I’m investing $10,000 into YC’s Fund
I’m investing $10,000 of my personal money into Y Combinator’s index fund (as soon as they let me).
For some reason, fairly few people talk about how impressive Y Combinator is as a for-profit firm. If they ever opened up an index fund to let the public participate in early stage financings of the startup ecosystem, I would gladly invest. They are one of the most powerful firms in the private sector.
There are three reasons that YC is beyond competition: elite positioning, incredible terms, and the ability to control mindshare via Hacker News.
Elite Positioning
Y Combinator is harder to get into than Stanford Undergrad or Harvard Business School. The acceptance rates are 1.6%, 5.1%, and 12.1% respectively. Accordingly, this ensures that Y Combinator gets the cream of the crop of smart, ambitious people.
Furthermore, this network creates a tremendous community of investors, partners, and alumni. The support and relationships that come out of this are a tremendous asset (as they would be at Stanford, Harvard, and other elite institutions).
Keep in mind, they are the only for-profit institution in this group.
Incredible Terms
After an extremely selective process, Y Combinator gets incredible terms with the companies it invests in: 7% of the company for $120,000 (a $1.5M valuation)
It is rare to get different terms than this because YC has such negotiating leverage: there are 70 other companies that would gladly take your spot if you don’t agree to their terms. Peter Thiel would probably be glad to invest in them because they seemingly have a ‘creative monopoly’ and are beyond competition.
For perspective, the average valuation of a YC Company at Demo Day is around $6M. This means that over the period of ~5 months, from acceptance until Demo Day, YC’s stake in a company has appreciated by 400%. Even if the companies take on 20% dilution by bringing in outside capital and 10% of companies don’t make it to Demo Day, it’s still 300% in 5 months. That’s insane.
Keep in mind that YC has now created five $1B+ companies: Dropbox, Airbnb, Twitch, Stripe, and Instacart. There’s also a ton of other companies such as Teespring and Reddit that are worth $100M+.
Here’s a sports analogy for how great YC’s investment terms are: Imagine if Nike signed an endorsement deal with Lebron James, three months before he went pro, for the price of what he was ‘worth’ as a 6th grader.
Control of Mindshare
Y Combinator exerts control over Hacker News — the coveted news source of hundreds of thousands of talented engineers. Control over this information affects the vantage point and thought processes of some of the world’s most influential builders.
Hacker News is the 500th most popular website in the USA, has more traffic than TechCrunch (one of the preeminent technology media outlets), and drives more users than Product Hunt. During Front’s launch, Hacker News sent more people to Front’s website than TechCrunch and Product Hunt combined.
YC routinely ensures that its companies’ hiring posts show up directly on the front page, driving extra exposure to posts that benefit their investments. That’s a significant advantage to have.
Y Combinator is somewhere between a venture capital firm and the world’s most elite, for-profit university. It has an extremely strong reputation, negotiates terms that almost guarantee a positive return, and has a powerful publication to influence mindshare. I’m incredibly impressed with what they have accomplished in 10 years.
In truth, it’s unlikely that YC would open up an index fund due to the risk of lowering their impressive standards. So many people would want to invest in the fund that there wouldn’t be enough quality companies for YC to partner with.
If they change their mind, I have $10,000 with their name on it.
I’m the CEO of BlueLight. We’re bringing personal safety into the digital age.
