Lessons learned from studying 4,000+ YC Companies.
By most standards, getting into YC represents a success: the admission rate is less than 1%, it invests a significant amount of capital often pre-revenue, and you become a member of an exclusive group that includes the founders of Airbnb, Dropbox, and DoorDash. For the analysis, I used an LLM to embed the companies' value propositions in a vector space, ran a clustering algorithm on top of the embeddings, manually analyzed the results, and used ChatGPT to edit the draft. The conclusions are surprisingly elegant and powerful.
The most common mechanism for creating a venture-backed business is by bringing efficiency to existing markets. This approach is the simplest and least risky because the demand for the product already exists. The promise is to deliver a product that is quantitatively better than what currently exists. There is often little technological uncertainty, as existing technology is applied to a new domain (low R&D). However, it causes significant disruption because it directly challenges existing players. Fundamentally, driving efficiency involves capital reallocation, where the end customer benefits from the disruption of the intermediate layers in the value delivery process.
There are clear distinctions between B2B and B2C startups that aim to drive efficiency. In B2B, efficiencies are geared towards improving or reducing the workforce. Unsurprisingly, sales receive the most attention, as it is a human-driven activity. Another source of efficiency in business is the reduction of transaction costs, which may involve reducing bureaucracy. Typically, it is expected that through automation, workforce productivity will increase, resulting in larger profit margins as the business grows and providing a competitive advantage for early adopters. Consequently, we can expect a myriad of new startups powered by AI as the possibilities for automation increase. Conversely, I was surprised by the large volume of B2B driving-efficiency startups created before the advent of generative AI, as there was little seismic technological movement enabling the entry of new players. I hope that the surge of SaaS is the result of process improvements based on insights discovered through repetition (process power). If so, I would expect the rise of AI startups to gradually increase, peaking somewhere in the next decade.
