9 ms·

Conclusions from analyzing Y Combinator’s investing history

164 points by yarapavan 7y ago

echelon 7y ago
I'm thinking of applying to YC this fall. I have capital, but little business experience. My product and niche is pretty cool and very research heavy. YC's 7% is a pretty heavy take if I already have a few million in self-funding. Is this negotiable? I think an exit for what I'm pursuing is very high if we can grow fast enough. (Possibly become the incumbent.) It's a new market and absolutely trounces an existing one.
- lisper 7y ago
  > little business experience Yes, that's clear just from the fact that you're asking this question. > YC's 7% is a pretty heavy take This is a FAQ and here is the stock answer: if you think that participating in YC will increase the value of your company by more than 7% than it would otherwise be, then it's a win. Otherwise not. That is true regardless of the circumstances. If what you say is true then you should have investors beating down your door whether or not you're in YC.
  - beambot 7y ago
    Such a negative undertone... And very unhelpful. "(...) if you think that participating in YC will increase the value (...)" is exactly half of what the commentor was asking (indirectly): is the value of YC worth 7%? That one's nuanced -- echelon, feel free to hit me up via email if you want to discuss (see profile). The other half of the question (is there any wiggle room?) is almost universally "no" to my knowledge. Echelon also already stated that they have investors -- self-investment, but still.
    - lisper 7y ago
      > is the value of YC worth 7%? There is no universal answer to that question. For some companies the answer is clearly "yes", for others it is clearly "no", and for some it's a tough call. But there is absolutely no way anyone could give a more specific answer without knowing a whole lot more about what's going on. That is not something that should have to be explained to you unless you are a totally clueless noob. That is not a value judgement. There is nothing wrong with being a clueless noob. Everyone starts out that way. Echelon even came right out and said that he (she?) had "little business experience". But I'm not convinced that Echelon was really being sincere about this because he (she?) then went on to strongly imply that his company was so bad-ass that YC should be willing to seriously consider changing their standard terms for the privilege of being allowed in. Echelon is almost certainly wrong about this [1]. So "I have little business experience" sounded to me like a humblebrag. My answer was intended to convey the following message: Yes, Echelon, your lack of business experience was evident even before you told us, and though you don't seem to have fully taken this on board, it is a serious threat to your success. You are almost certainly not as bad-ass as you seem to think you are. Not yet. Maybe I should have spelled all that out originally, but I was in a hurry. --- [1] Since I am passing judgement on Echelon's odds of success on very little data, I feel I should give you some of my bona-fides: I have been a principal (founder or co-founder) in six startups and invested in about 20 others. Just this year I am closing out an investment fund that I managed which had an IRR of 70%. I've seen success, and I've seen failure, and while there is obviously no reliable way to make these predictions, there are a few warning signs that manifest very early that have in my experience proven to be very good predictors of failure, and signaling that you think you're bad-ass when you pretty clearly aren't is one of them.
  - new2628 7y ago
    I think you got the math wrong. Say your company value was $100. After it increases by 7%, it is $107. But now you own 93% of it, which is about $99.5. So you need to increase it in value by about 8% to be worth it.
- irjustin 7y ago
  100% you should. Get the optionality to decline if you believe it is too expensive. IMHO, 7% to learn good business sense is very cheap from guys who have seen it all. > Is this negotiable? From my understanding, it is not, but if you get an offer to join, you can try always try and negotiate. > I think an exit for what I'm pursuing is very high if we can grow fast enough. (Possibly become the incumbent.) It's a new market and absolutely trounces an existing one. While you might believe this and it very well could be true, these words are uttered by too many startups/founders, so the words don't exactly carry weight. Disruption, taking over, etc etc. These words used to mean something closer to 2010. Today it's largely noise and words pale in comparison to track record and strong numbers. > I have capital, but little business experience. Where does this capital come from? Self? Self funding is always cool to keep 100% control, but taking on investors also helps get strong advice, ideally from industry leaders, while opening doors. Keeps one from a dangerous, self ruining, echo chamber - which by your own admission, sounds like this could happen.
- contingencies 7y ago
  I have capital, but little business experience. My product and niche is pretty cool and very research heavy. Sounds like you are motivated. How much of the research would you be doing yourself? How much do you anticipate needing to spend? If you have both capital and motivation, then consider moving somewhere cheap and investing your own time to maintain complete ownership. You can get all the hand-wavey advice online, YC videos, books, etc. My only advice would be don't discount the importance of marketing. "Build it and they will come" doesn't work. If possible, get a few committed or LOI (potential) customers and some small income guarantee first.
  - echelon 7y ago
    > How much of the research would you be doing yourself? All of it. That's what evenings and weekends have been for awhile now. > How much do you anticipate needing to spend? Equipment is going to be a huge expenditure. The software and the configuration adds all the value. I'll try to self-fund as long as I can, but if/when it catches on, I don't want to be caught off guard without funding while the big players step in. At some point this is going to have to grow fast to stay ahead. If I'm at all right about the market. I suppose I'd better meet some people now that I can start conversations with when I need to.
    - contingencies 7y ago
      Equipment is going to be a huge expenditure. As a hardware startup currently spending big on manufacturing equipment, I feel your pain. I've seen a few hardware startups use alternative approaches to this space, which depending upon your target business model may be viable. One option is, if you are selling hardware with your own software and configuration, the hardware manufacturer may gift/loan/discount development hardware to you to facilitate your development work. Another option is leasing or timeshare of the equipment. Finally, vendor financing may allow you to defer payment for 12-24 months without the overhead of seeking external capital. Outside of the above methods, at a business process level having a rapid and well documented pipeline for per-unit assembly that does not necessitate pre-purchase can help to defer per-unit costs (shift from pre-fab to post-purchase fab) without greatly blowing out lead time from the customer perspective.
- hinkley 7y ago
  Just an armchair inhabitant here, but I'm wondering if you've got the question backward. That is, instead of negotiating down the take, what help could they give you that would make it worth that 7% to you? What would be worth the opportunity cost?
gitgud 7y ago
Well I think the main reason consumer products are declining in VC funding is a combination of market saturation and a high level of freemium solutions for consumers. Consumers are already spending monthly subscriptions on spotify, uber, netflix, games and countless others... consumers also expect much more out of a free app these... B2B enterprise software is also a massively competitive market but businesses have a business-case to pay for things, making them a more lucrative investment IMHO.
kfk 7y ago
The enterprise software industry seems quite overcrowded these days. Lots of companies still doing negative OI (Tableau, Salesforce, etc.). Lots of competition. Very little improvement over stuff that was made 30 years ago like Excel. Compare that with the enterprise hardware industry. Plenty of opportunities there. You got 3D printing, insects farming, vertical hydroponics, batteries, solar and wind energy, fusion, cleaner nuclear, more sustainable fashion, more sustainable travelling, scaling remote work for multinationals, etc.. I love my data science work, but I see immense untapped opportunities in more traditional fields.
- nl 7y ago
  What is "negative OI"?
  - adenta 7y ago
    I think, "Operating Income".
    - nl 7y ago
      Salesforce is profitable so I don't think it's that. I didn't check Tableau.
m_ke 7y ago
I wonder how much this shift to enterprise software is due to YC having a large portfolio of enterprises now. It's a lot easier to build a B2B business when you can get an intro to all of the unicorns that came out of YC. A company like Scale AI can get Airbnb and OpenAI to play with their service, then throw their logos on a deck and go sell it to Liberty Mutual.
- hinkley 7y ago
  Companies evolve toward what they (think they) are good at. Probably something to do with min-maxing. But if you shift left, right, up or down enough you leave a power vacuum, and your observation has me wondering if someone will step in to fill the space YC is 'vacating' (less focused on)
- OnlineGladiator 7y ago
  Scale AI's secret sauce is in labeling lidar point clouds, which is really a necessity for the self-driving car industry. Sure, they can label other stuff as well, but it's not hard and there are other companies that can do it (not quite as well, but they could easily catch up). What I'm trying to say is Scale AI is pretty much the only company offering a solution for an absolutely hair-on-fire problem for self-driving car companies - the introduction was unnecessary (and many of their customers are Argo, Waymo, Zoox, and other companies not affiliated with Y Combinator). Assuming the self-driving bubble deflates (it will) then Scale AI will suddenly find itself a commodity business as labeling images is not so hard that it can't be easily copied. It will be a race to the bottom. Unless there is another sudden surge of demand for labeling lidar point clouds.
  - m_ke 7y ago
    Yeah I know what they do and know a few other people working on data annotation tools for autonomous vehicles. All of the data annotation startups pivoted to that space because of the money involved. I just used them as an example because they were the first recent YC company that came to mind that's working on enterprise tools and has a landing page full of logos.
smabie 7y ago
Nitpick, but the Dow Jones is not representive of the market. 30 equal-weighted large cap stocks is not what the market is. What you want would be market-cap weighted and enough companies so there is no idiosyncratic risk. Examples would be: S&P 500 or the Russell 3000.
- beefman 7y ago
  The Dow's correlation with the market is well over 90% and it isn't equal-weighted.
  - smabie 7y ago
    Price weighted. Maybe even worse. Moreover, correlation isn't enough. What you would want to look at is the Beta exposure (covariance of the asset/portfolio and the market divided by the variance of the market) if you were deciding whether something was representative of the market.
    - nuclearnice1 7y ago
      Thanks for the definition of beta. I hear it thrown around, but never knew. Beta of Dow Jones is .98 to the S&P 500. [1] [1] https://www.zacks.com/stock/chart/INDU/fundamental/beta https://www.zacks.com/stock/chart/INDU/fundamental/beta
    - beefman 7y ago
      An asset's Beta is the product of its market correlation and volatility ratio. Highly volatile assets can have beta near 1 even when they have low market correlation. That's why CAPM statistics usually include R-squared along with Beta. More generally, in constructing optimized portfolios, correlations are important, not Betas. To your original point, 30 large firms are generally plenty to capture the market factor, regardless of weighting. For one thing, market-weighted indices are dominated by their top names (the top 30 names in the S&P 500 constitute over 40% of the index presently). More importantly, summing quickly suppresses uncorrelated variance, and there's a point after which adding additional names does very little. (I think there's a phase transition, actually – see Lello et al's recent report on polygenic risk scores, which use LASSO regression...[1]) [1] https://arxiv.org/abs/1709.06489 https://arxiv.org/abs/1709.06489
master_yoda_1 7y ago
Somehow I feel that YC model has failed us as humankind. People makes shitload of money working on shitty problem and cancer research still has to ask for donation at local grocery store.
- badrabbit 7y ago
  Is cancer research starving for money? People get to do what they want with their money so long as they don't hurt others, I think you're simply against capitalism, I fail to see how this is a YC thing. Donations have no ROI...
- rolltiide 7y ago
  “Cancer research” doesn’t have to do that, some organizations interested in “cancer research” do that Medical research is funded in as numerous of ways that everything else is, while also being subsidized by the government
- thaumasiotes 7y ago
  Don't think of this as "cancer research has to go begging". There's plenty of money for cancer research. Cancer research begs in the local store because it's so popular that begging in the local store is extremely lucrative.
- ilyaeck 7y ago
  YC is still a VC, meaning that its modus operandi is to make relatively safe bets that are expected to materialize with ~10 years. They never promised to make humanity's really hard and important problems their main focus. At best, they might be bold enough to allocate 1-5% of their funds to those hard bets, and that's already impressive and net-positive. To fund basic research, we need a direct and explicit commitment from the government or big foundations like Gates.
  - the_watcher 7y ago
    That is the exact opposite of the early stage VC model, where the few hits pay off the numerous misses.
soneca 7y ago
> "I recently wrote a recommendation letter..." Since when YC asks recommendation letters in its applications?
- pbiggar 7y ago
  2012 I think. There's a place existing founders can go to recommend people. Which is probably why YC is so homogenous.
  - HenriNext 7y ago
    I've seen at least in two YC videos a very clear mention that the recommendations don't have much weight, basically saying "don't worry about it". Secondly, is YC even that homogenous? It may be skewed towards enterprise software, but they do invest in a far wider range of startups than any other VC. And the ethnical and gender diversity is not that bad either, all things considered.
- brudgers 7y ago
  An applicant might request one even if not required by YC.

164 points by yarapavan 7y ago

I'm thinking of applying to YC this fall. I have capital, but little business experience. My product and niche is pretty cool and very research heavy. YC's 7% is a pretty heavy take if I already have a few million in self-funding. Is this negotiable? I think an exit for what I'm pursuing is very high if we can grow fast enough. (Possibly become the incumbent.) It's a new market and absolutely trounces an existing one.

lisper 7y ago
> little business experience Yes, that's clear just from the fact that you're asking this question. > YC's 7% is a pretty heavy take This is a FAQ and here is the stock answer: if you think that participating in YC will increase the value of your company by more than 7% than it would otherwise be, then it's a win. Otherwise not. That is true regardless of the circumstances. If what you say is true then you should have investors beating down your door whether or not you're in YC.
- beambot 7y ago
  Such a negative undertone... And very unhelpful. "(...) if you think that participating in YC will increase the value (...)" is exactly half of what the commentor was asking (indirectly): is the value of YC worth 7%? That one's nuanced -- echelon, feel free to hit me up via email if you want to discuss (see profile). The other half of the question (is there any wiggle room?) is almost universally "no" to my knowledge. Echelon also already stated that they have investors -- self-investment, but still.
  - lisper 7y ago
    > is the value of YC worth 7%? There is no universal answer to that question. For some companies the answer is clearly "yes", for others it is clearly "no", and for some it's a tough call. But there is absolutely no way anyone could give a more specific answer without knowing a whole lot more about what's going on. That is not something that should have to be explained to you unless you are a totally clueless noob. That is not a value judgement. There is nothing wrong with being a clueless noob. Everyone starts out that way. Echelon even came right out and said that he (she?) had "little business experience". But I'm not convinced that Echelon was really being sincere about this because he (she?) then went on to strongly imply that his company was so bad-ass that YC should be willing to seriously consider changing their standard terms for the privilege of being allowed in. Echelon is almost certainly wrong about this [1]. So "I have little business experience" sounded to me like a humblebrag. My answer was intended to convey the following message: Yes, Echelon, your lack of business experience was evident even before you told us, and though you don't seem to have fully taken this on board, it is a serious threat to your success. You are almost certainly not as bad-ass as you seem to think you are. Not yet. Maybe I should have spelled all that out originally, but I was in a hurry. --- [1] Since I am passing judgement on Echelon's odds of success on very little data, I feel I should give you some of my bona-fides: I have been a principal (founder or co-founder) in six startups and invested in about 20 others. Just this year I am closing out an investment fund that I managed which had an IRR of 70%. I've seen success, and I've seen failure, and while there is obviously no reliable way to make these predictions, there are a few warning signs that manifest very early that have in my experience proven to be very good predictors of failure, and signaling that you think you're bad-ass when you pretty clearly aren't is one of them.
- new2628 7y ago
  I think you got the math wrong. Say your company value was $100. After it increases by 7%, it is $107. But now you own 93% of it, which is about $99.5. So you need to increase it in value by about 8% to be worth it.
irjustin 7y ago
100% you should. Get the optionality to decline if you believe it is too expensive. IMHO, 7% to learn good business sense is very cheap from guys who have seen it all. > Is this negotiable? From my understanding, it is not, but if you get an offer to join, you can try always try and negotiate. > I think an exit for what I'm pursuing is very high if we can grow fast enough. (Possibly become the incumbent.) It's a new market and absolutely trounces an existing one. While you might believe this and it very well could be true, these words are uttered by too many startups/founders, so the words don't exactly carry weight. Disruption, taking over, etc etc. These words used to mean something closer to 2010. Today it's largely noise and words pale in comparison to track record and strong numbers. > I have capital, but little business experience. Where does this capital come from? Self? Self funding is always cool to keep 100% control, but taking on investors also helps get strong advice, ideally from industry leaders, while opening doors. Keeps one from a dangerous, self ruining, echo chamber - which by your own admission, sounds like this could happen.
contingencies 7y ago
I have capital, but little business experience. My product and niche is pretty cool and very research heavy. Sounds like you are motivated. How much of the research would you be doing yourself? How much do you anticipate needing to spend? If you have both capital and motivation, then consider moving somewhere cheap and investing your own time to maintain complete ownership. You can get all the hand-wavey advice online, YC videos, books, etc. My only advice would be don't discount the importance of marketing. "Build it and they will come" doesn't work. If possible, get a few committed or LOI (potential) customers and some small income guarantee first.
- echelon 7y ago
  > How much of the research would you be doing yourself? All of it. That's what evenings and weekends have been for awhile now. > How much do you anticipate needing to spend? Equipment is going to be a huge expenditure. The software and the configuration adds all the value. I'll try to self-fund as long as I can, but if/when it catches on, I don't want to be caught off guard without funding while the big players step in. At some point this is going to have to grow fast to stay ahead. If I'm at all right about the market. I suppose I'd better meet some people now that I can start conversations with when I need to.
  - contingencies 7y ago
    Equipment is going to be a huge expenditure. As a hardware startup currently spending big on manufacturing equipment, I feel your pain. I've seen a few hardware startups use alternative approaches to this space, which depending upon your target business model may be viable. One option is, if you are selling hardware with your own software and configuration, the hardware manufacturer may gift/loan/discount development hardware to you to facilitate your development work. Another option is leasing or timeshare of the equipment. Finally, vendor financing may allow you to defer payment for 12-24 months without the overhead of seeking external capital. Outside of the above methods, at a business process level having a rapid and well documented pipeline for per-unit assembly that does not necessitate pre-purchase can help to defer per-unit costs (shift from pre-fab to post-purchase fab) without greatly blowing out lead time from the customer perspective.
hinkley 7y ago
Just an armchair inhabitant here, but I'm wondering if you've got the question backward. That is, instead of negotiating down the take, what help could they give you that would make it worth that 7% to you? What would be worth the opportunity cost?

gitgud 7y ago

Well I think the main reason consumer products are declining in VC funding is a combination of market saturation and a high level of freemium solutions for consumers. Consumers are already spending monthly subscriptions on spotify, uber, netflix, games and countless others... consumers also expect much more out of a free app these... B2B enterprise software is also a massively competitive market but businesses have a business-case to pay for things, making them a more lucrative investment IMHO.

kfk 7y ago

The enterprise software industry seems quite overcrowded these days. Lots of companies still doing negative OI (Tableau, Salesforce, etc.). Lots of competition. Very little improvement over stuff that was made 30 years ago like Excel. Compare that with the enterprise hardware industry. Plenty of opportunities there. You got 3D printing, insects farming, vertical hydroponics, batteries, solar and wind energy, fusion, cleaner nuclear, more sustainable fashion, more sustainable travelling, scaling remote work for multinationals, etc.. I love my data science work, but I see immense untapped opportunities in more traditional fields.

nl 7y ago
What is "negative OI"?
- adenta 7y ago
  I think, "Operating Income".
  - nl 7y ago
    Salesforce is profitable so I don't think it's that. I didn't check Tableau.

m_ke 7y ago

I wonder how much this shift to enterprise software is due to YC having a large portfolio of enterprises now. It's a lot easier to build a B2B business when you can get an intro to all of the unicorns that came out of YC. A company like Scale AI can get Airbnb and OpenAI to play with their service, then throw their logos on a deck and go sell it to Liberty Mutual.

hinkley 7y ago
Companies evolve toward what they (think they) are good at. Probably something to do with min-maxing. But if you shift left, right, up or down enough you leave a power vacuum, and your observation has me wondering if someone will step in to fill the space YC is 'vacating' (less focused on)
OnlineGladiator 7y ago
Scale AI's secret sauce is in labeling lidar point clouds, which is really a necessity for the self-driving car industry. Sure, they can label other stuff as well, but it's not hard and there are other companies that can do it (not quite as well, but they could easily catch up). What I'm trying to say is Scale AI is pretty much the only company offering a solution for an absolutely hair-on-fire problem for self-driving car companies - the introduction was unnecessary (and many of their customers are Argo, Waymo, Zoox, and other companies not affiliated with Y Combinator). Assuming the self-driving bubble deflates (it will) then Scale AI will suddenly find itself a commodity business as labeling images is not so hard that it can't be easily copied. It will be a race to the bottom. Unless there is another sudden surge of demand for labeling lidar point clouds.
- m_ke 7y ago
  Yeah I know what they do and know a few other people working on data annotation tools for autonomous vehicles. All of the data annotation startups pivoted to that space because of the money involved. I just used them as an example because they were the first recent YC company that came to mind that's working on enterprise tools and has a landing page full of logos.

smabie 7y ago

Nitpick, but the Dow Jones is not representive of the market. 30 equal-weighted large cap stocks is not what the market is. What you want would be market-cap weighted and enough companies so there is no idiosyncratic risk. Examples would be: S&P 500 or the Russell 3000.

beefman 7y ago
The Dow's correlation with the market is well over 90% and it isn't equal-weighted.
- smabie 7y ago
  Price weighted. Maybe even worse. Moreover, correlation isn't enough. What you would want to look at is the Beta exposure (covariance of the asset/portfolio and the market divided by the variance of the market) if you were deciding whether something was representative of the market.
  - nuclearnice1 7y ago
    Thanks for the definition of beta. I hear it thrown around, but never knew. Beta of Dow Jones is .98 to the S&P 500. [1] [1] https://www.zacks.com/stock/chart/INDU/fundamental/beta https://www.zacks.com/stock/chart/INDU/fundamental/beta
  - beefman 7y ago
    An asset's Beta is the product of its market correlation and volatility ratio. Highly volatile assets can have beta near 1 even when they have low market correlation. That's why CAPM statistics usually include R-squared along with Beta. More generally, in constructing optimized portfolios, correlations are important, not Betas. To your original point, 30 large firms are generally plenty to capture the market factor, regardless of weighting. For one thing, market-weighted indices are dominated by their top names (the top 30 names in the S&P 500 constitute over 40% of the index presently). More importantly, summing quickly suppresses uncorrelated variance, and there's a point after which adding additional names does very little. (I think there's a phase transition, actually – see Lello et al's recent report on polygenic risk scores, which use LASSO regression...[1]) [1] https://arxiv.org/abs/1709.06489 https://arxiv.org/abs/1709.06489

master_yoda_1 7y ago

Somehow I feel that YC model has failed us as humankind. People makes shitload of money working on shitty problem and cancer research still has to ask for donation at local grocery store.

badrabbit 7y ago
Is cancer research starving for money? People get to do what they want with their money so long as they don't hurt others, I think you're simply against capitalism, I fail to see how this is a YC thing. Donations have no ROI...
rolltiide 7y ago
“Cancer research” doesn’t have to do that, some organizations interested in “cancer research” do that Medical research is funded in as numerous of ways that everything else is, while also being subsidized by the government
thaumasiotes 7y ago
Don't think of this as "cancer research has to go begging". There's plenty of money for cancer research. Cancer research begs in the local store because it's so popular that begging in the local store is extremely lucrative.
ilyaeck 7y ago
YC is still a VC, meaning that its modus operandi is to make relatively safe bets that are expected to materialize with ~10 years. They never promised to make humanity's really hard and important problems their main focus. At best, they might be bold enough to allocate 1-5% of their funds to those hard bets, and that's already impressive and net-positive. To fund basic research, we need a direct and explicit commitment from the government or big foundations like Gates.
- the_watcher 7y ago
  That is the exact opposite of the early stage VC model, where the few hits pay off the numerous misses.

soneca 7y ago

> "I recently wrote a recommendation letter..." Since when YC asks recommendation letters in its applications?

pbiggar 7y ago
2012 I think. There's a place existing founders can go to recommend people. Which is probably why YC is so homogenous.
- HenriNext 7y ago
  I've seen at least in two YC videos a very clear mention that the recommendations don't have much weight, basically saying "don't worry about it". Secondly, is YC even that homogenous? It may be skewed towards enterprise software, but they do invest in a far wider range of startups than any other VC. And the ethnical and gender diversity is not that bad either, all things considered.
brudgers 7y ago
An applicant might request one even if not required by YC.