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Comment by pg | Hacker News Reader

"Another metric would be valuations — are companies becoming more valuable over time? — but we also don’t have good access to that."

That is the real test, and we've published those numbers:

http://ycombinator.com/nums.html

(The number I quoted in June is now out of date. The combined value of the top 21 companies we've funded is now slightly over $7 billion, and the average value of all the companies we funded up to summer 2010 is thus about $33 million.)

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PG - What is the median valuation of those fundraising rounds? Averages are not a great metric because the few big valuation winners (Dropbox, Airbnb) skew the average big time and bring up the "normals" a ton.

If Airbnb is valued at $1B and if there are 200 YC alums who've raised, that adds $5M to the "average valuation" of each YC startup. (I know those #s are not right but just for purposes of the example).

Those median valuation figures available?

I assume the median valuation will ultimately be zero. I.e. I'd be delighted if the success rate of companies we funded was as high as 50%.

For funding, the median is less useful. I wouldn't be surprised if the median series A returned a loss.

If optimizing for the median outcome is your goal, VC funding is probably not a good plan.

Not sure I understand your point. I'm asking for median valuations as averages often distort reality.

Plus, "median series A returned a loss" - huh? Can you clarify?

If 5 companies have valuations of $5, $10, $15, 20, $1000, the avg is $210 million. The median is $15 million. I'd argue the median is more representative of valuations received than averages. And if you're a startup founder, the median is more useful to gauge the program as that is more likely what your valuation will be near than the average.

Average is the important metric in startup investing, because the distribution of outcomes is extremely skewed, and the median is likely a net negative outcome at re series A stage. It's those few blockbuster hits that make VC investing work.

New founders might care more about the median, but big investors, not so much.

Absolutely. But it seemed the original TC article was trying to suggest which program was best for startups. So if trying to figure out which program is better for general partners/limited partners, I agree average makes sense. For startup founders, median is what matters.

Fair. That also depends on whether you're the type of person who wants to make something hugely impactful. If you are, average might still be better.

Out of a group of 10 companies, the average YC company has a top valuation of about 220 million. Paul does not give the distribution other than 'a power law' distribution.

  >> If 5 companies have valuations of $5, $10, $15, 20, $1000

A more likely range of valuations out of 10 companies is: $0, $0, $0, $0, $0, $0, $3M, $11M, $55M, $220M

The YC average is quite decent. The median result is likely to be $0.

If this probability distribution scares you, it is time to rethink startup companies.

The usual equation for startups is "This has a small chance to change the world." Fiddling around with the non-world-changing outcomes is premature optimization, since the best exits come from failing to change the world and merely creating a viable business (look at Paypal; they wanted to upend the world's financial system, and instead they had a billion-plus exit facilitating Beanie Baby trades).

The median is more representative of what a founder's expected financial return is, but many folks aren't optimizing for that. If they are, you need to look at the off-balance-sheet asset: the six-figure job offer from Google, FB, MS, Yahoo, etc. etc. etc. that is generally available to people of the viable startup-starting caliber.

Since the mean startup return is so driven by a small number of massively successful outliers, it makes economic sense that the median outcome will not look so great. (If startups presented a good chance of being as good as the next best option, plus a small chance of F-U money, nobody would work anywhere else.)

The median probably matters more to individual founders. The average matters to rational portfolio managers. As far as I know there is no portfolio strategy that rewards you proportional to your median investment. So, saying that one summary statistic is more representative than the other is only reasonable if you have some implicit reference frame.

I assume that the objective measure that we ultimately care about is exit valuations, correct?

Are there any studies that demonstrate the amount of correlation between money-raised and exit valuations?

With that information, it would be easier to judge how informative it is to use money-raised as a surrogate for the true objective criterion.

Are there any studies that demonstrate the amount of correlation between money-raised and exit valuations?

Yes, many. That's what any study of the returns of venture funds is measuring. And since the returns of the top venture funds are consistently at least positive, we can be fairly confident that $7 billion is a lower bound on exit valuations.

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