

Ask HN: YC new move will change SV dynamics. Are you sure for the better? - sinzone

With this move all small angel investors are out of biz. This new thing will change the dynamics of seed investments forever. Startups (in pre-seed stages) must embrace constraints to stay focused on what really matters, must stay in the garages working with few resources. This is like give alcohol to babies, they will get drunk.<p>Small angels will just need to seek investments outside of YC, but that takes some good companies off the table. It will definitely reduce the number of angels in SV within 2-3 years, only the smart ones will survive.<p>It looks like a bubble, and in the human history every bubble has crushed; soon or later. There will be a lot of burn outs and wasted money over next few years.
======
gyardley
$150K to each YC startup barely moves the needle when compared to the overall
amount of seed funding that goes on. It's nice for the YC class, but I doubt
it'll have that much impact on the ecosystem as a whole. Maybe ultra-
competitive seed deals will be less likely to have valuation caps.

As for whether valuations are creeping up and things are getting bubbly as a
whole - perhaps, but so what? Bubbles are great for entrepreneurs, and despite
their chaotic collapse and impact on investors, are arguably good for society
as well. A lot of innovation takes place and progress gets made when money is
cheap. After the bubble collapses, this innovation doesn't just vanish -
instead, it sets the stage for further economic growth.

------
pg
_With this move all small angel investors are out of biz._

What? The startups we fund almost always want to raise more than $150k. I
would guess the median startup in the last YC batch raised 4 to 5 times that
much.

~~~
sinzone
I mean...this is for sure the right move to help entrepreneurs, but I'm not
sure about the near future.

How a small angel investor can invest in conv. debt. without cap and discount?
Maybe the no cap/discount are only for SV/Yuri but I guess that in any case
startups (even if they need more than 150k) will feel more confortable with
some nice cash in the bank, thus they will become more picky and will ask for
hyper-strong favorable terms that not anyone will be able to afford (good for
entrepreneurs). Therefore a lot of small angel investors can't invest anymore
in YC startups (I guess YC will push out 100 startups/year - for sure a big
chunk). Thus, they will go somewhere and the one who were able to invest, were
able to invest at huge valuations whit less nice terms, so they will get
smaller future returns (bad for the future of the ecosystem).

To conclude, my concerns are not about now but about the future cause there is
a risk that we'll have less angels, then less money available for
entrepreneurs. I may be wrong though...

(obviously we're talking only about investments into YC startups; investors
can always invest elsewhere. So when I said "out of biz" it was more about the
"YC related biz")

~~~
pg
_How a small angel investor can invest in conv. debt. without cap and
discount?_

That doesn't make it any more expensive to invest; it just decreases the
eventual returns. But that variation in returns will be dwarfed by the
variation caused by which startup you pick. Which means investing with no cap
would be business as usual for angels.

Not that they would have to in any case. We don't anticipate that the
startups' additional money will have to come with no cap. Ron and Yuri had to
do this because to make their fund work like an index fund, they had to get
the entire batch, which meant they had to make it an offer no rational founder
would refuse.

~~~
sinzone
_it just decreases the eventual returns_

That's exactly my fear.

 _But that variation in returns will be dwarfed by the variation caused by
which startup you pick. Which means investing with no cap would be business as
usual for angels._

Yes, I agree with the no cap thing. Yet I think smaller discounts mean that
you'll get smaller returns whether you pick a "rocket" startup or a "tortoise"
one.

------
bluewatson
It most definitely will. The potential to be severely diluted in the next
round with uncapped convertible debt is a real potential. It also can
perversely make the angel wish for a lower valuation on the series A so they
convert at a higher percentage. Overall I don't think that this affects VCs as
much as it does angels. If anything you will start to see angels move up the
food chain and raise bigger funds to go after a bit later stage besides seed.

~~~
mattlong
They wouldn't be diluted at all. Convertible debt is not a priced round.

~~~
bluewatson
That is the problem with it being uncapped. The trend from Ycomb were capped
convertible notes that put a limit on how much the series A could be priced
at. This acts as a type of anti-dilution for the angels who know what their
percentage ownership will be on the next round. The problem with uncapped is
that you can be diluted to very little ownership depending on the valuation
for the series A which sets a share price and conversion number for your note.
In this sense you have the potential to be substantially squeezed down in the
round which is how I was using diluted.

------
sdizdar
_It looks like a bubble, and in the human history every bubble has crushed;
soon or later._

My understanding is that each bubbles require leverage (credit, margins, etc.)
with imperfectly informed lenders. You might call this as a bad investment
(which I don't think - internet and mobile is finaly maturing), but it lacks
definition of bubble.

~~~
_delirium
I don't think the usual definition involves leverage, though that can
certainly contribute to bubbles; a "bubble" is just any speculative run-up in
asset values where they temporarily deviate greatly from intrinsic/long-run
values.

------
philwelch
What percentage of startups are in YC, though? So what if small angels are
forced to invest in non-YC startups--YC openly admits they reject a lot of
promising teams. And if receiving too much investment is bad for the startups
that are in YC, then those small angels are bound to have an advantage.

------
imkevingao
$6.45 million on 43 ultra high potential startups, I wouldn't call it a
bubble. If anything, I would wonder why others didn't start earlier. I
consider this move by DST and YC an innovative pareto optimal solution for
both entrepreneurs and investors.

First you have many startup ventures that have limited growth due to the lack
of cash, the $150k is a really good booster to achieve relatively high
performance for most of the startups in this tech industry. The fact that this
is a no cap/discount deal is unheard, which why it is bringing so much
publicity. This is a game changer for the industry.

It might be a risky investment, but the odds are not bad since the investment
is diversified into 43 talented ventures instead of one. But furthermore I
think this investment is more than just money. YC and DST are investing in the
future of the tech industry.

Don't think of this as an investment for the current YC portfolio, rather,
think of it as a marketing strategy for future YC applicants. With this sort
of publicity with DST, as well as connections with other Valley's giant
investors ( _cough_ Sequoia _cough_ ) , all of the great talents across
America will start to apply for Y-Combinator. I have a feeling that YC's going
to find its Facebook real soon. It's just a matter of time.

------
coryl
_It looks like a bubble, and in the human history every bubble has crushed;
soon or later._

Bubbles have to have widespread macro-economic build up that will indicate
whether or not there is actually a bubble. Are IPO filings up? Is the average
dollar amount raised in Series A significantly higher? Are there more visible
failures than before? Unless you can scientifically point to some data or
experience that MANY unqualified startups are in fact receiving easy money,
than you're just a speculator. Because while YC companies have a large
attention-share in the startup world, it is still only a fraction of startups
and non-representative of the larger landscape.

I hate it when people ignorantly say things like "this is a bubble" just
because they read about some dumb company received funding in a TechCrunch
article. (Not a personal attack btw on you btw, just my general opinion.)

~~~
contagion
It doesn't have to be the money raised in a series A, we are talking about a
bubble in the seed level. In fact it does look like the start to investment
without much thought/diligence/etc. There is a large amount of capital chasing
early stage deals, people are writing checks after one meeting, giving away
uncapped convertible gifts.

------
johnroescher
How can you predict there will be lots of wasted money? Blindly investing in a
group of startups because of a high profile incubator they're participating in
is a practice in publicity and, as an investment, a bet against numbers at
worse.

I'm gambling that YC and Yuri are pretty smart about what they're doing. It's
a branding/publicity exercise that will probably return just a few (not
important) numbers for Yuri that uses these YC kids as a vehicle.

------
jetaries
I would actually agree with this to some extend. The cool part is that YC
started out as an experiment, and they are continuing to experiment and
pushing the boundaries. If anything, this will give YC team more data and
knowledge.

Another point is that YC startups have changed since the beginning. More and
more teams are semi-established joining the program. To them, this is no doubt
a great help.

------
loluyede
Anyway, TechCrunch says that around 90% of them already signed up for the
money so we'll just have to wait and see.

------
Mz
_...only the smart ones will survive._

And this is a problem?

