

Can The Y Combinator Idea Turn Into A Movement? - konsl
http://avc.blogs.com/a_vc/2008/04/can-the-y-combi.html

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ChaitanyaSai
Will proliferating seed companies start looking like micro sub-prime mortgage
traders? They operate on the similar assumptions: pooling small, high-risk
investments hoping that these individual bets are unrelated, thus driving down
the variance when bundled together. This is probably only true for the seed
company that gets to cherry pick first, which seems to be YC as of now.
Assuming an initial chance of success of 1/100 for the groups that are
selected by YC, the chance that every single one from a group of 100 fails is
about .36. That means that on an investment of about 1.5 million dollars (100
* 15,000) they have a 64 percent chance of a success, which I loosely define
as a big acquisition or buyout. Also, YC companies seems to prop each other up
and drive up success rates through intelligent nurturing and beneficial
network effects. I'd guess that the payout probabilities are much higher over
a three-four year period.

Now I am highly skeptical that the same math extends to other seed companies.
Do they get applicants of the same caliber when there are so many second tier
seed companies to choose from for a prospective applicant? People are willing
to uproot their youthful lives and move for YC, but will they do the same for
Techstars or LaunchBox? Probably not, at least not for 15,000 dollars and
little else. If I throw in the assumption of a power-law distribution for
startups, the quality goes downhill rather rapidly. And additionally, if YC
happens to be decently good at identifying truly promising candidates and
taking them all into their fold as they claim to, it the median success
probability for the rest is going to be rather low. Assuming an order of
magnitude drop-off, that gives an payout probability of .09 ( 1-(1-1/1000)^100
if they are operating on same scales as used for YC). The number of seed
companies sprouting is surely going to be limited by such math...

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Prrometheus
>Will proliferating seed companies start looking like micro sub-prime mortgage
traders?

I question the analogy. Seed funding might become a fad investment, but it
will surely be less volatile than the subprime mortgage sector. Subprime
mortgage originators and buyers backed their assets (the mortgages) by a large
amount of debt. So, if their assumptions were only a small bit off (say
defaults were 5.0% instead of 4.0%) the debt holders could demand a large
amount of new collateral, more than the companies had on hand, forcing them
into bankruptcy.

Most venture funds have little or no debt. If they overestimate their return
by 25%, that means that they will earn 25% less than expected. They will not,
however, go bankrupt.

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ChaitanyaSai
You are right. I don't mean to say they run the risk of bankruptcy. The
amounts invested are only in the millions here (seed companies). However, the
rationale that led a lot of risk assessors to view the bundling and
securitization process of sub-prime loans as meaningful is what I find to be
parallel.

You are also right that VCs and their investors are sensible as of now. It
boggles the mind that highly leveraged companies would buy and hold on to
high-risk bets.

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ojbyrne
I would tend to agree that YC cookie-cutter clones are probably not going to
succeed, but there are probably niches that are underserved. One that
immediately comes to mind, just from the various discussions here, is the "I
want to found a company, but I'm not in the US, and there's no such thing as a
company founder visa."

~~~
ericb
One reason Y Clone-ators may fail is lack of imagination. YC was not handed
their recipe from the heavens. If these clones had any creativity, they'd be
modifying the recipe to see if their ideas could make it better.

For example, why not a 4 month boot camp preceded by a 1 month crash course in
business, presentation skills, etc. I'm not saying this is a better
implementation, only that if the clones thought for themselves, they'd be
doing more interesting things, which would tell me they were smarter and
actually people I'd want to learn from. I'm afraid to take creative advice
from someone whose big innovation is copying YC. I think YC's model is better,
and it may be a good thing for it to spread, but none of the clones I peeked
at have impressed me much so far.

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bokonist
Even better would be a series of two week externships that would give hackers
exposure to business problems.

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SwellJoe
Really? That's what college and working a regular job is for. If you're
starting a company, taking two weeks off to be exposed to the corporate world
would be worse than a waste of time.

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wheels
I'm surprised that the responses here thusfar are negative. Right now there
are certainly more companies being funded by later stage VCs than YC knock-
offs, so there's obviously a large enough pool of companies that can make it
to that next phase. But can seed groups pick them?

I'll just make up some numbers:

Let's assume that the seed investment gets diluted down to 2% before an exit,
and let's assume a buyout of $5 million. If we pretend that the only costs of
running a seed firm are the investments, with seed investments of $15k, that
means one successful at that level would cover 13 startups.

YC seems to be shooting for successful exits of 1/3 of their startups. If a
group emulating could even do a quarter as well as YC hopes, then they'd come
out ok (using my pretend numbers).

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skmurphy
13 x $15K is $180K; 2% of 5 Million is 100K this is 6.6X If YC only had 1/3
exit they would earn 2.2X which is surely less than their total cost per
investment

YC looks more like a heavyweight advisor or individual angel than a seed fund
in terms of the size of their equity stake.

~~~
wheels
Oops, I accidentally messed up things by a factor of two. Reworking, this
means that a YC clone would need to do half as well as YC.

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jgrahamc
Movements require charismatic leaders. You can duplicate the $$$, you can
duplicate the choice of companies, but can you lead them?

~~~
davidw
PG as "Dear Leader" ?:-)

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pchristensen
Comment that turned into a blog post:

[http://www.pchristensen.com/blog/articles/can-ycombinator-
be...](http://www.pchristensen.com/blog/articles/can-ycombinator-be-beaten-at-
its-own-game/)

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brlewis
His blog is itself an example of the small-neuron phenomenon. If you're
running the noscript firefox extension you see there are 26 sites trying to
run JavaScript on just this one page.

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noonespecial
That would require at least 3 people to walk in, sing a bar of "Alice's
Restaurant" and walk out.

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fredwilson
great comments. can disqus get these comments into the comment thread on my
blog where I posted this question? i love that you are all discussing this and
that there are 22 comments here. but i got 34 comments on this post on my
blog. it seems that we'd all be better served if there was one thread with 56
comments.

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sabat
The hard part is not gathering the money, but knowing who to back. That's why
there are not a million successful Y-Combinators.

OTOH it is probably possible to figure out how PG and company are judging the
people and ideas, and duplicate the methodology.

The world doesn't need a bunch of bad YC clones, but it sure could use a few
more good ones. :-)

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Prrometheus
Paul Graham backs companies that fit into the Paul Graham philosophy. This
probably causes YCombinator to miss the majority of possibly profitable
investments. I am not criticizing YC here, they are only looking for a few
dozen startups each year so it is fine if they miss most of the good ones.
However, there is room for several YC clones, perhaps run by other successful
founders, that invest with a different worldview than Paul Graham.

~~~
attack
If there is not room for a far bigger number of YC clones or angels similarly
then this entire method of growing companies is doomed.

