Can The Y Combinator Idea Turn Into A Movement?
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Can The Y Combinator Idea Turn Into A Movement?
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Re: Can The Y Combinator Idea Turn Into A Movement?
#2His blog is itself an example of the small-neuron phenomenon. If you're running the noscript firefox extension you see there are 26 sites trying to run JavaScript on just this one page.
Re: Can The Y Combinator Idea Turn Into A Movement?
#3Will proliferating seed companies start looking like micro sub-prime mortgage traders? They operate on the similar assumptions: pooling small, high-risk investments hoping that these individual bets are unrelated, thus driving down the variance when bundled together. This is probably only true for the seed company that gets to cherry pick first, which seems to be YC as of now.
Assuming an initial chance of success of 1/100 for the groups that are selected by YC, the chance that every single one from a group of 100 fails is about .36. That means that on an investment of about 1.5 million dollars (100 * 15,000) they have a 64 percent chance of a success, which I loosely define as a big acquisition or buyout. Also, YC companies seems to prop each other up and drive up success rates through intelligent nurturing and beneficial network effects. I'd guess that the payout probabilities are much higher over a three-four year period.
Now I am highly skeptical that the same math extends to other seed companies. Do they get applicants of the same caliber when there are so many second tier seed companies to choose from for a prospective applicant? People are willing to uproot their youthful lives and move for YC, but will they do the same for Techstars or LaunchBox? Probably not, at least not for 15,000 dollars and little else. If I throw in the assumption of a power-law distribution for startups, the quality goes downhill rather rapidly. And additionally, if YC happens to be decently good at identifying truly promising candidates and taking them all into their fold as they claim to, it the median success probability for the rest is going to be rather low. Assuming an order of magnitude drop-off, that gives an payout probability of .09 ( 1-(1-1/1000)^100 if they are operating on same scales as used for YC). The number of seed companies sprouting is surely going to be limited by such math...
Re: Can The Y Combinator Idea Turn Into A Movement?
#4That would require at least 3 people to walk in, sing a bar of "Alice's Restaurant" and walk out.
Re: Can The Y Combinator Idea Turn Into A Movement?
#5I would tend to agree that YC cookie-cutter clones are probably not going to succeed, but there are probably niches that are underserved. One that immediately comes to mind, just from the various discussions here, is the "I want to found a company, but I'm not in the US, and there's no such thing as a company founder visa."
Re: Can The Y Combinator Idea Turn Into A Movement?
#6The hard part is not gathering the money, but knowing who to back. That's why there are not a million successful Y-Combinators.
OTOH it is probably possible to figure out how PG and company are judging the people and ideas, and duplicate the methodology.
The world doesn't need a bunch of bad YC clones, but it sure could use a few more good ones. :-)
Re: Can The Y Combinator Idea Turn Into A Movement?
#7Movements require charismatic leaders. You can duplicate the $$$, you can duplicate the choice of companies, but can you lead them?
Re: Can The Y Combinator Idea Turn Into A Movement?
#8Will proliferating seed companies start looking like micro sub-prime mortgage traders? They operate on the similar assumptions: pooling small, high-risk investments hoping that these individual bets are unrelated, thus driving down the variance when bundled together. This is probably only true for the seed company that gets to cherry pick first, which seems to be YC as of now. Assuming an initial chance of success of…
>Will proliferating seed companies start looking like micro sub-prime mortgage traders?
I question the analogy. Seed funding might become a fad investment, but it will surely be less volatile than the subprime mortgage sector. Subprime mortgage originators and buyers backed their assets (the mortgages) by a large amount of debt. So, if their assumptions were only a small bit off (say defaults were 5.0% instead of 4.0%) the debt holders could demand a large amount of new collateral, more than the companies had on hand, forcing them into bankruptcy.
Most venture funds have little or no debt. If they overestimate their return by 25%, that means that they will earn 25% less than expected. They will not, however, go bankrupt.
Re: Can The Y Combinator Idea Turn Into A Movement?
#9The hard part is not gathering the money, but knowing who to back. That's why there are not a million successful Y-Combinators. OTOH it is probably possible to figure out how PG and company are judging the people and ideas, and duplicate the methodology. The world doesn't need a bunch of bad YC clones, but it sure could use a few more good ones. :-)
Paul Graham backs companies that fit into the Paul Graham philosophy. This probably causes YCombinator to miss the majority of possibly profitable investments. I am not criticizing YC here, they are only looking for a few dozen startups each year so it is fine if they miss most of the good ones. However, there is room for several YC clones, perhaps run by other successful founders, that invest with a different worldview than Paul Graham.
Re: Can The Y Combinator Idea Turn Into A Movement?
#10I'm surprised that the responses here thusfar are negative. Right now there are certainly more companies being funded by later stage VCs than YC knock-offs, so there's obviously a large enough pool of companies that can make it to that next phase. But can seed groups pick them?
I'll just make up some numbers:
Let's assume that the seed investment gets diluted down to 2% before an exit, and let's assume a buyout of $5 million. If we pretend that the only costs of running a seed firm are the investments, with seed investments of $15k, that means one successful at that level would cover 13 startups.
YC seems to be shooting for successful exits of 1/3 of their startups. If a group emulating could even do a quarter as well as YC hopes, then they'd come out ok (using my pretend numbers).