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As a VC, the premise of this article makes little sense to me. 1) Investors aren't idiots when it comes to growth. No one expects today's growth rates to stay

As a VC, the premise of this article makes little sense to me. 1) Investors aren't idiots when it comes to growth. No one expects today's growth rates to stay constant. Growth decelerates over time. 2) You can't take averages of revenue and growth across lots of startups and use that as your model. Here's an example with two startups: * Startup 1: $4.99m annual revenue, grew 5% last month. * Startup 2: $10k annual revenue, grew 145% last month. "Hey look, if you average these growth rates out, you have a combined $5m in annual revenue growing 75% monthly. That'll be >$4b in annualized revenue in a year!!1!" No, it won't. The reason investors value high growth in young companies is that growth rates are an okay proxy for a lot of valuable things: product-market fit, execution ability, go to market strategy, etc.

tempestn 10y ago
You just forgot to divide the revenue by 2, but your point stands.
- lpolovets 10y ago
  Fixed, thanks! The article switched between "combined revenue" and "revenue per company," and so did I. I should've made that explicit in the first place.
CalChris 10y ago
One thing that confuses me about YC is that they're an accelerator rather an incubator. In particular, this article talks about revenue growth which is an acceleration stage metric. Seed stage needs seed money to prove a hypothesis. Acceleration stage needs A money to accelerate. Stressing revenue growth at seed stage seems like it could be dangerous to a startup's health. (Yeah, ideally you would want the seed/acceleration transition to be c2 continuous.) YC offers seed money for seed percentage, $120k in return for 7%, and attaches accelerator metrics. This transaction just doesn't make sense to me at all. Clearly it makes sense to others, given the number of YC applications.
- apsec112 10y ago
  I think the history of YC explains the confusion. YC was originally a seed-stage incubator (although they disliked that term, as they were very different from the 1990s "incubator" stereotype). As it became more famous, it focused more and more on later-stage companies, and the investment sizes also grew. From 2005 to now, the fraction of very early stage companies (pre-incorporation) has gone from 100% to ~12%, and the investment amount has increased from ~$20K to $120K. However, YC has (AFAIK) never explicitly acknowledged its transition to accelerator, and much of the writing on YC is years old, which creates some misunderstandings.
  - ProblemFactory 10y ago
    > As it became more famous, it focused more and more on later-stage companies, and the investment sizes also grew. Something I've wondered: was this focus change deliberate? Or is it just a result of becoming more famous, attracting many more applicants, and accepting more mature companies since their success to date looks better?
    - apsec112 10y ago
      Good question, I don't know. If anyone knows anything about this, I'd be very curious to hear.
    - clay_to_n 10y ago
      Another explanation is they may have realized that the pre-incorporation "super early" startups were a riskier bet, and moved their sweet spot preference just a little bit past that based on the success metrics of their previous classes.
    - tyre 10y ago
      (Recent YC founder) This looks confusing if you consider YC to be an accelerator or incubator, labels which they hate. If you look at them as a seed stage investor, their shifting focus makes sense. They give $120k for 7% of the company. Since the deal is set, the only variable, to maximize shareholder return, is the companies they accept. Since they are an investor, they're going to pick the best investments. How do they know the "best" investment? Past history helps, so (relatively) later stage companies will have an advantage. Revenue, team, traction, etc. are all good indicators. If you look at YC as just a seed stage VC, their actions are pretty consistent and logical.
jasonlotito 10y ago
From the point of view from someone else: the consumer side of things, and the way I start to approach and recommend companies like this. Basically, if the company still seems to be in growth first phase, I avoid recommending or using the product. This is generally because at that point in time, the product still doesn't have a solid financial plan. B2B offerings are less worrisome, and I imagine with the the SFO culture, easier to sell. After all, if your investors can introduce you to other companies that could use your product, well, it comes across as organic "growth." But at least it has a real business plan. Whether it sticks around, well, again, that really depends on the company and what they are offering. In the end though, most often I see this working out poorly for the consumers in the long run.
paradite 10y ago
I don't think the author's math is wrong here. Looking at this sentence, he/she is not taking the average for both like you described, but applying growth rate to revenue for each individual company: If we applied the companies’ monthly growth rates to their reported revenue, then after just one year the 22 companies would be generating about $21 billion in combined monthly revenue, or $963 million monthly revenue per company.
donmatito 10y ago
I didn't read in the article that he was taking the other investors for idiots. I think the point of the article was much more directed towards early entrepreneurs. 1) Growth is good but 2) ... don't fake the growth numbers with tricks 3) ... pay attention to other metrics like retention
garry 10y ago
Agree completely Leo. Growth rates are a snapshot and no replacement for understanding the market, founders, and product. Further, after having worked with 700 startups at YC, it is obvious to me now that if you can't grow from small numbers, there is no way a company can truly be a good startup. If that's true, then the best advice you can give starting out is to grow. It's just table stakes. The article is an absurd straw man argument.
- timr 10y ago
  Garry, it might be an exaggerated premise, but how is it an absurd straw man? Every demo day (YC or otherwise) has a large number of startups claiming these high growth rates. What percentage work out, even one year out from demo day? Maybe you can say that the high growth rates from small numbers aren't long-term predictors, but isn't that just what the article is saying? That's what I read. It's obvious that, as you say, growth is "table stakes" for a good startup. But it's also true that competitive metrics are gamed, and that many startups claiming these numbers are, in fact, gaming their metrics. Does this make a difference? Probably not to good investors. But it does change herd dynamics, and makes it harder for teams that are unwilling to do bad things in the name of short-term growth.
deleted 10y ago
[deleted]
mbesto 10y ago
> That'll be >$4b in annualized revenue in a year!!1!" Sadly, I've seen way too many instances where one month of growth in an early stage means a ridiculously published ARR number to the press. If anything this article is a reflection on TC itself and how they don't properly investigate in their reporting.

tempestn 10y ago

You just forgot to divide the revenue by 2, but your point stands.

lpolovets 10y ago
Fixed, thanks! The article switched between "combined revenue" and "revenue per company," and so did I. I should've made that explicit in the first place.

CalChris 10y ago

One thing that confuses me about YC is that they're an accelerator rather an incubator. In particular, this article talks about revenue growth which is an acceleration stage metric. Seed stage needs seed money to prove a hypothesis. Acceleration stage needs A money to accelerate. Stressing revenue growth at seed stage seems like it could be dangerous to a startup's health. (Yeah, ideally you would want the seed/acceleration transition to be c2 continuous.) YC offers seed money for seed percentage, $120k in return for 7%, and attaches accelerator metrics. This transaction just doesn't make sense to me at all. Clearly it makes sense to others, given the number of YC applications.

apsec112 10y ago
I think the history of YC explains the confusion. YC was originally a seed-stage incubator (although they disliked that term, as they were very different from the 1990s "incubator" stereotype). As it became more famous, it focused more and more on later-stage companies, and the investment sizes also grew. From 2005 to now, the fraction of very early stage companies (pre-incorporation) has gone from 100% to ~12%, and the investment amount has increased from ~$20K to $120K. However, YC has (AFAIK) never explicitly acknowledged its transition to accelerator, and much of the writing on YC is years old, which creates some misunderstandings.
- ProblemFactory 10y ago
  > As it became more famous, it focused more and more on later-stage companies, and the investment sizes also grew. Something I've wondered: was this focus change deliberate? Or is it just a result of becoming more famous, attracting many more applicants, and accepting more mature companies since their success to date looks better?
  - apsec112 10y ago
    Good question, I don't know. If anyone knows anything about this, I'd be very curious to hear.
  - clay_to_n 10y ago
    Another explanation is they may have realized that the pre-incorporation "super early" startups were a riskier bet, and moved their sweet spot preference just a little bit past that based on the success metrics of their previous classes.
  - tyre 10y ago
    (Recent YC founder) This looks confusing if you consider YC to be an accelerator or incubator, labels which they hate. If you look at them as a seed stage investor, their shifting focus makes sense. They give $120k for 7% of the company. Since the deal is set, the only variable, to maximize shareholder return, is the companies they accept. Since they are an investor, they're going to pick the best investments. How do they know the "best" investment? Past history helps, so (relatively) later stage companies will have an advantage. Revenue, team, traction, etc. are all good indicators. If you look at YC as just a seed stage VC, their actions are pretty consistent and logical.

jasonlotito 10y ago

From the point of view from someone else: the consumer side of things, and the way I start to approach and recommend companies like this. Basically, if the company still seems to be in growth first phase, I avoid recommending or using the product. This is generally because at that point in time, the product still doesn't have a solid financial plan. B2B offerings are less worrisome, and I imagine with the the SFO culture, easier to sell. After all, if your investors can introduce you to other companies that could use your product, well, it comes across as organic "growth." But at least it has a real business plan. Whether it sticks around, well, again, that really depends on the company and what they are offering. In the end though, most often I see this working out poorly for the consumers in the long run.

paradite 10y ago

I don't think the author's math is wrong here. Looking at this sentence, he/she is not taking the average for both like you described, but applying growth rate to revenue for each individual company: If we applied the companies’ monthly growth rates to their reported revenue, then after just one year the 22 companies would be generating about $21 billion in combined monthly revenue, or $963 million monthly revenue per company.

donmatito 10y ago

I didn't read in the article that he was taking the other investors for idiots. I think the point of the article was much more directed towards early entrepreneurs. 1) Growth is good but 2) ... don't fake the growth numbers with tricks 3) ... pay attention to other metrics like retention

garry 10y ago

Agree completely Leo. Growth rates are a snapshot and no replacement for understanding the market, founders, and product. Further, after having worked with 700 startups at YC, it is obvious to me now that if you can't grow from small numbers, there is no way a company can truly be a good startup. If that's true, then the best advice you can give starting out is to grow. It's just table stakes. The article is an absurd straw man argument.

timr 10y ago
Garry, it might be an exaggerated premise, but how is it an absurd straw man? Every demo day (YC or otherwise) has a large number of startups claiming these high growth rates. What percentage work out, even one year out from demo day? Maybe you can say that the high growth rates from small numbers aren't long-term predictors, but isn't that just what the article is saying? That's what I read. It's obvious that, as you say, growth is "table stakes" for a good startup. But it's also true that competitive metrics are gamed, and that many startups claiming these numbers are, in fact, gaming their metrics. Does this make a difference? Probably not to good investors. But it does change herd dynamics, and makes it harder for teams that are unwilling to do bad things in the name of short-term growth.

deleted 10y ago

[deleted]

mbesto 10y ago

> That'll be >$4b in annualized revenue in a year!!1!" Sadly, I've seen way too many instances where one month of growth in an early stage means a ridiculously published ARR number to the press. If anything this article is a reflection on TC itself and how they don't properly investigate in their reporting.