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A warning to startups from the head of Silicon Valley's most important startup factory

Y Combinator President Sam AltmanDavid Paul Morris/Bloomberg via Getty ImagesY Combinator President Sam Altman

Sam Altman, the president of top startup incubator Y Combinator, isn’t shy of voicing his opinion when it comes the current market’s outsized valuations and high cash burn rates.

On Monday, at Demo Day, Y Combinator’s big startup pitching event, Altman reiterated his concerns over these issues.

“I don’t think founders have to take lesser valuations — their valuations are very, very high,” Altman told Business Insider.

“But I don’t think it’s necessarily good when companies are able to raise money at very high valuations, or raise lots and lots of money.”

Altman said it’s particularly important for startups in their early stage to first establish a culture that works well before taking on too much money, which he says could potentially have adverse effects.

“The market is the market, and I can’t stop that. But the track record of companies that raise huge amounts of money at a huge valuation as their first round, like Colour or Clinkle, is not good,” he said. “The culture gets messed up.”

Altman has a point with those two startups. Colour started off as a photo-sharing app that raised $US41 million in 2011 before adding a single user — but the product was confusing, and after a few pivots, the company sold to Apple without ever releasing a hit product. Clinkle was supposed to be a payment app that raised $US30 million in early fund that went through all kinds of changes before launching a confusing and scaled-down service late last year.

“Frugality is sometimes incredibly important for startups. I think there’s a long history of this working well with the focusing effect of limited resources,” Altman added.

And if you look at some of the most successful startups to come out of Y Combinator, they all took small seed rounds before raising huge rounds later on. Dropbox, now worth over $US10 billion, only took $US1.2 million in seed money and $US6 million in its Series A. Airbnb, another $US10 billion-plus company out of YC, had only $US600,000 in seed funding, before raising $US7.2 million for its Series A.

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