Why you shouldn't join Y Combinator

https://newsletter.smallbets.co/p/why-you-shouldnt-join-y-combinator

by georgehill • 3 years ago

632 320 3 years ago

newsletter.smallbets.co

paulsutter2• 3 years ago

If you don't want to raise venture funding, you shouldn't join YC. Venture funding is rocket fuel, and if you're not building a rocket you really don't want rocket fuel.

thatwasunusual• 3 years ago

Venture funding is rocket fuel, and if you're not building a rocket you really don't want rocket fuel.

Fantastic. :D

brigadier1325• 3 years ago

The point of the article is that it's not rational for individual startup founders to take rocket fuel at company conception which is what YC provides.

paulsutter2• 3 years ago

Startup means rocket. Very few businesses are startups, and very few business founders have use for YC

Definition from Paul Graham essay Startup = Growth:

http://www.paulgraham.com/growth.html

mhitza• 3 years ago

Many of the YC projects I've seen posted on HN don't look like rockets. Or maybe I'm of the false impression that developer tooling, or products that bring iterative improvements cannot be rockets.

malfist• 3 years ago

Are you confusing Show HN projects with companies accepted into the Y Combinator startup incubator? They're two very separate classifications

jnovek2• 3 years ago

YC focuses on product-market fit so it's not uncommon to see a YC company start as something that just looks like a single feature. The product objective of doing this is to gather some early user feedback so you can grow and refine that feature into an entire business. Until that happens you are flying blind.

wslh2• 3 years ago

I think we often miss the marketing part and take a lot of focus in the technology stack. A good part of the need for funding is linked to the marketing part. You can make hundreds of technology copycats of existing unicorns but surely cannot market themselves as the did.

stuartjohnson12• 3 years ago

Iterative improvements can definitely be rockets.

Algolia is just a search provider. Supabase is just Firebase with better UX. Figma is just a drag and drop design tool.

0_____03• 3 years ago

Rocket fuel is very often highly refined kerosene. You could use it to run a jet engine or a diesel truck with small modifications.

* I will be entering this reply into "most HN comment" contest running at the end of this year

marginalia_nu3• 3 years ago

This is ignoring the whole tanker full of liquid oxygen part of the equation.

kortex• 3 years ago

Maybe a better analogy is nitromethane. If you put it in your honda civic, you will blow up your engine. You put it in a top-fuel dragster which cranks out thousands of hp and needs an engine rebuild after each race.

gcanyon• 3 years ago

Depending on who you ask, RP-1 costs between 20 and 80 times what diesel goes for. Others have tortured this analogy enough, but you certainly don't want to fuel your non-rocket startup with funding that costs far too much, which is conceptually adjacent to the point of the original article.

candiddevmike• 3 years ago

I keep seeing this "cute" line repeated, how do you find out if you're building a rocket or not...?

wcarss• 3 years ago

It's just what you want. Continuing to misuse the metaphor:

Do you want to try to go to space/the moon or whatever, for reasons like the personal glory and (mild) fame, the satisfaction of building the thing, the importance of being the person at the center of it all, the joy of changing an industry, etc?

That's the rocket: big big plans and you're kinda in it for the work.

Or, do you want a plane to a nice beach where you can relax? Because the fastest route to get enough money to relax is probably not via building a rocket these days.

Some caveats here: the successful (read: very lucky and very good) rocket builders do get the opportunity to relax, and often on a different level than the people who saved up and bought airplane tickets. But the 'great rocket builders' famously rarely "want to relax". And the vast vast majority of rocket builders don't actually directly succeed, but many do parlay it into savings for that plane ticket. But overall it's much easier for a random person to save up for a plane ticket than build a rocket.

fourseventy2• 3 years ago

Are you taking a huge swing at a huge market looking to IPO? If so it's a rocket. If you are building a niche product looking to scale to a few hundred thousand or single digit millions in revenue, its not.

dgudkov• 3 years ago

This is not a very good analogy because it assumes there is only one option if you build a rocket.

A founder should get funding through selling equity (to VCs) if the risks are high. If the risks are low, the founder get funding through debt, even if you're "building a rocket". Or bootstrap, if possible.

What every VC dreams is to get equity in a low-risk venture. Because the return is high, but the risk is low. That's why there is so much marketing that convinces founders to pay with equity.

albntomat04• 3 years ago

The article discusses known issues being a startup founder, such as the low odds of success, as if they’re unique to YC, followed by a pitch for his own product.

brigadier1325• 3 years ago

You missed the point. Using the analogy from the article, if you take YC money (or any VC money) you need to dig until you find a massive pile of treasure, if you dig and find a small pile of treasure you have to ignore it and start over because VCs are not looking for small piles of treasure, they only care about massive ones. Ignore the fact that the small pile of treasure could actually result in a very good life for a small group of people in a small company.

lacrimacida• 3 years ago

Can they take the pile and start another company?

albntomat04• 3 years ago

I considered that as an issue with being a vc funded startup founder. I could have made that part slightly more clear.

Once again, a much broader issue than just YC! The author could have written the exact same article, just with VC instead of YC.

steveBK1235• 3 years ago

There is a bit of a point here re: maximizing expected values vs individuals only getting one lifetime to walk finite iterations of the path.

So one path you take the startup route where you dedicate 10 years of your life going deep into a single idea in hopes you are one of the 1% to come up with a $1B idea. That dice has a $10M EV. (actually exaggerated high bc you are unlikely to be a sole founder, unlikely to monetize the full $1B of a unicorn yourself, and 1% success rate is for YC cohorts.. which you have an X% chance of getting into to start with!).

On the other hand you can focus on T-shaped skills in software engineering & domain expertise, possibly some entrepreneurship.. you course correct that career year to year in a 30 year career, possibly changing jobs every 2/3/5 years as appropriate. Let's exaggerate and say you have a 25% chance of making $500K. That dice has an EV of $125K.. peanuts!

The $10M EV dice you get maybe 2-3 rolls in a lifetime versus ~40 rolls annually at the $125K EV dice option. This still sounds like the first EV is better - $25M vs $5M!

However 97% of EV=$10M dice rollers get $0 over there entire life. Hypothetically every EV=$125K dice roller will win 7.5 times in their life because they get so many rolls.

It seems to me the fetishizing of youth and 20 something founders whereas the optimal path for an INDIVIDUAL might be to roll the boring $125k dice for a while, building up savings and experience.. and then try a few rolls of the $10M dice later in life when you may actually have realer ideas, a professional network, etc.

renegade-otter• 3 years ago

This is how bootstrappers market stuff. If we have something interesting to say, we write a blog post and plug our own product, and the blog post is usually not even related to a product. That Joel Spolsky or DHH were writing their posts out of boredom, you think?

People on HN, they first complain about paywalls and then about entrepreneurs mentioning their stuff.

This is not exactly a place full of selfless altruist types.

albntomat04• 3 years ago

Yes, and I’m free to criticize it for being a mediocre article with a clickbait headline.

DVassallo16• 3 years ago

This is how PG markets YC as well. Why do you think he wrote all those essays? :)

DVassallo16• 3 years ago

If I was pitching my product, maybe I would have put a link to it. Or maybe mentioned the name.

Do you think all of PG’s essays aren’t pitching you something?

albntomat04• 3 years ago

Direct from the article:

"BUT YOU JUST WANT TO SELL YOUR COURSE!!! Ahahaha, you caught me! It’s true. I do have something to sell you. I run a community for small-time entrepreneurs who are satisfied with reliably attainable mediocre success. The YC folks feel sorry for our joy with mediocrity while they’re out there changing the world. And we reciprocate the emotion.

So yes, I am promoting something that goes against everything YC stands for. But if you think YC is not also selling you something, I have a bridge to sell you. But maybe I’m being a bit too harsh. Because what is it that YC is selling you exactly?

Me, I charge you a one-time payment of $245, and you get access to my community, which includes live workshops, recorded classes, a group chat, and a few other things. It’s very clear what I’m doing. I ask for some money in exchange for access, and those who give me the money get access. Even my 6 year old kid understands it."

cj• 3 years ago

There’s a lot of different ways to build a business.

YC promotes one path of doing so (the VC funded path). If your incentives as a founder aligns with YC’s values and interests, then it can be a great value add.

But for every company that’s a fit for YC, there are a lot of companies that absolutely aren’t a good fit (e.g. if you’re planning on bootstrapping, you should steer clear of YC).

There’s no 1 right way to get a business off the ground.

sharemywin• 3 years ago

I think the point was just because your a "good fit" for YC doesn't mean the odds are with you. It's similar to the lotto moto. "you can win if you don't play".

ethanbond• 3 years ago

If this is news to you, you definitely shouldn’t be starting a VC backed company.

(“You” being the proverbial “you”)

HenryBemis• 3 years ago

So much to unpack, so I will not just not bother apart from one point that I keep to be discussing with many people who are stuck in a buzzword mode: "I run a community for small-time entrepreneurs who are satisfied with reliably attainable mediocre success".

The bakery around the corner from my house has been around for the past 20 years. It makes a bucketloads of money every day. The guy who runs it is in complaint-mode 24/7. BUT he still runs the place, he still NOT innovates, he still sells good, tasty, average, boring bread.

Perhaps Daniel wants that. Good for him. The same for the "community for small-time entrepreneurs". Good for them. But if someone has the next Dropbox-potential idea, you better hand out with this crew here, than that crew there. Because that crew there will settle for mediocre, while this crew here will aim higher.

TheCapeGreek• 3 years ago

I agree with you, but I also agree with Daniel. Content like this is IMO oriented to two audiences:

- Those who think of VC funding for a startup as the "default mode" and haven't considered a "slow burn"/lifestyle business/bootstrap/whatever alternative buzzword approach.

- Those who already agree with the indie hacker/no-VC style approach and Daniel's writing appeals to their confirmation bias. It's a feel-good piece for them.

braza2• 3 years ago

Those who already agree with the indie hacker/no-VC style approach and Daniel's writing appeals to their confirmation bias

Indeed.

Maybe old founders of YC can chime in but I do not think that someone that has that entrepreneurial spirit to have a start-up would gave up to a small-bet approach.

If we count all skills/perks/network of being in a YC program (seeing from the outside) it's a very hard sell to this folks.

There are several folks that at the same time could not take the BigCo. 9-5 could not take the solopreneurship/bootstrap as well.

Personally the idea of small-bets would not work for me due to the nature of my job (low-stress environment, high pay, a job that fits in my lifestyle and transitivity around countries with my set of skills) but I see the point on the approach.

runako2• 3 years ago

The same for the "community for small-time entrepreneurs". Good for them. But if someone has the next Dropbox-potential idea, you better hand out with this crew here, than that crew there. Because that crew there will settle for mediocre, while this crew here will aim higher.

There's a third way. Don't take VC, but hustle and focus on excellence and growth.

If you need capital, realize there are other non-dilutive sources. Or that perhaps you can achieve similar results with far less money than a speedy VC-backed company.

Think: what if I were not <demographics statistically favored by VCs> and did not have access to VC? How would I grow this business?

Think: how would the Mailchimp founders ($12 B exit), or the SAS founders, or the Epic Systems founder have solved this problem? Think: am I even aware that many (most?) multi-millionaire tech founders did not raise VC?

Look to non-tech industries for inspiration; VC typically doesn't fund high-growth companies, like Spanx, that are not tech companies. Then get big anyway, on your own terms.

The dichotomy between VC or small-time is false.

djbusby• 3 years ago

I don't think this person understands what/why pivot happens.

I also want entrepreneurs to build smaller, self funded businesses but bagging on the VC isn't the way to demonstrate that.

Both paths (and others) can exist at the same time.

The customer, the entrepreneur and (if you want them) investors need to be aligned. Some want huge, some want less huge.

Neither path guarantee success. Starting a business is more like a guaranteed failure (95% or something)

greatpostman2• 3 years ago

If you build a business that makes 500k a year, which can be done with 30-50 customers for saas selling for 10-15k, you can sell the business and retire. Even at 250k a year, you have an asset that could change your financial life for good.

If you raise VC money, the above scenarios are considered a failure. You will have to shutdown/get acquired for nothing. You have to shoot for the moon to get massive ARR, that very very few companies ever hit.

It’s really about the level of success needed to have a financial windfall, and bootstrapping is way lower for that.

gavinhoward23• 3 years ago

I'm a business owner currently doing what the parent says to do, and the parent is exactly correct.

I want a business that can support my wife and me; 500k is my target, and it would be a great situation for us because I would have a great work/life balance (based on how much time I spend right now).

But if I took money, the investors would clamor for more, and the stress would probably kill me.

ejlxsh• 3 years ago

What are you doing to try hit that 500k target? Running a SaaS, consulting, etc?

bko3• 3 years ago

Good luck, but I don't know many business owners who have a great work/life balance. I don't think it ever gets easier really. It's like writing software. It's never "complete". 500k revenue doesn't leave a lot of room for outsourcing work

DanielHB• 3 years ago

You also took a bigger risk, either in your own money to support your product to profitability or in missed opportunity from a steady pay check (although the latter is also true to varying extents in VC backed companies)

Although I am curious _how much_ risk did you take, could you elaborate?

gjmacd2• 3 years ago

This is otherwise known as a "lifestyle business". It's the north star for most people and should be but it's not easy.

If you build a $500K a year SaaS business and have very little overhead, you can probably take $200K of that revenue as income and have a good work-life balance that's very comfortable. I know, I was able to do this without taking VC and bootstrapping 100% on credit cards and my own cash. However, there's an inflection point that happens with this sort of business IF you're not careful -- or it becomes more successful / or becomes a death spiral.

If we're speaking of a true SaaS model. It can work. But there's "gotchas".

I did well with this and but eventually sold the business for about 3X and went back to work for another company. But for about 7 solid years as we gained customers and got to that $500-700K, it became very hard to keep it a "balance" as with every 10 customers we added, the more of my time was spent at work and not as much at home. As we added customers, my "balance" was diminished, so I had to hire people, which then cut my income considerably. In the end, I realized it was better to sell the business and take the profit I could to pay off my cards and get something out of it before it killed me. I used to tell people who used to say, "wow, must be great having a business like that!" I used to tell them, "Yes, it's amazing 100 hour work week!".

It became more of a "job" and less of a "lifestyle" as the customer count increased. This could have been anecdotal to my business and product, but I have to believe that it won't matter as that size annual revenue demands a bit more of a sophisticated product type. Unless you've hit lightning in a bottle and have a very "light work" product that you're selling and have cracked the code of hitting $500K and having to do barely anything, more power to you... But I don't think there's a lot of those out there and a lot to be created.

I just find that with most SaaS businesses I've been involved with and built, the product is solving business problems that aren't usually a "set it and forget it" kind of product to meet those requirements and just sit back and collect money... I find that most SaaS businesses in that range of revenue are complicated and warrant a higher degree of overhead.

The real challenge is, "little overhead" to be able to create an income and survive. Support, service and development is expensive and requires more than one person. Good support is important to retain your customers to keep that $500K coming in, and that really is the problem because having just 10-20 customers paying you $500K is far riskier than having 1000 customers paying you $500K.

Churn is dangerous in SaaS products that are high cost with smaller customer bases. One or two customers leaving could give you a pretty good dent in your revenue, thus causing you to cut income. So the trick is mitigating churn by having a product that's priced at a point that you can gain a larger customer base so that churn isn't going to radically impact your revenue.

But both strategies are going to require support and service and that costs quite a bit of money and can gravely cut your income that has to be passed to engineers/developers who can improve and maintain the product. I had to hire really good support people and some engineers because as we grew that revenue, the product became more complicated and support and service was more demanding (I had about 400 customers). I eventually had to cut my income to pass that to people who could take on more because I couldn't do everything.

So there is a law of diminishing returns with this sort of business strategy.

It can work, but you have to really strategize, have a product strategy that can generate a good sized customer base but requires very little maintenance, development, support and service.

But I call this the "holy grail" SaaS business -- they simply don't exist -- or if they do, they are rare birds. Just be prepared to understand the issues if you do have some success and are lucky enough to grown a SaaS business to $500K+

Just don't be surprised when you feel like you've succeeded but feel like you're failing.

moneywoes6• 3 years ago

looks like you run a consulting practice, is that correct?

if so how do you scale your arr? is it retainers

further how did you get your first clients?

edgyquant4• 3 years ago

I see this said here all the time, but why are obligated to do so? If VCs don’t own a majority stake what authority do they have to make you chase such huge returns at the cost of a stable and profitable business?

mantas• 3 years ago

VCs won’t invest if they know this is your plan? If you lie to them and keep going for 500k, they can sue you for scamming (or whatever legal term is).

brigadier1325• 3 years ago

edit: my comment on SAFEs was wrong

raincole2• 3 years ago

It's definitely possible. Example: gumroad. I don't know the whole story, but basically at one point they couldn't raise more VC money, so they scaled down (read: fire people) and made it at least moderately profitable.

But it's exception, not the norm.

paulgb2• 3 years ago

what authority do they have

Board seats, which are often a condition of investment at series A and later rounds.

indymike2• 3 years ago

If VCs don’t own a majority stake what authority do they have to make you chase such huge returns at the cost of a stable and profitable business?

Disputes with investors about the direction of the company are rare. Disputes about how exactly to aim that direction happen often. In my own experience, VCs and large investors have this leverage:

* Future investment. A major investor pulling back or not participating in the next round usually will result in worse terms, lower valuations or, the round not happening.

* Legal issues. Investments come with terms and conditions, and they are rarely, here's $5m, do what you want.

* Restructuring. From time to time, you need to have investors be on board with restructuring debt or the company. If you are at odds with a major investor, they are a whole lot less likely to be helpful.

* "We'll make it hard for you" Everything from investing in competitors, to introducing key people to job opportunities to guiding customers elsewhere. Yes they have a fiduciary duty, but when they think that duty requires management to change direction, things can get ugly.

Finally, investors talk to each other, and you piss one off, and they will poison the well with many others.

Waterluvian• 3 years ago

This general concept is what I wish I’d see more of: it’s okay not to grow.

When you’re a public or funded company you have no choice. You must grow until you pop. But if you’re some small private org, you can carve out a very comfortable niche.

brentm• 3 years ago

I'd argue that if you're running a internet based company you do need some growth regardless of what you've raised or not raised. Someone is always trying to cut into your business and if you sit back and ignore everything growth related you will eventually be in a worse position.(Besides competition you do also have other things to consider like every year employees need raises, etc).

What you really gain by not raising capital is freedom to pursue a less risky operating approach and a lower bar for a positive outcome.

zitterbewegung• 3 years ago

For an anecdotal story Bingo Card Creator was a lifestyle business having a large amount of customers and a stable cash flow. Then he moved forward an SEO consultant like business model which was rather successful after making Bingo Card Creator and eventually tried to do a startup with Y combinator trying to gamify hiring but then failing (and IIRC he downsized his lifestyle during the startup) but I think he moved forward and is doing well.

dpeck• 3 years ago

By most measures https://news.ycombinator.com/user?id=patio11 seems to be doing alright. But given the trajectory I’m not sure the anecdote holds.

mgaunard6• 3 years ago

You can get 500k as a normal employee. Why bother with the startup risk to make that amount?

It's just glorified contracting at this point.

3m• 3 years ago

If you own a business with $500k profit then you can sell it for a multiple of that.

You also have the option to automate yourself out of a job or hire someone to reduce the time you need to spend on the business.

As an employee you trade time for money with no ability to sell or reduce your workload.

fourseventy2• 3 years ago

Getting to $500k comp as an employee isn't exactly a walk in the park either.

wg02• 3 years ago

You can't leave your desk whenever you want. And when you leave your desk, you've always this social/peer pressure to ensure there aren't any complaints about you being frequently away or for longer, for example.

That's not freedom. What's not freedom isn't richness. The attached price tag doesn't matter.

thomasjudge• 3 years ago

This is not that easy outside the FAANG bubble

greatpostman2• 3 years ago

5 million exit in one year is much different than 500k yearly

bowsamic• 3 years ago

You are living in a bubble

herval• 3 years ago

this account is 100% bad takes, I wonder if it's some sort of chatbot?

dahart2• 3 years ago

Why bother with the startup risk to make that amount?

One reason that hasn’t been mentioned yet as of this comment: ownership. Your startup is yours. You have the vision, you run the business, and there’s nobody to blame for anything but yourself.

When I was doing game development I got frustrated with the yearly post-mortem where we’d identify what things didn’t go well and what we could do to improve, only to make the same mistakes the next year. The company was relying on ambitious and hard-working people like me to keep fixing the same mistakes and avoid having to do deep planning and make hard decisions early.

With my own company, I still made mistakes but they were my mistakes to make and fix, and I never had to pull overtime to fix someone else’s mistake. I was far happier making a lot less money. (Up to a point… you can’t live on nothing. :P)

There are other benefits like doing both customer relations and engineering, which can make you better at both, and the slim potential for a large payout of FU money, among other things. Running a business isn’t for everyone, but wanting to and being willing to take all the responsibility is one thing you can’t get as a normal employee.

jejeyyy772• 3 years ago

Tax vehicles is one big advantage. Your take home as an employee on $500K is only $250K a year, whereas you can defer income in a business and pay 20% tax.

moneywoes6• 3 years ago

less risk of layoffs, diversification

layer8• 3 years ago

Please don’t sell the business, at least not to a larger company. That’s how everything is sliding into enshittification.

greenie_beans2• 3 years ago

"enshittification" is my least favorite recent word. i like the concept but it's a terrible word. very cringe, it's got middle schooler trying to cuss vibes

esafak6• 3 years ago

That is a big incentive the build the company in the first place. If you eliminate that option you would simply have fewer startups.

krashidov• 3 years ago

These are all good points. To play Devil's advocate - the argument against this is that when you raise money you can sometimes take money off the table. Meaning you sell of a portion of your ownership for cash to you personally and not the business.

This is not always in the best interests of the company, because it doesn't incentivize the founder to stay as much. But it can be healthy for the founder's psyche to not have to have all of their net worth tied up in illiquid startup stock.

Also, I don't think this is as frequent as the crazy days of 2021. Where you could retire off of a Series A with not much revenue

ssharp• 3 years ago

Not all problems can be solved by a solo founder bootstrapping a business. If you're driven by the problem you're trying to solve for, you should take the path that most likely will result in you actually solving the problem. For many types of startups, that requires VC.

flandish• 3 years ago

This is just bog standard capitalist formula.

Doing it yourself puts you in control of the expectations.

Taking money from a firm is really just a camouflaged “employer:employee” relationship and the desire for larger returns, “more”, will always trend toward a disregard and exploitation of the humans doing the actual work.

dokein2• 3 years ago

I would add some things to the framing:

There's two axes. One axis of the matrix is what the founder wants. The other axis is what the business needs.

The business needs axis is continuous:

- Some businesses obviously don't require outside capital (e.g. founder is equipped to get a sellable product built by themselves).

- Some businesses require tons of outside capital and cannot be bootstrapped; self-driving cars is an obvious example.

- Some are in between; e.g. many b2b products require a baseline level of features / complexity with active competitors that's hard to achieve by bootstrapping.

If a business requires a significant amount of capital AND the maximum outcome is e.g. $500K a year, then it shouldn't exist. This is why VCs ask what the market size is.

Some founders think raising outside capital is a "win". They want that external validation and then convince themselves and/or VCs that there's a big outcome on the other side (or, in the ZIRP 2021 era, get convinced by VCs). This is a mistake -- the only external validation that matters is market validation.

Instead, founders should think of outside capital as a necessary evil, and make a clear-headed decision as to whether the benefits of capital for their businesses is worth the cost (in the form of preference and control -- or at least influence). And it should be worth the cost by some significant margin, because outside capital is often optimizing arithmetic mean outcome whereas the founder is often optimizing something closer to geometric mean outcome.

MacsHeadroom2• 3 years ago

I'm fairly certain most independently run american crop farms require many multiples of that in capital for around that much revenue if not less and NEED to exist. Of course they aren't good candidates for venture investment capital. But saying they shouldn't exist is probably a bit too far.

jryle70• 3 years ago

If you build a business that makes 500k a year, which can be done with 30-50 customers for saas selling for 10-15k, you can sell the business and retire

That's a big if, and no guarantee that it's easier to pull it off than if you have VC money. Let's assume for a second that VC brings nothing to the table other than money.

jwr4• 3 years ago

I run a business similarly to what the parent advised to do and I wouldn't have it any other way. I am independent, I don't have to pursue GROWTH GROWTH GROWTH at all costs, I don't have to worry about running out of funding, I don't have to "scale", I don't have to hire people just because investors want me to.

The numbers are different for every business, and I'd argue that SaaS customers at $10k-$15k are not easy, because you need high-touch sales for that, but you can make various approaches work.

The main point is that VC-funded (or YC->VC funded) startups are not the only way to achieve success as defined by financial sufficiency. Arguably (and I would really argue) they aren't even the best way, if you take quality of life factors into account. Or if you care about your customers/users.

DougN7• 3 years ago

I’m not sure I agree. I hear from lots of people wanting to buy my business IF it’s making at least $5 million/year (it’s not). $500K/year might get you a 2X exit, and $1M is nothing to sneeze at, but it’s not early retirement money.

brianwawok• 3 years ago

For a non-strategic buy you are right. For a big 1B PE fund, they can't be arsed to buy a bunch of 300k a year companies. I think its just too much to manage. So the higher in the millions you go, the more PE type people it can appeal to.

indymike2• 3 years ago

$500K/year might get you a 2X exit,

Depends. When a company is subscale it's purchase price varies wildly. This is because standard revenue x multiple thinking just doesn't make sense when:

* you are buying the team (leaders, skill positions, etc)

* you are buying the tech (which may have great value in accelerating go-to market or adding competitive advantage)

* The small company holds key contracts

* IP has great value

As companies grow, they tend to get valued more traditionally...

fairity• 3 years ago

If you raise VC money, the above scenarios are considered a failure. You will have to shutdown/get acquired for nothing.

There are several noteworthy exceptions to this generalization.

If you retain board control, you’re free to run a lifestyle business and pay out dividends to you and your investors. Plenty of VC funded companies have founder-controlled boards.

Also, you can negotiate a buyout of your VC’s and shift to lifestyle once you fail to grow.

danielvaughn3• 3 years ago

This is exactly right. A couple years ago I became a co-founder of sorts, supporting the technical side. I assumed all you needed was a good idea that attracted users - we had that.

Even though we had a working software product and demonstrable 20% MoM growth, we couldn't get investors interested. I learned (the hard way) that what you need to do is put the dollar signs in investors eyes and manipulate their greed in order to convince them to cough over their money. Of course, it isn't often described that way - they say things like "we need to de-risk the investment" and "expand the total available market". But really what they mean is they're only interested in businesses that are shooting for billions of dollars and have a solid plan on how to get there.

If I ever go into business again, I'm staying far away from VC.

moneywoes6• 3 years ago

what did you end up doing?

JumpCrisscross• 3 years ago

If you raise VC money, the above scenarios are considered a failure. You will have to shutdown/get acquired for nothing

Yes on the first. No on the second. You can still sell the business like a small business at a multiple of Ebitda. Standard early-stage terms shouldn’t give investors the right to block an exit that returns their liquidation value.

ugh123• 3 years ago

Yeah but you don't get to rub elbows and party with VCs! Isn't that what it's actually about? /s

manicennui• 3 years ago

ARR doesn't seem to be super important for VC funded companies as long as someone will pay a lot of money for the company and everyone can cash out.

esafak6• 3 years ago

If you don't turn a profit you'd better have significant, consistent growth. Pulling that off is not necessarily easier.

whitej125• 3 years ago

If you raise VC money, the above scenarios are considered a failure. You will have to shutdown/get acquired for nothing. You have to shoot for the moon to get massive ARR, that very very few companies ever hit.

N=1 example at least to the contrary... I read this a year ago.

https://twitter.com/robgo/status/1559517843388977152

I don't know who the company was, what the terms were, who/if were other investors, etc. But as I read it... the company was venture-backed, didn't really create (or pivoted away from) something that was "venture scale" but otherwise had built a good business.

The end result however, was not shutdown/get acquired.

By building a good business, the company gave themselves optionality with their current investors and seemingly got to a good outcome for everyone.

If you know your business is not going to be venture scale... there are probably better sources of capital out there for you to leverage if you need it (or bootstrap). Stresses that create less stress, less friction, etc.

That being said - venture or not... don't forget to build a good business.

Disclosure: NextView is one of our investors hence why I stumbled upon that post of Rob's back then.

joshstrange• 3 years ago

I’ve been of this opinion for quite a while now and the part about

If you raise VC money, the above scenarios are considered a failure

Rings particularly true.

My side company doesn’t make much right now but it’s growing and one day I could see being able to go full time on it. However there is no scenario that I can imagine where taking money (even if someone wanted to give it to me) would be a good idea. The business just doesn’t have the potential to justify the investment. It could grow to support myself and maybe even a few other people but never to a point where it would make investors happy.

I wish more people went the bootstrap/self-funded route without the intention of selling from day 1. That’s the other gross part of our industry, making something you have no desire to run long-term, just making it attractive enough for a larger company to buy. Those businesses are rarely sustainable.

As I’ve grown older the idea of “winner takes all” or “creating a business just to sell it” has become less and less attractive to me. I’m not saying I wouldn’t “sell out” if the price was right but there is a difference in my mind between those two things (creating to sell and choosing to sell).

The sad thing is that some really cool ideas (that aren’t “winner take all”) do require a substantial, to me, amount of money to get off the ground. I spent time on a side project with a few other people until we realized that money transmitter licenses we would need pretty much required outside investment. Things like that really suck and I understand investment in those cases a little more.

shipscode• 3 years ago

Aren’t most yc or funded founders broke asf? Meanwhile the solopreneur scene is printing cash money. Daniel makes good points here.

llamaimperative2• 3 years ago

So the best way to find good ideas is to have many ideas, try them out, take what works, and throw away the rest. But this is not what YC wants you to do. YC wants you to pick an idea that has market pull (or the potential for it), and to then dig a hole in the same spot until you reach the boiling magma. Because what if you stop digging just before you strike gold?

This is the hardest question of starting a startup (or trying to do anything novel), as far as I can tell, but this was not at all my experience with YC’s advice.

The overwhelming feeling is: be humble in the face of reality, try something and try to try it in a way that you can assess whether it’s working — quickly/cheaply — then try something new.

YC seemed perfectly fine with us either pivoting or staying the course so long as it seemed like we were trying to be intellectually honest with ourselves, and what more could you hope for? It’s not like they have the answer either — nor do they act like it.

Edit: Also YC explicitly advises against using VC feedback as signal on your idea. Ideally you’re pivoting well before you run up against “VCs won’t fund my next round,” because clearly things already weren’t working prior to that. You were trying new things and being honest about whether they were working, weren’t you?

jnovek2• 3 years ago

As a fellow YC founder, I agree with everything you've said here. This article wrongly characterizes the YC experience. I think the author is attempting to apply a normal VC incentive structure to YC, but YC positions itself a little differently in the landscape.

andrew_• 3 years ago

As a former employer for a YC funded company that was shut down against the founder's wishes, forced to via the investor board; I can say that this article does not universally wrongly characterize the YC experience.

We had another year of runway in the bank and solid growth. ZIRP ended and the board nuked us from orbit.

mrkeen• 3 years ago

Very compelling arguments against being someone's longshot bet.

But then he says that pivoting doesn't work either. Wasn't pivoting, in his analogy, deciding to dig for treasure in a new place?

Terretta• 3 years ago

From the comments about pivots, there are arguably two forms:

1) after digging a deep hole, or even a mine, deciding no treasure, and starting a new mine

2) checking whether the shovel breaks the surface easily, and moving around till it can dig

It may be true VC want diggers to see how deep the mine can go before giving up, it may also be true VC want diggers to scrabble around surface area at the start until there's at least some sign of purchase. Those aren't exclusive.

KaoruAoiShiho• 3 years ago

Don't really get it, there is no should or shouldn't. If you think your idea has multi billion dollar market then go for it, if it doesn't then YC probably don't want you anyway, there is no conflict.

abhayhegde• 3 years ago

If the system was ergodic, what’s happening to the collective would also translate to all individuals.

That's a definition of ergodicity I've never heard before. Ergodicity usually meant the phase space is fully occupied; in other words, a system tends to go through all possible configurations and sometimes irrespective of initial conditions.

braza2• 3 years ago

Not the OP, but being a former follower from him he is a big fan of Nassim Taleb that made some changes in the ergodicity concept to the everyday life in some of his books[1].

[1] https://medium.com/incerto/the-logic-of-risk-taking-107bf410...

_aaed• 3 years ago

Agreed, I think fallacy of composition is more appropriate here

DVassallo16• 3 years ago

I’m using the definition from economics not physics. https://www.youtube.com/watch?v=f1vXAHGIpfc&feature=emb_logo

marcosdumay• 3 years ago

On economics, one implies the other. (it's not true about every stochastic process, but for the ones important to economics, they do.)

If your life experiences do not depend on the initial conditions, then people all have about the same chance of reaching them.

bradley13• 3 years ago

The article makes excellent points. VCs fund a zillion different projects, playing the odds that one of them will make a mint. For the individual project, - which is you - the chances of success are very small.

One comments says that venture funding is rocket fuel. That's true, but only if you actually have a rocket. You probably don't: you have a VW bug, or maybe a BMW. Almost no one has a rocket.

Anyway, I honestly don't understand the craving to hit a $billion business. It's completely unrealistic - it's just not going to happen. Creating a business that can support you, turning over 6-digits (instead of 9 or 10) is much more realistic. You won't get VCs on board for that, nor do you need them.

brigadier1325• 3 years ago

Anyway, I honestly don't understand the craving to hit a $billion business. It's completely unrealistic

I think what the author is missing is that founders could have massive exits in the previous bubble in Series B rounds and walk away with millions. With that possible outcome available it's rational for founders to play the bubble game.

Otherwise, I agree, defining success as building an $X billion revenue business is completely irrational when there are infinite many success scenarios between 1million and $1 billion in revenue that you miss out on once you over grow your business' expenses.

simpaticoder2• 3 years ago

That's true, but only if you actually have a rocket. You probably don't: you have a VW bug, or maybe a BMW. Almost no one has a rocket.

You're right, I think. What I get reading this thread, and other sources, is that VCs will trash perfectly good VWs and BMWs trying to turn them into rockets. The reason being that only rockets have value to them. VW and BMW business are failures. E.g. a .1% chance at $1B is actually worth far more to a VC than a 100% chance at $1M even though the EV is the same.

enedil2• 3 years ago

How is the EV of 1% of change at $1B and 100% chance at $1M the same? The EV is respectively $10M and $1M. I actually think, that if it was the same, they would have different approach towards being a VC.

sf4lifer• 3 years ago

You shouldn't seek or take advice from the internet

starquake• 3 years ago

Thanks!

fndex• 3 years ago

Thanks for the advice.

cmrdporcupine3• 3 years ago

I guess the thing that always sticks out to me is: access to seed capital to bootstrap.

How can people ... adult, not in their early 20s etc ... afford to quit their job, and still feed themselves and family and pay mortgage ... to go off for months to a year to build a product to bootstrap something like that?

If you get into Y Combinator or whatever, there is at least a partial answer to that. Though clearly it comes with some really intense "strings attached."

This seems like a yawning gap in technology and it biases the set of solutions and products out there to those things that feed the VC furnace.

marcinzm4• 3 years ago

How can people ... adult, not in their early 20s etc ... afford to quit their job, and still feed themselves and family and pay mortgage ... to go off for months to a year to build a product to bootstrap something like that?

Work on it part time or save money beforehand by living below your means (which you really should do anyways but that's besides the point).

jeffbee2• 3 years ago

How can people ... adult, not in their early 20s etc ... afford to quit their job, and still feed themselves and family and pay mortgage ... to go off for months to a year to build a product to bootstrap something like that?

They can’t. That’s why bootstrap capitalism is largely a myth. When you scratch the surface what you often find is inherited wealth. If a person starts with a free house or a million dollars they have a massive advantage.

marcinzm4• 3 years ago

There's a massive number of small businesses in the US owned by immigrants that came to the US with fairly little. It's fair to say you prefer a regular job or VC money to the hell those immigrants went through but that is different than it being even close to impossible.

Cthulhu_• 3 years ago

Rich parents; Google, Amazon et al were started in a garage.

This is what I don't get about today; just owning a house with some extra space, an internet connection, and being young and not having to work because your parents can support you into your 20's already gives people a huge advantage.

But loads of people enter their 20's deep in debt, living paycheck to paycheck, etc. Little or no innovation can happen in those conditions, let alone starting families and the like.

cmrdporcupine3• 3 years ago

Google only partially started in Susan Wojcicki's parent's garage. The reality is that L&S already did a bunch of the Google work at Stanford.

Same with e.g. Netscape. It started as a fork of Mosaic, already developed and paid for by a team.

Anyways, largely agreeing with you. Rich parents or favourable conditions generally play into it.

The other thing is that these conditions also tend to bias things such that even for the people who "bootstrap", they're young; which means that experienced, "wise" engineers ... who generally have lives and responsibilities ... are on the whole excluded. Which I think has a deleterious effect on the kind of products/projects that can make it to market.

dagw• 3 years ago

How can people ... adult, not in their early 20s etc ... afford to quit their job

Depending on what you did the first 20 years of your career, it isn't unreasonable to be 45 and have enough savings that going without pay for 12 months is feasible, especially if you come from a well off background. This is doubly true if you have a partner that also has a job. Also at 45 you hopefully have enough professional contacts that getting a new job if your business fails isn't impossible.

Another option is to bootstrap in your free time and then quit your job once you have your first customer. I've had at least a couple of colleagues that have done that.

cmrdporcupine3• 3 years ago

I could maybe do 12 months without bringing in a paycheque by digging into savings, for sure.

The problem is that to properly bootstrap does mean there's things you'll need to pay out of pocket for that aren't just your own labour: for me this would be things like UX / graphic design, hosting costs, etc. That stuff can add up.

mirsadm• 3 years ago

You don't need to do those things though. I'm almost 40, I like programming. I do it for fun in my own time. I've got couple of projects that earn around a 1/3 of my salary every month without doing too much more with then. I plan on making a few of those. Some will fail, some will succeed. I still get to pick what I work on and enjoy doing it. If they all fail then it doesn't matter too much.

acdha3• 3 years ago

It’s possible with hard work and decent luck, but if you look behind the scenes it almost always involves family money. There’s a lot of carefully cultivated imagery around hardworking founders, and it’s true that many of them put in long hours, but that’s not sufficient in most cases unless you can also take advantage of things like free real estate or being able to get your first million in funding from your parent’s friends.

There’s a similar vein of story which repeats frequently in the news where some young couple has a “we bought a house in our 20s!” feel-good story and it’s like “I packed lunch every day, only went out to eat once a week, and we lived in my parent’s investment apartment for 3 years rent free” where the Calvinist tone directs all of the attention to the first part.

marginalia_nu3• 3 years ago

There are actually other options. I'm 38 and managed to eke out about 2 years of runway without touching VC money from grants and private donations. No family money or huge savings.

If you're building interesting things in an area where many people are annoyed with the status quo, you can according to my survivorship bias have money thrown at you, which then becomes self-reinforcing, since you can put more time into the project and find more success.

But there's admittedly a chicken and egg problem. I only got to that point by not having much work-life balance.

marcinzm4• 3 years ago

I think the issue is a lot of people think "I have an idea and all I need is money" versus "I have these skills and constraints what is an idea I can make work with them."

emddudley• 3 years ago

What kind of grants?

DVassallo16• 3 years ago

You shouldn’t do spend months on your project.

You do like what Tony did here: https://news.ycombinator.com/item?id=37622702

Make several weekend projects, improve your selection criteria over time, take what works, and throw away the rest.

iandanforth2• 3 years ago

I am not persuaded by this article.

I am not 22 and I have never gone through YC, but many friends have. I would urge any young founders to try to do the same.

The reason most successful CEOs are older is due to experience and networks. YC, even if your startup fails, gives you both in spades. It also gives you some financial stability you might not otherwise have to attempt this moonshot. If you don't have capital to spend on pay-to-access communities let alone fund a startup then YC makes a good offer.

If you manage to fail and pivot multiple times, you've just had a crash course in multiple areas, maybe even multiple industries. If you can't get lucky, you can at least get wise.

So the "you" in this article might actually apply to me. I'm older, I could self-fund my own work for quite a while, and be happy with a modestly successful business. But the "you" in this article is not general. If "you" are young, hungry, willing to sleep on floors, eat ramen, and want to pursue your dream with a possibly naive passion, then yes. You should join Y Combinator.

Fnoord• 3 years ago

The reason most successful CEOs are older is due to experience and networks.

What about resources in general? Like, settled and more money to burn?

iandanforth2• 3 years ago

I don't know. I can think of persuasive arguments that financial security helps and ones that financial security hurts a given individual's chances of being a successful CEO. My intuition is that there would be a correlation but that it's not causal.

AlchemistCamp3• 3 years ago

” I can't afford to rely on 26 lifetimes. But maybe you think you’re special. You’re not like those 3,950 dummies who failed. Maybe you are in fact special, but I wouldn’t rely too much on that. Business is much more random than it seems. If business was predictable, YC wouldn't have a measly 1.25% success rate, or thereabouts.”

This argument is very disappointing and dishonest. The piece repeatedly implies and assumes that every YC-funded company that isn’t currently valued at over a billion dollars is a failure for the founder.

This ignores the fact that many companies are still growing and will cross that threshold in a few years. It’s also not an honest representation of all the smaller acquisitions to call them “failures”.

Twitch’s acquisition wasn’t quite for a billion, but it was a massive success for its founders. There are many other companies that exited in the 9-figure range, for which this is true. Plenty of others excited in the 8 figure range and were still better outcomes than if the founders had just remained employees. Even those whose startups went to zero usually end up fine in terms of career.

What percentage of Daniel’s students have built unicorns? Have any or are they all, by his own metric, “failures”?

esafak6• 3 years ago

At those success rates, he's going to need a lot of students working for long enough to exit to yield statistically significant results. How long has his program been open?

AlchemistCamp3• 3 years ago

I bought it two years ago, and according to Gumroad, the version I bought has made 3,499 sales. It might be more due to different versions of his course, and it's certainly not much fewer than the pool of 4,000 he's using to calculate the failure rate for YC founders.

dancemethis• 3 years ago

Already joined HN.

samtheprogram• 3 years ago

Would you value this take on YC whatsoever if they hadn’t been it in? How would they know what it’s really like?

burcs• 3 years ago

It's hard to take advice from someone peddling their own course.

I will say I'm probably somewhat biased as, we went through YC, and yes if you don't want to be VC-backed, then don't do it. Maybe the title should be "You shouldn't raise Venture Capital, buy my course instead!"

That being said, the beauty of YC, SAFEs, and seed funding is you don't have anyone on your board. You get to decide what you want to build, how you want to build it, etc... The point of joining YC and raising money is because it helps you figure out what to build/not to build, and to build faster, and YC is REALLY good at helping you sort that out.

There are founders out there who realized they've built a product that doesn't have the unicorn potential and pay back their investors. I'm pretty sure Daniel worked at Gumroad for a bit, and that's what Sahil did.

Again I find it really hard to take advice from folks who have "something better" to sell you.

DVassallo16• 3 years ago

You think all the YC articles aren’t also peddling something? At least I’m clear.

michaelteter• 3 years ago

find it really hard to take advice from folks who have "something better" to sell you

We do this all the time when considering a change from one product or service to another. The potentially better offering tells why their way is better, and why the other ways are inferior. Then they sell us their way.

tim3332• 3 years ago

Yeah but is it a good idea? I mean a neutral source might be better than someone trying shill product.

jiveturkey2• 3 years ago

Disagree with your take, generally speaking. This is just called salesmanship. You don't present a balanced picture, you present a selectively, opinionated, persuasive one. The reader can take from it what they will. And as Daniel points out in a sibling comment, YC is actually much worse on this front.

I'm pretty sure Daniel worked at Gumroad for a bit,

huh. Yes he appears to have been Head of Product. So I'd say the abstract for https://smallbets.co/event/4019ad11-d5db-45dd-a341-a0f130378... goes beyond salesmanship and is willfully deceptive. Unless he joined Gumroad after that video was produced? Hopefully he'll see this and comment. And update the abstract.

DVassallo16• 3 years ago

That event is in the future. What’s deceptive about it?

portman2• 3 years ago

I believe the author made a simple math error.

Economic returns of VC-backed companies follow a power law distribution. This means that the vast majority of the returns for the VC are at the "fat head" of the distribution. The "long tail" does not impact returns, for the VC.

However, for the founder, those returns in the tail can be life-changing. It takes a $5B exit for YC to care. But a $5M exit can be real money for the founder.

So the correct math, from the perspective of the founder, is not "what % are unicorns" but rather "what % sell for more than capital invested" and that number is likely to be closer to 50% than 1%.

DVassallo16• 3 years ago

I’ve been on the acquirer side of $50M exits and from what I’ve seen almost no one makes any money in those situations. It is usually a deal done in desperation and everyone is diluted to the brim.

portman2• 3 years ago

I mean, N=3, but I've made decent money on smaller exits.

The relevant metric is not exit price, it's ratio of exit price to pref stack; i.e. raise $40M and sell for $50M, founder is worse than if they raised $2M and sold for $10M.

krosaen• 3 years ago

I bet the distribution of outcomes among all YC participants tells a different story - not all or nothing. Getting acquired or acqui-hired, while not as prestigious, often nets the founders as much or more than the opportunity cost of not taking lucrative tech jobs. And surely there are plenty that need to close up shop without any financial outcome at all as well, but again, would love to see the distribution.

Also, even those who do not net any financial outcome, how many of those founders would say they regret going through YC? Guessing they have built a great network, learned a ton more than they would have as an IC at a big company, and are well positioned to do whatever they want to next, even joining a big company after all.

treprinum• 3 years ago

VC business is reinforcement learning for investors doing the exploitation part whereas founders doing the exploration part.

esafak6• 3 years ago

I think you have it backwards. Each founder exploits one idea, and the ensemble of VC's founders explores.

You seem to be thinking of the colloquial definition of exploitation.

bko3• 3 years ago

This article is just bad.

So, digging in one spot is a dumb strategy for the economy of the individual, but a very wise strategy for the collective economy of all individuals.

First starts with the idea of diversification and why its good. Fair enough. Then an argument how a mining company could "just hire individual miners to do dig in one spot for cheap". While the individual miners are getting poorer you'll get rich! So why don't mining operations operate this way? Because there isn't an unlimited supply of stupid people to do waste away their lives for you to capture all the value.

This is what happens in a non-ergodic system. We often hear politicians claim that the GDP is growing, but all the gains are going to the 1%. This is the same thing. The wealth of a country could be growing, but almost all the citizens could be getting poorer. There’s nothing inconsistent with this. The average is simply being dragged up by the freak outliers.

I'm fortunate enough to be living in a country with a growing GDP and I can tell you, life is pretty good here, even if you're not 1%. Sure could be better, but certainly great compared to countries with a contracting or stagnant economy. But cool, overstate your claim that the system is rigged.

One of the bad learnings you get from YC is that there’s a formula for success, and it looks like this: First you do some brainstorming. Then you come up with a good idea that can scale to a billion dollars (otherwise what’s the point of getting out of bed in the morning?)

I was never part of YC but I read a lot of their literature and listened to a lot of their members, and this is opposite of their advice. The gospel is do things that don't scale and solve problems you're familiar with or have felt personally.

I guess my biggest gripe with the post is that the author sees founders as basically dumb diggers, a stupid exploitable resource that places like YC take advantage of. His bar for success is unicorn and only 1.25% of companies funded by YC make it. But would the other 98.75% have been better off working on optimizing ad placement at Google or something similar?

Sure taking VC money doesn't make sense in a lot of cases. If you can build a cash business without it, you probably should. And YC is definitely one of the better VCs from what I understand and have even pioneered the SAFE which was a huge step up from some contracts founders were asked to sign in the past.

corry3• 3 years ago

This has so much backwards.

You don't get to just 'decide' if your fledgling business is a potential unicorn or will just be a lifestyle SaaS business. It's a product of your idea/technology, the size of the market, competitive pressures, and your early traction.

It's more like this: You wake up and realize that -- while it's still early -- the thing you started has major potential; but you need a lot of capital to seize the opportunity. So you realize that going the VC route is likely your best bet. And that if you're doing the VC route, getting into YC is the best possible start.

If instead you wake up and realize your TAM is probably <$100M, your tech isn't anything particularly novel, and your path to a 'good life' is fairly clear if you can just organically grow from there - great, don't go the VC route.

But this idea that you're trying to discover treasure in a field or some bullshit is just bad. The better analogy is - you have a patch of land. You can slightly change that patch of land but it's mostly fixed. You could slowly farm that land and make a good living. Or you could risk it all, dig everything up in a search for oil, and maybe strike it big. If you fail, the land is worthless. Now, today you realize you have strong indications and evidence that there is A LOT of oil down there. So you go talk to some money guys, get funding for the exploration, and you're off.

But the guy who has zero evidence of oil, zero reasons for thinking it's down there, and is happy farming anyways - OF COURSE is better off just going the farm route.

corry3• 3 years ago

Just to continue my metaphor (because - why not?) -

So you suspect you may have oil hiding deep in your property, and while you know your land REALLY well, you're not totally sure how to go about validating that its there; or even if you could validate it, how to proceed best.

You hear there is a very friendly and experienced outfit called YC that will help you (a) quickly figure out if there's oil, and (b) if there might be oil, set you up for success with the bigger money that you'll need to extract the oil. This YC firm is basically geared towards helping someone like you figure this out quickly. And actually, YC will give you $ to explore this very thing. In exchange, they will own part of your land (a small fraction).

If it turns out there isn't oil after all - not the end of the world. You'll go back to farming, and at least you won't be wondering if you should have explored the oil thing more. YC won't care much about you anymore since they are in the business of owning a small % of the land that strikes BIG oil. But they also won't be a nuisance.

If it turns out there IS oil under there, then YC will help you navigate the big oil money people to help you get it out faster.

Metaphors are never perfect but I'm having fun with this one. :)

corry3• 3 years ago

Part 3 :)

Ok so let's talk about your land itself. First time entrepreneurs just kind of randomly end up on a plot of land, due to their prior experience or friends or personal challenges they want to solve etc. Maybe that will happen to have oil under it or not. Maybe the oil is plentiful and close to the surface, or maybe it's deep and small anyways. But often the choice of your land is kind of happenstance.

Meanwhile, hype-driven 'founders' hear some piece of dubious folk wisdom -- "land that has coniferous trees on it tend to have oil underneath" (akin to 'blockchain is the future!!!1') and go buy the first patch of land with conifers on it. Then struggle and struggle.

In contrast, seasoned entrepreneurs spend a lot more time deciding which plot of land to buy in the first place. They'll pick one that has good indications of having oil underneath, although they still won't know how close to the surface or how large the patch might be. They'll conduct surveys and other studies prior to really buying the land. Once they feel like the odds are in their favour, they'll buy the land and start the process of proving there's oil.

pcorsaro• 3 years ago

You don't get to just 'decide' if your fledgling business is a potential unicorn or will just be a lifestyle SaaS business. It's a product of your idea/technology, the size of the market, competitive pressures, and your early traction.

Sure you do. Of course there are types of businesses that only succeed if they're a unicorn, but for the most part, you can decide how much business you want to do. I know we're talking about software, but I deal with lots of restaurants in my life. Say you start a restaurant, and after the initial opening craziness, you see that's it's a sustainable business with lots of loyal customers that like your food. There are people who are going to tell you to open another location, to franchise it out. You'll need investors to do that. It may or may not make you more money. You might think your product has the potential to be the next big chain. You also get the choice whether you want to do that or not.

If you have a good product that people want to pay for, you more than likely will have the choice to decide whether you want to scale the business up larger.

lowkey_• 3 years ago

This is a good analogy to make, but I'd add that in this analogy, the majority of land has oil underneath it, and the majority of that oil can be reached without capital for exploration.

Fintech, bio, etc. are exceptions, but generally if you have a large TAM, you can still choose to take VC funding or not (you bootstrap at the risk of someone else taking funding to grow more quickly and capture the market).

underdeserver• 3 years ago

I don't see how this disproves anything. The win rate is 1.25%. These are all "major potential" projects.

AlchemistCamp3• 3 years ago

Do you believe Twitch “lost”, then?

demondemidi2• 3 years ago

The only startup founders I've known (and we didn't call them that in the late 80's early 90's) fall into two categories: those who want to get rich and don't care about the product, and those who really believe in their product (and hope that it makes them rich, but that's not the primary objective). I'm not sure if there is a third type, if there is I have not met them.

The most successful people I know fell into category two, and all struggled for more than a decade each and had multiple mentors, but ultimately took out loans (from banks, friends, etc) that weren't based on owning shares; none relied on VC. None of them are billionaires, but they are solid decimillionaires (if that's even a word) whose businesses practically run on autopilot.

I think the author makes excellent points that I thought were common sense but I guess they are not, however I don't know a lot of techie entrepreneurs anymore, they are all much younger than me (mid-50s). All I know about younger startup folks is based on scanning HN for the past decade, but it seems they are all chasing the brass ring the same way the author describes. And the truth is in the numbers.

DVassallo16• 3 years ago

The most successful might be from category two, but what is the denominator? How many with that attitude failed? I suspect category one has significantly higher survival, probably close to 100%.

gen220• 3 years ago

I think it depends on what you count as "survival".

Group 1's long-term success/survival is contingent on timely exits and timely access to future funding, which historically (i.e. during all times + places, except 2008-2021 in SV) is a pretty volatile commodity. Group 2 develops fairly portable skills that they can "sell" to the market whenever they want to give up on building by themselves. They can compound in a way that's uncorrelated from LPs' appetites for risky allocations.

It's like comparing a firecracker and a candle. Although they both depend on combustion, the goals of the two groups are almost disjoint.

demondemidi2• 3 years ago

Category a - 0 of 5; category b - 7 of 9.

robocat• 3 years ago

Rich versus King is another categorisation: https://siliconhillslawyer.com/2016/03/30/rich-v-king-the-co...

  [Founders] need to ask themselves, and be honest about, is: do you want to be rich, or do you want to be king? Because very very very rarely can you be both.
  Some founders legitimately care less about money than about ensuring that their business stays in alignment with their long-term vision/mission. They certainly want to be successful, but a removal from the leadership position in their company would, in their mind, mean personal failure, no matter how much gold they can expect to line their pockets with.

There area bunch of other amazing articles on the same website about the truth behind VC forces.

Sosh101• 3 years ago

Are there examples of YC investments that have become successful after a pivot?

BiteCode_dev• 3 years ago

Seems like it's just a matter of the stats you want, goals you have and compromise you are willing to make, as usual.

Per the article itself, Y combinators is actually a good deal if your objectives and theirs align.

If they don't, don's sign up.

Also the sky is blue.

posix86• 3 years ago

What I don't understand with this article is why it should be beneficial for YC to make you dig deep rather than everywhere. The digging analogy basically says that you can push founders in a way that the probability of ANY success decreases, but the overall average return increases. What push mechanism is that supposed to be? Fixation on an idea? And how will it increase return?

langsoul-com3• 3 years ago

Dig deep because that's the highest chance of a single or few people hitting gold.

There's not enough time for a single person to dig everywhere and it'd likely be a low payout if they did.

The push is that YC won't find the exact same idea and none others. It's a spread to maximise the tiles of people digging.

esafak6• 3 years ago

It is due to heavy-tailed returns; the winner who goes deep strikes big and compensates for the rest.

aristofun• 3 years ago

The egodicity term is misused there to begin with.

Ergodicity is not about unequal distribution it is about all every part of the system having same chances of finding gold in the long run.

DVassallo16• 3 years ago

That’s exactly how i used the term.

karl11• 3 years ago

From the outside looking in, it seems to me that the biggest benefit of YC is the people you get to meet and build relationships with along w/ the advice and feedback and accountability to focus on the things that actually matter to growing a business. These are lessons and relationships that will carry through even if you decide that VC-backed hypergrowth isn't for you and you want a small lifestyle business. Joining YC does not preclude you from doing things differently, but it does provide access to some amazingly smart and capable people that would be hard, if not impossible, to replicate somewhere else.

lucasfcosta• 3 years ago

I strongly disagree with the post. YC is the most founder friendly investor I’ve ever met, and they do have founder’s best interest in mind.

Also, their deal allows them to have interests aligned with founder’s if you just stop and read what’s publicly available.

I will always recommend YC.

DVassallo16• 3 years ago

I never implied they were not friendly. All the YC folks seem very nice. I’m sure they want you to succeed, but they succeed more if you take a strategy that is against your self-interest.

langsoul-com3• 3 years ago

I think this article is more directed towards all Venture Capital funding rather than just Y Comb. Mostly the type that demands an absolutely insane amount of return.

Actually more like why you shouldn't make a startup and instead live a bit longer. Then, if an idea comes to you, it'd be vetted through more experience and time.

And if you still want VC funding, just remember the house is setup to always win.

klohto• 3 years ago

I hate Vassallo’s spam on every single platform. I get it, you have a bootstrapping course.

Anyway, to the YC point about pivoting and digging a hole: Daniel has 0 experience with YC and this is absolutely not what YC encourages. YC is more than happy to see you pivot. You have the driver seat and you know best.

Do I agree you shouldn’t take VC money so easily? Yes. Do I agree everything applies to YC? Definitely not. Hell, pick your VCs well and you won’t face any of those problems.

getpost• 3 years ago

tl;dr: The "Small Bets Newsletter" says YC isn't suitable for small bets.

YC isn't designed for small bets! That's not their thing. It would be interesting to see stats on non-huge exits though, some kind of distribution showing the following with a time element, indicating, say, the number of months for various outcomes.

Huge exits 1.25% (define huge), Exit exceeding YC's investment, YC investment repaid, YC investment partially repaid, YC investment entirely lost

alexmolas• 3 years ago

This article is built over the assumption that 1.25% is small, but it never presents how this number changes between YC and non-YC companies. Without this comparison it doesn't make sense to say 1.25% is small.

DVassallo16• 3 years ago

It is too small when the expected payoff is business success in one lifetime.

anonu• 3 years ago

This is sort of a gibberish article. It has nothing to do with YC really. The story being told is that of any venture backed startup. The investors take the risk but if you build a business they may do better than you financially. Money generates money.

Another point they make is what I call "shots on goal". Investors will have tons of shots. That's the nature of investors. If your a startup founder it's tempting to think you have "one shot" but that's nonsense. Every day you have shots, every client call is a shot, every product decision is a shot.

hcks3• 3 years ago

1.5% chance of becoming a billionaire per try is good odds, actually. Also doesn’t take into account all the outcomes you become merely a millionaire (likely over 5% in the case of YC?)

sobellian• 3 years ago

One of the bad learnings you get from YC is that there’s a formula for success, and it looks like this: First you do some brainstorming. Then you come up with a good idea that can scale to a billion dollars (otherwise what’s the point of getting out of bed in the morning?) Then you work hard until you find “product-market-fit.” And then if the noises from investors indicate you won’t be getting a next round of funding, you start looking for a “pivot.”

YC is fairly relentless about iteratively finding product market fit but as far as pivoting goes - while YC makes it clear that you can pivot, it's pretty obvious that it's not ideal (but if people don't want your product, that's even less ideal). YC most definitely does not bill pivoting as part of a formula for success.

They also care about your idea when you apply, they do not expect you to start fresh during the batch. I honestly don't remember them saying anything about brainstorming, and that's probably because it's not true - most good startups have an unfair advantage in their industry and most founders already have some experience in their field of choice. Throwing a dart at a board and making a unicorn is quite rare indeed.

So this "formula" is mostly a strawman. And notably he tears down pretty much everything but iteratively finding product market fit, the one kernel of truth in this entire rant.

Think about this for a second: The most successful business owners are typically in their 40s and 50s. Why is YC full of 22 year olds? Why aren’t the 40 year old entrepreneurs taking up this incredible deal that YC is offering? YC will tell you it’s because only the 22 year old kids can be true visionaries. BULL. SHIT.

So I went through YC in 2014 and I was 22 at the time - and I was among the youngest in the batch. Most founders seemed more towards his proposed age range, and to be fair they seemed to have a better handle on things. Go figure. So YC most definitely does not say that "only the 22 year old kids can be true visionaries." At least in 2014, it was in fact rare for them to bet on 22 year-olds.

You might think that those who failed might still have gotten something. Maybe.

If you haven't founded a business before, it's quite valuable because you don't know what you don't know. Once you're a little more seasoned, I'd say it's a lot more situational.

satisfice• 3 years ago

This is a compelling piece.

pharmakom• 3 years ago

Join YC, maybe your startup is a success and you retire early. There’s a slim chance of that. However, YC on your resume opens the door for that comfy fang career slinging Java at 300k total comp.

grepLeigh2• 3 years ago

There are easier ways to get into FANNG:

* Read Cracking the Coding Interview and practice every exercise twice.

* Publish high-quality content (projects, tutorials, blog posts).

* Contribute to OS in some meaningful way, like owning the packaging for your favorite library for your favorite distro.

* Reach out to people at the company you want to work for, or go to a meetup hosted by that Co.

All of the above is much easier than starting a company.

esafak6• 3 years ago

Not as fun or educational, though, in the well-rounded sense. The best way to understand the business of software is to start one.

jefftk• 3 years ago

only about 50 companies met that expectation out of the 4,000 or so that went through their program. That’s 1.25% ... All those 4,000 kids who went into YC also thought they were visionaries, and where are they now? They’re all in the startup cemetery, except for a dozen or so who despite the low odds managed to flip 10 heads in a row.

This is a bit nitpicky, but:

* Some of those 4,000 may end up super successful but haven't yet; this isn't considering lag.

* Ten heads in a row is 0.1%; this is closest to six heads in a row.

I agree that your odds are low, and you should consider how much you care about a small chance of a massive success. But the odds do matter!

pdonis4• 3 years ago

My pretentiousness detector went off when I saw a completely wrong definition of "ergodicity" at the start of the article.

DVassallo16• 3 years ago

It’s the definition from economics, not physics:

https://www.nature.com/articles/s41567-019-0732-0#:~:text=It....

https://m.youtube.com/watch?v=f1vXAHGIpfc&feature=emb_logo

pdonis4• 3 years ago

It’s the definition from economics, not physics

They're pretty much the same, and have nothing to do with...

"First, you have to understand a very important concept: in some systems, what’s best for a group is not necessarily what’s best for the individuals who make up the group. In other words, the total wealth of a group of people could be increasing, while almost everyone making up that group could be seeing their wealth diminish. When this happens, we say we have a non-ergodic system. If the system was ergodic, what’s happening to the collective would also translate to all individuals."

...which is how the article defines "ergodic" in the section with that name at the start.

jp57• 3 years ago

This article could just as easily be "why you should not try to be a rock star", or "why you should not try to be a college professor". Both are non-ergodic pursuits where the chance of success is low and the expected financial ROI across all aspirants is negative. Coincidentally, I've done both and failed at both and I don't regret either one.

But contrary to the article, I did get valuable non-financial rewards from these experiences. I wouldn't trade my rock-band experiences for anything. Twenty-five years have passed since the last time I seriously got on stage with my guitar, but my old bandmates are still my closest friends. My PhD taught me so much about how to tackle big ambiguous problems, how to think deeply about things, how to be patient when clarity comes slowly, and how to drag a hard painful project over the finish line. I also made career contacts that were invaluable later.

It sounds to me like YC might be worth trying once, especially for a young person, and when you get to the point where you have to pivot, you should take what you've learned and bail. If the terms of the agreement make that impossible, then maybe it is a bad deal.

nkotov• 3 years ago

Having been on both sides of this, ran a YC startup and now running a "lifestyle" SaaS business, the honest reality is that both have their risks/rewards. I wouldn't trade anything for the experience + network I received from being a part of a YC batch. But bootstrapping a business and going from $0 to $1 is also just as exciting for me as well right now. Most likely for my next business, I will be re-applying for YC again.

The best note that I saved that someone else wrote: Know What You Want. Do you want to build a lifestyle business? Do you want to grow into a company with employees? Do you want funding? An exit? You should figure these things out. Decide your own goals, don’t let someone decide it for you.

cubes• 3 years ago

This article would be more accurately titled, "Why you shouldn't try to build a venture capital funded business." Of course, my suggested title is not nearly as compelling and edgy as the actual title, and would be less likely to make it to the front page of Hacker News.

The content in the article isn't inaccurate or misleading per se, but it's also basically repackaging well understood information about the economics of startups and venture backed businesses.

Further, the author asserts that, if you're trying to optimize your personal economic outcomes, you should not pursue venture funding. But this wrongly assumes that money is the sole motivator people have for starting a business. Further, it ignores the massive economic value that the venture ecosystem has created.

Some people want to retire early. Some people have bigger ambitions. Neither group is right or wrong, but, if you're starting the business, you should know which group you're part of.

DVassallo16• 3 years ago

"Further, it ignores the massive economic value that the venture ecosystem has created."

The subtitle of the post is: "Or why YC is good for the economy but bad for your economy."

scandox• 3 years ago

If you reach the magma layer and you still have nothing, then you’d be encouraged to pivot. But that’s not how you find business opportunities in the real world.

I think he is treating pivoting as if it's some totally random exercise. Surely a pivot is when you see something within your existing activity that may be a better avenue to pursue? Or am I misunderstanding that?

rich_sasha• 3 years ago

If your VC funded business fails, you probably still collected a salary. Also "failed" could mean, you had a $50m exit.

You could still argue it's a bad trade, poor work-life balance etc. but it's not like 1% chance of being a billionaire or debtors prison.

shtopointo• 3 years ago

I like David's posts on Twitter generally, but this piece is poorly written.

Big opener, controversial take, put a thing down, just to build your own product up by comparison, lack of nuance... from the get-go you can tell it's a marketing piece.

The premise imo is wrong.

Silicon Valley is a non-ergodic industry

How do you define this? Obviously Daniel's take is on the founders that failed, that were stressed out by investors etc. but he doesn't talk about the thousands of people with the highest paying, most comfortable job they've ever had. People that switched from manual labor to customer support or programming. Or the thousands of minted (multi-)millionaires that got there by just working a comfortable 9-5 for 5-10 years? (in fact, he may be one of the beneficiaries of a SV style system, through his AWS career that sounded like it landed him enough money to start on his entrepreneurial journey – not so non-ergodic now...)

And of course, he loses credibility because he is selling his course. The whole point of the blog post is to sour YC and siphon off a few readers to his course. Kudos to him too, I mean, that's marketing, and it seems like that course is great too! But, imo, he is not taking the high road here.

YC has a great track record at helping people succeed. And if they didn't succeed, it opened doors. YC foots the bill for you to explore an idea. Sure, you can be smart enough to get into YC, but still naive enough to believe a religion-version of YC, about changing the world and something-something vision; then again, maybe you are smart enough to know what you're getting yourself into. Or you should.

Because on the other hand, there are plenty of people peddling get-rich-quick schemes out there, and how you can make it on your own, "just do this thing". Life's tough out there, and going solo is a difficult journey (something not mentioned often). You work for a company, or you work with investors, you are protected / sheltered. Choose your own path, for sure, but also recognize the pros and cons and how nuanced this situation is.

Eumenes• 3 years ago

Alot of commenters here talking about scaling a saas biz which they can ride to retirement but imo it's a shot not worth taking for the average person. Way easier to build a consulting practice or become skilled in a niche area of development. There's literally Fortran developers making 500k year taking odd contracts. I know a MongoDB sme who bills $300/hr to fix common scalability challenges and address technical debt. Yes it's not sexy and you won't be featured on product hunt, but you'll be rich and can retire young in decadence.

cracrecry• 3 years ago

This man is calling anyone that does not become a billionaire a failure and those that get it a "success".

This binary thinking is beyond stupid. It is a reasonable thing with hard work to become millionaire and to earn more money than what you need. It is a reasonable thing to work on interesting problems with interesting people.

Once you have enough money your are not going to get happier with more money. On the contrary, with billions in the bank you can not do normal things because people could want to kidnap your family, and people around you are faking all the time their true intentions. You are being asked for money all the time and so on. You can trust nobody.

Most people that get into YC are going to get enough of those good things, but not too much, and this is going to make them to be in the top 5% in the world in satisfaction.

raincole2• 3 years ago

He even has a "Unlearning is hard" section in his article.

Maybe he needs to unlearn the idea that you need to go big or go die.

Mimmy• 3 years ago

This is a really bad article. There is a nugget of truth, but it's never properly articulated because the author himself doesn't actually understand the distinction.

If you've already decided you want to build a unicorn and are willing to make take that <1% chance of success, YC will help you. If you want a lifestyle business, you could probably skip YC (though you probably wouldn't get accepted even if you applied with that idea anyways).

jackcosgrove• 3 years ago

Are there any "accelerators" that are employee-owned? I'm thinking of an arrangement where it's basically a software consulting company 90% of the time to pay the bills and get experience/inspiration. The remaining 10% of the time is spent trying to spin out new businesses that are collectively owned. Modulate the ratio as appropriate.

So if one project becomes successful, the principals can pivot to that and drop other ventures?

jasonmarks_• 3 years ago

I'm trying to bootstrap a SaaS ( handshake www.weatherthetrip.com/download also on X @jasonmarks__ ) and sympathize with some of the points. Do I know what YC really does? Not really. Maybe they grease marketing? I don't think that's worth the equity ask though.

mitchelldeacon9• 3 years ago

For a contrarian argument, it is worth considering the advice of Michael Porter in his seminal study "Competitive Strategy: Techniques for Analyzing Industries and Competitors" (published in 1980):

Some argue that firms should not choose competitive positions at all but concentrate on staying flexible, incorporating new ideas, or building up critical resources or core competencies that are portrayed as independent of competitive position. I respectfully disagree. Staying flexible in strategic terms renders competitive advantage almost unobtainable. Jumping from strategy to strategy makes it impossible to be good at implementing any of them. Continuous incorporation of new ideas is important to maintaining operational effectiveness, but this surely is not inconsistent with having a firm strategic position (xv-xvi)... A strategic position is a path, not a fixed location (xiv).

In other words, there is no such animal as a "fully diversified" entrepreneurial business (unless your business is simply investing money in a diversified stock portfolio). The very concept of a (non-financial) capitalist enterprise implies some degree of specialization. Even YC, to some extent, specializes and focuses their investments in certain high-tech industries.

greenie_beans2• 3 years ago

everybody seems to miss one of the arguments of this article: instead of being a tiny bet for a VC, you should be like your own VC and make tiny bets on yourself. that's sensible logic.

steveBK1235• 3 years ago

I think people also way overestimate the founder takes from even successful exits.

One of my classmates was a co-founder of a company that had a near-$100M exit (acquired) ~10 years ago (back when that was real money). That sounds like a lot, right?

By the time the VCs took their cut, the equity grants were deducted, and the founders split the proceeds.. it wasn't life changing money.

The money wasn't much different than a typical equity grant at a FAANG for a 30-something dev. Especially after 5-10 years of effort. And then you might be stuck working for the acquirer for some contractual period before you can exit.

It was also one of the many ZIRP businesses that would never be bootstrapped. That is - gain a bunch of customers by giving away services for free in hope that you somehow get so many that you can ... do something, later.

moneywoes6• 3 years ago

wow. was he heavily dilluted?

engineercodex• 3 years ago

A lot more founders and employees are heavily diluted than you think. I always just assumed massive exits meant people were rich.

But when I calculated out how much an exec would make for a diluted $1B exit compared to working at FAANG for the same amount of time... FAANG turned out better many times (unfortunately).

I think preventing dilution should be one of the highest priorities for founders for themselves and for retention. Every single dilution event sets the outcome bar higher and, thus, harder to achieve.

aussiegreenie• 3 years ago

I work with University spin-outs mainly in Life Sciences. They take years and cost millions of dollars betfore they can start generating revenue.

I also own a metal recycling business. It is on track for USD 10 million revenue with about $1 million EBIT. This business has a low risk, it is cash-based and generates cash every month.

Basically, working with the startup are almost a charity. Yes, I like going to various universities, yes, I dicussing Deep Technology but my main source of incone and wealth comes from used beer cans.

Why do I need more that $500K pa? I will be dead soon enough.

moneywoes6• 3 years ago

how did you get in that line of work, i seldom see stories of “boring” business

doppp• 3 years ago

This is really cool. I recently started my my journey into brick and mortar business. Would love to chat and learn more about your experiences.

vmatsiiako• 3 years ago

This is just a collection of absolutely flawed arguments. Any (even a little bit) smart person reading this should see the BS immediately

DoreenMichele• 3 years ago

Eh, YC and Mr. "Don't join YC! Buy my course instead!" are in the same business, they just have different target markets.

Both make money off the fact that establishing a successful, profitable business is hard and most people can't do it without some help, especially education and feedback.

He's not really competing with YC, so it's a little silly to target YC. Except, you know, it works well as a clickbait title because YC is a well-known big name, so it's disingenuous but "smart marketing."

tim3332• 3 years ago

This article is so rubbish about YC. There was a very good article about YC's founding and philosophy by Jessica Livingston the other day https://foundersatwork.posthaven.com/grow-the-puzzle-around-...

I mean, from Vassallo:

...YC wouldn't have a measly 1.25% success rate, or thereabouts.

From YCs site "39% of YC companies have raised a Series A". If success is only going over $1bn them him and all his students are failures along with 99.99% of the population.

The biggest indicator YC is a bad deal is that only people who are easily duped take up these deals.

Again from YC "Every 6 months over 10,000 companies apply to participate in our accelerator and we typically have a 1.5% - 2% acceptance rate."

The main problem with YC would seem to be the difficulty of getting in. Fair enough starting VC style startups isn't for everyone but there's no need to lie about YC to flog his dumb course really.

chfritz• 3 years ago

So many mistakes! a) What you describe is the VC industry, not YC. b) Yes, it's a well known fact that the expected value (in $$$) of doing a startup is less than that of being an employee, so don't do it for the money; and c) most importantly, your article makes no argument for the claim of your title, because it doesn't compare success rates with or without joining YC.

Why you shouldn't join Y Combinator

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