Even if you think things will look good in 10 years and want to build a company to succeed at that time, you still need the money NOW if you want to invest in a company now, and the availability of money for investment now is completely dependent on the current financial markets.
In other words, the amount of money available to invest is independent of the fundamentals of what that money is invested in.
VCs aren't directly funded by debt. They generally receive funding from accredited investors, and accredited investors are as a rule wealthy. Now when you are wealthy you make money off your money (through traditional means stocks/derivatives/etc...) but you want to get even more wealthy and have access to special discounted loan rates through things like guaranteed loans. So you go to the bank and say here's some of my books over at Schwab and you can see there's 200M there and it's earning 10% a year on average. Now I want to put 50M into a VC firm so I can really leverage this shit up and make even more money, but I don't want to lose that 10% on the 50M and besides that the tax bill of I cash that position man...
And so the banker is like, but of course Mr Rich Dude here's a line of credit for that 50M at a low low rate of 2% since we have so much money to lend and you can keep making the now 8% interest profits by having your cake and eating it too. And if you're 200M account starts to dip too low that you might be at risk of not being able to pay us back you can always line up some more collateral or we'll margin call and collect that 50M you owe us.
Now sorry I got a bit long winded but that's really the gist of what happens, so yes indirectly VCs are largely funded by debt. And in times like these a lot of that collateral is losing value which is increasing the risk of the debt being collected, this is coupled with rising interest rates which then in turn reduces the potential reward for leveraging yourself up so much. It all becomes a vicious cycle.
Correct. Even the worlds richest man can't buy an internet company without going into debt (or crashing the stock which their "richness" is derived from)
In the U.S at least, holding cash is considered the worst thing to do if you have wealth. Which then leads people to use debt
Although Warren Buffet isn’t the richest, he surely can buy things with cash. In his last annual report, Berkshire reported 33 trillion in cash if I remember correctly. They didn’t find anything interesting to buy for a fair price so then they’ll just sit on their hands.
33 trillion would be more than the current US debt. It'd be more than 10 times the market cap of the most valued company. It'd be more than the combined market cap of the 100 most valued companies globally (seems to be at around 32 trillion for all of them).
The tl;dr is that humanity has at least an 80,000 year history of goods which are fungible, collectible, portable, scarce, and made to an exact standard, traded between people who may not speak the same language for any other sort of trade good. The familiar example is wampum, but the practice predates the colonization of the Americas by many multiples.
Debt is where state money comes from. But shell and hunk money is where states got it from, and the systems coexisted into the late 19th century.
> Is this just people being risk averse right now?
VC historically yielded 12 to 18% [1]. There is a lot of variance in those figures, with the crypto + Clubhouse guys coming in below ten, savvier funds still posting 30%+ and SoftBank + Tiger losing money.
So when a bond is yielding 5 pts [2] above the 10-Treasury’s 2.75% [3], more people will chose 7 or 8% with the guarantee of the issuer’s assets over maybe twenty maybe zilch.
There is only $2 trillion "real money", all the other money in circulation is debt. You can search for the definition of M0/M1/M2 money for more detailed explanation.
> at some point in their process they borrow money
I would be somewhat careful with such claims.
As an investor who has money available, you have two options (in this example) where none involve borrowing money:
a) invest in some startups
b) lend this money to other entities
Increased market interest rates mean that b) becomes more attractive. In other words: the startups that you invest in for a) have to be much more promising than in a market environment with lower interest rates. This means less investing in startups.
A VC fund will only get money if the risk-adjusted rate of return is greater than the rate of interest; otherwise backers of the VC fund invest their money elsewhere.
This means that VC have to become more selective with respect to the startups that they invest in, as I described.
You have the luxury of patience when it's your own money. YC has been raising outside capital for several years (a decade?) now. As soon as you're investing other people's money you're at the mercy of other people's willingness to invest.
They could sell some of their holdings in these huge companies they have 7% of but basically they are saying everything is screwed right now and they expect a decade or more of depression.
I don't read it that way. There is reduced funding available now . So the current batch is smaller. They are still thinking of more than 10 year horizon to mature opportunities but the funds available for that runway is smaller. Hence the small batch. That is my read any way. The depression may be over in 2 years (say), but that does nothing for investor sentiment and available cash right now.
This argument holds true for most VC firms in general. My contention is that YC's stance on defining the "bar for acceptance" seems to be on how much cash they have. So a mediocre company and founders could have got in the previous batch and a deserving one may not this year. I agree that this is fair and square in market economics. I simply expected more from this institution.
I am not sure how you came to that conclusion. This reduction can still be consistent with a fixed bar for acceptance. Say that earlier everyone who cleared the bar got funded. Now, only 60% of those who clear the bar gets funded. The further selection can be on the basis of a performance criteria like value expectation or risk of failure, or it could be on the basis of investor preference to certain areas.
In my opinion the pandemic era saw a significant increase in employee headcount, and now we are seeing a "correction" of the employee headcount.
But I think the bigger point is that venture capital funding is really drying up and investors aren't investing as much. A lot of the market is basically "taking a loan to cover a loan that covers a loan.." and the market is no longer giving out loans as easily due to higher interest rates.
> In my opinion the pandemic era saw a significant increase in employee headcount
I am interested in hearing why you think that. I would have thought that the whole "Great Resignation" theme of the two pandemic years would suggest that people are instead looking to move away from the established companies.
> the whole "Great Resignation" theme of the two pandemic years would suggest that people are instead looking to move away from the established companies
That period was characterised by easy money boosting the job pool relative to applicants. Employees had heightened mobility and many capitalised on the opportunity. That window is now closing, with firms focussing on survival over growth.
Even if unemployment rates triple, we're still not in an employer's market. Companies will lay off to survive, but there will be jobs for laid off to land in.
> Even if unemployment rates triple, we're still not in an employer's market
Broadly, no. We had 0.6 unemployed per job opening in May [1]. So a ~70% increase in unemployment would have neutralised the market.
We saw a 5% MoM reduction in job openings in June [2]; if that continued into July then the ratio is currently about 0.7. Still tight! But tightening, and with all signs pointing to a neutral market before Halloween. (I said the "window is now closing." Not that it’s closed.)
The JOLTS numbers you are using would indicate a neutral market at 6 unemployed per open job, not at 1 (5% unemployment is considered fully employed). I use these numbers regularly in estimating advertising costs and market demand in my business day to day (I own are recruiting tech company). The reason for optimism is simple: workers are aging out of the market, and young people are starting to work on average 4.9 years later in life - so the worker side is scarce and so scarce that the employer side can shrink with effectively little effect on employment, other than fluctuations in wages.
Today's report from DOL is unsurprising (unemployment went down in July).
> Earlier folks / seed funds have more than enough money and even if they take hits on marks the reality is that they invest at such low prices they are still 'good', but (a) they don't know exactly what to buy because they don't know what the later-stage folks are in the market for and (b) they really don't know what prices the later-stage folks will pay for things (which directly impacts what they are willing to pay)... — https://twitter.com/lessin/status/1528750068932788225
As a founder, you aren't paying the VC, the VC is paying you; you are the product and this meta-market is the actual real game you are playing. See: "Series A Exit Clause" – it's baked into your capitalization structure
It’s code for “actually the program isn’t as scalable as we thought and a high % of a cohort not getting interest from traditional VCs is probably not a good look”
Remember that something like 25%+ of all YC companies ever are In the post-pandemic cohorts (due to said mega scaling).
the 10 year horizon of a first mover who grows every one of the 10 years looks a lot better than the 10 year horizon of a first mover who is expected to do nothing the first couple years. And you can only invest money your investors give you, and they give you money out of their own funds that are depleted by the downturn, so while you may be right that this is the perfect time to make a 10 year investment, you can't take blood from a stone.
> Aren't reputed firms like YC supposed to look at a 10+ year horizon?
VC is affected by available capital. A lot of investors are dealing with climbing interest rates and loss of value in other investments. That means less money to place bets with, even if you want a 10+ year return.
It's clear that the valuation of the unicorns that YC and other VCs have been producing for the past ten years was way overblown. Now (i.e. with non-zero interest rates) that there will be less stupid money on the market, the returns on unicorns will be lower.
Survival is a precondition for growth. YC companies will run out of their $500K in under a year and will need to raise money in the VC markets. If they can't, there's no 10-year horizon to worry about.
Or that you expect a downturn that will last more than 10 years. Check out how the 10 year T note has been performing against the 2 year. Markets are not optimistic about the long term.
There was that headline that half of all Americans are expecting a civil war. Or maybe it’s the on-going showdown with the CCP. Or Russia’s disqualification of itself as an energy supplier. Or maybe it is climate change?
Seriously, what’s driving these market trends, I don’t know.
The problem is that their investors are chasing a return - they don't care specifically about start-ups, only that they can beat safer assets like T-bills, high grade corporate bonds, SPY, etc. Cheap credit is what fueled this start-up boom and bought us the Juicero, 21 Inc, etc. Now rates are rising and that era is over. I'm sure VCs still believe in their portfolios / thesis.
> it indicates that earlier investments were based on the market than the fundamentals of the founding team, market, and product.
Is that supposed to be a bad thing, to consider the market? Less good teams and products will do better in better markets, only the best teams and products do well in hard markets. Shouldn't you adjust?
It's a massive cut after a sequence of massive, program-redefining increases in batch sizes. The current size is, as their representative says, still a lot bigger than batches were until recently.
There are a massive amount of applications; they still base acceptance on quality. Otherwise, when market conditions were good, they were letting in a number of terrible companies.
It's actually a bad thing. Just like cryto all the YC companies sell to each other. As per their 2022 stats, more than 50% of sales for all YC startups are other YC companies.
So this is just a game of hot potato until they get a fat valuation, raise a zillion dollar series and then list it on the stock market for the retail traders to hold their bags.
Less YC startups= less customers for other YC startups.
As someone who was on the outside looking in on this until pretty recently, but also has spent much of the last 10 years working with a variety of different YC companies, this is pretty overblown. Moreover: there are so many YC companies at this point, the rate of increase is not an especially interesting marketing fact. For what you're saying to be true, the norm would have to be selling to your batchmates, which... I mean, batchmates are friendly with each other, but they're not like, your core market, even if you're selling pickaxes and shovels.
Still, I found it staggering that there were 414 companies in the recent batch. When we went through 13 years ago (crazy that it's been that long) we knew pretty much everyone in our batch. It was like 50 people. I had conversations with most of the speakers. A batch of 414 companies (or even 250) sounds like a completely different beast.
We went through S21, which was a large batch (400 or so). While we made great connections with folks in our little corner of the world, we definitely did not make a ton of connections broadly across the batch. In fact, we still meet people who are in our batch and we had no idea. Same for conversations with speakers - just not feasible given the size of the program.
This is something that people fail to understand about economics. The vast majority of wealth is created by the faster movement of money - Japan went into a period of stagflation because savings rates rose in order to cover loan defaults. A yen doing the 5 rounds in a family of three could buy 15 yen worth of goods.
That is true, but consumption is supposed to be part of the loop. If a bunch of B2B companies are paying each other no B2C or C involved it's pointless economic activity and Ponzi-esque
It's widely discussed in the industry. I like the Matt Levine hypothesis titled "Private markets are the new public markets", briefly stated: that for a while there was a lot more money available for private companies than there used to be, thanks to ZIRP and megafunds like Softbank VF, and also more regulations and disclosures imposed on public companies, which on net makes it more attractive to stay private and not go public https://www.bloomberg.com/news/newsletters/2020-08-05/money-...
Very informative, thanks for sharing. I guess one of the assumptions behind this is the overall economy is good so the private companies can raise funding easily without going public. Emm but on a second thought, it shouldn't matter when economy is good as companies can always raise funding easily no matter from private equality or public, vice versa, companies may find challenging to raise money when economy is downturn no matter from private or public. So, maybe what you mentioned are the main reasons.
The public markets are fucking stupid. A good company is managed for the next 25 years while a public company has to be managed for the next quarter. This is why private equity investing, including angel investing, beats the socks off of public marketing investing if you know what you're doing (barring access to things like public market manipulation capabilities or insider information)
> In addition there have been competing products launching within same batch
This could actually be a strategy: look which of these companies "sticks" and convince the other companies to become acqui-hired by this likely winning company.
no, YC realized that they let a bunch of companies into YC that historically would have never made it in, reducing the value of the brand. This is a great move to more or less shrink the size and use the economy as a reason.
Anyone remember who wrote that doomsday deck for portfolio founders in like 2008? I can’t believe it’s escaping me, it caused quite the stir at the time.
I don't know. Someone who took action under the assumption that the trends in that presentation were going to drive the economy over the next 10 years would have lost a LOT of money.
Notice the conspicuously-missing X axis label on page 42.
Any sense on whether there has been a decline in startup interest among potential founders? Startup founding seems a lot more risky if you cannot trivially go out and find a dev job if it fails.
I know a lot of people who ended their startups when the pandemic hit and ducked into government jobs to wait it out.
$125k * 400 companies/batch * 2 batches/year = ~$100 million/year deployed just during the batches. On top of that, they often participate in later funding rounds to maintain their 7% stake. Also, it takes a long time for those investments to generate cash. Many of the most valuable YC-funded companies are still private, and even for the public ones I doubt YC unloads its whole stake as soon as it can post-IPO.
There's definitely risk in the sense that YC invests in relatively risky companies, and anything that negatively impacts the long-term value of those businesses ultimately impacts YC. From, like, an accounting perspective, I have no idea when YC marks gains or losses to market or whether that timing coincides with other market participants or the companies themselves.
Either way, in the context of the top-level commenter's question, it's worth emphasizing that a change in valuation isn't a cash flow. YC doesn't get an influx of cash to invest when the value of its portfolio companies goes up, and it doesn't have to give up cash that it could otherwise invest when those companies' valuations go down.
The check size stayed the same, but now they offer a second check for a MFN uncapped SAFE.
Regarding inflation, though, I’d posit that being a seed stage startup is cheaper than ever in spite of inflation, unless you’re super dependent on labor that the founders can’t provide. There is so much competition between service providers that a lot of things are free or heavily discounted in the seed stage, from banking to cloud services to legal. Plus a lot more automation and standardization around back-office stuff than there used to be (e.g. Stripe Atlas, Clerky)
Investors just want a faster return in a high interest rate environment. If they can put money into super low risk things like bonds and get 3, 4, 5%+ then startups have to be beating that
these are not sectors but specific subindustries. to an investor there is no difference as they are almost perfecty correlated, as shown by this news piece
I always find it amazing that applicants only have 10 minutes to present themselves. If I only had 10 minutes, I'd be nervous as hell and it would not give a true representation as me as a person and my project - unless the nervousness factor is a key decision factor as well.
> I always find it amazing that applicants only have 10 minutes to present themselves.
Consider this as a strong sign that YC is looks for companies that are an "easy sell" to VCs (the same holds for products that such companies produce). You can easily guess why they want that ...
I think VC funds operate on the basis of greater fool theory.
You don’t need a product or a capable team, you just need a shiny yuppie team, an easily marketable idea and then keep selling it to greater fools that will invest in Series B / C.
I do wonder how much money has been lost by Series B / C investors in this fundamentally broken market but then again mostly likely Series B / C investors are too rich and well connected to be effected by downturns, so it balances out itself.
What they tell you and what the reality truly is, are very different things. Venture capital is a hustle, and once you learn how to dance the hustle you can find a partner.
Customers usually have more time to make a decision. When it comes to spending our own money, we ask around, we do some research by googling for independent reviews etc. before we buy an innovative product.
So yes, I think a 10 minute presentation of any more or less novel/disruptive product is going to be largely a lie. Disruption is a complex process with a ton of important details.
It is why as an entrepreneur you learn to use cacthphrases, all the current buzzwords that can please the investors' ears more than you actually talk about what you are building.
Many decisions are made in seconds based on an impression from an ad, or walking by a product in a store. Sure some purchasing decisions may linger for days, months or years, but even with such long times to ponder a final decision, there are likely a huge list of options that were thrown out in seconds because some aspect of the product message didn't resonate.
> Many decisions are made in seconds based on an impression from an ad
You are talking about click decisions, not purchase ones. There's no evidence ads can affect consumers' purchasing behavior, in fact quite the opposite.
Plenty of people see an ad for something and will then discount it in an instant as a possible option based on bad messaging, or design.
Do you have something to back up the idea that the ad industry doesn't affect purchasing behavior? Seems like a $837 billion industry must manage to accomplish something.
Meh, my dad ran a small window cleaning business in a small midwestern state. He clearly saw a difference when his existence was known on the internet versus with paper fliers only. Advertising is letting people know you exist.
I think clearly and effectively presenting yourself and your idea is something you can get better at. Perhaps right now, being a founder is not the right thing for you, just like perhaps later, it will be. I think it can be helpful to be careful with how you internalize things. Thinking "I'm just not made for being a founder" could become self-fulfilling, whereas rephrasing it as "I don't have an interest in being a founder" or "Being a founder isn't right for me right now" might be more accurate.
Being a startup founder will give you harsher obstacles to overcome than that. The world is tough and unjust. Founding a company is not for everybody. You gota be a nerd and a tough person at the same time.
YC has been irrelevant since they started admitting more than a handful of companies. It has almost become a rite of passage on to the fundraising circuit. It’s unclear what their admission philosophy is (e.g. p% of all applications?—I doubt). Or perhaps some fear of missing out dominates their thinking now? It would be interesting to know. Hopefully the current economic situation forces them to reconsider and perhaps return to admitting and cultivating an extremely small number of applications.
We actually thought about doing YC and demurred because (1) it wasn't a great deal and (2) because the batch size was so big, it wasn't a particularly good signal anymore. I've heard from other founders that they have so many startups no one gets much individual attention.
I do not understand why the mods flagged the sibling comment. It was on topic, directly related, and is a central issue for the given discussion.
Ah, yes, it’s because I tangentially pointed out exactly how much power YC has, and that’s bad for business. Got it. I’ll keep my head down before one of the powerful people reading this decides I need to get my account permanently penalized again until I learn my lesson and stop ever mentioning it.
You know what? I take it back. Please succeed without applying to YC. I wish there was a way to help you directly. And if you win, please try to help others win via the same route, or at least let people know that it’s possible. Best of luck.
I’m pretty bitter today for personal reasons, but not a single word of that comment was off topic, or dare I say mistaken. HN is inexorably linked to YC’s stranglehold on Silicon Valley, and moderation policy is not an off topic point. I don’t give a damn if you drag every one of my comments down to the very bottom for all eternity for saying this must because it’s true, because that’s just some small evil person exercising their power when someone else says a thing that worried them.
I’m logging out for a week while I figure out my life. Whoever is the person behind that flag button that you pretend the community controls when in fact it’s you personally, please, stop and consider for one moment that you’ve already won, and there’s no reason to cull voices just because you want to. It’s scary, and smart people do exist who see what’s happening. It might take 20 years for your power to finally crumble, but stuff like this is exactly how it’ll slip away.
Forget it. I put so much of my heart and soul into every one of my comments, and all of my effort into actually writing substantive, interesting, on-topic, entertaining commments, and the one time I say something laced with a little bit of (directly on-topic) truth, one specific person clicks a button to disable it ostensibly for the community’s benefit. The whole thing is just creepy, especially since the goal is to hypnotize as many programmers as possible without directly saying so.
Am I wrong? If I’m mistaken, I am 100% okay with being mistaken. I’m fine with downvotes, I’m fine with seeming a little strange. My goal here is to speak to the community. I even tried to figure out these questions privately via email with you, and then one day you publicly accused me of abusing hn@ycombinator.com when I was literally just trying to figure out what you want me to say vs not say.
You got the power man, you’ve won. Congratulations. I hope startups like Parsnip show that the world can do it without you.
I didn't flag you, but I did downvote you for tone and being overly dramatic about the "risk" Parsnip is taking by not banging down the door of YC. YC is great for startups that it's great for, which is not _all_ startups. Additionally you made it sound like YC is going to hold some grudge because Parsnip decided not to participate (apply? accept? either way), which seems very weird.
Hey man, I've read your comments and just gotta say, there's definitely some pent-up emotion or something behind there. Whatever you're going through, I'm sorry, I feel for you, and I hope you come out the other side. I've been there.
I read your comment before it was flagged. I assume it was removed because you broke the first rule of this board: "Be Kind, Don't be snarky".
Your followup comment here also seems to break that rule. In general the combativeness you've added to your previous and current comment make for nonproductive discussions.
I appreciate the level headed reply. And I admit that that’s a very solid justification.
My life’s crumbling, and I’m sure that has at least a little bit to do with the lack of kindness.
I have a therapy appointment later this evening, and maybe that’ll do something. Money didn’t change a damn thing either. I’ll just bow out and let the world go.
Thank you for speaking to me directly. I hope you have a nice week, and life.
Exactly. Hiring freezes are similar but it seems many places are taking advantage of this year to burst self created bubbles, not because they have to but because they can without seeming like wimps, which in any other year they would.
Ideally a scrappy spot takes advantage of this to dethrone YC completely because who knows how tired we've gotten of these companies. If they don't act fat though YC will succeed in trimming the fact and remaining as the #1 buzzword in silicon valley.
Why would they? They are buying into these companies at a $2m valuation which is absurd. It's a no-brainer move and almost nobody can rationally say no since YC is so powerful
Y Combinator’s Summer 2022 cohort — currently in action — boasts nearly 250 companies, down 40% from the previous cohort, which landed at 414 companies...the batch is still large “relative to the last five years of batches.”
Next up, we shall hand wring about Bezos having fewer billions or some nonsense.
It's signs like these that cause a recession. A lot of recession (and growth) is about belief in the economy. If YCombinator tells everyone there will be a tech recession, it increases odds of a recession.
My own opinion is that COVID19 ground the economy to a halt. We had two choices for dealing with the lost productivity:
a) About 2x inflation of currency (long-term -- e.g. 15% for five years). At the end, currency is worth less.
b) Structural damage (e.g. businesses going bankrupt, people losing mortgage, people fired, etc.)
And a bit of a spectrum in between. We chose much closer to (a) than to (b). This feels like the right choice. We didn't do it very cleanly, unfortunately, which has repercussions now.
Personally, I feel like we should all just accept that money is worth less today, that it's not a runaway problem, and just deal with it. I'm concerned we'll either just delay the structural damage, or see run-away inflation.
It effects everyone quite a bit. The problem is we lost many months of productivity. At the end of the day, there's less stuff to go around. You get less stuff. I get less stuff.
Money is a point-keeping abstraction.
Us simply being able to buy that much less stuff (by the lost production) is the best-case outcome. The worst-case outcome is that we continue to produce less stuff because of structural damage. For example, if you lose your job, can't get another one, and can't make your mortgage, that results in much more direct damage than a loss of savings. That, in turn, means you buy less stuff, and businesses who depend on you to consume go under, and more people lose their jobs. And so on.
If this is true, it indicates that earlier investments were based on the market than the fundamentals of the founding team, market, and product.