Investors haven't stopped investing. In fact the record series A valuation for a YC-funded company was set just a few weeks ago.
Even if investors did stop investing, it wouldn't kill us. At the last Demo Day, 4 of the companies presenting were already profitable. (All 4 have had offers of investment, incidentally.) At the next Demo Day the ratio of profitable companies will be even higher.
As for his alternative suggestion, among other problems, it wouldn't give startups any more runway. There's no reason to suppose that if we got into the real estate business, we could offer space to startups any cheaper than they can get it on the open market.
wow, record series A valuation? Did this company start working on their product near the beginning of their YC funding cycle or had they been working on it for a while? It appears to me that a higher percentage of YC companies are coming into the program with a developed product and traction than we had during the reddit, loopt, kiko days.
As an aside, I love the author Jamie Siminoff, I enjoy our product brainstorming sessions, and think his company Phonetag is awesome, but I think this article is a bit empty. I wonder if companies would be as hungry to succeed if they had guaranteed place to stay in a hotel that resembled a 24 hour lan party? Probably not.
Matt thanks for the comment and I agree the article is a bit empty, because in reality it was a quick post based on what I have been feeling lately, not so much an article...
I should probably write a follow up about how I would envision the "24 hour party". For example for sure you would not be gauranteed to stay, the ability to stay would be based on how the company and team are working. So in essence every week or 2 would be viewed as an additional round. However with this cost basis unlike others you could keep a company going a lot longer if you believed traction would come.
IIRC they didn't have too much done yet when YC started. They did have a lot done by the time the A round happened, though, because they'd done an angel round in the interim.
I'd say the bigger "risk" for YC is that the competition to get in becomes so fierce that building a profitable company would seem easier by comparison.
This is the "nobody goes there anymore it's too crowded" argument. The more fierce the competition to get in the more likely YC can pick winners. Also, they would get much broader visibility to other startups' plans. Consider the other extreme: fewer applicants than slots they had allocated. Quality and success rates would likely be lower.
Can you explain why a record series A valuation is useful for YC unless they bought you out as they bought in. I would assume it means less dilution of your equity stake but I would think a record exit value (e.g. acquisition) without further funding would be the best argument for your model.
I don't think he was saying that a big Series A was good for YC. He was just offering evidence contrary to the authors point that VCs weren't investing.
This seems to wholly miss the point of YC, associating it with a sweatshop style mentality: live for work, etc. But, YC has many, many, companies, possibly a majority, that would not fit into a "Hotel de Startup" model.
It wouldn't have fit my company, for example. We have baggage...family, dog, lives outside of our company, etc. I kinda doubt several of the most successful YC companies would have signed on at all for such an intense sort of experience.
Beyond the basic expenses of buying a hotel in the valley (I think the cost is being underestimated, even in this economic climate), the expenses of operating it are going to be very high, even without staffing it as a hotel. It's obviously a mandatory expense, and everyone needs somewhere to live, but you're not going to save a huge amount of money over individuals placing themselves in their own apartment or house. And, more importantly you're going to self-select out of being able to fund any company that doesn't exactly fit the stereotype: Fresh out of college, no family, not from the area and thus not already settled somewhere in the valley, not needing to have a presence outside of the valley for business reasons, etc.
This is one of those things that sounds cool, but I think it takes the simple, and obviously successful, kernel of YC and adds a non-essential boondoggle that doesn't actually improve on the model.
I believe the solution to the "what happens after" shouldn't be "make sure the founders never have to think about after by infantilizing them and making sure they never have to think about necessities", but instead should be "make sure the founders are well-prepared for after". After is going to come eventually, if the company is to be a success.
Agreed. I thought only diggers fell for big, empty headlines. Angel investing is more likely to survive in the IT segment than standard VC investment due to the small barriers to entry. I just said more than that entire blog post.
VC's still have funds to invest (unless their limited partners renege on their commitments) and will have to invest them unless they return them to their limited partners. Most Angels will have seen a significant reduction in their net worth in the last year (and likely an even greater reduction in the amount of "risk capital investments" that they want to make with the remainder).
But the idea that you can put something out there on the cheap, get traction and become profitable is very much alive.
You can run a startup for two years for less than the cost of grad school. If anything, the YC model is more alive than ever. The labels should be worrying, not the talent.
I've been reading PG's stuff since way before YCombinator existed, and that was my initial analysis of YCombinator.
First of all, my belief was that PG graduated from five different colleges around the world because he liked being around smart young people, and to continue to be in a college-like atmosphere of optimistic young people without going to school in the U.S. and Europe for yet another degree, he started YCombinator, where he convinces smart young people to come to him, which is a much more efficient way of being around smart young people.
Another way I've thought about it was that PG was like a manager of boy bands of 2-4 young people, who try to entertain fellow college men instead of young girls (and later on, the general population, once their "act"/app caught on). These bands couldn't always sing, but they used technology to help them get a marketable product out, similar to how startups make up for their inexperience by using frameworks and web services to make their product improve, so they could continue to release "new records" regularly.
Over time, I've found that both the number of startups YCombinator has launched and the addition of the jobs page to news.ycombinator has shown that PG is actually not like a manager of boy bands, because the companies hire their own people and PG does not micromanage every decision, from what I understand. Also, I've noticed that media articles now describe these companies as their own beings, without always mentioning that these companies are part of YCombinator, something that is different from when YCombinator first started.
I am a little surprised that this got picked up, did not realize that my blog had the readership to even become link bait...
While the title might have been a little aggressive it was how I was feeling today. I have seen a lot of stuff recently which is what brought this post about.
Hope I did not piss off anyone at Ycombinator (or the companies that they funded) as this post (if you read it you will see) is much more about the VC market changing and in my mind hurting the scrappy entrepreneur's chances.
I thought this was an interesting post, you raised a point which I haven't seen anyone refute yet: wouldn't it be more cost-effective in the long-term to purchase a bankrupt hotel? I'm not the finance guru in the room, but I feel like it would be cheaper long-term.
I've done apartment hunting in the bay area, and it sucks. You have to look around, sign contracts, deposits, etc. It's a huge time and energy drainer.
I like your idea, I find it to be creative. Can someone please discuss the downsides to doing it this way? Let's put aside the whole "YC is dead" argument, that's obviously only going to degenerate this otherwise meaningful discussion.
"wouldn't it be more cost-effective in the long-term to purchase a bankrupt hotel?"
It would be the ultimate extension of the Google (and Microsoft before them) "keep them at work" model. Bed, board, work in one location. Every cost could be amortized over the number of people/companies you have living there. Incomparable face to face networking opportunities.
Certainly one of those brainstorming "this is way too crazy to work...or is it?" kind of ideas.
It works on college campuses, why not elsewhere? Dorms largely eliminate the apartment-hunting roadblock and provide very close contact with (theoretically) interesting people.
I lived off campus for the last two years of college, and it made the experience suck a lot more.
This is the reason why I gave my upvote, nothing about a linkbait title or talk about VCs.
Steve Chen (from YouTube), Aber Whitcomb (from MySpace), Jim Young (from HotOrNot), and Ashwin Navin(Bittorrent) are actually doing something like that right now.
To encourage religious commitment to a project, instead of a hotel, it would be way more appropriate to get access to a monastery in the countryside. This would work especially well for open source projects. I imagine the experience would include wearing robes and taking part in mass, where the attendants chant the GPL license together.
"So, if you’re just now starting up, don’t get blinded by the successes of the first people to realize a platform could be built and operated on the cheap. You already missed that wave. Now, unless you are extraordinarily lucky or well-connected, you aren’t going to succeed in publicizing your new service and getting up to a critical mass of content or subscribers or both unless you raise or have enough money to create initial awareness or value. There is too much clutter from which you must emerge."
...I believe that the Y Combinator model is dead. The idea that you can put something out there on the cheap, get traction and then raise a quick real round no longer seems to be valid. While there will always be exceptions to this rule, from what I can see the market for these companies to the VC’s is mostly dead.
He feels that way - how much more support do you need?
Btw, how many YC companies could you fund for the cost of buying a hotel in the Bay Area? 400? (assuming $6M for a hotel)
Is it because VCs are being conservative right now? Will they be conservative forever? Is it because all business models are going to become failure in this economy? It capitalism dead?
And why the big building full of hackers? How is that entirely different than it is now? If they create self-sustaining businesses, is it necessary to have VCs?
Couldn't you build the business up using the traditional model of making money and then sell it off to a bigger company?
Article smells a bit link-baity to me. Use Y!C in any title and it's automatically going to climb to the first page here.
i think his point is that seeding and growing businesses that lead to external VC capital and acquisitions is dead/dying.
his alternative is to essentially do the same thing, but gear it not towards external funding/buying, but just a single company that grows, fosters and continually owns the companies it helps to start.
its sparse on the details, but i had/have similar thoughts and would love to start or participate in something similar.
yeah, i was thinking the same thing, but didn't edit to add it. i think the main difference is that google has a moneymaker product that helps to fund the other small ones, which wouldn't be the same as this concept. or, maybe it could be, with coworking space being the main business to keep it above water on the basic expenses.
Eviction in California cannot be based on association with a particular group...only behavior, and, thus, only Justin.TV was evicted. It was not a mass exodus. There are as many YC companies in the Y Scaper as ever, if not more, as far as I can tell.
I've kind of had my doubts about YC myself (not the YC model) -- I was thinking this might be an intelligent piece addressing YC itself and the role of that sort of funding in startups.
Everything I blog I am obviously willing to have put out in the open. I stand behind the post, the title I would probably slightly modify for the wide audience (this was intended for my normal readership of about 100 people) it seems to now be getting...
But if you read the post I think the point I am making is clear and the title does fit that as well.
The problem is your tense. You make a prediction that will affect investors like YC, yet declare the firm immediately dead.
I would recommend writing to the audience you want to have, and nurture your current readership into loyalty through respect. That means reasonable headlines and fleshed out arguments.
I must admit though, I've toyed with the idea of a "dev bunker". Really cheap housing + coworking + startup community = super cheap collaboration.
I think PG is right, that it wouldn't be cheaper than the open market. But the benefit is in the colocation, not just cost.
There are plenty of YC companies that don't fit the super scrappy model though. We at Tipjoy have a house, for example.
I think it would be a lot cheaper. Getting contracts for office, housing, etc., is very expensive (both from a cash perspective and a business energy perspective).
Scrappy startups dont have offices. They work out of their apartments. I don't think you can do better than that market. Utilities, food, etc. might be cheaper, but that is very, very marginal.
Even if investors did stop investing, it wouldn't kill us. At the last Demo Day, 4 of the companies presenting were already profitable. (All 4 have had offers of investment, incidentally.) At the next Demo Day the ratio of profitable companies will be even higher.
As for his alternative suggestion, among other problems, it wouldn't give startups any more runway. There's no reason to suppose that if we got into the real estate business, we could offer space to startups any cheaper than they can get it on the open market.