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People misunderstand YC's business model. They invest 125K for a 7% stake in the company. That's a <$2 million valuation. If this company sells a couple thou

People misunderstand YC's business model. They invest 125K for a 7% stake in the company. That's a <$2 million valuation. If this company sells a couple thousand (at $120/y), YC breaks even. If they sell a couple million, YC gets back 1000x on their money. It's a great investment.

asdfasgasdgasdg 6y ago
I dunno if you've got the math right here. A thousand units is enough to pay one junior engineer on an ongoing basis (assuming tier 1 or tier 2 US city). You still have to pay marketing and other costs. AFAICT you probably need a minimum of 3k subscriptions to break even. If they can't break even then their business isn't worth much, even if it has a couple thousand subscribers. No shot they are selling millions of these. But tens of thousands seems within the realm of possibility, and it would be a very profitable small enterprise if they managed it without a huge marketing budget.
utborin 6y ago
And if they sell four? Wish I still had a copy but there was a brilliant story printed years ago called something like "there are numbers smaller than 1%." It illustrated the fallacy in the thinking behind saying things like, "even if we only sell 1%, we'll be rich." Just because you pick some arbitrarily small number as your minimum sales doesn't mean it's actually the minimum, or even the most likely minimum. You could sell a couple hundred. You could sell ten. You could sell zero.
- mrkurt 6y ago
  If they sell zero, YC's investment is worth $0 just like it is for half of the companies they invest in. The success rate for hope-to-be-unicorn startups is very low.
- cbsks 6y ago
  This is probably the story you are thinking of: https://sive.rs/1pct https://sive.rs/1pct It was discussed on HN at the time: https://news.ycombinator.com/item?id=847334 https://news.ycombinator.com/item?id=847334
  - danaliv 6y ago
    Yes, that's the one. Thank you!
- effingwewt 6y ago
  I remember this as well but can't find it via searching. Was a fallacy along the lines of 'we only have to sell to one percent of China to make billions, anyone can sell anything to one percent of a country', but in reality it never works out due to factors like shipping and getting a foothold among the many established companies. If someone could cite the name of the economic theory it would be super appreciated. Edit: so I was thinking of this one[1], which I believe speaks to where this theory originated, and was known as 'Chinese Math' which is apparently re-invented every year by someone, but glad you found the one you were thinking of GP. [1] https://www.businesspundit.com/please-stop-with-your-chinese-math/ https://www.businesspundit.com/please-stop-with-your-chinese...
- fallingknife 6y ago
  The point is that decent shot at break even / small but non-zero chance of a home run is a good investment, at least if you do a lot of them for cheap. Which is what YC excels at.
rchaud 6y ago
Does 7% of ownership equity entitle them to 7% of revenue? Or even profits? Equity agreements can be set up to pay generous dividends, but I thought the point of an equity stake for a VC was to cash in when there's a new funding round or when the company IPOs.

asdfasgasdgasdg 6y ago

I dunno if you've got the math right here. A thousand units is enough to pay one junior engineer on an ongoing basis (assuming tier 1 or tier 2 US city). You still have to pay marketing and other costs. AFAICT you probably need a minimum of 3k subscriptions to break even. If they can't break even then their business isn't worth much, even if it has a couple thousand subscribers. No shot they are selling millions of these. But tens of thousands seems within the realm of possibility, and it would be a very profitable small enterprise if they managed it without a huge marketing budget.

utborin 6y ago

And if they sell four? Wish I still had a copy but there was a brilliant story printed years ago called something like "there are numbers smaller than 1%." It illustrated the fallacy in the thinking behind saying things like, "even if we only sell 1%, we'll be rich." Just because you pick some arbitrarily small number as your minimum sales doesn't mean it's actually the minimum, or even the most likely minimum. You could sell a couple hundred. You could sell ten. You could sell zero.

mrkurt 6y ago
If they sell zero, YC's investment is worth $0 just like it is for half of the companies they invest in. The success rate for hope-to-be-unicorn startups is very low.
cbsks 6y ago
This is probably the story you are thinking of: https://sive.rs/1pct https://sive.rs/1pct It was discussed on HN at the time: https://news.ycombinator.com/item?id=847334 https://news.ycombinator.com/item?id=847334
- danaliv 6y ago
  Yes, that's the one. Thank you!
effingwewt 6y ago
I remember this as well but can't find it via searching. Was a fallacy along the lines of 'we only have to sell to one percent of China to make billions, anyone can sell anything to one percent of a country', but in reality it never works out due to factors like shipping and getting a foothold among the many established companies. If someone could cite the name of the economic theory it would be super appreciated. Edit: so I was thinking of this one[1], which I believe speaks to where this theory originated, and was known as 'Chinese Math' which is apparently re-invented every year by someone, but glad you found the one you were thinking of GP. [1] https://www.businesspundit.com/please-stop-with-your-chinese-math/ https://www.businesspundit.com/please-stop-with-your-chinese...
fallingknife 6y ago
The point is that decent shot at break even / small but non-zero chance of a home run is a good investment, at least if you do a lot of them for cheap. Which is what YC excels at.

rchaud 6y ago

Does 7% of ownership equity entitle them to 7% of revenue? Or even profits? Equity agreements can be set up to pay generous dividends, but I thought the point of an equity stake for a VC was to cash in when there's a new funding round or when the company IPOs.