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As someone who went through YC and met PG while he was still actively running it, I can tell you that at least in our batch he was 100% spot on about who was going to do well. He had a tendency to spend his free time with the same individuals who ended up doing phenomenally well. It would be easy to be dismissive about this and say something about doubling down on his best investments, etc. But during our batch many of those companies had not yet become the clear cut winners that they are today, and instead only turned into them a year or so down the road. One of the best companies from our batch is Flexport, and PG had been super impressed by Ryan Petersen even before he was officially accepted into YC [1].

It's pretty clear in hindsight that taking note of who PG was hanging out with was a very investable strategy. In fact, one of my batchmates had some money to put into other companies in our batch, and when he asked me for my opinion of who to invest in, that's exactly what I told him. I just did some quick math and would estimate that his ROI today is somewhere in the 1,000x range.

I am not the only who figured this out - while this wasn't quite as much of a factor during my batch, nowadays there is an entire cottage industry of YC-only funds who invest only during YC demo days. As you can imagine, the way they differentiate from each other is by how much insider knowledge they are able to accumulate leading up to demo day (I am not implying that the partners ever leak anything, but these funds are very motivated and they look for all sorts of signals). One such signal is to track all other investors around you, and a well-connected angel can single-handedly increase the valuation of a startup (which explains why they manage to get in before demo day and at a discount).

I have to say though - while the success rate of these YC-only funds is likely good enough to make them quite profitable, none of them come even close to what I observed with PG's ability to pick the winners (which makes sense, since a lot of other people have tried to build accelerators and none of them come even close to YC).

[1] https://youtu.be/syoqjYLDs48?t=1169

It's pretty clear in hindsight that taking note of who PG was hanging out with was a very investable strategy. In fact, one of my batchmates had some money to put into other companies in our batch, and when he asked me for my opinion of who to invest in, that's exactly what I told him. I just did some quick math and would estimate that his ROI today is somewhere in the 1,000x range.

That’s hilarious. Cheers! I never thought of a person’s movements as an investment signal, but in hindsight it certainly must’ve been.

A strategy as old as hedge funds themselves: https://www.bloomberg.com/news/articles/2019-07-02/hedge-fun...

That sounds like a self-fulfilling prophecy: If a lot of investors and angels want them succeed, they will succeed. I doubt that it is always hard work and passion that make the difference in whom to invest, I think there are other variables that are less talked about (e.g. sympathy).

> That sounds like a self-fulfilling prophecy: If a lot of investors and angels want them succeed, they will succeed.

This is nonsense. VCs do not have that kind of power to will something into existence. They can pour money into it, but they can't make a company successful. And if they continually spend more than they make...they don't get to stay VCs for very long.

But how many of startups are self-fulfilling prophecies? Runaway success? Where by "success" I mean growth and ultimately good return for investors. The way it's achieved is by... perpetually operating at a loss, burning VC dollars from follow-up rounds. It has that nice pyramid scheme flavor to it, where the final investors - or the public - are the ultimate parties left holding the bag. Such a scheme can indeed be willed into existence if enough push is made to set up an initial feedback loop.

I think what you're describing is WeWork and Theranos. So, sure, they happen, but they get found out eventually, and in both cases, they were found out before they went public.

Looking at the list of "Former Unicorns" on this page [1], I can't see many that fit your description. Sure, there's a handful, inevitably, but it's far from the norm. Most of them have grown into real businesses making real revenues. And sure, some of them may be still making losses but that's a valid strategy where there is still growth potential in the market.

Granted, Uber is a big question mark; it remains to be seen whether they will ever turn out to be profitable. But everyone knows what the strategy and the bet is, it's just a matter of waiting to see if the bet pays off. But no serious commentator could dispute that Uber's founders and present executives are talented people, building a company of substance.

So, if the claim is that it's commonplace for unskilled/disingenuous founders to build huge, successful-seeming companies just through huge sums of VC money being pumped in, then exiting and fleeing the scene before they get found out - there don't seem to be many real examples of that happening as far as I can tell.

[1] https://en.wikipedia.org/wiki/List_of_unicorn_startup_compan...

For your self-fulfilling prophecy theory to be valid, venture capital would have to be able to ensure that your contribution margin is staying constant. Eg: if you make $1 per sale in CM at $1m in revenue in 2020, will you also make $1 per sale in CM at $100m in revenue in 2025? The reality is that unit economics change massively with scale and with time, and only a select few companies get the contribution margin to be constant (and even fewer achieve a constant contribution margin that's in the right ballpark). Therefore, venture capital can accelerate a successful company or delay the demise of an unsuccessful one, but it won't change the eventual outcome.

If you need mathematical proof for this, just ask yourself how many net new customers would you have to add to a business every year if you are at $100m in revenue and have an annual churn of 10%. Yep - you'll be running out of your TAM pretty quickly at that rate. And then add to that the fact that each new net customer will likely keep getting more expensive to acquire [1]. To get to $100m and stay there of even grow beyond that figure, the business fundamentals (first and foremost: churn) need to be good.

You can also think about it from this angle: why is it so rare for the same founder to continuously churn out one IPO after another? With each next attempt, they should be getting better at it and have more people willing to support them. The answer is - it takes a ton of stars to align correctly, and money alone won't fix your unit economics at a moment in time, let alone over many years and 100x growth in revenue.

[1] https://andrewchen.co/the-law-of-shitty-clickthroughs/

Or he makes winners rather than picking them by giving them extra attention, recommending them to fellow VCs and being willing to go further on the whole "disruption" (Aka law breaking) front for them.

I was in the batch with Airbnb. Every batch has practice demo days, and then everyone votes on most likely to succeed. Airbnb had like 3x the number of votes that number 2 had.

Did anyone else in your batch succeed?

Yep, obviously not to the same degree :)

wow! what do you think made them standout so much?

I can only speak for myself, and it was a feeling of “oh this is a great idea”

Thats pretty fascinating. I think PG made it pretty clear that none of the VCs thought airbnb's idea had any potential at first, I guess somehow they managed to turn it around, at least within the YC cohort

Yeah I remember Chris Sacca at one of our Tuesday dinners saying something like “sorry guys, don’t do this, someone is going to get murdered”

Which - to be fair - might have scuppered the company if it had happened early on by chance.

Ps Chris was my favorite speaker - he’s the only one who made sure to tell everyone to chill out, take care of your health, sleep, etc.

Sacca's response is interesting because it highlights something very cool about the gig economy: the commoditization of trust.

People are actually far more benevolent than people think. The number of actual murderers and other miscreants is such a small number as to be negligible for the purposes of renting out your home, your car, getting food delivered to you, etc.

You could also argue that this was solved "along the way" and also not really clear back then. I am an AirBnB host myself and were also wondering about this recently and there are several factors today which contribute positively: Provided as a (technical) solution by AirBnB (Recommendations, IDs, etc.) but also how the internet/web evolved as a hole - A place that somehow manages that strangers meaningfully/safely interact with each other. This was never clear and also an uncertainty for Wikipedia (earlier) and now for AirBnB in a different and new way: Inviting strangers to your house.

Part of this is because these companies associate individuals with their real world identities or credit card numbers. Uber does criminal and driving background checks.

My first interpretation was that the hotel chains would have them murdered mafia style!

Well thats one way of interpreting his comment Lol

And to be fair, Chris was right[0].

In total the parent comment exemplifies how Chris values and honors life over profit. That’s a tough internal struggle in this industry and is probably why he dipped out a few years ago.

[0] https://www.independent.co.uk/news/world/americas/airbnb-ban...

I suspect he knows as much. At least, from other writings, he seems to be self aware.

But you have to remember that his business depends on raising money from people that must buy in to the myth that he does have that special ability to spot a winner on day one.

Ironically though, successfully making people believe that you are able to pick winners actually does make the people you pick more likely to win. Being selected by YC not only allows you to raise truckloads of money more easily, it also gives you a boost when making connections or deals with other companies, hiring the best talent, etc.

That's the incubator/VC model - spread enough little bets around that you land on a few winners that result in almost all of the fund's returns.

And it's certainly possible that an experienced builder and investor like PG learns some heuristics and tricks along the way to increase the odds of landing on those few winners.

That's basically what this article is about, recounting some of those of heuristics that led to YC investing in a startup whose idea they originally didn't even like.

It's not about spotting that one survivor, it's about spreading enough bets with effective enough heuristics to ensure a high positive overall EV of the aggregate of all your bets.

https://en.wikipedia.org/wiki/Survivorship_bias

"Survivorship bias or survival bias is the logical error of concentrating on the people or things that made it past some selection process and overlooking those that did not, typically because of their lack of visibility. This can lead to false conclusions in several different ways. It is a form of selection bias"