# I.  Venture Capital and You

Many people who start businesses never deal with venture capitalists. 
Founders who do interact with VCs don’t necessarily do that early on. 
First you get your founders together and get working. Then maybe you get 
friends, family, or angels to invest. If you do end up needing to raise 
a larger amount of capital, you need to know how VC works. Understanding 
how VCs think about money—or, in some cases, how they don’t think about 
it and thus lose it—is important.

VC started in late 1940s. Before that, wealthy individuals and families 
were investing in new ventures quite frequently. But the idea of pooling 
funds that professionals would invest in early stage companies was a 
product of the ‘40s. The Sand Hill road, Silicon Valley version came in 
the late 1960s, with Sequoia, Kleiner Perkins, and Mayfield leading the 
field.

Venture basically works like this: you pool a bunch of money that you 
get from people called limited partners. Then you take money from that 
pool and invest it in portfolio companies that you think are promising. 
Hopefully those companies become more valuable over time and everybody 
makes money. So VCs have the dual role of encouraging LPs to give them 
money and then finding (hopefully) successful companies to back.

Most of the profits go back to LPs as returns on their investment. VCs, 
of course, take a cut. The typical model is called 2-and-20, which means 
that the VC firm charges an annual management fee of 2% of the fund and 
then gets 20% of the gains beyond the original investment. The 2% 
management fee is theoretically just enough to allow the VC firm to 
continue to operate. In practice, it can end up being a lot more than 
that; a $200m fund would earn $4m in management fees under a 2-and-20 
structure. But it’s certainly true that the real payout that VCs look 
for come with the 20% cut of the gains, which is called the carry.

VC funds last for several years, because it usually takes years for the 
companies you invest in to grow in value. Many of the investments in a 
given fund either don’t make money or go to zero. But the idea is that 
the companies that do well get you all your money back and then some; 
you end up with more money in the fund at the end than LPs put in to 
begin with.

There are many dimensions to being a good VC. You have to be skilled at 
coming up with reasonable valuations, identifying great entrepreneurs, 
etc. But there’s one dimension that is particularly important, yet 
surprisingly poorly understood. It is far and away the most important 
structural element of venture capital: exponential power. This may seem 
odd because it’s just basic math. But just as 3rd grade 
arithmetic—knowing not just how many shares you get, but dividing that 
by the shares outstanding—was crucial to understand equity, 7th grade 
math—understanding exponents—is necessary to understand VC.

The standard Einstein line on this is that the most powerful force in 
universe is compound interest. We see the power of compounding when 
companies grow virally. Successful businesses tend to have an 
exponential arc to them. Maybe they grow at 50% a year and it compounds 
for a number of years. It could be more or less dramatic than that. But 
that model—some substantial period of exponential growth—is the core of 
any successful tech company. And during that exponential period, 
valuations tend to go up exponentially.

So consider a prototypical successful venture fund. A number of 
investments go to zero over a period of time. Those tend to happen 
earlier rather than later. The investments that succeed do so on some 
sort of exponential curve. Sum it over the life of a portfolio and you 
get a J curve. Early investments fail. You have to pay management fees. 
But then the exponential growth takes place, at least in theory. Since 
you start out underwater, the big question is when you make it above the 
water line. A lot of funds never get there.

To answer that big question you have to ask another: what does the 
distribution of returns in venture fund look like? The naïve response is 
just to rank companies from best to worst according to their return in 
multiple of dollars invested. People tend to group investments into 
three buckets. The bad companies go to zero. The mediocre ones do maybe 
1x, so you don’t lose much or gain much. And then the great companies do 
maybe 3-10x.

But that model misses the key insight that actual returns are incredibly 
skewed. The more a VC understands this skew pattern, the better the VC. 
Bad VCs tend to think the dashed line is flat, i.e. that all companies 
are created equal, and some just fail, spin wheels, or grow. In reality 
you get a power law distribution.

![07-01.png]

An example will help clarify. If you look at Founders Fund’s 2005 fund, 
the best investment ended up being worth about as much as all the rest 
combined. And the investment in the second best company was about as 
valuable as number three through the rest. This same dynamic generally 
held true throughout the fund. This is the power law distribution in 
practice. To a first approximation, a VC portfolio will only make money 
if your best company investment ends up being worth more than your whole 
fund. In practice, it’s quite hard to be profitable as a VC if you don’t 
get to those numbers.

PayPal sold to eBay for $1.5bn. PayPal’s early stage investors had a 
large enough stake such that their investment was ultimately worth about 
the size of their fund. The rest of the fund’s portfolio didn’t do so 
well, so they more or less broke even riding on PayPal. But PayPal’s 
series B investors, despite doing quite well with the PayPal investment, 
didn’t break even on their fund. Like many other VC funds in the early 
2000’s, theirs lost money.

That investment returns take a power law distribution leads to a few 
important conclusions. First, you need to remember that, management fees 
aside, you only get paid if you return all the money invested plus more. 
You have to at least hit the 100% of fund size mark. So given power law 
distribution, you have to ask the question: “Is there a reasonable 
scenario where our stake in this company will be worth more than the 
whole fund?”

Second is that, given a big power law distribution, you want to be 
fairly concentrated. If you invest in 100 companies to try and cover 
your bases through volume, there’s probably sloppy thinking somewhere. 
There just aren’t that many businesses that you can have the requisite 
high degree of conviction about. A better model is to invest in maybe 7 
or 8 promising companies from which you think you can get a 10x return. 
It’s true that in theory, the math works out the same if try investing 
in 100 different companies that you think will bring 100x returns. But 
in practice that starts looking less like investing and more like buying 
lottery tickets.

Despite being rooted in middle school math, exponential thinking is 
hard. We live in a world where we normally don’t experience anything 
exponentially. Our general life experience is pretty linear. We vastly 
underestimate exponential things. If you backtest Founders Fund’s 
portfolios, one heuristic that’s worked shockingly well is that you 
should always exercise your pro rata participation rights whenever a 
smart VC was leading a portfolio company’s up round. Conversely, the 
test showed that you should never increase your investment on a flat or 
down round.

Why might there be such a pricing inefficiency? One intuition is that 
people do not believe in a power law distribution. They intuitively 
don’t believe that returns could be that uneven. So when you have an up 
round with a big increase in valuation, many or even most VCs tend to 
believe that the step up is too big and they will thus underprice it. 
The practical analogue would be to picture yourself working in a 
startup. You have an office. You haven’t hit the exponential growth 
phase yet. Then the exponential growth comes. But you might discount 
that change and underestimate the massive shift that has occurred simply 
because you’re still in the same office, and many things look the same.

Flat rounds, by contrast, should be avoided because they mean that the 
VCs involved believe things can’t have gotten that much worse. Flat 
rounds are driven by people who think they might get, say, a 2x return 
from an investment. But in reality, often something has gone very badly 
wrong—hence the flat round’s not being an up round. One shouldn’t be 
mechanical about this heuristic, or treat it as some immutable 
investment strategy. But it actually checks out pretty well, so at the 
very least it compels you to think about power law distribution.

Understanding exponents and power law distributions isn’t just about 
understanding VC. There are important personal applications too. Many 
things, such as key life decisions or starting businesses, also result 
in similar distributions. We tend to think about these things too 
moderately. There is a perception that some things are sort of better 
than other things, sometimes. But the reality is probably more extreme 
than that.

Not always, of course. Sometimes the straighter, perceived curve 
actually reflects reality quite closely. If you were to think about 
going to work for the Postal Service, for example, the perceived curve 
is probably right. What you see is what you get. And there are plenty of 
things like that. But it’s also true that we are, for some reason or 
other, basically trained to think like that. So we tend to miscalculate 
in places where the perceived curve does not, in fact, accurately 
reflect reality. The tech startup context is one of those places. The 
skew of distributions for tech startups is really vast.

This means that when you focus on the percentage of equity you get in a 
company, you need to need to add a modifier: given something like a 
power law distribution, where your company is on that curve can matter 
just as much or more than your individual equity stake.

All else equal, having 1% of a company is better than having 0.5%. But 
the 100th employee at Google did much better than the average 
venture-backed CEO did in the last decade.  The distribution is worth 
thinking hard about. You could spin this into argument against joining 
startups. But it needn’t go that far. The power law distribution simply 
means you have to think hard about a given company is going to fall on 
the curve.

The pushback to this is that the standard perception is reasonable—or at 
least is not unreasonable—because the actual distribution curve turns 
out to be random. The thesis is that you are just a lottery ticket. That 
is wrong. We will talk about why that is wrong later. For now, it’s 
enough to point out that the actual curve is a power law distribution. 
You don’t have to understand every detail and implication of what that 
means. But it’s important to get some handle on it. Even a tiny bit of 
understanding of this dimension is incredibly valuable. 

# II.  The View from Sand Hill Road

Peter Thiel: One thing we should talk about is what secrets VCs use to 
make money. Well, actually most don’t make money. So let’s talk about 
that.

Roelof Botha: The unprofitability of venture capital is pretty well 
documented. Average returns have been pretty low for a number of years 
now. One theory is that when venture was doing very well in the 1990s, 
it became a big deal to more or less blindly follow advice to put more 
money in venture. So the industry may be overinvested, and it’s hard for 
most firms to make money.

Peter Thiel: Paul, what can entrepreneurs do to avoid getting taken 
advantage of by VCs?

Paul Graham: There’s nothing inherently predatory about VC. Y-Combinator 
is a minor league farm club. We send people on up to VCs. VCs aren’t 
evil or corrupt or anything. But in terms of getting a good deal and not 
a bad one, it’s the same with any deal; the best way to get a good price 
is to have competition. VCs have to be competing to invest in you.

Peter Thiel: We’ve discussed in this class how competition can be a 
scary thing. Maybe it’s less bad when you make VCs compete against each 
other. In practice, you never really land just one investor. Chances are 
you have at least two people who are interested or you have zero. The 
cynical explanation of this is that most VCs have little or no 
confidence in their ability to make decisions. They just wait to ape 
others’ decisions.

Paul Graham: But investors also have an interest to wait, if they can. 
Waiting means that you’re able to get more data about a given company. 
So waiting is only bad for you if founders raise the price while you 
wait. VCs are looking for startups that are the next Google, or not. 
They are cool with 2x returns. But more than that they don’t want to 
lose a Google.

Peter Thiel: How do you avoid being a VC that loses money?

Roelof Botha: Since the distribution of startup investment outcomes 
follows a power law, you cannot simply expect to make money by simply 
cutting checks. That is, you cannot simply offer a commodity. You have 
to be able to help portfolio companies in a differentiated way, such as 
leveraging your network on their behalf or advising them well.  Sequoia 
has been around for more than 40 years. You cannot get the returns that 
we have if you are just providing capital.

Paul Graham: The top VC funds have to be able to make up their own 
minds. They cannot follow everybody else because it’s everyone that 
follows them! Look at Sequoia. Sequoia is very disciplined. This is not 
a bunch of B-school frat boys who are screening founders for guys who 
look like Larry and Sergey. Sequoia prepares careful research documents 
on prospective investments…

Roelof Botha: But succinct research. If you make or believe you need a 
100-page document, you miss the forest for trees. You must be able to 
condense it into 3-5 pages. If there can be no succinct description, 
there’s probably nothing there.

Peter Thiel: Even within an individual business, there is probably a 
sort of power law as to what’s going to drive it. It’s troubling if a 
startup insists that it’s going to make money in many different ways. 
The power law distribution on revenues says that one source of revenue 
will dominate everything else. Maybe you don’t know what that particular 
source is yet. But it’s certainly worth thinking about. Making money 
with A is key. Making money with A through E is terrifying, from an 
investor’s perspective.

Roelof Botha: LinkedIn is exception that proves the rule there. It had 3 
revenue streams that are pretty equal. No one else really has that. At 
least it’s very unusual.

Peter Thiel: Do Y-Combinator companies follow a power law distribution?

Paul Graham: Yes. They’re very power law.

Peter Thiel: Incubators can be tricky. Max Levchin started one. It had a 
really long cycle—maybe even a year-long cycle. That made for some crazy 
intercompany dynamics. All these people start in similar boats but, 
because of the power law dynamic, end up in very different ships. The 
perceptions are quite jarring. What happens with different people as 
they reach these different stages can be very complicated.

Roelof Botha: People don’t always appreciate or understand rapid 
increases in value when businesses take off. They underestimate the 
massive asymmetry of returns. They hear that a company has joined the 
billion-dollar club and are perplexed because only 6 months ago, it was 
worth $200m. The alternative to understanding the exponential growth is 
believing that Silicon Valley VCs have gone crazy.

Peter Thiel: PayPal’s most successful up round resulted in a 5x increase 
in valuation. But it was pitched in a forward-looking context. It wasn’t 
about taking x and multiplying by 5. The narrative was that the 
valuation made sense because of the promising future ahead. The real 
value is always in the future. Absent a very specific future you can 
point to, people anchor to a very specific past. And that is where you 
get the pushback of: “How can it possibly be worth 5x what it was 3 
months ago?”

Paul Graham: You could even say that the whole world is increasingly 
taking power law shape. People are broken into so many different camps 
now. If everyone were forced to work for 1 of 10 GM-like companies—maybe 
like Japan—it would straighten the power law curve and make it taught. 
Distributions would be clustered together because everyone is bound 
together. But when you have lots of slack and people break apart, 
extremes form. And you can bet on this trend continuing in the future.

Roelof Botha: One thing that people struggle with is the notion that 
these massive companies can be built very quickly, often seemingly 
overnight. In the early PayPal days, there were perhaps 300 million 
internet users. Now there are 2 billion. We have more mobile phones. We 
have cloud computing. There are so many ways to grow. Consequently there 
is a qualitative difference in one’s ability to have such a huge impact 
as an entrepreneur.

Question from audience: Do up, flat, and down rounds reflect power law 
distributions, or specifically where a company will fall on the 
distribution?

Peter Thiel: First, it’s important to note that when you join or start a 
startup, you’re investing in it. All your eggs are in that basket. But 
because of the power law distribution, your investors aren’t in a 
radically different place than you are. In a sense, VCs’ eggs are in 
your basket too. They have a few more baskets than you do, but again, 
because of the power law, not many. VC isn’t private equity where you 
shoot for consistent 2x or 3x returns.

One way to rephrase the question would be: is there a market 
inefficiency here? My backtesting claim is that one should do a full pro 
rata investment whenever one of your companies does an up rounds led by 
a smart VC.

Roelof Botha: I don’t have the data you’re looking at, but my intuition 
is that’s true. But only for the best VCs. Where the VC leading the 
round isn’t as smart or as trusted, the reverse can happen. Companies 
can end up with too much cash. They might have a 15-month runway. They 
get complacent and there’s not enough critical thinking. Things go bump 
at 9 months and it turns into a crisis. And then no one wants to invest 
more.

Peter Thiel: Even factoring in dilution, you tend to do quite well if 
every round is an up round. But even a single down round tends to be 
disastrous, mainly because it destroys relationships among all the 
relevant players. If you’re going to go with a not-so-intelligent 
investor who gives you a really huge valuation, you should take it only 
if it’s the last money you’re going to take.

Question from audience: Does the shape of the distribution curve change 
or depend on the time or stage of the investment?

Peter Thiel: The curve is fairly fractal-esque all the way up. Founders 
Fund tries to invest in 7 to 10 companies per fund. The goal is to get 
to 10x return. How hard is it to get to 10x? It’s about as hard to get 
from $10m to $100m as it is from $100m to $1bn or $1bn to 10bn. Taking 
$100bn to a trillion is harder because the world isn’t that big. Apple’s 
market cap is $500bn. Microsoft’s is $250bn. There’s a pretty incredible 
power law all the way up.

The same is probably true on angel level. The angel investment landscape 
is sort of saturated for angel piece, especially now with the JOBS Act. 
But some would say that angel investors are less aware of power law 
dynamics than other people are, and so they tend to overestimate a given 
company as a result.

Roelof Botha: There is a 50% mortality rate for venture-funded 
businesses. Think about that curve. Half of it goes to zero. There are 
some growth investments—later stage investments—which makes things less 
drastic. Some people try for 3-5x returns with a very low mortality 
rate. But even that VC model is still subject to power law. The curve is 
just not as steep.

Question from audience: What if your business is just worth $50m and you 
can’t grow it any more?

Paul Graham: That assumption is nonsense. Grow it, if you want to. 
There’s no such thing as an immutable company size. Companies are not 
intrinsically or inherently limited like that. Look at Microsoft or 
Apple. They started out making some small thing. Then they scaled and 
branched out as they succeeded.

To be clear, it’s totally cool to have low aspirations. If you just want 
to make a $50m company, that’s great. Just don’t take venture capital, 
or at least don’t tell VCs about your plans!

Peter Thiel: It would raise a big red flag if you were to put a slide at 
the end of your deck that says you’re looking to sell the company for 
$20m in 18 months.

Question from audience: What happens when you take out a bunch of rounds 
and things don’t go well and your current investors don’t want to put in 
more?

Paul Graham: In that scenario you are essentially wasting one of your 
investors’ board seats. Their opportunity cost of having you going 
sideways is very high. People can only stand being on a dozen or so 
boards. Any more than that and they go crazy. So they’ll try to get you 
sold.

Peter Thiel: Such unequal outcomes produces another cost of ending up on 
multiple boards. There are big reputational costs to just switching 
boards. So there is a big disconnect between public branding—narratives 
about how VCs pay loving attention to all their companies and treat them 
all equally—and the reality of the power law.

Roelof Botha: And it can be even worse than that; the problem companies 
can actually take up more of your time than the successful ones.

Peter Thiel: That is a perverse misallocation. There are differing 
perspectives on what to do in these situations. At one extreme, you just 
write checks and check out. At the other, you help whoever needs it as 
much as they need it. The unspoken truth is that the best way to make 
money might be to promise everyone help but then actually help the ones 
who are going to provide the best returns.

Question from audience: Bill Gates took no funding and he ended up with 
a large piece of Microsoft. If a startup can bootstrap instead of take 
venture capital, what should it do?

Paul Graham: VC lets you borrow against future growth. You could wait 
until your revenues are high enough to fund x. But, if you’re good 
enough, someone will give you money to do x now. If there’s competition, 
you may need to do x quickly. So if you don’t screw things up, VC can 
often help you a great deal.

Roelof Botha: We would not be in the business if it were just writing 
checks. The entrepreneurs make it happen; they are the ones building the 
companies. But the board and VCs can roll up their sleeves, offer 
counsel, and assist as needed. They can be there for the entrepreneurs. 
We shouldn’t overstate the importance of that, but neither should we 
dismiss it.

Paul Graham: Just being backed by a big VC firm will help you open lots 
of doors. It will help considerably with your hiring.

Peter Thiel: If you’re doing something where you don’t need to move as 
quickly as possible, you might want to rethink taking venture funding. 
But if there’s any sort of winner-take-all dynamic—if there is a power 
law distribution at play, then you want VC. Giving up 25% of your 
business is worth it if it enables you to take over your industry.

Question from audience: Do Sequoia or other top-tier VC firms offer 
tougher term sheets to account for the extra value they provide? Is all 
the stuff about non-monetary value-add just overplayed?

Roelof Botha: It’s not overplayed. It really is personal. Who are you 
getting in business with? Can you trust them? I wouldn’t send my brother 
to most VC firms. But some are great. You really have to get to know the 
people you might be working with. You’re essentially entering a 
long-term relationship.

Just look at you. There’s information contained in your Stanford degree. 
The signaling helps you quite a bit. The same is true if you’re backed 
by certain VCs. There’s a lot of value in the name, independent of 
things like making important introductions. And strategic direction is 
hard to pinpoint, but it can accumulate in many interesting and 
beneficial ways. Even if we don’t have the answers, we have probably 
seen similar problems before and we can help entrepreneurs think through 
the questions.

Question from audience: Right now, entrepreneurs are trying to flip 
companies for $40m in 2 years or less. The incentive is to flip easy 
stuff instead of create hard technical stuff. What’s the cause and 
what’s the effect? Entrepreneur greed? VCs who don’t value technical 
innovation?

Paul Graham: I disagree with the premise that there’s a lack of 
innovation. $50m companies innovate. Mine did. We basically invented the 
web app. We were doing complex stuff in LISP when everyone else was 
doing CGI scripts. And, quite frankly, $50m is no small thing. We can’t 
all get bought for $1.5bn, after all… [looks at Peter].

Peter Thiel: Let me rephrase the question: are VCs looking for quicker 
profits? Are we getting thinner companies that we should be?

Paul Graham: I don’t think investors have too much effect on what 
companies actually do. They don’t push back and say no, do this cool 
thing x instead of that dumb thing y. Of course, tons of people just try 
and imitate what they see and think is easy. Y-Combinator is probably 
going to be filtering out thousands of Instagram-like applications next 
cycle.

Roelof Botha: If someone came to me and I got the sense that he was 
trying to just flip a company quickly, I’d run. But most founders aren’t 
B-school finance mechanics who calculate exactly what space would be 
most profitable to enter. Most good founders are people solving problems 
that frustrate them. Google grew out of a research project stemming from 
frustration with AltaVista.

Peter Thiel: One strange corollary to the power curve dynamic is that 
the people who build the really great companies are usually hesitant to 
sell them. Almost necessarily that’s the case. And it’s not for lack of 
offers. Paradoxically, people who are heavily motivated by money are 
never the ones who make the most money in the power law world.

Question from audience: If the most money comes from people who aren’t 
trying to make the most money, how do you handle that paradox as a VC?

Roelof Botha: Consider a simple 2 x 2 matrix: on one axis you have easy 
to get along with founder, and not.  On the other, you have exceptional 
founder, and not. It’s easy to figure out which quadrant VCs make money 
backing.

Question from audience: If the power law distribution is so extreme, how 
can Y-Combinator succeed?

Paul Graham: There is a very steep drop-off. Y Combinator essentially 
gets the first pick of a very good national and even international 
applicant pool.

Peter Thiel: I won’t come out as pro- or anti- Y Combinator. They do 
some things well and maybe some other things less well. But I will 
something anti-not-Y Combinator. If you go to incubator that’s not Y 
Combinator, that is perceived as negative credential. It’s like getting 
a degree at Berkeley. Okay. It’s not Stanford. You can a complicated 
story about how you had to do it because your parents had a big mortgage 
or something. But it’s a hard negative signal to get past.

Question from audience: Do you back founders or ideas?

Paul Graham: Founders. Ideas are just indicative of how the founders can 
think. We look for relentlessly resourceful people. That combination is 
key. Relentlessness alone is useful. You can relentlessly just bang your 
head against the wall. It’s better to be relentless in your search for a 
door, and then resourcefully walk through it.

Roelof Botha: It is so rare to find people who can clearly and concisely 
identify a problem and formulate coherent approach to solve it.

Peter Thiel: Which is why it’s very important to drill down on the 
founding team.

Roelof Botha: You can discover a lot about founders by asking them about 
their choices. What are the key decisions you faced in your life and 
what did you decide? What were the alternatives? Why did you go to this 
school? Why did you move to this city?

Paul Graham: Another corollary to the power law is that it’s OK to be 
lame in a lot of ways, so long as you’re not lame in some really 
important ways. The Apple guys were crazy and really bad dressers. But 
they got importance of microprocessors. Larry and Sergey got that search 
was important.

Peter Thiel: Isaiah Berlin wrote an essay called “The Hedgehog and the 
Fox.” It revolved around a line from an ancient Greek poet: foxes know 
many little things, but hedgehogs know one big thing. People tend to 
think that foxes are best because they are nimble and have broad 
knowledge. But in business, it’s better to be a hedgehog if you have to 
choose between the two. But you should still try and know lots of little 
things too.

Question from audience: You mentioned “smart VCs” in your backtesting 
example. Who are the smart VCs?

Peter Thiel: The usual suspects. Next question.

Question from audience: What keeps you guys up at night? What do you 
fear most?

Paul Graham: I fear that something will come along that causes me 
personally to have to do a lot more work. What’s your greatest fear, 
Roelof? Andreessen Horowitz?

Roelof Botha: Suffice it to say that you’re only as good as your next 
investment.

Question from audience: Can entrepreneurs raise venture capital if 
they’ve raised and failed before?

Paul Graham: Yes.

Roelof Botha: Max fell twice before PayPal, right? Here, it’s a myth 
that failure is stigmatized. In some places, such as France, that is 
true. Failure is looked down upon. But much less so in the U.S., and in 
Silicon Valley in particular.

Peter Thiel: One still shouldn’t take failure lightly, though. There is 
still a reasonably high cost of failure.

Paul Graham: It largely depends on why one failed, though. Dalton 
Caldwell got killed by the music business. Everyone knows that wasn’t 
his fault. It’s like getting shot by the mafia. You can’t be blamed for 
it.

Roelof Botha: Sometimes having experience with failed startups can make 
an entrepreneur even better. If they learn from it, maybe they get 
inspiration or insight for their next company. There are plenty of 
examples. But you should not fail for sake of failure, of course.

Question from audience: Do you fund teams of 1?

Paul Graham: Yes. Drew Houston was a team of one. We suggested that he 
find a co-founder. He did. It worked well.

Peter Thiel: A core founding team of two people with equal shares tends 
to work very well. Or sometimes it makes sense to have one brilliant 
founder that’s far and away above anyone else.

Paul Graham: Four is too many.

Peter Thiel: Think about co-founders from a power law perspective. 
Having one means giving up half the company. Having two means giving up 
2/3. But if you pick the right people, it’s likely that the outcome will 
be more than 2x or 3x what it would’ve been without them. So co-founders 
work pretty well in power law world.