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Sam Altman: ‘Too many’ Y Combinator companies raise money
- toomuchtodo 9y agoIs there any way for YC to build its prestige and the sense of value it delivers without being a positive signal?
- matte_black 9y agoNon disclosure agreements until certain funding milestones are reached.
- deleted 9y ago[deleted]
- daddosi 9y agoI, in much ignorance, think having what it takes to create a credible startup might not be as close to a good idea as it doesn't even sound. I have a lot of ideas. Most not as good as some by my expectations but the sub set that would look neat to investors early on barely overlaps. Maybe YC should use the "void" to design the people they would like to see on this world. A product, after all, shapes the user. -G
- zjaffee 9y agoYes, 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.
- deleted 9y ago[deleted]
- ngokevin 9y agoWell, 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.
- 40acres 9y agoHe's probably right, didn't Airbnb struggle for about a year after graduation?
- bflesch 9y agoBy any chance, do you have further readings on this? We're also a struggling marketplace and would take great motivation from this.
- 40acres 9y agoRead 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.
- bflesch 9y agoWow, those seem like great resources! Thank you so much!
- trustfundbaby 9y agoAlso the how I built this podcast https://one.npr.org/?sharedMediaId=497820565:497945288 https://one.npr.org/?sharedMediaId=497820565:497945288, and their mixergy interview from eons ago https://mixergy.com/interviews/airbnb-chesky-gebbia/ https://mixergy.com/interviews/airbnb-chesky-gebbia/
- themagician 9y agoLook 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.
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- jpao79 9y agoWas 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! [0] https://en.wikipedia.org/wiki/Eating_your_own_dog_food https://en.wikipedia.org/wiki/Eating_your_own_dog_food
- sama 9y agoI am interested in trying some version of this! Have been thinking about all the edge cases.
- ukulele 9y agoUnless I am mistaken, literally all YC companies raise money. They do it from YC itself. There are lots of ways you could spin it, but how can Sam justify such a statement when they've invested in all of these companies too?
- benatkin 9y agoThe 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).
- ukulele 9y agoBy this logic, YC is investing even before the point that others shouldn't be investing, which would make even less sense.
- benatkin 9y agoHmm, 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.
- tzar 9y agoHe almost certainly meant that not all startups should raise more money, or raise the kind of money that many startups raise post-Demo Day.
- ukulele 9y ago> I think there’s sort of this halo around being a Y Combinator company, where companies raise money that perhaps shouldn’t. This is such a strange sentiment. YC has invested in all of these companies, then they pooh pooh others that follow their lead?
- sjbp 9y agoI 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.
- ukulele 9y agoBut YC is already making the claim that every company in the program is ready for investment. It's doing so by investing in them.
- deleted 9y ago[deleted]
- muzani 9y agoThey 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.
- ringaroundthetx 9y agoThe Russian money has got to go somewhere #payitforward
- chiefalchemist 9y agoMaybe 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?
- chaostheory 9y ago> 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.
- chiefalchemist 9y agoI was trying to say that if some post-YC VC comes up short he/she might say "WTF does YC know..." Hear that often enough and loud enough and the shine that is YC's will be less. Clearly YC / Sam benefits from being up the food chain not down it.
- forkerenok 9y agoI think he doesn't mean only ideas, but also people behind them (founders). And understandably they don't want to label startups on graduation.
- jacquesm 9y agoYC 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. [1] https://news.ycombinator.com/item?id=15928335 https://news.ycombinator.com/item?id=15928335
- d--b 9y agoThis 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 Anyone feeling the same?
- jacquesm 9y ago> It's more like they want to fund 1000 startups so that 100 are sustainable. That's actually good, not bad. 100 companies that work out long term are much better for the founders involved than two that are unicorns.
- d--b 9y agoI agree it's way better! I think in PG times, the idea was: aim for the moon, it's hard but if it doesn't work out you'll find plenty of well paid jobs. But now the market is so overcrowded that if you aim for the moon and fail, you'll mostly look like moron, and will have a hard time finding a gig. Just gut feelings though, I have no numbers nor people to talk to.
- wellboy 9y agoGood 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?
- crispytx 9y agoI don't think that's the case. Pretty sure they're still hunting unicorns and consider the rest of the companies a cost of doing business.
- cperciva 9y agoThis 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".
- jacquesm 9y agoIronically 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.
- newaccount4434 9y agoListen 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.
- mrep 9y agoIs 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.
- forgotpassagan 9y agoAka... '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 =)
- jacquesm 9y agoYC does not control HN. So that won't get you banned but trolling for a ban just might.
- forgotpassagan 9y agoIf 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
- ngokevin 9y agohttps://blog.ycombinator.com/pro-rata/ https://blog.ycombinator.com/pro-rata/
- d0m 9y agoThe 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.
- bunkydoo 9y agoThis 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.
- aswanson 9y agoI love the ambition of this dude to call out the valley to reach for more than what it is. The field needs 10000 more Sam Altmans.
- garmaine 9y agoI prefer a VC that doesn’t inject a political agenda.
- deleted 9y ago[deleted]
- aswanson 9y agoYou prefer a VC that isnt human. All humans inject their politics into every action they take. Accept it.
- garmaine 9y agoNot 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.
- TuringNYC 9y agoIf the artificially-created real estate "shortage" problem in the Bay Area was solved, lots of other problems would be solved. - Companies raising money just to pay inflated (yet still insufficient) labour costs - People who would love to work for startups but realize that most startup salaries barely gets you a studio apt, pretty cool until you have a family - Companies who "cant find" talent Is it any surprise companies need to raise so much funding, esp when operating out of the Bay Area?
- dmitrygr 9y ago> Companies raising money just to pay > inflated (yet still insufficient) labour costs 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)
- abritinthebay 9y agoBased 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
- ne01 9y agoThe problem is that too many startups go to Y Combinator! Many of them can bootstrap! Y Combinator prefers to get 6% of more companies to increase the chance of winning the jack pot.
- danschumann 9y agoNot 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.
- olfactory 9y agoEarly 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.
- dzink 9y agoMutual 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?
- baldajan 9y agoI 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.
- garganzol 9y agoSeen 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.
- baldajan 9y agoI 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.
- coziestSoup 9y agoIt 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.
- jrcii 9y agoHere's an idea: you start a company and you're profitable right away and you invest your profits back into the business. You get organic growth because your business is producing real value.
- sreyaNotfilc 9y agoMaybe 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! It reminds me of the Hubspot videos with Daniel Lyons. https://www.youtube.com/watch?v=RVSLLvHceSA https://www.youtube.com/watch?v=RVSLLvHceSA 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.