There is real danger in aiming for that. The way to make the hit rate higher is to fund safer bets, which are usually not what generate the giant returns.
I'd like to the "slugging percentage" be higher, but I think the hit rate is perhaps already too high.
I'm not sure there's immense danger. VRBO/ADP/PayPal/UPS/Xdrive 2.0 aren't super risky. Basically going in to huge categories and "doing it right". Again, easier said than done. I get that. But with 100 startups per year, an incredibly smart group evaluating, a priceless 3+ months, etc, I'd like to see even better stuff. Sure, maybe slugging percentage is the better number.
Maybe because AirBnB found success in commercial property rental, not renting out your couch to someone, the original pitch. But I still don't think it's clear why AirBnB succeeded.
Even very early on though the plan revolved around there being no real natural barrier between couches and commercial property no? It's in the email exchange released by PG to show how people can miss the idea. If someones plan involves starting with X because it's a good stepping point to Y, I don't think it's fair to say "oh but they were only found success with Y".
It's not clear couch rentals was a good stepping stone to whole unit rental; why not list whole units directly? And I'm wary of claims that grand strategies existed from the beginning, those strategies are usually post-hoc inventions.
In retrospect AirBnB could have been more accurately pitched as a better VRBO but there still isn't an obvious reason why that would have been a good investment.
Exactly. Also noting that there is a similar theme that has gone around in business calling companies stupid for, say, not green lighting computer or idea that "a Wozniak" (he wasn't probably the only one just the one that we know about because of what happened next) showed them and didn't recognize the potential. Could have been the pitch could have been 1000 other reasons. (And of course sure maybe they did miss the opportunity possibly..)
Oh, it was far from an obvious win. At that stage, it was going to take a relentlessly resourceful team making a series of good decisions. Further, going to complete strangers for an initial $150k raise doesn't make a ton of sense. This is friends and family territory or you would need to get to know some (semi-)professional investors. I don't think there's a whole lot to be learned from that story except that it's not a great approach to seed raising.
Hah, I doubt they do that, but it would be interesting. Make it double blind. Pre-select a couple of teams for acceptance to YC but don't tell the interviewers until afterwards, and never tell the teams, so that the team still feels like they got in on their merit.
This is certainly an experiment that YC could afford to run. Going random is really the only way to know if your selection processes are extracting real value or not.
The best way of doing this would be to pull the random companies out of the good, but not good enough to fund, pile. I am sure YC has little problem telling a good startup from a bad one, but I bet they have real problem picking the excellent from the good. Trying to pick the excellent out of the good is where you are most likely to run into unconscious biases.
You can keep a low hit-rate and focus on giant returns by playing the lottery, but fortunes are built on compound interest and diversified portfolios.
Reducing the number of failures does not mean getting rid of the big winners. It could mean focusing on large existing industries over speculative, pie-in-the-sky trends.
Think about ZenPayroll (disclaimer: early employee there, biased.) Product-focused payroll is not sexy, but the impact is massive and a tremendous business opportunity. We're now building software for local governments. Not sexy, huge market, huge impact on humans, clear path to single, double, and home-run.
My biggest frustration with looking for founding teams chasing these speculative bets is the sheer waste of human talent. I don't want to see another all-star team waste their time on bitcoin and food-delivery.
There are real, serious problems with the same upside but whose "failure" scenario may be a $25m business.
ZenPayroll was far from an obvious winner when we funded it. This job is so much easier with hindsight. If you can actually pick the winners better than we can, there's a giant fortune awaiting you :)
I'm not saying that ZP was an obvious winner when you funded it, because you didn't even fund it!* And that's kind of the point.
The companies that get into YC are often speculative in their ideas. Maybe it is devaluing the idea over the execution. Maybe it is the belief that getting in early to a growing trend is more valuable than reinventing an existing idea.
Regardless, the result is great teams of founders who think the key to success is a crazy idea. Sometimes crazy ideas work (AirBnB was kinda nuts at the time) but there seems to be a heavy weight in companies funded towards those types of investments versus the ZenPayrolls. Which tends to attract the same.
* They were Switchboard Labs at the time, doing something totally different.
Actually, I did fund it. I personally invested shortly after the ZP pivot :) (and it still wasn't clear they would be successful)
Nevertheless, the fact that yc invested pre-pivot only reinforces my point, as ZP wouldn't even exist had YC not taken a chance on the team and then helped them find a more promising idea.
Sorry I was unclear, I had meant YC didn't fund that idea because it didn't exist until they were already accepted.
I see your point, that the team is the most important part and YC invested in that. My feeling is that YC can be more effective at funding those types of ideas and teams. That the hit rate can be higher by focusing on a different class of idea. Perhaps that means more pivots or different ideas accepted at the start. I'll try to flesh this out more.
P.S.
Unrelated, but thank you for sharing your thoughts. I appreciate it
It could be easily argued that the promise of bitcoin (blockchain) will contribute way more to the betterment of humanity than anything ZenPayroll will ever do (I like ZenPayroll, don't get me wrong). But regarding bitcoin, the argument for increased transparency (public ledger), reach to 3rd world consumers who do not have access to a stable financial system, reduced overhead and costs of existing global financial systems etc. are very important and worth the time of smart, talented founders.
I think it's great that you believe in what you are doing versus what other "all-star" teams may choose to do but your comment is equally frustrating, IMO.
Maybe. I disagree about BTC. It sounds amazing in theory, but in practice I would rather help millions of small business owners.
When you talk with them, they never say (or say without knowing it) that their biggest problem is financial transparency. Or that customers want to buy but want an anonymous currency. Or that they need to switch between many different currencies. BTC has always felt like a solution in search of a problem. The blockchain is wonderful technology as well, but that's not the hardest part of most startups.
This makes sense to me more on the scale of a single company. Put together a great team and focus them on a long-term problem. Their year-over-year drive and passion will outlast the rollercoaster of starting a company, leading to a much better shot of those huge returns.
Rather than going all in on the flavor-of-the-week, I agree with the focus on radical improvements to existing markets. It's far more likely—which does not mean less impactful—that we can fix known problems than fix as-yet-unknown problems.
You're painting with too broad a brush. There are kinds of founders who are in conflict with their investors (first-timers without significant savings), but there are plenty who have the same risk tolerance as their investors do.
A fairer complaint to make is about the tension between investors/founders and employees.
This is all neither here nor there, though, because whatever kind of founder you are, you are vastly more likely to get external financing in the post-YC era than you were before YC happen. YC funds all kinds of companies that aren't immediately on a moonshot trajectory. VC firms as a rule don't.
I am not a YC booster, but I've been in startups since '95, and there is just no comparison. YC has made things significantly better for founders everywhere.
Taking fewer risks and only investing in "sure things" is in neither our interests nor the founders. The "safe" option is to not fund them at all, like a bank or other conservative organization would.
Paul are you concerned that by only funding companies that can hit the ball out of the park that you are biasing the sort of businesses that the smart founders are creating? Assuming smart founders know what sort of businesses will get VC funded then only the second tier founders will build businesses that not going for a moonshot. This is obviously going to bias the final outcome.
Do you think that if a business like YC were to commit to funding "safe" options that good founders would create safe businesses that could achieve returns in aggregate that would rival the high risk / high failure model?
YC funds approximately 0% of the new companies started every year, so it's not like there's a shortage of other options :)
As for returns, the average value of YC companies that are more than two years old is over $100M. I'm not aware of any other model that even comes close to that.
Paul I know that YC has a very minor direct role in company funding, but YC is extremely influential - where YC leads many (blindly) follow.
I see this effect here in Australia where founders and startups are trying to follow the YC model to success despite the ecosystem here being really different. The thing I really love about YC (apart from HN) is that you guys are trying to do things differently - the last thing the world needs is a 1000 YC clones all following your lead and nobody trying different approaches.
I too would like to see a literal moonshot. I have thought a lot about this topic over the years and I think everyone is stuck because they have been concentrating on the wrong area. The cheapest component in the whole process is the humans - the way to get a real moonshot off the ground (sorry for the pun) is to put risk back. There are plenty of people willing to be heroes so why not optimise everything around that - the engineering costs go way down if you are willing to tolerate a high failure rate.
Blackwell's growth calculator can be fun to play with and perhaps provides insight into the advantages of investing in unsafe fast growing companies (aka "startups" as used in Silicon Valley). Note that the growth rate defaults to weekly.
So ... trying to get my brain in gear, if investors weren't taking the occasional 10,000x opportunities so seriously, pressure on 100x-ers to swing for the fences might lessen ... but it would be much harder to get the money to get to 100x in the first place.
There is another way to get the hit rate higher, just like we got better at stuff we couldn't so in the past. It's called SELECTION. That's why all our industrial processes today are better than 100 years ago. They aren't "safer", or performing worse, they perform better than EVER because we have figured out what works and standardized it.
In accelerators, that means having more consistency in what factors work, and more selectiveness. Take things that repeatably work and use that.
In my opinion, companies like Google build one hit after another, internally, by re-using their internal platform and users and virality. There are failures but not as much as with startups. But it all benefits from internal resources, server farms, infrastructure, user base etc.
If you are outside such a company, use an open source platform that worked for others. We are working on such a platform and will probably take partners in a couple years, to build apps for our several million users, and provide them with all the infrastructure to try things out and take a % if it works out.
> In my opinion, companies like Google build one hit after another
Wait, what?
Do you have any idea how many ideas they've churned through to get the relatively few hits they've had?
Wave didn't do all that well.
Orkut had a decent run before they dissolved it (almost 11 years)
G+ is still in question.
Yes, they've had some success with some products. And made some excellent purchase decisions (you didn't think they wrote everything they released, did you? Urchin? Writely?).
They've also killed software instead of fully developing it: notebook, reader.
And that is to say nothing of the large numbers of 20% projects. I've personally heard engineers (as a whole) at Google being chastised because the success rate of 20% projects was too high.
That may be true of industrial systems, but human systems bite back. If you devise a strategy for the stock market or the startup market to make more money that anyone else, people who get wind of that strategy can (and will) devise a counter-strategy to eat your lunch.
Innovation is not zero-sum, but if you create a monoculture of "what works", then what will almost certainly eventually work in the market is something different than the monoculture. An interesting analogy here is Feyerabend's take on creativity in science, "Against Method."
Also, I strongly disagree that Google has figured out a process for innovation. Google does not have "one hit after another." They have a hit here and there in a sea of failure, just like Microsoft did. IBM, on the other hand, had one hit after another, until the market figured out how to "disrupt" them, and did.
As an investor I've spent much of the last twenty years trying to figure out how to make a better risk-adjusted return. Either I'm a complete idiot, or it's not as easy as it sounds.
As an investor I've spent much of the last twenty years trying to figure out how to make a better risk-adjusted return. Either I'm a complete idiot, or it's not as easy as it sounds.
These are not mutually exclusive :)
More seriously, you do make a really good point. Innovation is hard and making money from it is even harder.
>In my opinion, companies like Google build one hit after another,
There is a huge difference though. Google has the resources and network to push things towards success. There are so many different reasons why a startup may fail, but Google is able to avoid many of these issues because they are google. Not a good comparison IMO.
I'd like to the "slugging percentage" be higher, but I think the hit rate is perhaps already too high.