Y Combinator, DAOs & Personal Growth

The TechCrunch Exchange: Startups and Markets

Welcome to this week’s edition of The TechCrunch Exchange, a newsletter focused on the startup ecosystem and market trends. This publication draws inspiration from the daily Exchange column, but is offered freely for your weekend enjoyment.

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Recent Developments: SPACs and IPOs

The end of the week saw a significant Special Purpose Acquisition Company (SPAC) deal announced, the details of which are still under review. Notably, the investor presentation for this deal featured a slide displaying portraits of prominent global figures – a tactic worthy of recognition in the realm of SPAC presentation marketing.

Additionally, Oyo has submitted its initial public offering (IPO) filing. Further analysis of both these events will be provided at the beginning of next week.

Focus: Y Combinator and Decentralized Autonomous Organizations

Today’s discussion centers on Y Combinator and Decentralized Autonomous Organizations (DAOs). It’s important to clarify that these represent distinct concepts; Y Combinator is not, in itself, a DAO.

Let’s delve into a more detailed examination of each.

Y Combinator's Role in the Startup World

Y Combinator continues to be a pivotal force in the startup landscape, providing early-stage funding and mentorship to promising ventures.

Their influence extends to shaping the direction of innovation across various industries.

Understanding Decentralized Autonomous Organizations

DAOs represent a novel approach to organizational structure, leveraging blockchain technology to enable decentralized governance.

Key characteristics of DAOs include transparency, community ownership, and automated rule enforcement.

The Contrast Between Traditional and Decentralized Models

While Y Combinator operates as a centralized entity with a defined leadership structure, DAOs aim to distribute power and decision-making among their members.

This fundamental difference highlights the evolving landscape of organizational models in the tech industry.

Y Combinator, Credentialism, and Valuation Dynamics

One particularly noteworthy observation surfaced on social media this week, sparking considerable discussion.

Essentially, the question revolves around the increasing influx of capital into early-stage startups and the subsequent valuation increases observed in the market. Given these trends, how does Y Combinator justify its substantial fees for its program encompassing both capital and startup education?

A significant factor is brand recognition. The Y Combinator name carries weight. Furthermore, the guidance offered by the program contributes to its value, albeit to a lesser extent.

Receiving backing from Y Combinator bestows a level of credibility upon a young company, often one that exists more as an aspiration than a fully realized entity. This is comparable to the value of a degree from a respected university.

Importantly, participation in Y Combinator can significantly enhance visibility for startups originating from developing economies, placing them on the radar of potential investors. Therefore, the equity dilution may be a worthwhile trade-off.

However, the cost remains considerable. The effective price per equity point is well below $200, which is remarkably low considering the success rate of recent Y Combinator cohorts. This effectively positions the program as a highly profitable venture.

This isn't inherently problematic, as it simply reflects the principles of capitalism. But as the cost of Y Combinator participation increases – as the difference between the market valuation of YC-backed companies and the accelerator’s admission fee widens – the proposition becomes less appealing, particularly for international startups.

The growing number of startups from India and Africa accepted into Y Combinator is positive. However, it appears these companies may be required to pay a higher price for a program that offers diminishing returns. This raises concerns.

Nevertheless, congratulations are due to the limited partners investing in the Y Combinator seed fund. Enjoy the benefits of your investment.

DAOs

I extend my gratitude for your continued engagement with this series, despite a potentially challenging introduction. This segment offers a more positive outlook.

The realm of decentralized autonomous organizations, commonly known as DAOs, was marked by two significant developments this week. The first was notably amusing:

To provide context, Compound experienced a coding flaw that resulted in the unintended distribution of substantial amounts of cryptocurrency. This was an error on their part. Subsequently, they attempted to reclaim the funds by threatening to reveal user identities to the IRS if they did not voluntarily return the mistakenly sent money.

Setting aside the problematic nature of threatening its own user base for a self-inflicted error, Compound functions with a democratic structure that distributes authority. Further details on this operational model can be found here, but the key takeaway is that Compound’s mistake demonstrates the potential consequences when a decentralized governing body makes a large-scale, and rather comical, blunder.

Similar incidents are likely to occur in the future, and they will likely be equally entertaining. However, I don’t believe these instances diminish the inherent appeal of DAOs.

A concerning trend in contemporary capitalism is the erosion of shareholder voting rights. Facebook serves as a prominent example of a company where a single individual wields control over its direction. Snap famously launched an IPO with shares that carried no voting privileges. The increasing prevalence of dual-class and even triple-class shares, granting disproportionate power to insiders over external stakeholders, is a growing concern originating from Silicon Valley-backed enterprises.

And this is undesirable. Who desires a more monarchical form of capitalism? The very notion is unsettling.

DAOs, conversely, are inherently more democratic. While voting power will likely correlate with the extent of ownership, this mirrors the functioning of the stock market on a favorable day, representing an improvement over current IPO practices and their reliance on unwavering trust in existing leadership.

Venture capitalists did not always hold this view. They previously favored professional CEOs. However, a shift in the power dynamic between founders and investors, coupled with the success of founder-led companies, led VCs to relinquish this preference.

It is conceivable that DAOs may succeed in fostering a more democratic approach to business!

The second noteworthy event this week within the DAO landscape was the announcement that “Utopia Labs is developing an operating system for DAOs.” The company’s name is fitting; it is, in fact, quite promising. Why? Because utopias are rarely associated with authoritarian regimes; rather, the concept of utopia often evokes a system where all individuals have a voice. Therefore, DAOs may, to some extent, represent the business equivalent of utopian ideals. This is a concept I find appealing.

That concludes this week’s update. Next week will feature insights from a discussion with Gene Frantz of CapitalG!

Alex