Ask PG: Will the Yuri Milner deal affect which startups YC accepts? | Hacker News Reader

Ask PG: Will the Yuri Milner deal affect which startups YC accepts?

55 pointsil16 comments

One thing that hasn't been mentioned much is that, after making such a significant financial commitment, Yuri Milner/DST will probably have some say in who gets picked for YC. Does this mean that the next batch of YC startups will be more closely aligned with those investors' goals? For example, DST has pledged to invest heavily in social media. Does that lead to more social startups in the next batch? Would YC still fund, say, a hardware or enterprise software startup?

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No, of course not.

I don't know if people realize this, but there is no actual deal between Ron/Yuri and YC. The deals are between them and the startups. We liked their plan of investing in all the startups, so we called a meeting for them to present it. But we don't have any control over which investments the startups accept. Anyone who wanted to do what Ron and Yuri have done could have done it at any time, whether YC liked the idea or not, simply by making the offer publicly.

While we're on the subject, Sequoia, which we do have a deal with (they're our biggest LP), also doesn't have any effect on the startups we pick.

Do you mind giving us your opinion on how this changes things for Y Combinator, and for its startups?

Not to suggest that I know better than you what your own thoughts are/will be, but it is possible for this to influence what startups you accent without them talking to you about it.

For example, maybe there's a startup which couldn't possibly succeed without big initial investment - with a <$20k fund, you wouldn't bet on them doing well, but with an additional $150k available, you might see them as having a much higher chance of success.

Sure there are other examples, but basically the fact that it changes the amount of funding available to your startups, it has the potential to change their success, which means that, if you forsee those changes before deciding whether to accept or reject a startup, it could also change your decision.

Shouldn't you be able to communicate any idea for less than $20k?

The companies that communicate a good idea well on Demo Day will succeed in getting good funding.

The difference between $20k and $150k is "They need to work on communicating their idea" vs. "They can get to work on their implementation".

I personally disagree. If, for instance, you are renting out competitively priced infrastructure, you aren't going to get started with $20K, unless you are willing to spend some number of years consulting and rolling the money in to servers (which is what I did; so it /is/ possible; I'm just saying, it's pretty goddamn difficult to get a low-margin, competing on price infrastructure company off the ground with $20K. And really, it's going to be really difficult to get investor interest in such a venture until you have more traction than you can get with that kind of scratch.)

If you are going head to head with something like ec2, $170K is probably enough to get you started, I'd think, if you are willing to live cheaply and don't screw up too much. If you count all the contracting money I put in, eh, that's probably in the ballpark, and I am to the point where I can reasonably provide compute units at a competitive price, though my software lags by quite a lot. I mean, you need /some/ scale, though you don't really need as much scale as they say.

Of course, if you are a high-margin infrastructure company, and your margins are high enough to re-sell ec2 with a value add software stack, $20K very well might be enough. I'm just saying, $20K doesn't get a lot of hardware

It is interesting because companies that pretty much wouldn't work on YC money would have a much stronger chance with the additional investment. I'm thinking hardware/software combinations like wakemate, which went through YC but I'm sure would have needed additional money to get past a simple prototype.

>Shouldn't you be able to communicate any idea for less than $20k?

Not if you're making hardware...well, not all hardware, anyway. Was Wakemate able to get off the ground with 20k?

Even without the additional 150k available, if the start up was successful enough after the 20k of YC funding (like it was previously), they would be able to find funding elsewhere.

We often fund startups that couldn't succeed without a much bigger investment than we make. More often than not, in fact.

The only case where having the first 150k guaranteed would make a difference would be if we were considering a group that we liked, but we thought other investors would be too timid to fund. E.g. a group doing something insanely risky. But in those cases we always fund them anyway, and count on our own ability to talk the later stage investors around.

What does "LP" mean? Does that mean an investment deal or advising deal?

How do you guys manage 40 startups in one batch? I am quite excited to read about them when they launch.

limited partner - a partner with partial ownership, but no part of day to day management.

LP == Limited Partner (http://en.wikipedia.org/wiki/Limited_partnership)

LPs are basically the investors in YC who remain mostly silent as to the operations of the firm. They participate in the proceeds and receive limited liability from the affairs of the business. Sequoia invested in YC, just as YC invests in startups.

To apply directly to the venture capital world, LPs are the ones who provide the capital to the fund manager to invest. Other than providing the capital, they normally have no role in managing the fund (except perhaps an advisory committee role). Regardless of the legal structure of the fund, "LP" is shorthand for investors in a VC fund. To make an analogy, LPs are to the VC funds what the VC funds are to the companies they invest in, with the only distinction that LPs are typically far less involved in the funds they invest in than the VCs are in the companies they invest in. LPs for large institutional funds are generally university endowments and pension funds.

How do you guys manage 40 startups in one batch?

Practice. We could never have done that when we started, but after 5 years of gradual refinement, plus hiring more people, we do a better job for the current 43 than we did for the initial 8.

It will probably change who applies more than it will change who gets accepted. A lot of people reason that YCombinator is 6% of your company for ~$20k, are discouraged by the implicit valuation, assume (incorrectly) that the other parts of it probably aren't worth very much, and discard the idea of applying to YCombinator. This deal makes it obvious there's more value than the initial investment and makes application more compelling.

pg, you've mentioned that you're happy with the development and think it's a boon for YC companies. Did Milner/DST approach you before hand to gauge your interest, or did they essentially do this independently?

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