| | | Noise Cancellation | In order to streamline decision making, we often rely on signals | Five star Yelp reviews tell us a restaurant is worth eating at | A high Rotten Tomatoes rating tells us a movie is worth watching | and for venture capitalists, a Y-Combinator co-sign signals that a startup is worth investing in. | Although the above generalizations do not always hold true, deferring a portion of the decision making process to a trusted source saves time, energy, and effort | Today I want to take a closer look at just how strong the Y-Combinator signal is for early stage investors… | | | Startup U | Y-Combinator is the most prestigious startup accelerator in the world | Founded in 2005 by Paul Graham, Jessica Livingston, and Trevor Blackwell, the accelerator funds early stage founders and runs a program to teach founders marketing, product-market fit, business models, and more. | 5,000+ companies funded 1.5% acceptance rate Portfolio companies have a combined valuation of ~$1T Includes Dropbox, Airbnb, Stripe, Coinbase, Reddit, DoorDash, Gitlab, Brex, Substack, Instacart and many others Offers companies $500,000 in exchange for 7% equity plus an incremental amount contingent on the next funding round
| | Graham founded YC after selling his company to Yahoo and his first startup bootcamp included Sam Altman along with the Reddit founding team. | Its focus is quite exclusively on finding the best founders to back, rather than worrying about the idea feasibility or business model. | More recently, Garry Tan, YC CEO, revealed plans to raise $2B across 3 new funds. | At the very least, getting accepted to the accelerator will ease a founder's fundraising woes | On the opposite end of the spectrum, it's the strongest signal that a company will reach the coveted $1B valuation | | | | As seen in the visual above, YC's 2010-2015 cohorts produced unicorns at a 5.4% rate… | 2X+ the amount of unicorns from Techstars 3X the amount of unicorns from MassChallenge 3X+ the amount of unicorns from 500 Global
| The 2016-2020 cohorts outperformed with an even larger differential when compared to other notable accelerators. | The big question is: how much of YC's success is causation? | | | Correlation Ventures | In Everybody Lies, a NYT bestseller by Seth Stephens-Davidowitz, a team of MIT economists test the causal effects for attending Stuyvesant High School, arguably the nation's top public school. | Admissions at Stuyvesant are dependent upon scoring above the cutoff on the placement exam. | So the economists used students who barely missed the cutoff as the control group, and students who barely made the cut as the treatment group. | The results were as expected: students on either side of the cutoff received similar scores on SAT exams, AP exams, and ultimately, attended similar colleges. | The study is not replicable because YC's decision making takes many factors into account whereas Stuy admissions solely evaluate placement scores. | In order for YC to demonstrate significant causation, it needs to have some sort of unique value add relative to other accelerators. | The elephant in the room is their brand, which has fueled a positive feedback loop where the best founders only apply to YC. | All things considered, our answer is complicated. Of course YC adds tons of value to their companies. It's also likely that their unicorn companies would have been unicorns regardless. | To dive deeper, check out this article from Jared Heyman, Rebel Fund investor. | Rebel Fund aims to invest in the top 0.1% of tech startups that apply to Y-Combinator each year. | Their investment approach is data-driven, analyzing 100,000+ data points on startups in each new YC batch using a proprietary ML algorithm. | | | Headlines | Bill Ackman sells 10% of Pershing Square at $10B valuation; planning for a future IPO. CNBC article here Subway's $3.35B franchise-backed bond is the largest ever. Yahoo Finance article here Food delivery apps rack up $20B in losses. Financial Times article here Emerging women's basketball league to offer higher salaries for WNBA players. FOS article here
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