Actually the startups we've funded have a whole range of ambitions. Some would sell early if they could; others are bent on world domination (like Loopt).
I don't know why everyone seems to think we encourage founders to sell early. Like all venture investors, we make more money if founders don't sell early, and instead keep trying to grow the company. We can afford more risk than founders can. The difference between us and most other venture investors is that we don't forbid founders to sell early, if they really want to. But surely you can see that it would be more in our interest if they all tried to be the next Google?
That's not a whole range of ambitions. It's either "Get bought" or Facebook/Google.
"During the acquisition talks, ... The one refrain we heard quite often was from Paul, who reminded us in nearly every conversation: "Deals fall through!"
Seems like you were shopping Reddit.com vigorously. Let's do a naive calculation:
Profit:
6% - at least $250k - able to fund at least 5-6 more YCs
10% - at least $450k - able to fund at least 12 more YCs
Assuming half companies died, you still can fun tons more.
Now, if you look at the companies you funded, probably only 1 company out of 5 that can stand as long as Loopt. Others are just developing "feature". "Feature" companies should be flipped ASAP otherwise they're not going to stay long. Logically, it's true that you'll make more money if the companies don't sell early, but the odd says otherwise, you have to sell most of your companies if YC wants to sustain itself.
YC has a good business model I'd say. Plus you are elevating your value in public (think of conference, talks, book agreements and such) and building your network with all the bigs in Sillicon Valley (companies and VC).
We didn't shop reddit. Conde Nast found them. We didn't even know anyone at Conde Nast till they bought reddit.
Nor would we intentionally fund a startup that had no prospect of making money as an independent company. It's crazy to count on getting bought, because acquirers are so unpredictable.
You actually thought all the startups you funded could make money as independent companies, at the time you funded them?
I thought your model was a kind of a "throw it at the wall and see what sticks" approach. Then triage the promising ones, with the explicit understanding that a lot of the startups would lack prospects.
Google was a feature on Yahoo's site. They would have even sold their "feature company" were anyone willing to pay enough for the value they knew they had created.
This is the altruistic part of YC that will be very hard for the YC clones to copy well. Most investors will get greedy and push their investments to boom or bust.
By trying to be the next Google, the company may significantly lower its probability of getting any money at all out of the deal. So it's an expected value issue -- which expectation is higher? Is it really so obvious that the larger sales price the company would get outweighs the hit in payout probability?
> I don't know why everyone seems to think we encourage founders to sell early
I didn't say "sell early". I'm talking about getting bought. I've read about how other YC-backed startups got early acquisition offers but didn't take them -- because they were too low.
Selling early really has nothing to do with it except as a correlation with offers that are usually going to be lowballing. The operative distinction is selling cheaply.
I don't know why everyone seems to think we encourage founders to sell early. Like all venture investors, we make more money if founders don't sell early, and instead keep trying to grow the company. We can afford more risk than founders can. The difference between us and most other venture investors is that we don't forbid founders to sell early, if they really want to. But surely you can see that it would be more in our interest if they all tried to be the next Google?