
The YC VC Program - pg
http://ycombinator.com/ycvc.html
======
cs702
YC is perhaps the most innovative angel/accelerator/VC firm in the planet.
Despite all the success the firm has had, _it is still acting like a startup_
\-- constantly questioning, experimenting, tinkering, and gradually optimizing
via careful trial-and-error, based on the real-world results achieved with
each batch of companies. Clearly, it's run by hackers.

~~~
46Bit
I think this change is a definite plus, but I disagree this sort of change is
startup-specific.

Trying new things is just how you're supposed to build a company, at least
when you care for the long term rather than next quarter.

------
jedberg
This is great! I always thought the $150k was too much of a runway. It allowed
the poor startups to limp along for too long.

And besides, the real value from these investments isn't the money, it is the
mindshare you get with the VCs. This will help make that mindshare greater.

~~~
waterlesscloud
I get why it's great for investors, but why is it great for founders?
Especially when they could use the time to change plans.

~~~
pg
The office hours help all the startups. Decreasing the amount invested helps
the successful and borderline startups because it means less of our time is
taken up mediating founder disputes in the ones that are exploding. And yes,
that was a significant time suck; Jessica says the majority of her time last
batch was spent dealing with founder breakups.

~~~
sjtgraham
PG how much of this attributable to $150k being too much money? Wasn't the
last batch the largest by significant margin? Is it not expected that there
will be more failure and therefore more demand on partner time as batch size
increases?

In another comment, you mention founders scrapping over the carcass of their
failed startups; what is it exactly they're fighting over? Surely the money
has run out and anything left should be returned to investors in good faith?
Are they fighting over Cinema Displays, Aeron chairs, etc, and by reducing the
amount of the note you're reducing the amount of accoutrements these fledgling
startups accumulate, and thus can fight over in the event of failure?

~~~
tomhoward
_what is it exactly they're fighting over? Surely the money has run out and
anything left should be returned to investors in good faith?_

I assume he's talking about cases where the founders fall out well before the
money has run out.

Previously, when there was little (money or IP) left, they'd just go their
separate ways and start something new.

But with money still in the bank, founders may believe the company still has
some value and a future, and will fight to assume control of it.

~~~
trevelyan
I wonder how many of those teams were single-founder projects that took on
partners to apply. It is surely very rare for organic teams to experience this
sort of drama in three months, no? Or is YC really just that stressful?

~~~
ibdknox
Doing a startup in general will test even the strongest relationships. I've
seen old friends break apart.

So yeah, YC can really be that stressful.

~~~
smita622
Point made - but do you really believe that halving the investment is going to
change the level of drama involved? What is this - a shout out to Biggy's "mo
money mo problems"?

Surely, we can respect the complexity of founder relationships, and yes, at
times their tenuousness - and not trivialize them as matters that can be
solved by making it easier for a VC to write-off the investment. It just feels
like an aspirin for a different problem...

------
evansolomon
Is there any significance to Ron Conway not being in the group anymore?

~~~
pg
We certainly didn't kick SV Angel out. They're among our favorite investors in
fact. It just didn't make sense with their fund size to keep doing these
investments. Unlike the other investors, they are what's now called a "super
angel" fund, and those are much smaller.

~~~
kami8845
I'm certain there are some companies that need more runway than others. Is it
possible for, say, hardware companies to renegotiate for, e.g. 30k per VC
rather than the current 20k?

~~~
pg
I'd never thought of that. Maybe in version 2.

~~~
erohead
I'd recommend staying at ~$80k. One of the mistakes I made last year was over-
building inventory (possibly because I had access to $150k from Start fund).

------
dmmalam
80k may be a little tight for international founders, as flights and legal
fees for visas can be very expensive. Also silly things like paying extra for
deposits on rent/bills as you have no US credit history. But otherwise seems
reasonable.

~~~
pclark
$150K is not enough to secure H1B visas either.

~~~
ajju
Yup, the first thing I thought when I read this: I hope this doesn't end up
hurting non-resident applicants to YC.

The "prevailing wages" for an engineering position (the minimum salary the
company can pay an engineer on a H1B visa) in CA are about $75K. This means
that there is almost no leeway even if only one of the founders needs an H1B:
this funding alone would not cover it.

YC is very aware and supportive of immigrant entrepreneurs though, so I am
sure they are already thinking about this.

Two mitigating facts:

\- It is prudent to have enough money in the bank to pay the H1B employee for
a year, but this is not a requirement before filing for an H1B, especially if
you can show that there are other ways the company can continue to pay the
employee. Most significantly: revenue :)

\- The H1B is not the only route available to non-resident entrepreneurs: the
O1 visa is another option, although the requirements are more stringent.

I have had to cross a few of these bridges myself, so if I can be of help to
anyone reading this, please email me: hnusername@domainINprofile.com

~~~
001sky
Question - do you need the $75k lump sum, or just the pro-rata per month? its
only ~6k/month salary per fte, of course depending on the runway...

~~~
ajju
The company has to prove that it will be able to pay the employee's salary for
the duration of the visa. A lump sum in the bank is the easiest way of doing
this. A steady or growing revenue stream per month is another way.

------
josh2600
I think YC has more of a problem dealing with the bad startups than it does
dealing with the successful ones. My opinion from Paul's writing is that his
goal is to find the AIRbnb's as quickly as possible while relegating things
that aren't going to be mammoth. It makes sense when you're playing a
volume/numbers game like YC has been doing.

Quite the investor lineup; I think they had their choice of anyone in the
world to be honest.

I like reading PG's stuff because these sort of decisions are
counterintuitive, but very fun academic/didactic examples.

------
debacle
What kind of messy things happen with 150k that don't happen with 80k?

~~~
pg
It's a matter of degree. In the old days, when a startup fell apart, the
founders would just go their separate ways. When every startup got $150k,
sometimes they'd end up fighting over the carcass instead. Our hope is that
now they'll fight half as hard.

~~~
pyoung
Out of curiosity, what does the 'carcass' usually consist of? Wouldn't any
leftover money go back to investors? Or does that get divided out to founders
(seems like that would be a bad incentive). Or is it mostly related to the
product (domains, code, etc..)?

~~~
drusenko
you have to understand that YC & the start fund has little to no control over
the companies, except perhaps moral authority.

YC has common shares (and a small minority at that) while the start fund is
arguably even worse off with a convertible note.

so, if the founders decided to, they could just pay out the rest of the money
as a bonus. immoral? yes. illegal? i don't think so.

~~~
asr
Definitely illegal. <http://en.wikipedia.org/wiki/Duty_of_loyalty>

Thought I'd doubt it would be litigated, unless the founders are particularly
stupid in addition to being immoral.

~~~
mgummelt
I don't see how fiduciary responsibility holds if the company is in the
process of dissolving.

------
khangtoh
Not everything scales horizontally and shouldn't have to. YC should just stick
to a lower number of startups for each cycle.

1) Maintains the prestige of a team being selected.

2) Keeps investment level at previous level.

3) Spend quality time with each team.

------
argumentum
THANK YOU! This makes 250% sense, particularly for "no idea" companies. 150k
led to several bad decisions at the beginning, and led to our breakup later
on. 80k will be a lot more valuable than 150k, and make startups think more
carefully about how to spend money.

Perhaps for capital intensive startups that ought to be funded, there can be a
separate arrangement.

This shows why YC is YC.. it constantly innovates and is not afraid to change
things up as needed.

~~~
tatsuke95
> _"This makes 250% sense, particularly for "no idea" companies."_

I can't decipher the level of exaggeration. If your company has "no idea",
maybe that's where the blame should lie, rather than on having too much money.

~~~
argumentum
In no way do I blame the money, but it certainly made it easier to make bad
decisions. A better way to put it would be that it made us make decisions that
shouldn't have had to be made that early.

"no idea" doesn't literally mean we had "no idea", we had plenty of ideas. We
just hadn't settled on one yet.

~~~
davidwhodge
I'm curious. Would you mind sharing what kinds of early decisions you made
that you wouldn't have with 80k?

~~~
argumentum
Sure. Hiring 8 interns, leasing a 7k/month house for starters. Ok, it's
probably more relevant that I was an idiot (been a student my whole life). My
initial thoughts were the following:

1\. Demo Day was a unique non-linearity. Being especially good by that date
would make you overvalued (now I realize that's a dumb thing to aim for,
rather you should aim to be of genuine high value).

2\. Spending all 170k by Demo Day would be the optimal way to achieve this
outcome. It's pretty hard to spend 170k in three months with no idea, in fact
it's a job in and of itself to figure out how to spend that much.

I did manage to recoup all the losses by airbnb'ng out the house and finding
other yc co's for the interns, but still it was a waste of at least one month
and created an aura of bad feelings that doomed the company for good.

------
rdl
I've never heard of Maverick Capital -- are they the hedge fund? They seem to
be med-tech focused, if that's them.

~~~
sakai
Looks like it: [http://www.crunchbase.com/financial-organization/maverick-
ca...](http://www.crunchbase.com/financial-organization/maverick-capital)

Edit: NOT Mark Cuban.

------
rdl
It's sad to see SV Angel isn't part of the W13 VC program.

------
genuine
As alluded to in the post, I think that the 80k/startup rule is probably not a
good one either.

80k might not be enough and "doing more with less" can just as often lead to
failure. Case in point is the recent post about the lean startup that only
provided the minimum viable product (MVP), but failed to really provide what
was needed. If pressure is put on startups to provide a product faster for
less, then less of a product will be provided. Granted, YC will provide more
support and try not to let such things happen.

I think the funding should be decided on a case-by-case basis instead.
Possibly more funding could be given to those with a better idea that have
greater need through some sort of point system, and either provide a range of
funding from 40-120k without requiring more from the VC's, or provide 80-150k
if the VC's are able.

------
ssebro
What stops other investment firms from making identical blanket investments,
or how do you guys plan to stop that?

~~~
mustpax
Presumably Conway and Milner did not like how the initial approach was working
out either and were looking for a change.

------
Rezal
Here are my thoughts about this:

1\. You have idea, a plan to validate it and a plan to execute upon different
outcomes and different startups require different financing. I am just
wondering if YC has clear matrices which shows there is a same optimum
financing for early stage startups in all the domains (healthcare, edu,
consumer web, etc.) I am just curious about this!!! But then I read the
following: " it sometimes caused messy disputes in the unsuccessful ones.
Switching from $150k to $80k may not completely eliminate such problems, but
it will make them at most half as bad."

2\. The entire funding decision and amount is changed based on negative
thought of a dispute among the founders. I believe this is fundamentally wrong
and is against the entrepreneurial spirit. I wouldn't feel good as a person
and an entrepreneur if my investor would come up with this. It basically means
you don't know what you are doing and I am going to protect you against
yourself!!!

3\. Although a 70K difference is a small number, but it will have a huge
impact on your startup: \- validating your idea and pivoting: the startups
will show a tenancy towards low hanging fruit instead of seeking for the
bigger picture solution \- Shorter runway impacts your flexibility and thus
deal negotiations for the next rounds considering a 3-6 months funding period.
\- Am just wondering how this will impact valuations of companies in post YC.
I would think the valuations would go down.

What are your thoughts on this?

~~~
geoffschmidt
One of the most valuable things about YC is the pressure it puts on a startup:
focus or perish, excellence or death. I've really seen this bring out the best
in people, including myself. I think that reducing the "free" c-note from
$150k to $80k will increase the pressure a little bit, that entrepreneurs will
rise to the challenge, and that the overall outcomes will actually be better.
Accountability closes the feedback loop and results in faster learning.

As for (2), potential investors say a lot of things that just make you feel
terrible. The best response is to dig into them and try to figure out if there
is any truth in the criticism, make any adjustments you can, and keep pushing
ahead.

~~~
Rezal
There is no doubt about the track of record YC has built over the years. I
believe that reasoning behind it as I read it sounds not compelling from an
entrepreneur's point of view (kind a putting it like we are going to protect
you against yourself). From a business point of view I just don't know if
there are any matrices supporting their decision. And that's why I don't want
to judge since I don't have the background information. I am just wondering
how this move will impact the new type of companies (big picture vs. short
gains) & investment climate in the valley: 1\. future valuations 2\. Early
stage rounds 3\. product-market fit discoveries & pivots

------
waderoush
pg briefed Xconomy on the changes this morning, and the interesting part to me
was the feeling that too many failing YC startups were feuding internally over
the extra cash. He said such disputes have been taking up more than half of
Jessica's time recently. Now startups will have less money to argue over.

[http://www.xconomy.com/san-
francisco/2012/11/26/y-combinator...](http://www.xconomy.com/san-
francisco/2012/11/26/y-combinator-alters-investment-package-to-avoid-
contested-divorces/)

------
bsims
It is worth reading PG's email from 5 months back about his vision of what the
fund raising environment might look like.

[http://www.businessinsider.com/facebook-fallout-y-
combinator...](http://www.businessinsider.com/facebook-fallout-y-combinators-
paul-graham-just-emailed-portfolio-companies-warning-of-bad-times-in-silicon-
valley-2012-6)

------
kmcloughlin
Really interesting change.

Not sure what metrics YC collects on each of its cohorts, but if "Cycle
Length" and "Total Cycles" are two of them (i.e. end-to-end time through
build-measure-learn loop), then it would be valuable to see if January's teams
deviate, in a meaningful way, from the established average and mean.

Hypothetically, you'd think that "Cycle Length" would decrease as less cash in
hand forces teams without product-market fit to tap into higher gear (or
sustain that same high level of output), rather than spend valuable attention
wondering about how to get a piece of the "carcass" should things crash and
burn. Total cycles would then move up and to the right, as teams get a few
more in near the end of their runway.

That said, there are at least two additional potentialities.

1\. "Cycle Length" and "Total Cycles" are already running along their
respective natural asymptotes.

Consequence(s): A. Awesomely cool discovery re: limits of productivity! B. The
number of founders able to remain highly productive while simultaneously
squabbling (and providing PG w/ massive headaches) decreases.

2\. The "Starting Date" for raising an additional round of financing shifts to
the left (i.e. becomes earlier). With less cash in the bank, and hence a
shorter runway, the average starting date for teams w/o product-market fit to
begin seriously committing time to fundraising shifts "earlier".

Consequence(s): A. If more time fundraising = less time building, then the
average total output of a team, in the 12 months post-YC, could decrease.

Mitigation: Personal access to the best VCs in the world could mean that the
length of a "Funding Cycle" (i.e. total time spent raising a round) decreases,
thus offsetting consequence 2a.

It'd be great if these numbers were something YC actually collected. If
there's a science to building companies, you could certainly glean great
insight from those digits.

------
realrocker
So it has become easier to fail fast. The inertia to prevent death has been
halved. Good or Bad?

------
philwelch
Is this in addition to the $12k-20k invested by YC itself, for a total of
$92k-100k?

~~~
rdl
The START money has always been on top of the YC partnership investment.

------
mrkmcknz
Is there a particular reason that Maverick were involved? I don't know the
guys well enough but they seem like your traditional Wall Street hedge fund.

I'm probably completely wrong but guessing Sam Wyly was perhaps one of the
major reasons?

------
tyang
Another way to fix the founder breakup problem is to have a pre-nup with a few
menu options.

Require founders to choose and sign on to prior to receiving any of the $150K
(or maybe prior to acceptance to YC).

------
thinkdevcode
Does this mean that the outside investment of 150k is no longer available? I
don't see whats to stop them from investing (150k) anyway, considering it
wasn't part of YC in the first place. In my opinion 80k is a little too low,
especially for international founders or those with international teams. I
agree, though, that advice from VC would be better in terms of building a
business versus just throwing cash at the startup.

~~~
rhizome
Then again it lowers the bar for international VC providers to start
participating in this kind of model, making US-based funders a little less
necessary.

------
dogan
This will definitely reduce the number of startups with H1B holder founders,
even if you transfer the visas, the runway will be comparatively short.

------
cyphersanctus
Pg, are there really many ugly ducklings on demo day, despite the rigorous
selection and the subsequent teaching/incubation process?

~~~
ibdknox
people often switch ideas in the middle of YC, so there are more than a few
who get up on stage with just a couple week's worth of work (if even that). By
ugly ducklings in this case he means ideas that may not yet be fully fleshed
out or well understood - he's making no statement about the teams themselves,
which is what the selection process "solves."

~~~
philwelch
It's worth noting that in the original story of The Ugly Duckling, the "ugly
duckling" is actually a cygnet (baby swan) that looks out of place next to the
ducklings it grows up with, and that no one respects until it grows into a
beautiful swan. So an ugly duckling would be an idea that will turn out very
well even if it looks a little dubious at the beginning.

~~~
001sky
link > <http://en.wikipedia.org/wiki/The_Ugly_Duckling>

------
bmohlenhoff
My first thought at seeing the submission title was that YC was offering a
program teaching people about how to be VCs. Then I realized that this was
simultaneously awesome and nonsensical, since Joe Random probably isn't going
to have the scratch necessary to fund much of anything. Still, it would
probably be fascinating from an academic perspective.

------
hippich
_The new version involves less money and more engagement. The VCs will invest
$80k in each startup instead of $150k, and we'll organize sessions of office
hours in which partners from the VC firms advise the startups in each batch.
As before, the investments will be done as convertible notes with no valuation
cap and no discount._

------
dreamdu5t
$80k or $150k seem like pithy amounts of money to fund any sort of company.
What am I missing?

That's one good person's salary for a year. One.

~~~
timothya
At an established company, yes, that's a reasonable salary for a developer.

But when you're starting a startup, you don't take a salary of that size. You
live cheaply and take only the minimum that you need as you commit yourself to
building your company. It's not a life for everyone, but it is the startup
life.

~~~
flyinRyan
Sounds like anyone with a family is pretty much excluded from what you call
"startup life" then. $80k wouldn't get me alone through half a year without
selling my house and moving somewhere really cheap in the US.

------
semerda
This is what will make this work: "and we'll organize sessions of office hours
in which partners from the VC firms advise the startups in each batch".

That's the difference between "smart money" where investor(s) contribute more
than cash into startups and "dumb money" where investor do not.

Great move YC!

------
johnrgrace
Good call, guaranteeing $150K plus the seed money for the given inputs was far
in excess of what you could raise elsewhere for comparable inputs. Simply the
seed money, social capital, and demo day was attractive enough for me to
apply.

~~~
flyinRyan
>Good call, guaranteeing $150K plus the seed money for the given inputs was
far in excess of what you could raise elsewhere for comparable inputs.

Which would mean they would have their pick of ideas since everyone would try
YC first.

------
grandalf
Think about it this way, nobody applies to YC for the money, so why part with
it?

------
ajaymehta
I think this is wonderful... the expansion of VC office hours will be a huge
help for future batches. Having investor allies is always a great thing for a
young startup.

------
namank
I'm not sure if one amount will fit all startups.

Because categorization is important for organization, how about having startup
brackets?

base: 80k international: 100k hardware:120k ...

------
andrewhillman
YC is treated just like software. Time to scale back and move forward. Those
bottlenecks were obviously causing a problem.

------
polshaw
What equity is given for this (/how has it changed?) and is this pre defined
or 'negotiated' ?

~~~
ibdknox
This is a convertible note[1], just like the previous incarnations. Which
means that the amount of equity it is worth isn't determined until a priced
round happens (where a valuation is set).

[1]: [http://techcrunch.com/2012/04/21/convertible-note-seed-
finan...](http://techcrunch.com/2012/04/21/convertible-note-seed-financings-
econ-101/)

~~~
polshaw
Thanks, i see.. is there a requirement on when to take more funding then? what
would happen if the startup didn't take further funding (put remained
profitable)?

~~~
ibdknox
If I remember correctly there's a year long grace period after which the
investors can choose to force the note to convert. I don't know much about how
that works though.

------
littlegiantcap
I like the 20k from each. It's always good to have a diversity of opinions.

------
metra
Off topic: did Yuri Milner lose money on his Zynga and Groupon investments?

~~~
photorized
Probably. But then he is also doing OK on FB.

------
kevingibbon
love this move. I've seen first hand the 150k let's startups limp around for
far to long.

------
raheemm
It just keeps getting better

------
n00b101
$80k is peanuts. Apparently these folks haven't learned the lesson that you
get what you get what you pay for!

Maybe $80k is enough for some ridiuclous $2 iPhone game or some startup for
making a website for adding a single puny feature to an existing social
network and having 15 minutes of fame.

But $80k is nowhere near enough money to create an Enterprise solutions
startup. I laugh at your $80k and the hubdreds of flight-by-night, gimmicky,
bullshit, small businesses that you will burn your money on.

It takes at least $5 million over 5 years to startup a serious business that
has any chance in hell of becoming a real billion dollar company. That is the
future.

$80k ... it's insulting to people with real ezperience, real ideas, real
businesses and real explosive growth potential. You will never fund the next
Apple, Microsoft, Google, Oracle, NVIDIA, etc ... You're just going to fund a
whole lot of infantile business projects and a whole lot of fail.

~~~
gridspy
Apple and Microsoft were both making money before they had spent $80k.

Apple was selling hobbiest boards, Microsoft the license to DOS.

You don't have to build a whole company, just find a market and become
sustainable.

~~~
n00b101
Apple was created my making devices on breadboards, that doesn't mean that the
next Google/Apple/Microsoft will be able to do the same thing. Times have
changed, the barriers to entry are slightly higher. $1MM to seed a company,
that's the minimum... unless you are only interested in infantile businesses
like glorified classified ads, crappy thow-away games, or one-trick pony
"cloud" services... $80k doesn't even get you a hot dog stand!

