Y Combinator has now funded 564 startups including
the current batch, which has 53. The total valuation of the 287 that have
valuations (either by raising an equity round, getting acquired, or dying) is
about $11.7 billion, and the 511 prior to the current batch have collectively
raised about $1.7 billion.
As usual those numbers are dominated by a few big winners. The top 10 startups account for 8.6 of that 11.7 billion. But there is a peloton of younger startups behind them. There are about 40 more that have a shot at being really big.
One consequence of funding such a large number of startups is that we see trends early. And since fundraising is one of the main things we help startups with, we're in a good position to notice trends in investing.
I'm going to take a shot at describing where these trends are leading. Let's start with the most basic question: will the future be better or worse than the past? Will investors, in the aggregate, make more money or less?
I think more.
As usual those numbers are dominated by a few big winners. The top 10 startups account for 8.6 of that 11.7 billion. But there is a peloton of younger startups behind them. There are about 40 more that have a shot at being really big.
One consequence of funding such a large number of startups is that we see trends early. And since fundraising is one of the main things we help startups with, we're in a good position to notice trends in investing.
I'm going to take a shot at describing where these trends are leading. Let's start with the most basic question: will the future be better or worse than the past? Will investors, in the aggregate, make more money or less?
I think more.
…………………..
The fact that startups need less money means
founders will increasingly have the upper hand over investors. You still need
just as much of their energy and imagination, but they don't need as much of
your money. Because founders have the upper hand, they'll retain an
increasingly large share of the stock in, and control of, their companies.
Which means investors will get less stock and less control.
Does that mean investors will make less money? Not necessarily, because there will be more good startups.
Does that mean investors will make less money? Not necessarily, because there will be more good startups.
…….
What about angels? I think there is a lot of opportunity there. It used to suck to be an angel investor. You couldn't get access to the best deals, unless you got lucky like Andy Bechtolsheim, and when you did invest in a startup, VCs might try to strip you of your stock when they arrived later. Now an angel can go to something like Demo Day or AngelList and have access to the same deals VCs do. And the days when VCs could wash angels out of the cap table are long gone.
I think one of the biggest unexploited opportunities in startup investing right now is angel-sized investments made quickly. Few investors understand the cost that raising money from them imposes on startups. When the company consists only of the founders, everything grinds to a halt during fundraising, which can easily take 6 weeks. The current high cost of fundraising means there is room for low-cost investors to undercut the rest. And in this context, low-cost means deciding quickly. If there were a reputable investor who invested $100k on good terms and promised to decide yes or no within 24 hours, they'd get access to almost all the best deals, because every good startup would approach them first. It would be up to them to pick, because every bad startup would approach them first too, but at least they'd see everything. Whereas if an investor is notorious for taking a long time to make up their mind or negotiating a lot about valuation, founders will save them for last. And in the case of the most promising startups, which tend to have an easy time raising money, last can easily become never.
………..
If you want to find new opportunities for investing, look for things founders complain about. Founders are your customers, and the things they complain about are unsatisfied demand. I've given two examples of things founders complain about most—investors who take too long to make up their minds, and excessive dilution in series A rounds—so those are good places to look now. But the more general recipe is: do something founders want.
What about angels? I think there is a lot of opportunity there. It used to suck to be an angel investor. You couldn't get access to the best deals, unless you got lucky like Andy Bechtolsheim, and when you did invest in a startup, VCs might try to strip you of your stock when they arrived later. Now an angel can go to something like Demo Day or AngelList and have access to the same deals VCs do. And the days when VCs could wash angels out of the cap table are long gone.
I think one of the biggest unexploited opportunities in startup investing right now is angel-sized investments made quickly. Few investors understand the cost that raising money from them imposes on startups. When the company consists only of the founders, everything grinds to a halt during fundraising, which can easily take 6 weeks. The current high cost of fundraising means there is room for low-cost investors to undercut the rest. And in this context, low-cost means deciding quickly. If there were a reputable investor who invested $100k on good terms and promised to decide yes or no within 24 hours, they'd get access to almost all the best deals, because every good startup would approach them first. It would be up to them to pick, because every bad startup would approach them first too, but at least they'd see everything. Whereas if an investor is notorious for taking a long time to make up their mind or negotiating a lot about valuation, founders will save them for last. And in the case of the most promising startups, which tend to have an easy time raising money, last can easily become never.
………..
If you want to find new opportunities for investing, look for things founders complain about. Founders are your customers, and the things they complain about are unsatisfied demand. I've given two examples of things founders complain about most—investors who take too long to make up their minds, and excessive dilution in series A rounds—so those are good places to look now. But the more general recipe is: do something founders want.
Paul Graham prepared the remarks above for last week’s
500 Startups’ PreMoney Conference. I took the excerpts above from the written remarks on his website.
Or you can watch a video interview with Ryan Lawler of Techcrunch here.
Paul Graham is a programmer, writer, and investor. In 1995, he and Robert Morris started Viaweb, the first software as a service company. Viaweb was acquired by Yahoo in 1998, where it became Yahoo Store. In 2001 he started publishing essays on paulgraham.com, which in 2011 got 17 million page views. In 2005 he and Jessica Livingston, Robert Morris, and Trevor Blackwell started Y Combinator, the first of a new type of startup incubator. Since 2005 Y Combinator has funded over 564 startups, including Dropbox, Airbnb, Stripe, and Reddit.
Paul is the author of On Lisp (Prentice Hall, 1993), ANSI Common Lisp (Prentice Hall, 1995), and Hackers & Painters (O'Reilly, 2004). He has an AB from Cornell and a PhD in Computer Science from Harvard, and studied painting at RISD and the Accademia di Belle Arti in Florence.
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