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Y Combinator Numbers (ycombinator.com)
506 points by pg on June 1, 2011 | hide | past | web | favorite | 115 comments

Back of napkin math:

Funding of $25,000 per startup (funding plus costs) x 210 = $5,250,000 in funding costs. To factor other costs and be conservative, double that to $10.5 million.

YC usually takes 6% equity. Assume that's diluted in half, conservatively again, to get 3%.

Total current valuation of 4.7 billion: $4,700,000,000 * .03 = $141,000,000

So... using all conservative numbers, YC's return has been .... $141,000,000 / $10,500,000 = 13.4

Whoa... did I do that math right?

A return of 1340%

That's... pretty astounding. Talk about a win/win/win situation for everyone involved... if the order of magnitudes here are even close, well, massive congratulations to everyone involved. Wow. Wow.

My problem with pg's numbers is that they are almost entirely theoretical. The valuations don't represent anything close to liquidity, and the chances of those companes generating anywhere near that return in real terms are slim at best. The portfolio might be "worth" 4.7 billion, but what are the chances they'll generate a real return anywhere close to that?

I'm not arguing against pg's methodology, as I realize it's fairly consistent with standard practices, but the ycombinator investors are nowhere near as wealthy in real terms as these numbers would suggest. If airbnb were to fail that would destroy a huge amount of that wealth, with no ability to extract any value before then.

None of this is meant to rain on YC's parade. I have a great deal of respect and admiration for all involved, and congratulate them heartily on the very real successes they have had and continue to have. I'd simply be heasitant to describe YC as being "worth" 5BB, given a reasonable expected cash return.

Are you suggesting that Sequoia and other top VCs are making investments where the expected return is less than 1?

AirBnb could end up being worth $0, but it could also be worth $10 billion. A $1 billion valuation would be a bet that it's expected value is substantially more than $1 billion. You may disagree with that assessment, but the people making that bet have a pretty good track record.

This is obviously a valid criticism.

But it would be far more valid to criticize any alternative valuation that fixed the problem you're addressing. For example, it would be conservative to value all of YC's startups in terms of their cash and receivables, plus the liquidation value of their furniture and servers. But then it would be trivial to say "Hey! AirBNB isn't an asset play. It's valued based on growth. The asset value is a worst-case scenario, but most of the other scenarios involve a lot of revenue growth and free cash flow."

Basically, is there any valuation method you have that would make you indifferent to a bet on the portfolio's valuation going up or down? (i.e. anything you think would produce a "fair" market price?)

Actually, more directly: how much of your net worth would you invest in shorting YC's portfolio at this inflated $4.7bn valuation?

>Basically, is there any valuation method you have that would make you indifferent to a bet on the portfolio's valuation going up or down?

No, there isn't. Angel investing is an inherently speculative game. What I would say is this: a YC investor could reasonably claim to have seen a return on any shares he sold, or any shares he holds of a company that has gone public. That's it. Beyond that, all investments are good only in theory. Were I to buy a house, I would decide what was affordable based on the former, not the latter. The same is true for my contributions to my children's college fund or my retirement fund. In short, all of the things that actually matter in life would be based off of what I had sold and what shares I held of public companies. To make any long term financial decisions based on the projected worth of companies that had, at best, gone through a successful series A or B would be foolish. They're nice numbers to think about, but they don't mean a damned thing until they're putting food in my kids' mouths.

Let's illustrate my point like this: Suppose you are given the chance to pay 1MM for some good that has a 20% chance of being worth 1BB in 5 years. If you can spare the million, then this is a fantastic investment by any measure. Having bought into this investment, however, how would you describe your net worth? Your investment is valued at 1BB. The fact that it will likely never be worth that much doesn't change its value. Heading off the foreseen criticism, let's say that savvy investors would only say it is worth 200MM, the ultimate value times the expectation of realizing it. Still, that 200MM is fairy money. It doesn't exist, and you can't do a damned thing with it until you somehow manage to convince someone to give it to you. To claim that you're "worth" 200MM is silly, as you can't spend a dime of it.

This is the problem I have with pg's numbers: They sound great until you ask what the cash-out is. Saying "I've invested in companies that are worth 4.7BB" is great, but it doesn't say anything useful about how well your money has been used. Remember, prior to investment it was real money that could buy apples and tuitions. Now it's theoretical money that could buy a whole lot of apples, but only under a specific set of favorable circumstances.

A final reduction: There is a claimed ROI of ~13:1. Being generous, I would ask this: how many people who invested 1MM into YC have pulled 5MM out?

The fact that it will likely never be worth that much doesn't change its value. Heading off the foreseen criticism, let's say that savvy investors would only say it is worth 200MM, the ultimate value times the expectation of realizing it.

A market price is a price at which someone with good information is indifferent between going long and short. If you're applying some discount to the $200mm based on the possibility of a $0 outcome, you'd have to put your money where your mouth is and sell short at that level.

If you'd made $200mm through some other means, and bought that 20% chance for a billion dollars at the market rate, would you treat that as a loss? At what market value would buying that constitute a good deal?

The whole reason we have valuation is to answer questions like that. The question of "What is this worth?" is very different from the question "How much cash can I extract from this now? "What is this worth?" means "What is the net present value of all the cash I can extract from this asset, assuming I extract at the optimal time?" It's the difference between the value of a couple scraps of gold in a creek and the value of a massive gold mine.

A final reduction: There is a claimed ROI of ~13:1. Being generous, I would ask this: how many people who invested 1MM into YC have pulled 5MM out?

That's not the point, though. Startups are illiquid, so it doesn't make sense to sell. Plus, the YC people just don't seem to need that much money. Some people get rich in order to buy jets and vacation homes--the impression I get is that the YCers got rich enough to spend their time working on cool stuff, e.g. YC.

AirBnB was recently valued at $1BN, so even if you assume AirBnB is worth zero, you only take a 25% haircut on this back of the napkin math (because AirBnB only represents $1BN of the $4.2BN in pg's portfolio). So, then you're talking about a lifetime 10X investor instead of a 13.4X investor. Still completely amazing performance, and he has a diverse portfolio of startups to protect him from individual blow-ups (such as assuming one of his most valuable companies is worth zero).

pg doesn't describe YC as being worth 5BB, he says the projected value of all startups are in that ballpark. The question was How is YC doing? and the answer seems to be: pretty damn good. As in they are doing something right, not as in "our valuation is around 5BB".

Sorry, my last line wasn't in keeping with the spirit of the rest of my post. I'm not saying YC is or isn't worth 5BB, but rather that that's how they're valuing their portfolio. I don't doubt that valuation, just the utility of the money that's theoretically theirs.

Amazingly, it sounds a lot like a successful startup: 10 million in funding, 141 million exit. However, startups usually have to deal with a high probability of failure, while YC achieved this with a substantially lower risk (portfolio theory at play).

I thought portfolio theory referred to holding a diverse bunch of assets, no? (I could be wrong on this.) For example, an investment portfolio might be comprised of 90% T-bills, and 10% "high risk" assets (yes, I realise the risk of this statement becoming quite false in the not-too-distant future, given what has been said about US debt recently).


In YC's case, it's portfolio is entirely made up of high-risk startups, so to the best of my knowledge, it's not classic portfolio theory.


It's not classic, but it is a diversified portfolio. YC invests in startups across all industries--automotive, mobile, health, financial, entertainment, etc.--which presumably is less risky (lower variance in returns) vis-a-vis just investing in one sector.

YC companies address customers in diverse sectors, but if you were to classify YC companies with a GICS code, 99% of them would fall under Internet Software & Services (code 4510) [ http://en.wikipedia.org/wiki/Global_Industry_Classification_... ].

So, it's not really a diverse portfolio, but it's definitely a portfolio play, which is substantially less risky than having all your assets tied up in the stock of a single startup.

Think about it this way, if 2001 hit again and all tech stocks plummeted, all the companies in the YC portfolio would be substantially negatively impacted, so there isn't a portfolio effect to protect against this correlation in YC's assets.

Portfolio Theory is about keeping a set expected return but reducing risk (volitation) through diversification. Diversification is about choosing investments which aren't positively correlated. Are web startups positively correlated?

As a industry, probably/maybe. Was certainly the case in the dotcom crash.

Performance-wise, not really. Most startups fail, some make it big. Why? Low investment costs and high possible leverage with internet technology (to little marginal cost). This could change in the future.

In this case the second way is probably more fruitful to think about, since one big winner will even out all the losers. I'm sure this is possible to "prove" by some Black-Swan-ish statistic model theory.

NOTE: I could be wrong.

EDIT: I agree that web startups today aren't one industry. Social web startups is a candidate though.

I think it's a mistake to categorize all web startups as belonging to the "web startup" industry.

Even though we (CarWoo! YCS09) are a web startup, we see ourselves primarily as a company that plays in the automotive industry. All of our key metrics are highly-correlated with the automotive industry, not with what Techcrunch writes on any given day.

While a lot of YC startups' metrics ebb and flow with the goings on of the echo chamber, many do not.

In investment terms 'return' normally refers to profit. See http://www.investopedia.com/terms/r/returnoninvestment.asp

So I think you should have ended up with 1240%.

E.g turning $1 to $1.50 is a 50% return and $1 to $2 is 100% so $1 to $13.4 is a 1240% return. Still a spectacular return given the short time period.

Otherwise I agree with your numbers. The cost doubling sounds high at first but YC is by definition very hands on.

No, I work in VC and OP is right. If you have a $100M fund, you invest it all, and you don't lose any money, but you also don't make any money, then you will return $100M to your LPs. Your fund will be a 1x fund and you will return 100% of capital invested. So, I'd stick with the 1340% number.

I understand we are really just disagreeing about the semantics of the word "return", but I'm just including how I see it most commonly used in my line of work.

It's definitely astounding and deserves congratulations. But to be clear, valuation and return should not be equated in this way...

Did you factor in the amount of work Paul Graham and friends put into ycombinator?

Long term I think the big question is how much of the success of YC companies is directly related to the external benefits of being YC companies. There's no question they tend to get far more attention on every front (VC/valuations/press/bizdev/hiring, etc) than they otherwise would.

In a few years when there are 1000 YC companies it will start to mean a lot less to all those people who have been helping YC companies succeed to date. It probably already means a lot less to a VC to hear you're a YC company, because they've met 300 of them.

If it's the YC halo effect that's driving high returns it will be a big problem if it starts to wear off.

>In a few years when there are 1000 YC companies it will start to mean a lot less to all those people who have been helping YC companies succeed to date.

Harvard, Yale, MIT, Stanford, etc. seem to be doing rather well, as far as higher education goes.

And I would imagine those that have partnered with them are doing okay too.

Quality matters.

>It probably already means a lot less to a VC to hear you're a YC company, because they've met 300 of them.

I doubt that. A VC is just trying to pick the next Google. Or the next Google founder(s).

Right on. I think as long as the quality of YC companies remains high, the presence of imitators will of course increase the value of the original, just as in higher ed.

Startup incubators may in some ways be easier to replace than universities (Harvard, Brown, etc. are still going strong after 200+ years), but they are subject to similar dynamics, insofar as there is team loyalty and networking benefits (as there obviously are). Personally, I would accept 10% dilution of my company simply to be an YCombinator alumnus since I think the benefits are and will remain that high.

Harvard, Yale, MIT, Stanford, etc. seem to be doing rather well, as far as higher education goes.

Not a good example. These schools increase their enrollment very slowly, while other schools have grown massively. As a percentage of total college grads, these schools are more exclusive than they used to be.

But the general idea is correct: the value of the YC brand is getting diluted, of course (imagine what it would mean if YC funded just one company per cycle!), but the total value of the brand keeps going up.

The difference is that startups have a much shorter time horizon on which you can measure success, and their success is measured in different ways. While notoriously difficult to precisely compute, because of the length of time necessary to judge the impact of an 'XYZ Degree,' thorough studies show relatively small or, for many cohorts, almost nonexistent benefits to these kinds of Ivy League educations.

For, as in the case of YC, the success is first and foremost attributable to the participants - and whatever other value there may be is easily confounded and exaggerated. The only fair way to establish a comparison is to consider those who were accepted to YC, but chose not to enroll, for whatever reason. This is reasonably clear when X is 1300 students a year, harder when it's less than 100 startups.

Anyway, a rather belabored way of saying that the higher education comparison may be accurate... but not necessarily in the way that you think!

We've already expanded a lot and empirically there has not been any dilution so far. If anything the brand value of being funded by YC seems to increase with the number of startups we fund, not decrease.

"It probably already means a lot less to a VC to hear you're a YC company, because they've met 300 of them."

Another way to look at it is that the total number of YC startups over the least six years is less than the number of deals the typical VC sees each week.

I'm curious: why do you think more YC companies will dilute YC's value or brand? What data leads you to that assertion?

Personally, I'd think the opposite is possible. (And likely if YC companies continue to be considered "successful".) A stronger YC network and a large portfolio of successful companies should only strengthen the brand.

A large portion of what YC effect is the selection bias/filter it provides. If YC is good at picking and nurturing winners, that becomes their brand equity. If they lose this ability while scaling, then their brand loses value.

I think the value and prestige of being a YC company can only grow from here. Reason being is not for the hype aspect, but rather the education and attention you know the company received. People who really understand this industry expect quality. With 1000+ companies under their wing, it's assumed that after years of experience the YC team will have developed an excellent picture of the ideal startup/company and be able to impart that knowledge to the startups they've selected.

If the track record remains good, the brand will on mean more after 1000 not less.

A better question would be:

With all the 'me too' incubators out there, how much can YC scale horizontally? YC has been eating the Angel's lunch, but there will be more people at the table every year. How much of the market can YC grab without growth hurting their per-startup performance?

It might be the opposite. Many internet businesses are winner-take-all and YC companies clearly have a "leg up" in terms of having been vetted, having an attractive culture and getting superior mentorship. Investors could very well fixate even more on YC graduates

Far better than I would have expected, given the various spreadsheets, etc. that I had seen floating around. I was a bit skeptical about YCombinator's growth and the ability to mentor new startups, but with numbers like these (esp. the 34/36 number) I've a lot more confidence that they will be able to do just fine with more startups in each class.

In many ways, it also makes me comfortable saying that the "Harvard of startups" description is appropriate. Sprinkle in a bit of elitism based on merit, give people some general framework, a bit of advice, and a lot of free reign, and brilliant and hardworking people will make things happen. Much better to be a bit hands-off and cultivate excellence then micro-managing the actions of the less focused or ambitious.

This, even more than recent acquisitions, is the best news I've seen out of YC in awhile, and truly excellent. Congratulations!

btw, to pg or anyone else, would be a little bit interesting to see more about the power law distribution as it applies to investing. I'm assuming this is true across the field, but don't know for sure (do all vcs get the same distribution, or is it simply true of software startups, or is it simply true of software startups that manage to include big hits? Moreover, do you simply get big hits by funding enough decent sluggers, or are there other strategies to make sure you have a decent shot at the next Dropbox, Twitter, Google, etc.)

It seems safe to say that Y Combinator's expectancy* as an investor is currently unsurpassed - no private investor, mutual fund, hedge fund, VC, etc. I've ever heard of comes close. Congratulations!

* expectancy = (probability of win * average win) – (probability of loss * average loss)

I guess if Warren Buffet were to start again with only a few million USD, like Y Combinator did, he would do really well in terms of percentage return, too.

A question for PG - What's been the most surprising numbers to emerge, in your opinion, up to this point?

You mention the concern that would be inherent if funding was at 100% prior to yuri with regards to an overly conservative stance. With, as you have stated, the real goal being finding the next google or facebook isn't a 90+% level almost as worrying ??? Wouldn't something closer to 70 make a better balance in terms of maximizing coverage to increase the chance of landing the outliers ?

The most surprising thing was the number of companies with valuations between 30 and 60 million.

Please enlighten me if I'm missing something obvious here, but wouldn't a pretty interesting number be the percentage of funded companies that are profitable today? I mean, maybe not as a measure of YC's success monetarily, but certainly as a success rate for choosing viable products/teams, no?

So to be clear. I'm most interested in how many of the 208 considered as part of the $22.4 million calculation are self-sustaining and making a profit today.

That would be the wrong metric. A sandwich shop could become profitable much faster than a Google, but I'd much rather invest in the next Google.

Well, it still has to be a good sandwich shop to succeed, and I'd rather invest in a successful sandwich shop than one which will flop. So I'm just curious to know the overall track record of success had by YC funded companies - from a perspective other than 'got more funding' or 'is valued at X'.

Investors would rather invest in a company that has a 1% shot at being Google than 100% shot at being a normally successful sandwich shop.

But can we make the assumption that YC companies are chosen because they have the potential at becoming the next Google, therefore if they are profitable they're on their way towards that goal?

It's a small assumption, but I think one that could be made.

It makes more of a success/failure comparison than a return percentage calculation, but it would still be really interesting to know.

Yes exactly. I definitely didn't mean to say I wanted the numbers for profitable as opposed to the '1% chance of being Google'.

Terminology question: In footnote 1 it says

  "We're looking for companies with high beta. E.g. we're
  ok funding groups for whom the likelihood of failure is
  high but for whom success, if it happens, will be big."
I'm not sure what beta means here. My understanding had been that beta for an investment refers to correlation with a benchmark index (see http://en.wikipedia.org/wiki/Beta_(finance) ). So high beta for YC would mean startups that perform similarly to the average, which is probably not what YC seeks. Alpha ( http://en.wikipedia.org/wiki/Alpha_(finance) ), or risk-adjusted return, is what any investor seeks, but still doesn't seem to capture the idea of seeking very high-risk, very high-return investments.

Am I using the wrong definition of beta? Is there another term that better expresses this characteristic of investments?

Beta can also refer to relative volatility. A stock with a beta of 2 has twice the fluctuation of the index.

But in terms of asset allocation, you're right: PG is actually looking for alpha. You can get all the beta you want with leverage: just buy short-term out-of-the-money calls if you want extremely high beta.

(There's actually a lot to think about, here. Startups are pure "alpha" since the beta component is an expected return of zero.)

Ah, thank you. Beta is a coefficient of index performance, not just a measure of more or less correlation. So high beta would mean that when the startup market does well you do awesome. You'd also tank when there's a bust, but because YC's downside is so limited this is irrelevant.

Beta does not measure volatility.

PG means alpha here.

I meant we're looking for high risk, high reward startups (with an implicit claim that the biggest winners will seem very risky initially). I've heard beta used, possibly inaccurately, to describe that sort of volatility. Is that not right? Since you actually worked in this world I'll take your word for it. In the meantime I changed beta in the article to variability.


"Beta" has two popular definitions. One is "market beta," i.e. the return you've gotten from the market you're in versus the particular trades you make in that market. I have only heard professional investors refer to this. The other kind is the one defined by investopedia. I only hear this mentioned by retail brokers.

If PG said he wanted high alpha, it wouldn't make sense to increase the probability of failure. All else being equal, higher alpha means a lower chance of failure (at any given volatility level, the higher-alpha portfolio has a lower chance of going to zero, since e.g. if beta is -99% and the lower-alpha portfolio generates -1% alpha, that takes it to zero. Right?

Return of a security = return due to correlation to the market + return due not due to correlation to the market.

Rs = BRm + A

It doesn't speak to general volatility at all. The definition linked is inane; Beta of 2 only twice as volatile as the market if the security is highly correlated to the market.

Beta is literally cov(Rs, Rm) / var(Rm).

In this particular case, if he wanted returns highly correlated to beta he would just invest in VCs. To get a beta of 2 he'd leverage the funds somehow and invest that.

He thinks he has an edge, which is contained in alpha (return not captured by market performance.)

I don't know. Still sounds to me like he's using the linked definition. Which I agree is not a useful concept.

People do cite betas. e.g. here's a quote page for Yahoo, on a big personal finance site, that cites the "beta" as defined earlier: http://www.dailyfinance.com/quotes/yahoo-inc/yhoo/nas It's entirely possible for a typical investor to only encounter that version.

Colloquially, if someone says "I like high-beta stocks," they mean "I like really volatile stocks," not "I like stocks that have some combination of high volatility and high correlation to some index." So the statement makes sense colloquially.

A more accurate version would be "YC looks for a moderately negative beta and expects a very high alpha." Since that describes companies that fundamentally alter their target industries--e.g. by harming all the established players, but still making money.

The only time I've heard people talking about high beta has been in the context of leveraged securities that track the indexes.

But what do I know, I only spent a decade on wall street.

exactly. if you want to outperform the mean you're chasing alpha.

These numbers are astonishing. By my calculation YC has a cash-on-cash return of 67X!

Avg. value (22.4M) * Avg. equity (6%) = Value of average stake (1.34M)

Compare this to an investment of $20k, wow.

I am sure there is some sort of dilution that occurs, but anywhere in this order of magnitude is remarkable.

6% is undiluted, you have to assume YC has been diluted quite a bit during fundraising. But even assuming a more realistic 3%, those are great returns.

Also, remember this is a power law distribution. So talking about an average amount of dilution is probably risky. The dilution on the single largest exit is going to move the needle the most.

These are misguided statistics. I can envision a scenario where using average numbers give you completely the wrong picture.

For example, the majority of the total value comes from the few outliers (AirBnb, Heroku, DropBox) and the other 80/90/95% of companies contribute relatively little to the total valuation.

So let's say they still own 6% of these outliers. Great! That's still worth a lot. But how much do they still own? Have their shares been diluted? Did they have to issue new shares due to further financing? Has that 6% turned into 3% or 1.5%?

I'm not an expert but it's quite possible that their initial 6% has been diluted.

I think the picture looks good, overall, for YC from an investment standpoint. I think avg. value is not a great metric by which to value the "average" YC company since my guess is that the majority of the value is on the top end.

One way to measure is just on exists so far, which is a strict lower bound, but doesn't change with the market. I bet YC is in the black just from exits, and this can be measured explicitly. What is the sum of YC's returns from exits (and cash value for stock) over the sum of money spent on investments?

Measuring the value of companies that have grown dramatically since the last round if pretty arbitrary. If this estimate were done on the same companies in the same states but in 2009, wouldn't it be off by 50%?

> When startups are acquired, acquirers usually give the founders incentives to stay on. Sometimes to make the founders feel better these incentives are included in the number the acquirer quotes as the acquisition price. In that situation there are effectively two prices, the quoted price, and a lower price investors see.

Wow - I didn't know this. Does anyone have any more detailed examples of this happening they can share?

What, of acquisitions with earn-outs? Search NEWS.GOOGLE.COM for "earnout".

I'm curious what the top 5 or 10 YC companies by valuation are, and what their valuations are. AirBnB? Heroku? Dropbox? What else is in the $1B range?

Most of this seems like it should be public information, since fundings that large are usually announced by press release. Has anyone compiled a list?


Interesting, but it only has valuations for exits. I'm kinda curious what valuations for going companies are, based on recent rounds of funding. The totals on YCList are nowhere near the $4.7B that PG quotes.

Actually, I'm surprised how many of the acquisitions were talent acquisitions for ~$2M/founder. Decent sized chunk of change, but you can get that much by going to work for Google, kicking ass, and then getting a FaceBook offer.

"1 didn't bother because they were already so profitable" -> anyone an idea which one that was?

My guess would be Wufoo.

Never mind - that statement referred to a startup in a recent batch while Wufoo was part of a much earlier batch.

Interesting to note that there are probably a few Wufoos in the total YC universe that reached meaningful profitability without having to raise more money.

Those are the ones worth emulating even though they don't get nearly the amount of attention as ones raising mega vc rounds.

I'd be interested in the valuations based on traditional things such as revenue, assets, cash on hand etc... not that these things necessarily matter to Y Combinator as a company making $0 that is bought for $1 billion is still significant, I'm just curious what percentage actually is profitable.

This reminds me of my family's business. We do grant writing for nonprofit and public agencies, and people always want to know if they're going to get funded. We always say that we have no idea, for reasons discussed in this post: http://blog.seliger.com/2008/12/21/the-worse-it-is-the-bette... :

"All this also helps explain why a “batting average” or “track record” figure is useless regarding general purpose grant writers, as we describe in this FAQ question: http://seliger.com/faq.html#anchor5 . We don’t know if our clients are going to come from Beverly Hills or from places where most residents haven’t graduated from high school. From a grant writing perspective, a client from the latter place might be more likely to be funded than someone from Beverly Hills."

Here's a question to PG:

I can imagine many reasons, but I'd be interested to hear from you why you chose to share these numbers at this time?

Possibly prompted by PG's interview with Charlie Rose last week on stage at TechCrunch Disrupt.

I was present, and a two things were clear from the interview:

1. Charlie Rose had a few wildly incorrect assumptions about YC. (e.g. "so, to date, you've invested, what, $100M?")

2. Paul Graham had not given a lot of thought to aggregate numbers. When asked, he about total the total value of the YC portfolio, he could only guess.

Edit: interview link http://www.ustream.tv/recorded/14928956

Yes, the interview I mention in the first sentence of the post was the Charlie Rose interview. When he asked how we were doing, I quoted some numbers based on a back of the envelope calculation that turned out to be way off (an underestimate, fortunately).

BTW, I found that interview very enlightening.

I hadn't realized how nice you are. Your real-life persona completely contradicts the caricature I had developed in my mind after years of reading your essays.

I was expecting Vulcan (hyper-smart, non-sentimental), but instead got Camp Counselor (humble, encouraging).

You should do more on-stage stuff.

Seeming Vulcan is probably an artifact of conciseness.

$4.7 billion / 210 = $22.4 million, so the average value of startups we've funded is about $22.4 million.

Of course that could be cut in half tomorrow. Startup valuations are even more volatile than ordinary equities.

Couldn't one argue that startup valuations are sticky in a downward direction? The 21 largest companies are highly valued because they're generating tons of revenue (or even profits). Nothing short of a market collapse would hault that revenue generation, and it's hard to imagine such a collapse in the market of, say, peer-to-peer vacation rentals or cloud-based multi-platform storage.

It's entirely possible, though, that by "cut in half tomorrow" PG meant that Winter 2012 will include 210 companies. :P

The 21 largest companies are highly valued because they're generating tons of revenue (or even profits), and nothing short of a collapse in their market could halt that income generation.

I don't think valuation of startups are strongly based on revenue and profit. At least not in a way where their revenue/profits force a certain valuation, rather than simply suggest that the potential and growth is there. (if that makes sense).

Yeah, absolutely makes sense. Here's a proof by cases on my point:

Companies are highly valued b/c they (a) generate income or (b) have the potential to generate income. (a) companies are trivial cases, since they already make money. Let's move on.

Looking at (b) companies: they're highly valued because market conditions + company fundamentals suggest they CAN generate income soon. Let's assume company fundamentals (leadership, labor) are constant and solid (trivial, since they're being advised by PG and other VCs).

Therefore, highly-valued companies that do no yet generate income can only be negatively disrupted by market forces. Based on the initial assumption about (b) companies' potential, I argue that (b) have been selected such that they are not particularly vulnerable to negative shocks.

Therefore, their valuations have a very, very high floor and are sticky in the downward direction.

What about AirBnB? You don't think a $500M valuation would be considered reasonable by many? AirBnB seems like a classic example. $25M in revenue and $1B valuation (40x). The market moving slightly to a more hardcore earnings based valuation could easily see their valuation cut in half (20x).

No less of a company, but a slight change (yet reasonable change) could drastically effect their value (as it would with most startups at a similar phase).

Congratulations, I'm sure you've already felt it, but I just wanted to say you've built something truly amazing that helps so many other people realize their dreams. And as an added bonus it validates your assertions on what a startup needs to do.

Visionary indeed!

Interesting analysis but the statistic I find most disturbing (and selective) is the "average" value of startups funded. What would be more informative is the mean value. I'm guessing the mean value would be extremely lower since most of the total value is made by a few outliers on the top end.

By taking the average value in this case, it's likely giving an inaccurate picture of what the average YC funded company is actually worth.

Just a thought. I could be wrong assuming most of the total value does not come from outliers but my sense is that I'm right based on the news I've seen around YC companies.

He did show the mean. It looks like you're interested in the median. From a potential startup founder's perspective, the median is pretty important. From YC's perspective, mean is all that really matters (except to the extent that median affects the input to their program).

Yes, thank you. I meant to say median.

>If it were 100%, I'd worry we were being too conservative in >who we funded."

Note to self: if you're succeeding in everything you're doing, you're probably failing to attempt awesome things in which you could succeed.

>> That number is about as high as I'd want it to be. If it were 100%, I'd worry we were being too conservative in who we funded.

There is market feedback in this thought (and in the footnote where you cite 'beta'). Really what you are saying is that you are aiming for a level of conservatism/risk relative to the market.

I'm curious what the funding rates were in 2006 and how they changed. How much of the increase on funding percentages were due to being better at doing YC and how much of the increase was due to their being much more risk capital in the market?

With the numbers of startups growing with every batch. Do you think it dilutes the value Y Combinator provides?

I wonder if pg and YC partners would be able to give enough time and attention to 62 startups.

YC brand and alumni network is stronger than ever. YC is great at scouting great entrepreneurs at early stage. At this point YC may be acting as a filter for investors.

The big question is, Will YC still the advisory role to create great products? or Is it now a funding school that provides a brand and access to Angels and VCs?

Would love pg, YC partners or alumni to chime in on this.

Currently the request queue for office hours is empty, meaning everyone who wants to meet with us has been able to. We have capacity for more office hours this week and will be adding more. PG added office hours for this afternoon, with more slots than there were requests in the queue. Things seem to be working so far.

"...so far at least the great majority of VC investments in YC-funded startups have been by the better firms. I'm not sure exactly why, since bad VCs are more numerous than good ones; perhaps the bad VCs assume the companies at an event as public as Demo Day will already have been picked over by the time they get a shot at them."

Or perhaps the lower tier VCs just can't compete with the "better" firms.

I find it interesting that you so readily equate "lower-tier" VCs with "lower quality" VCs. Is this a reliable rule?

I find it interesting that you so readily equate "lower-tier" VCs with "lower quality" VCs. Is this a reliable rule?

If you were a low-tier good-quality VC, surely you'd become known as a top-tier VC pretty soon?

Fun math: if

- the average YC investment is $20K for 5% (400K valuation),

- YC's share get's diluted in each company by a round giving up 30% of the company

- the average YC company is worth $22.4M

...then that translates to a 43X return for YC. Woah.

If YC holds common shares, then you need to adjust the expected value down quite a bit. On any exit that isn't a huge win, non-employee common shareholders are by far the most likely to get short end. The expected value is probably 10-50% of the fully diluted headline value of a VC deal.

But YC is clearly going to do spectacularly well. They deserve big congrats for what they've accomplished.

This isn't generally the case anymore--funding rounds these days tend to assign a 1X liquidation preference to both common and preferred shares, so assuming that a company gets acquired for more than its valuation, you shouldn't need to adjust EV down.

1x is still 1x -- if you don't get over it, the common shareholders don't get paid. In a pool as big as YC's there will be plenty of examples.

True, but there's still a very good chance of being acquired for less - which means you have to adjust the EV down.

Except all the maths here has only accounted for the top 10%. Those top 10% are fairly unlikely to be sold off at scrap value.

You'd be surprised. The ones that raise the most money also have the hardest time getting over the preferred total. The purchaser will take care of the employees it wants, but other common shareholders often end up out of luck.


YC invests more like $17k on average, since most startups are 2 people. So your base is wrong there.

You also have to assume dilution since almost everyone raises money. So they might have started with 6%, but they probably have more like 3% in a mature company (assuming 50% dilution for no particular reason).

So if you wanted to estimate returns at this point you could say (3% * 4.7 billion) / (212 * 17k) which is 39x (or 3900%). Not half bad!

You also have to account for the other services and facilities that YC provides. I believe pg has mentioned previously that the total cost per startup for YC is about $40k. That would be about a 16x return. Still pretty amazing.

This investment strategy probably doesn't have a ton of capacity though. I could make a thousandfold annualized return on a dollar by reselling snacks outside my apartment for ten days.

Are there any numbers on how many YC companies are now defunct? Would be interesting to see how this compares to the anecdotal 9/10 startups fail in the first year.

There was a thread about this at some point. The answer was "a bunch", though the numbers were complicated. Some had merged, others experienced "exits" which were really just talent acquisitions and shut down all operations on their product. Very few really "failed".

The 9/10 startups thing was always a myth, though, especially if you're talking about startups which get to the stage of getting any funding at all. It's more like 1/2.

"like any portfolio of startups ours has a pretty steep power law distribution. If we can produce accurate estimates of the values of the top 10%, we'll have a sufficiently accurate estimate of the total value. "

No... this is incorrect. Power laws looks like this (imagine the "top 10%" in green): http://en.wikipedia.org/wiki/Power_law so the median value, or even showing a histogram of all values, would be WAY more informative. My hunch is that the "22.4m" average valuation is way higher than most YC grads.

You've misunderstood the math. The $22.4M figure was reached by assuming the bottom 90% of companies are worth $0. Therefore, it's strictly a lower bound on the mean valuation.

You're right.

Does it make sense to generalize about 200 startups based on 5 exits?

Thank you for posting about this I find it fascinating.


What about the control group though? You know, the 50% that were deemed fit for YC after the interview but lost at the coin toss backstage. How did those compare?

Right, the control group is required to tell you what the YC influence is (which is probably quite significant). Charlie Munger once said you could lock up the smartest students in a closet for four years instead of sending them to college and they'd still be the smartest students, what were the outcomes of the other 'smart students'?

Heh, Peter Thiel did, too.

I don't understand. Do you mean startups we fund that don't do well, or startups we don't fund?

I would be interested in the valuation of the group of companies that you "almost" funded.

Let's say you ranked startups during admission on a 1 to 100 scale, and took the top 20 scoring startups. (I don't know if this is the metric you used, but I imagine the following protocol could be adapted regardless; as long as you kept the data.)

Take the bottom 5 scoring startups that you funded - i.e. the ones that just made it. Now compare their outcomes to the next 5 --- i.e. the top 5 scoring startups that didn't get funded.

If you see a significant difference, that could show that being a part of YC adds tremendous value to a company. On the other hand, this sort of analysis is really hard because the data points are so few, and the noise in the data so high (the volatility is just too much to make meaningful conclusions).

It's still an interesting experiment to run, because there is a chance that being a part of YC adds just such a large amount of value that it still comes out in the data.

This sounds like a good instrumental-variable exercise for finding out whether the YC branding adds a significant amount of value to investors.

My understanding is that the person who asked that question wants to measure the value YC is adding, separate from YC's ability to select promising teams. Obviously there's no way to separate those things, so s/he suggested an absurd experimental setup in which half of the accepted startups, chosen at random, would be excluded from YC.

Don't just exclude them. Replace them at random with normally rejected companies.

I would be curious about startups you do not fund

The control group would consist of the hypothetical startups that you didn't fund (but were qualitively equal to the ones you did fund).

EDIT: gabrielroth got it.

Good idea. I wonder if there's some way YC could survey these people without offending everyone. Maybe offer a 30min advisory session (to known YC post-interview rejects) in return for filling out a survey indicating their current status?

What are you talking about? PG doesn't play dice with people's startups.

/Insert Einsteins's quote about god being dicey

He's saying there should have been a control group. We can't directly compare startups that YC funded with startups of equal quality that YC did not fund, because the latter does not exist (assuming YC is correctly selecting for quality.) To isolate YC's influence, you'd need YC to pick a set twice as large and fund only half of them at random.

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