Kingmakers... hardly. I remember going to a Commonwealth Club talk in January of 2013 titled: "Y Combinator:The Secret in this Incubator's Sauce". They talked about how YC exits are on par with or worse than any person trying to start a company. Sure there is tons of support when you're in the program and they really try to ensure soft landings through their relationships, but it's hardly a machine where your entrance into YC guarantees you a billion dollar valuation and great IPO.
Saying that, I still think YC is a wonderful program. It's what business school should be — starting and running a company; not talking about it. They have amazing leadership, mentorship, relationships and community in place which remove huge barriers from starting a company. I advise everyone I know who has a company idea to apply every semester.
Can you clarify how terms of changed, or direct me to further reading about that?
Otherwise I think point about the $80B not being liquid is a good one. It's not a dishonest figure, but it's clearly inaccurate and inappropriate for the purpose of estimating returns. The real answer is going to be far more nuanced than simply stating the aggregate value of all YC companies on paper.
It used to be $20k for 7%, now it’s basically $120k for 7% with pro rats rights (that’s again a simplification, but it’s close enough for this conversation).
I agree that n companies valued at over x isn’t a great metric, except that the number is so huge and the valuation so high that a single company could return the entire amount YC has invested, and what we’re debating is if YC are “kingmakers.” By nearly any possible measure they are.
The 'worth' of a private investor's portfolio is a vanity metric. A more precise measure of YC's success would be money invested VS realized returns. Are those figures available?
It’s not really a vanity metric in this day and age. A lot of the best companies aren’t going public... ever. The measure that determines whether it’s a vanity metric or not is liquidity. If there are a dozen investors willing to buy stock at $x it’s worth $x.
> If there are a dozen investors willing to buy stock at $x it’s worth $x.
This is not a correct representation of liquidity, and thinking about it under this definition can be very dangerous. You need to consider:
1. How many shares are there outstanding?
2. What is the ask price of those shares on paper?
3. What is the bid price of those shares by investors willing to purchase them on the private market?
4. How many owners are allowed to sell their shares at the same time?
5. How many owners could realistically find a buyer at the paper ask price of the shares?
6. How many owners could sell their shares before the existing deviation (spread) between the paper ask price and available bid prices changed?
This is not to say your overall point is wrong, it's to say that it can't be defended this way; more importantly, we really shouldn't be simplifying our discussion and its definition of liquidity to the one you've presented here, which is too simplistic. There is a lot of nuance about price discovery between public and private valuation that's missing here. For (one) example, you can maintain an artificially inflated valuation of a private company if there are fewer owners willing/able to sell than there are buyers, despite a relatively larger set of potential owners either not allowed to, or not conveniently capable of, selling their shares. This scenario makes presents an asymmetry between the weighting and availability of positive vs negative price sentiment that is much more easily resolved in the public market.
Of course there’s a lot of
nuance there. But certainly we can all agree on two things:
1. YC has not had good returns because it has only had one IPO (apparently selling Twitch and Cruise for $1B each don’t count as a win?)
2. While it’s difficult to know what the true value of YC companies is, the fact that there are nearly 100 companies valued at $100m+ is not just a “vanity metric.” Especially st the later stages of more mature companies there are real dollars trading hands and there’s more liquidity available on secondary markets.
There’s not really a way to get those numbers outside of asking a bunch of random people. I can say that I worked at a company that wasn’t in the top 50 and the market for shares was completely liquid. Most of the time at $100m+ valuation it should pretty active.
I think you should clarify what liquidity means in your anecdote, because liquidity is a function of time and volume. Definitionally speaking, shares in a private company are not as liquid as shares in a public company. So what does "completely liquid" mean? Could every owner of private shares find a buyer if they wanted to? If not, what subset could?
That these figures are not public is a very important discussion point, because it does introduce some level of anecdata and arbitrary speculation into the discussion. That's not to say you're wrong, but it's certainly imprecise and questionable.
It means I had shares that I could sell a ton a moments notice on a secondary market, and so far as I could tell the market for those shares was enormous. I’d guess anyone, including VCs and founders, at the top 50 or so YC companies could sell their shares at any time to a large number of willing buyers, given the ability to do so. Therefore I’d argue that the value of those shares is far different from a “vanity metric.”
Are there any limitations to who can do what in the secondary markets? (Thanks for your answers to my questions - it's not easy to find information on this and I don't know anybody at a company like this to ask.)
> I can say that I worked at a company that wasn’t in the top 50 and the market for shares was completely liquid. Most of the time at $100m+ valuation it should pretty active.
I doubt realized returns are available, but I think it's possible to at least very roughly estimate money invested. Their current "deal" is $120k for 7%, and that number has been going up over the years. So say all 1,588 startups they've funded got that investment (not true, since earlier investments were something like $20k). You're looking at about $150m in cash investments. According to https://www.ycombinator.com/people/, there are about 50 people working full-time at YC. We're being conservative, so let's say 150 people at $150k/year salaries, over the 13 years since YC's founding (again, very high estimates since they obviously did not start with even remotely close to that many people). That's about $300m.
So we're at maybe $450m spent on initial investments and people over the years. Maybe throw in another $200m for extra investments (I presume they re-invest in a couple promising companies on demo day) and other costs.
They say their portfolio's valuation is roughly $80b. Their "deal" is for 7%. I'm not super familiar with the technical stuff but they really only need to keep about 1% of that total value to be fairly successful, and I imagine that number is probably much higher unless I'm misunderstanding some of the details about how fundraising works.
Their return from Airbnb alone will probably cover the costs of investing in every other YC company. So Dropbox, Stripe, Twitch, Reddit, Cruise etc. are gravy.
I think the fact that they're phenomenal is pretty clear, but I think a more important question is how reliable the returns are. They might be reliable, but that doesn't seem obvious to me from the comments in this thread, and it's still not clear to me that YC is capable of catapulting an arbitrary company in their set to wild success ("kingmaking") or that they're capable of repeating those successes over the long term.
They have consistently pumped out many of the top companies in Silicon Valley for over 10 years now. Most of the companies are newer, as always, and I don’t think YC would claim they can pick any random company and make them successful, but if YC isn’t a “kingmaker” then there’s no such thing in Silicon Valley.
Out of 1280 YC companies, only 139 are listed as dead. Without pulling out a calculator to determine an exact figure, that roughly flips that figure from 90% failure rate to a near 90% success rate. And actually it is worse than that because the 90% failure rate is in the first year and the near 90% success rate for YC is an "all time" figure for the history of YC.
An IPO is not the only measure of success. Some successful YC companies are opting to remain private longer e.g. AirBnB, Coinbase and some have been acquired e.g. Heroku, Reddit.
Being acquired or acqui-hired(soft landing) means the company (and probably the culture) is gone. I worked at BBN Technologies back in the mid 2000's. This is the company that co-founded the internet, they have the second domain name ever registered (bbn.com)[1], their engineers co-invented foundational technologies that make the internet work today. In 2009, they were acquired by Raytheon[2]. As a stand alone company, BBN was not able to generate sustainable value, but Raytheon as the prime contractor is able to.
Also, being private longer but losing money is not sustainable. If companies are private and profitable, then that's a different story. AirBnB is still raising money[3] and their valuation is almost too big for them to get acquired. Their only successful exit is an IPO or becoming so profitable that they can buy out their investors. Coinbase is making a killing so they might be sustainable especially with the growth of the cryptocurrency market over the past 2-3 years (And the fees they keep charging me). SalesForce & Condé Nast have generated more value out of Heorku and Reddit than YC.
Don't get me wrong — I love YC products. I stayed at an AirBnB in March in Vancouver, I bought some Ethereum today on Coinbase, I updated a site I maintain[4] which has been running on a free Heroku Dyno for 5 years+ and my Reddit birthday is January 19, 2010.
YC companies have the same challenges that everyone else has even with their power and influence. There needs to be more of a track record of YC companies succeeding disproportionally to other companies before I could classify them as kingmakers.
An aquihire is not always a positive exit. More generally, not all liquidity events are positive outcomes for all parties involved, including investors. Many exits are agreed to by all parties to cut their losses and recoup some amount of the original investment.
An exit is not an exit for everyone. In a lot of cases, employees are investors too and sometimes acquihires are only wins for people that own preferred stock (vC's, founders), not common stock.
I’d note the article specifically says when AirBnB is planning to IPO.
Private market valuations are more risky than public markets, but it isn’t 2008 anymore, and the ecosystem of large funds funding large growth rounds is well understood now.
I don't think business school is for people that want to be entrepreneurs. I have a lot of friends who think that business school is for people who want to become entrepreneurs. Business school is for people that want to learn how to run and optimize other peoples businesses. I'm currently enrolled in Harvard's Executive MBA program and it's a great program, but it's focused on how to optimize a company that's already moving. I've also attend a few YC Startup Schools and those are optimized for someone who wants to create something from scratch. There are a lot of overlapping concepts, but Startup School and Business School clearly have different goals.
After thinking about it, you're right — Business school probably should't be renamed, but more explicit: Run Someone Else's Business School. And YC is more like: Run Your Own Startup School.
YC today is becoming the same as brand-name universities have. Their hype cycle as kingmaker now attracts 7000 applications for 141 slots. If you pick the best and the brightest, your value add is debatable.
Just like Ivy league schools - regardless of how good their program is, by virtue of picking the best, they have de-risked their brand dilution considerably. Mark Z didn't need Harvard or a degree to become a billionaire. If all the knowledge of YC gets democratized, anyone from anywhere can thrive at a business without going through YC
To be fair, they do share a lot of their knowledge openly. Just check out their YouTube Channel and blog. There are no secrets or tricks.
But I guess YC is more than knowledge. It has a strong signal effect, and the regular OH sessions you get with the partners potentially can help you a lot (even though you already might know what they telling you, but like a fitness coach, it helps you stay on track).
Plus the alumni network, which I guess is especially valuable for B2B businesses and future partnerships.
I didn't go through YC but know some people that have and I think that what it breaks down to.
If all the knowledge of YC gets democratized, anyone from anywhere can thrive at a business without going through YC
I doubt that. Knowledge alone is not what they provide. Additionally, even if it were, we often don't know what we know and trying to capture and convey our knowledge is incredibly challenging.
What people soak up by being in the same room with those in the know and getting their feedback live and watching them model behavior is just not something you can actually convey by (say) writing a book. The book would be the tip of the iceberg, at best.
On the contrary, I don't think there is much evidence at all that the Mark Zuckerberg's of the world have so much innate talent that circumstances don't matter. The more we learn about what explains individual success, it's clear that there are lots of factors pushing a given person towards being successful, and then a lot of other factors pushing that person toward being unsuccessful. There is no "best and brightest," there is a murky combination of talent, privilege, environment, education and luck.
It's impossible to know if Mark Zuckerberg would be a billionaire if not for Harvard, for both easy reasons (maybe if he went to Yale, he would have slipped on a banana peel and then gotten hit by a bus) and deeper ones (how much did luck play a role in Zuckerberg's success, and did the network and prestige of Harvard help him capitalize on his good luck?)
Zuckerberg had many more factors in his favor than just Harvard, that's for sure. Anyone who tries to explain his success by saying "oh, that's because he went to Harvard," is wrong. But it's also impossible and silly to claim that we can know that he is just so talented and intelligent that all contingency removed he still would have become a billionaire.
This applies to the broader argument about Y Combinator. YC has a competitive advantage in that it attracts companies that have many positive factors behind them to apply. But that doesn't mitigate the possibility that YC itself is another positive factor, or that the only benefit to participating in YC is knowledge. From the outside, it seems like the applied knowledge expressed as case-specific advice and mentorship would be hard to "democratize," and that the intense amount of mutual support (start ups patronizing each other and becoming an instant, deep professional network for each other) are also not really expressible as knowledge.
Access is an incredibly powerful resource that YC can provide its companies, and one that has absolutely no correlation to being "the best or the brightest." The reason there are so many successful white male founders is not because they are the "best and the brightest," but rather because they are culturally and ethnically connected to networks that provide them with access to business opportunities and conversations and platforms and education that aren't nearly as available to non-white non-men yet. There are countless "best and brightest" women of color who do not have all of the favorable circumstantial factors that made success easier for Mark Zuckerberg (and obviously made it easier for him to get into Harvard in the first place in various ways) and yet are equally brilliant and talented.
I don't know if it's a popular opinion to hold but YC has always been a kingmaker from the start. Only when Dropbox filed an IPO and is now worth a bazzilion dollars in the public market most of the media has caught up to their work. To the entire team at YC keep going there are phenomenal startups to come :)
In my opinion YC had some good wins early on but now, especially as the cohorts have gotten much larger, it’s not clear if they’re still “kingmakers”. It would be more impressive if their cohorts were still very small and had a high success rate (however you measure success).
The key factor here is the time it takes for a startup to be "successful", it took 9-11 years for Dropbox, Airbnb, Stripe to get to where they are today after they went through YC. It will take a similar amount of time to see how successful the larger batches are. I'm guessing your concern is whether they manage to give the same attention to each of the startups as the intake size increases. PG talks about doing things that don't scale (http://paulgraham.com/ds.html), so I'm guessing YC is trying to experiment with scaling, and it will be at least a few years to see definitive results.
While I love the utility of it, how the hell is that website legal? It’s stated purpose is to violate copyright law?!
From the page trailer:
> Outline is a free service that makes websites more readable. We remove the clutter, like ads, related links, and comments—so you can read comfortably.
Browsers don’t redistribute the content. That’s a crucial difference, much like you can video tape a broadcast and fast forward through the ads at home, but not if you run a pub.
I haven't looked at the code, but maybe this site doesn't redistribute anything, either.
And just because something's executing on the server side, that really shouldn't necessarily change the legality of it. (Hell, maybe Safari or Chrome look like they're doing it locally and tunnel data through a cache server.)
Where did this "editing a copy makes it transformative" meme come from? Legally, transformative means "created a substantially new work" not "mechanically applied a style change that preserves all of the original content and its original value"
By that logic adblock, readable mode, applying your own css and making the text bigger with cmd-+ is 'copyright' infringement since every modification is modifying some copy in memory.
Loopt only made millionaires in a technical sense - they turned $39M of investment into a $43M exit after 7 years. I would imagine most people can do this, e.g. by sticking the money into bonds or ETFs or something. In fact, with $10M of the exit earmarked for employee retention, it seems likely that at least some investors lost money. If investors are willing to lose money on a promising company, making millionaires out of their millions isn't hard at all.
"Michael Moritz (Sequoia partner) is still on the board of Green Dot, now a publicly traded company worth north of a billion dollars. Almost the entire board is Private Equity/VC guys, they do this kind of inside baseball all the time, it's no sweat off their back to do Moritz a favor."
"Buddy exits like this one and the Hunch exit are very demoralising. They make startups look like some sort of game. As you indicated, Loopt was clearly dying and yet people still got rich off of it."
(Of course, none of this should be taken as a negative view of Loopt's founder, who now leads YC - the chances of having a good exit are so low and so randomized that a qualified, smart, knowledgeable founder can still simply be unlucky. But it's still a fact that he was unlucky, and we shouldn't pretend Loopt was a successful exit.)
"millionaire" is hardly successful for YC, any of those people and more would have been millionaires if they joined an established big company. $10millionaires would be interesting credit for YC (and maybe some of them are). And Reddit's impact on society as a top 10 consumer website is undeniable regardless of financials.
Makes sense: Mastermind group. I would like to see a decentralized YC trial, i.e. a group of 10 startups/entrepreneurs, who are at a similar level, come together in a form of support group/alliance: monthly meetings, weekly email newsletters, one-to-one support & communication across several disciplines, etc... I want to track their performance and outcome after 1, 2, 3 years and compare with other existing models.
Does anybody know if the terms they offer to startups are negotiable / have been negotiated before? I believe that it's currently $120k for 7% of the company, with pro rata rights. (it roughly equates to investing $120k at a 1.7M cap).
I think I heard it said there has been the odd exception but the vast majority are that deal.
Update: "While we may deviate from this in exceptional cases, it will still be the case for almost all of the companies we fund." https://blog.ycombinator.com/the-new-deal/
Hey guys, this wasn't supposed to be on the front page. We (Manish, Zach, Kaya, and Lucas) are at the YC hackathon taking place right now. We're building an app that is like MoviePass for different publications. I posted this link here because FB, Google, etc bypass WSJ paywalls but HN doesn't (which we need for our demo).
Kingmakers... hardly. I remember going to a Commonwealth Club talk in January of 2013 titled: "Y Combinator:The Secret in this Incubator's Sauce". They talked about how YC exits are on par with or worse than any person trying to start a company. Sure there is tons of support when you're in the program and they really try to ensure soft landings through their relationships, but it's hardly a machine where your entrance into YC guarantees you a billion dollar valuation and great IPO.
Saying that, I still think YC is a wonderful program. It's what business school should be — starting and running a company; not talking about it. They have amazing leadership, mentorship, relationships and community in place which remove huge barriers from starting a company. I advise everyone I know who has a company idea to apply every semester.
[1] - http://yclist.com