
Growth as a false signal in Y Combinator startups - happy-go-lucky
https://techcrunch.com/2016/12/18/growth-as-a-false-signal-in-y-combinator-startups/
======
lpolovets
As a VC, the premise of this article makes little sense to me.

1) Investors aren't idiots when it comes to growth. No one expects today's
growth rates to stay constant. Growth decelerates over time.

2) You can't take averages of revenue and growth across lots of startups and
use that as your model. Here's an example with two startups:

* Startup 1: $4.99m annual revenue, grew 5% last month.

* Startup 2: $10k annual revenue, grew 145% last month.

"Hey look, if you average these growth rates out, you have a combined $5m in
annual revenue growing 75% monthly. That'll be >$4b in annualized revenue in a
year!!1!"

No, it won't.

The reason investors value high growth in young companies is that growth rates
are an okay proxy for a lot of valuable things: product-market fit, execution
ability, go to market strategy, etc.

~~~
CalChris
One thing that confuses me about YC is that they're an _accelerator_ rather an
_incubator_. In particular, this article talks about revenue growth which is
an acceleration stage metric. Seed stage needs seed money to prove a
hypothesis. Acceleration stage needs A money to accelerate. Stressing revenue
growth at seed stage seems like it could be dangerous to a startup's health.
(Yeah, ideally you would want the seed/acceleration transition to be c2
continuous.)

YC offers seed money for seed percentage, $120k in return for 7%, and attaches
accelerator metrics. This transaction just doesn't make sense to me at all.
Clearly it makes sense to others, given the number of YC applications.

~~~
Lordarminius
> This transaction just doesn't make sense to me at all.

As a YC applicant I feel I am in a position to offer an explanation.

Money is very hard to raise for many first time founders; 120k is a fortune at
this early stage. YC offers access to its rolodex and being accepted (whether
the startup succeeds or not) is a badge of validation that opens many doors
internationally.

The trade-off is worth it.

~~~
Hydraulix989
Also, the YC badge allows founders to raise a round at Demo Day at a MUCH
higher valuation than even the 2nd best accelerator (and this has been shown
to be true for almost every single company in each batch) -- the difference is
staggering.

~~~
saycheese
Source/data?

~~~
lpolovets
I've attended dozens of YC and non-YC demo days as an investor. I can vouch
for the grandparent's comment. YC companies have valuations that are 1.5-2.5x
higher than elsewhere, but (in my opinion) have outcomes that are 3x+ larger
on average. So they are expensive investments on the surface, but still
relatively great deals.

~~~
kriro
As a complete outsider who has never raised money or set foot in the valley my
feeling is that without data this sounds like some sort of buddy-buddy system.
Where's the data to back this up?

Basically the way I read this is if I have a business model that is likely to
require a series A eventually (i.e. not profit oriented) if I won't apply to
YC I'm setting myself up for a massively worse deal later?

~~~
lpolovets
1) I have anecdata about returns: my first fund wrapped up earlier this year.
About 30% of our investments were in YC companies. Based on investment
multiples, 3 of the top 6 companies in the portfolio were YC. This is based on
multiples, not absolute valuations.

2) Investors are strongly incentivized to be greedy, so buddy-buddy systems
are not in their self-interest. Most funds take a 20% cut of the profits they
generate, so they are typically investing in YC companies only if they think
those returns will be as good as lower-valued non-YC companies

3) FWIW, the valuations are only substantially higher for YC, and not for
other accelerators (many of which are quite good). I think that is also
evidence against a buddy-buddy conspiracy.

As to your question about Series As, I don't think YC has a huge effect on
Series A valuations, although I haven't looked at the data there. The effect
is mostly on seed valuations. I think of the YC badge as similar to a going to
Harvard. When it comes to getting your first job (seed round), having a
Harvard diploma is a great signal of your potential and might get you a higher
starting salary. When it comes to future jobs (Series A and later), people
will look more at what you've done since graduating than where you went to
school.

------
minimaxir
This data analysis is cheating. You can't provide an earnest data
visualization and _obfuscate the data_ (the corresponding YC companies) at the
same time, as it makes it impossible to validate. True, VCs can't disclose the
metrics revealed in a Demo Day, which makes the existence of this article
problematic.

Additionally:

> If we annualized revenue for each company on the twelfth month after demo
> day, then annualized revenue per company would vary from $1 million to _$159
> billion_.

What the hell?

------
dangero
Tangentially related to this article, a few growth number tricks I've seen
from founders recently:

-Flying all over the country speaking at conferences giving away tons of schwag while claiming zero dollars spent on advertising. "It's all organic growth!"

-Hiring a PR firm to get you mentions on industry blogs while again claiming zero dollars spent on advertising. "We get 1000 new visitors to our website every day and we've never spent any money on advertising."

-Un-launching their product when they don't see the growth numbers they want, "Right now we have about 50 users in a pre-launch focus group." AKA "Our first launch failed, so we are going to pretend it didn't happen." Followed by a second "launch" so that growth numbers look good "since launch".

------
vonnik
It's popular to pick fights with YC and its ideas these days. Easy press.
Other examples: Gab, CB Insights, various reporters. The recipe goes: Find
someone or something famous. Find a bone to pick. Leverage famous something's
name to generate headlines. People are going to click.

------
philip1209
I don't think that growth is a false signal. One major thing that kills
startups is that people don't want what the company is building. The second
derivative of revenue is a good way (i.e. signal) to measure product-market
fit. The other major cause of death is cofounder breakups, and that's hard to
predict.

Regardless, it's tough to predict the future.

------
personjerry
> Nick Mayberry, director of content at Tandem Capital, contributed to this
> article.

This might explain why the article seems to try so hard to bash YC.

~~~
garry
The article itself is written by a general partner at Tandem. It is pretty
unusual in the business to have that kind of agenda frankly. Seed investing is
the least zero sum stage in finance that I can think of. When founders win,
seed investors win. I just can't see how this is a good tactic.

~~~
drenert
Garry, I wrote the article and by no means have any agenda against YC. Tandem
owes much of its success to YC companies, and we don't intend to stop backing
them now. The main point of the article (as some other commenters pointed out)
is simply that not every company needs to be growing through the roof at demo
day to be on track for success. Perhaps some don't think that warranted
mentioning; I happen to think the reminder is healthy.

------
DavidWanjiru
Two points. One, my understanding of Paul's basic premise is that it's not the
class quality that matters, it's the unicorns that matter. As in, in this
game, you're not chasing good classes. You want the one or two superstars,
even if they're in a crap class. Secondly, the analysis I'd find useful is one
that looks at unicorns using hindsight. How early can you tell them apart?
They are the ones we came here for, remember? It's a very hard task, like
telling the gender of day-old chicks.

~~~
Lordarminius
> Paul's basic premise is that it's not the class quality that matters, it's
> the unicorns that matter... You want the one or two superstars, even if
> they're in a crap class....

I used to wonder at this thinking and so apparently have many other observers
until I hit upon the realization that the narrative from YC was misleading. It
doesn't make sense to rest your entire strategy on seeking one or two
superstars from a crap class. What is really going on, is that they organize
the most promising applicants into a class then nurture and wait for unicorns
to emerge. The midlings make returns too

------
free2rhyme214
The real point of this article isn't to be right, it's to generate more
eyeballs and provoke discussions. More TC clickbait.

------
coderzach
TL;DR

Not every company that has a revenue chart shaped like a hockey stick is going
to become a multi billion dollar business. Consider looking at metrics other
than growth when investing.

Is this actually something that needs to be said?

------
mck-
Am I reading the second chart correctly? $44m in MRR across the 22 companies,
ie an average of $2m MRR after demo day?

That sounds like Series B metrics? Why did they go through YC?

------
truetothepoint
Deleted

