Y Combinator’s Paul Graham On The $150K Per Start-Up Offer | Hacker News Reader

Y Combinator’s Paul Graham On The $150K Per Start-Up Offer

blogs.wsj.com

141 pointsjedwhite81 comments

"Graham is known for his 'pizza profitable' mantra".

It seems ramen isn't even a conceivable foodstuff for WSJ's readership. 'Pizza profitable' has a nice onomatopoeic quality though.

onomatopoeic -> alliterative? I don't think anything makes a sound like "pizza profitable" :)

I have a friend who, every time he tell someone what onomatopoeia means, points out that, oddly enough, onomatopoeia is not itself onomatopoeic.

That's because it's Ancient Greek for "to make name for": http://en.wiktionary.org/wiki/onomatopoeia

>onomatopoeia is not itself onomatopoeic.

It would be very difficult to do that since onomatopoeia is a concept and concepts don't make sounds.

which is ironic, given that a cucumber is saying it.

Hint please

Well, my thinking was: Euroclydon's friend likes to be technically correct about the term onomatopoeia, and jimmyk chimes in with the same level of technical correctness on the matter. So for levity, I point out how it is 'ironic' in a nonsensical way - hoping to hit their OCD nerve a bit. As it is clearly not an ironic statement, and we only have anecdotal evidence of cucumbers being able to mutter a sound.

Run for office.

I've always liked the idea of "conceptual onomatopoeias": - the word "word" - the sound of the word "sound" - the thought of a thought

...etc.

Some argue that "cliche" is onomatopoeic.

http://en.wikipedia.org/wiki/Cliche#Origin

A world like onomatopoeia being onomatopoeic isn't that far-fetched. Perhaps the word could be named after a very common onomatopoeia, perhaps one that has gone out of use. A word with that sort of etymology is "shibboleth" - its current meaning is derived from what was a common shibboleth.

Which means that onomatopoeic is a heterological adjective - an adjective which does not describe itself.

Is "heterological" a heterological adjective?

- Grelling and Nelson, 1908.

I would gladly swap 50% of the typical HN front page material for more stuff like this.

i didnt understand anything except the word pizza, which i go and order right now

Ah, crap. :)

A model steam engine? That's almost appropriate.

"Model steam engine profitable?"

That would be like, you sell 6 items a year, but you make $90 on each one.

I much prefer ramen profitable, I think it will be a shame if Pizza profitable becomes wide spread. I'd never heard it before the article, and I stopped reading to come and comment. It's obviously something we all relate to considering it's already the top comment.

Good ramen is more expensive than good pizza.

And bad pizza is more expensive than bad ramen.

Explaining a $15 bowl of soup to people who don't know anything about Asian food can be tricky.

Solidly decent ramen is still fairly cheap in some countries.

This sounds like the work of an editor. Some editor probably saw "ramen profitable" and decided that the august WSJ reader would have no idea what ramen was, so they changed it to pizza, not knowing that pizza is a huge luxury for many ramen profitable companies.

One of the things that surprised us about the Valley is that good pizza is more expensive here than on the East Coast. I'm still not sure why. But there is a noticeable difference when you have to order pizza 30 at a time.

I have noticed the same thing! I guess it is not that easy to make good pizza. In los angeles there are places that specifically advertise new york style pizza, and they are more expensive.

One of those more expensive places in my neighborhood in LA says that they import their dough directly from Brooklyn by plane. I highly doubt it. Another one has a sign that reads "We only use authentic New York tap water. (Suckers)"

The only way to get good pizza in the Valley is to fly it in from the East Coast, so that makes sense. :-)

Brian Chesky (AirBNB), once when asked if they were Ramen profitable, and responded "even better, we are pizza profitable". Maybe it was the same reporter?

This appears to have been changed, with an explanatory note of "this low-cost noodle dish".

Have they changed the article? I'm seeing "ramen profitable" now...

Let's assume that they have invested since the beginning of YC with the 250 startups:

   250 * 150 000 = $37 500 000

So far, 20 YC companies have been acquired generating $401 500 000 (data taken from yclist.com). If the investors own an average of 5% of the startups, their current position would have been about 50% loss:

   401 500 000 * .05 = $20 075 000

I don't think this is a bad position to be in since there are still great companies that have not been acquired or exited. The $150k investment may also reduce the failure rate.

Investors owning 5% of the company? Unlikely. YC takes an average 6% I believe? Then VC takes say 10-15% in next round for $700K (average after-YC investment).

5% is high.

If the Series A rounds were 1 on 3 ($1M on $3M pre-money valuation), then $150k would get him 3.75%. For hotter startups, 1 on 4 or 5 might actually happen. Presumably they would have the option to put more in, but that would increase their basis.

But your assessment is right. Average time to liquidity for a VC backed startup is 7+ years-- older than the oldest YC company, right? There is a TON of value locked in in previous YC companies.

According to the article, the average YC company raises $700k in seed funding. Assuming your $3M pre is correct, that would be about 18% total and 4% for the $150k investor.

The question is, does a quick and easy $150k delay fundraising until a company is looking at a $6M pre? For the super hot ones I bet it does. For those startups that are more worried about not getting early traction they probably won't delay fundraising.

So if we are going to throw a number around... my fuzzy math says 2% of the hottest companies and 4% of the others.

The first post-YC fundraising is usually made up of convertible notes. So in your example, that $700K at $3M pre would not trigger the conversion of Start Fund's note, which would instead convert at the valuation of the next round of fundraising.

They have pro-rata rights on the next round. This means that they can follow the investment in subsequent rounds if the company is successful.

This completely changes the economics.

We fixed that mistake:

http://blogs.wsj.com/venturecapital/2011/02/01/y-combinators...

Scott Austin wrote: @Andy - I think we mean the same thing. But we actually changed “pizza” to “ramen,” since “ramen profitable” is the correct term that Paul Graham uses. It was actually the founder of Y Combinator alum Airbnb that used “pizza profitable”! http://blogs.wsj.com/venturecapital/2009/06/10/from-crash-pa...

Interesting, I wonder if this bulk micro financing of start ups could become a new financial product. Find 30 - 100 small start ups, give them all a whack of cash that's backed by a bond. Sell the bond and repeat.

I don't think there are enough worthy start ups to make this a viable plan.

Just make sure you're the one selling and rating the bonds, easy money!

Does this negatively change anyone's mind who was thinking of applying to YC? I always thought YC was special, they give you less money, take less equity, and typically value you out of the gate at over 100K. Part of the appeal was seeing what kind of company could be grown from such humble roots.

The 150K offer on the table is nice, and the terms are such that you would be foolish to turn it down, but also in my mind it changes the dynamic of YC a bit.

Was wondering if others felt the same.

It changes the game a lot for startups that would fail 4 months in.

I don't see any downsides though for YC candidates; I don't subscribe to the idea that getting only the initial seed money from YC is better than having the option of the follow on $150K.

  If you find yourself in a fair fight, you didn't plan your mission properly. - David Hackworth

How many YC companies fold four months in?

The only reason I've heard for a YC company closing is "not enough traction", or some variation of "not enough passion" - I've never heard "not enough money", although I'm sure it happens too.

"not enough traction" = "ran out of {money|energy} before finding the right product/market fit"

I also think it changes the game for YC participants. Part of what keeps all entrepreneurs hungry (at least early on out of necessity) is creating knowing that nothing is guaranteed at the end. Now it seems that every participant will get $150K whether their product/business is viable or not. From a competition perspective it may entice more people to apply but the bad ideas will get weeded out no matter how much money is on the table.

It's because people know how much money to expect.

A company that requires significant physical capital investment won't bother with YC. Now they can.

For instance I bet this will produce more hardware companies like WakeMate. Companies that sell more than just software.

It's cheaper then you think to build a hardware prototype (of anything really), and 150K is hardly enough to have a decent first manufacturing run of a brand new hardware product.

I don't think this significantly impacts the hardware/software equation at all.

What about being able to produce a small batch to give to beta testers and iterate? It's possible that the extra money will allow you to better explore things at the prototype stage.

So if there are now a whole lot more applicants to YC, more good ones will get turned away than ever before. Suggesting rival seed-funds (or whatever you call them) will crop up to absorb the surplus. Unless YC just increases its intake proportionally (but that could be an unwanted dilution of the guidance/mentoring available to each one).

YC will probably increase its intake proportionally, or close to it. They've been begging for more applications lately, even extending the application deadline for the last round. It's sounds like they've got capacity for more.

I wish, it was like a mutual fund.

I would happily put let's say $10,000 that will give me a .17% share of the total 40 companies.

Thats an excellent idea. A startup could be made out of that. Sort of "private" stock market open to public? I'm sure this has already come up, but why can't there be a private unregulated "stock market", just as individual lending(as opposed taking a traditional loan) is possible eg: LendingTree

Regulation. There has been a huge number of scams based around selling stock so the amount of regulation has grown over time.

PS: Invest in wonderful Iowa beach front property.

It was great to see Paul make the very first connection that I made upon hearing the news. The deal had to be absolutely fantastic for the founders otherwise some portion of the best wouldn't take it. Having looked at the deal, it looks like it qualifies.

I agree with wave that it looks like something that should have worked so far, and one can presume they're getting better at what they're doing and hopefully will have a better economic environment for these current startups.

It's really cool that this happened.

Could someone help me run the numbers? What will $150,000 be used for on an average YC startup?

$150,000 will allow the startup to hire 1 or 2 engineers in the short-term. Is that the real use of the $150,000?

What other expenses do they spend good money on?

Another way to look at this question: If you were a new startup in YC, what would you spend the 150,000 on?

Runway

What do you mean by runway?

Scroll down to point 11:

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

One thing it can buy is time, and consequently leverage.

At Demo Day, the investors will know that all the startups have some cash to last after YC, so that they don't have to rush on the first investor that comes along which should translate to better terms for the founders. Or it could just allow them to look for investors a bit later on, hopefully providing them with a better negotiating position by having a product further along or gain some traction before needing the money.

hiring engineers is not a good idea, your startup team should have enough talent to do 90% of the work. Some use of the money could be for design art work, or marketing (free swag). For example if you were planning to launch your startup on iPhone only, you can now use the money to contract someone to develop for Android, WP7, blackberry, this money can make the startup more complete at launch.

uh, wouldn't that be "hiring engineers"?

Or do you want the designers to build the blackberry app?

I think spending it on swag would be a horrible idea. I can't think of any company that succeeded because they had really great swag in the early months.

I meant not hire full time engineers, $150 can only get u 2 engineers, get a app done on contract basis.

founder salaries

I.e. taking some of the "feed the family" money off the table.

This could open YC to entrepreneurs who can't live on ramen because they have families.

"Virtually all of the companies that go through the program receive seed funding after participating in the popular incubator program... The average Y Combinator company raises $700,000 after the program."

Had a hunch about the funding success rate and amount, but it's good to have these confirmed. Helps in appeasing queasy spouses, risk-averse cofounders, etc.

Maybe I'm the only one, but I always thought pizza-profitable (or ramen- or sushi- or whatever) referred to the fact that a company was pulling in enough revenue such that the founders could cover the cost of pizza (or sushi, or ramen). When used that way it's also more informative; sushi means more revenue than pizza, which means more than ramen.

It means that you're making enough to cover living expenses, provided that you are living extremely cheap -- so the different food gradings still apply. The article's description is correct but ambiguous.

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

s/pizza/ramen/

I for one would not want to associate myself with Russian wealth regardless of how squeaky clean Yuri or his firm might potentially be. On that latter point, I would try to conduct extensive due diligence on them and their investors. It strikes me, however, that there are too many potential skeletons in the closet when it comes to Russian wealth that even the best of due diligence may not reveal. I would just want to stay away from any possible connections with ill-gotten wealth of the sort that is widely known to have occurred in post-Soviet Russia. I am not willing to sacrifice my principles or reputation for the sake of business -- nor would I want to directly or indirectly benefit shady characters or associate myself with potential ill-gotten wealth that could be very difficult to detect when entering into such a relationship.

Honestly, I think this is a little racist. I agree that there is risk there, but surely there are legal frameworks in place to insulate the YC companies from that risk? (If "the best of due diligence" doesn't uncover anything shady, what more could they have done?)

If you want to talk about "ill-gotten wealth" or "shady characters" do you really need to look any further than American investment firms?

This is true. No one really knows how Mr. Miner got his money and from who. You have to be a really savvy business man to make it in Russia that's for sure...Or you have to be very well connected, or you have to give a lot of bribes. I doubt that he made his money in a "clean" way. I wouldn't take the money because most likely they are tainted. But I guess it doesn't matter.

even though pg says "there’s no reason for companies to turn it down"

There would be an advantage to being the only company not to accept the funds. i imagine the press and standing out in the herd might be well worth passing on the 150k.

Plus i think others angles and VCs will through money at you knowing you turned down the easy money.

Or it might backfire and just show that you don't have enough business sense to take the money.

That doesn't seem a terribly good reason to turn it down. A valid reason might be that the company is already profitable or has "enough" runway from a friends & family or non-YC seed round. In this case the convertible note's due date (or interest, if there is none?) might somehow be a problem, as it forces the company to sell more equity to get a conversion valuation. It goes beyond my knowledge of these things, however.

If you're looking to stand out, you could also stab yourself in the eye with a fork.

Being better is a better way to stand out.

Any company that is really hot will have people offering them money at a cheaper valuation than Yuris offer. Cos the other investors already know the line they have to undercut.

So the ones who take up the offer are the ones that don't appear hot enough for anyone to undercut that offer.

There is no way to offer better terms than a convertible note with no cap and no discount.

At least no current way. I suppose you could have a valuation floor instead of a cap, or a negative discount. I've never heard of that happening. It would be something if things ever came to that.

The convertible note insists on a pro rata right on future rounds. Someone who removes that would be offering a slightly better deal.

Pro rata rights cause more dilution in later rounds, but they are pretty standard and at seed rounds most people don't think about removing that term.

They don't intrinsically cause more dilution in later rounds. The buyer has to pay whatever the price is in the later round. So they'd only cause more dilution if the lead in the later round insisted on getting a specific percent of the company. VCs often insist on that sort of thing in A rounds, but less often in later rounds.

Agreed situation is the worst on the first round that involves a VC. It can also arise in later rounds if you take strategics or new VCs.

Given that most YC companies will still go on to raise a seed angel round after this 150k, they will be hit by extra pro-rata dilution. If we assume a $5m seed round post money, then the 150k translates to 3%. If you raise a VC round with a VC that insists on a 20% stake then the overall affect is 0.6% extra dilution. Every point hurts at that stage, but not that bad :).

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