Was just thinking the other day, it'd be super interesting if YC ran some YC Equity/YC UBI experiments within its own network. Basically in joining YC, each YC member would be granted a percentage of YC's 7% stake in all of the YC companies which would reduce their need to fundraise. In theory, YC members should all be highly motivated achievers and use that percentage stake to move their diverse set of businesses forward.
Since there is such a high barrier to entry into YC, it might not prove shared equity/UBI would 100% work in the real world. However, coming at it from the other side, it could provide some early clues as to whether a shared equity/UBI could ever work at all. For example:
- Would YC companies cheer each other on with positive peer pressure/be more motivated to knowledge share or would low achieving YC companies de-motivate high achieving YC companies? Would YC companies who fold be allowed to retain their percentage of the YC stake?
- Would high achieving startups bypass YC or be attracted to YC?
- Would every set of new annual entrants into YC be seen as diluting the value of the existing YC equity or additive? Would existing YC companies want more say in the selection process? Would Airbnb, Dropbox, Stripe receive the same percentage of YC stake as new entrants?
- How do you socialize the concept with existing stakeholders (i.e. existing YC partners) who would be diluted?
- Is it better to implement it as a single monolithic YC group or divide it by YC Class?
Assuming ~1500 YC companies with ~10 employees each, that'd be about 15,000 participants, which would be a pretty good dogfooding [0] experiment!
1. There is a risk of activist or corporate acquirers getting a substantial share of YC after buying out startups. Contract clauses can eliminate that, and prevent dilution, but value of extended network advocacy is lost too.
2. Do dead startups lose their share? If they do, you would see more zombies, which is not ideal. If they don’t who keeps the equity when founders part ways? If it’s the founders based on equity share - see (B)
3. Competing startups could have shares in the successful one, and potential vote, which leads Oracle/Salesforce type battles. Potential swinging votes during corporate governance, but also potential helpful behavior, which while nice could be seen collusion by regulators at scale. That said, startups win with monopoly characteristics, so that may be less of an issue.
B. If you give the equity to individual members:
1. There is selection bias where alumnae help friends and go through the program multiple times - you risk having portfolio maximization and groups voting buddies in for control over YC. Even if you don’t see clique battles, there will still be: Vote these guys in because they were Stanford alumns too. Over time you will lose even more diversity in the network and a broader network that captures the next wave of breakouts not seen by the less diverse YC will gain speed.
2. The resume stuffing and portfolio padding motif to join YC will be dominant to the “let’s build a unicorn” motif. People who pursue status and do YC as the next Harvard will have more easy access (B1) and more reason to go for it.
3. To boost the unicorn incentive the above equity distribution needs to continue only if you have a startup within YC that is actively growing by certain criteria or has had a meaningful exit for the YC network. Another way to protect integrity of the network, is to allow equity in YC to be stacked only if the person has been a founder of more than one startup still growing or with a meaningful exit. This scenario may be enhanced with some incentive for people who join other YC startups meaningfully, but how complicated a structure will be too complicated for investors in the YC startups themselves?
This is first layer of brainstorming with minimal info.
That'll be expensive. On the order of 100's of millions per year at that scale. 15,000 * 1000 = 15 M / month for an amount that would move the needle, but still not enough to live off.
You're right and maybe its more about providing the YC participants with a vested interest in the overall success of all the YC companies than providing them with a guaranteed income for life.
You'd want to size it to provide enough equity to turn the 15,000 participants into active evangelists of the larger network of YC companies than just their own individual startup.
And yes it is expensive. There are definitely significant parallels in that sense to the larger UBI discussion :)
> You'd want to size it to provide enough equity to turn the 15,000 people into active evangelists of the larger network of YC companies than just their own individual startup.
They already do this, for free. The YC alumni network is a vast resource and a substantial force behind the recruitment of new start-ups.
Roughly, yes YClist has 1280 of them, and every half year there are more. And at 10 FTE / company average the GGGP's 15,000 FTE total is believable. It could easily be more than that.
I'm reminded of an amusing projection of telephone switchboard operator jobs (from the early 1900s) soon occupying half the US population, but can't find it right now.
1) UBI (or anything similar) in Oakland is expensive. Back of the napkin calculation: $1,000/month/person = $12,000 = you need about $0.5M in capital to maintain that level of basic income without reducing the capital over time (I am applying the usual 4% interest on capital, for passive income - the number might be wrong or might change in the future (see Piketty) but let's use it for now).
Instead, UBI in other regions of the world can be a small fraction of it (I can easily imagine 1/10th of what it costs in Oakland = $50,000).
2) You have ~15,000 YC alumni. Ask each one of them to commit at least 50k each (or multiples of it), to offer UBI to 15,000 people in a developing country. In exchange for that, you might give them a tiny share of YC (not equivalent to 50k, but perhaps a smaller amount). It shouldn't be seen as a great investment for them; it should be instead done mostly out of altruism.
3) UBI provided to 15,000 people (or possibly more) is the right type of experiment, at a big enough size. It's essentially a big village, or a number of small villages. It's also good to see this applied in a developing country: the impact can really be seen and observed properly.
4) I am pretty sure that there would be a number of volunteers willing to commit their time to observing and measuring the experiment, wherever it will be (however, I suggest to pick an English-speaking developing country, as it makes many other things easier).
When calculating the capital needed to live off the interest, you need to subtract inflation from the interest, as 1000$ will be worth less and less every month. What you need to survive is "equivalent to 1000$ today", not "1000$".
The safe withdrawal rate of 4% (or whichever figure you pick) already includes inflation.
The rule is supposed to be that you have a high probability of withdrawing $X per year, each year, adjusting for inflation, where $X is 4% of your initial starting sum.
This micro-UBI thing is a bad experiment with good intentions.
UBI only works if it's fairly 'U'.
If you give UBI to 'one village' - that village will have tremendous leverage over the surrounding villages. Any rational application of commercial knowledge will - knowingly or unwittingly - drive competitors out of business, and that 'UBI village' could theoretically come to control a lot.
It only took a very small marginal advantage in transport costs for Oil companies to put others out of business and to create massive monopolies.
If you run a little 'sim village' experiment on that, you might find the UBI village owning all the regional real-estate over time and just extracting rent.
Another way of saying: a consistent, stable fixed income, even a not very big one, can be a powerful asset.
In the beginning YC kind of was a UBI experiment. $20k isn’t enough for more than living expenses for some amount of time. Of course, $120k is a bit more, but in my mind YC was a very successful implementation of UBI.
It was a BI experiment, the U being eliminated by heavy selection. Xerox PARC started that way as well - select very talented people, then give them money to work. UBI presumes you are ready to give the guy begging on the street with an alcohol habit the same check you'd give Drew Houston.
A company can pick its most favorable market to make a profit (people with money to invest then boost the companies with most favorable returns). Government is a silent partner in all commercial transactions because it has to serve all of the other citizens too at a basic level (it can't just pick and choose). Non-profits get a pass on taxation by the government to serve the markets missed by profit-makers.
This is a reason I like paying attention to Sam, looks like he has an experimental streak and is not motivated primarily by greed but instead shows a benevolent or generous approach.
Unfortunately such an approach is not shared by the majority of well-heeled capitalists who are interested and available to supply the next round of funding for the growing number of the very entrepreneurs that he helps to get off the ground. This puts him in a unique position to see the effect first hand and looks like it's getting him started at a young age seeking solutions which could maximize the return from scarce resources (or in his case more abundant financial resources), one of the most important of which is to reduce the suction of pure greed from the mix.
Seems to me it is exactly that suction on what is supposed to be the most prosperous and promising nation that keeps there from being enough to go around anyway.
Then again I have always done the math a little differently than most economists, but I sure have been doing it a lot longer than the vast majority.
So I think it would add up better for a greater number of less privileged citizens if the bar were lowered for entrepreneurs and raised for follow-up VC's first and foremost on the greed factor itself, and this is something that YC for one can implement on it's own, at least within its growing sphere of influence. If Sam is not yet capable of accomplishing this just by saying the word, I hope that does occur during my remaining lifetime. This could be gradually accomplished, and if momentum is not lost along the way, taken to its logical conclusion from this one seed it could end up becoming more universal than anything anyone has seen before.
It's impossible to put numbers to the difference between committing resources to a less financially capable entrepreneur with an apparently weaker idea and market, versus an alternative that rings all the bells for the majority of VC's even when you try to include greed as the realistically destructive factor that it has always been.
Therefore you just have to do more advanced math without using numbers or prosperity will never become as universal as it could be.
When you leverage greed, you are only going to get more greed in return.
So it might be more accurate to restate this little problem as "Too many greedy VC's are investing in otherwise promising YC companies, and that keeps some of the most ideal investments for less greedy VC's from moving in the direction of YC to begin with".
“a less financially capable entrepreneur with an apparently weaker idea and market, versus an alternative that rings all the bells for the majority of VC's”
You are assuming those variables have any correlation whatsoever, and I’d argue they don’t. If YC was to decouple them in their decisions, they would see a lot more returns. If they could provide more info, so VCs could decouple them you would see a new golden age for Silicon Valley. Less financially endowed entrepreneurs who persist nonetheless can have resourcefulness or insights into bottom of the market ideas that can make a huge return with small improvements (Whatsapp). They often lack the wealthy network for similarly less burdened cofounders and investor intro and advantageous information often distributed at top schools with most affluent founder candidates (each top school takes pride in sharing nonpublic insights with their disciples from VC network tips, to the personal preferences of each judge in the supreme court).
YC has the network to beat all advantages provided by pedigreee schooling which means they can venture far beyond Stanford grads and invest in less trite and privilidged ideas that have actual potential to change the world. The founder disadvantages could be mitigated with a standard toolbook and the network. YC could play Moneyball for early stage startups, but they don’t seem to just yet.
The quotes you provided in the article weren't clear on this: did you mean to say that some of these companies don't deserve funding or that it would be a better choice for them to continue to grow and operate without raising capital?
> Basically in joining YC, each YC member would be granted a percentage of YC's 7% stake in all of the YC companies which would reduce their need to fundraise.
I was curious what this could mean in reality so I did some back of the envelope math. (As a disclaimer - I have no inside knowledge of the performance of YC's portfolio, so all this math could be wrong.) YC Summer '17 had 294 founders at 124 startups. Let's say there is an Airbnb ($30 billion to common at liquidity) and three smaller but still substantial exits ($1 billion, $500 million and $250 million respectively, same terms). The rest of the class is a wash after expenses and fees which leaves $31,750,000,000 to split up. On a side note, every time I do this math I'm reminded how the ten figure exits really carry the rest of the valley along for the ride; whether there is one in your class or not is a roll of the dice.
YC keeps 4% for themselves (out of which they generally fund expenses and management fees) and puts 3% (with no carry) into the common class pool, divided equally by startup (not founder, to avoid perverse incentives around cramming). In other words, the YC Summer '17 class collectively owns 3% of every member company. After ten years the 3% has been diluted down by follow on rounds to 1.5%. At liquidity, the fund returns 1.5% of $31.175 billion: $467,625,000. Divided among 294 founders equally (which it wouldn't be, as mentioned above - but for easy math) that's about $1.5 million per founder.
If you miss the class with an Airbnb, Uber, or Snapchat and end up with (merely) a few traditional unicorns, the returns decline 90% to a couple hundred thousand dollars per founder, a.k.a. not that exciting financially. So it seems like a gamble.
Still, I like the spirit of the whole idea. As a lifelong entrepreneur who hasn't quite pulled the trigger on applying to YC this might push me over the edge. It would definitely feel like being part of a grander experiment of some kind.
Maybe I'm missing something. I don't see how that would reduce anyones need to fundraise. No one can wait around 10 years for others in their class to become liquid to fund their company.
I might be confused, but I thought it was a fund composed of a percentage of all YC companies, not just the current batch. So past batches would be liquid and able to return value to support current batches.
This is, of course, largely how firms trading with their own money work, but not historically how VC firms operate.
If you know you are a likely to get between $100k and $1m in ten years, then there is a lot less financial risk of not putting any money in a 401k for a few years when creating a startup that eventually fails. I think this is a really cool idea. It would also will bind the group together even more (if you think that is a good thing).
I do. So do my cofounder and many of our employees. We made the 401k available around 15 employees (I think). The tax savings of the 401k offsets the cost of providing the 401k, so its basically free-ish to offer... without matching.
For reference, we started offering the 401k before our A round. At that point, we had raised $2M and were still under $1M ARR run rate. Based in the Bay Area.
I don’t get the narrative that startups pay very little or don’t offer any benefits. We pay competitive comp and offer good benefits to get great people. We’re an enterprise SaaS company, so maybe pre-revenue or consumer or hit-based companies are different. But even our first employee was well compensated. Though at that point, my cofounder and I were paying ourselves well below market and were living off savings.
I was thinking more along the lines of solo-founders. Obviously if you can afford to pay employees, you can afford a 401k. Which brings me back to the fact that you probably still need money to pay employees; which generally means you still need funding unless you're profitable very early on.
We're entirely bootstrapped, but we provide a recurring service and it's taken me 2 years to hire our first employee. I don't think most companies can wait 2 years after launching to hire an employee (We couldn't even.. I had to bring in short-term help on numerous occasions).
First, huge respect for bootstrapping. My co-founder and I ran a bootstrapped company together for over a decade. Skipped our own paychecks three times to ensure we made payroll for our team. But I’m sure you have your own stories just like that. Again, HUGE respect to you and everyone that operates without a backstop.
We went just over two years in our venture-backed company before hiring anyone. Built the business to nearly $200k ARR. Everyone we told was amazed. But if 2 people can’t operate a business with only $200k top line, you don’t need a complex financial model to know that your economics aren’t where they need to be.
So, yes, you need to have revenues and cash before you can hire and pay salaries. 401k is only a little further out than that.
UBI at this time has just became a fancy word for "money for nothing".
- Wouldn't it be nice if X just gave away money for nothing to everyone.
- Oh, yes, of course it would be.
Wow imagine a UBI concept that has a barrier to entry dependent on one's merit and qualifications and stipulates that the recipient contributes a certain number of hours per week to a pursuit that generates a positive economic input. This is a brilliant idea, if only somebody had come up with this earlier.
It'd be funny snark if it were true, but the point is that the only qualification is to be a member of YC. Nothing else matters, including how much or little effort you put in.
Also, members of YC are members for life unless they get excluded. It doesn't matter if their company fails.
To me this leads to a question about the Bay Area centric techno-spehere: at what point do the prices become so high that companies/ecosystems in other parts of the country become relatively attractive?
I understand that the SV network is a real and powerful thing, but holding all else equal (indulge me), wouldn't it make the cost of startups more attractive for all stakeholders if an alternative, viable network were in Buffalo or Nashville or Boise or wherever? Is it just a matter of lack of coalescence?
I believe the network in the Bay Area is valuable. However, I don't know concrete examples of benefits that being based in the Bay Area brings. From my perspective as an upcoming newgrad, the companies in the Bay Area are great, but their location is decided by the founders/stockholders/executives. I'll try to see what are the pros for these people.
Off the top of my head:
- Nice weather
- Proximity to LA, meaning access to nice events or parties
- Proximity to friends. People who you've met through events in the area
- Proximity to other startup executives to exchange thoughts on company matters. (The bigger the company to share thoughts with, the better)
+ Same for counselling investors
- Proximity to investors or possible investors
+ Tangent: if your connections can afford to live in the area and are relatively comfortable, then they might have many thousands of dollars to spare.
- Proximity to Stanford, Berkeley, and other big name universities
- Culture that appreciates tech, such that many people like to discuss new technology
I can't think of other big benefits of being based in the Bay Area from the perspective of the biggest shareholders of a company/founders/executives.
When you're shooting for one company to return 100x your investment per fund, a 2x difference in cost to get the best possible environment for the company you're funding is worth it.
This is not the investment strategy of venture capital, though; they're not trying to be "smart" by picking a few good bets. They're placing a lot of small (small for them, "overfunded" for you) bets in order to increase their odds that one of the bets is really, really good. The more bets they make, the more likely they've bet on a 100x winner.
There's a certain element of myopia in SV, I think, in that people there seem not to understand that places like Austin, Fairfax County, and the Rt 128 Corridor do in fact currently exist and are full of startups doing startup things.
I think people vastly underestimates the social factors involved (e.g. status) and are willfully assuming that there is some rational economic factors to explain it.
To some degree it matters how interchangeable a founder is with an employee at a high paying tech co AND how much those high paying tech companies continue being the highest paying firms (in turn setting prices).
I suspect the answer to both of those questions over the medium-term is yes; if the entrepreneur's life (esp. their own network!) is already in the Bay Area (with the fallback being working at a high paying tech company here), there's a lot of cost to move to these lower cost areas. Even more so if the entrepreneur has family.
However, less tech intensive start-ups (say operations focused) may very well start popping up in higher numbers outside the Bay Area.
(1) Branding-- many companies actually maintain a faux office in the Bay Area because having a Palo Alto or Menlo Park address makes you look smarter or more legit.
(2) Investors-- talent and opportunity is everywhere, but smart tech investors are super-concentrated in the Bay Area. The further you get from it the less knowledgeable and more conservative the investment climate becomes.
In the long term I think (1) will fade and (2) will get disrupted by crowd funding.
This does not match reality since most startups in SV pay very very very little. In many cases barely enough to live with roommates (and forget having a family)
Based on nearly 15 years of working at startups: wut?
This is absolutely not true in any way. They sometimes pay less because they try to trade options for salaries but that’s becoming less popular given the lack of cashing out and people’s better understanding of the economics of it.
You can get low to mid six figures at a startup easily... which absolutely does not match your description
I'm not sure how much bay area real estate shortages drive this; I suspect little.
1. It's unclear how much additional housing will drop prices. There's enormous demand and denser housing costs more to build per square foot. Realistically, we're talking 10 to 20% drops as upper bounds of cuts (think Seattle costs)
2. [Edited to clarify price driving] These companies have decided to be in the bay area for some reason (mainly talent pool?) At that point, you are competing with very high paying companies. (Top prices for senior eng being set by companies like Google which pay $300k TCO; Series B stage startups need to do $170k+ cash to be competitive.. while not everyone can command these jobs, land costs are being set by them)
3. Sure, there might be some people excited enough to take a pay cut. But I suspect a lot of the problem is how poor the expected outcome is for first employees. Companies still seem unwilling to give out equity levels that justify pay cuts (i.e >10%)
Thing is though it’s not that easy to get a big4 job. It takes several weeks or even months to land those competitive roles whereas startups are much easier. Not all of us have the talent to land that big4.
>> you are competing with very high paying companies
True. But for people looking to do something meaningful, which they may find spot-on in a startup, you are competing with cost of living on the downside, not just alternate employers on the upside.
Agreed that cost of living is a factor. However, one upside of being in SF for employees is that there are so many start-ups that it is relatively easy to find one that is both meaningful + pays decently
Early YC: Small, gets disproportionate number of wins. Develops top tier reputation.
Later YC: Expands significantly due to the added prestige, and now performs much closer to the mean.
Today: Sam says that "too many YC companies are getting funded".
Is this fundamentally different from a mutual fund that yields 25% above market for a few years in a row and then performs closer to the mean for the following decade? In the mutual fund game, it's very common (hence Vanguard).
Surely during those top performing years the mutual fund managers strongly believe that they have deep insights that are the root cause of their funds' performance. But the following decade proves otherwise.
There probably are deep insights that lead to the root cause of success in both situations. Once these insights are made public or more people discover and exploit them on a widespread level, the market inefficiencies that gave the possibility for outperformance then disappear. If you don't find a new edge, you revert to the mean (or maybe rather, the "mean" catches up to you).
I think olfactory’s implication is that they get lucky at first, develop a reputation due to that luck, then revert to the mean. That there is no secret sauce at all.
Even if others don't discover and adopt your ideas - there is a limited market size for most investment strategies.
If you are good at picking winners for some specific type of startups, but there are only 10 of them per year, then you can't grow your fund from 10 to 100 investments per year and keep the same returns.
If you discover a clever arbitrage opportunity or market inefficiency, but there is only 1M of trades happening in that market, then you can't dump 100M into the strategy and keep the same returns.
Mutual funds and VCs have an incentive to increase fund size due to the 2/20 compensation. They make a 2% of funds under management win or lose, so it pays to up-size the bucket.
With early stage that is not an incentive, and the merit lines are so much fuzzier (is the fund adding value) and for smaller funds - how do you maximize odds of finding and funding the few winners. With increased late stage funding, the early money also get less priority, not to mention the delayed liquidity (unless they can sell to later investors).
Some real perks of having YC in the startup ecosystem is that it:
1. Grows the "seed variety" and "size of land planted" to get more founders with broader backgrounds and in more disciplines to build startups. That dramatically increases the odds of an unintuitive next-big-thing sprouting in Silicon Valley.
and
2. Fertilizes the soil - as YC alumnae help each other and can strike better deals or give each-other an early lift.
Demo day pressure-cooks many to fail or fly fast, and if too many are raising money means they is either a selection problem or a program decision to make:
- Startups picked are too early, or in less VC-worty sectors that need more incubation, or founders don't always have an incentive or plan to build a sustainable business beyond doing YC and raising a lot of money for bragging rights. They can easily an expectation that fundraising happens in 3 months, or narrow the selection of RFPs to later stage more immediately provable.
- Or YC just lets startups pick any demo day they want, but has to carry an ever-increasing load of zombies, or startups too-niche to accelerate with every increasing demand on partner's time. The latter helps both 1 and 2, but it has to be done in a sustainable way. Use Startup School as alumnae-expandable program for on-going incubation?
Even after ten years, that early success mutual fund won't be investing in entities that actively try to appeal to them, specifically.
Contrast this with YC, there is probably a whole ebook lurking somewhere in the depths of the Amazon catalog that claims to coach would be founders in how to best pitch to each individual star VC.
Founders are already winning if they only get funded, but investors need an entirely different kind of success. This misalignment (the funders' success is only a subset of the founders' success) is what I think Altman is talking about when he says "too many YC companies are getting funded". At the point where the two success metrics do not overlap (stretching the runway of an eventually failing startup for the maximally viable founder lifestyle), funder and founder are adversaries, which makes it a different (more difficult) situation from mutual funds.
What’s your source for YC now performing much closer to the mean?
I see it more like Stanford. Become prestigious, then you get all the best folks, many of whom would have been successful anyway, but you still add value as well as serious signaling and a rich network.
I don't know. Coinbase is sure looking like another hit. I think crypto is a bubble, but you can't deny that they picked another big winner as recently as 2012. And they had Instacart in that same S12 class as well.
Maybe I'm misinterpreting but in a way it sounds like he's saying that YC sometimes (often?) bet on ideas / teams that turn out to be crap. Well, of course that's going to be true.
Just they same, prestige or not, track record or not, it's also possible that not all ideas / teams were the right fit for the YC program. That is, yes within YC they were bad bets, but that's not to say things won't change once they're away from the VC dynamic.
Finally, perhaps he feels that by others putting money into what YC might consider a lost cause, those others will eventually realize what YC realized? But now the losses of others could be "blamed" on YC and thus tarnish the YC brand going forward?
> Finally, perhaps he feels that by others putting money into what YC might consider a lost cause those others will eventually realize what YC realized?
It's hard for 3rd parties to discern this, when YC has given the very companies being criticized seed money. Pair that with the competitiveness between angels and VCs, plus FOMO; and it gets even harder.
This seems like a signalling problem. If a YC company looks for funding at some point after demo day, the first question VCs ask is going to be "why didn't you raise money at demo day?" -- so there's going to be an incentive for companies to go after money at demo day even if they're not ready simply because it will be much harder if they wait.
I wonder if it would be effective to tell YC companies that they can participate in a demo day, but it doesn't have to be the one for their batch -- so a company could wait and join the following cohort in order to avoid the stigma of being "the company which couldn't get funding at demo day and is now going around to VCs one by one".
Ironically it might be a lot easier to raise money as long as there is less substance to the company. Dreams of getting in on the ground floor work so much better to woo investors with visions of Dropbox and Airbnb in their heads than a year old start-up without traction.
Besides that after that year the start-up will likely be out of runway and so in a much harder position to negotiate from.
If I were to run a YC backed company (which I won't be doing) I'd definitely use demo day to it's full potential.
Listen to the AirBnB story on the podcast "How I built this". Before YC, nobody wanted to invest in AirBnB and the company wasn't profitable. YC is how founders find ideas (in the case of Reddit) or refine them. (in the case of AirBnB) In the end, the short time offered in YC allows founders to create the minimum viable product and start to or continue to gain users. The fact that so many companies gain some form of investment shows that YC is a success! Some companies may eventually fail, but YC is a success.
Is it? I feel like they get so many applications and the bar is so high now that most of the teams are already getting steady revenues before even getting in.
This is one reason ICOs will hopefully disrupt VC strangehold. It's senseless for the fate of good companies to be determined by bogus social dynamics.
I get the regulation argument, but protecting stupid people from themselves is a losing battle. Everyone will know not to mortgage your house to invest in a new startup the same way everyone knows not to do heroin. Some people will anyway. But they already can participate in ICOs illegally, so it's a pretty decent analogy.
> I wonder if it would be effective to tell YC companies that they can participate in a demo day, but it doesn't have to be the one for their batch -- so a company could wait and join the following cohort in order to avoid the stigma of being "the company which couldn't get funding at demo day and is now going around to VCs one by one".
I mean.. that'll just change the first question VCs ask to "Why weren't you ready for demo day?" Maybe not as bad of a signal, but could still be construed as negative. (EDIT: Negative independent of how valid your reasoning your answer or spin you provide)
I know a fair bit of YC companies, and a trend is clear from the last few years. As they say: it's not that YC picks the best startups, it's that the startups they pick "become" the best startups (i.e. crappy companies look good just for being in YC).
This definitely isn't healthy, and I'm glad they at least recognize it.
Seen this from the beginning of 2011. Raise the money, throw a dotcom-grade party at MGM Grand, spend like there is no tomorrow. No worries, the product and customers don’t matter much. Networking and hustling are everything this is all about. Rinse and repeat.
This is unhealthy and could not last for too long.
I disagree. Sure some do that, but a lot don’t and focus on data on customers and are hard working. Even bad companies are hard working. It’s just sometimes the founders can’t get the product to have a product-market-fit. And product-market-fit is a lot harder to achieve than an outsider (of a startup) would think.
This seems to fit a continuous change in YC and perhaps tech in general. YC doesn't seem so eager to fund 1000 startups so that 2 of them become unicorns anymore.
It's more like they want to fund 1000 startups so that 100 are sustainable.
We don't hear moonshot or billion dollar market depth or hyper growth as much as we used
Good for the founders but bad for YC, since they miss out on moonshots if they aren't
optimizing for moonshots (which make up 90% of their valuation) no?
Not being in a position / deciding not to raise money has helped me immensely. It's also been hard. A little bit of raising money is "getting out" of work... you raise money to feel good and successful, but the work of the startup still isn't done. I've had to bear the full burden. If I would have raised, it would have muddied the waters. I would have 10 different priorities, other than writing the software.
The irony of the game is that having money in the bank let you hire great people and pivot to the right idea, but to raise money you need great people and the right idea. So, MAYBE, it's not that bad of a thing to raise even if you don't have everything figured out yet.
YC participation is a stamp of approval. Unless YC intends to take on responsibility for follow on funding in some kind of exclusivity - which on the record from a partner at YC is definitely not in the plan [1] - then Sam will just have to live with that. After all, companies are - for now - still free to try to raise funding from outsiders once YC has made their bet.
On another note, it's those investors money to waste, if they want to burn it on companies that don't make it then in the long term this will self-correct because there will be less money available from such investors.
I think it's an honest comment about the "Halo-effect" the YC stamp can have on investors.
One useful counterfactual is thinking about what our comments would be if Sam said "more YC company should raise money immediately after the program". I think it would be very hard to defend that every (most?) startup is ready for such a commitment at that very specific moment in time.
They invest based on very little data. It's more a gamble, but they gamble at scale, with good odds.
It doesn't mean every one of them is good. They don't know which one is good with the data they had, but are wise enough to accept they know little and instead chose to invest in several.
Maybe I'm missing something, but isn't one of the reasons to join YC is to find ways to get funding? Even in the Standford videos, there's a lot of focus on the topic of raising money.
I think Sam's point (or concern) is with the so-called "Startup-Culture". There's a big focus on...
-1 Presenting a basic idea
-2 Get into Y-Combinator
-3 ???
-4 Profit
Or, I think that's how startups are interpreting what being an entrepreneur is all about.
I think Sam's point is that the product shouldn't be a placebo that happens to raise money. Or, to better say it, you are not here to be good at fundraising. You are here to be good at making a product that will (wait for it) change the world.
I think the success of those so-called unicorns (Dropbox, AirBnb, Twitch, etc.) had caused this problem. There are a lot of investors that are willing to spend away hoping for something to stick and to become profitable. On the other hand, there are a lot of startups who's soul purpose is to be good at selling a 'not fully realized' idea, raise a ton of money, and then cash out. Oh, and have 'fun' while doing it. Why? because it works!
Now, if someone was banging on my door desperate to give me a crazy amount of money with almost no strings attached to but into my 'shell of a product' I may consider taking the offer. But doing so may benefit me, but could cause harm to those who really have a great world-changing idea.
Look at your competitors. What do they legally have to do to operate? Licensing, taxes, insurance, permits, etc.. Tally up all those things. Then stop paying them. Now you can offer lower rates than competitors. If the government tells you that you have to do certain things hire a lawyer and claim that you aren't actually in the industry that you are in.
Bonus points: Instead of employees use contractors, and instead of making capital investments make your contractors do it. Just make sure you can change the terms of service at any time, without consultation.
Read The Upstarts by Brad Stone. It's a fascinating book about the rise of Airbnb and Uber. Also check out the podcasts with Joe Gebbia and Brian Chesky on How I Built This and Masters of Scale respectively.
These kind of companies are among the hardest to get going unless you are the first entrant into a new field. The chicken-and-the-egg problem can take longer to solve than you can stay liquid. Better make sure you have a lot of runway.
This guy is not really a good thing for YC, I honestly stopped caring that much about this incubator after that guy who was in before him left. Sam Altman should be removed.
Not quite. Fund managers generally have a fiduciary responsibility to their limited partners, meaning they are required to act in ways guided first and foremost by what increases ROI.
There's a lot of room for interpretation there about short term vs long term gains, the investor value of creating sustainable businesses, and of course the biases the manager's own political views inject into their decision making. But he or she must still act with investor ROI in mind by investing in the companies they honestly think likely to succeed and then help them do so. To fail to do so would be to face investor revolt and possible lawsuits, and undermines those hard working entrepreneurs who take their companies in different (and maybe more profitable) directions than their investor had in mind. I don't like that.
To rephrase what I originally said, I prefer my investors to be economically rational in their motivation, not political. Hence I have never sought YC investment under Mr. Altman, nor do I intend to. Thankfully I've done just fine without.
Yes, this forum. This forum makes it marginally easier for their companies to get recognition and hire employees. Additionally, if you look at the really successful companies that have come out of the program, they were all funded by YC when they took on far less companies.
Well, companies take many years to reach that stage of success, so of course all the successful companies will have come from the past batches when batches were smaller.
It sounds to me like Sam was just trying to say that the reputation of YC-backed companies often preceeds them and that VCs look at YC graduates with rose tinted glasses, which they perhaps should not. Doesn't seem like a bad thing to say at all.
The difference between the first round and future rounds can be significant. Sometimes there's no company, and since there's no company, a company isn't raising money. Often the prospective founders don't start working on their product until they raise, even making it contingent on raising money, which means up until Demo Day the founders haven't tried to build their product and raise money at the same time. Finally, most aren't raising based on market traction – at YC stage it's valid not to have any market traction (though having traction at that stage is also valid).
Hmm, I was going to say that at YC they're investing on the team more than the product, and they can afford to do that, but I think investing primarily based on the team is common after the seed round too. So I concede that it doesn't make logical sense that the YC startups are too early to invest, if you have the right investor, that is going to play a similar role to YC.
Aka... 'too many' companies go on to raise outside money and dilute ycombinator shares. How unfortunate that ycombinator can invest a limited amount of money and have graduates turn around and get 10x as much from other investors. It must be stopped!
Also, I'll have some serious respect for YC if I'm not banned for this comment =)
If the trolling gets me a response from one of HN's most famous members then so be it
edit: You gotta admit, my point isn't groundless. I would disagree that it's trolling since HN is owned by YC but if you're right about them not using their position to silence criticism I respect that
Since there is such a high barrier to entry into YC, it might not prove shared equity/UBI would 100% work in the real world. However, coming at it from the other side, it could provide some early clues as to whether a shared equity/UBI could ever work at all. For example:
- Would YC companies cheer each other on with positive peer pressure/be more motivated to knowledge share or would low achieving YC companies de-motivate high achieving YC companies? Would YC companies who fold be allowed to retain their percentage of the YC stake?
- Would high achieving startups bypass YC or be attracted to YC?
- Would every set of new annual entrants into YC be seen as diluting the value of the existing YC equity or additive? Would existing YC companies want more say in the selection process? Would Airbnb, Dropbox, Stripe receive the same percentage of YC stake as new entrants?
- How do you socialize the concept with existing stakeholders (i.e. existing YC partners) who would be diluted?
- Is it better to implement it as a single monolithic YC group or divide it by YC Class?
Assuming ~1500 YC companies with ~10 employees each, that'd be about 15,000 participants, which would be a pretty good dogfooding [0] experiment!
[0] https://en.wikipedia.org/wiki/Eating_your_own_dog_food