11 ms·

Y Combinator Numbers

506 points by pg 15y ago

KennethMyers 15y ago
>If it were 100%, I'd worry we were being too conservative in >who we funded." Note to self: if you're succeeding in everything you're doing, you're probably failing to attempt awesome things in which you could succeed.
lionhearted 15y ago
Back of napkin math: Funding of $25,000 per startup (funding plus costs) x 210 = $5,250,000 in funding costs. To factor other costs and be conservative, double that to $10.5 million. YC usually takes 6% equity. Assume that's diluted in half, conservatively again, to get 3%. Total current valuation of 4.7 billion: $4,700,000,000 * .03 = $141,000,000 So... using all conservative numbers, YC's return has been .... $141,000,000 / $10,500,000 = 13.4 Whoa... did I do that math right? A return of 1340% That's... pretty astounding. Talk about a win/win/win situation for everyone involved... if the order of magnitudes here are even close, well, massive congratulations to everyone involved. Wow. Wow.
- jpwagner 15y ago
  It's definitely astounding and deserves congratulations. But to be clear, valuation and return should not be equated in this way...
- johnrob 15y ago
  Amazingly, it sounds a lot like a successful startup: 10 million in funding, 141 million exit. However, startups usually have to deal with a high probability of failure, while YC achieved this with a substantially lower risk (portfolio theory at play).
  - patrickk 15y ago
    I thought portfolio theory referred to holding a diverse bunch of assets, no? (I could be wrong on this.) For example, an investment portfolio might be comprised of 90% T-bills, and 10% "high risk" assets (yes, I realise the risk of this statement becoming quite false in the not-too-distant future, given what has been said about US debt recently). http://seekingalpha.com/article/43008-portfolio-allocation-nassim-taleb-s-90-solution http://seekingalpha.com/article/43008-portfolio-allocation-n... In YC's case, it's portfolio is entirely made up of high-risk startups, so to the best of my knowledge, it's not classic portfolio theory. http://en.wikipedia.org/wiki/Modern_portfolio_theory http://en.wikipedia.org/wiki/Modern_portfolio_theory
    - zyfo 15y ago
      Portfolio Theory is about keeping a set expected return but reducing risk (volitation) through diversification. Diversification is about choosing investments which aren't positively correlated. Are web startups positively correlated? As a industry, probably/maybe. Was certainly the case in the dotcom crash. Performance-wise, not really. Most startups fail, some make it big. Why? Low investment costs and high possible leverage with internet technology (to little marginal cost). This could change in the future. In this case the second way is probably more fruitful to think about, since one big winner will even out all the losers. I'm sure this is possible to "prove" by some Black-Swan-ish statistic model theory. NOTE: I could be wrong. EDIT: I agree that web startups today aren't one industry. Social web startups is a candidate though.
      - myoung8 15y ago
        I think it's a mistake to categorize all web startups as belonging to the "web startup" industry. Even though we (CarWoo! YCS09) are a web startup, we see ourselves primarily as a company that plays in the automotive industry. All of our key metrics are highly-correlated with the automotive industry, not with what Techcrunch writes on any given day. While a lot of YC startups' metrics ebb and flow with the goings on of the echo chamber, many do not.
    - myoung8 15y ago
      It's not classic, but it is a diversified portfolio. YC invests in startups across all industries--automotive, mobile, health, financial, entertainment, etc.--which presumably is less risky (lower variance in returns) vis-a-vis just investing in one sector.
      - andrewparker 15y ago
        YC companies address customers in diverse sectors, but if you were to classify YC companies with a GICS code, 99% of them would fall under Internet Software & Services (code 4510) [ http://en.wikipedia.org/wiki/Global_Industry_Classification_Standard http://en.wikipedia.org/wiki/Global_Industry_Classification_... ]. So, it's not really a diverse portfolio, but it's definitely a portfolio play, which is substantially less risky than having all your assets tied up in the stock of a single startup. Think about it this way, if 2001 hit again and all tech stocks plummeted, all the companies in the YC portfolio would be substantially negatively impacted, so there isn't a portfolio effect to protect against this correlation in YC's assets.
- adamt 15y ago
  In investment terms 'return' normally refers to profit. See http://www.investopedia.com/terms/r/returnoninvestment.asp http://www.investopedia.com/terms/r/returnoninvestment.asp So I think you should have ended up with 1240%. E.g turning $1 to $1.50 is a 50% return and $1 to $2 is 100% so $1 to $13.4 is a 1240% return. Still a spectacular return given the short time period. Otherwise I agree with your numbers. The cost doubling sounds high at first but YC is by definition very hands on.
  - andrewparker 15y ago
    No, I work in VC and OP is right. If you have a $100M fund, you invest it all, and you don't lose any money, but you also don't make any money, then you will return $100M to your LPs. Your fund will be a 1x fund and you will return 100% of capital invested. So, I'd stick with the 1340% number. I understand we are really just disagreeing about the semantics of the word "return", but I'm just including how I see it most commonly used in my line of work.
- eru 15y ago
  Did you factor in the amount of work Paul Graham and friends put into ycombinator?
- deleted 15y ago
  [deleted]
- redthrowaway 15y ago
  My problem with pg's numbers is that they are almost entirely theoretical. The valuations don't represent anything close to liquidity, and the chances of those companes generating anywhere near that return in real terms are slim at best. The portfolio might be "worth" 4.7 billion, but what are the chances they'll generate a real return anywhere close to that? I'm not arguing against pg's methodology, as I realize it's fairly consistent with standard practices, but the ycombinator investors are nowhere near as wealthy in real terms as these numbers would suggest. If airbnb were to fail that would destroy a huge amount of that wealth, with no ability to extract any value before then. None of this is meant to rain on YC's parade. I have a great deal of respect and admiration for all involved, and congratulate them heartily on the very real successes they have had and continue to have. I'd simply be heasitant to describe YC as being "worth" 5BB, given a reasonable expected cash return.
  - zyfo 15y ago
    pg doesn't describe YC as being worth 5BB, he says the projected value of all startups are in that ballpark. The question was How is YC doing? and the answer seems to be: pretty damn good. As in they are doing something right, not as in "our valuation is around 5BB".
    - redthrowaway 15y ago
      Sorry, my last line wasn't in keeping with the spirit of the rest of my post. I'm not saying YC is or isn't worth 5BB, but rather that that's how they're valuing their portfolio. I don't doubt that valuation, just the utility of the money that's theoretically theirs.
  - paul 15y ago
    Are you suggesting that Sequoia and other top VCs are making investments where the expected return is less than 1? AirBnb could end up being worth $0, but it could also be worth $10 billion. A $1 billion valuation would be a bet that it's expected value is substantially more than $1 billion. You may disagree with that assessment, but the people making that bet have a pretty good track record.
  - deleted 15y ago
jasonshen 15y ago
> When startups are acquired, acquirers usually give the founders incentives to stay on. Sometimes to make the founders feel better these incentives are included in the number the acquirer quotes as the acquisition price. In that situation there are effectively two prices, the quoted price, and a lower price investors see. Wow - I didn't know this. Does anyone have any more detailed examples of this happening they can share?
- tptacek 15y ago
  What, of acquisitions with earn-outs? Search NEWS.GOOGLE.COM for "earnout".
dtap 15y ago
These numbers are astonishing. By my calculation YC has a cash-on-cash return of 67X! Avg. value (22.4M) * Avg. equity (6%) = Value of average stake (1.34M) Compare this to an investment of $20k, wow. I am sure there is some sort of dilution that occurs, but anywhere in this order of magnitude is remarkable.
- emmett 15y ago
  6% is undiluted, you have to assume YC has been diluted quite a bit during fundraising. But even assuming a more realistic 3%, those are great returns.
  - seats 15y ago
    Also, remember this is a power law distribution. So talking about an average amount of dilution is probably risky. The dilution on the single largest exit is going to move the needle the most.
- freshfunk 15y ago
  These are misguided statistics. I can envision a scenario where using average numbers give you completely the wrong picture. For example, the majority of the total value comes from the few outliers (AirBnb, Heroku, DropBox) and the other 80/90/95% of companies contribute relatively little to the total valuation. So let's say they still own 6% of these outliers. Great! That's still worth a lot. But how much do they still own? Have their shares been diluted? Did they have to issue new shares due to further financing? Has that 6% turned into 3% or 1.5%? I'm not an expert but it's quite possible that their initial 6% has been diluted. I think the picture looks good, overall, for YC from an investment standpoint. I think avg. value is not a great metric by which to value the "average" YC company since my guess is that the majority of the value is on the top end.
larrik 15y ago
"...so far at least the great majority of VC investments in YC-funded startups have been by the better firms. I'm not sure exactly why, since bad VCs are more numerous than good ones; perhaps the bad VCs assume the companies at an event as public as Demo Day will already have been picked over by the time they get a shot at them." Or perhaps the lower tier VCs just can't compete with the "better" firms. I find it interesting that you so readily equate "lower-tier" VCs with "lower quality" VCs. Is this a reliable rule?
- hugh3 15y ago
  I find it interesting that you so readily equate "lower-tier" VCs with "lower quality" VCs. Is this a reliable rule? If you were a low-tier good-quality VC, surely you'd become known as a top-tier VC pretty soon?
deleted 15y ago
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- emmett 15y ago
  YC invests more like $17k on average, since most startups are 2 people. So your base is wrong there. You also have to assume dilution since almost everyone raises money. So they might have started with 6%, but they probably have more like 3% in a mature company (assuming 50% dilution for no particular reason). So if you wanted to estimate returns at this point you could say (3% * 4.7 billion) / (212 * 17k) which is 39x (or 3900%). Not half bad!
  - tansey 15y ago
    You also have to account for the other services and facilities that YC provides. I believe pg has mentioned previously that the total cost per startup for YC is about $40k. That would be about a 16x return. Still pretty amazing.
achompas 15y ago
$4.7 billion / 210 = $22.4 million, so the average value of startups we've funded is about $22.4 million. Of course that could be cut in half tomorrow. Startup valuations are even more volatile than ordinary equities. Couldn't one argue that startup valuations are sticky in a downward direction? The 21 largest companies are highly valued because they're generating tons of revenue (or even profits). Nothing short of a market collapse would hault that revenue generation, and it's hard to imagine such a collapse in the market of, say, peer-to-peer vacation rentals or cloud-based multi-platform storage. It's entirely possible, though, that by "cut in half tomorrow" PG meant that Winter 2012 will include 210 companies. :P
- kenjackson 15y ago
  The 21 largest companies are highly valued because they're generating tons of revenue (or even profits), and nothing short of a collapse in their market could halt that income generation. I don't think valuation of startups are strongly based on revenue and profit. At least not in a way where their revenue/profits force a certain valuation, rather than simply suggest that the potential and growth is there. (if that makes sense).
  - achompas 15y ago
    Yeah, absolutely makes sense. Here's a proof by cases on my point: Companies are highly valued b/c they (a) generate income or (b) have the potential to generate income. (a) companies are trivial cases, since they already make money. Let's move on. Looking at (b) companies: they're highly valued because market conditions + company fundamentals suggest they CAN generate income soon. Let's assume company fundamentals (leadership, labor) are constant and solid (trivial, since they're being advised by PG and other VCs). Therefore, highly-valued companies that do no yet generate income can only be negatively disrupted by market forces. Based on the initial assumption about (b) companies' potential, I argue that (b) have been selected such that they are not particularly vulnerable to negative shocks. Therefore, their valuations have a very, very high floor and are sticky in the downward direction.
    - 15y ago
limist 15y ago
It seems safe to say that Y Combinator's expectancy* as an investor is currently unsurpassed - no private investor, mutual fund, hedge fund, VC, etc. I've ever heard of comes close. Congratulations! * expectancy = (probability of win * average win) – (probability of loss * average loss)
- eru 15y ago
  I guess if Warren Buffet were to start again with only a few million USD, like Y Combinator did, he would do really well in terms of percentage return, too.
Jd 15y ago
Far better than I would have expected, given the various spreadsheets, etc. that I had seen floating around. I was a bit skeptical about YCombinator's growth and the ability to mentor new startups, but with numbers like these (esp. the 34/36 number) I've a lot more confidence that they will be able to do just fine with more startups in each class. In many ways, it also makes me comfortable saying that the "Harvard of startups" description is appropriate. Sprinkle in a bit of elitism based on merit, give people some general framework, a bit of advice, and a lot of free reign, and brilliant and hardworking people will make things happen. Much better to be a bit hands-off and cultivate excellence then micro-managing the actions of the less focused or ambitious. This, even more than recent acquisitions, is the best news I've seen out of YC in awhile, and truly excellent. Congratulations! btw, to pg or anyone else, would be a little bit interesting to see more about the power law distribution as it applies to investing. I'm assuming this is true across the field, but don't know for sure (do all vcs get the same distribution, or is it simply true of software startups, or is it simply true of software startups that manage to include big hits? Moreover, do you simply get big hits by funding enough decent sluggers, or are there other strategies to make sure you have a decent shot at the next Dropbox, Twitter, Google, etc.)
SemanticFog 15y ago
If YC holds common shares, then you need to adjust the expected value down quite a bit. On any exit that isn't a huge win, non-employee common shareholders are by far the most likely to get short end. The expected value is probably 10-50% of the fully diluted headline value of a VC deal. But YC is clearly going to do spectacularly well. They deserve big congrats for what they've accomplished.
- myoung8 15y ago
  This isn't generally the case anymore--funding rounds these days tend to assign a 1X liquidation preference to both common and preferred shares, so assuming that a company gets acquired for more than its valuation, you shouldn't need to adjust EV down.
  - usaar333 15y ago
    True, but there's still a very good chance of being acquired for less - which means you have to adjust the EV down.
    - pmjordan 15y ago
      Except all the maths here has only accounted for the top 10%. Those top 10% are fairly unlikely to be sold off at scrap value.
      - SemanticFog 15y ago
        You'd be surprised. The ones that raise the most money also have the hardest time getting over the preferred total. The purchaser will take care of the employees it wants, but other common shareholders often end up out of luck.
  - SemanticFog 15y ago
    1x is still 1x -- if you don't get over it, the common shareholders don't get paid. In a pool as big as YC's there will be plenty of examples.
ivankirigin 15y ago
One way to measure is just on exists so far, which is a strict lower bound, but doesn't change with the market. I bet YC is in the black just from exits, and this can be measured explicitly. What is the sum of YC's returns from exits (and cash value for stock) over the sum of money spent on investments? Measuring the value of companies that have grown dramatically since the last round if pretty arbitrary. If this estimate were done on the same companies in the same states but in 2009, wouldn't it be off by 50%?
ry0ohki 15y ago
I'd be interested in the valuations based on traditional things such as revenue, assets, cash on hand etc... not that these things necessarily matter to Y Combinator as a company making $0 that is bought for $1 billion is still significant, I'm just curious what percentage actually is profitable.
RealGeek 15y ago
With the numbers of startups growing with every batch. Do you think it dilutes the value Y Combinator provides? I wonder if pg and YC partners would be able to give enough time and attention to 62 startups. YC brand and alumni network is stronger than ever. YC is great at scouting great entrepreneurs at early stage. At this point YC may be acting as a filter for investors. The big question is, Will YC still the advisory role to create great products? or Is it now a funding school that provides a brand and access to Angels and VCs? Would love pg, YC partners or alumni to chime in on this.
- Harj 15y ago
  Currently the request queue for office hours is empty, meaning everyone who wants to meet with us has been able to. We have capacity for more office hours this week and will be adding more. PG added office hours for this afternoon, with more slots than there were requests in the queue. Things seem to be working so far.
zyfo 15y ago
Impressive. What about the control group though? You know, the 50% that were deemed fit for YC after the interview but lost at the coin toss backstage. How did those compare?
- wdr 15y ago
  What are you talking about? PG doesn't play dice with people's startups. /Insert Einsteins's quote about god being dicey
  - T-hawk 15y ago
    He's saying there should have been a control group. We can't directly compare startups that YC funded with startups of equal quality that YC did not fund, because the latter does not exist (assuming YC is correctly selecting for quality.) To isolate YC's influence, you'd need YC to pick a set twice as large and fund only half of them at random.
- scw 15y ago
  Right, the control group is required to tell you what the YC influence is (which is probably quite significant). Charlie Munger once said you could lock up the smartest students in a closet for four years instead of sending them to college and they'd still be the smartest students, what were the outcomes of the other 'smart students'?
  - lurker19 15y ago
    Heh, Peter Thiel did, too.
- shimon 15y ago
  Good idea. I wonder if there's some way YC could survey these people without offending everyone. Maybe offer a 30min advisory session (to known YC post-interview rejects) in return for filling out a survey indicating their current status?
- pg 15y ago
  I don't understand. Do you mean startups we fund that don't do well, or startups we don't fund?
staunch 15y ago
Long term I think the big question is how much of the success of YC companies is directly related to the external benefits of being YC companies. There's no question they tend to get far more attention on every front (VC/valuations/press/bizdev/hiring, etc) than they otherwise would. In a few years when there are 1000 YC companies it will start to mean a lot less to all those people who have been helping YC companies succeed to date. It probably already means a lot less to a VC to hear you're a YC company, because they've met 300 of them. If it's the YC halo effect that's driving high returns it will be a big problem if it starts to wear off.
- deleted 15y ago
  [deleted]
- ryannielsen 15y ago
  I'm curious: why do you think more YC companies will dilute YC's value or brand? What data leads you to that assertion? Personally, I'd think the opposite is possible. (And likely if YC companies continue to be considered "successful".) A stronger YC network and a large portfolio of successful companies should only strengthen the brand.
- stevenj 15y ago
  >In a few years when there are 1000 YC companies it will start to mean a lot less to all those people who have been helping YC companies succeed to date. Harvard, Yale, MIT, Stanford, etc. seem to be doing rather well, as far as higher education goes. And I would imagine those that have partnered with them are doing okay too. Quality matters. >It probably already means a lot less to a VC to hear you're a YC company, because they've met 300 of them. I doubt that. A VC is just trying to pick the next Google. Or the next Google founder(s).
  - Jd 15y ago
    Right on. I think as long as the quality of YC companies remains high, the presence of imitators will of course increase the value of the original, just as in higher ed. Startup incubators may in some ways be easier to replace than universities (Harvard, Brown, etc. are still going strong after 200+ years), but they are subject to similar dynamics, insofar as there is team loyalty and networking benefits (as there obviously are). Personally, I would accept 10% dilution of my company simply to be an YCombinator alumnus since I think the benefits are and will remain that high.
seats 15y ago
>> That number is about as high as I'd want it to be. If it were 100%, I'd worry we were being too conservative in who we funded. There is market feedback in this thought (and in the footnote where you cite 'beta'). Really what you are saying is that you are aiming for a level of conservatism/risk relative to the market. I'm curious what the funding rates were in 2006 and how they changed. How much of the increase on funding percentages were due to being better at doing YC and how much of the increase was due to their being much more risk capital in the market?
VaedaStrike 15y ago
A question for PG - What's been the most surprising numbers to emerge, in your opinion, up to this point? You mention the concern that would be inherent if funding was at 100% prior to yuri with regards to an overly conservative stance. With, as you have stated, the real goal being finding the next google or facebook isn't a 90+% level almost as worrying ??? Wouldn't something closer to 70 make a better balance in terms of maximizing coverage to increase the chance of landing the outliers ?
- pg 15y ago
  The most surprising thing was the number of companies with valuations between 30 and 60 million.
rd108 15y ago
"like any portfolio of startups ours has a pretty steep power law distribution. If we can produce accurate estimates of the values of the top 10%, we'll have a sufficiently accurate estimate of the total value. " No... this is incorrect. Power laws looks like this (imagine the "top 10%" in green): http://en.wikipedia.org/wiki/Power_law http://en.wikipedia.org/wiki/Power_law so the median value, or even showing a histogram of all values, would be WAY more informative. My hunch is that the "22.4m" average valuation is way higher than most YC grads.
- bdr 15y ago
  You've misunderstood the math. The $22.4M figure was reached by assuming the bottom 90% of companies are worth $0. Therefore, it's strictly a lower bound on the mean valuation.
  - rd108 15y ago
    You're right.
petervandijck 15y ago
"1 didn't bother because they were already so profitable" -> anyone an idea which one that was?
- allantyoung 15y ago
  My guess would be Wufoo.
  - allantyoung 15y ago
    Never mind - that statement referred to a startup in a recent batch while Wufoo was part of a much earlier batch. Interesting to note that there are probably a few Wufoos in the total YC universe that reached meaningful profitability without having to raise more money. Those are the ones worth emulating even though they don't get nearly the amount of attention as ones raising mega vc rounds.
ivankirigin 15y ago
Fun math: if - the average YC investment is $20K for 5% (400K valuation), - YC's share get's diluted in each company by a round giving up 30% of the company - the average YC company is worth $22.4M ...then that translates to a 43X return for YC. Woah.
shimon 15y ago
Terminology question: In footnote 1 it says "We're looking for companies with high beta. E.g. we're ok funding groups for whom the likelihood of failure is high but for whom success, if it happens, will be big." I'm not sure what beta means here. My understanding had been that beta for an investment refers to correlation with a benchmark index (see http://en.wikipedia.org/wiki/Beta_(finance) http://en.wikipedia.org/wiki/Beta_(finance) ). So high beta for YC would mean startups that perform similarly to the average, which is probably not what YC seeks. Alpha ( http://en.wikipedia.org/wiki/Alpha_(finance) http://en.wikipedia.org/wiki/Alpha_(finance) ), or risk-adjusted return, is what any investor seeks, but still doesn't seem to capture the idea of seeking very high-risk, very high-return investments. Am I using the wrong definition of beta? Is there another term that better expresses this characteristic of investments?
- byrneseyeview 15y ago
  Beta can also refer to relative volatility. A stock with a beta of 2 has twice the fluctuation of the index. But in terms of asset allocation, you're right: PG is actually looking for alpha. You can get all the beta you want with leverage: just buy short-term out-of-the-money calls if you want extremely high beta. (There's actually a lot to think about, here. Startups are pure "alpha" since the beta component is an expected return of zero.)
  - shimon 15y ago
    Ah, thank you. Beta is a coefficient of index performance, not just a measure of more or less correlation. So high beta would mean that when the startup market does well you do awesome. You'd also tank when there's a bust, but because YC's downside is so limited this is irrelevant.
  - joshu 15y ago
    Beta does not measure volatility. PG means alpha here.
    - dschobel 15y ago
      exactly. if you want to outperform the mean you're chasing alpha.
thenduks 15y ago
Please enlighten me if I'm missing something obvious here, but wouldn't a pretty interesting number be the percentage of funded companies that are profitable today? I mean, maybe not as a measure of YC's success monetarily, but certainly as a success rate for choosing viable products/teams, no? So to be clear. I'm most interested in how many of the 208 considered as part of the $22.4 million calculation are self-sustaining and making a profit today.
- paul 15y ago
  That would be the wrong metric. A sandwich shop could become profitable much faster than a Google, but I'd much rather invest in the next Google.
  - thenduks 15y ago
    Well, it still has to be a good sandwich shop to succeed, and I'd rather invest in a successful sandwich shop than one which will flop. So I'm just curious to know the overall track record of success had by YC funded companies - from a perspective other than 'got more funding' or 'is valued at X'.
    - staunch 15y ago
      Investors would rather invest in a company that has a 1% shot at being Google than 100% shot at being a normally successful sandwich shop.
      - mashmac2 15y ago
        But can we make the assumption that YC companies are chosen because they have the potential at becoming the next Google, therefore if they are profitable they're on their way towards that goal? It's a small assumption, but I think one that could be made. It makes more of a success/failure comparison than a return percentage calculation, but it would still be really interesting to know.
        15y ago
fishtaco 15y ago
This investment strategy probably doesn't have a ton of capacity though. I could make a thousandfold annualized return on a dollar by reselling snacks outside my apartment for ten days.
nostrademons 15y ago
I'm curious what the top 5 or 10 YC companies by valuation are, and what their valuations are. AirBnB? Heroku? Dropbox? What else is in the $1B range? Most of this seems like it should be public information, since fundings that large are usually announced by press release. Has anyone compiled a list?
- raldi 15y ago
  yclist.com
  - nostrademons 15y ago
    Interesting, but it only has valuations for exits. I'm kinda curious what valuations for going companies are, based on recent rounds of funding. The totals on YCList are nowhere near the $4.7B that PG quotes. Actually, I'm surprised how many of the acquisitions were talent acquisitions for ~$2M/founder. Decent sized chunk of change, but you can get that much by going to work for Google, kicking ass, and then getting a FaceBook offer.
Sukotto 15y ago
Thank you for posting about this I find it fascinating.
sabj 15y ago
Here's a question to PG: I can imagine many reasons, but I'd be interested to hear from you why you chose to share these numbers at this time?
- portman 15y ago
  Possibly prompted by PG's interview with Charlie Rose last week on stage at TechCrunch Disrupt. I was present, and a two things were clear from the interview: 1. Charlie Rose had a few wildly incorrect assumptions about YC. (e.g. "so, to date, you've invested, what, $100M?") 2. Paul Graham had not given a lot of thought to aggregate numbers. When asked, he about total the total value of the YC portfolio, he could only guess. Edit: interview link http://www.ustream.tv/recorded/14928956 http://www.ustream.tv/recorded/14928956
  - pg 15y ago
    Yes, the interview I mention in the first sentence of the post was the Charlie Rose interview. When he asked how we were doing, I quoted some numbers based on a back of the envelope calculation that turned out to be way off (an underestimate, fortunately).
    - portman 15y ago
      BTW, I found that interview very enlightening. I hadn't realized how nice you are. Your real-life persona completely contradicts the caricature I had developed in my mind after years of reading your essays. I was expecting Vulcan (hyper-smart, non-sentimental), but instead got Camp Counselor (humble, encouraging). You should do more on-stage stuff.
      - pg 15y ago
        Seeming Vulcan is probably an artifact of conciseness.
dcdork 15y ago
Does it make sense to generalize about 200 startups based on 5 exits?
mattmanser 15y ago
Congratulations, I'm sure you've already felt it, but I just wanted to say you've built something truly amazing that helps so many other people realize their dreams. And as an added bonus it validates your assertions on what a startup needs to do. Visionary indeed!
freshfunk 15y ago
Interesting analysis but the statistic I find most disturbing (and selective) is the "average" value of startups funded. What would be more informative is the mean value. I'm guessing the mean value would be extremely lower since most of the total value is made by a few outliers on the top end. By taking the average value in this case, it's likely giving an inaccurate picture of what the average YC funded company is actually worth. Just a thought. I could be wrong assuming most of the total value does not come from outliers but my sense is that I'm right based on the news I've seen around YC companies.
- BrandonM 15y ago
  He did show the mean. It looks like you're interested in the median. From a potential startup founder's perspective, the median is pretty important. From YC's perspective, mean is all that really matters (except to the extent that median affects the input to their program).
  - freshfunk 15y ago
    Yes, thank you. I meant to say median.
jseliger 15y ago
This reminds me of my family's business. We do grant writing for nonprofit and public agencies, and people always want to know if they're going to get funded. We always say that we have no idea, for reasons discussed in this post: http://blog.seliger.com/2008/12/21/the-worse-it-is-the-better-it-is-your-grant-story-needs-to-get-the-money http://blog.seliger.com/2008/12/21/the-worse-it-is-the-bette... : "All this also helps explain why a “batting average” or “track record” figure is useless regarding general purpose grant writers, as we describe in this FAQ question: http://seliger.com/faq.html#anchor5 http://seliger.com/faq.html#anchor5 . We don’t know if our clients are going to come from Beverly Hills or from places where most residents haven’t graduated from high school. From a grant writing perspective, a client from the latter place might be more likely to be funded than someone from Beverly Hills."
zemaj 15y ago
Are there any numbers on how many YC companies are now defunct? Would be interesting to see how this compares to the anecdotal 9/10 startups fail in the first year.
- hugh3 15y ago
  There was a thread about this at some point. The answer was "a bunch", though the numbers were complicated. Some had merged, others experienced "exits" which were really just talent acquisitions and shut down all operations on their product. Very few really "failed". The 9/10 startups thing was always a myth, though, especially if you're talking about startups which get to the stage of getting any funding at all. It's more like 1/2.
Vencent 15y ago
Thanks again for reminding us of this important, simple information. I like this and the blank canvas article as well. I have a website about Tennis Racquets, the adress is http://www.tennisshow.org http://www.tennisshow.org
Vencent 15y ago
http://www.skateshoesbuy.org http://www.skateshoesbuy.org
benlang 15y ago
Paul you're a genius.

506 points by pg 15y ago

>If it were 100%, I'd worry we were being too conservative in >who we funded." Note to self: if you're succeeding in everything you're doing, you're probably failing to attempt awesome things in which you could succeed.

lionhearted 15y ago

Back of napkin math: Funding of $25,000 per startup (funding plus costs) x 210 = $5,250,000 in funding costs. To factor other costs and be conservative, double that to $10.5 million. YC usually takes 6% equity. Assume that's diluted in half, conservatively again, to get 3%. Total current valuation of 4.7 billion: $4,700,000,000 * .03 = $141,000,000 So... using all conservative numbers, YC's return has been .... $141,000,000 / $10,500,000 = 13.4 Whoa... did I do that math right? A return of 1340% That's... pretty astounding. Talk about a win/win/win situation for everyone involved... if the order of magnitudes here are even close, well, massive congratulations to everyone involved. Wow. Wow.

jpwagner 15y ago
It's definitely astounding and deserves congratulations. But to be clear, valuation and return should not be equated in this way...
johnrob 15y ago
Amazingly, it sounds a lot like a successful startup: 10 million in funding, 141 million exit. However, startups usually have to deal with a high probability of failure, while YC achieved this with a substantially lower risk (portfolio theory at play).
- patrickk 15y ago
  I thought portfolio theory referred to holding a diverse bunch of assets, no? (I could be wrong on this.) For example, an investment portfolio might be comprised of 90% T-bills, and 10% "high risk" assets (yes, I realise the risk of this statement becoming quite false in the not-too-distant future, given what has been said about US debt recently). http://seekingalpha.com/article/43008-portfolio-allocation-nassim-taleb-s-90-solution http://seekingalpha.com/article/43008-portfolio-allocation-n... In YC's case, it's portfolio is entirely made up of high-risk startups, so to the best of my knowledge, it's not classic portfolio theory. http://en.wikipedia.org/wiki/Modern_portfolio_theory http://en.wikipedia.org/wiki/Modern_portfolio_theory
  - zyfo 15y ago
    Portfolio Theory is about keeping a set expected return but reducing risk (volitation) through diversification. Diversification is about choosing investments which aren't positively correlated. Are web startups positively correlated? As a industry, probably/maybe. Was certainly the case in the dotcom crash. Performance-wise, not really. Most startups fail, some make it big. Why? Low investment costs and high possible leverage with internet technology (to little marginal cost). This could change in the future. In this case the second way is probably more fruitful to think about, since one big winner will even out all the losers. I'm sure this is possible to "prove" by some Black-Swan-ish statistic model theory. NOTE: I could be wrong. EDIT: I agree that web startups today aren't one industry. Social web startups is a candidate though.
    - myoung8 15y ago
      I think it's a mistake to categorize all web startups as belonging to the "web startup" industry. Even though we (CarWoo! YCS09) are a web startup, we see ourselves primarily as a company that plays in the automotive industry. All of our key metrics are highly-correlated with the automotive industry, not with what Techcrunch writes on any given day. While a lot of YC startups' metrics ebb and flow with the goings on of the echo chamber, many do not.
  - myoung8 15y ago
    It's not classic, but it is a diversified portfolio. YC invests in startups across all industries--automotive, mobile, health, financial, entertainment, etc.--which presumably is less risky (lower variance in returns) vis-a-vis just investing in one sector.
    - andrewparker 15y ago
      YC companies address customers in diverse sectors, but if you were to classify YC companies with a GICS code, 99% of them would fall under Internet Software & Services (code 4510) [ http://en.wikipedia.org/wiki/Global_Industry_Classification_Standard http://en.wikipedia.org/wiki/Global_Industry_Classification_... ]. So, it's not really a diverse portfolio, but it's definitely a portfolio play, which is substantially less risky than having all your assets tied up in the stock of a single startup. Think about it this way, if 2001 hit again and all tech stocks plummeted, all the companies in the YC portfolio would be substantially negatively impacted, so there isn't a portfolio effect to protect against this correlation in YC's assets.
adamt 15y ago
In investment terms 'return' normally refers to profit. See http://www.investopedia.com/terms/r/returnoninvestment.asp http://www.investopedia.com/terms/r/returnoninvestment.asp So I think you should have ended up with 1240%. E.g turning $1 to $1.50 is a 50% return and $1 to $2 is 100% so $1 to $13.4 is a 1240% return. Still a spectacular return given the short time period. Otherwise I agree with your numbers. The cost doubling sounds high at first but YC is by definition very hands on.
- andrewparker 15y ago
  No, I work in VC and OP is right. If you have a $100M fund, you invest it all, and you don't lose any money, but you also don't make any money, then you will return $100M to your LPs. Your fund will be a 1x fund and you will return 100% of capital invested. So, I'd stick with the 1340% number. I understand we are really just disagreeing about the semantics of the word "return", but I'm just including how I see it most commonly used in my line of work.
eru 15y ago
Did you factor in the amount of work Paul Graham and friends put into ycombinator?
deleted 15y ago
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redthrowaway 15y ago
My problem with pg's numbers is that they are almost entirely theoretical. The valuations don't represent anything close to liquidity, and the chances of those companes generating anywhere near that return in real terms are slim at best. The portfolio might be "worth" 4.7 billion, but what are the chances they'll generate a real return anywhere close to that? I'm not arguing against pg's methodology, as I realize it's fairly consistent with standard practices, but the ycombinator investors are nowhere near as wealthy in real terms as these numbers would suggest. If airbnb were to fail that would destroy a huge amount of that wealth, with no ability to extract any value before then. None of this is meant to rain on YC's parade. I have a great deal of respect and admiration for all involved, and congratulate them heartily on the very real successes they have had and continue to have. I'd simply be heasitant to describe YC as being "worth" 5BB, given a reasonable expected cash return.
- zyfo 15y ago
  pg doesn't describe YC as being worth 5BB, he says the projected value of all startups are in that ballpark. The question was How is YC doing? and the answer seems to be: pretty damn good. As in they are doing something right, not as in "our valuation is around 5BB".
  - redthrowaway 15y ago
    Sorry, my last line wasn't in keeping with the spirit of the rest of my post. I'm not saying YC is or isn't worth 5BB, but rather that that's how they're valuing their portfolio. I don't doubt that valuation, just the utility of the money that's theoretically theirs.
- paul 15y ago
  Are you suggesting that Sequoia and other top VCs are making investments where the expected return is less than 1? AirBnb could end up being worth $0, but it could also be worth $10 billion. A $1 billion valuation would be a bet that it's expected value is substantially more than $1 billion. You may disagree with that assessment, but the people making that bet have a pretty good track record.
- deleted 15y ago

jasonshen 15y ago

> When startups are acquired, acquirers usually give the founders incentives to stay on. Sometimes to make the founders feel better these incentives are included in the number the acquirer quotes as the acquisition price. In that situation there are effectively two prices, the quoted price, and a lower price investors see. Wow - I didn't know this. Does anyone have any more detailed examples of this happening they can share?

tptacek 15y ago
What, of acquisitions with earn-outs? Search NEWS.GOOGLE.COM for "earnout".

dtap 15y ago

These numbers are astonishing. By my calculation YC has a cash-on-cash return of 67X! Avg. value (22.4M) * Avg. equity (6%) = Value of average stake (1.34M) Compare this to an investment of $20k, wow. I am sure there is some sort of dilution that occurs, but anywhere in this order of magnitude is remarkable.

emmett 15y ago
6% is undiluted, you have to assume YC has been diluted quite a bit during fundraising. But even assuming a more realistic 3%, those are great returns.
- seats 15y ago
  Also, remember this is a power law distribution. So talking about an average amount of dilution is probably risky. The dilution on the single largest exit is going to move the needle the most.
freshfunk 15y ago
These are misguided statistics. I can envision a scenario where using average numbers give you completely the wrong picture. For example, the majority of the total value comes from the few outliers (AirBnb, Heroku, DropBox) and the other 80/90/95% of companies contribute relatively little to the total valuation. So let's say they still own 6% of these outliers. Great! That's still worth a lot. But how much do they still own? Have their shares been diluted? Did they have to issue new shares due to further financing? Has that 6% turned into 3% or 1.5%? I'm not an expert but it's quite possible that their initial 6% has been diluted. I think the picture looks good, overall, for YC from an investment standpoint. I think avg. value is not a great metric by which to value the "average" YC company since my guess is that the majority of the value is on the top end.

larrik 15y ago

"...so far at least the great majority of VC investments in YC-funded startups have been by the better firms. I'm not sure exactly why, since bad VCs are more numerous than good ones; perhaps the bad VCs assume the companies at an event as public as Demo Day will already have been picked over by the time they get a shot at them." Or perhaps the lower tier VCs just can't compete with the "better" firms. I find it interesting that you so readily equate "lower-tier" VCs with "lower quality" VCs. Is this a reliable rule?

hugh3 15y ago
I find it interesting that you so readily equate "lower-tier" VCs with "lower quality" VCs. Is this a reliable rule? If you were a low-tier good-quality VC, surely you'd become known as a top-tier VC pretty soon?

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emmett 15y ago
YC invests more like $17k on average, since most startups are 2 people. So your base is wrong there. You also have to assume dilution since almost everyone raises money. So they might have started with 6%, but they probably have more like 3% in a mature company (assuming 50% dilution for no particular reason). So if you wanted to estimate returns at this point you could say (3% * 4.7 billion) / (212 * 17k) which is 39x (or 3900%). Not half bad!
- tansey 15y ago
  You also have to account for the other services and facilities that YC provides. I believe pg has mentioned previously that the total cost per startup for YC is about $40k. That would be about a 16x return. Still pretty amazing.

achompas 15y ago

$4.7 billion / 210 = $22.4 million, so the average value of startups we've funded is about $22.4 million. Of course that could be cut in half tomorrow. Startup valuations are even more volatile than ordinary equities. Couldn't one argue that startup valuations are sticky in a downward direction? The 21 largest companies are highly valued because they're generating tons of revenue (or even profits). Nothing short of a market collapse would hault that revenue generation, and it's hard to imagine such a collapse in the market of, say, peer-to-peer vacation rentals or cloud-based multi-platform storage. It's entirely possible, though, that by "cut in half tomorrow" PG meant that Winter 2012 will include 210 companies. :P

kenjackson 15y ago
The 21 largest companies are highly valued because they're generating tons of revenue (or even profits), and nothing short of a collapse in their market could halt that income generation. I don't think valuation of startups are strongly based on revenue and profit. At least not in a way where their revenue/profits force a certain valuation, rather than simply suggest that the potential and growth is there. (if that makes sense).
- achompas 15y ago
  Yeah, absolutely makes sense. Here's a proof by cases on my point: Companies are highly valued b/c they (a) generate income or (b) have the potential to generate income. (a) companies are trivial cases, since they already make money. Let's move on. Looking at (b) companies: they're highly valued because market conditions + company fundamentals suggest they CAN generate income soon. Let's assume company fundamentals (leadership, labor) are constant and solid (trivial, since they're being advised by PG and other VCs). Therefore, highly-valued companies that do no yet generate income can only be negatively disrupted by market forces. Based on the initial assumption about (b) companies' potential, I argue that (b) have been selected such that they are not particularly vulnerable to negative shocks. Therefore, their valuations have a very, very high floor and are sticky in the downward direction.
  - 15y ago

limist 15y ago

It seems safe to say that Y Combinator's expectancy* as an investor is currently unsurpassed - no private investor, mutual fund, hedge fund, VC, etc. I've ever heard of comes close. Congratulations! * expectancy = (probability of win * average win) – (probability of loss * average loss)

eru 15y ago
I guess if Warren Buffet were to start again with only a few million USD, like Y Combinator did, he would do really well in terms of percentage return, too.

Jd 15y ago

Far better than I would have expected, given the various spreadsheets, etc. that I had seen floating around. I was a bit skeptical about YCombinator's growth and the ability to mentor new startups, but with numbers like these (esp. the 34/36 number) I've a lot more confidence that they will be able to do just fine with more startups in each class. In many ways, it also makes me comfortable saying that the "Harvard of startups" description is appropriate. Sprinkle in a bit of elitism based on merit, give people some general framework, a bit of advice, and a lot of free reign, and brilliant and hardworking people will make things happen. Much better to be a bit hands-off and cultivate excellence then micro-managing the actions of the less focused or ambitious. This, even more than recent acquisitions, is the best news I've seen out of YC in awhile, and truly excellent. Congratulations! btw, to pg or anyone else, would be a little bit interesting to see more about the power law distribution as it applies to investing. I'm assuming this is true across the field, but don't know for sure (do all vcs get the same distribution, or is it simply true of software startups, or is it simply true of software startups that manage to include big hits? Moreover, do you simply get big hits by funding enough decent sluggers, or are there other strategies to make sure you have a decent shot at the next Dropbox, Twitter, Google, etc.)

SemanticFog 15y ago

If YC holds common shares, then you need to adjust the expected value down quite a bit. On any exit that isn't a huge win, non-employee common shareholders are by far the most likely to get short end. The expected value is probably 10-50% of the fully diluted headline value of a VC deal. But YC is clearly going to do spectacularly well. They deserve big congrats for what they've accomplished.

myoung8 15y ago
This isn't generally the case anymore--funding rounds these days tend to assign a 1X liquidation preference to both common and preferred shares, so assuming that a company gets acquired for more than its valuation, you shouldn't need to adjust EV down.
- usaar333 15y ago
  True, but there's still a very good chance of being acquired for less - which means you have to adjust the EV down.
  - pmjordan 15y ago
    Except all the maths here has only accounted for the top 10%. Those top 10% are fairly unlikely to be sold off at scrap value.
    - SemanticFog 15y ago
      You'd be surprised. The ones that raise the most money also have the hardest time getting over the preferred total. The purchaser will take care of the employees it wants, but other common shareholders often end up out of luck.
- SemanticFog 15y ago
  1x is still 1x -- if you don't get over it, the common shareholders don't get paid. In a pool as big as YC's there will be plenty of examples.

ivankirigin 15y ago

One way to measure is just on exists so far, which is a strict lower bound, but doesn't change with the market. I bet YC is in the black just from exits, and this can be measured explicitly. What is the sum of YC's returns from exits (and cash value for stock) over the sum of money spent on investments? Measuring the value of companies that have grown dramatically since the last round if pretty arbitrary. If this estimate were done on the same companies in the same states but in 2009, wouldn't it be off by 50%?

ry0ohki 15y ago

I'd be interested in the valuations based on traditional things such as revenue, assets, cash on hand etc... not that these things necessarily matter to Y Combinator as a company making $0 that is bought for $1 billion is still significant, I'm just curious what percentage actually is profitable.

RealGeek 15y ago

With the numbers of startups growing with every batch. Do you think it dilutes the value Y Combinator provides? I wonder if pg and YC partners would be able to give enough time and attention to 62 startups. YC brand and alumni network is stronger than ever. YC is great at scouting great entrepreneurs at early stage. At this point YC may be acting as a filter for investors. The big question is, Will YC still the advisory role to create great products? or Is it now a funding school that provides a brand and access to Angels and VCs? Would love pg, YC partners or alumni to chime in on this.

Harj 15y ago
Currently the request queue for office hours is empty, meaning everyone who wants to meet with us has been able to. We have capacity for more office hours this week and will be adding more. PG added office hours for this afternoon, with more slots than there were requests in the queue. Things seem to be working so far.

zyfo 15y ago

Impressive. What about the control group though? You know, the 50% that were deemed fit for YC after the interview but lost at the coin toss backstage. How did those compare?

wdr 15y ago
What are you talking about? PG doesn't play dice with people's startups. /Insert Einsteins's quote about god being dicey
- T-hawk 15y ago
  He's saying there should have been a control group. We can't directly compare startups that YC funded with startups of equal quality that YC did not fund, because the latter does not exist (assuming YC is correctly selecting for quality.) To isolate YC's influence, you'd need YC to pick a set twice as large and fund only half of them at random.
scw 15y ago
Right, the control group is required to tell you what the YC influence is (which is probably quite significant). Charlie Munger once said you could lock up the smartest students in a closet for four years instead of sending them to college and they'd still be the smartest students, what were the outcomes of the other 'smart students'?
- lurker19 15y ago
  Heh, Peter Thiel did, too.
shimon 15y ago
Good idea. I wonder if there's some way YC could survey these people without offending everyone. Maybe offer a 30min advisory session (to known YC post-interview rejects) in return for filling out a survey indicating their current status?
pg 15y ago
I don't understand. Do you mean startups we fund that don't do well, or startups we don't fund?

staunch 15y ago

Long term I think the big question is how much of the success of YC companies is directly related to the external benefits of being YC companies. There's no question they tend to get far more attention on every front (VC/valuations/press/bizdev/hiring, etc) than they otherwise would. In a few years when there are 1000 YC companies it will start to mean a lot less to all those people who have been helping YC companies succeed to date. It probably already means a lot less to a VC to hear you're a YC company, because they've met 300 of them. If it's the YC halo effect that's driving high returns it will be a big problem if it starts to wear off.

deleted 15y ago
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ryannielsen 15y ago
I'm curious: why do you think more YC companies will dilute YC's value or brand? What data leads you to that assertion? Personally, I'd think the opposite is possible. (And likely if YC companies continue to be considered "successful".) A stronger YC network and a large portfolio of successful companies should only strengthen the brand.
stevenj 15y ago
>In a few years when there are 1000 YC companies it will start to mean a lot less to all those people who have been helping YC companies succeed to date. Harvard, Yale, MIT, Stanford, etc. seem to be doing rather well, as far as higher education goes. And I would imagine those that have partnered with them are doing okay too. Quality matters. >It probably already means a lot less to a VC to hear you're a YC company, because they've met 300 of them. I doubt that. A VC is just trying to pick the next Google. Or the next Google founder(s).
- Jd 15y ago
  Right on. I think as long as the quality of YC companies remains high, the presence of imitators will of course increase the value of the original, just as in higher ed. Startup incubators may in some ways be easier to replace than universities (Harvard, Brown, etc. are still going strong after 200+ years), but they are subject to similar dynamics, insofar as there is team loyalty and networking benefits (as there obviously are). Personally, I would accept 10% dilution of my company simply to be an YCombinator alumnus since I think the benefits are and will remain that high.

seats 15y ago

>> That number is about as high as I'd want it to be. If it were 100%, I'd worry we were being too conservative in who we funded. There is market feedback in this thought (and in the footnote where you cite 'beta'). Really what you are saying is that you are aiming for a level of conservatism/risk relative to the market. I'm curious what the funding rates were in 2006 and how they changed. How much of the increase on funding percentages were due to being better at doing YC and how much of the increase was due to their being much more risk capital in the market?

VaedaStrike 15y ago

A question for PG - What's been the most surprising numbers to emerge, in your opinion, up to this point? You mention the concern that would be inherent if funding was at 100% prior to yuri with regards to an overly conservative stance. With, as you have stated, the real goal being finding the next google or facebook isn't a 90+% level almost as worrying ??? Wouldn't something closer to 70 make a better balance in terms of maximizing coverage to increase the chance of landing the outliers ?

pg 15y ago
The most surprising thing was the number of companies with valuations between 30 and 60 million.

rd108 15y ago

"like any portfolio of startups ours has a pretty steep power law distribution. If we can produce accurate estimates of the values of the top 10%, we'll have a sufficiently accurate estimate of the total value. " No... this is incorrect. Power laws looks like this (imagine the "top 10%" in green): http://en.wikipedia.org/wiki/Power_law http://en.wikipedia.org/wiki/Power_law so the median value, or even showing a histogram of all values, would be WAY more informative. My hunch is that the "22.4m" average valuation is way higher than most YC grads.

bdr 15y ago
You've misunderstood the math. The $22.4M figure was reached by assuming the bottom 90% of companies are worth $0. Therefore, it's strictly a lower bound on the mean valuation.
- rd108 15y ago
  You're right.

petervandijck 15y ago

"1 didn't bother because they were already so profitable" -> anyone an idea which one that was?

allantyoung 15y ago
My guess would be Wufoo.
- allantyoung 15y ago
  Never mind - that statement referred to a startup in a recent batch while Wufoo was part of a much earlier batch. Interesting to note that there are probably a few Wufoos in the total YC universe that reached meaningful profitability without having to raise more money. Those are the ones worth emulating even though they don't get nearly the amount of attention as ones raising mega vc rounds.

ivankirigin 15y ago

Fun math: if - the average YC investment is $20K for 5% (400K valuation), - YC's share get's diluted in each company by a round giving up 30% of the company - the average YC company is worth $22.4M ...then that translates to a 43X return for YC. Woah.

shimon 15y ago

Terminology question: In footnote 1 it says "We're looking for companies with high beta. E.g. we're ok funding groups for whom the likelihood of failure is high but for whom success, if it happens, will be big." I'm not sure what beta means here. My understanding had been that beta for an investment refers to correlation with a benchmark index (see http://en.wikipedia.org/wiki/Beta_(finance) http://en.wikipedia.org/wiki/Beta_(finance) ). So high beta for YC would mean startups that perform similarly to the average, which is probably not what YC seeks. Alpha ( http://en.wikipedia.org/wiki/Alpha_(finance) http://en.wikipedia.org/wiki/Alpha_(finance) ), or risk-adjusted return, is what any investor seeks, but still doesn't seem to capture the idea of seeking very high-risk, very high-return investments. Am I using the wrong definition of beta? Is there another term that better expresses this characteristic of investments?

byrneseyeview 15y ago
Beta can also refer to relative volatility. A stock with a beta of 2 has twice the fluctuation of the index. But in terms of asset allocation, you're right: PG is actually looking for alpha. You can get all the beta you want with leverage: just buy short-term out-of-the-money calls if you want extremely high beta. (There's actually a lot to think about, here. Startups are pure "alpha" since the beta component is an expected return of zero.)
- shimon 15y ago
  Ah, thank you. Beta is a coefficient of index performance, not just a measure of more or less correlation. So high beta would mean that when the startup market does well you do awesome. You'd also tank when there's a bust, but because YC's downside is so limited this is irrelevant.
- joshu 15y ago
  Beta does not measure volatility. PG means alpha here.
  - dschobel 15y ago
    exactly. if you want to outperform the mean you're chasing alpha.

thenduks 15y ago

Please enlighten me if I'm missing something obvious here, but wouldn't a pretty interesting number be the percentage of funded companies that are profitable today? I mean, maybe not as a measure of YC's success monetarily, but certainly as a success rate for choosing viable products/teams, no? So to be clear. I'm most interested in how many of the 208 considered as part of the $22.4 million calculation are self-sustaining and making a profit today.

paul 15y ago
That would be the wrong metric. A sandwich shop could become profitable much faster than a Google, but I'd much rather invest in the next Google.
- thenduks 15y ago
  Well, it still has to be a good sandwich shop to succeed, and I'd rather invest in a successful sandwich shop than one which will flop. So I'm just curious to know the overall track record of success had by YC funded companies - from a perspective other than 'got more funding' or 'is valued at X'.
  - staunch 15y ago
    Investors would rather invest in a company that has a 1% shot at being Google than 100% shot at being a normally successful sandwich shop.
    - mashmac2 15y ago
      But can we make the assumption that YC companies are chosen because they have the potential at becoming the next Google, therefore if they are profitable they're on their way towards that goal? It's a small assumption, but I think one that could be made. It makes more of a success/failure comparison than a return percentage calculation, but it would still be really interesting to know.
      - 15y ago

fishtaco 15y ago

This investment strategy probably doesn't have a ton of capacity though. I could make a thousandfold annualized return on a dollar by reselling snacks outside my apartment for ten days.

nostrademons 15y ago

I'm curious what the top 5 or 10 YC companies by valuation are, and what their valuations are. AirBnB? Heroku? Dropbox? What else is in the $1B range? Most of this seems like it should be public information, since fundings that large are usually announced by press release. Has anyone compiled a list?

raldi 15y ago
yclist.com
- nostrademons 15y ago
  Interesting, but it only has valuations for exits. I'm kinda curious what valuations for going companies are, based on recent rounds of funding. The totals on YCList are nowhere near the $4.7B that PG quotes. Actually, I'm surprised how many of the acquisitions were talent acquisitions for ~$2M/founder. Decent sized chunk of change, but you can get that much by going to work for Google, kicking ass, and then getting a FaceBook offer.

Sukotto 15y ago

Thank you for posting about this I find it fascinating.

sabj 15y ago

Here's a question to PG: I can imagine many reasons, but I'd be interested to hear from you why you chose to share these numbers at this time?

portman 15y ago
Possibly prompted by PG's interview with Charlie Rose last week on stage at TechCrunch Disrupt. I was present, and a two things were clear from the interview: 1. Charlie Rose had a few wildly incorrect assumptions about YC. (e.g. "so, to date, you've invested, what, $100M?") 2. Paul Graham had not given a lot of thought to aggregate numbers. When asked, he about total the total value of the YC portfolio, he could only guess. Edit: interview link http://www.ustream.tv/recorded/14928956 http://www.ustream.tv/recorded/14928956
- pg 15y ago
  Yes, the interview I mention in the first sentence of the post was the Charlie Rose interview. When he asked how we were doing, I quoted some numbers based on a back of the envelope calculation that turned out to be way off (an underestimate, fortunately).
  - portman 15y ago
    BTW, I found that interview very enlightening. I hadn't realized how nice you are. Your real-life persona completely contradicts the caricature I had developed in my mind after years of reading your essays. I was expecting Vulcan (hyper-smart, non-sentimental), but instead got Camp Counselor (humble, encouraging). You should do more on-stage stuff.
    - pg 15y ago
      Seeming Vulcan is probably an artifact of conciseness.

dcdork 15y ago

Does it make sense to generalize about 200 startups based on 5 exits?

mattmanser 15y ago

Congratulations, I'm sure you've already felt it, but I just wanted to say you've built something truly amazing that helps so many other people realize their dreams. And as an added bonus it validates your assertions on what a startup needs to do. Visionary indeed!

freshfunk 15y ago

Interesting analysis but the statistic I find most disturbing (and selective) is the "average" value of startups funded. What would be more informative is the mean value. I'm guessing the mean value would be extremely lower since most of the total value is made by a few outliers on the top end. By taking the average value in this case, it's likely giving an inaccurate picture of what the average YC funded company is actually worth. Just a thought. I could be wrong assuming most of the total value does not come from outliers but my sense is that I'm right based on the news I've seen around YC companies.

BrandonM 15y ago
He did show the mean. It looks like you're interested in the median. From a potential startup founder's perspective, the median is pretty important. From YC's perspective, mean is all that really matters (except to the extent that median affects the input to their program).
- freshfunk 15y ago
  Yes, thank you. I meant to say median.

jseliger 15y ago

This reminds me of my family's business. We do grant writing for nonprofit and public agencies, and people always want to know if they're going to get funded. We always say that we have no idea, for reasons discussed in this post: http://blog.seliger.com/2008/12/21/the-worse-it-is-the-better-it-is-your-grant-story-needs-to-get-the-money http://blog.seliger.com/2008/12/21/the-worse-it-is-the-bette... : "All this also helps explain why a “batting average” or “track record” figure is useless regarding general purpose grant writers, as we describe in this FAQ question: http://seliger.com/faq.html#anchor5 http://seliger.com/faq.html#anchor5 . We don’t know if our clients are going to come from Beverly Hills or from places where most residents haven’t graduated from high school. From a grant writing perspective, a client from the latter place might be more likely to be funded than someone from Beverly Hills."

zemaj 15y ago

Are there any numbers on how many YC companies are now defunct? Would be interesting to see how this compares to the anecdotal 9/10 startups fail in the first year.

hugh3 15y ago
There was a thread about this at some point. The answer was "a bunch", though the numbers were complicated. Some had merged, others experienced "exits" which were really just talent acquisitions and shut down all operations on their product. Very few really "failed". The 9/10 startups thing was always a myth, though, especially if you're talking about startups which get to the stage of getting any funding at all. It's more like 1/2.

Vencent 15y ago

Thanks again for reminding us of this important, simple information. I like this and the blank canvas article as well. I have a website about Tennis Racquets, the adress is http://www.tennisshow.org http://www.tennisshow.org

Vencent 15y ago

http://www.skateshoesbuy.org http://www.skateshoesbuy.org

benlang 15y ago

Paul you're a genius.