On the Y Combinator “premium”

On the fundraising road for Pioneer Fund, I’ve had the pleasure of meeting with 100+ potential investors from all around the world, and one of the most common questions I hear is, “Are Y Combinator startups really worth their high valuations?”

I’ve been answering this question anecdotally, dropping well-known YC company names like Airbnb and Dropbox, and referencing some of YC’s impressive results statistics:

  • Cumulative valuation of top companies: $100B
  • Companies valued at $100M+: 93
  • Jobs created by top companies: 28K+

But this lacks context, so I decided to dig in deeper and compare YC startups to non-YC startups by “vintage” as best I could, comparing the data YC recently released on its top companies with an analysis of broader seed-stage startup outcomes courtesy of CBInsights. I also pulled some data from Snappr’s wonderful YC DB project.

Here are some of my key findings:

YC startups are 3x more likely to become ‘unicorns’ — Looking at the 2008–2010 vintage, CBInsights reports that 12 venture-backed startups are now valued at $1B or more (1.1% of the total). Of the 146 companies that graduated from YC those years, 5 are now valued at $1B+ (3.4% of the total). Those companies — Airbnb, Stripe, Docker, PagerDuty & Machine Zone — are impressively nearly half of the ‘unicorns’ for the whole industry those years.

YC startups are 4.5x more likely to be valued at $100M+ — At first, I thought YC startups are ‘only’ 2.7x more likely, since CBInsights reports 31 exits from the 2008–2010 vintage at $100M+ (2.8% of the total) and YC reports 11 companies from those years valued at $100M+ (7.5% of the total). But then I noticed an interesting trend… if you look at YC’s 2011–2012 vintage, there are a whopping 31 companies valued at $100M+ (12.7% of the total). This is counter-intuitive because the younger companies should be at a disadvantage to the older companies in achieving that milestone. This means that YC’s batch quality is rising over time (more below).

YC’s batch quality is rising over time :)— This is pretty obvious when you look at the percentage of $100M+ and $1B+ companies by batch. In the chart below, $100M+ companies are in blue and $1B+ companies in red:

The trendline is definitely up-and-to-the-right, which is especially impressive when you consider that newer companies are at a disadvantage to older companies in hitting a given valuation. So, the company quality is actually improving more quickly than implied visually above. I’d expect the 2012 and later vintages to eventually have at least as many $100M+ companies as 2011, and for some of the 2011 companies to soon join the ‘unicorn’ club.

So, that’s what I came up with. You’re welcome to review my work here.

Considering all of this on top of the strong allure of seed-stage venture returns more generally, one can understand why YC Demo Days are so well-attended.

Now, back to investing in YC startups…