The best way to look at the uncapped note is like investing in an index fund.
Rather than picking and choosing specific companies, the money behind YC VC is betting that the basket of companies as a whole is going to perform well on aggregate (thanks to power law).
It's really putting faith in the YC selection process / mentoring multiplier as a whole rather than any particular company (which they can do later after demo day).
Exactly, which is why I disagree with the 2nd reason mentioned. I don't see how anyone can perceive a lack of follow-on investment in any startup negatively, when it is widely known that each participating firm only plans to invest in some, not all startups in a batch.
You really don't see how somebody can perceive a lack of follow-on investment negatively, when an entity that has more knowledge of said startups than yourself invests extra in some startups but not all?
No. Especially not when that entity typically invests only in a fixed number of startups per batch, subject to certain criteria such as addressing specific sectors of interest to the investing firm.
I actually disagree with this. It was never a problem in the past because everyone gets said initial investment, regardless of startup performance. It's in no way a signaling issue (at least in my class if wasn't) if one of those firms doesn't invest anything further.
I'm an outsider, but I believe the signalling risk comes at or after demo day. You already have those VCs in the deal, they already know the team... Why didn't they invest?
If I were a 3rd party looking at the deal, the known information asymmetry would make me leery of any company not funded by those who have the most access to information.
If this were the case for the majority of investors post demo day, how are so many YC companies raising money even if the start fund / YC fund partners are not investing a second time?
My impression is most investors view the Start Fund / YC Fund instant investments as "free money" for the startups, and they view those investment partners as hedging their bets with YC as a whole.
While I see your point, I don't think it's ever been an issue for anyone (as far as I've heard and personally experienced).
I think the unfair early advantage these third party investors had is the real issue here, and much more in-line with changes YC has made in the past
>I think the unfair early advantage these third party investors had is the real issue here, and much more in-line with changes YC has made in the past*
I'm not sure if you wrote it or if someone else at CB Insights wrote it but it is interesting. When you looked at the data, did you considered the following two possibilities:
1) The founders who raised from VCs for their seed understood how to raise money from VCs and were much more likely to be able to repeat the process.
2) The VCs had better deal flow and were able to finance companies with higher probabilities of raising additional rounds.
I spent a few years working with an angel investment presentation group at my university. I noticed that the deal flow was primarily companies that could have a $20m-$50m exit, but were never going to be mid caps or large caps and that exit value is largely ignored by VCs. The more angel money that funds those, the less opportunity for follow on rounds for the group financed by angels.
Additionally, the situation your data describes doesn't really fit the Y Combinator example since qualitatively they are very different. The VCs that invest in Y Combinator companies at the seed stage do so in batches without analysis. That changes over the course of time, after they have made the investment as they get to see progress. The fact that they make the original investment blind, then later make the second investment with better information causes your data to not be applicable to the situation.
Now, before you think that I am saying that the signaling is an issue, understand that I do not know if it is or isn't. I was simply pointing out what I believe the author meant.
Glad you found it interesting. I'm one of the co-founders of CBI, but the heavy lifting on this analysis one was done by our data team.
These are good questions but unfortunately, they're hard to answer in a data-driven way. Essentially, there is no way to discern from data your points 1 and 2 as it requires judging founder savvy or VC deal flow quality. While both are plausible, it's hard for me to say conclusively either way.
Agreed, in many cases you have early access to those firms (as they have some very small interest in your company) - but I've not heard of anyone experiencing signaling issues from those LPs
If there was one change I'd like to see YC make, it's this: expand the franchise outside of the Bay area. Open a branch on the East Coast (Raleigh/Durham would be a nice location!).
OK, yes, I'm being selfish here, but this is just the way it is for us... moving, even for 3 months, just isn't an option and may never be. But that's really the main thing preventing us from taking a stab at doing YC.
Of course, we do have a similar accelerator/incubator here in The Startup Factory, but competition and more choices are a Good Thing. :-)
Incidentally YC is actually the YC for all startups everywhere. Lots of startups move to Silicon Valley for 10 weeks, raise money, and sometimes they decide the best place for them is where they came from, or another startup hub.
Silicon Valley is so concentrated that it is super valuable to absorb the values of how startups build valuable things, and start your company here.
It seems to be a litmus test for commitment — 10 weeks is short enough that if you're serious about your startup, it's not too much to ask. It is correlated with commitment and therefore success.
I completely agree with garry comments ' 10 weeks is a Litmus test for commitment' .
If one can't be away from home Town for 10 weeks, you are not prepared for 10x or 20x bigger tough situations Start-up is going to throw at you
It might work for 20 somethings just out of undergrad. But when you start looking at founders who are older and have families, you eliminate a lot of talent from the pool (including people with actual experience). It just isn't feasible for everyone.
Actually we have quite successful founders who move with their families to Mountain View — notably the two founders of Mongo HQ and their families shared a rented house there for the duration of the batch. They happened to stay in the Bay Area, but they could have just as easily went back home after raising their seed round too.
mbreese didn't say that it eliminates all such founders. I think the argument here is that some number of startup founders (where the exact number would be hard to pin down) are unable to move to San Francisco for 10 weeks due to other commitments, and that this factor is probably going to be more pronounced with older founders - who are more likely to have spouses, children, mortgages, and other entanglements that work against letting them move.
The other argument, that I'll make, is that as nice as the Bay Area is, you don't have to be there to be successful.
Assuming that all of the smart, talented, hard-working, $INSERT_SUPERLATIVE_HERE people in the world aren't already in the Bay Area, then if you accept the above premises, it stands to reason that a YC expansion to some other parts of the world could be very effective.
> Silicon Valley is so concentrated that it is super valuable to absorb the values of how startups build valuable things, and start your company here.
Assuming you think modern Silicon Valley "values" are worth emulating, and the idea of inhaling the Silicon Valley myopic mono-culture 24/7 appeals to you.
On the other hand, staying grounded in the world outside Silicon Valley means being able to empathize with people who aren't 20 years old and don't know everything, and who actually have to produce real lasting value for there to continue to be a paycheck.
I went through an exit in the first bubble once already; I was happy when it popped, and happy to move away from the navel-gazing Silicon Valley culture when it re-emerged, and can't possibly imagine why I would want to go back.
10 weeks is short enough that if you're serious about your startup, it's not too much to ask.
I'm sorry, but I have to call bullshit on that. It has nothing to do with how serious you are or not... some of us have constraints that just don't allow uprooting our lives and moving to the opposite coast for 10 weeks. We all have different situations and to suggest that someone isn't serious about their startup just because they won't come to CA for 10 weeks is, to be quite frank, rather disparaging and insulting.
It's appreciated though. I use this kind of shit as fuel for the fire. Doubt us, please... the more people that doubt us, the stronger we get.
Anyway, as far as commitment, let me share a little history with you... I started tinkering with the earliest ideas for what would become Fogbeam Labs way back in 2006... was only treating it as a hobby OSS project back then, had no (or very nebulous) plans to make a company. By 2010 I knew far more about what needed to be built, threw out all the old code, started over, and created an actual company. By late 2010 I had recruited a co-founder. In 2011 we recruited another co-founder. In late 2012, the second co-founder left, but we hired in intern in Summer of 2013 and he did such a bang-up job that we asked him to stay on and join the founding team. We've since recruited another intern / part-time sales guy to work with us.
So over 4 years, we've gone from nothing but one guy (me) and some half-baked ideas, to a 4 person team, with 2 products that are shipping ("limited availability" but still, available for sale), another product in development, and we are having sales conversations with Fortune 500 companies.
We have a marketing strategy that is starting to come together, we're developing potential partnerships, and we're learning how to do the sales thing (all of the members of the founding team are techies first and foremost).
No, we haven't gotten our first sale yet, and as far as that goes, we might never. We could still fail and never make a dollar. That isn't the point.
The point is that I've given ~4 years of my life, and quite a bit of my income during that period, to building this company. And during that time, I've done little but eat, sleep and breathe this company... dating? Feh, no time for that. Social life? What's that? Friends? You're kidding, right? Family? They think I'm dead or something. Adversity? Fuck, I could tell stories that would make me cry to tell them.
But here we are, still pounding away. But somebody is going to say that we're not committed because we're not willing to go to CA for 10 weeks? Yeah, right. ROFLMFAO.
How about you downvoters actually provide some kind of reasoned response telling me why I'm wrong, instead of just blind downvoting? Or are we so wrapped up in celebrity worship now, that you can't disagree with a YC partner without being downvoted to hell?
Seriously, if somebody can provide me any actual evidence that you can conclude anything meaningful about someone's level of commitment from one data-point, I'll happily eat crow. Until then, as far as I'm concerned, all of this "coming to CA equates to commitment" stuff is just hand-waving.
I didn't downvote you, but as someone who did a pretty arduous company from almost-zero-in-bank-account to acquisition without taking a dime of funding: spend time with your friends and family. You're going to look back and see that over the long run, any time you that shortchanged from them didn't actually contribute to your success.
spend time with your friends and family. You're going to look back and see that over the long run, any time you that shortchanged from them didn't actually contribute to your success.
Yeah, you're probably right. And don't get me wrong, it's not that I don't spend any time with friends and family. (I do engage in a bit of hyperbole from time to time). But I have made a conscious choice to focus the majority of my energy on a particular path for the time being, in the hopes of achieving some things that are important to me.
Unfortunately, because I take the piss out of people and joke and exaggerate a lot, many people on HN probably think that my only motivation really is to drive a Maserati and have a 6' tall redheaded supermodel with a Scottish accent for a girlfriend.
Finding the right balance is tough, and like too many things in life, these situations are things where you don't get many (if any) "dry runs". You're learning on the fly as you go, hoping for the best outcome while being fully aware that you might be fucking the whole thing up. :-)
Ah well, that's what makes things interesting, I guess!
As a Brazillian that did not went to YC because of that, yes!
(explaining for those wondering: I believe Bay Area costs are too ridiculous of high, and the YC money is too low to cover them when I have to also account the costs of moving from another country entirely and then moving back...)
I'd love to see an East Coast incubator as well ;)
I'm in the D.C. Baltimore region, and the DC-to-Dulles tech corridor and the Bethesda, MD biotech region are huge tech regions.
There's a very large small/bootstrapped tech business scene here, they just don't call themselves "startups" quite as often. Most folks I know out here get funding from SV or Boston and not the local area.
The main problem of course is that many investors (and potential board members and mentors) fundamentally don't understand how to do business in this area, where the major customer is the USG. It's been done (e.g. Palantir), but they were working off of SV cachet more than local talent. Even simple things like release schedules (which inform and are driven by development practices) are different, plus the additional processes around getting approved for use on USG systems (not just DOD!) are things that outside companies just don't really understand how to deal with.
Big SV (and West Coast) companies do have significant presences out here, but they tend to be more large "sales offices" than proper tech shops.
edit I mean, there's In-Q-Tel I guess...that's part of Palantir's early story as well...and probably a large part of how they've been successful. Understood the climate, negotiated access for them, and basically helped them navigate the byzantine environment.
Well, there are East Coast incubators, but no "YC East". Here in the Triangle (NC) region, we have TSF - The Startup Factory[1], which is a "YC like" program, as well as Groundwork Labs[2] who don't invest money.
They used to do a batch in Boston/Cambridge, but stopped when PG was expecting a child. I'm hoping that Sam Altman considers bringing this back, or continues expanding to other areas. I believe such a move could have a huge impact in places they'd expand to
If you're planning to run a successful tech company, you'll need to spend time talking to customers, partners, suppliers and investors. A large fraction will be in SV. You should really learn to be comfortable in any of the major tech cities.
True, but still, it's hardly required to be in SV in order to found a successful technology company. And the Triangle area is actually quite a burgeoning startup hub these days... although the word hasn't gotten out quite everywhere yet. :-)
Because there are a lot of smart, talented people out here building startups, and not all of them are willing/able to move to CA for 10 weeks. Personally I think an RTP branch of YC would be wildly successful, but I am a bit biased.
The YC VC program (and it's earlier incarnation) made sense to me because VCs wanted access to YC deal flow. But now with the new program traditional LPs are investing at the same time (i.e., acceptance to YC) as YC LPs, but with much worse terms.
Part of it would have been access to YC deal flow, sure.
But to me it was also like an index fund - i.e. invest in the basket of companies rather than picking and choosing because on aggregate the group is going to do very well.
Really, you're blind betting on YC having chosen a few winners in the cohort. Not a bad bet to make!
Does anyone know how these investments/loans have actually performed overall? We don't know what the catalyst for this move is. It makes me wonder if the smart money (from VC's) has decided that the YC model isn't generating ROI, leaving YC to go searching for dumb(er) money (from LP's).
This is good for YC startups in the long run. When you're out raising a series A, you really don't want the negative signals when Horowitz or Khosla decide to pass.
This can't really be a problem. These firms spend so little time with the startups and invest in ~70 each batch, that them not investing signals almost nothing.
^ This. It is roughly the equivalent of them never investing in your seed round, and then again passing on your A round. That is a signal, just not a strong one of any sort.
Where signaling may seem off is when they invest 500k in your seed, and then don't invest in your A. They were heavily committed and liked your company, and then for some reason lost interest in investing any more.
YC will continue to structure our investment as we have always done - ie we use a Share Purchase Agreement to buy shares. The docs are not the same as the Series AA docs that we publish though. We buy common stock and the Seris AA docs are for investors that buy preference stock.
In the most recent batch, the YCVC investment was made using the safe documents.
It would not make sense to structure it as a SAFE security as then it would be a tiny percentage of the company at Series A when it converts, messes up the entire economics.
The purpose (as I see it) for SAFE, just like convertible notes, is that early stage startups are hard to value. At Series A you have a value and subsequent raisings can use that as a benchmark for up/down rounds. You also tend to have VCs etc take liquidation preferences and such like, which dilute the benefits of a convertible note.
The initial $20k(ish) for 6-7% of the company is where the real value for Y-combinator kicks in, if that was in the form of a SAFE, using a 25% discount to a $5m Series A valuation at $4m would mean that Y-combinator owned just 0.5% for their investment of $20k + value add.
I imagine the $80k convertible note should be a SAFE though?
We apply to YC S14, and I think, it does not matter. That's why - if your product team will selected, you still get access to best community. Anyway, you get as much money from VC on Demo Day, as your product look. And you still YC alumnum. So, don't worry. Just work harder.
This. The initial funding is by no means the reason to participate in YC - it should have zero impact on any company's decision making process. It is a bonus that takes some pressure off in the short term to allow you to focus on absolute execution.
Build something awesome and you'll have a good shot at getting funding with or without YC. There are many other benefits to the program beyond the up front money.
We are not applyed for money, no. We need understand a vision of YC companies. Vision let grow, not funding. Vision let you understand, how to build something awesome.
Rather than picking and choosing specific companies, the money behind YC VC is betting that the basket of companies as a whole is going to perform well on aggregate (thanks to power law).
It's really putting faith in the YC selection process / mentoring multiplier as a whole rather than any particular company (which they can do later after demo day).