Refusing to commit either way until a lead investor term sheet happens seems like a clean way to mitigate the signaling risk. What am I missing about that? If that works, couldn't YC have always picked and chosen investments to follow on with?
Anybody else think this is a possibility?
Of course, these investors may get a bad score in YCs internal systems, but are other YC companies not going to meet with the VC based on those feedback systems?
TBH, I didn't know YC had a guaranteed follow-on amount. Either way, you just gotta be too good to ignore.
What I have seen - and just once - is that a DD did in fact turn up some major issues, the investors backed out and the startup then made a stink pretending they were stiffed. But the truth on that one will likely never see the light. So not 100% of these can be laid at the door of the VCs either.
I've also had founders back out of accepted term sheets, which is also a pretty shitty thing to do.
(but still are the majority so you have to account for them)
as you said pro-rata can't be after the fact. The company needs to know how much equity it is selling and can't allocate to new investors without knowing what the company has available
Everything you say to a VC should be assumed to be public information.
There are a couple of things in this comment that aren't true, and I want to respond to make sure that people reading it don't come away misinformed.
YC does not distribute lists of "top companies" to investors, around demo day or at any other time. Quite the opposite - we take great pains to ensure that investors at demo day see all companies as equally as possible.
About other venture firms being investors in YC, it is true that Sequoia was once an investor in YC's funds, but that was a decade ago. We haven't had a venture firm as an investor in YC in many years to ensure there is an even playing field.