Can The Y Combinator Idea Turn Into A Movement? | Hacker News Reader

Can The Y Combinator Idea Turn Into A Movement?

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47 pointskonsl23 comments

Will proliferating seed companies start looking like micro sub-prime mortgage traders? They operate on the similar assumptions: pooling small, high-risk investments hoping that these individual bets are unrelated, thus driving down the variance when bundled together. This is probably only true for the seed company that gets to cherry pick first, which seems to be YC as of now. Assuming an initial chance of success of 1/100 for the groups that are selected by YC, the chance that every single one from a group of 100 fails is about .36. That means that on an investment of about 1.5 million dollars (100 * 15,000) they have a 64 percent chance of a success, which I loosely define as a big acquisition or buyout. Also, YC companies seems to prop each other up and drive up success rates through intelligent nurturing and beneficial network effects. I'd guess that the payout probabilities are much higher over a three-four year period.

Now I am highly skeptical that the same math extends to other seed companies. Do they get applicants of the same caliber when there are so many second tier seed companies to choose from for a prospective applicant? People are willing to uproot their youthful lives and move for YC, but will they do the same for Techstars or LaunchBox? Probably not, at least not for 15,000 dollars and little else. If I throw in the assumption of a power-law distribution for startups, the quality goes downhill rather rapidly. And additionally, if YC happens to be decently good at identifying truly promising candidates and taking them all into their fold as they claim to, it the median success probability for the rest is going to be rather low. Assuming an order of magnitude drop-off, that gives an payout probability of .09 ( 1-(1-1/1000)^100 if they are operating on same scales as used for YC). The number of seed companies sprouting is surely going to be limited by such math...

>Will proliferating seed companies start looking like micro sub-prime mortgage traders?

I question the analogy. Seed funding might become a fad investment, but it will surely be less volatile than the subprime mortgage sector. Subprime mortgage originators and buyers backed their assets (the mortgages) by a large amount of debt. So, if their assumptions were only a small bit off (say defaults were 5.0% instead of 4.0%) the debt holders could demand a large amount of new collateral, more than the companies had on hand, forcing them into bankruptcy.

Most venture funds have little or no debt. If they overestimate their return by 25%, that means that they will earn 25% less than expected. They will not, however, go bankrupt.

You are right. I don't mean to say they run the risk of bankruptcy. The amounts invested are only in the millions here (seed companies). However, the rationale that led a lot of risk assessors to view the bundling and securitization process of sub-prime loans as meaningful is what I find to be parallel.

You are also right that VCs and their investors are sensible as of now. It boggles the mind that highly leveraged companies would buy and hold on to high-risk bets.

I like the math but don't love the analogy. In the subprime mortgage market, you're managing failure (how few of our lenders will default) whereas in YC/VC, they're managing for a few big successes. The downside is uncapped for subprime, the upside is uncapped for YC/VC.

I would tend to agree that YC cookie-cutter clones are probably not going to succeed, but there are probably niches that are underserved. One that immediately comes to mind, just from the various discussions here, is the "I want to found a company, but I'm not in the US, and there's no such thing as a company founder visa."

There has been lots of discussions on what YC is and how to emulate YC. I don't think these discussions are wrong or misguided. I just think they are missing an important point which is that we are in the midst of a great generational change of consumer pattern (both for hard goods and for information). And the only way to catch this wave is if you are part of this wave. Being an older entrepreneur (much older than the typical YC'er), I speak for myself when I say that I can only be a spectator and watch everything at awe. But it would be very difficult for me to lead any startup opportunities that exploit this change (at least not by myself).

So I think the key to success for YC is not the incubation aspect nor the micro-loan aspect (both of which exist outside of YC). I think the key here is that the YC'er are encouraged to view themselves as the ultimate "surrogate" customers, that they should lead the charge and they have the right to because they are both technologists (i.e, hackers) and representative of their generation.

"I would tend to agree that YC cookie-cutter clones are probably not going to succeed."

In reference to the web 2.0 genre, or hashed out in other models as well? The cost of starting a company is falling in other sectors as well...

One reason Y Clone-ators may fail is lack of imagination. YC was not handed their recipe from the heavens. If these clones had any creativity, they'd be modifying the recipe to see if their ideas could make it better.

For example, why not a 4 month boot camp preceded by a 1 month crash course in business, presentation skills, etc. I'm not saying this is a better implementation, only that if the clones thought for themselves, they'd be doing more interesting things, which would tell me they were smarter and actually people I'd want to learn from. I'm afraid to take creative advice from someone whose big innovation is copying YC. I think YC's model is better, and it may be a good thing for it to spread, but none of the clones I peeked at have impressed me much so far.

Even better would be a series of two week externships that would give hackers exposure to business problems.

Really? That's what college and working a regular job is for. If you're starting a company, taking two weeks off to be exposed to the corporate world would be worse than a waste of time.

In this kind of forum that encourages entrepreneurship even in the face of stiff competition I'm surprised that many people dismiss the notion that someone could make a better seed funding organization than YC.

There are many successful entrepreneurs in Silicon Valley and elsewhere who would be great startup advisors and inspiration leaders. If they decided to start YC clones I don't see why they couldn't attract great talent. They may even be more successful than YC at generating high returns on their investment. Luck plays a huge factor in startup success, after all...

I'm surprised that the responses here thusfar are negative. Right now there are certainly more companies being funded by later stage VCs than YC knock-offs, so there's obviously a large enough pool of companies that can make it to that next phase. But can seed groups pick them?

I'll just make up some numbers:

Let's assume that the seed investment gets diluted down to 2% before an exit, and let's assume a buyout of $5 million. If we pretend that the only costs of running a seed firm are the investments, with seed investments of $15k, that means one successful at that level would cover 13 startups.

YC seems to be shooting for successful exits of 1/3 of their startups. If a group emulating could even do a quarter as well as YC hopes, then they'd come out ok (using my pretend numbers).

13 x $15K is $180K; 2% of 5 Million is 100K this is 6.6X If YC only had 1/3 exit they would earn 2.2X which is surely less than their total cost per investment

YC looks more like a heavyweight advisor or individual angel than a seed fund in terms of the size of their equity stake.

Oops, I accidentally messed up things by a factor of two. Reworking, this means that a YC clone would need to do half as well as YC.

Movements require charismatic leaders. You can duplicate the $$$, you can duplicate the choice of companies, but can you lead them?

PG as "Dear Leader" ?:-)

Comment that turned into a blog post:

http://www.pchristensen.com/blog/articles/can-ycombinator-be...

His blog is itself an example of the small-neuron phenomenon. If you're running the noscript firefox extension you see there are 26 sites trying to run JavaScript on just this one page.

That would require at least 3 people to walk in, sing a bar of "Alice's Restaurant" and walk out.

great comments. can disqus get these comments into the comment thread on my blog where I posted this question? i love that you are all discussing this and that there are 22 comments here. but i got 34 comments on this post on my blog. it seems that we'd all be better served if there was one thread with 56 comments.

The hard part is not gathering the money, but knowing who to back. That's why there are not a million successful Y-Combinators.

OTOH it is probably possible to figure out how PG and company are judging the people and ideas, and duplicate the methodology.

The world doesn't need a bunch of bad YC clones, but it sure could use a few more good ones. :-)

Paul Graham backs companies that fit into the Paul Graham philosophy. This probably causes YCombinator to miss the majority of possibly profitable investments. I am not criticizing YC here, they are only looking for a few dozen startups each year so it is fine if they miss most of the good ones. However, there is room for several YC clones, perhaps run by other successful founders, that invest with a different worldview than Paul Graham.

If there is not room for a far bigger number of YC clones or angels similarly then this entire method of growing companies is doomed.

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