Yes, that makes sense, logically. But it ignores the plain fact that there’s no way to know if Y Combinator improves the company any more or less than on-the-fly learning would or—better yet—free mentorship from someone who has been there. In other words, maybe your startup is 10% better after going through an incubator.
Wait, that's it? The phrase 'average outcome' ignores the fact that there are multiple possible outcomes? I don't think 'The Equity Equation' meant to imply that the question was "Y Combinator funding, or doing nothing," -- it was about getting funding versus alternatives. So the entire criticism seems rooted in coming up with ex post reasons to hate YC.
I am trying to read Lacy's book, because it's informative. But the writing is excruciating. Next time, I hope she does the same interviews, but then hands off the notes to someone who can actually write.
Well, I thought the main point she was raising (perhaps muddled by her own writing) was simply that PG's assertion that YC does in fact improve your odds by X% might not be true, and even if it is true, you may have other means--that have no equity cost--to realize the same benefits that YC offers.
Totally agree about her book: the subject (the entrepreneurs) is quite interesting, but she gets in her own way with her poor writing ability (and where the hell was her editor, or don't those exist anymore?) She also seems to pretty much take her interviewees at face value.
It is a bit ironic that on her blog post she mentions she wouldn't be where she is today if she had gone to journalism school; um, yes, it's entirely possible she might have become an actual journalist.
Dead on with "pretty much take her interviewees at face value." I'm described in the book as "not willing to work for stock" (re: digg). Not sure who made that up, but she made no attempt to verify it with me. If she had, I would have told her that it wasn't in any way true.
There is a paragraph in the book where she talks about "founders' mythology" that I guess functions as a disclaimer of sorts. It should have been included on the dust jacket.
She also defines YC's value by its "mentorship". I think that YC's connections to additional funding are at least as valuable. If you need more money, then they might save a lot of time that would be spent trying to acquire it.
The biggest risk (and most likely outcome) with any tech startup is financial failure. The smart strategy is to do things that will boost your odds of success. Hoarding equity is rarely a good way to do that -- you will most likely end up owning 100% of nothing.
I have thought a lot about this, mainly because of my hoarding mentality that I am trying to purge. Think about the great successes in startups -- they seem to come from people sharing and building off of other each others ideas. Take one person away from the early teams of any major tech company and the odds of success drop to nil. Hate to admit it, but this line of thinking lends some credence to the 'single founder fail' conclusion of YC that I disagree with.
AFAICT, Sarah Lacy's counter argument paraphrased is: Okay, so if Y Combinator can improve your chances by 10%, then the small equity cut is arguably a fair price. But you can get the same mentoring for free! The free stuff might even be as good!
So is her argument that paying for anything you can get for free is a rip-off? No, she's not even saying that. She's saying it might possibly be a bad deal. That's not even a counter argument. That's FUD.
The cost/benefit of giving up equity or taking VC funding is highly personal, situational decision. The correct answer is "It depends".
The folks that YC funds, by and large, have no business experience at all, so it is likely well worth it for them. But you can "go to school" (the school of hard knocks, that is) to learn those things YC brings too. That learning process takes time - time you may not have.
Ironically, in a serious downturn you turn out to have plenty of time. Companies like Flickr came out in a fairly relaxed time - nothing much was happening anyway. They actually took their time (Flickr was a side project of a site they called Game Never Ending which was on for a long time ...)
By comparison, we are now in a relatively frenzied times, and success is necessarily harder to achieve, so every bit of assistance you can get may be worth it.
To visualize the kind of "no body cares" times, look at the business of starting a classy restaurant right about now (with restaurant chains all around folding). You have to be pretty passionate to keep going at it. Funding? Unlikely.
The folks that YC funds, by and large, have no business experience at all, so it is likely well worth it for them. But you can "go to school" (the school of hard knocks, that is) to learn those things YC brings too. That learning process takes time - time you may not have.
I don't fully agree with this, mainly because nobody can teach you business or anything close to business in 3 months. True, YC gives you a gist of how a start up really works and how you need to go through that process but that might not work out for you mainly because there are tons of reasons for success and failure and we hardly know them.
To me YC is like an identity, in a world where everyone is same it tries to make you stand out from others. If you want me to compare YC with Hollywood, the position of YC is something like Godfather. Paul Graham is to Hackers what Don Corleone was for Italian immigrants. He pretty much gives you an identity, mentorship and protection for a tiny company share. Think of the Italian Immigrants if they didn't have Godfather, they would have been badly exploited by the system and would have ended up as nobody's. Paul Graham takes the position of Don Corleone and saves Hackers from being exploted in a big bad world of Start ups and Business by being there for you. This is my personal definition of YC.
"perhaps it's more like taking out an insurance policy, and most of the best entrepreneurs don't like insurance or safety nets. That's why they are entrepreneurs!"
Does she actually know any entrepreneurs? Despite all of the ideological fights on this site, the most consistent piece of advice I've run across here is: Make sure you have health insurance. Get high deductible policy with low premiums if you're poor, but get some freaking insurance.
I don't think you understand just how poor poor can be.
I haven't had health insurance for almost 10 years now. I do not regret this at all, nor do I see any point to paying any money at all for a high-deductible policy in which the insurance will only become useful in the most extreme -- and unlikely -- of cases.
Health insurance companies put a lot of effort into coming up with ways to not cover your bills, and for that privilege, you are subjected to seeing only the professionals that the insurance companies have "blessed", no small fraction of which aren't taking new patients.
I would never do business with any company that treated me that way, and health insurance is no different.
I'm confused. Are both 'affect' and 'effect' valid in the case of "... have a huge * on ...".
It seems as though 'affect' was misused there because the usage is also the definition and so she should have written: "greatly affects" or "has a huge effect".
Sarah Lacy tends to Troll her own articles, I've noticed, not only with abysmal writing, but also using math in, shall we say, a rather haphazard manner.
You do have to admit her courage in writing a supposedly carefully considered analysis of incubator funding of startups by someone lacking a firm grasp of the financial characteristics of startups.
But, I guess that is what makes Sarah Lacy, Sarah Lacy.
I was pretty disappointed by this article; I'd expected to see something compelling here and there just wasn't anything there.
I try not to be swayed by proofreading issues and the like, but starting the article off implying that the Paul Graham "Equity" essay (which is clearly labeled to be from July 2007) was written a few days ago as a response to her colleague's Y Combinator critique set a really bad tone for the article.
"I'm not trying to beat up on incubators, but most of the entrepreneurs I respect the most would argue they were better off putting off raising money for as long as possible."
That's not Max Levchin's philosophy, whom presumably she respects. He raised $8m for Slide before they even launched anything.
There's also a difference between an established company taking funds and kids without any savings raising $15,000 so they can put together a prototype.
For the early stage companies that YC usually invests in, I do believe participating in YC can improve their chances of success by at least 6% or 10% or whatever. If your company is already off the ground, with non-founder employees, etc, then maybe not.
Just the confidence inspired by being accepted to YC, and the smallish amount of money that allows you to quit your job is a huge benefit, to say nothing of the knowledge gained and networking opportunities.
Of course, as she points out, this can never be proved, but that doesn't make it not true.
Lacy's original article refuted its own reservations, because it was, after all, about YC Demo Day startups.
There are countless other tiny hopeful startups very similar to those that appeared in YC Demo Day. But those others will not get coverage all the places the Demo Day startups did, including Lacy's blog. That single YC-sparked PR coup may have increased their chances of success, against identical non-YC competitors, by 5-10%.
And merely asking, in her public writings, if YC is a bad deal incrementally makes YC a better deal, by focusing more attention on YC companies. (This hall of mirrors makes my head hurt!)
> That 6% you don’t give up could wind up being a big chunk of your holdings-- maybe even the only thing you're left with.
I've not seen a YC termsheet but this seems really unlikely since YC basically gets founders stock and get diluted along with the founders. The 94:6 ratio should normally be maintained through funding rounds.
It follows that if the founders are left with nothing, they would have been 6.4% richer without YC. 1.064 * nothing = nothing.
Anyone who pays any attention at all (let alone whose job involves investigating) wouldn't have made the mistake of calling YC an incubator. That just seems careless to me. I keep wanting to give Saray Lacy the benefit of the doubt but it's getting harder and harder. :/
At least she wants to talk to Paul about it. Anyone who does will realize that they've been generalizing YC incorrectly to at least some degree.
I've seen this strategy with other journalists. Write a story, get a reaction directly from the main person, rebut reaction... rinse, repeat. Oddly enough, it's also the formula for trolling.
Therefore, like trolls, the best thing for YC to do is to ignore her.
Wait, that's it? The phrase 'average outcome' ignores the fact that there are multiple possible outcomes? I don't think 'The Equity Equation' meant to imply that the question was "Y Combinator funding, or doing nothing," -- it was about getting funding versus alternatives. So the entire criticism seems rooted in coming up with ex post reasons to hate YC.
I am trying to read Lacy's book, because it's informative. But the writing is excruciating. Next time, I hope she does the same interviews, but then hands off the notes to someone who can actually write.