How very Silicon Valley of the author to treat these numbers almost like they're profits, or any reasonable sort of "income" at all. The real question is: how much of that money has already been multiplied tenfold, through exits, IPOs or exorbitant profits?
What on earth did the author say that conflated fundraising with revenues? All he did was compute an average and list some individual amounts raised.
Also, a 10x return is the sort of target a VC will have for a series A round. Investors in later stage rounds have lower expectations. And since later stage rounds are much bigger, that means most of the money invested in a successful startup is done with the expectations of way less than 10x returns.
From what I know, I would guess that the investor of the median dollar of that billion is happy with the way things are going so far.
Essentially, my complaint is exactly that: he just reported the numbers. In a more mainstream financial magazine, I would've expected the author to also do his best trying to find out what those investments are doing. Basically, what I find an interesting question is "Ok, so $1B has been invested in YC companies. How much are those worth now? Of those which exited, how much did they exit for?". Essentially: how healthy is the startup ecosystem economy?
Why can't TechCrunch ask and answer questions like these?
The impression I get from articles like these, which don't balance the equation but just say "investment, hooray!!", is that the common conception in Startupland is that you're already halfway done when you secured a large amount of funding. In other words, that getting investors implies success. Some other commenters in this thread called me bitter and even jealous for that, but I don't understand that. Sure, getting investment increases the chance for success. Admittedly, I'd go and share a few drinks if someone just gave me a few million dollars for me to spend on making my dream reality. But it's not success yet. I'm still very much in the red!
Now, what I find really interesting is the last line of your comment. Do you have any numbers about that? How much is that $1B worth right now? (and, why didn't TechCrunch ask?)
ps. I really believed that tenfold returns were expected in later rounds, too. Thanks for clearing that up.
Surely also the big question is how much real long term value has been created, versus how many photo-sharing apps aqui-hired.
I bet that $1b could do a lot of good finding cures for diseases, rather than pumping up web startups to be sold on. But I guess there's not so much profit in that.
Note that I'm not beating up on YC here, I'm just stating an opinion on web-startups in general and the ridiculous valuations of them lately.
A lot of $1b's are invested into finding cures for diseases, you just don't read about it on HN. It's nearly entirely done by the relatively small number of very large farmaceutical companies in the world.
I forgot the numbers, but getting a single new medicine on the market is frighteningly expensiv (and it's being done anyway).
Personally, I think it's fine that meanwhile some other people are investing in companies that allow me to easily sync my files across devices.
Wrong target populace for that kind of news I think. These investments are (without regarding the amount of it) are business as usual, in Start-Up land as well as in Big Pharma land.
What makes the one billion interessting for HN are 1. it quite a sum 2. from an investment point of view a good indicator for success (only since you can estimate the overall value of the portfolio, success for the individual companies is something completely different) and last but not least it's pg and YC companies.
Somewhere further down in this discussion raising money was called an interessting way to pay salaries (or something along these lines). And for me there lies some truth in it. For a certain growth rate one needs external funding to keep the business running in a pace that wouldn't be possible on income alone. The problem is, at least from my point of view, that it's a tempting idea to do all the growth on funding instead of income. And then it's only a small step to hold funding in a higher esteem than income and profits. A view I for my part I see kind of reinforced by the tone of the TC article.
Again I agree that to build the next Google or whatever funding is necessary. But focusing in funding as the only source of cash for a business and as an IPO as the only way to make a profit is equaly dangerous.
But I think you that's more or less in line with your essays on fund raising. If not I understood them wrong, so feel free to correct me!
Why are HNers so dense when it comes to fundraising? No, the treatment doesn't come off at all sounding like profits or income. Yes, fundraising is definitely a point of success. Why do HNers have such a hard time with this? Money is an important resource for growing companies! Sheesh.
I think they're not so much dense as bitter. There's a subset of HN readers who regard startups as a whole as a sort of con game, and are angry that the participants get so much attention. There may not be that many of them, but their anger makes them disproportionately active as commenters and voters.
I probably belong to that subset. "Bitter" is an uncomfortable term, but probably accurate. Personally, it's not that I think startups are a con game (and certainly not YC); it's that YC represents a tremendous amount of support and resources and influence that aren't available to people like me who are working just as hard, and are just as skilled, but aren't a good fit for YC.
It's tough in practice to not get a little envious of that support when you don't have it.
I still think it's good manners to keep my jealousy to myself though. This is a YCombinator forum after all; bringing bile here just because we're not alums is not cool.
Definitely good manners to keep the jealousy to oneself, but more important to get rid of the jealousy altogether. Resenting others for their success/progress is a huge energy waste (been there, done that).
I'm neither dense nor bitter, I just think there's something[1] a bit wrong with a world in which SpaceX (a startup FWIW) can bootstrap a space programme from scratch for less money[2] than a photo uploader is apparently worth[3].
> bit wrong with a world in which SpaceX (a startup FWIW) can bootstrap a space programme from scratch for less money[2] than a photo uploader is apparently worth[3].
You're comparing apples and oranges:
1) what X is WORTH
2) what Y took as cash infusions
If you said "there's something wrong when a photo uploader is worth more than an orbital company", you'd be comparing apples to apples.
The mark of genius is that some people can take just a few apples and CREATE a stunning...uh...orange. OK, the analogy breaks down, but the point is: creating value is the POINT of a startup (or of any business, really), so we shouldn't be surprised that Elon Musk achieved a ton without that much cash input.
At my practice, I've worked with a bunch of YC startups. Uniformly enjoyed the experience.
I'm wary of venture capitalists. I've watched them do skeezy things firsthand.
More importantly, every time I see people cheerleading some startup for raising 50MM, all I can think is, "that poor team isn't going to be able to exit unless they can beat 150MM". It's very hard to do that, and huge investments almost guarantee that dubious companies are going to waste a lot of time trying.
True. But it's also hard to exit at $150m+ without a $50m raise. The lean startups and bootstraps simply don't have big exits like their well-funded counterparts.
While it would be nice to think that the people accepted at Harvard are the most and only qualified people to go to Harvard we all know that is not the case.
Harvard can only accept so many people and many people who could do well there, and aren't accepted, will fail to get in because the decision process isn't perfect in who gets accepted and who doesn't (and I am not even speaking of people who get in for reasons such as family or some other advantage). There are only so many slots.
Substitute Harvard for anything where the amount of qualified people greatly exceed the number of slots available and the decision process isn't a lottery and the decision is made by humans.
So it would be natural for people to be jealous and maybe bitter if they see someone of equal ability to themselves get into Harvard. Especially if it was in their face everyday. (But it's not, at least with Harvard, the jealous person is probably on another campus. With YC, if you are a HN reader and enjoy it it is in your face every day.)
I don't disagree with you about college admissions (http://paulgraham.com/colleges.html). But in my experience investors try a lot harder than undergrad admissions officers, partly because they suffer fairly immediate consequences when they make mistakes in either direction. In that respect investment is more like graduate admissions, which is done by professors instead of admissions officers, and the professors get whoever they select as grad students. (And incidentally, I went to grad school at Harvard, not to Harvard College.)
I think we need to split "startups" from "startups that people will be angry and bitter about". I guess I'm an optimist, but I don't think that sentiments like that arise out of nowhere. There's a kernel of truth to the feeling, engendered by some of the excesses of the current startup environment. That being said, the real challenge is not to paint too broad a brush and lump all startups that you don't "like" with startups that are worthy of this kind of derision.
It's a "con game" to these folks because all of the strategies for getting VC investment is described as such. And when someone succeeds in winning the "game", these people take it personally. I would call it "resentment" instead.
For me, the dream of entrepreneurship isn't about selling my company to a BigCo (TM), or even getting VC funding. It's about building a business that will sustain my family for years to come. Exactly like businesses in my Chicago neighborhood who start restaurants, or retail shops, etc. I want to build something that I can call my own and not be dependent on an employer's paycheck. And the fear of being pink-slipped because I'm not a "young rock star ninja." I just happen to know software and GIS, etc rather than widgets. And I know it really well.
DHH has talked at length about this trend, and although it's not quite as strong in Chicago as S.V., it's still present. Many people in GenX/Y/etc aren't willing to work their asses off to build a business. Popular media and SV successes only build on this fantasy. This adds to peoples' resentment. It's like the American Dream has morphed from bootstrapping your own small business into something larger, to building something that someone else will pay you F.U. money to take off your hands. Then you can sip Mai-Tais on the beach with half-naked women wandering around. If that's your vision, then Godspeed. But don't assume everyone has that same vision.
I don't mean to sound trite, but that's not the America I grew up with. This entire forum has the undercurrent of the very idea/goal you're complaining about. Building start-ups, but let's glamorize the VC-funded ones that got lucky in the lottery. If this forum was about "bootstrapping companies" into successful small businesses, I think the tone would be very different.
Regardless, I'll keep reading HN, and taking pleasure in those diamonds in the rough that inspire my vision of America.
>"Yes, fundraising is definitely a point of success."
Really? When your bank gives you a mortgage, do you deem that a "success"?
The fact that there are people who see raising funds as a sort of "end game" is a problem, at least in my opinion. Pets.com, Kozmo.com and Webvan all raised lots of money. So did Enron and Worldcom, in a different way.
Success occurss when you produce net economic gains to society.
Actually, for most people, the bank giving them a mortgage is deemed a success. It means that the bank believes that you, as a person, are responsible enough to pay back a massive loan. It is a huge personal validation for a lot of people.
In the same way, obtaining VC means that a fund believes that your team and your idea are strong enough to return on their investment, and anyone who isn't pissing their pants with joy about receiving an offer, even if they're not going to accept it, has a seriously deficiency in their Oh Shit Is This Really Happening receptors.
>"and anyone who isn't pissing their pants with joy about receiving an offer, even if they're not going to accept it, has a seriously deficiency in their Oh Shit Is This Really Happening receptors."
Of course you piss your pants with joy. But its more of a, "no matter what happens we're going to be okay" thing. There are many examples of that investment vaporizing, either in the startup stage or when they unleash the business on the public. It's happening with Zynga as we speak.
So, I can understand being happy about it, but calling it a business "success" is a stretch.
> When your bank gives you a mortgage, do you deem that a "success"?
Whithout a doubt! No one is saying it's an end game! It's a milestone on the road to large scale success.
Enron and Worldcom were wildly profitable. Is that your point?
Your sentiment is exactly what I'm talking about. If you're going to follow startups or have an interest in business-building, at least learn the basics that funding is necessary and raising it is an accomplishment.
If anyone is dense, it's you. It is certainly odd that the number of HN postings that follow the pattern "Company X raised $Y" far exceeds that of postings about revenue or profits, which are undeniably more important metrics for success. To some degree that can be explained by the fact that many incubated startups are legitimately in a phase where raising capital is important and revenue/profits not yet achievable. But why do we hear so little about later phases? IMO it's just as much a symptom of the dysfunctional aspects of the current startup scene that aims primarily towards acquisitions, where revenue, let alone profits, are ctively avoided because they're seen as an impediment to ridiculous acquisition valuations.
If you think that the goal of a startup is to get the highest possible hype-based acquisition valuation, sure. Call me naive, but I still believe that building an actual profitable business is a much better goal. It may not lead to crazy payouts, but it is also more honest and does not depend as much on timing a boom phase. I gather that this kind of thing is derisively called a "lifestyle business" in startup circles. I submit that at least it is actually a business, rather than a hand of hype poker.
In Techcrunch's defense, they have published a very good article on these kind of numbers[1]. Actually, they have published a lot of articles on this[2].
What is more insteresting, is that Paul Graham reiterates the Power Law of Startups he talked to Peter Thiel recently[3]:
Peter Thiel: Do Y-Combinator companies follow a power law distribution?
Raising money isn't any indication for any success but is a nice accomplishment - money coupled with the mentoring and connection from ycombinator could significantly improve the companies odds to succeed.
These numbers are vanity metrics but are still indicating a trend - companies going through ycombinator are more likely to raise money than others.
I know I would go thru ycombinator - not because of the money I could raise easily but mostly because of the alumni network, connections and access to world class mentors.
I launched Seed-DB earlier today (http://www.seed-db.com) where you can find these data points for all companies that have been through seed accelerators.
It's pretty incredible to think that YC is likely the highest performing venture fund in history.
For 380 companies that works out to about $7.6 million invested into a portfolio of companies worth $7.78 billion. Assuming a 2-7% stake for YC(after dilution), that puts the value of YC's share at $155-$545 million on that $7 million invested.
There are a couple of catches though. One is that we can't invest more at such rates of return. A VC fund may get a lower return per dollar, but they can invest a hundred times as many dollars at that rate. The other catch is that the $7 million doesn't include our operating expenses or the value of our time.
You could take a larger initial stake. I assume that the value placed on the YC program, including the cash, mentors, exposure, network etc has probably risen over time.
I think it's mainly because of Paul Graham. He's a visionary and he's excellent at spotting awesome teams (even if their ideas suck). Nobody would have thought twice about Airbnb, but Paul saw something that other investors didn't see. He noticed how effectively the team worked together. He also knew they would pivot if they needed to. Having that type of discernment has allowed YC to find & fund all these amazing startups. His hunch with the Airbnb guys paid off considering the company is valued at over a billion now!
~20x isn't close in the pantheon of record venture deals, especially when normalized to an IRR (annual return).
Benchmark Capital is often cited since their $6M investment was worth 500M+ at IPO less than a year later and then eventually ballooned to being worth $5B as shit got crazy.
the 12.7M Accel invested into Facebook in the A was worth ~$10B at IPO. I think even that is less on IRR than the ebay deal
You can't compare the entire fund to returns on a single deal. The investment in dropbox, conservatively assuming a 20k investment with dilution to 1% and sticking to the $4B valuation, is already a 2000x return. The actual return will probably be much higher, as DropBox's value will continue increasing.
Right, but those are single deals. You could show similarly silly numbers for YC/Heroku, etc... How did Benchmark and Accel do in aggregate is the question? I don't think that data is public, is it?
What's interesting is that if 2-3 years ago, ycombinator had the ability to identify and pick winners. I have the impression that in the past year it became the other way around.
Y combinator by picking companies are in fact the kingmakers and are creating the winners.
In 1999 I sold a domain name to a KPCB company. I remember very distinctively the team members throwing in my face how they were a KCPB company and that they could just buy my entire company if they wanted the domain name. It was one of Vinod Khoslas hand picks apparently. Founder was a Stanford Grad [1] This was probably at the top of the KCPB hype I haven't seen it like that since back in that time period. Anyway, they bought the domain and folded within a few years failing spectacularly.
[1] Out of curiosity I just checked and the founder is a VP at Vmware.
Last I checked you still have to get users/customers to be a winner in business. YC has clout with investors, so their companies are more likely to get investment, but that's not the right measure of who is a winner.
The millions of consumers you need as customers (or, if B-to-B, say fortune 500 companies) don't give a damn about the YC stamp of approval.
Increased investment only turns into increased "wins" if you use that money to get more users/customers, i.e. with a better sales team, more marketing dollars. Is this happening? I don't know, it sure seems like a lot of software companies are eschewing traditional marketing and sales and counting on viral growth to be a success, but you can't just hire more engineers and increase a product's viral-ness. I don't think anyone truly understands what makes a software product catch on.
Sorry about that - what I meant is that an investor role is to identify likely winners and support them until they get acquired or IPO. But ycombinator have more than the ability of identifying winners, I think they have achieved the status of turning people into winner just by picking them. Their true value is not by giving out money or knowing who are the winners, but by adding value to teams to a point where everything they touch turn into gold.
People will want to get associated with anything ycombinator invests in, you can see that with the fact that the startfund is now offering $150k convertible note to any company getting accepted into YC. That is amazing.
_disclaimer:_ I tried getting into YC once but got rejected - but I still think of myself as a winner!
He means that in the past, they made good guesses about which companies would be winners. Now, they have so much clout that merely by picking a company they can make it a winner.
Of course, they're still making smart picks. It's just easier for those picks to succeed.
Quite a lot, actually. While some startups (e.g. Twitter) take a while to generate significant revenues, it happens that the most successful startups we've funded were not of that type.
I'm curious what proportion of YC's success has come through very public, consumer-facing companies like Reddit, vs. companies the outside world never hears of, that quietly make tons of money behind the scenes selling to businesses and/or governments.
I'd still like to know the exact figure. its easy to find out how much was put in, but not so easy how much was generated. I'd love to know the total yc bottom line.
I can't think of any YC-funded companies that have slowly grown organically into modestly successful long-term businesses. Paul Graham made a comment somewhere that YC actually has no problem if the founders want to build a "lifestyle" business, and won't push for VC-backed moonshots if it's not in the founders' interests, but I just haven't heard of that outcome happening. It's possible I just don't know about them, though.
There have been several that sold for reasonably good totals without raising any funding, if that counts. For example, Clickpass sold for $1m, and raised no funding except YC's $20k.
For shits and giggles let's use 6%. A low end estimate of their ROI would be around a whopping 174%. Their current holdings of the 7.78 Billion would be around 466 million.
This is all wacky math I realize but it's interesting to take into account how well this fund has done.
You're not taking into consideration the various dilutions and other preferred rights from other investors but all in all - it's clear that this fund will be very successful.
Didn't Paul breakout the outcomes of Y Combinator companies a while back (e.g. acquired, sold, in business, etc)? It would be interesting to see if anything has dramatically changed.
I'm doing quick 3 min survey on what people think about certain venture capital firms and see if there is any correlation to their industry, location, school etc. Will post results back here upon completion.
More amazing, given that over half of the companies are from last year and this year, and it is mostly agreed that they have only gotten better and better by Demo Day.
