

Why $150k for YC companies is a huge deal - tommy_mcclung
http://carwoo.com/blog/why-150k-for-all-y-combinator-companies-is-a-huge-deal/

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alexophile
Reminds me of pgs "Fundrising Survival Guide":

 _"More often than not the company comes to a standstill while raising money.
And that is dangerous for so many reasons. Raising money always takes longer
than you expect. What seems like it's going to be a 2 week interruption turns
into a 4 month interruption. That can be very demoralizing. And worse still,
it can make you less attractive to investors. They want to invest in companies
that are dynamic. A company that hasn't done anything new in 4 months doesn't
seem dynamic, so they start to lose interest. Investors rarely grasp this, but
much of what they're responding to when they lose interest in a startup is the
damage done by their own indecision."_

<http://paulgraham.com/fundraising.html>

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kloncks
Student here.

What confuses me is why 90% of the companies, according to TechCrunch, took
the funding. From what it seems like, the $150k is for each YC company to
decide upon. Why now?

Surely most (if not all) YC companies don't need an additional $150k after
just a few weeks in the program. It's great that the $150k is there for
everyone when they need it. Raising money, which is usually a distraction, is
now much more easily expedited.

While that's great, I just question the timing. Why did 90% accept the money
now? No one needs it. Within the next few weeks, we might see better deals.
Sequoia and others might want to compete. There might be better offers.

That's my one concern so far with this.

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patio11
It is an extraordinarily generous deal, and I can imagine many reasons to
accept on the spot, some of them good. That said, I might have gone and cooled
my head somewhere while thinking things through, and possibly chatting with a
lawyer or other advisor. I preface the following comment with "We're all
businessmen and know how this game works, right?" because it may sound greedy
or contrary-to-the-communal-spirit : if you have just told me you want to
invest $150k at hyper generous terms without knowing anything about me, I have
reason to suspect that a five minute conversation has a high probability of
leading to a better offer. ("Hiya, you just offered 150k sight unseen. Salient
fact: our traction is... Cool huh? Would you be interested in investing more
than $150k at the terms mentioned earlier?")

I suspect that $150k is the lowest possible outcome of that conversation.

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jnovek
I don't know much about Yuri, but I've never met anyone who regretted taking
money from Ron Conway/SV Angel. He's one of the nicest and most founder-
friendly investors in the valley.

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bretpiatt
Agree with everything said here. The "being poor will make them work harder"
might apply to other groups of people but the YC company founders are already
working as hard as possible -- they are motivated to succeed and do their
best.

With 3 founders this $150k is now enough for them to go through their cycle
and go "ramen" level for another 6-12 months depending on the costs beyond
food/rent of their idea.

Assume they need to start raising money 3-6 months before being out of cash
and this gives them a good amount of time to do 100% product work then work
with folks on funding without the pressure of "having to get the round done in
a week or we can't make rent". With the ability to move the funding along at a
reasonable pace some of the members can focus on still building product while
one person leads the effort as well.

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keiferski
_I believe what you’ll see are more YC companies launching with bigger, more
complete businesses. Notice I said businesses and not ideas, or features._

This is probably the _real_ benefit of the 150k. Sure, the money will help to
alleviate rent-worries, but it also lets founders tackle serious (more
expensive) business problems.

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jasonervin
Ok, I don't think $150k will actually make you less poor, nor make you work
any less. What it does allow is a little more leeway, say if you have bills
that need to be paid. Maybe you are not right out of college so car payments,
house payments, etc... might need to be paid while you take 3 to 6 months off
form work. I like that it shakes things up in the VC & Angel world because
they need to be shaken up. You are dealing with statups, you can't be risk
averse... go invest in mutual funds if you don't want risk.

Congrats YC and Yuri, wise investments. Oh, this is not a bubble this is the
same pattern that came about in the 1930's and 1940's with Great Depression
and the auto industry. It's simply happening again with the internet industry
(steam engine == bubble/economically unfeasible long term && combustion engine
== years of growth/redistribution of power and wealth; dial-up ==
bubble/economically unfeasible long term && mobile/high speed == years of
growth/redistribution of power and wealth)

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damoncali
One would think you could put the same amount of cash into just the winners at
pretty similar terms. (Apparently, exactly the same terms for series A).

This implies that simply getting a spot at the table for a Y Combinator Series
A has become prohibitively difficult, even for the likes of SV Angel.

Am I missing something? How does this work from the investor's side? Or is
this just for-profit philanthropy?

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nir
Yuri Milner definitely guaranteed his spot in future articles about the '10
bubble.

~~~
bretpiatt
Why is it a bubble buy? They are getting in on the A round of every YC company
with the same terms as the other participants and with their deep pockets the
ability to lead A rounds as well as B, and C rounds for those that take off is
worth way more than the $150k each.

Consider this acquisition costs, like buying a really expensive key word on
Google. The ~$6M every 6 months is worth it for the seat at the table. An
additional benefit is getting to see the terms at which all of these rounds
are financed at -- this will help them ensure they are paying properly on non-
YC deals they get in.

~~~
hugh3
Basically, he's investing in everything that YC is investing in, except he's
investing at much worse terms than YC gets (that is, YC typically invests in
companies at a valuation of a couple of hundred grand, while Series A rounds
are typically at a significantly higher valuation than that). It may, in the
end, pay off, but I don't think it's a good investment strategy to follow
someone else's investments and pay systematically more than they did.

~~~
jackowayed
He's getting much worse terms, but he's also doing a lot less work. YC picks
the companies, does office hours, finds speakers for dinners, cooks the
dinners, works out deals like this one and the Facebook one, etc.

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mfringel
I think there's something much simpler going on. If YC's track record has been
pretty good (or at least, better than average), then Yuri Milner now has a
pre-vetted list of companies in which to invest, without having to do any
research at all. The simplicity of the strategy is actually pretty brilliant.

~~~
erik_landerholm
This is what everyone should take away from this. What he is really saying is
the diligence and track record of YC is good enough that he doesn't need to do
any more diligence himself.

If that isn't the highest level endorsement possible I don't know what is.

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Wolf_Larsen
"I would say the fund raising thoughts, conversations, meetings stole 3-4
solid weeks of time that we could have been focusing on building an even
better product."

\- This is HUGE. If this speaks for the other companies then it means that
everyone will have 25%-33% more time to build their product / customers /
business.

"Funny thing is, anyone could have done this deal with the YC companies. You
have to hand it to Yuri for stepping up and taking this risk. It will be a
huge win for him and it is already a huge win for YC and the future of
entrepreneurship in general. Congrats."

\- Awesome.

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ipster
Any explanation as to why other investors were not included in this deal? I
understand this is a huge deal but being able to select an guaranteed investor
from a panel seems like it would be beneficial to both sides?

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andreasklinger
Am i the only one who has the feeling that if you are already in an ecosystem
where you need _3 weeks_ to raise a perfect ("silicon valley level")
angelround you even almost not need the 150k$.

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alanh

        div.entry-content { letter-spacing: 1px; }
    

Why? It makes this text harder to read!

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ebaysucks
I'm wondering about the 10% who didn't take the money and if there is adverse
selection at play here.

~~~
btilly
Here is one possibility.

Suppose that you're planning to bootstrap. Then there will be no future round
where you get the loan magically paid off, and this becomes just a loan with a
not very great interest rate.

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zrgiu
can someone explain to me please how exactly are these money given? The
startups receive the $150k in exchange for a percentage, or how ? I keep
hearing the "no cap" and "no debt" thing, but I can't figure out what that
means.

Thanks!

~~~
OLAGUNJUOLADAYO
NB: You meant "no cap...no discount". Now to your question:

These sums are notes (loans, debt). The money is either given as a check or
wired. That is all. Just that simple. It is real money. Since it is a note,
the investor gets zero equity (percentage, ownership). Rather, he gets [1] a
compounded interest over time, in the case where the company has to repay, and
[2] a percentage of the company "in the future".

Since startups go on to raise an A-round, investors who give startups loans
(convertible debt), like to put a cap (maximum) on the amount of $ that may be
raised in the future A-round. They do this because the higher the $ raised in
an A-round and subsequent rounds, the more dilute the % the seed investor owns
(if he does not follow-up). In this case, Yuri/SV Angels -- without fear of
dilution -- are allowing the companies to "feel free to raise as huge a sum as
they like/can in the future". There is, "at large", one main reason why a seed
investor would do this: because he intends to and can participate in the
future round. More basically, it is a branding statement that earns the
entrepreneurs' trust or fondness.

The second provision is that of "discount". A discount simply answers the
question: "How much % slack will you give me compared to your next round
investor? i.e. How much cheaper "for me" will your stock be in your next
round?". In this case, Yuri/SV Angels say they don't want any slack/discount.

What we don't know is if there is/was a liquidation preference (exit-clause or
clause in case of a default). But that is another story.

~~~
zrgiu
thanks!

