The Best Deal In Startup Land

Sarah Lacy has a post up on Techcrunch about Paul Graham and Y Combinator. In the post, she says:

I’ve been a bit hard on Paul Graham and Y Combinator in the past. It’s not that I think he hasn’t been a great mentor to young entrepreneurs– he has. But that’s a lot of equity to give up and to date no Y Combinator company has really hit it huge.

I read that and went right to the comments and wrote:

it’s not a lot of equity to give up considering what he does for the YC
companies. in fact, i think its the best deal in startup land

Our firm has investments in two YC backed companies, Disqus and HeyZap, and hope to make many more. We've been attending demo days since the very early days of Y Combinator and we've paid pretty close attention to what Paul and Jessica do and how they do it.

You could say that giving up 6% for $25k is a bad deal, that it values the business at less than $500k. But that would only be true if all you got from Y Combinator was $25k.

The cash is the smallest part of the Y Combinator value proposition. I've met dozens of Y Combinator backed entrepreneurs and every single one of them has come away from the experience with a really good mindset on the startup process. They have a set of core beliefs which come from Paul and Jessica. They are lean, mean, and focused on the right things. They are almost always strong technical teams and they are often working on interesting problems.

And on top of all that, they have the Y Combinator "seal of approval" and they have Paul and Jessica tirelessly working on their behalf to raise the next round of funding.

I am not going to try to value all of that, but I can tell you this. It is worth a multiple of $25k and it is the best deal in startup land.

But maybe the best thing Paul and Jessica have done for startup land is inspire a whole bunch of fast followers. I don't think I can name them all right now as I am racing to get on a plane, but there are at least a half dozen quality programs that follow the Y Combinator model to some degree. So we now have hundreds of entrepreneurs every year going through one of these programs. That is a huge development and is making a difference. We may not have seen any of these companies IPO yet, but that will happen. It is just a matter of time.

#VC & Technology

Comments (Archived):

  1. Rodrigo Mazzilli

    YC does contribute a lot for a 6% equity participation.In fact, giving up 6% of your start-up actually increases its valuation a lot when it becomes a YC-backed company. It’s a no-brainer!

    1. Steven Kane

      here’s the data. probably not complete but not bad

  2. zacksteven

    Agreed! Better to have a piece of something big than 100% of something that doesn’t go anywhere. And the education is priceless. I suspect startups would actually pay to go through the program. Hope to see the Y Combinator model continue to spread.

  3. Steven Kane

    can i agree with your assessment of the huge positive value of YC but respectfully submit that is besides the point? or at least, besides sarah lacy’s point?$500K either is, or is not, a low valuation. the founders do not own more of their own company because they received so much value from YC.if you are right and lots of IPOs are coming (and I hope so!) then we will really have data to look at — data, that is, that demontates that giving up so much equity on day one of s atrtup really can be a good decision for founders if they get enough non-cash value-addas of today, there is no such mitigating data, only the simple truth that giving up 6% of your company for $25K is just that — 6% of your company for $25K.think of it this way — is there some amount of non-cash value YC can provide that old make it worth, say 12% of the company for $25K? where is the threshhold?its not today but tomorrow — over time — that valuation matters, no? just do the math…

    1. Rodrigo Mazzilli

      Any investment so early in the game is full of risk for entrepreneurs and YC alike. Before believing in IPOs, you have to believe in creating value and increasing the valuation of the start-up. Most of the start-ups YC invests in don’t even have a proper team and product.Getting adult supervision, some early capital and the support of YC and its network of advisers is well worth 6% in my opinion.As far as I know, Paul Grahan’s doors are always open for the start-ups he invested in, even later in the game.

    2. lacker

      the valuation is only $500K if you count the advice as worth nothing.if you would pay another $25k for that advice, you’re essentially getting a $1M valuation.etc etc.

      1. Steven Kane

        Respectfully, that is gobbledy gookIf not, can I show you a nice bridge thats for sale?;)

    3. Mark Essel

      Steven great comments all over this post, appreciate the different perspective and agree that the verdict is still out until we see some successful businesses. I suspect we’ll see quite a few viable models (disqus, dropbox are two of my favorites but there are many more).

      1. fredwilson

        I agree. Steve has done us all a huge favor with his comments in this thread

    4. fredwilson

      But steve, the entrepreneur really does get a lot more than 25k of value. What if you assigned a total value of the deal at 100k? Then its a really great deal for 2-4 founders and an ideaThat’s how to think about it

  4. Tony Wright

    Totally agree. Here’s what I said on the TechCrunch post:“That’s a lot of equity to give up…”As one who has given it up, it’s really not.In the earliest stages you want to optimize for you CHANCE at success, not your magnitude of personal windfall should you actually achieve it. It’s a no-brainer to me. It accelerates fundraising, makes fundraising more competitive (which probably raises your valuation by 6% right there), gets you a great network, gets you some great advice, and (the smallest part) gets you some free PR.Overall, your shot at success and/or an exit is vanishingly small. Startups are very fragile things. If you can increase your chances for success and build some early momentum by giving up 6% at a time where you have built virtually NO value (pre product), then it’s a ridiculously good buy.

    1. Steven Kane

      is 6% too low?doing a startup is like a bobsled ride — once you’re in, for some period of time, you can’t get out. meaning, whatever terms you agree to vis a vis financing at the beginning define your entire experience of the startup.again, i’m not arguing that YC isn’t providing great value and resources. stipulated. i’m just saying, entrepreneurs should always always visualize where they want to try to end up, especially right at the beginning, perhaps most so with regards to financing.will you be happy 6-7 years from now, owning 2% of the company?if not 2%, then what?decisions made today directly impact longterm outcomes — and decisions made today affect longterm outcomes more than most other decisions precisely because the valuations are so low…

      1. Tony Wright

        The math is simple, right? Paul actually has a pretty killer essay on thetopic here:…Excerpt:*An investor wants to give you money for a certain percentage of yourstartup. Should you take it? You’re about to hire your first employee. Howmuch stock should you give him?These are some of the hardest questions founders face. And yet both have thesame answer:1/(1 – n)Whenever you’re trading stock in your company for anything, whether it’smoney or an employee or a deal with another company, the test for whether todo it is the same. You should give up n% of your company if what you tradeit for improves your average outcome enough that the (100 – n)% you haveleft is worth more than the whole company was before.For example, if an investor wants to buy half your company, how much doesthat investment have to improve your average outcome for you to break even?Obviously it has to double: if you trade half your company for somethingthat more than doubles the company’s average outcome, you’re net ahead. Youhave half as big a share of something worth more than twice as much.In the general case, if n is the fraction of the company you’re giving up,the deal is a good one if it makes the company worth more than 1/(1 – n).*You’re talking about long term personal outcomes (i.e. how much $ do I getto walk away with) and I’m talking about chance of success (what’s my shotat building a profitable company that someone buys someday). Having 2% lessof the company (given that I have 2 co-founders) does not lower mymotivation one whit, and the value that YC gives moves the needle enoughthat it’s probably a net positive (i.e. owning 31% of a $10.6m company isthe same of owning 33% of a $10m company). And at the earliest stages(where YC plays) the biggest risk isn’t your personal stake– it’s losingmomentum and/or death-by-fundraising.Deciding how much is too much depends on the value offered and howinvestment-intensive a business is, I’d think. But at the end of the day,you just take your best guess using the above formula.

        1. Steven Kane

          I’ve read pauls essay and its spot onBut YC doesn’t negotiate – its a take it or leave it dealWhich is fineBut all your logic is still besides the point – YC has been doing its thing for 4 years. 40 startups I think? Any case at best the jury is still out. All the firm conviction expressed around here seems a little premature

          1. fredwilson

            i think it is more like a couple hundred at this point steve

          2. Steven Kane

            here’s the data. probably not complete but not bad

          3. fredwilson

            it’s great that someone is tracking this and in about five to ten years we’ll know the answer. that’s the problem with VC performance data as you know Steve

          4. Steven Kane

            YepThat’s all I have been trying to say – definitive statements about the value of the YC deal are premature

          5. jedc

            Hi, Fred. I put together that spreadsheet with YC, Seedcamp, TechStars, etc. as part of my master’s thesis on the rise of these types of programmes. I’m blogging my results (and the full paper) shortly. Will definitely send you the link once it’s up.So far, YC and TechStars in particular look successful. Both look like they’ve already made their money back in the companies that have already exited, and YC in particular has a handful of companies that could be real home runs, even after all the dilution.

          6. maeozkan

            Jedc, I would love to see the paper as well. Could you send it to me as well, please? My email is mae at goldenhornventures dot com. Thank you very much!

          7. jedc

            Hi! I recently posted my paper (and the underlying data sources) here: http://blog.jedchristiansen…The paper is on Scribd, so you can read/download it as you like.(I see Lady Judge is part of your team… my business school is named after her husband!)

          8. maeozkan

            Great! Thank you very much. I am downloading it right now.(Barbara is co-chair of our management company. She has been very helpful.)

          9. Satish Mummareddy

            Hi StevenI agree with you in principle that the 6% should not be a hard # and should be proportional to the value that YC adds. And i think they add more than 6% value for some teams and less than 6% for some teams. Yesterday night i though that YC had a hard 6% that they want. But i just dropped by YC website and saw this.”We usually invest $11,000 + $3000n, where n is the number of participating founders, up to 3 (i.e. 2 founders get $17,000, 3 or more get $20,000), in return for between 2% and 10% of the company. The average is 6-7%.”So maybe your point is already taken into account by Paul as he is willing to negotiate on the cut he wants based on the value add that he is going to provide to that team.

      2. kidmercury

        i def think we’ll see models where the investor gets double digit percentage equity and no capital investment. but to get there, i think what the investor is offering needs to be a lot more clear. right now it’s like, “yeah we’ll give you 25 grand and some advice” but the advice part is very vague. i think entrepreneurs will almost be given a blueprint — i.e. here’s the technical standards you use, here’s an open source community of developers you tap into, here are the benchmarks, etc. the fact that y com is starting to now doing that thing where they give you the idea and the entrepreneur builds it is i think a nice step in this direction.but ultimately to get there the security of knowing where the exit line is must be delivered. IPO market? lol. that’s dead and not coming back. the microfinance people are going to need to have liquidation models built in. upselling to VCs works for now, but only if VCs can upsell to the IPO market…

      3. fredwilson

        I like your advice to figure where you want to end up and work backThat said, if getting YC involved means your seed/first round is 20pcnt dilution instead of 30pcnt, then its a better dealI think that’s a real trade that you can make with YC and other programs like it

  5. Nate

    Since it doesn’t take a lot of cash to launch a web startup the non-cash contributions from VCs matter more. This is why VCs like Graham and Fred Wilson who’ve built good will based on transparency, writing, and personal reputation can punch above their financial weight class.

    1. fredwilson

      I love boxing analogy nathan!

    2. Steven Kane

      it may be true “it doesn’t take a lot of cash to launch a web startup.” but IMHO anyway it is not true that “it doesn’t take a lot of cash” to execute a startup, and be successful, and exit.fabulous outcome for announced today… they raised $35 milliontwitter has raised, what, $55 million?zynga, also has raised many tens of millions of dollarsfounders have to think about the entire lifecycle of financing a company, not just having an exciting first tranchehad the mint, twitter or zynga founders sold 6% for $25K at the outset, their personal outcomes would have been radically radically less — and that’s just simple math, no?

      1. Nate

        That’s why I said “launch”. While later influxes of capital are important, I’d imagine that the early rounds have the most influence on the outcome. That’s when relationships, culture, and product direction are still malleable.

      2. RyanHaugarth

        Mint did give up X% in exchange for legal support in the very early days. The founder sited this as one of the critical moves made that allowed them to go from nowhere to 140M in 3 years.If Mint did not give up that equity for the legal support, would their financial situation be different today… Absolutely! It’s impossible to say which way however. From the founder’s comments in his TechCrunch post… it seems he doesn’t regret it for a second.I completely agree that YC type programs can add a huge amount of value to the startups not only in cash… but “in kind” services that DO have value.

        1. Steven Kane

          Trading equity for services is common, and often smartNaturally mint did not give up 6% for $25K legal services – probly gave up 0.6%

          1. RyanHaugarth

            I think the point is YC brings a significant amount of these services to startups. Obviously you need to quantify all of this in order to do a proper assessment on if 6% is a good deal or not. Obviously again.. it is impossible to assign a true value to a lot of the services provided by YC. It’s up to each founding team to decide if the 6% is a good trade or not… I don’t think there is any shortage of startups ready to jump at the trade.

          2. Steven Kane

            here’s the data. probably not complete but not bad

      3. ErikSchwartz

        Twitter and Zynga both had experienced entrepreneurs as founders.Don’t know about Mint’s founders. FWIW, how good an exit for the investors is $170M if the previous round was raised at $130M valuation? Especially the later stage guys (I’m guessing Josh did OK).

        1. fredwilson

          the mint exit is awesomethere aren’t more than ten or twenty of that size in the web sector everyyearthey should be commended on it

          1. ErikSchwartz

            Just seems like the guys who are only in series C are getting about a 1.25X.Of course that is on an exit in <45 days…

          2. fredwilson

            focus on the entrpreneursthe VCs might make big money, might notbut the entrepreneurs hit a home run on this one

          3. ErikSchwartz

            Totally agree. The founders did awesome.

          4. Dave Pinsen

            Seems to be some disappointment among Mint’s users. Some interesting comments on Mint’s blog, which are also relevant to the previous posts here about premium versus freemium. For example, a commenter named Steven Bryson wrote,”Unlike a lot of the posts here, “free” was never a feature of that sprang out at me. Sure, it made it easy to try, but I have always been agreeable to paying for a good service. I tried Quicken Online and Mvelopes, and frankly, though neither one was great, I probably could have made one of them work if it weren’t for I chose to use Mint not because it was cheaper, but because it was superior.Intuit has a terrible reputation with their customers. I am also a QuickBooks Online customer, and I use it to manage my consulting business. I hate this product… I hate it more than I can describe it in this thread.And a commenter named Josh wrote,”I’m sorry to say I will be canceling my account.I am simply not comfortable with Intuit having access to so much personal data of mine. What guarantees do we have that this data will not be compromised or sold for marketing purposes?I would rather pay a monthly fee and know my data is guaranteed. Intuit is not buying mint simply to provide us a great free service; they intend to monetize, and it doesn’t take a PhD in Economics to see how they plan to achieve this.

          5. Mark Essel

            Good points Dave. When early adopters of a service dig in, was there no guarantee of data security or privacy? When it comes to most any service (some are explicitly public), users should have full rights to keep their information as private as they wish. Data portability is also a huge issue.

          6. fredwilson

            I hope they move to wesabe

          7. kidmercury

            lol i hope you’ll diss mint if they do

  6. ceonyc

    How much higher is the *next* rounds valuation b/c it is a YCombinator company and comes with that Good Housekeeping seal of approval? Net-net, it all evens out.Besides… its a free market. If Sarah doesn’t want to take money from Paul at that price for her next startup, she doesn’t have to. No one is putting a gun to the head of all these entrepreneurs who are applying.Also, how much is the PR worth that companies get by being a YC company? And the networking connections…

    1. Steven Kane

      here’s the data. probably not complete but not bad

  7. Dan

    It’s really just the beginning. Y Combinator is an experiment, right? So they are learning a lot from this experience, and I’m not surprised that after only 4 years they haven’t dented Wall Street yet. Unless this is 1999, it usually takes at least 5 – 10 years to do that.So it is important to read what Paul Graham writes simply because he learns things — not everyone from Ivy League or MIT or Stanford comes across as smart; one of the key elements is that the doctrine of the elect applies to startups; launch and iterate — and passes it along to all of us for free.I’m excited that startup scenes are cropping up across the USA. They act as a sort of filter, but inevitably some will be more successful than others. Y Combinator and TechStars seem to be strong, and I like Founders Co-op in Seattle. Atlanta, Pittsburgh, Philly, and D.C. could make it happen with their yc clones.Maybe we will learn something about the process that is essential to achieving IPO.

    1. fredwilson

      Check out the short post my partner albert did on this topic this morning

      1. Dan

        Very true. I was just talking with a more seasoned gentleman than myself in a coffee shop here, and he told me he was beginning to think that looking at factors other than business plans may be key. I pointed out that business plans often cite current market sizes, but it is hard to show new and large markets because you really need to build something for customers first (“will you use this?” will work on occasion, but not always).The problem I’ve always had with any application is that you don’t get the opportunity to show yourself and how determined you are. Figures on paper can easily lie. What’s important is character, and only real life experience can give someone confidence in another person.

  8. Mihai Badoiu

    Y combinator can take as little as 2% in equity. Would this number make it even more appealing?–mihai

    1. fredwilson

      Yes of course

  9. jos3ph

    Sarah Lacy’s job is to stir the pot and generate page views. At this point, it’s practically trolling to argue that YCombinator has not done a good thing for the world.

    1. Steven Kane

      that is not even remotely what she said. go back and read the quote?

  10. Mike

    Wouldn’t the 6% be more akin to sweat equity (even with the nominal $25k cash infusion)? In that sense, I’d have to agree with Fred that this is most likely one of the best deals in town. Also, is there any data on the YC backed success rate vs. the startup community as a whole? I’d assume it would be much higher.

    1. fredwilson

      There is no way to measure the startup community as a whole that I know ofWe might be able to look at the entire universe of seed investments made by VCs and reported to their LPs and we can probably also get a bunch of angel deals from crunchbaseIf someone did that work, I’d bet YC has a significantly higher success rate with success being defined as creating profitable sustainable businesses and/or exits (quick flips)

  11. dlifson

    Between the legal services, mentorship, speakers, and networking, I can say that the 6% we gave DreamIt was well worth it regardless of the cash ($20k). For less experienced teams, the non-cash value is huge, potentially the difference between success and failure.I look forward to the day NYC can boast it’s own startup incubator program.

    1. davidkpark

      We were selected to be a part of the First Growth Venture Network. No cash or equity component, just a lot of mentoring and advice. Would have loved to see USV as part of the group. Maybe next year.

  12. Don Jones

    Better to have a lower percentage of a very valuable company, then a high percentage of a dead company…

    1. Steven Kane

      ok, but thats like saying its better to live to be 100 than die at 60there’s just not enough data yet about YC companies to make any kind of judgement, and suggesting otherwise is a little cruel to young entrepreneurs, i fear. no matter what, founders need to understand how financing works over time, no?

      1. fredwilson

        I hear you steve but I see a wide swath of this market and I do understand the long term math you so rightly point out. I feel very comfortable with my statement that its the best deal in startupland

        1. Satish Mummareddy

          Would you recommend any team thinking of starting a company to take up the YC offer if they get in? Or is there a certain threshold beyond which the team should do it on their own?

    2. Steven Kane

      here’s the data. probably not complete but not bad

      1. Satish Mummareddy

        Did you pull all that data together? that was cool. 🙂

        1. Steven Kane

          No, a friend who wants to remain anonymous sent me the link

    3. fredwilson


    4. Carl Rahn Griffith

      As ever, simple is good. Well said.A percentage means nothing. Value means everything.

  13. rajjr_tx

    I love the YC model, BUT It doesn’tt fit well with people like me that have to feed a family. I wish there was an option for more seasoned new entrepenuers, like me. I would gladly suffer sleeping on the floor and eating 99 cent burritos, but I couldn’t ask my family to do the same.

    1. Andrew Hyde

      about half of the TechStars founders have been married with children. A hard thing to pull off.

    2. Jason

      I love it as well. But, there is no way I could afford to move there with my family for a few months. I would also have to figure out how to manage a mortgage for a house that I’m not living in during those months. :)I can understand why YC asks people to move locally. But, I really wish there was a way to be part of the program remotely.

  14. Ivan Kirigin

    I’d give YC the same amount of stock just to be advisors. Do people even need to know more?It isn’t about the money.It’s just bad journalism to ignore the non-monetary components.

  15. bojanbabic

    Interesting, since I’ve heard same story on TWIST from posterous CEO Garry Tan.Yes, they got 25K seed round. But, that was not all as Fred said. They held weekly dinner sessions where he met people that later invested in later rounds. On those sessions, weekly milestones have been set and afterwards all together have been working to meet that milestone. It worked out for them!

  16. davidkpark

    As a founder of a startup in the early stages, I completely agree with you that YC is the “best deal in startup land.” However, let me put on my other hat, which is as an academic. The question from an academic perspective focuses on if the $25K and 6% are the optimal cash/equity combination. Is it truly the “best” deal, “best” deal for who, and how do we even measure “best?” We could try to mathematically model this as a negotiation with uncertainty, or we could survey Paul, Jessica, and applicants to YC to see if they will reveal their true preferences on what cash/equity combination they would really do it for. Would be a nice academic paper.

    1. Steven Kane

      here’s the data. probably not complete but not bad

      1. jedc

        Hi, Steve. I was the one who put the YC, Seedcamp, TechStars, etc. data together… thanks for mentioning it so many times here!It’s not 100% complete for YC, but is virtually complete for the rest. But even for YC it’s probably 90%+ correct (except for valuations, which are my personal guesses.)

  17. Aaron Klein

    “But maybe the best thing Paul and Jessica have done for startup land is inspire a whole bunch of fast followers.”Fred: this is very true. I’m playing a small role in getting one started as a part of our local community college, where I sit on the board as a trustee. We’ll be offering dorm space, cash, mentoring, and potentially technical resources from server space to mechanical prototyping.In a year or two, we hope to have a couple of budding entrepreneurs to send your way. 🙂

  18. Andrew Hyde

    I agree that the program (and similar ones) add tons more than the $ on hand.It is generally a big discussion point for teams looking to do our program, and the biggest ‘can you believe we thought about that’ moment.One of our founders this year went so far to say “I robbed David Cohen blind” http://georgeaspland.blogsp… in reference to the 6%.

  19. Dale

    As a founder of two companies that ultimately failed bucause of a lack or support, mentoring and contacts, not cash, I’d say that YC, and it’s ilk, are a great value. It’s why we’re trying to get into the next intake.But I did have a question. Where did this $25K figure come from? My understanding is that it’s $11K + $3K per founder – with 3 founders that’s $20K, with 2 it’s only $17K.I’m not arguing that the mentoring, contacts, etc. arn’t the best part, just that the $ calculations seem off a bit.

    1. fredwilson

      Its the number I’ve seen. I was not aware it could be different for different teams.

  20. Linnea Geiss

    Tough to really “value” the experience even once you have the data from the first 40 companies…as those founders may take that experience with them to future startups that become the big hits (w/ or w/out YC). This is a journey, and it’s definitely a team sport, so I’m a believer that a supportive ecosystem of caring contributors will build stronger entreprenuers, companies and investors in the long term. IMHO, quibbling over something that is inherently fairly subjective to begin with probably won’t really move the needle on the ultimate outcome. Good discussion to have, though, as these are important decisions for founders.

  21. Doug Kersten

    Most of the YC winners just have a dream when they get the money and Paul’s time. I doubt that what is brought to the table by the founders is even worth $500K. After Paul gets done with them they are Entrepreneurs. Maybe none of the original YC deals will hit it big ( I doubt it) but I bet at least one of the guys/gals he takes under his wing hits it big. He’s building a future for many people.

    1. fredwilson

      So true. And that’s what I’m talking about. And now we have a bunch more people doing this. Its really huge

    2. fredwilson

      So true. And that’s what I’m talking about. And now we have a bunch more people doing this. Its really huge

  22. Dave Pinsen

    Has any Y-Combinator business become profitable without another round of venture capital? I can see how that might be rare, but in general, if you are an entrepreneur and want to retain the largest ownership percentage possible in your business, isn’t the way to do that to minimize your need for outside investors?

    1. Steven Kane


    2. fredwilson

      Yes. Many have. That’s part of paul’s mantra. Get ‘ramen profitable” and then stay there

  23. Bastian Lehmann

    Most of your posts make me actually wonder why you are not a kick ass entrepreneur yourself. I love you man! If i could choose one VC to get funding from, it would be you.

    1. fredwilson

      Thanks. If I could go back to my 20s knowing what I know now, I’d be an entrepreneur for sure. But I am a VC now and I love being one

    2. fredwilson

      Thanks. If I could go back to my 20s knowing what I know now, I’d be an entrepreneur for sure. But I am a VC now and I love being one

    3. fredwilson

      Thanks. If I could go back to my 20s knowing what I know now, I’d be an entrepreneur for sure. But I am a VC now and I love being one

  24. mydigitalself

    Not sure if this is a silly question or not, but what if they invested $0? Would it still be worth it?

    1. Dale

      It would be to me – I’d swap 5% for contacts, introductions and a network any day of the week.One thing that I think gets looked over is that with YC, not only do you have people like Paul Graham, but you have a whole bunch of people who are in the program who can be your early adaptors. These poeple tend to be young, smart and passionate. They drive a lot of your early success. Some of them are already alumns and some you’re having dinner with every Tuesday. Without these people you have to go out and find users, which as everyone who’s tried this before knows, is really hard. I think this is one of the most under-rated parts of the program.

      1. fredwilson

        I saw the same comment on hacker news (in the reactions at the end of this thread) and I totally agree with it

    2. fredwilson

      Many say yes

    3. fredwilson

      Many YC alums say it would have been

  25. MikePLewis

    I hate it when people talk about X being a bad deal and valuations being bad or good. The fact is, for an entrepreneur, the deal is only as bad or as good as your options. If you can get more than 25k and good advice for less than 6% than do it. If you can’t then don’t complain. It’s quite easy to comment and critique from afar but the reality is that every founder wants the best deal possible regarding money, advice, help, partnerships, etc. and they’ll take the best deal on the table.

  26. Satish Mummareddy

    The value that YC or similar groups add to a startup is dependent on the founding team of the company. To get a company off the ground and to a stage that it can be funded by VC, you need some attributes & experience in your founding team (this is no way a comprehensive list): technical skills to launch a product, customer focus, basic management skills such as prioritization, planning, growing a small team, ability to sell a vision to recruit people to work for free, ability to get users for your betas, network to get in front of VCs etc. Different founding teams have different needs in helping them get to the next stage. So the value that YC adds to two fresh out of undergrad computer science hackers is more than they would if the company were founded by a person who has been part of a previous startup for 4 years and worked in different roles ranging from Product Management to sales engineering to account management and managed small teams. For some teams the YC cut should be more than 6% and for some it should be less than 6%. But the terms of the a deal are set by the partner who is scarce, and clearly Paul is the scarce resource and he chooses to have a flat 6% for any team he chooses to work with. For some startups it is a better deal than others. But all startups have an opportunity to say NO and they don’t. So it implies that the startups joining YC think it is a good deal for them.

  27. steveplace

    “to date no Y Combinator company has really hit it huge.”I’d go out on a limb and say Omnisio was a hit. I’m assuming the “huge” part is a baked-in longshot bias from TC.

    1. Steven Kane

      here’s the data. probably not complete but not bad

  28. Carl Rahn Griffith

    It’s not the percentages that matter, the funding involved, the equity sacrificed. it’s about respect, trust, empathy and understanding. A 100% of that is worth more than anything else.

  29. Mike

    Ask any first time entrepreneur and what they would give to participate in Y Combinator, DreamIt Ventures, Capital Factory, or any of the other programs out there, 97% of the serious entrepreneurs would give up more to be accepted. These types of programs are more valuable than a B- School degree. They teach you how to actually start and develop a company, while at the same time introducing you to their network. The intros to the network are worth a 6% stake only.

    1. fredwilson

      B schools aren’t even in the same league if you want to be an entrepreneur. Now if you want to work as a consultant for Bain, go to B school.

      1. ShanaC

        You don’t even need to, they come recruiting for cute undergraduates from what they determine are the right schools around now….

  30. alexismichelle

    “The cash is the smallest part of the Y Combinator value proposition…”Absolutely– I can not agree with this more! Having spent this past summer as an associate with LaunchBox Digital (a Washington DC based incubator similar to Y Combinator), I worked very closely with the portfolio companies and saw first hand the myriad of ways that the program itself adds value far beyond that of the seed funding: weekly workshops and seminars, strong and supportive community, opportunity to focus intensely for an extended period, exposure to an extensive network of mentors and advisers, demo days, and perhaps most importantly, ongoing guidance from the LaunchBox partners themselves.More than anything, I was incredibly impressed by the amount of time, effort and energy each of the partners put into working with the portfolio companies (it far exceeded my expectations prior to coming on board). As someone who believes very deeply in the value of mentors and trusted advisers, I think this aspect of the program alone is well worth a small stake in the company.What I do wonder, however, is how viable a business it is for the incubators? Their equity stake likely gets heavily diluted in the event of additional rounds, and if the program has multiple partners and investors, any upside is ultimately split among several parties. I know much attention has been paid to this question, but I do continue to wonder.

    1. fredwilson

      It will work for the best of the breed. Sadly I agree that we should be concerned about the economic model for many of these programs

  31. Name

    There’s no substitute for cash. Startups have plenty of people willing to give advice, but almost nobody with money to offer. Really nothing matters but meeting the payroll.

    1. fredwilson

      I disagree. Building the right product is more important than cash. Many founders can survive for very little money. The YC founders are great examples of this. But if you can’t build something people want, your dead

  32. Malcolm

    Absolutely agree with you Fred. For the quality of mentorship, etc. you receive from the program.. many startups would (and should) be willing to give 6% for $0

  33. Jeroen Fransen

    Of course money isn´t everything, but keep in mind that the entrepreneur often doesn´t realise in advance exactly whom he´s bringing on board, and what that´s worth, though in case of YC it´s a no-brainer.

  34. Mark Essel

    Before I really dug into what YC provided I sided with Sarah. 6% for 25k seemed like a bum deal, and I don’t think any startup should consider something as weak as that offer. But when it comes to the connections, education, mindset and shared stake the 25k really is the much smaller part of the 6% exchange.I think about stake/ownership much differently now than I did a few months ago. Now sharing ownership means building a network of folks that all push for the success of the business. No man is an island, and there’s no reason you have to build a fantastic company on your own.The long term value of the business you’re building will increase by much more than the equity you split. I’d much rather own 8-10% of a 10 million dollar business, than 100% of nothing 😉

  35. valto

    I fully agree. Y-Combinator is a true pioneer in the “new way of doing things”

  36. Venkat

    On a different front, do you see any methodological groupthink in alums as a result of having gone through the same process? I can’t hell thinking “assembly line entrepreneurship” and “formulaic innovation.”I often have the same reaction to people who talk TRIZ.But maybe I am just gloomy, and these incubators do maintain significant intellectual and operational diversity.

    1. fredwilson

      Yes. I likened YC to a cult in a big story on Paul in some magazine a while back. Paul didn’t like it even though I meant it as a compliment. Its not like he’s poisoning the teams or anything. But they do walk the walk and talk the talk

      1. Venkat

        glad I am not the only one to think so. Somebody put one of my blog posts on their news-talk page a while back and I sensed a certain pattern in their comments.I agree it is not a bad thing, so long as people are aware they are in a specific bubble and are suitably ironic and skeptical about their own beliefs, without the irony/skepticism draining energy 🙂

      2. Dave Pinsen

        Sort of like Jim Collins’s observation about how great companies were “cult-like places to work”?

        1. fredwilson


    2. kidmercury

      no worries, we are all conditioned by the propaganda we consume, i’d rather be conditioned by paul graham than most of what’s out there.though i agree it is not for certain entrepreneurs. though i am a big fan of the model and value proposition i myself could never do ycombinator, i’d find it too confining.

  37. alexknowshtml

    “They have a set of core beliefs which come from Paul and Jessica.”I firmly believe that YC’s value proposition works BECAUSE of Paul and Jessica being a the helm, for that exact reason. I think that there’s value in services far and above the $25k invested, but with the influx of Y-Combinator-like seed stage “startup camps”, I have yet to see leadership quite like the YC team elsewhere.It always makes me a little sad to see comparable deals go down in other groups when they’re missing the most important component: the laser-focused, well-reputed, little-bit-loony figurehead leader(s) at the helm.

    1. fredwilson

      Seedcamp and Techstars are both quality operations. I need to get closer to the others before I can say that about any of them

      1. alexknowshtml

        Thanks for the response, Fred. I’ve heard lots of good things about TechStars.I guess my question, though, is do you think that the strong leadership in these operations can be quantified along side of the cash and the services? Is that a defining factor in what makes these types of operations “quality”, as you described??

  38. Himanshu Sheth

    The same Y- Combinator has now been replicated in India as well. There is Morpheus Venture Partners, IAccelerator and might be many others to follow which are very much tightly coupled to the Y-Combinator model. Some currently provide only mentorship whereas other provide the seed money for the venture.-Himanshu Sheth

  39. Keenan

    Don’t underestimate the value of access. As someone who recently failed at a Web 2.0 start-up. (, RIP) access and mentorship would have been huge. We had a great idea, we were passionate about it, (still think it could work) and to have had the mentorship and support would have had tremendous impact. I would have GLADLY given up 6% for that.The early, early stages of a start-up can be the loneliest and hardest (as well as the most exciting). There is little historical data to say you are on the right track. You are constantly selling your idea and why it’s good. There is lots of rejection, challenges to your premise idea and little positive reinforcement. As your idea solidifies, and comes together much of that begins to change, however, having a mentor like Y Combinator would only accelerate the process, expand options and minimize the dumb mistakes.It is a great deal, well worth the 6%, especially at the stage in development. I would have taken it!

  40. markallenroberts

    What is often the case is entrepreneurs have false expectations. So I wrote a short eBook about the 50 ugly truths of starting your own business at http://nosmokeandmirrors.wo…Keep up the thought leadership as a number of my clients are now enjoying your content, and getting a real picture versus a false expectation.Mark Allen Roberts

  41. kenberger

    I attended YC’s Demo Day this past spring. That was a time when the Chicken Littles across worldwide Startup Land were heard at a fever pitch (maybe they still are). You’d never know that sitting in the room in Mountain View, or more importantly, if you’ve monitored the progress of some of the graduates since then.Even if Paul, Jessica and the team did nothing for you (very untrue), the COMMUNITY and NETWORK you join are beyond price. These programs are aimed at super talented, driven, but very new people whose thinking tends to get transformed by the involvement.”What if Facebook, Twitter, etc took those terms? How would they be now, huh, huh??” is a line written by a financial analyst using hindsight thinking, and misses the mark here.

  42. Chris Dodge

    Ag, always late to a thread that really interests me.I’ve been watching the “next-wave” incubators like YC and TS for some time now. I’m a big fan of the model.What I’ve been seeing are more and more incubator-like models with VC parentage, Polaris just announced one the other day. However, like any investing approach, either at this seed-stage or later Series X stages, the amount of “quality” really is the limiting factor. I’ve spoken with many people in this sector and they all say how hard it is to identify quality seed-stage companies that is appealing at even such a low funding level.With ever more numbers of incubators coming online, this competition for quality deals (just as it always has been) will increase. I wonder if that may in turn cause a shift in the financial offerings to attract the best deals.

  43. ShanaC

    So now that I’ve read and thought about the thread, is it odd to crowdsource this question in a functional way, as in take a bunch of ideas, and see what people come up with?

  44. dig bands

    creating the right product is more important than money.i

  45. Michael

    Indeed th YC model presents advantges. For all the interesed startups check out, there are over 4300 investors or read some startup reviews on the same webpage.

  46. Steven Kane

    that’s a truismno one here has come forwrd with actual outcome dtas showing this is true. evertyone is just stating the obvious thoertical idea thats a small piewce of a big pie can be better than a big piece of a small piewhat about a small piece of a small pie? or a miniscule piece of a big pie? etc….you say “no doubt about it” — ok, i’ll bite! prove it with actual cases…

  47. Steven Kane

    Sorry that makes no sense. If the data doesn’t exist then you can’t possibly be rightAnd sorry again – of course the data exists! some deals are better than others. Or are you saying all outcomes are the same? Of course not? Are you saying, why negotiate terms at all? Of course not.Talk to any experienced serial founder. Initial funding terms MATTER

  48. Steven Kane

    Well, I’m certainly glad you’re contentBut again, I’m nort arguing for or against mentor programs or incubators orYC or TS or anythingAnd I’m not saying 6% for $25K is a good deal or a bad deal. It depends.All I am saying is, the most important thing is to be a critical thinker.That, and caveat emptor.You seem to be good on both fronts. That’s great.It seems like many commenters here, though, are parroting platitudes.”Better a small piece of a big pie.” Gee. Duh. And many are opining that YCbreeds better companies and entrepreneurs ‹ and on that the jury is way out.One final note ‹ you write that “companies who exit these programs have asignificantly better chance at survival.” But I couldn’t care less. What Icare about are the founders and entrepreneurs. There are tons of VC backedstartups that persevere for long periods of time ‹ if nothing else, VCssometimes keep funding deals way after they should be decalred dead for allsorts of reasons (eg, they are raising a new fund or whatever). But justbecause companies that survive does not mean the founders nd entrepreneurssurvive. In fact, in VC backed startups, they usually do not.

  49. Steven Kane

    tom, you’re a evry smart guy — build a spread sheet and see the ripple effect over time of selling 6% for $25K. series a funding valuation has to be *significantly* higher than the norm series a valuation for such a seed valuation share sale to be “accretive”again, only respect for YC’s value add services. just always amazed at how young founders can be simultaneously brilliant at technology and utterly at sea hen it comes to finance. and no one should kid themselves that such an “arbitrage” opportunity doesn’t get exploited (as it should be!) by the finance side. caveat emptor.

  50. fredwilson

    Can’t wait to attend seedcamp next week reshma

  51. Carl Rahn Griffith

    Interesting – and refreshing – feedback, Reshma. At this early stage most ventures are seeking a sanity-check of sorts. An abundance of funding at the early stage is not, I believe, a healthy thing and can be counter-productive in fact – there’s plenty of time to become ‘conventional’ when successful (and is usually when the decline starts, if that’s allowed to happen!). More important is the building of a cohesive, focused team with a shared vision.Only just became aware of next week’s event – looks good, hope it goes well.

  52. heidi harman

    Seedcamp is a healthy reality-check for all entrepreneurs, getting feedback on your own idea or not, getting the cash or not. At the end of the day, you´ll create your idea anyway (with or without cash) but having people that want to reflect with you – that money cant buy. Keep up the good work Reshma!

  53. fredwilson

    Steve, every great discussion needs a naysayer. Pls keep it up. This thread is better off because of your participation. I don’t agree with you on this one but I really appreciate the points you are making

  54. fredwilson

    Get an MBA if you want to work in consulting or in a big company. I see no reason to spend the time and money otherwise

  55. Satish

    What about someone wanting to get into the VC business? 🙂

  56. Steven Kane

    “Naysayer”?I know its not your intent but that’s a little hard and loaded language?I haven’t said nay to anything. I have extolled the virtues of YC. I have only challenged entrepreneurs to not reflexively adopt conventional wisdom and to acquire sophistication and knowledge and skill in financeThat’s not nay that’s yayAbsence of sycophancy does not equal negativity! 😉

  57. fredwilson

    nay in the sense that maybe it is not the best deal in startupland