
Y Combinator's YC VC may lose the actual VCs - quant
http://finance.fortune.cnn.com/2014/03/28/y-combinators-yc-vc-may-lose-the-actual-vcs/
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corry
The best way to look at the uncapped note is like investing in an index fund.

Rather than picking and choosing specific companies, the money behind YC VC is
betting that the basket of companies as a whole is going to perform well on
aggregate (thanks to power law).

It's really putting faith in the YC selection process / mentoring multiplier
as a whole rather than any particular company (which they can do later after
demo day).

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Geekette
Exactly, which is why I disagree with the 2nd reason mentioned. I don't see
how anyone can perceive a lack of follow-on investment in any startup
negatively, when it is widely known that each participating firm only plans to
invest in some, not all startups in a batch.

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jules
You really don't see how somebody can perceive a lack of follow-on investment
negatively, when an entity that has more knowledge of said startups than
yourself invests extra in some startups but not all?

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Geekette
No. Especially not when that entity typically invests only in a fixed number
of startups per batch, subject to certain criteria such as addressing specific
sectors of interest to the investing firm.

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salimmadjd
> _2\. Negative signaling risks if the participating firms passed on a
> startup_

To me that would be the most significant reason to do it.

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cwilson
I actually disagree with this. It was never a problem in the past because
everyone gets said initial investment, regardless of startup performance. It's
in no way a signaling issue (at least in my class if wasn't) if one of those
firms doesn't invest anything further.

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wtvanhest
I'm an outsider, but I believe the signalling risk comes at or after demo day.
You already have those VCs in the deal, they already know the team... Why
didn't they invest?

If I were a 3rd party looking at the deal, the known information asymmetry
would make me leery of any company not funded by those who have the most
access to information.

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cwilson
If this were the case for the majority of investors post demo day, how are so
many YC companies raising money even if the start fund / YC fund partners are
not investing a second time?

My impression is most investors view the Start Fund / YC Fund instant
investments as "free money" for the startups, and they view those investment
partners as hedging their bets with YC as a whole.

While I see your point, I don't think it's ever been an issue for anyone (as
far as I've heard and personally experienced).

I think the unfair early advantage these third party investors had is the real
issue here, and much more in-line with changes YC has made in the past

~~~
wtvanhest
>I think the unfair early advantage these third party investors had is the
real issue here, and much more in-line with changes YC has made in the past*

That makes more sense than the signaling issue.

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mindcrime
If there was one change I'd like to see YC make, it's this: expand the
franchise outside of the Bay area. Open a branch on the East Coast
(Raleigh/Durham would be a nice location!).

OK, yes, I'm being selfish here, but this is just the way it is for us...
moving, even for 3 months, just isn't an option and may never be. But that's
really the main thing preventing us from taking a stab at doing YC.

Of course, we do have a similar accelerator/incubator here in The Startup
Factory, but competition and more choices are a Good Thing. :-)

~~~
garry
Incidentally YC is actually the YC for all startups everywhere. Lots of
startups move to Silicon Valley for 10 weeks, raise money, and sometimes they
decide the best place for them is where they came from, or another startup
hub.

Silicon Valley is so concentrated that it is super valuable to absorb the
values of how startups build valuable things, and start your company here.

It seems to be a litmus test for commitment — 10 weeks is short enough that if
you're serious about your startup, it's not too much to ask. It is correlated
with commitment and therefore success.

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reddys
I completely agree with garry comments ' 10 weeks is a Litmus test for
commitment' . If one can't be away from home Town for 10 weeks, you are not
prepared for 10x or 20x bigger tough situations Start-up is going to throw at
you

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mbreese
It might work for 20 somethings just out of undergrad. But when you start
looking at founders who are older and have families, you eliminate a lot of
talent from the pool (including people with actual experience). It just isn't
feasible for everyone.

~~~
garry
Actually we have quite successful founders who move with their families to
Mountain View — notably the two founders of Mongo HQ and their families shared
a rented house there for the duration of the batch. They happened to stay in
the Bay Area, but they could have just as easily went back home after raising
their seed round too.

~~~
mindcrime
mbreese didn't say that it eliminates _all_ such founders. I think the
argument here is that some number of startup founders (where the exact number
would be hard to pin down) are unable to move to San Francisco for 10 weeks
due to other commitments, and that this factor is probably going to be more
pronounced with older founders - who are more likely to have spouses,
children, mortgages, and other entanglements that work against letting them
move.

The other argument, that I'll make, is that as nice as the Bay Area is, you
don't _have_ to be there to be successful.

Assuming that all of the smart, talented, hard-working,
$INSERT_SUPERLATIVE_HERE people in the world aren't already in the Bay Area,
then if you accept the above premises, it stands to reason that a YC expansion
to some other parts of the world could be very effective.

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lquist
I'm a bit confused.

The YC VC program (and it's earlier incarnation) made sense to me because VCs
wanted access to YC deal flow. But now with the new program traditional LPs
are investing at the same time (i.e., acceptance to YC) as YC LPs, but with
much worse terms.

Maybe I'm missing something here?

~~~
corry
Part of it would have been access to YC deal flow, sure.

But to me it was also like an index fund - i.e. invest in the basket of
companies rather than picking and choosing because on aggregate the group is
going to do very well.

Really, you're blind betting on YC having chosen a few winners in the cohort.
Not a bad bet to make!

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downandout
Does anyone know how these investments/loans have actually performed overall?
We don't know what the catalyst for this move is. It makes me wonder if the
smart money (from VC's) has decided that the YC model isn't generating ROI,
leaving YC to go searching for dumb(er) money (from LP's).

~~~
nrao123
They may be the best performing fund of all time. My post from 2-3 years ago:
[https://news.ycombinator.com/item?id=2854630](https://news.ycombinator.com/item?id=2854630)

320 YC Companies X $30k/Company = ~$10M Investment Dropbox Return=~3% Share X
$10BN Valuation=$300M

30X return for the entire fund even without accounting for companies such as
AirBnB, Heroku etc.

I have heard of 30x/100x returns on specific investments e.g.
Skype/Google/Facebook etc...

But for the entire fund itself- wouldn't that be a record?

~~~
masonhensley
I would guess that YC's stake in Dropbox would be much lower than 3% due to
dilution from all the subsequent investment rounds.

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btrautsc
Yes.

there is no pro-rata follow on.

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nishankkhanna
This is good for YC startups in the long run. When you're out raising a series
A, you really don't want the negative signals when Horowitz or Khosla decide
to pass.

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alooPotato
This can't really be a problem. These firms spend so little time with the
startups and invest in ~70 each batch, that them not investing signals almost
nothing.

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joncalhoun
^ This. It is roughly the equivalent of them never investing in your seed
round, and then again passing on your A round. That is a signal, just not a
strong one of any sort.

Where signaling may seem off is when they invest 500k in your seed, and then
don't invest in your A. They were heavily committed and liked your company,
and then for some reason lost interest in investing any more.

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argumentum
Interesting, obviously I doubt Sam/PG will comment prematurely. However I
wonder if this affects the summer batch that's applying right now?

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mikikian
On an unrelated note, does anyone know if YC is investing their $[18]k using
their SAFE security or will they continue using Series AA?

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memossy
It would not make sense to structure it as a SAFE security as then it would be
a tiny percentage of the company at Series A when it converts, messes up the
entire economics.

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thecolorblue
So do SAFE securities only ever make sense in a seed round?

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memossy
The purpose (as I see it) for SAFE, just like convertible notes, is that early
stage startups are hard to value. At Series A you have a value and subsequent
raisings can use that as a benchmark for up/down rounds. You also tend to have
VCs etc take liquidation preferences and such like, which dilute the benefits
of a convertible note.

The initial $20k(ish) for 6-7% of the company is where the real value for
Y-combinator kicks in, if that was in the form of a SAFE, using a 25% discount
to a $5m Series A valuation at $4m would mean that Y-combinator owned just
0.5% for their investment of $20k + value add.

I imagine the $80k convertible note should be a SAFE though?

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bourdine
We apply to YC S14, and I think, it does not matter. That's why - if your
product team will selected, you still get access to best community. Anyway,
you get as much money from VC on Demo Day, as your product look. And you still
YC alumnum. So, don't worry. Just work harder.

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adamhooper
This. The initial funding is by no means the reason to participate in YC - it
should have zero impact on any company's decision making process. It is a
bonus that takes some pressure off in the short term to allow you to focus on
absolute execution.

Build something awesome and you'll have a good shot at getting funding with or
without YC. There are many other benefits to the program beyond the up front
money.

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bourdine
We are not applyed for money, no. We need understand a vision of YC companies.
Vision let grow, not funding. Vision let you understand, how to build
something awesome.

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hisabness
what is an LPA?

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berberous
I assume they mean a Limited Partnership Agreement.

