Update: Paul Graham was kind enough to respond on Twitter letting me know, well, basically that i’m wrong :)
From the minute Paul Graham hit “publish” on Black Swan Farming two streams of response emerged. First was praise for the essay. Second was the question “why write this now?” There was some speculation he was signaling to the marketplace (and YC companies) that some of them might struggle to find funding, and that this was expected (if not desired). But there might be a simpler answer: he wanted to tell the story before Randall Stross did.
Vanity Fair just published an except from Stross’ book “The Launch Pad” which will be available later this month. It’s a fairly detailed look at Y Combinator, which has been one of the most influential forces in startups over the past five years. Not just for the companies they have helped create but as the straw which has stirred the drink with regards to incubator models, funding terms and hacker culture. The section they chose to publish includes the following:
Six years after Y.C. had made its first investments, Graham attempted to tote up the value of the fund’s investments. Excluding the most recently funded start-ups and looking only at the 208 start-ups funded from 2005 through 2010, he reported that five Y.C.-funded companies had been acquired for over $10 million each, and 20 more had been sold for less. Graham also added up the valuations of the 21 most valuable Y.C. companies that had not exited and came up with a total of $4.7 billion. Most of that came from two companies: Dropbox and Airbnb. Paul Buchheit, a Y.C. partner and an early employee of Google’s credited with creating Gmail, points out that in Y.C.’s portfolio “the number one company is worth more than [the] next 199 companies combined, while number two is worth more than [the] next 198 combined, and so on.”
One could say that the outliers—Dropbox and Airbnb—are the only ones that matter to the Y.C. fund. Perhaps it would be better to say that Y.C. is in the hits business, and uncertainty about which start-up will become the one monstrous hit benefits many founders who are funded. Graham and the other Y.C. partners tell the founders that start-ups fail only when founders give up. It is not necessarily in the interest of founders to follow that advice indefinitely, however. At a certain point, surely the personal price paid by founders to attempt to resuscitate a failed start-up is simply too high.
Sounds a lot like a condensed version of Black Swan Farming, but without the logic and the emotional searching that Graham was able to express on his blog. My hypothesis is simply that Graham knew this was the section coming out in Vanity Fair and wanted to speak more broadly and personally to this question of “winner take all.” What it means for him and YC, what it means for the companies in the YC classes, and what it means to founders thinking about applying to YC. So he wrote Black Swan Farming and preempted any of the mischaracterization that might result from people just quoting Stross’ book.