Paul Graham is “Selling” the Children

Ray Deck of Element55 writes an interesting blog called 52Bicycles. One of his posts talks about his view of the negative effects of the Y Combinator approach to funding teams and not paying that much attention to the product or business. Paul Graham is hurting the Children There may be another reason why the business model or product is not that important to Y-Combinator

YC doesn’t care about the product or the business, the value is in the individuals themselves. The PG strategy is a beautiful and subtle plan to skim the cream of the best developers out of the labs of Stanford and MIT etc.. It has been said that on average the acqusition price of developers is $1-2 million apiece. Now consider what Mr. Graham has said about the best ones…

“Economically, this is a fact of the greatest importance, because it means you don’t have to pay great hackers anything like what they’re worth. A great programmer might be ten or a hundred times as productive as an ordinary one, but he’ll consider himself lucky to get paid three times as much. As I’ll explain later, this is partly because great hackers don’t know how good they are. But it’s also because money is not the main thing they want.”

So if Y Combinator sees 200-300 company applications a year, with 2 founders each, he is developing a relationship with 600 of the brightest most ambitious young technologist every year. Some are 10x and one may be the 100x code monster. So YC is building up a “farm team” worth $600+ million every year. Obviously, this a concept and all that talent cannot be monetized, but you get the idea. With a $ 5k per employee investment YC is getting $ 3 million of raw talent for $ 15 grand, plus 6-10% of the company. A no brainer investment.

Someone else has realized how beautiful a recruiting strategy this is for the YC portfolio, as I see at least one other start up trying to take advantage of the “overflow”. Why not all Great Hackers get picked by Y Combinator

So the next time you see a 40ish looking guy strolling the campus and attempting eye contact, don’t be surprised to find he is trolling for “Googlebait”

Disclaimer: This is not a critique of the YC business model. I believe that it is a good thing overall and serves a vital role in fostering the entrepreneurial spirit. We’re just making a point and having a little fun doing it.

4 thoughts on “Paul Graham is “Selling” the Children

  1. I agree that it’s easy to see how this makes economic sense to an agressive, positive investor. I can think of two reasons not everyone does it:

    1. It’s high risk
    2. A lot of business people think IT people are already spoiled and it galls them to pay more than the bare minimum they can get away with.

  2. Last time I checked, getting $1m value for $5,000 is not a high risk investment.

    In the start up world here in Boston, engineers are golden and getting more valuable everyday.

  3. Rem – check your math buddy. $1 MM post-money with $5,000 invested would imply Y-Combinator is only taking 0.5%. They average 6% for $10,000 in, that means the average valuation is approximately a $166K post-money valuation. That’s a significant discount to the average Series A round and even to the average angel round.

  4. Sorry, I must get better at explaining myself. The engineers are worth $1m apiece. the company nothing. $10K for $ 3 million worth of engineers. anyway, I was only half serious with the math, as I was hoping you could figure out with the pedophile analogy or “geekophile” out trolling a campus for Googlebait.

    Hopefully, I will get better with humor as time goes on.

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