Comment by spolsky | Hacker News Reader

Comment by spolsky | Hacker News Reader

Exploding offers are a sign of desperation, but they also serve to filter out young entrepreneurs who have a modicum of business sense.

The VC firm that extends an exploding offer and won't negotiate it is guaranteeing that they'll only fund companies that aren't very good at business.

A few years ago I wrote:

It seems to me that a company that accepts an exploding offer is demonstrating a remarkable lack of basic business aptitude. Every building contractor in New York knows you request bids from five or ten plumbers before you award the contract. If a plumber said, "I'll do it for $x, but if you shop around, deal's off," the contractor would laugh his head off and throw the plumber out on the street. Nothing sends a stronger message that an offer is uncompetitive than refusing to expose it to competition. And that's for a $6000 kitchen installation. Getting $10 million in funding for a business is the biggest and most important deal in the life of a company.

(http://www.joelonsoftware.com/articles/VC.html)

Arguably they're tolerable in the VC world, or at least pretty common. Empirically an expiration date on a termsheet is not always evidence that a VC is desperate or dishonest.

It's when this idea gets imported into seed funding that it really becomes a problem, because of the synchronous nature of this market. And it gets worse as the number of seed firms increases.

The root of the problem is that people think seed funding is regional. They think they're starting the YC of St. Louis, or wherever. Then after they get started they realize that in fact the seed firms are all drawing on the same national applicant pool, and that the default fate of the nth seed firm is not to be the YC of St. Louis, as they'd expected, but to be the YC of the nth quality bucket. That's a pretty grim situation, and it tempts them to take desperate measures. The VC market is more fluid, so VCs aren't subject to such pressures.

Is this not just a reality of this game? You mentioned Universities. For them 'fairness' is an independently important (though probably imposed) quality. Here there is no such force. Since there are always going to be application deadlines, it would take conscious effort or collaboration to avoid an exploding termsheet becoming the norm. Since it would adversely affect the lowest in the pecking order, you'll always have defectors.

A possible solution is more rounds. Even triennial intake is probably enough to let applicants time applications to meet their hierarchy of preferences.

I'd suppose they call it being cutthroat? With the idea being if you can't beat 'em, at least get ahead of them?

YCombinator is the only seed funding firm with a comparatively well-known name. I'd bet that nearly all people applying for any seed funding apply for YCombinator. It's got a bunch of well-known companies, well-known people, and it's located in SF, which is where lots of startups want to be. It's got a competitive advantage that's very hard to combat. Date fixing is one of the methods that other funders can use to give themselves a fighting chance.

I wonder if there are tenants of the funding system itself that a company could change to become a completely different sort of funder. Could a program be as small as YC and yet work in a radically different way? (If any of the seed funders do work radically differently, then it's news to me.)

I guess the next logical step for 'other funds' is to lower the percent of equity they take and to increase the money they invest. That can make startups think twice before turning over to YC.

That'd give the companies a higher valuation, which would (in turn) preclude small exits, so it's a mixed bag.

I don't think YC really fits here, since you know ahead of time what their offer will be.

Sure it does. You know what the offer will be but you might not know what OTHER offers will be. Yes, I know TechStars and others are before YC, but there can be other offers on the table (other funding, acquisition offers, etc)

Thankfully, YC seems to be friendly if there are circumstances like this (Paul gives an example below).

This works because YC has a flexible # of slots. TechStars has a rough way to go here because, with 10 slots, they can't let a deal linger for a month without a firm answer. I don't think it's malicious on their part.

Unless I am mistaken the valuation offer varies, so you really don't know how much of your company you will have to give away.

I think with most of the groups you know the basics of the offer ahead of time.

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