We’ll use this instead of individual introductions, where we often don’t think of someone that would be really interested in the company.
I think I understand what this means, but it really needs to be reworded. It could be interpreted as either "We'll use this instead of individual introductions (which often have the property of unintentionally missing people)", which I think is the intended meaning, or "We'll use this instead of individual introductions when we don't think anyone will be really interested", which would be a very bad misinterpretation.
It's crazy that this is even an issue. Investors fighting over YC companies to the extent that YC has to play politics to make sure everyone is getting a fair shot; that's pretty insane.
The accelerator I participated in had relatively open doors and investors who came to everything from office hours to pitch practice. We ended up taking money from one of the most involved investors first, (and left some who really wanted to participate out) but the group of investors who didn't get in on the deal said, "Well it's fair if they want to put that much time and effort into it; we're not willing to do that."
It is, however, a major signal; if the guys who know you intimately well don't want to invest, could cause other investors to be cautious/skeptical, which isn't fair to the companies that don't get an investment from the YC partners.
My impression was that it was less to do with fighting and more to do with YC companies not being able to raise funding because a YC partner hadn't invested in them.
For a while there was a standing offer from Yuri Milner to invest a substantial amount as a convertible note in any YC company (this has changed in the meantime, but it gives you an idea about how hot YC companies are).
"Investors fighting over YC companies" also shows that there is insufficient high-quality deal flow (real or perceived). Stated another way, there is a supply/demand imbalance for high-quality deal flow. While hard to tap, there's an opportunity for creating/finding/aggregating high-quality startups.
Obviously, replicating YC has been tried, so a real solution likely requires some innovative approach that I can't currently think of. But, if I'd bet on a company that creates a solution because there is clearly high demand from willing and able buyers.
No, they are just trying to maximize their return. They still carry plenty of risk but the ratio changes in their favour if they use YC as a vetting machine. And with a couple of out-of-the-ballpark hits under its belt YC is now a proven kingmaker.
It's much simpler than that. YC is a stamp-of-approval, and there is a very large amount of money available for pre-vetted deals because this substantially improves the chances VCs have for a return on their investment.
So the YC advantage is what creates this scarcity, and that's rapidly starting to exhibit network effects and this is one of those.
The 'classes' model is a stroke of genius, it reduces the question of whether or not an investment is a good one to is this investment a good one against the backdrop of a whole pile of possible investments. That question in isolation is much harder to answer than the question with a lot of material around it to compare against.
> there is a very large amount of money available for pre-vetted deals
This is part of the point I was making. Which is that there is an obvious opportunity for a company to come along and commercialize this demand. I'm not saying it's easy, just that it would be lucrative. More specifically, the demand volume far exceeds the amount of supply that YC or any single organization can produce. YC is benefiting from the demand b/c they produce a high quality product (pre-vetted startups). However, the demand would exist with or without YC...just that without YC the supply/demand imbalance would be worse.
If YC could double its output while maintaining quality, or if a 2nd organization/company comes along and creates high-quality, pre-vetted startup supply then they too will enjoy high demand.
You're missing one crucial bit I think. The vetting is the hard part. And YC has that down to an art form, they've crunched the numbers on thousands of applications, have built up a large network of alumni who are very smart individually and scary smart collectively.
This is one very tough act to follow. Not that that should stop you from trying.
If one of the Y Combinator partners makes a follow-on investment in a company, a lazy investor might assume it's a "signal" the company is worth investing it. Conversely, if a Y Combinator partner doesn't make a follow-on investment in a company, a lazy investor might assume it's a "signal" the company isn't as attractive.
Signaling is the idea that you can get the insight of information that is not public yet by watching the behavior of insiders with access to the private information.
For example if the officers and board members of a company are selling shares in a company, they probably think the company is going to decline in value. At the same time, they might make statements saying everything is great and getting better, but the signal that they are selling is stronger than their words.
In the public equities markets, a lot of amateurs lose money making assumptions based on lazy analyses of Form 4 filings. There are a variety of reasons insiders sell which have absolutely nothing to do with the health of their companies. Trying to glean meaningful and profitable insight from these filings is a lot more difficult than you suggest.
The same dynamic applies to startup investments, particularly in the early stages. There are any number of reasons why an investor may not make a follow-on investment. These range from the personal finances of the investor to conflicts that have emerged in the investor's portfolio. More importantly, at the seed stage, even the most successful angel investors (if they're honest) will readily admit that it's damn near impossible to tell the future winners from the losers, and anybody who has been investing actively can tell stories about ones that got away, so there's limited value in playing follow the leader.
Signaling is a bigger issue in later stage financings, but there too, if you make assumptions without digging deeper (something any good investor does), you're bound to draw the wrong conclusions.
Sam seems to be one of the best things that's happened to YC - and extra kudos to pg for recognizing that and working so hard to grab him.
The most important piece of this write up is concerning the rules for being part of the investor email list. This takes what was previously an informal rule (don't mess with YC companies) to a much more formalized rule. Every decent investor is going to want to be on this email list which means they are very clearly and explicitly incentivized to not screw a YC company.
This will hopefully not just have a positive impact on YC companies. What I hope is that the idea of what "screwing" a company means will get further standardized which will have a positive impact on every startup around the world. i.e. a very good filter may simply be "are you on the YC list?"
Agreed. The other big news here is that they're leveling the playing field a bit, by moving away from LP (or LP-like) relationships with a collection of VC firms.
It strikes me that while it less unlevel (if that's a word) the playing field is still skewed. I have occasionally assumed that YC companies would be amount the first to use crowd-funding for their early and Series A rounds.
(About a year ago there was a lot of interest in new rules allowing small investors to get more easily fleeced / access to startups and YC seemed that sort of "Brand" I would trust in that area)
So yes a more level playing field for professional investors but still opaque for spreading the wealth around once the great hollowing out takes hold.
(Before my socialist underpinnings are revealed I want to point out I welcome this - YC seems in good hands - I was just interested now they moved slightly in one direction, I want to see more movement !)
You might be somewhat interested in FundersClub, a YC company which has helped fund other YC companies. FundersClub does limit membership to "Accredited Investors" (rich people), but I don't believe they take steps to verify whether you qualify for this. They got their start before the new rules you mentioned, so that limitation may change soon.
(CrowdTilt, which IMO democratizes crowdfunding better than Kickstarter does, is also a YC company).
On a separate note, I personally think that "microbonds" would be a better model for the general public to invest in small companies for whom presales/crowdfunding don't work, as equity actually is hard for the average person to really grok.
Apologies if my reply came off as glib - I'm surprised (though only through my ignorance) to learn a personal connection may not be present despite a number of mutual connections. I guess the volume of YC companies has had that effect over the years.
No worries. I think many investors know at least one YC partner, but many do not. YC is so big these days =). Last demo day was probably ~150 founders and maybe ~500 investors.
This may get downvoted, but I hope not, as it's a genuine question:
Why not just use AngelList? They do a lot of curation, you can have custom groups (I'm sure Naval would set it up), and there are already reviews and qualification of investors, big and small. Rather than having a totally separate list, why not leverage AngelList's network and also benefit from the increased awareness/signaling of being able to state someone is invested and share among their network?
Angel list is the equivalent of self publishing. YC is like going to a publisher who separates the wheat from the chaff. You also really open the kimono to a bunch of unknowns on AngelList.
"In general, we don’t start introducing startups to investors until a maximum of 10 days before Demo Day"
I know for a fact that accelerators like TechStars start introducing startups to investors 4 weeks into the program. They actually have groups of investors come in and talk to the startups. Although, they don't talk about investments, but everyone knows there is a vetting element in there.
Accelerators are very different nowadays from what its roots. Many YC companies (as well as TechStars companies) come into the program with significant traction. (See note)
I always had the expectation that accelerators are about helping young startups to figure out what they do. Although the reality is that they are all fund raising bootcamps to help startups that already know what they do to raise their round easily.
I am curious to hear YC founders on their thoughts of accelerators, especially, the traction you have or your peers already had before YC.
Note:
e.g. Memebox - YC company was already on 1.5 million runrate before entering into the program and have already raised 1+million dollars; There are many more examples, in both YC and TechStars which I can list if anyone is interested
>> I always had the expectation that accelerators are about helping young startups to figure out what they do.
Not to be pedantic but I see accelerators as accelerating a startup. Try to picture something accelerating really fast, but apply that concept to a startup. I think it's a bit of a myth that YC helps young startups figure out what to do.. they are more about helping great startups move and grow faster.
>> I am very surprized by this statement: "In general, we don’t start introducing startups to investors until a maximum of 10 days before Demo Day"
Simply because it's better to focus on the product and get more users before demo day. Raising is just a way to grow faster.
>> am curious to hear YC founders on their thoughts of accelerators, especially, the traction you have or your peers already had before YC.
Loved the experience, would do it again. We had great traction for a very early startup.
"The rules for membership are simple—5 total investments in YC companies of any size or 2 big ones, a positive reputation among our alumni, and no history of bad behavior like breaking term sheets without great cause, pressuring founders into advisor shares in addition to an investment alongside others in a round, etc."
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[ 6.0 ms ] story [ 96.9 ms ] threadI think I understand what this means, but it really needs to be reworded. It could be interpreted as either "We'll use this instead of individual introductions (which often have the property of unintentionally missing people)", which I think is the intended meaning, or "We'll use this instead of individual introductions when we don't think anyone will be really interested", which would be a very bad misinterpretation.
The accelerator I participated in had relatively open doors and investors who came to everything from office hours to pitch practice. We ended up taking money from one of the most involved investors first, (and left some who really wanted to participate out) but the group of investors who didn't get in on the deal said, "Well it's fair if they want to put that much time and effort into it; we're not willing to do that."
It is, however, a major signal; if the guys who know you intimately well don't want to invest, could cause other investors to be cautious/skeptical, which isn't fair to the companies that don't get an investment from the YC partners.
Agreed.
"Investors fighting over YC companies" also shows that there is insufficient high-quality deal flow (real or perceived). Stated another way, there is a supply/demand imbalance for high-quality deal flow. While hard to tap, there's an opportunity for creating/finding/aggregating high-quality startups.
Obviously, replicating YC has been tried, so a real solution likely requires some innovative approach that I can't currently think of. But, if I'd bet on a company that creates a solution because there is clearly high demand from willing and able buyers.
I suspect the problem is more that VCs are neglecting the first half of their job description.
So the YC advantage is what creates this scarcity, and that's rapidly starting to exhibit network effects and this is one of those.
The 'classes' model is a stroke of genius, it reduces the question of whether or not an investment is a good one to is this investment a good one against the backdrop of a whole pile of possible investments. That question in isolation is much harder to answer than the question with a lot of material around it to compare against.
> there is a very large amount of money available for pre-vetted deals
This is part of the point I was making. Which is that there is an obvious opportunity for a company to come along and commercialize this demand. I'm not saying it's easy, just that it would be lucrative. More specifically, the demand volume far exceeds the amount of supply that YC or any single organization can produce. YC is benefiting from the demand b/c they produce a high quality product (pre-vetted startups). However, the demand would exist with or without YC...just that without YC the supply/demand imbalance would be worse.
If YC could double its output while maintaining quality, or if a 2nd organization/company comes along and creates high-quality, pre-vetted startup supply then they too will enjoy high demand.
This is one very tough act to follow. Not that that should stop you from trying.
For example if the officers and board members of a company are selling shares in a company, they probably think the company is going to decline in value. At the same time, they might make statements saying everything is great and getting better, but the signal that they are selling is stronger than their words.
The same dynamic applies to startup investments, particularly in the early stages. There are any number of reasons why an investor may not make a follow-on investment. These range from the personal finances of the investor to conflicts that have emerged in the investor's portfolio. More importantly, at the seed stage, even the most successful angel investors (if they're honest) will readily admit that it's damn near impossible to tell the future winners from the losers, and anybody who has been investing actively can tell stories about ones that got away, so there's limited value in playing follow the leader.
Signaling is a bigger issue in later stage financings, but there too, if you make assumptions without digging deeper (something any good investor does), you're bound to draw the wrong conclusions.
The most important piece of this write up is concerning the rules for being part of the investor email list. This takes what was previously an informal rule (don't mess with YC companies) to a much more formalized rule. Every decent investor is going to want to be on this email list which means they are very clearly and explicitly incentivized to not screw a YC company.
This will hopefully not just have a positive impact on YC companies. What I hope is that the idea of what "screwing" a company means will get further standardized which will have a positive impact on every startup around the world. i.e. a very good filter may simply be "are you on the YC list?"
Smart and classy move.
(About a year ago there was a lot of interest in new rules allowing small investors to get more easily fleeced / access to startups and YC seemed that sort of "Brand" I would trust in that area)
So yes a more level playing field for professional investors but still opaque for spreading the wealth around once the great hollowing out takes hold.
(Before my socialist underpinnings are revealed I want to point out I welcome this - YC seems in good hands - I was just interested now they moved slightly in one direction, I want to see more movement !)
(CrowdTilt, which IMO democratizes crowdfunding better than Kickstarter does, is also a YC company).
On a separate note, I personally think that "microbonds" would be a better model for the general public to invest in small companies for whom presales/crowdfunding don't work, as equity actually is hard for the average person to really grok.
Why not just use AngelList? They do a lot of curation, you can have custom groups (I'm sure Naval would set it up), and there are already reviews and qualification of investors, big and small. Rather than having a totally separate list, why not leverage AngelList's network and also benefit from the increased awareness/signaling of being able to state someone is invested and share among their network?
"In general, we don’t start introducing startups to investors until a maximum of 10 days before Demo Day"
I know for a fact that accelerators like TechStars start introducing startups to investors 4 weeks into the program. They actually have groups of investors come in and talk to the startups. Although, they don't talk about investments, but everyone knows there is a vetting element in there.
Accelerators are very different nowadays from what its roots. Many YC companies (as well as TechStars companies) come into the program with significant traction. (See note)
I always had the expectation that accelerators are about helping young startups to figure out what they do. Although the reality is that they are all fund raising bootcamps to help startups that already know what they do to raise their round easily.
I am curious to hear YC founders on their thoughts of accelerators, especially, the traction you have or your peers already had before YC.
Note: e.g. Memebox - YC company was already on 1.5 million runrate before entering into the program and have already raised 1+million dollars; There are many more examples, in both YC and TechStars which I can list if anyone is interested
Not to be pedantic but I see accelerators as accelerating a startup. Try to picture something accelerating really fast, but apply that concept to a startup. I think it's a bit of a myth that YC helps young startups figure out what to do.. they are more about helping great startups move and grow faster.
>> I am very surprized by this statement: "In general, we don’t start introducing startups to investors until a maximum of 10 days before Demo Day"
Simply because it's better to focus on the product and get more users before demo day. Raising is just a way to grow faster.
>> am curious to hear YC founders on their thoughts of accelerators, especially, the traction you have or your peers already had before YC.
Loved the experience, would do it again. We had great traction for a very early startup.
Or being a pervert/sex pest.