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Comment by pg | Hacker News Reader

We haven't seen a decrease in the valuations/valuation caps at which YC companies have raised money after Demo Day.

Valuations are high by historical standards, which means at some point they'll probably fall, but we're not seeing evidence of a fall yet.

It does seem to be getting harder to raise later rounds. But I think that is a secular change, not a market fluctuation. VCs seem to be shifting toward a strategy of spraying money at early stage startups, and then ruthlessly culling them at the next stage. This may well be the optimal strategy, but it's tough on the late bloomers.

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There is another aspect to this that is not getting much mention: many more startups are reaching profitability without VC, but still don't have metrics to justify going for a home run. Ergo, the "ruthless culling" is not resulting in the bloodbath that some predicted. In general, great for startup founders & great for (the remaining) active VCs.

pg - do you have any stats around how many more recent YC co's are profitable & have not secured/pursued Series A?

My guess is very few but I'd love to know as well.

ZeroCater, Mobileworks.

That's a complicated question, because the nature of series A rounds has changed in the last couple years. A lot of so-called series A rounds now are de facto series B rounds, huge "seed" rounds having taken the place of series As (at least financially).

A bunch of the companies we've funded are profitable and haven't raised a series A round yet, but it looks like there is only one that is way past the (now much later) series A stage and yet didn't raise a series A: Weebly.

Didn't Weebly raise a Series A with Sequoia? They list them as a portfolio Company at least! http://www.sequoiacap.com/us/home/weebly/info

we skipped what would traditionally be called a series A and series B and went straight to a growth-staged round with Sequoia

Interesting. Looking at some of the Weebly figures on the Sequoia website, I thing many people (myself included) would be surprised of the revenue run rate you guys must have today. This is an amazing venture - congratulations to you guys! Well executed "simple ideas" are the best!

I learned of Weebly when someone complained on HN about your email communications. I immediately signed up and (with very few technical bones in my body) built a totally bad ass website for a friend of mine in 2 hours. There's a very good reason for your success. Incredible product.

i will defer to PG & YC in terms of their data on valuation/caps post-demo day, however our experience is that they probably reached a local max sometime last year, and they are certainly softer this year.

in general, most companies with similar progress are being valued less highly than last year.

which isn't to say they are either cheap, or a bargain -- just not as high as last year.

One explanation is that the startups you fund are on average better than ones you funded before. You did become increasingly selective. Having higher standards and valuations remaining flat implies valuations are falling on average.

Hmm, yes, that could be.

> VCs seem to be shifting toward a strategy of spraying money at early stage startups, and then ruthlessly culling them at the next stage.

Looking at this from way outside: I think this is because they're much more aggressive on product-market fit. Pivot once or twice, then give up when you're not the next instagram.

Ideas have consequences; here it's the concept of startups as early-terminating simulated annealing search algorithms that has been consequential.

I wonder if there isn't another force in play here, given the aggressiveness of acqui-hires a VC firm can make book by spraying a lot of 100 - 200K investments around, maybe a 1M and then harvesting the acquihire dollars when the team works out. They are essentially glorified head hunters with a bigger contract bounty but they put together teams instead of just individuals. So putting in a million $ to get a couple of young stars to recruit 5 or 6 of the best programmers they know, and organize them into a team that can build a project. Then scare them with the "Series A crunch" and sell them off to BigCo for a million dollars a head.

I know, I know, too cynical. But looking at the exits that way skews the numbers.

Definitely not. For some reason there is a persistent myth that investors make money from HR acquisitions, but they don't. Even we don't, and we invest at much lower valuations than VC funds.

completely agree with PG -- acqui-hires aren't a big source of capital returns at all, especially anything below $10M.

Interesting, do the investors get to keep any IP and/or remaining funds in your experience?

Of the two acquisitions where I had good visibility into the terms, in both cases the original Investors were cashed out at approximately 2x their total investment and the rest put into an earnout/retention package for the people that were coming on board. It was a haircut to be sure, but it wasn't actually a loss for anyone with preferred stock. I would have thought with smaller starting chunks that would be easier rather than harder than it was after the dot-com debacle. I certainly defer to your greater experience here as it is much more current than mine. I made the mistake of figuring those were more typical than I guess they actually are.

Considering the risk of their investments, would a VC consider a 2x return a way of "making money"?

There usually aren't significant remaining funds, and I've never heard of investors keeping IP (there are usually multiple investors, and IP would be hard to split). And a 2x return is unusually rich for an HR acquisition. If you're lucky you get your money back. But after several years, during which you've had operating expenses.

Acqui-hires typically do not make investors a profit, but in many cases acquiring companies have made sure investors get their money back. I would think that changes the risk equation significantly when making early-stage investments.

Maybe some details would help dispel the myth.

At face value, an investors buy shares at price X and the HR acquisition happens at value 2X. A naive conclusion is that (X - legal costs - time)= profits.

Do you mean that these acquisitions don't make enough to pay for the failed startups? That the cost associated with investing in that startup are more than the revenue? That something about typical deal terms makes (reported) valuations at buy and sell time meaningless?

Very relevant question given current events.

What happens in practice is that the acquiring company effectively recaps the startup on the fly. This takes a bunch of different forms but a common method is that a big part of the purchase price takes the form of restricted stock grants or signing bonuses to the employees, as opposed to cash or stock that gets processed through the cap table.

From the acquiring company's standpoint, this is logical behavior because the acquirer wants the people to be well motivated to work hard at the big company, and doesn't care whether the investors get their money back or not.

But this has the effect of putting a startup's founders at cross incentives with their investors. It's very important for everyone to act like adults in that circumstance, which often but not always happens.

Of course acquirers can overdo this and burn their relationships with angels and VCs in the process.

On the other side of the table, are Investors suddenly finding better/safer/more profitable opportunities now?

This just further reenforces to make sure you get enough money to get where you need to prove what you need to..

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