Stay hungry , not foolish :)
We invest in approximately 10 to 15 YC companies every single year. We aim to fund most of the French entrepreneurs going through the program. Since I joined Venture Capital back in 2015, the valuation of YC-backed companies changed quite a bit. Just from the back of my mind, here is what I recall…
2015-2017: $6M to $8M pre-money cap
2018-2019: $10M to $12M pre-money cap
2020 onwards: $15 to $20M post-money cap
A couple of parameters explain why valuation almost tripled over the past decade:
From a macro perspective, the market just went up. Venture capital has become an abundant resource, automatically inflating the price of its underlying asset: Startups. Now that the market is contracting, it’s mostly affecting later-stage companies, especially as venture firms are trying to make up for their returns by investing as early as they can. For that reason, seed-stage valuations are less likely to go down dramatically.
From a micro perspective, companies raise more money at seed stage than before to face competition, development costs, and also because they can… The ownership target, in the meantime, remains the same, so valuations go up.
Regarding YC, it’s like a luxury shop of collectibles that are selected and crafted for investors to buy them. Everybody knows that out of all the founders joining each batch, some of them will eventually build highly valuable startups. People always complain about the valuation of YC-Backed companies, but they keep investing.
A pessimist will argue that you will never get your money back. An optimist will tell you that it only takes one hit to make it up several times for the rest of your investments. A realist will show you the dynamics and will let you decide for yourself.
When you invest in startups, you need access, wins, and diversification. Access means that you must be able to engage with the best founders, which is easier when you manage to build a strong enough network to connect with great entrepreneurs. Then you need to win deals and get your allocation, and finally, it only works if you diversify your portfolio consistently with at least 20 deals. You will lose your money once, but you really don’t know which company will return the most, and it’s really not easy to predict when you know that consensus is the enemy of the best decisions.
Now, what happens when the price of your underlying asset increases quite significantly? From a portfolio perspective, it does work if the overall output increases as well with the same magnitude, which was true over the past few years. It’s not the case anymore. Yet outliers and big winners will still emerge. It will require a lot more talent, diligence, and hard work to find, fund, and exit those companies, especially in a market with more investors and entrepreneurs than ever.
In theory, your returns depend on your entry point and your exit price, and the higher you pay, the harder it gets to generate outstanding returns. But in practice, and especially at early stage, two elements matter: hit rate and ownership:
If you’re building a portfolio like Kima Ventures, for instance, with 100 companies per year, and decide to pass on a deal because you find it too expensive, you might just miss that one hit that would return your entire vintage. When I got a €50k allocation in Deel, back in April 2020, at a valuation beyond €50M for a company that was below €100k of MRR, I wasn’t proud of my move, but I knew I had to do it. Now I am so happy we did it. The company is performing beyond expectations and accounts for more than 100x of our investment. Of course, I wish we could have invested more, but it’s always easy to look back and rewrite history.
Regarding ownership, if you have a more intentional strategy and are building a portfolio with higher entry tickets like New Wave, for instance, with, let’s say, 20 to 30 portfolio companies, the one thing that matters is to get to your target ownership, whether the cost is $2M or $4M, because 20% of your companies will potentially really perform and you need that ownership in order to generate outstanding returns.
From a more practical standpoint, the real issue with high valuations, large rounds, and the overall frenzy around early-stage startups, it’s that very often, entrepreneurs lose sight of what really matters. They quickly lose the sense of humble beginnings, of the grind that comes from early rejection, of the extreme common sense that arises when people start with absolutely nothing.
It’s great to have leverage and raise with great conditions, to have early momentum and traction, but it’s a trap as much as it’s a gift.
Stay hungry, not foolish :)
PS : YC is like Paris, it’s always a good idea…