[chadash]

And this is why Y Combinator may not be right for your startup. The 100 billion dollars of valuation listed on YC's website may not be up to date, but it's clear that the top 10% of companies make up the overwhelming majority of their portfolio. So they go for moonshots. And they also invest in multiple competitors in the same space in the hopes that one will pan out.

So if you're building the kind of company that might be worth $100 million someday but won't ever be worth $100 billion, VCs and startup incubators might not be right for you, but just remember that a rejection from them doesn't necessarily mean you aren't on to something great.

[snowmaker]

The thing is that it is very hard to tell, early on, if you have a potential $10M or $10B company.

You're right: if YC had a crystal ball where we could somehow only invest in the $10B kind of company and never in the $10M kind of company, we'd do that.

But I don't think such a crystal ball is possible, because companies morph too much. Famously, Microsoft's first product was an interpreter for Altair Basic, which had a total market size probably < $10M.

So when we see a startup that has an idea that seems small, we ask ourselves, "What Microsoft is this the Altair Basic of?" (http://www.paulgraham.com/altair.html). Most of the companies that today seem like moonshots started with mundane, even trivial ideas.

So if you don't currently see how your idea can become a $100B company, that doesn't mean that you won't figure it out later.

[edanm]

> The thing is that it is very hard to tell, early on, if you have a potential $10M or $10B company.

I (kind of) disagree with one part of your comment. YC can't tell whether a startup has the potential to be a $10B kind of company, but a person starting a company can certainly decide whether they want to go for a $10B company.

Many people do - a lot of startup founders are trying to be the next Google. But some of them are not, in which case YC isn't right for them (and they'd probably need to pick the right idea/product/company to work on that can succeed without needing to be a $10B company).

Btw, I think you make a great point about Microsoft/BASIC!

[tlb]

Many people find that once they have built something to satisfy their original ambition, they enjoy growing and want to keep doing it. And some find they want to stay small and customer-focused, and some cash out and spend their days windsurfing. You can’t be sure which you will choose until you have the choice.

[jm20]

YC does not invest in multiple competitors 'in the hopes that one will pan out'. They just don't use competition as an exclusionary criterea like many VCs do. They invest in founders first and ideas second. When the idea is a secondary metric, inevitably you end up with competitors. Sometimes they even end up with competitors anyway, just because the founders pivot.

[sah2ed]

> They just don't use competition as an exclusionary criterea like many VCs do.

YC, originally started as Summer Founders Program [0], was an experiment to help PG & JL allocate seed capital differently from the norm.

So the reason why "investing in competitors" makes sense for YC as a VC firm is because YC invests a tiny fraction of $1m at the earliest stage in the life of a company, similar to the dollar amounts an angel investor would commit to a fledging startup.

Angel investing dollar amounts are an order of magnitude lower than what VCs typically invest because they invest at the growth or late stage, where an idea has been shown to be viable -- at this stage -- the product matters as much as the team behind it and thus the capital requirements are higher, usually in 10x, 100x multiples of a $1m, depending on the opportunity.

IOW, VCs don't necessarily use competition as an "exclusionary criteria" as you imply, it is merely the consequence of the magnitude of the capital at risk due to the stage at which many of them choose participate in the startup lifecycle.

A VC having a portfolio of companies competiting for the same set of customers would only lead to capital erosion -- it wouldn't any make sense to allocate capital to multiple independent entities that have traction, to exploit what is essentially the same market opportunity.

[0] http://paulgraham.com/summerfounder.html

[Liron]

Even though the top 99.9th percentile companies account for half of YC's return, it's possible that the 90th percentile companies nevertheless all produce a great return, more than sufficient to subsidize the 1-89th percentile, and YC just aims for that.

[erikpukinskis]

Ya just because I make most of my money selling hamburgers doesn’t mean I’m ignoring my regulars who come in for milkshakes.

[fanzhang]

What is an accelerator or a funding group for whom the portfolio is not following that power law? For example one where the top 20 companies each comprise say appx 2% of the portfolio?

[maehwasu]

Growth stage private equity buying out companies for multiples of EBITDA.

Whenever you're investing in early-stage companies with low marginal costs, that deal primarily in bits, not atoms, you're likely to end up with power law outcome distributions.

[anujabro]

One that all have similar successes (e.g. all fail)

Odds are most early stage venture portfolios have a power law distribution, but of different magnitude.

Later stage you go, the more normal the distribution will look

[kevinr]

> [I]t's clear that the top 10% of companies make up the overwhelming majority of their portfolio. So they go for moonshots.

You've just described the entire business model of every Silicon Valley VC firm, not just YC.

[thegeomaster]

It appears to me that almost all companies theoretically have a chance of growing that big. You never know what area they'll pivot into and if they'll find unexpected growth along the way. And so I think that there wouldn't be YCombinator's top 10% without the long tail of lesser-valued (and even longer tail of failed) startups. A lot of it comes down to the people who run them and pure chance. So it doesn't make much sense to say that a startup will not be worth $SOME_VALUATION at some indeterminate point in the future. We see these 180° changes a lot when looking at successful companies in retrospect, and they can deliver order of magnitude differences in market cap.

Of course, if you're not building a startup but an "ordinary", self-sustainable company (37Signals is a widely known example), then VCs and YCombinator are not for you. But that kind of follows from the definition.

[colechristensen]

the top 10% of companies make up the overwhelming majority of their portfolio. So they go for moonshots

This is just a power law thing and what would be expected with any large group of companies.

Success isn't linear or a bell curve, people seem to understand those two distributions rather well power law distributions rather poorly.

[chadash]

> "This is just a power law thing"

Yes, every group of companies is going to have some winners and some losers. But VCs and (even more so) accelerators operate in a space where the power law produces a curve that is especially steep. The vast majority of their investments will fail entirely. In order to make up for this, they need a few big winners in order to make an overall rate of return that their investors expect.

If I'm investing in large cap consumer goods company stocks, that curve is likely to look much less steep since, for example, a company like Unilever is unlikely to fail completely.