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“A 30% revenue share can easily be the difference between a company that can afford to scale, hire new employees, and reinvest in its product, and one that is p

“A 30% revenue share can easily be the difference between a company that can afford to scale, hire new employees, and reinvest in its product, and one that is perpetually struggling to stay afloat.” This brought up a fun thought exercise for me. Pretty sure that Y Combinator would argue that giving away 7% of one's company for access to intangible (but beneficial) things like funding, advisors, etc, is completely worth it for a company. Pretty sure that they also fund companies that pay salespeople fairly significant commissions on sales. Interesting to see them argue that asking a company to give up 30% "commission" on revenue for access to a large market stifles competition and innovation. Is Y Combinator's forcing companies to give up 7% of their companies for access to advisors and funding stifling innovation and competition? (Spoiler: I don't think so. I think both Y Combinator and apple should be able to capitalize on the access they provide.)

deleted 1y ago
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georgemcbay 1y ago
Far be it from me to defend Y Combinator or VCs in general but IMO the situation is a bit different because of the monopoly (or at least duopoly) power that Apple and Google hold as gatekeepers over the only practical way to sell to iOS and Android device users. Of course, I'd also assume most or all the people associated with YC were part of the "fire Lina Khan because our whole business model is actually just taking advantage of FAANG acquihire panic" squad, making them hypocrites (in a slightly different way) for helping to prop up these monopolistic gatekeepers and then acting put upon by the results of that.
wmf 1y ago
I thought the standard advice is to target 80-90% gross margin at early stage so you can easily eat 30% CAC. It probably starts to hurt as you scale though.
ensignavenger 1y ago
If there were competition for App Stores, we could discover what the correct market price for App Stores is, but Apple doesn't want that.
- tpdly 1y ago
  This is a very good argument. We would also learn what features of an App Store add marketable value, and what features are trivial. I imagine the front end isn't very important, but some kind of build certification/verification is. That requires branding, infrastructure and labor. Maybe its easier than I imagine to verify that apps aren't lying about what they do, but as far as I can tell that could well account for some 5% at cost. On the other hand you trust your bank, for example, so you follow the link on their website and install the App, and the trust came from their own brand.
Hammershaft 1y ago
Startup founders can choose between many models of funding, VCs, etc. Starups cannot choose between different ways of accessing willing customers over iOS, they have to comply with a %30 cut and a jungle of regulations that act in Apple's interest. These two examples aren't the same, even just on the basis of market power.
- addaon 1y ago
  > Starups cannot choose between different ways of accessing willing customers over iOS What? They can offer an SPA, or a traditional web page. They can offer a hardware device. They can make an android app compelling enough to convert users.
  - maximus_01 1y ago
    You are really trying to say that for a startup trying to build software, say a productivity app or whatever, they should consider launching their own hardware device? They are very different things and would basically make indie development impossible (or really any software company that can't raise hundreds of millions to billions)
    - sokoloff 1y ago
      You’re arguing that Apple’s App Store, even with its commission, is a better business proposition. I agree, and from that conclude that Apple’s earned their commission/fees.
      - maximus_01 1y ago
        There is a limit to this sort of logic though. Don't get me wrong, I'm generally pro free markets. But: A) Apple's policies make some products completely unviable (anything with a gross margin less than 30%). Even for products at say 40% gross margin, Apple as a storefront is taking 75% of the gross margin pool (ie 30% to Apple, 10% to developer). This in my view is direct consumer harm. B) Apple acts egregiously and restricts what should be basic free speech. For instance, app developers not being able to even mention they have to pay Apple (let alone being able to direct customers to their own website etc). To me this is the biggest one - I could probably live with everything else more if developers at least could show customers where their fees were going etc. C) Apple has changed the rules over time, or at least how they enforce the rules (by trying to force more and more apps to pay the 30% - eg what they did to Patreon)
kg 1y ago
Equity and revenue share are fundamentally different things. YC could be asking for 30% equity and it'd still be more reasonable than the 30% revenue cut modern gatekeepers demand.
cma 1y ago
7% of equity is worth far less than 7% of gross, equity ultimately gets paid on what you can make net.
x0x0 1y ago
I'm not sure how offering an investment in a highly competitive market (dozens of incubators, thousands of vcs) is comparable to raising the cost of payment processing 900%. Alongside all the other bad acts that Apple does, mostly inhibiting your ability to provide good customer service to your customers. Or even continue a billing relationship if they migrate from ios -> android/pc.
ianbutler 1y ago
The dynamics of 7% of ownership and 30% of ongoing revenue are vastly different. So different in fact that the comparison doesn't hold water.
- Bud 1y ago
  [dead]
- johnnyanmac 1y ago
  I'd love to hear a proper cointerargument, and not a dismissal.
  - ianbutler 1y ago
    Equity ownership doesn't directly effect operating capacity on the same timescale as revenue. (sure investment does but in a positive way, but again not quite the same) Where as revenue does on shorter timescales, and 30% off revenue is an ongoing constraint to operating capacity day to day in a way ownership just isn't. They don't behave the same way so to make the comparison didn't make any sense. Note: Edited this a few times because words are hard.
  - CGamesPlay 1y ago
    When Y Combinator gives $10,000 for a 7% stake in the company, the company goes from being "worth" $130,000 before the money to being worth $140,000 after, and they have $10,000 more in their bank account. Every dollar the company earns afterwards also increases their bank account by $1.00. When an app store takes a 30% commission on sales, every dollar the company earns afterwards increases their bank account by $0.70. The percent doesn't really matter (if YC took 30% ownership or app stores took 7% commission), the comparison doesn't really make sense either way.
    - ianbutler 1y ago
      Thank you, making it concrete expressed what I was trying to say way better than I was doing in my reply :P
aprilthird2021 1y ago
> I think both Y Combinator and apple should be able to capitalize on the access they provide. Capitalizing, to the detriment of your competition (other paid software services) when you have a monopoly or duopoly on app distribution isn't legal.

deleted 1y ago

[deleted]

georgemcbay 1y ago

Far be it from me to defend Y Combinator or VCs in general but IMO the situation is a bit different because of the monopoly (or at least duopoly) power that Apple and Google hold as gatekeepers over the only practical way to sell to iOS and Android device users. Of course, I'd also assume most or all the people associated with YC were part of the "fire Lina Khan because our whole business model is actually just taking advantage of FAANG acquihire panic" squad, making them hypocrites (in a slightly different way) for helping to prop up these monopolistic gatekeepers and then acting put upon by the results of that.

wmf 1y ago

I thought the standard advice is to target 80-90% gross margin at early stage so you can easily eat 30% CAC. It probably starts to hurt as you scale though.

ensignavenger 1y ago

If there were competition for App Stores, we could discover what the correct market price for App Stores is, but Apple doesn't want that.

tpdly 1y ago
This is a very good argument. We would also learn what features of an App Store add marketable value, and what features are trivial. I imagine the front end isn't very important, but some kind of build certification/verification is. That requires branding, infrastructure and labor. Maybe its easier than I imagine to verify that apps aren't lying about what they do, but as far as I can tell that could well account for some 5% at cost. On the other hand you trust your bank, for example, so you follow the link on their website and install the App, and the trust came from their own brand.

Hammershaft 1y ago

Startup founders can choose between many models of funding, VCs, etc. Starups cannot choose between different ways of accessing willing customers over iOS, they have to comply with a %30 cut and a jungle of regulations that act in Apple's interest. These two examples aren't the same, even just on the basis of market power.

addaon 1y ago
> Starups cannot choose between different ways of accessing willing customers over iOS What? They can offer an SPA, or a traditional web page. They can offer a hardware device. They can make an android app compelling enough to convert users.
- maximus_01 1y ago
  You are really trying to say that for a startup trying to build software, say a productivity app or whatever, they should consider launching their own hardware device? They are very different things and would basically make indie development impossible (or really any software company that can't raise hundreds of millions to billions)
  - sokoloff 1y ago
    You’re arguing that Apple’s App Store, even with its commission, is a better business proposition. I agree, and from that conclude that Apple’s earned their commission/fees.
    - maximus_01 1y ago
      There is a limit to this sort of logic though. Don't get me wrong, I'm generally pro free markets. But: A) Apple's policies make some products completely unviable (anything with a gross margin less than 30%). Even for products at say 40% gross margin, Apple as a storefront is taking 75% of the gross margin pool (ie 30% to Apple, 10% to developer). This in my view is direct consumer harm. B) Apple acts egregiously and restricts what should be basic free speech. For instance, app developers not being able to even mention they have to pay Apple (let alone being able to direct customers to their own website etc). To me this is the biggest one - I could probably live with everything else more if developers at least could show customers where their fees were going etc. C) Apple has changed the rules over time, or at least how they enforce the rules (by trying to force more and more apps to pay the 30% - eg what they did to Patreon)

kg 1y ago

Equity and revenue share are fundamentally different things. YC could be asking for 30% equity and it'd still be more reasonable than the 30% revenue cut modern gatekeepers demand.

cma 1y ago

7% of equity is worth far less than 7% of gross, equity ultimately gets paid on what you can make net.

x0x0 1y ago

I'm not sure how offering an investment in a highly competitive market (dozens of incubators, thousands of vcs) is comparable to raising the cost of payment processing 900%. Alongside all the other bad acts that Apple does, mostly inhibiting your ability to provide good customer service to your customers. Or even continue a billing relationship if they migrate from ios -> android/pc.

ianbutler 1y ago

The dynamics of 7% of ownership and 30% of ongoing revenue are vastly different. So different in fact that the comparison doesn't hold water.

Bud 1y ago
[dead]
johnnyanmac 1y ago
I'd love to hear a proper cointerargument, and not a dismissal.
- ianbutler 1y ago
  Equity ownership doesn't directly effect operating capacity on the same timescale as revenue. (sure investment does but in a positive way, but again not quite the same) Where as revenue does on shorter timescales, and 30% off revenue is an ongoing constraint to operating capacity day to day in a way ownership just isn't. They don't behave the same way so to make the comparison didn't make any sense. Note: Edited this a few times because words are hard.
- CGamesPlay 1y ago
  When Y Combinator gives $10,000 for a 7% stake in the company, the company goes from being "worth" $130,000 before the money to being worth $140,000 after, and they have $10,000 more in their bank account. Every dollar the company earns afterwards also increases their bank account by $1.00. When an app store takes a 30% commission on sales, every dollar the company earns afterwards increases their bank account by $0.70. The percent doesn't really matter (if YC took 30% ownership or app stores took 7% commission), the comparison doesn't really make sense either way.
  - ianbutler 1y ago
    Thank you, making it concrete expressed what I was trying to say way better than I was doing in my reply :P

aprilthird2021 1y ago

> I think both Y Combinator and apple should be able to capitalize on the access they provide. Capitalizing, to the detriment of your competition (other paid software services) when you have a monopoly or duopoly on app distribution isn't legal.