Stanford is really an investment fund that runs a school on the side for the tax break. This started in 1991, when Stanford spun off their endowment management as the Stanford Management Company.[1] SMC's headquarters was on Sand Hill Road, across from all the VCs. This ended up putting Stanford into venture capital in a big way.
This was new. Before that, universities tended to put their endowments into passive investments - real estate, stocks, and bonds. Investing in startups worked out very well for Stanford. Stanford had pre-IPO stock in Cisco, Yahoo, Google... They have money in various VC funds. Buying into YCombinator is consistent with that investing approach.
As SMC became more powerful, executives from SMC started moving into positions in the university itself. SMC moved its HQ onto the main campus. Not clear where this will end; we'll have to see who replaces Henessey as president.
Stanford did not pioneer investments in alternative assets classes (VC/PE etc...) Robert Swenson of the Yale endowment fund was much earlier than that. It also became known as the "Yale Model"
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For the two decades after Swensen took over as manager of Yale’s endowment in 1985 (just five years after he’d gotten his economics Ph.D at Yale), this worked spectacularly well — with a 16.1% annualized return compared with 12.3% for the S&P 500 and a remarkable record of sailing through stock market downturns that pummeled most other institutional investors.
The prevalence of Swensen acolytes in leadership posts highlights how dominant the Yale investment model has become among major U.S. universities. Colleges and universities ended 2014 with 51% of their portfolios invested in less-traditional fare like hedge funds, private equity and real estate that Yale favors—nearly double the allocation to those investments in 2001, according to annual surveys done by Nacubo and Commonfund.
Swensen’s idea, implemented at Yale and copied nationwide, was that universities should shift their endowment money out of traditional investments such as stocks and bonds and into higher-yielding ones like private equity, hedge funds, and real estate. The Yale model, as it came to be known, perennially outperformed stodgier strategies, gaining Swensen gurulike adulation.
B&A is a boring-sounding organization which is the primary income sheet profit-center, which rakes in slightly more than tuition; SMC is balance sheet (aka investment) management.
Stanford is unlike most other universities in the fact that there is no pretense of firewalling business opportunity development from academic research. I think this pushes away some pure-research, money-is-evil people and attracts more entrepreneurial folks.
You know what would be really awesome / disruptive / game-changing? If YC funded the program via crowdfunding (eg. JOBS Act) monies so that normal peons (sorry, "non accredited investors") could realize gains from a fund of early startups while effectively locking out all these institutional investors.
This would be a real coup for people who believe in Basic or Guaranteed Minimum Income [1], like Sama.
We would someday like to allow access for individual investors. We actually looked into it this time around; it's still extremely difficult. But hopefully the laws keep evolving and someday soon we can make you lots of money :)
I can't help but think how ironic it is that most Americans would say what we have is capitalism, but at the same time there are laws in place prohibiting people from freely sending capital to each other.
It's regulated capitalism... You may not agree with the laws governing investments for private companies, but surely you can understand the motivation for protecting investors?
Eh, it might be a good idea for the small population of tech savvy investors in Silicon Valley who make 6 figures and work within the industry so they can make informed decisions. But the whole SEC regulatory dictum that allows only accredited investors (accreditation based on annual income and net worth, not passing a Series 7 test or what not) can invest in certain forms of securities is a good thing.
Imagine if Joe Schmo reads an article on the home page of the tech section of "his Yahoo" about this new investment vehicle, decided to put all of his 401k money that as safely placed in low-load index funds into a YC fund that didn't particularly do so well when the fund finally matured and he cashed out. I've seen people pissed off at losing 10 bucks on Kickstarter prototypes-- imagine how pissed off Joe would be that he lost 200k because he wanted to "get in on this Web 3.0 stuff".
Those accredited investors regulations do more good than harm mostly because people in aggregate are greedy and don't read prospectus' in their entirety. Most people didn't even read their mortgages in 2007 (or now for that matter, even after the systemic ..situation of 2008), look what happened there.
If you're living in SF and married to someone in tech, odds are you make enough to qualify as an accredited investor anyways-- the per annum barrier is pretty low.
The whole "we're protecting you" argument is a line of garbage intended to sway meatheads into thinking that being denied access to ownership and prosperity is a good thing. That these these opportunities should only be given to already wealthy people and that the peons are too stupid to understand concepts like "this is pretty risky, you'll probably lose it all, but if it hits you might make a bundle."
In the meantime, the lobbyist for every other way to lose your shirt have made sure that all the doors are open to everyone. The poor little peons too stupid to understand if Facebook might have been a good risk are still able to: blow all their money in Vegas, invest in penny stocks, buy Apple at a top and sell at a bottom, buy a virtual spaceship for $10K, buy a house with maximum leverage into a bubbly market, have $100K in credit card and vehicle debt, and on and on. There are a million ways to shoot yourself in the foot and they are all perfectly fine, but if you want to put $1000 into Google pre-IPO then WHOA we gotta protect you from that!
I don't know what world you live in, but the accreditation barrier limits investors to the top 1-2% of the US. Very few people make $200K/yr single, $300K/yr married. Plus they changed the net worth provision to exclude home value. How many people do you think there are that have $1M net worth exclusive of their house?
> If you're living in SF and married to someone in tech, odds are you make enough to qualify as an accredited investor anyways-- the per annum barrier is pretty low.
I'm not, and I'm not. I recognize that not everyone is sophisticated enough to do well at startup investing, but it's no one's place to tell me that I should be legally forbidden from making my own financial decisions. And I deeply resent the patronizing attitude of anyone who supports that prohibition.
let's pretend it's a TV show.
Y Combinator is Blues Clues. pg was Steve. we're currently in the first part of the Joe Era. Joe was actually better than Steve in many ways[1], but he just isn't Steve, and everyone, including the audience, is trying not to notice, because yay, new Blue's Clues.
>Each startup that goes through the three-month program now receives$120,000 in cash — $20,000 from Y Combinator, plus $100,000 from the outside investors – in exchange for 7% equity in their company.
$120k for 7% in a company!? Is that really a favorable term to startups? There's no way I would ever, EVER sell 7% of my company for a such a small sum. Who would sell out their passion for such a pittance?
It's very possible I'm missing something here, because my impression is that YC truly tries to act as a partner with founders. I just can't see giving a go at a startup - with all that entails - for an idea I believe is worth only $1.7M (even at the nascent stage).
If you were allowed to, the best thing you could possibly do for your early stage company would be to go take $100,000, nay $500,000 plus 30% of your stock and give it to Paul Graham in exchange for being let in to YC.
It's not just the education you get, nor the peer pressure of being in a 'class' with other companies, it's also the social cache, the network of other YC funders, the access to investors, and lately, the benefits of YC punishing investors who treat their portfolio companies badly.
Good/Great investors are all people you would always pay to have on your board, and gunning for your company. The money they give you helps keep the lights on and grow, but it's really a proxy for getting (and holding) their attention and focus on what you need to succeed.
I am wondering hos this dilutes over time though. I mean, if I was in a select group of 100 people, I would pick up the phone if one of them rang and wanted my help. However, as that group grows to 1000, it would be less likely and at 10.000 I would probably not bother. But maybe there are stronger ties within the batches?
You're welcome to not take/seek the deal. For what it's worth, I have asked ~100 YC founders whether they felt it was valuable to them, and have had precisely one person say no.
Incidentally, for virtually the entire startup era prior to YC, "two geeks with a gleam in their eye" was worth ~$250k. The first check from an angel to pay for ~6 months of rent and ramen bought 1/6th the company for $50k.
Having 100% of something vs having 93% of something with access to a great network, a demo day for best investors, great mentors, resources for HW startups, Azure grants for SW startups (worth $500k) etc etc.
Some time ago, PG published an email exchange between himself and Fred Wilson, where PG was really pushing USV to invest in AirBnB, what a service for both sides. How much would you pay for it?
IMO 7% for 120k is quite cheap, especially if you're in early stage.
Think again: the _first_ valuation of your company - that is not even incorporated - is 1.7 million and you keep 93%. If you know about a better deal then please let us know! :)
Pretty sure it used to be <$20k for the same ~7%. The main value of YC has always been the training, network, and vote of confidence, not the funding. Not everyone finds it worth it for their particular situation, but many do.
Forget the money/valuation for a second. If YC makes your company just 8% more valuable on average than it would have been otherwise, you win. For the value they provide I think it's a no brainer.
> $120k for 7% in a company!? Is that really a favorable term to startups? There's no way I would ever, EVER sell 7% of my company for a such a small sum. Who would sell out their passion for such a pittance?
YC is typically funding a company in their seed round. At this stage the company doesn't have a real valuation and could honestly be worth zero. Valuing a company at $1.7 million at this stage seems pretty good to me.
Now companies coming into YC much later when they already have a specific valuation? May or may not be worth it, it depends on where the company is.
How many companies have you started? $120k at that kind of valuation for a seed round is not at all strange. I've been part of companies that have done much worse (~$30k for 20%..) and much better ($1.2m for 10%); in the end you take the best you can find, and the valuation you can get in your seed round is not necessarily a good predictor for how well you'll do as a founder.
And you have to consider that "the best you can find" also depends on other factors such as the advice and contacts you gain, which could very well make or break the company by itself.
You're looking at it all wrong when you say "for an idea I believe is worth only $1.7M". It's an idea and a team that's only worth $1.7M now when factoring in risk and time. Let's say a coin flip right after the investors have put their money in determines if the company will continue as is or get shut down; if so the present value of the company is at most half what it will be after the coin flip, probably less. And the reality is that startup risks are massive.
Now add the time element, and your growth also need to reflect returns the investors could have gotten elsewhere.
The net result is that if your startup is valued at $1.7M today, then they're saying they think it'll be worth far more than that assuming you succeed. Even then, the $1.7M number exclude the value of the advice and contacts you gain access to.
It's a business decision. When it doesn't make sense as one or when the criteria are something else, then it shouldn't be done. On the other hand, when it makes business sense, it makes business sense.
Anyway, my understanding is that those terms are relatively favorable in comparison with those oft times offered by other investors.
$120K in return for 7% of "an idea" with a 90%+ failure rate outside of the YC trajectory seems like a pretty good deal to me.
I wouldn't sell 7% of whatever I'm doing to YC either because I (1) don't fit their profile and (2) am much too conservative to go for VC (the whole 'go big or go home' thing does not appeal to me) but if I were doing high risk high growth start-up(s) then I would definitely come knocking on their door.
Love to see Stanford leverage their successful models in incubating large part of Silicon Valley huge startup and franchise/multiple/clone into Stanford NY, Stanford LA, HongKong, Shanghai, Bangalore, London, etc.
With large amount of the Stanford class contents already online, it is probably just setup small local campus for testing, group study local students and meetup.
It should not, they'll try hard not to let it make a difference (and in the case of the Yuri Milner investments it did not as far as I can see) but it could change if decisions made in one funding round would affect their ability to attract capital in the next.
In other words, LPs have bigger influence in follow on rounds if any of the decisions made in the current round turn out bad for YC, but so far there is no evidence of that as far as I can see.
It's a very interesting question though, sources of funds tend to exert pressure on the places those funds flow to. YC has always been 'as much hands on as you need or want' so in that respect they've been very good about letting their portfolio companies run themselves as much as possible while being there when needed.
Thanks, I'll forward this the next time they ask for money. A shotgun approach to investing other people's money in tech startups is fine, but drawing down the $__B endowment in 2008-2009 to avoid salary freezes was too risky.
They might be putting up $10 million a year.
In the context of a $22 billion dollar endowment this seems minor. All that money has to be invested somewhere, this isn't drawing it down.
Wow, any links about Stanford's position on the salary issues? Agree that Stanford putting in so much money (more than YC!!) seems pretty wonky. Perhaps not as bad as Larry Summers blowing billions of Harvard's money on derivatives, though.
This was new. Before that, universities tended to put their endowments into passive investments - real estate, stocks, and bonds. Investing in startups worked out very well for Stanford. Stanford had pre-IPO stock in Cisco, Yahoo, Google... They have money in various VC funds. Buying into YCombinator is consistent with that investing approach.
As SMC became more powerful, executives from SMC started moving into positions in the university itself. SMC moved its HQ onto the main campus. Not clear where this will end; we'll have to see who replaces Henessey as president.
[1] http://www.smc.stanford.edu/