Why $150k for YC companies is a huge deal | Hacker News Reader

Why $150k for YC companies is a huge deal

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92 pointstommy_mcclung36 comments

Reminds me of pgs "Fundrising Survival Guide":

"More often than not the company comes to a standstill while raising money. And that is dangerous for so many reasons. Raising money always takes longer than you expect. What seems like it's going to be a 2 week interruption turns into a 4 month interruption. That can be very demoralizing. And worse still, it can make you less attractive to investors. They want to invest in companies that are dynamic. A company that hasn't done anything new in 4 months doesn't seem dynamic, so they start to lose interest. Investors rarely grasp this, but much of what they're responding to when they lose interest in a startup is the damage done by their own indecision."

http://paulgraham.com/fundraising.html

Student here.

What confuses me is why 90% of the companies, according to TechCrunch, took the funding. From what it seems like, the $150k is for each YC company to decide upon. Why now?

Surely most (if not all) YC companies don't need an additional $150k after just a few weeks in the program. It's great that the $150k is there for everyone when they need it. Raising money, which is usually a distraction, is now much more easily expedited.

While that's great, I just question the timing. Why did 90% accept the money now? No one needs it. Within the next few weeks, we might see better deals. Sequoia and others might want to compete. There might be better offers.

That's my one concern so far with this.

Who doesn't want free money? I don't need $150k, but if someone offered a zero-interest loan with a repayment date I can push off arbitrarily long, why wouldn't I take it before they changed their mind?

It's not like that.

I offer you $150k to take anytime within the next few months. You can take them now...or wait and see if you get a better deal in a few weeks. The $150k is still here. For you, if you need it.

Just don't rush is all I'm saying.

What better deal? This turns into an extra $150k of investment in any future deal you get.

If someone takes this and then Sequoia knocks on their door the next day offering them $20M at a $100M valuation, the fact that they took this deal just means that they get $20M+$150k at a $100M valuation.

Deals fall through. Money in your bank account doesn't.

http://www.paulgraham.com/startupfunding.html

It is an extraordinarily generous deal, and I can imagine many reasons to accept on the spot, some of them good. That said, I might have gone and cooled my head somewhere while thinking things through, and possibly chatting with a lawyer or other advisor. I preface the following comment with "We're all businessmen and know how this game works, right?" because it may sound greedy or contrary-to-the-communal-spirit : if you have just told me you want to invest $150k at hyper generous terms without knowing anything about me, I have reason to suspect that a five minute conversation has a high probability of leading to a better offer. ("Hiya, you just offered 150k sight unseen. Salient fact: our traction is... Cool huh? Would you be interested in investing more than $150k at the terms mentioned earlier?")

I suspect that $150k is the lowest possible outcome of that conversation.

I don't know much about Yuri, but I've never met anyone who regretted taking money from Ron Conway/SV Angel. He's one of the nicest and most founder-friendly investors in the valley.

"there might be better offers."

It's possible, but there just about CAN'T be a better offer. I guess investors could literally pay founders to take their investment. This is, quite literally, the best early stage investment deal that any entrepreneur will ever see.

It also gives them tremendous leverage on demo day and beyond should they want to raise money... If there isn't strong interest and good terms, they can say, "screw this, we'll go hunker down and prove some of the theories that these investors are doubting... Or we'll just go lean and get profitable."

Here is a life lesson. If someone offers you money, take it ASAP. If it is a deal this good, i.e., a zero interest loan that you can repay with equity, just take the money put it in your bank account and then you can figure out what to do with it. I mean it is not like you have to pay interest on it. You are not guaranteed that the money "will be there when you need it." Many things can happen. The economy can go south again, the investors may decide they need the money after all. A new hot investment class can emerge. A high profile startup may go down in flames and scare off all investors.

Regarding better deals, nothing in this deal prevents companies from taking other investments.

$15k to 20k will probably get two to three founders four months the bay area when you consider additional expenditures such as moving, equipment, business costs, etc. Some YC founders are lucky enough to have savings or family to fall back on, but we weren't. We ended up having to focus on revenue before it would have been optimal; we had to consider raising before it would have been optimal. $150k would have probably meant better terms for us later and would have allowed us to focus 100% on our product during our YC months.

Regarding the terms, they are fantastic. Because there is no cap on the note, the debt converts at whatever valuation you get in future funding. That means that you can receive this and pursue the proverbial fantastic deal from Sequoia later on without any cost (aside from the actual equity that you will spend on the deals). Effectively, it's not possible for there to be a "better" offer, because the note is as good as whatever other funding you take.

Agree with everything said here. The "being poor will make them work harder" might apply to other groups of people but the YC company founders are already working as hard as possible -- they are motivated to succeed and do their best.

With 3 founders this $150k is now enough for them to go through their cycle and go "ramen" level for another 6-12 months depending on the costs beyond food/rent of their idea.

Assume they need to start raising money 3-6 months before being out of cash and this gives them a good amount of time to do 100% product work then work with folks on funding without the pressure of "having to get the round done in a week or we can't make rent". With the ability to move the funding along at a reasonable pace some of the members can focus on still building product while one person leads the effort as well.

I believe what you’ll see are more YC companies launching with bigger, more complete businesses. Notice I said businesses and not ideas, or features.

This is probably the real benefit of the 150k. Sure, the money will help to alleviate rent-worries, but it also lets founders tackle serious (more expensive) business problems.

Ok, I don't think $150k will actually make you less poor, nor make you work any less. What it does allow is a little more leeway, say if you have bills that need to be paid. Maybe you are not right out of college so car payments, house payments, etc... might need to be paid while you take 3 to 6 months off form work. I like that it shakes things up in the VC & Angel world because they need to be shaken up. You are dealing with statups, you can't be risk averse... go invest in mutual funds if you don't want risk.

Congrats YC and Yuri, wise investments. Oh, this is not a bubble this is the same pattern that came about in the 1930's and 1940's with Great Depression and the auto industry. It's simply happening again with the internet industry (steam engine == bubble/economically unfeasible long term && combustion engine == years of growth/redistribution of power and wealth; dial-up == bubble/economically unfeasible long term && mobile/high speed == years of growth/redistribution of power and wealth)

One would think you could put the same amount of cash into just the winners at pretty similar terms. (Apparently, exactly the same terms for series A).

This implies that simply getting a spot at the table for a Y Combinator Series A has become prohibitively difficult, even for the likes of SV Angel.

Am I missing something? How does this work from the investor's side? Or is this just for-profit philanthropy?

Yuri Milner definitely guaranteed his spot in future articles about the '10 bubble.

Why is it a bubble buy? They are getting in on the A round of every YC company with the same terms as the other participants and with their deep pockets the ability to lead A rounds as well as B, and C rounds for those that take off is worth way more than the $150k each.

Consider this acquisition costs, like buying a really expensive key word on Google. The ~$6M every 6 months is worth it for the seat at the table. An additional benefit is getting to see the terms at which all of these rounds are financed at -- this will help them ensure they are paying properly on non-YC deals they get in.

Basically, he's investing in everything that YC is investing in, except he's investing at much worse terms than YC gets (that is, YC typically invests in companies at a valuation of a couple of hundred grand, while Series A rounds are typically at a significantly higher valuation than that). It may, in the end, pay off, but I don't think it's a good investment strategy to follow someone else's investments and pay systematically more than they did.

He's getting much worse terms, but he's also doing a lot less work. YC picks the companies, does office hours, finds speakers for dinners, cooks the dinners, works out deals like this one and the Facebook one, etc.

The terms are only worse in the beginning, the YC organizers do not have a $1B fund to lead on A, B, C rounds and beyond. Because of the ability to double down on the winners the terms may actually be better than what the YC team gets.

People have been talking about how crazy deals he's lead have been already for several years. History has quickly proven them foolish.

Past performance, as fund managers are always obliged to remind you, is no guarantee of future returns.

it's not a guarantee, but it's very often a correllated indicator.

Not the same thing at all. Most funds just follow the stock market's performance. They are at the mercy of the market fluctuations. What this investment is saying is that Yuri believes strongly that YC has the ability to pick winners more often then not. And they do it often enough that it's not even worth his time to do anymore diligence.

He is saying that if he spent a bunch of time on each company the odds of him doing better then YC has already done is not worth the extra effort. He is betting he can get a good return by just trusting PG and company's judgment. Pretty awesome endorsement, imo.

I think there's something much simpler going on. If YC's track record has been pretty good (or at least, better than average), then Yuri Milner now has a pre-vetted list of companies in which to invest, without having to do any research at all. The simplicity of the strategy is actually pretty brilliant.

This is what everyone should take away from this. What he is really saying is the diligence and track record of YC is good enough that he doesn't need to do any more diligence himself.

If that isn't the highest level endorsement possible I don't know what is.

"I would say the fund raising thoughts, conversations, meetings stole 3-4 solid weeks of time that we could have been focusing on building an even better product."

- This is HUGE. If this speaks for the other companies then it means that everyone will have 25%-33% more time to build their product / customers / business.

"Funny thing is, anyone could have done this deal with the YC companies. You have to hand it to Yuri for stepping up and taking this risk. It will be a huge win for him and it is already a huge win for YC and the future of entrepreneurship in general. Congrats."

- Awesome.

Any explanation as to why other investors were not included in this deal? I understand this is a huge deal but being able to select an guaranteed investor from a panel seems like it would be beneficial to both sides?

Am i the only one who has the feeling that if you are already in an ecosystem where you need _3 weeks_ to raise a perfect ("silicon valley level") angelround you even almost not need the 150k$.

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Why? It makes this text harder to read!

I'm wondering about the 10% who didn't take the money and if there is adverse selection at play here.

IIRC, there are a handful of companies in the program now that were already funded prior to being admitted. For a company like that, a 150k convertible note might not make much sense.

Here is one possibility.

Suppose that you're planning to bootstrap. Then there will be no future round where you get the loan magically paid off, and this becomes just a loan with a not very great interest rate.

can someone explain to me please how exactly are these money given? The startups receive the $150k in exchange for a percentage, or how ? I keep hearing the "no cap" and "no debt" thing, but I can't figure out what that means.

Thanks!

NB: You meant "no cap...no discount". Now to your question:

These sums are notes (loans, debt). The money is either given as a check or wired. That is all. Just that simple. It is real money. Since it is a note, the investor gets zero equity (percentage, ownership). Rather, he gets [1] a compounded interest over time, in the case where the company has to repay, and [2] a percentage of the company "in the future".

Since startups go on to raise an A-round, investors who give startups loans (convertible debt), like to put a cap (maximum) on the amount of $ that may be raised in the future A-round. They do this because the higher the $ raised in an A-round and subsequent rounds, the more dilute the % the seed investor owns (if he does not follow-up). In this case, Yuri/SV Angels -- without fear of dilution -- are allowing the companies to "feel free to raise as huge a sum as they like/can in the future". There is, "at large", one main reason why a seed investor would do this: because he intends to and can participate in the future round. More basically, it is a branding statement that earns the entrepreneurs' trust or fondness.

The second provision is that of "discount". A discount simply answers the question: "How much % slack will you give me compared to your next round investor? i.e. How much cheaper "for me" will your stock be in your next round?". In this case, Yuri/SV Angels say they don't want any slack/discount.

What we don't know is if there is/was a liquidation preference (exit-clause or clause in case of a default). But that is another story.

thanks!

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