
Y Combinator announces growth program for later-stage startups - ascertain
https://venturebeat.com/2017/12/14/y-combinator-announces-growth-program-for-later-stage-startups/
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jacquesm
The next step to vertical integration and an eventual much bigger slice of the
pie in the successful few. You can expect that eventually 'demo day' and A
round financing by outsiders will disappear[1], that's the part where YC now
loses out on a large chunk of still relatively cheap equity. I suspect it will
eventually be replaced by some kind of voting mechanism where partners and
alumni decide who gets to make a run of it.

Those that don't make that cut will then be forced to go outside of YC for
follow on funding with the stamp 'damaged goods' on them, a similar effect
will be present for those companies that do not make it into this new program
they announce and the continuity program established earlier.

It will be interesting to watch what kind of unintended side effects this will
generate and how the success rates of those companies in YC continuity and
outside of it will compare.

Keep in mind that YC makes almost all of its returns on very few companies and
that either increasing their stake in those companies or widening the pool of
companies that have a shot at making it (in which case the founders goals and
YCs goals are much closer aligned) are the only ways they can grow themselves
unless they manage to pick more winners out of the gate, which is a super hard
problem.

In a way what we are watching is YC slowly coming of age and doing what every
successful start-up would do: to become more efficient at what they do.
Programs like these are an important step along that way, it's a soft entry
with relatively little risk into a larger role in the life cycle of the start-
ups they initially funded.

[1]
[https://www.ycombinator.com/continuity/](https://www.ycombinator.com/continuity/)

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arowghani
Hi…Ali from YC here. There are a couple of things I’d like to address in the
comment above from YC’s perspective. First, YC has no “vertical integration
strategy” to make “demo day and A round financing by outsiders” to
“disappear.” In fact, it’s quite the opposite. We work very hard to make sure
that there is a vibrant investing ecosystem around YC. Our core program is
attractive to founders because there are hundreds of investors who come to
Demo Day to invest in YC companies. YC would be much less valuable if this
ecosystem did not exist, so it would not be in our interest (or in the best
interest of our founders) to make these investors “disappear” or otherwise
compete with them for Series A deals. In fact, YC's Continuity Fund expressly
does not compete for Series A deals.

Secondly, it's highly unlikely that companies who do not participate in our
Growth Stage program will find it more difficult to raise money because they
will be labeled “damaged goods.” YC’s signal at the growth stage is largely
irrelevant. Investors evaluate growth stage companies based on their business
metrics. There is enough data at this stage to evaluate whether a business is
working or whether it’s not. Companies with robust metrics attract investors;
those with weak metrics don’t. It’s as simple as that. No late stage investor
will care whether a company participates in our program or not.

~~~
jacquesm
Hey Ali,

I totally understand where you are coming from but a similar dismissive
comment was made when I first suggested YC would eventually do follow on
investments and _tada_ , that is now the case.

Long term plans or long term reality and short term strategy do not
necessarily overlap. No malice is inferred or intended, just a change of
perspective over time.

As for

> "Secondly, it's highly unlikely that companies who do not participate in our
> Growth Stage program will find it more difficult to raise money because they
> will be labeled “damaged goods.”"

I meant that to be related to the combination of funding and growth stage
program, not to be related to the growth stage program by itself.

~~~
arowghani
Thanks Jacques. I don’t read any malice in your words and I certainly don’t
mean to sound dismissive. My point was simply that, as a matter of strategy,
it would not be in YC’s interest to “vertically integrate” as you suggest. And
I can assure you it’s not in our plans. I also don’t believe that YC’s actions
have a profound impact on how growth stage companies are perceived by
investors because these companies thrive or suffer based on their own measured
performance rather than based on YC’s signal. I think a lot of your comments
on this thread were quite smart, but wanted to add some color on these two
points

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jacquesm
> My point was simply that, as a matter of strategy, it would not be in YC’s
> interest to “vertically integrate” as you suggest.

Why do you believe this to be the case?

YC has sucked a substantial amount of oxygen out of the lower tiers, to the
point where no matter where in the world you are as an early stage investor YC
competes. What in particular do you feel will stop YC from doing the same
thing for higher tiers, where - as far as I can see it - the only
differentiating factor is the size of the tickets?

~~~
arowghani
We won’t compete for traditional Series A deals because it would damage our
core program to do so. It would be self-defeating to try to “vertically
integrate” and disrupt the vibrant investor ecosystem that we have cultivated
around Demo Day. Not to mention the fact that founders would hate us for
denying them the ability to choose their own investors if, as you write, we
made Demo Day “disappear” in order to compel founders take more money from us.

~~~
jacquesm
Ok, but you _could_ do a better job than traditional VCs, just like what you
did with the original program. So: better alignment of interest between
founders and capital providers, better terms and so on. Just like right now YC
does not have exclusivity in the early stage, it could be a viable
alternative, and if that viable alternative has better terms and other
intangibles it could easily work out as a win-win for both founders and YC.

Demo day would then shift down the road to series B and later.

Anyway, that is just speculation. Thank you for taking the time to answer me.

~~~
arowghani
My pleasure!

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StephenSmith
Limiting this to Founder-CEOs may limit their ability to solve some of the
problems at hand. Many of these companies post series A may be seeing
stagnated growth (This is a 'growth' program).

Many companies in this boat may have already gone through
founder/CEO/organizational changes that really don't fit this bill.

I would just be worried that they are narrowing their pool too much.

-Mostly YC Companies

-Post Series-A

-50-100 Employees

-Founder-CEO with 3-4 hours a week that can attend

-Company who identifies this as a need for their company (or a board that dictates it)

~~~
jacquesm
\- Mostly YC Companies

That makes good sense from YCs perspective.

\- Post Series-A

This kind of effort would be wasted earlier on, the number of entrants would
be too large for that kind of attention to detail and effort required.

\- 50-100 Employees

A growth program needs a set of skills and a certain organizational structure
already in place to be effective.

\- Founder-CEO with 3-4 hours a week that can attend

How else would you do this? A video course?

\- Company who identifies this as a need for their company (or a board that
dictates it)

Just like YC applications are initiated by the company and start-up school
applicants are not conscripted it makes no sense to force this on a party that
is not ready to receive the input.

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ereyes01
As a little boy, it feels like more and more of the big boys are leaving the
playground and taking their ball home?

~~~
Analemma_
That's just the business cycle: early-stage investment is drying up as
interest rates go up and it becomes clear who the winners of the last
"Cambrian explosion" were. Probably we'll have a recession soon and early-
stage investment will pick up again towards the tail end of it.

~~~
tedmiston
What makes early stage investment pick up again with respect to a recession?

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toomuchtodo
Cheap money from central banks to stoke the economy causes capital to scrounge
for returns, leading dollars into venture funds.

As interest rates climb once the economy is growing (we are here), capital no
longer needs such risk to obtain returns, hence the flight to safer financial
instruments (and the seed/A squeeze currently occurring).

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marknadal
This makes sense, ycombinator always seemed more risk-averse and later stage
anyways, from my interactions with them (I've raised from billionaires like
Tim Draper and Marc Benioff, but YC only asked us for an interview once). This
isn't a bad thing, but it is sad because seed stage funding has been drying up
since 2014 (when I raised for gunDB.io), there are some good TechCrunch
articles on this "dry up" and I think it is gonna make the lives of a lot of
developers harder. But I can blame YC, it matches their model, and they've
obviously done a good job at everybody knowing their name.

~~~
jacquesm
> ycombinator always seemed more risk-averse and later stage anyways

Huh? YC is fairly universally seen as doing quite a few investments that
nobody else would back and as early stage, your personal data point is an
important one but you have to see it against the backdrop of all the other
investments they _did_ make.

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allenleein
"...we think companies approaching 100 employees are ideal candidates." ? But
WhatsApp only needs 50 engineers for its 900M users back then (After Series
B).

~~~
jacquesm
Not every company is a WhatsApp, in fact, the reason you are quoting this is
because WhatsApp was exceptional.

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lquist
Would love if this were open to non-YC startups!

~~~
jacquesm
"Although the program will focus on active YC startups, the accelerator plans
on including a few companies that did not previously participate in YC’s core
program."

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wonderoo
What % of YC investments are now driven by activism vs business potential?
Political projects selected because partners and alumnae are voting in
something they want to see happen vs something likely to generate high
returns?

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reiderrider
I’d love to see them make a video series like startup school out of this.

