Comment by motti_s | Hacker News Reader

Comment by motti_s | Hacker News Reader

Parent Full thread

I don't think it's that easy for all companies to raise money. In fact, I just watched an interview with Pinterest's founder who said that they were turned down by virtually the entire investor community. I think the pendulum has made a full swing for YC companies, but a partial one for others.

Deciding what to invest in is hard, especially in the seed stage. With the market being so hot, investors have to decide quickly which makes it even harder. When investors are agreeing to an 8 million cap on a YC company and a 4 million cap on comparable non-YC company, they are essentially saying that the YC company is twice as likely to succeed, which I don't think is far-fetched. You may also wonder whether this anticipation fulfils itself (a company that seems more likely to succeed may get "better" investors, positive media coverage, early adopters, etc, which may end up helping it becoming successful).

I also think that the increased popularity of convertible notes is a contributing factor. The 8 million cap only becomes 8 million valuation if the company raises the next round at 8 million or above, so in a way it has to live up to its promise in order for the increased cap to take an effect.

And finally, if a company becomes the next Google then the valuation at the seed stage is insignificant. Therefore the valuation just represents the perceived probability of that happening.

Every entrepreneur I've talked to, including many outside Silicon Valley that are not part of any accelerator has said that it's easier to raise money than ever before. If you have an idea and team that's fundamentally fundable, you'll get money fairly easily. The size of the round might be smaller, the valuations might be lower, and it might take longer, but I know several people in the middle of Wisconsin who have raised seed rounds between $500K-750K easily. Being part of the Silicon Valley scene or an incubator is by no means a prerequisite for a seed round. Series A would be a different story.

While the market for seed rounds has been generally frothy, I believe these wild valuations are very specific to YC. Maybe they are indeed adding real value to investors by attracting the very best founders, or maybe investors are creating an YC bubble by overestimating their odds based on some recent homeruns. Probably the truth is somewhere in between.

>"...they are essentially saying that the YC company is twice as likely to succeed"

In my opinion, this is precisely what makes the business so frothy. I don't really believe that YC backed companies are significantly (certainly not twice) more likely to succeed.

The whole incubator thing could be the best or worst thing to happen to to Valley; we just don't know yet.

Well, YC only takes the top 3% of startups. If you believe that they have any skill at all at judging startups, that number should be a lot more than twice.

Investors are not just counting on the fact that YC makes a company more successful- they also know YC filters for startups that are already more likely to succeed.

"YC only takes the top 3% of startups."

This is exactly how legends are built in the media. YC takes 3% of startups that apply, not "3% of startups". This is the same as when they say it is harder to get into Techstars then to get into Harvard.

See this:

http://www.forbes.com/sites/nicoleperlroth/2011/08/24/the-mo...

Figures like that ultimately don't mean much anyway other than creating a appearance of scarcity. It is well know for example that colleges try to increase the application rate to game the acceptance %. Nobody has access to all the companies applying to YC in the 97%, (do they?).

Edit: To judge the quality (if possible) of the applicant pool.

Edit2: I don't mean to imply that YC tries to game applications. Only that numbers get thrown around without any vetting.

YC only takes the top 3% of startups.

s/the top//

Obviously they try to select the top startups, but as smart as they are, it's hard to believe that there is zero error in their selections.

Incubators were around before YC though, and pg et al seemed to want to avoid being identified as an incubator. At any rate though, YC certainly redefined what an incubator is, and my impression is that the track record already shows better returns than any previous incubator. But as with any good idea, the cargo cults are quick to follow, and I think it's inevitable that a froth would be raised following this kind of success.

It's true that a YC company is more likely to succeed, but it still seems wrong to use someone else's filter instead of your own. Maybe this is just a result of the high competition to fund YC companies- they simply don't have time to use their own filters for this prefiltered subset. I'd argue that it probably won't be in their best interest to do this in the long run, but then again I'm not an investor.

Reply on news.ycombinator.com