If you look at the distribution of exists/mergers/sales, it is infinitely easier to grow and sell a company for $20-$50m than it is for $100m+. The number of potential buyers rapidly diminishes, once you get into 9 figures, deals get more complex, take longer to execute, and have a higher chance of failing.
Over the past 18 months, I've seen four of my friends "cash in". Most of these guys were at it for 7-10 years before the exit, and all but one of these was a sub-$30m deal.
In order to justify these "NEW" valuations, entrepreneurs & investors have to hold out for VERY high value exits, which will dramatically reduce the chances of success and statistically extend the exit time for the angels and entrepreneurs by over a decade.
For most entrepreneurs who are on their first business, $5m or $10m is a life changing amount of money - by declining exits at prices that could achieve that outcome, they are forced to keep rolling the dice, over and over again, hoping that growth continues, a new competitor doesn't emerge, someone doesn't undercut their pricing, and everything is going at 110%.
It doesn't seem to make sense on the surface of it.
Obviously small exits are more numerous, but most of the returns actually come from the larger exits. Of the first 200 yc companies, Dropbox is worth more than all of the others combined (at current valuations, maybe in five or ten years it will be airbnb or one of the others, but I expect that the general principle will still hold true). Therefore, the value of a high-priced startup is determined by estimating the odds that it is the next DropBox (or Google or Facebook).
I think he's saying that, because many first time entrepreneurs would happily take a $XX million offer to sell, most will sell early rather than holding out for a chance to be the next Dropbox. So even if the potential/expected value to be a billion dollar company is there, factors that are harder to calculate might ultimately determine exit value.
Interesting point. I view YC's strategy as playing the central limit theorem -- taking a high-volatility random variable (startup returns) and increasing the sample size until the sample mean tends arbitrarily close to the population mean.
YC has had a few small-exit founders come back though--do you hold that into consideration? In other words, would you fund an unambitious startup if it gave a promising entrepreneur a potential launchpad to go bigger next time?
Over the past 18 months, I've seen four of my friends "cash in". Most of these guys were at it for 7-10 years before the exit, and all but one of these was a sub-$30m deal.
In order to justify these "NEW" valuations, entrepreneurs & investors have to hold out for VERY high value exits, which will dramatically reduce the chances of success and statistically extend the exit time for the angels and entrepreneurs by over a decade.
For most entrepreneurs who are on their first business, $5m or $10m is a life changing amount of money - by declining exits at prices that could achieve that outcome, they are forced to keep rolling the dice, over and over again, hoping that growth continues, a new competitor doesn't emerge, someone doesn't undercut their pricing, and everything is going at 110%.
It doesn't seem to make sense on the surface of it.