Why You Shouldn’t apply to YC

The deadline for YC S24 is tomorrow. Here's why you SHOULD NOT APPLY TO YC:

YC seems like a reasonable proposition. They give you some money to help start your business, and they promise you access to a community of people that can help you along the way. In exchange, they don't ask for much. The standard YC deal is $500K for 7% equity. That doesn’t sound too bad, right?

But by the end of this post I will convince you that it’s actually a terrible idea.

ERGODICITY

First, you have to understand a very important concept: in some systems, what’s best for a group is not necessarily what’s best for the individuals who make up the group. In other words, the total wealth of a group of people could be increasing, while almost everyone making up that group could be seeing their wealth diminish. When this happens, we say we have a non-ergodic system. If the system was ergodic, what’s happening to the collective would also translate to all individuals.

Silicon Valley is a non-ergodic industry (like Hollywood, book publishing, the music industry, and even your country’s economy unless you’re under full-blown communism). A non-ergodic system is not necessarily bad, but if you’re not cognizant of the system you’re in, you’re going to be played like a fiddle. Those who benefit from the collective will take advantage of you, while you (as the individual) lose out. This is what YC will try to do to you. In fact, this is what YC has to do; otherwise it won’t survive. Let me explain.

LOOKING FOR TREASURE

Imagine you’re told there’s a bunch of hidden treasures within a 100 acre area. What’s the best strategy for finding some of these treasures?

One way is to pick a spot, and dedicate your entire life digging as far down as possible on that one spot. You might reason that the deeper the treasure, the bigger the loot. You don’t want to settle for a measly small treasure box. You want the full chest of diamonds buried near the end of the earth’s crust. This is your shot at glory.

Another way is to use a search method employed by search and rescue teams. You divide the area into small squares, and do a “reasonable search” in each one. You use probabilities and some common sense to help guide you how deep to dig, and then you move to the next square. If you encounter undisturbed compacted dirt, chances are there’s no treasure beneath. If you run into bedrock, it’s almost certain there’s nothing below. So you use that information and move on. Your goal is to search the entire area where there’s probable treasure as quickly as possible. Ideally within your lifetime.

I’m sure you agree with me that the first way is a dumb strategy. Almost every digger employing this strategy will die treasure-less. But actually, it’s only dumb for that individual treasure hunter. For a gold mining company, this is the optimal strategy. The company only needs one miner to hit jackpot, and all the other miners can die penniless. If the cost of sacrificing an individual treasure hunter is low, the most optimal strategy is to get tens of thousands of treasure hunters, allocate hundreds of them per acre, and make them dig all the way down to the earth’s core. The treasure hunting economy would grow much bigger than if all the individual treasure hunters were optimizing for their own self-interest.

So, digging in one spot is a dumb strategy for the economy of the individual, but a very wise strategy for the collective economy of all individuals.

This is what happens in a non-ergodic system. We often hear politicians claim that the GDP of the country is growing, but all the gains are going to the 1%. This is the same thing. The wealth of a country could be growing, but almost all the citizens could be getting poorer. There’s nothing inconsistent with this. The average is simply being dragged up by the freak outliers.

The same thing happens in venture capital. The owners of the portfolio maximize their returns when the system is non-ergodic, because while the individual treasure hunter has one lifetime to strike gold, the VC portfolio has access to thousands of lifetimes: those of all the treasure hunters.

PLANE CRASH

YC will proudly tell you that you are more likely to end up with a billion dollar business if you join them. That may be true. What they’re more reluctant to tell you is that only about 50 companies met that expectation out of the 4,000 or so that went through their program. That’s 1.25%. To be fair, that’s actually quite impressive, but let’s say you have the stamina and willpower to go through YC three times in your lifetime. You’d need approximately 26 lifetimes to hit the jackpot! See the problem now?

I don’t know about you, but I want to be successful in this lifetime. I can't afford to rely on 26 lifetimes. But maybe you think you’re special. You’re not like those 3,950 dummies who failed. Maybe you are in fact special, but I wouldn’t rely too much on that. Business is much more random than it seems. If business was predictable, YC wouldn't have a measly 1.25% success rate, or thereabouts.

You might think that those who failed might still have gotten something. Maybe. But failure is a very expensive way to learn those things. You don’t need to crash a plane to learn how to fly one. And whatever lessons are learned from going through YC are probably not very useful anyway, but more on that later.

PIVOTS DON'T EXIST

One of the bad learnings you get from YC is that there’s a formula for success, and it looks like this: First you do some brainstorming. Then you come up with a good idea that can scale to a billion dollars (otherwise what’s the point of getting out of bed in the morning?) Then you work hard until you find “product-market-fit.” And then if the noises from investors indicate you won’t be getting a next round of funding, you start looking for a “pivot.”

This so-called formula is nonsense. First, good ideas rarely come to us from a brainstorming session. They come from wandering about with an open mind until we stumble on an opportunity worth pursuing. Most of your ideas will be bad ideas, because unfortunately you’re not a visionary genius. So the best way to find good ideas is to have many ideas, try them out, take what works, and throw away the rest. But this is not what YC wants you to do. YC wants you to pick an idea that has market pull (or the potential for it), and to then dig a hole in the same spot until you reach the boiling magma. Because what if you stop digging just before you strike gold? When you’re cheap and expendable, that’s not an optimal strategy for the YC fund. You must go all in. Diversification is for your YC overlords, not for you.

If you reach the magma layer and you still have nothing, then you’d be encouraged to pivot. But that’s not how you find business opportunities in the real world. You can’t just say I’m going to pivot, and suddenly a good opportunity lands on your lap from heaven. You get good ideas by embracing randomness for a long time, until something looks like it has a fighting chance of paying off. The pivot idea you were forced to come up with is extremely unlikely to be one. Your imagination is overrated. The YC execs didn’t imagine Stripe or Dropbox or AirBnb. Random things come to them during demo days. The YC folks are smart because they know their imagination is limited. And so should you. You can’t just pivot a business idea. And if you’re going to cherry pick some pivot that worked out of the thousands attempted, you should stop reading now. Just go join YC.

The second bad lesson from YC is the focus on the upside. Because if there’s any formula for success in business, it’s to focus relentlessly on staying in the game rather than on hitting it big. Focus on the downside, and let the upside take care of itself. To thrive, you must first survive. To win the race, you must finish the race. And so on. But this is in tension with what YC wants you to do. They want you to dig deep to the middle of the earth, and if you don’t come back alive, tough luck. You were a brave soldier, but now it’s time for them to focus on the other 999 soldiers. YC is still alive, but you’re not.

Don’t be a dummy. Don’t be a bet in somebody else’s portfolio.

BUT YOU JUST WANT TO SELL YOUR COURSE!!!

Aha, you caught me! It’s true. I do sell something. I run a community for small-time entrepreneurs who are satisfied with reliably attainable mediocre success. The YC folks feel sorry for our joy with mediocrity while they’re out there changing the world. And we reciprocate the emotion.

So yes, I am promoting something that goes against everything YC stands for. But if you think YC is not also selling you something, I have a bridge to sell you. But maybe I’m being a bit too harsh. Because what is it that YC is selling you exactly?

Me, I charge you a one-time payment of $375, and you get access to my community, which includes live workshops, recorded classes, a group chat, and a few other things. It’s very clear what I’m doing. I ask for some money in exchange for access, and those who give me the money get access. Even my 7 year old understands it.

But YC is not asking you for money. They actually give you money! It looks like you’re the one selling to them. You’re technically selling them a piece of your business, no?

No, no, no, hold on. The easiest way to see what YC is selling is to look at military recruitment. The military sells the narrative that serving your country is a noble endeavor. You’ll get a shot at glory, and at the very least you gain some important life skills. You’ll also get paid enough to feed yourself and cover your basic needs, but barely. The military wants to recruit expendable soldiers who will go out to the battlefield risking their lives and limb for the collective, while the generals with all the medals sit in an air conditioned room giving orders.

YC is no different. It wants to recruit wide-eyed young founders to pick a spot on the treasure map and dig all the way down through the earth’s crust. Most of them will spend years or decades digging, and all they end up with it is a ramen lifestyle. Usually bunched up with 4 roommates in a damp San Francisco basement living on take-out ramen noodles every single day. But hey, they’re young. They’ll have time to do adult things later, like starting family or making decent money. And at the very least, they’ll gain some important life lessons and make some good connections.

Think about this for a second: The most successful business owners are typically in their 40s and 50s. Why is YC full of 20-something year olds? Why aren’t the 40 year old entrepreneurs taking up this incredible deal that YC is offering? YC will tell you it’s because only the 22 year old kids can be true visionaries. BULL. SHIT. You’re not a visionary. All those 4,000 kids who went into YC also thought they were visionaries, and where are they now? They’re all in the startup cemetery, except for a dozen or so who despite the low odds managed to flip 26 heads in a row. The biggest indicator YC is a bad deal is that only people who are easily duped take up these deals.

UNLEARNING IS HARD

The best thing I learned about business is to avoid trying to predict what will work and what won’t. YC knows this. That's why they only make small bets in thousands of businesses. But YC will try to teach you the exact opposite.

Business is a lot more random than it seems. You can’t treat it like a predictable project. You need to treat it like a financial investment. Instead of investing your money, you’re simply investing your time, which is as scarce and as precious as money (if not more). Tell me, how do you invest your money? Do you pick one amazing stock, say NVDA, and put all your life savings on it? Of course not. You understand that finance is uncertain. What’s good today might not be good tomorrow. There are hidden risks everywhere. And even if your stock pick doesn’t go bust, the biggest gains are likely to happen elsewhere and you won’t benefit from them if you’re only exposed to one piece of equity. If you went all in on AAPL in 2022, you would have missed out on NVDA. Same thing in business.

YC teaches you to try to be a visionary. When you fail… Oopsie! Tough luck. The fund benefits from the non-ergodic nature of the system, but you’re out years of your time. But that’s not even the worst of it. You would have been taught things that not only won’t work in the real world of business, but are counterproductive. You will have to unlearn almost everything.