Honest question: have the specific funding goals of YC changed to accommodate more pedestrian "lifestyle" businesses? A number of these companies look like they could make viable businesses turning out respectable multi-million-dollar-a-year profits without ever being a target for a billion-dollar acquisition.
(My understanding is that YC specifically targets opportunities that have hundred-million- to billion-dollar potential, so perhaps my underlying assumption is wrong here.)
Does this mean YC is hedging their bets, or are they amenable to funding "low" potential companies now? That would seem to jive with their recent public statements about wanting to expand, since not all viable businesses see huge exits.
Not at all. All of these companies have the potential to be worth billions of dollars or else we would not have funded them. Of course it's not always easy for people reading a short summary on a blog to see that potential, as you can easily verify by reading the comments on early articles about uber or Twitter.
> it's not always easy for people reading a short summary on a blog to see that potential
Very true. Today was the 7th demo day I went to with my fund partners. For each batch, we try to reverse engineer the startup list as much as possible, and we usually figure out 2/3 or 3/4 of the list before demo day. Every single time so far, when I review the list of startups before demo day and check out their websites, I think "meh, seems like this batch is a little weaker." Then I go to demo day, see the full picture on each company, and consistently feel like the current batch is the strongest one yet. It's hard to really understand a company's progress and its potential from its website, or even worse, a one- or two-line elevator pitch.
It's possible, but I think it's more that elevator pitches are often the tip of an iceberg. For example, if Uber had been part of YC, its one-line pitch might have been "limo service at the push of a button." That's not super exciting. But then I'd go to demo day, and full pitch would be: "we're starting with limos, and here's a graph of traction and retention for the last two months, and based on these trends we think we can move to using regular cars and undercutting taxis within 6 months." That's much more exciting IMO.
This assumes it was their plan from the beginning. Is that the case or did they later pivot based on new information. If the latter is the case then any company would arguably have billion dollar potential
Side-note: I realize you were using Uber as an example to make a point but actually "Limo Service at the push of a button" sounds pretty awesome on it's own.
Thank you for your response, Mr. Buchheit. I really appreciate it.
This is the answer I was looking for, one that explains your driving intentions. I'm nothing like a venture capitalist or investor, so I appreciate that I may not have any kind of good read on these companies' potentials.
I can't help but notice this article puts a lot of focus on actual revenue and margins of these companies and almost none on user number growth. At least compared to the relative focus of years past.
Is that a choice of the writer, or was it something YC companies were coordinated to focus on?
Americans spend tens of billions of dollars per year on sofas, more than they spend on mattresses. The market is tremendously big and there seems to be a gap between Ikea and $2k West Elm sofas. That's what Burrow is going after.
So they have taken both the capital costs of manufacture as well as delivery. And they have a product near the grand price point in a market saturated by Target, Amazon, Walmart, IKEA, and who knows who else.
To get a billion dollars of that market, they need to move 1e6 of their sofas--and that's assuming pure profit. How many sofas can they make a day?
I've seen several small businesses whose only function is to pick things up from Ikea and deliver. If people are comfortable buying sofas online, it will apply to a range of home furnishing items. Furniture stores have been selling "rooms" for years for this very reason.
Aside from brand and customer relationships, if the delivery infrastructure for furniture is different than other items, that will provide a moat.
Everyone in this thread is referencing Dollar Shave Club.
Can someone give a good summary of why that company made it to a big exit? What strategic moves did they make that made them succeed where countless others fail? Software doesn't automatically eat the world, after all. Why now? Why these companies? What specifically is the right plan?
Thanks for probably the most interesting business article I have seen on HN in a while!
That said, the market between sofas and razor blades is very different. I don't buy a new sofa every month. Companies don't leverage R&D and advertising the way that Proctor and Gamble did to move sofas.
The Dollar Shave Club Explanation here is optimistic at best.
At list if we look at IKEA(maybe the closest to compare to P&G) - they do have R&D(every year a new lineup, optimizing manufacturing and supply chain), and at least when they grew they did alot of advertising - and they still do some, but maybe they need less because of their strong brand an that they are considered monopolistic locally in places they reach.
But don't take the Dollar Shave Club literally, the point is more the lack of capability of companies(and their ecosystem) to move ahead, because they are deeply integrated/dependent in the past with it's old assumptions.
But now a lot of the old assumptions might be broken : no local monopolies(and monopolies over large areas are much much harder to create), no limit to product variety, much more customization becomes possible, targeting highly focused niches becomes possible, software may enable AI interior designer service for free, the supply chain looks very different for that, etc.
Burrow could get a billion dollar exit through an acquisition but its hardly going to become a sustainable concern. It's designed to sell, basically, and the idea is no more mysterious than building a furniture company that is digital first, which would be attractive to existing companies because they cannot simple change their processes over night.
It might be helpful if you pointed to specific companies which you see as more "lifestyle" businesses.
As others have pointed out, YC (and VCs in general) have definitely expanded outside of pure software companies and a number of them have done well (see Dollar Shave Club). I think it remains very hard to classify companies as lacking in huge potential from the start—originally, I was very skeptical that DSC would ever be worth a billion.
I suspect that it's still a requirement for YC founders to be interested in aggressive growth. It's still for startups after all—I don't think anyone would get in if they admitted their sole goal was to reach <$1m/yr in profit.
Not that my opinion matters for anything, but I don't want to call out specific companies as having "low" potential. Now is probably uncertain and stressful for each of them, and I wouldn't want to undermine anyone's confidence as some anonymous armchair investor on their big day. (I know one should not be affected by that, but we're all human.)
To your point, I wonder if there is some sort of calculus within YC: Company A has 1% potential of a $10B exit, Company B has 50% potential of $100MM/year ... what do we do? Cold logic says we invest in Company A over Company B (not that this is zero-sum), but they can only make so many investments and the real numbers are much smaller than one-percent. Whereas, a series of conservative investments keeps them solvent long-term, while the bigger exits slow boil.
Fair enough, but I think by definition if a company's founders are targeting high/huge potential then it's not a lifestyle business.
> To your point, I wonder if there is some sort of calculus within YC: Company A has 1% potential of a $10B exit, Company B has 50% potential of $100MM/year ... what do we do?
These days, I think the answer is increasingly: both. YC is in the enviable position of fantastic deal flow and also being able to scale up their operation (classes have been getting much bigger).
Of course, they definitely still are going to miss out on some great companies. But I suspect those cases are increasingly ones of YC not recognizing the potential, not cases of passing on companies with only $100MM/year potential.
I suspect that they all have a vision for being a billion dollar company, although that may not be the "phase 1" we're seeing here.
For example, Burrow just sells a single couch right now. It's apparently a really nice couch with a great buying experience, but it's just a couch. Probably not a billion-dollar business.
If I had to guess, though, they pitched a much large vision to YC. They probably talked about a whole suite of barely-luxury furniture. They want to take over the market for 20-30 somethings who have outgrown Ikea but don't want to go through the relatively crappy experience of normal furniture buying. That could be a billion-dollar business.
What you see in a 2 line press article is literally the simplest way to describe what their business is doing right now. The point of demo day is to get people interested in your idea for follow-ups.
Read: http://paulgraham.com/investors.html
There's a question on the app that asks (I'm paraphrasing) "what do you know about your market that others don't?".
Answer: What appears to be a lifestyle sized market to the casual onlooker is actually big business
> businesses turning out respectable multi-million-dollar-a-year profits without ever being a target for a billion-dollar acquisition.
Very hard at the seed stage to tell the difference between a business that will turn out to be a $3M a year business and one that will be a $80M a year business growing at %30 a year. That latter might easily sell for over $1B. ( After all $80M in profit is only a 13X multiple to reach $1B, and growing at %30/year means that's a cheap.)
I hate the term "lifestyle business", it comes from redefining "startup" to be a very specific narrowly defined form of startup of the kind that is popular in silicon valley in the past decade.
Do note that a small subset of "pedestrian"/"lifestyle" businesses are ripe for acquisitions by large conglomerates. Example? Dollar Shave Club [0] who rapidly built a massive brand despite acting as an upseller/reseller.
When the narrative of "the next big thing will look initially like a toy"[0] is the investment thesis, then you're probably going to get a lot of companies that look like toys.
YC's goals haven't changed. The conventional wisdom on what startups make sense to fund is changing though - the whole "software is eating the world" logic suggests that many traditionally non-software businesses are ripe for disruption as well. Think Dollar Shave Club.
That's not quite my question. I'm not referring to the divide between "pure software" businesses and, well, everything else. I'm referring to the divide between $10MM/year gross profit and $1B exit.
Dollar Shave Club had a $1B exit. Is YC willing to fund the former?
It's not just that they're "non-software" business. They're not really even technology businesses, in the traditional Silicon Valley (HP, Intel, Apple, Atari, Synopsys, Netscape, Google, Facebook, Snapchat) sense. Both DSC and Casper are innovative companies, but (as far as I can tell) they don't innovate in technology, they instead use technology to leverage innovation in other areas.
Casper could have been founded 30 years ago. But would NEA and Norwest have invested in 1986 in a version of Casper that used late-night TV ads and a 1-800 number? My guess is probably not. So what does it mean that they do now? Does this mean that the current fashion in VC is shifting away from technology innovation? If so, does this mean that pure technology ventures may soon find it hard to find funding?
(My understanding is that YC specifically targets opportunities that have hundred-million- to billion-dollar potential, so perhaps my underlying assumption is wrong here.)
Does this mean YC is hedging their bets, or are they amenable to funding "low" potential companies now? That would seem to jive with their recent public statements about wanting to expand, since not all viable businesses see huge exits.