I Don’t Understand Y Combinator Hate

http://www.techcrunch.com/2008/08/18/i-dont-understand-y-combinator-hate/

by gaz • 18 years ago

68 38 18 years ago

demandred• 18 years ago

so the answer is to write ... an article whining about the whiners???

danielha• 18 years ago

He isn't whining in the least bit. I think it's a perfectly fine Sunday night article, given how apparent it is to anyone reading TC's article comments how many people are especially critical of YC companies and YC itself.

It's true that YC companies receive more exposure than similarly-early non-YC companies. Well, that's one of the benefits. With YC acting as some sort of filter for minimum quality, blogs like TechCrunch know there's at least something worth looking at.

Herring• 18 years ago

So your solution is to comment on the article thus driving it up the page?

oh wait...

rgrieselhuber• 18 years ago

I don't get it either. It's a good thing to see a new model of investment in small startups and the education / training that apparently comes along with YC investment is practically unheard of (in my experience, anyway) in other VC firms.

Most of the criticism that I've seen seems to come from, well, critics, and not people who actually build stuff so that may have something to do with it.

cperciva2• 18 years ago

I think part of the reason for the Y Combinator hate is that the valuations YC offers are so low and it's not clear whether YC significantly helps the teams it funds. Wait, don't throw those tomatoes, let me explain!

The valuation YC offers -- a median of 250k for a two-person team -- would be absurdly high if it was being offered to any team of two recent college graduates; but YC doesn't make offers to just any team. YC only picks the best teams (about 5% of applicants if I'm remembering the statistics correctly)... and it's not unreasonable to expect that the top 5% of teams are worth far more than average.

Similarly, the chance of a YC-funded team succeeding (for whatever definition of "success" you choose) is much higher than the chance of a non-YC-funded team succeeding -- but this doesn't necessarily imply that YC is helping the companies it funds. It might just be that YC is very good at picking winning teams.

This isn't to say that YC is making all of its money by taking advantage of the people it funds, though: Simply by selecting those top 5% of teams, YC provides a very valuable service -- distinguishing teams which have a 50%+ chance of success from those with a 5% chance of success, and encouraging the teams with a 50%+ chance, is certainly economically useful; and the profit which accrues to YC as a result of that is not qualitatively different from the profits which any other smart investor makes by figuring out that a stock is undervalued -- in both cases, the investor is doing work to increase the efficiency of a market.

The economist in me wishes that we could experimentally separate the selection process from the 3 month YC program in order to determine their relative importance -- but somehow I doubt the YC crew would be interested in running an experiment where they either (a) pick good teams and only fund half of them (in order to determine whether the teams they identified as good were likely to succeed with or without YC), or (b) fund a "good cohort" and a "bad cohort" of applicants simultaneously (in order to determine if being funded by YC is enough to make anybody successful).

(In addition to the difficulty of running such an experiment, the YC crew might not want to have this question answered: They probably don't want to be confronted by teams saying "well, were interested in being funded at a valuation of $200k -- but knowing that YC thinks that we're a strong team has resulted in us increasing our self-valuation to $800k".)

But in the absence of experimental data, the question remains open, with all the attached room for anti-capitalist hatred: Does YC help the teams it funds... or are they just shrewd investors?

cperciva2• 18 years ago

Ouch. I really shouldn't have typed that much. I'm supposed to be resting my wrists.

Pre-emptive note to anyone who replies to my comment above: I'm not likely to respond to anything you say, but please assume that I'm not being an idiot.

/me wanders off to find some ice for his wrists...

pg2• 18 years ago

I think the explanation usually is more emotional and less analytical. People start to dislike anything that gets a lot of publicity. Everyone is susceptible to this to some degree, but some people more than others.

As for the question of whether we help people or not, I don't think many people who know what goes on inside YC would argue that we didn't improve startups' prospects by 6.4%, which is what we have to do to earn our keep. Considering the amount of effort we put into it, we'd have to be pretty ineffective not to manage that.

volida2• 18 years ago

"People start to dislike anything"

In the case when journalists are those who "dislike" and not people, someone could think that their motives to write something bad are not so innocent, if not directed by someone who pays to create a bad impression.

Although to be honest the majority of press I see about YC is really positive.

shafqat• 18 years ago

PG - I think no matter how well or how often you try to explain this point, the real haters don't understand the derivation nor the impact of the 6.4% figure. If they did, it would be a moot point!

robg• 18 years ago

Do you think these folks understand the math behind improve startups' prospects by 6.4%? It seems the emotional reaction is usually driven by a basic misunderstanding - "$5k per founder for 10%!? OMG!" even when they're wrong on the basic facts. MA does a nice job clearing up the valuation "paradox" but it seems it's worth repeating over and over again, esp for newbies to investment equity who encounter YC and shudder at the "terms".

EDIT: Just reading the TC comments, it amazes me how often this basic misunderstanding comes up, even after an article that explains it.

vitaminj• 18 years ago

"... with all the attached room for anti-capitalist hatred..."

In some ways, YC represents the purest form of the capitalist ideal - people risking their OWN money and resources to help develop a productive enterprise, and then reaping the rewards if it's successful (presumably the YC founders are risking their own money and their time with the startups they fund...).

I think most people reserve their anti-capitalist vitriol for things like hedge funds, where the managers of said funds can get insanely rich taking risks with other people's money.

I find the YC model very hard to hate.

13ren4• 18 years ago

There are some ways to separate the selection process vs. YC input:

The startups offered YC-funding, who declined it... how did those guys work out, in comparison? (although the offer itself is an important YC input).

Also, the YC guide says they they decline funding to many very good applicants (because YC has limited places and they go to the very very good applicants). It sounds like these guys would have been selected, in some other batch... YC knows who the "almost selected" guys were and could do a comparison.

volida2• 18 years ago

when two companies (zenter, omnisio) get bought off Google, another one (reddit) got an acquisition offer from them, others get funding from Sequoia, others from Atomico etc I think the role of YC it's pretty obvious and enviable from competitors, and although the statistical increment for success due to their aid may be 6% I think for better ideas/execution is really a lot higher.

none the less it's obvious by now that YC at least acts as a proven talent filter which I think is highly desirable by VCs

maryrosecook• 18 years ago

The test you propose isn't entirely valid. If the "winning" teams who don't get funded by YC are told they "won", that would affect their control status because they would get a big boost in confidence. If they aren't told, again their confidence would get affected, but this time negatively.

rgr• 18 years ago

I'm a fan of YC and I don't need convincing that YC provides great value to a young startup -- more than the 6% equity it takes. However, I just don't believe that PG & co are capable of separating the potential winners from the losers based on a short application and a 10 minute interview. So many factors affect the success of a startup and I don't think that anyone can have such predictive abilities based on so little input. Maybe YC knows is good at filtering out the lowest 40% or so, but between the teams that have some viability I believe it's simply impossible to call which will succeed and which won't using YC's selection method.

The only way to measure YC's ability in picking winners is to to have PG & co rate a bunch of non-YC founding teams at the early stage of their startups, wait a few years, and see how well their predictions held up against more or less random predictions. The experiment must involve non YC startups is that YC enhances their startups' chances of success, which can create the likely false impression that YC excels at picking successful teams rather than at guiding the teams it happens to pick to success.

pwk• 18 years ago

"I just don't believe that PG & co are capable of separating the potential winners from the losers based on a short application and a 10 minute interview"

In poker, if a pot is very large, calling a bet (ie investing some money) can have positive expectation even if the probability of winning the pot is quite low.

Similarly, YC's filtering ability only needs to be "good enough" to generate positive expectation, which can happen even if their predictive ability for selecting winners is quite low. Picking winners at a slightly better rate than the competition gives them an edge, even if they're not actually good at it. ie being "barely competent" at something extraordinarily difficult can often be enough to achieve considerable success.

Of course, I don't see any reason to believe that they aren't actually quite good at choosing winning startup teams -- it would certainly be interesting to be able to measure that. It will also be interesting to see if their hit-rate goes up over time.

mattmaroon2• 18 years ago

"but YC doesn't make offers to just any team. YC only picks the best teams (about 5% of applicants if I'm remembering the statistics correctly)...

distinguishing teams which have a 50%+ chance of success from those with a 5% chance of success"

Perhaps we should give them a few more years of operation before we assume those to be facts. So far the vast majority of funded teams haven't resolved one way or the other, which is actually a pretty good sign, but I think I'd still bet the under on 50%.

colortone• 18 years ago

the original post on Sarah Lacy's blog is atrocious, I can see why MA responded...

raganwald• 18 years ago

If I may agree with your sentiment, while disagreeing with your conclusion:

the original post on Sarah Lacy's blog is atrocious, I can't see why MA bothered to respond

It seems like publishing link bait never fails to garner an undue amount of attention.

13ren4• 18 years ago

Most YC companies seem not to be technically revolutionary, but applying existing technology to solve real problems (not a criticism, an observation - after all, there is great opportunity there for making money).

- Are there any technology-based startups funded by YC?

- A proxy could be patent applications: how many YC startups have filed for patents?

emmett2• 18 years ago

YC startups are often technology companies; I'd argue Justin.tv, where we wrote our own video server software from scratch, would count. The ones who file patents tend to be slow burn, and are still under the radar.

13ren4• 18 years ago

Thanks for explaining the slow-burn/patent correlation.

I'm looking at Justin.tv, and I've never seen smooth live video online before. It's consistently smooth (though minor freeze-frames every so often). Your implementation is a better method for live video.

Is this because your implementation is coded better - tighter, more efficient, cleverer - or is there a fundamental new insight behind it, that makes it faster?

dcurtis• 18 years ago

"Remember, these startups are usually 2-3 people with little more than an idea. Generally speaking there are few other investors who will be willing to invest in them until they have some sort of code written or an initial product out the door."

That's not exactly true. I think majority of the startups were launched or had extensive prototypes before they joined YC.

This makes sense, because it filters out the people who are too lazy or not motivated enough to build an amazing product. (But it also filters out very smart and motivated people with awesome ideas who are too busy, as many smart people are.)

In any case, the risk that YC takes isn't quite as big as investing in two kids with a pipe dream. All of the founders seem to be carefully selected for their propensity towards success.

mattmaroon2• 18 years ago

That seems to only be true of the last batch or two.

ojbyrne• 18 years ago

Sarah Lacy writes fantasy, not journalism. Ah, I suppose I should say more. For the technical co-founder (the person who writes the code) YC offers the opportunity to complete avoid the "professionals" that are brought in to run things (often into the ground). Sarah makes her living writing PR fluff to support those same people. YC is a direct threat to her source of income, and thus needs to be attacked.

bitdiddle• 18 years ago

With all due respect to the talents of the best and brightest college grads, 250K, or 125K per head seems about right when compared to the starting salary those grads could get at a MS or Google. YC puts up a bit of funding and takes a small cut.

More importantly, I think is that it's giving young programmers a big leg up in understanding how the VC game is played and an opportunity to build a software career that is very independent. For really good programmers I suppose there is always demand, always a place to work and more or less define your own path. But if you sell your company for 15 mill, you get a nice piece of what I like to call FU money.

I've sort of followed this YC project from the beginning as an outsider and my sense is that the folks behind YC are putting back some of their good fortunes. It's a cool way to spend some of their money and possibly grow it even more.

All the negative press and trash talk about burned out programmers, etc. looks to me like a good measure of success. The others are looking at the backs of your sneakers

nir2• 18 years ago

Note that Lacy's original post contains links to and descriptions of current YCombinator companies.

TechCrunch also usually covers every YC project as it launches.

This is the main value of YCombinator: It provides guidance and media exposure that would otherwise take years to achieve, if at all - how many people can say that every project they do will get a story on TechCrunch?

Judging it as a VC company is misguided. The money involved is less than a year's tuition in many US colleges, and the recipients are mostly young enough to just live with their parents for a few months, and not need it anyway. The funding is minor, but the other parts - startups pay, a lot, to get this level of publicity and consulting.

I'd go with the "record label" metaphor instead of Lacy's American Idol one (I'm older ;)): Find talent, give them some producer and studio hours to record a single, then use your connections with DJs to get it some airplay hope it will catch on. Watch "24 Hour Party People" for more details :)

The one piece missing here, though, is the fact that ultimately the public (pre-mp3) was paying money for the singles. YC's audience is big companies with money to spend - it may prove less sustainable in the long run.

pchristensen• 18 years ago

Why would big companies with money to spend be a less sustainable customer than music single consumers?

nir2• 18 years ago

Because there are less of them, and the value they get out of buying companies - especially companies who don't earn money - isn't completely clear. (I'm not saying there isn't any, just that it may be harder to explain to stock owners in a down market)

webwright• 18 years ago

"This [free press coverage] is the main value of YCombinator: It provides guidance and media exposure that would otherwise take years to achieve, if at all".

No no no. It truly is not-- it blows me away how often people say this. Look at the traffic graphs of most YC companies and they have a healthy spike around Demo Day and then nearly flatline (and start the rough/long trudge up the hill).

If I were going to put things at the top of the list of values YC provides, I'd say it's:

- the (very) public declaration of intent-- it becomes DAMN awkward to quit once you're a YC company.

- the investor relationships, introductions, and acceleration. It's nearly impossible to pitch 150+ investors at once without YC. That setting results in faster investment oftentimes (but not fast enough).

- YC guidance. They've shepherded 100+ startups thru this now-- they have more data and better instincts about the "right" thing to do than most advisors... And invest way more time.

- The peer relationships. Very few early stage questions can't be (very effectively) answered by the collective wisdom of YC founders (who have all gone thru the same issues).

chaostheory• 18 years ago

I guess I've been living under a rock lately... I've only seen one article so far

jnovek• 18 years ago

I think much of what we see here is the media engaging in the age-old sensationalist tradition of turning on its darlings.

However, I think there is some legitimate discussion going on in these anti-YC articles.

For example, it is an interesting and open question whether it's wise or healthy for the market to develop so-called "built to flip" companies. While YC isn't exclusively in the built-to-flip business, it happens to be a vocal advocate for this model where there once was none.

Generally, PG (chief ideologist for YC) is interested in doing disruptive things in the realm of startup funding. Disruptive people tend to often be both spectacularly right and spectacularly wrong -- PG no exception -- and I think that traits make a person more polarizing.

I don't think it's necessarily a knee-jerk to dislike a company because you disagree with it's chief ideologist. Look at Apple and Steve Jobs -- it seems to me that everything about the guy permeates every nook of the company. If you don't like him, you're probably not going to love Apple products.

pg2• 18 years ago

BTW, if anyone is wondering why Arrington is making a big deal over a moderately negative article, it's been rewritten since it was originally posted and most of the more egregious mistakes removed.

gruseom• 18 years ago

I was wondering that a little, since the article (by the time I got to it) didn't seem particularly hateful. But it didn't seem very insightful either. It's pleasing (and a healthy sign) that it hasn't gotten any traction on News YC.

j2d2• 18 years ago

Honestly, I didn't know there was any Y Combinator hate... I suspect that particular attitude might be local to the start-up center of the US where Y Combinator is direct competition for the other residents.

I'd like to say that I have learned a LOT from reading the contents of this site. I'd imagine any YC hatred is a sign that YC is actually do it's job well!

I Don’t Understand Y Combinator Hate

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