

Trying to understand incubator math - jrodgers
http://startupnorth.ca/2011/08/21/trying-to-understand-incubator-math

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pg
As in startup investing generally, the expected value comes mainly from a
small chance of a big hit, multiplied by lots of investments. You're hoping
that if you invest in 100 startups, one will be a Dropbox or Airbnb.

For this to work, you have to (a) invest in a lot of startups and (b) they
have to be drawn from a pool that could include big winners.

The latter could actually be a problem, if you're not founders' first choice.
If you lose the big winners, your returns might be orders of magnitude
smaller, even if you get everyone else.

Yes, you do have to invest for years before you end up in the black, even if
things go well. That's also true for startup investing generally.

When we started YC, the returns seemed completely unpredictable. (They still
do actually.) What allowed us to do it was that we didn't care if we made
money.

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pedalpete
Though the big hit makes the major returns, doesn't the one small hit per
session cover the operating expenses? (Reddit, Zenter, 280North, etc. etc.)

I think this is what the original post might be missing. The top incubator(s)
can patiently wait for the big hits, as long as they've got 1-in-20(ish) small
hits to keep them in the black.

~~~
pg
You can't count on that, because acquisitions are so unpredictable. In bad
times they dry up entirely. YC was not in the black till December 2010, more
than 5 years after we started.

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abiekatz
Sounds like it was Heroku's $212 million sale to Salesforce that pushed YC
into the black. Though, I imagine if you also include on paper gains, you were
in the black much earlier.

~~~
pg
Actually it was either Zecter or Cloudkick. December was a big month.

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JacobAldridge
_"it’s sole purpose should be to make money."_

Wrong use of "it's". Wrong application of "sole".

Why would an incubator, or any business, only have a "sole" purpose?
Certainly, it makes sense for them to have a purpose that is "to make money",
but what requires that to be its sole purpose?

If a client every came to me and declared their sole purpose in business was
"to make money" I would 1) not take them on as a client, but not before 2)
strongly suggesting that there is something far deeper than money which needs
to drive them and their business if they're to make that money. Maybe their
underlying reason is still personal, like being able to holiday 11 months a
year or have enough money to send their kids to a better school than they went
to. Maybe their other purposes include changing peoples' lives or delivering
health initiatives into a third world country. Both benefit enormously from a
sustainable, profitable company. And it's a lot easier to recruit motivated
staff, build clients, gain media attention etc when your authentic reason is
more than money.

Trying to solely make money is like running a business solely to not make
money - makes no sense, and I've not seen anything in incubators that
indicates they're any different.

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akkartik
Also:

 _"If your running an incubator.."_

Wrong use of 'your'.

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JacobAldridge
Possibly missing my main point, so I must refrain from nitpicking, especially
when I'm making a more significant point.

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nazgulnarsil
what are you missing? the fact that the vast majority of your return will come
from just one or two major exits after funding 50+ companies.

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mathattack
It certainly makes ycombinator's performance seem all the more impressive.

What is left out of the equation is the opportunity cost of Angel/VC time. And
benefit too. The caliber of advice and strength of networking has a huge
impact on fund performance. This comes at a large opportunity cost, as advisor
time and attention could be deployed elsewhere. I believe this opportunity
cost is higher than tangible dollars. Te benefit certainly is.

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gallerytungsten
re: "An incubator is a business and it’s sole purpose should be to make
money."

Not necessarily. Some incubators are government organizations or non-profits,
with the goal of improving the local economy.

