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Comment by albertsun | Hacker News Reader

Despite the high risk/high reward, I think the expected value (in money) of going to Wall Street is still quite a bit higher than that of a startup.

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The one place data is easy to find is at the high end-- in the Forbes 400-- and there at least that is not the case.

Well, of course, the richest people will all come from the high-risk high-reward pool. But the expected value of doing a startup could easily be lower than working in an investment bank.

If one startup in five "succeeds" and the average return is 5M after 5 years of work, then the expected annual "salary" is 200K. Not a completely unreasonable figure for investment banking (I have no clue what the real numbers are. Plus, not everyone can work in wall street or do a startup)

If that's the case, then a startup would be similar to a lottery ticket. Do it for the thrill, do it for the experience, but don't do it for the money.

Sure, the average expected value of starting a startup could be lower. Or it could be higher. But I feel pretty sure in a startup you have more control over the outcome. You don't have to pay any dues or work your way up any ladder. So if the average expected value of starting a startup was equal to that of going to Wall St, but you were convinced you were a superstar, you'd be better off starting a startup, because there is less force pushing you toward the mean.

That makes sense, but misses one important point: most people who are convinced they are superstars are wrong.

pg, unfortunately for America, in recent years most of the highest paid people (to the tune of hundreds of millions per person) have been financiers. Even fairly successful outcomes in the start-up world, such as Mint.com to take a random example, don't make founders that rich.

I suspect if you look at the new inclusions in Forbes 400 list over the past 10 years, that list (of deltas) would be dominated by Finance. This is not a good thing.

Instead of assuming this, why don't you check and tell us? It should be pretty easy; historical Forbes 400 data is available online.

http://news.ycombinator.com/item?id=1200488

Only one post-Bubble company (Facebook) currently looks like it has a good shot at making its founder a billionaire. Compare to newly minted finance billionaires Steven Cohen, James Simons, Peter Thiel (also the founder of PayPal, but he made his billion in finance, not software), Ray Dalio, John Paulson, Kenneth Griffin and dozens more.

How long do you think it will take before YC can work out an expected return for founders?

It could take 20 years to get numbers for YC specifically, because in startups the returns are dominated by the big hits, which (a) take longest and (b) are rare.

However, you could do a crude back of the envelope calculation now, based on average exits for series A funded companies. I believe the average (again, dominated by the big wins) is on the order of $100m. If you assume founders have 10% at exit, that's $10m. Currently 20-25% of YC funded cos raise series A. So if you ignore startups that don't raise series A (which could be an increasingly large mistake), you get a lower bound of $2m to $2.5m per founder.

Interesting. I'd never done that calculation.

The bogusness of it, of course, is evident from the fact that your expected value is so dependent on the performance of the other startups we accept. If 100% of the startups we funded went on to raise series A, the expected value would jump to $10m. And of course we have no idea how well YC funded startups will do compared to series A funded startups in general.

Would it have any meaning to deal with (a) and to some extent, (b) by considering the stock founders at their last investment after a certain number of years (say, 5 or 10)?

Side question: You seem more aware of YC contribution to startup performance. Does this mean you see YC more as competing with other investors and less with graduate programs (I think I recall you mentioning that on some old thread).

There is also a worry about the diminishing utility of money.

If the really big exits are dominating the figures, then that will make the odds of your startup "solving the money problem" seem larger than they really are.

But for a back-of-envelope calculation this could be a pedantic quibble.

Present value for $2.5m received in 5 years using a 5% rate (decent, currently) is about $2m.

Present value for $2.5m received in 5 years using a 15% rate (say you are accounting for high risk) is about $1.2m.

Solved?

based on average exits for series A funded companies

Is that counting all the series A funded companies which never exit? $100M sounds about right to me as an average exit size, but only after excluding non-exits.

Yes, but it's only for companies that get series A rounds from good (= top 50) VC funds. There is a huge mass of lame VC funds below that whose returns are negative. But since we don't intro YC startups to bad VCs, it seemed reasonable to use norms from the good ones.

That is a lot higher then I would have expected. Does this mean that top VC funds are making insane returns (>50%)?

From what I'm told, a good VC fund will roughly triple over the life of the fund (~ 10 years).

So is YC doing better or worse than a good VC fund?

We're projected to generate a better return on money invested, but we invest much less money, so we're not likely to end up as rich as partners at a successful VC fund.

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