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Comment by acconrad | Hacker News Reader

That's great but seems - wow crazy. Why does one need that much money that late (not a rhetorical question, I've only ever been at Pre-B series startups)?

I've already seen Airbnb ads on TV, and it's not like they're a hardware company or some place like Zipcar where they need the capital to buy more machinery or equipment, so what is this really going towards? They're still operating at a loss, so how is this going to get them further out of the red, unless they expect to be operating in the red for a while?

Another tangential question I have is - where does YC fit now for startups? We're seeing all of these billion "Unicorn" companies coming up, and YC has grown from a handful of companies in a class to over 100 - can the next YC class really expect to earn the same esteem as the older ones? Is YC incrementally losing it's value to startups with every class that starts (and grows)?

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Is YC incrementally losing it's value to startups with every class that starts (and grows)?

Would you rather have the deal that Airbnb got from YC or the deal that the next three kids with a gleam in their eye will get from YC?

Airbnb vintage YC deal: Here's $15k for 7% of your company. Also, welcome to the club! Nobody has heard of us, but we're still a club.

Next YC deal: Here's $120k for 7% of your company. Also, welcome to the club! People have heard of us! You now have social permission to tap the resources of several hundred companies, some of which are worth billions of dollars. You're a mortal lock on raising a round subsequent to Demo Day at a valuation which will make angels weep while happily investing. You have preferential access to every connection which matters in Silicon Valley, including top-tier VC firms, a pool of interested employees, potential acquirers, and vendors who you need good relations with. Comes with one free TechCrunch article, too!

> Next YC deal: Here's $120k for 7% of your company. Also, welcome to the club! People have heard of us! You now have social permission to tap the resources of several hundred companies, some of which are worth billions of dollars. You're a mortal lock on raising a round subsequent to Demo Day at a valuation which will make angels weep while happily investing. You have preferential access to every connection which matters in Silicon Valley, including top-tier VC firms, a pool of interested employees, potential acquirers, and vendors who you need good relations with. Comes with one free TechCrunch article, too!

Sigh.

YC has a lot of cachet and no doubt opens certain doors, but founders should never drink too much Kool-Aid. For all of the wonderful things YC provides, the success of YC startups basically follows the same power law distribution you see across the Valley and no founder should delude himself or herself that being part of a "club" guarantees success in today's market.

Just look at the experience of the founder of Dating Ring (YC Winter 2014)[1]:

And so we focused on growth. For a year, my cofounders and I worked 100-hour weeks, all major holidays and weekends. We gave up social lives and had one of the most impressive graphs at the crazy 78-company Demo Day YC hosted – 60% MoM revenue growth, with 25k in revenue for March.

We had more press and name recognition than any other company there, and my pitch was named as one of the top 8 by TechCrunch.

Out of the 500 investors there, only one invested.

[1] http://advice.datingring.com/fundraising-while-female/

Read a little more carefully. He didn't say YC guarantees success, nor does he believe that. (I'm one of his cofounders, and this came up).

You're correct that patio11 didn't say that but I think it's helpful to remind people that the power law still exists. It's really easy to fall into the trap of survivorship bias and I'm sure there are plenty of folks out there who would benefit from being reminded that "... no founder should delude himself or herself that being part of [YC] guarantees success ..."

A denial worthy of a top flight attorney. He implied that by this paragraph:

"You're a mortal lock on raising a round subsequent to Demo Day at a valuation which will make angels weep while happily investing. You have preferential access to every connection which matters in Silicon Valley, including top-tier VC firms, a pool of interested employees, potential acquirers, and vendors who you need good relations with. Comes with one free TechCrunch article, too!"

So we have:

"mortal lock"

"make angels weep"

"preferential access to every connection which matters"

"top tier VC firms"

"one free TC article".

What an oddly noisome comment.

Nice SAT word (I didn't learn that at the school that I attended).

You find being called a top flight attorney offensive?

As a Level 15 message board arch-nerd, I love that word, because it's a sort of two-fer: it suggests "noisy", which is really what I'm getting at, but actually means "annoying" --- "noise" and "annoying" having apparently different roots.

I felt like my response was dispositive. I'm telling you straightforwardly that's not what he meant, and I have good reason to believe I'm right. Your rebuttal actually ignored the substance of my comment and instead launched into a tedious semantic tea-leaf-reading exercise.

"Noisome" seems like the right word. :)

You don't drink the kook-aid. You take advantage of every advantage.

The problem is that many of the things founders assume to be advantages really aren't, or they're not as a significant as believed. In business generally, a lot of people overvalue and place too much emphasis on "advantages" that don't directly influence the metrics that matter, like sales, cost of customer acquisition, churn, etc.

Being in the YC family is clearly a meaningful advantage for many/most startups.

You're entitled to believe whatever you'd like, but if you want to make a convincing argument that being a part of YC is a meaningful advantage, you'll have to explain why, as I previously noted, the success of YC startups basically follows the same power law distribution you see across the Valley.

You only need 1 investor - so long as they have enough cash for your needs and fall under the "good/adds value" category. To me, that should equal a hurrah rather than a sigh.

In a past life, I built a company with backing from a single investor. If you're going to go down the path of building a company that requires outside financing, you can never assume that a single investor has "enough cash" to meet your future needs.

Your investor could be a billionaire and there are still countless reasons he or she might not be able or willing to provide additional financing. Just a handful: legal problems, health problems, travel, divorce, death.

To be fair, most of those benefits were there early on. Everyone in the industry definitely knew about YC already when I started (S07). All major angels/VCs were reachable through the network already. Valuations were good (for back then).

But the network effect does make the club worth more.

"You're a mortal lock on raising a round subsequent to Demo Day at a valuation which will make angels weep while happily investing."

While I concede your greater point, you're really overstating this part of it.

My ex-ante expectation of a YC company in the current class raising successfully conditional on them being a going concern as of Demo Day is > 95%. With regards to valuation, I was joking -- the discursive market for it was the "angels weep" wordplay but it belatedly occurs to me that for people whose primary association with the term "angel" is "angel investor" that is less obviously intended to be a joke than it is with the rest of us.

Competition to get "the next YC" deal is much greater now than it was back when "nobody has heard of us but we're still a club" but did provide value. [1]

If you don't get into the club and haven't passed the filter (which almost certainly has become more difficult) then you don't have anything.

[1] Also the resources are most certainly stretched much thinner than they were "back then". Even though there are more resources to tap.

I assume that the money is going to Airbnb ads on TV (and on airline seatbacks, and on Facebook, and everywhere else). When you have a model that works and is proven profitable on a unit basis, it makes sense to cram as much money as possible into distribution channels to make sure that it gets in front of everyone.

When you have a model that works and is proven profitable on a unit basis, it makes sense

...to IPO. In the normal world.

Post Sarbanes-Oxley, it never makes sense to IPO, ever. You incur costs of several million dollars for compliance. Meanwhile, the ostensible purposes of an IPO (to provide liquidity for shareholders, and to provide access to public capital markets for the company) have had other solutions crop up. There's now an active secondary market for employee stock of private companies, and the vast majority of the money that would go into the public markets is now managed by the same large investment firms that do these late-stage private rounds.

I remember back when I was a countercultural libertarian hacker, we had a saying: "The Internet treats censorship as damage and routes around it." Well, the financial markets treat regulation as damage and route around it.

Post Sarbanes-Oxley, it never makes sense to IPO, ever.

Let's go with, maybe, "Pre-SOX, you could reasonably IPO on revenue in the tens of millions with a valuation in the hundred of millions. SOX decisively removes that option. We now have economically viable alternatives to IPO, for high-growth tech companies, at valuations into minimally 'the tens of billions of dollars.' It may make sense to IPO if one is not a high-growth tech company or one desires a valuation higher than 'tens of billions of dollars.'" (Context: Uber is $25 ~ $50 billion, Microsoft is ~$375 billion.)

The a16z deck posted a couple of days ago made a great point relating to this. In the past, an IPO would allow everyone to participate in the upside (e.g., 1000%+ growth of the Microsofts and Oracles). Now, the ones reaping the rewards are the private equity groups. By the time they unload companies on the public markets, most of the upside is gone.

https://a16z.com/2015/06/15/u-s-tech-funding-whats-going-on/

>>it never makes sense to IPO, ever

Except private financing rounds are incredibly costly long term, and post-IPO you have access to debt financing that is an order of magnitude cheaper. Financing is, after all, just money you pay for money to do things sooner, hopefully to make more money. When you look at it from that angle, you want that money to cost as little as possible. There's a reason revenue is considered the cheapest form of financing, I'd say 6% debt financing is the next cheapest for a large company.

I'm pretty sure debt financing is available to private companies. My wife works in impact investing, they do a number of debt deals and bridge loans to private portfolio companies.

Debt financing is available to everyone, but the question is how much and at what cost? Correct me if I'm wrong, but I am under the impression that the terms are much better for public companies.

I've only become familiar with the Sarbanes-Oxley Act, but can you or someone elaborate on why this prevents companies from IPOing?

Sarbanes-Oxley (SOX)'s primary provisions only apply to publicly-held companies. One survey estimated that the average Fortune 500 company spent $4.1MM on SOX compliance in 2004 alone. Much of the cost of compliance is static, so a domestic company with ~$1BB/yr in revenue and domestic company with $100MM/yr in revenue could both spend $1MM on compliance, even though this represents a much more significant chunk of revenue to the smaller company.

The costs of compliance (both financial and the operational overhead of having controls in place) can be put off by delaying an IPO and the requirement to make public financial statements.

If AirBnB hypothetically decided to never IPO, what incentives does an investor have in investing? Does the private AirBnB need to issue dividends? Genuinely curious about how this would work.

Sell to a later investor in a private financing round. A number of these late-stage rounds include cash-out provisions that apply to early investors as well as founders and employees.

The financial industry has basically taken the public markets private. There's nothing that says that all stock markets must be public, and in fact the history of stock exchanges has several instances of this in the past. The NYSE started out as a direct agreement between 24 brokers in 1792; it was regulated in 1817 to prevent abusive trading, and then grew dramatically in the mid 1800s with the invention of the electric telegraph. By 1865, a number of brokers were getting fed up with regulation, and so they established what became American Stock Exchange by trading stocks on the curb outside the NYSE. It was regulated in 1908. I predict that we're witnessing the birth of another stock market, or maybe it's already been born and I'm not enough of a cool kid to know about it.

> Sell to a later investor in a private financing round.

But what incentives would those later investors have?

Public company stock is valuable because it provides the owner a dividend stream, control of the company as well as ownership of the company's assets; I wonder how an AirBnB, for example, that never went public would provide value to shareholders.

Truth: best to raise when you can, not when you need.

Does that scale into the billions, though?

Apparently, it just did.

Consider it like FB buying instagram. Company is playing around with a small amount of equity as a % of total value. Having some liquidity in the bank for a rainy day is a good thing in a bubble. As is investing it in a way that will increase an eventual IPO value. So in either the upside or the downside here they have options to use the money that likely will move the needle on valuation.

Absolutely. Once you raise, you're practically praying for the economy to tank. All of your poorly funded competitors go away and everything gets way cheaper (primarily, labor).

Does this hold if you're selling a luxury good like holidays?

I'm sure there are exceptions but very few. And not that one. A well-capitalized player could go a long way towards sewing up the entire market.

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