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Thank you, but I think your assumption that the only thing that matters is finding 1000x returns is wrong. If you look at VC returns at scale and over time, wha

Thank you, but I think your assumption that the only thing that matters is finding 1000x returns is wrong. If you look at VC returns at scale and over time, what's considered acceptable returns are lower than you might expect (12% IRR). If you're funding people at $2m valuation without customers and with a SAFE, then yes the only way to get there is with the hits. We are betting that's not the only way, but it does mean we cannot compete in the valuation olympics.

staunch 8y ago
(I find this topic interesting to talk about and I don't mean to make this a huge criticism of what you're doing. I think it's great any time someone in a position to help early stage startups does so.) I'm definitely not saying that 1000x returns are all that matters, just that they're an inescapable reality. My understanding is based on what I believe are three facts: 1. A given startup's financial returns can range from 0x to 1000x or more due to the uniquely-high scalability of tech startups. 2. It's impossible to predict how big any particular startup's returns will be (i.e. not even the founders or investors can know). 3. Some very small percentage of any (sufficiently large) startup portfolio will return huge multiples unless you do something incredibly backwards. I'd imagine that YC generates much more than 12% IRR even excluding their hits. But what makes them so incredibly profitable is their hits. And because of their understanding that the hits are what makes them so profitable, they can rationally afford to be very generous towards all of their startups, which makes great startups want to apply, creating a virtuous cycle. Creating a firm that tries to be YC-without-the-hits seems totally fine, except if you still end up with huge hits, because then you're just YC with much less founder-friendly terms. It may feel like the conservative and safe approach but it could also be the riskiest possible path, by serving to filter out the best startups. There's a huge market opportunity for YC competitors that are remote but operate on the same terms. And when someone does this, they'll be first choice for all of the best startups, just like YC is. And it seems smart to compete with what's possible rather than with what currently exists.
- einarvollset 8y ago
  "I'd imagine that YC generates much more than 12% IRR even excluding their hits. " What makes you think so? 12% IRR is 3x capital in 10 years. YC terms are $120k for a SAFE * 256 companies/year = $30m/year. 10x is $300m return per cohort. Assuming we remove the unicorns, and that 50% die, that's 127 companies (half dead, one unicorn). Assuming again that the non-dead raise subsequent funding over various rounds, diluting YC's original stake down to (say) 4%, then all the 127 remaining companies would need to sell for an average $60m to beat a 12% IRR. Given how many exits are actually zero investor return acqui-hires then I think that's unlikely. " then you're just YC with much less founder-friendly terms." I don't think so, because nobody who applies to YC is going to be able to get any funding what so ever if they argue that they want to become a $20m ARR vertical SaaS business. So I guess it boils down to whether you think it's more founder friendly to say "no" than it is to offer our terms.
  - staunch 8y ago
    YC has pro rata rights, so maybe that 4% is low? Regardless, I concede that it's entirely possible many (or all) of the YC batches are unprofitable without the hits. It's an interesting question. I just think the entire concept of asking founders how big their companies could be doesn't make much sense. If Drew Houston predicted that he would be willing to sell Dropbox for $1 million in six months, and the Google Guys wanted to sell Google for a few million to Yahoo, YC had zero idea how big Airbnb would be, etc. what exactly is the point? My understanding is that YC asks the question "How big could your company become?" but discounts the answer very heavily because of how hard it is to predict at the earliest stages. Almost any startup can give an answer about how they could conceivably be huge. Anyone trying to build a $20 million ARR SaaS company has a very easy answer. It seems obvious that a founder with nothing would love to have a nice $20 million ARR business. It also seems obvious that when they achieve that level of success their ambitions will often grow, as happened with Dropbox, Facebook, Google, Stripe, and virtually every other hit startup ever. I do think there's a good point about focusing on sustainable growth, and "not growth at all costs" but this just seems like what all the best founders and VCs actually practice, so it boils down to "don't be stupid".

staunch 8y ago

(I find this topic interesting to talk about and I don't mean to make this a huge criticism of what you're doing. I think it's great any time someone in a position to help early stage startups does so.) I'm definitely not saying that 1000x returns are all that matters, just that they're an inescapable reality. My understanding is based on what I believe are three facts: 1. A given startup's financial returns can range from 0x to 1000x or more due to the uniquely-high scalability of tech startups. 2. It's impossible to predict how big any particular startup's returns will be (i.e. not even the founders or investors can know). 3. Some very small percentage of any (sufficiently large) startup portfolio will return huge multiples unless you do something incredibly backwards. I'd imagine that YC generates much more than 12% IRR even excluding their hits. But what makes them so incredibly profitable is their hits. And because of their understanding that the hits are what makes them so profitable, they can rationally afford to be very generous towards all of their startups, which makes great startups want to apply, creating a virtuous cycle. Creating a firm that tries to be YC-without-the-hits seems totally fine, except if you still end up with huge hits, because then you're just YC with much less founder-friendly terms. It may feel like the conservative and safe approach but it could also be the riskiest possible path, by serving to filter out the best startups. There's a huge market opportunity for YC competitors that are remote but operate on the same terms. And when someone does this, they'll be first choice for all of the best startups, just like YC is. And it seems smart to compete with what's possible rather than with what currently exists.

einarvollset 8y ago
"I'd imagine that YC generates much more than 12% IRR even excluding their hits. " What makes you think so? 12% IRR is 3x capital in 10 years. YC terms are $120k for a SAFE * 256 companies/year = $30m/year. 10x is $300m return per cohort. Assuming we remove the unicorns, and that 50% die, that's 127 companies (half dead, one unicorn). Assuming again that the non-dead raise subsequent funding over various rounds, diluting YC's original stake down to (say) 4%, then all the 127 remaining companies would need to sell for an average $60m to beat a 12% IRR. Given how many exits are actually zero investor return acqui-hires then I think that's unlikely. " then you're just YC with much less founder-friendly terms." I don't think so, because nobody who applies to YC is going to be able to get any funding what so ever if they argue that they want to become a $20m ARR vertical SaaS business. So I guess it boils down to whether you think it's more founder friendly to say "no" than it is to offer our terms.
- staunch 8y ago
  YC has pro rata rights, so maybe that 4% is low? Regardless, I concede that it's entirely possible many (or all) of the YC batches are unprofitable without the hits. It's an interesting question. I just think the entire concept of asking founders how big their companies could be doesn't make much sense. If Drew Houston predicted that he would be willing to sell Dropbox for $1 million in six months, and the Google Guys wanted to sell Google for a few million to Yahoo, YC had zero idea how big Airbnb would be, etc. what exactly is the point? My understanding is that YC asks the question "How big could your company become?" but discounts the answer very heavily because of how hard it is to predict at the earliest stages. Almost any startup can give an answer about how they could conceivably be huge. Anyone trying to build a $20 million ARR SaaS company has a very easy answer. It seems obvious that a founder with nothing would love to have a nice $20 million ARR business. It also seems obvious that when they achieve that level of success their ambitions will often grow, as happened with Dropbox, Facebook, Google, Stripe, and virtually every other hit startup ever. I do think there's a good point about focusing on sustainable growth, and "not growth at all costs" but this just seems like what all the best founders and VCs actually practice, so it boils down to "don't be stupid".