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Jon Bradshaw & Peter Harris

What do VC's think about YCombinator? On this episode Peter and Jon discuss the Pro's and Con's of the program and how it may affect your startup.

Y Combinator: What Do VC’s Think?

Have you ever wondered what Venture Capitalists think of Y Combinator companies/investments?

In 2022 the program has significantly changed. It went from accepting 10 startups with each class to 400 in a recent cohort.

Learn about the Pro’s and Con’s of the program from a venture capitalist that has funded YC companies.

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Episode Transcript

Jon: All right. So Y Combinator, Peter, for those that don't know what Y Combinator is, it's a graduate school or an accelerator for startups. What they do is you used to go through a mentorship batch of like ten companies. They give each company about $100,000 for about 7% of your company. Now they give you 135,000 for 7%, plus a convertible note for another 3.75.
Jon: So a total 500 k. So the question is, is how would you what do you venture capitalists think about Y Combinator?
Jon: I think let me and that's that's the context I'm going to start with a little more background is as a founder. When we were debating if we applied to ICI or not, we feel like it has lost the charm that used to have. So typically companies like Airbnb went through their weave that, you know, a local company that IPO'd went through there and they only allowed about ten ish companies to be part of the entire program.
Jon: So it was fairly exclusive. Last year, they allowed, I believe, about 400 companies into their program, and then this summer they reduced by 40% to 250 companies. But still, you're instead of one in ten, you're one out of 250. So as a founder, as an entrepreneur, CEO, there was a lot of personal debate whether the program was even worth it or not, especially for the valuation where you're giving up 7% plus of your company, regardless of whatever attraction you have.
Peter: Yeah, I mean, yeah.
Jon: So what do you VCs think?
Peter: Look, I mean, I think Y Combinator and I've said this before, right, like I think accelerators, broadly speaking, are kind of like MBAs, right? There's like, brand, there's network, there's, you know, support. Right? Or you learn something kind of equivalent. And I think for better or worse, like Y Combinator is like the Harvard or Stanford of of accelerators.
Peter: So that comes with like all the same similar types of baggage. Right. So on the one hand, it's, you know, even if you don't like it, you kind of have to admit that if you're going to go through any accelerator. Like Y Combinator is probably the best. It's most well known. It's got the most exits. And those exits aren't like you know, yeah, we got this company to 100 million or a couple of hundred million.
Peter: It's like we got this company do over a hundred billion in size, Right? Okay, so there's that. But then, you know, you have people like Vinod Khosla who's gone out and said especially and this was like years ago, this is like way before this was back when they were only had like ten, 20, 30 companies. A you know, like I'm sorry for the Y Combinator folks because they're just they're so entitled and they think like the world is their oyster, but they're still just a little startup, you know, kind of thing.
Peter: and I think there is a little bit of that impression. Like sometimes people that go through Y Combinator may have like an inflated sense of, of who they are and what they've done, and sometimes that can rub some VCs the wrong way because let's be honest, our our industry is full of people with really big egos. Yeah.

Jon: So, but as a general. As a general.
Peter: But as a general rule, right. Like, is it.
Jon: A positive or a negative?
Peter: It's probably a positive.
Jon: You're like, this person went through Y Combinator.
Peter: Somebody else said that they like Y Combinator was the best accelerator so that they were worth investing in, Right? So that's a positive signal. So like, okay, but like I've I've looked and passed on a lot of Y Combinator businesses. I've also looked at and backed a bunch of Y Combinator businesses. So for me, it's like it's, it's a positive signal, but it's not an end all be all where it's like, you went through Y Combinator.
Peter: Yeah. Incident check right.
Jon: Would open the door for you if someone just, if they solely said I went through Y Combinator, I would love to talk with you.
Peter: maybe. Okay, but maybe not, because it depends on, like, where they are or in their.
Jon: But if you don't know traction or anything else, someone, someone says, Hey, Peter, you need to meet with my friend. They went through Y Combinator.
Peter: Yeah, but that's not good, because I meet with everybody because I'm. I don't know. I just figure everybody's got something interesting to teach me.
Jon: Okay, So.
Peter: I mean, unless it's like a really, like, total random person I've never met and I know the company's not going to be a fit for us and it's going to be a total waste of their time. If it's a.
Jon: Cold email, you don't know the person, you don't know the person introducing them. Peter And through Y Combinator, I think would be a good fit for your fund.
Peter: Just based on that alone. Yeah.
Jon: Can you share more info?
Peter: Yeah, I'd let them share more info.
Jon: Okay. Would you take that meeting or would you pass it off to one of your students? It's a.
Peter: Good question. I probably do it.
Jon: Okay. So, I mean, to me then, it seems fairly positive. How does what are the biggest draw? What are the pros and cons of going through Y Combinator in your mind as a VC for, you know, for the founder, you look at it as potentially a positive signal. Yeah, the con could be valuation. Like I know when I when I pitched, I feel like valuation was something that a lot of the, the local VCs were trying to kind of dissuade me because they're like, once you go through here, your valuation is too high.
Jon: There's no there's no way we would touch you afterwards.
Peter: Yeah, but that's kind of a lame excuse because the reason you're valuation would be high is because every other VC would be willing to give you money, right? For the local funds would be like, yeah, we're not going to invest in you because your valuations do high, because all those those dummies in Silicon Valley are willing to give you a high valuation.
Peter: I don't know. That's that's not like a good reason. What I think is like maybe a reason is like, somehow you've gotten deluded or maybe I don't want there's 350 k converting and diluting, but I don't know even that that's kind of a weak, weak reason. I don't know. I don't think it's a bad thing.
Jon: Okay, so not a bad thing from a founder standpoint. This is some stats I got. This is going to be anonymous. So you and I both know the person, but we're not going to share anything more. But they raised initially at a 10 million valuation. I don't know if that was a pre or post money valuation. Yep. They once they got accepted, their valuation rose to 25 million and then after demo day their valuation was $35 million.
Peter: Okay.
Jon: And they this individual feels that that spike only came from that.
Peter: Okay. Could be.
Jon: So from a founder standpoint.
Peter: Look, if nothing else, the fact that they went through Y Combinator meant that they got a lot of attention. Well, let's be honest like that, that increase from 10 to 250 or 400. Right. You also have to look at it from the broader perspective, which is it's never been easier to start a company than it is today. And that's only that only continues to get easier and easier and easier.
Peter: Right. And you've really opened up to this like really global marketplace. And then on top of all of that, you have, you know, generate Gen Z people in Gen Z like starting things or there are a lot more of hustlers than millennials. And so you I don't know, I think you take those three things and you hit them all together and you're going to end up with bigger classes.
Peter: But that doesn't necessarily mean that the quality, broadly speaking, suffers. but you know, talking out of the other side of my mouth, 400 startups, that's a lot.
Jon: But even 250 startups is a lot.
Peter: Even 250 is a lot. It's more than most. That's a way. It's like a multiple of what most seed funds will do.
Jon: Yeah, and pretty, pretty crazy from my perspective. But so generally.
Peter: But you only need one Airbnb.
Jon: You only need one Airbnb per.
Peter: Cohort.
Jon: Do you think they they get those type of numbers, Do they, do they get an Airbnb equivalent in each cohort?
Peter: I don't know. I think that's tough because there's so much more competition now, right? Like when Airbnb started, you know, we had gone from roughly somewhere between 800 to 1000 venture funds at the end of the dotcom boom to like by the time I joined venture and started investing 2728, like at least half of those were zombie funds.
Peter: And so you had another kind of call it 400 that were active, and that's roughly when Y Combinator also started, was about the same time I started my career. And so, yeah, I just think, you know, today we're now probably well over a thousand venture funds because a lot of those other ones, you know, kind of got wiped out because their returns didn't perform.
Peter: And then, you know, we've been on a bull run for the last like over a decade, right? And so a lot of venture funds have popped up and grown quite a bit. So there's just a lot more competition. And hedge funds have come in, which has pushed venture funds earlier stage.
Jon: So, okay, I guess Airbnb has gone public. They don't see Airbnb on their their website anymore.
Peter: Yeah, they went public a while ago.
Jon: But it's a this is the Y Combinator top private companies list. But if I look at their top list, I mean I've got Stripe, Instacart, Cruz, I think I'm familiar with Cruz, like I've heard of them. But if Rich.
Peter: Cruz is that.
Jon: See, that's the thing. It's self-driving.
Peter: yeah, yeah, yeah. Well, because that one got acquired by GM, but then GM spun it back out as a private company and invested in it and allowed other people to invest in it. So like, it was one of those was like right exited but then gusto.
Jon: Yeah, I'm looking over the top but yeah, like there's not that many companies that I recognize by name even in their top.
Peter: Those are some pretty good companies.
Jon: But if.
Peter: They I mean Stripe is the largest privately held company in the U.S..
Jon: So but if they've done 20 companies, they need at least one.
Peter: CEO would be more interesting is to see what are the top companies per cohort.
Jon: Per cohort. Okay.
Peter: Right. Can they generate at least one, you know, couple of hundred X or per cohort?
Jon: And that would be maybe we should run that data.
Peter: It would be interesting. But part of it too, is like, how long have they been running these larger cohorts of like 400?
Jon: I'm not sure, Michel, But yeah, a lot of these names I don't recognize or even message bird number 21. I don't I never got the impression that message Bird was that big.
Peter: Yeah, I don't know.
Jon: But anyways.
Peter: I don't know my sister very well enough to speak on it.
Jon: To, to summarize this as of see what do you, what do you venture capitalists think of Y Combinator? You see it as a positive signal that might open a cold email, but not a lot more than that.
Peter: Yeah.
Jon: And in the future, what do you think the trend will be?
Peter: I don't know. They'll probably be about the same. What's the trend like getting a degree from Harvard or Stanford? Still a positive signal, right? Hundreds of years later.
Jon: But they also have 100 years of precedents versus 12 years.
Peter: Yeah.
Jon: You know.
Peter: Well, I mean, it really begs the question of whether or not Y Combinator can continue to identify strong companies. Right. What's their acceptance rate? I know when I last looked at it, it was like a 10th of what Stanford's is.
Jon: I don't know, their current acceptance rate. Regulators would need to Google it.
Peter: Stanford's about 6 to 7% and there's was like point 6 to 7.7%.
Jon: Can you find it really fast? 1.5%.
Peter: Okay. So it's gone up. It's kind of doubled. but still 1.5 is pretty low.
Jon: According to to this one, to this one website. Now let's go to Y Combinator dot com. Exactly. They have a 1.5 to 2% acceptance rate and they have over 10,000 companies that apply.
Peter: Makes sense. All right well but I mean that's pretty close to like your pre your typical venture fund.
Jon: Okay. What does a typical venture fund do for like we will use it. It's close I assume for acceptance.

Jon: For over 100 deals. You see. You might invest in one or two. Yeah. Between one and two.
Peter: That's pretty close. Sometimes some funds would be like we look at a thousand deals for everyone. But I mean do they really look at a thousand or like, do a thousand kind of hit their pipeline and they immediately like kick them out for, you know, an obvious reason?
Jon: All right. Anything else you want out of this podcast?
Peter: No, I think yeah, I think Y Combinator is a great place. If it works for your startup, do it. If you know you're further along and you don't want to take the hit on valuation or give up, you know that much equity. I don't think you really need it once you have solid traction, but I think it can be really helpful in the early days, especially if you're like a little bit more of an unknown team to get some additional credibility.
Peter: But if you don't get them Y Combinator, I don't think like makes or breaks anything, right? I think it can just be a help.
Jon: So, yeah, I mean, there's a lot that we could talk about this. My main focus is just what do you think about it? Not should you apply. But you did say an interesting question.
Peter: But I'm saying like from the VC perspective, if I'm talking to an entrepreneur, I wouldn't tell the entrepreneur not to do it. That's what I'm saying.
Jon: Some have told me not to do it. So I'm curious what you think. What percentage of I just.
Peter: Told you what I think?
Jon: What percentage of VCs do you think would say, Do y see versus not? Do I see It depends.
Peter: Are they seed stage investors?
Jon: I mean, if they're seed stage.
Peter: Because then they would view it as more competitive, Right?
Jon: Okay.
Peter: Then they're like, well, you should just raise for me instead of you, you know, versus investing in income. But later stage investors, I don't know. I don't know why you would buy. You would care, honestly. I mean, here's the thing. Y Combinator allows you to tap in to a really strong network that can be super beneficial for a lot of things, raising money, hiring people, getting advice right, Like, I don't know why is if you see you would actively tell entrepreneurs not to do things that are beneficial to them like that.
Peter: But you know, there are a lot of different opinions in venture.
Jon: Okay. I mean, we'll bleep this one out. The name he said don't apply.
Peter: And why did he say not to apply?
Jon: I don't know. I think he said it was too diluted. But I wonder what if that was his.
Peter: Really give.
Jon: Too diluted. He just like he doesn't see sorry he or she who writes in who this is doesn't see that much value in it, but also might just be extremely competitive with what what it is that they do.
Peter: Yeah, but he's backed Y Combinator companies.
Jon: How many y c companies have you backed and which ones do you know? I put you on the spot all Okay. All right.
Peter: We backed companies like Simple Citizen. That was y c I'd have to look at our portfolio. I don't know.
Jon: Okay.
Peter: There's been a bunch.
Jon: Well, anything else you want to add to this podcast? No. All right, well, thank you. Want to close that? You should close it.
Peter: All right. Thanks for joining us. Hopefully that was interesting. If not, blame John.
Jon: All right. Does it the venture venture capital firm. And if you just go to our homepage, you can see all the options of where to find us on Spotify, Apple, YouTube, etc..
Peter: So, you know, that's how you want me to close it.
Jon: That's what I think. I should maybe do that at the beginning, but who knows? All right. Well, thanks, guys. We're watching and we will see you on the next episode.
Peter: All right. Thanks.