4 ms·

It's useful to think about Jessica's comment under the original message, that YC is "mass production of startups." What it really means, I think, is that YC is

by vonnik 9y ago

It's useful to think about Jessica's comment under the original message, that YC is "mass production of startups." What it really means, I think, is that YC is comfortable with more failure than other investors. They are spreading their bets wide by making many small investments, and as they have said many times, only a small percentage of those bets need to be right. That's quite different from how most VCs invest at any level. Most VCs are trying very hard to be right while making very few bets that are fairly large relative to their fund. And as the Kaufman report shows, that doesn't work. Most of those VCs are failing to show ROI to their LPs. YC's approach -- making many small bets and tripling down on what works -- is similar to some biological processes. Consider how mammals manufacture antibodies, for example. When an antigen is detected, we start to make tons of different types of antibodies, not knowing which ones will successfully attack the pathogen. Most of those antibodies turn out to be useless, but a few succeed, and their success is reported so that the body makes more. That is, massive, parallel failure is the precondition of success here. YC is like that. But instead of manufacturing antibodies, they're manufacturing startups. Those startups are attacking lots of different problems rather than just one. And it's hard to know in advance which ones will succeed.

tedsanders 9y ago
I don't see the subtext that connects mass production and comfort with failure. In fact, I see mass production as a way to reduce failure rates. The idea behind mass production is to take a process that's done in a low-volume, idiosyncratic way and replace it with a process that can be reliably repeated at scale. With Y Combinator, that means replacing the rocky solo founder journey with a community full of of advisors and partners who can advise on topics like incorporation, financial planning, customer testing, investor relations, hiring, etc. There's no reason for a new founder to re-invent the wheel when the Y Combinator collective has already manufactured 1,000 wheels and gotten it down to a science. Founders should focus on their customers and their product - everything else should be 'mass produced' to the extent possible. (An example of this sort of mass production is pg's advice to incorporate as a Delaware C corp. Advice like this can save your fledgling startup from a week of legal research. Having 'mass-produced' shortcuts to these sorts of managerial microdecisions can make or break a startup.)
- abstractbeliefs 9y ago
  I guess mostly because you're spending less on them in overheads. When you can share the same overhead costs over 10 startups and expect 9 of them to fail, that's more palatable than spending the overhead 10 times for each individual company. And it's not just monetary costs: you can get more done when you have all the companies demo day together, simply by having to arrange fewer meetings individually, and less time travelling/setting up etc.
- vonnik 9y ago
  The subtext may not be in Jessica's piece, but YC's strategy implies that only a few of their investments need to go big for them to win. While certain aspects of YC do standardize startup growth, a lot of parts of the process can't be standardized. What you have left is a numbers game. If all YC startups succeeded, that would be a sign of failure, because it would indicate that YC itself was not taking sufficient risk.
zeckalpha 9y ago
Investing in stocks : Vanguard :: Investing in companies : YC
- ravibala1 9y ago
  Apart from the volume characteristic this doesn't seem to hold. Vanguard creates ETFs on diversified baskets of stocks picked(rules based) by other people eg: S&P, Nasdaq etc. YC actually has to review each and every application and independently determine whether to accept them. At a push, I'd go with - Investing in stocks:Vanguard :: Investing in companies : Random funds that will only invest if you have a brand-name lead investor
- vonnik 9y ago
  In a sense, and there's no shame in that. Index funds recognize that retail investors are bad at choosing where to place their money. I think it's equally plausible that venture investors are just as bad, and that spreading your bets within a certain range (in stocks, publicly traded companies) reduces risk and increases the likelihood of gain.
mbesto 9y ago
> That's quite different from how most VCs invest at any level. Most VCs are trying very hard to be right while making very few bets that are fairly large relative to their fund. And as the Kaufman report shows, that doesn't work. Most of those VCs are failing to show ROI to their LPs. Sequioa, Accel, Kleiner, and NEA for example have all made a similar amount of (or more) investments in startups than YC. I think it's a bit of a stretch to say that YC is more comfortable than most VC firms. You just don't hear about the other ones' failures because they're less publicized.
- vonnik 9y ago
  Maybe so, but not in the same amount of time. Sequoia and Kleiner have been around since 1972. 45 years. YC has been around since 2005. The larger a startup gets, the more likely we are to hear of its failure, and the firms you mention are all making much bigger bets. YC comes in earlier and spreads its bets wider. It takes it more than 100 startups per batch. I doubt Sequoia makes 100 investments in a year.
hyperpallium 9y ago
Yes, though I'd express it as YC funding startups earlier, before they're proven, when they need less funding. YC experimented with pushing it back even earlier in the gestation process, to pre-idea (pre-conception, if you will), and just backing team-quality. But that didn't work out well. Perhaps not being able to come up with an idea is a crucual indicator of team-quality? A start-up isn't just one idea, but requires thousands of ideas along the way, like a movie. Or maybe passion for a specific idea rallies people round.
meric 9y ago
Jesse Livermore's strategy.
taneq 9y ago
I was attending an event at a local incubator last week when it hit me - and maybe this is obvious to everyone else - that 'startup incubators' are just taking the music industry business model and applying it to entrepreneurs.
- tedmiston 9y ago
  It might be helpful to explain more what parts of the analogy you have in mind with that.
  - taneq 9y ago
    They operate like a music studio or production company. They take applications from (or scout out) likely-looking 'undiscovered' artists / entrepreneurs, and offer them an advance / venture capital, along with advice and other resources, to create an album / product, in return for which they take an interest (shares / rights) in the resulting product. The details vary slightly (as the other response said, music studios typically take the rights to the album in exchange for royalties, rather than directly becoming a part-owner of the artist) but the basic model looks very similar to me.
- npkarnik 9y ago
  Not really, artistic talent has historically relinquished all IP rights. Incubators are more like a tax to get involved in the VC ecosystem, if anything.

by vonnik 9y ago

tedsanders 9y ago

I don't see the subtext that connects mass production and comfort with failure. In fact, I see mass production as a way to reduce failure rates. The idea behind mass production is to take a process that's done in a low-volume, idiosyncratic way and replace it with a process that can be reliably repeated at scale. With Y Combinator, that means replacing the rocky solo founder journey with a community full of of advisors and partners who can advise on topics like incorporation, financial planning, customer testing, investor relations, hiring, etc. There's no reason for a new founder to re-invent the wheel when the Y Combinator collective has already manufactured 1,000 wheels and gotten it down to a science. Founders should focus on their customers and their product - everything else should be 'mass produced' to the extent possible. (An example of this sort of mass production is pg's advice to incorporate as a Delaware C corp. Advice like this can save your fledgling startup from a week of legal research. Having 'mass-produced' shortcuts to these sorts of managerial microdecisions can make or break a startup.)

abstractbeliefs 9y ago
I guess mostly because you're spending less on them in overheads. When you can share the same overhead costs over 10 startups and expect 9 of them to fail, that's more palatable than spending the overhead 10 times for each individual company. And it's not just monetary costs: you can get more done when you have all the companies demo day together, simply by having to arrange fewer meetings individually, and less time travelling/setting up etc.
vonnik 9y ago
The subtext may not be in Jessica's piece, but YC's strategy implies that only a few of their investments need to go big for them to win. While certain aspects of YC do standardize startup growth, a lot of parts of the process can't be standardized. What you have left is a numbers game. If all YC startups succeeded, that would be a sign of failure, because it would indicate that YC itself was not taking sufficient risk.

zeckalpha 9y ago

Investing in stocks : Vanguard :: Investing in companies : YC

ravibala1 9y ago
Apart from the volume characteristic this doesn't seem to hold. Vanguard creates ETFs on diversified baskets of stocks picked(rules based) by other people eg: S&P, Nasdaq etc. YC actually has to review each and every application and independently determine whether to accept them. At a push, I'd go with - Investing in stocks:Vanguard :: Investing in companies : Random funds that will only invest if you have a brand-name lead investor
vonnik 9y ago
In a sense, and there's no shame in that. Index funds recognize that retail investors are bad at choosing where to place their money. I think it's equally plausible that venture investors are just as bad, and that spreading your bets within a certain range (in stocks, publicly traded companies) reduces risk and increases the likelihood of gain.

mbesto 9y ago

> That's quite different from how most VCs invest at any level. Most VCs are trying very hard to be right while making very few bets that are fairly large relative to their fund. And as the Kaufman report shows, that doesn't work. Most of those VCs are failing to show ROI to their LPs. Sequioa, Accel, Kleiner, and NEA for example have all made a similar amount of (or more) investments in startups than YC. I think it's a bit of a stretch to say that YC is more comfortable than most VC firms. You just don't hear about the other ones' failures because they're less publicized.

vonnik 9y ago
Maybe so, but not in the same amount of time. Sequoia and Kleiner have been around since 1972. 45 years. YC has been around since 2005. The larger a startup gets, the more likely we are to hear of its failure, and the firms you mention are all making much bigger bets. YC comes in earlier and spreads its bets wider. It takes it more than 100 startups per batch. I doubt Sequoia makes 100 investments in a year.

hyperpallium 9y ago

Yes, though I'd express it as YC funding startups earlier, before they're proven, when they need less funding. YC experimented with pushing it back even earlier in the gestation process, to pre-idea (pre-conception, if you will), and just backing team-quality. But that didn't work out well. Perhaps not being able to come up with an idea is a crucual indicator of team-quality? A start-up isn't just one idea, but requires thousands of ideas along the way, like a movie. Or maybe passion for a specific idea rallies people round.

meric 9y ago

Jesse Livermore's strategy.

taneq 9y ago

I was attending an event at a local incubator last week when it hit me - and maybe this is obvious to everyone else - that 'startup incubators' are just taking the music industry business model and applying it to entrepreneurs.

tedmiston 9y ago
It might be helpful to explain more what parts of the analogy you have in mind with that.
- taneq 9y ago
  They operate like a music studio or production company. They take applications from (or scout out) likely-looking 'undiscovered' artists / entrepreneurs, and offer them an advance / venture capital, along with advice and other resources, to create an album / product, in return for which they take an interest (shares / rights) in the resulting product. The details vary slightly (as the other response said, music studios typically take the rights to the album in exchange for royalties, rather than directly becoming a part-owner of the artist) but the basic model looks very similar to me.
npkarnik 9y ago
Not really, artistic talent has historically relinquished all IP rights. Incubators are more like a tax to get involved in the VC ecosystem, if anything.