This is an application of Mises' work on economic calculation in socialist economies and why it is so problematic for such economies to allocate capital without squandering it.
At scale I think this affects companies like Microsoft which, as they grow, find it harder and harder to allocate resources without an internal price function. E.g., how many engineers do you put on infrastructure versus Xbox? The answer isn't obvious because you can't directly measure the profitability of the infrastructure team. When teams are small (such as in startups) the leader can kind of guess this stuff, and successful leaders do it well, while bad ones go out of business. Some companies try create internal markets to allocate capital but that has problems too, because it causes some level of friction in the process of how capital is internally allocated.
This is why I think Ycombinator's model is potentially very useful. Instead of a monolithic structure where capital is essentially moved between divisions based on the judgment of a single person (the CEO), there is a syndicate of companies which tend to produce goods that the others need, while still maintaining a market so that prices can be established and used as a guide for which projects should receive more (or less) capital.
That is interesting. I like Mises' work on economic calculation, and I tend to use that model to interpret most large-scale government regulation and economic planning, but I never thought of its application to firms. It's perhaps the most obvious and fundamental example of a diseconomy of scale.
I may have missed something - are you saying that ycombinator requires all it's startups to use say Dropbox and not pay Box? I had not heard this.
If this is just informal is it measurable?
I don't doubt it is effective however - it suggests alumni networks or diaspora like family networks (strongly suggested in China and India for example)
I don't quite grasp the Y Combinator analogy, but in the syndicate situation, each company would be expected to at least try to procure services from the sister, but not required, and each company would be free to sell its services to the wider world.
I know of at least one (non-software) corporation that spun off its IT shop, and that shop ended up doing rather well as an IT consultancy in it's own right.
Also, if you can reasonably spin off a division in this way, it isn't part of your competitive advantage, and it then has the benefit of allowing you to focus more on that.
I'm not aware of any mainstream economic theory that describes a limited network in which everyone is both a customer and a trader.
(I suspect 'hamsters on wheels' comes closest, but it's not very mainstream.)
I think of YC as the modern equivalent of the old music business model: money gets advanced to potential talent, most of it disappears, some of it returns as a big hit.
The fact that the talent may be trading with other talent doesn't appear to alter that dynamic, because the money stays in the system, and you don't get a big hit until money starts coming in from outside the system.
I probably didn't make my point very clearly. I'm thinking of groups of companies like Virgin (I'm not sure if it's properly considered a "syndicate").
I doubt any of the companies are formally bound to do business with any other by virtue of being in the Virgin group, but it would make sense that the companies enjoy some kind of (if only informal) "preferred vendor" relation with each other.
There's no need to describe it in theory as anything else than a number of independent companies, only with common ownership and perhaps a slightly above average interconnectedness.
Branson owns Virgin Management who are the central VC/Management corp. He has varying stakes in the other companies which vary from outright ownership, majority holding, minority holding, to brand licensing deals with occasional informal management input but no shareholding.
Bottom line is the different businesses are independent. Branson probably gets perks like free travel, and maybe some of the Virgin execs do. But I'm not aware of any loose internal market or preferred vendor relationship.
I'm trying and failing to think of an example of the model you're suggesting. (Which doesn't mean there isn't one - just that I'm not familiar with it. Maybe the recent Apple/IBM deal?)
It's an interesting model, but I'm not sure how well it works when customers can also be potential competitors. AFAIK syndication traditionally works better when relationships are distant and there's no immediate danger of competition.
It is not a requirement, but companies within batches, and within Ycombinator in general have a unique insight into the demands and pain-points of their fellow companies. This is why each batch usually has a handful of companies working on products specifically designed for other companies (e.g., MailGun, SendHub, Heroku, Mixpanel etc). Some of the companies pivot toward building tools if/when they discover their original idea isn't getting traction.
Also Parse, Apptimize, Taplytics, ZeroCater, Disqus, Optimizely, Authy, HireArt, ZenPayroll, etc.
For a startup doing B2SmallB, getting into YCombinator gives you ready access to a large network of customers. It's not just about access to investors, sometimes you can get very direct customer feedback by selling to your batchmates.
This is an application of Mises' work on economic calculation in socialist economies and why it is so problematic for such economies to allocate capital without squandering it.
At scale I think this affects companies like Microsoft which, as they grow, find it harder and harder to allocate resources without an internal price function. E.g., how many engineers do you put on infrastructure versus Xbox? The answer isn't obvious because you can't directly measure the profitability of the infrastructure team. When teams are small (such as in startups) the leader can kind of guess this stuff, and successful leaders do it well, while bad ones go out of business. Some companies try create internal markets to allocate capital but that has problems too, because it causes some level of friction in the process of how capital is internally allocated.
This is why I think Ycombinator's model is potentially very useful. Instead of a monolithic structure where capital is essentially moved between divisions based on the judgment of a single person (the CEO), there is a syndicate of companies which tend to produce goods that the others need, while still maintaining a market so that prices can be established and used as a guide for which projects should receive more (or less) capital.