Totally agree. Here's what I said on the TechCrunch post:
“That’s a lot of equity to give up…”
As one who has given it up, it’s really not.
In the earliest stages you want to optimize for you CHANCE at success, not your magnitude of personal windfall should you actually achieve it. It’s a no-brainer to me. It accelerates fundraising, makes fundraising more competitive (which probably raises your valuation by 6% right there), gets you a great network, gets you some great advice, and (the smallest part) gets you some free PR.
Overall, your shot at success and/or an exit is vanishingly small. Startups are very fragile things. If you can increase your chances for success and build some early momentum by giving up 6% at a time where you have built virtually NO value (pre product), then it’s a ridiculously good buy.
Steven Kane
· 3 months ago
is 6% too low?
doing a startup is like a bobsled ride -- once you're in, for some period of time, you can't get out. meaning, whatever terms you agree to vis a vis financing at the beginning define your entire experience of the startup.
again, i'm not arguing that YC isn't providing great value and resources. stipulated. i'm just saying, entrepreneurs should always always visualize where they want to try to end up, especially right at the beginning, perhaps most so with regards to financing.
will you be happy 6-7 years from now, owning 2% of the company?
if not 2%, then what?
decisions made today directly impact longterm outcomes -- and decisions made today affect longterm outcomes more than most other decisions precisely because the valuations are so low...
fredwilson
· 3 months ago
I like your advice to figure where you want to end up and work back
That said, if getting YC involved means your seed/first round is 20pcnt dilution instead of 30pcnt, then its a better deal
I think that's a real trade that you can make with YC and other programs like it
*An investor wants to give you money for a certain percentage of your startup. Should you take it? You're about to hire your first employee. How much stock should you give him?
These are some of the hardest questions founders face. And yet both have the same answer:
1/(1 - n)
Whenever you're trading stock in your company for anything, whether it's money or an employee or a deal with another company, the test for whether to do it is the same. You should give up n% of your company if what you trade it for improves your average outcome enough that the (100 - n)% you have left is worth more than the whole company was before.
For example, if an investor wants to buy half your company, how much does that investment have to improve your average outcome for you to break even? Obviously it has to double: if you trade half your company for something that more than doubles the company's average outcome, you're net ahead. You have half as big a share of something worth more than twice as much.
In the general case, if n is the fraction of the company you're giving up, the deal is a good one if it makes the company worth more than 1/(1 - n).*
You're talking about long term personal outcomes (i.e. how much $ do I get to walk away with) and I'm talking about chance of success (what's my shot at building a profitable company that someone buys someday). Having 2% less of the company (given that I have 2 co-founders) does not lower my motivation one whit, and the value that YC gives moves the needle enough that it's probably a net positive (i.e. owning 31% of a $10.6m company is the same of owning 33% of a $10m company). And at the earliest stages (where YC plays) the biggest risk isn't your personal stake-- it's losing momentum and/or death-by-fundraising.
Deciding how much is too much depends on the value offered and how investment-intensive a business is, I'd think. But at the end of the day, you just take your best guess using the above formula.
Steven Kane
· 3 months ago
I've read pauls essay and its spot on
But YC doesn't negotiate - its a take it or leave it deal
Which is fine
But all your logic is still besides the point - YC has been doing its thing for 4 years. 40 startups I think? Any case at best the jury is still out. All the firm conviction expressed around here seems a little premature
fredwilson
· 3 months ago
i think it is more like a couple hundred at this point steve
Steven Kane
· 3 months ago
here's the data. probably not complete but not bad
it's great that someone is tracking this and in about five to ten years we'll know the answer. that's the problem with VC performance data as you know Steve
Steven Kane
· 3 months ago
Yep
That's all I have been trying to say - definitive statements about the value of the YC deal are premature
jedc
· 3 months ago
Hi, Fred. I put together that spreadsheet with YC, Seedcamp, TechStars, etc. as part of my master's thesis on the rise of these types of programmes. I'm blogging my results (and the full paper) shortly. Will definitely send you the link once it's up.
So far, YC and TechStars in particular look successful. Both look like they've already made their money back in the companies that have already exited, and YC in particular has a handful of companies that could be real home runs, even after all the dilution.
maeozkan
· 3 months ago
Jedc, I would love to see the paper as well. Could you send it to me as well, please? My email is mae at goldenhornventures dot com. Thank you very much!
The paper is on Scribd, so you can read/download it as you like.
(I see Lady Judge is part of your team... my business school is named after her husband!)
maeozkan
· 3 months ago
Great! Thank you very much. I am downloading it right now. (Barbara is co-chair of our management company. She has been very helpful.)
Satish
· 3 months ago
Hi Steven I agree with you in principle that the 6% should not be a hard # and should be proportional to the value that YC adds. And i think they add more than 6% value for some teams and less than 6% for some teams. Yesterday night i though that YC had a hard 6% that they want. But i just dropped by YC website and saw this.
"We usually invest $11,000 + $3000n, where n is the number of participating founders, up to 3 (i.e. 2 founders get $17,000, 3 or more get $20,000), in return for between 2% and 10% of the company. The average is 6-7%."
So maybe your point is already taken into account by Paul as he is willing to negotiate on the cut he wants based on the value add that he is going to provide to that team.
kidmercury
· 3 months ago
i def think we'll see models where the investor gets double digit percentage equity and no capital investment. but to get there, i think what the investor is offering needs to be a lot more clear. right now it's like, "yeah we'll give you 25 grand and some advice" but the advice part is very vague. i think entrepreneurs will almost be given a blueprint -- i.e. here's the technical standards you use, here's an open source community of developers you tap into, here are the benchmarks, etc. the fact that y com is starting to now doing that thing where they give you the idea and the entrepreneur builds it is i think a nice step in this direction.
but ultimately to get there the security of knowing where the exit line is must be delivered. IPO market? lol. that's dead and not coming back. the microfinance people are going to need to have liquidation models built in. upselling to VCs works for now, but only if VCs can upsell to the IPO market...
rajjr_tx
· 3 months ago
I love the YC model, BUT It doesn'tt fit well with people like me that have to feed a family. I wish there was an option for more seasoned new entrepenuers, like me. I would gladly suffer sleeping on the floor and eating 99 cent burritos, but I couldn't ask my family to do the same.
andrewhyde
· 3 months ago
about half of the TechStars founders have been married with children. A hard thing to pull off.
Jason
· 3 months ago
I love it as well. But, there is no way I could afford to move there with my family for a few months. I would also have to figure out how to manage a mortgage for a house that I'm not living in during those months. :)
I can understand why YC asks people to move locally. But, I really wish there was a way to be part of the program remotely.
pescatello
· 3 months ago
I hate it when people talk about X being a bad deal and valuations being bad or good. The fact is, for an entrepreneur, the deal is only as bad or as good as your options. If you can get more than 25k and good advice for less than 6% than do it. If you can't then don't complain. It's quite easy to comment and critique from afar but the reality is that every founder wants the best deal possible regarding money, advice, help, partnerships, etc. and they'll take the best deal on the table.
reshma
· 3 months ago
The story on this side of the pond is the same. We surveyed 100 European startups that came to Seedcamp. 80% said they mostly came for the product/marketing support and advice, 70% said the 2nd reason was the access to the network, and finally just over 50% said it was for the validation and profile building. Investment was important but not the most crucial element. These were teams as far west as Ireland and east as Israel. Overwhelmingly the teams we've funded would also say that the money helped pay to live for a few months but the support has been the critical differentiator
fredwilson
· 3 months ago
Can't wait to attend seedcamp next week reshma
egoboss
· 3 months ago
Interesting - and refreshing - feedback, Reshma. At this early stage most ventures are seeking a sanity-check of sorts. An abundance of funding at the early stage is not, I believe, a healthy thing and can be counter-productive in fact - there's plenty of time to become 'conventional' when successful (and is usually when the decline starts, if that's allowed to happen!). More important is the building of a cohesive, focused team with a shared vision.
Only just became aware of next week's event - looks good, hope it goes well.
heidi harman
· 3 months ago
Seedcamp is a healthy reality-check for all entrepreneurs, getting feedback on your own idea or not, getting the cash or not. At the end of the day, you´ll create your idea anyway (with or without cash) but having people that want to reflect with you - that money cant buy. Keep up the good work Reshma!
Steven Kane
· 3 months ago
can i agree with your assessment of the huge positive value of YC but respectfully submit that is besides the point? or at least, besides sarah lacy's point?
$500K either is, or is not, a low valuation. the founders do not own more of their own company because they received so much value from YC.
if you are right and lots of IPOs are coming (and I hope so!) then we will really have data to look at -- data, that is, that demontates that giving up so much equity on day one of s atrtup really can be a good decision for founders if they get enough non-cash value-add
as of today, there is no such mitigating data, only the simple truth that giving up 6% of your company for $25K is just that -- 6% of your company for $25K.
think of it this way -- is there some amount of non-cash value YC can provide that old make it worth, say 12% of the company for $25K? where is the threshhold?
its not today but tomorrow -- over time -- that valuation matters, no? just do the math...
computertom
· 3 months ago
Steve,
While the founders don't own more of their company because they were a YC company (or TS in my case), they do own less of a *much* more valuable company. I think this model doesn't fit the standard pre/post value math. These two programs (at least, not as familiar with the others) provide more value than anything else we could do with that 6%. No doubt about it.
-Tom
Steven Kane
· 3 months ago
that's a truism
no one here has come forwrd with actual outcome dtas showing this is true. evertyone is just stating the obvious thoertical idea thats a small piewce of a big pie can be better than a big piece of a small pie
what about a small piece of a small pie? or a miniscule piece of a big pie? etc....
you say "no doubt about it" -- ok, i'll bite! prove it with actual cases...
computertom
· 3 months ago
What we have to find are those two separated at birth, raised by different mothers (or in this case, seed fund vs. no seed fund) startups that have gone to exit. They we can see how everything turned out and know if it was nature vs. nurture, 94% or 100% ... Then we can all get together to watch the Dateline episode where they wrap it up in 45 minutes. I'll bring the tissues! I'm saying, that data will never exist. What does exist, has value and convinced me. To *me* there is no doubt.
While there aren't enough exits yet to know, do you doubt the percentage of successful seed rounds, or the percentage of co's still in business at 1 year, 2 years, etc after YC or TS? Those are data we do have. Sure, some can be attributed to deal flow, but can it all? I guess we'll have to wait and see.
Steven Kane
· 3 months ago
Sorry that makes no sense. If the data doesn't exist then you can't possibly be right
And sorry again - of course the data exists! some deals are better than others. Or are you saying all outcomes are the same? Of course not? Are you saying, why negotiate terms at all? Of course not.
Talk to any experienced serial founder. Initial funding terms MATTER
computertom
· 3 months ago
Exactly - there are no "separated at birth" startups. We also have too few exits from which to draw a conclusion. What we do have is intermediate data on seed and follow-on funding as well who is still alive. That data has value, and that data sure seems to say that companies who exit these programs have a significantly better chance at survival. Will they be the next Mint, who knows. Are the entrepreneurs (remember, NOT serial founders, often first or second time founders) better and much more equipped for present and future success - yes.
It's funny, I asked many of the mentors this summer if they would have done TS had it been around. Every single one said they would in a heart beat.
Yes terms matter, yes negotiating matters, yes outcomes differ based on the two, but at this point in my career I'll take owning a chunk of the remaining 94% of a TS or YC company over being 100% of a non TS|YC each and every day of the week and twice on Sunday.
I also have no doubt that had I come into the program with more experience, I'd have been able to push mentors like you even further and get just as much out of the experience - that is to say, far more than 6% common of my company's value this past Spring.
I agree, it's "the best deal in startup land."
Steven Kane
· 3 months ago
Well, I'm certainly glad you're content
But again, I'm nort arguing for or against mentor programs or incubators or YC or TS or anything
And I'm not saying 6% for $25K is a good deal or a bad deal. It depends.
All I am saying is, the most important thing is to be a critical thinker. That, and caveat emptor.
You seem to be good on both fronts. That's great.
It seems like many commenters here, though, are parroting platitudes. "Better a small piece of a big pie." Gee. Duh. And many are opining that YC breeds better companies and entrepreneurs and on that the jury is way out.
One final note you write that "companies who exit these programs have a significantly better chance at survival." But I couldn't care less. What I care about are the founders and entrepreneurs. There are tons of VC backed startups that persevere for long periods of time if nothing else, VCs sometimes keep funding deals way after they should be decalred dead for all sorts of reasons (eg, they are raising a new fund or whatever). But just because companies that survive does not mean the founders nd entrepreneurs survive. In fact, in VC backed startups, they usually do not.
fredwilson
· 3 months ago
Steve, every great discussion needs a naysayer. Pls keep it up. This thread is better off because of your participation. I don't agree with you on this one but I really appreciate the points you are making
Steven Kane
· 3 months ago
"Naysayer"?
I know its not your intent but that's a little hard and loaded language?
I haven't said nay to anything. I have extolled the virtues of YC. I have only challenged entrepreneurs to not reflexively adopt conventional wisdom and to acquire sophistication and knowledge and skill in finance
That's not nay that's yay
Absence of sycophancy does not equal negativity! ;)
fredwilson
· 3 months ago
nay in the sense that maybe it is not the best deal in startupland
Rodrigo Mazzilli
· 3 months ago
Any investment so early in the game is full of risk for entrepreneurs and YC alike. Before believing in IPOs, you have to believe in creating value and increasing the valuation of the start-up. Most of the start-ups YC invests in don't even have a proper team and product. Getting adult supervision, some early capital and the support of YC and its network of advisers is well worth 6% in my opinion. As far as I know, Paul Grahan's doors are always open for the start-ups he invested in, even later in the game.
lacker
· 3 months ago
the valuation is only $500K if you count the advice as worth nothing.
if you would pay another $25k for that advice, you're essentially getting a $1M valuation.
etc etc.
Steven Kane
· 3 months ago
Respectfully, that is gobbledy gook
If not, can I show you a nice bridge thats for sale?
;)
Mark Essel
· 3 months ago
Steven great comments all over this post, appreciate the different perspective and agree that the verdict is still out until we see some successful businesses. I suspect we'll see quite a few viable models (disqus, dropbox are two of my favorites but there are many more).
fredwilson
· 3 months ago
I agree. Steve has done us all a huge favor with his comments in this thread
fredwilson
· 3 months ago
But steve, the entrepreneur really does get a lot more than 25k of value. What if you assigned a total value of the deal at 100k? Then its a really great deal for 2-4 founders and an idea
That's how to think about it
ceonyc
· 3 months ago
How much higher is the *next* rounds valuation b/c it is a YCombinator company and comes with that Good Housekeeping seal of approval? Net-net, it all evens out.
Besides... its a free market. If Sarah doesn't want to take money from Paul at that price for her next startup, she doesn't have to. No one is putting a gun to the head of all these entrepreneurs who are applying.
Also, how much is the PR worth that companies get by being a YC company? And the networking connections...
Steven Kane
· 3 months ago
here's the data. probably not complete but not bad
There's no substitute for cash. Startups have plenty of people willing to give advice, but almost nobody with money to offer. Really nothing matters but meeting the payroll.
fredwilson
· 3 months ago
I disagree. Building the right product is more important than cash. Many founders can survive for very little money. The YC founders are great examples of this. But if you can't build something people want, your dead
DaveinHackensack
· 3 months ago
Has any Y-Combinator business become profitable without another round of venture capital? I can see how that might be rare, but in general, if you are an entrepreneur and want to retain the largest ownership percentage possible in your business, isn't the way to do that to minimize your need for outside investors?
Steven Kane
· 3 months ago
Y.E.S.
fredwilson
· 3 months ago
Yes. Many have. That's part of paul's mantra. Get 'ramen profitable" and then stay there
Dan
· 3 months ago
It's really just the beginning. Y Combinator is an experiment, right? So they are learning a lot from this experience, and I'm not surprised that after only 4 years they haven't dented Wall Street yet. Unless this is 1999, it usually takes at least 5 - 10 years to do that.
So it is important to read what Paul Graham writes simply because he learns things -- not everyone from Ivy League or MIT or Stanford comes across as smart; one of the key elements is that the doctrine of the elect applies to startups; launch and iterate -- and passes it along to all of us for free.
I'm excited that startup scenes are cropping up across the USA. They act as a sort of filter, but inevitably some will be more successful than others. Y Combinator and TechStars seem to be strong, and I like Founders Co-op in Seattle. Atlanta, Pittsburgh, Philly, and D.C. could make it happen with their yc clones.
Maybe we will learn something about the process that is essential to achieving IPO.
fredwilson
· 3 months ago
Check out the short post my partner albert did on this topic this morning
Very true. I was just talking with a more seasoned gentleman than myself in a coffee shop here, and he told me he was beginning to think that looking at factors other than business plans may be key. I pointed out that business plans often cite current market sizes, but it is hard to show new and large markets because you really need to build something for customers first ("will you use this?" will work on occasion, but not always).
The problem I've always had with any application is that you don't get the opportunity to show yourself and how determined you are. Figures on paper can easily lie. What's important is character, and only real life experience can give someone confidence in another person.
Mihai Badoiu
· 3 months ago
Y combinator can take as little as 2% in equity. Would this number make it even more appealing?
--mihai
fredwilson
· 3 months ago
Yes of course
Don Jones - VentureDeal
· 3 months ago
Better to have a lower percentage of a very valuable company, then a high percentage of a dead company...
Steven Kane
· 3 months ago
here's the data. probably not complete but not bad
No, a friend who wants to remain anonymous sent me the link
Steven Kane
· 3 months ago
ok, but thats like saying its better to live to be 100 than die at 60
there's just not enough data yet about YC companies to make any kind of judgement, and suggesting otherwise is a little cruel to young entrepreneurs, i fear. no matter what, founders need to understand how financing works over time, no?
fredwilson
· 3 months ago
I hear you steve but I see a wide swath of this market and I do understand the long term math you so rightly point out. I feel very comfortable with my statement that its the best deal in startupland
Satish
· 3 months ago
Would you recommend any team thinking of starting a company to take up the YC offer if they get in? Or is there a certain threshold beyond which the team should do it on their own?
fredwilson
· 3 months ago
Word
egoboss
· 3 months ago
As ever, simple is good. Well said.
A percentage means nothing. Value means everything.
Ivan Kirigin
· 3 months ago
I'd give YC the same amount of stock just to be advisors. Do people even need to know more?It isn't about the money.
It's just bad journalism to ignore the non-monetary components.
davidkpark
· 3 months ago
As a founder of a startup in the early stages, I completely agree with you that YC is the "best deal in startup land." However, let me put on my other hat, which is as an academic. The question from an academic perspective focuses on if the $25K and 6% are the optimal cash/equity combination. Is it truly the "best" deal, "best" deal for who, and how do we even measure "best?" We could try to mathematically model this as a negotiation with uncertainty, or we could survey Paul, Jessica, and applicants to YC to see if they will reveal their true preferences on what cash/equity combination they would really do it for. Would be a nice academic paper.
Steven Kane
· 3 months ago
here's the data. probably not complete but not bad
Hi, Steve. I was the one who put the YC, Seedcamp, TechStars, etc. data together... thanks for mentioning it so many times here!
It's not 100% complete for YC, but is virtually complete for the rest. But even for YC it's probably 90%+ correct (except for valuations, which are my personal guesses.)
Rodrigo Mazzilli
· 3 months ago
YC does contribute a lot for a 6% equity participation. In fact, giving up 6% of your start-up actually increases its valuation a lot when it becomes a YC-backed company. It's a no-brainer!
Steven Kane
· 3 months ago
here's the data. probably not complete but not bad
Agreed! Better to have a piece of something big than 100% of something that doesn't go anywhere. And the education is priceless. I suspect startups would actually pay to go through the program. Hope to see the Y Combinator model continue to spread.
Nathan Bowers
· 3 months ago
Since it doesn't take a lot of cash to launch a web startup the non-cash contributions from VCs matter more. This is why VCs like Graham and Fred Wilson who've built good will based on transparency, writing, and personal reputation can punch above their financial weight class.
Steven Kane
· 3 months ago
it may be true "it doesn't take a lot of cash to launch a web startup." but IMHO anyway it is not true that "it doesn't take a lot of cash" to execute a startup, and be successful, and exit.
fabulous outcome for mint.com announced today... they raised $35 million
twitter has raised, what, $55 million?
zynga, also has raised many tens of millions of dollars
founders have to think about the entire lifecycle of financing a company, not just having an exciting first tranche
had the mint, twitter or zynga founders sold 6% for $25K at the outset, their personal outcomes would have been radically radically less -- and that's just simple math, no?
RyanHaugarth
· 3 months ago
Mint did give up X% in exchange for legal support in the very early days. The founder sited this as one of the critical moves made that allowed them to go from nowhere to 140M in 3 years.
If Mint did not give up that equity for the legal support, would their financial situation be different today... Absolutely! It's impossible to say which way however. From the founder's comments in his TechCrunch post... it seems he doesn't regret it for a second.
I completely agree that YC type programs can add a huge amount of value to the startups not only in cash... but "in kind" services that DO have value.
Steven Kane
· 3 months ago
Trading equity for services is common, and often smart
Naturally mint did not give up 6% for $25K legal services - probly gave up 0.6%
RyanHaugarth
· 3 months ago
I think the point is YC brings a significant amount of these services to startups. Obviously you need to quantify all of this in order to do a proper assessment on if 6% is a good deal or not. Obviously again.. it is impossible to assign a true value to a lot of the services provided by YC. It's up to each founding team to decide if the 6% is a good trade or not... I don't think there is any shortage of startups ready to jump at the trade.
Steven Kane
· 3 months ago
here's the data. probably not complete but not bad
That's why I said "launch". While later influxes of capital are important, I'd imagine that the early rounds have the most influence on the outcome. That's when relationships, culture, and product direction are still malleable.
computertom
· 3 months ago
Or I'll argue maybe their original seed or A pre would have been higher by enough to make that 6% quite an investment. Who knows.
Mint is a great, great outcome, but man what an outlier! Twitter and Zynga - we'll all have to wait and see...
Steven Kane
· 3 months ago
tom, you're a evry smart guy -- build a spread sheet and see the ripple effect over time of selling 6% for $25K. series a funding valuation has to be *significantly* higher than the norm series a valuation for such a seed valuation share sale to be "accretive"
again, only respect for YC's value add services. just always amazed at how young founders can be simultaneously brilliant at technology and utterly at sea hen it comes to finance. and no one should kid themselves that such an "arbitrage" opportunity doesn't get exploited (as it should be!) by the finance side. caveat emptor.
ErikSchwartz
· 3 months ago
Twitter and Zynga both had experienced entrepreneurs as founders.
Don't know about Mint's founders. FWIW, how good an exit for the investors is $170M if the previous round was raised at $130M valuation? Especially the later stage guys (I'm guessing Josh did OK).
fredwilson
· 3 months ago
the mint exit is awesome there aren't more than ten or twenty of that size in the web sector every year
they should be commended on it
ErikSchwartz
· 3 months ago
Just seems like the guys who are only in series C are getting about a 1.25X.
Of course that is on an exit in <45 days...
fredwilson
· 3 months ago
focus on the entrpreneurs the VCs might make big money, might not
but the entrepreneurs hit a home run on this one
ErikSchwartz
· 3 months ago
Totally agree. The founders did awesome.
DaveinHackensack
· 3 months ago
Seems to be some disappointment among Mint's users. Some interesting comments on Mint's blog, which are also relevant to the previous posts here about premium versus freemium. For example, a commenter named Steven Bryson wrote,
"Unlike a lot of the posts here, “free” was never a feature of Mint.com that sprang out at me. Sure, it made it easy to try, but I have always been agreeable to paying for a good service. I tried Quicken Online and Mvelopes, and frankly, though neither one was great, I probably could have made one of them work if it weren’t for Mint.com. I chose to use Mint not because it was cheaper, but because it was superior.
Intuit has a terrible reputation with their customers. I am also a QuickBooks Online customer, and I use it to manage my consulting business. I hate this product… I hate it more than I can describe it in this thread.
And a commenter named Josh wrote,
"I’m sorry to say I will be canceling my account.
I am simply not comfortable with Intuit having access to so much personal data of mine. What guarantees do we have that this data will not be compromised or sold for marketing purposes?
I would rather pay a monthly fee and know my data is guaranteed. Intuit is not buying mint simply to provide us a great free service; they intend to monetize, and it doesn’t take a PhD in Economics to see how they plan to achieve this.
Mark Essel
· 3 months ago
Good points Dave. When early adopters of a service dig in, was there no guarantee of data security or privacy? When it comes to most any service (some are explicitly public), users should have full rights to keep their information as private as they wish. Data portability is also a huge issue.
fredwilson
· 3 months ago
I hope they move to wesabe
kidmercury
· 3 months ago
lol i hope you'll diss mint if they do
fredwilson
· 3 months ago
I love boxing analogy nathan!
Joseph Miller
· 3 months ago
Sarah Lacy's job is to stir the pot and generate page views. At this point, it's practically trolling to argue that YCombinator has not done a good thing for the world.
Steven Kane
· 3 months ago
that is not even remotely what she said. go back and read the quote?
Mike
· 3 months ago
Wouldn't the 6% be more akin to sweat equity (even with the nominal $25k cash infusion)? In that sense, I'd have to agree with Fred that this is most likely one of the best deals in town. Also, is there any data on the YC backed success rate vs. the startup community as a whole? I'd assume it would be much higher.
fredwilson
· 3 months ago
There is no way to measure the startup community as a whole that I know of
We might be able to look at the entire universe of seed investments made by VCs and reported to their LPs and we can probably also get a bunch of angel deals from crunchbase
If someone did that work, I'd bet YC has a significantly higher success rate with success being defined as creating profitable sustainable businesses and/or exits (quick flips)
dlifson
· 3 months ago
Between the legal services, mentorship, speakers, and networking, I can say that the 6% we gave DreamIt was well worth it regardless of the cash ($20k). For less experienced teams, the non-cash value is huge, potentially the difference between success and failure.
I look forward to the day NYC can boast it's own startup incubator program.
davidkpark
· 3 months ago
We were selected to be a part of the First Growth Venture Network. http://www.firstgrowthvn.com/ No cash or equity component, just a lot of mentoring and advice. Would have loved to see USV as part of the group. Maybe next year.
bojanbabic
· 3 months ago
Interesting, since I've heard same story on TWIST from posterous CEO Garry Tan. Yes, they got 25K seed round. But, that was not all as Fred said. They held weekly dinner sessions where he met people that later invested in later rounds. On those sessions, weekly milestones have been set and afterwards all together have been working to meet that milestone. It worked out for them!
aaronklein
· 3 months ago
"But maybe the best thing Paul and Jessica have done for startup land is inspire a whole bunch of fast followers."
Fred: this is very true. I'm playing a small role in getting one started as a part of our local community college, where I sit on the board as a trustee. We'll be offering dorm space, cash, mentoring, and potentially technical resources from server space to mechanical prototyping.
In a year or two, we hope to have a couple of budding entrepreneurs to send your way. :)
andrewhyde
· 3 months ago
I agree that the program (and similar ones) add tons more than the $ on hand.
It is generally a big discussion point for teams looking to do our program, and the biggest 'can you believe we thought about that' moment.
As a founder of two companies that ultimately failed bucause of a lack or support, mentoring and contacts, not cash, I'd say that YC, and it's ilk, are a great value. It's why we're trying to get into the next intake.
But I did have a question. Where did this $25K figure come from? My understanding is that it's $11K + $3K per founder - with 3 founders that's $20K, with 2 it's only $17K. I'm not arguing that the mentoring, contacts, etc. arn't the best part, just that the $ calculations seem off a bit.
fredwilson
· 3 months ago
Its the number I've seen. I was not aware it could be different for different teams.
linneageiss
· 3 months ago
Tough to really "value" the experience even once you have the data from the first 40 companies...as those founders may take that experience with them to future startups that become the big hits (w/ or w/out YC). This is a journey, and it's definitely a team sport, so I'm a believer that a supportive ecosystem of caring contributors will build stronger entreprenuers, companies and investors in the long term. IMHO, quibbling over something that is inherently fairly subjective to begin with probably won't really move the needle on the ultimate outcome. Good discussion to have, though, as these are important decisions for founders.
doke01
· 3 months ago
Most of the YC winners just have a dream when they get the money and Paul's time. I doubt that what is brought to the table by the founders is even worth $500K. After Paul gets done with them they are Entrepreneurs. Maybe none of the original YC deals will hit it big ( I doubt it) but I bet at least one of the guys/gals he takes under his wing hits it big. He's building a future for many people.
fredwilson
· 3 months ago
So true. And that's what I'm talking about. And now we have a bunch more people doing this. Its really huge
fredwilson
· 3 months ago
So true. And that's what I'm talking about. And now we have a bunch more people doing this. Its really huge
Bastian Lehmann
· 3 months ago
Most of your posts make me actually wonder why you are not a kick ass entrepreneur yourself. I love you man! If i could choose one VC to get funding from, it would be you.
fredwilson
· 3 months ago
Thanks. If I could go back to my 20s knowing what I know now, I'd be an entrepreneur for sure. But I am a VC now and I love being one
fredwilson
· 3 months ago
Thanks. If I could go back to my 20s knowing what I know now, I'd be an entrepreneur for sure. But I am a VC now and I love being one
fredwilson
· 3 months ago
Thanks. If I could go back to my 20s knowing what I know now, I'd be an entrepreneur for sure. But I am a VC now and I love being one
mydigitalself
· 3 months ago
Not sure if this is a silly question or not, but what if they invested $0? Would it still be worth it?
Dale
· 3 months ago
It would be to me - I'd swap 5% for contacts, introductions and a network any day of the week.
One thing that I think gets looked over is that with YC, not only do you have people like Paul Graham, but you have a whole bunch of people who are in the program who can be your early adaptors. These poeple tend to be young, smart and passionate. They drive a lot of your early success. Some of them are already alumns and some you're having dinner with every Tuesday. Without these people you have to go out and find users, which as everyone who's tried this before knows, is really hard. I think this is one of the most under-rated parts of the program.
fredwilson
· 3 months ago
I saw the same comment on hacker news (in the reactions at the end of this thread) and I totally agree with it
fredwilson
· 3 months ago
Many say yes
fredwilson
· 3 months ago
Many YC alums say it would have been
Satish
· 3 months ago
The value that YC or similar groups add to a startup is dependent on the founding team of the company. To get a company off the ground and to a stage that it can be funded by VC, you need some attributes & experience in your founding team (this is no way a comprehensive list): technical skills to launch a product, customer focus, basic management skills such as prioritization, planning, growing a small team, ability to sell a vision to recruit people to work for free, ability to get users for your betas, network to get in front of VCs etc. Different founding teams have different needs in helping them get to the next stage. So the value that YC adds to two fresh out of undergrad computer science hackers is more than they would if the company were founded by a person who has been part of a previous startup for 4 years and worked in different roles ranging from Product Management to sales engineering to account management and managed small teams. For some teams the YC cut should be more than 6% and for some it should be less than 6%. But the terms of the a deal are set by the partner who is scarce, and clearly Paul is the scarce resource and he chooses to have a flat 6% for any team he chooses to work with. For some startups it is a better deal than others. But all startups have an opportunity to say NO and they don’t. So it implies that the startups joining YC think it is a good deal for them.
steveplace
· 3 months ago
"to date no Y Combinator company has really hit it huge."
I'd go out on a limb and say Omnisio was a hit. I'm assuming the "huge" part is a baked-in longshot bias from TC.
Steven Kane
· 3 months ago
here's the data. probably not complete but not bad
It's not the percentages that matter, the funding involved, the equity sacrificed. it's about respect, trust, empathy and understanding. A 100% of that is worth more than anything else.
Mike
· 3 months ago
Ask any first time entrepreneur and what they would give to participate in Y Combinator, DreamIt Ventures, Capital Factory, or any of the other programs out there, 97% of the serious entrepreneurs would give up more to be accepted. These types of programs are more valuable than a B- School degree. They teach you how to actually start and develop a company, while at the same time introducing you to their network. The intros to the network are worth a 6% stake only.
fredwilson
· 3 months ago
B schools aren't even in the same league if you want to be an entrepreneur. Now if you want to work as a consultant for Bain, go to B school.
ShanaC
· 3 months ago
You don't even need to, they come recruiting for cute undergraduates from what they determine are the right schools around now....
alexismichelle
· 3 months ago
"The cash is the smallest part of the Y Combinator value proposition..."
Absolutely-- I can not agree with this more! Having spent this past summer as an associate with LaunchBox Digital (a Washington DC based incubator similar to Y Combinator), I worked very closely with the portfolio companies and saw first hand the myriad of ways that the program itself adds value far beyond that of the seed funding: weekly workshops and seminars, strong and supportive community, opportunity to focus intensely for an extended period, exposure to an extensive network of mentors and advisers, demo days, and perhaps most importantly, ongoing guidance from the LaunchBox partners themselves.
More than anything, I was incredibly impressed by the amount of time, effort and energy each of the partners put into working with the portfolio companies (it far exceeded my expectations prior to coming on board). As someone who believes very deeply in the value of mentors and trusted advisers, I think this aspect of the program alone is well worth a small stake in the company.
What I do wonder, however, is how viable a business it is for the incubators? Their equity stake likely gets heavily diluted in the event of additional rounds, and if the program has multiple partners and investors, any upside is ultimately split among several parties. I know much attention has been paid to this question, but I do continue to wonder.
fredwilson
· 3 months ago
It will work for the best of the breed. Sadly I agree that we should be concerned about the economic model for many of these programs
Malcolm
· 3 months ago
Absolutely agree with you Fred. For the quality of mentorship, etc. you receive from the program.. many startups would (and should) be willing to give 6% for $0
Jeroen Fransen
· 3 months ago
Of course money isn´t everything, but keep in mind that the entrepreneur often doesn´t realise in advance exactly whom he´s bringing on board, and what that´s worth, though in case of YC it´s a no-brainer.
Mark Essel
· 3 months ago
Before I really dug into what YC provided I sided with Sarah. 6% for 25k seemed like a bum deal, and I don't think any startup should consider something as weak as that offer. But when it comes to the connections, education, mindset and shared stake the 25k really is the much smaller part of the 6% exchange.
I think about stake/ownership much differently now than I did a few months ago. Now sharing ownership means building a network of folks that all push for the success of the business. No man is an island, and there's no reason you have to build a fantastic company on your own.
The long term value of the business you're building will increase by much more than the equity you split. I'd much rather own 8-10% of a 10 million dollar business, than 100% of nothing ;)
valto
· 3 months ago
I fully agree. Y-Combinator is a true pioneer in the "new way of doing things"
Venkat
· 3 months ago
On a different front, do you see any methodological groupthink in alums as a result of having gone through the same process? I can't hell thinking "assembly line entrepreneurship" and "formulaic innovation."
I often have the same reaction to people who talk TRIZ.
But maybe I am just gloomy, and these incubators do maintain significant intellectual and operational diversity.
fredwilson
· 3 months ago
Yes. I likened YC to a cult in a big story on Paul in some magazine a while back. Paul didn't like it even though I meant it as a compliment. Its not like he's poisoning the teams or anything. But they do walk the walk and talk the talk
Venkat
· 3 months ago
glad I am not the only one to think so. Somebody put one of my blog posts on their news-talk page a while back and I sensed a certain pattern in their comments.
I agree it is not a bad thing, so long as people are aware they are in a specific bubble and are suitably ironic and skeptical about their own beliefs, without the irony/skepticism draining energy :)
DaveinHackensack
· 3 months ago
Sort of like Jim Collins's observation about how great companies were "cult-like places to work"?
fredwilson
· 3 months ago
Yup
kidmercury
· 3 months ago
no worries, we are all conditioned by the propaganda we consume, i'd rather be conditioned by paul graham than most of what's out there.
though i agree it is not for certain entrepreneurs. though i am a big fan of the model and value proposition i myself could never do ycombinator, i'd find it too confining.
alexknowshtml
· 3 months ago
"They have a set of core beliefs which come from Paul and Jessica."
I firmly believe that YC's value proposition works BECAUSE of Paul and Jessica being a the helm, for that exact reason. I think that there's value in services far and above the $25k invested, but with the influx of Y-Combinator-like seed stage "startup camps", I have yet to see leadership quite like the YC team elsewhere.
It always makes me a little sad to see comparable deals go down in other groups when they're missing the most important component: the laser-focused, well-reputed, little-bit-loony figurehead leader(s) at the helm.
fredwilson
· 3 months ago
Seedcamp and Techstars are both quality operations. I need to get closer to the others before I can say that about any of them
alexknowshtml
· 3 months ago
Thanks for the response, Fred. I've heard lots of good things about TechStars.
I guess my question, though, is do you think that the strong leadership in these operations can be quantified along side of the cash and the services? Is that a defining factor in what makes these types of operations "quality", as you described??
Ryan Graves
· 3 months ago
Qualifiers.
I've been coming to the conclusion that it's often times all about qualifiers in this world. What I mean by that is if I did startup xyz, self funded, and didn't have any help it may go nowhere, but if I do startup xyz, same product, model, etc with YCombo I become qualified, thus I have a significantly better shot at success.
If Johnny Law goes to Harvard vs. 'Avg Law Program University' even if it's the same individual with the same raw intelligence, he'll improve his chance at success just because of the Harvard qualifier.
I've been pondering this concept because of my consideration to get my MBA (vs. do a startup). If I do decide to get an MBA, I'm under the belief that it's only worth doing if I get into a top notch program that will work as a positive qualifier in my future.
So, by best deal in startup land I believe your saying that not only is the education phenom in YC (like Harvard) but it's likely the best qualifier in startup land.
fredwilson
· 3 months ago
Get an MBA if you want to work in consulting or in a big company. I see no reason to spend the time and money otherwise
Ryan Graves
· 3 months ago
No & No. Cheers Fred!
Do you agree w/ the qualifier concept or is it bullshit?
Satish
· 3 months ago
What about someone wanting to get into the VC business? :)
Himanshu Sheth
· 3 months ago
The same Y- Combinator has now been replicated in India as well. There is Morpheus Venture Partners, IAccelerator and might be many others to follow which are very much tightly coupled to the Y-Combinator model. Some currently provide only mentorship whereas other provide the seed money for the venture.
-Himanshu Sheth
Keenan
· 3 months ago
Don't underestimate the value of access. As someone who recently failed at a Web 2.0 start-up. (cre8buzz.com, RIP) access and mentorship would have been huge. We had a great idea, we were passionate about it, (still think it could work) and to have had the mentorship and support would have had tremendous impact. I would have GLADLY given up 6% for that.
The early, early stages of a start-up can be the loneliest and hardest (as well as the most exciting). There is little historical data to say you are on the right track. You are constantly selling your idea and why it's good. There is lots of rejection, challenges to your premise idea and little positive reinforcement. As your idea solidifies, and comes together much of that begins to change, however, having a mentor like Y Combinator would only accelerate the process, expand options and minimize the dumb mistakes.
It is a great deal, well worth the 6%, especially at the stage in development. I would have taken it!
Keep up the thought leadership as a number of my clients are now enjoying your content, and getting a real picture versus a false expectation.
Mark Allen Roberts
kenberger
· 3 months ago
I attended YC's Demo Day this past spring. That was a time when the Chicken Littles across worldwide Startup Land were heard at a fever pitch (maybe they still are). You'd never know that sitting in the room in Mountain View, or more importantly, if you've monitored the progress of some of the graduates since then.
Even if Paul, Jessica and the team did nothing for you (very untrue), the COMMUNITY and NETWORK you join are beyond price. These programs are aimed at super talented, driven, but very new people whose thinking tends to get transformed by the involvement.
"What if Facebook, Twitter, etc took those terms? How would they be now, huh, huh??" is a line written by a financial analyst using hindsight thinking, and misses the mark here.
Chris Dodge
· 3 months ago
Ag, always late to a thread that really interests me.
I've been watching the "next-wave" incubators like YC and TS for some time now. I'm a big fan of the model.
What I've been seeing are more and more incubator-like models with VC parentage, Polaris just announced one the other day. However, like any investing approach, either at this seed-stage or later Series X stages, the amount of "quality" really is the limiting factor. I've spoken with many people in this sector and they all say how hard it is to identify quality seed-stage companies that is appealing at even such a low funding level.
With ever more numbers of incubators coming online, this competition for quality deals (just as it always has been) will increase. I wonder if that may in turn cause a shift in the financial offerings to attract the best deals.
ShanaC
· 3 months ago
So now that I've read and thought about the thread, is it odd to crowdsource this question in a functional way, as in take a bunch of ideas, and see what people come up with?
dig bands
· 3 months ago
creating the right product is more important than money.i think.so.
Michael
· 1 month ago
Indeed th YC model presents advantges. For all the interesed startups check out www.vcgte.com, there are over 4300 investors or read some startup reviews on the same webpage.
All Comments
“That’s a lot of equity to give up…”
As one who has given it up, it’s really not.
In the earliest stages you want to optimize for you CHANCE at success, not your magnitude of personal windfall should you actually achieve it. It’s a no-brainer to me. It accelerates fundraising, makes fundraising more competitive (which probably raises your valuation by 6% right there), gets you a great network, gets you some great advice, and (the smallest part) gets you some free PR.
Overall, your shot at success and/or an exit is vanishingly small. Startups are very fragile things. If you can increase your chances for success and build some early momentum by giving up 6% at a time where you have built virtually NO value (pre product), then it’s a ridiculously good buy.
doing a startup is like a bobsled ride -- once you're in, for some period of time, you can't get out. meaning, whatever terms you agree to vis a vis financing at the beginning define your entire experience of the startup.
again, i'm not arguing that YC isn't providing great value and resources. stipulated. i'm just saying, entrepreneurs should always always visualize where they want to try to end up, especially right at the beginning, perhaps most so with regards to financing.
will you be happy 6-7 years from now, owning 2% of the company?
if not 2%, then what?
decisions made today directly impact longterm outcomes -- and decisions made today affect longterm outcomes more than most other decisions precisely because the valuations are so low...
That said, if getting YC involved means your seed/first round is 20pcnt dilution instead of 30pcnt, then its a better deal
I think that's a real trade that you can make with YC and other programs like it
topic here: http://www.paulgraham.com/equity.html
Excerpt:
*An investor wants to give you money for a certain percentage of your
startup. Should you take it? You're about to hire your first employee. How
much stock should you give him?
These are some of the hardest questions founders face. And yet both have the
same answer:
1/(1 - n)
Whenever you're trading stock in your company for anything, whether it's
money or an employee or a deal with another company, the test for whether to
do it is the same. You should give up n% of your company if what you trade
it for improves your average outcome enough that the (100 - n)% you have
left is worth more than the whole company was before.
For example, if an investor wants to buy half your company, how much does
that investment have to improve your average outcome for you to break even?
Obviously it has to double: if you trade half your company for something
that more than doubles the company's average outcome, you're net ahead. You
have half as big a share of something worth more than twice as much.
In the general case, if n is the fraction of the company you're giving up,
the deal is a good one if it makes the company worth more than 1/(1 - n).*
You're talking about long term personal outcomes (i.e. how much $ do I get
to walk away with) and I'm talking about chance of success (what's my shot
at building a profitable company that someone buys someday). Having 2% less
of the company (given that I have 2 co-founders) does not lower my
motivation one whit, and the value that YC gives moves the needle enough
that it's probably a net positive (i.e. owning 31% of a $10.6m company is
the same of owning 33% of a $10m company). And at the earliest stages
(where YC plays) the biggest risk isn't your personal stake-- it's losing
momentum and/or death-by-fundraising.
Deciding how much is too much depends on the value offered and how
investment-intensive a business is, I'd think. But at the end of the day,
you just take your best guess using the above formula.
But YC doesn't negotiate - its a take it or leave it deal
Which is fine
But all your logic is still besides the point - YC has been doing its thing for 4 years. 40 startups I think? Any case at best the jury is still out. All the firm conviction expressed around here seems a little premature
http://j.mp/aK33K
That's all I have been trying to say - definitive statements about the value of the YC deal are premature
So far, YC and TechStars in particular look successful. Both look like they've already made their money back in the companies that have already exited, and YC in particular has a handful of companies that could be real home runs, even after all the dilution.
http://blog.jedchristiansen.com/2009/09/21/copy...
The paper is on Scribd, so you can read/download it as you like.
(I see Lady Judge is part of your team... my business school is named after her husband!)
(Barbara is co-chair of our management company. She has been very helpful.)
I agree with you in principle that the 6% should not be a hard # and should be proportional to the value that YC adds. And i think they add more than 6% value for some teams and less than 6% for some teams. Yesterday night i though that YC had a hard 6% that they want. But i just dropped by YC website and saw this.
"We usually invest $11,000 + $3000n, where n is the number of participating founders, up to 3 (i.e. 2 founders get $17,000, 3 or more get $20,000), in return for between 2% and 10% of the company. The average is 6-7%."
So maybe your point is already taken into account by Paul as he is willing to negotiate on the cut he wants based on the value add that he is going to provide to that team.
but ultimately to get there the security of knowing where the exit line is must be delivered. IPO market? lol. that's dead and not coming back. the microfinance people are going to need to have liquidation models built in. upselling to VCs works for now, but only if VCs can upsell to the IPO market...
I can understand why YC asks people to move locally. But, I really wish there was a way to be part of the program remotely.
Only just became aware of next week's event - looks good, hope it goes well.
$500K either is, or is not, a low valuation. the founders do not own more of their own company because they received so much value from YC.
if you are right and lots of IPOs are coming (and I hope so!) then we will really have data to look at -- data, that is, that demontates that giving up so much equity on day one of s atrtup really can be a good decision for founders if they get enough non-cash value-add
as of today, there is no such mitigating data, only the simple truth that giving up 6% of your company for $25K is just that -- 6% of your company for $25K.
think of it this way -- is there some amount of non-cash value YC can provide that old make it worth, say 12% of the company for $25K? where is the threshhold?
its not today but tomorrow -- over time -- that valuation matters, no? just do the math...
While the founders don't own more of their company because they were a YC company (or TS in my case), they do own less of a *much* more valuable company. I think this model doesn't fit the standard pre/post value math. These two programs (at least, not as familiar with the others) provide more value than anything else we could do with that 6%. No doubt about it.
-Tom
no one here has come forwrd with actual outcome dtas showing this is true. evertyone is just stating the obvious thoertical idea thats a small piewce of a big pie can be better than a big piece of a small pie
what about a small piece of a small pie? or a miniscule piece of a big pie? etc....
you say "no doubt about it" -- ok, i'll bite! prove it with actual cases...
While there aren't enough exits yet to know, do you doubt the percentage of successful seed rounds, or the percentage of co's still in business at 1 year, 2 years, etc after YC or TS? Those are data we do have. Sure, some can be attributed to deal flow, but can it all? I guess we'll have to wait and see.
And sorry again - of course the data exists! some deals are better than others. Or are you saying all outcomes are the same? Of course not? Are you saying, why negotiate terms at all? Of course not.
Talk to any experienced serial founder. Initial funding terms MATTER
It's funny, I asked many of the mentors this summer if they would have done TS had it been around. Every single one said they would in a heart beat.
Yes terms matter, yes negotiating matters, yes outcomes differ based on the two, but at this point in my career I'll take owning a chunk of the remaining 94% of a TS or YC company over being 100% of a non TS|YC each and every day of the week and twice on Sunday.
I also have no doubt that had I come into the program with more experience, I'd have been able to push mentors like you even further and get just as much out of the experience - that is to say, far more than 6% common of my company's value this past Spring.
I agree, it's "the best deal in startup land."
But again, I'm nort arguing for or against mentor programs or incubators or
YC or TS or anything
And I'm not saying 6% for $25K is a good deal or a bad deal. It depends.
All I am saying is, the most important thing is to be a critical thinker.
That, and caveat emptor.
You seem to be good on both fronts. That's great.
It seems like many commenters here, though, are parroting platitudes.
"Better a small piece of a big pie." Gee. Duh. And many are opining that YC
breeds better companies and entrepreneurs and on that the jury is way out.
One final note you write that "companies who exit these programs have a
significantly better chance at survival." But I couldn't care less. What I
care about are the founders and entrepreneurs. There are tons of VC backed
startups that persevere for long periods of time if nothing else, VCs
sometimes keep funding deals way after they should be decalred dead for all
sorts of reasons (eg, they are raising a new fund or whatever). But just
because companies that survive does not mean the founders nd entrepreneurs
survive. In fact, in VC backed startups, they usually do not.
I know its not your intent but that's a little hard and loaded language?
I haven't said nay to anything. I have extolled the virtues of YC. I have only challenged entrepreneurs to not reflexively adopt conventional wisdom and to acquire sophistication and knowledge and skill in finance
That's not nay that's yay
Absence of sycophancy does not equal negativity! ;)
Before believing in IPOs, you have to believe in creating value and increasing the valuation of the start-up. Most of the start-ups YC invests in don't even have a proper team and product.
Getting adult supervision, some early capital and the support of YC and its network of advisers is well worth 6% in my opinion.
As far as I know, Paul Grahan's doors are always open for the start-ups he invested in, even later in the game.
if you would pay another $25k for that advice, you're essentially getting a $1M valuation.
etc etc.
If not, can I show you a nice bridge thats for sale?
;)
That's how to think about it
Besides... its a free market. If Sarah doesn't want to take money from Paul at that price for her next startup, she doesn't have to. No one is putting a gun to the head of all these entrepreneurs who are applying.
Also, how much is the PR worth that companies get by being a YC company? And the networking connections...
http://j.mp/aK33K
So it is important to read what Paul Graham writes simply because he learns things -- not everyone from Ivy League or MIT or Stanford comes across as smart; one of the key elements is that the doctrine of the elect applies to startups; launch and iterate -- and passes it along to all of us for free.
I'm excited that startup scenes are cropping up across the USA. They act as a sort of filter, but inevitably some will be more successful than others. Y Combinator and TechStars seem to be strong, and I like Founders Co-op in Seattle. Atlanta, Pittsburgh, Philly, and D.C. could make it happen with their yc clones.
Maybe we will learn something about the process that is essential to achieving IPO.
http://continuations.com
The problem I've always had with any application is that you don't get the opportunity to show yourself and how determined you are. Figures on paper can easily lie. What's important is character, and only real life experience can give someone confidence in another person.
--mihai
http://j.mp/aK33K
More info here: http://blog.jedchristiansen.com/2009/08/10/y-co...
-Tom
there's just not enough data yet about YC companies to make any kind of judgement, and suggesting otherwise is a little cruel to young entrepreneurs, i fear. no matter what, founders need to understand how financing works over time, no?
A percentage means nothing. Value means everything.
It's just bad journalism to ignore the non-monetary components.
http://j.mp/aK33K
It's not 100% complete for YC, but is virtually complete for the rest. But even for YC it's probably 90%+ correct (except for valuations, which are my personal guesses.)
In fact, giving up 6% of your start-up actually increases its valuation a lot when it becomes a YC-backed company. It's a no-brainer!
http://j.mp/aK33K
fabulous outcome for mint.com announced today... they raised $35 million
twitter has raised, what, $55 million?
zynga, also has raised many tens of millions of dollars
founders have to think about the entire lifecycle of financing a company, not just having an exciting first tranche
had the mint, twitter or zynga founders sold 6% for $25K at the outset, their personal outcomes would have been radically radically less -- and that's just simple math, no?
If Mint did not give up that equity for the legal support, would their financial situation be different today... Absolutely! It's impossible to say which way however. From the founder's comments in his TechCrunch post... it seems he doesn't regret it for a second.
I completely agree that YC type programs can add a huge amount of value to the startups not only in cash... but "in kind" services that DO have value.
Naturally mint did not give up 6% for $25K legal services - probly gave up 0.6%
http://j.mp/aK33K
Mint is a great, great outcome, but man what an outlier! Twitter and Zynga - we'll all have to wait and see...
again, only respect for YC's value add services. just always amazed at how young founders can be simultaneously brilliant at technology and utterly at sea hen it comes to finance. and no one should kid themselves that such an "arbitrage" opportunity doesn't get exploited (as it should be!) by the finance side. caveat emptor.
Don't know about Mint's founders. FWIW, how good an exit for the investors is $170M if the previous round was raised at $130M valuation? Especially the later stage guys (I'm guessing Josh did OK).
there aren't more than ten or twenty of that size in the web sector every
year
they should be commended on it
Of course that is on an exit in <45 days...
the VCs might make big money, might not
but the entrepreneurs hit a home run on this one
"Unlike a lot of the posts here, “free” was never a feature of Mint.com that sprang out at me. Sure, it made it easy to try, but I have always been agreeable to paying for a good service. I tried Quicken Online and Mvelopes, and frankly, though neither one was great, I probably could have made one of them work if it weren’t for Mint.com. I chose to use Mint not because it was cheaper, but because it was superior.
Intuit has a terrible reputation with their customers. I am also a QuickBooks Online customer, and I use it to manage my consulting business. I hate this product… I hate it more than I can describe it in this thread.
And a commenter named Josh wrote,
"I’m sorry to say I will be canceling my account.
I am simply not comfortable with Intuit having access to so much personal data of mine. What guarantees do we have that this data will not be compromised or sold for marketing purposes?
I would rather pay a monthly fee and know my data is guaranteed. Intuit is not buying mint simply to provide us a great free service; they intend to monetize, and it doesn’t take a PhD in Economics to see how they plan to achieve this.
We might be able to look at the entire universe of seed investments made by VCs and reported to their LPs and we can probably also get a bunch of angel deals from crunchbase
If someone did that work, I'd bet YC has a significantly higher success rate with success being defined as creating profitable sustainable businesses and/or exits (quick flips)
I look forward to the day NYC can boast it's own startup incubator program.
Yes, they got 25K seed round. But, that was not all as Fred said.
They held weekly dinner sessions where he met people that later invested in later rounds. On those sessions, weekly milestones have been set and afterwards all together have been working to meet that milestone.
It worked out for them!
Fred: this is very true. I'm playing a small role in getting one started as a part of our local community college, where I sit on the board as a trustee. We'll be offering dorm space, cash, mentoring, and potentially technical resources from server space to mechanical prototyping.
In a year or two, we hope to have a couple of budding entrepreneurs to send your way. :)
It is generally a big discussion point for teams looking to do our program, and the biggest 'can you believe we thought about that' moment.
One of our founders this year went so far to say "I robbed David Cohen blind" http://georgeaspland.blogspot.com/2009/08/techs... in reference to the 6%.
But I did have a question. Where did this $25K figure come from? My understanding is that it's $11K + $3K per founder - with 3 founders that's $20K, with 2 it's only $17K.
I'm not arguing that the mentoring, contacts, etc. arn't the best part, just that the $ calculations seem off a bit.
One thing that I think gets looked over is that with YC, not only do you have people like Paul Graham, but you have a whole bunch of people who are in the program who can be your early adaptors. These poeple tend to be young, smart and passionate. They drive a lot of your early success. Some of them are already alumns and some you're having dinner with every Tuesday. Without these people you have to go out and find users, which as everyone who's tried this before knows, is really hard. I think this is one of the most under-rated parts of the program.
I'd go out on a limb and say Omnisio was a hit. I'm assuming the "huge" part is a baked-in longshot bias from TC.
http://j.mp/aK33K
Absolutely-- I can not agree with this more! Having spent this past summer as an associate with LaunchBox Digital (a Washington DC based incubator similar to Y Combinator), I worked very closely with the portfolio companies and saw first hand the myriad of ways that the program itself adds value far beyond that of the seed funding: weekly workshops and seminars, strong and supportive community, opportunity to focus intensely for an extended period, exposure to an extensive network of mentors and advisers, demo days, and perhaps most importantly, ongoing guidance from the LaunchBox partners themselves.
More than anything, I was incredibly impressed by the amount of time, effort and energy each of the partners put into working with the portfolio companies (it far exceeded my expectations prior to coming on board). As someone who believes very deeply in the value of mentors and trusted advisers, I think this aspect of the program alone is well worth a small stake in the company.
What I do wonder, however, is how viable a business it is for the incubators? Their equity stake likely gets heavily diluted in the event of additional rounds, and if the program has multiple partners and investors, any upside is ultimately split among several parties. I know much attention has been paid to this question, but I do continue to wonder.
I think about stake/ownership much differently now than I did a few months ago. Now sharing ownership means building a network of folks that all push for the success of the business. No man is an island, and there's no reason you have to build a fantastic company on your own.
The long term value of the business you're building will increase by much more than the equity you split. I'd much rather own 8-10% of a 10 million dollar business, than 100% of nothing ;)
I often have the same reaction to people who talk TRIZ.
But maybe I am just gloomy, and these incubators do maintain significant intellectual and operational diversity.
I agree it is not a bad thing, so long as people are aware they are in a specific bubble and are suitably ironic and skeptical about their own beliefs, without the irony/skepticism draining energy :)
though i agree it is not for certain entrepreneurs. though i am a big fan of the model and value proposition i myself could never do ycombinator, i'd find it too confining.
I firmly believe that YC's value proposition works BECAUSE of Paul and Jessica being a the helm, for that exact reason. I think that there's value in services far and above the $25k invested, but with the influx of Y-Combinator-like seed stage "startup camps", I have yet to see leadership quite like the YC team elsewhere.
It always makes me a little sad to see comparable deals go down in other groups when they're missing the most important component: the laser-focused, well-reputed, little-bit-loony figurehead leader(s) at the helm.
I guess my question, though, is do you think that the strong leadership in these operations can be quantified along side of the cash and the services? Is that a defining factor in what makes these types of operations "quality", as you described??
I've been coming to the conclusion that it's often times all about qualifiers in this world. What I mean by that is if I did startup xyz, self funded, and didn't have any help it may go nowhere, but if I do startup xyz, same product, model, etc with YCombo I become qualified, thus I have a significantly better shot at success.
If Johnny Law goes to Harvard vs. 'Avg Law Program University' even if it's the same individual with the same raw intelligence, he'll improve his chance at success just because of the Harvard qualifier.
I've been pondering this concept because of my consideration to get my MBA (vs. do a startup). If I do decide to get an MBA, I'm under the belief that it's only worth doing if I get into a top notch program that will work as a positive qualifier in my future.
So, by best deal in startup land I believe your saying that not only is the education phenom in YC (like Harvard) but it's likely the best qualifier in startup land.
Do you agree w/ the qualifier concept or is it bullshit?
-Himanshu Sheth
The early, early stages of a start-up can be the loneliest and hardest (as well as the most exciting). There is little historical data to say you are on the right track. You are constantly selling your idea and why it's good. There is lots of rejection, challenges to your premise idea and little positive reinforcement. As your idea solidifies, and comes together much of that begins to change, however, having a mentor like Y Combinator would only accelerate the process, expand options and minimize the dumb mistakes.
It is a great deal, well worth the 6%, especially at the stage in development. I would have taken it!
Keep up the thought leadership as a number of my clients are now enjoying your content, and getting a real picture versus a false expectation.
Mark Allen Roberts
Even if Paul, Jessica and the team did nothing for you (very untrue), the COMMUNITY and NETWORK you join are beyond price. These programs are aimed at super talented, driven, but very new people whose thinking tends to get transformed by the involvement.
"What if Facebook, Twitter, etc took those terms? How would they be now, huh, huh??" is a line written by a financial analyst using hindsight thinking, and misses the mark here.
I've been watching the "next-wave" incubators like YC and TS for some time now. I'm a big fan of the model.
What I've been seeing are more and more incubator-like models with VC parentage, Polaris just announced one the other day. However, like any investing approach, either at this seed-stage or later Series X stages, the amount of "quality" really is the limiting factor. I've spoken with many people in this sector and they all say how hard it is to identify quality seed-stage companies that is appealing at even such a low funding level.
With ever more numbers of incubators coming online, this competition for quality deals (just as it always has been) will increase. I wonder if that may in turn cause a shift in the financial offerings to attract the best deals.