I think one thing thats often missed in posts like this is the memetic effect if Y-Combinator were to stop growing its class size. Its irrelevant whether or not YC's continued growth is reasonable or not because they don't have a choice in the matter at this point.
YC is for a very large portion of people an indicator of the health of the industry. Were YC to cease growing, or worse reverse its class size, dozens of articles would appear about how this means the "popping of the bubble".
Regardless whether thats the actual reason, it would have a detrimental effect on the startup world as a whole. I'm pretty sure PG is aware of this fact.
"...those funds know that internet companies are still valuable, there is no tech bubble and by building a long-lasting company that creates value well-timing its IPO, you can make incredible returns"
It occurs to me that part of the issue surrounding the controversy of bubble vs. no bubble may boil down to semantics. A "bubble", after all, is a fairly arbitrary construct. Whether or not we are approaching the peak of a J or S-curve may be subject to debate - but there is no doubt we are approaching a temporary peak.
Funding will begin to dry up as general perception sours vis a vis tech in general and Internet startups specifically. A fair amount of publicity surrounding the Facebook IPO was directed at monetization (or lack thereof). Frankly, this criticism is legitimate. The widespread lack of sustainable business models among Internet ventures should be a source of concern to investors. Expecting "value" to simply materialize serendipitously is wishful thinking at best - and at worst, the telltale sign of a bubble.
"First Round Capital, A16Z, NEA, KPCB, Sequoia and Khosla all raised new funds very recently for a total of several billion dollars. Early seed stage doesn’t look bad either with 500 Startups, Lowercase Capital, etc. all raising new capital."
I think OP hit the nail. I'm no expert or angel investor. But availability of capital is not a problem. May be the market for uncapped notes and massive seed rounds has stabilized.
"pushing out 80 companies a batch “demanding” that each of those raises a seed round at 10m pre is just wrong and unsustainable"
I see these types of comments all the time from people who did not go through Y Combinator. They are incredibly frustrating because anyone who has done YC knows that the partners constantly hammer home the message that founders should NOT optimize for valuation but instead look for great investors who really understand the market and will add value to your company in the long term.
The fact that many YC companies do raise at high valuations is a function of investor interest, not because they are being driven to do so with a stick by YC.
I agree with your point. And I'm not saying it's the fault of YC.
The reality tho as you probably know is that YC companies go out seeking higher valuations than the norm. Those may be justified or not, and as you say often times that is driven by investor interest, but unfortunately "blindly" based on the fact that it's a YC company.
What I'm saying is that 80+ companies a batch raising at high vals is unsustainable.
If you don't think it's the fault of YC then don't write things that suggest YC "demands" that each (aka all) of their companies raise at $10m. This is a hyperbolic talk that's not grounded at all in reality and unfairly hurts YC's reputation.
Additionally, unless can read the minds of all these investors, you have no right in using the word "blindly" either. Are you saying that a huge number of otherwise really smart people are somehow being "tricked" into investing in YC companies just because of the brand?
Are you willing to give a call to all your investor friends who have YC companies in their portfolio and tell them they have just "blindly" overpaid for that company.
Jason, seems you've taken this personally. I apologize if I offended you or other YC companies in any way. That was not the intention, but may be picked up from the post.
I'm not saying that every investor that invested in YC companies did so blindly, I'm saying that it's not normal that every startup that comes out of YC has these high valuations, and that is unsustainable for the ecosystem.
Often times investor demand picks up based on the brand and that drives up the valuation, while some other really awesome companies don't get the deserved attention just because they don't have the brand. Those could be big winners and are also cheaper. I'm not saying that investors that invest in YC cos are tricked and that they're not smart. They try to lower their risk basing on the fact that PG vetted and formed those companies, which is completely understandable.
Again, sorry if you were offended. Would love to debate more if you want, I'm pretty easy to get a hold of.
I'm not offended or really looking to debate. Since you posted this on Hacker News, I wanted readers to know about the article's inaccuracies about YC's stance on valuations and the hyperbole of your statements regarding why investors choose YC companies. Your comments here are much more reasonable than the actual post, which unfortunately still contains the issues I wrote about initially.
Being at a startup in 2001 when funds went tragically south right after 9/11, there is no way the current market is even close to this.
Things were BAD. Unless you had a hint of profitability and located in the valley, it was almost impossible to get funds. Investors literally said they weren't going to invest for at least 6 months and see how the economy fairs (and it didn't fair well). Everyone was gun shy because they had lost a ton of money on insane valuations already, so even legitimate businesses were getting overlooked.
Really, the (first) tech bubble pop set the entire industry back for probably close to a decade. I often wonder how many great ideas went unfunded and dissolved because investors were just too guarded.
Investors literally said they weren't going to invest for at least 6 months and see how the economy fairs (and it didn't fair well) ... so even legitimate businesses were getting overlooked.
Sounds like a golden time for a contra market investor.
Definitely. But, just like everyday people, investors can be sheep. The savvy see an opportunity, just like investing in stocks during a down market where you can actually get good value. Those looking for a free ride with big returns put there money elsewhere and that doesn't help anyone.
Subsidiary point in the post, but I strongly disagree with OP that YC has been diluting it's brand / average quality of companies by accepting more companies. Having seen the vast majority of YC companies, it's obvious that the average quality of companies in YC has only risen over the years. More companies are being accepted because more good companies are applying, not because YC has relaxed its standards. If anything, it's probably harder to get into YC now than it was before.
That can be true. I still think that many companies are smaller in ambition.
Even if the company quality continues to go up, my opinion (as I tried to write in the post) is that 80+ companies raising seed rounds almost at the same time, every semester, with very high valuations, are unsustainable for the ecosystem in the long run.
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[ 95.8 ms ] story [ 225 ms ] threadYC is for a very large portion of people an indicator of the health of the industry. Were YC to cease growing, or worse reverse its class size, dozens of articles would appear about how this means the "popping of the bubble".
Regardless whether thats the actual reason, it would have a detrimental effect on the startup world as a whole. I'm pretty sure PG is aware of this fact.
It occurs to me that part of the issue surrounding the controversy of bubble vs. no bubble may boil down to semantics. A "bubble", after all, is a fairly arbitrary construct. Whether or not we are approaching the peak of a J or S-curve may be subject to debate - but there is no doubt we are approaching a temporary peak.
Funding will begin to dry up as general perception sours vis a vis tech in general and Internet startups specifically. A fair amount of publicity surrounding the Facebook IPO was directed at monetization (or lack thereof). Frankly, this criticism is legitimate. The widespread lack of sustainable business models among Internet ventures should be a source of concern to investors. Expecting "value" to simply materialize serendipitously is wishful thinking at best - and at worst, the telltale sign of a bubble.
I think OP hit the nail. I'm no expert or angel investor. But availability of capital is not a problem. May be the market for uncapped notes and massive seed rounds has stabilized.
I see these types of comments all the time from people who did not go through Y Combinator. They are incredibly frustrating because anyone who has done YC knows that the partners constantly hammer home the message that founders should NOT optimize for valuation but instead look for great investors who really understand the market and will add value to your company in the long term.
The fact that many YC companies do raise at high valuations is a function of investor interest, not because they are being driven to do so with a stick by YC.
What I'm saying is that 80+ companies a batch raising at high vals is unsustainable.
Additionally, unless can read the minds of all these investors, you have no right in using the word "blindly" either. Are you saying that a huge number of otherwise really smart people are somehow being "tricked" into investing in YC companies just because of the brand?
Are you willing to give a call to all your investor friends who have YC companies in their portfolio and tell them they have just "blindly" overpaid for that company.
I'm not saying that every investor that invested in YC companies did so blindly, I'm saying that it's not normal that every startup that comes out of YC has these high valuations, and that is unsustainable for the ecosystem.
Often times investor demand picks up based on the brand and that drives up the valuation, while some other really awesome companies don't get the deserved attention just because they don't have the brand. Those could be big winners and are also cheaper. I'm not saying that investors that invest in YC cos are tricked and that they're not smart. They try to lower their risk basing on the fact that PG vetted and formed those companies, which is completely understandable.
Again, sorry if you were offended. Would love to debate more if you want, I'm pretty easy to get a hold of.
Things were BAD. Unless you had a hint of profitability and located in the valley, it was almost impossible to get funds. Investors literally said they weren't going to invest for at least 6 months and see how the economy fairs (and it didn't fair well). Everyone was gun shy because they had lost a ton of money on insane valuations already, so even legitimate businesses were getting overlooked.
Really, the (first) tech bubble pop set the entire industry back for probably close to a decade. I often wonder how many great ideas went unfunded and dissolved because investors were just too guarded.
Sounds like a golden time for a contra market investor.
Even if the company quality continues to go up, my opinion (as I tried to write in the post) is that 80+ companies raising seed rounds almost at the same time, every semester, with very high valuations, are unsustainable for the ecosystem in the long run.