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I don’t know what you’re saying there but Jay has a valid point there. 20 small startups, investing 400 to 500 k, having a Google payday after sometime, selling it off for at least a million, its a great return.

Where I don’t agree with Jay is the way he talks about Paul Graham and YC. I sincerely beleive YC is much better than having random angel funders or crappy, pain in the neck VCs.

May be that’s why he can afford to do what he is doing. He creates value. YC funded startups do get a lot of publicity. Paul’s personal site attracts millions of visitors every year, plus you got people “in the know” guiding you.

Just my thoughts, not facts.

You have variously suggested in an assortment of your posts and comments that, because the YC stake is small, they can afford to take greater risks, and that it doesn’t really matter that the quality of the portfolio companies is poor because there is “nothing at stake”. You have also implied that YC somehow exploits the founders by making such small investments (forcing them to live off ramen and get scurvy). I’ve tried to point out that absolute size of the investment does not affect the measurable consequences of selecting poor quality companies. Also that the small size of the stake seems roughly commensurate with the value of the companies and the % equity taken.

Your latest response is non-sequitur. Sure, if you diversify an investment fund across many investments, you can push the winners and cut the losers. This may or may not be a good thing; but this strategy too is independent of the absolute size of each investment. Your style of argument often diverts the thread from the actual issue at hand, it’s not very helpful.

And again: YC does not take a controlling stake in these companies. So they can’t force them to shut down and thus cut them out. (or take on other founders, as Alexis points out above). They probably do pay more attention to the ones which do well, though, that would be a natural approach, and I must say I don’t see an ethical problem with that.

“Paul wanted to give Aaron Swartz, another YC founder, a birthday gift in November. More than anything else, Aaron wanted co-founder so Paul suggested the “merger”. Merger is probably a bit hyperbolic for what actually happened, Aaron basically moved in with us and we made him a co-founder.”

I ought to address this quote because I feel like I did a poor job explaining myself. I think I was trying to be cute and was instead unclear. I based the “birthday gift” on this quote from Aaron in the infogami blog:

“[Paul and his friends] noted my birthday was tomorrow and asked me what I wanted. I thought for a moment about what I wanted most. ‘A cofounder,’ I finally said. We all laughed. The next morning was my birthday and I was awakened by a knock on the door from Paul. ‘I thought of a solution to your problem,’ … ‘Merge with Reddit!’”

The issue is not that Aaron was looking for a cofounder and PG forced us to merge with Aaron — it was just a recommendation. After Paul had suggested the idea, Aaron began working with us and as the weeks passed, we thought it’d be a good fit.

I called it a “merger” because I think most people assume the word has a much grander connotation (e.g., when AOL merges with TimeWarner). We did legally merge reddit (Steve and me) with infogami (Aaron) in Jan 2006, which is when Aaron did become a legal cofounder of the new entity, but it wasn’t a very dramatic (and I thought the word sounded hyperbolic) as we’d already been working and living together.

Clearly you don’t understand finance and risk. If you have 20 investments of $20K each versus one investment of $400K, you can prune your losers and support your winners much more easily. It’s like allowing evolution to flourish. Rather than betting on one horse, bet on 20 baby horses and nourish the ones that get bigger faster. It’s not a bad strategy for the investor. Push each of your 20 portfolio companies to the highest risk/reward scenario possible – hence launching free products with no future revenue stream and pray that one takes off.

There is a gross logical fallacy in your argument. The size of each individual stake has no bearing on the expected return across a diversified portfolio. There is not “literally nothing at stake” for YC. The only thing that will make up for a high risk is greater upside potential. It is a mathematical fact that the size of the stake does not come into it.

And, no, I would absolutely not choose invest my $400k in small stakes across 20+ startups consisting of naive incompetent scurvy-ridden coders working on crappy ideas!

I believe I made my points very clearly. Let me re-iterate them for your edification:

(Please note that these are sequentially ordered)

1. Founder applies to Y Combinator with X idea

2. Y Combinator chooses founder and then gives founder 5 minutes to accept funding offer. Founder tends to be young, impressionable coder with limited business and negotiating skills. Founder is overawed by Paul Graham and accepts offer.

Y Combinator then invests in founder’s idea but often changes it. That’s fine, many start-ups change direction.

3. Because Y Combinator has so little invested in founder and aforementioned start-up, Y Combinator’s incentive is to take maximal risk as there is literally nothing at stake. Founders are driven away from any sort of viable business to follow “projects” or “features” that Paul Graham finds intriguing.

4. Start-up becomes more of a product development shop of sorts and prays that some major internet company will purchase it.

5. Founder gave up 6% for chump change of which much is spent on moving out to Silicon Valley, living in the same apartment building as other Y Bombs, using the Y Combinator law firms, etc.

$15,000 barely gets a legal agreement done for you. Add in the costs of moving and you net out to 0.

Yes, if Y Combinator invests in shitty start-ups, then they deserve a low valuation. The point I am making though is that Y Combinator makes the start-up focus on extremely unlikely outcomes because it’s stake is so low and it’s upside so easy.

If you could get a bunch of 22 year olds to live on ramen, get scurvy, live 5 to a 2 bedroom apartment, and have 20 groups of them working for you for a mere $400,000, you’d do it. One will pay off. It’s a great model for Y Combinator, it’s a poor bargain for any reasonably intelligent entrepreneur.

Lazy, dumb, impressionable entrepreneurs + Y Combinator = match made in heaven.

I’ll respond briefly to the reddit “merger” story in a separate message, so as not to dilute the earlier message, which represents what I really have to say. Fair enough, you found a reference backing up your report that something went down. You know it’s plausible that PG made a personel recommendation that turned into a mistake. Maybe its even true pressure was brought to bear on the original reddit founders to comply. It’s still true that YC did not have a controlling stake in reddit, so legally they could not force the issue. If a mistake was made the original founders share responsibility. Seems to me it turned out ok for them in the end, mistakes and all.

You know, the startupstories post you referenced overall reflects quite well on YC in its tone. Here’s another Alexis quote, as an example:

“For the most part, YC was very hands off. Early on, our top user happened to be one of the YC investors (his name rhymes with Tall Graham) so we were getting lots of feedback on the site. All in all, they were a great resource for advice.”

I’m obviously not being very clear, I’ll try just once more. You claim on the one hand that the YC startups are of generally poor quality; and on the other that the YC investment is paltry and that 6% is a lot of equity to “pony up” for it. To me this represents a disconnect at the core of your overall message, which to me pretty much undermines the specific criticisms you level against particular startups–some of which may well have merit. It appears that you have an ax to grind.

Again, if the fair value is $250k, then $15k is a fair price for a 6% share. It’s not “paltry”, it just is what it is; originally conceived as enough to fund a couple of college students through a summer developing their idea. If more cash needs to be raised, more equity needs to be paid. You don’t seem to dispute the $250k valuation for these very early stage companies, indeed you generally trash them, and by implication their value. I’m not sure why you’re still going on about paying equity for the dinners with PG, my point was the dinners, mentoring, etc don’t even come into this calculation.

Alternate sources of funding, such as VCs, are not generally reputed to have altruistic motives.

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You can meet a lot of people and get a lot of advice without giving up any equity. You can’t claim that the “dinners” are things one should have to pay equity for. I think that going through Y Combinator is “cool” because Paul Graham has done an amazing job marketing it and building his personal brand through his essays.

An acquisition is reasonable, but you have to realize that the reason Y Combinator doesn’t disclose a lot of the acquisition prices are low because they are basically talent acquisitions. So I suppose it’s like doing a start-up to try to get a job at Google/Facebook. Good for them. That’s not building a business.

Good engineers have access to web sites to contact people. They can show up at networking events. Y Combinator is competitive because it’s hyped. They deserve a lot of credit for building a great brand. I’m just trying to remind everyone that “bootstrapping” doesn’t require a paltry amount from Y Combinator and you don’t need the connections they give you nor do you need to focus your tremendous brainpower on building mindless businesses with a minimal potential to succeed or perhaps more importantly, help you learn about building a business.

From the mouth of Alex Ohanian (one of the Reddit co-founders):

“Paul wanted to give Aaron Swartz, another YC founder, a birthday gift in November. More than anything else, Aaron wanted co-founder so Paul suggested the “merger”. Merger is probably a bit hyperbolic for what actually happened, Aaron basically moved in with us and we made him a co-founder.”

http://startups...nder-of-reddit/

This is the same Aaron Swartz who was fired from Reddit. Sounds like a great “suggestion” from Paul Graham. No real VC firm would ever pull a joke like this.

Sure, being a critic is easy. Being a fanboy like you guys are is even easier. “I love this and I love that.” Everything is great in your world. I’m just trying to bring a little bit of the real world. Sure, I knock a lot of dumb ideas and a couple will make me look foolish by figuring out a strategy. Constructive criticism is supposed to be used to mold your business model – not claim “we’ll figure one out later”.

I find it amazing that you fanboys hardly ever address any of my points and even then it takes like 20 of you arguing with me to bring up one valid point. Please try harder. I would appreciate an engaging debate every now and then.

@ 51 Zaid

Yes, those two may generate some revenues with the “Freemium” model which is pretty much the only model that can work for them given that they aren’t sites that will generate enough traffic to be ad-supported. There’s nothing evil to twist it into, but again, no statistical significance behind the claim that Y Combinator churns out a lot of successful start-ups.

Thanks for the response. I’m sorry, though, but I am still not clear on your position. If an early stage startup is worth $250k, then $15k is, objectively, a fair price for a 6% stake. This is with no value placed on the connections, mentoring, and dinners which may or may not come with the investment. Of course one can debate the worth of a very early stage company, but with your generally dismal view of the YC companies, I somehow don’t think that’s your problem–based on your opinion of these companies, how do you think they should be valued?

Regarding your comment: “when your basis in the investment is so tiny, it’s not hard to break even”. Like penny stocks, if these tiny companies don’t generate any value YC will not be able to extract the $15k. To break YC needs to cash in at some significant multiple, since only a fraction of startups get to a liquidity event. There’s no getting around that some of the YC portfolio companies need to create value after the founders program seed funding for YC to break even, this is true whether the initial funding round is $15k or $15M. By the way, if YC is able to cash in their 6% equity stake at some multiple, the founders collectively have an opportunity to cash in their collective 94%, the interests seem well aligned. I’m afraid I still see a contradiction between your low opinion of the companies, and your implication that YC is taking advantage of them.

I suppose one could have a reasonable debate about when it’s appropriate for a business to generate revenue, and how clear a plan to do so one needs to have at the outset. But it seems to me that acquisition is an honorable exit alternative. At the acquiring company would have to see some value in the startup i.e. the potential for a revenue stream; unless they’re just being dumb. I don’t see why this strategy is intrinsically riskier than one which focuses on early revenue.

As for free will and the Reddit “merger”; how could YC force Reddit’s co-founders do do anything, while holding only 6% of the corporation’s equity? Do you have a reference to anything posted by those actually involved which documents dissatisfaction with how this is handled?

I thought that the YC founders program was really quite competitive, not an “easy way out”. Can you elaborate specifically on the alternative funding sources that such early stage companies with such inexperienced founders have?

/waits for Jay to twist that into something very evil:)

People don’t like extra effort, they are more likely to ignore an ad they don’t like than click or move a slider. On the other side of the same coin, they will be more likely to just click on an ad they do like than muck with some sort of rating system.

People don’t always know what they like, just because one day they find something attractive doesn’t mean a week later or even hours later they will like the same thing.

In the words of the recent film Ratatouille’s Anton Ego – In many ways, the work of a critic is easy. We risk very little yet enjoy a position over those who offer up their work and their selves to our judgment. We thrive on negative criticism, which is fun to write and to read. But the bitter truth we critics must face is that, in the grand scheme of things, the average piece of junk is more meaningful than our criticism designating it so.