Was Y Combinator Worth It?
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I love telling people the story of how some investors scoffed at Teespring on demoday -- I remember one person asking why they were even there. It shows why it's still possible to make a lot of money in this business, and that startups shouldn't be put off by a weak reception from investors.
assuming I dont want to raise capital unless i really really really really have to, assuming im doing not b2c, assuming I actually am friends with a number of people who've done YC, etc etc
then why YC?
Unnuanced advocacy makes me nervous (and thats all I typically hear). Every single time in my life where I have taken unnuanced, uncaveated remarks on face value, it has blown up in my face. There are many fine businesses that have been certainly enabled by YC, and many that have not been.
Is YC suitable for businesses whose risks have been shifted to be strictly of the "can technology of this caliber actually exist?" sort, rather than "explore the business premise, do an MVP for the tech" sort? (admittedly, one challenge with sophisticated tech is educating folks about it!).
I guess I'm asking for nuance in why. If you can't give me nuance on that, why should I trust your advice on anything more complex?
[edit: to be clear, if someone convinced me, i'd totally apply to YC, just not sure if it makes sense for me]
This stood out in the post:
"If I could only pitch you one reason why Y Combinator is worth it, it would be the people."
Exactly. And along the same lines the reason that I always give for why it's good to go to a "known" grade a institution (say a top business school if that is your major) is not necessarily for the education but because of the people that surround you and raise the experience level.
In other words a higher degree of non slackers and people who are serious just like you are. Of course they exist everywhere. But there are generally more of them at the top schools. And likewise there are more of them in YC. (And if you read some of my other comments you will see that I'm not a fanboy by any means but this benefit stands out clearly to me..)
And this doesn't even have to do with whether those people became life long friends or associates or not (although that is icing on the cake for sure). It has to do with the immersive experience in being in that type of group.
Also I'm deep enough in some OSS ecosystems these days that I already have the pleasure of being the (in my mind) slacker in a community of amazing technologists.
Heterogeneity and brilliant folks who are wildly different from me, who I can still communicate with, are how I thrive. Variety is good for the brain!
I'm not in any way suggesting YC isn't great for most folks. I'm pretty weird, being an general extrovert and a deep technologist in the same day is a really odd combo. Both as a help and hinderence
There are certainly business for which YC is not a good fit though, and we generally screen them out at the application stage. In fact, most businesses aren't a good match for YC, as we are only looking for high-growth potential startups of the sort described in http://paulgraham.com/growth.html
I agree its a bit more manageable to evaluate in b2c /b2smb / b2b cases.
I guess its also for me, I've seen so many well publicized, brilliant technologically sophisticated analytical tools startups fail over the past two years, i'm just leery of how i've seen quantitative products "grow fast" too early.
But seriously, how does one evaluate technology that (when positioned well) becomes a substrate for core product strategy for other organizations and entire technological ecosystems? This is a question I hope to know the answer to this spring :)
Also I wasn't asking about how YC stuff gets evaluated, but trying to understand what concrete specific concrete explicit reasons I should apply!
I have applied to YC in the past, but in the past I also knew nothing of business, was a younger idiot and had dumb ideas! :)
It's ridiculous to suggest that YC is a universally positive experience, just like it's ridiculous to suggest it's completely without value (based on the significant praise you refer to).
(If anyone has a link to such a writeup, that I may have missed, please comment!)
I'll let others debate the monetary economics of YC and just say that the YC network effect is the most under-rated aspect of YC. Both the W14 batch mates and the YC alums from past batches have been amazing in terms giving us strategic and tactical advices. This aspect of YC simply can not be ignored.
Downside is no prestige and of the few investors it does attract, they tend to be low quality by SV standards.
Taking you at face value (meaning I don't know the facts and I'm relying on what you are saying..) that's a huge downside.
Prestige is important. While YC is not Harvard have you even noticed how many doors going to Harvard, Wharton etc. open? That said not everyone with an open door is able to capitalize on it but I'd say it's a pretty big advantage to have.
Once again, this is based on my many years in business. I have nothing to gain from touting YC and I have been critical at times as well.
If anyone thinking about YC has any follow up questions, happy to answer them here. It truly was an amazing experience for us.
Inspiring story, and I'll be in touch.
The good news is that you don't necessarily need YC to have much of that experience. If you build a good network around you, with lots of hard-working and positive people, it helps a lot.
From the articles I see lately, it seems like there has been a pretty big shift at YC to help companies go from $1MM to $500MM rather than $0 to $1MM. Everything appears to be about pre-existing growth now.
It would be a disaster if that were true, because in this type of investing as in any other, returns are proportionate to risk. Fortunately it isn't. As I said in another thread, a quick sample of the current batch suggests half had no growth when YC accepted them.
YC does face a danger in this respect, because as it gets better known, there are an increasing number of applications from fairly established startups. To avoid that danger we make a conscious effort to fund risky outliers. E.g. the 17 year old kid from Bulgaria with zero revenues or users.
The saying in traditional business could be "everyone and their uncle".
You begin to attract people who apply for what might appear to be the wrong reasons.
You run into this with physicians. You find people who truly care about medicine and helping people. But then you find people who went into medicine simply because it's a career that has prestige and pays well.
There was this dichtomy that I observed when I was at Wharton (which has an undergraduate and graduate business school).
The UG student body tended to be people who were angling to make a buck when they were 10. It was in their blood and their family upbringing.
The MBA students tended to be people who had liberal arts degrees and then decided to "get their MBA". (Caveat: This was true when I was there which was quite some time ago and it may have changed).
Seems similar to how things like the Olympics evolved. At first participants had to be amateurs but later they started letting in the professionals and the amateurs could no longer even qualify. Good to see that there is a concerted effort at YC to continue to fund the amateurs but I can only assume that will be harder and harder to justify in the future.
Sorry, I just took a look at your LinkedIn Profile (love drinking Karhu in a Sauna btw...)
It doesn't appear that you've created any startups, so I'm curious how you came to the opinion that YC is Hype and not worth the value to founders, if you yourself have not been a founder (and presumably) not gone through an accelerator?
> Clearly you can't review any movies because you're probably not a director?
You shouldn't review a movie, until you've watched it.
Also are we discussing movie reviews, or discussing whether YC is worth it?
What I can tell you is that we thought about in the same way as bringing on a co-founder or superstar employee. The value of YC isn't measured in their investment, but rather the value they bring.
Even in terms of the boost to our valuation alone from the validation, beyond everything else, YC more than paid for itself. If you look at our growth graph there's also a sharp inflection that starts shortly after we joined the program. That could be unrelated, but it's my strong belief that it was the value of the program that helped us accelerate.
We ended up raising millions (about $22M in the last year), and I don't know if it would have been possible without YC. All our investors and intros came through the network we built while in the program.
Hope that makes sense, of course this is all my opinion and you can evaluate and come to your own conclusion - I just wanted to share my experience and perspective!
As an aside, I think your numbers are a bit unrealistic. Even if you were to sell 4% for $1m, that's a $25m valuation. That's definitely higher than what most YC companies are worth prior to entering YC (and even right afterwards).
Did that affect the valuation at which YC invested?
If all YC did was write a check for $20K and walk away, I agree, it's too much. They do more than that, and I believe they increase your chances of meaningful success by way more than the 6.4% hurdle rate, so much so that if I were to do a startup, I'd apply to YC, even though the very last thing that I need from them is the $20K check.
My company, based in London, couldn't even secure meetings with VC funds before we got accepted to YC.
The week after we got accepted, every major VC firm in London called us.
3 years later, we've raised more than $10m in funding from Accel Partners & Balderton.
I think the point Paul was making - which you haven't addressed at all - is that you get far more than money from going through YC, and most of the other things you get (eg. the network and brand name) can't be replicated anywhere, for any amount of money.
I think there is a class of companies that really do not require outside funding. They could very feasibly bootstrap (grow from cash flow). Often this would be a superior financial result for the founders, and possibly lifestyle.
However that assumes the founders know what they're doing -- have a good business model, and know how to execute it. Sometimes they don't. They need help -- advisors, compatriots, whatever.
If you want certain "elite" advisors to help you, the only way they're going to be interested is with some equity upside. Otherwise it's just not meaningful for them, either financially or in terms of "impact".
So my suggestion is that founders should ask themselves if they really need funding, or if they really need advising, or if they actually need both. If they need both, something like YC is probably a bargain.
"In the general case, if n is the fraction of the company you're giving up, the deal is a good one if it makes the company worth more than 1/(1 - n).
For example, suppose Y Combinator offers to fund you in return for 6% of your company. In this case, n is .06 and 1/(1 - n) is 1.064. So you should take the deal if you believe we can improve your average outcome by more than 6.4%. If we improve your outcome by 10%, you're net ahead, because the remaining .94 you hold is worth .94 x 1.1 = 1.034."
Sure, if we assume that other deals are impossible. Which is a false assumption.
Edit: You aren't understanding my post; I just said that something can be a "good deal" compared to doing nothing regardless of what other options are available; i.e. YC offers a positive value proposition.
I think you are missing my assumption in my OP "in the early stage of a startup". In fact at that stage of startup, even if you have a better deal than YC, you might still want to do YC (so you would take both two deals) because even after your take the better deal, YC can still gives your startup >6.4% growth.
Not every YC company is going to be the next DropBox, or AirBNB, but many do go on to grow to later stage startups.
Also, if you think the only value of YC is the $14k stipend you get, then myfriend, I think that YC and other accelerators are not for you.
Full Disclosure, I'm not a YC alum.
If you were to think rationally, the only question is whether YC would improve your outcomes by more than 6-7%. If that's true, it should be a no-brainer.
I'm questioning the tautology of what you wrote.
It is a no-brainer if you don't have other choices. If you do have choices, though, you might not be able to choose to get funded from all of them if the programs might take place at the same time. Also, while accelerators generally don't request much equity, there is a hard limit (unlikely to get hit at this stage) where you need to maintain some equity for the founders and employees.
It therefore isn't a question of should I do YC or (some other accelerator) .. but rather should they do an accelerator period. If that's a yes (you're at the right stage for it) then I'd argue it's pretty much a no-brainer if you get in.
That said, based on my understanding of the accelerator space, I'd probably prefer YC to other options. Some reasons you maybe would prefer something else (guessing) would be if it conflicts with an accelerator that is very domain specific, although I'm not sure if such a situation would happen that couldn't be worked around.
You can haggle over the $'s and %'s all day - but what you can't argue over is where your company stands after YC, especially in the eyes of customers & investors.
Some people have the ability to never worry about investors, but for those who don't, it is insanely helpful. And most of the shift in opinion is based on how your product is being used by customers, which is the primary focus of many YC partners.
Once again for good measure: Yes.