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.
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.