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Fundraising Advice for YC Companies (ycombinator.com)
234 points by cryptoz on Feb 23, 2016 | hide | past | web | favorite | 100 comments

One thing I think might be important to distinguish is how different companies coming out of YC (and not in YC) are in different stages. No matter how many times the partners told our batch to not compete over valuations, it still happened. Personally I felt like without a competitive price tag, we wouldn't be looked at as a promising company even though we had less traction than other companies. We had a (rightfully) pretty lame raise after YC. I think one thing that might help is to be explicit with the companies, give them some idea of what their perceived stage is and what valuation range would be a good place for them to start.

what's a "competitive price tag" for a "pretty lame raise" mean in valuation for you? I was shocked to see the article say:

>I'd close the first, say, $200k from the first reasonably good investors that offer it on reasonable terms--say a $5 million pre-money valuation or higher. This removes some uncertainty and pressure, gives you capital to execute with while raising the rest of your round, puts you in a stronger position, etc. It's worth a discount for all of this. (Emphasis added.)

Which means that a $5M seed-stage is a 'dicount'! (The true price would be at a higher valuation.) That is a shocking phrase to use, when selling a company for $5M outright is a pretty good outcome for 95% of people who create a company in the tech space.

An investor buying $200K preferred equity at 5 million pre is not implying that investor would buy the entire company for 5 million cash. The preferred equity makes high valuations possible as the first $200K goes back to the investor.

it's kind of a nuance, but an early stage investment is a bet on the founders/core team as much as it is on the idea. so you want the founders to retain significant equity (i.e. not purchase outright) to align the incentives.

To echo the other commentators, another way to think about this is: a seed stage company like this is worth ~$0 if the investor owned 100%. But it's worth $X million, if the investor only owns 20%; the "team commitment" factor being a multiplier on the total valuation that has an inverse relationship with the investor's ownership percentage.

> It's important to articulate why the company will eventually be in a strategically valuable position (i.e. a monopoly).

Is it possible to ever answer this in a meaningful way, besides "we're going to be the best and get mindshare and beat everyone out of the market"? Anyone have examples, or care to imagine what the answer would have looked like for those few companies that DID go on to dominate a market?

I guess if your product has vendor lock-in or network/virual effects then you're in a better place to answer it well (?).

>> Is it possible to ever answer this in a meaningful way, besides "we're going to be the best and get mindshare and beat everyone out of the market"?

Yes, here are a few examples:

1. Some businesses require a massive amount of capital upfront and won't work in a iterative-lean-startup model. E.g. Tesla and SpaceX. I can't think of many people who can pull that off.

2. Most startups are started because the founders "live in the future", where the market isn't really a market yet but it's clear that there's going to be one. Basically, potential investors and competitors think you're wasting your time. I would say this is the most common thing at YC. When they "get it", you're already far ahead. Think of Paypal, Heroku, Reddit, optimizely or Stripe. (And hundred of others)

3. Owning the brand. I.e. You create some kind of horror app and you are Stephen King. Or, you're a big player in a space and expand in another one using your existing network. For instance, think about how fitbit keep adding new products, selling them to their existing customers, etc.

4. Expertise. You are one of the best in the world. I.e. Working on a new fusion reactor or some quantum computing.

If you're thinking "Most startup don't have those kind of competitive advantages", you're right. And most startups fail. Executing better than the competition or doing your best isn't a competitive advantage, it's just a coin flip.

To know if you have a real competitive advantage, you need to think that your competitors are going to raise more money, have a better team and execute better, but you should still beat them.

Tesla -- we'll see in 10 years, but looks good.

SpaceX -- great business model... get massive government contracts, hire ex-government employees, and pretend that you're not dependent on the government.

Paypal -- basically a luckbox.

Heroku -- commodity, getting eaten alive.

Reddit -- going strong.

Optimizely -- commodity, trouble hitting numbers, getting crushed.

Stripe -- commodity, failed to grow substantially beyond MMP, going to be eaten alive.

Imagine Slack's answer to this, which is "network effects within teams and, more subtly, between teams. Slack will be proposed by your engineering team because their OSS projects use Slavk, their conferences use Slack, their last client used Slack, etc. Then after your entire corporate brain uses Slack for its synapses we, not to put too fine a point on it, own your soul."

Ok, but slack is just like campfire/hipchat/yammer/etc and none of those have come close to the outcome you're proposing. So what does "your" product, Slack, plan to do to actually achieve this, besides just being better than the rest?

"We're going to take $340M in funding so that we build every conceivable integration and API into the product, blast the hell out of every marketing channel, and ensure that there's never a reason to use anything besides Slack. And if you do, you're stupid."

More seriously - network effects exist when there are reasons to choose your product other than what you, as the company running it, have personally built. People shop on EBay not because it's a great site (it isn't), but because if you want to find someone selling a rare item, you are far more likely to find it there than anywhere else. People stay on Facebook (despite oftentimes hating them) because their friends are on Facebook; it has nothing to do with what Facebook does, and everything to do with the behavior of their friends. People use Whatsapp/Line/WeChat/Hangouts/iMessage based on what their friends are using, irrespective of the relative technical merits. People stay at AirBnB not because it's a great site (though IMHO, it is), but because they're far more likely to find a nice place at an out-of-the-way location than any other hotel search.

The office messaging market - for whatever reason - has started to exhibit these dynamics. People setup Slack channels not because it's a good service, but because their employees encourage them to setup Slack channels. They write plugins for Slack not because they want to, but because that's where the audience is. They stay on Slack because that's where all the plugins are. Maybe these were intentional moves that Stewart Butterfield carefully planned out, or maybe they were just accidents of history. From an investor's POV, they don't care: the fact is that people do ask their employers to setup Slack channels, and they do get on Slack because other groups they're part of are using it, and that dynamic will lead to a monopoly that the investor wants to be a part of.

How is "just being better than the rest" not a good enough answer? Better marketing, better features, better marketing, better marketing(!!!). Better than the rest, but what more do you need to be better at than convincing more people to use it? That's what makes a monopoly.

Obviously if you can pull it off then you're golden.

But we're discussing the early pitch here. It's not enough to say We'll do the same as product X but BETTER. That's totally generic and not a plan.

So there has to be SOME insight at least on what might constitute "better," and then how to translate that into market dominance.

What are some good open-source alternatives to Slack and why don't people use them?

Well, that's kind of the point. Slack has built a moat. IRC is libre and free, but also can get far more arcane than the RFC suggests and to get something like Slack's feature set, you have to either build or strap together a lot of moving parts. Discourse is targeted at gamers and is not good for businesses. Ryver is way behind. MS' offering is laughable. Slack also has exactly the kind of differentiating features that don't particularly matter to ICs, but which corporate values highly—like auditing, retention policy, and permissions stuff. There's a specific subset of "good product" which has the word-of-mouth marketing result that Slack gets, and that's not the same as being "good" in a vacuum.

People don't use the alternatives to Slack because they're not as good as Slack, on various axes, is the short version. Slack has made themself hard to compete with.

I use Mattermost and don't miss slack except for mobile apps. They released an OSS iPhone app for it recently and the Android one is about to be released.

Self-hosting, unlimited history, unlimited team size. They have great deployment docs for various methods and it was pretty easy for me to containerize it for docker.

It has a slack compatible webhook integration so many slack integrations will "just work" with mattermost, if the integration will allow you to specify your own url.

Why must everything be a monopoly? The biggest ecosystems of wealth has been created around open source software. Email. The Web. Linux. Webkit. Git. MySQL. NGinX. Wordpress. Wikimedia. You can build something for the world without capturing 100% of the value that results, and still have a billion dollar company. Or several, if they all have a first mover advantage. Once you have a huge audience on a platform you built, the subsequent investments can be seriously de-risked.

I appreciate your point, but the difference is that in the "monopoly" scenario, the creator is the capturer of value. In the open source case, the creator does not necessarily capture the value. It is others (in the ecosystem, as you suggest) that capture the value. "Building on the shoulders of giants..." So ultimately it depends on your motivations. In the Peter Thiel book, I believe the whole premise was to have an entity that creates and captures.

Everything doesn't need to be a monopoly but investors will want to cash in somehow. Github is perhaps a good example of cashing in on Git.

second this. At an early stage, pre-PM/fit or revenue, is articulating this good story-telling? I mean, we're going to give it our best shot and try to wow our customers and stay ahead of competition. Examples would be great, if any of you have some.

>At an early stage, pre-PM/fit or revenue, is articulating this good story-telling?

At that stage almost everything is story telling

>Is it possible to ever answer this in a meaningful way, besides "we're going to be the best and get mindshare and beat everyone out of the market"?

I'd imagine a good answer might try to elucidate what it is they intend to do, and at least approximate how world domination could be achieved.

Explaining the market fit of the startup in detail, and how it meshes with present and future trends probably wouldn't hurt either.

I really appreciate that a document like this is public. It would be very easy to send this out via private email list or internal wiki. Cheers for sharing!

I know this is probably covered in day-to-day conversations with founders at YC, and this email is about raising funds... but, I'm astounded there is not a single word in here about building a business to be profitable, or to "polish up the business plan" ready for investors to review.

Or put another way - with all the issues documented (and probably over-blown) in the media regarding the current fund raising climate, is it truly good advice to just give a suggestion to "3) You should raise enough money to get to your next significant milestone.".

Surely developing the business case and reaching profitability should rate a mention somewhere when it comes to giving out fund raising advice, particularly when this is being released publicly for budding entrepreneurs not part of YC? And even more importantly because investors will be motivated to use this current climate as an excuse to negotiate harder than usual and get more stock for less money?

From the inside, there is far more talk at YC about building a good business and getting profitable than about raising money. PG has advocated this for a long time[1], and YC continues to encourage this.

The YC way is "Make something people want." Fundraising is a distraction that is occasionally necessary.

[1] http://www.paulgraham.com/ramenprofitable.html

I think it's a combination of:

- common sense (you should have a business plan)


- avoiding premature optimization

If you can build an unprofitable business that is growing like crazy and has a clear path to profitability (i.e. the fundamentals of the business are not based on unscalable factors), it shouldn't matter so much how close you are to profitability.

YC is still YC. Investor's come to YC to win, and win big. They want to see companies shooting for the moon, not worried about profitability 12 weeks in.

Can't you do both?

12 weeks in validates a market.. and proves you're easily displaced

Yeah but it hardly ever happens does it; I'd love to get 12 solid weeks to show what I can do but I'm stuck trying to build and launch something quite complex in my spare time, it's really difficult so we've taken ourselves to Lanzarote for a full week developing, which we are half way through. You quickly realise that a few issues and a few nights out and your week is over :-/

May not matter if there's cash to make off with. Plenty of folks don't care about long-haul world domination or owning a market; if being a Significant Player for 3 years will earn them enough to retire, why not?

That's fine for you and many others. However, it's an anti-pitch for a YC company: demo day is really auction day. They're selling a chunk of themselves to an institutional investor sifting for disproportionate returns.

> I'd close the first, say, $200k from the first reasonably good investors that offer it on reasonable terms--say a $5 million pre-money valuation or higher. This removes some uncertainty and pressure, gives you capital to execute with while raising the rest of your round, puts you in a stronger position, etc. It's worth a discount for all of this.

Wow 5MM pre-money for seed is considered reasonable (and considered a discount) nowadays? Or have I misinterpreted?

https://angel.co/valuations shows $6.5m average for YC, $6–8M 25 th / 75 th (does not include valuations over $10m).

Keep in mind the "tech startup slowdown" that the media is talking about right now is pretty much concentrated in the late stage: Series A and later. There are still tons of angel investors out there.

Yes. Pretty much any investor you talk to will "lowball" with 2 on 6. 5M would be a discount. I'll make no judgement on whether this is bad or or not.

For YC companies, which also benefit from a Bay Area premium. Up here in Seattle, 5MM is not a discounted, seed stage, pre-money valuation.

I also find it strange to mention numbers without saying whether it's revenue generating, MVP or what.

> It's important to articulate why the company will eventually be in a strategically valuable position (i.e. a monopoly).

I find it interesting, and disconcerting, that articulating a defensible competitive advantage is no longer sufficient advice. Now it's, "can you be a monopoly? no? go home". I realize this is a good way to maximize value for investors, but is this a healthy way to grow new companies and build a better society?

I think they're using the Peter Thiel version of the word, not the traditional economics version of the word.

For example, while Facebook, Apple, Google, and present-day Microsoft all are not strictly speaking monopolies (they have viable competitors) -- they each have various features that make switching difficult (but not impossible).

> I think they're using the Peter Thiel version of the word, not the traditional economics version of the word.

Which is a poor way to communicate a point when the widely considered definition of one of your words doesn't match the one you're articulating. It assumes everyone has read Peter Thiel's book (ps - everyone has not).

It's the same with the word "startup". For a majority of the world a startup is business that has just started, but for YC (well, pg specifically[0]), the definition is "A startup is a company designed to grow fast" and more specifically notes "Being newly founded does not in itself make a company a startup". The definitions are not only considered inconsistent but they're explicitly inconsistent.

Communication is important and this is one of those instances where I think many people might scoff at the notion that YC is building monopolies and that's "bad".

[0] - http://www.paulgraham.com/growth.html

Maybe a clarification is in order. BUT, this is YC's attempt to make their advice available to the broader community. If you're interested in YC and listen to their advice, you will likely have heard about Peter Thiel's monopoly (see Sam Altman's "How to Start a Startup" series w/ Peter Thiel otherwise).

I'm just happy they're making this advice available.

EDIT: Here ya go https://www.youtube.com/watch?v=-oKjLVECMKA

I have an economics degree and know precisely what the word means, and have never read Peter Thiel's book and am not familiar with his usage of the word, and still the concept as applied in the letter made perfect sense to me.

All monopoly is contextual.

Context does matter though. If you're talking about startups in Silicon Valley, it's completely correct to exclude normal small business and focus on technology-based startups aka "tech startups". They really are very different kinds of businesses.

The problem may be that that "tech startup" is too verbose and lame sounding.

Is it really though? I'd be more surprised at the scenario where the average hacker read this piece and didn't immediately make the mental connection to "Oh, he's talking about the Thiel thing."

So Peter Thiel's version of "monopoly" is "oligopoly"? Why use a term specific to economics if you're using it in a non-economic sense?

Because the term has a certain emotional impact. The purpose here isn't to be pedantic economists. The purpose is to sell something - in this case, sell an approach to startups for how they can sell a vision to investors. "Monopoly" is a beautiful, meaningful word, not a technical specification. Investors don't hear dry economics. They hear "Potential for sustainable high profit margins in a large and hopefully growing market".

If you want to get pedantic about Thiel, he argues that the monopoly does not need to be the direct source of revenue - in fact, it's better if it isn't. Consider Google. What's their monopoly? Search engines, which they dominate with their superior product. How much do they charge to use that product? Nothing. Google makes all of its income indirectly, off of ads served via their monopoly (and other monopolies they hold, like email).

Warren Buffett refers to a moat. Same idea in that you have a defensible advantage.

Who is facebook's viable competitor?

Individual features of Facebook can be picked off by competitors. Instagram is just Facebook pictures. WhatsApp is just Facebook chat, etc. And, at least Facebook thought they were competitors, because Facebook obviously acquired them.

So facebook doesn't have viable competitors, it owns its viable competitors? ;)

obviously Google+, hangouts etc.

Facebook has a monopoly on Facebook, not posts, friends lists, and messaging.

I found that quote to be the most interesting bit of the piece as well.

Obviously it's in every company's best interest to hold a monopoly position in a large market. It's that strong self interest and drive to do whatever it takes to be #1 that I think YC is generally looking for in its founders, rather than a truly brilliant or unique idea. Ideas are cheap, execution and grit is rare. This will be increasingly true for the new biotech/hardware startups that YC is looking at - grinding away in the lab for a shot at a patented monopoly position is the name of the game.

It's just interesting to see the goal of becoming a monopoly stated so bluntly as the end goal of every company that comes through YC. It clashes a bit with the hacker ethos of doing something because its intrinsically cool, interesting, and not expected to scale. Seems like YC is entering a new phase as a larger, more mature organization.

Startups aren't (and have never been) about the hacker ethos of doing things just because they're intrinsically cool and interesting.

There is a small bit of overlap (as in a Venn diagram) between the spheres of "doing things that hackers find technologically cool" and "doing things that make a lot of money." That small area of overlap is where startups are. The vast majority of hacker-cool material isn't (and has never been) in that startup slice.

There's another way to look at it that is useful: first, try to be a monopoly in a small market. Instead of being one-of-many in a large market.

This sentiment reminds me of DHH's talk at startup school (https://www.youtube.com/watch?v=0CDXJ6bMkMY) in which he explains that the best way to create a business is to make money, but not just make money, make it on your own.

I am a little removed from the Silicon Valley echo chamber and enjoy the ability to watch it from the sidelines, but I don't understand the obsession with the 'rapid growth, raise millions from investors, become a unicorn, own the world' mentality.

I just don't get it. As a founder, your life is going to be just as good (probably better) if you made a couple million dollars in actual money that you don't have to divide up in odd percentages to all sorts of already rich guys who gave you tons of money in the first place.

Why isn't everyone just trying to build products that work, that people like, that make money, and going from there?

Why the need to go to YC, or raise any capital AT ALL, for the very very low chance of becoming gajillionaires?

I understand the appeal of the #1 king on top thing, but not really, and not with the risks and pain associated with the journey and the reality.

Whatever I guess. People will not stop investing or raising money, at least for now.

I'm going to assume you're relatively new to startups, because this didn't always used to be the case. Founders 40, 30, even 10 years ago had much less leverage in that today it's so comparatively cheap to launch an app that can quickly get millions of users. Back then, even to think about launching an app you needed a server. The capital that founders needed came with investors who had all the leverage and board control.

It's only recently that you could literally start accepting dollars from paying users without actually paying anything (servers, money integration, etc all free). That means founders have more leverage, which in turn means for the first time founders are getting more of a say in the trajectory of the company.

Basically, your feelings are following recent developments, but it's unusual that this is the case. In other words, you are the long tail that previously never got a seat at the table. But, there are still going to be founders already at the table chasing the big bets.

Of course, you are also discounting the value of having investors that prioritize growth. In most cases, all companies somewhat converge when it comes to what that start up needs to do to survive and succeed: grow.

This is insightful and informative, thanks. I am relatively new to startups, but at 25 years old, most of my peers seem to be in the category I've described and seem to think that is clearly the best way, if not the only way, to start a company.

Plenty of people are starting software businesses without taking outside funding.

I imagine the majority of Show HN posts are of that variety.

Agreed, most companies are this way in general. But that's why I'm surprised to see such hype around the alternative.

Peter Thiel draws a binary distinction between monopolies which dominate a market and competitive commodity businesses. In such a binary model, the only businesses that can have startup [in the Silicon Valley sense] type growth are monopolies.

Of course in a binary model, "monopoly" and "commodity" get stretched to cover a lot of grey flux between the poles. The important thing is which half of the spectrum a company is on, not if the company is on the absolute end of the side with all the potential.

This isn't to say that this is the perfect state of the world, only that there is some context around the way the terms of used...in this case, it's a sketch, or a diagram, or a schematic rather than a documentary photograph.

I realize this is a good way to maximize value for investors, but is this a healthy way to grow new companies and build a better society?

It's complicated, but for startups the answer is Yes.

If every auto company merged into one monopoly, society (other than the shareholders) would be worse for it. This is why anti-trust legislation exists.

If startups create things that never existed before and wind up owning the market for a few years, society benefits. This is why patent protection exists. (Yes - it's abused in software, but that's another story)

It's certainly not black and white. As a buyer, I may say "I'd rather have service X from many providers than one provider, but I'd rather have it from one provider than not at all."

Really this advice is born out of two things:

1. Many investors argue you should build your product in a narrow vertical that has the opportunity to turn into a much larger market. Given you start in a narrow vertical, you should aim to dominate that vertical ('Crossing The Chasm' makes a very coherent argument in favour of this). 2. Investors are aiming for 10-100x returns, and it's hard to do that if you are not going to become the clear market leader.

Whether this leads to a better society is an interesting question. One might argue that it makes your company more likely to be successful, and successful startups are job/value creators which is better for society.

I think this is a combination of two things. Firstly the common business definitions of monopoly are weaker than the common economic definitions of monopoly. In some cases the Michael Porter's of the world are happy to call something a monopoly casually if it has any unique selling point. Secondly, the standards for companies that raise venture capital are higher than for most normal businesses.

I realize this is a good way to maximize value for investors

Full stop there. This post is about attracting investors. From my experience in the fundraising world, there doesn't exist an investor who has the goal of "building a better society" over maximizing return. At best it's a nice to have feature of an investment that it's making something better.

These things are not mutually exclusive given large enough time scale. In fact, they are correlative.

Thus, the conclusion to be drawn from this is that most investors are bad at what they do. Even if that fault is only a short-sightedness.

A big problem with this mindset, I believe, is the unintended-consequence issue.

No one really knows how things are going to eventually turn out.

History is utterly littered with the debris of feel-good movements and ideas that, once implemented, turned out to have negative outcomes unforeseen by the original instigators.

It depends on how large a VC, too. A small VC might be happy to see you build a $50M company, because their overall requirement for returns is smaller. But if you have a billion dollar fund that investors want to see turned into $10B (or more), a $10M return (20% of $50M) is peanuts. It's not worth the time of the small number of general partners available for due diligence, board seats, and other oversight. Their business model depends on unicorns, not horses, no matter how beautiful the horse.

> I find it interesting, and disconcerting, that articulating a defensible competitive advantage is no longer sufficient advice. Now it's, "can you be a monopoly? no? go home".

A "defensible competitive advantage" is precisely a "monopoly" as that term is used in economics; that is, a defensible competitive advantage meansyou have something that assures that no other notionally "competing" product or combination of products is a perfect substitute for at least some subset of your products use cases; within that subset of use cases, you therefore have some range of pricing power, which defines a monopoly.

Bear in mind that this advice is for companies in YC that are trying to raise a VC round.

The failure rate in tech startups is so high that VCs are mostly only interested in investing in the potential to have an outsized Thielian-monopoly return, so that the very few winners in their portfolio can cover the many losses.

It doesn't mean that this is the only way to run a successful business or that other ways are invalid or unprofitable. It just means if you want Silicon Valley VC, this is what that particular group of investors is looking for.

i find it downright scary. that such insane scale is a prerequisite for success leads to companies taking greater and greater risks. to achieve monopoly scale requires it. ignoring local laws and regulations becomes rational in this environment, as we have seen.

"Local laws and regulations" == "limited monopoly".

Assuming you're referring to service businesses like Uber, you're talking about competing with businesses that exploit these local legal monopolies in a corrupt manner to prevent competition and thus become local monopolies themselves. My first Uber ride was in Omaha, the week the service started there, and my driver was a (former) cabbie. She said there were four taxi companies in town, but all four were owned by the same person (faux competition). They regularly cheated drivers out of wages, overcharged customers, and used crappy vehicles. You'll find similar situations in cities all over the country - taxis as local monopoly, enforced by the police and depending on the taxi monopoly's cozy relationship with the local political machine.

Uber challenges the local regulations, but they win by offering a service that is less expensive and much higher quality than the monopolies they compete with.

It's not a prerequisite for success. It's a prerequisite for raising an insane VC round.

Plenty of profitable businesses take a different path and don't try to be a Thielian monopoly. That's fine, it's not invalid as a business. But that's not what VCs are interested in investing in.

The extremely high startu failure rate means they need enormous returns on the very few investments in their portfolio that actually work. Such huge returns imply a Thielian monopoly business.

Monopolies can leverage economies of scale and can be the most beneficial for consumers and the economy. As long as there are no anticompetitive barriers, monopolies can easily fall out when a better product offering comes along.

why? it's the ideal state in capitalism for the single market player. it's just the extreme version of unfair market adv and most will anyhow not succeed getting there

(btw no political notion to this - it just is fact from my pov)

The ideal state in capitalism is for businesses to be interchangable and suffer perfect competition in order to maximise the consumer surplus. This is different from the ideal state for capitalists, who obviously want a monopoly.

As Peter Thiel observed, in the "ideal state" of capitalism, profit is impossible. Perfect competition drives profits to zero. All profit in capitalist systems results from various forms of friction - imperfections in "perfect competition". Barriers to entry are an imperfection.

We're not in the startup world out of an ideological obsession with the perfectly spherical cows of economic fantasy. We're here to make money (among other things). We are trying to build high-growth sustainable business models. That means high profits, much higher than can be achieved in highly competitive industries.

Perhaps we shouldn't be saying "monopoly" so much as high demand, low competition, high barrier to entry.

It's not that in perfect competition profit is impossible, it's that in perfect competition the rate of return of capital invested would equal the risk free rate + what are you compensated for the risk you are taking on. You wouldn't see the excess returns that come from rent-seeking behaviors

this is only true if the market is fluid and market players have comparable powers/options - but it's not the goal of the players themselves

> "so far we haven't seen nearly as much of an effect on early-stage fundraising as the level of press coverage would seem to indicate"

This is pretty interesting to me. I wonder if the press is just blowing things out of proportion, or if there's some Big Money™ behind this so that investors can convince companies to agree to worse terms.

It's the unicorn crash. It's mostly affecting later stages of hugely valued companies. So far the impact in the seed and A markets and more reasonably valued companies is minimal.

Whether that changes depends on a bunch of factors. The two biggest are the overall health of the economy and how economically incestuous high-tech has become. If write-downs and possibly failures among the unicorns trickles down a lot to smaller ventures and investors, it will get worse. Otherwise it will be mostly isolated to that segment of the market.

Edit: check the other response to the parent-- looks like we might indeed be seeing a pullback in angel/seed.

It's definitely had a big effect at late stages. Early stages may not have been mis-priced, or it just may take longer to filter down. We don't know yet.

Early funding is a very small part of the overall pool of capital available. If every seed round is $2.5 million, 10,000 seed deals (~100X YC's size) is $25 billion in capital spent.

For context: - It's less than ten percent of Google's market cap ($490 billion) [0] - The average Series D or later round is 40x higher ($100 million) [1] - It's less than a tenth of a percent of the US bond market ($40 trillion.) [2]

Net - seed funding is just not a lot of money compared to the market at large. If founders and VCs have money, they can spend it. It gets very different later on.

[0] http://www.google.com/finance?cid=304466804484872 [1] https://www.preqin.com/docs/press/Venture-Capital-Q1-15.pdf [2] http://money.cnn.com/2015/10/14/technology/cb-insights-ventu... [2] https://en.wikipedia.org/wiki/Bond_market

Hmm in the aggregate, we reported a pretty sharp decline in 3Q and 4Q 2015 for angel/seed round count - http://imgur.com/CSqVOVQ

I don't think the sky is falling, but people are tightening up on the number of deals being done, there's no doubt about that.

This seems like the same advice YC has been giving for years minus the fact that the market seems to restricting based on the unicorn mess happening which is ultimately probably a good thing in the long term to avoid a bubble and a later collapse. Maybe I've missed the difference between this and the message they had been saying for years now. Though this does seem very solid and something not just YC companies should aim to do. Picking good investors is much more valuable than having a lot of money. Bad investors will give you a lot of money to spend on whatever they tell you spend it on, sometimes good sometimes bad, whereas good investors will give you a little less money and give you the freedom as the founder who may know best to spend it on what you think is best in the long run with some guidance.

Question for Sam -- How do you raise the first 200K at a different valuation without significant extra cost and hassle? I'm guessing it would be a SAFE or convertible note, in order to avoid issuing such a small amount of equity.

Yes, the SAFE is designed to make seed funding very cheap, easy, and fast (and it has proven very successful at doing so).

And the 5MM valuation refers to the cap?


I love this article, but would love to see some Marketing advice for YC companies....

Probably the single best essay on startup advice that has ever been written: Jessica Livingston: Why Startups Need to Focus on Sales, Not Marketing



Missing from all of this...

Hey, you may not be ready to take investor money and that's completely fine. Maybe you've realized you'd rather have a bootstrapped business instead of a unicorn. Cool, actually think about what taking investor money means. Figure out what's best for you and your team.

To be fair, this letter was targeted at companies in the current YC batch. They've already explicitly opted-in to going the venture route, at least in some capacity.

Bootstrapped businesses can be awesome; I've built a couple myself. But the time to be asking these sorts of existential questions would be before you take VC money, not after.

For a group that focuses primarily on young, inexperienced founders and is so founder focused, I think it would be reasonable to expect them to allow for founders to take the exit ramp if they decided the VC route didn't make sense for their business based on their YC experience.

As an employee how can you get these details? and how should you act once you have the information?

As an employee, you probably aren't the one fundraising.

Yes, what I was implying is - based on the result of the fundraising what point of action should an employee at an early stage start-up take considering the current climate. Or what questions should you ask the founders.

Just ask the founders what you want to know. No need to play mind games or whatever, tiptoeing around what you actually want to know.

If you're at an early stage startup and you don't get a satisfactory answer, you need to leave.

This post tell us how undervalued Swedish startups are. We created the term `Swedish series A` a while back, which is around ~$1m - $3m. Interesting that this a seed round elsewhere. High tax and all.. :)

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