Saturday, June 08, 2013

The Real Odds That Your Startup "Succeeds"

Henry Blodget is a smart journalist who knows how to drive pageviews.  He certainly got me to click through when he picked the headline, "DEAR ENTREPRENEURS: Here's How Bad Your Odds Of Success Are"
http://read.bi/17yADel

Blodget riffs on a tweet by Paul Graham to estimate the odds of startup success:
"Graham says that 37 of the 511 companies that have gone through the Y Combinator program over the past 5 years have either sold for, or are now worth, more than $40 million.
Most entrepreneurs would probably view creating a company worth more than $40 million as a success (unless the company raised more capital than that). And, on its face, the "37 companies" number seems relatively impressive.

In fact, however, the number tells a scary and depressing story.

This number suggests that a startling 93% of the companies that get accepted by Y Combinator eventually fail.
If only 37 of the companies that have applied to Y Combinator over the years have succeeded, this is a staggeringly low 0.4% success rate.
Put differently, only one in every 200 companies that applies to Y Combinator will succeed."
I don't contest Blodget's numbers. Y Combinator is a great program, and I agree that it ought to give its companies an above-average chance of success.

What I do contest is the definition of success.  One of the YC companies I was an investor in was AppJet, which produced EtherPad.  AppJet was sold to Google for less than $40 million.  Yet all the investors in the deal made money, and the founders became millionaires.

Moreover, the founder of AppJet, Aaron Iba, went on to become...a partner at Y Combinator.  It sure doesn't seem like Paul Graham was disappointed with him.

If you raise $10 million, any exit under $40 million is a disappointment.  But if you're capital-efficient and build a real business, even a smaller exit can be a great outcome for everyone involved.

I'd love to know how many YC companies made their investors money--that's a far better measure of success.

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