
90% of Y Combinator Startups Have Already Accepted The $150k Start Fund Offer - mjfern
http://techcrunch.com/2011/01/29/90-of-y-combinator-startups-have-already-accepted-the-150k-start-fund-offer/
======
pkrumins
Can anyone explain the terms "no cap" and "no discount" in "$150,000 in
convertible debt. With no cap and no discount."?

I understand what a debt is, so how is "no cap and no discount debt" different
from a regular debt?

Also why would you as a startup would want to take a debt?

Another question - what's the point of Yuri giving the debt, it seems he's not
even asking for equity in return?

~~~
ebaysucks
When offering convertible debt, the investor accepts the valuation at the next
round of investments (in this case series A).

The risk for the convertible debt investor is that this valuation will be very
high and the series A can take a long time.

To limit this risk convertible debt investors negotiate valuation caps and
discounts.

Cap: The convertible debt gets converted at min=[series A valuation, cap].
Discount: The convertible debt gets converted at series A valuation * (1-
discount)

(Obviously, when both cap and discount apply, the valuation for conversion
becomes min = [series A valuation * (1 - discount), cap].)

~~~
cft
Can somebody give me an advice. We have a two person startup, that is making
about 20k/mo and it's growing. I am the founder. The thing is, I do not
currently plan to raise VC money. My goal is to achieve revenue of 200k/mo by
2013. It is very realistic, but the problem is that as the service grows, we
spend more and more time on operations, since certain things were not timely
automated. We need about 300k , so that we can hire a couple of contractors to
automate operations, to accelerate product development. But since I do not
plan to raise a VC round, the convertible loan would not work. What is the
right mechanism for this investment? I also believe the risk is lower than
normal, since we have been making money for a while, and this should be
reflected in the terms and in the valuation. Is this the domain of angels to
make such an investment?

~~~
2arrs2ells
I think what you're looking for is a _loan_.

Not sure if it's possible to get $300k on $20k/month revenue, though.

~~~
cft
FYI: Last time I stopped at the bank where I opened business checking account
2+ years ago (Wells Fargo), they sat me down and offered a 100K line of credit
(the interest rate was unknown unless I applied, but she said it would be
around 7-8%). The service is poorly monetized ( disproportionately high
hosting fees + new hardware expenses / revenue). Until recently I was putting
all these hosting related expenses on a single US Bank credit card (and paying
it off monthly). In response, they raised the credit line to 40k at 8% yearly
interest. This is less however than the 300k, that I think is needed.
Additionally, I would prefer to use this kind bank debt financing only in an
emergency, because I suppose that unlike a savvy investor, Wells Fargo and US
Bank would be absolutely inflexible if I say need slightly more time, and
would drive the company into default by their blanket policy, regardless of
the specific circumstances.

------
brudgers
The $150k offer reminds me of a rumor about the way in which Subway selected
franchise locations back in the 1980's.

Subway wouldn't do extensive market research or study traffic counts. Instead,
they would see where there was a McDonalds franchise and then open a franchise
in the same catchment area. At least that was the rumor (not to compare YC to
McDonalds or Hamburger University).

~~~
rmorrison
Supposedly the same thing happens with coffee too. Starbucks does the
expensive market research, and then other chains build near Starbucks.

~~~
brudgers
From what I've seen it's not just other chains that locate stores near
Starbucks. Even Starbucks locates stores next to Starbucks.

------
ssebro
Does anyone else see that this offer will drastically change the tone and
success rate of YC startups?

Constraints (in the form of funding and time) were a large part of YC.
Entrants got a low (but livable) amount of money and 3 months to come up with
something great. That something would either sink or swim on demo day.(for
more on how constraints help creativity:
<http://ecorner.stanford.edu/authorMaterialInfo.html?mid=1530>) Within those
constraints, past YC classes did pretty well, and came up with amazing
companies. Those that didn't failed quickly, and could go on to bigger and
better things. But YC is now throwing those constraints away.

Because the $150k offer is guaranteed runway, it fundamentally changes the
behavioral economics behind startups participating in YC. Products no longer
have to be demoable by demo day, and startups won't have to think about
profitability/funding, in the short term. This means that we should expect YC
startups to dream -and fail- bigger in the future.

~~~
updog
I was thinking this as well, but for a different reason. I, for one, would
never enter the YC program. $15,000 (especially for that much equity) just
doesn't work for most people. The only demographic that can really make that
work are 20ish year olds coming right out of school. They haven't started real
life yet, and have minimal obligations. Anyone else competent/qualified is
probably quitting a job and has various bills and debts, and if they made the
decision to do a startup, they already have some bootstrap money or a bit of
revenue from a side gig, so that $15k isn't going to make or break them. For
150k however, this changes things entirely. YC can now attract a far more
diverse pool of aspiring startups.

------
mcmc
I was curious about the potential for returns so I considered a scenario: the
successful YC companies take series A investment at an average $10 mm pre-
money valuation (which is reasonable for a YC company starting off with
$150k), and no series B is ever needed before exit. This gives the original
investors a 1.5% stake at the time of exit.

In order to return the $6 mm there needs to be $400 mm of exits.

But I don't think it's reasonable to assume that the successful companies
wouldn't take additional funding past series A. More likely, any successful
company would also take series B funding. Then we'd need to see ~$500 mm -
$800 mm to break even.

My guess is that these investments aren't really intended to be profitable. I
would guess that they're instead a gateway into future deals that will be
profitable.

~~~
pg
In your model you may have neglected to consider that they'll have pro-rata
rights.

------
corin_
Going off on a tangent, one of the comments on the TC article seemed really
odd - even by TC's standards for terrible comments.

    
    
      Am I the only one who finds Y combinator predatory? It preys on 20 year old kids who think they're building the next google. Am I crazy?
    

On the actual subject of the article - if any of the four startups that
haven't (yet) signed the paperwork don't end up accepting the offer, I hope
they share their reasonings (either now or sometime in the future).

And on a pedantic note: 39/43 rounds to 91% rather than 90%.

~~~
mlinsey
Some people believe that in every economic transaction, at least one party
must be exploited, no matter how wildly beneficial the deal is to both sides.
It's actually a natural implication of the idea that wealth is never created,
only reallocated. Unfortunate to see that view among TechCrunch readers, who
have evidence to the contrary presented to them every day.

~~~
corin_
I wouldn't mind hearing the view that YC is exploiting founders (though I
wouldn't agree with it), but the idea of YC exploiting them in such a way that
YC would lose money is fairly dumb.

------
imkevingao
Na i'd take that money any day. First it's good to have Yuri Milner and Ron
Conway on your team.

43 startups @ 150k is only 6.45million, which is typical funding for one
venture capital company. Except it's diversified into 43 of them, so that if
one of them advances to a series C, they can probably get it all back.

I guess the only problem would be if you try to get a Series A from DST, then
you might possibly not get an ultra high valuation, but then again, DST seems
to be throwing money at startups after their lustful experiences with
Zynga/Groupon/Facebook

This just toughens up the next round of YC applications, which is a bummer.
But i'm really interested to see how this will work out.

------
liamk
150K x 43 = 6,450,000. I'm guessing that there is a fair chance that at least
one of the 43 companies alone will allow them to break even on their
investment. They should end up doing extremely well on the deal.

~~~
hugh3
Numbers missing: what is the typical valuation at Series A for a company
coming out of YC? If it's $2 million then he'll wind up with (on average) 7.5%
of each company (similar to what YC itself gets for about eight times less
money), so to break even on one exit it'll have to be a $100+ million exit,
which would be bigger than any YC exit so far as far as I know.

~~~
jeff18
Heroku was acquired for ~$250 million

------
jacquesm
They'd be crazy not to, it basically boosts whatever runway they had by a
considerably amount. What's more interesting than those that took it is those
who didn't and if in the end there will be any that won't take it at all and
what their reasons are. Likely the number will be '0'.

------
rams
Adios Ramen profitability !

------
paraschopra
I have a question. What if the startup getting convertible debt never raises a
round of funding and perhaps gets acquired or does an IPO?

~~~
danbmil99
I would assume the conversion is calculated at the value of the acquisition or
IPO (which is really just a type of investment round). [edit: as it says, no
discount so forget this part] Typically there's a conversion percentage
kicker, so it might be 110% of the value (ie the early investor gets more for
the risk)

------
6ren
$150k is approaching being ramen-wealthy, if you invest it and have cheap rent
(not Silicon Valley).

------
what-to-do
Amateurs. Why not wait a week or two, explore options, see who else is going
to respond to this?

~~~
cperciva
Because there's no downside. You can take the $150k and stick it in a bank
account and still be better off.

~~~
waterlesscloud
What's the downside to thinking about it for a week or two to see if there are
any non-obvious problems?

~~~
Devilboy
Who says they didn't?

~~~
waterlesscloud
The offer was just made to them last night.

Actually, the TC article says many of them signed papers at the offer meeting
itself.

I understand the offer sounds fantastic, but surely they'd want some advice
first?

Obviously they didn't, but it seems a little rash.

------
shub
Don't they know that money is bad for them?

~~~
bigwally
Money may be bad for a few of them at this stage but it will probably provide
a leg up for just as many if not more.

