5 ms·

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

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

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