If you read this Techrunch post profiling 50 of the current YC companies you will notice that many of them are up and running with customers and revenues. That marks a shift in the YC investment strategy which used to focus on younger businesses. In the words of an alum from the 2006 cohort:
Companies are joining YC at a much later stage. When I started YC, most companies wrote their first line of code in the first week in the program. Today, most new YC companies have been operating for a year or longer and have customers and revenue before starting. If the companies in my batch applied to YC today, I doubt that any of them would get in.
That relates to a second change he observed:
Companies are much more ambitious now. In 2006, getting acquihired by Google for a couple million buckets was considered a fabulous outcome and basically the goal of every company. Today, there are six YC companies worth over a billion dollars, and as a result new startups aim much higher.
I think there are three inter-related reasons for these changes.
- Now that the YC portfolio is worth over $30bn (a number they put on their homepage) acquihires don’t move the needle. The work of investing and mentoring only feels worth it if it can impact the $30bn figure, and returns of less than around $1bn aren’t significant in that context. Note that these returns are from the value of YC’s stake in the company, not the total valuation. Hence they back companies with more ambition. Much more.
- Because Sam Altman & co have enjoyed a lot of success good entrepreneurs and investors alike are rushing towards YC in the hope that the magic will rub off on them. This creates a virtuous circle of demand and enables YC to invest in better companies than before. Better often means less risky, and hence more mature companies.
- Assessing the potential scale of an opportunity is one of the hardest things to do for startups and the earlier you invest the harder it is. To have more confidence that their investments match their new found levels of ambition I imagine the YC partners are drawn towards companies that have more validation of their market size.
As I mention in the headline this is a well trodden path for successful investment firms. The usual VC path is slightly different to YC in that it’s also linked to fund dynamics, but the flow from initial success to larger fund to targeting larger exits has been seen many times over. Perhaps the best example is Apax, from here in the UK who started out as one of the first venture capital firms and over time morphed themselves into a private equity company doing multi-billion dollar deals.