It's a gem. What I'm curious about is how these two ended up at YC as partners and not founding another company. I think I know the answer but always interested to know other people's journeys.
As Michael has said in one of the shows getting to PMF is a miracle. If you’re already set for life it’s less risky to play the odds by investing in hundreds of startups rather than starting one. Also there’s altruistic motives in giving back to the community etc.
> If you’re already set for life it’s less risky to play the odds by investing in hundreds of startups rather than starting one.
Risky is not the word I would use to phrase that, at least not in the financial sense. There's little such risk there, "if you're already set for life" as you said.
More comfortable, for sure. Easier. PG has said as much himself on X several times when asked whether starting a company or investing was harder.
I agree with you I meant reputational risk and the amount of output per level of input. It's hard to be as hungry once you've 'made it' or at least, your drive changes. Arguably at that level you can have more impact as a mentor of a large number of domain experts doing great work rather than trying to becoming one yourself.
I think pg said it best in one of his tweets/essays ?? not sure.
Essentially starting a startup is super hard. You can't just chill/half ass and still do well even if you had already succeeded before.
Correct, and to add - It is infinitely harder to force yourself through the start-up meat grinder if you know that if that start-up fails it does not materially impact you financially.
Everyone at YC knows exploiting naive founders is more profitable and less risky than doing a startup. The key is to perpetuate a mythical cult around the startup and convince huge swaths of kids to give you equity for almost nothing. The chumps are the founders, not the investors.
"The key is to perpetuate a mythical cult around the startup and convince huge swaths of kids to give you equity for almost nothing"
I found that amusing seeing as the second most recent video in their series, "Should Your Startup Bootstrap or Raise Venture Capital?", spends most of its time making a strong case for why VC isn't right for the vast majority of founders: https://www.youtube.com/watch?v=D81y-kh11oI
IMHE as part of multiple YC-backed founding teams, this is a new tone from YC.
In the past they have been very condescending of anything that doesn't involve trying to be a unicorn as fast as possible. There's even a video in their catalog deriding 'lifestyle' (ie - non-vc, non-unicorn, non-blitz-scaling) startups.
It makes sense given their business model, but I found it distasteful that they were advising young, impressionable entrepreneurs to take on more risk and to move away from their core competencies: greatly reducing the entrepreneurs' own chances of success in order to give YC and their associates another lottery ticket for a billion dollar payoff.
As a bootstrapped founder I am biased but given everything I have seen and heard in the last couple of decades I think the tone has shifted from success at any cost to creating sustainable/profitable businesses.
It also helps that in many ways creating a startup has been commoditized. Specifically, it's now cheaper and easier to use various online tools to get a new business up and running with little upfront cash/time than ever before. This trend will continue.
That's not to say this is true for all startups but it is true for the majority of them.
The good old days of being able to exploit starry eyed kids for their ideas in return for taking the majority of their equity is hopefully behind us.
Tbf that video came pretty late (post the ZIRP era). Before that, YC was one of the strongest proponents for raising VC because that's ingrained in their business model. I've heard that YC before would be quite disappointed at founders choosing not to raise money, because that meant a lower upside for them via the SAFE model.
Not to mention, most YC exits are usually via acquisitions, and often between YC companies.
Strategic self-anticonformity is the technical term for reverse psychology.
By making raising VC seem specific and exclusive, they make it seem high-value and make people want it more.
It is telling people that the object at the top end of the price sheet is not really for them, vs saying “yes, everyone should buy this.” The former increases interest, the latter increases suspicion.
Effort and result are not synonyms. YC investors take a big risk - a lot of these startups will have well intentioned and hard working founders and they will fail anyway. VCs provide a valid service. They make money (if they are good guessers and are also lucky) and founders make money (if they work hard and smart and are also lucky). Everyone wins.
YC tag teams to VCs who definitely game the system.
YC sells a good founder friendly story and it seems believable and YC is a repeat player so they care about their reputation: however the financial incentives of YC are not well aligned with founders (for example YC gets preferential shares, and founders get common stock).
The issues of control only really matter for the few unicorn winner companies. YC can afford to be very founder friendly to loser companies or to founders before the company becomes a clear winner. Founders of winning companies are not going to publicly complain if YC is less than fair.
If vc doesn’t get preferred shares, someone can just turn around and immediately sell the company for $400k and keep 90% of the money so that would seem like a silly thing to complain about
If you have a great team going to YC helps lower your downside. The most successful companies in your cohort are likely to acquihire you when they need to grow quickly.
Selection bias. The median return for a founder is about $0.
If you want to be a billion+ market cap company, sure, use capital to get there. But chances are that the startup will fail. VC investing is diversified - a founder is not.
Founders are free to make agreements to swap equities of their companies with each other.
For simplicity assume that there exist three startups with a similar estimated company value. Each founders gives two 10 % equities (and keeps 80 %) of his startup to each of the two founders of the other two startups. This way, the risk of founding a startup becomes a little more diversified.
> Founders are free to make agreements to swap equities of their companies with each other.
Only in theory.
Firstly it depends on the shareholders agreement, and other contracts with the VC. Co-Sale rights, First Refusal rights, drag-along etcetera etcetera can easily effectively prevent selling common shares. Or clauses just put the idea into the too hard basket.
Secondly: nobody wants to give away voting rights. Small investors don't care about voting rights in public companies so they forget just how important voting is in private companies
Thirdly: the necessary diversification would need to swap more than 50% of shares to get effective diversification. Good luck with that!!
Forthly: the dynamic would be that everyone would want to swap their shares with the perceived best startup in the cohort. It just wouldn't work. The only way it could work would be if founders got some ownership of a VC fund.
> little more diversified.
Exactly: not diversified enough. VCs often own significant percentages of the companies they invest in. And they own preferential shares. Common shares have a completely different risk profile than preferential shares.
