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.
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?
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?
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...
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.
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.
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.
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.
