Waiting for the Accelerator Bubble to Pop
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This was nothing to do with any overall trend. It was just because YC's then structure couldn't deal with so many startups.
The other thing this guy doesn't seem to grasp is that we didn't decrease the size of something homogenous. This is not like a restaurant cutting back from 84 tables to 46. Essentially we picked the best 46 out of 84. And in any group of 84 startups, the top 46 will have 100% of the success.
There are so many of these things now that I wouldn't be surprised if a lot of them die off. But if that happened I don't think it would affect us.
I think he's said in many article, that, in fact, the vast majority of the returns each session will come from only one or two startups, and he certainly isn't able to identify those two in advance.
(Not doubting, honestly curious.)
they are not simply complements.
But you're right that this is a perilous move. We only did it because we had to, and I'd like to edge back toward our old approach now that we can scale better. We'll probably always have a tighter filter than we used to, though, if only because some of the techniques we learned for predicting failure seem very useful.
YC's scaling back of class sizes wasn't anything to do with the quality of the cohort dropping, but rather due to YC's ability to handle a cohort of that size.
First-time startup founders tend to make the same mistakes as each other, and that's one area in which it's easy for accelerators to add value (some do and some don't).
Clearly some accelerators are better than others, and some will undoubtedly fail, but this article doesn't really provide any compelling argument for it.
As was said at the time, the portfolio effect requires investing in many startups to diversify risk. Most startups are high-risk investments that will obviously fail. And only extremely qualified investors should invest in startups.
One major issues with all these accelerators is the mentors are increasingly less qualified and experienced to give advice. The other major issue is the startups themselves are not focusing on actually making anything people want, but rather focusing on raising money. Paul Graham said as much at Demo Day for YCS12, where the startups were prohibited from speaking about fundraising efforts: http://ycuniverse.com/ycw13-likely-less-than-50-companies
a) raise seed money from an angel
b) develop a mvp, show some traction and raise money from VCs
c) bootstrap a profitable product
or d) go to an accelerator
from my expirience almost all accelerators have will present you with a bad deal (say 10-20k and office space) and claim to provide you with more value by helping you out with their expertise in other areas. In exchange they want a 20-30% equity cut. BUT the value add through their network (for most accelerators) will be negligible that's why it is a bad deal. Every other option is better:
a) Angel -> can be a vocal defender and loyal partner or early adopter of your product
b) VC -> You get money at a fair valuation
c) Bootstrap -> Keep all the equity and stay hungry
So for what it's worth I think reducing the number of accelerators would not be a bad thing for the startup eco system.
YC originally gave something like 10K for roughly 6%, giving a rough valuation in the 180K range. HackFWD is giving, for two people, 110K for 30% which implies a value of roughly 370K. On the numbers alone the deal isn't as bad as it sounds.
I think a top FB/Google tech lead who knows investors who leaves to go do a related startup probably doesn't see as much of a bump in valuation from YC as someone who just dropped out of U of Michigan and is living in Ann Arbor, but there are plenty of other reasons why giving up 2-10% to YC is more than worthwhile.
I suspect there's a strong selection bias in YC and other incubators (take dropbox, for which Drew is an MIT grad), which probably makes my request for numbers somewhat foolhardy.
YC has gotten pretty big now relative to a certain part of the startup ecosystem, but look back in 2005-2008 for when YC was smaller, and the success rate of YC companies vs. non-YC companies of that time. It seems pretty good, which warrants the valuations.
- Just entering YC will generate promo for your product, it will put you in-front of the eyes of thousand of tech focused people.
- Free job postings on HN
- Incredible alumni network of actually successful founders
- Demo day will be covered by major news outlets and attended by lots of investors
- 150k of convertible credit [1]
- Only 10 percent don't raise any money after graduating [1]
- 90% raise an average of 700k USD [1]
- "The average valuation of Y Combinator-backed companies, according to co-founder Paul Graham, is $45.2 million." [2]
Looks way more valuable then 170k of dumb money to me.
[1] http://blogs.wsj.com/venturecapital/2011/02/01/y-combinators...
[2] https://en.wikipedia.org/wiki/Y_Combinator_(company)
EDIT: I'm not saying HackFWD is dumb money, with regards to money smartness they are definitely better then most other European accelerators. My original (GP) statement is not about HackFWD but accelerators in general.
I'm not saying there isn't a value-add to YC, but rather that its bad to assume other programs don't have value.
YC arguably made a mistake for many companies by going from 20k to 20+150k, because with 170k you can waste a lot of time and also there's a lot left to fight over if it fails early. This is mostly why YC went to 20+80k now.
I think the right thing is probably 50-100k plus a low-hassle way to get another 250-300k, and then 1-2mm. So, something like YC plus non-stupid early investors and something like a raise shortly after Demo Day. (If I had a 10-20mm fund, I'd love to fill in the 250-300k gap)
To put it different, you can throw billions of dollars at a company, but they'll still operate in stress mode if you tell them a demo is due in a few months.
What they should have done is extended the program length while giving more money.
There is a strong bias toward "having launched at Demo Day". If I had two things to work on, and got into YC, I'd absolutely pick the one I could get launched before Demo Day.
There are some companies which think they're type 2 but really have elements of type 1, and should do those elements first. (which is kind of what my company did; we wanted to do generalized secure/trustworthy cloud computing, and should have focused on specific applications of that technology, which is what we're doing now)
It's probably a net win for society and for an accelerator if they push some of the "fake type 2" into type 1 even at the cost of excluding some genuine type 2.
An easy hack for YC would be to have companies accepted into YC but let them choose to defer until the following Demo Day. You do need the initial 20-50k ASAP to get corp formation and other things done on a good foundation, but most of the "genuine type 2" companies are founded by people who can float their own living expenses for a year or two (or do very low time commitment consulting to do so), so it doesn't need to be more money.
YC is basically 6-7% now, and bumps your valuation by (what appears to be) >100%, so it's a no-brainer for that reason.
If you have the pick of the best people, you don't need to take a big cut to show a return.
I saw one accelerator in the UK that takes a 75% cut. (Not joking).
I have a very different perspective to offer. I live in Pakistan where there is an energy crisis so serious we don't have electric power half the day. It is in these challenging conditions that we are trying to establish ourselves as a tech startup. Perhaps this is not such an issue in SV but incubators can play a very crucial role in places where the conditions are not so ideal .
For example the incubator we have here, apart from providing seed money and mentoring, provides 24/7 power supply, connects us with businesses abroad (huge benefit, because no one wants to do business with a Pakistani startup, right?), is trying to get some foreign investors on board, etc. In effect, an ecosystem is being built and I dont see how it could have been possible without an incubator at its center.
Perhaps in SV these things dont even matter but they can be the difference between survival and failure in lesser developed ecosystems.
Another thing I've been thinking about is renting some houses in Hawaii, Thailand, etc., where teams could work for ~3-4 weeks on a new project (1983-Apple-Mac-team style), and then bring their friends/families for a week or so at the end.
Mathematical Definition, Mapping, and Detection of (Anti)Fragility Nassim N. Taleb, Raphael Douady