
Conclusions from analyzing Y Combinator’s investing history - yarapavan
https://medium.com/@efeng/seed-investors-are-favoring-enterprise-startups-and-other-conclusions-from-analyzing-y-110432adf199
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m_ke
I wonder how much this shift to enterprise software is due to YC having a
large portfolio of enterprises now. It's a lot easier to build a B2B business
when you can get an intro to all of the unicorns that came out of YC.

A company like Scale AI can get Airbnb and OpenAI to play with their service,
then throw their logos on a deck and go sell it to Liberty Mutual.

~~~
OnlineGladiator
Scale AI's secret sauce is in labeling lidar point clouds, which is really a
necessity for the self-driving car industry. Sure, they can label other stuff
as well, but it's not hard and there are other companies that can do it (not
quite as well, but they could easily catch up).

What I'm trying to say is Scale AI is pretty much the only company offering a
solution for an absolutely hair-on-fire problem for self-driving car companies
- the introduction was unnecessary (and many of their customers are Argo,
Waymo, Zoox, and other companies not affiliated with Y Combinator). Assuming
the self-driving bubble deflates (it will) then Scale AI will suddenly find
itself a commodity business as labeling images is not so hard that it can't be
easily copied. It will be a race to the bottom. Unless there is another sudden
surge of demand for labeling lidar point clouds.

~~~
coderunner
Does Scale AI use trained human annotators to label point clouds for customers
or do they have a trained model that they use to quickly and automatically
label point clouds for customers?

~~~
akelly
I met an ex-employee, they have 500 employees in the Philippines doing
annotation. They built some software to help annotate point clouds but it
seems like mostly a contractor handling logistics that the tech companies
would rather not deal with, and they became a unicorn because AI.

~~~
coderunner
Oh okay, thanks. I wasn't sure if they were selling annotations that their
trained model can do quickly or selling manual labeling services that their
customers can use to train their own models. Sounds like the latter which
isn't as technically impressive.

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master_yoda_1
Somehow I feel that YC model has failed us as humankind. People makes shitload
of money working on shitty problem and cancer research still has to ask for
donation at local grocery store.

~~~
lone-commenter
I think replies to this comment miss the point. The author is stating that the
"YC model" \-- which falls under capitalism -- is generally incapable of
fostering the development of society in any meaningful way.

~~~
seem_2211
I don't agree. I think enterprise software is a big lever that we can use to
improve society. It looks different to biotech and cancer cures, but it's
still important.

Enterprise software should make businesses more efficient, and productive. And
we have that now. I can run a business that employs people from anywhere,
using Quickbooks (accounting & billing), Rippling (HR/payroll/IT), Brex
(charge card) etc. I built a simple website earlier this year on Squarespace
(far better than handcoding it myself, or using old editing software). I can
collect payments from anywhere using Stripe and Paypal. If I was running an
ecommerce site, I'd probably be using Shopify and that related world of
plugins.

Productivity growth is one of the biggest challenges of our time, and software
lets us do that, without harming the environment. YC is a great addition to
capitalism and societal development.

~~~
lone-commenter
Yes, technology can benefit any field; I know it. But this doesn't make all
this startup business around things which are completely divorced from reality
worth to pursue.

Productivity growth is a myth of the money-centric attitude that I'm
criticizing; I don't see how it could confute my point.

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echelon
I'm thinking of applying to YC this fall. I have capital, but little business
experience. My product and niche is pretty cool and very research heavy.

YC's 7% is a pretty heavy take if I already have a few million in self-
funding. Is this negotiable?

I think an exit for what I'm pursuing is very high if we can grow fast enough.
(Possibly become the incumbent.) It's a new market and absolutely _trounces_
an existing one.

~~~
lisper
> little business experience

Yes, that's clear just from the fact that you're asking this question.

> YC's 7% is a pretty heavy take

This is a FAQ and here is the stock answer: if you think that participating in
YC will increase the value of your company by more than 7% than it would
otherwise be, then it's a win. Otherwise not. That is true regardless of the
circumstances.

If what you say is true then you should have investors beating down your door
whether or not you're in YC.

~~~
beambot
Such a negative undertone... And very unhelpful.

"(...) if you think that participating in YC will increase the value (...)" is
exactly half of what the commentor was asking (indirectly): is the value of YC
worth 7%? That one's nuanced -- echelon, feel free to hit me up via email if
you want to discuss (see profile). The other half of the question (is there
any wiggle room?) is almost universally "no" to my knowledge.

Echelon also already stated that they have investors -- self-investment, but
still.

~~~
lisper
> is the value of YC worth 7%?

There is no universal answer to that question. For some companies the answer
is clearly "yes", for others it is clearly "no", and for some it's a tough
call. But there is absolutely no way anyone could give a more specific answer
without knowing a whole lot more about what's going on.

That is not something that should have to be explained to you unless you are a
totally clueless noob. That is not a value judgement. There is nothing wrong
with being a clueless noob. Everyone starts out that way. Echelon even came
right out and said that he (she?) had "little business experience".

But I'm not convinced that Echelon was really being sincere about this because
he (she?) then went on to strongly imply that his company was so bad-ass that
YC should be willing to seriously consider changing their standard terms for
the privilege of being allowed in. Echelon is almost certainly wrong about
this [1]. So "I have little business experience" sounded to me like a
humblebrag.

My answer was intended to convey the following message: Yes, Echelon, your
lack of business experience was evident even before you told us, and though
you don't seem to have fully taken this on board, it is a serious threat to
your success. You are almost certainly not as bad-ass as you seem to think you
are. Not yet.

Maybe I should have spelled all that out originally, but I was in a hurry.

\---

[1] Since I am passing judgement on Echelon's odds of success on very little
data, I feel I should give you some of my bona-fides: I have been a principal
(founder or co-founder) in six startups and invested in about 20 others. Just
this year I am closing out an investment fund that I managed which had an IRR
of 70%. I've seen success, and I've seen failure, and while there is obviously
no reliable way to make these predictions, there are a few warning signs that
manifest very early that have in my experience proven to be very good
predictors of failure, and signaling that you think you're bad-ass when you
pretty clearly aren't is one of them.

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gitgud
Well I think the main reason consumer products are declining in VC funding is
a combination of market saturation and a high level of _freemium_ solutions
for consumers.

Consumers are already spending monthly subscriptions on spotify, uber,
netflix, games and countless others... consumers also expect much more out of
a free app these...

B2B enterprise software is also a massively competitive market but businesses
have a _business-case_ to pay for things, making them a more lucrative
investment IMHO.

------
kfk
The enterprise software industry seems quite overcrowded these days. Lots of
companies still doing negative OI (Tableau, Salesforce, etc.). Lots of
competition. Very little improvement over stuff that was made 30 years ago
like Excel. Compare that with the enterprise _hardware_ industry. Plenty of
opportunities there. You got 3D printing, insects farming, vertical
hydroponics, batteries, solar and wind energy, fusion, cleaner nuclear, more
sustainable fashion, more sustainable travelling, scaling remote work for
multinationals, etc..

I love my data science work, but I see immense untapped opportunities in more
traditional fields.

~~~
nl
What is "negative OI"?

~~~
adenta
I think, "Operating Income".

~~~
nl
Salesforce is profitable so I don't think it's that. I didn't check Tableau.

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soneca
> _" I recently wrote a recommendation letter..."_

Since when YC asks recommendation letters in its applications?

~~~
pbiggar
2012 I think. There's a place existing founders can go to recommend people.

Which is probably why YC is so homogenous.

~~~
HenriNext
I've seen at least in two YC videos a very clear mention that the
recommendations don't have much weight, basically saying "don't worry about
it".

Secondly, is YC even that homogenous? It may be skewed towards enterprise
software, but they do invest in a far wider range of startups than any other
VC. And the ethnical and gender diversity is not _that_ bad either, all things
considered.

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smabie
Nitpick, but the Dow Jones is not representive of the market. 30 equal-
weighted large cap stocks is not what the market is. What you want would be
market-cap weighted and enough companies so there is no idiosyncratic risk.
Examples would be: S&P 500 or the Russell 3000.

~~~
beefman
The Dow's correlation with the market is well over 90% and it isn't equal-
weighted.

~~~
smabie
Price weighted. Maybe even worse. Moreover, correlation isn't enough. What you
would want to look at is the Beta exposure (covariance of the asset/portfolio
and the market divided by the variance of the market) if you were deciding
whether something was representative of the market.

~~~
beefman
An asset's Beta is the product of its market correlation and volatility ratio.
Highly volatile assets can have beta near 1 even when they have low market
correlation. That's why CAPM statistics usually include R-squared along with
Beta. More generally, in constructing optimized portfolios, correlations are
important, not Betas.

To your original point, 30 large firms are generally plenty to capture the
market factor, regardless of weighting. For one thing, market-weighted indices
are dominated by their top names (the top 30 names in the S&P 500 constitute
over 40% of the index presently). More importantly, summing quickly suppresses
uncorrelated variance, and there's a point after which adding additional names
does very little. (I think there's a phase transition, actually – see Lello et
al's recent report on polygenic risk scores, which use LASSO regression...[1])

[1] [https://arxiv.org/abs/1709.06489](https://arxiv.org/abs/1709.06489)

