Thursday, August 27, 2015

The Odds Are Always Against Startups

Y Combinator CEO Sam Altman just released a fascinating set of statistics about the firm.

The numbers are pretty stunning; Y Combinator's 940 companies are now worth more than $65 billion.  That's an astonishing mean value of $69 million...and recall, that Y Combinator buys into those startups at a sub-$1 million valuation.  Now that's a great business!

But while Y Combinator itself is a great business, I want to point out that embedded in those stats are the fact that the odds are always against startups.

I'm fond of telling audiences that only 10% of venture-backed startups succeed, by which I mean achieving an exit of $100 million or more.

Y Combinator estimates that 40 of its 940 companies are now worth more than $100 million.  That's 4.3%.

Even if we double this number to account for the fact that many Y Combinator companies are too young to have reached their final stage of growth, we still only get 8.6%.

Meanwhile, YC has produced 8 "unicorns," which implies a ratio of 8 / 940, or 0.9%.

In other words, even if you get into the world's greatest, most successful accelerator (Y Combinator), your chances of building a unicorn are only 1-2%.

This is one of the paradoxes of startups: Collectively, startups are a fantastic business that contribute greatly to society.  Individually, the odds against any individual startup and entrepreneur are incredibly long.


SYF said...

Good observation. But one follow-up thought. If you calculate expected value based on 1% for unicorns, it means your EV is at least $10m (plus the probability-weighted values of the less- than-unicorn exits). Seems like a good deal for Y-Combinator entrants if they can afford the risk.

Alber Gore said...

Greetings and salutations!! Wow Great page and you should definitely check out this video on Entrepreneurship and Lessons from Steve Jobs & Apple!!

Chris said...

The expected value of entrepreneurship is definitely positive, but it's impossible to start enough companies in your lifetime to guarantee that you'll actually reap the benefits.