There is a massive difference between founding a startup and investing in startups.

Professional investors (VCs, Angels, Incubators) choose the best startups (most efficient choices) and do not fund the rest which eliminates a huge number of founders who simply fail and get zero return for their work. On top of that, there are a number of VCs and angels who are completely unsuccessful picking startups and end up out of the business unable to raise additional institutional money or who lose their additional investment capital.

The expected return of investing in startups is very likely negative if you add all the smart and non-smart investors together. (I don't have data, and can't even imagine where to get it, so I'm saying "likely".)

Using the security market line to prove your point isn’t really fair since not much research has been done on applying it to startups. One of the major issues with applying the SML is the fact that it is very hard to calculate beta of startup investments since they have very long term time horizons. SML has more to do with portfolio construction and how you can get a portfolio which doesn’t deviate from the benchmark too far while still producing Alpha. (Alpha is active return). The Tryenor ratio is more about making sure public equity managers are not doing really crazy stuff.

Overall my point is that there is no evidence that suggests the expected return from investing is startups in net positive. Whether founding or working for a startup produces positive expected returns or not is also very hard to know, but I would estimate that working for early stage startups for lower than market pay has a negative expected value even after considering the possibility of huge exits (a lot of companies fail that you have never heard of).

Where I think startups have a much higher expected return comes with the experience and growing up you can do while working in a small company. When you calculate total earnings over a lifetime for people who join even failed startups early on, I would not be surprised if they made more and had more enjoyable lives, even if they ended up at big stable companies later. When you add the possibility of a big exit to the higher future earnings I think the expected value goes net positive.

I've rarely heard people try and sell startups as a way to make oodles of cash. It's more frequently sold as a way to be your own boss. As such I'd expect it to attract people of a particular personality type, who want to drive their own ideas forward and do things their own way, without anyone telling them what they can or cannot do. As such I'm not convinced that it is always a rational decision (or, at least, not an entirely rational one - there's definitely emotional input there).

Looking at all of the people who applied to YCombinator and seeing how many of them have successful businesses a couple of years later would be fascinating.

That's of the ones that got funded, of course.

And most of that money doesn't actually go to the founders - YC owns a chunk of them, and so do other investors (as PG says, 94% of them get funding from elsewhere too).

Interesting stats though, thanks!