A warning for young tech companies from Silicon Valley's top start-up factory

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Sam Altman of Y Combinator, September 23, 2015 in San Francisco.

Technology has entered a new era where the most powerful companies will continue to make gains more and more quickly — and most founders and investors don't fully understand the implications, according to Sam Altman, president of Y Combinator's parent company.

Altman wrote a letter on Tuesday warning young companies to tread carefully when trying to compete with the regulatory advantages and unbeatable scale of tech's dominant brands. Instead of trying to be the next Facebook or Apple, founders must strike where those companies are weak, Altman said.

Here's what Altman wrote to start-up founders that envision themselves as the next Steve Jobs or Mark Zuckerberg:

Companies like Amazon, Facebook, Google, Apple, and Microsoft have powerful advantages that are still not fully understood by most founders and investors. I expect that they will continue to do a lot of things well, have significant data and computation advantages, be able to attract a large percentage of the most talented engineers, and aggressively buy companies that get off to promising starts. This trend is unlikely to reverse without antitrust action, and I suggest people carefully consider its implications for startups. There will of course be areas where these companies are naturally weaker, and these are good areas to start companies.

With Apple, Alphabet, Microsoft, Amazon and Facebook all near record high stock prices, their total market capitalization of about $2.5 trillion accounts for about 13 percent of the S&P 500, according to Factset.

Y Combinator, a program that mentors and invests in start-ups, has backed companies like Reddit and Dropbox. Altman's annual letter showed that Y Combinator's portfolio is on track to surpass a $100 billion total valuation.

In the letter, Altman also said that he would teach a new free online course with advice for start-ups. And Y Combinator is also expanding an experimental group that gives people unconditional monthly cash.

Read more of Y Combinator's advice to start-ups at Altman's blog.

CNBC

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