If "The Russian" comes to the U.S. to make an investment is because the U.S. has done a really really good job in terms of policy to make it easy and convenient for foreign investors to bring money to the U.S. now they (gov) need to do the same for talent/entrepreneurs.
Can be parental, culture, education, standard of living, etc.
That's a pretty strong statement, but even if we take it as an axiom, I think that it isn't migration that concentrates it -- people migrate from everywhere to everywhere all the time.
I think it has more to do with having gone through some hardship, and (selection bias) having done so successfully, makes people better at taking risks.
There's a statistic that says that a huge number (ten percent or so) of immigrants immigrate again to a 3rd country.
Someone who never immigrated would think "all that trouble, again?". Someone who [successfully] has thinks "Well, that wasn't so hard, we can try that again".
Also, I'm offended by your last sentence. You've obviously not immigrated to america recently. I have, and it wasn't easy, nor was it cheap.
And if you take offence at random remarks by strangers on the internet, you should have a long talk with yourself.
The anti-intuitive thing is what others have said: migrants are bolder (entrepeneurish) or they have some requested talent.
These are investors with a large number of connections in the silicon valley world. My assumption is that they have some extremely well-informed spreadsheets about past YC company performance.
Predictably there will be a lot of bitching by other angels, imo they should create a fund and offer to match.
YC might become a one stop shop.
YC now has more partners and a larger network of alumni so that should help a bit with scaling this.
While that doesn't seem particularly fair to the rest of the VC community, it's exactly analogous to investing in an S&P ETF (which just invests in a whole bunch of stocks at the current market prices).
As shown by history - this does not work in the long run and makes things worse than better.
Dont get me wrong - YC is great, pg and rest of the team do an amazing job of selecting startups. But such blanket offers will mean lesser money available to non-YC companies. So if you are competing with a YC company, you have so much ground to cover.
More money for startups is good, but quality of the startups should be judged almost every 3 months. That is very healthy for entire startup community on the whole.
I actually think precisely the opposite will happen.
If you go to a top college, they dont interview much. You get a very fat paycheck. If you go to tier II college you are interviewed a bit more and given a bit thinner paycheck.
Over a period of time this became a positive feedback cycle and is the core reason for very low quality yet expensive workforce.
What I feel in my gut is - such blanket investments normally take up valuations to such levels over a period of time that it becomes unsustainable. Whether it is with job markets or investments or real estate.
The only place I can see this as being a problem is with acuhires, where an acquiring company can potentially care whether it's a YC company or not.
They could have bought a boat instead, investing is not a zero sum game, they don't have to spend the money.
And as an entrepreneur, do you really want to take money from some one who might not have enough knowledge about you and your business? Who is relying on a second hand judgement about you and your business, even if that judgement directly comes from pg?
Um, yes. Taking money with these terms is a no-brainer. It doesn't preclude you from taking on more active money or taking on advisors. Anyone who puts together an angel syndicate almost always has investors who say, "I'm really busy, so I can't help out much, but here's my money". Most angels think about your business for a few hours a month, at best.
Having said so I do see your point as well and we can just agree to disagree.
For analogy, I'd use the resource curse. Countries which should theoretically be paradises are not, because their natural resources prop up bad economics and bad governance.
As always, its an opinion. I guess a data driven answer would depend on the contra event of what these companies would have done if they weren't offered the money.
Any evidence for this statement? Because I think the system works just fine.
And YC don't limit themselves to just web startups, or even just to software companies, according to the FAQ. 
Except, of course, you're getting a lot more than money for your 6%. The difference is that YCombinator's promise are much less empty than that of a record labels.
(I know, I deflected. Milner's terms are not shitty. It's YCombinator's that are, but only on the surface).
We were ecstatic. That was the best deal I've ever been offered in my life.
I think for most startups that haven't executed much, that's an incredible deal. Your idea that your two buddies just threw together, and maybe a prototype, is worth $250,000. Really?
(I know that some more mature companies have come to Ycombinator, companies likely worth more, but there are ycombinator companies that came fresh; so my assumption would be that the more mature companies would get a somewhat better deal than the brand-new companies. If that isn't the case, then it's possible that those more mature companies are getting the poor deal you are suggesting. But certainly for a fresh company, the ycombinator valuation, I think, is quite generous.)
Maybe it's just because I'm in a more traditional market, where people value you based on revenue, or maybe it's because I'm not that good, but it's taken me years of work to reach that kind of a valuation.
(on the upside, the valuations are somewhat, ah, less volatile in my industry. Assuming that my costs/revenues don't change sharply, the valuation of my company isn't going to change sharply. )
Does that sound like what's happening at Y-Combinator?
I suspect all 40 companies will take the money on those terms. You would be crazy not to.
e.g. If the A series funding was taken at $1.5 Million valuation, the SV share in the company would be 10%. No valuation ceiling, no discount. Lower the A series valuation, better off SV angel are.
This is sort of like going to the race track and betting on every horse. Except at this particular race track, the horses are all above average and multiple horses can win each race.
I'd take those odds.
OTOH, maybe/probably Ron Conway actually enjoys the thrill of the hunt for new exciting stuff, so he doesn't consider it a particular cost.
Right now, according to the article, YC (pg) is happy about the situation : it improves their brand, helps entrepreneurs, etc. But I'm sure that they'll realize that Yuri just got in at a better valuation (on average) than they did, but they're doing all the work. Of course, they probably already have realized this, but they don't have many other options now - other than inserting 'poison pill' anti-freeloader terms into their deals...
Given how (YC) entrepreneur-friendly this is, there must be a whole lot of soul-searching going on at VCs and other angels now : Somehow, the private equity space just got an index investor.
You know the jockeys they use are great (investor community), you know their horses are from great stock (top applicants), you know that the breeders, handlers and trainers (advisors and partners) are THE most experienced in the area. You know the stable only enter horses into races (markets) where they think the odds of placing are good, or the opportunity cost is so low for a potential outsider.
Sure there are other stables, and sure, some of the horses in this figurative stable are co-owned by people with very different aims from you (boot strapping cofounders?), and some are backed some of your competitors.
He can afford to gamble $6M on YC startups, if they will create demand in the market for his hundreds of millions dollars worth Groupon, Facebook, Zynga shares.
It's a good assymetry position to have.
If one of the 40 becomes the next google, he wins. If he can exit his DST positions, he wins.
However if the web bubble burst, he is sh*t out of luck. And DST will be a huge bagholder.
I don't get it, how does this help with that?
They say that the only limit to AOL's revenue from this was the amount of space on their website first page, not the number of interested startups.
Basically the valuation of the giants stayed up for as long as easy funding was available to .com's. Their spending habits, without being backed by actual revenues, were more than enough to sustain the stock prices of the few big ones selling to startups whatever they needed (ad space, big iron or aerons).
They all fell together when the crash came and easy funding dried up.
Most startups now to know that building an audience isn't enough that they need a revenue model. Many startups being built to are good fits for acquisitions by the bigger players, generally less people getting funding for things that are unworkable.
Also the public is far less adverse to sharing and purchasing online and innovations like the app stores and things like the kindle have opened up many more markets to generate revenue.
Also, the money might keep people working on bad ideas instead of giving up and trying something new. Obviously they could pivot, but $150k gives them the ability to spend ~a year working on a bad idea before needing outside validation.
But I'm sure it'll be great for YC overall
Can you quantify a big win?
I don't believe that's been borne out yet.
So either the homeruns have to be further out of the park than Heroku or (as is likely) the median return needs to keep things in balance a bit more.
I can't believe Paul Graham deals with these guys. He should understand that Russia is outside of his circle of competence. His smarts are not enough to make the judgement.
Russia gets roughly $90B annually for oil and gas. Most of the money gets stolen one way or the other and ends up in the funds like DST.
Andrey Ternovskiy is the founder of Chatroulette.
And the excerpt above is from The New Yorker
In Russian, use google translate to read in English...
Looks like PG got fucked. Now, YC companies are Milner's bitches. And what a cheap brothel it is, only $6M.
YC may be the best deal for a crew of wet-behind-the-ears startup virgins, I'll grant that.
150k is not going to get a company very far, and certainly not far enough to reinvent the startup model completely. Building a team is still a critical part of building a YC (or any other) company, as is honing a product and bringing it to market (which is primarily what they help you do). Saying that those things aren't part of the YC model just because you get some extra free money on great terms is disingenuous.
Also, more and more experienced entrepreneurs are going to YC, because of the effects of the network and because the money really isn't that expensive. People always bring up that it isn't a great deal for experienced entrepreneurs, but you can ask my friend Steve, who just sold Reddit, went back to YC, and just raised a fat series A for hipmunk whether it was worth it.
The YC model is something like this: Founders are recruited, then weeks are spent building a prototype whilst attending dinners/lectures about the next step: fundraising.
YC is out of the picture once teambuilding, product honing begins. Its explicitely NOT part of the YC experience. As I understand it.
To expand on my 1st remark: the shoestring bootstrap model is just one; others solicit Angels to fund development in a more structured manner. The reasons to bootstrap are usually, you are not known and cannot convince Angels to cough up. If for instance you have a success behind you, it may be possible to dispense with the grinding poverty phase.
Although "Paul Graham seemed very pleased" implies it doesn't, so I figure I'm wrong. Maybe it is for the better, especially when it's optional...
(Also the Ycomb environment and all that too)
How long before a major VC steps in to offer a third round for those that get to some pre-set goal to every YC funded company that took the second round too?
I've read about convertible notes before just a little confusing at first.
Example #1: Company A takes the offer and sells for $1m in 6 months. The debt converts to $150k in stock, netting the investor $150k.
Example #2: Company B takes the the offer and raises $1m at a pre-money valuation of $3m (selling 25% of the company and establishing a post-money valuation of $4m). The $150k turns into $150k in stock at the new valuation, so 3.75% of the company.
Normally, there are various ways (discounts, caps, etc) to reward the early investor for the additional risk they are taking for investing so early.
Basically what this means is YC companies can (if they want) eschew funding at demo day, hold out for great terms, or just get busy creating value and raise money when they have more leverage. This is huge.
1. I get $150K in convertible debt from Yuri.
2. At the end of YC, my rich friend Joe decides to invest a million dollars in my company at a valuation of five hundred trillion dollars. Yuri thus gets an insanely small slice of my company.
3. Two days later, my company buys Joe's shares back for a million dolars.
4. Now my company goes off to seek actual funding at a sane valuation. Yuri gets annoyed.
Who would do that for $150k? To me, this is the equivalent of leaving $20 on the table to see if you can trust your friends.
IRS couldn't care who ripped off whom as long as they get their pound of flesh.
yc is a small network; if one founder screws someone else, everyone knows about it. vice versa.
That's why when companies buy back stock they tend to use tender offers that are extended towards all shareholders.
This is not legal advice. The legal issues here are more complex than this post calls for.
The next term might be a bit better off, but it certainly doesn't suck to be you.
I have no problem with that, really. In 2001 it was different - everyone was playing with public money through IPOs. Now only a few quite established companies can afford to go public.
Don't be mistaken, though - this will turn into a bubble, whether you wax romantic about "entrepreneurs just do it!" or not. It always happens - it will happen again, life will go on, but it will happen.
This investment will convert at valuations closer to 5M these days. So in fact they're effectively paying 10x what YC is paying for about the same stake in a company post the financing.
Congrats to YC and time will tell if it works, exciting either way.
The denominator is the investment valuation, which is significantly different for YC and DST.
I've heard from quite a few people who say this is a negative thing and they say it defeats the idea of being a startup. My question is, why do you HAVE to start in a garage? Why do you HAVE to eat Ramen noodles for 2 years? At the end of the day, being a startup is about having a creative team and being innovative.
This is a great step forward and if it helps a few more teams create a killer product then we all win.
The payment pg and company receive for this service is the increased negotiation power in the deals they fund.
Theoretically this makes entire YC batches without a single dollar invested by YC itself possible.
It's a little scary how good the yc companies seem to be lately.
My guess is that it's usually a bet on the people, not the idea. If you mentor a founder that eventually starts the next Google, they are going to remember that.
It's hard to believe the math works out here, but obviously a lot of thought and number crunching has gone into this decision. Great news for YC though!
Guess it's time to get cracking on those YC applications, folks...
If it's a bubble, it's a cheap bubble $6M is nothing for most funds.
But is this fair to other angels/investors?
Less sardonically: if YC is so ridiculously superior to other investment models that investing money at these terms is profitable knowing nothing of the actual company invested in, then the system is broken. This is the market's corrective measure, attempting to come up with a better approximation of the true value of early stage startups. Might it discomfit people who made a lot of money when it was broken? shrug
$150k is a meaningful amount for an early-stage startup. Multiplied by 40, that is $6 million. $6 million is, seat of the pants calculation, two orders of magnitude lower than 2% of United States VC funding in a typical year. VC funding is three orders of magnitude lower than the amount of outstanding bonds in the US. That is one asset class: there are others.
Or, for another visualization: if this investment is one pixel, then the US bond market is a grizzled old neckbeard sporting six monitors at 1024x768. The remainder from that calculation might fit an iPhone, but I don't know the resolution on those off the top of my head.
Long story short: there is always a ridiculous amount of money in the capital markets.
If you compare to that, it doesn't look reckless at all.
What it does do is turn YC into a market index. Interesting.
SEC Accredited Investor Status.
We have at this point in time, the lowest rate of success or ROI of the VC industry since stats were kept. It would seem to me that any deal whereas someone short-changes the process of getting to a Series A deal for any VC or group of VCs is somewhat dangerous of destroying the very model that got all of us here.
What steps are being taken to protect the 'YC-Combinator' VC and start-up incubaor model?
This changes the character of the YC experience. YC companies can now spend their time on product, not fundraising. On the other hand, less financial pressure may mean the founders don't learn to hustle and act less lean.