Is Y Combinator right for your startup?

http://blog.pretheory.com/arch/000433.php

by bhb • 19 years ago

19 25 19 years ago

blog.pretheory.com

pg• 19 years ago

Maybe it's time I finally explained the math of taking investment. You should give up n% of your company iff (not a typo) what you'll get in return for it will increase the value of the remaining (100 - n)% enough to put you net ahead.

So in the case of YC, you should trade us 6% of your co if you think that the money plus whatever else we add will increase your average outcome by 7%. (.94 x 1.07 > 1) Do we increase the average outcome of the startups we fund by 7%? I think few would say we didn't. I'd guess we at least double the outcome for the average startup.

onebeerdave• 19 years ago

I wish TechCrunch commenters would read this.

staunch• 19 years ago

The problem is that most people buy into "the pie fallacy", as PG called it. An amazing number of people would honestly rather have 50% of $1 million than 10% of $100 million.

dfranke• 19 years ago

That math assumes that the only two options on the table are either accept funding from YC or don't accept funding at all. The benefit you get from multiple investors is not orthogonal because you get diminishing returns from extra funding and because of the potential (for better or for worse) for interplay between investors. So, if you have a different investor offering you different terms (or even the potential for such), as is more likely to be the case for a more established startup, then things get more complicated than that simple cost-benefit analysis.

python_kiss• 19 years ago

I hope this helps:

"Financially, a startup is like a pass/fail course. The way to get rich from a startup is to maximize the company's chances of succeeding, not to maximize the amount of stock you retain. So if you can trade stock for something that improves your odds, it's probably a smart move." - How to Start a Startup

sethjohn• 19 years ago

When you sit down with VCs to set terms for a few million in A-round funding, it will be a question of whether they take 25% or 50% of your company.

Between connections, advice, and time, the extra strength you'll have at the bargaining table at this stage (the increase in the ratio of what your company is worth/how much money you need) should allow you to more than make up for the 6% equity...assuming your idea is good!

dawie• 19 years ago

It sounds like you guys are already on your way. I guess in 6 month's time you can join YC if you need. I have always wondered if you could join YC at a later stage. When your company is already up and running

jl• 19 years ago

Yes, a bunch of startups in the winter funding cycle were already up and running.

brett2• 19 years ago

I understand the timing thing. The Y Combinator schedule is rigid, it's not always going to fit your situation perfectly. After that though, the rest of the downsides listed just seem like quibbling compared to the list of upsides.

wastedbrains• 19 years ago

I am one of the Pretheory Founders, and I agree the downsides are not that strong. This is why we generally think Y Combinator is still a really good move for us. Since we aren't sure if it is as large of benefit to our company as it can be to others, we wanted to think about it, and start a discussion. Seeing if any other founders would add potential positive or negative issues that we haven't been evaluating.

I guess the biggest point is the benefits are far more than the money. The advice is probably priceless, but if you feel your on a pretty good track with momentum, is it worth the change up? Possibly having to move away from established local relationships (banks, lawyers, advisers)...

Is there some angles we are missing when evaluating the decision?

brett2• 19 years ago

No, it's not anything you're missing, just your conclusion from the data given. In my opinion, if we're talking about value here, the negatives listed in that blog entry just don't stack up against the value add YC brings (e.g., as mentioned, connections, exposure, advice...).

That's not to say that YC is right for you. There are plenty of potential reasons that YC is not a good fit and obviously plenty of ways to succeed without them. Some of the negative points you bring up have a lot of bearing on your lives as founders and probably should be considered. I'm just skeptical that, were you accepted into the Summer Founders Program tomorrow, it would be a sound business decision to turn YC down. Then again, maybe there is something you know that I don't...

paul2• 19 years ago

If Ben is serious about making his startup a success, then he should do his best to get into YC. The "downsides" he lists are all excuses that suggest he's not really that committed and isn't willing to go "all in".

It's also important to understand that the 6% that goes to YC will be diluted by subsequent rounds of investment, and could easily end up as 1%-2% by the time they cash out.

bhb4• 19 years ago

I hope I didn't come across as not willing to go "all in." I certainly didn't intend that. My intent was to outline the issues we considered, with the hope that others might find it useful and even suggest variables we hadn't considered.

At this point, I really couldn't back out if this startup even if I wanted to (and I have no desire to): I quit my job, spent a ton of money to move, and told everyone I know about my plans. As Dharmesh Shah of onstartups would say, I'm emotionally committed, which is more significant than my financial commitment (He has a good post about this at http://onstartups.com/home/tabid/3339/bid/1204/Startup-Founders-The-Involved-vs-The-Committed.aspx ).

As dfranke pointed out, we have more options than only accepting YC funding or not accepting. The real question is whether it makes more sense for us to keep going with money we have in Denver and find angel funding on our own, or move and take YC funding in a few months.

paul2• 19 years ago

How many angels and VCs do you personally know? How many other startup founders do you regularly meet with there in Denver?

People who already have a lot of startup connections and experience probably don't need YC, but I don't get the impression that you are one of those people.

bootload• 19 years ago

'... The real question is whether it makes more sense for us to keep going with money we have in Denver and find angel funding on our own, or move and take YC funding in a few months. ...'

No the 'real question' is, in the words of pg is ...

'... Most of the groups applying have not stopped to ask: of all the things we could do, is this the one with the best chance of making money? ...' [0]

The article link is cactus. [1]

Reference

[0] pg, 'Why Smart People have bad ideas, A Familiar Problem'

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

[accessed thursday, 15 March 2007]

[1] The article link has a ').' appended to it so it gives a 404.

domp• 19 years ago

I found the girlfriend and location issues to be the biggest challenge for submitting. Luckily my partners gf lives close, I can't score a girl and we both live in Massachusetts. Works out perfect!

danielha2• 19 years ago

The downsides to something like this is absolutely context-dependent. But the reasons given in that post just aren't convincing. Going to Cambridge is not a "disruption" given the milestone it represents in your startup's progress. When you're a new founder with little to go in regards to beginning a company, it's the ideal scenario. For my goals, I could not think of a better use of time and energy than being involved in YC's program and working on my startup full-time.

Harj• 19 years ago

putting a poor social scene as a con. amusing. that's a con if you're deciding where to go on vacation. not whether to accept startup funding from yc.

jamiequint• 19 years ago

I agree, if you seriously worry about a poor social life for 3 months or your gf can't understand the opportunity the situation presents, its either time to get more dedication or a new gf.

Leonidas• 19 years ago

I admire your friend's dedication to his gf and you being a great friend in understanding. However, you have to consider this: you're just starting out now..once your startup is in its later phases, you will be MUCH busier. If the gf can't understand now, would she understand later?

The gf 'issue' shouldn't be an 'issue' at all

Alex3917• 19 years ago

All of the potential YC startups should get together and unionize to force higher valuations and shorter working hours.

/irony

danielha2• 19 years ago

It seems we're all coming to the same conclusion here:

If the social scene, the necessity of travel, and girlfriends is even thought of as issues, perhaps this funding program really is _not_ for you. Perhaps, even, it may prompt you to reconsider if starting a company at this point is right for you. Pursuing a startup requires an extraordinary amount of dedication and focus; the issues presented are not indicative of that.

Is Y Combinator right for your startup?

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