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Comment by sytelus | Hacker News Reader

This numbers don't give away too much because of subjective nature of "valued at" as well not actually knowing the mean or the variance, let alone the nature of distribution.

However what is impressive is that if you were going to do startup with YC, your chance of becoming significant company is about 10%. Due to nature of power law in these things, I tend to think, may be about 20% of other startups managed to become less spectacular but still successful and other 40% may be just sustainable to make a reasonable living(lifestyle business) and rest had to fold.

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Depends what you mean by subjective. The valuations are not just our internal estimates of the values of these companies. They're the post-money valuations resulting from actual investments, and at these valuations, invariably by institutional investors.

So while of course not all of these companies are going to succeed (a $40m valuation is roughly a bet that a company has a 10% chance of ending up worth a billion), the people making these investments are professionals at valuing startups, and they're betting their own future income on the accuracy of their estimates. There's always uncertainty when you have an asset appraised, especially one whose value is so hard to predict, but you can't generally get a more accurate appraisal than one by a professional who is actually willing to buy the asset at their estimate of its value.

Don't many of these rounds have diluton consequences for existing shareholders if some performance target isn't met? Is that taken into account?

No, I've never heard of a funding round with performance targets.

Err I think I meant preferred shares? FOO buys in at $X valuation. If a liquidity event happens that doesn't meet price target $Y, FOO gets paid out before the previous holders altogether or at some higher percentage.

Yes, investors with preferred stock usually get their money back first. Sometimes they get a multiple, but that's considered overreaching nowadays and the more promising startups never have to agree to that.

I suppose that is implicitly a target valuation in a sense. But no one views it as a target, because it only matters if things go badly.

Tranched rounds with performance targets didn't used to be unheard of.

Grandparent poster has since clarified his question (he was talking about liquidation preferences and multiples). But yeah, back in the day, tranched rounds with company performance targets were not unusual. In fact, they're still practiced today -- typically by big corporate investors, as opposed to angels or VCs.

My personal opinion is that performance targets specifically, if not tranched payments in general, are bad for all concerned. Ostensibly they cover some downside for the investor, but startup investing is abot maximizing upside, not covering downside per se. At their worst, tranches and targets hold the company hostage to goals that are often arbitrary, and are almost always gamed accordingly. As a result, you have a company that is checking boxes and focusing on its arbitrary numbers, and you've got investors who don't realize they're creating perverse incentives. Also, it's basically impossible to run any variant of the Lean Startup methodology when under the gun of performance-based tranches.

I say this having worked for a startup that accepted big corporate money on a tranch-based system with performance goals. Total headache for all concerned.

Also depends on how much investment they got surely.

Loopt apparently sold for $43m, but had $32m investment. I don't know if that's classed as 'success' or not.

Imagine the success-failure spectrum.

On one end, there are the companies that fail; for every dollar put in, exactly $0 came out in the end.

The other ("success") end is more difficult to define because there is no end point; the company that is furtherest along that end of the spectrum might not hold that position forever if an even more successful company comes along.

I think the natural tipping point between failure and success is the break-even point, perhaps adjusted for inflation. A company that does just a bit better than breaking even for investors isn't going to overwhelm anyone, but it's the point at which most people won't feel too bad about having invested in the company. Top investors who are used to yielding massive gains will perhaps not feel the same way about that, though.

That's easy, no.

The more interesting part of his question was the objective criteria for determining success, not opaque opinions about one example that fits into the gray area.

"be just sustainable to make a reasonable living(lifestyle business)"

Pure speculation and just throwing this out there to see if others agree but somehow I don't feel that YC is spinning off lifestyle businesses. Not to mention that it's hard to believe that some of the founders (and supporting people) that get involved in and strive to be in YC will stay put at what ends up amounting to a lifestyle business.

We're not intentionally spinning off lifestyle businesses, but that is a common outcome for seed investments. For investors it's a failure, but for the founders it could be good.

I'm not sure I follow. OP's point is that a failed startup might still be profitable enough to be a lifestyle business.

That opens up some pretty cool options for the founders.

"I'm not sure I follow. OP's point is that a failed startup might still be profitable enough to be a lifestyle business."

But who will operate the lifestyle business? The founders and the team?

My point is that the type of person/team that gets involved in wanting and getting into YC (both the founders and the team) don't seem to me to be the type of people that would want to continue in "merely" a lifestyle business. Not that some wouldn't but my speculation is that the majority would not.

From your profile I see that you do LSAT prep.

My guess is that the majority of people who put in the time to get into law school are generally shooting to be lawyers.

If they end up graduating and not getting employment in law (or not being able to sustain that) they might very well end up having to do another job. (Actually they will or they will starve.).

But now we have a case of people who pursue the startup lifestyle presumably for the big win.[1] And now after all the work "all" it turns out to be is "lifestyle" I would think a high percentage of them would then try to get involved in another startup (whether their own or someone elses) not stay and have "only" a lifestyle business.

Otoh if enough time goes on before it becomes apparent that it is only going to be a lifestyle business it's possible that members of the team might have priority changes (marriage and kids) and decide that the lifestyle business is pretty attractive.

[1] Edit: Or to change the world.

You can sell the business. Or you can put work into automating it and hire someone to manage it.

The point was that it's not "Be Airbnb or have nothing to show for it". You can join YC, aim for the moon, but maybe end up with something pretty decent for your efforts even if you fail at the big one.

The startup mantra is Go big or Go home. You want alignment with your investors. To even tell them you're tolerable of a lifestyle business would not be alignment with the use of their funds.

Don't confuse temporary state of 'sustainable' with 'going to continue to maintain a lifestyle business'. Many startups are happy to be at a sustainable state while figuring out product / market fit, how to scale, etc - because it gives them a longer runway without having to raise funds.

It'd still be considered a 'failure' from the investors perspective, and again, if aligned correctly - the founders also. One of my favorite quotes from an investor is 'Don't return my money. Return me 10x or fail ($0 return) trying'

It think the "battle" is over owning the "startup" label. Can a lifestyle business be a startup? I personally don't care much, but if you're taking investment, you can't aim for a lifestyle business (as you explain well).

Reddit, for example, sold for like 20-30 million so isn't included.

I know some other YC businesses that seem unlikely to ever be huge but are profitable and probably will be as long as they want to be. Own Local has that feeling to me, although perhaps it's actually going to be larger someday I don't really know.

Perhaps a 3D graph would be interesting.

   - Batch year
   - Valuation
   - Years to reach valuation*

* First dinner to m&a, discounting prior traction/validation.

That way, gross valuation / year can be more easily elucidated.

Are we sure that is what this is saying? I was reading it as 'sold' || 'valued > 40 million', not 'sold > 40 million' || 'valued > 40 million'

Nor Wufoo, sold for 35 million.

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