Screw the Black Swans: Ichiro is our role model, not Barry Bonds.
There are probably better things for me to do today, however i feel compelled to respond to the Black Swan Farming post by Paul Graham, founding partner of Y Combinator.
Maybe you can call this post “Grooming for Ugly Ducklings”.
While i respect YC & PG immensely – note that 500 Startups has invested in over 40+ YC startups, and we have generously borrowed (COUGH) many excellent & original ideas that YC developed – at the same time, it's useful to grok the similarities vs. differences between 500 & YC.
Put bluntly: we are both ambitious and we both play baseball, but YC is quite clearly the Yankees, while 500 is more like the Oakland A's. Though i don't profess to be Billy Beane (or Jerry Maguire), 500 is ideologically more focused on being an organization that teaches great hitting & fielding, rather than one that aims to find the best hitters & help them negotiate the best contracts. In other words, we're happy to discover we have a few black swans, but our MISSION is to groom ugly ducklings.
This may sound like 500 is aiming for the minor leagues rather than the majors, but on the contrary, it's more a difference in philosophy and style. We may not always swing for the fences, and we may not always win gold medals, but our athletes put in their hours at the gym & on the field, and they will be just as ready for battle whether on a local or global theater.
However, our role models are Ichiro, Steve Nash, Allen Iverson, & Michelle Kwan, rather than Barry Bonds, Joe Montana, Michael Jordan, or Serena Williams. We'd love to bankroll Michael or Serena, but we know they're probably going to YC and not 500. But maybe we'll go to Canada and find Steve Nash, or go to Germany and find Dirk Novitzki, or go to Japan and find Ichiro before YC does. (note: it's not lost on me that ironically, Ichiro now plays for the Yankees… sigh).
But before we describe our differences, let's first review the similarities.
Similarities: Guilds of Geeks, Big Winners, Scaling VC.
I'm pretty sure Paul & YC care deeply about all the companies they've funded, as we do at 500. This is quite obvious, as both our communities of partners, founders, alumni & mentors have extremely strong ties, and support each other whether they are billionaires or shoeless bums. We are both FAMILIES built on blood, sweat, & tears more than contractual partners based on deal terms, more a Band of Brothers (or Sisters, at least at 500), or perhaps more accurately we are both a Guild of Geeks.
In contrast to the above warm fuzzies, as venture capitalists we also both have fiduciary responsibilities to our investors that require us to focus on our WINNERS. For YC that means the black swan “billionaire startup club” of Dropbox & AirBnB, and more, with still other big wins in the wings that will likely bear fruit in years to come.
500 doesn't have billion-dollar stories yet, but we did just have our biggest exit to date with Google buying Wildfire for $350M, and we are optimistic about our investments in Twilio, SendGrid, TaskRabbit, MakerBot, & others (note: Wildfire & Taskrabbit came out of fbFund, and SendGrid came out of TechStars). We also have high hopes for our own still young accelerator startups, including 9GAG from Hong Kong, which now has both shared 500 & YC heritage. But invariably some of our warriors will fall by the wayside, and while we salute the fallen, we will march forward with the survivors, and feed the strongest and smartest of our soldiers. This is not capitalism, but rather simple survival and competition.
YC and 500 also both focus on SCALE. We are probably the only two investors in the world consistently aiming to do over 150+ investments per year (SV Angel and Google Ventures also invest in many startups, and maybe Sequoia & others via less visible programs ;) altho we go about it in slightly different ways. YC has been growing the class size of its accelerator program, recently with ~80+ companies in the most recent program (~10 of which 500 also invested in). In their next class, i wouldn't be surprised to see them exceed 100 per class. And they will scale using systems and machine algorithms, as well as heuristic optimizations that 500 probably can't match.
500 also runs an accelerator, but we focus on tribe size of 25-30 startups per batch, and invest in another 100+ companies outside of our accelerator (many of whom are also YC, TechStars, SeedCamp, AngelPad, or others). However we primarily scale geographically, through our people and our community, through our own systems and metrics, and through the broadest possible diversity of gender, race, religion, and language. We do a wider variety of investments and variations, and we compete on a more irregular playing field that involves rainbows & unicorns, gnomes & underpants, and sheer naked hustle that leaves most other folks gasping in our exhaust.
But while we both are GUILDS, we both aim for WINNERS, and we both build for SCALE, beyond this is where the comparisons likely end. We are as much different as we are similar. We are as much Sparta and Athens as we are geeks in arms. We are the Underdogs, and they are the Sure Thing.
Differences: Hustlers vs Hackers, Singles not HRs, Global Diversity vs. Alpha Geeks
At the core of our different cultures, 500 is most clearly born from Hustle, and YC is easily King of Hackers. While both YC and 500 would brashly declare we aim for #1 in all things, one of our founders who is of both worlds put it best that YC is for Hackers and 500 is for Hustlers. YC is unbeatable in engineering & programming culture, and 500 is best in show at marketing, design, & story-telling culture. They are chess nerds and we are band geeks. YC made Fire. 500 stole it.
There is mutual respect, but we come from different worlds.
Most relevant to this post, I want to discuss the goal of Looking for Black Swans. It would seem from PG's post this is most definitely YC's mission – to find the biggest & baddest startup founders, and get them to swing for the fences. Not to mention get them the highest possible valuations at demo day.
While there is nothing at all wrong with this mission (in fact, there's a helluva lot right with it, especially if you believe in Peter Thiel's power law theory), this is not at all what 500 is about. We are not going to beat YC at attracting the biggest home run hitters (unless maybe they're from Brazil or India or Russia). We aren't going to ask them to hit bigger home runs… in fact we might ask them to hit more singles, or just get on base more often. And we also aren't going to ask them to aim for $10-15M valuations, or uncapped notes. (note: this is where it sounds like i'm whining, since 500 is an investor in several YC startups, and recently we turned down some great companies at higher valuations we didn't think were matched with current traction).
We understand this may not always be seen as founder-friendly, but in the long run we think it's better for founders & investors to be practical about early valuations, rather than to optimize for highest possible seed round valuation. Valuation may become more important at Series A or B, but for early-stage and seed rounds, you probably want smart money at lower valuations rather than dumb money at higher valuations. Regardless, we think that seed round valuations for good companies at $3-7M are not a bad deal for either founders or investors, and is more sustainable pricing for an ecosystem that will neither crash nor explode in the near future.
Your mileage and traction may vary, but we've seen our fair share of companies raising at $10M+ valuations on demo day who can't raise a Series A at $8M a year later. On the other hand, we know we'll probably miss out on the next AirBnB or DropBox that raises at $15-20M on demo day, and exits 5 years later for $1B or more.
But that's ok, that's just not our game.
We aren't going to get Albert Pujols or Alex Rodriguez out of college, and we won't be able to buy them in their power years. And we won't be able to keep Dirk Novitzki when he becomes a free agent. We just aren't George Steinbrenner. But we sure as hell like Bill James & Sabermetrics.
Lastly, i want to focus on the global diversity item.
Without making too big a deal about it, we think there is a lot of talent that is going overlooked outside the US border, and perhaps even within the US that looks a little different than the next Mark Zuckerberg. Those founders may dress a little unusual, they may wear a dress, or shave their head, or they may speak a different language, or they may hail from Nairobi or Kuala Lumpur or Zagreb or Beijing or Colombo or Recife or Jordan or Manila or Sydney or Montreal or wherever the fuck name of city you've never heard of.
This is not to say that YC doesn't draw startups from all over the world, but perhaps 500 is a little more focused on bringing talent from different corners of the planet to Silicon Valley, and most certainly we're doing a lot of investing outside the valley in places like Brazil, Mexico, India, China, Australia, and Europe. Our investing team speaks Mandarin, Japanese, Portuguese, Spanish, Hebrew, Korean, Hindi, Punjabi, French, German, and will probably speak Arabic and Russian sometime next year.
Make no mistake: 500 is going ALL IN on the growing global market, whether it comes to Silicon Valley, or whether we fly to meet them.
In closing, i want to again praise YC and PG for all that they have done to innovate and disrupt the world of venture capital, and the leadership and bravery they have displayed in doing things different. They are most certainly the Giant whose shoulders we all stand upon, 500 and others included. They are kicking everyone's ass, and they are easily King of the Hill.
But 500 Got Next.