Hey Sam, I think it would be beneficial to explain these different areas of YC a bit clearer on the website as right now everything still seems very focused on core. Just a suggestion.
Does YC use Slack? If so, we just launched Tettra into beta this week. It's a company wiki built on top of Slack - http://tettra.co
Might help to clarify some of those "who owns what" questions by putting them into a wiki that everyone at YC has access to via Slack. We're working on a bot to automate the updating of content too.
I'm sure you already have something internally for a wiki at YC but thought I'd post here just in case it helps.
I remembered reading that Tesla CTO, JB Straubel commented that he understands 90% of the processes at Tesla. If an organization is so complex that the CTO & CEO are unable to effectively understand the business processes, then that would be a problem.
I guess one measure for YC and the funded companies, is when major mistakes get repeated because the solution is not communicated to startups requesting advice.
> I'm coining a new term for this from now: Alphabetizing.
Having conglomerate and/or parent corporations to organize the different goals of a company is nothing new, even in the world of startups.
If anything, it's surprising that Google didn't make the change earlier, given how unrelated many of their projects are (self-driving cars, search, and mobile operating systems, just to name three).
Minor nitpicky editorial: Perhaps put specifically what you manage as a parenthetical around "investment programs" as it may not be clear to a lot of people.
Hi Sam, this isn't really the place for this, but I was late to the party during your AMA a couple months ago and you weren't around when I asked my question. I'm reposting it here in hopes that you'll see it.
A few weeks ago I submitted this article https://news.ycombinator.com/item?id=10213547 about one of Peter Thiel's biotech investments and the top comment asked "How does someone very intelligent like Peter Thiel make investment decisions in an area where he lacks a huge amount of background knowledge?". I'm curious how you personally and YC as a whole goes about making investments in areas where you don't have great expertise. For example, how do you evaluate biotech markets and the YC biotech companies? How did you evaluate your energy investments?
1) Build a network of experts you can rely on for evaluation
2) A lot of what makes a startup good or bad translates across different domains, so even if you can't evaluate the technology yourself, you can still evaluate other things (e.g. how well the founders communicate, how quickly they get things done, etc.)
I'd like to see some energy spent on trying to get the hit rate higher. I'm sorry to see the 5% or 10% hit rate become conventional wisdom in venture land (outside of obvious moonshots). Companies going through YC have enormous resources and I think we should hope for a higher percentage of "hits". I know, easier said than done.
There is real danger in aiming for that. The way to make the hit rate higher is to fund safer bets, which are usually not what generate the giant returns.
I'd like to the "slugging percentage" be higher, but I think the hit rate is perhaps already too high.
Taking fewer risks and only investing in "sure things" is in neither our interests nor the founders. The "safe" option is to not fund them at all, like a bank or other conservative organization would.
Paul are you concerned that by only funding companies that can hit the ball out of the park that you are biasing the sort of businesses that the smart founders are creating? Assuming smart founders know what sort of businesses will get VC funded then only the second tier founders will build businesses that not going for a moonshot. This is obviously going to bias the final outcome.
Do you think that if a business like YC were to commit to funding "safe" options that good founders would create safe businesses that could achieve returns in aggregate that would rival the high risk / high failure model?
Blackwell's growth calculator can be fun to play with and perhaps provides insight into the advantages of investing in unsafe fast growing companies (aka "startups" as used in Silicon Valley). Note that the growth rate defaults to weekly.
YC funds approximately 0% of the new companies started every year, so it's not like there's a shortage of other options :)
As for returns, the average value of YC companies that are more than two years old is over $100M. I'm not aware of any other model that even comes close to that.
Paul I know that YC has a very minor direct role in company funding, but YC is extremely influential - where YC leads many (blindly) follow.
I see this effect here in Australia where founders and startups are trying to follow the YC model to success despite the ecosystem here being really different. The thing I really love about YC (apart from HN) is that you guys are trying to do things differently - the last thing the world needs is a 1000 YC clones all following your lead and nobody trying different approaches.
I too would like to see a literal moonshot. I have thought a lot about this topic over the years and I think everyone is stuck because they have been concentrating on the wrong area. The cheapest component in the whole process is the humans - the way to get a real moonshot off the ground (sorry for the pun) is to put risk back. There are plenty of people willing to be heroes so why not optimise everything around that - the engineering costs go way down if you are willing to tolerate a high failure rate.
So ... trying to get my brain in gear, if investors weren't taking the occasional 10,000x opportunities so seriously, pressure on 100x-ers to swing for the fences might lessen ... but it would be much harder to get the money to get to 100x in the first place.
You're painting with too broad a brush. There are kinds of founders who are in conflict with their investors (first-timers without significant savings), but there are plenty who have the same risk tolerance as their investors do.
A fairer complaint to make is about the tension between investors/founders and employees.
This is all neither here nor there, though, because whatever kind of founder you are, you are vastly more likely to get external financing in the post-YC era than you were before YC happen. YC funds all kinds of companies that aren't immediately on a moonshot trajectory. VC firms as a rule don't.
I am not a YC booster, but I've been in startups since '95, and there is just no comparison. YC has made things significantly better for founders everywhere.
There is another way to get the hit rate higher, just like we got better at stuff we couldn't so in the past. It's called SELECTION. That's why all our industrial processes today are better than 100 years ago. They aren't "safer", or performing worse, they perform better than EVER because we have figured out what works and standardized it.
In accelerators, that means having more consistency in what factors work, and more selectiveness. Take things that repeatably work and use that.
In my opinion, companies like Google build one hit after another, internally, by re-using their internal platform and users and virality. There are failures but not as much as with startups. But it all benefits from internal resources, server farms, infrastructure, user base etc.
If you are outside such a company, use an open source platform that worked for others. We are working on such a platform and will probably take partners in a couple years, to build apps for our several million users, and provide them with all the infrastructure to try things out and take a % if it works out.
That may be true of industrial systems, but human systems bite back. If you devise a strategy for the stock market or the startup market to make more money that anyone else, people who get wind of that strategy can (and will) devise a counter-strategy to eat your lunch.
Innovation is not zero-sum, but if you create a monoculture of "what works", then what will almost certainly eventually work in the market is something different than the monoculture. An interesting analogy here is Feyerabend's take on creativity in science, "Against Method."
Also, I strongly disagree that Google has figured out a process for innovation. Google does not have "one hit after another." They have a hit here and there in a sea of failure, just like Microsoft did. IBM, on the other hand, had one hit after another, until the market figured out how to "disrupt" them, and did.
As an investor I've spent much of the last twenty years trying to figure out how to make a better risk-adjusted return. Either I'm a complete idiot, or it's not as easy as it sounds.
As an investor I've spent much of the last twenty years trying to figure out how to make a better risk-adjusted return. Either I'm a complete idiot, or it's not as easy as it sounds.
These are not mutually exclusive :)
More seriously, you do make a really good point. Innovation is hard and making money from it is even harder.
>In my opinion, companies like Google build one hit after another,
There is a huge difference though. Google has the resources and network to push things towards success. There are so many different reasons why a startup may fail, but Google is able to avoid many of these issues because they are google. Not a good comparison IMO.
> In my opinion, companies like Google build one hit after another
Wait, what?
Do you have any idea how many ideas they've churned through to get the relatively few hits they've had?
Wave didn't do all that well.
Orkut had a decent run before they dissolved it (almost 11 years)
G+ is still in question.
Yes, they've had some success with some products. And made some excellent purchase decisions (you didn't think they wrote everything they released, did you? Urchin? Writely?).
They've also killed software instead of fully developing it: notebook, reader.
And that is to say nothing of the large numbers of 20% projects. I've personally heard engineers (as a whole) at Google being chastised because the success rate of 20% projects was too high.
You can keep a low hit-rate and focus on giant returns by playing the lottery, but fortunes are built on compound interest and diversified portfolios.
Reducing the number of failures does not mean getting rid of the big winners. It could mean focusing on large existing industries over speculative, pie-in-the-sky trends.
Think about ZenPayroll (disclaimer: early employee there, biased.) Product-focused payroll is not sexy, but the impact is massive and a tremendous business opportunity. We're now building software for local governments. Not sexy, huge market, huge impact on humans, clear path to single, double, and home-run.
My biggest frustration with looking for founding teams chasing these speculative bets is the sheer waste of human talent. I don't want to see another all-star team waste their time on bitcoin and food-delivery.
There are real, serious problems with the same upside but whose "failure" scenario may be a $25m business.
This makes sense to me more on the scale of a single company. Put together a great team and focus them on a long-term problem. Their year-over-year drive and passion will outlast the rollercoaster of starting a company, leading to a much better shot of those huge returns.
Rather than going all in on the flavor-of-the-week, I agree with the focus on radical improvements to existing markets. It's far more likely—which does not mean less impactful—that we can fix known problems than fix as-yet-unknown problems.
ZenPayroll was far from an obvious winner when we funded it. This job is so much easier with hindsight. If you can actually pick the winners better than we can, there's a giant fortune awaiting you :)
I'm not saying that ZP was an obvious winner when you funded it, because you didn't even fund it!* And that's kind of the point.
The companies that get into YC are often speculative in their ideas. Maybe it is devaluing the idea over the execution. Maybe it is the belief that getting in early to a growing trend is more valuable than reinventing an existing idea.
Regardless, the result is great teams of founders who think the key to success is a crazy idea. Sometimes crazy ideas work (AirBnB was kinda nuts at the time) but there seems to be a heavy weight in companies funded towards those types of investments versus the ZenPayrolls. Which tends to attract the same.
* They were Switchboard Labs at the time, doing something totally different.
Actually, I did fund it. I personally invested shortly after the ZP pivot :) (and it still wasn't clear they would be successful)
Nevertheless, the fact that yc invested pre-pivot only reinforces my point, as ZP wouldn't even exist had YC not taken a chance on the team and then helped them find a more promising idea.
Sorry I was unclear, I had meant YC didn't fund that idea because it didn't exist until they were already accepted.
I see your point, that the team is the most important part and YC invested in that. My feeling is that YC can be more effective at funding those types of ideas and teams. That the hit rate can be higher by focusing on a different class of idea. Perhaps that means more pivots or different ideas accepted at the start. I'll try to flesh this out more.
P.S.
Unrelated, but thank you for sharing your thoughts. I appreciate it
It could be easily argued that the promise of bitcoin (blockchain) will contribute way more to the betterment of humanity than anything ZenPayroll will ever do (I like ZenPayroll, don't get me wrong). But regarding bitcoin, the argument for increased transparency (public ledger), reach to 3rd world consumers who do not have access to a stable financial system, reduced overhead and costs of existing global financial systems etc. are very important and worth the time of smart, talented founders.
I think it's great that you believe in what you are doing versus what other "all-star" teams may choose to do but your comment is equally frustrating, IMO.
Maybe. I disagree about BTC. It sounds amazing in theory, but in practice I would rather help millions of small business owners.
When you talk with them, they never say (or say without knowing it) that their biggest problem is financial transparency. Or that customers want to buy but want an anonymous currency. Or that they need to switch between many different currencies. BTC has always felt like a solution in search of a problem. The blockchain is wonderful technology as well, but that's not the hardest part of most startups.
Hah, I doubt they do that, but it would be interesting. Make it double blind. Pre-select a couple of teams for acceptance to YC but don't tell the interviewers until afterwards, and never tell the teams, so that the team still feels like they got in on their merit.
This is certainly an experiment that YC could afford to run. Going random is really the only way to know if your selection processes are extracting real value or not.
The best way of doing this would be to pull the random companies out of the good, but not good enough to fund, pile. I am sure YC has little problem telling a good startup from a bad one, but I bet they have real problem picking the excellent from the good. Trying to pick the excellent out of the good is where you are most likely to run into unconscious biases.
I'm not sure there's immense danger. VRBO/ADP/PayPal/UPS/Xdrive 2.0 aren't super risky. Basically going in to huge categories and "doing it right". Again, easier said than done. I get that. But with 100 startups per year, an incredibly smart group evaluating, a priceless 3+ months, etc, I'd like to see even better stuff. Sure, maybe slugging percentage is the better number.
Maybe because AirBnB found success in commercial property rental, not renting out your couch to someone, the original pitch. But I still don't think it's clear why AirBnB succeeded.
Exactly. Also noting that there is a similar theme that has gone around in business calling companies stupid for, say, not green lighting computer or idea that "a Wozniak" (he wasn't probably the only one just the one that we know about because of what happened next) showed them and didn't recognize the potential. Could have been the pitch could have been 1000 other reasons. (And of course sure maybe they did miss the opportunity possibly..)
Even very early on though the plan revolved around there being no real natural barrier between couches and commercial property no? It's in the email exchange released by PG to show how people can miss the idea. If someones plan involves starting with X because it's a good stepping point to Y, I don't think it's fair to say "oh but they were only found success with Y".
It's not clear couch rentals was a good stepping stone to whole unit rental; why not list whole units directly? And I'm wary of claims that grand strategies existed from the beginning, those strategies are usually post-hoc inventions.
In retrospect AirBnB could have been more accurately pitched as a better VRBO but there still isn't an obvious reason why that would have been a good investment.
Oh, it was far from an obvious win. At that stage, it was going to take a relentlessly resourceful team making a series of good decisions. Further, going to complete strangers for an initial $150k raise doesn't make a ton of sense. This is friends and family territory or you would need to get to know some (semi-)professional investors. I don't think there's a whole lot to be learned from that story except that it's not a great approach to seed raising.
As Paul Graham has emphasized before, virtually all of your financial return is in a teeny number of companies. IIRC just AirBnB and Dropbox account for a large majority of return over ALL yc companies, and the number of companies that make up something like 95% of the total return can be counted on one hand.
I'd argue that the resources a YC company has available extend far beyond the $200K in funding; even if you ignore the effect YC's 'seal of approval' has on future rounds.
Compared to other incubators I don't think it's a stretch at all to consider them extremely well resourced.
The non-monetary resources provided to YC companies are mostly freely available to any company (startup school, how to start a startup, pg's blog, sama's blog, AmAs, etc.).
Sure, you could argue that being a YC alum helps you raise that first round, but even YC companies that raise smaller-ish rounds fail all the time.
I feel like people think if you're in YC you're a sure bet. That's not the case at all. First and foremost you need a product that's going to be better than anything that currently exists. At the end of the day YC is just an angel investment firm with a great track record.
>I feel like people think if you're in YC you're a sure bet.
Did not mean to imply I feel YC makes success a sure bet, that is obviously and demonstrably false.
That said; non-monetary resources made available to YC companies are 'mostly' available to every startup? Really?[0]
-Regular founders dinners(networking, helps with initial traction)
-Free legal counsel
-AWS/Azure credit well above what the respective companies offer non-yc startups.
-Being YC alum helps with future funding rounds.
->but even YC companies that raise smaller-ish rounds fail all the time.
Yes...Of course they do, that's the point of VC
Yes blog posts and AMA's are great learning material, but I'd argue they aren't nearly as valuable as regular 1on1's with the people that wrote them.
I'm not trying to say YC is a magic bullet or that YC alum 'have it easy', it's hard as hell to create a successful startup. I am saying that there are not-so-trivial advantages to being incubated at/by YC
Off the top of my head: approximately $1 million for land, $1 million for building, $1 million for working capital of which only about $30~50k is COGS. Some of the working capital is machines and other improvements; more than you would expect is salaries for employees for the first few months.
(n.b. Some of this is fronted by McDonalds, some by the franchisee. McDonalds has an interesting model where they insist on the franchisee being a tenant of theirs, at least domestically -- this turns them into one of the largest commercial real estate options in the world.)
Huh! $1m for land? Where, in Monaco? What's a McDonald's sit on, 1/4 acre? And I assume the $1m for "building" includes all the branding collateral, signage, custom cabinets, and other expensive to-spec physical accoutrements?
It's really hard to predict which companies will be successful at an early stage. YC was created to invest in founders that would have otherwise been passed over, often because their companies were so young.
Getting a higher hit rate probably means investing in fewer less-young companies, like a traditional VC. The companies that attract VCs are more proven, but investing like this is antithetical to the accelerator model.
Personally, I think it's great that YC is growing by trying new things (like YC Fellowship and YC Research) rather than only trying to do a better job at existing things, like being VCs.
Silicon Valley is dominated by a few big tech companies that hire tens of thousands of employees they don't really need, in large part just to keep them out of the hands of a competitor.
With Alphabet, Inc., Google is in the process of decentralizing itself into a version of YC. They're essentially VCs now. At some point someone (maybe Alphabet) is going copy the YC model effectively and scale it up to tens of thousands of startups. It's just too damn profitable and efficient to not become the standard way Silicon Valley works.
It would be neat if in a few years all the big tech companies are basically YC alternatives and most people work for a small startup that actually makes something.
It's convenient if Wall Street views it that way because then it's not scary ("It's just like GE!"). But Calico was never related to Google, and it's the startup they mention as the model example. Larry Page's full-time job is investing in companies and managing his portfolio. He's a VC. The only real question is how far he goes, and he tends to go pretty far.
This describes many more companies than Google. If Google really is alphabetizing because they want to be more like a VC, they have a long way to go before they get anywhere close to the level Cisco has been operating at for decades.
I don't know if there are companies that do this (I'm not saying there aren't), but this does not match my ground-level understanding of how and why big tech companies are hiring. The ones I'm talking to are hiring because they are constrained on what they can build by the availability of specific kinds of engineers in their organization.
Zero is the number of companies I've talked to who have ever mentioned competition with other tech companies as a recruiting concern. I'm sure that's A Thing That Happens, particularly in executive hiring, but I don't think most companies are hoovering up developers so they can hoard them.
I didn't mean to single out a particular specialty, only to call out that there are different kinds of developers, and companies can get constrained on one kind or another.
Hiring tens of thousands of people is a very high level strategic decision. No one on the ground-level would have any special insight into it. The people on the Android team probably didn't know why Eric Schmidt authorized hiring a bunch more employees after returning from an exciting Apple board meeting, they were just happy to hire help.
A small fraction of Google's employees are responsible for all of its revenue.
They use those profits to help ensure their longevity. One way to do that is to keep people from competing with them, so they liberally hire and attempt to acquire anyone that's a potential threat.
It's not the only reason they hire so many people. Wall Street rewards headcount and tech companies have such great profit margins that it actually makes a lot of sense. What else are they going to do with all those profits?
It can also be a decision that's made from the bottom up. At any large company, as long as there's growth and success, every development team is going to either have more work than they can handle or can think of something they could do if they had more devs. So they're going to ask for more headcount. (Or cynically, some managers view headcount as a metric of their personal career progression and will ask for more headcount regardless.) You don't usually see senior management say, "let's hire 40,000 engineers". Instead, you have maybe 8,000 line managers all saying, "I want five more engineers". If anything, they are all saying, "I want six more engineers" and senior management has to figure out how to cut that down from 48,000 to 40,000.
OK, so what if 20% of Google's engineers generate 80% of the value? As long as either the other 20% of the value breaks even with the cost of the other 80% of engineers, or there's potential for explosive growth somewhere in the 80% of work that's being done outside of the core business, it's a smart decision. Google's not going to stop Microsoft from hiring enough engineers to make Bing just as good of a search engine. And if that's all they wanted to do, they could just go on LinkedIn and offer to double the salary of everyone in the Bing division and it would still cost less.
I was working at Microsoft shortly after 9/11 and one of their main goals was hoovering up talent let go by other companies. Ballmer (or maybe it was the head of HR can't remember her name) mentioned the strategy in a company-wide email.
The largesse worried existing softies so much that someone created the "Mini MSFT" movement, culminating in the blog: http://minimsft.blogspot.com/
This is what a PE (Private Equity) Firm basically does from my understanding.
They are a company, that buys, (hopefully) improves, and then sells companies. For example, a PE Firm might have some expertise in mining. They hear about a company that builds some sort of mining technology. They've done pretty well so far but they've really leveled out. The PE Firm decides to buy them, install a new CEO, revise some business practices to help cut costs, and now as the same business they bought but with a better bottom-line. They then sell it.
What you're describing is like an earlier stage PE firm.
That's what they are supposed to do. In practice many of them borrow a bunch of money on the acquired company's credit and funnel it to themselves before selling. It's kind of like the legal version of a "bust out" (as seen on "The Sopranos" and "Goodfellas" :)
I don't think Google would benefit from a YC-style approach. Google can afford to buy the winners because they have mountains of cash. They also can only invest the time in companies that have significant upside because the numbers they need to move the meter are so significant. YC is a different animal altogether. They use relatively small sums of money in hopes they will find a lottery ticket.
Yeah, this is Yahoos biggest failure to be sure. I've even said this on HN a few years ago, that if yahoo were smart they'd have already taken their billions they sit on and exactly copy YC
> It's just too damn profitable and efficient to not become the standard way Silicon Valley works.
Not sure I agree with that assertion. While YC companies market cap is approx $30B (a recent Bloomberg cited estimate), the profits of these companies are minuscule.
The public tech giants do need to show profits for all their efforts. So this model works only so long as all these "experiments" aka start ups are relatively inexpensive to run and don't chip away at the bottom line too much.
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[ 2.7 ms ] story [ 179 ms ] threadI used to be able to place most or even all of you on a mental map but I really lost track.
Keep at it, you're doing great!
How long until the 1,000th YC company?
(silly base 10 sentiment, but still it would be quite a milestone)
https://twitter.com/sama/status/664484490060795904
Wow. I remember the 500 mark and how long that took. I thought it would happen in 2016, very surprised the milestone is already passed.
Might help to clarify some of those "who owns what" questions by putting them into a wiki that everyone at YC has access to via Slack. We're working on a bot to automate the updating of content too.
I'm sure you already have something internally for a wiki at YC but thought I'd post here just in case it helps.
I guess one measure for YC and the funded companies, is when major mistakes get repeated because the solution is not communicated to startups requesting advice.
Having conglomerate and/or parent corporations to organize the different goals of a company is nothing new, even in the world of startups.
If anything, it's surprising that Google didn't make the change earlier, given how unrelated many of their projects are (self-driving cars, search, and mobile operating systems, just to name three).
Hoping some biochemists and petroleum engineers added to the team. Would make YC very all-encompassing.
Physics+EECS seem plentiful.
Biochem/pharma/subsea-hydrology seem to be only areas lacking in expertise.
A few weeks ago I submitted this article https://news.ycombinator.com/item?id=10213547 about one of Peter Thiel's biotech investments and the top comment asked "How does someone very intelligent like Peter Thiel make investment decisions in an area where he lacks a huge amount of background knowledge?". I'm curious how you personally and YC as a whole goes about making investments in areas where you don't have great expertise. For example, how do you evaluate biotech markets and the YC biotech companies? How did you evaluate your energy investments?
2) A lot of what makes a startup good or bad translates across different domains, so even if you can't evaluate the technology yourself, you can still evaluate other things (e.g. how well the founders communicate, how quickly they get things done, etc.)
I'd like to the "slugging percentage" be higher, but I think the hit rate is perhaps already too high.
Do you think that if a business like YC were to commit to funding "safe" options that good founders would create safe businesses that could achieve returns in aggregate that would rival the high risk / high failure model?
http://growth.tlb.org/#
As for returns, the average value of YC companies that are more than two years old is over $100M. I'm not aware of any other model that even comes close to that.
If anything, I'd like to find more ways to fund even more extreme moonshots (e.g. http://techcrunch.com/2014/08/14/y-combinator-and-mithril-in...). Funding an actual, literal moonshot would be wonderful.
I see this effect here in Australia where founders and startups are trying to follow the YC model to success despite the ecosystem here being really different. The thing I really love about YC (apart from HN) is that you guys are trying to do things differently - the last thing the world needs is a 1000 YC clones all following your lead and nobody trying different approaches.
I too would like to see a literal moonshot. I have thought a lot about this topic over the years and I think everyone is stuck because they have been concentrating on the wrong area. The cheapest component in the whole process is the humans - the way to get a real moonshot off the ground (sorry for the pun) is to put risk back. There are plenty of people willing to be heroes so why not optimise everything around that - the engineering costs go way down if you are willing to tolerate a high failure rate.
A fairer complaint to make is about the tension between investors/founders and employees.
This is all neither here nor there, though, because whatever kind of founder you are, you are vastly more likely to get external financing in the post-YC era than you were before YC happen. YC funds all kinds of companies that aren't immediately on a moonshot trajectory. VC firms as a rule don't.
I am not a YC booster, but I've been in startups since '95, and there is just no comparison. YC has made things significantly better for founders everywhere.
In accelerators, that means having more consistency in what factors work, and more selectiveness. Take things that repeatably work and use that.
In my opinion, companies like Google build one hit after another, internally, by re-using their internal platform and users and virality. There are failures but not as much as with startups. But it all benefits from internal resources, server farms, infrastructure, user base etc.
If you are outside such a company, use an open source platform that worked for others. We are working on such a platform and will probably take partners in a couple years, to build apps for our several million users, and provide them with all the infrastructure to try things out and take a % if it works out.
Innovation is not zero-sum, but if you create a monoculture of "what works", then what will almost certainly eventually work in the market is something different than the monoculture. An interesting analogy here is Feyerabend's take on creativity in science, "Against Method."
Also, I strongly disagree that Google has figured out a process for innovation. Google does not have "one hit after another." They have a hit here and there in a sea of failure, just like Microsoft did. IBM, on the other hand, had one hit after another, until the market figured out how to "disrupt" them, and did.
As an investor I've spent much of the last twenty years trying to figure out how to make a better risk-adjusted return. Either I'm a complete idiot, or it's not as easy as it sounds.
These are not mutually exclusive :)
More seriously, you do make a really good point. Innovation is hard and making money from it is even harder.
There is a huge difference though. Google has the resources and network to push things towards success. There are so many different reasons why a startup may fail, but Google is able to avoid many of these issues because they are google. Not a good comparison IMO.
Wait, what? Do you have any idea how many ideas they've churned through to get the relatively few hits they've had? Wave didn't do all that well. Orkut had a decent run before they dissolved it (almost 11 years) G+ is still in question.
Yes, they've had some success with some products. And made some excellent purchase decisions (you didn't think they wrote everything they released, did you? Urchin? Writely?).
They've also killed software instead of fully developing it: notebook, reader.
And that is to say nothing of the large numbers of 20% projects. I've personally heard engineers (as a whole) at Google being chastised because the success rate of 20% projects was too high.
You can keep a low hit-rate and focus on giant returns by playing the lottery, but fortunes are built on compound interest and diversified portfolios.
Reducing the number of failures does not mean getting rid of the big winners. It could mean focusing on large existing industries over speculative, pie-in-the-sky trends.
Think about ZenPayroll (disclaimer: early employee there, biased.) Product-focused payroll is not sexy, but the impact is massive and a tremendous business opportunity. We're now building software for local governments. Not sexy, huge market, huge impact on humans, clear path to single, double, and home-run.
My biggest frustration with looking for founding teams chasing these speculative bets is the sheer waste of human talent. I don't want to see another all-star team waste their time on bitcoin and food-delivery.
There are real, serious problems with the same upside but whose "failure" scenario may be a $25m business.
This makes sense to me more on the scale of a single company. Put together a great team and focus them on a long-term problem. Their year-over-year drive and passion will outlast the rollercoaster of starting a company, leading to a much better shot of those huge returns.
Rather than going all in on the flavor-of-the-week, I agree with the focus on radical improvements to existing markets. It's far more likely—which does not mean less impactful—that we can fix known problems than fix as-yet-unknown problems.
The companies that get into YC are often speculative in their ideas. Maybe it is devaluing the idea over the execution. Maybe it is the belief that getting in early to a growing trend is more valuable than reinventing an existing idea.
Regardless, the result is great teams of founders who think the key to success is a crazy idea. Sometimes crazy ideas work (AirBnB was kinda nuts at the time) but there seems to be a heavy weight in companies funded towards those types of investments versus the ZenPayrolls. Which tends to attract the same.
* They were Switchboard Labs at the time, doing something totally different.
Nevertheless, the fact that yc invested pre-pivot only reinforces my point, as ZP wouldn't even exist had YC not taken a chance on the team and then helped them find a more promising idea.
I see your point, that the team is the most important part and YC invested in that. My feeling is that YC can be more effective at funding those types of ideas and teams. That the hit rate can be higher by focusing on a different class of idea. Perhaps that means more pivots or different ideas accepted at the start. I'll try to flesh this out more.
P.S. Unrelated, but thank you for sharing your thoughts. I appreciate it
There's always room to improve, but it's likely they are making fewer mistakes than you think.
AirBnb was almost dead when they got into YC. Nobody would fund them, and Nate had moved to Boston to get a real job.
Airbnb is actually still nuts. They probably aren't even to the half-way point in terms of where they need to be to be actually mainstream.
http://www.paulgraham.com/airbnb.html
And that's just one public example. (Chris Sacca also turned them down.)
Empirically it would be shocking if they were the only 2 investors who had the opportunity to invest but didn't.
I think it's great that you believe in what you are doing versus what other "all-star" teams may choose to do but your comment is equally frustrating, IMO.
When you talk with them, they never say (or say without knowing it) that their biggest problem is financial transparency. Or that customers want to buy but want an anonymous currency. Or that they need to switch between many different currencies. BTC has always felt like a solution in search of a problem. The blockchain is wonderful technology as well, but that's not the hardest part of most startups.
The best way of doing this would be to pull the random companies out of the good, but not good enough to fund, pile. I am sure YC has little problem telling a good startup from a bad one, but I bet they have real problem picking the excellent from the good. Trying to pick the excellent out of the good is where you are most likely to run into unconscious biases.
Yes; they've said as much.
One of the challenges with this business is that our decisions look foolish at the time, and then obvious and easy with hindsight :)
(Although parent didn't mention AirBnB?)
In retrospect AirBnB could have been more accurately pitched as a better VRBO but there still isn't an obvious reason why that would have been a good investment.
A typical McDonalds costs $3 million to open. They reheat burgers.
I might recalibrate on whether a YC company counts as enormously resourced.
Compared to other incubators I don't think it's a stretch at all to consider them extremely well resourced.
No comment on the hit rate.
Sure, you could argue that being a YC alum helps you raise that first round, but even YC companies that raise smaller-ish rounds fail all the time.
I feel like people think if you're in YC you're a sure bet. That's not the case at all. First and foremost you need a product that's going to be better than anything that currently exists. At the end of the day YC is just an angel investment firm with a great track record.
Did not mean to imply I feel YC makes success a sure bet, that is obviously and demonstrably false.
That said; non-monetary resources made available to YC companies are 'mostly' available to every startup? Really?[0]
-Regular founders dinners(networking, helps with initial traction)
-Free legal counsel
-AWS/Azure credit well above what the respective companies offer non-yc startups.
-Being YC alum helps with future funding rounds.
->but even YC companies that raise smaller-ish rounds fail all the time.
Yes...Of course they do, that's the point of VC
Yes blog posts and AMA's are great learning material, but I'd argue they aren't nearly as valuable as regular 1on1's with the people that wrote them.
I'm not trying to say YC is a magic bullet or that YC alum 'have it easy', it's hard as hell to create a successful startup. I am saying that there are not-so-trivial advantages to being incubated at/by YC
[0]http://www.fastcompany.com/3042861/the-y-combinator-chronicl...
(n.b. Some of this is fronted by McDonalds, some by the franchisee. McDonalds has an interesting model where they insist on the franchisee being a tenant of theirs, at least domestically -- this turns them into one of the largest commercial real estate options in the world.)
The resources are mainly non-cash, yes. And the YC cachet (an extremely valuable asset) helps out in the fundraising.
Getting a higher hit rate probably means investing in fewer less-young companies, like a traditional VC. The companies that attract VCs are more proven, but investing like this is antithetical to the accelerator model.
Personally, I think it's great that YC is growing by trying new things (like YC Fellowship and YC Research) rather than only trying to do a better job at existing things, like being VCs.
With Alphabet, Inc., Google is in the process of decentralizing itself into a version of YC. They're essentially VCs now. At some point someone (maybe Alphabet) is going copy the YC model effectively and scale it up to tens of thousands of startups. It's just too damn profitable and efficient to not become the standard way Silicon Valley works.
It would be neat if in a few years all the big tech companies are basically YC alternatives and most people work for a small startup that actually makes something.
... but the competitor does need them?
Zero is the number of companies I've talked to who have ever mentioned competition with other tech companies as a recruiting concern. I'm sure that's A Thing That Happens, particularly in executive hiring, but I don't think most companies are hoovering up developers so they can hoard them.
Can you give any details/examples of what these 'specific kinds of engineers' are?
A small fraction of Google's employees are responsible for all of its revenue.
They use those profits to help ensure their longevity. One way to do that is to keep people from competing with them, so they liberally hire and attempt to acquire anyone that's a potential threat.
It's not the only reason they hire so many people. Wall Street rewards headcount and tech companies have such great profit margins that it actually makes a lot of sense. What else are they going to do with all those profits?
OK, so what if 20% of Google's engineers generate 80% of the value? As long as either the other 20% of the value breaks even with the cost of the other 80% of engineers, or there's potential for explosive growth somewhere in the 80% of work that's being done outside of the core business, it's a smart decision. Google's not going to stop Microsoft from hiring enough engineers to make Bing just as good of a search engine. And if that's all they wanted to do, they could just go on LinkedIn and offer to double the salary of everyone in the Bing division and it would still cost less.
Therefore, everyone tries to make their project too big to fail. It doesn't matter whether the organization as a whole benefits.
Speaking generally, I don't think startups think about it very much but it seems that the "very top" companies do/did.
Feel free to let me know if I'm wrong. I only have a general understanding of what you mean and the lawsuit.
The largesse worried existing softies so much that someone created the "Mini MSFT" movement, culminating in the blog: http://minimsft.blogspot.com/
They are a company, that buys, (hopefully) improves, and then sells companies. For example, a PE Firm might have some expertise in mining. They hear about a company that builds some sort of mining technology. They've done pretty well so far but they've really leveled out. The PE Firm decides to buy them, install a new CEO, revise some business practices to help cut costs, and now as the same business they bought but with a better bottom-line. They then sell it.
What you're describing is like an earlier stage PE firm.
Not sure I agree with that assertion. While YC companies market cap is approx $30B (a recent Bloomberg cited estimate), the profits of these companies are minuscule.
The public tech giants do need to show profits for all their efforts. So this model works only so long as all these "experiments" aka start ups are relatively inexpensive to run and don't chip away at the bottom line too much.
pg's biggest contribution to YC may be finding sama and giving him the reins.