YCombinator- The Innovation Guru

I was cracking a conversation with a friend the other day and we started discussing about innovative startups. We tried to pick up companies from Europe, North America and APAC and a majority of companies that were there on the list either because of the technology or because of the business hailed from America. Having said that we also discovered a large majority of those successful companies that either had monumental exists either as aquisitions or IPOs came from YCombinator. That's right!! YC has been the holy grail of the technolgy startup ecosystem for almost a decade now. Go to any startup city be it London, Singapore,Dublin, San Francisco, Newyork or Bangalore and you'd find how YC commands a position of respect in the founder community. In fact much before PG(Paul Graham) started YC, he was perhaps the only one who started writing about startups in his essays. So when PG started YC with his wife Jessica Livingstone(author of another cult book 'Founders at work'), Trevor Blackwell and Robert Tappan Morris, it was perhaps the start of an era that saw the rise of tech companies exponentially at a pace never seen before. As computation became cheaper and cheaper, it was now possible to build products that could now harness the power of many distributed processing systems for computational tasks.

It was the same era that saw the rise of cloud computation, augmented reality(after that jaw dropping demonstration by Pranav Mistry), SaaS(now the de facto business model for most companies), blockchain(after Bitcoin and Etherium became the new decentralised currency for procuring anything on the dark web), IoT(which saw the rise of digital homes and even Mark Zuckerberg could take out time to create Jarvis, an AI assistant). This was presumable the greatest leap mankind had ever made now that the processor speeds went up by 14000%  over the last 40 years. We've never had such exponential surge in performance for any industry in the world. This was what made technologies like Artificial Intelligence viable and Tesla left no stones unturned to use AGI to improve the perfromance of its cars by an exponetial factor. But let's get bacl to the topic before we digress any further to unchartered territories.

A majority of tech companies today that changed the way business worked or consumers operated hailed from YCombinator. In some ways if one tries to rationalise with some of the companies that YC invested in , it might seem almost a foolhardy thing to a conventional investor. But here is exactly where YC gets it right. Who would have thought that AirBnB was actually a business model waiting to be explored by Brian Chesky- I presume no one. Similarly who would have though that Docker, Quora, Twitch, Dropbox,Reddit, Heroku,Optimizely,Front, Doordash, Weebly, Mixpanel or Coinbase could change the way things work. Today YC has created some of the most profitable companies across the world and India has also had it's fair share of YC companies that are doing exceedingly well from Hackerrank(formerly knows an InterviewStreet) to as RazorPay to GiGi. If the following stats by Shawn NG are to be believed then YC has been able to raise close to $23.34 B till date with a death rate of merely 18%.

So YC has done a tremendous job when it comes to building the global startup ecosystem for tech companies. But amidst this hoopla and celebratory fireworks, we forgot or should I say missed out the simple yet powerful fact that- YC indeed is the most innovative startup Silicon Valley has ever created. Sound confused? Let me help clear that.

YC ever since it's inception has had the most innovative business model ever deployed by any company worldwide. Don't look at me like that. I thought you knew about it. Now that you don't, let me help you get there. So what exactly is YCombinator? Well its a tech accelerator that invests in some of the most promising tech startups and then gives them all the support and the network they require to succeed. How much does YC invest? Well they invest close to $120,000 for 7% equity. So how much is 100% worth(lets forget DCF and other valuation methodologies for the time being and just calculate the valuation simplistically). 100% is worth- its worth $1.7 MM. So at that stage itself YC will ensure the valuation for the startup is magnified to an appreciable amount when in most cases the startups are yet to prove a product market fit and in most cases would pivot from their original ideas. Now with a formidable set of partners ar hand, YC will help the startups get the necessary traction they require for Demo Day. Most of these founders, barely 20 somethings, right out of college would be groomed in a way that they end up getting their first set of paid customers. Remember this Forbes article where Codeacademy, an online coding platform snagged 200,000 users just by virtue of its python course.

Now Codeacademy is a brandname when it comes to online platform for learning programming. It spent a summer at YC and then leveraged the YC platform to bag some lucrative deals with some investors. So likewise most startups picked up by YC are superlative and with a near about 20% death rate, chances are that there are around 80% safety blanket YC relies on. Now let's talk about the economics.

Let's say in a batch YC picks up 100 companies. It invests a total of $12 MM per cohort at a valuation of $1.7MM *100= $170 MM. Let's say it grooms the said startups in the best possible way and then say by Demo day almost 80% secure funding to the range of $6MM average. That means $480 MM of cash raised at a valuation say 5X or 10X times the pre money valuation of $1.7 MM. That turns out to be $17MM per startup. Now multiplying it with 80, we get $1,360,000,000 combined valuation. At that range if even 10% of those companies become a Unicorn or become a part of an acquisition then YC's initial invested capital of $12MM becomes $100MM *10= $1B which is a 100X return on invsetments. Ever thought about that? Now if YC is churning two cohorts per year then it's diversifying its portfolio of returns to ensure that it ends up making more money being a part of the food chain where it can cater easily to the needs of the startups at one end and the need of the higher players in the food chain namely VC, PE, hedge funds and investment banks far more easily. End of the day YC cuts down any amount of uncertainty their model has by helping companies that are shutting down, get acquired by other portfolio companies and thus saving it's investment even in the lossy startups. If this ain't close to ingenious- what is?

This has been the greatest economic model in the history of mankind. We have seen innovative business models from time to time, be it SaaS(hubspot, kissmetrics) or ISA(with Lambda School) or freemium(with candy crush) but we haven't seen such an innovative model ever. Unfortunately PG hasn't written much about YC as an innovative company in his essays. But look at the success rate of YC depicted in the following pictures and you'll be able to understand what made me write this blog on a Saturday afternoon. It was a Eureka moment for me, once realization dawned.

I wonder how you feel now that I've opened Pandora's box. But believe me, what YC has achieved since 2005, nothing short of phenomenal. It's success rate is perhaps more than Ivy Leagues that have produced the likes of Mark Zuckerberg, Elon Musk and Bill Gates. So today when Sam Altman talks about startups in his SUS(Startup School) lectures, I wish he'd speak about YC someday, talking and expanding on how they managed to create the most innovative startup on the planet by a state of the art network, a formidable PR machinery, a brilliant team of partners and an ecosystem that ensured capital inflow and outflow is guaranteed to the needs of the YC startups. If you're also thirsting for becoming a YC portfolio company, look no further than the official YC website and apply for the Winter 2021 batch. Who knows you could be those lucky unicorns out there in 10 years from now. Besides YC is a fraternity of innovators, entrepreneurs and investors who have collectively built some of the most innovative companies in the world. You could hang on to it, till you become a shining example of what a successful tech entrepreneur looks like. All the best with your application.