The YC Report
Performance of Y Combinator companies that went public
Y Combinator (YC) has been hailed as the 'Harvard of startup accelerators' and is arguably the most popular startup incubator in the world. For those unfamiliar with the startup ecosystem, Y Combinator is a boot camp for new companies. Founders who make it to YC get $500K as seed investment for 7% of their company1. In addition, the founders are immersed in a 3-month cohort with other ~300 startups, which are sorted into groups and mentored by successful founders. All this to say that YC is an extremely selective club with a ~1.5% acceptance rate, and it gives the founders access to a great network, future funding, and instant street cred.
The results speak for themselves. 4% of YC companies become unicorns (compared to the 2.5% outcome for similar venture-backed seed-stage startups), and YC has funded 90+ billion dollar companies. Top YC companies include Stripe, Airbnb, Reddit, and much more…
Based on our rough calculation, YC has invested nearly $1 billion across 5,000 companies2, which have grown to a combined valuation of $600 billion. It’s safe to say that the YC team has made an incredible return on their investment. But, most of these returns are only accessible to the Limited Partners3 that invest in YC. It’s next to impossible for a retail investor to get access to these deals, and the next best thing would be to invest as soon as these companies become public.
Post-IPO Performance of YC Companies
According to the data from YC, 17 companies that went through YC have gone public. These include household names like Coinbase, Airbnb, DoorDash, and Reddit. So, did their private market success translate into public market gains for retail investors?
The results are striking.
If you invested equally in all YC companies on their IPO day, you would now be down 49% compared to the +58% return of the S&P500!
14 of the 17 companies lost money for the investor, and 3 companies lost more than 99% of their IPO value.
Only one company ended up beating the S&P 500 benchmark
To start, we did not consider the IPO price as you might not be guaranteed an allocation when applying for an IPO as a retail investor4. For a more realistic scenario, we used the closing price on the IPO day. Technically, you then had a full day of trading to buy into the IPO.
The Cost of Speculation
Price is what you pay; value is what you get. — Warren Buffett
One of the biggest companies on the list was Coinbase, valued at $47 billion at IPO, approximately 40 times its 2020 revenue of $1.2 billion. The valuation was largely due to the crypto bull market. The story held up for a year, with the revenues rising to $7 billion due to the crypto wave before crashing down to $3.1 billion in 2022. The company has experienced pretax losses both in 2022 and 2023. Extrapolating the exceptional performance of 2020 and 2021 into the future led to unsustainable valuations, and the long-term stock returns have reflected that.
This theme is recurring across other YC companies that went public. Let’s take a look at 2 other companies that represent the most extreme cases of value destruction.
Momentus (99.9% loss) — Momentus wanted to create space infrastructure and went public via a SPAC merger at the height of the space industry hype. The commercial mission never happened, and the SEC charged Momentus with misleading investors about its technology and national security risks.
Presto (99% loss) — Presto, a restaurant technology company, went public via a SPAC merger during the pandemic-driven tech boom. The company created AI-powered drive-thru voice assistants and touch-screen tablets for restaurant tables. However, the company never managed to scale its operation and recently got a delisting notice from Nasdaq due to its low stock price.
Investing in growth stories rarely pans out, especially at these rich valuations. The sky-high revenue multiple reminds us of what Scott McNealy, CEO of Sun Microsystems, told Bloomberg just after the dot-com collapse in 2002.
“2 years ago we were selling at 10 times revenues when we were at $64.
At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends.
That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate.
Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes.
What were you thinking?”
The Y Combinator Paradox: Private Success, Public Struggle
The stark contrast between Y Combinator's private market triumphs and the public market struggles reveals an interesting paradox in the modern tech ecosystem. Private markets can sustain higher valuations based on just potential alone — Investors are willing to bet on visionary ideas and projected growth. But unless you are Tesla, public markets eventually demand tangible results, often leading to painful drawdowns.
This report is by no means meant to throw shade at YC. They have created some incredible companies like Stripe (Fun fact — Stripe now processes more than 1% of the Global GDP!), Airbnb, and Dropbox.
Unfortunately, by the time most of these companies reach the IPO stage, the hype surrounding them pushes them to unsustainable valuations. While this gives a great payout for the initial investors and founders of the company, retail investors frequently find themselves at the short end of the stick when market expectations adjust.
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Footnotes
The deal is slightly more complicated than that. Here are the specifics if you are interested.
Both the batch size and funding amount have grown considerably in the last two decades. YC started with $20K funding with nearly 30 companies per batch. Now its’s $500K funding for more than 300 startups.
Limited Partners are generally high-net-worth individuals, pension funds, other VC firms, etc. For example, Andreessen Horowitz, Khosla Ventures, and Sequoia Capital are all investors in YC.
In most cases, less than 10% of the total IPO is allocated to retail investors. Adding to this, a multitude of other factors, such as your brokerage account, account balance, and historical trading pattern, will all contribute to whether you get the IPO shares or not in the end. For example, Brokerages tend to allocate IPO shares to their premium clients - In the case of TD Ameritrade, your account must have a value of at least $250,000 or have completed 30 trades in the last 3 months.
While you didn't say YC LPs got 600X for their investments, you do write that they "made an incredible return on their investment." To that I say, maybe. It is probably fair to say they made back their money, but at what IRR over 2 decades? Hard to say. Was that $1B into $600B in follow-on investments? If so, that $1B is worth exactly $1B. Also, valuations can be self-fulfilling prophecies where each round brings more optimists to the table without actually being tethered to reality. The market is the real test, and it would appear that $600B was grade inflation.