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Introduction and summary
We’re interested in estimating how much tech entrepreneurs earn, since it’s one of our top recommended careers, partly because of its earnings. Big earners can create a lot of economic value and can sometimes become big donors. We wanted to find out: if you get into Y Combinator, how much will you earn? We’re interested in Y Combinator because it’s the best known seed accelerator, and the data is available. Here’s what we found:- The total value of Y Combinator companies is $26 billion, of which the founders own $8 billion.
- Most of the returns have gone to a tiny minority of super-successes. The founders of AirBnB, Dropbox and Stripe are worth about US$7 billion, about 78% of all founders’ equity, although they account for 0.5% of the companies.
- Outside of the most successful companies, it was still possible to earn significant returns. 12% of companies from the first five years of Y Combinator are now worth US$40 million or more, and a further 10% have sold for US$5-40 million. The remainder probably earned little more than their (low) salaries.
- On average, founders from the first five years of Y Combinator are now worth US$18 million after 5-9 years, meaning that their average net worth has increased by US$2.5 million per year
- When it invests in its companies, Y Combinator values them at US$1.7 million, of which each founding team owns $1.6 million. This means that for average team sizes, each founder owns $700,000 of equity. So founders must earn (in cash or equity) substantially more than $100,000 per year, on average.
- We expect the average earnings (in cash or equity) going forward to be less than $2.5 million per founder per year because of competitors to Y Combinator and regression to the mean.
- Y Combinator accept 2.5% of applications.
- Your personal expected earnings from applying to Y Combinator depend on your chance of being accepted and your chance of creating the next AirBnB or Dropbox.
- Estimate the value of Y Combinator startups so far
- Study the historical earnings of Y Combinator startups including i) average earnings, ii) mid-range outcomes and iii) failures
- Discuss the likely earnings of future Y Combinator founders
What are Y Combinator startups worth so far?
As at April 2014, the total value of the roughly 634 startups that have passed through Y Combinator is over US$26 billion. Two years ago, Forbes estimated the total value of Y Combinator companies at US$7.8 billion1, but this year, their value has skyrocketed due to its largest companies receiving big valuations in their latest funding rounds:- Dropbox was valued US$10 billion.
- Stripe was valued at US$1.75 billion.
- AirBnB was valued at US$10 billion.
Paul Graham has previously noted how unintuitively fat-tailed startup investing can be:
“Effectively all the returns are concentrated in a few big winners. The total value of the companies we’ve funded is around US$10 billion, give or take a few. But just two companies, Dropbox and Airbnb, account for about three quarters of it.”Investing in startups is risky. However, founding them is even riskier, because founders can’t diversify their equity across multiple firms. Of founders backed by venture capital, the top 2% get half of the equity. Of Y Combinator founders, the top 0.5% have 78% of the total equity4. Essentially, Drew Houston from Dropbox has put all his eggs in one basket and it has paid off.
Whether this bet will appeal to you depends on what you plan to do with the money. As Bill Gates points out, if you spend millions of dollars on yourself, they soon reach diminishing returns:
“I can understand wanting to have millions of dollars, there’s a certain freedom, meaningful freedom, that comes with that. But once you get much beyond that, I have to tell you, it’s the same hamburger. Dick’s [the Seattle fast food chain] has not raised their prices enough.”In contrast, giving can scale. As our researcher Carl Shulman put it: What would I do with a tenth Ferrari? Not much. But with my tenth vaccine… I can vaccinate another kid. So if you can think of good things to do with a billion dollars, or if earning that billion dollars indicates you created a lot of economic value, entering Y Combinator becomes more desirable.
How much do Y Combinator founders earn?
The total earnings of all Y Combinator founders is around US$9 billion and so the average founding team is worth US$14 million. Together, the founding teams of AirBnB and Dropbox are worth about US$6 billion. Stripe’s founding team are probably worth about another billion dollars5. On my previous estimate, the remainder of Y Combinator companies are worth US$4.25 billion. Of this, the founders probably only own $2 billion.6 This gives a grand total of $9 billion of founder-equity, representing 35% of the total value of Y Combinator companies.The problem with averaging across all Y Combinator companies is that some of them are too young to have achieved much growth.
To get a less conservative estimate, we can focus on the older companies. The total net worth of founders from the first 5 years of Y Combinator’s operations (2005-09) is about $7 billion7 or $48 million per founding team8. This estimate depends a little on which exact year you cut it off. From 05-08, the total net worth is US$3 billion, or US$30 million per founding team. Let’s split the difference and say that the average founding team from Y Combinator’s heyday has earned US$39 million. Assuming typically-sized teams, this is $18 million per founder. As 5-9 years have passed since the graduation of these companies, they have earned about US$2.5 million per founder per year over this time9
To get a more conservative estimate, we can see what Y Combinator pays to invest in companies. Y Combinator recently increased their standard investment to US$120,000, valuing each company at US$1.7 million, of which each founding team owns $1.6 million10. At this valuation, each founder stands to earn US$100,000 per year (in cash or equity).11 However, this estimate will be low because Y Combinator’s business model depends on investing at a discount rate in exchange for training and access to further investment.
What about founders that didn’t win big?
For the overwhelming majority of founders, their basket of eggs does not turn to gold. This leaves a range of possibilities. Looking again at graduates from the first five years of Y Combinator, 55 (38%) of these companies are now dead, 38 (26%) have been sold and 52 (36%) continue to operate. Paul Graham recently said that 18 (12%) of the startups from this period have been sold or valued at US$40 million12. I count 6 companies that have sold for that much,13 leaving 12 in operation. I count a further 15 companies that have sold for between US$5 and $40 million14. So here is how it all breaks down:
So most of these companies have died or are struggling on with low valuations. A few still stand a chance at making it big, and a substantial minority have made small exits. These small (US$0-40m) exits are smaller than they may seem because a) the founding team only owns a portion of the equity, b) this must be divided between the founders, c) it will be taxed and d) it is achieved by years of hard work with minimal salary.
What about the companies that died?
The founders whose companies die usually only earn small salaries. Before being admitted to Y Combinator, founders usually live off savings or taking loans. During the Y Combinator program, they use only a one-off seed investment from Y Combinator of US$120,000 to pay living and business expenses15. If they go on to receive angel investment can pay themselves about $50,000 per year. With venture capital funding, this tends to increase to about US$100,000 per year16.How much could you expect to earn going forward?
Will Y Combinator’s results project into the future?
So should we expect founders earnings to continue at their historical average? There are some reasons to suspect that they will not. First, the valuation environment for technology companies may worsen. Second, competing seed accelerators have arisen and so some of Y Combinator’s founders and venture capitalists may leave. Third, there is a selection effect at play. There is a lot of unpredictable variation in the performance of incubators. We have studied Y Combinator because of its fame and success, but some of the early teams may have been lucky, upwardly distorting our estimates17. Over time, we should expect performance to regress to the mean. All things considered, these factors make US$2.5 million per founder per year an optimistic forward estimate.What are my chances of being accepted by Y Combinator?
The next part of the equation is your chance of being accepted. Y Combinator inform me that they have accepted 2.5% of their latest batch of applicants, with a few late applications still pending18.It is hard to estimate the chance of being accepted to Y Combinator for a particular individual. The competition is exceptionally technically able, intelligent and determined. Your chance of getting accepted will depend on personality traits, the strength of your cofounders, and the quality of your product. Mostly, Y Combinator invest in internet technology startups but they are also starting to fund biotechnology and nonprofits.
What are my expected earnings once I get into Y Combinator?
Almost all of the expected earnings of Y Combinator founders are concentrated in the tail - in the AirBnBs and Dropboxes. So your expected earnings in Y Combinator depend on the extent to which your company resembles these big successes. For a lot of people, whether to enter Y Combinator, and entrepreneurship in general, hinges on the answer to this hard question.So what predicts big success? Well, venture capitalists think they know something about this - some companies find it relatively easy to get their funding and others struggle. We’ve only reviewed a little of the relevant literature, but it appears that intelligence is at least somewhat predictive of success. Typically, the most successful founders are more ambitious than average, have technical expertise, have a strong team, and have entered a top university (though have not necessarily finished). For marginal founders who would not find it easy to get funding and do not resemble the super-successes, it may not be good to enter Y Combinator. On the other hand, individuals who possess more of the traits of successful entrepreneurs can plausibly claim that if they pass the application, they will earn - on expectations - millions of dollars per year. There is plenty of opportunity for more research here.
The bottom line is that we expect future Y Combinator founders to make an average of US$700,000-18 million, or US$100,000-2.5 million per year, and the chance of being accepted is 2.5%. What you personally can expect to earn by applying to Y Combinator depends on:
- How likely you are to get accepted into Y Combinator, and
- How likely you are to go on to create the next AirBnB or Dropbox (2 companies among hundreds).
Footnotes
- In June 2011, Paul Graham said the top 21 companies were worth US$4.7 billion. ↩
- Seed DB has estimates for >80% of exited companies. It is the primary source of data for this post. ↩
- I would guess US$2-3b. Note that in Forbes’ 2011 estimate, the 2nd through 25th companies were thought to be worth US$3.7b. A figure of 3 billion would be congruent with Forbes’ latest estimate, which preceded the last two funding rounds of DropBox and AirBnB, and with Paul Graham’s comment that the total value of funded companies in 2012 came to US$10b, three quarters of which was through Dropbox and AirBnB. Note also that the total funding of Dropbox, AirBnB and Stripe is US$1.5b, compared to an estimated total of US$1.1b for the remainder of operating companies. ↩
- US$1.5b for each of the three AirBnB founders, US$1.2b for Dropbox CEO Drew Houston and somewhere in the hundreds of millions for Dropbox CTO Arash Ferdowski, out of a total of ~$9b. ↩
- The dilution calculation runs: US$1.75b * 0.94 (for YC funding) * 0.88 * 0.8 * 0.95 ≈ US$1.1b ↩
- Seed-DB estimates that US$1.1b of venture capital has been invested in 185 operating companies (excluding AirBnB, Dropbox and Stripe) and US$0.2b has been invested in 41 companies that have been acquired. There are many more missing data points. YC own another few percent. ↩
- This is from AirBnB, Dropbox and a handful of others. ↩
- We can estimate the total market capitalisation of the companies too. The companies from the first 5 years (2005-09) of Y Combinator are worth US$24 billion, or US$170 million each, on average. If you move the cut-off forward by a year (05-10), the average market capitalisation is US$120m. If you push it back by a year, the average is US$130m. So older YC companies have an average market cap of about US$140m. ↩
- ~US$39 million / ~2.2 cofounders / ~7 years = ~2.5 million. Note that the actual number of years spent working on these startups is less than the full 5-9 years because some of the startups exited or failed early on. ↩
- It also depends how the deal is structured. If some of the investment is structured as convertible debt, then the founding team may own less than US$1.6m, depending on the terms of the deal. ↩
- ~US$1.7 million / ~2.2 cofounders / ~7 years = ~104 million. ↩
- 42 (7%) of all YC companies have been sold or valued at >US$40m, and the figure is 12% for older rounds. This is at least partially explained by the fact that companies take time to grow to a size of US$40m. ↩
- There are five on Seed-DB. Cloudant had 70 employees and over US$20 million invested and likely sold for over US$40 million so it is added. There could be ±2 companies here, depending on estimates used. ↩
- On Seed-DB, there are 19 companies sold for >US$5m. By adding Infogami and Cloudant to that, we reach 21. ↩
- The funding arrangement was $US10,000-16,000 from YC in earlier rounds, then supplemented with $150k from VCs, before the VC contribution decreased to US$80,000. Finally, YC has taken the VCs out of the equation again and has increased its own contribution to US$120k. ↩
- This is broadly consistent with the report that most startup founders pay themselves US$50k or less per year. ↩
- Although Y Combinator claims that its accelerator model is unprecedented, other incubator models existed and failed in the 90s. ↩
- In 2011, Paul Graham said that 3% of applicants were admitted and In 2012, this fell to 2% despite rapidly growing class sizes. Since then, class sizes have been stable. Perhaps the increased acceptance rate is due to dropping demand due to the increasing number of competing seed accelerators. ↩
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Thanks Chris Hallquist for following on from my investigations into startup earnings.