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Comment by CalChris | Hacker News Reader

One thing that confuses me about YC is that they're an accelerator rather an incubator. In particular, this article talks about revenue growth which is an acceleration stage metric. Seed stage needs seed money to prove a hypothesis. Acceleration stage needs A money to accelerate. Stressing revenue growth at seed stage seems like it could be dangerous to a startup's health. (Yeah, ideally you would want the seed/acceleration transition to be c2 continuous.)

YC offers seed money for seed percentage, $120k in return for 7%, and attaches accelerator metrics. This transaction just doesn't make sense to me at all. Clearly it makes sense to others, given the number of YC applications.

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I think the history of YC explains the confusion. YC was originally a seed-stage incubator (although they disliked that term, as they were very different from the 1990s "incubator" stereotype). As it became more famous, it focused more and more on later-stage companies, and the investment sizes also grew. From 2005 to now, the fraction of very early stage companies (pre-incorporation) has gone from 100% to ~12%, and the investment amount has increased from ~$20K to $120K. However, YC has (AFAIK) never explicitly acknowledged its transition to accelerator, and much of the writing on YC is years old, which creates some misunderstandings.

> As it became more famous, it focused more and more on later-stage companies, and the investment sizes also grew.

Something I've wondered: was this focus change deliberate? Or is it just a result of becoming more famous, attracting many more applicants, and accepting more mature companies since their success to date looks better?

Good question, I don't know. If anyone knows anything about this, I'd be very curious to hear.

Another explanation is they may have realized that the pre-incorporation "super early" startups were a riskier bet, and moved their sweet spot preference just a little bit past that based on the success metrics of their previous classes.

(Recent YC founder)

This looks confusing if you consider YC to be an accelerator or incubator, labels which they hate. If you look at them as a seed stage investor, their shifting focus makes sense.

They give $120k for 7% of the company. Since the deal is set, the only variable, to maximize shareholder return, is the companies they accept. Since they are an investor, they're going to pick the best investments.

How do they know the "best" investment? Past history helps, so (relatively) later stage companies will have an advantage. Revenue, team, traction, etc. are all good indicators.

If you look at YC as just a seed stage VC, their actions are pretty consistent and logical.

If you view them as just a seed stage VC then is 7% for $120,000 reasonable? Seems that if someone thinks $120,000 is a lot of money (cuz 7% is a hefty percentage) they're desperate. If they think the YC Rolodex will make them, they're desperate. I'm not getting the value.

Yes, YC has a brand and they can command this and their actions are indeed pretty consistent and logical. But it doesn't make sense from the other side of the transaction at least to me.

Won't YC get diluted along with the founders? That 7% will end up being less than 5% after a few rounds of VC when the founders' collective share of the company is 40-60%.

7% for $120k is a pre-money valuation of ~$1.6M. The value of a startup is not just its present value but also includes its expected future value. If you believe that your startup is worth less than that before YC, it makes sense to sell as much as possible at that valuation.

On the flip side, that is a post-money (and post-YC) valuation of over $1.7M. I think any reasonable founder would expect their startup to be worth at least $2M after going through YC - for the Rolodex and for the 3 months of heads down focus that it forces you to do.

> But it doesn't make sense from the other side of the transaction at least to me.

It does make sense, because YC is effectively help price a round. What doesn't make sense is that most companies that go through YC are getting convertible notes from non-YC seed stage investors, while YC itself as an equivocal seed stage investor is getting equity. This is where the waters get a bit muddy.

Empirically, selling 7% of your company to join YC improves your average outcome so much that the remaining 93% is worth more than the entire company before to the transaction. If anything, YC is too cheap.

What empirical data is there about this? Selection biases would seem to prevent a simple analysis.

> This transaction just doesn't make sense to me at all.

As a YC applicant I feel I am in a position to offer an explanation.

Money is very hard to raise for many first time founders; 120k is a fortune at this early stage. YC offers access to its rolodex and being accepted (whether the startup succeeds or not) is a badge of validation that opens many doors internationally.

The trade-off is worth it.

Also, the YC badge allows founders to raise a round at Demo Day at a MUCH higher valuation than even the 2nd best accelerator (and this has been shown to be true for almost every single company in each batch) -- the difference is staggering.

Source/data?

I've attended dozens of YC and non-YC demo days as an investor. I can vouch for the grandparent's comment. YC companies have valuations that are 1.5-2.5x higher than elsewhere, but (in my opinion) have outcomes that are 3x+ larger on average. So they are expensive investments on the surface, but still relatively great deals.

As a complete outsider who has never raised money or set foot in the valley my feeling is that without data this sounds like some sort of buddy-buddy system. Where's the data to back this up?

Basically the way I read this is if I have a business model that is likely to require a series A eventually (i.e. not profit oriented) if I won't apply to YC I'm setting myself up for a massively worse deal later?

Well, it could be the case that companies that get into YC are already "good enough" to already have higher valuations in the first place.

I suspect there's a bit of groupthink involved though, creating a feedback loop. (Well, of course there is, VC investment decisions and valuations are based on signaling from other investors!)

So, building your company, maybe not massively worse, but yes, probably at least somewhat worse. It's a tough Valley out there.

1) I have anecdata about returns: my first fund wrapped up earlier this year. About 30% of our investments were in YC companies. Based on investment multiples, 3 of the top 6 companies in the portfolio were YC. This is based on multiples, not absolute valuations.

2) Investors are strongly incentivized to be greedy, so buddy-buddy systems are not in their self-interest. Most funds take a 20% cut of the profits they generate, so they are typically investing in YC companies only if they think those returns will be as good as lower-valued non-YC companies

3) FWIW, the valuations are only substantially higher for YC, and not for other accelerators (many of which are quite good). I think that is also evidence against a buddy-buddy conspiracy.

As to your question about Series As, I don't think YC has a huge effect on Series A valuations, although I haven't looked at the data there. The effect is mostly on seed valuations. I think of the YC badge as similar to a going to Harvard. When it comes to getting your first job (seed round), having a Harvard diploma is a great signal of your potential and might get you a higher starting salary. When it comes to future jobs (Series A and later), people will look more at what you've done since graduating than where you went to school.

This is the kind of thing that isn't public.

https://angel.co/valuations

So maybe the metric should be traction rather than acceleration. To me, personal opinion, if anyone is talking about acceleration at seed stage then my bullshit detector is firing. If someone is measuring acceleration at seed stage, I'm out.

Yes, I'm an engineer. How could you tell?

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