I find it interesting that they choose to change their investing program instead of changing their application program. Why not keep the program smaller and more exclusive instead?
(Not a criticism, and I can see the merits of that choice. But, when I talk to my friends about YC that usually comes up.)
that's likely because before the success, there was no way anyone with the network would come to YC as a first port of call. And with technical partners able to judge the incoming seed company on the merits the founders themselves, YC managed to pick the successful ones (mostly - obviously there are failures).
When the success of YC's model became so prominent that it is a culture all on its own, the technical partners no longer work the same way as the old way. I don't think it's possible. So network, and human capital is used as a filter, rather than deal with the massive amounts of no-name people.
They can’t really afford that model, that’s why funding is being slashed: insiders successful in the 2010s are not better poised to be successful in the 2020s than outsiders, even if network and critical mass help them raise and burn money to have a more structured shot.
But, since YC was not providing any additional signal by investing in everyone, the original signal carried so much weight that even obviously failing companies so keep raising rounds based upon the original YC signal.
So the "hack" about letting the market guide YC's later rounds was foiled by the same reason they came up with it in the first place.
I personally enjoy the irony of it.
(i.e. when we went through in 2009 it did not exist) It also clearly isn't scaleable without infinite capital.
Plus, if you had complete information, why would you ever want to automatically invest any time a company in your portfolio raised money?
My guess is the only reason they made it automatic, was to minimize the impact of a negative signal. It sounds like they hope the new changes will still minimize that signal.
This assumes that automatic pro-rata is a winning investment strategy. YC's goal ultimately is to turn money into more money, or at least that's (almost certainly) the most significant metric of success for them.
I do wonder whether this was actually a strategic decision -- if it simply is more profitable to pick winners in deciding whether to participate in follow-on rounds; or perhaps YC would describe it as not picking the companies that don't have a clear path to monetization.
In other words, I wonder whether the "we didn't realize how hard it would be to raise the quantum of capital implied by our initial commitment, and also, it turns out we don't like running a big fund" explanation is not the real reason they're doing this; and whether the real reason is in fact that they've realized that being able to exercise discretion in follow-on rights has a tangibly positive effect on fund returns. Which makes sense!
The question for YC leadership is whether, in a world in which there were no issues with fundraising or fund operations, they would commit to follow-on participation for every company. If that's the case, and they would like to maintain a YC culture of committing to all future funding rounds for all YC companies, why not fundraise a special purpose vehicle for the funding shortfall to fulfill the commitment that was just abrogated? Give first dibs to current LPs....I bet it would be multiples oversubscribed. With that covered, YC could downscale class size to the point they can continue the full funding commitment using LP funds.
1) It's not quite accurate to say that YC is running out of money, though I could see how the article could read that way. YC is fortunate to be well-funded. However, we saw that if we continued our previous pro rata policy, that that could eventually happen someday, so we made a proactive adjustment well ahead of time.
2) One of the consequences of our old pro rata policy was that it left us without control of how much money we spent. Because we committed to investing in every round of every YC company, our spending was dependent on how many companies raised money, which turned out to be hard to predict. Imagine running a company where your monthly budget could vary by millions of dollars and you wouldn't know until the end of the month how much you'd need!
3) As far as I know, no other investor in the world has a programmatic pro rata policy (what YC tried from 2015-2019, which we are stopping now per the article). The whole idea was a bit of a crazy invention, and while its motivation was good, unfortunately it turned out to have too many drawbacks.
Imagine investing in only one round and pretending that you care about, or even understand, the trials of a startup!