

Y Combinator's Value to The US Economy - niccolop
https://blog.siasto.com/ycombinators-value-to-the-us-economy

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hooande
What people don't understand about YCombinator is that they are ultimately in
the business of making friends. The few thousand dollars they invest in
startups isn't meant to be seed money, or enough money for founders to sustain
a business. It's a token of friendship and a reason to continue a
relationship.

The fact is that relationships with successful people can be far more valuable
than bags with dollar signs on them. Relationships can lead to inside
information, help with making deals and most importantly, once in a lifetime
investment opportunities. Most rich people spend a lot of their money and
effort on _access to information_. At the higher levels, information and
relationships rule all and powerful people will go far out of their way to get
them.

Evaluating the success of YCombinator based on the total value of their
portfolio is missing the point. Most of their value is in the form of soft
currency, the massive network of grateful friends that they are building. The
incubator model gives them the investment returns of a venture capital firm
combined with the social returns of a fraternity. We won't know their true
value for decades.

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obviouslygreen
_On average, the accelerator has invested between $15,000 to $20,000 in each
company participating in their program..._

If this is the case...

 _Based on specific macroeconomic assumptions, we calculate an economic value
of around $6.1 bn added since the accelerator was founded in 2005._

...this seems phenomenal, but also highly suspect. How is it that YC is
investing so little in so many companies that the average investment is $20k
or less? That's almost _nothing_ by Silicon Valley living standards (which,
based on HN bias, seems to be a significant share of YC's audience).

$20k, even in very low-income areas, isn't even half the yearly pre-tax salary
of anyone who's very good at anything _or_ has an adult's bills to pay. And
that's one year for one person. They cite 2-3 founders as average... this
absolutely does not compute.

Unless the average YC alum gets enough to operate for about three to six
months _without_ employees, advertising expenses, hosting, or any other paid
service, and this somehow results in an average of $15,000,000 in "economic
value," this article is some inexplicable sort of bullshit.

~~~
ibdknox
That is indeed the average amount invested _by_ YC. As stated below in recent
batches there has been the startfund blanket investment which used to be $150k
and is now $80k. Technically speaking this blanket investment has nothing to
do with YC and is given as uncapped convertible note (basically the best
possible terms).

To address if this is enough, I'd say you'd be surprised how much you can make
things stretch if you absolutely have to, but most companies also raise a
small amount of money after YC's demo day as well to help them continue. You
can think of YC as a startup bootcamp at the end of which you have to prove
yourself to get the opportunity (further investment, usually) to continue on.
With the startfund though, you get more than those three months to do so.

In short, yes, YC invests $20k and produces $6.1bn in value across the alumni.

~~~
loganfrederick
"In short, yes, YC invests $20k and produces $6.1bn in value across the
alumni."

For the sake of clarity, an accurate comparison would be: $20K * # of startups
funded : $6.1 billion in valuation for all portfolio companies

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trotsky
_we calculate an economic value of around $6.1 bn added since the accelerator
was founded in 2005_

If you could add up the market cap of all of the companies you've been
involved with finding funding all of a sudden the NYSE has "contributed" over
14 trillion dollars to the US economy. Except it hasn't.

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codex
For comparison: Sequoia Capital estimates that 19% of the NASDAQ's value is
made up of firms that they have invested in. If you apply the same ridiculous,
super sloppy accounting used here to Sequoia, it has contributed over one
trillion dollars to the U.S. economy in market cap alone, to say nothing of
second order effects on the economy.

And you can add YC's value to Sequoia's, since Sequoia is an investor in YC
itself.

~~~
garry
s/is/was/

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danvideo
not knocking all the great stuff YC does, but the analysis here seems to
assume that none of these companies/jobs would have been created otherwise,
which sounds incredibly far fetched.

~~~
garry
It's not far fetched to claim this. I'll admit it's unclear whether Posterous
would have launched the way it did, or had any reaction similar to it, if we
had not been through the YC program. The homepage wouldn't have looked the
same (PG hammered us until it looked good). We may not have quit our jobs. We
would not have been as aggressive about customer support. (Thanks Kevin Hale!)
That's just n=1, but these stories are not uncommon among YC founders.

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rwhitman
Isn't there also the flip side - that the disruptive tech businesses
represented by YC actually remove jobs from the economy on some level?

For example hotel workers who are displaced because of AirBnb etc. Not that
I'm the kind of person who advocates for keeping people employed for
employments sake, but I'd be curious how many jobs are actually made obsolete
by tech startups...

~~~
chimeracoder
With absolutely no data to back this up, I'll posit the following speculation:

In the short- and medium-run, these business cost more jobs than they create.

In the long run, they rid the economy of relative inefficiency (relative to
the 'improved' marketplace), which creates a healthier economy (creating jobs
being one symptom of a healthier economy).

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codex
This analysis doesn't seem to account for the investments in and opportunity
costs of, YC failures. Example: a company that takes $10m over three rounds
and then dies.

Also, it seems to assume that without YC investment none of these companies
would have been founded, and that no other investors contributed. They seem to
be giving YC credit for the entire valuation even though they invested a tiny
fraction of funding.

Finally, they seem to be double counting: estimating market valuation and then
adding the effects on the economy. Those amounts are not exclusive.

~~~
jacquesm
YC would not put the $10M in, so from their point of view it doesn't matter.
From the economic point of view it is simply statistics, a large majority of
start-ups fails, the few that make it to round 'C' and then burn are not very
significant. The majority will fail long before that or will survive.

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SatvikBeri
I was trying to come up with a framework for estimating the incremental impact
of YC. Some of these businesses would have been successful without going to
YC. And we can't just compare against the general startup population because
YC also selects the best.

So what's a good proxy for estimating the value that an incbuator provides to
startups? Perhaps _time_. Iterating through product ideas, getting
introductions, and getting help with legal work & administrivia probably
shaves somewhere from months to years off of getting to a good product-often
to the point where the product/business would have been abandoned before
getting traction.

Let's pick a completely arbitrary amount of time saved-one year. Most of the
value of YC's portfolio comes from AirBnB & Dropbox. It's hard to get good
revenue numbers, but based on users, nights booked, and other heuristics their
growth rates are estimated at around 100%-500%.

If we take an estimate of 350%, that means that we could attribute roughly 70%
of the value of YC's portfolio companies to YC itself. I'm not sure if these
assumptions are all accurate (especially the 1 year saved figure), but this
can give us a starting point to estimating YC's impact on their portfolio
companies.

ETA: the amount of time saved is probably the most important variable. If we
assume YC saves each company 6 months instead of 12, then YC's impact drops
from 70% to 47%. With 3 months, it's about 27%.

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kfk
Besides the fact that 6.1B is not the value to the US Economy: those engineers
and developers would have probably produced value anyway. So, to be specific,
we should know the value without YC and with YC and the difference would then
be "the value of YC to the US Economy"; I think we should ask ourselves:

1\. How does the YC-factor scale to make a real impact to any economy. Don't
ask me data, but 6.1 billion in few years have a 1*10^-n impact to the GDP of
most western economies, where probably n>10.

2\. If it's fair to call copycats everybody that tries to replicate the
concept, any concept. Innovation involves lots of copying, I thought we agreed
on that.

3\. If the YC-factor can make a real impact on industries that are likely to
be fundamental for our future welfare: food, pharma, hospitals, insurance
(pensions).

And I am interested in point 3 especially. Because 6.1B is nice, but we need
to face the reality here. We live in an aging world were people want to retire
at 60 with the same shape they had at 18. Implications of this are enormous
for our future.

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en3203
interesting. clearly some work has gone into this and, like with any research,
the results will always be open to debate. although i think obviouslygreen has
got the wrong end of the stick by comparing apples with oranges. i wouldn't be
surprised if the valuation number is actually higher. would like to see some
more details on those 'assumptions'

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EliRivers
What does it even mean to add $6.1 bn of value? It's not as if the alternative
was to put $6.1 bn in a heap and burn it. They've included staff - would they
all have been unemployed otherwise? There's lots of data but no meaning here.
What, in this case, _is_ "economic value"?

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aliston
All this says to me is that Silicon Valley success has more to do with who you
know that what you do.

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jedc
If people are interested in YC numbers (and individual companies) compared to
the 150+ other accelerators around the world, check out Seed-DB.
(<http://www.seed-db.com>)

YC startups have raise >$1billion in funding, approximately half of the
>$2billion raised by all startups from accelerators. And this is only the
reported (or self-reported) funding numbers from Crunchbase, so the total is
actually higher than that.

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tedsanders
Using specific macroeconomic assumptions, I estimate $100 trillion. What's the
point of the article if the methodology is excluded?

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michaelochurch
I never applied to YC because of the small amounts. First of all, if I'm going
to ask for money, I only want to do it once. Which means I'd prefer to ask for
enough to get to profitability, not just enough to get to another round.
(Granted, you'll raise that A on better terms with YC social proof.) Second,
if we assume a 4-year vesting cycle (which, I think, should apply to founders
as well) then my being there already puts the valuation at $1.5-2M (because,
while I wouldn't get $375-500k on the normal wage-labor market, I'm working 2+
times as hard and taking lots of risk). Scale that up based on how many other
founders there are. So for me, it's not a good deal. If you're 22, I think
it's probably a great deal.

~~~
garry
Having been an alum before, I feel confident in saying, as hooande mentions in
another thread, that the program itself is unlike getting invested in by any
other investor. If you get funded by other angels or VC's, you have little
real relationship built beyond that of you with the partner or angel.

On the other hand, at YC, when we needed help with our Series A, we got to
talk to James Lindenbaum of Heroku, who taught us the ins-and-outs. When we
needed to launch, we could talk to Alexis Ohanian who created Reddit (and
interviewed us) and knows a thing or two about launching consumer sites. YC
batchmates help each other and pay it forward when we become alums.

Few people do it these days for the money itself. One trend we see of late is
companies who have already raised seed rounds, often from already prominent
angel investors, opt to go through YC because it's a multiplier on their
ability to execute -- they're more motivated, they focus more on the right
things, have access to a hugely powerful network of alums, make deep lasting
connections with batchmates, and then get a multiplier on their valuation at
Demo Day.

I don't see age as the determining factor. Even for people who already have
networks (I was an early engineer at Palantir, Stanford grad) it was useful to
greatly increase the number of smart people I knew and trusted. (See
Metcalfe's law.)

~~~
jordo37
I've joined a YC company as a founder after the actual YC sprint and I would
definitely echo much of what garry is saying here even for myself. Our other
investors are good people, but none of them offer the accessibility and
information even now, versus what we get from the YC partners and especially
our fellow YC companies.

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rocky1138
Don't forget the numerous other accelerators which follow the YC 3-month
spring, money, and mentors method. If we include those who have been inspired
to do YC-alikes, the numbers would become huge.

