I don't really see the moral problem. YC is a group of investors, not a charity. Of course they're going to look for the kind of hardy founders who would succeed even if they got rejected.
Yes, they're not a charity. They're also not a pension fund. To me they look a little like a prep school (but maybe I'm wrong).
The mission of a prep school is to help good students become brilliant; if it becomes stuffed by already brilliant candidates (for example because the admission process is more selective than the admission process of the college it preps for), so much so that there's no place left for second-tier students who would make the most of its teaching, then there's a problem.
I'm just wondering if this is something YC worries about or should worry about.
I see what you mean, since Y Combinator is an institution now, and its selection process has an impact on the overall ecosystem. But let's say Startup A, which is top-tier, would become a $75M company with Y Combinator's help, but would become a $50M company without them. Meanwhile, Startup B, which is second-tier, would become a $3M company with Y Combinator, but would become a $30K company without them. Even if we throw profit out the window (which an investment group doesn't do, obviously), Y Combinator would add a greater total dollar value to Startup A than to Startup B, even though they would multiply the value of Startup B by 100x.
Also, elite prep schools do try to fill their classes with nothing but brilliant students, for a variety of reasons, including money and prestige. There are some negative consequences, to be sure, but it happens. At least Y Combinator increases the size of its classes every year, unlike prep schools.
YC is not like a prep school. It is a win condition for the YC model (really, for any investment system) if so many top-tier companies apply that there's no room for second-tier companies. YC is a business, not a public good.
Many comments to my initial post point out that YC is not a charity. We can all agree on that.
Prep schools are businesses too, BTW. And yes, businesses have a responsibility to their shareholders to maximize profits. But if that was the only purpose of any business, everyone would be selling luxury watches.
YC is not a pension fund putting money in a VC; YC "makes it happen". They invest in very early stage companies because they believe that they can help them succeed (and they do).
In 2004-2005, PG famously predicted the second coming of Apple; if he had put all of his money in Apple stock then, he would be 17 times richer today. And yet that's not what he did. At the same time he was making this prediction, he founded YC.
- - -
I can't seem to explain myself clearly, but I'll give it another try.
The total return of an investment fund is really the return on a very few top investments, which tend to dwarf all others.
Now, if you had a magic prediction device that let you identify for certain the next Google, it wouldn't make sense from a profit-maximizing point of view to invest money in any other company: just put all your money in the next Google and you're done.
It's safe to assume that YC, who have been in business for 7 years (really 14 since they have 2 rounds per year) are getting better at what they do. They should be able to predict who's likely to succeed and who's not, better and better each year.
Therefore in all logic they should be reducing the number of startups they fund: put more money in sure winners and don't fund anybody else.
And yet they're doing the exact opposite: each batch is larger than the previous one.
There can be only two explanations to this: either they're getting worse and worse, and are spreading their bets; or, they're getting better and better and can afford to offer their services to more and more companies.
It seems likely that the second option is the correct one.
>> put more money in sure winners and don't fund anybody else
That is not their business model. Their model is to take a small fraction of the company for a small amount of money, and then help them succeed.
>> There can be only two explanations to this: either they're getting worse and worse, and are spreading their bets; or, they're getting better and better and can afford to offer their services to more and more companies.
So far YC has a fantastic return on investment. I imagine that their returns are the envy of many conventional VC firms.
They invest so little per company that they can afford to invest in every company where the expected return on investment exceeds the amount invested.
As they become better known, they get more and more qualified applicants, and thus the number of bets that they make should be expected to increase over time.
