
Sam Altman: ‘Too many’ Y Combinator companies raise money - chasedehan
https://venturebeat.com/2017/12/21/sam-altman-too-many-y-combinator-companies-raise-money/
======
jpao79
Was just thinking the other day, it'd be super interesting if YC ran some YC
Equity/YC UBI experiments within its own network. Basically in joining YC,
each YC member would be granted a percentage of YC's 7% stake in all of the YC
companies which would reduce their need to fundraise. In theory, YC members
should all be highly motivated achievers and use that percentage stake to move
their diverse set of businesses forward.

Since there is such a high barrier to entry into YC, it might not prove shared
equity/UBI would 100% work in the real world. However, coming at it from the
other side, it could provide some early clues as to whether a shared
equity/UBI could ever work at all. For example:

\- Would YC companies cheer each other on with positive peer pressure/be more
motivated to knowledge share or would low achieving YC companies de-motivate
high achieving YC companies? Would YC companies who fold be allowed to retain
their percentage of the YC stake?

\- Would high achieving startups bypass YC or be attracted to YC?

\- Would every set of new annual entrants into YC be seen as diluting the
value of the existing YC equity or additive? Would existing YC companies want
more say in the selection process? Would Airbnb, Dropbox, Stripe receive the
same percentage of YC stake as new entrants?

\- How do you socialize the concept with existing stakeholders (i.e. existing
YC partners) who would be diluted?

\- Is it better to implement it as a single monolithic YC group or divide it
by YC Class?

Assuming ~1500 YC companies with ~10 employees each, that'd be about 15,000
participants, which would be a pretty good dogfooding [0] experiment!

[0]
[https://en.wikipedia.org/wiki/Eating_your_own_dog_food](https://en.wikipedia.org/wiki/Eating_your_own_dog_food)

~~~
sama
I am interested in trying some version of this! Have been thinking about all
the edge cases.

~~~
jacquesm
That'll be expensive. On the order of 100's of millions per year at that
scale. 15,000 * 1000 = 15 M / month for an amount that would move the needle,
but still not enough to live off.

~~~
jpao79
You're right and maybe its more about providing the YC participants with a
vested interest in the overall success of all the YC companies than providing
them with a guaranteed income for life.

You'd want to size it to provide enough equity to turn the 15,000 participants
into active evangelists of the larger network of YC companies than just their
own individual startup.

And yes it is expensive. There are definitely significant parallels in that
sense to the larger UBI discussion :)

~~~
jacquesm
> You'd want to size it to provide enough equity to turn the 15,000 people
> into active evangelists of the larger network of YC companies than just
> their own individual startup.

They already do this, for free. The YC alumni network is a vast resource and a
substantial force behind the recruitment of new start-ups.

------
TuringNYC
If the artificially-created real estate "shortage" problem in the Bay Area was
solved, lots of other problems would be solved.

\- Companies raising money just to pay inflated (yet still insufficient)
labour costs

\- People who would love to work for startups but realize that most startup
salaries barely gets you a studio apt, pretty cool until you have a family

\- Companies who "cant find" talent

Is it any surprise companies need to raise so much funding, esp when operating
out of the Bay Area?

~~~
cjf4
To me this leads to a question about the Bay Area centric techno-spehere: at
what point do the prices become so high that companies/ecosystems in other
parts of the country become relatively attractive?

I understand that the SV network is a real and powerful thing, but holding all
else equal (indulge me), wouldn't it make the cost of startups more attractive
for all stakeholders if an alternative, viable network were in Buffalo or
Nashville or Boise or wherever? Is it just a matter of lack of coalescence?

~~~
kovek
A siblung comment writes:

> doing startup things

I believe the network in the Bay Area is valuable. However, I don't know
concrete examples of benefits that being based in the Bay Area brings. From my
perspective as an upcoming newgrad, the companies in the Bay Area are great,
but their location is decided by the founders/stockholders/executives. I'll
try to see what are the pros for these people.

Off the top of my head:

\- Nice weather

\- Proximity to LA, meaning access to nice events or parties

\- Proximity to friends. People who you've met through events in the area

\- Proximity to other startup executives to exchange thoughts on company
matters. (The bigger the company to share thoughts with, the better)

\+ Same for counselling investors

\- Proximity to investors or possible investors

\+ Tangent: if your connections can afford to live in the area and are
relatively comfortable, then they might have many thousands of dollars to
spare.

\- Proximity to Stanford, Berkeley, and other big name universities

\- Culture that appreciates tech, such that many people like to discuss new
technology

I can't think of other big benefits of being based in the Bay Area from the
perspective of the biggest shareholders of a company/founders/executives.

~~~
mattmanser
These people are on the site, let them speak for themselves.

I don't see what a clueless new grad, wildly speculating, adds to the
discussion.

Especially as you say the weather first, while the real reason is probably
money, money, money, money, money.

------
olfactory
Early YC: Small, gets disproportionate number of wins. Develops top tier
reputation.

Later YC: Expands significantly due to the added prestige, and now performs
much closer to the mean.

Today: Sam says that "too many YC companies are getting funded".

Is this fundamentally different from a mutual fund that yields 25% above
market for a few years in a row and then performs closer to the mean for the
following decade? In the mutual fund game, it's very common (hence Vanguard).

Surely during those top performing years the mutual fund managers strongly
believe that they have deep insights that are the root cause of their funds'
performance. But the following decade proves otherwise.

~~~
slyn
There probably are deep insights that lead to the root cause of success in
both situations. Once these insights are made public or more people discover
and exploit them on a widespread level, the market inefficiencies that gave
the possibility for outperformance then disappear. If you don't find a new
edge, you revert to the mean (or maybe rather, the "mean" catches up to you).

~~~
marcoperaza
I think olfactory’s implication is that they get lucky at first, develop a
reputation due to that luck, then revert to the mean. That there is no secret
sauce at all.

It’s an interesting theory.

------
chiefalchemist
Maybe I'm misinterpreting but in a way it sounds like he's saying that YC
sometimes (often?) bet on ideas / teams that turn out to be crap. Well, of
course that's going to be true.

Just they same, prestige or not, track record or not, it's also possible that
not all ideas / teams were the right fit for the YC program. That is, yes
within YC they were bad bets, but that's not to say things won't change once
they're away from the VC dynamic.

Finally, perhaps he feels that by others putting money into what YC might
consider a lost cause, those others will eventually realize what YC realized?
But now the losses of others could be "blamed" on YC and thus tarnish the YC
brand going forward?

~~~
chaostheory
> Finally, perhaps he feels that by others putting money into what YC might
> consider a lost cause those others will eventually realize what YC realized?

It's hard for 3rd parties to discern this, when YC has given the very
companies being criticized seed money. Pair that with the competitiveness
between angels and VCs, plus FOMO; and it gets even harder.

~~~
chiefalchemist
I was trying to say that if some post-YC VC comes up short he/she might say
"WTF does YC know..."

Hear that often enough and loud enough and the shine that is YC's will be
less. Clearly YC / Sam benefits from being up the food chain not down it.

------
cperciva
This seems like a signalling problem. If a YC company looks for funding at
some point _after_ demo day, the first question VCs ask is going to be "why
didn't you raise money at demo day?" \-- so there's going to be an incentive
for companies to go after money at demo day even if they're not ready simply
because it will be much harder if they wait.

I wonder if it would be effective to tell YC companies that they can
participate in _a_ demo day, but it doesn't have to be the one for their batch
-- so a company could wait and join the following cohort in order to avoid the
stigma of being "the company which couldn't get funding at demo day and is now
going around to VCs one by one".

~~~
jacquesm
Ironically it might be a lot easier to raise money as long as there is less
substance to the company. Dreams of getting in on the ground floor work so
much better to woo investors with visions of Dropbox and Airbnb in their heads
than a year old start-up without traction.

Besides that after that year the start-up will likely be out of runway and so
in a much harder position to negotiate from.

If I were to run a YC backed company (which I won't be doing) I'd definitely
use demo day to it's full potential.

~~~
newaccount4434
Listen to the AirBnB story on the podcast "How I built this". Before YC,
nobody wanted to invest in AirBnB and the company wasn't profitable. YC is how
founders find ideas (in the case of Reddit) or refine them. (in the case of
AirBnB) In the end, the short time offered in YC allows founders to create the
minimum viable product and start to or continue to gain users. The fact that
so many companies gain some form of investment shows that YC is a success!
Some companies may eventually fail, but YC is a success.

~~~
mrep
Is it? I feel like they get so many applications and the bar is so high now
that most of the teams are already getting steady revenues before even getting
in.

------
baldajan
I know a fair bit of YC companies, and a trend is clear from the last few
years. As they say: it's not that YC picks the best startups, it's that the
startups they pick "become" the best startups (i.e. crappy companies look good
just for being in YC).

This definitely isn't healthy, and I'm glad they at least recognize it.

~~~
garganzol
Seen this from the beginning of 2011. Raise the money, throw a dotcom-grade
party at MGM Grand, spend like there is no tomorrow. No worries, the product
and customers don’t matter much. Networking and hustling are everything this
is all about. Rinse and repeat.

This is unhealthy and could not last for too long.

~~~
baldajan
I disagree. Sure some do that, but a lot don’t and focus on data on customers
and are hard working. Even bad companies are hard working. It’s just sometimes
the founders can’t get the product to have a product-market-fit. And product-
market-fit is a lot harder to achieve than an outsider (of a startup) would
think.

------
d--b
This seems to fit a continuous change in YC and perhaps tech in general. YC
doesn't seem so eager to fund 1000 startups so that 2 of them become unicorns
anymore.

It's more like they want to fund 1000 startups so that 100 are sustainable.

We don't hear moonshot or billion dollar market depth or hyper growth as much
as we used

Anyone feeling the same?

~~~
jacquesm
> It's more like they want to fund 1000 startups so that 100 are sustainable.

That's actually good, not bad. 100 companies that work out long term are
_much_ better for the founders involved than two that are unicorns.

~~~
d--b
I agree it's way better!

I think in PG times, the idea was: aim for the moon, it's hard but if it
doesn't work out you'll find plenty of well paid jobs.

But now the market is so overcrowded that if you aim for the moon and fail,
you'll mostly look like moron, and will have a hard time finding a gig.

Just gut feelings though, I have no numbers nor people to talk to.

------
danschumann
Not being in a position / deciding not to raise money has helped me immensely.
It's also been hard. A little bit of raising money is "getting out" of work...
you raise money to feel good and successful, but the work of the startup still
isn't done. I've had to bear the full burden. If I would have raised, it would
have muddied the waters. I would have 10 different priorities, other than
writing the software.

------
d0m
The irony of the game is that having money in the bank let you hire great
people and pivot to the right idea, but to raise money you need great people
and the right idea. So, MAYBE, it's not that bad of a thing to raise even if
you don't have everything figured out yet.

------
jacquesm
YC participation is a stamp of approval. Unless YC intends to take on
responsibility for follow on funding in some kind of exclusivity - which on
the record from a partner at YC is definitely _not_ in the plan [1] - then Sam
will just have to live with that. After all, companies are - for now - still
free to try to raise funding from outsiders once YC has made their bet.

On another note, it's those investors money to waste, if they want to burn it
on companies that don't make it then in the long term this will self-correct
because there will be less money available from such investors.

[1]
[https://news.ycombinator.com/item?id=15928335](https://news.ycombinator.com/item?id=15928335)

------
ukulele
> I think there’s sort of this halo around being a Y Combinator company, where
> companies raise money that perhaps shouldn’t.

This is such a strange sentiment. YC has invested in all of these companies,
then they pooh pooh others that follow their lead?

~~~
sjbp
I think it's an honest comment about the "Halo-effect" the YC stamp can have
on investors.

One useful counterfactual is thinking about what our comments would be if Sam
said "more YC company should raise money immediately after the program". I
think it would be very hard to defend that every (most?) startup is ready for
such a commitment at that very specific moment in time.

~~~
ukulele
But YC is already making the claim that every company in the program is ready
for investment. It's doing so by investing in them.

~~~
muzani
They invest based on very little data. It's more a gamble, but they gamble at
scale, with good odds.

It doesn't mean every one of them is good. They don't know which one is good
with the data they had, but are wise enough to accept they know little and
instead chose to invest in several.

------
ne01
The problem is that too many startups go to Y Combinator! Many of them can
bootstrap!

Y Combinator prefers to get 6% of more companies to increase the chance of
winning the jack pot.

------
sreyaNotfilc
Maybe I'm missing something, but isn't one of the reasons to join YC is to
find ways to get funding? Even in the Standford videos, there's a lot of focus
on the topic of raising money.

I think Sam's point (or concern) is with the so-called "Startup-Culture".
There's a big focus on...

-1 Presenting a basic idea

-2 Get into Y-Combinator

-3 ???

-4 Profit

Or, I think that's how startups are interpreting what being an entrepreneur is
all about.

I think Sam's point is that the product shouldn't be a placebo that happens to
raise money. Or, to better say it, you are not here to be good at fundraising.
You are here to be good at making a product that will (wait for it) change the
world.

I think the success of those so-called unicorns (Dropbox, AirBnb, Twitch,
etc.) had caused this problem. There are a lot of investors that are willing
to spend away hoping for something to stick and to become profitable. On the
other hand, there are a lot of startups who's soul purpose is to be good at
selling a 'not fully realized' idea, raise a ton of money, and then cash out.
Oh, and have 'fun' while doing it. Why? because it works!

It reminds me of the Hubspot videos with Daniel Lyons.
[https://www.youtube.com/watch?v=RVSLLvHceSA](https://www.youtube.com/watch?v=RVSLLvHceSA)

Now, if someone was banging on my door desperate to give me a crazy amount of
money with almost no strings attached to but into my 'shell of a product' I
may consider taking the offer. But doing so may benefit me, but could cause
harm to those who really have a great world-changing idea.

------
40acres
He's probably right, didn't Airbnb struggle for about a year after graduation?

~~~
bflesch
By any chance, do you have further readings on this? We're also a struggling
marketplace and would take great motivation from this.

~~~
themagician
Look at your competitors. What do they legally have to do to operate?
Licensing, taxes, insurance, permits, etc.. Tally up all those things. Then
stop paying them. Now you can offer lower rates than competitors. If the
government tells you that you have to do certain things hire a lawyer and
claim that you aren't actually in the industry that you are in.

~~~
canadian_voter
Bonus points: Instead of employees use contractors, and instead of making
capital investments make your contractors do it. Just make sure you can change
the terms of service at any time, without consultation.

Externalize all your costs, keep all the revenue!

------
bunkydoo
This guy is not really a good thing for YC, I honestly stopped caring that
much about this incubator after that guy who was in before him left. Sam
Altman should be removed.

~~~
aswanson
I love the ambition of this dude to call out the valley to reach for more than
what it is. The field needs 10000 more Sam Altmans.

~~~
garmaine
I prefer a VC that doesn’t inject a political agenda.

~~~
aswanson
You prefer a VC that isnt human. All humans inject their politics into every
action they take. Accept it.

~~~
garmaine
Not quite. Fund managers generally have a fiduciary responsibility to their
limited partners, meaning they are required to act in ways guided first and
foremost by what increases ROI.

There's a lot of room for interpretation there about short term vs long term
gains, the investor value of creating sustainable businesses, and of course
the biases the manager's own political views inject into their decision
making. But he or she must still act with investor ROI in mind by investing in
the companies they honestly think likely to succeed and then help them do so.
To fail to do so would be to face investor revolt and possible lawsuits, and
undermines those hard working entrepreneurs who take their companies in
different (and maybe more profitable) directions than their investor had in
mind. I don't like that.

To rephrase what I originally said, I prefer my investors to be economically
rational in their motivation, not political. Hence I have never sought YC
investment under Mr. Altman, nor do I intend to. Thankfully I've done just
fine without.

------
toomuchtodo
Is there any way for YC to build its prestige and the sense of value it
delivers without being a positive signal?

~~~
zjaffee
Yes, this forum. This forum makes it marginally easier for their companies to
get recognition and hire employees. Additionally, if you look at the really
successful companies that have come out of the program, they were all funded
by YC when they took on far less companies.

~~~
ngokevin
Well, companies take many years to reach that stage of success, so of course
all the successful companies will have come from the past batches when batches
were smaller.

------
coziestSoup
It sounds to me like Sam was just trying to say that the reputation of YC-
backed companies often preceeds them and that VCs look at YC graduates with
rose tinted glasses, which they perhaps should not. Doesn't seem like a bad
thing to say at all.

------
ukulele
Unless I am mistaken, literally all YC companies raise money. They do it from
YC itself.

There are lots of ways you could spin it, but how can Sam justify such a
statement when they've invested in all of these companies too?

~~~
benatkin
The difference between the first round and future rounds can be significant.
Sometimes there's no company, and since there's no company, a company isn't
raising money. Often the prospective founders don't start working on their
product until they raise, even making it contingent on raising money, which
means up until Demo Day the founders haven't tried to build their product and
raise money at the same time. Finally, most aren't raising based on market
traction – at YC stage it's valid not to have any market traction (though
having traction at that stage is also valid).

~~~
ukulele
By this logic, YC is investing even before the point that others shouldn't be
investing, which would make even less sense.

~~~
benatkin
Hmm, I was going to say that at YC they're investing on the team more than the
product, and they can afford to do that, but I think investing primarily based
on the team is common after the seed round too. So I concede that it doesn't
make logical sense that the YC startups are too early to invest, if you have
the right investor, that is going to play a similar role to YC.

------
forgotpassagan
Aka... 'too many' companies go on to raise outside money and dilute
ycombinator shares. How unfortunate that ycombinator can invest a limited
amount of money and have graduates turn around and get 10x as much from other
investors. It must be stopped!

Also, I'll have some serious respect for YC if I'm not banned for this comment
=)

~~~
jacquesm
YC does not control HN. So that won't get you banned but trolling for a ban
just might.

~~~
forgotpassagan
If the trolling gets me a response from one of HN's most famous members then
so be it

edit: You gotta admit, my point isn't groundless. I would disagree that it's
trolling since HN is owned by YC but if you're right about them not using
their position to silence criticism I respect that

