Sam Altman: ‘Too many’ Y Combinator companies raise money
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Since there is such a high barrier to entry into YC, it might not prove shared equity/UBI would 100% work in the real world. However, coming at it from the other side, it could provide some early clues as to whether a shared equity/UBI could ever work at all. For example:
- Would YC companies cheer each other on with positive peer pressure/be more motivated to knowledge share or would low achieving YC companies de-motivate high achieving YC companies? Would YC companies who fold be allowed to retain their percentage of the YC stake?
- Would high achieving startups bypass YC or be attracted to YC?
- Would every set of new annual entrants into YC be seen as diluting the value of the existing YC equity or additive? Would existing YC companies want more say in the selection process? Would Airbnb, Dropbox, Stripe receive the same percentage of YC stake as new entrants?
- How do you socialize the concept with existing stakeholders (i.e. existing YC partners) who would be diluted?
- Is it better to implement it as a single monolithic YC group or divide it by YC Class?
Assuming ~1500 YC companies with ~10 employees each, that'd be about 15,000 participants, which would be a pretty good dogfooding [0] experiment!
A. If you give the equity to the startups:
1. There is a risk of activist or corporate acquirers getting a substantial share of YC after buying out startups. Contract clauses can eliminate that, and prevent dilution, but value of extended network advocacy is lost too.
2. Do dead startups lose their share? If they do, you would see more zombies, which is not ideal. If they don’t who keeps the equity when founders part ways? If it’s the founders based on equity share - see (B)
3. Competing startups could have shares in the successful one, and potential vote, which leads Oracle/Salesforce type battles. Potential swinging votes during corporate governance, but also potential helpful behavior, which while nice could be seen collusion by regulators at scale. That said, startups win with monopoly characteristics, so that may be less of an issue.
B. If you give the equity to individual members:
1. There is selection bias where alumnae help friends and go through the program multiple times - you risk having portfolio maximization and groups voting buddies in for control over YC. Even if you don’t see clique battles, there will still be: Vote these guys in because they were Stanford alumns too. Over time you will lose even more diversity in the network and a broader network that captures the next wave of breakouts not seen by the less diverse YC will gain speed.
2. The resume stuffing and portfolio padding motif to join YC will be dominant to the “let’s build a unicorn” motif. People who pursue status and do YC as the next Harvard will have more easy access (B1) and more reason to go for it.
3. To boost the unicorn incentive the above equity distribution needs to continue only if you have a startup within YC that is actively growing by certain criteria or has had a meaningful exit for the YC network. Another way to protect integrity of the network, is to allow equity in YC to be stacked only if the person has been a founder of more than one startup still growing or with a meaningful exit. This scenario may be enhanced with some incentive for people who join other YC startups meaningfully, but how complicated a structure will be too complicated for investors in the YC startups themselves?
This is first layer of brainstorming with minimal info.
You'd want to size it to provide enough equity to turn the 15,000 participants into active evangelists of the larger network of YC companies than just their own individual startup.
And yes it is expensive. There are definitely significant parallels in that sense to the larger UBI discussion :)
They already do this, for free. The YC alumni network is a vast resource and a substantial force behind the recruitment of new start-ups.
let me offer one humble suggestion.
1) UBI (or anything similar) in Oakland is expensive. Back of the napkin calculation: $1,000/month/person = $12,000 = you need about $0.5M in capital to maintain that level of basic income without reducing the capital over time (I am applying the usual 4% interest on capital, for passive income - the number might be wrong or might change in the future (see Piketty) but let's use it for now). Instead, UBI in other regions of the world can be a small fraction of it (I can easily imagine 1/10th of what it costs in Oakland = $50,000).
2) You have ~15,000 YC alumni. Ask each one of them to commit at least 50k each (or multiples of it), to offer UBI to 15,000 people in a developing country. In exchange for that, you might give them a tiny share of YC (not equivalent to 50k, but perhaps a smaller amount). It shouldn't be seen as a great investment for them; it should be instead done mostly out of altruism.
3) UBI provided to 15,000 people (or possibly more) is the right type of experiment, at a big enough size. It's essentially a big village, or a number of small villages. It's also good to see this applied in a developing country: the impact can really be seen and observed properly.
4) I am pretty sure that there would be a number of volunteers willing to commit their time to observing and measuring the experiment, wherever it will be (however, I suggest to pick an English-speaking developing country, as it makes many other things easier).
The rule is supposed to be that you have a high probability of withdrawing $X per year, each year, adjusting for inflation, where $X is 4% of your initial starting sum.
UBI only works if it's fairly 'U'.
If you give UBI to 'one village' - that village will have tremendous leverage over the surrounding villages. Any rational application of commercial knowledge will - knowingly or unwittingly - drive competitors out of business, and that 'UBI village' could theoretically come to control a lot.
It only took a very small marginal advantage in transport costs for Oil companies to put others out of business and to create massive monopolies.
If you run a little 'sim village' experiment on that, you might find the UBI village owning all the regional real-estate over time and just extracting rent.
Another way of saying: a consistent, stable fixed income, even a not very big one, can be a powerful asset.
For example if you were to pay taxes in gold: https://www.forbes.com/sites/briandomitrovic/2014/09/08/tran...
If we all behaved conscientiously and responsibly, almost all of the world's problems would disappear.
A company can pick its most favorable market to make a profit (people with money to invest then boost the companies with most favorable returns). Government is a silent partner in all commercial transactions because it has to serve all of the other citizens too at a basic level (it can't just pick and choose). Non-profits get a pass on taxation by the government to serve the markets missed by profit-makers.
Unfortunately such an approach is not shared by the majority of well-heeled capitalists who are interested and available to supply the next round of funding for the growing number of the very entrepreneurs that he helps to get off the ground. This puts him in a unique position to see the effect first hand and looks like it's getting him started at a young age seeking solutions which could maximize the return from scarce resources (or in his case more abundant financial resources), one of the most important of which is to reduce the suction of pure greed from the mix.
Seems to me it is exactly that suction on what is supposed to be the most prosperous and promising nation that keeps there from being enough to go around anyway.
Then again I have always done the math a little differently than most economists, but I sure have been doing it a lot longer than the vast majority.
So I think it would add up better for a greater number of less privileged citizens if the bar were lowered for entrepreneurs and raised for follow-up VC's first and foremost on the greed factor itself, and this is something that YC for one can implement on it's own, at least within its growing sphere of influence. If Sam is not yet capable of accomplishing this just by saying the word, I hope that does occur during my remaining lifetime. This could be gradually accomplished, and if momentum is not lost along the way, taken to its logical conclusion from this one seed it could end up becoming more universal than anything anyone has seen before.
It's impossible to put numbers to the difference between committing resources to a less financially capable entrepreneur with an apparently weaker idea and market, versus an alternative that rings all the bells for the majority of VC's even when you try to include greed as the realistically destructive factor that it has always been.
Therefore you just have to do more advanced math without using numbers or prosperity will never become as universal as it could be.
When you leverage greed, you are only going to get more greed in return.
So it might be more accurate to restate this little problem as "Too many greedy VC's are investing in otherwise promising YC companies, and that keeps some of the most ideal investments for less greedy VC's from moving in the direction of YC to begin with".
That would be most logical, Captain.
You are assuming those variables have any correlation whatsoever, and I’d argue they don’t. If YC was to decouple them in their decisions, they would see a lot more returns. If they could provide more info, so VCs could decouple them you would see a new golden age for Silicon Valley. Less financially endowed entrepreneurs who persist nonetheless can have resourcefulness or insights into bottom of the market ideas that can make a huge return with small improvements (Whatsapp). They often lack the wealthy network for similarly less burdened cofounders and investor intro and advantageous information often distributed at top schools with most affluent founder candidates (each top school takes pride in sharing nonpublic insights with their disciples from VC network tips, to the personal preferences of each judge in the supreme court).
YC has the network to beat all advantages provided by pedigreee schooling which means they can venture far beyond Stanford grads and invest in less trite and privilidged ideas that have actual potential to change the world. The founder disadvantages could be mitigated with a standard toolbook and the network. YC could play Moneyball for early stage startups, but they don’t seem to just yet.
I was curious what this could mean in reality so I did some back of the envelope math. (As a disclaimer - I have no inside knowledge of the performance of YC's portfolio, so all this math could be wrong.) YC Summer '17 had 294 founders at 124 startups. Let's say there is an Airbnb ($30 billion to common at liquidity) and three smaller but still substantial exits ($1 billion, $500 million and $250 million respectively, same terms). The rest of the class is a wash after expenses and fees which leaves $31,750,000,000 to split up. On a side note, every time I do this math I'm reminded how the ten figure exits really carry the rest of the valley along for the ride; whether there is one in your class or not is a roll of the dice.
YC keeps 4% for themselves (out of which they generally fund expenses and management fees) and puts 3% (with no carry) into the common class pool, divided equally by startup (not founder, to avoid perverse incentives around cramming). In other words, the YC Summer '17 class collectively owns 3% of every member company. After ten years the 3% has been diluted down by follow on rounds to 1.5%. At liquidity, the fund returns 1.5% of $31.175 billion: $467,625,000. Divided among 294 founders equally (which it wouldn't be, as mentioned above - but for easy math) that's about $1.5 million per founder.
If you miss the class with an Airbnb, Uber, or Snapchat and end up with (merely) a few traditional unicorns, the returns decline 90% to a couple hundred thousand dollars per founder, a.k.a. not that exciting financially. So it seems like a gamble.
Still, I like the spirit of the whole idea. As a lifelong entrepreneur who hasn't quite pulled the trigger on applying to YC this might push me over the edge. It would definitely feel like being part of a grander experiment of some kind.
This is, of course, largely how firms trading with their own money work, but not historically how VC firms operate.
I also don't see how that's enough money to tip the scale.
For reference, we started offering the 401k before our A round. At that point, we had raised $2M and were still under $1M ARR run rate. Based in the Bay Area.
I don’t get the narrative that startups pay very little or don’t offer any benefits. We pay competitive comp and offer good benefits to get great people. We’re an enterprise SaaS company, so maybe pre-revenue or consumer or hit-based companies are different. But even our first employee was well compensated. Though at that point, my cofounder and I were paying ourselves well below market and were living off savings.
We're entirely bootstrapped, but we provide a recurring service and it's taken me 2 years to hire our first employee. I don't think most companies can wait 2 years after launching to hire an employee (We couldn't even.. I had to bring in short-term help on numerous occasions).
We went just over two years in our venture-backed company before hiring anyone. Built the business to nearly $200k ARR. Everyone we told was amazed. But if 2 people can’t operate a business with only $200k top line, you don’t need a complex financial model to know that your economics aren’t where they need to be.
So, yes, you need to have revenues and cash before you can hire and pay salaries. 401k is only a little further out than that.
Take a percent of equity, add it to the "YC Mutual Fund", and return equal value in the form of "YC Mutual Fund" shares at par value.
Also, members of YC are members for life unless they get excluded. It doesn't matter if their company fails.
- Companies raising money just to pay inflated (yet still insufficient) labour costs
- People who would love to work for startups but realize that most startup salaries barely gets you a studio apt, pretty cool until you have a family
- Companies who "cant find" talent
Is it any surprise companies need to raise so much funding, esp when operating out of the Bay Area?
I understand that the SV network is a real and powerful thing, but holding all else equal (indulge me), wouldn't it make the cost of startups more attractive for all stakeholders if an alternative, viable network were in Buffalo or Nashville or Boise or wherever? Is it just a matter of lack of coalescence?
> doing startup things
I believe the network in the Bay Area is valuable. However, I don't know concrete examples of benefits that being based in the Bay Area brings. From my perspective as an upcoming newgrad, the companies in the Bay Area are great, but their location is decided by the founders/stockholders/executives. I'll try to see what are the pros for these people.
Off the top of my head:
- Nice weather
- Proximity to LA, meaning access to nice events or parties
- Proximity to friends. People who you've met through events in the area
- Proximity to other startup executives to exchange thoughts on company matters. (The bigger the company to share thoughts with, the better)
+ Same for counselling investors
- Proximity to investors or possible investors
+ Tangent: if your connections can afford to live in the area and are relatively comfortable, then they might have many thousands of dollars to spare.
- Proximity to Stanford, Berkeley, and other big name universities
- Culture that appreciates tech, such that many people like to discuss new technology
I can't think of other big benefits of being based in the Bay Area from the perspective of the biggest shareholders of a company/founders/executives.
I don't see what a clueless new grad, wildly speculating, adds to the discussion.
Especially as you say the weather first, while the real reason is probably money, money, money, money, money.
Note: there are lots of successful small startups that never explode..
I suspect the answer to both of those questions over the medium-term is yes; if the entrepreneur's life (esp. their own network!) is already in the Bay Area (with the fallback being working at a high paying tech company here), there's a lot of cost to move to these lower cost areas. Even more so if the entrepreneur has family.
However, less tech intensive start-ups (say operations focused) may very well start popping up in higher numbers outside the Bay Area.
(1) Branding-- many companies actually maintain a faux office in the Bay Area because having a Palo Alto or Menlo Park address makes you look smarter or more legit.
(2) Investors-- talent and opportunity is everywhere, but smart tech investors are super-concentrated in the Bay Area. The further you get from it the less knowledgeable and more conservative the investment climate becomes.
In the long term I think (1) will fade and (2) will get disrupted by crowd funding.
> inflated (yet still insufficient) labour costs
This does not match reality since most startups in SV pay very very very little. In many cases barely enough to live with roommates (and forget having a family)
This is absolutely not true in any way. They sometimes pay less because they try to trade options for salaries but that’s becoming less popular given the lack of cashing out and people’s better understanding of the economics of it.
You can get low to mid six figures at a startup easily... which absolutely does not match your description
Mid six figures? $500,000? If that's what's easy, what are they paying above-average people?
If we’re saying experience and training are things that exclude “easy” then we’re in crazy town.
Firstly, mid-six figures is 500,000 -- please share which startup's comp range is in this area.
Secondly, you cant pay rent with options.
Startups are paying a lot because they're raising a lot of money.
Round and round we go.
1. It's unclear how much additional housing will drop prices. There's enormous demand and denser housing costs more to build per square foot. Realistically, we're talking 10 to 20% drops as upper bounds of cuts (think Seattle costs)
2. [Edited to clarify price driving] These companies have decided to be in the bay area for some reason (mainly talent pool?) At that point, you are competing with very high paying companies. (Top prices for senior eng being set by companies like Google which pay $300k TCO; Series B stage startups need to do $170k+ cash to be competitive.. while not everyone can command these jobs, land costs are being set by them)
3. Sure, there might be some people excited enough to take a pay cut. But I suspect a lot of the problem is how poor the expected outcome is for first employees. Companies still seem unwilling to give out equity levels that justify pay cuts (i.e >10%)
30% of base?
That’s almost greater than the US gov’t’s cut.
From various data points I have, average is around ~33% post-tax, 22% pre-tax of base.
> Consider how much of the pay of well-paid big Corp talent goes to real estate rentiers in the Bay Area.
For sure, it's a lot - but when all these high payed folks have such high value of time, housing in areas near work/fun places are going to be bid up.
True. But for people looking to do something meaningful, which they may find spot-on in a startup, you are competing with cost of living on the downside, not just alternate employers on the upside.
Later YC: Expands significantly due to the added prestige, and now performs much closer to the mean.
Today: Sam says that "too many YC companies are getting funded".
Is this fundamentally different from a mutual fund that yields 25% above market for a few years in a row and then performs closer to the mean for the following decade? In the mutual fund game, it's very common (hence Vanguard).
Surely during those top performing years the mutual fund managers strongly believe that they have deep insights that are the root cause of their funds' performance. But the following decade proves otherwise.
It’s an interesting theory.
If you are good at picking winners for some specific type of startups, but there are only 10 of them per year, then you can't grow your fund from 10 to 100 investments per year and keep the same returns.
If you discover a clever arbitrage opportunity or market inefficiency, but there is only 1M of trades happening in that market, then you can't dump 100M into the strategy and keep the same returns.
With early stage that is not an incentive, and the merit lines are so much fuzzier (is the fund adding value) and for smaller funds - how do you maximize odds of finding and funding the few winners. With increased late stage funding, the early money also get less priority, not to mention the delayed liquidity (unless they can sell to later investors).
Some real perks of having YC in the startup ecosystem is that it:
1. Grows the "seed variety" and "size of land planted" to get more founders with broader backgrounds and in more disciplines to build startups. That dramatically increases the odds of an unintuitive next-big-thing sprouting in Silicon Valley.
and
2. Fertilizes the soil - as YC alumnae help each other and can strike better deals or give each-other an early lift.
Demo day pressure-cooks many to fail or fly fast, and if too many are raising money means they is either a selection problem or a program decision to make:
- Startups picked are too early, or in less VC-worty sectors that need more incubation, or founders don't always have an incentive or plan to build a sustainable business beyond doing YC and raising a lot of money for bragging rights. They can easily an expectation that fundraising happens in 3 months, or narrow the selection of RFPs to later stage more immediately provable.
- Or YC just lets startups pick any demo day they want, but has to carry an ever-increasing load of zombies, or startups too-niche to accelerate with every increasing demand on partner's time. The latter helps both 1 and 2, but it has to be done in a sustainable way. Use Startup School as alumnae-expandable program for on-going incubation?
Even after ten years, that early success mutual fund won't be investing in entities that actively try to appeal to them, specifically.
Contrast this with YC, there is probably a whole ebook lurking somewhere in the depths of the Amazon catalog that claims to coach would be founders in how to best pitch to each individual star VC.
Founders are already winning if they only get funded, but investors need an entirely different kind of success. This misalignment (the funders' success is only a subset of the founders' success) is what I think Altman is talking about when he says "too many YC companies are getting funded". At the point where the two success metrics do not overlap (stretching the runway of an eventually failing startup for the maximally viable founder lifestyle), funder and founder are adversaries, which makes it a different (more difficult) situation from mutual funds.
Aren't the board members supposed to make sure that the incentives are aligned so that all parties involved share the same goals and timeline?
Sure, a founder may manage to collect a salary, but I'd guess most founders could earn more being hired by someone else.
I see it more like Stanford. Become prestigious, then you get all the best folks, many of whom would have been successful anyway, but you still add value as well as serious signaling and a rich network.
Just they same, prestige or not, track record or not, it's also possible that not all ideas / teams were the right fit for the YC program. That is, yes within YC they were bad bets, but that's not to say things won't change once they're away from the VC dynamic.
Finally, perhaps he feels that by others putting money into what YC might consider a lost cause, those others will eventually realize what YC realized? But now the losses of others could be "blamed" on YC and thus tarnish the YC brand going forward?
It's hard for 3rd parties to discern this, when YC has given the very companies being criticized seed money. Pair that with the competitiveness between angels and VCs, plus FOMO; and it gets even harder.
Hear that often enough and loud enough and the shine that is YC's will be less. Clearly YC / Sam benefits from being up the food chain not down it.
And understandably they don't want to label startups on graduation.
I wonder if it would be effective to tell YC companies that they can participate in a demo day, but it doesn't have to be the one for their batch -- so a company could wait and join the following cohort in order to avoid the stigma of being "the company which couldn't get funding at demo day and is now going around to VCs one by one".
Besides that after that year the start-up will likely be out of runway and so in a much harder position to negotiate from.
If I were to run a YC backed company (which I won't be doing) I'd definitely use demo day to it's full potential.
I get the regulation argument, but protecting stupid people from themselves is a losing battle. Everyone will know not to mortgage your house to invest in a new startup the same way everyone knows not to do heroin. Some people will anyway. But they already can participate in ICOs illegally, so it's a pretty decent analogy.
You can defer your demo day.
This definitely isn't healthy, and I'm glad they at least recognize it.
This is unhealthy and could not last for too long.
It's more like they want to fund 1000 startups so that 100 are sustainable.
We don't hear moonshot or billion dollar market depth or hyper growth as much as we used
Anyone feeling the same?
That's actually good, not bad. 100 companies that work out long term are much better for the founders involved than two that are unicorns.
I think in PG times, the idea was: aim for the moon, it's hard but if it doesn't work out you'll find plenty of well paid jobs.
But now the market is so overcrowded that if you aim for the moon and fail, you'll mostly look like moron, and will have a hard time finding a gig.
Just gut feelings though, I have no numbers nor people to talk to.
On another note, it's those investors money to waste, if they want to burn it on companies that don't make it then in the long term this will self-correct because there will be less money available from such investors.
This is such a strange sentiment. YC has invested in all of these companies, then they pooh pooh others that follow their lead?
One useful counterfactual is thinking about what our comments would be if Sam said "more YC company should raise money immediately after the program". I think it would be very hard to defend that every (most?) startup is ready for such a commitment at that very specific moment in time.
It doesn't mean every one of them is good. They don't know which one is good with the data they had, but are wise enough to accept they know little and instead chose to invest in several.
Y Combinator prefers to get 6% of more companies to increase the chance of winning the jack pot.
I think Sam's point (or concern) is with the so-called "Startup-Culture". There's a big focus on...
-1 Presenting a basic idea
-2 Get into Y-Combinator
-3 ???
-4 Profit
Or, I think that's how startups are interpreting what being an entrepreneur is all about.
I think Sam's point is that the product shouldn't be a placebo that happens to raise money. Or, to better say it, you are not here to be good at fundraising. You are here to be good at making a product that will (wait for it) change the world.
I think the success of those so-called unicorns (Dropbox, AirBnb, Twitch, etc.) had caused this problem. There are a lot of investors that are willing to spend away hoping for something to stick and to become profitable. On the other hand, there are a lot of startups who's soul purpose is to be good at selling a 'not fully realized' idea, raise a ton of money, and then cash out. Oh, and have 'fun' while doing it. Why? because it works!
It reminds me of the Hubspot videos with Daniel Lyons. https://www.youtube.com/watch?v=RVSLLvHceSA
Now, if someone was banging on my door desperate to give me a crazy amount of money with almost no strings attached to but into my 'shell of a product' I may consider taking the offer. But doing so may benefit me, but could cause harm to those who really have a great world-changing idea.
Externalize all your costs, keep all the revenue!
There's a lot of room for interpretation there about short term vs long term gains, the investor value of creating sustainable businesses, and of course the biases the manager's own political views inject into their decision making. But he or she must still act with investor ROI in mind by investing in the companies they honestly think likely to succeed and then help them do so. To fail to do so would be to face investor revolt and possible lawsuits, and undermines those hard working entrepreneurs who take their companies in different (and maybe more profitable) directions than their investor had in mind. I don't like that.
To rephrase what I originally said, I prefer my investors to be economically rational in their motivation, not political. Hence I have never sought YC investment under Mr. Altman, nor do I intend to. Thankfully I've done just fine without.
If you present neither, your opinion doesn't amount to much.
I have a lot of ideas. Most not as good as some by my expectations but the sub set that would look neat to investors early on barely overlaps.
Maybe YC should use the "void" to design the people they would like to see on this world. A product, after all, shapes the user.
-G
There are lots of ways you could spin it, but how can Sam justify such a statement when they've invested in all of these companies too?
Also, I'll have some serious respect for YC if I'm not banned for this comment =)
edit: You gotta admit, my point isn't groundless. I would disagree that it's trolling since HN is owned by YC but if you're right about them not using their position to silence criticism I respect that