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Ask HN: YC new move will change SV dynamics. Are you sure for the better?

30 points by sinzone ↗ HN
With this move all small angel investors are out of biz. This new thing will change the dynamics of seed investments forever. Startups (in pre-seed stages) must embrace constraints to stay focused on what really matters, must stay in the garages working with few resources. This is like give alcohol to babies, they will get drunk.

Small angels will just need to seek investments outside of YC, but that takes some good companies off the table. It will definitely reduce the number of angels in SV within 2-3 years, only the smart ones will survive.

It looks like a bubble, and in the human history every bubble has crushed; soon or later. There will be a lot of burn outs and wasted money over next few years.

21 comments

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bluewatson
It most definitely will. The potential to be severely diluted in the next round with uncapped convertible debt is a real potential. It also can perversely make the angel wish for a lower valuation on the series A so they convert at a higher percentage. Overall I don't think that this affects VCs as much as it does angels. If anything you will start to see angels move up the food chain and raise bigger funds to go after a bit later stage besides seed.
sojourn
Agreed, however if you follow the money many of the angels already co-invest and have receive financing from very specific VCs, will be curious to see what happens if they try to go more head-to-head with later stage deals.
mattlong
They wouldn't be diluted at all. Convertible debt is not a priced round.
bluewatson
That is the problem with it being uncapped. The trend from Ycomb were capped convertible notes that put a limit on how much the series A could be priced at. This acts as a type of anti-dilution for the angels who know what their percentage ownership will be on the next round. The problem with uncapped is that you can be diluted to very little ownership depending on the valuation for the series A which sets a share price and conversion number for your note. In this sense you have the potential to be substantially squeezed down in the round which is how I was using diluted.
coryl
It looks like a bubble, and in the human history every bubble has crushed; soon or later.

Bubbles have to have widespread macro-economic build up that will indicate whether or not there is actually a bubble. Are IPO filings up? Is the average dollar amount raised in Series A significantly higher? Are there more visible failures than before? Unless you can scientifically point to some data or experience that MANY unqualified startups are in fact receiving easy money, than you're just a speculator. Because while YC companies have a large attention-share in the startup world, it is still only a fraction of startups and non-representative of the larger landscape.

I hate it when people ignorantly say things like "this is a bubble" just because they read about some dumb company received funding in a TechCrunch article. (Not a personal attack btw on you btw, just my general opinion.)

contagion
It doesn't have to be the money raised in a series A, we are talking about a bubble in the seed level. In fact it does look like the start to investment without much thought/diligence/etc. There is a large amount of capital chasing early stage deals, people are writing checks after one meeting, giving away uncapped convertible gifts.
[dead] mcbreed
I am with contagion on this one, the time to raise capital has been greatly reduced, and yes the valuations are up across the board in seed raises. The question is specific to the SV environment, it wasn't "is US technology in a macro bubble."
gyardley
$150K to each YC startup barely moves the needle when compared to the overall amount of seed funding that goes on. It's nice for the YC class, but I doubt it'll have that much impact on the ecosystem as a whole. Maybe ultra-competitive seed deals will be less likely to have valuation caps.

As for whether valuations are creeping up and things are getting bubbly as a whole - perhaps, but so what? Bubbles are great for entrepreneurs, and despite their chaotic collapse and impact on investors, are arguably good for society as well. A lot of innovation takes place and progress gets made when money is cheap. After the bubble collapses, this innovation doesn't just vanish - instead, it sets the stage for further economic growth.

jetaries
I would actually agree with this to some extend. The cool part is that YC started out as an experiment, and they are continuing to experiment and pushing the boundaries. If anything, this will give YC team more data and knowledge.

Another point is that YC startups have changed since the beginning. More and more teams are semi-established joining the program. To them, this is no doubt a great help.

philwelch
What percentage of startups are in YC, though? So what if small angels are forced to invest in non-YC startups--YC openly admits they reject a lot of promising teams. And if receiving too much investment is bad for the startups that are in YC, then those small angels are bound to have an advantage.
pg
With this move all small angel investors are out of biz.

What? The startups we fund almost always want to raise more than $150k. I would guess the median startup in the last YC batch raised 4 to 5 times that much.

alexsolo
The poster is assuming that once a YC startup is funded with a convertible note with no cap and no discount, that all other notes in the round will be at similar terms (and thus small angels won't be able to afford to participate in the deal). Maybe he doesn't realize that you can raise an angel round with different terms for different investors.

Personally, I don't think many YC companies in the batch will be able to raise an entire round with no cap, no discount. However, the $150K investment from SV Angel/Yuri will help companies negotiate better deal terms than they would have otherwise obtained.

sinzone
I mean...this is for sure the right move to help entrepreneurs, but I'm not sure about the near future.

How a small angel investor can invest in conv. debt. without cap and discount? Maybe the no cap/discount are only for SV/Yuri but I guess that in any case startups (even if they need more than 150k) will feel more confortable with some nice cash in the bank, thus they will become more picky and will ask for hyper-strong favorable terms that not anyone will be able to afford (good for entrepreneurs). Therefore a lot of small angel investors can't invest anymore in YC startups (I guess YC will push out 100 startups/year - for sure a big chunk). Thus, they will go somewhere and the one who were able to invest, were able to invest at huge valuations whit less nice terms, so they will get smaller future returns (bad for the future of the ecosystem).

To conclude, my concerns are not about now but about the future cause there is a risk that we'll have less angels, then less money available for entrepreneurs. I may be wrong though...

(obviously we're talking only about investments into YC startups; investors can always invest elsewhere. So when I said "out of biz" it was more about the "YC related biz")

pg
How a small angel investor can invest in conv. debt. without cap and discount?

That doesn't make it any more expensive to invest; it just decreases the eventual returns. But that variation in returns will be dwarfed by the variation caused by which startup you pick. Which means investing with no cap would be business as usual for angels.

Not that they would have to in any case. We don't anticipate that the startups' additional money will have to come with no cap. Ron and Yuri had to do this because to make their fund work like an index fund, they had to get the entire batch, which meant they had to make it an offer no rational founder would refuse.

sinzone
it just decreases the eventual returns

That's exactly my fear.

But that variation in returns will be dwarfed by the variation caused by which startup you pick. Which means investing with no cap would be business as usual for angels.

Yes, I agree with the no cap thing. Yet I think smaller discounts mean that you'll get smaller returns whether you pick a "rocket" startup or a "tortoise" one.

johnroescher
How can you predict there will be lots of wasted money? Blindly investing in a group of startups because of a high profile incubator they're participating in is a practice in publicity and, as an investment, a bet against numbers at worse.

I'm gambling that YC and Yuri are pretty smart about what they're doing. It's a branding/publicity exercise that will probably return just a few (not important) numbers for Yuri that uses these YC kids as a vehicle.

sdizdar
It looks like a bubble, and in the human history every bubble has crushed; soon or later.

My understanding is that each bubbles require leverage (credit, margins, etc.) with imperfectly informed lenders. You might call this as a bad investment (which I don't think - internet and mobile is finaly maturing), but it lacks definition of bubble.

_delirium
I don't think the usual definition involves leverage, though that can certainly contribute to bubbles; a "bubble" is just any speculative run-up in asset values where they temporarily deviate greatly from intrinsic/long-run values.
Mz
...only the smart ones will survive.

And this is a problem?

loluyede
Anyway, TechCrunch says that around 90% of them already signed up for the money so we'll just have to wait and see.
imkevingao
$6.45 million on 43 ultra high potential startups, I wouldn't call it a bubble. If anything, I would wonder why others didn't start earlier. I consider this move by DST and YC an innovative pareto optimal solution for both entrepreneurs and investors.

First you have many startup ventures that have limited growth due to the lack of cash, the $150k is a really good booster to achieve relatively high performance for most of the startups in this tech industry. The fact that this is a no cap/discount deal is unheard, which why it is bringing so much publicity. This is a game changer for the industry.

It might be a risky investment, but the odds are not bad since the investment is diversified into 43 talented ventures instead of one. But furthermore I think this investment is more than just money. YC and DST are investing in the future of the tech industry.

Don't think of this as an investment for the current YC portfolio, rather, think of it as a marketing strategy for future YC applicants. With this sort of publicity with DST, as well as connections with other Valley's giant investors (cough Sequoia cough) , all of the great talents across America will start to apply for Y-Combinator. I have a feeling that YC's going to find its Facebook real soon. It's just a matter of time.