Is There a Y Combinator Valuation Bubble or Not?

If you look at the distribution of exists/mergers/sales, it is infinitely easier to grow and sell a company for $20-$50m than it is for $100m+. The number of potential buyers rapidly diminishes, once you get into 9 figures, deals get more complex, take longer to execute, and have a higher chance of failing.<p>Over the past 18 months, I've seen four of my friends "cash in". Most of these guys were at it for 7-10 years before the exit, and all but one of these was a sub-$30m deal.<p>In order to justify these "NEW" valuations, entrepreneurs &#38; investors have to hold out for VERY high value exits, which will dramatically reduce the chances of success and statistically extend the exit time for the angels and entrepreneurs by over a decade.<p>For most entrepreneurs who are on their first business, $5m or $10m is a life changing amount of money - by declining exits at prices that could achieve that outcome, they are forced to keep rolling the dice, over and over again, hoping that growth continues, a new competitor doesn't emerge, someone doesn't undercut their pricing, and everything is going at 110%.<p>It doesn't seem to make sense on the surface of it.

Bottom line:<p>(a) We're not in a bubble. We're in a revenue tsunami like nothing any of us have ever seen in our lifetimes.<p>Instagram didn't have a single dime of revenue. and the CEO basically waved away any thoughts of revenue when pointedly asked about it in an interview.<p>Facebook, who has 800M active, engaged users has only $4B in revenue. Is that what passes for a revenue tsunami these days? Guys, a revenue tsunami looks like double digit income growth quarter after quarter.<p>NB: Kudos to the CEO of instagram for making out like he did. But it's not an example to follow. Unless you like failure.

I'm not qualified to opine whether there is a bubble or not, but having recently visited the tech start-up scene in SF &#38; SV from my economically depressed corner of the country it definitely feels unworldly. The rest of the country is slogging along with poor growth or outright contraction and I think it is wonderful that somewhere people are still bringing good ideas and hungry money together. As we say down South, "make hay while the sun's still shining."<p>Bubble or no bubble it's a good time to make something happen.

Fun lesson in line with some of the comments.<p>I worked with an app co that stuck on millions of users and never earned a dime in revenue.<p>While the CEO was going manic about potentially running out of money, one of the advisors (who had recently sold for $100m+) emphatically insisted that we NOT generate revenue.<p>His reasoning?<p>The minute you turn on revenue you eliminate the "story" about the revenue potential.<p>The result?<p>A beautifully large exit to a entrenched and old school player.<p>Hook. Line. Sinker.

<i>I'm guessing, due to Paul G's awesome track record, that 50% of YC startups will get A rounds (I pulled that number out of the air, someone fact check me).</i><p>Not accurate. Out of ~45 companies in the W11 batch I think 4-8 have raised A rounds. There's still time for others, but I don't think there's any way that number will approach 20+.

It only feels like a bubble because of structural unemployment.<p>We wouldn't be talking about a bubble if blue-collar workers had the same opportunity that white-collar workers do. (Yeah, I know, I can't find a better term for the groups.)<p>Also, the vast amount of economic activity is happening in SF/SV and in NY. Raising money outside of these two centres is much harder. This is one facet of structural mismatch between supply and demand. One part of the 500 Startups thesis is to find under-valued startups that don't happen to be in the major tech centres.

More like a funding tsunami, where there's a lot of easy money floating around from all those finance guys and tech vets who cashed out last time around. I'm sorry, but when you start talking about how many users a site has and then using that metric as a comparison for the valuation of the site that acquires it... you're in a bubble. Why? Because nowhere in that thought process does revenue come into play.

A relevant graphic/talk from a board I found on Quora:<p><a href="http://www.quora.com/the_edge/Long-wave-boom-and-bust-cycle-from-a-talk-called-Innovation-in-a-disruptive-environment-by-Steve-Jurvetson-at-Stanfor" rel="nofollow">http://www.quora.com/the_edge/Long-wave-boom-and-bust-cycle-...</a><p>In it Steve Jurvetson (a Draper Fisher Jurvetson VC) shows the cyclical nature of capital, and how we seem to go from a PE boom and bust, to a VC boom and bust every ~7-10 years, with recessions interspersed in between.<p>YC appears to be near the centre of this new growth period, bubble or not, and is hence probably a beneficiary of the long term swings in global credit/capital.<p>Guess we'll just have to see how it plays out.<p>I hope it isn't that, and we have great companies, with solid business models (profit/revenue), without the mania that we had before.<p>But who knows, with the JOBS act passed (last week), and the consequent relaxation in securities regulations we may have sown the seeds of an unpleasant moment in the near future.<p>Talk:<p><a href="http://ecorner.stanford.edu/authorMaterialInfo.html?mid=2288" rel="nofollow">http://ecorner.stanford.edu/authorMaterialInfo.html?mid=2288</a><p>JOBS Source:<p><a href="http://en.wikipedia.org/wiki/Jumpstart_Our_Business_Startups_Act" rel="nofollow">http://en.wikipedia.org/wiki/Jumpstart_Our_Business_Startups...</a><p>JOBS Act criticism:<p>The Consumer Federation of America characterized an earlier version of the legislation as "the dangerous and discredited notion that the way to create jobs is to weaken regulatory protections"<p>Criminologist William K. Black had said the bill would lead to a "regulatory race to the bottom" and said it was lobbied by Wall Street to weaken the Sarbanes–Oxley Act.<p>"gutting regulations designed to safeguard investors", legalizing boiler room operations, "reliev[ing] businesses that are preparing to go public from some of the most important auditing regulations that Congress passed after the Enron debacle" and "a terrible package of bills that would undo essential investor protections, reduce market transparency and distort the efficient allocation of capital".

<p><pre><code> It assumes that you can a) get into the YC rounds (which 95% of angels can not) and b) there are other deals out there as good as the YC deals (80% of angel deals I see are not as refined as YC startups). </code></pre> So true.<p>That's probably where YC derives most of its value.

I've always thought that the OMGPOP buy was an excellent deal for Zynga and the Instagram buy a terrible deal for Facebook.<p>OMGPOP is adding a significant amount to Zynga's topline revenue. Last reported, OMGPOP was bringing $250k per day.<p>Instagram? $0/day. Not harsh but just the truth.<p>OMGPOP doesn't scream bubble at all. Instagram's deal does. So are we in a bubble? The answer is in the eye of the beholder.

Also worth noting, when a bubble forms people are yelling BUBBLE the whole time. It goes on for quite a while, more and more people screaming about the BUBBLE until pretty much everyone agrees it's a bubble. Then it goes on a little longer still. Then suddenly it pops and everyone says "who could have known???"

The question is, can it continue to not be a bubble? With so many investors vying to invest in YC companies in angel rounds the demand is eventually going to reach an unsustainable frenzy. Good for them, as the author assumes, if they are being more conservative and not really asking what they could (25mm priced rounds) just because they could. If prices keep going up, and there's a bad batch or two (not saying there will ever be ;)) then it could go away in true bubble fashion. What won't go away is the consistency in tutelage and the invaluable, growing alumni network. The question is if there is a way to keep YC Companies from hitting that bubble and then bursting it, just by sheer force of demand and consistency of investment in an otherwise inconsistent environment?

I have a bit of a problem accepting one of the arguments in this article (under the heading "Is There a Bubble?").<p>The author seems to be arguing that if you look at the actual and projected growth rate for both Instagram and OMGPOP (measured in number of account signups) as a percentage of the userbase of their suitors (i.e. Facebook and Zynga respectively), then the money paid for these companies represents "EXCELLENT" value.<p>To me that is an absolute fallacy. OMGPOP was going for 6 odd years and almost out of cash before they stumbled upon something that worked. Draw Something caught on like wildfire but the buzz will eventually die. What comes after it? i.e. how does past performance guarantee future performance (especially given the majority of past performance wasn't great)?<p>Similarly, Instagram has caught on like wildfire but even the CEO admitted that they have no way to monetize the user interest. So what we have is a freebie product that people love to use to send photos and an accompanying strap line of text. Yes it's cool but it isn't curing cancer and the users are using it as a fun throwaway service. They have no loyalty to Instagram and would drop it in a heartbeat if a charge was attached to using it.<p>So, where is the inherent "value" in all of these user accounts &#38; signups? Having millions of user's doesn't automatically translate to a long term money printing machine like Apple or Google.<p>You can apply this argument to Zynga and Facebook themselves. Facebook has 800 million users but its total yearly revenue is half of Google's annual profits (according the wikipedia entries). Zynga IPO'd at $10 a share. Almost 6 months later and the share price hasn't moved. That doesn't look like explosive growth to me.<p>Given all of the above it really does feel like a bubble (at least to me). All the valuations seem to be based on a house of cards...<p>P.S. It's 1am where I am and I'm not an econ or finance guy so if my assumptions or arguments above are wrong , I'd love to have it explained to me rather than being flamed to death :)

there was a recent blog which dealt with rationality behind such high absurd evaluations: <a href="http://continuations.com/post/19000949472/a-rational-internet-venture-valuations-bubble" rel="nofollow">http://continuations.com/post/19000949472/a-rational-interne...</a><p><i>4. The winner-take-all nature of network-effects businesses in which the dominant business can be an order of magnitude more valuable than other competitors.<p>So it is entirely rational given the Internet environment to see a dramatic stretching of the valuations for market leaders with network effects. It does, however, not bode well for aggregate returns for the venture capital asset class:<p>1. In a race to pick the winners ever earlier, valuations get stretched even for companies that have not yet proven that they really have strong network effects and that they will be the leader in their respective market.<p>2. These stretched early stage valuations will lead to depressed returns in a large number of companies and will also make many of these companies harder to fund. There will be more of these companies and more capital invested in them (in aggregate) than in the winners.</i>

Does it matter?<p>The fact is during this bubble, or non bubble, all of society is now online and connected and using the internet to make purchases for goods and services.<p>It wasn't the case during the last boom. If someone could enlighten me a little on how an exploration of things like this help move a startup forward, when we know there's plenty of profitable bootstrapped and funded startups that have become businesses.

&#60;&#60;The $210M sale of OMGPOP and the $1B Instagram purchase feel like a bubble, but you have to step back for a moment and realize that OMGPOP was purchased for 2% of the value of Zynga and Instagram for 1% of the value of Facebook.&#62;&#62;<p>how can relative valuations prove/disprove bubble valuations? poor point in my mind.

A priced round has 25-35K in legal fees? I'm assuming this depends on the size of the round. A priced angel round, yes they do still happen, should not incur 25-35K in legal fees, or the angels will walk.

Is there a bubble bubble?<p>With all those people talking about bubbles, what happens if the bubble bubble burts? People get back to work and are actually productive? A horrifying thought indeed.

Systematic overvaluation vs equivalent non ycomb companies plus the real value created by the network but not a bubble.

I feel it's money flowing from the left pocket to the right pocket of the same pants.

The upcoming Crowdfunding tsunami might also help keep valuations high.

it's certainly a gigantic bubble, from what I can tell.