Paul Graham's Dilemma
manyniches.com
manyniches.com
1. A convertible note, however favorable its terms, is still fundamentally a loan. This means it will have a due date at which the holder may demand payment unless the amounts due have been converted into equity before then.
2. Item 1 in turn means that there will be no coasting for the YC companies upon receipt of this money or even necessarily a break from the pressure of fundraising. Why? Because the investment is not from a relative who is looking to get a high-interest-rate return on his investment but rather from a venture investor who fully expects that the company will make a good-faith effort to raise funds as appropriate to meet the minimum funding threshold at which his note will convert into equity. That means there will be considerable pressure to do a Series A round within the term of a typical note of this type, which means within the first 9 months.
3. What this money does then, in my view, is strengthen the negotiating leverage of the YC companies in terms of getting further bridge funding to carry them out to Series A. They won't need to worry about survival money during their first steps and they can in turn be more selective about whom to talk to and what terms to consider in taking further bridge money for their early build-out.
4. The terms of these notes will undoubtedly have provisions covering what happens if the startup is acquired before a triggering event for the note conversion. Those terms might vary widely but my guess is that they will be such as to motivate the founders to push for funding so as to effect a conversion. There is nothing wrong with an investor building in reasonable safeguards to make sure he doesn't get abused and the safeguards here might be such as to make it unattractive for the founders to exit via M&A prior to conversion, which again means that there will be great pressure to get the larger funding.
The biggest impact here will be on those investors competing for early deal-flow and on what should be a broader pool of applicants who can now seek to go the YC direction. I doubt that it will relieve the fund-raising rigors of the YC companies themselves very much, if at all.
Ya, but it's a loan to the company. If the company goes bust the owners of the company aren't liable.
Talent selection in the hands of too few is one sort of problem, but financial engineering concentrated in the hands of too few, especially those who think of themselves as smart, is really, really dangerous.
No, it's really not dangerous. Dangerous is something that can deprive people of their life or property without them choosing to take on that risk; it's normally something the government is supposed to prevent. The markets are designed for investors to take risks, and overall, it's a great system; it's the opposite of dangerous.
(In fact, if people supposedly having knowledge about venture capital start shouting about how "dangerous" it is, that's only going to increase the amount of government regulation, which is a lose-lose for everyone involved in venture capital or startups.)
The whole article takes on sort of an end-of-the-world gloomy tone. Y Combinator just doesn't have that big of an impact. If Y Combinator were to disappear tomorrow, things would keep on going, at least just as well as they were before Y Combinator was brought into existence.
By accepting this money, is YC basically saying that $10-20k isn't enough to startup? Or at least that having the next $150k promised is beneficial to startups in general?
If that's true, why doesn't YC just give more money to teams to begin with? I thought the low amount was part of the secret sauce - constraints leading to creativity and all that.
That being said, I think YC has probably funded startups knowing that they would need far far more than 20k to properly startup. That's what demo day is for.
They called a meeting to tell their startups that Yuri will be offering this deal to each of them.
I don't think this changes much. Most YC companies get funding anyway after the program. This is yet another great opportunity YC's startups.
It is quite obvious that, assuming your desire is to quickly scale your startup, $10-20k isn't enough. That's why YC has always had demo day, the goal of which is to secure investment. Even still, that day will remain important; Yuri didn't change that.
As an answer to your second line of questioning: Have you ever considered the cash value of "free" resources offered to YC companies? YC could just invest a lot of money, or they could provide mentorship opportunities and resources. They chose the latter (obviously), and have had clear success in doing so.
[1] http://news.ycombinator.com/item?id=2156560\
[edit] Haha... three other posts in the time it took me to find pg's response...
People are criticizing how it's a bad investment, but come on DST has earned god knows how much money from the three social network/deal/gaming giants, they can afford to lose some money. Bottom line, these offers are great for the entrepreneurs, which is what i believe pg would want, therefore he allowed Yuri/Conway to propose such deals to them. If these were horrible deals with massive strings attached, pg would never allow that to happen to his YC peeps.
The main reason i love what Yuri is doing is because this deal has increased the possibility of the American Dream. If you're brilliant enough and hard working enough, you don't need a rich family to become successful. Even if you lack in startup capital, YC, and soon many startup accelerator, as well as the increase flow of angel money (if angels want to stay competitive), will open endless doors of opportunities.
The main issues revolve around some topics I hadn't seen elsewhere.
1) Will Paul's talent filter function work as the influx of applicants grows? One poster suggested he doesn't think a 3x is possible. I disagree.
2) What happens when older, more seasoned folks see this? Will they see this reduction of risk as the opportunity they have been waiting for to start something? Don't underestimate the power of "what if" and "what could have been" for people who have been working for 10+ years, but kids/mortgage got in the way of starting something.
3) What will the angel response be? Offering more money in the next go round isn't the right answer. Yuri have removed the risk premium from angel investing. That's huge.
4) Is it possible that there is too much of a choke point, now, for talent selection for YC? Will the ecosystem continue to flourish, or does it run the risk of stagnation, because the selection criteria doesn't allow for random mutation?
5) Will financial engineering take hold? With a few players doing this, things could get messy.
I suspect that the profile of applications that YC gets are 1-3% "We should definitely interview this team" (bucket 1), 75% "these are quick rejections for one (or many) reasons" (bucket 3) and 20-25% that need a deeper read to handle (bucket 2). Even if applications tripled (which I also doubt), a small number of the "extra" applications will fall into the first bucket (and may well be a consequence of #2 above), which may crowd out a few of the applicants in the second bucket who may have gotten interviews and ultimately selected but will now miss the interview cut. Loss for them surely, and maybe a small loss for YC, but one that is being more than offset by the increase in applicants from the first bucket.
I think the Start Fund announcement is certainly damaging to the other "competing" programs as it makes it slightly more likely that a "bucket 1" team will apply to YC rather than TechStars et al, probably has harmed other angel investors' prospects slightly, but in the short term is an enormous win for YC and the startups that best fit the YC "mold" (to the extent that there is one).
But I'm still a little confused by the collective hand-wringing that's going on in the last 72 hours. It's not like the Start Fund has cornered the market here. Anyone else could come along and say they'll match or could do it with Tech Stars or any of a number of other responses. I think that Yuri is being especially bold (some would read as reckless) and that's naturally going to cause some disruption. I don't view that as bad, unless my own application to YC S11 is a "bucket 2" application that is now de-selected for interviewing, an outcome that I view as a quite realistic possibility, but even then I have to say that it caused YC to select for "better" applicants, and I need to dust myself off, pull on my big boy pants and get back to working on it.
will the 150K improve the success rate by motivating more experienced people to join?
Yikes...I never thought about it that way. Basically Yuri is encouraging the speed at which the angel/super-angel bubble is hyper-inflating. I wonder if most incubators/angels have responded/will respond with refusal to go along with Yuri, or up the ante with larger amount of angel investment?
I get that they're trying to get into every deal that's been prescreened, but the valuations are totally upside down by design. I may be missing something, but I the only way I can see this working out is if you're going to deploy lots more money on top of these notes, which are basically an expensive marketing scheme. That's a pretty big gamble. Perhaps $6 million is play money to these guys. In any case, I'd be more worried as an early stage VC than as an angel.
I can't put my finger on why I think that's a bad idea, but there problems just seem to follow people who are this free with their money. It smells of hubris, but it's not like these guys are pikers.
Either he's wrong and everyone else is right, in which case he's burning money, or he's right and everyone else is wrong, and he's burning less money.
Either way, I don't get it. These guys are very well connected. Is it so hard to participate in Y Combinator Series A round that they need to spend this much money just for the opportunity?
If the companies don't allow him into later rounds at equal terms with the others on the round up to as much money as he wants to put in the round (up to the full amount the company is trying to raise) then I expect you'll see this experiment end. He's paying for access, for screened deal flow. Angels are there for a different reason.
So is Yuri's money better than another angels? It is better than PG's? No. No way. Yuri's money is just money. If the only thing stopping you from starting a successful company is access to capital you aren't getting creative enough. Taking money from an angel, from PG, gives you access -- to people with domain knowledge -- to people that will help you succeed with more than just piles of money.