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w22_throwaway
eloff
I'm curious what your startup is. I'm in the devtools space as well. My email is in my profile, contact me if you're willing to share what you're working on in private.
mritchie712
This makes it much easier to get to profitability[0] and never raise again after YC (especially as a SaaS). I wonder how this will impact the decision to raise money after YC.
0 - Including paying the founders a reasonable salary
maximp
I'm also confused about how this works. If you choose to never raise after YC, is the remaining $375K just part of of the 7% they take upfront, or is it only available if you raise?
> Simply put, we’re giving the company money now but at terms you’ll negotiate with future investors.
mritchie712
You get the 375k now, it is not part of the 7%. The incremental % they own wouldn't be determined until you raise again.
But you could choose to never raise again. They'd still own some incremental amount of your company, but % would be a bit unclear unless you got a formal valuation outside of raising or sold the company.
SmellTheGlove
If you can build something with 500k and grow at VC-expected multiples without raising again, I'm sure that'd be a pretty positive conversation to go have with YC to determine the equity attached to that additional 375k!
I think the issue is going to be that YC isn't looking to fund lifestyle businesses, so getting that initial shot is going to be tough. It just doesn't seem to me like YC is looking for companies that wouldn't have that next equity round.
I've never gone through YC though, so don't necessarily take my word for it!
tptacek
They would own the 7%, and have a debt claim in the amount of the SAFE on the company at liquidation.
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itsoktocry
>This makes it much easier to get to profitability[0] and never raise again after YC (especially as a SaaS).
More money is better than less money, sure. But a couple founders and a couple engineers making reasonable salaries and 500k gets you, what, 1 year? 1.5? Profitability might still be challenging.
ryanSrich
Yeah no one talks about the cost of engineering. Most quality engineers are looking for $150-$200k salary to start. So a team of 5 is easily $1m after benefits, not to mention any equity grants. And that’s before the founders take a salary, before they hire any designers, or marketing, or sales people. The cost of starting a tech company is still low relative to other fields, but it’s increasing drastically.
ramraj07
As OP mentioned, this works for years if a team of founders agree to take minimum wage salaries for a few years. If you need to recruit you’re OOL.
ddingus
Seems nobody is really investing in that scenario. With modest, to low investment, there should also be very modest returns. By that, I mean taking less to extend runway, but then also have it all pay very nicely on take off.
mritchie712
The founders would need to be able to build the product themselves. It will be challenging, for sure, but I know about a dozen founders that have done it with less.
captn3m0
Not all companies are based out of SF. For companies in India, it easily scales to 10-15 devs. You could get to a 2yr runaway with a small 10 people team.
the-dude
Are you sure this is how it would work? From the post I read the remaing 375k will be invested at the next equity round.
aripickar
Not quite. The way that it works is that the 375k is invested now, but at terms that are determined in the next equity round. If the next round values the company at 10 million, then the 375k would be 3.75% of the company.
ketzo
Woah, okay, didn't totally understand that until you put some numbers on it.
That's... almost unbelievably founder-favored, yeah? Neat.
nirmel
This is also not true. Their uncapped MFN note assumes the terms of the lowest-capped safe (or other investment) after their investment. So if founder accepts $3.75m capped safe soon after YC’s investment, then later raises an equity round at $10m valuation, YC gets 10% more, not 3.75% more at that time. There may be dilution from the equity round but that’s a different matter.
_xnmw
The full $500k is upfront. Quote:
> Simply put, we’re giving the company money now but at terms you’ll negotiate with future investors.
uranium
The terms are set at the next equity round. The money comes in right away.
See the footnote:
"Simply put, we’re giving the company money now but at terms you’ll negotiate with future investors."
_xnmw
If you never intend to raise again after YC, I'm pretty sure that would be defrauding them. YC expects that you build VC-scale companies which require several rounds of additional funding, anything else is a failure, if I understand correctly.
tptacek
You are getting downvoted to invisibility because YC doesn't ask you to raise again. You likely need to have the kind of company that could plausibly do so (ie, an idea that can scale), but lots of YC companies don't, and no YC process I'm aware of prods them to do so.
Not raising again doesn't even violate the expectations of the program.
lazide
Note on one point - technically it doesn’t require multiple rounds. For early investors, the fewer rounds before a large IPO, the better. If you made it huge and IPO’d as a billion+ dollar company with only the YC funds? YC would be thrilled
The reality is that is really really hard to do - harder even than doing it with extra funds - so it’s foolish to have that as your goal, or be tied to that. Especially since the decisions required to do that would almost certainly hamstring your ability to get market traction, grow as quickly as you otherwise would be able, etc.
YC, and most other investors, would much rather have 1% of a $10bln company than 10% of a $100mln company.
gcanyon
Since A. 1% of $10B is $100M, and B. 10% of $100M is $10M, who wouldn't take A?
solarmist
Do you think the idea that popped into your head after reading this is something that didn't occur to them? A couple of YC companies have not raised additional VC rounds after YC.
I re-read the MFN SAFE contract. The second clause discusses "liquidity events." I.e., IPOs or selling the company. And discusses the details of that.
The only way around it would be to build the company after YC without further investment and to keep it private indefinitely, a la Gumroad, but given most company employees are also working partially for equity, that's generally a non-starter already. At that point, VCs usually make offers to the founders to buy back the equity for some amount to clear their books. I don't know if YC does this, though.
TL;DR The only way to not "convert" the $375k (this applies to the $125k SAFE too) would be to keep the company private forever which for most startups is a non-starter since employees generally want some equity.
andruby
It might go against the expectations, but it would not be defrauding.
_xnmw
Explicitly misrepresenting your intentions would be fraud though. I'm not talking about a company that intended to go big, but didn't quite take off. I'm talking about a founder who never intended to go big (keep a small bootstrapped company all the way), but applied to YC claiming big ambitions anyway, just to get the initial $500k check.
sudosteph
The entire reason I didn't apply last season was because despite being my startup looking for funding, and despite us having our best traction to date (functional MVP deployed in big retail partner, making sales) - the $125k (minus the cost of uprooting our team and product to CA) was just a bad deal. We've been in talks with some angel groups with 500K being the ask for the pre-seed, and that has been well received. So I think 500K is right on the money for now. It's a good change to see!
Finbarr
Very curious to see what kind of pricing pressure this puts on seed investors who traditionally invest after YC. The dynamics seem likely to swing even more in favor of founders.
amirhirsch
Yea I was thinking this too. A reasonable startup is talking to other investors besides YC when they apply, so those investors will have to make up their mind before you get in or they will have to accept the same MFN note after
blast
> The dynamics seem likely to swing even more in favor of founders.
What makes you say that?
Finbarr
There isn't the same pressure on founders to raise a seed round as they are likely to exit YC with significant capital and runway. Seed investors still have capital allocation targets and are likely to improve their offers to encourage founders to accept investment.
tmcneal
This also incentivizes founders to raise at a higher cap to minimize the dilution from the $375k. I imagine it'll be harder for investors to negotiate a lower cap or get a discount.
Grustaf
I wouldn't call 400-500k a significant runway, but it should have some effect, since you can put of fund raising for at least a few months, maybe even 2 years if you're frugal. At that time you are hopefully further along.
colinmhayes
They can wait longer before seeking funding. And since the terms for the 375k are based off the first funding round it makes sense to wait until the last second to minimize the percentage that goes to yc.
pipnonsense
What is the effect of this on Demo Day? Is Demo Day less relevant (since lean companies might just skip it)? Isn't the Demo Day a motivational deadline that adds value to the YC experience, so it reduces the weight of the "acceleration" part of the program?
I don't know those answers, just wondering in the hope that someone from YC comments on that.
snowmaker
Most companies in YC these days raise over $1M at demo day, so no, I don't think many companies are likely to skip demo day as a result of this.
Our goal instead is to make companies more successful at demo day. Now they'll have more capital to use to grow during the batch, and they'll have more leverage to negotiate with demo day investors because they are better capitalized going into their fundraise.
aerosmile
Founders will sometimes say "if I can't build this company with no more than a million dollars, it's not worth building it at all." In isolation, that thinking may not be wrong, since it highlights the importance of frugality and the product market fit. But in connection with the easiest influx of capital you will ever experience in the lifecycle of your company, paired with valuations that are super high on a risk-adjusted basis, it would be insane not to say yes to a war chest of a few million dollars that you put away for the rainy day.
So no, I don't think that YC companies will raise any less, or will be any less concerned about being ready for Demo Day. The one thing that might happen is that the earliest investors will see a hike in valuations. In the past, investors with the strongest value add (reputation/brand/connections/etc) were able to get in a few weeks before Demo Day at a discount. Since Demo Day investments are characterized by a very weak signal-to-noise ratio, knowing that a reputable investor is bullish on a startup tends to increase the demand to such an extend that the resulting higher valuation more than makes up for that initial discount.
Now that this additional $500k is going to be valued against the lowest valuation, it will increase the barrier for giving discounted deals.
herval
> Founders will sometimes say "if I can't build this company with no more than a million dollars, it's not worth building it at all."
I feel like this became such a big meme, that it actually hurt innovation. With lots of founders (me included) adopting the "Lean Startup" mindset, it's much easier to build a "single-feature company" that does something slightly mundane, then get acquired/acquihired because what you're doing is just so easy to reproduce. In my mind, that explains why most Unicorns these days are stuff like debit cards for companies, yet another task manager or note taking app, etc.
tl;dr I think true innovation requires [capital & research & time], and feel like we've replaced that pyramid with [quick iteration & extreme scrappiness & failing fast], maybe a bit too much.
reasonabl_human
You can have both sets of descriptors- but you need deep pockets and pepper willing to commit to a long term plan with profitability further out
ryanSrich
I don’t think this has any real impact on Demo Day. Seed rounds have inflated so dramatically at this point that $500k is just a drop in the bucket. Most venture scale companies (which if you’re in YC you most likely are) are raising $3-$5m seed, and then $10-$20m Series A. Of course, this is pushing valuations to astronomical levels.
jrochkind1
> also pointed out that if founders stay lean, this is more than enough capital to survive for years, regardless of the economic environment.
What does this look like?
I'm thinking 2 people's salary and overhead at say $110K each -- including employer's taxes, healthcare, and all benefits, that's maybe salaries of like $75-85K? Which is of course not a lot of money at all by software engineer standards (or to live near YC HQ), but is that still more than YC means by "lean"?
Because after two years that's $440K, leaving $30K/year for any infrastructure (like, that your software runs on) or marketting, or any other overhead at all.
So, yeah, that's lasting for "years" (2, which is I guess the minimum amount of "for years"), with exactly two founder employees, but it definitely seems very very lean to me.
How do you think YC is thinking about it, about like that, or I guess, even less take-home for the founders? Or is this not supposed to include the founders supporting themselves for those two years, is that not how it works? Or is the assumption they'd have at least a couple hundred thousand of revenue in those years too? Or thinking they will surely get some additional investment? (but that doens't seem to be what "this is more than enough capital to survive for years" suggests).
I'm not saying 500K is "not a lot of money", of course it is!
I'm just saying it's not clear to me how it's enough money to run a business "for years", even "leanly". Just curious how they're thinking about it like that, how I'm thinking about it wrong/different. I figure I don't know what I'm talking about, hoping someone will explain how it works!
austenallred
You're assuming zero revenue.
At a total spend of $250k/yr if you can figure out how to bring in $150k/yr of revenue ($12,500/month) you've got 5 years of runway now.
chubs
I've also pondered how these sorts of VC things work. Are they just targeted towards people fresh out of university who can afford to live cheaply? Seems a lost opportunity to hire experienced (expensive) people who can execute with no problems. For instance, what if say 2 experienced people went in on a startup, simply paying themselves out of eg that 500k - 125k each per year? For instance in australia that'd almost be competitive vs just taking a normal software job if you're experienced. I'm just curious how these things work :)
tppiotrowski
You take a pay cut. In return you get to be a decision maker and drive the mission of the company.
I worked a few years at a high paying job (about $100K), am single and can forgo some luxuries. I did a startup with some friends because we enjoyed hanging out and could afford to work for free. I worked on contract for $6K a month. No benefits.
chubs
Just curious what people do once they're at a stage in life (eg kids) where taking a paycut isn't very doable? Do they simply bow out of the startup world? I wonder if people at that stage have the experience to execute startups very effectively, i wonder if there's a structural weakness in how startups are financed that with a bit more capital (and there should be plenty of that sloshing around with governments printing like crazy) they could execute far better. I dont have fully formed thoughts on this of course :)
jiveturkey
i think you and all the other top comments are missing the point. this isn’t meant to pay any salary at all. the cost to bring a product, nay an mvp, to market have gone up significantly since the $125k deal.
this is meant to get you through on the same rice and beans, everyone living together or better yet free in the basement, as earlier.
if you spend it on salaries you are squandering it
dannyw
In 2020, YC cut the standard deal from 150k to 125k, while still preserving the 7% equity (and the 4% pro rata).
To sell a solution, first create a problem ;)
nrudrapp
Such a good catch. Let's see that with an example.
A startup on demo day raises $25m post.
7% on 150k means it's 11.7 multiple.
And 7% on 125k means its 14.7 multiple.
That's +3x jump on every deal.
Now let's say company exited at $1b.. the difference in multiple is +100x!!
Give that person a raise YC, whoever suggested to go down to $125k.
As somebody else has suggested below. This 375k is mostly cheaper way of buying prorata at series A
yaseer
YC was a no-brainer value-add for us, even without this deal.
It's still a no-brainer for any founder, regardless of batch size or remote vs in-person. This new deal simply cements that.
Well done to the YC team.
swyx
well, i mean, if you can raise externally at a $35m valuation (current top of market for early stage) and you go into YC for $2m, you* may be the one without a brain, not YC.
*you in the general sense, not you specifically :)
762236
Apparently it isn't no brainer, since I don't understand what is the benefit received for 7% of the company. Could you explain?
exolymph
The money is helpful if you're close to seed stage, but the network and brand cachet are invaluable. For example, recruiting is crucial for early-stage startups, and it is MUCH easier to recruit high-level talent (and get them to accept more equity in lieu of more cash) when you have a name-brand VC committed.
skeeter2020
>> brand cachet are invaluable.
This was much more a value when there was only a handful of companies in each cohort. Now there's 3 groups:
* YC~low number~ that I've heard of: Original signalling value
* YC~low number~ that I've never heard of: zombie
* YC~high number~ : new batch of spray and pray
This is unfair but my initial reaction
pyb
You get 500k investment, and you get to participate in the YC accelerator.
dang
A significant part of how YC thinks about this deal has not yet been articulated in the thread. (This is just my personal interpretation, not anything official.)
Some comments are describing $500k as "not much". Most people would gasp at hearing that. Only a tiny slice of humans are a position to think that way—for example, people who have family wealth (or maybe an elite educational credential) to fall back on, or who have already managed to break into the fundraising scene (or maybe a FAANG job) and have gotten used to comparing themselves to all the $multimillion deals they keep hearing about.
A big part of what YC is about is to be a bridge for everybody else to enter this space—no matter who they are or where they live or what demographic they belong to. YC has a long track record, right from the beginning, of funding founders who never would be given a chance by more mainstream institutions [1]. The new YC deal is particularly important for these sorts of founders. Geoff said it in the post, but I haven't seen anyone pick up on this yet:
We also hope that this deal will encourage more founders of any age and from every demographic group and geographic location to take the leap into the startup world.
YC does that because it's in its interest to do it and because it's good for the world. The idea that those two things go together, and that the way to maximize them is to help founders as much as possible, is in YC's DNA: https://www.ycombinator.com/principles/.
Capital-rich climates notwithstanding, many founders are not necessarily in a position to step out of YC and raise millions right away. Geographic and demographic disadvantages don't suddenly disappear. (And let's not forget the disadvantage of just working on something weird.) Being in YC helps, of course, but all the same imbalances are still in play.
For those founders, YC going from $125k to a $500k deal is a gamechanger because it gives them a lot more runway—more time to build, to grow, and prove what they can do, before stepping back into fundraising. Then they can hopefully raise from a position of strength instead of potentially having to accept less favorable terms.
[1] Me, for example. I wouldn't be here right now if it weren't for that, and I could tell a long story about how most investors weren't interested in us even after we got into YC.
tabbott
Yeah, the change from $125k to $500k is a huge difference.
$500k is enough money for a team with multiple founders who are OK with living on a graduate student budget of ~$30-40k/person/year (as my friends were, inflation adjusted, when we dropped out of graduate school to found Ksplice) to pay their expenses for multiple years, and still have plenty of money for hardware, hiring people to do specialty work they aren't good at, etc.
$125k is not, which means this change is a big shift in what is possible for a company raising money only from YC.
What this change means is that it's now more realistic for a team without any personal capital to start a startup and then bootstrap it from there, without raising capital from anyone other than YC (which I believe is experientially pretty different from having VC investors). Prior to this announcement, the main way to raise that kind of capital without angels/VCs on your cap table was the NSF's SBIR program.
Due to the selection process, companies accepted into YC generally are those that planning to raise a big funding round just after Demo Day, but I know a lot of folks who didn't succeed in doing so (some of whose companies are still in business 10 years later). This change in how much money YC offers means that failing to raise a satisfactory round at Demo Day does not mean they need to give up -- teams can spend a couple years figuring out their business if they think doing so is warranted.
(I have no YC affiliation other than having invested in many YC companies in the past).
tabbott
Edited to better inflation-adjust what graduate students make; it's $30-40K these days :).
lumost
Just wanted to give a shout out for solving a hard tech problem with big impact. ksplice eliminated an entire person’s worth of work at our company back in the day giving me enough spare time at work to move into software rather than patching servers.
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anotherfounder
> A big part of what YC is about is to be a bridge for everybody else to enter this space—no matter who they are or where they live or what demographic they belong to. YC has a long track record, right from the beginning, of funding founders who never would be given a chance by more mainstream institutions
I find this fascinating, maybe as an example of how institutions think of themselves and how they are actually perceived.
YC feels it is giving outsiders a chance (and that might be true for lot of the intl founders YC funds). But for most in the US, it seems like YC funds only safe SAAS startups, often by founders who were ex-FAANG (or ex-prominent YC startups), who are often white, and often MIT/Stanford.
Maybe it's the definition of 'outsider' that differs, but when I look around founders who reach out, female and founders of color often feel ignored. Consumer founders feel ignored compared to enterprise founders.
There are so many stories of founders who are actual outsiders (woman/PoC and non-elite schools) who have growing, promising, even revenue-generating companies who don't get even an interview and yet, other 'insider' founders (white, male, ex-FAANG or ex-YC portfolio) who get in on a recently thought of high-level idea (and then subsequently pivot a bunch of times in the batch).
I say all of this because it worries me if YC already thinks of itself as funding those outside the mainstream, that it doesn't actually realize who the outsiders are.
emmett
It may “seem” like that to you, but YC publishes actual stats…
https://blog.ycombinator.com/yc-summer-2021-batch-stats/
* 50% are based outside the US * 70% are not B2B/Enterprise * 43% of the batch is white (less than half)
So…your impression is simply incorrect. YC doesn’t fund the companies you think it does.
anotherfounder
Just to add to appsec112's point, while I did frame my original point as a 'perception', I'm willing to take a bet that if you put together US companies stats, I would be more right than wrong.
And while we are at 'actual stats' conversation, can we do the following -
- for the sake of this conversation, not divvy up enterprise/saas from devtools and enterprise-y fintech and enterprise-y health?
- publish stats on stanford/mit claim?
- publish stats on previous employer? ex-FAANG vs ex-YC portfolio vs none of those.
I appreciate YC publishing stats but the industry's work is not done when just high-level stats are published without scrutiny.
apsec112
This doesn't address the claims, and honestly feels evasive. The original comment specified:
"(and that might be true for lot of the intl founders YC funds). But for most in the US"
ie., they agree things might be different for international YC startups, but they are talking specifically about US startups. That half of the startups are international doesn't matter for claims about the sub-population of US startups. Likewise, any particular type of startup could be well-represented among all YC companies but not US companies.
jpglegal
One problem with these stats is that they're counting the 15% of founders who are Latino as non-white. However, in countries like Brasil and especially Mexico, a large portion of the people who are able to get tech startups up and running are white people, not indigenous, mestizo, or black people. Mexico in particular has a huge problem with the elites almost all being white. Y Combinator is likely padding its diversity numbers by recruiting rich European and Mediterranean elites from Latin America. I'm not saying they definitely are, but it's very likely.
I do think it'd be more accurate to say "white or Asian" rather than just "white" when describing the bulk of Y Combinator participants. Asian people, though discriminated against in many ways in US office settings, are still firmly a part of Silicon Valley culture at all levels.
xwolfi
The perception tells more about the poster than YC for sure, but how will you address this ? I'll be honest, I had the exact same impression and I'm French, living in Hong Kong. For everyone, YC is a sort of Californian techno bubble, and now that I see stats, I wonder why I thought that way.
Maybe move away from California/US completely, change your own capital providers, make documentaries about how you're the top African venture capitalists and are headquartered in Kenya ? Maybe we conflate who you fund with who funds you ? Do you have the same breakdown for representatives of capital providers ?
dang
Sure, perceptions differ, especially from different points of view. People at YC put a ton of effort into what I've described. Is a lot more needed? Of course. They'd be the first to agree with you about that. That doesn't mean the efforts to date aren't worth anything, though; let's not fall into being binary about this. Nor does it change the point about the differential impact of a $500k deal, for those who do get funded and don't have external resources to fall back on.
> But for most in the US, it seems like YC funds only [etc.].
That's far from accurate, and I don't think it's very helpful to say "for most in the US". Surely only a small minority in the US have even heard of YC.
infamia
> That's far from accurate, and I don't think it's very helpful to say "for most in the US". Surely only a small minority in the US have even heard of YC.
I read the parent's statement as (brackets are mine), "But for most in the US [startup community], it seems like YC funds only safe SAAS startups, often by founders who were ex-FAANG (or ex-prominent YC startups), who are often white, and often MIT/Stanford."
bambax
A way to know would be to publish statistics.
eyelidlessness
> let's not fall into being binary about this
Do you ever have a take that doesn't favorably frame your preferred discussion parameters whether they're stated or not? Isn't there a way to imagine this has been binary in some people's experience? Wouldn't that be a failure of this mission you'd want to know about?
rogerkirkness
Rural Canadian with no college degree here. Our competing fundraising offers were 1. A $10k loan from a bank or 2. $250k CAD on $750k CAD with a board seat and 2x liquidation preference. YC deal was like helicopter money generous at $125k SAFE for 7% compared to alternatives.
hypatiadotca
Oh man offer #2 is such a classic bad Canadian angel deal. Amazing.
alanlammiman
Sharing my personal experience here, as I found this thread interesting. To be clear: this anecdote isn't intended to argue with the statistics mentioned in sibling comments, or that YC doesn't fund outsiders, nor do I claim to be 'an outsider' in the first place. In any case I believe YC should fund or not fund whomever they want. But I hope it shows how some of these feelings can arise.
For context: white man from Brazil, top Brazilian uni but no brand-name US MBA or MS, Bain + Private Equity, first applied to YC with a startup in my late 20s when I left PE in late 2015. Since then have applied perhaps half a dozen times, sometimes with something that was still on paper, sometimes with things I was working on with a team and were already advanced. Some theses more enterprise-y (e.g. corporate education benefit platform), some pure consumer fun (e.g. stickers), some 'you must be joking' (e.g. let's redesign the web). My cofounders are brilliant in their domains but often don't speak great English, and they have small shares in the company as they need to take salaries, while I don't and I do the initial funding, so either I show up as a sole founder, or I have them on the video subtitled which ends up a bit weird.
About 2 years ago, our startup (which we had applied with to YC a couple of times before) reached US$6M ARR. Until then we had bootstrapped it, but decided it now made sense to go for VC. At that size we spoke directly to VC firms, of course, but given that we were all the way over here in Brazil, and Brazilian VCs by and large focus on local theses (at least in the early stage) rather than global ones, I also thought that it would make sense to talk to YC, as even though the dilution would be painful, that would multiply our global VC network in one go and thereby perhaps pay for itself. One catalyst for that was when a VC from a top-10 US firm reached out to us, but ultimately said "Look, if you were in the US, we'd be able to fund you Series A no sweat, but in Latam we only go in once things are at Series C". So I led our presentation video for YC with "Hi! We're X. We have US$6M ARR" making a 6 with my fingers. I realize of course that that per se doesn't make a company attractive, but I thought that at least it would buy us an interview. Nope.
Although it may come across as arrogant to do so, I do think that was a clear-cut investing mistake of omission, simply because our actual ex-post performance would have compensated YC very well had they invested, even without factoring in any value-add.
I later found out YC in that batch backed a tiny startup in the same field which (to the best of my knowledge) had struggled in consumer (competing directly against us), had little-to-no-revenue and was now trying to go for a B2B approach (which we had analyzed but dismissed as unattractive). Really made me rethink whether it was a good idea to put lots of our sexy stats in the application; not that I am saying YC used them - but it drove home how they could have.
We applied with a new unrelated thing once after that, even though we didn't need the money, mostly because we think it would be an interesting personal experience, and a good investment for the long-term to build that network. But frankly the program now being remote also puts a bit of a question mark there - it's a mixed blessing.
Anyway, we've done well enough, and one thing I'm considering is setting up a small angel fund just focused on founders in emerging markets (esp. Latam, esp. Brazil) whose products are global from the start, like ours, as I do feel that still falls in-between the cracks. But I'm busy with our company so don't have much time for that yet.
I hope this was helpful without coming across as too whiny or salty!
I realize that these funnel processes with vast amounts of applications are needle-in-the-haystack hell. I experience it when we open up a job post and get just 200 applications 180 of which aren't a great fit, let alone the thousands YC gets. Perhaps with some of these demographics, YC faces, to a small degree, a problem analogous to iBuying (e.g. as discussed by Rich Barton when Zillow quit that market), where the selectiveness by definition means that the majority of applications are rejected, thus contradicting the 'fast & easy' value-proposition and thereby generating negative sentiment among those rejected, no matter how generous the offer to those accepted or how representative the sample of those accepted.
anotherfounder
As a response to both dang and emmett, I'm honestly surprised by the strong defensive nature of both your responses. It's what I'd expect from old-school VCs, not YC.
Both appsec112 and infamia already responded to each of your nitpicks, and we can slice and dice categories, labels and phrasing till the cows come home but I was hoping for a more substantive, introspective or atleast a thoughtful response to the original thread.
Maybe there will be a better forum for this conversation some day but as an under-represented founder, this feels like a cynically but not surprisingly another disappointing conversation.
SmellTheGlove
> We also hope that this deal will encourage more founders of any age and from every demographic group and geographic location to take the leap into the startup world.
Again, haven't gone through YC, but this was a topic I raised with (IIRC) Kyle and Jared during a Startup School Q&A, from my perspective as someone who is a little more senior in my career, has a family, but not really the safety net of a prior exit or generational wealth to fall back on.
I will tell you that this news had me thinking about my ideas again. This would give me the runway to ship an MVP prior to having to raise again, which is significant because it means I could validate that MVP or decide to do something else. Fundraising is distracting and takes time away from building, so instead being able to align my personal expense runway with startup expense runway would be pretty significant.
As of this moment, I'm thinking about whether my ideas are shitty or not between meetings :D
phlipski
Same. $500K is huge for us older engineers with families. Let's not forget - the average age of successful entrepreneurs is 45... (ok unicorns average 34 - but they're f&cking UNICORNS!!).
https://www.bloomberg.com/news/articles/2021-05-21/what-s-th...
shafyy
> YC does that because it's in its business interests to do it and because it's good for the world.
See, this is where I disagree. This is all well and good, but only if you accept the fundamental premise that taking VC investment is the best way to become an entrepreneur and to do good for the world.
I would strongly challenge this premise. I think for the vast majority of tech entrepreneurs, aiming to build a slowly growing business that doesn't have the aspiration to become a unicorn and 1000x everything is much, much better. I think that many great businesses failed because they were convinced by the VC-marketing-hype-machine to take on venture capital.
If YC's goal truly is to do good for the world, they would think about ways to help entrepreneurs make that happen, not force them into the VC world. I know that there are cases where VC-type capital is extremely valuable, and I'm glad that it exists, but for the vast majority, it's the wrong tool for the job.
solarmist
Isn't this precisely what you're describing? YC has never preacher taking VC money as the one true way, but until now, options were pretty limited.
If you join YC now, there's a much bigger likelihood you don't need to touch VC money (excluding YC itself, of course).
shafyy
YC's whole business model is based on the venture capital investment model. As you mentioned, they make a VC-type investment themselves initially. Then, at demo day they invite VCs. Then, they have their follow on VC investment rounds (not sure what it's called). In their educational materials, they preach hyper growth and even define a "startup" as a company that's designed to grow quickly.
didntknowya
YC is great but it's a bit of a hyperbole saying they're driving for "good for the world" and giving chances to the minority/contrarians that wouldn't otherwise get funding.
It would be good to see stats on proportion of ivy league founders or those with previously successful/exited founders in YC. A lot of the applicants are impressive (obviously) and already have a decent chance of getting SV investors- and even more so outside the valley.
jedwhite
Even a friendly fundraising round is a big time sink. This lets early-stage startups focus their energy on building rather than fundraising, especially for harder tech. $500k is enough to feel like you can do anything, but not so much that you don't have to.
AlchemistCamp
> Only a tiny slice of humans are a position to think that way—for example, people who have family wealth (or maybe an elite educational credential) to fall back on, or who have already managed to break into the fundraising scene (or maybe a FAANG job) and have gotten used to comparing themselves to all the $multimillion deals they keep hearing about.
> We also hope that this deal will encourage more founders of any age and from every demographic group and geographic location to take the leap into the startup world.
It's interesting you brought up this point specifically. My impression was that YC tended overwhelmingly to fund the more elite demographics.
What % of YC investments go to founders who either worked at "a FAANG job" or graduated from Harvard, MIT or Stanford? What percentage of people (from the US and globally) have that background?
jacquesm
And increasing the size of the initial funding has the side effect of keeping the captable clean and sidelining a lot of minor investors that would fill the gap between YC and an A-round, which not every YC company achieves by demo day.
mathnmusic
On keeping the captable "clean", this is what Michael Siebel had to say:
> Can we kill the myth that your company is screwed if there are too many investors on your angel/seed round cap table? Having too many angel/seed investors on a cap table has never killed a single YC startup. For founders who are raising: if you can get the money you need and reduce dilution as much as possible - I don’t care if you collect 1 check or 20.
jacquesm
True, but it can make negotiations later on a lot harder and it increases the chance of having a problematic investor on board. The more professional investors are the easier it is to make deals. A start-up doesn't have to be killed for it to be a problem. Speaking from experience: I had a 5% problematic shareholder in camarades.com/ww.com in 1998 and it significantly reduced our chances of success.
devy
The amount of money that's flowing into the VC since the pandemic is insane! [1] Thanks to Fed's unlimited QE, investors can borrow almost free cash from the feds and pour them into the VC funds for investments. Great times to be an entrepreneur! However, this reminds me of the dot com bubble years. When is this going to end? A lot scary to think about the consequences if that were to happen...
itsoktocry
>Thanks to Fed's unlimited QE, investors can borrow almost free cash from the feds and pour them into the VC funds for investments.
Yes, there is a surplus of capital (and has been for a few years), so it's cheap. No, there isn't unlimited QE, and no investors are borrowing from the Fed.
robocat
> no investors are borrowing from the Fed.
Some of the borrowing is indirect.
Let’s say you have a portfolio that includes property. Inflation is high and the current 15 year interest rates are low, so you might increase your mortgage to the maximum. You then put that money into other investments, including VC.
This opportunity is even available to many home owners in the US.
robocat
Perhaps another second order effect?
Anyone who is not buying property because they can’t afford it (say in San Francisco), and is instead investing as a retail investor, is indirectly doing so because of low fed rates. Although I am unsure how much money flows into VC from retail investors via funds.
Low fed rates lead to an overpriced home market (people borrow as much as they can afford to bid on a house, and what they can afford depends on interest repayments which depends upon interest rates).
scottiebarnes
> No, there isn't unlimited QE
Well there certainly isn't any explicit limit either.
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kevinventullo
I think I have a pretty good idea of exactly which sub-sector of Tech right now is most likely to be a bubble…
mizzao
The one that causes repeated flamewars on HN?
sokoloff
This seems crazy, crazy good for founders (and difficult for many other incubators to match).
peterhunt
You think? I actually have the opposite impression. This takes away control from the founders and makes it harder to precisely control dilution, which is very important at the early stages.
tptacek
If you're looking for such fine-grained control over dilution that $500k is an untenable amount of cash to take vs. whatever YC was paying before, you might just want to skip YC.
freeqaz
A SAFE without a cap is nice though for an early company, especially if it's optional. A SAFE like this means that you're effectively raising at a Series A valuation but during your pre-seed stage. The most obvious effect of this to me is that it will gives your Series A investors a little less, either that or you'll take more dilution at Series A if your investors won't budge. Is that what you mean by "precisily controlling dilution"?
That's counteracted, fortunately, because at the current valuations that many companies are raising a Series A at, $375k isn't a big hit. (I've seen Series As from 20m up to 150m these days)
What I see as the major upside here is: Companies gain the ability to take a little less $ when raising pre-seed/seed SAFEs with harsher restrictions. Most SAFEs at that stage have some sort of investor incentive either as a "valuation cap" or a "discount" (at least the standard YC SAFEs[0]). For many companies, at least pre-pandemic, these caps were usually around $10-15m post-money (you raise $1m at $10m post-money, your investors get 10%, so you're saying your company is worth $9m).
Of course, SAFEs can screw you too if you don't hit your valuation goals. So YCs $375k SAFE, if you have to raise a Series A at a low valuation, will hurt you more because you might have specific $ goals in mind that you can't budge on. But, at least having an extra $375k early on will help more companies, on average, avoid these "Series A downrounds" more frequently by giving them more runway.
There is always going to be pros/cons when raising investment. At least with this, I feel like this makes the world a little more founder-friendly for early stage companies. Is my take approximately in-line with what you're thinking?
robocat
You have $375k extra runway to increase the valuation of your company. If you are increasing the valuation enough, then the extra runway is worth far more to you than the dilution costs you. Without this deal, a 375k seed would likely cost you far more dilution.
If you have a successful startup, then the YC 7% for $125k and YC’s 4% participating is far more significant in terms of dilution.
Let’s say you sell 10% equity in a 5 million post valuation seed round with no option pool. Seed investor invests $500k for 10% preferential shares. YC ‘MFN safe’ converts at $375k value for 7.5% preferential shares. YC also has a 4% participation right, so it puts an extra $200k in for 4% preferential shares. For their ‘$125k safe’ YC had 7% premoney, which ends up being 5.5% preferential shares*. YC has put in a total of $700k for 17% of the business and has made $150k profit (assuming no other internal costs!). Founders have 73% common shares with a post money valuation of $3.6 million.
Let’s say you use the $500k from YC as your “seed round”, so instead your first round is your A series selling 25% with a post money valuation of $20 million, and a 10% post money option pool (which usually all comes from the pre money investors). Round A investor invests $5 million for 25% preferential shares. YC MFN converts at $375k value for 1.9% preferential shares. YC also has a 4% participation right, so it puts an extra $800k in for 4% preferential shares. Pool gets 10% common shares. For their $125k YC had 7% premoney, which ends up being 4.1% preferential shares*. YC has put in a total of $1.3 million for 10% of the business and has made $700k profit. Founders have 55% common shares with a post money valuation of $11 million.
During all of this, the founders have the most influence over choosing investor amounts and timing. YC only makes money if the founders do, and YC is more aligned with founders than most other seed or VC funding. YC invests resources including money into the business, and profits only a small amount in comparison with the founders who mostly invest their time. YC also drives down costs, especially the most significant cost which is the founders time, but also with standardised cheap legal documents etcetera. Other VCs can waste a lot of a companies time and money.
* Edit: I think my YC 7% calculations are incorrect, because I was presuming that it was pre-money that followed the same rules as the founders shares. However “YC’s $125k Safe will convert in the priced round into 7% of the company’s equity (including any existing option pool) after all the Safes and other convertible instruments have converted in conjunction with the priced round.” That reads more like 7% post-money and then diluted by options pool. In which case YC ends up with ~2.5 percentage points extra and founders with ~2.5 percentage points less in both examples. If somebody wants some HN love hugs, perhaps make a simple online calculator.
nrmitchi
I *think* that this is overall a good thing, but does it not implicitly create a floor for what a future funding round would be able to raise at?
My basic back-of-the-envelope math looks like this makes raising a future round at anything < 5M pretty impractical? This obvious doesn't affect the big-wins from YC (at which point the additional equity from the 375k is likely trivial anyways).
I know that YC (like any VC) is really betting on it's unicorn outliers for it's returns, and this is likely a big win for middle-of-the-pack companies as well, but could easily lead to many "smaller" outcomes being unable to raise and forced to shut down, no?
freeqaz
I definitely agree with you here. If you aren't doing so hot and you have to raise at a low valuation with an extra $375k to "convert" at that low valuation, then you'll be hit with a ton of dilution.
Fortunately, I think this is balanced by the fact that it will give more runway to companies before they have to deal with that, so hopefully more companies can move towards the "middle of the pack" tier before being eaten. (And to be quite frank, if you have YC on your investor list, there are many investors that are happy to invest in you just because of that. You're likely already "middle of the pack" just by virtue of that.)
nrmitchi
> Fortunately, I think this is balanced by the fact that it will give more runway to companies before they have to deal with that
Complete agree, which is why I'm leaning in favor of it being a good thing. If the funds weren't available immediately it would be a different story.
> You're likely already "middle of the pack" just by virtue of that
I also agree with this, but I think we're using different definitions. I meant "middle of the YC pack", which isn't the same as "middle of the start up pack".
Either way, I still think this change is going to (note that all percentages are guesstimated):
- Have minimal impact to the top 5% of YC companies that raise (relatively) huge follow-on rounds - Be a slight consideration for the "middle" 50% of YC companies (will have to consider a couple extra points on their cap table) - Effectively drive the bottom 25% out of business, or prevent growth, by preventing them from being able to raise
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I'm currently in the W22 batch. There's some heavy skepticism in this thread, so I want to add perspective from someone actually in the current batch (throwaway because we haven't announced our funding yet).
The additional $375k (+$125k OG deal = $500k) that YC is offering is an optional and uncapped SAFE. I think of this as YC being an investor in our next round, except I can receive and deploy the cash now with no premium paid to YC. This is extremely founder friendly, and is in addition to what YC had already agreed to invest in us. The terms on this SAFE are much better than what I could have negotiated on my own, and it comes with zero fundraising effort.
Because of this, I'm able to go into pitch meetings with investors around demo day in March with more leverage – I no longer need capital from them to keep the company moving in the short term. I can also make capital intensive moves I otherwise would have waited to do.
As to whether YC is a value add for us with the dilution it incurs: yes, absolutely. The valuation cap we're raising at has doubled, we have access to a great network of people and companies (this has a real and significant effect), and we were able to convince someone with the YC funding to leave their stable and well paying job to join us.
This is all in the context of a US based developer tools startup that already has a top-tier university signal (Stanford), co-founders with FAANG offers on the table, and a co-founder with years of experience working (but not as a founder) at two startups that were acquired.
I'm sure some others have better fundraising opportunities, but there is a reason many founders like myself still choose to go through YC.