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"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 $12

"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".
- einarvollset 8y ago
  So if I may - your assertions are: A) There is nothing wrong with how funding currently operates in the tech space. It allocates resources optimally in terms of risk adjusted returns for investors and there is no room to try alternate approaches. B) There is no way to assertain what the potential size of a business is, anything could become Dropbox (including - I dunno, a SaaS focused on kitchen countertop installers) C) The only way to provide suitable risk adjusted returns for investors is the current approach (focusing on finding unicorn outliers that can scale to 1000x)

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".

einarvollset 8y ago
So if I may - your assertions are: A) There is nothing wrong with how funding currently operates in the tech space. It allocates resources optimally in terms of risk adjusted returns for investors and there is no room to try alternate approaches. B) There is no way to assertain what the potential size of a business is, anything could become Dropbox (including - I dunno, a SaaS focused on kitchen countertop installers) C) The only way to provide suitable risk adjusted returns for investors is the current approach (focusing on finding unicorn outliers that can scale to 1000x)