This is the mistake. Advice is easy to find, but it varies in value.
This guy can correctly value our money. It's worth the same as everyone else's. But he has no idea whether our advice is good or bad, and if good, how much better it is than "average" advice, whatever that is.
To be fair, noone knows if your advice is good or bad(essays notwithstanding). Can you give an example of some specific advice you gave to one of the YC startups recently?
Actually around 300 people know, because that is about the number of founders we've funded. So if people (e.g. those applying for funding) want to know if YC is worth it, we usually suggest they contact some and ask them individually.
I could never talk about conversations I'd had with specific startups, because the more useful the advice was, the more precisely you'd be able to identify the startup.
Well yeah, I was more talking about people outside looking in, like the author, since he can't judge the quality of the advice he resorts to just comparing the monetary terms
I think the point of the essays and this community is to give startups an idea of the sort of advice they'll be getting [1]. Any "specific" advice would either be too close to the issues to have any meaning outside the company. As far as I can tell, PG has no qualms about "trade secrets"--if he thinks the advice would benefit everyone starting up a company, he will probably write an essay about it.
If those ideas and themes resonate with you, you have an idea of what benefits you'll reap from the support of the YC staff.
I think another fallacy in his argument is that he is saying all Angel investors are worth the same outside of money. Sure, some angels will bring good advice, input and ideas to the table, but some will not.
With YC you know there's a solid support infrastructure.
I would argue that by putting such a high valuation on your advice, people think it's worth more, just as they have a natural tendency to think that they are getting a higher quality shirt if it is priced at $50 instead of $5.
Another point to note is that there is an incentive for all of the Y-combinator startups to say they had a good experience, because if they said otherwise they might be burning the bridges they built (which they would not want to do, even if those bridges are not worth what YC charges for them).
I agree advice varies greatly in value. Bad advice is worth less than zero because it obscures the good.
I think YC's advice is generally quite good. The thrust of my argument was that advice and connections are more commodities than most investors believe.
Naval Ravikant, a YC speaker, says to assume investors are mostly money, as does Marc Andreesen:
"Odds are, nothing your VC does, no matter how helpful or well-intentioned, is going to tip the balance between success and failure."
Ironically, because you distribute a lot of advice freely in essays and events, and because YC's connections are high-profile enough to work outside YC, it's less necessary to join YC for them.
To me, the other entrepreneurs in YC are the biggest value-add and worth a premium. I don't argue YC should match angel terms, just come closer to them than 1/10th.
I mention all this because I'm a fan of YC and want to see it succeed. The #1 criticism I hear about YC is the terms.* Investing a bit more is a good way to address that and one that now seems feasible. Otherwise it remains an obstacle to some high-quality founders and a way the increasing number of incubators can compete with you.
To use a mixed metaphor, I know I'm preaching against the choir in the lion's den, so I expect skepticism. I intend it as a friendly perspective.
-Mark
* #2 is that YC ideas aren't "big" enough, but that's mainly a VC complaint and one I mostly disagree with, anyway.
"Odds are, nothing your VC does, no matter how helpful or well-intentioned, is going to tip the balance between success and failure."
The effect of VC advice is in principle measurable. That would suggest an empirical approach is possible to determine whether YC is really 10x better than a 'regular' angel. Of course you'd have to consider the effect of how being chosen by YC might affect the performance of a startup. Also, whether YC is better at picking 'winners' than a regular angel.
YC is really the first angel/excubator to sell themselves on the idea that they are mostly not money. They have to, because they don't give a lot of it.
But is your advice worth (50-12) 38 thousands of dollars? Of course, it's not only advice, so I assume experience+popularity+connections. Is it worth that much money? Maybe, I don't know.
If startup is so freaking awesome it was accepted by a rich Angel and the YC, it can "buy" all that stuff for $38,000 from you.
The question of whether non-monetary YC experience is worth that much money is a hard one and it would probably involve calculating probability rate of success at YC vs Angel, non-monetary factors (well-being), externalities (with all the benevolence), and other things.
On the other hand, there is $38,000 just laying around, waiting for you to grab and multiply your runway by ~5 (50,000/12,000).
The author of this article made a mistake in proposing the "more money cheaper" investors as an alternative to YC. In reality, YC and those investors target totally different segments of the market.
If you have a good idea, you are confident in your ability to executing on it, and you just need money, then of course it is dumb to choose YC over other kinds of seed investment. As the author stated, it is relatively easy to get more money for less equity somewhere else.
YC is easy money. You type up one short application and you give one short presentation and you are either in or out. If you lose all the money they give you nobody cares. Raising money other ways is not nearly so easy; if it is easy then you probably got it from people whose money you will feel very guilty for losing.
From afar, YC seems to be a very college-like experience. PG is like the professor. The other founders are like your classmates. Your acceptance into YC is akin to that letter you received in the mail your senior year that made your mom cry because she was so proud--instant validation. When you get into YC you feel like you've succeeded regardless of whether or not your business fails. Once you are in, the environment is so confortable because it is just like the environment you've been in your whole life: people hovering above you, waiting to collect your homework every week.
Other people who might be willing to fund a business are not going to offer such a friendly, comfortable environment. You actually have to read everything they want you to sign; you probably should have a lawyer look over everything before you even sign the initial agreement. You're going to hear "where's my money" in your head every time you talk to them. They are unlikely to appreciate the vital importance of a weekly dinner party.
I'm no expert on this stuff, but it seems like 10x improvement in terms for the Angel route is abusing some New Math.
If a two person team goes with YC, and YC gets 6%, then the founders have 94% of the equity and $15k. If they go with the hypothetical Angel, who takes 2.4%, then they end up with 97.6% of the company and $50k.
So yes, they end up with 3.3x the cash in hand, but only 3.8% more equity (97.6/94). And it doesn't seem to make sense to multiply those numbers to reach some good-for-headlines number like 10x. Not to mention the stated goal of YC has been "seed stage", which is presumably before, and not exclusive of, "angel stage".
Well, options are granted at the discretion of the board and YC doesn't take a board seat. Most companies will incorporate leaving some percentage of their stock unallocated. Founders only "lose" that percentage of their voting rights when they grant options to later people joining the company, which they'd probably do anyway.
SYC argues their advice and connections are worth this premium. I respectfully disagree. Advice and connections for even idea-stage entrepreneurs are easy to find with a little initiative, and if you don’t have that, you’ll fail as an entrepreneur. YC’s connections, Demo Day, and brand are indeed value-added, but it’s hard to argue they’re worth ten times an angel and free advice and connectionss
I strongly disagree with this statement. As someone who was in the Valley at age 19 I can attest to how backwards many companies are run and how valuable it is to have an experienced entrepreneur guiding you. Of the companies I was around the major difference between success and failure was how much effort the Angel investors put in to mentoring their founders.
As far as connections, I mean no offense to the author of this article but it's foolish to assume people will acquire connections as valuable as those Paul Graham has simply by showing up. The more I live in the world the more I realize it's all about connections and the doors that are opened through YC are easily worth an extra 4%
In the end you can argue hypothetical numbers all you want but the reality is you have to make a company successful before it's worth anything. Good advice and industry connections are vital to making that happen.
> As far as connections, I mean no offense to the author of this article but it's foolish to assume people will acquire connections as valuable as those Paul Graham has simply by showing up.
You should go one step further because you don't even need to show up to get these connections with YC. YC is basically offering people the ability to email in their idea, and get funding, connections, and a network.
I don't live in Silicon valley. I don't know any angels, personally. There are probably a very very very tiny few where I live, but not like the valley. I'd like to know about all these angels I can just effectively email with my idea to get money. That's what YC is offering. I reject the notion that there's all these angels out there offering a similar path and that they are easy to find.
His startup just died. I dunno if YC investment/credibility/free PR/advice would have kept it from dying, but I'd wager it'd help his chances by a meaningful amount.
People should optimize less for their magnitude of personal success (should their startup succeed) and more for the chances of their company's success.
I agree with what you're saying, but I'd be curious to know what the response to the program would be if terms started to move towards the funders and away from the founders. YC gets a lot of attention from their current terms, which means they have more choice and can be picky about who they fund. If they start asking for more equity or offering less money, I'm assuming they'll lose some of that choice. How much they'd lose is anyone's guess. Startups as a collective "product" certainly don't fit nicely on a supply/demand chart. It will be interesting as the years pass to see if the terms are adjusted and how the quality and/or quantity of funded companies moves with those adjustments.
One thing complicating your line of argument is that investment terms (as a price) are are significantly harder to value than cash. So it can make sense for people with more experience could to correct the under- or overestimation of inexperienced entrepreneurs.
Thought experiment: if YC invested $0, for the same stake, how much would it reduce their number of applicants? My guess is that the reduction would be minimal. A small number of people would decide that it wasn't worth it, lots of people would live off of savings, and most of the rest would borrow (or find very early seed investors to do a preferred round) rather than miss out.
It would make us sloppy about who we accepted. While $20,000 is much smaller than a series A round, it is still a lot of money. It makes us think hard about who we want to fund. Plus there are some groups that really do need the money. Half at least.
I'm astonished that angels would put in $50K at a $2M valuation for a first-time team with a working prototype. That valuation seems waaaay too high to me.
Yeah, that was another wrong assumption. In this market, probably only around a third of YC-funded startups could get a $2m valuation after YC, let alone before.
YC is MORE about the advice from pg, the alum network you are connected to and the long-term value of the connections you continue to make. That is the CORE value of YC--not the $ amount invested.
If he thinks YC is poor, he should have based his arguments on how you can get better advice/connections etc. from raising angel than through YC. Instead he decides to take YC on the $ invested/valuation and merely glosses over the advise/non-$ value of YC. This is little more than a straw man.
He spends ~1 out of the 12 paragraphs addressing the REAL argument. The other 11 are spent on addressing the straw man argument(that YC is good because of its valuation).
The hypothetical cannot win. This article spelled out what everyone already had some fuzzy idea about. But there are too many variables to draw any valuable conclusions.
Many founders share at least one goal: to get rich. To a lot of first time entrepreneurs this means, "Whatever works." If YC has a 50% success rate (if) and your option of angel investment has a 27% success rate, what would you do? OK, maybe you need to hire programmers, but 3 months of undivided attention and 2 quality hackers can produce results stunning. Goldenson is right, he is biased because he has been in the game for a while now. His advice may be helpful to some, but a lot of smart people go through YC's program. Why?
I hadn't even heard of Goldenson's self-described failed startup before yesterday. Yet, YC companies consistently get press as long as they are churning. If only we could factor these kinds of things into the equation. In his blog about his startup, Goldenson mentioned he spent $5,000 on PR. So what is YC's PR worth? This is just one example.
Too many variables, many not easily expressed monetarily.
A lot has been said to rebut the math in the article.
One more smart thing I'd like to point out about YC is that by making it a standard 6% for all, it removes any discussion on valuation.
Those discussions tend to be very counterproductive: as the investor, I offer you X%. You feel insulted, you counter-offer. Repeat. By the time we are done and agree to terms, there is bad blood.
The YC method? No discussions. You know the terms when you apply. End of story. We can all stay friends.
Simple and elegant.
Is 6% the right number? 1% would be rip-off. 5% is essentially the same as 6%. It's small enough that it doesn't impact the founders in the grand scheme of things, significant enough that YC gets some upside. Sounds fair to me.
The YC companies aren't being offered the 2M angel valuation, so it seems silly to compare them directly like this.
There's nothing barring YC companies from taking more investment after the 3 months in which they go from an idea to a launched product. In fact, being in YC makes a company much more attractive to future investors.
I'd say that the difference between an idea on paper and a complete product or prototype is probably 10x, so in that sense these numbers really seem reasonable.
"n fact, being in YC makes a company much more attractive to future investors."
If this were Wikipedia I'd say [citation needed]. Also, are you comparing being in YC and having no support, or being in YC and having an angel investor? The latter is what the OP is talking about and argues that an angel gives more cash, for less equity.
It's amazing how effective "YC terms don't optimize your pre-seed valuation" linkbait is- this has to be the sixth article expounding on the same points.
I like the provocation! You have gotten people thinking.
Personally, from the writings and essays of Paul Graham I don't think his goal is to make money. He is a visionary with the intent of creating more value in the world for people. He, as an individual could go and do his own thing for the rest of his life and not bother with this. Hawaii here we come. However, as people look for purpose and meaning in life, when one looks back and sees that they were an integral part in creating a great deal of 'wealth' (the way he defines it)for the world that is very rewarding.
Their terms ...
Just as it is integral for them to give of their expertise and experience so too it is of equal and perhaps greater importance to be able to curb their giving. This empowers founders to dig deep within their own reservoirs of strength and character and develop their company with minimal resources, i.e. money.
Just as a parent wants to give it is perhaps more important for him not to. It is important to discipline.
There's actually a way of calculating how good the YC terms are.
Basically what you want as an entrepreneur is to maximise your exit. The exit sum for a founder can be calculated as %ownership X salesprice. So if you add up all the founders that have exited, and see how much money they made on average, and then compensate for the companies that didn't make it you will come up with the average salesprice that a founder will get paid when his copmany is sold. Since YC has a track record by now you can simply do the calculation for YC and your seedfunding outfit of choice and see which gives a better payour for the average founder.
There are a lot of nuances of course, maybe there's an extraordinarily large exit, some incubators hold on to companies longer, you can only estimate companies that heve either been sold or gone bust, etc. but it will give a pretty good rough idea.
What the author misses is that it doesn't really matter what your seed valuation is because the equity of the seed investors gets super diluted by future rounds anyway. Once you've raised a series C the difference in equity for the founders is probably .2%.
Unless you exit before your Series A, which seems to be fairly common for YC companies: Reddit, Clickpass, Auctomatic come to mind... 6% at that early a stage might still be pretty high.
If you exit before your Series A, you're probably pretty happy anyway. I dunno about you, but for me I don't care if I get $5M or $4.7M, I'd just be freaking glad to have a few million.
Depends when you believe you are exit is going to be. If it's that you are going to get Series A and then get bought by BigCo for $x million then the initial terms make a big difference.
Well, it's not about absolute percentages but relative. If YC owns, at the start, 6% and the founders 94%, there will still be that roughly 15-1 ratio on cashout. It might be 15% and 1%, rather than 94-6, but it's still the same % less that the founders get.
The article operates under the assumption that all dollars are equal. The effect of being invested in by YC versus, say, my grandmother, are not the same. There are alot of other intangibles in play that are almost impossible to quantify. But that doesn't mean they can be safely ignored.
It reminds me of the assumption of statistical independence in various machine learning problems where the variables are most certainly not independent... its just that including it makes the problem completely intractable, so even though everyone knows its wrong, they have no choice but to assume it.
Are you making the smart money vs dumb money argument? Mark does address that:
YC argues their advice and connections are worth this premium. I respectfully disagree. Advice and connections for even idea-stage entrepreneurs are easy to find with a little initiative, and if you don’t have that, you’ll fail as an entrepreneur. YC’s connections, Demo Day, and brand are indeed value-added, but it’s hard to argue they’re worth ten times an angel and free advice and connections.
Anyway, I think the real value YC brings is they give you an excuse to focus on your startup full-time like mad maniacs for 3 months. Try doing that outside of YC and people will just ridicule you. Being in YC also provides motivation during those post-idea-pre-prototype stages which are super hard.
He makes some great points. The ideal situation for entrepreneurs is to have VCs competing for equity in their companies: the more VCs out there, the better. OTOH, the ideal situation for VCs is to have tons of entrepreneurs competing for their dollars (hello TechCrunch 50).
So while there will probably always be more entrepreneurs than VCs, dollars are almost certainly the most non-unique aspect in the value equation. I guess it's when they get into the big numbers where the little percents equal a lot that a more in-depth analysis is called for.
I didn't -say- that was his argument, therefore its not a strawman . I was simply providing an example to illustrate (with hyperbole) the comment I made in the previous sentence. The one you snipped out.
You've essentially repeated my point, elsewhere in this thread, by claiming that the value added comes down the "network" of said angels not just the personal networks but all of the non-financial considerations.
Does being a YC versus an average angel-funded company get you more press? How many TC writeups, on average, do you think being YC funded gets you? How much money is that worth? How much page rank is that worth? This is important because he specifically talks about "marketing" as an important early expense, and yet YC provides quite a bit of it, for free.
I think he misses the point. $12K is chump change. less than a month of contracting, at bay area sysadmin rates. The reason to do a ycombinator startup is the contacts. If pg was willing to trade me access to his contacts for 6% of my hosting company without requiring me to go into the 'sell to investors' rather than 'sell to consumers' market, I'd jump in an instant. (I've personally invested quite a bit more than $12K so far)
Wow, that was an interesting article, but when he said a good domain name costs $5-$50k. Man, what is he smoking? Businesses don't depend on $50k domain names.
"my real suggestion is that Y Combinator should invest more"
He's missing the whole point right here.
Y-Combinator is like Twitter. Venture capitalists are like bloggers.
With Y-Combinator, like twitter, people just didn't understand how so much value could come out of so little. At first, typing to someone in 140 characters is hopeless. Then you try it, and you realize how much can come out of so little--you become resourceful and cut out the fat you don't need.
Hate to liken them to twitter, but hey, everyone's doing it... (best reasoning ever)
No, his argument is that as an entrepreneur you could get more cash for less equity by going to an angel. If you don't dispute that fact then the argument comes down to how much you value the YC network vs. an angel's network.
I think the value of contacts and credibility should not be underestimated. On both ends, really. You have to trust your investors as much as they have to trust you, especially if you don't retain 51%.
YC has a lot more credibility than most other entities when it comes to choosing the right startup or the right investor. I would be significantly more likely to accept an investor who was introduced to me by pg.
The essays I've been writing about startups are going to be such a book. Most of the general advice I could give about investors, particularly, I've already given, in e.g.
This is the mistake. Advice is easy to find, but it varies in value.
This guy can correctly value our money. It's worth the same as everyone else's. But he has no idea whether our advice is good or bad, and if good, how much better it is than "average" advice, whatever that is.