5 ms·

Y Combinator's Value to The US Economy

59 points by niccolop 13y ago

danvideo 13y ago
not knocking all the great stuff YC does, but the analysis here seems to assume that none of these companies/jobs would have been created otherwise, which sounds incredibly far fetched.
- SatvikBeri 13y ago
  I posted my napkin estimate of YC's incremental impact in another comment[0]. It's not perfect, but it's a potential starting point. [0]: https://news.ycombinator.com/item?id=5597216 https://news.ycombinator.com/item?id=5597216
- garry 13y ago
  It's not far fetched to claim this. I'll admit it's unclear whether Posterous would have launched the way it did, or had any reaction similar to it, if we had not been through the YC program. The homepage wouldn't have looked the same (PG hammered us until it looked good). We may not have quit our jobs. We would not have been as aggressive about customer support. (Thanks Kevin Hale!) That's just n=1, but these stories are not uncommon among YC founders.
obviouslygreen 13y ago
On average, the accelerator has invested between $15,000 to $20,000 in each company participating in their program... If this is the case... Based on specific macroeconomic assumptions, we calculate an economic value of around $6.1 bn added since the accelerator was founded in 2005. ...this seems phenomenal, but also highly suspect. How is it that YC is investing so little in so many companies that the average investment is $20k or less? That's almost nothing by Silicon Valley living standards (which, based on HN bias, seems to be a significant share of YC's audience). $20k, even in very low-income areas, isn't even half the yearly pre-tax salary of anyone who's very good at anything or has an adult's bills to pay. And that's one year for one person. They cite 2-3 founders as average... this absolutely does not compute. Unless the average YC alum gets enough to operate for about three to six months without employees, advertising expenses, hosting, or any other paid service, and this somehow results in an average of $15,000,000 in "economic value," this article is some inexplicable sort of bullshit.
- graeme 13y ago
  For a while all YC startups were getting 150,000 in additional funding. I don't know exactly how the terms work as I don't know VC finance. http://news.cnet.com/8301-32973_3-57554351-296/ron-conway-steps-back-as-y-combinator-cuts-team-funding/ http://news.cnet.com/8301-32973_3-57554351-296/ron-conway-st...
  - michaelochurch 13y ago
    Terms are everything. It's not hard to get money. It's hard to get money in a way that doesn't make you angry or miserable on a regular basis.
    - rdl 13y ago
      The $80k or $150k is independent of YC, so it doesn't affect YC's returns. The terms for the $80k or $150k were incredibly favorable; essentially uncapped/no discount and would inherit the cap of the next round of financing.
- timcederman 13y ago
  The figures are accurate. It used to be enough to properly fund people, but now it's a nominal figure. Each company gets an automatic investment, if they choose to take it, of just less than $100k.
  - michaelochurch 13y ago
    With what terms? What's the valuation and how bad are the liquidation preferences, board concessions, etc.?
    - timcederman 13y ago
      For YC's, I believe it's all listed out online. For the rest of the money, it's simply an uncapped convertible note.
- 13y ago
michaelochurch 13y ago
I never applied to YC because of the small amounts. First of all, if I'm going to ask for money, I only want to do it once. Which means I'd prefer to ask for enough to get to profitability, not just enough to get to another round. (Granted, you'll raise that A on better terms with YC social proof.) Second, if we assume a 4-year vesting cycle (which, I think, should apply to founders as well) then my being there already puts the valuation at $1.5-2M (because, while I wouldn't get $375-500k on the normal wage-labor market, I'm working 2+ times as hard and taking lots of risk). Scale that up based on how many other founders there are. So for me, it's not a good deal. If you're 22, I think it's probably a great deal.
- sbisker 13y ago
  Fair; it's not for everyone - but that's really not the point. The point is that no one really thought "22 year olds" were capable of making an economic impact before YC came along. Hence, someone with the simple idea to say "Hey, we should give 22 year olds this deal" created an employment impact on the economy as big as Facebook. The more people that come up with new funding models like YC that actually work, the better we'll all be.
  - michaelochurch 13y ago
    Some 22-year-olds are pretty badass, so I wouldn't underestimate them as a group. You're right, though. VC, except in certain bubble chambers (e.g. Stanford's CS department in the '90s) has this a weird paradox where you're either too old to raise money or too young to get an introduction. YC solved that, which is commendable.
- hkmurakami 13y ago
  I personally see YC's equity stake as a "fee" companies with young or un-networked founders will pay to gain law/financial/sales-lead networks to leverage. In a vacuum, the trade works best for young founding teams and the value decreases as the team gets older (age typically does correlate with your leveragable network size).
- olalonde 13y ago
en3203 13y ago
interesting. clearly some work has gone into this and, like with any research, the results will always be open to debate. although i think obviouslygreen has got the wrong end of the stick by comparing apples with oranges. i wouldn't be surprised if the valuation number is actually higher. would like to see some more details on those 'assumptions'
SatvikBeri 13y ago
I was trying to come up with a framework for estimating the incremental impact of YC. Some of these businesses would have been successful without going to YC. And we can't just compare against the general startup population because YC also selects the best. So what's a good proxy for estimating the value that an incbuator provides to startups? Perhaps time. Iterating through product ideas, getting introductions, and getting help with legal work & administrivia probably shaves somewhere from months to years off of getting to a good product-often to the point where the product/business would have been abandoned before getting traction. Let's pick a completely arbitrary amount of time saved-one year. Most of the value of YC's portfolio comes from AirBnB & Dropbox. It's hard to get good revenue numbers, but based on users, nights booked, and other heuristics their growth rates are estimated at around 100%-500%. If we take an estimate of 350%, that means that we could attribute roughly 70% of the value of YC's portfolio companies to YC itself. I'm not sure if these assumptions are all accurate (especially the 1 year saved figure), but this can give us a starting point to estimating YC's impact on their portfolio companies. ETA: the amount of time saved is probably the most important variable. If we assume YC saves each company 6 months instead of 12, then YC's impact drops from 70% to 47%. With 3 months, it's about 27%.
codex 13y ago
This analysis doesn't seem to account for the investments in and opportunity costs of, YC failures. Example: a company that takes $10m over three rounds and then dies. Also, it seems to assume that without YC investment none of these companies would have been founded, and that no other investors contributed. They seem to be giving YC credit for the entire valuation even though they invested a tiny fraction of funding. Finally, they seem to be double counting: estimating market valuation and then adding the effects on the economy. Those amounts are not exclusive.
- jacquesm 13y ago
  YC would not put the $10M in, so from their point of view it doesn't matter. From the economic point of view it is simply statistics, a large majority of start-ups fails, the few that make it to round 'C' and then burn are not very significant. The majority will fail long before that or will survive.
trotsky 13y ago
we calculate an economic value of around $6.1 bn added since the accelerator was founded in 2005 If you could add up the market cap of all of the companies you've been involved with finding funding all of a sudden the NYSE has "contributed" over 14 trillion dollars to the US economy. Except it hasn't.
hooande 13y ago
What people don't understand about YCombinator is that they are ultimately in the business of making friends. The few thousand dollars they invest in startups isn't meant to be seed money, or enough money for founders to sustain a business. It's a token of friendship and a reason to continue a relationship. The fact is that relationships with successful people can be far more valuable than bags with dollar signs on them. Relationships can lead to inside information, help with making deals and most importantly, once in a lifetime investment opportunities. Most rich people spend a lot of their money and effort on access to information. At the higher levels, information and relationships rule all and powerful people will go far out of their way to get them. Evaluating the success of YCombinator based on the total value of their portfolio is missing the point. Most of their value is in the form of soft currency, the massive network of grateful friends that they are building. The incubator model gives them the investment returns of a venture capital firm combined with the social returns of a fraternity. We won't know their true value for decades.
codex 13y ago
For comparison: Sequoia Capital estimates that 19% of the NASDAQ's value is made up of firms that they have invested in. If you apply the same ridiculous, super sloppy accounting used here to Sequoia, it has contributed over one trillion dollars to the U.S. economy in market cap alone, to say nothing of second order effects on the economy. And you can add YC's value to Sequoia's, since Sequoia is an investor in YC itself.
- garry 13y ago
  s/is/was/
aliston 13y ago
All this says to me is that Silicon Valley success has more to do with who you know that what you do.
EliRivers 13y ago
What does it even mean to add $6.1 bn of value? It's not as if the alternative was to put $6.1 bn in a heap and burn it. They've included staff - would they all have been unemployed otherwise? There's lots of data but no meaning here. What, in this case, is "economic value"?
jedc 13y ago
If people are interested in YC numbers (and individual companies) compared to the 150+ other accelerators around the world, check out Seed-DB. (http://www.seed-db.com http://www.seed-db.com) YC startups have raise >$1billion in funding, approximately half of the >$2billion raised by all startups from accelerators. And this is only the reported (or self-reported) funding numbers from Crunchbase, so the total is actually higher than that.
rwhitman 13y ago
Isn't there also the flip side - that the disruptive tech businesses represented by YC actually remove jobs from the economy on some level? For example hotel workers who are displaced because of AirBnb etc. Not that I'm the kind of person who advocates for keeping people employed for employments sake, but I'd be curious how many jobs are actually made obsolete by tech startups...
- chimeracoder 13y ago
  With absolutely no data to back this up, I'll posit the following speculation: In the short- and medium-run, these business cost more jobs than they create. In the long run, they rid the economy of relative inefficiency (relative to the 'improved' marketplace), which creates a healthier economy (creating jobs being one symptom of a healthier economy).
tedsanders 13y ago
Using specific macroeconomic assumptions, I estimate $100 trillion. What's the point of the article if the methodology is excluded?
rocky1138 13y ago
Don't forget the numerous other accelerators which follow the YC 3-month spring, money, and mentors method. If we include those who have been inspired to do YC-alikes, the numbers would become huge.
kfk 13y ago
Besides the fact that 6.1B is not the value to the US Economy: those engineers and developers would have probably produced value anyway. So, to be specific, we should know the value without YC and with YC and the difference would then be "the value of YC to the US Economy"; I think we should ask ourselves: 1. How does the YC-factor scale to make a real impact to any economy. Don't ask me data, but 6.1 billion in few years have a 1*10^-n impact to the GDP of most western economies, where probably n>10. 2. If it's fair to call copycats everybody that tries to replicate the concept, any concept. Innovation involves lots of copying, I thought we agreed on that. 3. If the YC-factor can make a real impact on industries that are likely to be fundamental for our future welfare: food, pharma, hospitals, insurance (pensions). And I am interested in point 3 especially. Because 6.1B is nice, but we need to face the reality here. We live in an aging world were people want to retire at 60 with the same shape they had at 18. Implications of this are enormous for our future.

59 points by niccolop 13y ago

not knocking all the great stuff YC does, but the analysis here seems to assume that none of these companies/jobs would have been created otherwise, which sounds incredibly far fetched.

SatvikBeri 13y ago
I posted my napkin estimate of YC's incremental impact in another comment[0]. It's not perfect, but it's a potential starting point. [0]: https://news.ycombinator.com/item?id=5597216 https://news.ycombinator.com/item?id=5597216
garry 13y ago
It's not far fetched to claim this. I'll admit it's unclear whether Posterous would have launched the way it did, or had any reaction similar to it, if we had not been through the YC program. The homepage wouldn't have looked the same (PG hammered us until it looked good). We may not have quit our jobs. We would not have been as aggressive about customer support. (Thanks Kevin Hale!) That's just n=1, but these stories are not uncommon among YC founders.

obviouslygreen 13y ago

On average, the accelerator has invested between $15,000 to $20,000 in each company participating in their program... If this is the case... Based on specific macroeconomic assumptions, we calculate an economic value of around $6.1 bn added since the accelerator was founded in 2005. ...this seems phenomenal, but also highly suspect. How is it that YC is investing so little in so many companies that the average investment is $20k or less? That's almost nothing by Silicon Valley living standards (which, based on HN bias, seems to be a significant share of YC's audience). $20k, even in very low-income areas, isn't even half the yearly pre-tax salary of anyone who's very good at anything or has an adult's bills to pay. And that's one year for one person. They cite 2-3 founders as average... this absolutely does not compute. Unless the average YC alum gets enough to operate for about three to six months without employees, advertising expenses, hosting, or any other paid service, and this somehow results in an average of $15,000,000 in "economic value," this article is some inexplicable sort of bullshit.

graeme 13y ago
For a while all YC startups were getting 150,000 in additional funding. I don't know exactly how the terms work as I don't know VC finance. http://news.cnet.com/8301-32973_3-57554351-296/ron-conway-steps-back-as-y-combinator-cuts-team-funding/ http://news.cnet.com/8301-32973_3-57554351-296/ron-conway-st...
- michaelochurch 13y ago
  Terms are everything. It's not hard to get money. It's hard to get money in a way that doesn't make you angry or miserable on a regular basis.
  - rdl 13y ago
    The $80k or $150k is independent of YC, so it doesn't affect YC's returns. The terms for the $80k or $150k were incredibly favorable; essentially uncapped/no discount and would inherit the cap of the next round of financing.
timcederman 13y ago
The figures are accurate. It used to be enough to properly fund people, but now it's a nominal figure. Each company gets an automatic investment, if they choose to take it, of just less than $100k.
- michaelochurch 13y ago
  With what terms? What's the valuation and how bad are the liquidation preferences, board concessions, etc.?
  - timcederman 13y ago
    For YC's, I believe it's all listed out online. For the rest of the money, it's simply an uncapped convertible note.
13y ago

michaelochurch 13y ago

I never applied to YC because of the small amounts. First of all, if I'm going to ask for money, I only want to do it once. Which means I'd prefer to ask for enough to get to profitability, not just enough to get to another round. (Granted, you'll raise that A on better terms with YC social proof.) Second, if we assume a 4-year vesting cycle (which, I think, should apply to founders as well) then my being there already puts the valuation at $1.5-2M (because, while I wouldn't get $375-500k on the normal wage-labor market, I'm working 2+ times as hard and taking lots of risk). Scale that up based on how many other founders there are. So for me, it's not a good deal. If you're 22, I think it's probably a great deal.

sbisker 13y ago
Fair; it's not for everyone - but that's really not the point. The point is that no one really thought "22 year olds" were capable of making an economic impact before YC came along. Hence, someone with the simple idea to say "Hey, we should give 22 year olds this deal" created an employment impact on the economy as big as Facebook. The more people that come up with new funding models like YC that actually work, the better we'll all be.
- michaelochurch 13y ago
  Some 22-year-olds are pretty badass, so I wouldn't underestimate them as a group. You're right, though. VC, except in certain bubble chambers (e.g. Stanford's CS department in the '90s) has this a weird paradox where you're either too old to raise money or too young to get an introduction. YC solved that, which is commendable.
hkmurakami 13y ago
I personally see YC's equity stake as a "fee" companies with young or un-networked founders will pay to gain law/financial/sales-lead networks to leverage. In a vacuum, the trade works best for young founding teams and the value decreases as the team gets older (age typically does correlate with your leveragable network size).
olalonde 13y ago

en3203 13y ago

interesting. clearly some work has gone into this and, like with any research, the results will always be open to debate. although i think obviouslygreen has got the wrong end of the stick by comparing apples with oranges. i wouldn't be surprised if the valuation number is actually higher. would like to see some more details on those 'assumptions'

SatvikBeri 13y ago

I was trying to come up with a framework for estimating the incremental impact of YC. Some of these businesses would have been successful without going to YC. And we can't just compare against the general startup population because YC also selects the best. So what's a good proxy for estimating the value that an incbuator provides to startups? Perhaps time. Iterating through product ideas, getting introductions, and getting help with legal work & administrivia probably shaves somewhere from months to years off of getting to a good product-often to the point where the product/business would have been abandoned before getting traction. Let's pick a completely arbitrary amount of time saved-one year. Most of the value of YC's portfolio comes from AirBnB & Dropbox. It's hard to get good revenue numbers, but based on users, nights booked, and other heuristics their growth rates are estimated at around 100%-500%. If we take an estimate of 350%, that means that we could attribute roughly 70% of the value of YC's portfolio companies to YC itself. I'm not sure if these assumptions are all accurate (especially the 1 year saved figure), but this can give us a starting point to estimating YC's impact on their portfolio companies. ETA: the amount of time saved is probably the most important variable. If we assume YC saves each company 6 months instead of 12, then YC's impact drops from 70% to 47%. With 3 months, it's about 27%.

codex 13y ago

This analysis doesn't seem to account for the investments in and opportunity costs of, YC failures. Example: a company that takes $10m over three rounds and then dies. Also, it seems to assume that without YC investment none of these companies would have been founded, and that no other investors contributed. They seem to be giving YC credit for the entire valuation even though they invested a tiny fraction of funding. Finally, they seem to be double counting: estimating market valuation and then adding the effects on the economy. Those amounts are not exclusive.

jacquesm 13y ago
YC would not put the $10M in, so from their point of view it doesn't matter. From the economic point of view it is simply statistics, a large majority of start-ups fails, the few that make it to round 'C' and then burn are not very significant. The majority will fail long before that or will survive.

trotsky 13y ago

we calculate an economic value of around $6.1 bn added since the accelerator was founded in 2005 If you could add up the market cap of all of the companies you've been involved with finding funding all of a sudden the NYSE has "contributed" over 14 trillion dollars to the US economy. Except it hasn't.

hooande 13y ago

What people don't understand about YCombinator is that they are ultimately in the business of making friends. The few thousand dollars they invest in startups isn't meant to be seed money, or enough money for founders to sustain a business. It's a token of friendship and a reason to continue a relationship. The fact is that relationships with successful people can be far more valuable than bags with dollar signs on them. Relationships can lead to inside information, help with making deals and most importantly, once in a lifetime investment opportunities. Most rich people spend a lot of their money and effort on access to information. At the higher levels, information and relationships rule all and powerful people will go far out of their way to get them. Evaluating the success of YCombinator based on the total value of their portfolio is missing the point. Most of their value is in the form of soft currency, the massive network of grateful friends that they are building. The incubator model gives them the investment returns of a venture capital firm combined with the social returns of a fraternity. We won't know their true value for decades.

codex 13y ago

For comparison: Sequoia Capital estimates that 19% of the NASDAQ's value is made up of firms that they have invested in. If you apply the same ridiculous, super sloppy accounting used here to Sequoia, it has contributed over one trillion dollars to the U.S. economy in market cap alone, to say nothing of second order effects on the economy. And you can add YC's value to Sequoia's, since Sequoia is an investor in YC itself.

garry 13y ago
s/is/was/

aliston 13y ago

All this says to me is that Silicon Valley success has more to do with who you know that what you do.

EliRivers 13y ago

What does it even mean to add $6.1 bn of value? It's not as if the alternative was to put $6.1 bn in a heap and burn it. They've included staff - would they all have been unemployed otherwise? There's lots of data but no meaning here. What, in this case, is "economic value"?

jedc 13y ago

If people are interested in YC numbers (and individual companies) compared to the 150+ other accelerators around the world, check out Seed-DB. (http://www.seed-db.com http://www.seed-db.com) YC startups have raise >$1billion in funding, approximately half of the >$2billion raised by all startups from accelerators. And this is only the reported (or self-reported) funding numbers from Crunchbase, so the total is actually higher than that.

rwhitman 13y ago

Isn't there also the flip side - that the disruptive tech businesses represented by YC actually remove jobs from the economy on some level? For example hotel workers who are displaced because of AirBnb etc. Not that I'm the kind of person who advocates for keeping people employed for employments sake, but I'd be curious how many jobs are actually made obsolete by tech startups...

chimeracoder 13y ago
With absolutely no data to back this up, I'll posit the following speculation: In the short- and medium-run, these business cost more jobs than they create. In the long run, they rid the economy of relative inefficiency (relative to the 'improved' marketplace), which creates a healthier economy (creating jobs being one symptom of a healthier economy).

tedsanders 13y ago

Using specific macroeconomic assumptions, I estimate $100 trillion. What's the point of the article if the methodology is excluded?

rocky1138 13y ago

Don't forget the numerous other accelerators which follow the YC 3-month spring, money, and mentors method. If we include those who have been inspired to do YC-alikes, the numbers would become huge.

kfk 13y ago

Besides the fact that 6.1B is not the value to the US Economy: those engineers and developers would have probably produced value anyway. So, to be specific, we should know the value without YC and with YC and the difference would then be "the value of YC to the US Economy"; I think we should ask ourselves: 1. How does the YC-factor scale to make a real impact to any economy. Don't ask me data, but 6.1 billion in few years have a 1*10^-n impact to the GDP of most western economies, where probably n>10. 2. If it's fair to call copycats everybody that tries to replicate the concept, any concept. Innovation involves lots of copying, I thought we agreed on that. 3. If the YC-factor can make a real impact on industries that are likely to be fundamental for our future welfare: food, pharma, hospitals, insurance (pensions). And I am interested in point 3 especially. Because 6.1B is nice, but we need to face the reality here. We live in an aging world were people want to retire at 60 with the same shape they had at 18. Implications of this are enormous for our future.