Silicon Valley Guru Blasts Y Combinator Hype(preview.inc.com)
preview.inc.com
Silicon Valley Guru Blasts Y Combinator Hype
http://preview.inc.com/john-mcdermott/silion-valley-guru-blasts-y-combinator-hype.html
14 comments
Khosla is simply stating the fact that some quality investors shy away from "hot/overhyped" investment opportunities. You can't argue with fact. However, some quality investors are also attracted to "hot/overhyped" startups. Which effect dominates?
It's not true though that quality investors shy away from high valuations. The difference between a high and low valuation for a given startup might be 3x at most, whereas the kind of startup they're hoping to fund could return 300x.
The enormous multiples generated by successful startups mean there is no "value investing" in the startup business. There are no successful investors who systematically seek out underpriced startups. The successful investors are simply the ones that pick the winners, regardless of price.
The enormous multiples generated by successful startups mean there is no "value investing" in the startup business. There are no successful investors who systematically seek out underpriced startups. The successful investors are simply the ones that pick the winners, regardless of price.
We're just arguing different things.
You're saying value investing for startups is a suboptimal strategy. (I understand your point and read swan farming and found it highly interesting.)
I'm saying that may be true but that doesn't stop investors from trying.
Khosla is one of these people. He appears to have just stated he was.
Now maybe there are ulterior motives at play, and Khosla is lying about his aversion to superhyped startups.
Basically I'm saying investors have a distribution of frugality coefficients, and was asking: what does it look like if you plot "frugality" versus "investor quality". I would guess there might be a small relationship. Even if frugality is strongly negatively associated with quality, it is still true that high valuations will turn-off some quality investors. However, the important question is not whether you turn off some good investors, but, how many good investors do you attract, period. Thus hype may still be good.
You're saying value investing for startups is a suboptimal strategy. (I understand your point and read swan farming and found it highly interesting.)
I'm saying that may be true but that doesn't stop investors from trying.
Khosla is one of these people. He appears to have just stated he was.
Now maybe there are ulterior motives at play, and Khosla is lying about his aversion to superhyped startups.
Basically I'm saying investors have a distribution of frugality coefficients, and was asking: what does it look like if you plot "frugality" versus "investor quality". I would guess there might be a small relationship. Even if frugality is strongly negatively associated with quality, it is still true that high valuations will turn-off some quality investors. However, the important question is not whether you turn off some good investors, but, how many good investors do you attract, period. Thus hype may still be good.
I didn't get that but it must be interesting... What does it mean plz?
It's a quote from a very famous baseball player/funny man Yogi Berra [0]. It's sarcastic -- normally, a place being very popular would be considered a sign of success. But Yogi describes it as a negative -- as if the place is a failure because it's "too crowded".
Likewise, it's normally considered a positive thing for a company to get a high valuation from investors. This suggests that investors think the business is very valuable. But Vinod has described high valuations as a negative. PG is using a famous quote to point out that it's not something one would normally view as a negative.
[0] http://en.wikipedia.org/wiki/Yogi_Berra
Likewise, it's normally considered a positive thing for a company to get a high valuation from investors. This suggests that investors think the business is very valuable. But Vinod has described high valuations as a negative. PG is using a famous quote to point out that it's not something one would normally view as a negative.
[0] http://en.wikipedia.org/wiki/Yogi_Berra
Actually the interesting thing about that quote is that it's self refuting. It couldn't be too crowded if nobody goes there. The quote in the article is similarly self-refuting. If a startup has a high valuation, that means investors were willing to pay it.
He's just refuting Khosla's agument and pointing out that if VCs were really repelled, then the valuations could not be high (since these are determined by the demand of the market).
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VCs who really believe that they are adding value not money should prove it by making investments on the sort of terms YC gets.
Reading his remarks was the first time I seriously started to think about applying to YC for my next startup. It gave me the sense that YC has really cracked the code for company building and raising investment.
Reading his remarks was the first time I seriously started to think about applying to YC for my next startup. It gave me the sense that YC has really cracked the code for company building and raising investment.
Are quality angels being priced out of these rounds? Definitely. But I don't think that quality VCs are getting priced out. The top VCs know that each year about 15 startups are responsible for the majority of the returns, returns that pale in comparison to the initial investment, even those from current YC seed rounds. The VCs not getting priced out are those that can try to self-guarantee some sort of return from their investment. The top half dozen VCs provide a lot more than just cash to a startup. They often help with hiring, since their rolodexes of talent are very valuable.
An acqui-hire may be a failure insofar as VCs making money off founders are concerned because those founders can find a way to cut out investors (if they want to burn bridges), but AFAIK large acqui-hires of entire teams (20+ people) aren't total losses for top VCs that can buy their way into a promising YC startup since many of those employees don't have double/single triggers and will move to the new company in an acqui-hire. With that in mind, top VCs can stack promising companies with talent they have contact with and still at least break even at the end of the day if not profit. While it is certainly not their goal, top VCs can at least avoid losing money by just shuffling talent around Silicon Valley. This makes investing in the strong founders PG and co fund attractive because of the reduced downside.
Big acqui-hires are a hedge. You need a solid founding team that can manage team growth and a solid talent rolodex to be able to make those hedges.
An acqui-hire may be a failure insofar as VCs making money off founders are concerned because those founders can find a way to cut out investors (if they want to burn bridges), but AFAIK large acqui-hires of entire teams (20+ people) aren't total losses for top VCs that can buy their way into a promising YC startup since many of those employees don't have double/single triggers and will move to the new company in an acqui-hire. With that in mind, top VCs can stack promising companies with talent they have contact with and still at least break even at the end of the day if not profit. While it is certainly not their goal, top VCs can at least avoid losing money by just shuffling talent around Silicon Valley. This makes investing in the strong founders PG and co fund attractive because of the reduced downside.
Big acqui-hires are a hedge. You need a solid founding team that can manage team growth and a solid talent rolodex to be able to make those hedges.
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Yesterday's discussion on the matter: http://news.ycombinator.com/item?id=4513696
Y Combinator and similar accelerators for causing excessive valuations in the companies they mentor
Its the investors that "cause the valuation", though. While this may seem pedantic, its not. The Author of the quote, is an investor. And this is a deflection. At worst, he's saying Y combinator is now a brand, like Gucci or Apple. And that this is causing handbag or laptop prices to rise because of the brand is attached.
It dismisses, prematurely, the possibility that the brand has or adds value.
Ironically, most of the value in brands is search/selection efficiency. It seems a bunch of them are paying a premium to not do legwork, discovery, and etc. Odd, then that the critique is directed outwards.
Its the investors that "cause the valuation", though. While this may seem pedantic, its not. The Author of the quote, is an investor. And this is a deflection. At worst, he's saying Y combinator is now a brand, like Gucci or Apple. And that this is causing handbag or laptop prices to rise because of the brand is attached.
It dismisses, prematurely, the possibility that the brand has or adds value.
Ironically, most of the value in brands is search/selection efficiency. It seems a bunch of them are paying a premium to not do legwork, discovery, and etc. Odd, then that the critique is directed outwards.
Nobody goes there anymore. It's too crowded.