I think this comment shows everything that is asinine and vapid about the YC "community".
Ian Clarke invented freenet... the most successful peer-to-peer privacy network.
And whether his businesses have been successful or not (I don't know, but I know you don't) he's been more successful than the members of this community. He has far more users than reddit, for instance.
Its amazing that every disagreement or criticism of YC is met with the "you're a failure" or "you're jealous" or "you're bitter" response.
Never a response on the point.
This is what has me increasingly believing that YC is a cult of personality-- its adherents don't make arguments, they repreat mantra. Their motivation is not intellectual honesty-- but defense of their idol.
Please, prove me wrong!
These are the classic comebacks of kids. Is this community made up of college students? Is that the problem?
Is FreeNet really all that successful? I remember seriously looking into it back in 2000, when Napster and Gnutella and FreeNet were all the rage, and thinking it was incredibly innovative and potentially world-changing. However, back then it had no GUI and required that you search for files by hash code, both of which were showstoppers for me. I've kinda forgotten about it since, because none of my friends use it. The Wikipedia article suggests that it still has speed and usability problems. Have they fixed the showstoppers that made me ignore it in 2000?
I do think the remark about 5 minute IQ test is a bit arrogant. I am not sure if Paul really said this (haven't read the article) or it was just journalism as usual...
I'd recommend taking quotes from a news article with a grain of salt. It's out of context, and you don't get to hear tone of voice or see the expression on his face.
My impression is that there are lots of insecure people who are way overreacting to that comment. He took the sentence "we think the deal we offer is great for the startup companies" and made a geeky joke out of it.
I've had the same reaction as boris when reading the original quote. But what he was talking about was the case where someone turns them down because of the valuation. And I can see Paul's point there, actually.
Thanks to SwellJoe for setting it out straight, really why I bothered posting this - so slashdotters could have an inside opinion on the process. Yes they are angry sheep, but they are our geek brethren.
It's odd that they criticize the amounts raised so often: $15K for 5% means YC's average bet is that the output of one project from two coders is worth $300K. How many of the slashdot commenters think they could take a summer off with a buddy and make $300K worth of software?
And that's not including the risk premium and required risk-free return, both of which have been implicitly priced into the contract. To stay competitive, VCs often require an expected annual return on new investments of 30-40%. Because YC invests at such an early stage, I would suspect that their required return should be much higher.
A 50% discount rate would lead to significantly larger average valuations @ 5% equity ($15k invested): $450,000 after first year; $675,000 at second year; $1 million at third year.
Since any later financing would dilute their stake, the expected post-money valuations should be even larger.
Let me ask you this- - you're buying a car. You're going to use this car to deliver papers and make some money delivering pizza on the side. You're going to build a little business here that's worth 10 times the value of the car after a year or two.
Do you go to the bank who gives you %100 of the purchase price of the car in exchange for %9 interest each year? Or do you go to the local loan shark who charges you ("to stay competitive, of course") %30-%40 of the value of the loan, plus-- if you decide to sell the car-- 4 times the value of the loan at liquidation?
YC says you go to the loan shark and pay %400 for your money.
Slashdot "Trolls" say "that's way too much"... and you think they are engaging in bad math?!?!
YC doesn't say that. YC isn't competing with the larger VCs, and as far as I know large VCs wouldn't deal with a company the size of a YC candidate. Also, the bank isn't giving you a list of customers whose credit card statements show pizza and newspaper purchases in the last year.
Your analogy doesn't work; YC is buying equity just like anyone else. They're getting it cheap because they're paying for a couple undergrads to work for the summer -- your analogy would work if the bank would only give the loan if you had an established business and promised to work full-time for years.
Since we have the math, there's no reason to make up emotionally charged analogies. YC values these companies at somewhere between $100K ($10K for 10%) and $1.5 million ($15K for 1%). They do some legal work, and offer lots of advice and connections. Obviously, this isn't a good deal for everyone (given the industry I'm in, for example, I'd probably pass on YC), but if you're having trouble understanding why anyone would accept it, you may just have trouble thinking like a smart, ambitious, well-informed twenty-something.
And judging by the quality of your writing, age is not what sets you apart.
My analogy does work, but I wasn't talking aobut YC, I was talking about VC. I wasn't saying the YC model was broken, I was saying the VC model is broken.
This is not an "emotionally charged" analogy, it is exatly correct. This is probably not apparent because people tend to ignore the cost of VC money.
"And judging by the quality of your writing, age is not what sets you apart."
Seems all you got is insults... great argument technique.
You're still missing the point. The biggest advantage of YC is advice and connections. (Actually, I suspect an even bigger advantage is a supportive peer group and a sense that you don't want to let your investors down, but nobody's mentioned that yet.) That's worth a lot more than a bank loan, because it's a lot more than money. A bank loan for $15,000 will not increase your startup's chances of success nearly as much as being accepted to YC.
Firstly, that's not my impression of YC. Reddit took only angel funding before being acquired. Very few of their startups actually seem to take VC: the ones I can think of are Loopt and Scribd. Most use angel capital only. If you actually had paying customers at the end of the 3 months, I doubt YC would object to simple revenue-based growth.
Secondly, what do you propose instead? Most banks will not give bank loans to revenue-less Internet startups, because they have no guarantee of being repaid. Bootstrapping off savings is ideal (it's what I'm doing...), but not every idea is bootstrappable.
As someone who's double majoring in Economics & Commerce with a double concentration in Finance & Accounting while simultaneously pursuing a masters degree in Accounting, YES you might say I'm brainwashed.
However, society brainwashes us all in some way - don't you think?
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OK, let me try to condense 4 years of finance education into few paragraphs, so that I can point out the fundamental errors you're making:
First, you have to understand the capital asset pricing model (CAPM): E(r) = B(Rm + Rf) + Rf
E(r) = Expected return; B = beta = the risk of a firm; Rm = the market risk premium; Rf = Risk free rate
OK, so the capital asset pricing model basically states that the riskier the investment, the higher the return the market will demand. This makes sense. Investing in McDonalds is much safer than investing in Justin.TV, because you're almost guaranteed that McDonalds will be around in 5 years.
This is why VCs demand a 30-40% expected return - because there's a very high risk the companies will fail. This isn't "unfair" - this is how the stock market, and the rest of the financial world, works. When you buy a stock, its price has been shown to correlate to the expected risk. Higher risk stocks earn a higher return, as predicted by the CAPM.
Now, I think you're confusing debt with equity. Of course you could take out $15,000 of debt for 9%, but you're entering into a contract to repay it. If you don't, they get your house, car, etc. This is why the debt isn't as expensive - the bank knows they're getting their money back, one way or another. The bank is using the same CAPM calculation, except with a lower beta.
Finally, if you choose equity, you obviously will want to go with the firm that values you the highest (and gives you the best deal). The argument I was making is that YC already values these startups at a very high level. It's not very often that someone will value 3 months worth of your work for $332,000K [($15K/5%) x (1.5^0.25)].
Who the hell even reads slashdot anymore? It's been years, for me. Digg and Reddit pick up the stuff I actually want to know about, and I don't have to put up with Cmdr Taco's government-conspiracy pontifications.
- Reddit is a big group of paranoids ;-) rather than just one gun-toting Michigan hick, and
- the government "conspiracy" stories on Reddit are, by and large, true or close to true, whereas on ./ they're complete mis-readings of stories or out-and-out BS. It's a matter of degree, in other words.
He's just jealous/jadded/overly-arrogant.
Safely ignore him :)