YC Terms are Poor

If you have a good idea, you are confident in your ability to executing on it, and you just need money, then of course it is dumb to choose YC over other kinds of seed investment. As the author stated, it is relatively easy to get more money for less equity somewhere else.

YC is easy money. You type up one short application and you give one short presentation and you are either in or out. If you lose all the money they give you nobody cares. Raising money other ways is not nearly so easy; if it is easy then you probably got it from people whose money you will feel very guilty for losing.

From afar, YC seems to be a very college-like experience. PG is like the professor. The other founders are like your classmates. Your acceptance into YC is akin to that letter you received in the mail your senior year that made your mom cry because she was so proud--instant validation. When you get into YC you feel like you've succeeded regardless of whether or not your business fails. Once you are in, the environment is so confortable because it is just like the environment you've been in your whole life: people hovering above you, waiting to collect your homework every week.

Other people who might be willing to fund a business are not going to offer such a friendly, comfortable environment. You actually have to read everything they want you to sign; you probably should have a lawyer look over everything before you even sign the initial agreement. You're going to hear "where's my money" in your head every time you talk to them. They are unlikely to appreciate the vital importance of a weekly dinner party.

This is the mistake. Advice is easy to find, but it varies in value.

This guy can correctly value our money. It's worth the same as everyone else's. But he has no idea whether our advice is good or bad, and if good, how much better it is than "average" advice, whatever that is.

If a two person team goes with YC, and YC gets 6%, then the founders have 94% of the equity and $15k. If they go with the hypothetical Angel, who takes 2.4%, then they end up with 97.6% of the company and $50k.

So yes, they end up with 3.3x the cash in hand, but only 3.8% more equity (97.6/94). And it doesn't seem to make sense to multiply those numbers to reach some good-for-headlines number like 10x. Not to mention the stated goal of YC has been "seed stage", which is presumably before, and not exclusive of, "angel stage".

A price is set by a market.

Asserting that "YC terms are poor" is like saying that YC's price is too expensive.

If the price were too expensive, YC wouldn't have enough applicants.

YC does, indeed, have applicants beating down the doors.

So I would argue that their terms are actually a bit rich.

I strongly disagree with this statement. As someone who was in the Valley at age 19 I can attest to how backwards many companies are run and how valuable it is to have an experienced entrepreneur guiding you. Of the companies I was around the major difference between success and failure was how much effort the Angel investors put in to mentoring their founders.

As far as connections, I mean no offense to the author of this article but it's foolish to assume people will acquire connections as valuable as those Paul Graham has simply by showing up. The more I live in the world the more I realize it's all about connections and the doors that are opened through YC are easily worth an extra 4%

In the end you can argue hypothetical numbers all you want but the reality is you have to make a company successful before it's worth anything. Good advice and industry connections are vital to making that happen.

YC is MORE about the advice from pg, the alum network you are connected to and the long-term value of the connections you continue to make. That is the CORE value of YC--not the $ amount invested.

If he thinks YC is poor, he should have based his arguments on how you can get better advice/connections etc. from raising angel than through YC. Instead he decides to take YC on the $ invested/valuation and merely glosses over the advise/non-$ value of YC. This is little more than a straw man.

Many founders share at least one goal: to get rich. To a lot of first time entrepreneurs this means, "Whatever works." If YC has a 50% success rate (if) and your option of angel investment has a 27% success rate, what would you do? OK, maybe you need to hire programmers, but 3 months of undivided attention and 2 quality hackers can produce results stunning. Goldenson is right, he is biased because he has been in the game for a while now. His advice may be helpful to some, but a lot of smart people go through YC's program. Why?

I hadn't even heard of Goldenson's self-described failed startup before yesterday. Yet, YC companies consistently get press as long as they are churning. If only we could factor these kinds of things into the equation. In his blog about his startup, Goldenson mentioned he spent $5,000 on PR. So what is YC's PR worth? This is just one example.

Too many variables, many not easily expressed monetarily.

One more smart thing I'd like to point out about YC is that by making it a standard 6% for all, it removes any discussion on valuation.

Those discussions tend to be very counterproductive: as the investor, I offer you X%. You feel insulted, you counter-offer. Repeat. By the time we are done and agree to terms, there is bad blood.

The YC method? No discussions. You know the terms when you apply. End of story. We can all stay friends.

Simple and elegant.

Is 6% the right number? 1% would be rip-off. 5% is essentially the same as 6%. It's small enough that it doesn't impact the founders in the grand scheme of things, significant enough that YC gets some upside. Sounds fair to me.

There's nothing barring YC companies from taking more investment after the 3 months in which they go from an idea to a launched product. In fact, being in YC makes a company much more attractive to future investors.

I'd say that the difference between an idea on paper and a complete product or prototype is probably 10x, so in that sense these numbers really seem reasonable.

Personally, from the writings and essays of Paul Graham I don't think his goal is to make money. He is a visionary with the intent of creating more value in the world for people. He, as an individual could go and do his own thing for the rest of his life and not bother with this. Hawaii here we come. However, as people look for purpose and meaning in life, when one looks back and sees that they were an integral part in creating a great deal of 'wealth' (the way he defines it)for the world that is very rewarding.

Their terms ...

Just as it is integral for them to give of their expertise and experience so too it is of equal and perhaps greater importance to be able to curb their giving. This empowers founders to dig deep within their own reservoirs of strength and character and develop their company with minimal resources, i.e. money.

Just as a parent wants to give it is perhaps more important for him not to. It is important to discipline.

Basically what you want as an entrepreneur is to maximise your exit. The exit sum for a founder can be calculated as %ownership X salesprice. So if you add up all the founders that have exited, and see how much money they made on average, and then compensate for the companies that didn't make it you will come up with the average salesprice that a founder will get paid when his copmany is sold. Since YC has a track record by now you can simply do the calculation for YC and your seedfunding outfit of choice and see which gives a better payour for the average founder.

There are a lot of nuances of course, maybe there's an extraordinarily large exit, some incubators hold on to companies longer, you can only estimate companies that heve either been sold or gone bust, etc. but it will give a pretty good rough idea.

It reminds me of the assumption of statistical independence in various machine learning problems where the variables are most certainly not independent... its just that including it makes the problem completely intractable, so even though everyone knows its wrong, they have no choice but to assume it.

That's not a metric, that's an emotion.

How to you measure a "once in a lifetime experience" that did happen vs. one that didn't?

"my real suggestion is that Y Combinator should invest more"

He's missing the whole point right here.

Y-Combinator is like Twitter. Venture capitalists are like bloggers.

With Y-Combinator, like twitter, people just didn't understand how so much value could come out of so little. At first, typing to someone in 140 characters is hopeless. Then you try it, and you realize how much can come out of so little--you become resourceful and cut out the fat you don't need.

Hate to liken them to twitter, but hey, everyone's doing it... (best reasoning ever)