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Another relevant article hinting at this development: http://www.businessinsider.com/y-combinator-raising-money-fo...

The impetus behind a growth equity fund, according to the article, would be to provide "long-term capital that allows startups to continue to operate in beta [sic, I assume -- they probably mean privately] without having to go public."

I can see why this approach would make sense for optimistic investors who are familiar with the impatience of public market investors with the kind of moonshot, long-term investments that are game-changing but don't pay off during next quarter's earning call.

That's one charitable interpretation of this decision, if it's true -- Y Combinator wants to counteract the abundance of hedge fund money pouring into this space (with attendant expectations of a near-term public liquidity event) with strategic capital and a longer time horizon.

Relevant, but it's not hedge fund money. It's private equity & venture capital money, which is backed by large institutional investors like retirement plans. Hedge funds are dying a slow death.

If tripling in size in the last ten years can be called a slow death.


The only thing hedge funds are doing, is growing more slowly.

CNBC: there are now more hedge funds than ever

"Investors have the choice of an estimated 10,149 hedge funds and funds of hedge funds as of March 31, according to new data from industry research firm HFR. That surpasses the previous high of 10,096 set in 2007 before the financial crisis. About 1,040 new funds launched in 2014, a net addition of 176 compared with ones that closed. Total industry assets are $2.94 trillion, another all-time high, despite relatively muted single-digit returns from most hedge funds last year."


Not quite true, which is exactly the point -- T. Rowe Price, Fidelity, Tiger Global, BlackRock, Coatue, Valiant and Wellington are a few of the public asset managers that are heavily outgunning traditional VCs and pumping up valuations throughout the growth-stage investment space. Between them they have an enormous amount of capital to bring to bear.

These funds have a mix of institutional LPs like university endowments and normal high-net worth/retail investors, but either way, I believe they usually don't mandate the ~5 yr lockup period (not sure of the avg. VC investment period/fund life these days) that PE and VC firms require of their investors. As such, in my understanding, traditional VCs are both structurally and philosophically inclined to hold their investments for longer.

This may not be the impetus behind YC Growth at all, but I do think such a fund would be more patient with its portfolio, allowing it to take greater risks, and that's (probably) a good thing.

The asset managers you mentioned (especially T. Rowe, Fidelity, BlackRock, Wellington) are huge and have a lot of different products which have different mandates, time horizons, client agreements etc.

I am not going to dig through all the announcements, but it is unlikely that a large chunk of the capital from the asset managers I listed above is from hedge fund products at those companies. Most of the capital is likely coming from their PE arms or mutual funds that are allowed to invest a certain percentage of their portfolio in illiquid securities.

There is a possibility that the money is coming from hedge fund products or other short-term investment horizon products, but it is not likely.

That's a great point and definitely something I oversimplified -- perhaps the "structural" factors of time horizon aren't a significant influence on the liquidity-seeking behavior of these investors.

But I'd stand by the theory that (1) there is a difference in motivation and mindset between a growth investor domiciled with a firm that primarily trades in extremely liquid, public equities and a traditional growth investor with a sole focus on venture, and (2) that mindset manifests itself in the guidance coming from that member of the board.

Again, this might be a good thing. I think many companies could use more discipline around focusing on profitable revenue vs. top-line growth alone. The point I'm trying to make is that the kind of investor/board member you have definitely changes your decisions as an entrepreneur -- and as non-traditional growth equity pours into tech, decision-making starts to change in a big way.

I think we'd need some proof that the behaviour focused on cashing out in the short term is good for anybody but the investor. Y Combinator 'growth fund' on the other hand, is a good idea if it is what I think it is. It addresses a thing called 'death vallye' for the companies who have done their angel, seed A funding are still of a fairly small size and need support to grow big.

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