Y Combinator's YC VC may lose the actual VCs
finance.fortune.cnn.com
finance.fortune.cnn.com
Rather than picking and choosing specific companies, the money behind YC VC is betting that the basket of companies as a whole is going to perform well on aggregate (thanks to power law).
It's really putting faith in the YC selection process / mentoring multiplier as a whole rather than any particular company (which they can do later after demo day).
To me that would be the most significant reason to do it.
If I were a 3rd party looking at the deal, the known information asymmetry would make me leery of any company not funded by those who have the most access to information.
My impression is most investors view the Start Fund / YC Fund instant investments as "free money" for the startups, and they view those investment partners as hedging their bets with YC as a whole.
While I see your point, I don't think it's ever been an issue for anyone (as far as I've heard and personally experienced).
I think the unfair early advantage these third party investors had is the real issue here, and much more in-line with changes YC has made in the past
That makes more sense than the signaling issue.
http://www.cbinsights.com/blog/trends/seed-venture-capital-f...
It's an idea smaller micro-VC funds have propagated as a way to scare startups from taking seed money from larger multi-stage VC investors.
1) The founders who raised from VCs for their seed understood how to raise money from VCs and were much more likely to be able to repeat the process.
2) The VCs had better deal flow and were able to finance companies with higher probabilities of raising additional rounds.
I spent a few years working with an angel investment presentation group at my university. I noticed that the deal flow was primarily companies that could have a $20m-$50m exit, but were never going to be mid caps or large caps and that exit value is largely ignored by VCs. The more angel money that funds those, the less opportunity for follow on rounds for the group financed by angels.
Additionally, the situation your data describes doesn't really fit the Y Combinator example since qualitatively they are very different. The VCs that invest in Y Combinator companies at the seed stage do so in batches without analysis. That changes over the course of time, after they have made the investment as they get to see progress. The fact that they make the original investment blind, then later make the second investment with better information causes your data to not be applicable to the situation.
Now, before you think that I am saying that the signaling is an issue, understand that I do not know if it is or isn't. I was simply pointing out what I believe the author meant.
These are good questions but unfortunately, they're hard to answer in a data-driven way. Essentially, there is no way to discern from data your points 1 and 2 as it requires judging founder savvy or VC deal flow quality. While both are plausible, it's hard for me to say conclusively either way.
OK, yes, I'm being selfish here, but this is just the way it is for us... moving, even for 3 months, just isn't an option and may never be. But that's really the main thing preventing us from taking a stab at doing YC.
Of course, we do have a similar accelerator/incubator here in The Startup Factory, but competition and more choices are a Good Thing. :-)
(explaining for those wondering: I believe Bay Area costs are too ridiculous of high, and the YC money is too low to cover them when I have to also account the costs of moving from another country entirely and then moving back...)
http://en.wikipedia.org/wiki/Research_Triangle_Park
It may completely shock some of you stuck in bubble land, but many people don't want to live in SV. Even for a day.
Silicon Valley is so concentrated that it is super valuable to absorb the values of how startups build valuable things, and start your company here.
It seems to be a litmus test for commitment — 10 weeks is short enough that if you're serious about your startup, it's not too much to ask. It is correlated with commitment and therefore success.
The other argument, that I'll make, is that as nice as the Bay Area is, you don't have to be there to be successful.
Assuming that all of the smart, talented, hard-working, $INSERT_SUPERLATIVE_HERE people in the world aren't already in the Bay Area, then if you accept the above premises, it stands to reason that a YC expansion to some other parts of the world could be very effective.
Such as?
I'm sorry, but I have to call bullshit on that. It has nothing to do with how serious you are or not... some of us have constraints that just don't allow uprooting our lives and moving to the opposite coast for 10 weeks. We all have different situations and to suggest that someone isn't serious about their startup just because they won't come to CA for 10 weeks is, to be quite frank, rather disparaging and insulting.
It's appreciated though. I use this kind of shit as fuel for the fire. Doubt us, please... the more people that doubt us, the stronger we get.
Anyway, as far as commitment, let me share a little history with you... I started tinkering with the earliest ideas for what would become Fogbeam Labs way back in 2006... was only treating it as a hobby OSS project back then, had no (or very nebulous) plans to make a company. By 2010 I knew far more about what needed to be built, threw out all the old code, started over, and created an actual company. By late 2010 I had recruited a co-founder. In 2011 we recruited another co-founder. In late 2012, the second co-founder left, but we hired in intern in Summer of 2013 and he did such a bang-up job that we asked him to stay on and join the founding team. We've since recruited another intern / part-time sales guy to work with us.
So over 4 years, we've gone from nothing but one guy (me) and some half-baked ideas, to a 4 person team, with 2 products that are shipping ("limited availability" but still, available for sale), another product in development, and we are having sales conversations with Fortune 500 companies.
We have a marketing strategy that is starting to come together, we're developing potential partnerships, and we're learning how to do the sales thing (all of the members of the founding team are techies first and foremost).
No, we haven't gotten our first sale yet, and as far as that goes, we might never. We could still fail and never make a dollar. That isn't the point.
The point is that I've given ~4 years of my life, and quite a bit of my income during that period, to building this company. And during that time, I've done little but eat, sleep and breathe this company... dating? Feh, no time for that. Social life? What's that? Friends? You're kidding, right? Family? They think I'm dead or something. Adversity? Fuck, I could tell stories that would make me cry to tell them.
But here we are, still pounding away. But somebody is going to say that we're not committed because we're not willing to go to CA for 10 weeks? Yeah, right. ROFLMFAO.
Seriously, if somebody can provide me any actual evidence that you can conclude anything meaningful about someone's level of commitment from one data-point, I'll happily eat crow. Until then, as far as I'm concerned, all of this "coming to CA equates to commitment" stuff is just hand-waving.
Yeah, you're probably right. And don't get me wrong, it's not that I don't spend any time with friends and family. (I do engage in a bit of hyperbole from time to time). But I have made a conscious choice to focus the majority of my energy on a particular path for the time being, in the hopes of achieving some things that are important to me.
Unfortunately, because I take the piss out of people and joke and exaggerate a lot, many people on HN probably think that my only motivation really is to drive a Maserati and have a 6' tall redheaded supermodel with a Scottish accent for a girlfriend.
Finding the right balance is tough, and like too many things in life, these situations are things where you don't get many (if any) "dry runs". You're learning on the fly as you go, hoping for the best outcome while being fully aware that you might be fucking the whole thing up. :-)
Ah well, that's what makes things interesting, I guess!
Assuming you think modern Silicon Valley "values" are worth emulating, and the idea of inhaling the Silicon Valley myopic mono-culture 24/7 appeals to you.
On the other hand, staying grounded in the world outside Silicon Valley means being able to empathize with people who aren't 20 years old and don't know everything, and who actually have to produce real lasting value for there to continue to be a paycheck.
I went through an exit in the first bubble once already; I was happy when it popped, and happy to move away from the navel-gazing Silicon Valley culture when it re-emerged, and can't possibly imagine why I would want to go back.
I'm in the D.C. Baltimore region, and the DC-to-Dulles tech corridor and the Bethesda, MD biotech region are huge tech regions.
There's a very large small/bootstrapped tech business scene here, they just don't call themselves "startups" quite as often. Most folks I know out here get funding from SV or Boston and not the local area.
The main problem of course is that many investors (and potential board members and mentors) fundamentally don't understand how to do business in this area, where the major customer is the USG. It's been done (e.g. Palantir), but they were working off of SV cachet more than local talent. Even simple things like release schedules (which inform and are driven by development practices) are different, plus the additional processes around getting approved for use on USG systems (not just DOD!) are things that outside companies just don't really understand how to deal with.
Big SV (and West Coast) companies do have significant presences out here, but they tend to be more large "sales offices" than proper tech shops.
edit I mean, there's In-Q-Tel I guess...that's part of Palantir's early story as well...and probably a large part of how they've been successful. Understood the climate, negotiated access for them, and basically helped them navigate the byzantine environment.
But, there are plenty of wealthy beltway bandits who are willing to make investments. You just have to approach them a big differently.
The YC VC program (and it's earlier incarnation) made sense to me because VCs wanted access to YC deal flow. But now with the new program traditional LPs are investing at the same time (i.e., acceptance to YC) as YC LPs, but with much worse terms.
Maybe I'm missing something here?
But to me it was also like an index fund - i.e. invest in the basket of companies rather than picking and choosing because on aggregate the group is going to do very well.
Really, you're blind betting on YC having chosen a few winners in the cohort. Not a bad bet to make!
320 YC Companies X $30k/Company = ~$10M Investment Dropbox Return=~3% Share X $10BN Valuation=$300M
30X return for the entire fund even without accounting for companies such as AirBnB, Heroku etc.
I have heard of 30x/100x returns on specific investments e.g. Skype/Google/Facebook etc...
But for the entire fund itself- wouldn't that be a record?
there is no pro-rata follow on.
Where signaling may seem off is when they invest 500k in your seed, and then don't invest in your A. They were heavily committed and liked your company, and then for some reason lost interest in investing any more.
The initial $20k(ish) for 6-7% of the company is where the real value for Y-combinator kicks in, if that was in the form of a SAFE, using a 25% discount to a $5m Series A valuation at $4m would mean that Y-combinator owned just 0.5% for their investment of $20k + value add.
I imagine the $80k convertible note should be a SAFE though?
In the most recent batch, the YCVC investment was made using the safe documents.
Build something awesome and you'll have a good shot at getting funding with or without YC. There are many other benefits to the program beyond the up front money.