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.