? For QC, they have a team in China that checks random x items to determine the defect rate, but is there a way to automate the QC testing process, or more sophisticated and better ways for QC? Or is the only way having someone on the team there at the factory?</strong></p>\n<p>Is this an enterprise (b2b) or consumer product? Each group has different standards. If they are seeing 24% return rate, they have a big problem. One way to solve this is to institute 100% QC at the factory – meaning one of their team members, or someone they trust (not a factory working) is in-line at the factory checking each unit as it’s prepared. It’s a huge time sink and annoying but sometimes this is the only way to fix problems at the factory.</p>\n<p><strong>Do we need to get validation that the problem we are trying to solve is ‘hair on fire’-type before building the MVP? We are building an IOT cushion to correct user posture and increase physical activity. People we to talk so far don’t believe it as there is no product to show.</strong></p>\n<p>When looking for potential markets for a product I consider a venn diagram of 3 circles:<br />\n– severity of problem (how much money can be earned or saved)<br />\n– frequency of problem<br />\n– spending power (does the person with the problem have the power to buy a solution)</p>\n<p>The best hair on fire problems are people at the centre of all 3 circles. You can test your potential market by talking to customers and determining how willing they are to spend money to solve their problem. People with ‘hair on fire’ problems should be willing to prepay for a solution to their problem.</p>\n<p><strong>Outsourcing Advice: Which part of that hardware startup, one can be better off by getting it done by a third party and not necessarily from a founding team?</strong></p>\n<p><strong>Which one is preferred: Learning the activity self, and trying it first hand with the higher risk of failure at implementation or outsourcing it to a third party with the risk of beind dependent on outside at cost of some leverage?</strong></p>\n<p><strong>Things like Supply Chain, Web design, Industrial design, Aesthetics, Legal compliances etc.</strong></p>\n<p>This was a lesson I learned at the beginning of Pebble: it’s impossible to pay someone enough to care about your startup. You and your cofounders are the only ones who actually care. You are the ones who get up in the morning and throw 110% of your energy into making your vision come true.</p>\n<p>In the early days, I thought I could get by with contractors doing things but they invariably failed, charged too much (and then failed) or did shitty work. The most helpful non-founders were friends of mine who I con(vinc)ed into doing odd projects, helping with the early assembly line and such. Looking back, I wish I had offered to make them cofounders and encouraged them to come on full-time.</p>\n<p>In the early days, when money is super tight, founders have no choice but to do literally everything themselves. And that’s a good thing. Learning how to do something makes you better at outsourcing it later. Your naivety will also be an advantage – you may not know that something is ‘impossible’ and accidentally create a novel solution that an expert may have written off a long time ago. I benefited from a number of these situations.</p>\n<p>The one area that I would recommend cultivating is a network of advisors and startup founders that are a few years ahead of you in the process. These people are the best sounding boards for questions like ‘who should I use for FCC testing’ or ‘should I use Shopify or build my own ecommerce site?’ (answer: USE SHOPIFY).</p>\n<p><strong>I’d like to know the strategies you used to boost the success of your kickstarter campaign. If you had to do it all over again would you still go for crowdfunding (why/why not)? Thanks for your time.</strong></p>\n<p>People tend to overlook the fact that I started Pebble in 2008, shipped several thousand units of inPulse in 2010-2011 and only launched Pebble on Kickstarter in 2012. That was 5 years later. We learned a ton in those early years, improved the product and figured out how to market it. That’s the real reason why our Kickstarter was so successful in 2012. There are no silver bullets.</p>\n<p>If I were to do it all over again, I would definitely focus on shipping a working albeit alpha product to customers first, then only after shipping many units of that would I move onto a crowdfunding campaign.</p>\n<p><strong>In your experience, what is the minimum level of fidelity that a seed or an investor wants to see in a prototype/MVP? Any way to know it before pitching? Any recommendation? What was yours?</strong></p>\n<p><strong>Breaking the chicken and egg is really difficult, and wasting time on useless twitches is a very real problem for a hardware startup. But a fugly MVP seems to get you nowhere…</strong></p>\n<p>As a seed investor, I look first to see if the startup has shipped product to a paid customer. That’s the gold standard – if you can do that, you’re ahead of 99% of all other hw startups. So try to do that – don’t build a prototype just to impress investors.</p>\n<p>A fugly MVP with paying customers is no longer a prototype…it’s a real damn product with a market!</p>\n<p><strong>I and my friend are both web developers. Recently, we’re so passionate about the idea of autonomous robot charging. We know that it involves high technology of AI and Robotic, but we believe in the vision and so start learning AI and Self-driving, which has a lot of similarity to our idea in tech aspect. We really want to bring in another cofounder who has decent knowledge in tech.</strong></p>\n<p><strong>How do you bring in cofounders or hire technical people in these highly expertised engineering field?</strong></p>\n<p><strong>Since the learning curve is super steep, should we keep learning until we build a prototype to be more easily pitch in a new cofounder or go networking right the way, by just pitching the concept to try to bring in a new cofounder?</strong></p>\n<p>Since you both are already technical, you could consider researching and studying the technology and work to build it yourself. I’d recommend this route as it’s entirely within your control – you don’t rely on any outside forces to make it happen. Alternatively you could consider bringing on another cofounder, especially if you happen to have a friend or past colleague in the space! But oftentimes I find that technical and problem solving ability beats experience in a particular domain.</p>\n<p><strong>I’m a software engineer. I have 2 hardware product ideas but I don’t have the expertise on electronic/electrical field. What are the good ways I can find a like minded hardware expert as co-founder to research and bring out a product?</strong></p>\n<p>Sounds cool! What are the product ideas? Best way is to start by sharing your ideas with practically every person you meet. You never know who will be a) interested in the same stuff and b) have a complementary skill set that can help you make it a reality.</p>\n<p><strong>The key problem that I have right now is a manufacturing management. We got 6 months delay at the first batch and 4 months delay on the second production batch. Yes, we are still alive but I’m looking for a new manufacturer. I’m afraid that the problem is not in manufacturer but in my incompetence in managing them.</strong></p>\n<p><strong>QUESTION: Is there a proper way to deal (manage) with suppliers and manufacturers to get the product on time and with the expected quality?</strong></p>\n<p><strong>I know that we can set strict terms in a written contract/agreement, to cover the risks, but the manufacturer increases the price and increase the lead-time. Also, because the manufacturing cost is 2x-3x lower than the MSRP, I can’t assign the direct delay losses to the manufacturer as an equation MSRP * PO Quantity = Fines.</strong></p>\n<p>We had the same type of problems with Pebble – long lead time components really constrained us. If I were to do it again, I will try to design products specifically with easier to source components.</p>\n<p>Have you traveled to visit your supplier in person? Sometimes it takes in-person pressure to kick people into gear. Contracts will never have the right effect, they have to sense that you care and will stop at nothing to get it done. So it might be time to get on a plane and camp out at the factory until they get moving.</p>\n<p><strong>Do you have any advice on pitfalls hardware startups should avoid as they mature? I’m not sure if it’s a subject you want to broach as Pebble had a large sales success but was sold to Fitbit. There are also a lot of consumer electronics companies that do IPO but struggle to maintain financial success afterwards (notable exceptions exist).</strong></p>\n<p><strong>I just would like an idea of what to expect on the road ahead of a hardware startup after prototyping, manufacturing, and sales no longer become issues to contend with. Much thanks!</strong></p>\n<p>Really depends on the type of company. Consumer or enterprise? One-time sale or recurring subscription? The best advice for early stage companies is ‘how not to fail’ by Jessica Livingston <a href=https://www.ycombinator.com/"https://blog.ycombinator.com/how-not-to-fail//">https://blog.ycombinator.com/how-not-to-fail/ and ‘how not to die’ by PG <a href=https://www.ycombinator.com/"http://www.paulgraham.com/die.html/">http://www.paulgraham.com/die.html
/nHardware startups usually die for the same proximate cause as non HW cos: they run out of money. It’s exacerbated for HW startups because they have inventory which locks of their cash early in the sales cycle. If I were to recommend one thing for hw startups – understand your cash conversion cycle and make sure you have the right ‘business model to company’ fit, which is just as important as PMF for hw companies.</p>\n<p><strong>My question is about the ethics of manufacture: Do you have any insights on how we could be more mindful of product impact on a long term basis?, the possible impact it could have on the planet, the ethics of the suppliers & manufacturing processes and long term repercussions, are there any tangible ways (you may have found) to measure or calculate the future impact of a product so it can be negated right at design stage? any resources would be very useful, as it is my goal to make my company among the most ethical on this planet.</strong></p>\n<p>Modern design thinking is centered around something called ‘cradle to grave’ product design. So you consider the materials going into your product and how the user will deal with the product after it’s lifespan is up. The easiest way to build this into your product is to design it to last and to be repairable. Then the user can continue to use it long into the future.</p>\n<p><strong>What’s the best way to outsource embedded electronics prototyping? Also, what resources do you recommend when looking for a manufacturing partner in China?</strong></p>\n<p>I wrote a post precisely about this: <a href=https://www.ycombinator.com/"https://techcrunch.com/2017/09/19/what-working-on-pebble-taught-me-about-building-hardware//">https://techcrunch.com/2017/09/19/what-working-on-pebble-taught-me-about-building-hardware/
/nIt seems to be a catch-22 situation for a new company, as protecting product IP internationally, including design patents, brand IP etc, is cost-prohibitive at an early stage, yet without these in place, launching a product puts the founders in a non defensible position. How would you recommend tackling this challenge especially when your focus is creating a strong international ‘Brand image’?</strong></p>\n<p>I would not worry about IP in the early stage except for a very specific set of products (mainly pharmaceuticals). If you really care about patents then file a super broad provisional patent for $500 to $1000. This gives you 1 year period to file a full patent for anything that you actually end up building.</p>\n<p>“Don’t worry about people stealing your ideas. If your ideas are any good, you’ll have to ram them down people’s throats.”</p>\n<p><strong>My company is working on remote control cars for car sharing companies. We’re remotely piloting cars so that there’s no need for an in car driver. Right now we are in the very early stages of development but we had a few questions.</strong></p>\n<p><strong>1. Our team eventually will need to recruit someone with a mechanical engineering background as my co-founder and I are a bit weak in that department, but we’ve been debating on if that person should be an early hire or a founder. Do you have any advice on how we should evaluate that distinction?</strong></p>\n<p><strong>2. Right now we’re bootstrapping development and we believe we have enough savings to get to an MVP though it might be cutting it close. Is there an ideal time to start the fundraising process?</strong></p>\n<ol>\n<li>\n<p>Essentially the first 4-5 people at any company are cofounders. Sometimes they have the title, sometimes not. But they effectively are and should be treated as such with large amounts of equity. Think of it this way – if the first 4-5 people aren’t spending every waking second thinking about how to make the company a success, who else is going to? If you are relying on them to do this, they should be compensated as such. Some people need to make more money for personal reasons, that’s okay but the important thing is they still have a large % of equity. Don’t be stingy with equity to someone who is putting in 20% of the effort to make your company a raging success.</p>\n</li>\n<li>\n<p>No, fundraising basically always sucks. I would try to optimize for earning revenue over trying to time fundraising. If you earn revenue you have cash to fund further growth and the happy side effect of making investors want to invest in you!</p>\n</li>\n</ol>\n<p><strong>1. How essential is it to figure out the manufacturing aspect very early on versus just making an MVP prototype as soon as you can?</strong></p>\n<p><strong>2. Where can we go to read/learn about hardware startups and their product-market-fit process, and especially, how they scaled effectively? (including Pebble)</strong></p>\n<ol>\n<li>\n<p>Speed speed speed! The one thing a startup needs to accomplish is prove that they have product market fit. Everything else is secondary. So make the MVP asap!</p>\n</li>\n<li>\n<p>This is a great blog by a friend of mine. Fellow HW founder: <a href=https://www.ycombinator.com/"http://marcbarros.com//">http://marcbarros.com/
/n/n/nWhat is your opinion in engaging product design companies if we can’t build the complete hardware all by ourselves? What are the documents needed to protect our IP?</strong></p>\n<p>First I would try to build it all yourselves without working with product design companies. Not because of IP, but because they’ll bleed you dry with fees and are generally slow. Now I don’t know what you’re trying to build (feel free to share!) but in general, I’d recommend pursuing a path more like this: <a href=https://www.ycombinator.com/"https://techcrunch.com/2017/09/19/what-working-on-pebble-taught-me-about-building-hardware//">https://techcrunch.com/2017/09/19/what-working-on-pebble-taught-me-about-building-hardware/
/nA conversation with Olaf Carlson-Wee, Coinbase’s first employee.
Employee #1 is a series of interviews focused on sharing the often untold stories of early employees at tech companies.
Olaf Carlson-Wee was the first employee at Coinbase. He currently runs Polychain Capital, a hedge fund which invests in a portfolio of blockchain-based assets. He is also an angel investor and filmmaker, based in San Francisco.
Discussed: The Early Days of Bitcoin, Interviewing at Coinbase, Finding Employees on R/Bitcoin, Scaling Support at Coinbase, Spotting Fraud, Vetting Founders in a New Field, Launching Polychain Capital.
You can subscribe to The Macro newsletter to receive future conversations.
Craig : What are you currently working on?
Olaf : I actually launched a company yesterday.
Craig : [Laughter] Whoa, congrats.
Olaf : Yeah, thank you. I don’t feel like celebrating quite yet because it’s just the beginning but it’s called Polychain Capital, “chain” here referring to the blockchain. It’s a hedge fund that invests in a diversified portfolio of cryptocurrencies.
Craig : Man, that’s wild. Is it a big team at this point? Is it just you?
Olaf : Just me.
Craig : And how are you picking the currencies?
Olaf : So I’m looking at things like novel uses of cryptography in the protocol. Or is the protocol attempting something that a blockchain has never done before. I’m also looking at core developer team quality, the developer ecosystem, and asking questions like are there a lot of apps being built on this, with GitHub forks, GitHub stars, and then looking at the community ecosystem. What’s the size of the forum? How often do people post relative to other forums? Is it an active community? Stuff like that. So part is core analysis of protocol, and part is quantitative metrics surrounding the use of the protocol.
I’ve launched with five million under management so mostly right now I’m focused on operationally executing the portfolio perfectly. And then making sure that I’m tracking the space and developments at the protocol level. Keep in mind, my last day at Coinbase was eight weeks ago.
Craig : Wow. Did you raise the five in that eight weeks?
Olaf : Yeah, I’ve been on the phone a lot. I have this stupid headset that I wear all the time. [Laughter]
Craig : [Laughter] You’re one of those guys?
Olaf : Yeah. It’s really embarrassing.
Craig : We’ll let it slide. Ok, so let’s talk about Coinbase. How did you find out about them?
Olaf : So I wrote my undergraduate thesis about Bitcoin and the larger implications of open source finance in 2011. I was Coinbase’s 30th user and now we have four million. I literally cold emailed jobs@coinbase and said, “I love bitcoin. Here’s my thesis. I’ll do any job.”
Craig : So you cold emailed these guys a document that was like 60 pages long?
Olaf : Yeah, like 90 pages long. [Laughter] But, to be fair, I clipped the 30 page chapter that was specifically on Bitcoin and cryptocurrency. But yeah, I did. I emailed an annoyingly long and annoyingly academic document.
Craig : And they responded?
Olaf : Fred [Ehrsam] replied in five minutes and said, “Hey, can you hop on Skype?” That’s when I started learning how things work in Silicon Valley. The pace of things.
We got on Skype and talked for 20 minutes. Then I got an email from him that said, “Okay, we wanna do an in-person interview. You’re going to come to the office tomorrow. I want you to have two finished presentations, 15 minutes each. The first should explain something complicated you know very well. The second should outline your vision for Coinbase.”
So I got to work. At the time I was on a road trip and actually was crashing on a friend’s couch in Oakland so the scheduling worked out well.
Craig : Did you study CS in school?
Olaf : I majored in sociology so I’m self-taught on computer science. Though I’m not a great coder. If I’m a building a website, I’m not very good at that. But I do know cryptography pretty well and, in particular, I know game theory well, which is really important in cryptocurrency.
Craig : Gotcha. So what were your presentations?
Olaf : Okay. So the first one was on the pharmacological induction of lucid dreams. It is complicated, but it’s a mechanism to induce lucidity in your dreams. You can control your dream by waking up in the middle of the night and taking an over-the-counter supplement called galantamine, which increases levels of the neurotransmitter acetylcholine in the synapse. Fun fact is that I’ve been writing down my dreams for 11 years.
The second presentation was on Coinbase and my high level strategy for the company. Coinbase had a lot of problems at that time. When I was applying, there were really bad bugs. Actually, on the first day of my work trial, there was a top Hacker News post that said, “My balance is wrong. I lost all this money.” Everything was broken.
My strategy was to clean up PR problems but focus 100% on security. Bad customer experiences will eventually be forgotten but a security incident will not be forgotten. I basically was saying, “Listen, people want us to move faster than we can.” I mean, Brian [Armstrong] was literally building everything. I was saying to Brian, “We cannot hack something together that ends up leading to a security incident. Even though everything is on fire, let’s do this very carefully.” And I think that resonated with them.
But Coinbase, especially in its early days, had a lot of hard tradeoffs between moving really quickly like a traditional startup and operating as a financial institution. Even then we were storing tens of millions of dollars of people’s money. And of course there were security incidents. Fraud was a big problem. People trying to buy bitcoin with stolen identities. We wanted to give good customers high limits and we we wanted to give scammers low or no limits. There are a lot of hard tradeoffs. I basically took the perspective that we need to be a security juggernaut and any bad customer experiences will long-term be forgotten.
On the other hand, if you get hacked or you have a massive fraud incident and lose all your money, it’s catastrophic. The main thing is avoid the catastrophic events. And what’s funny is looking back, that’s really what Coinbase has done. A big way that Coinbase is the leader in the space is just that we didn’t get hacked, honestly. We did many things right. But that is honestly the number one thing.
Craig : Ok, so you do the presentations. Is this to both of them?
Olaf : This is just to Fred. Fred and I probably talked for 45 minutes–a long time. Then Fred gave me a really brutal mathematics problem and said, “Okay, why don’t you figure that out while I go talk to Brian?”
So I knew I had at least on some level passed the first part. I knew he’d walk me out without meeting Brian if it definitely wasn’t working out.
Do you want to know the problem?
Craig : Yeah, absolutely.
Olaf : Okay. So there are 100 lockers in a row. They’re all closed, okay? A kid goes by. He opens every single locker. A second kid goes by. Now he closes every other locker, every second locker. Third kid comes by, every third locker. If it’s open, he closes it. If it closed, he opens it. Then the fourth kid goes by. Every fourth locker, he changes the state. And now 100 kids go by. What is the state of the lockers after 100 kids go by?
Craig : Oh man, I’d definitely need some time for that.
Olaf : Yeah, so don’t try to figure it out because it may take a while. So I’m sitting there and thinking like, “Okay, focus Olaf. If Brian comes down and the first thing you have is the answer to this problem, this is gonna seal the deal.” At least in my head I thought that. In retrospect, that was getting ahead of things a bit much.
To be honest, I don’t know what happened but I had this crazy flash of insight and had the answer. And when Brian came back, we started talking through it and I just figured it out way faster than I reasonably should have.
Craig : Whoa. So what’s the answer?
Olaf : The answer is perfect squares are open. The reason being, they’re the only numbers that have an odd number of factors. So the number of factors determines whether a locker is open or closed because that’s the number of kids that interacted with it. And so the odd number of factors means it’s open and even number of factors means it’s closed. And the only numbers that have an odd number of factors are perfect squares like 16, 25, 36.
Craig : How long were you given to solve that?
Olaf : Oh, probably like three minutes.
Craig : Holy shit, okay.
Olaf : Yeah. It was probably three minutes. I don’t believe in divine intervention or anything. But that was a time in my life when I had an uncanny flash of insight that I would never pretend I could recreate. But anyway, then Brian grilled me for another hour.
Craig : [Laughter]
Olaf : Brian’s questions were really intense. “What do you wanna do with your life?” “What drives you as a person?” “What’s a belief you have that is extremely unpopular?” He wanted to really know me.
I think Fred had gone up to Brian and said, “Listen, Olaf’s at least sort of qualified for this. I talked to him. I think he could do the job. Now we need to figure out do we want to actually work with him.” And Brian went super deep on a lot of really intense questions about my life, what drove me, what mattered to me, why I wanted to do this, all that stuff. And we had a very intense conversation about what it meant to want to do things, what it meant to be a human trying to go about the world.
Craig : Did you feel prepared to answer those questions?
Olaf : I definitely had to think about each question but I tend to have a pretty crystallized ideology about the way I think about the world. It changes, but at any given moment, I know what it is. So yeah, I think it was pretty reasonable for me to say, “Here’s why I wanna do this.”
Craig : Okay, and then how does it wrap up?
Olaf : They say, “Okay, great. We’ll let you know.” And then they walk me out. I heard back, I wanna say, four days later. They said, “You should come in for work trial.” And that was a two week paid trial. I worked really hard because I knew this was the final test. At the end of those two weeks they said, “Okay. You have a formal job offer.”
Craig : What was the actual job?
Olaf : Customer support. Like I said, I came in and was willing to do anything. I did customer support by myself until we had 250,000 users.
It was a marathon. It was like 12-hour days of fast replying. And, to be clear, we did not have good support during that time. I’ll say that as the person who was doing it. You would get an email. It wouldn’t necessarily come right away. It wouldn’t necessarily perfectly answer your question. But we were replying. [Laughter]
Craig : [Laughter] Okay. So then did you become involved in hiring future people?
Olaf : Yes. So basically what happened was we were trying to hire more customer support people, because it was not scaling with just me. We did four work trials for our customer support people to join me in San Francisco. We rejected all of them. Meanwhile the problem is getting worse and worse and worse, right?
The delay in replies and the quality of replies is just going down in a bad way. I think at the peak, the average time to reply was five days. And this is a financial institution. It’s really inappropriate.
So I got really desperate and I posted a Bitcoin SAT on Reddit. What this was was a test, a Bitcoin aptitude test so to speak. And it had questions like, “What is the hash of the genesis block?” That was the first question. And the idea there was if you’re asking yourself, “What does that mean?” this isn’t the job for you. If you have no idea what that is then get out of here.
It was a bunch of Bitcoin-style brainteaser-y questions and I just posted it on Reddit’s /r/bitcoin and Bitcoin Talk and I said, “If you get a perfect score, you get an interview for remote customer support.”
And we got like 250 people to take this test. Skip ahead maybe four months. I have 43 people reporting to me in a distributed team.
Craig : Whoa.
Olaf : This team covers merchant integrations, API support, anti-fraud investigations, compliance investigations, and did customer support. We now have all of these teams at Coinbase. They mostly came from this one Bitcoin SAT. It was so successful that I posted it a second time at some point and got a new round of candidates.
It was a globally distributed team. The first person I hired was in New Caledonia. It’s weird how these things work. Skip ahead two years, he works at Coinbase in San Francisco and is the director of customer support. He’s an amazing guy. He started remote and I remember thinking when we had our first talk – he had a master’s in computer science from George Washington University – and I was like, “Why do you wanna do customer support?”
And he said, “I’m in New Caledonia. This is the best job I could hope for and I love Bitcoin.” And I was like, “Well, you’re hired.”
And that was when I realized that the remote structure was actually going to work really well. There were hard things about it, but I now feel very confident running remote teams. This was when we were using HipChat–before Slack. Then Slack came out and that helped a lot. And then we had Google Hangouts. Basically the tooling was good enough. Like Google Docs where we can all edit something. The tooling really was good enough, just at that moment. I think if were to try to do this distributed team two or three years before, it would’ve fallen on its face.
Craig : So you were managing support but then you eventually ran risk, right? How does that happen?
Olaf : Yup. So I was kind of managing what was really like the whole operational part of the company and it was really burning me out. This was a year and half of 12-hour days without any vacations. I took Sundays off. We scaled to probably 30 or 40 people in San Francisco before I hired a Director of Support and became the Head of Risk.
So as Head of Risk the main things I focused on were account security and fraud prevention. It wasn’t like infrastructure security around preventing hackers. It’s user-facing, like they enter their password on a phishing site.
Basically with security there are two angles: We can get your coins stolen or you can get your coins stolen.
Craig : [Laughter] Right.
Olaf : [Laughter] So yeah, I was responsible for the latter and anti-fraud, i.e. people buying bitcoin with stolen identities. While I was running support I had a huge part in handling all that stuff. And when fraud had gotten bad in early 2013, I designed the Risk Queue that would review people that we thought were stolen identities. At one point I would review every single buy on the website–one by one.
Craig : Whoa.
Olaf : These are things that absolutely don’t scale, but you can build it in one day and start working on it that day. So Brian built it and I would review every single buy. As a result I started to get an incredible eye for stolen identities. Like I had a sixth sense for whether an account was a stolen identity or not.
Craig : Can you explain that a little bit? What are you looking for?
Olaf : Ok, so there are a couple tiers of scammer. Let’s pretend you’re a unsophisticated scammer. You sign up. The email you use is Edward.Fitzgerald@whatever.com and the name you use is Laura Johnson. Then the bank account you use is Alexander Smith. Obviously something’s going on there. So big name mismatches are the easiest to spot.
Then there are patterns. So, for example, scammers would buy dumps–some guy will a hack a site, he’ll get a bunch of bank account numbers and then he’ll use them all. And those dumps will often share certain traits. For example, I’d suddenly see like 20 SunTrust bank accounts get added in 20 minutes and they all share certain formatting rules or the email domain is the same, or something like that. So again, it’s basically pattern recognition.
But then it gets way more complicated because for sophisticated scammers, their entire job hinges on me looking at something and saying, “that’s legit.”
And it can mean massive payouts for them. Our limits at that time were 50 bitcoin a day. So, if you could sneak past me, you could buy 50 bitcoin every day until the real account holder called their bank and said, “I’m seeing all these crazy charges.”
But yeah, I learned a lot very quickly. I learned a lot about traditional payment mechanisms. Before I knew a lot about bitcoin. Now I know a lot about credit cards. And ACH. And bank wires. And all that stuff.
Craig : Yeah, it sounds like you’ve dug in. I assume not everyone who works at Coinbase now has the same degree of knowledge. How do you scale understanding at a company that is based around something inherently technical?
Olaf : In the early days, everyone was a cryptocurrency fanatic. The first two engineering hires were these absolutely brilliant people who basically came to Coinbase because they wanted to work on cryptocurrency. And what’s interesting is a lot of our anti-fraud people are also super into Bitcoin. They’re not people who worked anti-fraud at Stripe. They’re Bitcoin people first.
So yeah, we’d sort of filter for smart people that were passionate about Bitcoin. It’s my opinion that if you’re smart you can learn a new skill and all the details. But passion and innate interest cannot really be learned. We tended to hire people who said, “I love this company. I don’t quite have the experience.” Versus people that said, “I have the experience, but I’m looking at four other places and maybe I’ll pick Coinbase.”
My belief is that the inexperienced, interested person will outperform the experienced, uninterested person over time.
That said, when we started scaling we did have to start trading between interest in Bitcoin and domain experience. The person who runs Compliance, for example, can’t just be winging it.
Craig : What was it that made you want to join Coinbase?
Olaf : Before I was gonna apply, I read all about the founders. There were a bunch of competitors at the time. The massive market share was MtGox, which ended in tragedy, as you may know. And then like there were bunch of other companies that were bigger. BitInstant, Tradehill, these are all defunct. Every single one of them is dead now. But at the time, Coinbase was like the new little company.
Craig : Okay, so the underlying question is how do you vet founders in a new field?
Olaf : Yeah. I have pretty strong feelings on that. I’d say meet them and make sure 100% that you like them, that you could work for them, and that you will run the whole marathon with them. Running a company and scaling a startup is so much stress, so much work. And they’re gonna be sitting next to you the whole time
If you don’t feel like they’re in it 110% and that you can work with them and be friends with them, it’s not gonna work. Especially in a very micro team. I mean, once a company is 40 people, that’s still like a startup but the founder matters for you personally a little less. It does for the company’s success but not for you personally. But if you’re joining like a sub-10-person startup you really need to make sure that the founder is gonna drive this all the way. This needs be a grand slam.
So much of it is about personality and drive. Even if you’re technically brilliant, there are these dark times. And dark like bad things are happening. There’s always gonna be bad events.
You have to ask, are they gonna focus in and just move forward, or are they gonna give up? And it doesn’t matter if they’re technically competent if they’re in the latter category. They could be the best person in the world at this but if at the end of the day they don’t have the drive and spirit to make this happen, it doesn’t matter. So to me the technical competency of course is vital. But if you met someone and said, “Wow, that guy is the number one expert in the world at this,” but you felt like he’s kind of flakey. Pass. Always pass.
With Brian and Fred, they’re two of the smartest, most focused and driven people I have ever met. And I knew that after the interview. I was like, “These guys are really not fucking around.” Seriously, it really made me wanna work there.
Craig : So to your point of the bad things always happening, what were the bad things that happened?
Olaf : Oh, man. I think in 2013 our user base increased 100x. And the price of bitcoin went up 100x. Our volumes went up I think even more than 100x. You know when people talk about like rapid aggressive scaling? That’s exactly what it was and a tiny number of us were scaling all of it. At the beginning of that year it was two people. At the end of that year, just eight.
Craig : Wow.
Olaf : Brian and Fred are very careful about hiring. They only hire people that they truly think are superstars. At Coinbase one thing that gets said a lot is, “On a candidate if you’re not a ‘hell yes’, you’re a ‘no’.” If you’re like, “I like them. I think they’re smart. I think they’re great.” That’s a “no.”
You really have to fight to keep that up. You have to feel like if this person does not get hired, we’re crazy. That’s how you have to feel for someone to get hired at Coinbase.
And that early team was really unique individuals. Like, it was the perfect puzzle pieces. But anyway, the scaling during that time was brutal. It was absolutely brutal. And we had bugs that were really bad.
Here’s the thing, it’s not like having bugs on Twitter where maybe something gets retweeted wrong. When you have a bug on Coinbase, balances are incorrect in what are essentially bank accounts. And transactions that are time sensitive aren’t getting sent out. The stakes are way higher yet you’re still just five people in a room making the whole thing.
One time the ACH file we use with banks got duplicated. That’s means that if you bought $100 of Bitcoin we duplicated the transaction so you’re buying $200 of Bitcoin. When something like that happened I would get a thousand emails in 20 minutes because these are bank accounts and people definitely notice that stuff.
The one thing that’s so lucky is we never had an incident where someone gained access to our infrastructure and pulled out Bitcoin from the hot wallet. That was just the blessing. I think even Brian would probably tell you that there were times in Coinbase’s history that were sort of coin flips. But we survived them. Other companies had incidents like that and had to shut down. We caught things fast enough.
Craig : That’s funny. It’s exactly the same thing Aston said about Dropbox. Basically, “Shit went wrong all the time but the one thing we never did was lose a ton of files.”
Olaf : Exactly. This is exactly Coinbase’s story. In those early days everything went wrong except the one thing that couldn’t go wrong.
Craig : [Laughter] Exactly. So at what point were you like, “Okay. I’m ready to do something else?”
Olaf : Yeah. So I basically saw what, for me, has been the biggest trend in the space I’ve ever seen, and I’ve been in this heads down for five years. People are doing this new behavior where they’re actually raising capital and issuing what is essentially network ownership of their network on the blockchain. So these are like bits of equity in peer-to-peer networks that are built on the blockchain.
A crude example here is imagine if an early user of Facebook gets a thousand shares of Facebook. Now, instead of just normal network effects, there’s also monetary incentive network effects built into this protocol. And these new types of protocols are built on new blockchains or as subtokens of existing blockchains. The opportunity for me was too big to pass up. The trend was too strong. Plus I needed a new adventure. So I left to start Polychain.
And it’s only been eight weeks but Polychain has seen a lot of interest because this trend is really strong. I think that over the next year, there’s gonna be amazing opportunities here. The alternative thing that I could’ve started is a venture fund that invests in companies built on the protocols.
But in this new model, there’s really no place for traditional VCs because the protocol tokens themselves are the issuance of ownership. Not shares on a piece of paper. And as the company wants to raise their Series A, their Series B, their Series C, all that is them holding say 5%, 10% of the protocol tokens and those going up in value as their network becomes more valuable. And then they can sell tokens and become diluted to get liquid cash. It works very well. It’s a lot of similar mechanics to venture capital fundraising, but they can do it all with this native protocol units and crowdfunding, and there’s just no place for paper shares or VCs.
So, instead of betting in companies built on protocol, I’m actually buying units of the protocol. I’m buying scarce blockchain tokens and creating a portfolio of those tokens. I’m basically buying ownership in all of these new 2.0 peer-to-peer protocols.
Craig : That’s wild.
Olaf : Yeah, that’s why Polychain is a hedge fund instead of a venture fund. Because I’m holding solely protocol tokens. To a normal person what I’m doing is extremely esoteric.
Craig : [Laughter] Uh, yes.
Olaf : It absolutely is. That said a lot of smart people in Silicon Valley think it’s on that edge where this is going to grow substantially over the next five years.
Craig : You’re definitely in the right place. Ok, random question. Aside from the Bitcoin readings you recommended, what books do you recommend?
Olaf : I have a couple that come to mind. So I love David Foster Wallace and Infinite Jest is probably my favorite book. His short stories are also amazing.
Another book that comes to mind is House of Leaves. The premise is crazy. So the actual book is a manuscript written by an old man. With annotations by a narrator who has found and reconstructed this book. With annotations by an omnipotent editor. Who is finding the annotations of the person who reconstructed this old man’s book.
Craig : Oh my god.
Olaf : And now this is where it gets even crazier. The old man’s book is a analysis of a movie that doesn’t exist.
Craig : [Laughter]
Olaf : And the narrator who’s annotating and reconstructing this old man’s book is being driven crazy because there’s so much detail and he can’t find this movie. And it like actually doesn’t appear to exist. And the old man, all his sources are fake articles and things. It gets really weird but it’s much more of a page turner than David Foster Wallace.
Anyway, I’d recommend both because they’re super long and once you get into them, they completely consume your brain. They’re my favorite kind of books.
Craig : Right on. Ok, let’s end there. Thanks for your time.
Olaf : Sure thing.
Olaf’s Suggested Reading
Blood Meridian by Cormac McCarthy – Probably my other favorite book along with Infinite Jest.
Programming and Metaprogramming in the Human Biocomputer by Dr. John Lilly
Journey to Ixtlan by Carlos Castaneda
Steppenwolf by Herman Hesse
Here are three posts that explain the Polychain thesis well:
• App Coins and the dawn of the Decentralized Business Model
• The Golden Age Of Open Protocols
• Crypto Tokens and the Coming Age of Protocol Innovation
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Craig is the Director of Content at YC.