Y Combinator's Value to The US Economy(blog.siasto.com)
blog.siasto.com
Y Combinator's Value to The US Economy
https://blog.siasto.com/ycombinators-value-to-the-us-economy
16 comments
On average, the accelerator has invested between $15,000 to $20,000 in each company participating in their program...
If this is the case...
Based on specific macroeconomic assumptions, we calculate an economic value of around $6.1 bn added since the accelerator was founded in 2005.
...this seems phenomenal, but also highly suspect. How is it that YC is investing so little in so many companies that the average investment is $20k or less? That's almost nothing by Silicon Valley living standards (which, based on HN bias, seems to be a significant share of YC's audience).
$20k, even in very low-income areas, isn't even half the yearly pre-tax salary of anyone who's very good at anything or has an adult's bills to pay. And that's one year for one person. They cite 2-3 founders as average... this absolutely does not compute.
Unless the average YC alum gets enough to operate for about three to six months without employees, advertising expenses, hosting, or any other paid service, and this somehow results in an average of $15,000,000 in "economic value," this article is some inexplicable sort of bullshit.
If this is the case...
Based on specific macroeconomic assumptions, we calculate an economic value of around $6.1 bn added since the accelerator was founded in 2005.
...this seems phenomenal, but also highly suspect. How is it that YC is investing so little in so many companies that the average investment is $20k or less? That's almost nothing by Silicon Valley living standards (which, based on HN bias, seems to be a significant share of YC's audience).
$20k, even in very low-income areas, isn't even half the yearly pre-tax salary of anyone who's very good at anything or has an adult's bills to pay. And that's one year for one person. They cite 2-3 founders as average... this absolutely does not compute.
Unless the average YC alum gets enough to operate for about three to six months without employees, advertising expenses, hosting, or any other paid service, and this somehow results in an average of $15,000,000 in "economic value," this article is some inexplicable sort of bullshit.
That is indeed the average amount invested by YC. As stated below in recent batches there has been the startfund blanket investment which used to be $150k and is now $80k. Technically speaking this blanket investment has nothing to do with YC and is given as uncapped convertible note (basically the best possible terms).
To address if this is enough, I'd say you'd be surprised how much you can make things stretch if you absolutely have to, but most companies also raise a small amount of money after YC's demo day as well to help them continue. You can think of YC as a startup bootcamp at the end of which you have to prove yourself to get the opportunity (further investment, usually) to continue on. With the startfund though, you get more than those three months to do so.
In short, yes, YC invests $20k and produces $6.1bn in value across the alumni.
To address if this is enough, I'd say you'd be surprised how much you can make things stretch if you absolutely have to, but most companies also raise a small amount of money after YC's demo day as well to help them continue. You can think of YC as a startup bootcamp at the end of which you have to prove yourself to get the opportunity (further investment, usually) to continue on. With the startfund though, you get more than those three months to do so.
In short, yes, YC invests $20k and produces $6.1bn in value across the alumni.
"In short, yes, YC invests $20k and produces $6.1bn in value across the alumni."
For the sake of clarity, an accurate comparison would be: $20K * # of startups funded : $6.1 billion in valuation for all portfolio companies
For the sake of clarity, an accurate comparison would be: $20K * # of startups funded : $6.1 billion in valuation for all portfolio companies
The analysis is clearly slanted, but the quoted numbers are based in reality.
YC indeed only invests enough money to keep the founders from starving for the first few months, and offers all kinds of support and advice to help them get going. After that, lots of other investors are willing to invest more dollars, but YC does not.
The billions figure is an estimate of the aggregate value across all companies. Most of which is concentrated in a handful of stellar successes like Airbnb and Dropbox.
Attributing value is hard to do. Obviously not all of these billions are the result of YC. But without YC, much of these billions in value would not have been created. So the quoted figure is an upper bound for the value of YC investment.
If you want a lower bound, YC itself takes just a few percent of the company, which can get diluted in later rounds. It would not be worthwhile to be in YC if YC did not provide more value than that. That figure is ballpark likely somewhere around $100 million (could be off by a substantial factor either way).
There is a wide range between, and many, many values in that range could be argued for. In fact many people not in YC claim to have received value from trying to get into YC, and from reading about YC. So one could even argue for figures above the upper bound that this article uses. (Not very tenably in my opinion, but the argument can be made.)
YC indeed only invests enough money to keep the founders from starving for the first few months, and offers all kinds of support and advice to help them get going. After that, lots of other investors are willing to invest more dollars, but YC does not.
The billions figure is an estimate of the aggregate value across all companies. Most of which is concentrated in a handful of stellar successes like Airbnb and Dropbox.
Attributing value is hard to do. Obviously not all of these billions are the result of YC. But without YC, much of these billions in value would not have been created. So the quoted figure is an upper bound for the value of YC investment.
If you want a lower bound, YC itself takes just a few percent of the company, which can get diluted in later rounds. It would not be worthwhile to be in YC if YC did not provide more value than that. That figure is ballpark likely somewhere around $100 million (could be off by a substantial factor either way).
There is a wide range between, and many, many values in that range could be argued for. In fact many people not in YC claim to have received value from trying to get into YC, and from reading about YC. So one could even argue for figures above the upper bound that this article uses. (Not very tenably in my opinion, but the argument can be made.)
>YC itself takes just a few percent of the company
Typically around 6% at that stage.
Typically around 6% at that stage.
I'd estimate the investment by YC as more like $50k per company. ~$20k in cash, and then $30k or so in costs (partner time, meals, etc.), as an upper bound.
That's still an essentially trivial amount of money for the return YC receives.
That's still an essentially trivial amount of money for the return YC receives.
Note that the amount raised is typically meant for a small team of people to work on things for a few months.
Most YC companies go on to raise several hundred thousand dollars from angel investors and VC's at the end of the three months -- some raise millions. The $15K-$20K (plus $80K YC VC program) is enough money to get to market and prove people want it. It's also enough money to change your idea and try something else if your initial tries do not work.
Most YC companies go on to raise several hundred thousand dollars from angel investors and VC's at the end of the three months -- some raise millions. The $15K-$20K (plus $80K YC VC program) is enough money to get to market and prove people want it. It's also enough money to change your idea and try something else if your initial tries do not work.
The figures are accurate. It used to be enough to properly fund people, but now it's a nominal figure. Each company gets an automatic investment, if they choose to take it, of just less than $100k.
With what terms? What's the valuation and how bad are the liquidation preferences, board concessions, etc.?
For YC's, I believe it's all listed out online. For the rest of the money, it's simply an uncapped convertible note.
For a while all YC startups were getting 150,000 in additional funding. I don't know exactly how the terms work as I don't know VC finance.
http://news.cnet.com/8301-32973_3-57554351-296/ron-conway-st...
http://news.cnet.com/8301-32973_3-57554351-296/ron-conway-st...
Terms are everything. It's not hard to get money. It's hard to get money in a way that doesn't make you angry or miserable on a regular basis.
The $80k or $150k is independent of YC, so it doesn't affect YC's returns.
The terms for the $80k or $150k were incredibly favorable; essentially uncapped/no discount and would inherit the cap of the next round of financing.
The terms for the $80k or $150k were incredibly favorable; essentially uncapped/no discount and would inherit the cap of the next round of financing.
we calculate an economic value of around $6.1 bn added since the accelerator was founded in 2005
If you could add up the market cap of all of the companies you've been involved with finding funding all of a sudden the NYSE has "contributed" over 14 trillion dollars to the US economy. Except it hasn't.
If you could add up the market cap of all of the companies you've been involved with finding funding all of a sudden the NYSE has "contributed" over 14 trillion dollars to the US economy. Except it hasn't.
For comparison: Sequoia Capital estimates that 19% of the NASDAQ's value is made up of firms that they have invested in. If you apply the same ridiculous, super sloppy accounting used here to Sequoia, it has contributed over one trillion dollars to the U.S. economy in market cap alone, to say nothing of second order effects on the economy.
And you can add YC's value to Sequoia's, since Sequoia is an investor in YC itself.
And you can add YC's value to Sequoia's, since Sequoia is an investor in YC itself.
s/is/was/
not knocking all the great stuff YC does, but the analysis here seems to assume that none of these companies/jobs would have been created otherwise, which sounds incredibly far fetched.
It's not far fetched to claim this. I'll admit it's unclear whether Posterous would have launched the way it did, or had any reaction similar to it, if we had not been through the YC program. The homepage wouldn't have looked the same (PG hammered us until it looked good). We may not have quit our jobs. We would not have been as aggressive about customer support. (Thanks Kevin Hale!) That's just n=1, but these stories are not uncommon among YC founders.
I posted my napkin estimate of YC's incremental impact in another comment[0]. It's not perfect, but it's a potential starting point.
[0]: https://news.ycombinator.com/item?id=5597216
[0]: https://news.ycombinator.com/item?id=5597216
Isn't there also the flip side - that the disruptive tech businesses represented by YC actually remove jobs from the economy on some level?
For example hotel workers who are displaced because of AirBnb etc. Not that I'm the kind of person who advocates for keeping people employed for employments sake, but I'd be curious how many jobs are actually made obsolete by tech startups...
For example hotel workers who are displaced because of AirBnb etc. Not that I'm the kind of person who advocates for keeping people employed for employments sake, but I'd be curious how many jobs are actually made obsolete by tech startups...
With absolutely no data to back this up, I'll posit the following speculation:
In the short- and medium-run, these business cost more jobs than they create.
In the long run, they rid the economy of relative inefficiency (relative to the 'improved' marketplace), which creates a healthier economy (creating jobs being one symptom of a healthier economy).
In the short- and medium-run, these business cost more jobs than they create.
In the long run, they rid the economy of relative inefficiency (relative to the 'improved' marketplace), which creates a healthier economy (creating jobs being one symptom of a healthier economy).
This analysis doesn't seem to account for the investments in and opportunity costs of, YC failures. Example: a company that takes $10m over three rounds and then dies.
Also, it seems to assume that without YC investment none of these companies would have been founded, and that no other investors contributed. They seem to be giving YC credit for the entire valuation even though they invested a tiny fraction of funding.
Finally, they seem to be double counting: estimating market valuation and then adding the effects on the economy. Those amounts are not exclusive.
Also, it seems to assume that without YC investment none of these companies would have been founded, and that no other investors contributed. They seem to be giving YC credit for the entire valuation even though they invested a tiny fraction of funding.
Finally, they seem to be double counting: estimating market valuation and then adding the effects on the economy. Those amounts are not exclusive.
YC would not put the $10M in, so from their point of view it doesn't matter. From the economic point of view it is simply statistics, a large majority of start-ups fails, the few that make it to round 'C' and then burn are not very significant. The majority will fail long before that or will survive.
I was trying to come up with a framework for estimating the incremental impact of YC. Some of these businesses would have been successful without going to YC. And we can't just compare against the general startup population because YC also selects the best.
So what's a good proxy for estimating the value that an incbuator provides to startups? Perhaps time. Iterating through product ideas, getting introductions, and getting help with legal work & administrivia probably shaves somewhere from months to years off of getting to a good product-often to the point where the product/business would have been abandoned before getting traction.
Let's pick a completely arbitrary amount of time saved-one year. Most of the value of YC's portfolio comes from AirBnB & Dropbox. It's hard to get good revenue numbers, but based on users, nights booked, and other heuristics their growth rates are estimated at around 100%-500%.
If we take an estimate of 350%, that means that we could attribute roughly 70% of the value of YC's portfolio companies to YC itself. I'm not sure if these assumptions are all accurate (especially the 1 year saved figure), but this can give us a starting point to estimating YC's impact on their portfolio companies.
ETA: the amount of time saved is probably the most important variable. If we assume YC saves each company 6 months instead of 12, then YC's impact drops from 70% to 47%. With 3 months, it's about 27%.
So what's a good proxy for estimating the value that an incbuator provides to startups? Perhaps time. Iterating through product ideas, getting introductions, and getting help with legal work & administrivia probably shaves somewhere from months to years off of getting to a good product-often to the point where the product/business would have been abandoned before getting traction.
Let's pick a completely arbitrary amount of time saved-one year. Most of the value of YC's portfolio comes from AirBnB & Dropbox. It's hard to get good revenue numbers, but based on users, nights booked, and other heuristics their growth rates are estimated at around 100%-500%.
If we take an estimate of 350%, that means that we could attribute roughly 70% of the value of YC's portfolio companies to YC itself. I'm not sure if these assumptions are all accurate (especially the 1 year saved figure), but this can give us a starting point to estimating YC's impact on their portfolio companies.
ETA: the amount of time saved is probably the most important variable. If we assume YC saves each company 6 months instead of 12, then YC's impact drops from 70% to 47%. With 3 months, it's about 27%.
Besides the fact that 6.1B is not the value to the US Economy: those engineers and developers would have probably produced value anyway. So, to be specific, we should know the value without YC and with YC and the difference would then be "the value of YC to the US Economy"; I think we should ask ourselves:
1. How does the YC-factor scale to make a real impact to any economy. Don't ask me data, but 6.1 billion in few years have a 1*10^-n impact to the GDP of most western economies, where probably n>10.
2. If it's fair to call copycats everybody that tries to replicate the concept, any concept. Innovation involves lots of copying, I thought we agreed on that.
3. If the YC-factor can make a real impact on industries that are likely to be fundamental for our future welfare: food, pharma, hospitals, insurance (pensions).
And I am interested in point 3 especially. Because 6.1B is nice, but we need to face the reality here. We live in an aging world were people want to retire at 60 with the same shape they had at 18. Implications of this are enormous for our future.
1. How does the YC-factor scale to make a real impact to any economy. Don't ask me data, but 6.1 billion in few years have a 1*10^-n impact to the GDP of most western economies, where probably n>10.
2. If it's fair to call copycats everybody that tries to replicate the concept, any concept. Innovation involves lots of copying, I thought we agreed on that.
3. If the YC-factor can make a real impact on industries that are likely to be fundamental for our future welfare: food, pharma, hospitals, insurance (pensions).
And I am interested in point 3 especially. Because 6.1B is nice, but we need to face the reality here. We live in an aging world were people want to retire at 60 with the same shape they had at 18. Implications of this are enormous for our future.
interesting. clearly some work has gone into this and, like with any research, the results will always be open to debate. although i think obviouslygreen has got the wrong end of the stick by comparing apples with oranges. i wouldn't be surprised if the valuation number is actually higher. would like to see some more details on those 'assumptions'
What does it even mean to add $6.1 bn of value? It's not as if the alternative was to put $6.1 bn in a heap and burn it. They've included staff - would they all have been unemployed otherwise? There's lots of data but no meaning here. What, in this case, is "economic value"?
All this says to me is that Silicon Valley success has more to do with who you know that what you do.
If people are interested in YC numbers (and individual companies) compared to the 150+ other accelerators around the world, check out Seed-DB. (http://www.seed-db.com)
YC startups have raise >$1billion in funding, approximately half of the >$2billion raised by all startups from accelerators. And this is only the reported (or self-reported) funding numbers from Crunchbase, so the total is actually higher than that.
YC startups have raise >$1billion in funding, approximately half of the >$2billion raised by all startups from accelerators. And this is only the reported (or self-reported) funding numbers from Crunchbase, so the total is actually higher than that.
Using specific macroeconomic assumptions, I estimate $100 trillion. What's the point of the article if the methodology is excluded?
I never applied to YC because of the small amounts. First of all, if I'm going to ask for money, I only want to do it once. Which means I'd prefer to ask for enough to get to profitability, not just enough to get to another round. (Granted, you'll raise that A on better terms with YC social proof.) Second, if we assume a 4-year vesting cycle (which, I think, should apply to founders as well) then my being there already puts the valuation at $1.5-2M (because, while I wouldn't get $375-500k on the normal wage-labor market, I'm working 2+ times as hard and taking lots of risk). Scale that up based on how many other founders there are. So for me, it's not a good deal. If you're 22, I think it's probably a great deal.
Having been an alum before, I feel confident in saying, as hooande mentions in another thread, that the program itself is unlike getting invested in by any other investor. If you get funded by other angels or VC's, you have little real relationship built beyond that of you with the partner or angel.
On the other hand, at YC, when we needed help with our Series A, we got to talk to James Lindenbaum of Heroku, who taught us the ins-and-outs. When we needed to launch, we could talk to Alexis Ohanian who created Reddit (and interviewed us) and knows a thing or two about launching consumer sites. YC batchmates help each other and pay it forward when we become alums.
Few people do it these days for the money itself. One trend we see of late is companies who have already raised seed rounds, often from already prominent angel investors, opt to go through YC because it's a multiplier on their ability to execute -- they're more motivated, they focus more on the right things, have access to a hugely powerful network of alums, make deep lasting connections with batchmates, and then get a multiplier on their valuation at Demo Day.
I don't see age as the determining factor. Even for people who already have networks (I was an early engineer at Palantir, Stanford grad) it was useful to greatly increase the number of smart people I knew and trusted. (See Metcalfe's law.)
On the other hand, at YC, when we needed help with our Series A, we got to talk to James Lindenbaum of Heroku, who taught us the ins-and-outs. When we needed to launch, we could talk to Alexis Ohanian who created Reddit (and interviewed us) and knows a thing or two about launching consumer sites. YC batchmates help each other and pay it forward when we become alums.
Few people do it these days for the money itself. One trend we see of late is companies who have already raised seed rounds, often from already prominent angel investors, opt to go through YC because it's a multiplier on their ability to execute -- they're more motivated, they focus more on the right things, have access to a hugely powerful network of alums, make deep lasting connections with batchmates, and then get a multiplier on their valuation at Demo Day.
I don't see age as the determining factor. Even for people who already have networks (I was an early engineer at Palantir, Stanford grad) it was useful to greatly increase the number of smart people I knew and trusted. (See Metcalfe's law.)
I've joined a YC company as a founder after the actual YC sprint and I would definitely echo much of what garry is saying here even for myself. Our other investors are good people, but none of them offer the accessibility and information even now, versus what we get from the YC partners and especially our fellow YC companies.
That's an excellent set of points. Thank you for adding some real experience to counterbalance my speculations.
When it's viewed that way-- as not a fundraiser but a high-power incubator-- YC isn't a bad deal if you can capitalize on those synergies.
I have a lot of respect for Paul Graham and his Lisp advocacy in the mid-2000s can't be underestimated for its positive effect on programming. It was his essays that got me interested in Python, then Lisp and Ocaml, then Clojure and Scala. I'd certainly consider YC if I was sure I'd get a lot of personal attention from people like him.
When it's viewed that way-- as not a fundraiser but a high-power incubator-- YC isn't a bad deal if you can capitalize on those synergies.
I have a lot of respect for Paul Graham and his Lisp advocacy in the mid-2000s can't be underestimated for its positive effect on programming. It was his essays that got me interested in Python, then Lisp and Ocaml, then Clojure and Scala. I'd certainly consider YC if I was sure I'd get a lot of personal attention from people like him.
Fair; it's not for everyone - but that's really not the point.
The point is that no one really thought "22 year olds" were capable of making an economic impact before YC came along. Hence, someone with the simple idea to say "Hey, we should give 22 year olds this deal" created an employment impact on the economy as big as Facebook. The more people that come up with new funding models like YC that actually work, the better we'll all be.
The point is that no one really thought "22 year olds" were capable of making an economic impact before YC came along. Hence, someone with the simple idea to say "Hey, we should give 22 year olds this deal" created an employment impact on the economy as big as Facebook. The more people that come up with new funding models like YC that actually work, the better we'll all be.
Some 22-year-olds are pretty badass, so I wouldn't underestimate them as a group. You're right, though. VC, except in certain bubble chambers (e.g. Stanford's CS department in the '90s) has this a weird paradox where you're either too old to raise money or too young to get an introduction. YC solved that, which is commendable.
It is better to start with small amounts, demonstrate viability of the concept and team, then work up to larger amounts. Even if someone would bet a large amount on you up front, you'll retain more of the company by raising most of the money after demonstrating traction.
I personally see YC's equity stake as a "fee" companies with young or un-networked founders will pay to gain law/financial/sales-lead networks to leverage.
In a vacuum, the trade works best for young founding teams and the value decreases as the team gets older (age typically does correlate with your leveragable network size).
In a vacuum, the trade works best for young founding teams and the value decreases as the team gets older (age typically does correlate with your leveragable network size).
If you don't mind me asking, what's your job and where do you live?
New York. Between jobs, have offers, still looking for a little while. Strongly considering a move outside of NYC (sick of having an impressive city on my resume be my savings; would like actual savings savings). Boston, SF, and Austin are main candidates. SF is still expensive but my pay would go up.
Also, doing a talent scan for a startup concept. Possibly a Hail Mary pass because I don't know if anyone can meet the standards for the business co-founder, but worth a shot. http://michaelochurch.wordpress.com/2013/04/23/seeking-co-fo...
Also, doing a talent scan for a startup concept. Possibly a Hail Mary pass because I don't know if anyone can meet the standards for the business co-founder, but worth a shot. http://michaelochurch.wordpress.com/2013/04/23/seeking-co-fo...
Tried mining AngelList for contacts? I suspect you're going to have trouble recruiting people blind if you can't even say what the opportunity is.
(NB. On the NLP for code quality analysis front: there's a startup {well, going a couple of years now, so now exactly startup} in Oxford that's been doing something related: http://semmle.com/ code quality analysis is supposed to be one of the selling points of their product.)
(NB. On the NLP for code quality analysis front: there's a startup {well, going a couple of years now, so now exactly startup} in Oxford that's been doing something related: http://semmle.com/ code quality analysis is supposed to be one of the selling points of their product.)
Don't forget the numerous other accelerators which follow the YC 3-month spring, money, and mentors method. If we include those who have been inspired to do YC-alikes, the numbers would become huge.
The fact is that relationships with successful people can be far more valuable than bags with dollar signs on them. Relationships can lead to inside information, help with making deals and most importantly, once in a lifetime investment opportunities. Most rich people spend a lot of their money and effort on access to information. At the higher levels, information and relationships rule all and powerful people will go far out of their way to get them.
Evaluating the success of YCombinator based on the total value of their portfolio is missing the point. Most of their value is in the form of soft currency, the massive network of grateful friends that they are building. The incubator model gives them the investment returns of a venture capital firm combined with the social returns of a fraternity. We won't know their true value for decades.