Great Expectations

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