I can’t subscribe to the view — put forth in a recent Business Insider piece on startup valuations — that the Y Combinator program is driving startup valuations higher across the board. And in fact, the article strikes me as a fairly shallow take on the issue. It collects a mess of unattributed quotes (as well as quotes from one or two attributable sources), and does very little of the due diligence you’d hope to get out of a journalist with a calculator and/or a Google spreadsheet to hand. Math aside, it completely fails to take any kind of close look at the startup market itself, and instead slavishly regurgitates the (again: overwhelmingly unattributed) quotes that the reporter has collected.
If you take a little time to assess the market, a different picture emerges.
Yes, Y Combinator helps startups get better terms when they’re looking for A rounds or subsequent angel financing. That’s pretty much the purpose of the program. Some of the techniques that are lamented in the article (founders are “coached to go for the jugular of the investor”; YC creates the sense that “a deal is ‘Going, going, gone!’ It’s not the same process you go through with a non-YC company”; YC startups are “marketed the right way, and it’s frustrating”) are nothing more than the advertised benefit a startup gets from Y Combinator tutelage.
But beyond that, there are structural reasons that startup valuations feel higher these days, and Y Combinator is simply an example of broader trends that are driving that shift.
I’d headline the shift by saying the startup market (probably a misleading term in itself) has matured ever so slightly over the last five years. On one level, that’s all there is to it. You can see it in a number of different evolutions:
- Entrepreneurs are now better educated about the market they’re entering (i.e., the market for financing), and how to navigate it.
- The tools of innovation continue to get cheaper and more accessible, a trend well chronicled in many places and for many years.
- The financing market has become more efficient, in the sense that more participants on both sides of the table have access to more market information than they’ve had before; you see this in the emergence of startup financing portals like AngelList, and sites like TheFunded.com.
- There is more money being directed toward early-stage companies right now. I know this anecdotally from talking to investors and entrepreneurs, but I’ve also seen it written up in studies, though I can’t seem to locate any at the moment.
The fact that the market is maturing means the playing field is starting to level out (somewhat) between investors and entrepreneurs. Hence the dissatisfaction expressed by the unnamed investors in the article over the presence of entrepreneurs who are smarter about raising money. To anyone who’s spent any time around Sand Hill Road, this shouldn’t be surprising.