

Sarah Lacy's counter argument to PG's 6.4% point - shafqat
http://www.sarahlacy.com/sarahlacy/2008/08/6-can-be-a-lot.html

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byrneseyeview
_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.

~~~
jeremytliles
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.

~~~
ojbyrne
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.

------
paul
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.

~~~
aswanson
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.

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stcredzero
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.

~~~
omouse
wtf do you expect? She's a sensationalist. A fine journalist who deserves to
work at the National Enquirer or elsewhere!

~~~
alaskamiller
Wow.

------
startingup
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.

~~~
azharcs
_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.

Hence the start of YC Mafia.

------
froo
Good to see Sarah Lacy got her numbers wrong again...

 _mentioning they take a rather hefty cut of a startup for a comparatively
small $5,000_

Journalist Mathematics strikes again, I mentioned this yesterday..

<http://news.ycombinator.com/item?id=281780>

Glad to see Sarah doesn't let me down :)

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pchristensen
"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_.

~~~
thaumaturgy
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.

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k4st
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".

~~~
daniel-cussen
No, you're right, it's "has a huge _effect_ on something." She could have
proofread.

~~~
falsestprophet
How does this girl have a job?

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mattmaroon
"1% of Facebook is also worth hundreds of millions (at least)."

What valuation does she give Facebook? Even the most outlandish valuation ever
given to them (one nobody sane would use for anything) puts 1% at 150m.

~~~
ghshephard
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.

------
pius
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.

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kul
"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.

~~~
Prrometheus
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.

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jsmcgd
Please don't take her up on her offer PG! I get a really creepy teen drama
vibe about her.

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tlrobinson
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.

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mwerty
> 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.

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johnrob
"1% of facebook is worth hundreds of millions"

Yeah, but 99% of facebook is worth tens of billions by the same logic, so
hundreds of millions isn't really that much anymore.

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gojomo
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!)

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bfioca
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.

------
bullseye
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.

