90% of Y Combinator Startups Have Already Accepted The $150k Start Fund Offer
techcrunch.com
techcrunch.com
I understand what a debt is, so how is "no cap and no discount debt" different from a regular debt?
Also why would you as a startup would want to take a debt?
Another question - what's the point of Yuri giving the debt, it seems he's not even asking for equity in return?
The risk for the convertible debt investor is that this valuation will be very high and the series A can take a long time.
To limit this risk convertible debt investors negotiate valuation caps and discounts.
Cap: The convertible debt gets converted at min=[series A valuation, cap]. Discount: The convertible debt gets converted at series A valuation * (1- discount)
(Obviously, when both cap and discount apply, the valuation for conversion becomes min = [series A valuation * (1 - discount), cap].)
Not sure if it's possible to get $300k on $20k/month revenue, though.
Basically you need a small-scale VC or large-scale angel investment... or else to continue to bootstrap.
If you don't do a series A the valuation of the sale of the company will be taken. A sale without investments in between would mean a debt investor only gets his money back + interest.
Given your situation, the debt investor might negotiate a time limit for the conversion (and either a cap or a formula for the valuation at that point).
You'll likely need to part with 10-20% equity in the business, but the value of the $300k to take you to the next level should make sense. Think of it as - can we get to $200k/m by 2012 if we have $300k/$600k/$1mm. If you can 10x your revenue in a year and give up 20%, you're in a good place.
Email me, and I'd be happy to discuss your situation and provide pointers where I can. (address is in profile)
So if someone else invests $250,000 for 25%, that's a valuation of $1m. Yuri would get 15% at that valuation. He'd get 7.5% at a $2m valuation and so forth.
Obviously any exit event would be a valuation and Yuri would get a cut. But in case of failure, everyone walks away empty-handed.
Subway wouldn't do extensive market research or study traffic counts. Instead, they would see where there was a McDonalds franchise and then open a franchise in the same catchment area. At least that was the rumor (not to compare YC to McDonalds or Hamburger University).
Very common tactic.
Constraints (in the form of funding and time) were a large part of YC. Entrants got a low (but livable) amount of money and 3 months to come up with something great. That something would either sink or swim on demo day.(for more on how constraints help creativity: http://ecorner.stanford.edu/authorMaterialInfo.html?mid=1530) Within those constraints, past YC classes did pretty well, and came up with amazing companies. Those that didn't failed quickly, and could go on to bigger and better things. But YC is now throwing those constraints away.
Because the $150k offer is guaranteed runway, it fundamentally changes the behavioral economics behind startups participating in YC. Products no longer have to be demoable by demo day, and startups won't have to think about profitability/funding, in the short term. This means that we should expect YC startups to dream -and fail- bigger in the future.
In order to return the $6 mm there needs to be $400 mm of exits.
But I don't think it's reasonable to assume that the successful companies wouldn't take additional funding past series A. More likely, any successful company would also take series B funding. Then we'd need to see ~$500 mm - $800 mm to break even.
My guess is that these investments aren't really intended to be profitable. I would guess that they're instead a gateway into future deals that will be profitable.
There's a solid chance that the next Google or Facebook-level company will come through YC, and this deal means they'll get a piece of it.
Am I the only one who finds Y combinator predatory? It preys on 20 year old kids who think they're building the next google. Am I crazy?
And on a pedantic note: 39/43 rounds to 91% rather than 90%.
Now, I sure as hell hope this time it turns out differently, and even it working out the same it would be pretty slick (I wasn't quite in industry yet the first time around, so it almost seems like harmless fun to me), but I definitely can see some parallels. Also, I'm talking about the industry in general right now, not just YC.
Don't doubt for a minute that some of us old farts are staying up late, downing obscene amounts of coffee, Red Bull, Monster drinks, etc., trying to get in on things. Hell, if anything, when you start getting older, and you look around and realize "I haven't done anything yet" a certain sense of, hmmm... I won't quite say desperation, but something like that, sets in. I've even spent a lot of time lately debating the merits of going ahead and ordering some black market "smart drugs" just to get a little extra edge. I haven't pulled the trigger yet, but it's awfully damn tempting.
Not really trying to butt in. I've just seen my quality of life go up so much and it's hard to resist sharing my enthusiasm.
EDIT: Oh, and I meant better to feed your brain better than to try "smart drugs". I consume caffeine like it's going out of style. So I didn't mean that.
I'll have to do some research, thanks for the pointer.
Or, to look at it another way.... "The four food groups for programmers are salt, sugar, fat and caffeine."
All joking aside, my diet has it's good days and it's bad days. But I do like my coffee, that's for sure.
Google, Apple, and facebook aren't going to continue making $65MM talent acquisitions indefinitely, so at some point the penny will drop. When it does, the question of whether we'll have a popped bubble or an adjustment will be decided on the individual financial condition of the startups in question.
Could the current ecosystem be sustained if Google, Facebook, Apple, and AOL acquisitions were no longer a reality? No. Too many people are investing in features, not companies. Those startups can't survive on their own if there isn't a real possibility of a big exit through acquisition.
Nevertheless, it isn't 1999. Groupon is IPOing with at least some real revenue and exponential growth, and LinkedIn has a solid, if not expansive, userbase. If there is a bubble, it should only affect the startup world, and even then only the companies that can't survive on their own.
A few years back there was no big social gaming company, now you have zynga cashed up and acquiring companies. Same thing could happen in the mobile space, a company that gets really big and then is able to acquire some of the many small new mobile development companies.
As to a bubble - without getting into that debate now, even if it later turns out that we're in a massive bubble right now, YC are investing money/time with the purpose of making money, so they're in the same situation as the founders themselves, in that they don't want the bubble to burst, and they don't want to see their startups fail.
Which should be cleared up by reading http://lesswrong.com/lw/qs/einsteins_superpowers/
Maybe they were going for one sigfig. This comment doesn't really add anything, so next time you find yourself typing "And on a pedantic note" press delete 22 times.
43 startups @ 150k is only 6.45million, which is typical funding for one venture capital company. Except it's diversified into 43 of them, so that if one of them advances to a series C, they can probably get it all back.
I guess the only problem would be if you try to get a Series A from DST, then you might possibly not get an ultra high valuation, but then again, DST seems to be throwing money at startups after their lustful experiences with Zynga/Groupon/Facebook
This just toughens up the next round of YC applications, which is a bummer. But i'm really interested to see how this will work out.
I trust Paul implicitly, and I suspect most YC Founders do, and that probably has a lot to do with the acceptance rate. I wasn't in the meeting obviously, so I can't know how I would have reacted to the specifics, but I can say knowing only what I know now I probably would have at least taken the weekend to do my homework.
Edit: phrasing.
What rational reason would an angel investor have to avoid investing in a company that has taken this investment?
Actually, the TC article says many of them signed papers at the offer meeting itself.
I understand the offer sounds fantastic, but surely they'd want some advice first?
Obviously they didn't, but it seems a little rash.
(Or he might die of a heart attack, or the Russian government might seize his assets, or any number of other unlikely scenarios might make him unable to close the deal.)
Convertible debt paperwork is really only a few pages... Heck, they might've used YC's boilerplate docs to simplify things.