
Y Combinator’s Paul Graham On The $150K Per Start-Up Offer - jedwhite
http://blogs.wsj.com/venturecapital/2011/02/01/y-combinators-paul-graham-on-the-150k-per-start-up-offer/
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ladon86
"Graham is known for his 'pizza profitable' mantra".

It seems ramen isn't even a conceivable foodstuff for WSJ's readership. 'Pizza
profitable' has a nice onomatopoeic quality though.

~~~
johnswamps
onomatopoeic -> alliterative? I don't think anything makes a sound like "pizza
profitable" :)

~~~
euroclydon
I have a friend who, every time he tell someone what onomatopoeia means,
points out that, oddly enough, onomatopoeia is not itself onomatopoeic.

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jimmyk
>onomatopoeia is not itself onomatopoeic.

It would be very difficult to do that since onomatopoeia is a concept and
concepts don't make sounds.

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phlux
which is ironic, given that a cucumber is saying it.

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euroclydon
Hint please

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phlux
Well, my thinking was: Euroclydon's friend likes to be technically correct
about the term onomatopoeia, and jimmyk chimes in with the same level of
technical correctness on the matter. So for levity, I point out how it is
'ironic' in a nonsensical way - hoping to hit their OCD nerve a bit. As it is
clearly not an ironic statement, and we only have anecdotal evidence of
cucumbers being able to mutter a sound.

~~~
mahmud
Run for office.

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wave
Let's assume that they have invested since the beginning of YC with the 250
startups:

    
    
       250 * 150 000 = $37 500 000
    

So far, 20 YC companies have been acquired generating $401 500 000 (data taken
from yclist.com). If the investors own an average of 5% of the startups, their
current position would have been about 50% loss:

    
    
       401 500 000 * .05 = $20 075 000
    

I don't think this is a bad position to be in since there are still great
companies that have not been acquired or exited. The $150k investment may also
reduce the failure rate.

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webwright
5% is high.

If the Series A rounds were 1 on 3 ($1M on $3M pre-money valuation), then
$150k would get him 3.75%. For hotter startups, 1 on 4 or 5 might actually
happen. Presumably they would have the option to put more in, but that would
increase their basis.

But your assessment is right. Average time to liquidity for a VC backed
startup is 7+ years-- older than the oldest YC company, right? There is a TON
of value locked in in previous YC companies.

~~~
jaxn
According to the article, the average YC company raises $700k in seed funding.
Assuming your $3M pre is correct, that would be about 18% total and 4% for the
$150k investor.

The question is, does a quick and easy $150k delay fundraising until a company
is looking at a $6M pre? For the super hot ones I bet it does. For those
startups that are more worried about not getting early traction they probably
won't delay fundraising.

So if we are going to throw a number around... my fuzzy math says 2% of the
hottest companies and 4% of the others.

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mlinsey
The first post-YC fundraising is usually made up of convertible notes. So in
your example, that $700K at $3M pre would not trigger the conversion of Start
Fund's note, which would instead convert at the valuation of the _next_ round
of fundraising.

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churp
We fixed that mistake:

[http://blogs.wsj.com/venturecapital/2011/02/01/y-combinators...](http://blogs.wsj.com/venturecapital/2011/02/01/y-combinators-
paul-graham-on-the-150k-per-start-up-offer/tab/comments/)

Scott Austin wrote: @Andy - I think we mean the same thing. But we actually
changed “pizza” to “ramen,” since “ramen profitable” is the correct term that
Paul Graham uses. It was actually the founder of Y Combinator alum Airbnb that
used “pizza profitable”! [http://blogs.wsj.com/venturecapital/2009/06/10/from-
crash-pa...](http://blogs.wsj.com/venturecapital/2009/06/10/from-crash-pad-to-
pizza-profitable-entrepreneurs-target-budget-travel-market/)

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redstripe
Interesting, I wonder if this bulk micro financing of start ups could become a
new financial product. Find 30 - 100 small start ups, give them all a whack of
cash that's backed by a bond. Sell the bond and repeat.

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MichaelApproved
I don't think there are enough worthy start ups to make this a viable plan.

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r0s
Just make sure you're the one selling and rating the bonds, easy money!

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c2
Does this negatively change anyone's mind who was thinking of applying to YC?
I always thought YC was special, they give you less money, take less equity,
and typically value you out of the gate at over 100K. Part of the appeal was
seeing what kind of company could be grown from such humble roots.

The 150K offer on the table is nice, and the terms are such that you would be
foolish to turn it down, but also in my mind it changes the dynamic of YC a
bit.

Was wondering if others felt the same.

~~~
sokoloff
It changes the game a lot for startups that would fail 4 months in.

I don't see any downsides though for YC candidates; I don't subscribe to the
idea that getting only the initial seed money from YC is better than having
the option of the follow on $150K.

    
    
      If you find yourself in a fair fight, you didn't plan your mission properly. - David Hackworth

~~~
c2
How many YC companies fold four months in?

The only reason I've heard for a YC company closing is "not enough traction",
or some variation of "not enough passion" - I've never heard "not enough
money", although I'm sure it happens too.

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pmjordan
"not enough traction" = "ran out of {money|energy} before finding the right
product/market fit"

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Tycho
So if there are now a whole lot more applicants to YC, more good ones will get
turned away than ever before. Suggesting rival seed-funds (or whatever you
call them) will crop up to absorb the surplus. Unless YC just increases its
intake proportionally (but that could be an unwanted dilution of the
guidance/mentoring available to each one).

~~~
SkyMarshal
YC will probably increase its intake proportionally, or close to it. They've
been begging for more applications lately, even extending the application
deadline for the last round. It's sounds like they've got capacity for more.

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huherto
I wish, it was like a mutual fund.

I would happily put let's say $10,000 that will give me a .17% share of the
total 40 companies.

~~~
bigbang
Thats an excellent idea. A startup could be made out of that. Sort of
"private" stock market open to public? I'm sure this has already come up, but
why can't there be a private unregulated "stock market", just as individual
lending(as opposed taking a traditional loan) is possible eg: LendingTree

~~~
Retric
Regulation. There has been a huge number of scams based around selling stock
so the amount of regulation has grown over time.

PS: Invest in wonderful Iowa beach front property.

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yoak
It was great to see Paul make the very first connection that I made upon
hearing the news. The deal had to be absolutely fantastic for the founders
otherwise some portion of the best wouldn't take it. Having looked at the
deal, it looks like it qualifies.

I agree with wave that it looks like something that should have worked so far,
and one can presume they're getting better at what they're doing and hopefully
will have a better economic environment for these current startups.

It's really cool that this happened.

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chanri
Could someone help me run the numbers? What will $150,000 be used for on an
average YC startup?

$150,000 will allow the startup to hire 1 or 2 engineers in the short-term. Is
that the real use of the $150,000?

What other expenses do they spend good money on?

Another way to look at this question: If you were a new startup in YC, what
would you spend the 150,000 on?

~~~
krisrak
hiring engineers is not a good idea, your startup team should have enough
talent to do 90% of the work. Some use of the money could be for design art
work, or marketing (free swag). For example if you were planning to launch
your startup on iPhone only, you can now use the money to contract someone to
develop for Android, WP7, blackberry, this money can make the startup more
complete at launch.

~~~
jaxn
uh, wouldn't that be "hiring engineers"?

Or do you want the designers to build the blackberry app?

I think spending it on swag would be a horrible idea. I can't think of any
company that succeeded because they had really great swag in the early months.

~~~
krisrak
I meant not hire full time engineers, $150 can only get u 2 engineers, get a
app done on contract basis.

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zhyder
"Virtually all of the companies that go through the program receive seed
funding after participating in the popular incubator program... The average Y
Combinator company raises $700,000 after the program."

Had a hunch about the funding success rate and amount, but it's good to have
these confirmed. Helps in appeasing queasy spouses, risk-averse cofounders,
etc.

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andrewpbrett
Maybe I'm the only one, but I always thought pizza-profitable (or ramen- or
sushi- or whatever) referred to the fact that a company was pulling in enough
revenue such that the founders could cover the cost of pizza (or sushi, or
ramen). When used that way it's also more informative; sushi means more
revenue than pizza, which means more than ramen.

~~~
jcl
It means that you're making enough to cover living expenses, provided that you
are living extremely cheap -- so the different food gradings still apply. The
article's description is correct but ambiguous.

<http://www.paulgraham.com/ramenprofitable.html>

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Mongoose
s/pizza/ramen/

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startupcomment
I for one would not want to associate myself with Russian wealth regardless of
how squeaky clean Yuri or his firm might potentially be. On that latter point,
I would try to conduct extensive due diligence on them and their investors. It
strikes me, however, that there are too many potential skeletons in the closet
when it comes to Russian wealth that even the best of due diligence may not
reveal. I would just want to stay away from any possible connections with ill-
gotten wealth of the sort that is widely known to have occurred in post-Soviet
Russia. I am not willing to sacrifice my principles or reputation for the sake
of business -- nor would I want to directly or indirectly benefit shady
characters or associate myself with potential ill-gotten wealth that could be
very difficult to detect when entering into such a relationship.

~~~
ZoFreX
Honestly, I think this is a little racist. I agree that there is risk there,
but surely there are legal frameworks in place to insulate the YC companies
from that risk? (If "the best of due diligence" doesn't uncover anything
shady, what more could they have done?)

If you want to talk about "ill-gotten wealth" or "shady characters" do you
really need to look any further than American investment firms?

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samwise
even though pg says "there’s no reason for companies to turn it down"

There would be an advantage to being the only company not to accept the funds.
i imagine the press and standing out in the herd might be well worth passing
on the 150k.

Plus i think others angles and VCs will through money at you knowing you
turned down the easy money.

~~~
paul
If you're looking to stand out, you could also stab yourself in the eye with a
fork.

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markessien
Any company that is really hot will have people offering them money at a
cheaper valuation than Yuris offer. Cos the other investors already know the
line they have to undercut.

So the ones who take up the offer are the ones that don't appear hot enough
for anyone to undercut that offer.

~~~
pg
There is no way to offer better terms than a convertible note with no cap and
no discount.

At least no current way. I suppose you could have a valuation floor instead of
a cap, or a negative discount. I've never heard of that happening. It would be
something if things ever came to that.

~~~
immad
The convertible note insists on a pro rata right on future rounds. Someone who
removes that would be offering a slightly better deal.

Pro rata rights cause more dilution in later rounds, but they are pretty
standard and at seed rounds most people don't think about removing that term.

~~~
pg
They don't intrinsically cause more dilution in later rounds. The buyer has to
pay whatever the price is in the later round. So they'd only cause more
dilution if the lead in the later round insisted on getting a specific percent
of the company. VCs often insist on that sort of thing in A rounds, but less
often in later rounds.

~~~
immad
Agreed situation is the worst on the first round that involves a VC. It can
also arise in later rounds if you take strategics or new VCs.

Given that most YC companies will still go on to raise a seed angel round
after this 150k, they will be hit by extra pro-rata dilution. If we assume a
$5m seed round post money, then the 150k translates to 3%. If you raise a VC
round with a VC that insists on a 20% stake then the overall affect is 0.6%
extra dilution. Every point hurts at that stage, but not that bad :).

