Sam Altman: ‘Too many’ Y Combinator companies raise money
Was just thinking the other day, it'd be super interesting if YC ran some YC Equity/YC UBI experiments within its own network. Basically in joining YC, each YC member would be granted a percentage of YC's 7% stake in all of the YC companies which would reduce their need to fundraise. In theory, YC members should all be highly motivated achievers and use that percentage stake to move their diverse set of businesses forward.
Since there is such a high barrier to entry into YC, it might not prove shared equity/UBI would 100% work in the real world. However, coming at it from the other side, it could provide some early clues as to whether a shared equity/UBI could ever work at all. For example:
- Would YC companies cheer each other on with positive peer pressure/be more motivated to knowledge share or would low achieving YC companies de-motivate high achieving YC companies? Would YC companies who fold be allowed to retain their percentage of the YC stake?
- Would high achieving startups bypass YC or be attracted to YC?
- Would every set of new annual entrants into YC be seen as diluting the value of the existing YC equity or additive? Would existing YC companies want more say in the selection process? Would Airbnb, Dropbox, Stripe receive the same percentage of YC stake as new entrants?
- How do you socialize the concept with existing stakeholders (i.e. existing YC partners) who would be diluted?
- Is it better to implement it as a single monolithic YC group or divide it by YC Class?
Assuming ~1500 YC companies with ~10 employees each, that'd be about 15,000 participants, which would be a pretty good dogfooding [0] experiment!
If the artificially-created real estate "shortage" problem in the Bay Area was solved, lots of other problems would be solved.
- Companies raising money just to pay inflated (yet still insufficient) labour costs
- People who would love to work for startups but realize that most startup salaries barely gets you a studio apt, pretty cool until you have a family
- Companies who "cant find" talent
Is it any surprise companies need to raise so much funding, esp when operating out of the Bay Area?
Early YC: Small, gets disproportionate number of wins. Develops top tier reputation.
Later YC: Expands significantly due to the added prestige, and now performs much closer to the mean.
Today: Sam says that "too many YC companies are getting funded".
Is this fundamentally different from a mutual fund that yields 25% above market for a few years in a row and then performs closer to the mean for the following decade? In the mutual fund game, it's very common (hence Vanguard).
Surely during those top performing years the mutual fund managers strongly believe that they have deep insights that are the root cause of their funds' performance. But the following decade proves otherwise.
Maybe I'm misinterpreting but in a way it sounds like he's saying that YC sometimes (often?) bet on ideas / teams that turn out to be crap. Well, of course that's going to be true.
Just they same, prestige or not, track record or not, it's also possible that not all ideas / teams were the right fit for the YC program. That is, yes within YC they were bad bets, but that's not to say things won't change once they're away from the VC dynamic.
Finally, perhaps he feels that by others putting money into what YC might consider a lost cause, those others will eventually realize what YC realized? But now the losses of others could be "blamed" on YC and thus tarnish the YC brand going forward?
This seems like a signalling problem. If a YC company looks for funding at some point after demo day, the first question VCs ask is going to be "why didn't you raise money at demo day?" -- so there's going to be an incentive for companies to go after money at demo day even if they're not ready simply because it will be much harder if they wait.
I wonder if it would be effective to tell YC companies that they can participate in a demo day, but it doesn't have to be the one for their batch -- so a company could wait and join the following cohort in order to avoid the stigma of being "the company which couldn't get funding at demo day and is now going around to VCs one by one".
I know a fair bit of YC companies, and a trend is clear from the last few years. As they say: it's not that YC picks the best startups, it's that the startups they pick "become" the best startups (i.e. crappy companies look good just for being in YC).
This definitely isn't healthy, and I'm glad they at least recognize it.
This seems to fit a continuous change in YC and perhaps tech in general. YC doesn't seem so eager to fund 1000 startups so that 2 of them become unicorns anymore.
It's more like they want to fund 1000 startups so that 100 are sustainable.
We don't hear moonshot or billion dollar market depth or hyper growth as much as we used
Anyone feeling the same?
Not being in a position / deciding not to raise money has helped me immensely. It's also been hard. A little bit of raising money is "getting out" of work... you raise money to feel good and successful, but the work of the startup still isn't done. I've had to bear the full burden. If I would have raised, it would have muddied the waters. I would have 10 different priorities, other than writing the software.
The irony of the game is that having money in the bank let you hire great people and pivot to the right idea, but to raise money you need great people and the right idea. So, MAYBE, it's not that bad of a thing to raise even if you don't have everything figured out yet.
YC participation is a stamp of approval. Unless YC intends to take on responsibility for follow on funding in some kind of exclusivity - which on the record from a partner at YC is definitely not in the plan [1] - then Sam will just have to live with that. After all, companies are - for now - still free to try to raise funding from outsiders once YC has made their bet.
On another note, it's those investors money to waste, if they want to burn it on companies that don't make it then in the long term this will self-correct because there will be less money available from such investors.
> I think there’s sort of this halo around being a Y Combinator company, where companies raise money that perhaps shouldn’t.
This is such a strange sentiment. YC has invested in all of these companies, then they pooh pooh others that follow their lead?
The problem is that too many startups go to Y Combinator! Many of them can bootstrap!
Y Combinator prefers to get 6% of more companies to increase the chance of winning the jack pot.
Maybe I'm missing something, but isn't one of the reasons to join YC is to find ways to get funding? Even in the Standford videos, there's a lot of focus on the topic of raising money.
I think Sam's point (or concern) is with the so-called "Startup-Culture". There's a big focus on...
-1 Presenting a basic idea
-2 Get into Y-Combinator
-3 ???
-4 Profit
Or, I think that's how startups are interpreting what being an entrepreneur is all about.
I think Sam's point is that the product shouldn't be a placebo that happens to raise money. Or, to better say it, you are not here to be good at fundraising. You are here to be good at making a product that will (wait for it) change the world.
I think the success of those so-called unicorns (Dropbox, AirBnb, Twitch, etc.) had caused this problem. There are a lot of investors that are willing to spend away hoping for something to stick and to become profitable. On the other hand, there are a lot of startups who's soul purpose is to be good at selling a 'not fully realized' idea, raise a ton of money, and then cash out. Oh, and have 'fun' while doing it. Why? because it works!
It reminds me of the Hubspot videos with Daniel Lyons. https://www.youtube.com/watch?v=RVSLLvHceSA
Now, if someone was banging on my door desperate to give me a crazy amount of money with almost no strings attached to but into my 'shell of a product' I may consider taking the offer. But doing so may benefit me, but could cause harm to those who really have a great world-changing idea.
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He's probably right, didn't Airbnb struggle for about a year after graduation?
This guy is not really a good thing for YC, I honestly stopped caring that much about this incubator after that guy who was in before him left. Sam Altman should be removed.
Is there any way for YC to build its prestige and the sense of value it delivers without being a positive signal?
It sounds to me like Sam was just trying to say that the reputation of YC-backed companies often preceeds them and that VCs look at YC graduates with rose tinted glasses, which they perhaps should not. Doesn't seem like a bad thing to say at all.
Unless I am mistaken, literally all YC companies raise money. They do it from YC itself.
There are lots of ways you could spin it, but how can Sam justify such a statement when they've invested in all of these companies too?
Aka... 'too many' companies go on to raise outside money and dilute ycombinator shares. How unfortunate that ycombinator can invest a limited amount of money and have graduates turn around and get 10x as much from other investors. It must be stopped!
Also, I'll have some serious respect for YC if I'm not banned for this comment =)
The Russian money has got to go somewhere #payitforward
Here's an idea: you start a company and you're profitable right away and you invest your profits back into the business. You get organic growth because your business is producing real value.