
New YC Partner Investment Policy - jamesjyu
http://blog.ycombinator.com/new-yc-partner-investment-policy
======
pbiggar
"This should fix the problem. If it doesn't we'll try something else."

That's an interesting phrase. This should really be implicit in everything we
say or do. It stands to reason, if something doesn't work, you try something
different.

But when you're famous and have thousands of people who constantly try to
undermine you or misquote you or take something out of context, you start to
need to be explicit in calling this out. Otherwise next month's tech rag
headline says "YC partner recants failed investment policy".

~~~
Zikes
Oh I'm sure it'll happen, they'll just ignore the existence of this policy
altogether when they do: "PG Prevents Partners from Investing in Minority-
Founded Startup"

~~~
thenmar
Come on, mocking straw men just makes things worse for everyone.

~~~
jessriedel
That's not a straw man, it's satire.

~~~
hueving
satire is a subset of a strawman

~~~
ZoF
If either of those is a subset of the other then strawman would be a subset of
satire.

~~~
hueving
Yeah, subset wasn't the right term. The sets intersect. Exaggeration (a form
of satire) is a strawman.

------
mattmaroon
That's smart. When we did it (Summer 2007) investors we talked to still didn't
even know you guys did that. A couple asked, most didn't. I won't lie, we used
it to our advantage.

I'm sure it only took a couple rounds before people started noticing you (and
some alums) in the cap tables and realizing what's going on. Word spread. I
have no doubt that now it is considered a signal.

Investing is like dating. You need to be right for them, and they need to be
right for you. Just because you don't want to invest in someone doesn't mean
they're a bad investment. Smarter angels & VCs probably realize this, but
there's plenty of perfectly good money that would not go to companies who
might be a good fit amongst the less savvy.

~~~
ivanplenty
Super interesting story, and thanks for sharing. I think you're referring to
your time at DraftMix, right? Admittedly that was a really hard connection to
find online [see below].

That said, quietly using partner/alumni investment as a signal for VCs doesn't
quite fit the "Startups are a perfect meritocracy" narrative I'd prefer to
believe...

[below]

Interestingly, searching for "Matt Maroon" (on Google, Crunchbase, AngelList,
etc) yields results like [0] that only mention Blue Frog. Same for your blog.
Wouldn't care otherwise, but I wanted to know if your story _could_ be true or
to dismiss as an internet rant.

However there was one interview-like-thing [1] still hanging around the Google
Index that connected DraftMix [2] with a "Matthew Maroon" as the CEO [3]

[0] [http://www.crunchbase.com/person/matt-
maroon](http://www.crunchbase.com/person/matt-maroon)

[1] [http://en.wikioffuture.org/DraftMix](http://en.wikioffuture.org/DraftMix)

[2]
[http://www.crunchbase.com/company/draftmix](http://www.crunchbase.com/company/draftmix)

[3] [http://www.crunchbase.com/person/matthew-
maroon](http://www.crunchbase.com/person/matthew-maroon)

~~~
argonaut
For some reason this strikes me as kind of creepy.

~~~
nitrogen
...and people talk about the death of privacy like it's no big thing.
Remember, the real creeps don't post their research on a public forum (unless
it's for harassment).

------
pjg
I am assuming that "YC partners not able to invest till the start has raised
atleast $500K or 3 weeks after demo day" will mean YC founders follow the rule
in letter and spirit i.e. no pre-discussions with YC partners leading to
pitching claims like "One of the YC partners has committed to investing after
first $500K" ...

~~~
pg
We're small enough that we can enforce things easily on our side. We can't
control what founders say to investors. But experienced investors wouldn't
believe a YC partner had agreed to invest without being able to confirm it.

------
mjmahone17
This is interesting, and actually similar to a policy that a lot of elite high
schools in the US follow: not ranking their students. If you have good unis
accepting 50% of your class, ranking your students unnecessarily makes your
50th percentile weaker candidates than the 95th percentile at schools that
rank (often even if those schools only have 2-3% getting into top-flight
unis).

However, the downside of not ranking is that your top 1-5% of students are not
clear to the extreme elite (Harvard, Stanford, MIT) schools, meaning there is
no one who is "guaranteed" those positions, as even your top 5% has to compete
with students in the top 20 or 30% for admittance. For high schools that
couldn't hope to admit more than 5% of their class in top tier unis, it makes
sense to rank (as then you get to showcase your top students as being
exceptional). If you expect 20% or more to be competitive candidates though,
it's usually better to stay quiet on relative success.

~~~
gertef
This is a nice example of what's wrong with elitism in higher-education, mis-
applying metrics to "rank" students.

~~~
jtbigwoo
Yeah, it's funny. A friend of mine got one B in high school and ended up
outside the top 5% of his class (which matters for some scholarships) because
there were twelve kids with straight A's. If he had been a year younger he
would have been second in his class.

~~~
commandar
Yeah, my high school stopped publishing class ranks in transcripts as of my
graduating class because something like you got down to 50 or 60 out of a
class of nearly 300 before you got _below_ a 4.0 GPA and it was hurting kids
on college admissions.

~~~
philwelch
20% of the student body had straight A's? Sounds like grade inflation to me.

~~~
commandar
Liberal arts magnet school that only took the top students in a metro area of
250k people. You had to test in to be admitted and failing any one class meant
you went back to one of the area's non-magnet high schools.

So not inflation, just that the student body was limited to kids that were
going to make high grades anyway with very heavy AP course loads (which push
GPAs over 4.0 since they're weighted).

------
aelaguiz
Kudos. This was an issue in my batch. If you didn't have YC partner money you
weren't necessarily a black sheep, but you definitely weren't awesome.

~~~
jdavid
Getting YC Partner Buy-In sounds like pledging a fraternity.

~~~
aelaguiz
It isn't, at all. It's not some popularity contest. The best companies do in
fact tend to have YC partners invested in them. It's just because they
are..the best companies.

The only reason it's bad is because there are lots of great startups in the
batch that can be hurt by it, which is obviously not what the partners intend.

------
lbr
I think the most interesting bit is that it decreases a sort of self
fulfilling prophecy.

Investors "treat investment by YC partners as an accurate sign of how
promising we thought a startup was." So then, the company raises more money -
and appears to look more promising.

Sure, partners may have less incentive immediately (as mathattack said) - but
the real winners will be more clear to the partners after demo day (and three
weeks).

They will have a list of winners (in their mind) before demo day. Then,
investors at demo day will pick a list of winners (who they invest in). And YC
partners will see the overlap - those who are picked as winners by YC Partners
and independent investors.

~~~
pg
The reactions of investors after Demo Day don't change our opinions much.
We've just spent the last 3 months working closely with these companies.

------
borski
For what it's worth, 500startups has done this for long time. They don't tell
companies whether they are going to provide follow-on funding (even though
it's in the original terms as an option) until significantly after Demo Day,
for the same reason.

~~~
argumentum
That's not the same, YC has _never_ provided follow-on investment and this
doesn't change that.

This policy affects investments made by _individual partners_. I'm sure 500
startups does not stop it's mentors from investing right after demo day, or
does it explicitly do that?

~~~
borski
It actively encourages mentors to invest. The reason is because a) there are
so many that most companies can raise a little from at least one mentor, b)
all companies in a batch are encouraged to raise a small amount of money prior
to demo day, and c) mentor investment isn't typically seen as a signaler as
they aren't 500 partners. It helps, as any outside investment helps, but 500
following on is the real signaler, at least in my experience.

~~~
mrkurt
Does Dave McClure wait to invest personally? I could see his investment having
a similar signaling effect.

~~~
borski
He actually has a rule of not investing personally. Granted I don't know if
that's explicitly true, but I haven't heard of him investing personally since
500 was founded.

~~~
adambenayoun
Partners can't invest. 500startups mentors != YC partners - the closest to
that is basically 500startups investing a follow-on, it has the same signal as
YC partners investing in YC companies during the accelerator program.

P.S: I'm the co-founder of a company who was in Batch 6 of 500startups.

------
United857
Is this a common policy in the VC world in general (prohibiting personal
investments by general partners in the firm's companies)?

~~~
pg
It is in VC funds in the narrower sense, because their LP agreements often
forbid any individual investments in startups. VCs' LPs don't want the VC
partners siphoning off the best of the firm's deal flow for themselves.

~~~
larrys
Long long time ago when I was a kid and my dad was buying real estate I asked
him why the realtor didn't buy the property if it was so good. He answered by
saying that if he did that you might then infer that the properties that he
didn't buy were not good.

I also point this out because what I've found in business is that so many
basic principles end up repeating themselves in different situations. Things
that you don't learn in school or in books but by listening to others and real
life experiences. One reason that certain people who have grown up in business
families have a nice advantage over those that don't. [1] You have a seat of
the pants feel for things because everything is just a variation of something
that has already happened.

[1] But it's not just growing up in the family but also interacting and
listening and thinking. My siblings grew up with the same parents but are
vastly different than I am in their thinking and understanding even given the
same trough of water.

~~~
gertef
Any realtor who knows a good investment becomes an investor, not a realtor.

~~~
lawnchair_larry
This sounds nice rolling off the tongue, but there is clearly no truth to it.
Did you just make it up?

------
kirpekar
Interesting snippet: "... a startup's fundraising trajectory is almost always
established, one way or another, by 3 weeks after Demo Day..."

I never knew fund raising worked so quickly.

~~~
petenixey
It really doesn't anywhere except after that particular event.

------
codex
It sounds like YC serves as a vehicle to bring deals to YC partners, who make
a killing funding the most promising candidates from the YC batch. This has
made so much money for YC partners that they still want to continue to pick
winners, but they don't want to kill the golden goose, so they withhold their
blessings for three weeks. YC companies will still prefer the partners for
funding over some random VC, so they still get the deals, but now the relative
losers from the YC batch will get more funding from the more clueless VCs.

~~~
CyrusL
That's not true. An angel investment after demo day is worth a lot less equity
than the YC investment. Most YC companies raise their seed rounds at $5
million - $20 million valuations, so it would take many hundreds of thousands
or even a couple million to end up with the same 7% that YC gets.*

That kind of money would usually be put in by a larger fund. Most angels write
checks for $25k-$100k.

* One difference being that the demo day investors will have preferred shares upon conversion and YC takes the same common shares that the founders and employees get.

~~~
brayton
Yes it could be worth a lot less equity but you can still make a killing with
those small investments in the right companies

------
mathattack
This seems to solve one problem, but does it create another? Does it diminish
the incentive for partners? Or wind up penalizing the winners (better firms
coming out of demo day) by reducing their exposure to firms most likely to
invest in them?

My sense is net this is positive.

~~~
kevin
I can't speak for the other partners, but I love that we're willing to do
whatever it takes to help our startups succeed. I don't work at YC for the
money. I work there because they are the best at what they do and are always
trying to do the right thing for their founders. It was my experience when I
went through the program and it's reinforced by actions like this.

~~~
mathattack
Ahh - I misinterpreted partners. I thoughts it was the coinvestors providing
converts. This makes much more sense to me now, and is obvious in hindsight.

------
nhangen
Why not just prevent partners from individually investing?

------
kartikkumar
Maybe I have the wrong end of the stick but this seems unnecessarily forced.
Surely, given time, the system should equilibrate. If YC partners investing in
startups is treated as a signal of winners, investors will be able to derive
their own conclusions in time about whether this is a trustworthy metric.

If it is trustworthy, then surely this would mean that great startups prosper
faster and those that aren't that great know it even earlier, meaning that
they can pivot after spending much less time on building their business.

If it is not trustworthy, the numbers will show that to be the case, with
investors being able to directly assess which companies backed by YC-partners
actually make it big. In this case, surely investors will wise up and not go
by YC-partner investments as a signal of success.

If I'm missing something, I'd appreciate it if someone could point out where
my logic falls short. Otherwise, I stand by my conclusion that this seems
unnecessary.

~~~
cube13
The problem isn't really whether or not the YC partners are good investors,
it's really more of a question if they know something that the startups aren't
telling everyone.

Early investment by any of the YC partners after a startup has been accepted
to YC could give the impression that the YC partners may be doing some sort of
insider trading based on the meetings that they had with the company. That
probably isn't an issue at all, but the perception is there.

~~~
kartikkumar
I don't really understand the issue with that perception, cause surely it is
true that YC partners have the inside scoop. Isn't that the wonderful deal of
being involved with YC in any capacity? I don't see what the "insider trading"
part of the deal is. To me it just makes common sense that YC partners reap
the rewards of the clamour that exists for people to get into the system.

I think I might just be missing the point entirely. We are not talking about
publicly listed companies, so if you're smart enough to have fashioned a
position as a YC-partner for yourself, then kudos to you and surely that just
challenges external investors to get better at picking YC winners even
earlier.

~~~
cube13
It's in YC's best interest for every company accepted by them to succeed and
get funding. When a YC partner funds startup A instead of startup B, the
perception(which, again, probably is not reality) is that startup A has
_something_ better than the ones that aren't funded. So it puts startup B in a
disadvantaged position from startup A.

------
larrys
" Which meant we were now making it harder for the startups that partners
didn't invest in to raise money."

An analogy to this is what happened during the financial crisis when they got
all banks to agree to take money so as not to send a signal showing what banks
were the weaker ones.

------
bluishgreen
It looks to me like this is going to put pressure on the window size
(currently 3 weeks). Folks can now wait for 3 weeks if they really want the YC
signal to kick in, unless other forces are working to counter act the waiting.

Think of it as a star which is trying to explode because of all those gases
burning away, and gravity is keeping it together. The size of the star is the
equilibrium point of the differential equations describing this dynamic.

One of the signals that was keeping the 3 week window to 3 weeks could have
been the YC investments (gravity), but now that gravity has been set to a
lower level, the 3 week window will expand..to account for this.

~~~
argonaut
That's not how things work. Most YC companies tend to be oversubscribed,
anyway, so what keeps the window small is competition between angels/VCs.

------
markhelo
YC company approaches VC and says we have a soft commit from a YC partner. VC
calls the YC partner and invests. I am not saying there is anything wrong in
the old world. It is what it is. When its your company and there is money
involved people get creative and work around rules. Some companies raise
successfully and some others dont. If VC's (with all their resources) are
taking their cues from YC Partners then something else is broken not the
entrepreneur.

~~~
lawnchair_larry
Obvious answer: YC partners are not allowed to soft commit either.

~~~
markhelo
Not realistically enforceable.

------
amirmc
Impressed that this issue is recognised and a mechanism created to mitigate
it. However, doesn't this merely _delay_ the signal (which is mentioned) so it
may simply defer the problem down the line. If after $500k you _haven 't_ had
a YC partner join, raising more becomes difficult (assuming you were trying to
raise more than that to begin with).

Curious whether this will actually matter in the long run but I guess they'll
adjust if needed.

------
drp4929
This might impact startup fundraising trajectory. Investors may prefer to wait
out for 3 weeks if VC partner's investment is a strong enough signal for them.

------
Skywing
But then isn't this just the other way around? Now will YC invest in the
company if they see that they're not raising much from outside investors?

------
blazespin
Question for PG: Do the partners commit to fund companies in secret
immediately on demo day or do they now make decisions based on how well
external funding goes? In some ways, it sort of seems we have the same
problem, but now the partners are the ones to take advantage of 'signals'.

~~~
lawnchair_larry
If a YC company could no longer get a personal investment from a YC partner,
it doesn't matter much. If they can't get funding from _any_ VC, they almost
certainly die. So even if one thinks that the comparatively low-value signal
of a VC investment is now going to be exploited by a partner, YC is not worse
off.

------
melindajb
Seems like a great idea, PG. Are the partners prohibited from signalling to
favored investors their intentions? What's to stop someone from giving a wink
to a friend?

~~~
TheCowboy
Partners who decide that they are not going to follow the rules to the
detriment of the founders, and therefore YC and other partners, would likely
be excluded from participating in future batches.

YC is in a strong enough position that they are likely not dependent upon one
particular partner, and most partners would prefer to have access to future
batches. They probably don't need to have a contract that slaps on additional
legal damages, because at such an early stage the small gain for favoring
their own investments does not outweigh the longterm gains from continued
early access.

~~~
melindajb
Theoretically your point makes sense. But in practicality, sounds like nothing
prevents a partner from winking at their buddy in a VC. After all, who's to
know? And how could it ever be enforced? Insider trading didn't stop just
because it became illegal. This is not in any way meant to cast aspersions on
the partners per se. Color me jaded when it comes to money.

------
aaronchriscohen
I wager the % of the YC companies that raise $500k within three weeks of demo
day is <10% making this rule effectively meaningless.

------
williamle8300
What's wrong with being a 'signal' to investors? There are multiform reasons
why YC chooses to invests or not.

Those startups that join demo day realize that they're putting themselves on a
public platform to be assessed, etc. If they don't get funded by YC, that's
their problem; not YCs.

There's a problem with PGs policy since it rules out the possibility of YC
being a first rounder. Which is a huge reason why VCs exist in the first
place.

~~~
mikeg8
Seeing has how YC has an equity steak in every startup, how is a startup who
can't receive funding not a problem for them? From an investment point of
view, they want ALL of their companies to receive funding. If signaling is
negatively influencing how investors evaluate every company, than this policy
makes a ton of sense.

------
EGreg
You think this might cause startups to close their funding later as investors
all wait around to see who pg chose? :)

------
dsugarman
this seems really smart, although I worry that it could affect many startups
ability to raise the initial $500k.

~~~
argumentum
True, perhaps even more than the first $500k, I worry about those that are
trying to raise $100-$250k.

------
lyime
Seems good.

