There are not just startups that become unicorns and startups that fold.
Investors' worst nightmare is if you just make enough money to keep going, but you don't grow ("lifestyle business" as they use it is a derogatory term).
That's because they prefer a sudden death where they can write down the investment and deduct their loss from taxes than an investment where they never see any money again.
And then there are "acquisitions" that are really "acui-hires" dressed up as acquisitions to get the people (more common) or to buy an asset in a limited shell package (less common) after things did/may have (but people were to tempted to take the offer) or did not pan/panned out. Some people consider anything <$50m as a "failure", because that's roughly the sum that many corporations can spend without calling the bigshots for a board meeting to decide.
Worse than becoming lifestyle company is becoming a zombie startup.
Zombie is when founders get rid of almost everyone except what they need to give the impression of effort, do little work, but draw an income and slowly spend down the money they raised until it’s gone.
I was one of the very few survivors at a startup that turned into a zombie in 2020 (went from 100+ employees to 10 in a matter of weeks).
In some ways it was a cushy job and a privilege, just wish I realized the founders didn’t truly care about success. Cause then I could have shared the mindset and better prepared myself and my skills for life after.
IMO that’s not a zombie because it has an expiration date (when the money raised runs out).
A proper zombie is a lifestyle company without the lifestyle — enough revenue to maintain an eternal startup crunch and trying to make a product work, but without the resources to actually grow. Doesn’t die, doesn’t quite live.
I question your read on what happens here. At most startups the investors control the board (there are a few where a charismatic founder manages to retain control, but that's rare).
If the board thought the founder was just transferring the remaining investment to himself slowly they'd fire him and replace him with someone to wind operations down.
"Investors' worst nightmare" seems very off. Most SAFE notes give you dividends that are on par with how corporations issue dividends. Assuming there is cash flow, you should be getting dividends.
If the dividends are so low that you will never be reasonably paid back you can often negotiate to get out in some form. Very low cash flow only with no growth seems to be the only exception...which I'd guess would only exist if something such as high revenue or some unique IP existed to make the equity very valuable and therefore the company worth running.
With a convertible note as opposed to a SAFE, you either need to extend the maturity date or get paid back your note with interest.
Both SAFEs and convertible notes seems to have a path to exit in some reasonable form.
If there’s enough money to pay the founders salaries, but not so much for dividends, this doesn’t help.
There are two direct ways to return money to the founders - salaries and dividends. In the U.S. there is a tax advantage to dividends, over an amount anyway. This is not true of all countries.
This is very typical in startups, where making revenue at all may be rare in many categories (social media for example), and a startup is either wildly successful or nobody uses it.
Hopefully, the startup is about to be wildly successful, but it's easy to end up in a situation where some funding was raised, the product has reached a dead end, but the founders continue to "try to make it work". Whether they are doing this to "draw a salary", are earnestly trying to make it work, or a little bit of both, there isn't much legal recourse for investors if they aren't doing anything worse than not being very successful.
Sure it is. If your business nets 3 million a year, it takes 5 people to run it, and your customer base is steady, that's lifestyle. Sucks for investors, pretty nice for you if you can keep it running.
The thing I don't like about the term "lifestyle business" is that it imprecisely mixes 2 very different things. It's like grouping students who were accepted at Harvard and chose not to go, with students who flunked out of school, as "not Harvard." Imagine if you were presented with a group that was 50/50 for example and had to draw conclusions about it. Really those are just two dissimilar groups that were lumped together, that shouldn't be bucketed together.
In the case of "lifestyle business," it includes businesses that tried their best to expand but hit a ceiling. They failed, basically, to return their investment in any meaningful way. Or to put it even more simply, they failed. At the same time, "lifestyle business" includes businesses that are tremendously strong and could be 10 or even 100x bigger, but aren't due to owner's choice. It mixes together businesses that are capable of being Fortune 500 with those that are almost the inverse. In that sense it's confusing and unhelpful.
Enough money to keep going doesn't mean just enough money to cover the costs. It means being able to continue paying yourself and all your employees their salaries, meet costs and make a small minimum profit.
I personally know the founders of three YC startups that are functionally dead (raised capital, not developing anything, basically laid off everyone but the founder(s)) but are not on this list. I'd bet it's at least twice that number.
I can think of at least one YC startup -- one that was relatively high-profile, for a hot minute, at least in the developer space -- that just shut down, period, that doesn't seem to be on the list, because I worked there. One extra irony point for its absence: it was basically across the street from Y Combinator's office in Mountain View at the time. :)
I'm curious, what do ex-founders generally do after their startup is dead? For me I just got a job after my first few ones died, until I was able to succeed at my current ones, but I'm sure many might just continue working a job indefinitely.
I know some (YC and others) who float around doing nothing on $200k a year in salary because no investor cares enough, or has the legal right, to get their money back. Not sure what their long-term game plan is.
The others end up at another Series B+ startup or go to a MANGA company if they can grind leetcode for a bit and get an interview.
I don't think a lot of founders actually write code, but I did, I just realized my startup was probably going to be illegal soon and also that it wasn't going to get the funding it needed. I just kept writing code for whoever wanted to pay. It's fairly lucrative.
Looking back, maybe I should have just done the illegal thing and gotten pardoned.
Need to also consider the ones that had a qualified exit event and then the product got axed (e.g. aquihire or just customer acquisition). It’s a very different graveyard but in many cases has similar impact on the non-Founders (especially the IC SWEs).
I know a similar number but they were "acquihired" to essentially return money to investors and get the founders promotions at their former companies. So an exit on paper even if it's not necessarily so in practice.
I love seeing the 'YC Graveyard' project. It’s a great reminder of the incredible ideas and effort behind each startup, even if things didn’t pan out. We’ve been working on giving some of these inactive startups a second chance by acquiring them and exploring ways to repurpose or revive their tech.
If anyone’s been involved with an inactive YC project and wants to chat about what’s possible, I’d love to connect.
Looking through the list, my reaction to some was “of course that OpenAI wrapper failed” but others sounded compelling. It’s logical that some of those failed companies have a viable product but failed for other reasons. Maybe combining the IP of similar companies could breed a winner. It’s an interesting concept and I’m curious if it works.
* PG makes big talk about winner's average returns... Yayyyyy..... However YC gets preferential shares; YC is not aligned with the common shareholders (founders; builders). YC builds a story that they support creators however YC doesn't sit on the same table-side as creators.
* I actually believe YC is worthwhile, but I wonder if Ize just been brainwashed?
> For most companies, pre-seed SAFEs don't end up much above common.
I'm not sure that is correct.
AFAIK the modern YCombinator post-money SAFE [1] converts to the exact same share class as the VC investment round. The bookface document[2] says "when the company decides to sell shares of preferred stock in a priced round (an 'Equity Financing'), the outstanding safes will convert into shares of preferred stock" and also says elsewhere "then the safe holder will receive shares of Standard Preferred Stock".
I know nothing - so could be completely wrong!!! Complicated stuff LOL
It's not that YC specifically gets "preferred shares" -- it's that investors in general insist on liquidation preferences when buying non-liquid shares in unproven private companies.
How would an alternative scenario of investors buying common shares of illiquid stock in a private company actually be realistic? Maybe the startup founders could hypothetically insist on selling only common shares and never preferred shares as a condition of investment?!? But what investors (other than family relatives) would put in money in that case?
Or put another way, let's say we create a brand new VC fund to invest in startups and one of the novel concepts is that the fund only buys common shares to be more "founder friendly". The problem is that hypothetical VC fund will attract no rational limited partners with money because they know that startup founders can just take their invested dollars with no payback protection. Such a VC fund with no investors and no money to invest would be a moot point. The general partner of such a VC fund would be considered a "financial idiot" for buying common shares in startups.
In the end, the "preferred shares" is the market's "risk premium" that investors charge as an offsetting factor for losing 100% of their money. If startup founders can't find a way to convince investors to accept illiquid common stock instead of preferred shares, they need to avoid investors altogether and self-fund via bootstrapping.
He didn’t claim YC does this where others don’t, his gripe is with the narrative YC pushes and how they seem incongruent to how they currently operate.
preferred shares prevent cookie cutter founder fraud. Founder raises $1M at 10 post. Founder decides to sell 6 months later for 2 mil. Investors get 200k back founder gets 1.8 mil. Now run this math for AI unicorns.
> The problem is that hypothetical VC fund will attract no rational limited partners with money because they know that startup founders can just take their invested dollars with no payback protection.
YC famously claims it is not a VC fund because it invests their own money, they wouldn’t have this problem.
Welcome to capitalism. Of course there is an asymmetry between individual founders and one of the, if not the most famous VC firm on the planet. It's an individual decision to determine whether YC is worthwhile. If it wouldn't be, it wouldn't work.
Silicon Valley is not capitalism, it's financier-ism. It isn't about finding a gap in the market and providing a profitable service, but bandwagoning behind the latest trends so as to chase "scalability" and later using financial/political muscle to weaken regulations so as to better "disrupt" the market. Profits? That's a problem for whoever they manage to dump their shares on.
The quality bar for YC has been at an all time low. Hence why lots of “startups” are getting accepted into YC in 2024 screaming about AI and some that compete against each other over the same idea, but “open source”.
> I actually believe YC is worthwhile, but I wonder if Ize just been brainwashed?
Ask yourself, if you really need VC money in the first place.
The moment you go to YC, they become your new boss and always win and you get to laugh at all of us HNers in this secret club called bookface [0]. (Yes, that hidden version of HN and part of YC)
Very unlikely to change anytime soon, but the SVB collapse should have taught us something.
The quality bar of pretty much all seed stage investors has always been extremely low. That is simply the nature of the business. At that stage the signal-to-noise ratio is very low. There just isn't enough data to make reliable determinations, hence the emphasis on quantity of deals over quality.
There is nothing to learn from the SVB collapse. They mismanaged interest rate risk and overextended. So what.
Since you probably already have this information, it would be interesting to have the "death date", with a link to the announcement or however you gathered the information.
There's not really such a thing as a concrete "date of death" in many cases, and very rarely will there be a public one -- I'm familiar with a few names on this list that never actually made a formal public announcement and kept the website running for months to well over a year after everyone was laid off
The methodology of the aggregator might have been as simple as "ping every YC company's listed website, check the response" with some light hand curation, which suggests that the number presented is just a lower bound on the number of dead YC startups
Readit News
Investors' worst nightmare is if you just make enough money to keep going, but you don't grow ("lifestyle business" as they use it is a derogatory term).
That's because they prefer a sudden death where they can write down the investment and deduct their loss from taxes than an investment where they never see any money again.
And then there are "acquisitions" that are really "acui-hires" dressed up as acquisitions to get the people (more common) or to buy an asset in a limited shell package (less common) after things did/may have (but people were to tempted to take the offer) or did not pan/panned out. Some people consider anything <$50m as a "failure", because that's roughly the sum that many corporations can spend without calling the bigshots for a board meeting to decide.
Zombie is when founders get rid of almost everyone except what they need to give the impression of effort, do little work, but draw an income and slowly spend down the money they raised until it’s gone.
I was one of the very few survivors at a startup that turned into a zombie in 2020 (went from 100+ employees to 10 in a matter of weeks).
In some ways it was a cushy job and a privilege, just wish I realized the founders didn’t truly care about success. Cause then I could have shared the mindset and better prepared myself and my skills for life after.
A proper zombie is a lifestyle company without the lifestyle — enough revenue to maintain an eternal startup crunch and trying to make a product work, but without the resources to actually grow. Doesn’t die, doesn’t quite live.
If the board thought the founder was just transferring the remaining investment to himself slowly they'd fire him and replace him with someone to wind operations down.
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If the dividends are so low that you will never be reasonably paid back you can often negotiate to get out in some form. Very low cash flow only with no growth seems to be the only exception...which I'd guess would only exist if something such as high revenue or some unique IP existed to make the equity very valuable and therefore the company worth running.
With a convertible note as opposed to a SAFE, you either need to extend the maturity date or get paid back your note with interest.
Both SAFEs and convertible notes seems to have a path to exit in some reasonable form.
The only time I've seen "nightmare" situations occur is when the investor themselves makes it a nightmare i.e. https://www.cnbc.com/2025/01/07/tech-investor-denis-grosz-or...
...and that's a nightmare for the company, not the investor.
There are two direct ways to return money to the founders - salaries and dividends. In the U.S. there is a tax advantage to dividends, over an amount anyway. This is not true of all countries.
This is very typical in startups, where making revenue at all may be rare in many categories (social media for example), and a startup is either wildly successful or nobody uses it.
Hopefully, the startup is about to be wildly successful, but it's easy to end up in a situation where some funding was raised, the product has reached a dead end, but the founders continue to "try to make it work". Whether they are doing this to "draw a salary", are earnestly trying to make it work, or a little bit of both, there isn't much legal recourse for investors if they aren't doing anything worse than not being very successful.
That's not an exception. That's the norm. Most start-ups fail.
They literally burn down the investors' money and that's it.
In the case of "lifestyle business," it includes businesses that tried their best to expand but hit a ceiling. They failed, basically, to return their investment in any meaningful way. Or to put it even more simply, they failed. At the same time, "lifestyle business" includes businesses that are tremendously strong and could be 10 or even 100x bigger, but aren't due to owner's choice. It mixes together businesses that are capable of being Fortune 500 with those that are almost the inverse. In that sense it's confusing and unhelpful.
The others end up at another Series B+ startup or go to a MANGA company if they can grind leetcode for a bit and get an interview.
Looking back, maybe I should have just done the illegal thing and gotten pardoned.
If anyone’s been involved with an inactive YC project and wants to chat about what’s possible, I’d love to connect.
Looking through the list, my reaction to some was “of course that OpenAI wrapper failed” but others sounded compelling. It’s logical that some of those failed companies have a viable product but failed for other reasons. Maybe combining the IP of similar companies could breed a winner. It’s an interesting concept and I’m curious if it works.
* The modal win for a founder is $0.00
* PG makes big talk about winner's average returns... Yayyyyy..... However YC gets preferential shares; YC is not aligned with the common shareholders (founders; builders). YC builds a story that they support creators however YC doesn't sit on the same table-side as creators.
* I actually believe YC is worthwhile, but I wonder if Ize just been brainwashed?
(reëdited for clarity)
YC invests on a SAFE, the terms are public.[0]
For most companies, pre-seed SAFEs don't end up much above common.
[0] https://www.ycombinator.com/deal
I'm not sure that is correct.
AFAIK the modern YCombinator post-money SAFE [1] converts to the exact same share class as the VC investment round. The bookface document[2] says "when the company decides to sell shares of preferred stock in a priced round (an 'Equity Financing'), the outstanding safes will convert into shares of preferred stock" and also says elsewhere "then the safe holder will receive shares of Standard Preferred Stock".
I know nothing - so could be completely wrong!!! Complicated stuff LOL
[1] https://www.ycombinator.com/documents/
[2] https://bookface-static.ycombinator.com/assets/ycdc/Website%...
It's not that YC specifically gets "preferred shares" -- it's that investors in general insist on liquidation preferences when buying non-liquid shares in unproven private companies.
How would an alternative scenario of investors buying common shares of illiquid stock in a private company actually be realistic? Maybe the startup founders could hypothetically insist on selling only common shares and never preferred shares as a condition of investment?!? But what investors (other than family relatives) would put in money in that case?
Or put another way, let's say we create a brand new VC fund to invest in startups and one of the novel concepts is that the fund only buys common shares to be more "founder friendly". The problem is that hypothetical VC fund will attract no rational limited partners with money because they know that startup founders can just take their invested dollars with no payback protection. Such a VC fund with no investors and no money to invest would be a moot point. The general partner of such a VC fund would be considered a "financial idiot" for buying common shares in startups.
In the end, the "preferred shares" is the market's "risk premium" that investors charge as an offsetting factor for losing 100% of their money. If startup founders can't find a way to convince investors to accept illiquid common stock instead of preferred shares, they need to avoid investors altogether and self-fund via bootstrapping.
If anything, employees are taking a greater risk because you can replace money far more easily than years of your life.
YC famously claims it is not a VC fund because it invests their own money, they wouldn’t have this problem.
Not sure if I’ve changed or the landscape has.
> I actually believe YC is worthwhile, but I wonder if Ize just been brainwashed?
Ask yourself, if you really need VC money in the first place.
The moment you go to YC, they become your new boss and always win and you get to laugh at all of us HNers in this secret club called bookface [0]. (Yes, that hidden version of HN and part of YC)
Very unlikely to change anytime soon, but the SVB collapse should have taught us something.
[0] https://bookface.ycombinator.com/
There is nothing to learn from the SVB collapse. They mismanaged interest rate risk and overextended. So what.
The methodology of the aggregator might have been as simple as "ping every YC company's listed website, check the response" with some light hand curation, which suggests that the number presented is just a lower bound on the number of dead YC startups