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Early YC: Small, gets disproportionate number of wins. Develops top tier reputation. Later YC: Expands significantly due to the added prestige, and now perform

Early 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 ago
Mutual 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?
- in3d 9y ago
  I think you mean hedge funds not mutual funds with 2/20.
slyn 9y ago
There probably are deep insights that lead to the root cause of success in both situations. Once these insights are made public or more people discover and exploit them on a widespread level, the market inefficiencies that gave the possibility for outperformance then disappear. If you don't find a new edge, you revert to the mean (or maybe rather, the "mean" catches up to you).
- marcoperaza 9y ago
  I think olfactory’s implication is that they get lucky at first, develop a reputation due to that luck, then revert to the mean. That there is no secret sauce at all. It’s an interesting theory.
- ProblemFactory 9y ago
  Even if others don't discover and adopt your ideas - there is a limited market size for most investment strategies. If you are good at picking winners for some specific type of startups, but there are only 10 of them per year, then you can't grow your fund from 10 to 100 investments per year and keep the same returns. If you discover a clever arbitrage opportunity or market inefficiency, but there is only 1M of trades happening in that market, then you can't dump 100M into the strategy and keep the same returns.
primeblue 9y ago
“A fool and his money are soon parted.” Given the world population, that’s and endless supply. Marketing and psychology are kings of science.
crispytx 9y ago
I don't know. Coinbase is sure looking like another hit. I think crypto is a bubble, but you can't deny that they picked another big winner as recently as 2012. And they had Instacart in that same S12 class as well.
deleted 9y ago
[deleted]
austenallred 9y ago
What’s your source for YC now performing much closer to the mean? I see it more like Stanford. Become prestigious, then you get all the best folks, many of whom would have been successful anyway, but you still add value as well as serious signaling and a rich network.
usrusr 9y ago
More than that: Even after ten years, that early success mutual fund won't be investing in entities that actively try to appeal to them, specifically. Contrast this with YC, there is probably a whole ebook lurking somewhere in the depths of the Amazon catalog that claims to coach would be founders in how to best pitch to each individual star VC. Founders are already winning if they only get funded, but investors need an entirely different kind of success. This misalignment (the funders' success is only a subset of the founders' success) is what I think Altman is talking about when he says "too many YC companies are getting funded". At the point where the two success metrics do not overlap (stretching the runway of an eventually failing startup for the maximally viable founder lifestyle), funder and founder are adversaries, which makes it a different (more difficult) situation from mutual funds.
- olfactory 9y ago
  > Founders are already winning if they only get funded, but investors need an entirely different kind of success. Aren't the board members supposed to make sure that the incentives are aligned so that all parties involved share the same goals and timeline? Sure, a founder may manage to collect a salary, but I'd guess most founders could earn more being hired by someone else.

dzink 9y ago

Mutual 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?

in3d 9y ago
I think you mean hedge funds not mutual funds with 2/20.

slyn 9y ago

There probably are deep insights that lead to the root cause of success in both situations. Once these insights are made public or more people discover and exploit them on a widespread level, the market inefficiencies that gave the possibility for outperformance then disappear. If you don't find a new edge, you revert to the mean (or maybe rather, the "mean" catches up to you).

marcoperaza 9y ago
I think olfactory’s implication is that they get lucky at first, develop a reputation due to that luck, then revert to the mean. That there is no secret sauce at all. It’s an interesting theory.
ProblemFactory 9y ago
Even if others don't discover and adopt your ideas - there is a limited market size for most investment strategies. If you are good at picking winners for some specific type of startups, but there are only 10 of them per year, then you can't grow your fund from 10 to 100 investments per year and keep the same returns. If you discover a clever arbitrage opportunity or market inefficiency, but there is only 1M of trades happening in that market, then you can't dump 100M into the strategy and keep the same returns.

primeblue 9y ago

“A fool and his money are soon parted.” Given the world population, that’s and endless supply. Marketing and psychology are kings of science.

crispytx 9y ago

I don't know. Coinbase is sure looking like another hit. I think crypto is a bubble, but you can't deny that they picked another big winner as recently as 2012. And they had Instacart in that same S12 class as well.

deleted 9y ago

[deleted]

austenallred 9y ago

What’s your source for YC now performing much closer to the mean? I see it more like Stanford. Become prestigious, then you get all the best folks, many of whom would have been successful anyway, but you still add value as well as serious signaling and a rich network.

usrusr 9y ago

More than that: Even after ten years, that early success mutual fund won't be investing in entities that actively try to appeal to them, specifically. Contrast this with YC, there is probably a whole ebook lurking somewhere in the depths of the Amazon catalog that claims to coach would be founders in how to best pitch to each individual star VC. Founders are already winning if they only get funded, but investors need an entirely different kind of success. This misalignment (the funders' success is only a subset of the founders' success) is what I think Altman is talking about when he says "too many YC companies are getting funded". At the point where the two success metrics do not overlap (stretching the runway of an eventually failing startup for the maximally viable founder lifestyle), funder and founder are adversaries, which makes it a different (more difficult) situation from mutual funds.

olfactory 9y ago
> Founders are already winning if they only get funded, but investors need an entirely different kind of success. Aren't the board members supposed to make sure that the incentives are aligned so that all parties involved share the same goals and timeline? Sure, a founder may manage to collect a salary, but I'd guess most founders could earn more being hired by someone else.