"Access to venture capitalists: Raising money is incredibly hard and incredibly distracting. The faster you can get it done, the faster you can get back to building something people want. YC is the perfect forcing function to help you raise capital.
Network: Being an entrepreneur is a lonely path. There are few people who truly understand what you’re going through and even if your friends (or parents) are well meaning, they still don’t get it. YC is the ultimate network and you will be surrounding by people who do get it."
These two points from her essay reveal more about the true nature of YC than perhaps the author intended.
In theory, when you join YC, you and your cofounders give Paul & Co. a sizable chunk of equity in your budding startup in exchange for advice dispensed over dinner--advice and dinners which, given the valuations of certain YC-backed startups and the percentage of equity surrendered, cannot possibly, no matter how enlightening the advice or delicious the dinners, be worth the price paid in shares.
Why then are so many founders eager to make what on the surface seems like a terrible deal? Because what they actually get in exchange for their equity is not mere mentoring, but the access to top VCs like Andreeson Horowitz and Sequoia. Those VCs can in turn, using their money and media connections, hype-up your startup and work to get you bought out/acquihired.
We like to pretend that the startup game is a meritocracy and not all like the cronyism that goes on in corporate boardrooms where CEOs doubling as board members vote on each other's lavish compensation packages, but it is not difficult to recall examples that suggest it is all too similar.
Take Loopt. It was a dying product with a dwindling userbase that while novel in concept for 2004, was clearly too early to market and soon found itself in a market awash with location-aware competitors like Foursqaure and Gowalla. But because Loopt had gone through YC and took investment from board members of Sequoia, strings were pulled to get Greendot to acquire Loopt and reward Sam with a life-changing exit and provide him and his investors with a justification for branding Loopt a success. From there, he went on to succeed PG as YC's president, and using that platform, he's written--without any hint of irony--polemics decrying the lack of innovation[1] and calling for startups to work on "breakthrough technologies"[2] despite having as his major accomplishment a failed feature phone version of Grindr.[3]
I'm happy for Susan and hope her startup is successful, but her experiences has only reinforced my view that success in the Valley startup game is much more about luck and connections than skill and execution. She was suspiciously vague about her financial situation, but one can infer from the essay (buying the domain, flying back and forth, hiring a "full stack" dev), that it's probably much better than most mothers of two, married or otherwise. The requirement that you "move to the bay area"[4] (which she technically violated) all but ensures mothers who aren't rich won't apply, which completely negates her message of "I'm a mom and I did it and so can you!"
YC really has succeeded in building a recognized brand in the tech startup space, such that they can really define that space. I'd compare YC to Harvard or Davos (the World Economic Forum), where the challenge is to get accepted. Once you have passed the gateway, the wealthy/powerful recognize this by extending opportunities to new members.
This is true of almost any club (the Free Masons, your local BPOE, Boy Scouts, etc.). You join, you get to know people, those people help you with your interests, and in return you help them with their interests. It isn't particularly difficult to see why this success might backfire and reduce/limit actual innovation, because it creates a powerful echo chamber – in part by design, to achieve specific goals, and in part by accident, because the people accepted by the club tend to meet predefined expectations.
The problem is, as I see it, that escaping that kind of feedback loop is very difficult, once an organization is in it, because the momentum making the loop bigger is difficult to redirect into an energy to make the loop different. Harvard could announce that it will no longer accept children from powerful/wealthy families, Davos could release a statement that this year it will be hosted in conjunction with the Communist International, and YC could relocate to Uganda for a season – but that's not what these organizations do, so after a point, they aren't able to innovate outside of very specific boundaries.
The answer to that, of course, is create new organizations with different boundaries/priorities, but Christ, that reeks of effort.
Feedback loops and echo chambers are an excellent way to describe it. There is an analogy that I think is relevant but most people don't get when I bring it up or just think I'm plain crazy. The analogy is the fire ecology.
In certain ecosystems fire is a necessary component of ecological vitality. It is destructive in the short term but leads to a more robust and diverse ecosystem in the long term. Coming back to your points we have reached a certain kind of equilibrium in the startup ecosystem where the incumbents through network effects have become entrenched and are now actively detrimental to diversity and innovation. I don't know what the equivalent of fire would be in the startup and technology ecosystem.
I believe the 'fire' is something akin to the post-2000 tech bubble collapse. When markets correct or collapse, investors tend to become more conservative (or outright scared) and risk averse. That dries up the sources of capital available to more risk-prone endeavors, like funding tech startups. Even with lower capital costs, a VC firm looking for tech opportunities will be more selective in post-correction market. Whether that means startups will be more innovative or diverse, to impress VCs, or become more homogenous but cost-effective, in order to attract investment, is an issue I don't know enough about to predict. In any event, I like the idea of a fire ecology. I think it's a good one.
"Coming back to your points we have reached a certain kind of equilibrium in the startup ecosystem where the incumbents through network effects have become entrenched"
So, with ~50% of the top venture backed companies being founded by immigrants and 75% of them having immigrants in key product/management positions, you think we're in a "burn it down" moment? This doesn't even account for the non-immigrants-non-insider people who succeed in the Valley every day. I'm all for working to reduce cronyism, racism, ageism, etc. But I don't think we're remotely near needing to set fire to things (metaphorically or otherwise).
Two points. There was a non-rich mom in my batch in 2008 (one of the hardest fundraising climates in the last decade). She and her co-founder kicked ass and raised more money than most of the batch.
Point #2: You need to expand your view of meritocracy beyond just product/code. Expanding who you know, how much they like/admire you, and how much they want to work with you is part of meritocracy. Imagine it as a multiplier to product merit and,as a founder, you NEED to imagine it as part of your job. In a failure scenario, it absolutely helps turn a zero into a one. But it also helps you hire, sell products, raise money, get press, do bizdev deals, sell companies, etc.
All sorts of other nits I could pick with your comment. Strawmen (really? Does anyone go into YC thinking advice at dinners is the primary value they offer?) and ad hominem attacks (what does Sam's previous company have to do with the merits of his "polemics"?).
Some stats to challenge the "rich white dudes raining gold on each other" theory:
52% of founding teams in the Valley have 1st generation immigrants on them. Just shy of half of the top-ranked venture companies (in case you think all of these immigrant-heavy startups are floundering while rich white guys are winning). Does anyone believe that a meaningful percentage of this group is rich and white? The same study also found that immigrants were key members of the product or management teams in more than 75% of those companies.
> Point #2: You need to expand your view of meritocracy beyond just product/code. Expanding who you know, how much they like/admire you, and how much they want to work with you is part of meritocracy.
This is why I also include skin color, culture, gender, and how rich my parents are in my definition of merit. This allows me to honestly believe that all my success is based on merit.
Because nothing says, "merit", like being connected to a small group of very wealthy, very insular people who have the ability to magically bestow success on whoever they please.
This is another strawman argument. Of course there's cronyism, racism, sexism, ageism, etc. And of course we should discourage that. Was I championing any of those things you're attacking?
You said "You need to expand your view of meritocracy beyond just product/code. Expanding who you know, how much they like/admire you, and how much they want to work with you is part of meritocracy."
So yes, you may as well be championing gender, race and background, since you've already redefined 'merit' (in a rather perverse way, imho).
Can you point me to a definition of merit that I redefined?
I guess I'll try to say it slightly differently to clarify: "it's worth working to expand who you know, how much they like/admire you and how much they want to work with you". This is a skill you can get better at. It's hard work that you need to do. And yes, sadly, this work is certainly easier if you're a 25 year old white guy who went to Stanford.
Do you think people who have worked to have a deep network of folks to sell to, hire from, get introductions from, etc., have done meritorious work? I'm suggesting that how hard you work on this stuff (and how good you get at it) is part of your merit (in the world of startups/entrepreneurship). I certainly don't think it's the only part.
Given that about half of the top venture backed startups are founded by immigrants, I'd say the startup is more meritocratic than a lot of people seem to think. But I'd agree with you that we have a ways to go.
You can't simply say that it's meritorious to work hard at whatever it is that makes one succeed. Otherwise any non-randomised culture is meritocratic. For meritocracy to be a meaningful term, the concept of merit needs to be detached from real-world success.
Which isn't to say that network-building isn't meritorious, but you can't use that particular argument for it.
(It's also not relevant how meritocratic SV culture is in other areas.)
It is fair to say that the YC experience adds value to the companies that participate - even if only by virtue of screening and vetting companies for investors - although that is clearly not the only benefit. For a company that comes in as an idea, and has no revenue / implicit value, the equity (in exchange for funding and value add) makes sense. Companies are not obliged to apply if they don't see value.
>Expanding who you know, how much they like/admire you, and how much they want to work with you is part of meritocracy
This is a lot like the original definition of meritocracy. A very negative one.[1] If merit is determined solely by the people already in places of power like A16Z on the arbitrary measure of "how much they like/admire you" then it is exactly like and by definition Cronyism.[2] I'm not making a value judgement, but if it quacks like a duck...
That's why I said "part of meritocracy". Which words did I use that made you think that I believed that was most or all of it? I just added a stat to my original comment-- about half of the top venture backed startups have immigrants on the founding team, and 75% in key positions.
> Expanding who you know, how much they like/admire you, and how much they want to work with you is part of meritocracy. Imagine it as a multiplier to product merit and,as a founder, you NEED to imagine it as part of your job.
Why are you counting these as part of meritocracy, rather than deviations from it?
(If they're sufficiently small deviations, you could still call the overall ecosystem a meritocracy. But then you have a meritocracy with deviations, and enshrining the deviations as part of meritocracy seems like a mistake.)
(I could also see an argument that "meritocracy plus it matters how likeable you are" would be preferable in many ways to just pure meritocracy. But "meritocracy plus it matters who you know" seems like a bad direction to go in.)
"Why are you counting these as part of meritocracy, rather than deviations from it?"
Because hiring, sales, pr, marketing, bizdev and fundraising are all part of startup success... Building and cultivating a good network is hugely valuable for all of that, no?
It is in today's culture. In another country, maybe it's hugely valuable to know the correct officials to bribe. That doesn't mean it would be valuable in a meritocratic culture.
The question is whether or not SV is meritocratic; your argument appears to be along the lines of "these things are valuable in SV, so they are part of meritocracy", which is circular.
You are caught in a semantics discussion. "Meritocracy" in tech circles _is_ talking about "code/product" as you say. When a company advertises saying "We are a strict meritocracy" they are not saying, "We value code but also your ability to schmooze". Of course things other than code matter, a lot more than code itself, but that isn't how the term is used in the industry.
> You need to expand your view of meritocracy beyond just product/code. Expanding who you know, how much they like/admire you, and how much they want to work with you is part of meritocracy.
These things may very well be critical to success, but that's not what the term 'meritocracy' actually means as it is commonly used and understood.
"I hired hitwomen to slay all of my competitor's developers. We are now on top because of our company's longstanding culture of meritocracy."
Edit: Meritocracy is not synonymous with success. In the way you are going, all successful startups become meritocracies by virtue of being successful.
Could you please link the study you are citing from? I'd be curious how it'd look after being equity adjusted.
This article looks at only founding teams which get the vast majority of equity. The study found that while less than 1 percent of venture-capital-backed company founders were African American and 12 percent were Asian, 83 percent had a racial composition that was entirely Caucasian.[1] The study mentioned was done by CB Insight from 2010.[2]
This lack of diversity in the founders that receive VC funding may not be that surprising given the lack of diversity of the investors making those choices.[3] And it's not too hard to find other sources that say there is a lack of diversity at the top.[4]
First, I think it's unwise to underestimate the value of good advice early on. Advice and it's best friend encouragement are often necessary ingredients. People do not function best in a vacuum. There is a reason why startups (and lots of things) happen in clusters.
Second, there is a tendency to think for "meritocracy" as a very cold, dead thing. This kind of thinking is like applying an engineering mentality to human culture, society and personal interactions. The result is often a bureaucratic version of meritocracy, like a college application. These are not without their own biases, problems and everything else. They also strip nuance out of the process. This is a serious problem when you're looking for novelty, creativity, black swans, etc.
In any case, imagine Andy Warhol in the 80s with his stable of artists, models, musicians and Warhol Superstars. He supported them in various ways. This paved their access to audiences, money, collaborators, publishers, patrons, etc. etc. Was Andy Warhol running a cronyism ring or was he a prominent figure in a community of artists? Was the Velvet Underground's success a product of cronyism?
There's merit to the concept of cronyism in, for example, the government of a country. But, it's actually just a subcategory within a wider context of human interaction, important human interaction.
I think your definitions of meritocracy and/or cronyism just aren't rich enough to capture what's going on here.
If Leonard Cohen had a show where he introduced new artists he liked (personally and musically), I would pay attention. Leonard Cohen has whatever right to my attention as a listener that I choose to give him. Same for producers, collaborators, record labels, concert organizers and anyone else who values his opinion, or even his favor.
Yes Warhol was running a cronyism ring. The entire point of his work was success based on celebrity, in contrast to the ponderous quality judgements of the previous generation of abstract expressionists.
You are massively undervaluing YC. It's not just "advice dispensed over diner", there is lot goes on [1]. In startup world, there are just too many bad decisions you can make at any point in time and even just 5 minute advice from an experienced person who has literally seen it all 100s of times is worth all of the 7% cut that you give to YC. In the book[1] you will see several cases described by author where founders are at critical juncture such as what features to work on, what to pivot, which investors to reject and so on. YC also preps you for demos, protects you against signing bad terms and exposes to pretty much all investors that matter in business in one fell swoop. This is all in addition to $120K seed money that they are pretty much guaranteed to lose. If your friend was lending you $120K, wouldn't you offer 10% of your company? IMO, YC's 7% cut is far more reasonable.
Next, you are also massively undervaluing Susan's work. Did you read that she kept failing for 2 years and still kept at it? If you were already rich, would you go through that kind of hustle as opposed to enjoying your margarita on a private island? Did you also read that she was pregnant while making her attempt and with 3-year baby in hand? Do you have any idea how is it like to be pregnant and working on something as taxing as startup while also taking care of 3-year old? If you don't I humbly suggest to ask this to your mom.
Next, Loopt was innovative in its time but unfortunately way too easily and quickly copiable. Being still able to sell that is actually a business success and tells you something about Sam's ability to win over investors and break a way against odds.
Read their own terms. They don't provide you with office space, living space, or other necessities that even other, less vaunted incubators do. And the seed money used to much lower: $17,000 (a few months salary).
Again, 7% is an enormous chunk of a company, and for a firm like Dropbox, such a stake runs easily into the millions. YC on its face has always been a terrible deal, except it isn't, because YC is the first step in a sequence that ends with you getting bought by Facebook or Google regardless of whether you actually deserve it, and that's why people sign up--not to hear advice from Sam Altman.
And I wasn't devaluing Susan's work at all. My point was that for other women with similar ambition and talent but without similar financial independence, YC would be a non-starter.
It doesn't make sense to evaluate historic seed stage valuation based on current valuation. Any angel investment looks like a bad deal retrospectively for a billion dollar company on that basis.
Investments need to be evaluated on the basis of the valuation at time of investment.
Certainly there are many companies who could raise money at higher valuations elsewhere who go through YC, but almost none of them could raise at a >$15m valuation (YC doesn't typically invest in post-A companies).
Financial stability is always an issue for founders. Any founder that has an alternative source of income, a large reserve of liquid cash, or a small living expense (NOT a family to feed), is going to have more flexibility.
"that ends with you getting bought by Facebook or Google regardless of whether you actually deserve it"
..and this is because Facebook and Google are not independent companies with their own self-interest at heart, but stooges of YC remote controlled by a secret cabal of YC alumni?
>We like to pretend that the startup game is a meritocracy
It is not "we like", is it just a rule of the game - to pretend that it is about meritocracy, to wear a hoodie.
>decrying the lack of innovation
being formally pro-innovation is just a rule like the "meritocracy" rule.
The game is a well-oiled money making machine and like any such machine it is very risk-averse, and with any innovation (or, God forbid, "breakthrough technology") being a risk, it is thus in particular innovation-averse.
The flaw in that line of reasoning is assuming that luck and connections are the opposite of skill and execution.
Building relationships is a core part of business development, if a business lacks appropriate connections then it's something they should work on either by building bizdev skills internally or hiring. In the same way that if someones a tech founder with no marketing skills, they have to learn it or hire for it. You're not going to win just by having the best technical product, you have to have the best business.
Similarly luck isn't automatic, if you work to put yourself in positions where you have the opportunity to be lucky you're much more likely to have that luck. One of the big advantages of being in startup hub like SF is you're moving somewhere where your far more likely to have valuable serendipitous meetings than anywhere else.
The number of people whose "luck and connections" come from "skill and execution" is smaller than the number whose "luck and connections" come by accident of birth. This is true no matter where one lives, or how one wants to leverage his own skills.
While it probably varies between different fields, I haven't seen any evidence for that in the startup world.
There's obviously a certain level of "accident of birth", you have a much better chance if you were born in a developed country, one where you can go to university, etc. But if we standardise at say pool of CS graduates from good universities it's certainly a much more level playing field.
If we take what's probably the most important relationship in the startup world, that of co-founders, most co-founders meet each other through work, actively seeking through professional networks or university. There's very few co-founders who met through family connections.
Similarly for investors, investors will take a recommendation from one of their portfolio founders who've worked with someone much more seriously than that from a family friend who just knows someone socially.
One does have a much better chance if one is born in a developed country--but it's still a small chance.
Also, a "pool of CS graduates from good universities" is already biased toward people who were born into (relative) privilege. Have you considered that you "haven't seen any evidence" because you are effectively excluding from your analysis a large quantity of the data?
Look, I'm not saying it's pointless for those who were born into poor or middle class (or even many upper-middle class) families without connections to try. I'm saying it's disingenuous to pretend that a system that self-selects against those very people is somehow a meritocracy or that it is not, in fact, self-selecting against people who aren't, essentially "born lucky."
Network: Being an entrepreneur is a lonely path. There are few people who truly understand what you’re going through and even if your friends (or parents) are well meaning, they still don’t get it. YC is the ultimate network and you will be surrounding by people who do get it."
These two points from her essay reveal more about the true nature of YC than perhaps the author intended.
In theory, when you join YC, you and your cofounders give Paul & Co. a sizable chunk of equity in your budding startup in exchange for advice dispensed over dinner--advice and dinners which, given the valuations of certain YC-backed startups and the percentage of equity surrendered, cannot possibly, no matter how enlightening the advice or delicious the dinners, be worth the price paid in shares.
Why then are so many founders eager to make what on the surface seems like a terrible deal? Because what they actually get in exchange for their equity is not mere mentoring, but the access to top VCs like Andreeson Horowitz and Sequoia. Those VCs can in turn, using their money and media connections, hype-up your startup and work to get you bought out/acquihired.
We like to pretend that the startup game is a meritocracy and not all like the cronyism that goes on in corporate boardrooms where CEOs doubling as board members vote on each other's lavish compensation packages, but it is not difficult to recall examples that suggest it is all too similar.
Take Loopt. It was a dying product with a dwindling userbase that while novel in concept for 2004, was clearly too early to market and soon found itself in a market awash with location-aware competitors like Foursqaure and Gowalla. But because Loopt had gone through YC and took investment from board members of Sequoia, strings were pulled to get Greendot to acquire Loopt and reward Sam with a life-changing exit and provide him and his investors with a justification for branding Loopt a success. From there, he went on to succeed PG as YC's president, and using that platform, he's written--without any hint of irony--polemics decrying the lack of innovation[1] and calling for startups to work on "breakthrough technologies"[2] despite having as his major accomplishment a failed feature phone version of Grindr.[3]
I'm happy for Susan and hope her startup is successful, but her experiences has only reinforced my view that success in the Valley startup game is much more about luck and connections than skill and execution. She was suspiciously vague about her financial situation, but one can infer from the essay (buying the domain, flying back and forth, hiring a "full stack" dev), that it's probably much better than most mothers of two, married or otherwise. The requirement that you "move to the bay area"[4] (which she technically violated) all but ensures mothers who aren't rich won't apply, which completely negates her message of "I'm a mom and I did it and so can you!"
[1] http://blog.samaltman.com/what-happened-to-innovation-1
[2] http://blog.samaltman.com/new-rfs-breakthrough-technologies
[3] https://news.ycombinator.com/item?id=385178
[4] http://www.ycombinator.com/apply/