{"id":13979,"date":"2021-03-22T07:08:59","date_gmt":"2021-03-22T11:08:59","guid":{"rendered":"https:\/\/www.renthop.com\/content-manager\/?p=13979"},"modified":"2021-03-22T07:09:36","modified_gmt":"2021-03-22T11:09:36","slug":"are-y-combinator-demo-day-valuations-too-high-or-is-the-market-efficient","status":"publish","type":"post","link":"https:\/\/www.renthop.com\/blog\/are-y-combinator-demo-day-valuations-too-high-or-is-the-market-efficient\/","title":{"rendered":"Are Y Combinator Demo Day Valuations Too High? Or is the Market Efficient?"},"content":{"rendered":"\r\n

In 2015, Sam Altman issued his famous Demo Day valuation challenge<\/a>, asking startup naysayers and bubble callers to place a friendly six-figure wager. Sam picked three baskets – late stage, mid-stage, and the entire graduating Winter 2015 YC batch. The bet was that by 2020, each basket would hit certain valuation targets, giving investors a great return for the risk.<\/p>\r\n\r\n\r\n\r\n

\u00a0 Mid-Stage Results – Easy Win for YC<\/h2>\r\n\r\n\r\n\r\n

For the mid-stage bucket, he wins easily. It’s not even close. The official bet was that a basket of 9 “mid-stage” YC companies, most early unicorns or close to it, would eventually triple in aggregate value. Out of the 9 companies, at least three single-handedly meet the valuation requirement for the entire group. At every point in the 5-year bet, this handful of companies always looked solidly ahead of their 2015 valuations and solidly ahead of the already very strong S&P and Nasdaq returns during the period.<\/p>\r\n\r\n

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Not all of the companies had completely smooth sailing. The most volatile was Zenefits, which shortly after hitting $4Bn in mid 2015<\/a> saw management change and faced allegations of securities fraud from some of the VCs (the VCs eventually got a better valuation<\/a>). Others didn’t have any particular incidents; they may have just slowed their growth. However, when one company stumbled, the others more than made up the difference.<\/p>\r\n\r\n\r\n\r\n

Draw the bet out one more year, and things look even better for the YC alumni. Stripe, Coinbase, and Instacart have private valuations adding up to over $200 Bn, giving the entire basket a 10x-20x return (some dilution along the way).<\/p>\r\n\r\n\r\n\r\n

Late Stage Results – Late By One Year?<\/h2>\r\n\r\n\r\n\r\n

The late stage bucket initially underperformed, but by 2021 pulled ahead. Technically, Sam loses the bet. On Jan 1st, 2020, Uber and Lyft had IPOed with mixed results. Several other companies had lackluster IPOs relative to their latest private valuations, or were delaying their IPOs. Airbnb was still rapidly growing pre-Covid, but they were not large enough to carry the remaining 5. The original bet was that the 6 companies, worth $100 Bn in 2015, would double by 2020.<\/p>\r\n\r\n\r\n\r\n

Of course, by 2021 the tides completely turned. Uber, Airbnb<\/a>, Pinterest, DropBox, and Palantir all have public valuations. Their total market cap trounces the target. You don’t even need SpaceX, which more than holds its 1\/6 share of the $200 Bn burdens. Was Sam’s time horizon too short by one year? Or did we catch a new bubble? Reasonable people can disagree.<\/p>\r\n\r\n\r\n\r\n

Are YC Demo Day Valuations Too High?<\/h2>\r\n\r\n\r\n\r\n

Most interesting is the third bucket, because the bet originally stemmed from angel and seed investors claiming there was a valuation bubble in the early stages. Even Sam’s post states “the thing that feels least reasonable is some early-stage valuations<\/em>“, a very candid assessment coming from the president of YC at the time! Bubble alarms were going off at least two years prior, with terms like the “Series A Crunch<\/a>” making headlines (seed funding was growing exponentially; Series A deals, not so much). A SAFE with a valuation cap of $8M at Demo Day seemed too high.<\/p>\r\n\r\n

\"ScreenFrom the Fenwick Series A Crunch report<\/div>\r\n

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Some investors even pointed to the invention of the SAFE as evidence of the bubble. YC invented and published the SAFE, with advice from Wilson Sonsini, in late 2013 with the 2014 batches being the first to widely use them. They replace the older style of using convertible debt notes and fix at least three very important and annoying problems. Convertibles count as debt on the balance sheet, they have interest, and they have a maturity date. All three are undesirable to the founders, and honestly, not particularly useful to investors. But somehow, SAFEs became a hot issue with people claiming YC was intentionally flexing muscles and taking many important protections away from investors.<\/p>\r\n

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These squabbles seem quaint with the benefit of hindsight. The last thing either side wants to spend time on is the awkward auto-conversion process of a convertible note. Plus, most convertible notes gave investors the worst possible conversion price if the company hadn’t raised by the maturity date. The original era of the Series A Crunch, say 2012-2014, saw many startups and investors scrambling to extend the notes, hopefully without incurring more legal fees than the actual interest on the debt.<\/p>\r\n

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