I'm hoping we'll eventually see some experimentation with the model, now that they have more money to work with.
I've always believed there's room for a YC-like company to do slightly bigger investments. Instead of $17k for 2 founders, it would be $80k for 2 founders. That way they could attract people with higher cost of living/high paying jobs (who would hopefully tend to be more successful due to more experience/connections/stability)
Actually given an incremental dollar to invest I'd always prefer to expand sideways rather than depthwise. It's much more interesting to fund a whole new startup than to give more money to an existing one.
Plus the startups themselves don't need that as much; there are already lots of investors ready to give the next $100k to startups we seed.
The idea would be to get all the awesome 100k/yr+ hackers with mortgages/families to try their hand at a startup. Their current options are 1) Risk their marriage/mortgage/savings by quitting their day job. 2) Build up traction on the side of their day job.
Most people won't do #1 and #2 makes failure much more likely. If some of these people are significantly more likely to succeed (my theory) it would make sense to invest more on one of these.
Starting a start-up will risk your marriage in plenty of other ways besides financially.
And those people wouldn't be willing to go all out killing themselves like the start-up myth around YC funded companies seems to more or less ask for. That's self selecting to some extent because one of the demands YC makes (drop everything and move here for 3 months) only applies to young or at a minimum fairly unattached people willing to take a fairly large risk in return for a shot at a potentially larger success.
Founders with 'lives' are a lot less likely to take that plunge, even an 80K investment would not be enough to provide the required security for a team of four to get to the break even point, after all that depends not on the size of the investment as much as to how long it will take you to get to 'ramen profitable' and that point is a lot further in to the future than you'd be with 3 or 4 'cheap' people.
The problem is to get monthly income to become greater than monthly expenses, and to get people that would require more payment during the launch phase the whole picture becomes terribly unattractive as long as there are plenty of young guns willing to try it for a lesser take home pay.
Their chances of success are better, they are less demanding and they probably have more energy (even if less experience).
You are in direct competition with them and I don't think that from an investors point of view there is an incentive to change the formula if it already works. The chances of those larger investments tanking is just as large or larger as it is with the small ones.
And a nice side bonus is that younger people are less set in their ways and more likely to listen to good advice.
Another way (and perhaps the optimal way) to mitigate your risk is to join an existing startup early on, which we're also trying to make easier for hackers to do:
The value proposition for not-quite-founders when you compare your market-rate salary vs. a startup-salary + equity tends to drop steeply. I don't have data, but from my own anecdotal experience you'll probably take around a 20-25k per year salary cut for 0.1% - 0.5% in options if you take a position at a series-A to Series-C funded startup.
This economic situation is really a kind of hybrid of full-salary and apprenticeship, where you're partially compensated in startup experience. I'm doing it now so I can learn the ropes of an early-stage startup while paying off my student loans. But long term I suspect your EV is better as a founder or cash-compensated so long as you properly invest your cash compensation.
<only-marginally-realistic rant>
Even better is to be one of those VP's who come in during Series C at an already-successful company and somehow make a market-salary and get 10%+ in equity. You know, the fuckers in suits who come in and do nothing.
Risk and reward tend to be correlated, at least in efficient markets. And since there are so many startups to choose from, all desperate to get programmers, there's a reasonable hope of getting market price for your risk.
The startups presenting at Workatastartup range from established companies 5 years old to startups from the most recent YC cycle that are currently run by single founders and are looking for people to be de facto cofounders, in every sense including equity.
Fundamentally I think startups overvalue the risk of coming up with a product vision and undervalue the risk of executing on that vision. It's arguable harder and more risky to go from "lets make a social network" to the entire product that is Facebook, and a majority of the people that bridge that gap get relatively shafted on equity.
As to your point about joining a post-YC company, employees #1-#5 are generally defacto cofounders and are often given similar equity. I'm not disputing that. I'm talking more about (roughly) employees #6 -> #30. At that point you have a product vision, but no concrete product. Since the major work of a startup is discovering the details of what to build, a majority of the work isn't done yet, and the real risk hasn't been mediated. However, a majority of the equity has already been passed around.
The risk and reward are certainly correlated. To say for certain you'd need a rather complex economic analysis that factors in opportunity costs to really say what the monetary sweet-spot is on the founder<->enterprise-employee spectrum. My suspicion is that the startup talent market isn't very efficient; As an industry we haven't really found a good way to judge technical skill other than working alongside someone for months. This hurdle means all the good jobs come via social connections. All the good positions are taken by the founder's network, and all the great devs already have a good gig.
My suspicion is that the startup talent market isn't very efficient
I think this is true of the hiring market in general. "You made $80k at your last job as a senior developer? Super. Alright, we have to ask: FizzBuzz. Can you do it?"
I hate to say it, but I've interviewed a 'senior devs' who made six figures before who couldn't do fizz buzzish problems in any language of their choice (and many more who took >15min to do so ...)
What's the harm in asking if it's a quick and simple discriminator?
I'm talking more about (roughly) employees #6 -> #30. At that point you have a product vision, but no concrete product.
I don't think this is true, at least not for consumer internet startups. If you can't build a concrete product in this space with 5 people, you probably can't build one at all.
If you have your first scalable product with 5 people, there's a good chance that after you start hiring up to 20-30 employees (not just engineers), the market and your product will make large shifts. You'll have to rework and rethink your product after you start scaling, too.
My co-founders and I are in this situation, and we did YC this winter (Zencoder), so it definitely can be done. We basically ran on savings for four months, and were able to raise money quickly, so none of us lost our homes or wives/girlfriends.
But not risking your savings, on the other hand - if you aren't willing to risk your savings, being a startup founder might not be for you. :)
i.e., "Make it easier to put risk capital into people who are more risk averse."
A mortgage and family are a handicap in something that requires high levels of uncertainty and huge amounts of time. It seems you'd want to bias selection towards those who would take the plunge despite that handicap rather than offering a work around with a 6 month expiration date.
For an individual with a mortgage and family, when the going get's tough, they drop the startup and go get jobs. For someone who can live on a grad student budget (YC funding level), there are many months of productivity left after money starts to get thin.
That's wildly inconsistent with everything I've ever heard from you on the subject before.
I thought the limit on YC was you -- that the partners didn't have enough attention to distribute to any more startups (or more tablespace to sit them all at for weekly dinners :)
How are you planning to expand sideways without drastically reducing your (non-monetary) contribution? Wouldn't this just make YC less valuable on it's own merits? You'd retain the brand value, but that would diminish pretty quickly if the startups you funded started getting crappier. If you did diminish your responsibilities, and the startup quality didn't go down, what would that say about the value of your higher-bandwidth contributions before?
Till recently the two main bottlenecks in YC were my time and the size of our space. Which is why we recently hired Harj and expanded the orange room by a third. I'm not sure what the next bottleneck will turn out to be.
As I said in another comment on this thread, we approach scaling YC the same way we approach scaling software. You can never predict what the bottleneck will be till you hit it, so you just fix them as you hit them. If we did eventually hit a bottleneck that we couldn't fix, in the sense that if we continued to expand, the startups we funded would start to do worse, we'd stop expanding. But we clearly haven't hit such a bottleneck yet, and my experience of scaling stuff makes me cautious about predicting exactly where it might occur.
I thought about it a bit more, especially after seeing that article talking about how %74 of your startups from this round have taken funding or are profitable already -- which I saw as having only %26 of them not be successful (whether among users or VCs) in the super-short-term.
I think you could afford to increase that rate significantly -- if anything, it's too low! Do you have a better metric to gauge your expansion by?
How much of that tranche of un-profitable and un-funded startups has historically been just in continual stealth ramen mode, and how much is actual failure? It'd be really interesting if you could put up some anonymized statistics about the 207 startups from the perspective of the founders. I'd visualize it as a series of images for each quarter, with a grid of venn diagrams of none/dead/acquired/funded/profitable for each YC round up to that point. Put it in a slideshow so you can scrub back and forth in history. Would also work in table form with YC rounds on one axis and time (or time since YC) on the other. I know you're rightly hesitant to talk about YC startups that didn't do well, but I'm not really interested in them specifically, just the collective attrition/success rates over time.
The network of alum really helps.
Having access to so many startups that have already optimize the hell out of the steps needed to start a company is a big value add.
The reality is that if you want/need PG's time you can get at any point during YC.
I think the really interesting thing about the alumni network is that it's not only growing in size, but experience. At this point there are companies inside of YC that have grown larger and been around longer than Viaweb was, so not only are you able to get advice from folks other than the YC founders, there's an emerging set of people who are in some aspects more experienced. (Though, naturally none who have seen more early phase startups up close.)
That's one of those surprising emergent properties that I think will be of increasing import as the trend continues upwards and also has an effect of distributing the load on the YC founders.
Does this mean that we're going to start seeing a wider variety of startups funded by YC? Most of them seem to be consumer facing, but there is a lot of room for innovation in behind-the-scenes software.
This won't change the types of startup we fund. But the types of startups we fund aren't as constrained as they seem. If it seems like we fund mostly consumer web apps, that's because (a) consumer web apps are more visible; Reddit has a lot more users than Clustrix, and (b) that is the kind of startup that younger, more technically inclined founders tend to start.
I think most of the ones that are the best known seem to be consumer facing, but then things like Clustrix, which has raised more money than Loopt, Scribd or Dropbox are a reminder that there's other stuff happening that's just less visible.
Supply/demand. Why would YC (or ANY early stage investor) ever want their money to go to your higher cost of living when they have a line out the door of great opportunities founded by people who have a cheaper lifestyle and/or a pile of personal savings?
The answer, of course, is "they'd do it if it was an unusually good startup with TONS of traction." Of course, if you're in that boat fundraising isn't a problem, is it?
But it would never be 4x more likely to succeed, or at least not in any way that you can prove in advance, and statistics are against you anyway.
Batting averages do not vary considerably based on the size of the investment, and having 'graybeards' on board is no guarantee for success, at best it is neutral.
The only real case I could make for investing in a company with older people with a lot of responsibilities (distractions!) is that they have a lot more to lose.
Since when can anyone prove anything like this in advance? Everyone invests based on a hypothesis. Mine is that there's an untapped resource available. If you're the only investor that attracts these people you get the pick of the litter, so even if it wouldn't work if everyone did it, it might still work for one or two investors.
If there is no proof up front then best case it will be equal, worst case it will be (much) worse. Contrary to popular belief investors are conservative, they will gamble on the companies involved but they are less likely to gamble on changing the formula.
There are a number of questions that need answering before you can get someone to take a bigger risk.
20 start-ups at 20K = 400K invested, 20 shots at a payout of a million or more.
5 start-ups at 80K = 400K invested, 5 shots at a payout of a million or more.
The chances of any one of those 5 being successful are not nearly 4 times as high as any one of the 20, and you'd have to cross that hurdle for it to make sense for a VC to drop their working model in favour of your unproven one.
In my opinion, when it comes to seed capital, the amount is the lesser factor in determining success, so I would figure that the chances of success are exactly equal for each of the five as they are for each of the twenty. So it is the other method that has a 4x higher chance of success!
Why not just do $1k x 400 investments, if the number doesn't matter? Obviously it does matter.
The current YC investment size was an estimate based on their own experience raising angel money for Viaweb. It's not some magical number arrived at through hard analysis. It's essentially a guess.
There's no way to know if it's the right number or not. YC can't know who isn't applying. I suspect they're losing out on a large number of the most promising candidates.
Because $1k is too small an amount to be useful. But I think you are not really serious here, you are just trying to argue your point from extremes.
$20k is a useful amount, it will get some work done. $80k is not that much more useful but it is 4 times as much.
$10k is probably still too low.
You optimize the number, and around $20K there is an optimum for the target audience that YC tries to reach, and it makes sure that you don't get a bunch of gold-diggers that see the investment itself as a success.
$20k is enough to get a boatload of applications. YC is limited by the # of people they can invest in, NOT by the # of applicants. They are constantly turning away great startups due to having limited slots. Upping the amount they invest per startup would only help them if they took commensurately more equity ($80k = 24%+). With limited slots, they are simple trading great startups with lean-living co-founders for great startups with a higher price tag.
Who isn't applying? The YC process is -- survive 3 months on ~$20k. Survive 3-4 more months as you raise more money or get to profitability. Presumably you have savings or friends/family you can borrow from. How about a HELOC?
Honestly, if you can't find some way for 2 people to survive on $20k for 6ish months, you're probably either a pretty lousy life-hacker or you've had some bad luck. Either way, you're a bad bet compared to the alternatives.
But, again, if your startup is badass compared to YC applicants, fundraising shouldn't be a problem.
My impression is that they arrived at that based on what it would take young people to live frugally in the area until they built their product and got funding.
They have a very large pool of applicants to choose from even with the small amounts the invest. I think if they decided that they needed to increase the size of the talent pool to get enough quality groups, they would look into ways (such as increasing the investment amount). As it is, they don't seem to need to, so why would they?
To quote both Warren Buffet and Naval Ravikant (startupboy.com): "It's the people, stupid". It could very well be worth it to invest 4x in a company started by proven startup veterans than to invest in some plucky college grads.
Yes, that's true. I forgot to mention that, but it is now a very deliberate strategy. When we started YC we didn't even realize we'd produce an alumni network, but it is becoming more and more important.
It would be most accurate to say it competes with MBA programs. I could say with a straight face now that if you want to learn about the startup end of the business spectrum, you'd be better off doing YC than going to B school. But I wouldn't say that about college, because so much of what you learn in college is social.
Some of us have dropped out of top MBA programs (Dave and I were at UChicago) to participate in YC. And I haven't regretted my decision for a second. Most of my entrepreneurship focused MBA friends would trade in a heartbeat (and some have applied to YC). Although they are definitely selective the top 10 MBA programs take in ~5000 students a year while YC will only take ~200-250/yr at 35 companies per session.
If the goal of funding $80k is to attract more experienced founders, it seems to me that by default, those founders would be better suited for different investors anyway. YC is largely about helping founders learn how to start a business, and connecting them with more experienced people (and with each other).
I'm also having trouble understanding what 2 people would do with that much money in only 6 months. I would argue that the 'stability' factor would make them less likely to work as hard as the other companies who are highly motivated to pay their bills in that time period.
How much income would you need? Even with a smallish Series A, you're generally expected to have a pretty crappy salary.
It's kind of sad that startups are a game for people who have a long personal runway (combination of savings and cheap lifestyle, usually), but that's the reality.
No investor is going to be excited to see their money put to work by paying down student loan bills, though at a certain level you can often swing a 50-70k salary. As I understand it, get big revenue or a big Series B round, and you can generally lobby successfully for a non-insulting salary.
I don't think this is entirely correct. Good investors understand that different founders have different situations. If you're 19 years old and your personal expenses are negligible, and you pay yourself $90K, investors will wonder if you're committed to your startup. But if you're leaving a $150K job and have a family, and you pay yourself $90K, your investors won't mind. Or else they shouldn't be investing in you in the first place.
It totally depends on how much you raise, who your investors are, who YOU are, etc.
But your salary needs are a reflection of your commitment. i.e. if 3 founders raise $500k, $50k salaries give them a ~15k/month burn rate fully loaded, approximately. $100k salaries give them a $30k/month burn rate fully loaded. The difference is the ability to hire two solid ppl.
Which do you choose? Is your lifestyle more important than 2 hires? Alternatively, if you don't need to hire any more, how much runway do you shave by making $100k across 3 founders?
Investors also want interests to be aligned. Low pay early on means that you're motivated every day for growth (because revenue or a larger investment round means a raise). They'd certainly rather see their money invested in growth than in founder lifestyles.
Of course, every situation/investor/founder is different... But yeah, expect to take a big pay cut.
Yaw, I did say "smallish" series A. If you're raising 4-6m, then founder salary really ceases to be a big needle mover in terms of runway. Certainly angel investors will often push hard on founder.
If you have less than a million in the bank, I think the question needs to be framed as "How much do I need to survive" and NOT "What did I make at my last job". If the founders aren't trying to dig deep here, then I'd wonder about their motivations (unless revenue was taking off). Lack of runway kills startups.
I don't agree with this. Most startups I've worked for paid better than that. Especially after series A. The investors know you have to pay for talent.
There are no IPOs these days so at a typical .5-1% the best outcome for a hired engineer is for the company to get acquired in < 2 years, make about $300K and get a job at the acquiring company that pays 2x they would make if they just went to work there in the first place. Kids who go to Stanford and MIT seem to have this figured out and are expecting to be paid market rates. Your market rate may vary.
The worst places I've worked are the ones where the founders conned all the staff into working for $50-$70K by using extremely optimistic outcomes for demonstrating how much their options might be worth in the future. Which is like 70% of all startups in Silicon Valley.
What are your monthly payments? I imagine anything under $500/month is doable (I have $250/month and just quit my job: by the time I run out of money I'll know whether or not my business will work out, and that's really all you need).
EDIT: as a corollary, I'm thrilled I didn't pay off my student loans earlier. They average about 4.5% - that's the cheapest loan you can get anywhere. Treat it like a business loan and use whatever you save to live off of when you're working on your startup :).
Are (presumably American?) student loans deferrable? I recall with my UK loans it was possible to defer repayment if some conditions were met (low income I think was one of them).
I suspect American student loans aren't (more or less) de-facto interest free. Interest on UK student loans supposedly only tracks inflation, although that doesn't seem to be quite true in practice. Nevertheless, interest is low enough that you can actually benefit from arbitrage if instead of paying back the loan you invest in high-interest savings. (except there's no such thing as a high-interest savings account right now) We did this for my girlfriend's student loan for a while, but we're just going to pay as much of it back as possible before interest goes up to >4% in September. No arbitrage possible at that rate, not in this economic climate.
The other aspect is that UK student loans are probably much smaller for the majority of people.
Looking at it from a money perspective is backwards. The idea is to pay your living expenses so that you can focus, not give you any kind of salary (at least that's my understanding).
The rate seems like a good commitment filter as is.
If you believe enough in what you're building that you're willing to ruin your credit... than you have the proper motivation. If you are getting paid well enough to stay financially fat & happy, what risk are you taking? What will keep your head & heart in it after you've hit your first road bump... or wrecked around the first blind curve?
In my experience... everyone can get their expenses lean. Just depends on what you're willing to give up. For those with families that's a bit harder.
207 investments @ $17k is $3.5m
13 exits @ $69m total is $4.1m for YC
That means that YC is probably close to breaking even already, plus they have all their equity in a ton of successful companies that haven't exited yet.
I don't know much about investing, but at this rate $8.25m should keep them going for quite some time.
I'm the guy who maintains that spreadsheet, and do try to keep it up to date.
But my huge disclaimer is that the exits are _my_ guesses only, and are likely wildly off the mark. But I keep it since I think my errors potentially cancel themselves out in aggregate, and it's useful to estimate the financial return YC has had thus far.
Congrats pg, jl, tlb and rtm! 70 startups per year is an amazing number - how long before YC is involved in practically every startup in Silicon Valley?
I couldn't resist calculating the answer to your rhetorical question. It depends how many startups get started each year in SV of course. If the answer is 1000 and we continue to expand at 1/3 per year, then 12 more years. But since we could never get all the startups, what this calculation really proves is that our growth rate is going to have to slow down at some point within the next 12 years.
Unless of course there start to be a lot more startups, which is a real possibility.
But it's alarming to think what sort of monstrosity we'd have to evolve into in order to fund 1000 startups a year.
You won't have to. Your alumni network will do it. A more interesting question: how long will it be before YC, or its alumni, are involved in a majority of SV startups?
Hmm, interesting question, but so much harder to calculate, however bogusly. Paradoxically enough, the answer there would be the fewer, the better, because the spread of YC alumni to companies they didn't found tends to happen through startups dying or getting acquired in small, early acquisitions. Ideally all the startups we funded would go public and the founders would still be working for them 10 years later, like Larry & Sergey are. In that ideal scenario the number YC alumni were involved with would reduce to the number we funded.
That already happens. The Reddits and Zenters have made angel investments in later YC funded companies. They make great investors. They're completely trustworthy, because they're all part of the network, and they understand the founders' situation better than any other investor could.
I think the reason people are surprised that we fund so many startups compared to other YC-like organizations is that I work full time on this, whereas at nearly all (perhaps all) the others, the startups are advised by a consortium of people doing it part time. When you're doing it full time, it's no problem to advise, say, 25 new startups at once. At least once you have some practice.
Earlier this year we hired Harj Taggar who also works full time advising startups. Since this kind of work scales nearly linearly, we're about as busy as one person would be advising 18, which was no problem at all.
That is a type of question we think about a lot. But we know that our guesses are likely to be pretty bogus. We approach scaling YC the way you would approach scaling software. And the way scaling works is that you can never be sure what the bottlenecks are, or how you're going to get around them, till you hit them.
So it's interesting to speculate about, but not useful except in a mind-opening way.
Perfect timing -- I was just finishing my 93-page business plan and the last line of my nine pages of Excel spreadsheets told me I needed $8.25 million. I'm definitely applying for the next round.
You can definitely fund more startups but as you admit yourself, the startups you fund don't give up equity for money. They give up equity for your guidance, network and the whole ethos of the program.
Scaling up the YC experience would be an interesting challenge.
As a percentage, but not as an absolute number. YC is actually run very cheaply, but the amounts we invest are so small that any expenses seem high in comparison.
I don't know the details but from my observations they are:
- Office space
- Legal fees
- Events (demo days, etc., are catered)
- Salaries
- Weekly food costs
I actually thought the operating costs would be slightly higher. The office is a comfortable space and the food is great(IMO, others might disagree :) ), the events are always well done, you'd expect the legal fees to be high, not to mention how much time everyone at YC puts in.
Are those all per startup? I assume office space, legal fees and salaries refer to YC and not its startups (e.g. YC's legal fees, not the startups' legal fees). Food would be per startup of course.
It's my understanding YC does the incorporation paperwork for the vast majority of the startups it funds. So there is a per-startup legal fee for that.
The way I see it, there's no way to show confidence in the future like putting your own money up. This is great even for people not affiliated with YC, its partners, or YC-funded startups.
I've always believed there's room for a YC-like company to do slightly bigger investments. Instead of $17k for 2 founders, it would be $80k for 2 founders. That way they could attract people with higher cost of living/high paying jobs (who would hopefully tend to be more successful due to more experience/connections/stability)