YC is supposed to be an exclusive program funding companies they believe will work.
I find it interesting that they choose to change their investing program instead of changing their application program. Why not keep the program smaller and more exclusive instead?
Because they want to have their cake and eat it too. YC has followed a similar trajectory to many successful tech innovations. A novel approach that has aligned goals with their clients, strong & visible leadership, a huge emerging market, an appetite for a new approach - we're now essentially 2 generations of leadership removed from PG & co and while I have no doubt the people in charge are very smart and good at VC'ing, YC is now a totally different beast from 10+ years ago. It's motivations, goals and practices have changed and I have no doubt the next incarnation will come along and eat their lunch too.
It's astonishing how quickly it happened, too. People underestimate the effect of a decade, but a decade feels so short. I still remember YC startup school in 2007-ish.
In what ways does it seems the motivations and goals have changed? I’m particularly interested in this as I just rejoined YC as a partner after running a startup for five years. I first joined as a partner 10 years ago.
For starters, back in the day, YC was mostly seen as a place anyone could get funding and build a great company whether or not they had a great network. Nowadays, it seems more and more like having that network is the primary thing that gets you in YC.
(Not a criticism, and I can see the merits of that choice. But, when I talk to my friends about YC that usually comes up.)
I'm not sure where that belief would come from. YC only takes online applications, rather than getting introductions to founders like most investors do. When we're reading an application, we wouldn't even know if the founders have a big network or not.
> YC was mostly seen as a place anyone could get funding and build a great company whether or not they had a great network.
that's likely because before the success, there was no way anyone with the network would come to YC as a first port of call. And with technical partners able to judge the incoming seed company on the merits the founders themselves, YC managed to pick the successful ones (mostly - obviously there are failures).
When the success of YC's model became so prominent that it is a culture all on its own, the technical partners no longer work the same way as the old way. I don't think it's possible. So network, and human capital is used as a filter, rather than deal with the massive amounts of no-name people.
> Nowadays, it seems more and more like having that network is the primary thing that gets you in YC.
They can’t really afford that model, that’s why funding is being slashed: insiders successful in the 2010s are not better poised to be successful in the 2020s than outsiders, even if network and critical mass help them raise and burn money to have a more structured shot.
The reason for the original idea was because if YC invested in a later round, or chose not to, that was a huge signal to the other investors. Most companies at the time could not raise later rounds if they were not promising.
But, since YC was not providing any additional signal by investing in everyone, the original signal carried so much weight that even obviously failing companies so keep raising rounds based upon the original YC signal.
So the "hack" about letting the market guide YC's later rounds was foiled by the same reason they came up with it in the first place.
Automatic Pro-rata was a relatively recent addition to YC.
(i.e. when we went through in 2009 it did not exist)
It also clearly isn't scaleable without infinite capital.
Plus, if you had complete information, why would you ever want to automatically invest any time a company in your portfolio raised money?
My guess is the only reason they made it automatic, was to minimize the impact of a negative signal. It sounds like they hope the new changes will still minimize that signal.
If LP's are willing to fund automatic pro-rata it's pretty clearly in YC's interests to take them up on it. Apparently that used to be the case but now it's not.
> If LP's are willing to fund automatic pro-rata it's pretty clearly in YC's interests to take them up on it.
This assumes that automatic pro-rata is a winning investment strategy. YC's goal ultimately is to turn money into more money, or at least that's (almost certainly) the most significant metric of success for them.
If anything, the new changes will be a huge signal (YC doesn't think this company is one of its most valuable investment opportunities), except in this case, outside investors without insider information will be the ones left holding the hot potato.
As the article says, YC is running out of money. They can’t fund the existing companies at the original levels. Shrinking number of companies helps in the long term, but not in the immediate.
1) It's not quite accurate to say that YC is running out of money, though I could see how the article could read that way. YC is fortunate to be well-funded. However, we saw that if we continued our previous pro rata policy, that that could eventually happen someday, so we made a proactive adjustment well ahead of time.
2) One of the consequences of our old pro rata policy was that it left us without control of how much money we spent. Because we committed to investing in every round of every YC company, our spending was dependent on how many companies raised money, which turned out to be hard to predict. Imagine running a company where your monthly budget could vary by millions of dollars and you wouldn't know until the end of the month how much you'd need!
3) As far as I know, no other investor in the world has a programmatic pro rata policy (what YC tried from 2015-2019, which we are stopping now per the article). The whole idea was a bit of a crazy invention, and while its motivation was good, unfortunately it turned out to have too many drawbacks.
That is true, but I still don't get why this YC announcement wasn't accompanied by an announcement to reduce the class size, which will definitely help in the long run in terms of retaining funds.
I do wonder whether this was actually a strategic decision -- if it simply is more profitable to pick winners in deciding whether to participate in follow-on rounds; or perhaps YC would describe it as not picking the companies that don't have a clear path to monetization.
In other words, I wonder whether the "we didn't realize how hard it would be to raise the quantum of capital implied by our initial commitment, and also, it turns out we don't like running a big fund" explanation is not the real reason they're doing this; and whether the real reason is in fact that they've realized that being able to exercise discretion in follow-on rights has a tangibly positive effect on fund returns. Which makes sense!
The question for YC leadership is whether, in a world in which there were no issues with fundraising or fund operations, they would commit to follow-on participation for every company. If that's the case, and they would like to maintain a YC culture of committing to all future funding rounds for all YC companies, why not fundraise a special purpose vehicle for the funding shortfall to fulfill the commitment that was just abrogated? Give first dibs to current LPs....I bet it would be multiples oversubscribed. With that covered, YC could downscale class size to the point they can continue the full funding commitment using LP funds.
Agree. The blanket investments on later rounds seems like a weird policy regardless of fund size. Some YC participants are going to be weaker than others, and as someone said elsewhere in these comments, YC probably has an idea even before the class is over simply due to having more intimate exposure to the the companies. Unless there was some sort of implicit pump and dump, why bother throwing good money after bad on the underperforming alums?
Arguably YC is not meant to be exclusive at all. The idea is to give as many promising people (and products) as possible a chance to get started who might not otherwise have the opportunity. Their application process is still rigorous and weeds out 95%+. Lowering their pro rata stake will only serve to increase applications from people who thought 7% was too high.
I'll disagree with some of the other comments here and say I'm very happy that YC made this change instead of shrinking class size. YC is still one of the most exclusive programs around, and always will be. Anyone who has the privilege of attending will always have an advantage over those who don't - even if it's just because they'll learn from the best and make great connections. Follow on funding is great, but with how inflated some series A valuations have been lately - it's just too costly to the core YC program to keep doing that type of funding indiscriminately. I'm sure this was a difficult decision to make, but it feels consistent with the YC mission. And it seems like the right thing to do.
Refusing to commit either way until a lead investor term sheet happens seems like a clean way to mitigate the signaling risk. What am I missing about that? If that works, couldn't YC have always picked and chosen investments to follow on with?
A term-sheet is a non-binding agreement. So I think it's pretty easy for investors to test the waters by throwing out a term-sheet, and then finding out if YC is investing or not. If not, they come up with a reason to pull the term sheet.
Anybody else think this is a possibility?
Of course, these investors may get a bad score in YCs internal systems, but are other YC companies not going to meet with the VC based on those feedback systems?
TBH, I didn't know YC had a guaranteed follow-on amount. Either way, you just gotta be too good to ignore.
You're right that that is a theoretical possibility, but I think it's very unlikely in practice. In the VC world, term sheets are only technically non-binding; breaking a signed term sheet is considered a Big Deal.
It's a big deal, but it happens and not always for the right reasons. Imnsho an investor should only walk away from agreed upon terms if something nasty and previously undisclosed turns up during DD.
This may have changed, but a few years ago multiple friends with YC companies told me there were consequences for VCs, w/r/t YC, who ruthlessly withdrew term sheets.
Absolutely, word gets around and before you know it the stream of decks dries up and other people no longer want you as co-investors in rounds, so not just YC where there are consequences for such trickery. This is just bad for the industry as a whole, a lot of this hinges on trust and if parties start breaking that trust capriciously then that is a problem.
What I have seen - and just once - is that a DD did in fact turn up some major issues, the investors backed out and the startup then made a stink pretending they were stiffed. But the truth on that one will likely never see the light. So not 100% of these can be laid at the door of the VCs either.
Overall, it's a solid solution. Some hiccups:
- It's common for new investors to ask about pro rata ahead of writing a term sheet (can impact the investment case/deal).
- Especially in difficult times, new investors might invest under the condition that existing investors do their pro rata.
investors who act conditionally on other investors are the worst
(but still are the majority so you have to account for them)
as you said pro-rata can't be after the fact. The company needs to know how much equity it is selling and can't allocate to new investors without knowing what the company has available
There are a couple of things in this comment that aren't true, and I want to respond to make sure that people reading it don't come away misinformed.
YC does not distribute lists of "top companies" to investors, around demo day or at any other time. Quite the opposite - we take great pains to ensure that investors at demo day see all companies as equally as possible.
About other venture firms being investors in YC, it is true that Sequoia was once an investor in YC's funds, but that was a decade ago. We haven't had a venture firm as an investor in YC in many years to ensure there is an even playing field.
The problem here is that everyone will know if YC will follow up or not during the process.
Investing is game of information. If an investor can’t figure out who else will be on the cap table, they have much bigger problem.
The way it is going to go down is that investor during meeting will ask if founders think YC is in that round. If founders say something along the lines of YC decides after term sheet, it basically means no.
In the end
, the overall result is that less YC companies will raise, but the good once still will, but it was always the case.
> If founders say something along the lines of YC decides after term sheet, it basically means no.
Why would it basically mean no? It seems like the new policy makes the answer "Maybe, and there's no way to find out until a lead investor has signed on the dotted line".
YC partners doing a lot of introduction during the fundraising process.
It puts them in a tough spot. If YC partner writes to an investor, this company is awesome, plz invest and then investor asks if YC is going to invest?
And they get back, you commit first and then we decide, it just doesn't look/sound good.
It is important to remember is that a lot of companies in YC batch fundraise on SAFE, so when a priced round comes along probably 90% of them are not even in a position to fundraise, because a product didn't work out, team issues etc.
Also, there is YC Series A program which basically is going to be the sign of approval for investors and I am pretty sure YC is going to follow in 100% of cases for that one.
If they just do that for everyone and get a reputation for sticking to writing back that they wont decide until you've committed though, that would mitigate the signal
As an investor, if YC contacts me with a "great investment opportunity" and does not invest themselves even tho I know they could have, the investment better be successful. Because otherwise, I will feel cheated on. "Do as I say, not as I do" type of relationship is not exactly what I am looking for.
In the previous system, they had skin in the game, they literally were putting money where their mouth was: same companies, same valuation. If I make money they make money, if I lose money, so do they. You can't beat that.
Well now every rational investor must reduce the value of YC's brand being attached to a company. If YC only invests in X% of YC companies, there must be some Y% discount to the YC brand as a whole, no?
If there's a 100% chance YC takes their pro rata stake, then the YC brand is more valuable.
That would be the biggest challenge I would think. When ever I've been involved in funding rounds the investors are always trying to eek out every possible bit of signalling they can.
There used to be prestige, mystique, exclusivity, and desirability associated with being a YC company.
I kinda feel now it’s just become a numbers game machine.... back as many as possible, some will win. There doesn’t see anything special about the investors or the investors in this model, it’s just about churning out as many companies as possible and playing the numbers.
I got the sense that the personal and network support given initially might have been worth 7% of the company (especially for founders who needed that kind of advising), but the partners' ability to add value has gone down recently, making follow-on investments less likely to succeed.
I first heard YC described that way in 2009 and I think that’s pretty much been their model all along. Before 2010 they were routinely described as “throwing spaghetti at the wall and see what sticks.”
Is waiting to see a term sheet from a lead investor enough of a move to mitigate concerns about optics? I'm not too familiar with the series A process - is the round basically over by that point? Or is there still work to do in assembling the rest of the syndicate or an opportunity for the term sheet to be revoked? It seems like no matter what, the continuing desire of an early investor to participate on follow on rounds is a strong signal to future investors about the company (especially if it's a prominent early investor like YC) - and there will be a lot of incentive to acquire that sort of information before the funding round is finalized.
No, the opposite. Every other investor wins because they can invest more $$$ and own a bigger % of the company. Before, YC had a right to maintain its 7% stake, leaving less room for new investors to acquire ownership.
if YC doesn't invest, won't that be a signal that they don't believe the 7% is worth it?
it makes it hard for startups that would need more money to prove their profitability to lose out on new rounds, or have to give up more for those rounds (as investors will need better incentive to invest without the YC signal).
I am having thinking about doing a startup for a while, whatever trips me up is how to go about acquiring customers short of cold calling. Are incubators helpful in introducing you to potential clients? Especially if your product is b2b or enterprise, having worked in large corporate enterprises I can't imagine how it works to get your foot in the door.
If your product is Enterprise or B2B, you need a few things (in my experience):
1) A first client to take a chance on you, because no one wants to be the first client, very few companies will buy something that no one else has bought. In my experience your first client (or first few) is the result of some existing personal connection to the client (i.e. a favour/referral), and expect to be at their beck and call for a while, and probably take a bath on the price.
2) You need an experienced sales team that knows how to sell to enterprise/B2B. This is not something you can "pick up" or learn on the job (or at least is very difficult to do). You need to hire someone who has done it before, otherwise you will stumble and spend your way through months-long sales cycles only to have them fail at some late stage because you didn't know how to prepare.
3) You likely need standards certifications and third-party testing. Look into ISO 27001 and other similar standards if you're a software company. Get third-party security testing done up front. Have pre-written answers and "white papers" around privacy, data governance, scaling, deployment, etc..
I've been on both sides of selling into enterprise and medium/large B2B and it's a solid 50/50 mix of your actual product capabilities and your company's ability to navigate procurement and due diligence.
You forgot the most important thing - a 2 year runway.
There is a trick to speed things up a little with Enterprise sales - find out who is an approved supplier for the enterprise you want to sell to and get them to “sell" your product for you under some sort of licensing deal, but where you actually do all the selling. This cuts out a huge amount of pointless activity dealing with said enterprise’s lawyers and purchasing people.
#2 and #3 are probably true for enterprise but definitely not true for SME B2B. Source: we’ve been targeting that niche (15-500 employee companies) for 8 years. Have made two experienced sales hires both in the last year, and dont have any standards certifications. Most businesses are very reasonable and just want you to solve their problems.
Fair enough, I was definitely thinking medium-size B2B and up, where the people you're dealing with while trying to sell the product are (probably) not the internal stakeholders who want to buy it (i.e. procurement, IT/security, etc)
It also depends on what you're selling of course. My experience is in data management solutions (including PII data), and standards/requirements can be pretty demanding in that world.
You definitely can get in the door without ISO 27001, but you'll spend way more time on due diligence for each deal because you can't just point at the badge. Whether that's a trade off you're willing to make probably depends on your exact company, but ISO 27001 itself is a painful process to get certified for, especially if you're a young company without any established internal processes.
100% agree, but even if you don't go through the whole certification process (which is painful and expensive), it's worth spending the ~$1,000 on a "cert-in-a-box" kit to understand the framework of the standards and what kind of processes your company will eventually need to put in place as it grows.
Also in my experience, being able to produce existing docs around your standards and processes, versus producing them on-demand, helps inspire confidence in the prospect's due diligence team, because it shows them you've thought of this before they asked about it. :-)
It's a connections game. I remember last year I was trying to get an internship in an industry where I literally knew no one.
So I sent 100-200 personalized emails throughout a 4 month period to every single person I could find in the space. Eventually I got one and made a ton of connections just with that alone.
Now I'm also doing a startup and am talking with some big corporations just with getting to the right people and climbing my way to the top to sell my product.
Tyler Bosemany did a great talk about how to sell, i'd reccomend you watch it.
We blew about 10k per event to be an exhibitor at trade shows. It was like speed dating for customers. We landed one good customer that way and scrambled to deliver, but ultimately it was a worth it. You learn what the customers care about and how to pitch very quickly.
Also, it was a consultant with that first customer who brought us in, he could see the value despite the rough edges, and was willing to take the risk.
It's called advertising. You have to spend money to make money. No one cold called you about a pair of Nikes and yet you know exactly what I'm talking about.
Advertising to businesses for a b2b startup is very different from advertising to consumers. Perhaps all it is is having targeted ads for company management, but its not a trivial difference.
Is YC cutting prices? Is the new YC deal $150k for 4%?
The article suggests that YC is reducing its stake to 4%, however the quotes presented don’t seem to be really saying that.
I’m not sure if this story is a technical announcement about how they handle pro rata, or an updated version of the YC Deal for newly admitted startups?
YC was always about exploiting the startup mystique by creating a sweat shop of fruit fly startups, some of which will make it big by sheer dumb luck. It’s the index fund of the startup scene, but naive new grads who can’t get audiences with first-tier VC firms still fall for it.
The sentence doesn't read that way, but if that's what they meant, it's just as wrong.
YC's publicly-stated strategy from the very beginning has been to cast an extremely wide net, knowing that most wouldn't amount to much but the outliers would return enough to deliver a huge outcome overall.
And a key part of their strategy has been to be so founder-friendly that most of the promising startups would want to be part of their program.
If you look at the number of "unicorns" that have emerged since 2005, it's remarkable how many went through YC.
It's also notable that basically none of the spectacular boom-then-busts went through YC.
That's not "dumb luck", it's a well-thought-out strategy that has been proven to work extremely well over a decade-and-a-half.
It does not change much for the two very ends of the spectrum, that is the solo-hero bootstrapping from scratch and the moonshots however needing a lot of cash... while anything in the middle gets squeezed if not profitable on its own. Good to me as an observer: less serialization and templates, more unorthodox and fun.
This might be an unpopular opinion, but I think YC’s days are numbered, as are many other startup accelerators, and this is just another sign. The model is breaking down and isn’t really up to date with the way startups develop these days. And with the raging bull market of the 2010s winding down, it’s clearly looking like the end of an era.
Without another entrepreneurship catalyst (in the early 2010s it was the rise of mobile app markets and social media) we are unlikely to see the return of the accelerator model in its full glory.
I am actually surprised they were doing this at all.
They have no obligation to support the startup beyond the initial 7% investment more so for the Series A. Companies who can't stand on their own two feet and raise money on their own simply don't deserve to survive.
I actually wish YC would take it a step further and offer an option where they don't invest any money at all. You participate in the accelerator, have access to their resources, are part of the alumni but simply don't accept the $150k and 7% equity dilution.
YC is a for profit entity. Why would they offer a free cup of coffee much less access to the resources and network if they aren't getting anything out of it? I like YC and enjoy HN, but the altruism comes after the profit (as it should).
I should have clarified. I meant an option where they take some fraction of 7%. Not sure whether this is necessarily a great deal for YC or not. Depends how cheaply they can raise the $150k they need for each company in each batch.
I just know for many startups like mine $150k is basically worthless. It's not enough to hire and you just stay somewhere cheaper and commute into YC for the program.
>> It's not enough to hire and you just stay somewhere cheaper and commute into YC for the program.
As I understood it, the original intent was just to pay living expenses while doing the program and developing a minimum viable product. The intent was that the makers would own the company. It has strayed from that for better or worse.
Got it. I always thought the 150k was meant for smallish teams as a "spend 3 months growing here and 3 months raising more money" kind of money, which is important for many companies.
You're right. A no investment incubator would kind of suck but there are pay to play incubators?! Reverse investing? Makes no sense, but your scenario would be better than that. Nothing wrong with a Harvard scholarship.
There are few government run 0% equity accelerators. Start-Up Chile gives $35k in reimbursed expenses and six months of office space + mentorship. Their hope is you stay in Chile and they make it back in taxes.
The latter and I am surprised it has taken this long.
Maybe in the early days it was more like being part of a family that looked after you as you grew older. But now with the batch sizes being so large YC is much more like an industrial machine.
My prediction here is that for natural and totally understandable reasons, it will be hard to gauge the investability of international companies vs US startups.
So over a period of time, we might see prorata moving to US startups fairly naturally . Given the other issues around travel in a post-COVID world, this will might to a return to US centric portfolio allocation.
This could be a result of a failed investment strategy by YC or insufficient interest by investors to raise additional investment for new funding. I sincerely hope that it is the latter and not the former. The latter can be addressed far easier.
In 2017, it was announced that YC was trying to raise a Billion dollar fund. How did fundraising turn out?
Can someone put this whole piece into plain English, e.g. we're going to fund less startups? or no more 150K for 7%, now it's 100K for 4% or something like that in the first paragraph? I have no idea about "pro rata stake", or what "case-by-case" exactly different from what it has been doing.
I don't think there's any opportunity anymore. The market is super saturated, capital has dried up, and only insiders have a shot at funding. The cards are stacked against outsiders.
I've lost hope on the Silicon Valley dream and decided to just use my big brain to make money in public markets, which is surprisingly easy given how much effort the government puts into pumping up the stock market.
I used to think YC was great, I applied several times, but YC doesn't really represent what it used to anymore (to me at least).
The coronavirus situation has certainly altered capital markets but outside of that your comment doesn't conform to the data. There was more capital deployed in the last several years, at all levels, then we've ever seen.
It's not really a secret that angel and seed funding has been steadily dropping since the mid-2010s.
With that said, I think that @brenden2 is overvaluing funding. Most people around here build software -- which can be easily bootstrapped. For those in hardware/biotech/energy/etc. it's much harder to get out an MVP without funding.
Ya, I believe 2014 was the peak when it comes to seed deals per year so fair, we are below peak. But there was a TREMENDOUS rise starting in about 2005 or so (a combination of coming out of the dotcom bust then the rise of mobile with iOS/Android).
Overall I see the availability of seed funding as still quite high.
Very much agree with your last point about overvaluing funding. It's never been easier to bootstrap something for a year or two. Get an actual product working, maybe have a few users, and then go for funding to scale up. We see this in the data too with median company ages at the time of seed funding rising.
What cherry picked data are you looking at? Just because TOTAL investment amount is rising doesnt mean that it is lifting all boats. Pareto distribution 101.
there's also opinion, expert opinion, and statistics.
the problem with statistics is you have to look how it's being used to figure out if you've got something lower than a damned lie or higher than an expert opinion. Which requires work and expertise of its own.
Things look quite different to many small, non vc-funded, profitable businesses: there is so much vc money sloshing about that one is constantly fighting competitors who operate at a loss to try to build monopolies whereas in more typical industries such businesses face much more fair competition.
On your second paragraph, you may be amused to note that a popular theme in Matt Levine’s column is that “private markets are the new public markets”.
> Things look quite different to many small, non vc-funded, profitable businesses: there is so much vc money sloshing about that one is constantly fighting competitors who operate at a loss to try to build monopolies whereas in more typical industries such businesses face much more fair competition.
This story doesn’t add up.
1. VC funded company operates at a loss.
2. All incumbents are pushed out of market.
3. VC funded company has monopoly. They raise prices above the original “competitive-profitable price”.
4. New company enters market at original price.
5. VC funded company goes to the original price or goes bankrupt.
I don’t see why that doesn’t add up. It looks plausible to me.
Note that often this low price for internet companies is 0 and many users will not put up with any price increase, so the VC backed company will fail once their monetisation strategy ( usually it’s “something something advertisers”) doesn’t pan out.
A small profitable business is harmed by the unsustainable competition at steps 1-2 and may struggle to hold out until step 3 (which likely won’t happen; going bust/being acquired and shuttered seem more likely to me) or 6
Operating at a loss doesn’t mean they’re running at negative margins. It means they’re burning money to do sales or marketing or hire a bunch of devs to build faster than other companies.
I’m not sure why you’re fixated on price. Most interesting companies aren’t building commodities like toothpaste.
Companies that have enough market power to crush smaller competitors tend to also drive the quality of products down. I’d prefer more high quality products to fewer “better companies”.
>> there is so much vc money sloshing about that one is constantly fighting competitors who operate at a loss to try to build monopolies
He’s claiming that VC companies use their warchest to undercut and ultimately force out incumbents.
> Most interesting companies aren’t building commodities like toothpaste.
Why is price less relative for “non-commodity” companies?
> Companies that have enough market power to crush smaller competitors tend to also drive the quality of products down.
Maybe? Peter Thiel talks about small margins in competitive industries leading to lower quality products because companies lack sufficient resources to innovate. eg, Google’s advertising domination lets them build high quality products like GMaps and GMail.
Alternatively, no one enters the market because the monopoly company can still undercut them.
Another bigger problem is that the monopolist pushes the low cost of delivered goods or services on third parties (see the gig economy). That race to the bottom harms people, but there will always be takers for those jobs in any society without a good social security system.
"just use my big brain to make money in public markets, which is surprisingly easy given how much effort the government puts into pumping up the stock market"
Off-topic but do you have a recommended starting place or other ideas? I did well with some short positions recently but would love to explore more strategies.
As an outside insider (live and work here but haven’t gotten funding directly ever), here’s my question: Do you even need funding?
It’s never been this easy to start a thing. Build stuff, get some users, see how much they pay. Then go from there.
Most funded startups these days just feel unnecessarily bloated. Over engineered, over staffed, building run-of-the-mill boring stuff you could slap together in a couple afternoons using 3rd party tools and some glue.
It's not the money itself that matters, it's the social proof. Since I personally have no brand, and nobody knows who I am, they won't take a chance on me. Even with lots of money, nobody is going to join a startup or give you the time of day. Admittedly you can do some marketing to change this, but that's not my area of expertise and not something I'm good at (I'm a technical person and a good natural leader).
It doesn't really matter that I've done well on my own, or that I've been privileged enough to work at a few successful companies. You need either a lot of Twitter followers or a big name VC backing you before anyone will take you seriously.
> Since I personally have no brand, and nobody knows who I am, they won't take a chance on me.
Who is "they" in this case? Customers? Investors? Recruiting candidates?
In any case, I don't think this is true.
Customers don't buy a product because of who created it (in the vast majority of cases). They buy because it provides them value. Build something valuable and you'll get customers.
Once you have customers via creating something valuable, you have revenue, growth, etc. With this you can win over investors, recruiting candidates, heck even other potential customers.
Social proof might help a little, but probably not as much as you think.
Marketing is probably the most important skill for a founder to have. You have to market to raise money. You have to market to hire employees. You have to market to get customers. It's especially hard at the beginning when you have to get the first of all of those things.
If you want to start a company, you should get good at it.
I think that's using a very broad definition of marketing.
Convincing founders to give you money, finding employees and convincing them to join you, marketing or selling to customers are very important skills. But they are fairly diverse and I don't think there is a lot of overlap in the skill sets.
Even just something like "market to customers" can require very different skills depending on your budget, target customer, market segment and could involve such diverse skills branding, networking, inside sales, outside sales.
I think you're right they're very important but I think devs tend to way overestimate the overlap and underestimate how deep and diverse the knowledge bases are.
I don't know if it's helpful or not for you to hear this, but as another serial startup person, I strongly second what he's saying. And marketing is a learnable skill, not a personality trait. It can even be engineered! It's also how you acquire social capital, and a "brand".
Another way to think about it is: by writing comments like the one you wrote above, about the unfairness of it all, you're already marketing. You're just doing it badly.
I don't want to sound like I'm picking on you, because this is an incredibly prevalent handicap among smart tech people.
I appreciate you taking the time to try and be helpful. Perhaps I'm just not cut out for being a startup entrepreneur when there are easier ways for me to make a living.
This raises the question, why didn't AirBNB and Stripe go public when the market was ready? Looks like the strategy of staying private for longer isn't really working out for anybody.
AirBNB raised $1B and Stripe $600M. Just a guess but terms would've been MUCH better if they'd done it in the stock market. Really puzzling why they didn't go public when markets were ripe, now YC is paying the price.
I wouldn't be surprised that companies like Stripe arrive at a point where they want fewer investors controlling their company.
When you are Stripe big, what does YC do for you that you can't do with your own money printing machine? Aside from cash, there must be other advantages to having investors.
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“In addition, processing hundreds of follow-on rounds per year has created significant operational complexities for YC that we did not anticipate. Said simply, investing in every round for every YC company requires more capital than we want to raise and manage. We always tell startups to stay small and manage their budgets carefully. In this instance, we failed to follow our own advice.”
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Is picking winners difficult? Or is it that the economy has a hard cap on how many winners will occur every year?
There are multiple reasons why startups fail. Some of them are:
- Product-market fit: Is there demand for our product? Is the timing for our product right?
- Customer acquisition: How can we make customers know that our product exists? How much does it cost to acquire a new customer (through ads, etc.)?
- Market size and profitability: Is the demand and profitability for our product sufficient to sustain a business?
- Building a viable product within the constraints of the runway capital (Uber for dog walking is not as capital intensive as building a self driving car fleet, for example)
1) It has nothing to do with the economy and everything to do with whether people love your product and you have product-market fit. Getting to that point takes time and mostly companies run out of money before they get there.
With regard to 2), if that's indeed how VC works, then YC just needs to fund every company. There's no need to do vetting if you are guaranteed to fund the next FB and the earnings will outweigh all operational expenditure on non-FBs.
1) People would definitely love a machine that prints gourmet food for them in their house, but it's really difficult to do that. It's so difficult that the amount of money it would take to make such a machine is pronably greater than all of the money in the world. This is what I mean by "the economy has a cap on the number of new ideas that can be funded"
Going to 4% makes YC much more attractive. At 7% it's really hard to justify, though even at 4% for such a small investment it may be a hard pill to swallow for founders who aren't right out of college.
So, and I may have misunderstood, a company can now get into YC, but might not be invested in by YC?
So its a two tier system. We like you gorgeous, but not enough to sleep with you (sorry, invest in you).
Why not just pick the ones you will sleep with (sorry invest in). Why have the half way signal? If investors don't like investing pro-rata, that's not because they don't like making money - its because they think YC is not picking all winners.
Isn't that the problem? Competition?
Edit: Perhaps I need to understand raising finance better. But, re-reading the announcement as quoted, it still seems there is a two-tier system, and it looks to me that YC will have placed a bullseye on its shirt - if they will only pick 1/3 of companies, then any investor must assume YC has some extra information in the market for lemons - in which case the simple solution is just wait for YC to invest / SAFE / whatever, and invest in that. If a YC company tries to raise a round without a letter from YC, it just won't get anything ... ?
Instead of every investor now either making its own decisions, they just wait for YC to signal its own special knowledge.
I would like to see how many companies close a round without YC from now on?
But that does not matter - YC will always be assumed to know something extra than other investors. They will have seen something at the weekly dinner, whatever.
So YC's decisions will impact meaningfully on the ability to raise subsequent rounds.
That probably was true for series B anyway, but now its true at the priced seed round.
I get it - its silly to throw gobs of money at companies that will fold next week, especially if you know they will. But ...
It does matter because you misunderstood (like your first sentence in your first comment said). Every company that gets into a YC batch is still invested in by YC. You cannot be in YC without being invested in by YC.
What's changing is the follow-on investments are not automatic. It used to be they would automatically exercise their right to maintain their 7% stake by investing more. Now they're going to maintain a smaller stake, and it's not going to be for every company. Only about 1/3rd of them.
Why would YC know more than other investors? The required knowledge seems to be a function of ability to predict market outcomes and perform due diligence.
I find it interesting that they choose to change their investing program instead of changing their application program. Why not keep the program smaller and more exclusive instead?