EA - Entrepreneurship ETG Might Be Better Than 80k Thought by Ben West

Link to original articleWelcome to The Nonlinear Library, where we use Text-to-Speech software to convert the best writing from the Rationalist and EA communities into audio. This is: Entrepreneurship ETG Might Be Better Than 80k Thought, published by Ben West on December 29, 2022 on The Effective Altruism Forum.SummaryIn 2014, Ryan Carey estimated that YCombinator-backed startup founders averaged $2.5M/yearI repeat his analysis, and find that this number is now substantially higher: $3.8-9.9M/yearWhen this amount is discounted by 12%/year (average S&P 500 returns) this falls to $1.9-4.3M/y, and with a 20%/year discount (a number I've heard for returns to community building) it falls to $1.1-2.9M/y.Note that these numbers include illiquid (pre-exit) valuations.Major Results0% discount$3.77M/y$8.17M/y12% discount$1.98M/y$4.28M/y20% discount$1.34M/y$2.90M/yDiscountAll companiesExcluding post-2019Average founder income under different discount rates. “All companies” includes in the denominator every company incubated by YCombinator; “excluding post-2019” excludes companies incubated after 2019 (which presumably are less likely to make it to the list of top YCombinator companies by valuation, and therefore arguably should be excluded from consideration).Weighted Per Year0% discount$4.56M/y$9.87M/y12% discount$1.84M/y$3.98M/y20% discount$1.06M/y$2.30M/yDiscountAll companiesExcluding post-2019This table is the same as the above except it e.g. counts a company which has been around for 4 years twice as much as one which has been around for 2 years. I.e. this table is the expected value of a founder-year, whereas the previous table is the expected annual value of founding a company. I’m not sure which is more intuitive.CommentaryBackground: See this 80k article for the basic case behind considering entrepreneurship for earning to give reasons.These numbers seem fairly high, and may indicate that earning to give through entrepreneurship is a good path for those who have solid personal fit (with the usual caveats about only pursuing ethical startup careers; see also my analysis of YCombinator fraud rates).With a 20% annual discount the numbers are not that far off from what I've heard as higher-end estimates of the value of direct work, and I expect that there is a fairly strong correlation between being at the higher end of entrepreneurship returns and being at the higher end of direct work, so this doesn't seem like that strong of an argument for entrepreneurship over direct work.My impression is that these numbers are roughly similar to average quantitative finance income, so I’m not sure there’s much of an argument for one over the other based on this data (from an income perspective).Note that the vast majority of founders who apply to YCombinator are rejected, and this is not considered in these estimates.Appendix A: Methods and DataNote: if you know Python, reading the Jupyter notebook might be easier than following this document.MethodsUsed this list of YCombinator top companies and tried to find public information about their most recent valuation. Importantly, note that this is including pre-exit valuations.For publicly traded companies, I used their market capitalization at the time of writing (rather than when they IPO’d).I used an estimate of 2.3 people per founding team and average equity ownership of 35% from the original 80 K article. These numbers could probably use an update.The discount was calculated using a straightforward geometric discount, i.e. receiving $N in Y years with discount rate d has a net present value of (1-d)^Y N.I assume that everything not on that list is valued at zero. This is obviously an underestimate; but I think it’s not too far off:I estimate the value of the company at the bottom of the list (Karbon Card) at $60MIf the 1,788 companies started after 2019 who are not in this list were all valued at $60M, this would increase the total valuation by $107B = 19.5%This is a very conse...