I'd like to the "slugging percentage" be higher, but I think the hit rate is perhaps already too high.
One of the challenges with this business is that our decisions look foolish at the time, and then obvious and easy with hindsight :)
(Although parent didn't mention AirBnB?)
In retrospect AirBnB could have been more accurately pitched as a better VRBO but there still isn't an obvious reason why that would have been a good investment.
The best way of doing this would be to pull the random companies out of the good, but not good enough to fund, pile. I am sure YC has little problem telling a good startup from a bad one, but I bet they have real problem picking the excellent from the good. Trying to pick the excellent out of the good is where you are most likely to run into unconscious biases.
Yes; they've said as much.
You can keep a low hit-rate and focus on giant returns by playing the lottery, but fortunes are built on compound interest and diversified portfolios.
Reducing the number of failures does not mean getting rid of the big winners. It could mean focusing on large existing industries over speculative, pie-in-the-sky trends.
Think about ZenPayroll (disclaimer: early employee there, biased.) Product-focused payroll is not sexy, but the impact is massive and a tremendous business opportunity. We're now building software for local governments. Not sexy, huge market, huge impact on humans, clear path to single, double, and home-run.
My biggest frustration with looking for founding teams chasing these speculative bets is the sheer waste of human talent. I don't want to see another all-star team waste their time on bitcoin and food-delivery.
There are real, serious problems with the same upside but whose "failure" scenario may be a $25m business.
This makes sense to me more on the scale of a single company. Put together a great team and focus them on a long-term problem. Their year-over-year drive and passion will outlast the rollercoaster of starting a company, leading to a much better shot of those huge returns.
Rather than going all in on the flavor-of-the-week, I agree with the focus on radical improvements to existing markets. It's far more likely—which does not mean less impactful—that we can fix known problems than fix as-yet-unknown problems.
The companies that get into YC are often speculative in their ideas. Maybe it is devaluing the idea over the execution. Maybe it is the belief that getting in early to a growing trend is more valuable than reinventing an existing idea.
Regardless, the result is great teams of founders who think the key to success is a crazy idea. Sometimes crazy ideas work (AirBnB was kinda nuts at the time) but there seems to be a heavy weight in companies funded towards those types of investments versus the ZenPayrolls. Which tends to attract the same.
* They were Switchboard Labs at the time, doing something totally different.
Nevertheless, the fact that yc invested pre-pivot only reinforces my point, as ZP wouldn't even exist had YC not taken a chance on the team and then helped them find a more promising idea.
I see your point, that the team is the most important part and YC invested in that. My feeling is that YC can be more effective at funding those types of ideas and teams. That the hit rate can be higher by focusing on a different class of idea. Perhaps that means more pivots or different ideas accepted at the start. I'll try to flesh this out more.
P.S. Unrelated, but thank you for sharing your thoughts. I appreciate it
There's always room to improve, but it's likely they are making fewer mistakes than you think.
AirBnb was almost dead when they got into YC. Nobody would fund them, and Nate had moved to Boston to get a real job.
Airbnb is actually still nuts. They probably aren't even to the half-way point in terms of where they need to be to be actually mainstream.
http://www.paulgraham.com/airbnb.html
And that's just one public example. (Chris Sacca also turned them down.)
Empirically it would be shocking if they were the only 2 investors who had the opportunity to invest but didn't.
I think it's great that you believe in what you are doing versus what other "all-star" teams may choose to do but your comment is equally frustrating, IMO.
When you talk with them, they never say (or say without knowing it) that their biggest problem is financial transparency. Or that customers want to buy but want an anonymous currency. Or that they need to switch between many different currencies. BTC has always felt like a solution in search of a problem. The blockchain is wonderful technology as well, but that's not the hardest part of most startups.
Do you think that if a business like YC were to commit to funding "safe" options that good founders would create safe businesses that could achieve returns in aggregate that would rival the high risk / high failure model?
As for returns, the average value of YC companies that are more than two years old is over $100M. I'm not aware of any other model that even comes close to that.
If anything, I'd like to find more ways to fund even more extreme moonshots (e.g. http://techcrunch.com/2014/08/14/y-combinator-and-mithril-in...). Funding an actual, literal moonshot would be wonderful.
I see this effect here in Australia where founders and startups are trying to follow the YC model to success despite the ecosystem here being really different. The thing I really love about YC (apart from HN) is that you guys are trying to do things differently - the last thing the world needs is a 1000 YC clones all following your lead and nobody trying different approaches.
I too would like to see a literal moonshot. I have thought a lot about this topic over the years and I think everyone is stuck because they have been concentrating on the wrong area. The cheapest component in the whole process is the humans - the way to get a real moonshot off the ground (sorry for the pun) is to put risk back. There are plenty of people willing to be heroes so why not optimise everything around that - the engineering costs go way down if you are willing to tolerate a high failure rate.
A fairer complaint to make is about the tension between investors/founders and employees.
This is all neither here nor there, though, because whatever kind of founder you are, you are vastly more likely to get external financing in the post-YC era than you were before YC happen. YC funds all kinds of companies that aren't immediately on a moonshot trajectory. VC firms as a rule don't.
I am not a YC booster, but I've been in startups since '95, and there is just no comparison. YC has made things significantly better for founders everywhere.
In accelerators, that means having more consistency in what factors work, and more selectiveness. Take things that repeatably work and use that.
In my opinion, companies like Google build one hit after another, internally, by re-using their internal platform and users and virality. There are failures but not as much as with startups. But it all benefits from internal resources, server farms, infrastructure, user base etc.
If you are outside such a company, use an open source platform that worked for others. We are working on such a platform and will probably take partners in a couple years, to build apps for our several million users, and provide them with all the infrastructure to try things out and take a % if it works out.
Innovation is not zero-sum, but if you create a monoculture of "what works", then what will almost certainly eventually work in the market is something different than the monoculture. An interesting analogy here is Feyerabend's take on creativity in science, "Against Method."
Also, I strongly disagree that Google has figured out a process for innovation. Google does not have "one hit after another." They have a hit here and there in a sea of failure, just like Microsoft did. IBM, on the other hand, had one hit after another, until the market figured out how to "disrupt" them, and did.
As an investor I've spent much of the last twenty years trying to figure out how to make a better risk-adjusted return. Either I'm a complete idiot, or it's not as easy as it sounds.
These are not mutually exclusive :)
More seriously, you do make a really good point. Innovation is hard and making money from it is even harder.
There is a huge difference though. Google has the resources and network to push things towards success. There are so many different reasons why a startup may fail, but Google is able to avoid many of these issues because they are google. Not a good comparison IMO.
Wait, what? Do you have any idea how many ideas they've churned through to get the relatively few hits they've had? Wave didn't do all that well. Orkut had a decent run before they dissolved it (almost 11 years) G+ is still in question.
Yes, they've had some success with some products. And made some excellent purchase decisions (you didn't think they wrote everything they released, did you? Urchin? Writely?).
They've also killed software instead of fully developing it: notebook, reader.
And that is to say nothing of the large numbers of 20% projects. I've personally heard engineers (as a whole) at Google being chastised because the success rate of 20% projects was too high.