YC vs. Rest of the World
In this article, we breakdown what makes Y Combinator the number one aspiration of early-stage startup founders, and the numbers behind its success.
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Since Paul Graham, Jessica Livingston, Trevor Blackwell, and Robert Morris founded Y Combinator in 2005, startup accelerators have come a long way and in many different forms.
If you would've invested in every YC Company since 2005, you would've made 176% average annual return net of dilution. Even in the modest years, YC produces 70-80% average annual returns (see 2010-2011). 300%+ annual returns on strong years.
In outlier years (on which VCs build their reputation), YC produces 2500%+ annual returns (see 2009, Stripe & Airbnb)
In the world of accelerators, Y Combinator is still the king. It has been criticized for its one-size-fits-all approach, taking too many startups, overvaluing companies, and recently its standard deal terms and continuity fund, but every six months, the biggest investors in Silicon Valley flock to YC for its Demo Day.
Competing to the Top
The legacy of YC can be determined by comparing the market value of the companies that went through its programs vs. its closest competitor Techstars, companies who have found their roots in YC have a market cap of ~$600Bn while Techstars is ~$100Bn.
Other models of accelerators have popped up in recent years, but nothing comes close to generating the sheer amount of successful entrepreneurs and companies as YC.
5.4% of companies from Y Combinator’s 2010 to 2015 cohort are unicorns.
Not just in unicorns, Over the same period, Y Combinator also led in startups valued at $500 million to $999 million at around 1.8%, on average, compared with Techstar’s approximately 0.3%.
Techstars and 500 Global have built their presence using the YC model and built geography-specific presence to differentiate themselves - while Techstars have their presence in Tulsa, New York, Seattle, and Tel Aviv, among other places, 500 Global is spread across the world - USA, Canada, Egypt, Israel, Japan, Saudi Arabia, and a few other places. Yet, they lag behind YC, five years after completing the program, YC’s cohort was valued at $22.5Bn cumulatively, Techstars’ 2013-2016 annual cohorts were valued at an estimated $3.1Bn, and the number was $1.7Bn for 500 Global.
VCs also realizing the competition in pre-seed and seed investment have started sectors specific accelerator programs like a16z START, which focuses on  American Dynamism, Consumer, Enterprise, Fintech, and Games, Sequoia Surge in South East Asia, and BTV Ventures The Mint, a FinTech accelerator.
Exit Outcomes
In the end, the job of an accelerator, just like a Venture Capital Firm, is to generate returns for their Limited Partners (LPs), and that is defined as portfolio exit outcomes.
YC leads its peers in exits with large IPOs such as Airbnb, Coinbase, Dropbox, & GitLab.
According to a report by PitchBook, Y Combinator has outperformed other accelerators, some top VC firms, Private Equity, Hedge Funds, and other institutional money managers. Here’s the data from PitchBook's report about YC’s 2011 - 2015 Batch.Â
Techstar’s data is limited, but its 2011 exit stood at around $9.8Bn; in 2017, it was at $3.5Bn. It must be noted that exit outcomes can depend a lot on big outcomes like big public market debut and big acquisition, and it also depends on how long the company has existed. There can be private companies with big valuations whose equity is still held by other accelerators, which will remain unaccounted for in this metric.
Follow on Capital Raised
Capital raised by the companies that went through the accelerator is another significant frontier because it helps identify the accelerator's reputation and its program in the investment community. YC boasts of companies like Airbnb, Instacart, OpenSea, and Cruise, which have raised massive rounds and are some of the top-performing companies in the market, so naturally, YC is miles ahead in this segment. According to PitchBook data, Y Combinator, 70.4% of the startups that went through the program raised the next round of funding.
Valuation
Five years after completing the development program, Y Combinator’s 2013 to 2016 annual cohorts were valued at an estimated $22.5 billion, on average per cohort, but this metric can easily be manipulated by the rapid growth of one or two single companies. After five years, the 2017 to 2019 cohorts are tracking to an estimated 40.0% to $50.0-plus billion of value due to the 2021 bull run.
Y combinators have generated an attractive estimated median value to invested capital ratio of 5.8x, which will likely improve as time passes because the startups will grow over time, and one or two will win big. From 2010 to 2020, Techstars’ value/capital ratio was 2.3x—though it was 3.3x from 2010 to 2015.
According to the founders, YCs real value may not be the $500K of initial investment but its mentors and corporations, which are crucial for helping the entrepreneur identify the right problem to solve, determine the right service, and develop a go-to-market strategy. Plus, the badge of trust it gives to founders and early-stage companies is truly priceless.
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