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The YC VC Program (ycombinator.com)
404 points by pg on Nov 26, 2012 | hide | past | web | favorite | 165 comments

YC is perhaps the most innovative angel/accelerator/VC firm in the planet. Despite all the success the firm has had, it is still acting like a startup -- constantly questioning, experimenting, tinkering, and gradually optimizing via careful trial-and-error, based on the real-world results achieved with each batch of companies. Clearly, it's run by hackers.

I think this change is a definite plus, but I disagree this sort of change is startup-specific.

Trying new things is just how you're supposed to build a company, at least when you care for the long term rather than next quarter.

Its unfortunate there are so many 'sucking up to' responses to the original post.

If PG is smart enough he wouldn't give a Damn to those response. If he is not, he is not worth 'sucking up to'

There is nothing wrong in questioning this change.

To me this is a clear indication of YC has passed its peak. If you are funding people who are going to fight over 80K after their dream company fails, there is something seriously wrong in kind of people that are being funded by the program.

Well then, to play devil's advocate, there's this -

How to interview a VC: http://startupframework.tumblr.com/post/27080999978/intervie...

There's a term for that, it's entrepreneurship. It was never limited to startups. Many massive corporations are quite entrepreneurial.

It just means the are not insane, at least as defined by Albert Einstein: "Doing the same thing over and over again and expecting different results."

This is great! I always thought the $150k was too much of a runway. It allowed the poor startups to limp along for too long.

And besides, the real value from these investments isn't the money, it is the mindshare you get with the VCs. This will help make that mindshare greater.

It'll be interesting to see how the mindshare arrangement plays out.

VC's are used to writing huge checks and providing value after a company has solved product-market fit. This asks them to write a tiny check and provide very early expertise they generally don't provide.

The big VC firms are increasingly trying to do early stage angel investments to get their foot in the door, so to speak. They will likely have better advice at the early stage than they would have a few years ago because they have more experience with companies at that stage.

Also, Andreessen Horowitz added Chris Dixon (a very well known angel investor) as a general partner, so I think this speaks to their intentions of being able to help companies at an earlier stage.

I get why it's great for investors, but why is it great for founders? Especially when they could use the time to change plans.

The office hours help all the startups. Decreasing the amount invested helps the successful and borderline startups because it means less of our time is taken up mediating founder disputes in the ones that are exploding. And yes, that was a significant time suck; Jessica says the majority of her time last batch was spent dealing with founder breakups.

Have these disputes changed YC views regarding single founders?[0] I think YC has always favored founding teams with a dominant leader[1], but I wonder if these break-up experiences have pushed it a bit further towards single founders with strong teams.

I guess there is no change, since the advantage YC sees in multi founders is probably only for the time interval before these disputes, at which point they are already doomed. But what I may be missing: could amicable breakup ever help a company avoid the dead pool?

Another thing I find missing from the discussion: is this move also meant to push new founders to profitability faster? PG seems to be mentioning it more lately ([2], [3] etc.).

[0] Honest question- I hope it does not spark another single vs. multi founder debate.

[1] http://www.youtube.com/watch?v=JK3sVFs6_rs

[2] The best solution is not to need money. http://news.ycombinator.com/item?id=4067297

[3] The best thing to measure the growth rate of is revenue. http://www.paulgraham.com/growth.html

PG how much of this attributable to $150k being too much money? Wasn't the last batch the largest by significant margin? Is it not expected that there will be more failure and therefore more demand on partner time as batch size increases?

In another comment, you mention founders scrapping over the carcass of their failed startups; what is it exactly they're fighting over? Surely the money has run out and anything left should be returned to investors in good faith? Are they fighting over Cinema Displays, Aeron chairs, etc, and by reducing the amount of the note you're reducing the amount of accoutrements these fledgling startups accumulate, and thus can fight over in the event of failure?

what is it exactly they're fighting over? Surely the money has run out and anything left should be returned to investors in good faith?

I assume he's talking about cases where the founders fall out well before the money has run out.

Previously, when there was little (money or IP) left, they'd just go their separate ways and start something new.

But with money still in the bank, founders may believe the company still has some value and a future, and will fight to assume control of it.

I wonder how many of those teams were single-founder projects that took on partners to apply. It is surely very rare for organic teams to experience this sort of drama in three months, no? Or is YC really just that stressful?

Doing a startup in general will test even the strongest relationships. I've seen old friends break apart.

So yeah, YC can really be that stressful.

Point made - but do you really believe that halving the investment is going to change the level of drama involved? What is this - a shout out to Biggy's "mo money mo problems"?

Surely, we can respect the complexity of founder relationships, and yes, at times their tenuousness - and not trivialize them as matters that can be solved by making it easier for a VC to write-off the investment. It just feels like an aspirin for a different problem...

The batches usually grow, but we also hire more partners, so the ratio of startups to partners stays pretty constant.

What about holding the additional $70k per startup in escrow and dividing it among those startups that deserve to stick around?

Basically, if you take 60 startups, give each $80k and put the $4.2 million (60 * $70k) in the bank. When that batch of YC startups gets to $20k left in the bank on average, figure out which ones show promise and which ones should be deadpooled. Assuming a 2/3 deadpool rate, that leaves 20 startups to divide the $4.2k among, or approximately $210k in convertible debt per startup to reach the next milestone.

This is more inline with your essay about the future of funding, in which you speculate that funding will become more continuous.


If we delayed the investment, the investors would lose money. The investors are counting on indexing to generate returns. If they invest at the start of the YC cycle, all the startups take it, including the one that will later turn out to be the star of the batch. By Demo Day, though, there is a good chance that the star will have started to emerge and already have enough money. So this strategy would cause the money to go to the medium-good startups, which is not good in a domain with a power-law distribution of outcomes.

This would all but put a nail in the coffin of those who are "lagging" behind. The first question an investor will ask is whether you received the additional $70k. No investor wants to institutionalize that 30% of their companies will receive bad signaling by default.

> The office hours help all the startups.

I would say that they were definitely valuable to us, if for no other reason than to get a chance to talk with investors before there was anything really at stake. The way investor meetings go is something that's hard to explain and something you just have to experience. This gave our class the opportunity to get a little used to how investors think and the way they interact with potential investments. While that may seem to be somewhat intangible, it's hard for me to estimate how much that initial experience helped ease us into doing it "for real" later.

Would the reduced chance of success of a single founder startup be compensated for by the reduction in investment, time required and increased number of companies that could be funded? Even if you think single founders succeed only half as often, having twice as many with no founder breakup issues could put YC ahead.

Forgive me, but if some other VC had said this, I would have thought, "The blowing-up startups aren't the primary revenue stream - this VC is solving the wrong problem, i.e., optimizing the hedonic profile of failing startups instead of optimizing the financial profile of successful startups." Obviously things are different for you because you aren't necessarily in YC primarily to maximize RoI... but nonetheless, am I missing something? My brain throws a fairly large warning exception when it encounters the event "find yourself disagreeing with PG about VC".

(The alternative I would've given that hypothetical VC would've been to pay somebody with professional business mediation or even personal counseling experience to specialize in the part of the problem they were finding painful. This option is admittedly less open to the average VC because they would have to solve the Design Paradox well enough to identify a good mediator/counselor. I have a rant about groups not explicitly recursing on their most important obstacles and trying to solve them on an ad-hoc basis instead focusing strongly enough to start a subproject that can invoke specialization and a person whose explicit responsibility is to solve that problem, but it probably doesn't belong here.)

The explanation is that the two types of optimization are related, because the successful and exploding startups both consume our time and (perhaps more importantly) attention. If we can make founder disputes at the unsuccessful startups take up less of our attention, we have more left to use helping the successful startups.

Plus we're human, and we don't want to spend all our time mediating disputes. It's very boring.

I don't think outsourcing dispute mediation would work. There's too much context, and founders seem to want to make their case to us personally.

Are there any patterns to founder disputes?

Sorry, I am having trouble parsing the last sentence about your rant. Without pasting the full rant in - are you saying that you believe that groups that try to solve their main obstacle by starting a subproject with a specialized leader are doing it wrong? Or groups that start a subproject that is designed to solve some side, not-as-important obstacle are doing it wrong?

The reason I find that ambiguous is that for YC, mediating disputes between failing startups is not as important as the main obstacle they are trying to solve, which is the RoI problem. So, they could indeed outsource the mediation/counseling problem to someone else, and even if someone else didn't do as good a job as they themselves did because they didn't identify a good enough mediator - well, making sure that a failing startup separates fairly is not that big a deal anyway.

pg, can you express percentages of yc startups that went through this?

IIRC around a quarter of the startups lost a founder. Many of those partings were amicable though. Maybe a third required us to get involved.

So basically, the thesis is that a startup only needs $80k to determine if it may succeed or definitely fail and that $150k provides little added benefit in determining success for those that will be successful, but let failing startups stick around for too long sucking up time and attention. Tough love, but sounds like a great idea.

I'm curious what it might do to valuations. Now the startups have 12 months of runway instead of 18-24 months depending on the number of founders. This means that at demo day, investors know they could potentially squeeze startups a bit more because the runway is shorter. Hopefully the sheer competition will mitigate VC propensity to keep telling investors, "Hey come back next month with updated numbers" until the startup is willing to take money at any valuation.

It's often hard to step out and see that the idea just doesn't have legs, especially if you've invested so much of your time and effort into it.

When you come to the end of that runway, you need to make a hard decision.

Also, when you change plans, you can look for new investment in the new idea. The assumption is that if you can't get follow on funding for your current idea, then it really is in your interest to come to the end of that runway sooner so you can be forced to make that hard decision and focus your efforts elsewhere.

Is there any significance to Ron Conway not being in the group anymore?

We certainly didn't kick SV Angel out. They're among our favorite investors in fact. It just didn't make sense with their fund size to keep doing these investments. Unlike the other investors, they are what's now called a "super angel" fund, and those are much smaller.

I'm certain there are some companies that need more runway than others. Is it possible for, say, hardware companies to renegotiate for, e.g. 30k per VC rather than the current 20k?

I'd never thought of that. Maybe in version 2.

I'd recommend staying at ~$80k. One of the mistakes I made last year was over-building inventory (possibly because I had access to $150k from Start fund).

Also for version 2 and inline with the needs of hardware startups:


From our perspective (hardware company), the 150k did provide some runway, but more than that, it provided funds for R&D. We could finally make future versions of the product without always finding a customer for it first.

We could order components just to try them out, without worrying that we were spending money on what may potentially turn out to be an unusable or unnecessary part. We could answer a lot of questions about what was possible using test setups rather than assumptions based on scraps of information collected from various sources.

80k probably would not have provided both R&D funds and some runway.

EDIT: I mean 'runway' in the sense of money for salaries, excluding R&D and other costs which could possibly be seen as ongoing costs of operation too.

This doesn't preclude a company from seeking funding elsewhere and I can imagine very, very few companies at this stage that could legitimately burn through $80k in 3 months. If that doesn't get you close enough to at least prove something that could be used as a basis for raising more, it's probably time to take a step back and figure out if that's really the best strategy for moving forward.

Yes. But this takes time away from building things when you only have 3 months before demo day, and I'm sure there's always stigma attached to pursuing "outside-money" when everyone else is fine taking the 80k from the 4 investors YC trusts.

I agree. I meant that you could raise after demo day. As I said, it's pretty unlikely that you must have more than the 100k you'll get during that time, even for hardware. Plus constraint in this case is a good thing, virtually anything can be built given enough money, but in order for a company to exist you need to be able to build it at some reasonable cost. If your prototype is going to burn through all of that cash, it's time to get creative and find a way to do it for less.

That may be true in many cases but as a counterexample, SpaceX needed rather more than 100k to reach minimum viable product.

The 150K was crucial for us as a hardware company. But it's hard to find the optimal balance between development speed and burn rate for hardware. Being able to more freely purchase things (components, raw materials, equipment, prototyping services, express shipping) helped us move much more quickly than before. With 80K, we would have adjusted our judgement calls and consequently moved a little more slowly.

From Techcrunch (http://techcrunch.com/2012/11/26/y-combinator-debuts-yc-vc-t...):

"Notably missing from the investor group: Ron Conway’s SV Angel. Y Combinator founder Paul Graham said in an interview that this new format didn’t make sense for Conway and David Lee’s fund size."

80k may be a little tight for international founders, as flights and legal fees for visas can be very expensive. Also silly things like paying extra for deposits on rent/bills as you have no US credit history. But otherwise seems reasonable.

80k also substantially complicates hardware, I think. I wouldn't do a $50k hardware build without $100k in the bank.

I don't think that taking this money precludes founders from raising more money if they need it, as they would have needed to do two years ago before the Start Fund.

The problem is raising money during the 3mo YC program is difficult and discouraged. YC founders have said they are discouraged from raising money until Demo Day or beyond, so they can focus on building stuff.

In very few cases will $80k vs. $150k make a difference before Demo Day, except for (IMO) hardware, certain other businesses with specific prepayments (maybe a licensing deal like "exclusive 12mo license for Kinect tech for pharmaceutical industry"), etc. But really hardware is the only obvious case.

I would actually go further and say it's not just difficult, I imagine it would be near fatal unless you were a well established company walking in. We found fundraising to be an incredibly soul sucking process and without at least a firm grip and a solid plan for what you're doing you wouldn't make it far.

While not nearly as bad as fundraising itself, I would also caution people not to underestimate how much work a successful kickstarter is. A lot of work is required, and is continued to be required long after it has finished.

It seems like the smart thing to do in this case is to then go down the Kickstarter route. I definitely wouldn't suggest it for software, as I genuinely think we got extraordinarily lucky, but for hardware it's an excellent choice.

Yeah. Getting early revenue or at least commits is key for anyone.

That said, I think I'd still want to have a bigger bank doing hardware. If you kickstart or take pre-delivery payment for something at ~cost, and you need to respin a few times, you may become the next Wakemake. Being able to just take your $50k reserve fund and buy all new parts or pay for an expedited mold or something could make a big difference early on.

I wish I had enough silicon-valley-version-of-Wasta to raise a $2-5mm microfund. Being able to finance hardware projects or other obviously capital-intensive YC projects on START terms with an extra $100-200k early on would be a pretty decent investment. It would still be a much more algorithmic decision than "which teams do I think will win", which probably wouldn't work as well. The ideal LP for this would be Jeff Bezos and maybe a few other guys who made bank off hardware or retail.

You'd almost be a bank, vs. an investor -- you would be investing based on a specific credible expenditure. Do it as debt + warrant coverage, or secure against revenue. Just be easy about it -- it should take 5 minutes to make a decision, and you should be adding hardware/distribution/retail/logistics clue to the process to help the founders.

YC hardware companies (and, honestly, all startup hardware companies) kind of sucked before the $150k START in W11.

$150K is not enough to secure H1B visas either.

Yup, the first thing I thought when I read this: I hope this doesn't end up hurting non-resident applicants to YC.

The "prevailing wages" for an engineering position (the minimum salary the company can pay an engineer on a H1B visa) in CA are about $75K. This means that there is almost no leeway even if only one of the founders needs an H1B: this funding alone would not cover it.

YC is very aware and supportive of immigrant entrepreneurs though, so I am sure they are already thinking about this.

Two mitigating facts:

- It is prudent to have enough money in the bank to pay the H1B employee for a year, but this is not a requirement before filing for an H1B, especially if you can show that there are other ways the company can continue to pay the employee. Most significantly: revenue :)

- The H1B is not the only route available to non-resident entrepreneurs: the O1 visa is another option, although the requirements are more stringent.

I have had to cross a few of these bridges myself, so if I can be of help to anyone reading this, please email me: hnusername@domainINprofile.com

Question - do you need the $75k lump sum, or just the pro-rata per month? its only ~6k/month salary per fte, of course depending on the runway...

The company has to prove that it will be able to pay the employee's salary for the duration of the visa. A lump sum in the bank is the easiest way of doing this. A steady or growing revenue stream per month is another way.

Misread your comment earlier. Actually 150k is enough to secure an H1B, all other things being kosher.

That is only true in some cases. I know people who have been turned down. It's very hit-and-miss.

You are correct in that immigration in general, and H1B visas in particular are non-deterministic. Even having $1M in the bank and a top VC firm as an investor does not a guarantee a H1B by any means.

it is

$80k would also be hard to do in SF for Americans. I think YC should do something around the Google Fiber initiative in KC - there's already a startup community congealing around the fiberhoods that have already gone live, and you can make it at least 1.5 to 2 years in KC on $80k, given the ridiculously low cost of living compared to SF.

Generally people are willing to accept a lower quality of life (in terms of spending) for short periods, like during a summer or winter of YC. Splitting a 2br apartment with a cofounder, even in SF or MV, isn't going to consume that much of 80k -- maybe $4k/mo, tops, including utilities, food, and the premium for month to month.

What screws people is when they have high fixed expenses -- like a founder who has a kid in college, a mortgage in another expensive city, non-working spouse, expensive medical insurance or medical costs, etc., or some combination of these. It's not hard to need $5-10k/mo to cover upper-middle-class fixed expenses, especially if you have to run it through payroll and thus ~50% total taxes, and then add living in the Bay Area for the summer on top of that.

That is why a lot of startup founders do it when they're young, not because being 22 is inherently better for doing a startup than 44.

But then you'd have to live in Kansas City, not the Bay Area, where all the investors and talent are. There are many parts of the Bay Area less expensive than SF proper.

That's why I'm saying that YC should take the first step, since it has the power to make a startup community in KC a real thing.

I also think that having the entire tech community concentrated in the Bay Area is a bad thing. It leads to mental inbreeding and a narrow perspective.

If YC was going to try and create a startup community outside of SV they would want to go somewhere else where actual hackers were. Certainly no where in the midwest. Maybe somewhere like Boston or NY... wait, didn't they try that?

What's the benefit to YC?

As I said, concentrating the community in the Bay Area leads to mental inbreeding and a narrow perspective. Funding Midwestern startups might lead to successes that couldn't have been achieved in the Bay Area. Also, such startups could be funded with less money and will have a longer runway.

Why would it be less money? For software startups human capital gets to be the most expensive. Unless KC has a rather large community of brilliant senior engineers, who also happen to be unemployed, you'd have to offer something significant to convince people to move there and pay their (and families') relocation.

Bay Area inbreeding partially works because (a) young companies don't have to spend as much on relocation, (b) availability of public transportation makes living and working in different cities plausible.

> you'd have to offer something significant to convince people to move there and pay their (and families') relocation.

That's why I'm saying that a push by YC combined with Google Fiber could be that initiative. Like I said, there is already interest in the startup community in KC because of Google Fiber. For example, someone started a "startup house" in the first fiberhood to get hooked up, and is now renting it out to startup founders. He's got a lot of reservations already.

As for moving their families, I don't think that's a big concern. There are a ton of young, single potential founders who would have no problem moving halfway across the country.

> Bay Area inbreeding partially works because (a) young companies don't have to spend as much on relocation

These costs can be much lower in the Midwest. Finding an apartment is not the multi-month ordeal it can be in SF, for example.

> (b) availability of public transportation makes living and working in different cities plausible.

There's no need for public transportation in KC. Gas is cheap, taxes are low, and parking space is plentiful. Just get a car. In fact, I'd prefer not to take public transportation if the train stations need to be cleaned by Hazmat crews[0], as they do in SF, with BART.

0: http://www.sfgate.com/bayarea/article/Human-waste-shuts-down...

Relocation costs to the Midwest would be lower per relocated employee, but the lowest relocation cost would be 0 because the employee already lives there. This is the benefit of the Bay Area.

Traditionally the tech industry has been centered on suburban Silicon Valley, not San Francisco proper. But more and more educated young people want to live in real cities with culture, diversity, mass transportation, and walkability, which is they they live in San Francisco. There are other places with some or all of those benefits--New York, Chicago, Seattle, Portland, London, Berlin, Vancouver, BC--but Kansas City has close to none of them.

In addition, the San Francisco Bay Area has the Sand Hill Road VC's, tons of angels, a large talent pool, two world-class CS departments at Berkeley and Stanford pumping more talent in every summer, and lots of other technology companies in town to collaborate with. It even has lots of suburbs if you really want that. Kansas City has Google Fiber. Not even Y Combinator would tip that balance.

What does Google Fiber have to do with anything? Are any of these startups really hosting anything in their work space? I doubt it, and either way, hosting a server on Google Fiber is currently prohibited and they don't offer business service. Beyond that, I don't think working on a 1gb connection is going to make the founders any more productive than regular 30mbit connections.

YC gives a measly $600 for travelling expenses for the interviews, but suddenly $80k isn't enough?

$4k gets you anywhere in the world, and maybe half the western world is reachable with $1k or less. You're not going to spend a substantial portion of $80k on flights unless you go home and back every weekend.

Visas cost 5-10k per founder. We had to pay an extra month of rent as 'deposit'. You will need to fly in and out of the US several times while the visas get process, as the ESTA is only 3 months. A round trip from LON-SF can be 1k per person, and that's from a hub. I've already got enough miles to be bumped up on my frequent flyer prog.

It's not the end of the world, and the typical YC company will be resilient enough to survive whatever. However it does add up fast (40k easily), it's not something you can avoid, like say buy a less shiny laptop, and reduces your runway in a meaningful way.

Use visa waivers. They let you stay in the US for 3 months at a time and spending $1k on a ticket at the end of each 3 months is cheaper than paying $5-10k upfront for a visa plus additional flights.

If you are worried about the number of times you can enter on a visa waiver, don't - I have entered the USA 50+ times on a waiver and the guys at immigration ask me how I am going and wave me on each time.

This was even more fun before they closed 'The Mexican Loophole', where you could drop out to Mexico for the weekend and get a new visa on the way in. I had a lot of fun weekends in Mexico before they shut that down. You now need to leave the North American continent (they included Central America when people started flying to Belize to get new US entry visa's)

Visa waivers (ESTAs) are fine during YC, but after 6-9 months it becomes necessary to have legal status to do things like fund raise (many investors only do local), paying yourself, staying in the country for more than 6 months in a year etc. Obviously there is also the risk of the nightmare scenario that immigration dude has a bad day and doesn't allow you to enter the US. Whilst this is rare, I know of it happening.

Most international YC companies end up moving to the US, and they sort out visa issues after demo day as it takes too much time during YC.

I didn't know what a visa waiver was. For others:


Sadly, my country is not in the list, so I have to pay up.

Sorry, I should have mentioned that.

The list of countries that you can get a waiver from is a lot longer now than it was when I started doing it. The USA realized that they depends on business tourism/migration, so they have been steadily expanding that list of countries and the scope of the waiver program.

So make sure you check back regularly.

this could really bite you in the back.

I know of two people who did something like that and it went wrong. If you are not lucky you get the "wrong" immigration officer and then you won't get into the US anytime soon.

You don't know what you're talking about.

Immigration costs close to $10-15K if it's a real move. Without a US credit history, you're going to have to put down a lot of deposits just to get basic things done like getting a credit card.

Maybe I don't. But what about founders before 2010? There are plenty of companies that succeed without being based in the US. Is spending almost 20% of your business runway on immigration worth it?

You can also stay with Chez JJ, which has no such requirement. We've hosted over 20 YC companies in the past year, many of them international, and we also help with orientation to the Bay Area.

Can I use this quote? Working on a company built around supplementing credit information to solve this problem. Would be curious to hear an international perspective on this.

I think YC has more of a problem dealing with the bad startups than it does dealing with the successful ones. My opinion from Paul's writing is that his goal is to find the AIRbnb's as quickly as possible while relegating things that aren't going to be mammoth. It makes sense when you're playing a volume/numbers game like YC has been doing.

Quite the investor lineup; I think they had their choice of anyone in the world to be honest.

I like reading PG's stuff because these sort of decisions are counterintuitive, but very fun academic/didactic examples.

What kind of messy things happen with 150k that don't happen with 80k?

It's a matter of degree. In the old days, when a startup fell apart, the founders would just go their separate ways. When every startup got $150k, sometimes they'd end up fighting over the carcass instead. Our hope is that now they'll fight half as hard.

Out of curiosity, what does the 'carcass' usually consist of? Wouldn't any leftover money go back to investors? Or does that get divided out to founders (seems like that would be a bad incentive). Or is it mostly related to the product (domains, code, etc..)?

Technically if a company were to dissolve, its assets would belong to shareholders (investors, founders, YC, etc.). In practice, though, it's rare for everyone to agree to dissolution while there's still money in the bank. Instead, you have a guy who has given up arguing against a guy who wants to put in a few more months. Less money in the bank means less arguing about "another pivot" vs. "let's just move on to new things".

you have to understand that YC & the start fund has little to no control over the companies, except perhaps moral authority.

YC has common shares (and a small minority at that) while the start fund is arguably even worse off with a convertible note.

so, if the founders decided to, they could just pay out the rest of the money as a bonus. immoral? yes. illegal? i don't think so.

Definitely illegal. http://en.wikipedia.org/wiki/Duty_of_loyalty

Thought I'd doubt it would be litigated, unless the founders are particularly stupid in addition to being immoral.

I don't see how fiduciary responsibility holds if the company is in the process of dissolving.

Besides, there are plenty of now very successful founders that didn't have any of the luxuries that we have with StartFund. Somehow they have survived. Survival of the fittest is a good thing.

I seems weird to me, like the whole debt component of the convertible note pretty much ceases to exist unless it is able to be successfully converted to equity.

I guess investors of the type investing in start fund tend to think of it more as a gamble that only converts to anything if the company raises and don't care much about recovering relatively small bits and pieces in the even the company fails.

A Start Fund investment comes with a buy-in for next round. Don't think they're planning to generate huge returns on the initial investment, it will get diluted eventually anyways, but a buy-in gets its participants the front-row seats on next Dropbox and Heroku.

I would have assumed that the startups would pay whatever they had left of the $150k if they were folding?

Or are you referring to cases where at least one founder wants to continue?

There is also the trap that if you have a little too much at the beginning you might fall into the trap of overbuilding thinking that you have "the time" instead of being obsessive about actually making money.

I think the assumption is that only the most colossal implosions happen in the first 6mo after YC. It's much easier for 2-3 people plus 1-2 hires to burn through most of $80k in 6mo after YC, vs. 150k. Figure founders consume $3-4k/mo each, and hires cost $10-15k, and you spend $20-30k on corp/legal/etc.

I was asking specifically about:

> it sometimes caused messy disputes in the unsuccessful ones.

I can't imagine a dispute that would occur at 150k but not at 80, except maybe of the cut-and-run variety, but the same could be said of any dollar amounts - you need to know when to cut your losses.

The dispute happens after some of the money is burned off. Only very exceptional people get divorced during their honeymoon. Assuming a constant burn rate, there's much less money left when you start with a smaller pile.

(and, virtually anyone who can get into YC is passing on a $10-15k/mo income opportunity by just getting a job somewhere. Fighting for 1-2 mo of wages makes less sense than fighting for 6-12. The dispute would happen anyway, but it's not worth fighting if there's only a small balance left.)

"Free money" is dangerous, it creates something like a moral hazard in early stage start-ups.

The companies get into a habit of spending more than required on everything.

VC loses $70k

VC loses half the equity they would get otherwise..

The equity is insignificant, specially for the top startups. What those 20k buys the VC is first-hand knowledge of what is going on with the company and (hopefully) a better chance to invest additional money when/if the company takes off.

Of course, though it's still half of what they'd get before. That is better for the startup. Don't take more money than you need, unless you're getting a really good deal - though then you could burn and piss off VCs and may look bad during future rounds.

Not everything scales horizontally and shouldn't have to. YC should just stick to a lower number of startups for each cycle.

1) Maintains the prestige of a team being selected.

2) Keeps investment level at previous level.

3) Spend quality time with each team.

THANK YOU! This makes 250% sense, particularly for "no idea" companies. 150k led to several bad decisions at the beginning, and led to our breakup later on. 80k will be a lot more valuable than 150k, and make startups think more carefully about how to spend money.

Perhaps for capital intensive startups that ought to be funded, there can be a separate arrangement.

This shows why YC is YC.. it constantly innovates and is not afraid to change things up as needed.

>"This makes 250% sense, particularly for "no idea" companies."

I can't decipher the level of exaggeration. If your company has "no idea", maybe that's where the blame should lie, rather than on having too much money.

In no way do I blame the money, but it certainly made it easier to make bad decisions. A better way to put it would be that it made us make decisions that shouldn't have had to be made that early.

"no idea" doesn't literally mean we had "no idea", we had plenty of ideas. We just hadn't settled on one yet.

I'm curious. Would you mind sharing what kinds of early decisions you made that you wouldn't have with 80k?

Sure. Hiring 8 interns, leasing a 7k/month house for starters. Ok, it's probably more relevant that I was an idiot (been a student my whole life). My initial thoughts were the following:

1. Demo Day was a unique non-linearity. Being especially good by that date would make you overvalued (now I realize that's a dumb thing to aim for, rather you should aim to be of genuine high value).

2. Spending all 170k by Demo Day would be the optimal way to achieve this outcome. It's pretty hard to spend 170k in three months with no idea, in fact it's a job in and of itself to figure out how to spend that much.

I did manage to recoup all the losses by airbnb'ng out the house and finding other yc co's for the interns, but still it was a waste of at least one month and created an aura of bad feelings that doomed the company for good.

"250%" was of course hyperbole

I've never heard of Maverick Capital -- are they the hedge fund? They seem to be med-tech focused, if that's them.

It's sad to see SV Angel isn't part of the W13 VC program.

As alluded to in the post, I think that the 80k/startup rule is probably not a good one either.

80k might not be enough and "doing more with less" can just as often lead to failure. Case in point is the recent post about the lean startup that only provided the minimum viable product (MVP), but failed to really provide what was needed. If pressure is put on startups to provide a product faster for less, then less of a product will be provided. Granted, YC will provide more support and try not to let such things happen.

I think the funding should be decided on a case-by-case basis instead. Possibly more funding could be given to those with a better idea that have greater need through some sort of point system, and either provide a range of funding from 40-120k without requiring more from the VC's, or provide 80-150k if the VC's are able.

What stops other investment firms from making identical blanket investments, or how do you guys plan to stop that?

Presumably Conway and Milner did not like how the initial approach was working out either and were looking for a change.

Here are my thoughts about this:

1. You have idea, a plan to validate it and a plan to execute upon different outcomes and different startups require different financing. I am just wondering if YC has clear matrices which shows there is a same optimum financing for early stage startups in all the domains (healthcare, edu, consumer web, etc.) I am just curious about this!!! But then I read the following: " it sometimes caused messy disputes in the unsuccessful ones. Switching from $150k to $80k may not completely eliminate such problems, but it will make them at most half as bad."

2. The entire funding decision and amount is changed based on negative thought of a dispute among the founders. I believe this is fundamentally wrong and is against the entrepreneurial spirit. I wouldn't feel good as a person and an entrepreneur if my investor would come up with this. It basically means you don't know what you are doing and I am going to protect you against yourself!!!

3. Although a 70K difference is a small number, but it will have a huge impact on your startup: - validating your idea and pivoting: the startups will show a tenancy towards low hanging fruit instead of seeking for the bigger picture solution - Shorter runway impacts your flexibility and thus deal negotiations for the next rounds considering a 3-6 months funding period. - Am just wondering how this will impact valuations of companies in post YC. I would think the valuations would go down.

What are your thoughts on this?

One of the most valuable things about YC is the pressure it puts on a startup: focus or perish, excellence or death. I've really seen this bring out the best in people, including myself. I think that reducing the "free" c-note from $150k to $80k will increase the pressure a little bit, that entrepreneurs will rise to the challenge, and that the overall outcomes will actually be better. Accountability closes the feedback loop and results in faster learning.

As for (2), potential investors say a lot of things that just make you feel terrible. The best response is to dig into them and try to figure out if there is any truth in the criticism, make any adjustments you can, and keep pushing ahead.

There is no doubt about the track of record YC has built over the years. I believe that reasoning behind it as I read it sounds not compelling from an entrepreneur's point of view (kind a putting it like we are going to protect you against yourself). From a business point of view I just don't know if there are any matrices supporting their decision. And that's why I don't want to judge since I don't have the background information. I am just wondering how this move will impact the new type of companies (big picture vs. short gains) & investment climate in the valley: 1. future valuations 2. Early stage rounds 3. product-market fit discoveries & pivots

pg briefed Xconomy on the changes this morning, and the interesting part to me was the feeling that too many failing YC startups were feuding internally over the extra cash. He said such disputes have been taking up more than half of Jessica's time recently. Now startups will have less money to argue over.


It is worth reading PG's email from 5 months back about his vision of what the fund raising environment might look like.


Really interesting change.

Not sure what metrics YC collects on each of its cohorts, but if "Cycle Length" and "Total Cycles" are two of them (i.e. end-to-end time through build-measure-learn loop), then it would be valuable to see if January's teams deviate, in a meaningful way, from the established average and mean.

Hypothetically, you'd think that "Cycle Length" would decrease as less cash in hand forces teams without product-market fit to tap into higher gear (or sustain that same high level of output), rather than spend valuable attention wondering about how to get a piece of the "carcass" should things crash and burn. Total cycles would then move up and to the right, as teams get a few more in near the end of their runway.

That said, there are at least two additional potentialities.

1. "Cycle Length" and "Total Cycles" are already running along their respective natural asymptotes.

Consequence(s): A. Awesomely cool discovery re: limits of productivity! B. The number of founders able to remain highly productive while simultaneously squabbling (and providing PG w/ massive headaches) decreases.

2. The "Starting Date" for raising an additional round of financing shifts to the left (i.e. becomes earlier). With less cash in the bank, and hence a shorter runway, the average starting date for teams w/o product-market fit to begin seriously committing time to fundraising shifts "earlier".

Consequence(s): A. If more time fundraising = less time building, then the average total output of a team, in the 12 months post-YC, could decrease.

Mitigation: Personal access to the best VCs in the world could mean that the length of a "Funding Cycle" (i.e. total time spent raising a round) decreases, thus offsetting consequence 2a.

It'd be great if these numbers were something YC actually collected. If there's a science to building companies, you could certainly glean great insight from those digits.

So it has become easier to fail fast. The inertia to prevent death has been halved. Good or Bad?

Is this in addition to the $12k-20k invested by YC itself, for a total of $92k-100k?

The START money has always been on top of the YC partnership investment.

Is there a particular reason that Maverick were involved? I don't know the guys well enough but they seem like your traditional Wall Street hedge fund.

I'm probably completely wrong but guessing Sam Wyly was perhaps one of the major reasons?

Another way to fix the founder breakup problem is to have a pre-nup with a few menu options.

Require founders to choose and sign on to prior to receiving any of the $150K (or maybe prior to acceptance to YC).

Does this mean that the outside investment of 150k is no longer available? I don't see whats to stop them from investing (150k) anyway, considering it wasn't part of YC in the first place. In my opinion 80k is a little too low, especially for international founders or those with international teams. I agree, though, that advice from VC would be better in terms of building a business versus just throwing cash at the startup.

Then again it lowers the bar for international VC providers to start participating in this kind of model, making US-based funders a little less necessary.

This will definitely reduce the number of startups with H1B holder founders, even if you transfer the visas, the runway will be comparatively short.

Pg, are there really many ugly ducklings on demo day, despite the rigorous selection and the subsequent teaching/incubation process?

people often switch ideas in the middle of YC, so there are more than a few who get up on stage with just a couple week's worth of work (if even that). By ugly ducklings in this case he means ideas that may not yet be fully fleshed out or well understood - he's making no statement about the teams themselves, which is what the selection process "solves."

It's worth noting that in the original story of The Ugly Duckling, the "ugly duckling" is actually a cygnet (baby swan) that looks out of place next to the ducklings it grows up with, and that no one respects until it grows into a beautiful swan. So an ugly duckling would be an idea that will turn out very well even if it looks a little dubious at the beginning.

Good point. Thanks.

My first thought at seeing the submission title was that YC was offering a program teaching people about how to be VCs. Then I realized that this was simultaneously awesome and nonsensical, since Joe Random probably isn't going to have the scratch necessary to fund much of anything. Still, it would probably be fascinating from an academic perspective.

The new version involves less money and more engagement. The VCs will invest $80k in each startup instead of $150k, and we'll organize sessions of office hours in which partners from the VC firms advise the startups in each batch. As before, the investments will be done as convertible notes with no valuation cap and no discount.

$80k or $150k seem like pithy amounts of money to fund any sort of company. What am I missing?

That's one good person's salary for a year. One.

If you need to pay salaries , you're going to have to burn your own savings or seek further funding.

This is a seed investment to help you prove your idea, or a bit of a boost for a business with profits too low to get impact from reinvestment.

At an established company, yes, that's a reasonable salary for a developer.

But when you're starting a startup, you don't take a salary of that size. You live cheaply and take only the minimum that you need as you commit yourself to building your company. It's not a life for everyone, but it is the startup life.

Sounds like anyone with a family is pretty much excluded from what you call "startup life" then. $80k wouldn't get me alone through half a year without selling my house and moving somewhere really cheap in the US.

This is what will make this work: "and we'll organize sessions of office hours in which partners from the VC firms advise the startups in each batch".

That's the difference between "smart money" where investor(s) contribute more than cash into startups and "dumb money" where investor do not.

Great move YC!

Good call, guaranteeing $150K plus the seed money for the given inputs was far in excess of what you could raise elsewhere for comparable inputs. Simply the seed money, social capital, and demo day was attractive enough for me to apply.

>Good call, guaranteeing $150K plus the seed money for the given inputs was far in excess of what you could raise elsewhere for comparable inputs.

Which would mean they would have their pick of ideas since everyone would try YC first.

Think about it this way, nobody applies to YC for the money, so why part with it?

I think this is wonderful... the expansion of VC office hours will be a huge help for future batches. Having investor allies is always a great thing for a young startup.

I'm not sure if one amount will fit all startups.

Because categorization is important for organization, how about having startup brackets?

base: 80k international: 100k hardware:120k ...

YC is treated just like software. Time to scale back and move forward. Those bottlenecks were obviously causing a problem.

What equity is given for this (/how has it changed?) and is this pre defined or 'negotiated' ?

This is a convertible note[1], just like the previous incarnations. Which means that the amount of equity it is worth isn't determined until a priced round happens (where a valuation is set).

[1]: http://techcrunch.com/2012/04/21/convertible-note-seed-finan...

Thanks, i see.. is there a requirement on when to take more funding then? what would happen if the startup didn't take further funding (put remained profitable)?

If I remember correctly there's a year long grace period after which the investors can choose to force the note to convert. I don't know much about how that works though.

I like the 20k from each. It's always good to have a diversity of opinions.

Off topic: did Yuri Milner lose money on his Zynga and Groupon investments?

Probably. But then he is also doing OK on FB.

love this move. I've seen first hand the 150k let's startups limp around for far to long.

It just keeps getting better

$80k is peanuts. Apparently these folks haven't learned the lesson that you get what you get what you pay for!

Maybe $80k is enough for some ridiuclous $2 iPhone game or some startup for making a website for adding a single puny feature to an existing social network and having 15 minutes of fame.

But $80k is nowhere near enough money to create an Enterprise solutions startup. I laugh at your $80k and the hubdreds of flight-by-night, gimmicky, bullshit, small businesses that you will burn your money on.

It takes at least $5 million over 5 years to startup a serious business that has any chance in hell of becoming a real billion dollar company. That is the future.

$80k ... it's insulting to people with real ezperience, real ideas, real businesses and real explosive growth potential. You will never fund the next Apple, Microsoft, Google, Oracle, NVIDIA, etc ... You're just going to fund a whole lot of infantile business projects and a whole lot of fail.

Apple and Microsoft were both making money before they had spent $80k.

Apple was selling hobbiest boards, Microsoft the license to DOS.

You don't have to build a whole company, just find a market and become sustainable.

Apple was created my making devices on breadboards, that doesn't mean that the next Google/Apple/Microsoft will be able to do the same thing. Times have changed, the barriers to entry are slightly higher. $1MM to seed a company, that's the minimum... unless you are only interested in infantile businesses like glorified classified ads, crappy thow-away games, or one-trick pony "cloud" services... $80k doesn't even get you a hot dog stand!

$80k is guaranteed, but it's not stopping other investors to make million dollar investments if it's recognised as being the next Microsoft.

You realize some of YCs biggest successes to date such as Dropbox and airbnb only got the maybe from YC, no start fund.

Steve Jobs rejected Dropbox and called it a mere feature, not a business, and then Apple created there own version.

Airbnb ... again, it's just a small business at best.

If I could seed my startup idea with $80k I would bankroll the damn thing myself using my own savings, instead of selling my company down the river on a convertible note for a paltry sum. Yes, I have $80k to blow because I have real experience making real money. No, 80k does not come anywhere close to the investment needed to seed a real business.

I don't think they are targeting people with real experience though.

yeah, you're totally right man. Heroku, Dropbox, Airbnb ... those guys are all flops that never got anywhere coming out of YC ...

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