This seems to be good for YC, bad for companies in YC. The value of YC, as far as I can tell, has been access to great advisors and a cohort of folks going through the same thing as you (maybe some other fringe benefits as well like discounts for services). As you scale up, both those things seem like they will be watered down (the quality of advisors and peers goes down as the quantity increases). This reads to me like YC has decided that a spray and pray approach is best.
This is most people's first reaction - they assume that if YC is getting bigger, some limited resource must be getting diluted. But that's actually not the case: there is no limited resource that isn't being increased. And it also misses an important trend that works in the opposite direction: the network effects that make YC more valuable for companies when the batch is larger.
These network effects aren't obvious to outside observers (actually some of them weren't obvious to us at first!), so here are some of them.
1) The larger the batch is, the more companies there are that are similar to you. The author of the parent comment described this as a "cohort of folks going through the same thing as you".
Suppose you're building a fintech company in India. In an earlier batch where we only had 75 companies, you might well have been the only India fintech company in the batch. Now, there are probably 4 other companies in the batch that are also India/fintech. Those companies are likely to be the ones that can be most helpful to you.
2) Related to (1), having more scale in each vertical has allowed us to specialize our program and deliver more specific advice for different kinds of companies.
We now have specialized advice, content, and events for devtools, fintech, saas, consumer, enterprise, bio/healthcare, hard tech, & hardware companies. Much like AWS's large scale allows it to offer more and more specialized products, our larger scale allows us to offer more specialized programming.
3) For a large percentage of the YC batch, other YC startups and YC founders make up an important customer segment. The more YC companies there are, the more potential customers they can get from this community.
Related to that, the YC network is also a powerful tool for getting introductions to non-YC companies. Suppose you want an introduction to a key person at Apple. Apple isn't a YC company, but the YC network of founders who used to or currently work at Apple will be very helpful for reaching the right person. And that gets better when we have more founders.
4) The YC companies effectively collectively bargain for a large variety of things: discounts on services (worth over $1M / company now), press exposure, investor attention, etc. The more companies in the pool, the stronger our bargaining position becomes.
5) The more highly successful companies YC has, the more brand recognition YC's name has. That's obviously good for YC, but it is also good for YC companies. One of the hurdles new companies have is getting other people and particularly big companies to take them seriously. The YC brand name is now pretty helpful for accomplishing that in the tech world; we're still getting to the point where it works in every other industry and that requires more scale.
6) With more YC companies, we're now able to run https://www.workatastartup.com/ to help YC companies hire. From the standpoint of someone who is looking for a job at a startup, the more (successful) startups there are on Work at a Startup, the more useful the site is.
7) Most of the advisors who work with companies (we call them "group partners") are YC alumni who started a successful company. Because of this, when we fund more successful companies, it expands the pool of potential great group partners we can hire. To scale to the next level, we need more group partners (a.k.a more expert advisors). The trick of hiring our own alumni allows this seemingly limited resource to actually scale more-or-less proportionally.
8) As YC becomes better known, more great founders become interested in applying. YC is well known in silicon valley but still has a long way to go to be well known everywhere in the world. We've consistently noticed a trend where after we fund our first company in a new country, we get a surge of applications from that country. When we have more companies in each country, we make YC more accessible and useful to new companies in that country as well.
Interestingly, some of these network effects have just become apparent to us in the past couple of years - we had to reach a certain scale to even see them. This makes me think there will probably be other network effects that kick in as we reach even larger numbers.
I think this is totally valid and for YC, scaling has obvious advantages (more chances of finding the next hit).
For founders, the reality is that the scaling of YC, fairly or not, does change the perception of being admitted into YC, in that having a larger class size gives off the impression (whether true or not), that the program is no longer as highly-selective/elite. For what it’s worth, I don’t think YC is at that stage and I don’t think the expansion dilutes the YC name (this isn’t like TEDx). There is a big gulf between admitting everyone and expanding class size the way they have been expanded now. Still, as I said, an increased class size can absolutely change the perception, amongst applicants, alumni, or outsiders, that the program is no longer as “elite.”
This isn’t unique to YC. Elite colleges and universities are often artificially limited in their admission figures (Harvard College has about 6600 undergrads whereas Harvard University has like 14,000 graduate students across the different schools and programs) and while some have attempted scale through either extension schools or online programs, there is a not insignificant social construct surrounding the idea of keeping something deemed “elite,” selective.
So everything you write is true. But it’s also true that the perception of scaling can be negative in some ways, even if the program isn’t actually diluted.
When you put it that way, to me it sounds like a great thing. YC has always sought to filter out the resume-padding sort of founder who sees YC as a step up the status ladder. Such founders are not up for the gruelling slog of really building a startup, and tend to bail not long after the batch since they've already gotten what they wanted out of it.
People should apply to YC because they believe it would them them build a successful startup, not because they want prestige. If expanding YC leads to a decrease in prestige (alongside an increase in real value to startups, as Jared explained above), that's a win for everybody: more business-builders get access to YC, YC gets to fund more successful companies, and status-seekers can find something else that will look better on their resume.
In this sense YC is very different from the elite colleges whose brand depends on their exclusiveness. The upper bound on YC's expansion is how much startup opportunity exists in the world.
I think status has as much value as what someone is willing to give you for it. If the YC “Badge” is a currency that opens doors based on its perceived status, that feels like a helpful bonus to founders. I agree that if someone is in YC for status, that trait alone is likely not sufficient to help them create a successful company. However if someone is able to get a meeting with a VC because of their enrollment in the program (or a PM with a larger company to discuss a partnership, etc) that seems helpful and worth preserving.
That being said, it’s not clear to me that YC is lowering it’s acceptance rate. By accepting companies from all around the world, it’s pool of potential applications exponentially increases. If YC accepts 100 more companies from 10,000 more applicants that still feels like a pretty exclusive acceptance rate.
What could be going on is that people are comparing the batch sizes now to the batch sizes in the past and assuming the same rate of company applications. I’m not sure if YC publishes their application data, but without it I think it’s tough to say based on batch size alone whether or not YC is statistically becoming easier to get into.
>> the network effects that make YC more valuable for companies when the batch is larger.
This is only part of the story though. THe size of the network doesn't mean nearly as much as the quality of the connection; i.e. edges over nodes.
Every other point is true to some extent but addresses the accidental vs. essential aspects of a startup. Collective bargaining for services? hiring pool? potential customers? These all seem like nice-to-haves vs. must-haves.
Call me jaded but I see a VC machine that hires it's friends, associates and good-but-not-great investments, and then needs to fuel the machine with startups at scale. This could work but I can't see how it's better than smaller batches for anyone but YC.
Love this comment - really insightful. We did YC ourselves, and I guess there are two points here where I think YC can help improve things further.
1) Regarding getting other YC companies as your customers, I don't think there is a really great mechanism for that yet. With a network of thousands of founders, it is hard to pitch your company to the YC network without it becoming spam.
2) I agree that we learned most from companies relatively similar to ours. But it is also clear now that there is a lot of direct competitors within the YC network. I don't see a way to avoid that, but it feels important to think about at this scale.
> there is a lot of direct competitors within the YC network
I would never view other small startups in the space as competitors. I would view them as 1) people that will help lower our r&d costs b/c you can watch them 2) potential companies that could acquire you if they turn out to be executing better 3) potential companies that you could acquire if you turn out to be executing better.
That depends on how fast they fail. A successful company should be around for years and will have lots of money to publicize itself; how long does it take the typical "failed" YC startup to fold?
I agree with most of this. However, (3) has issues:
a) NASDAQ in 2000 had a ton of companies selling to other VC backed companies. When the flow slowed, even profitable companies failed because they sold to unprofitable ones. They fell like dominos. And this was in the public markets!
b) Any investor in a YC B2B company should ask the percentage of customers that are YC backed. It’s good for a cold start in sales, but ultimately see #1.
c) I hope hundreds of companies don’t want to talk to the SAME person at Apple. Otherwise, I agree.
It's obvious that there is some upper limit of companies per batch, past which it will be impossible for YC to source quality companies and advisors for batches. But why should we believe we've hit the point where the quality of advisors and peers decline as YC gets bigger? There are a lot more than 300 companies started per year...YC still only makes up a small fraction of the total. (And anecdotally just looking at this batch...I wouldn't care to bet that the quality of peers has decreased!)
> But why should we believe we've hit the point where the quality of advisors and peers decline as YC gets bigger?
We shouldn't, it's the exact opposite. As the network grows, the ecosystem of high quality advisors goes up, not just because better people join, but people are learning to become better advisors through being a part of the network. Not only that, but as the network grows so does the YC economy of potential partners. Instead of YC companies purchasing goods and services from outside the network (and thus bleeding valuation of the network) keeping money flowing in the YC economy only accelerates the value of the entire network. As this monetary flow through the network grows and accelerates so does the quality of the people managing the companies in the networks and thus potential future advisors to new companies joining the network.
You write like these are guaranteed outcomes, but organizations lose their ability to deliver value as they grow all the time, which is where startups come in...
Granted YC is probably more aware of these downfalls than most companies, and are trying to mitigate them, but to act like YC can only get better as it expands is really short sighted.
I'm sure every person on this board can think of dozens of companies that failed because they got too big and could no longer deliver value as well as smaller companies. The tech space is littered with them every year.
>but organizations lose their ability to deliver value as they grow all the time, which is where startups come in...
>I'm sure every person on this board can think of dozens of companies that failed because they got too big and could no longer deliver value as well as smaller companies. The tech space is littered with them every year.
Yes to both points. And so is the business (management) consulting and literature space littered with
stuff, a.k.a. work and talks and books and confs about all that. Throwing out a few words that give a flavor:
Disruption (ha!), Clayton Christensen, Tom Peters, reengineering, innovator's dilemma, the HP way, Lou Gerstner, Teaching Elephants to Dance, Jack Welch, the HP Way, the IBM Way, the Toyota Way, Made in America, Made in Japan, etc.
Tip of the iceberg.
So one mental model of what YC does is that it has social capital (e.g. prestige, connections). It gives some of that to its portfolio companies so they'll be more successful and so YC gets better yields.
If social capital is mostly fixed, then this is a zero-sum situation and increasing batch sizes is bad for each company, even if it's better for YC as a whole.
Another mental model is that social capital is generated by YC companies themselves, as they e.g. network with one another, trade advice and other resources, and otherwise collectively learn how to build better startups.
I'm not sure which mental model is correct, but if you think the value of the YC ecosystem scales at Θ(N²), then a bigger batch can better for each YC company, even if they're get less 'direct' support from YC itself.
I'm not sure which mental model is correct, but if you think the value of the YC ecosystem scales at Θ(N²)...
The correct scaling for social networks is almost always n log(n). See http://www.dtc.umn.edu/~odlyzko/doc/metcalfe.pdf for a collection of arguments using various measures that all conclude that that is the right scaling laws.
I've heard a few times that recent YC companies often find a lot of customers in previous YC companies. I have no idea how true it is, but if it's a substantial effect, increasing batch size could increase this as well.
It is just revenue kiting. Company A enters $20M deal with company B which enter a $19.975M deal with company C which enters a $19.970M deal with company A.
Ma, look at our revenue! Lets do another raise! Investors will eat it up!
It depends quite a bit on what type of product or service you are selling. For us, we expected to find customers in our batch, but when we did not we learned a valuable lesson: that it was larger companies that valued our offering more.
I'd love to hear from more companies on their take on this (especially any "repeat founders" who can contrast their recent experience to an earlier one).
They don't have to be 100%, and I did not say so. But there has to be some alignment, say 60 to 80%, or the whole YC biz model falls apart, for obvious reasons.
Good sales and profits, or being acquired for a good price, or a good IPO, etc.
I think YC has the companies best interests in mind because that's just who they are how they were built.
But I don't think there has to be much alignment at all. One unicorn every couple of years is all that YC needs to "make their fund" since they don't have LPs to satisfy. And one every few years will also keep the applicants coming.
>One unicorn every couple of years is all that YC needs
True, but there is no ongoing guarantee of that, no matter how many times it has happened in the past, and no matter who claims it[1], be it a Midas-list VC or a serial founder or whoever.
Past performance is not a sure predictor of future performance. Just see any company's statutory annual report, and the ifs and buts in the legalese therein.
[1] If anyone claims that, just ask them to put their money where their mouth is. E.g. by paying the predicted unicorn future value for the stock, but now. And then see the disclaimers and caveats flowing fast and freely from their mouths.
Spray and pray has another name... venture capital. I think a lot of founders are waking up to the misalignment of interests between founders (growing a sustainable business) and VCs (dilution)
That has been happening for quite a while now, and has even been a topic on HN for some years now.
PG started YC partly because of that, in fact. See his early essays, including one called something like "A theory of VC suckage".
Edit: Found it:
Yes.
Although I would label it a bit differently, not plain "capital": human nature and group / organizational dynamics. That's the reason why many smart companies try to stay small, the reason for spinoffs, skunkworks, for creative destruction or reinvention a la HP (see the HP Way and other articles about them - of the time when they were in their prime decades ago, not now or recent).
And that is also the point of my comment in this other subthread, about the IBM, HP and Toyota Ways, Sam Walton / Walmart, Tom Peters, etc.:
Yes, but I was saying earlier that I didn't prefer the use of the word "capital", because it is abstract - a thing (money), not an actor. And I mentioned human nature i.e. people, who are real actors. Your use of the word "newcomers" (who are people, not money) says the same. Maybe just a matter of wording or interpretation.
That doesn't match what YC is doing at all. YC is trying to be a force multiplier to literally anyone in the world with an opportunity to create a great startup. Part of that involves expanding as rapidly as is feasible without breaking the system or diluting the effect. It is about creating wealth, not defending or maintaining it.
It has less to do with YC and more to do with the nature of success, network and accumulation of resources. What it has to do with the topic is that it has created an inequality where YC companies have an advantage through access to the network. You just have to look at OpenAI access model to understand how this creates a two tier environment. YC alum can pick up the phone and have access them same day just to fuck around and potentially make a new unicorn business. People on the outside? Good luck. Yes I understand that OpenAI isn’t a YC company but the same will apply to YC companies... OpenAI was just my personal most recent experience.
>misalignment of interests between founders (growing a sustainable business) and VCs (dilution)
Not all foundrrs are interested in growing a successful business. In fact, what with all the brainwashing that has been going on for years by VCs ("go big or go home", "10-bagger" - old, now it is "unicorn", or is there another more current mot du jour, ha ha?, "lifestyle business" passive-aggressive shaming, etc.), it's a wonder that anyone exposed to that shit still has the balls for doing a traditional business that relies on, you know, just honest sales, customers and profits. But there are still many who do (have the balls for it).
Who do you think bags the 10(x their investment)? VCs, not founders or emps.
I should have added: by VCs, to founders or prospective founders, for their own selfish vested interests, of course. The more dupes join the startup lottery, the more the "house"[1] (a.k.a. VCs) stands to gain, because it is a numbers game.
[1] Think Las Vegas.
In fact, top VC Fred Wilson wrote a blog post about this "lifestyle business" passive-aggressive shaming business a few years ago, and it had a ton of discussion in the comments. You can find it by a Google or blog search.
And this does not mean that I am advocating that no one should start or join a startup. I just mean, for your own sake, do your due diligence. It's not only companies or VCs who need to do that.
