Continuing Conversation...Sam Altman on Start-ups, Venture Capital, and the Y Combinator

EconTalk Extra
by Amy Willis
Sam Altman on Start-ups, Ventu... Reid Hoffman and Ben Casnocha ...

This week, Russ Roberts spoke with Y Combinator president Sam Altman about tech, innovation, Y Combinator's impact, and more.

Share your thoughts on this week's episode, exploring the prompts below. Or pose your own question(s) for conversation. Either way, we love to hear from you.

Check Your Knowledge:

1. What does Altman look for in a potential entrepreneur? How does what he looks for differ from you might expect? Do you think his ordering of skills is a good way to judge employees?

2. How can a software platform increase the supply of a tangible good or service? What sort of limits are there to this sort of increase?

Going Deeper:

3. Altman speaks with great enthusiasm about the potential of nuclear power. Yet despite his enthusiasm, he doesn't want a nuclear plant near his home. Is this rational? Why or why not? How do you feel about transitioning to nuclear power? Use the economic way of thinking to craft your response.

4. Altman and Roberts discuss trends and the potential for future innovation in health care, Bitcoin, and wearables. Which is Altman most optimistic about, and why? Which do you think holds the most potential for making life better?

Extra Credit:

5. Altman argues that finding a clean, safe, and cheap energy source would be "the most important thing an individual can do for the future of the world." Defend his position, or argue a different position. In other words, what is the most important innovation the world could benefit from today, and why?

Comments and Sharing

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COMMENTS (6 to date)
Michael Rogers writes:

Russ, this was a terrific interview with Sam. I've been a small business owner and have spent most of the past 20 years writing and broadcasting about entrepreneurship and innovation here in Michigan. Sam's observations about entrepreneurs resonate with my experience, especially the importance of persistence and tolerance of risk. But of course, that's not to say that anyone who is persistent and likes risk will have a successful business. I'm struck by how often observers look at successful enterprises and then try to extrapolate what kind of qualities we should look for in start-ups. From my experience, pure chance and being in the right place at the right time are far more crucial factors than are finely-crafted business plans. Which leads to my conclusion that successful entrepreneurship is a crap shoot. We can't pick winners (which is just one more reason that government should not even attempt to do so). The best we as a society can hope to do is prepare fertile soil for startups, try not to pour weedkiller on them and then get out of the way.

Dan King writes:

Nothing grows exponentially forever. Extrapolating technological trends 100 years into the future is a mug's game. There will be too many wars, and too much human, biological evolution to make any such predictions meaningful.

Michael Byrnes writes:

Michael Rogers wrote:

"From my experience, pure chance and being in the right place at the right time are far more crucial factors than are finely-crafted business plans. Which leads to my conclusion that successful entrepreneurship is a crap shoot. We can't pick winners (which is just one more reason that government should not even attempt to do so). The best we as a society can hope to do is prepare fertile soil for startups, try not to pour weedkiller on them and then get out of the way."

I think this is a strength of YC's model. They don't invest a lot of time trying to pick winners and they give a little bit of funding to a lot of companies. Even if they lose the full $120K investment on most of the companies they fund, those few that do happen to be in the right place at the right time will generate returns that more than cover all of the losses.

Nevertheless, I think you are right to point out the selection bias. Just because entrepreneurs who do succeed with their startup may have certain qualities does not mean that any entrepreneur with those qualities will succeed. To the extent that it is useful, YC's funding process may help by weeding out those who are highly unlikely to succeed.

I wonder if they would ever try to test their model by randomly choosing a selection of companies that "missed the cut" and seeing how they actually perform.

Mr. Econotarian writes:

Russ you seemed to express surprise about nuclear start-ups. Here are some:

Tri Alpha Energy: Colliding Beam Fusion Reactor with non-neutron producing primary reactions, such as hydrogen and boron-11. The fusion products are all charged particles for which highly efficient direct energy conversion is feasible, and neutron flux and associated on-site radioactivity is virtually non-existent (raised over $140 million).

General Fusion: Magnetized target fusion, gas pistons launch a high pressure spherical compression wave into liquid metal that compresses the plasma fuel (raised $45 million in VC funding).

Helion Energy: Inductive Plasma Accelerator fusion

Lawrenceville Plasma Physics, Inc.: Dense Plasma Focus to "pinch" plasma

TerraPower: traveling wave fission reactor (raised $35 million)

Transatomic Power: advanced molten salt fission reactor (raised $3.5 million)

You should have some of these folks on a future show!

Chris Rooks writes:

I wholeheartedly agree on Sam's point about the leadership team being the most important element in an early stage. His comment on "funding the pivot" caught my attention. I have been involved in early stage businesses in which having the ability to pivot has been instrumental. Successful entrepreneurs that have demonstrated the ability to pivot have a much more easier time of obtaining funding, irrespective of the idea. In some cases, this may be due their ability to orchestrate a successful exit, even if the business doesn't achieve critical mass to survive as a standalone entity.

Kudos for his statement on the uselessness of a business plan. We generally took a pass on potential investors that requested that we invest a inordinate amount of time in creating a professional looking book that will be outdated in six months, rather than in building our product or generating sales. His disinterest in the financial plan was surprising though as seemed that every investor wanted to dig into the economic viability of our plan and poke holes into it.

Overall, this was an entertaining and insightful podcast.

Ron Crossland writes:

Question 3.

To me the nuclear power plant in my neighborhood challenges the concept of neighborhood. Altman implied a type of "down the street" type of neighborhood. What people who say this really mean is" I don't want one within my county, state, or nation." The minimum neighborhood size when it comes to nuclear is the perceived blast radius of a bomb, even though that is not the danger from these plants.

This irrationality is similar in some sense to those who argue against fluoride in water supplies. Economics suggest looking at the statistical evidence and arguing an general result. Fluoride in the water is often argued anecdotally "I knew a person who suffered blah, blah, blah from fluoride (or nuclear power plant leakage)." It's the old Kahneman system 1 versus system 2 type of thinking.

Russ and Altman easily recalled the three big meltdowns, which do not describe the general nuclear power problem at all - just the scariest exception. Economics thinking is better served through statistical methods - the anecdotes should shed light on the general output, not the exception.

Michael Rogers suggested successful entrepreneurship is a crap-shoot and then stated government shouldn't attempt to pick winners. Why he stopped at government is curious, because if it truly is a crap shoot (meaning unknown, unpredictable variables), then private enterprise should stay out of it as well. If there are variables that aid our understanding of increasing success for entrepreneurs then this knowledge could be used by all sectors, including government (which might be to stay out of it, or to participate in it differently than it is done today).

Question 5.
Many agree that making strides against production, distribution, and storage of energy would be a huge benefit for the planet. I have a scientist friend in this arena and every time I share a meal with him I urge him to double, triple, or quadruple battery storage capacity for my own selfish needs.

But I believe a factor that may have at least equal power in terms of the future of the world is to re-orient all education toward the power of cooperation as opposed to the constant emphasis on competition. Consider this thought experiment.

Your goal is to truly change the future of the world. You discover a process of recharging a battery for one-tenth the cost of today and it would store ten times as much energy. Which model would benefit the world more and faster? Taking a patent and holding the patent to create a company that would put all other companies out of business and create an hugely profitably enterprise. Or taking a patent, creating a company, AND giving the patent knowledge freely (no license) to all current energy companies in order to accelerate the innovation around this new energy process.

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