11 ms·

Y Combinator announces growth program for later-stage startups

153 points by ascertain 9y ago

jacquesm 9y ago
The next step to vertical integration and an eventual much bigger slice of the pie in the successful few. You can expect that eventually 'demo day' and A round financing by outsiders will disappear[1], that's the part where YC now loses out on a large chunk of still relatively cheap equity. I suspect it will eventually be replaced by some kind of voting mechanism where partners and alumni decide who gets to make a run of it. Those that don't make that cut will then be forced to go outside of YC for follow on funding with the stamp 'damaged goods' on them, a similar effect will be present for those companies that do not make it into this new program they announce and the continuity program established earlier. It will be interesting to watch what kind of unintended side effects this will generate and how the success rates of those companies in YC continuity and outside of it will compare. Keep in mind that YC makes almost all of its returns on very few companies and that either increasing their stake in those companies or widening the pool of companies that have a shot at making it (in which case the founders goals and YCs goals are much closer aligned) are the only ways they can grow themselves unless they manage to pick more winners out of the gate, which is a super hard problem. In a way what we are watching is YC slowly coming of age and doing what every successful start-up would do: to become more efficient at what they do. Programs like these are an important step along that way, it's a soft entry with relatively little risk into a larger role in the life cycle of the start-ups they initially funded. [1] https://www.ycombinator.com/continuity/ https://www.ycombinator.com/continuity/
- cornellwright 9y ago
  The counter argument to this is the YC Continuity fund [1]. It already does invest in some YC co A rounds, and them not investing does not have a negative signal. It is in YC's best interest to try to avoid negative signaling about any companies they've funded as that potentially limits YC's upside. [1] https://www.ycombinator.com/continuity/ https://www.ycombinator.com/continuity/
  - jacquesm 9y ago
    I think I covered that. Do you realize that this is not yet in a stage where there is any kind of exclusivity? That's the biggest hurdle to overcome. There was a time when YC needed outside financiers more than they needed YC, but that's rapidly changing and once one of the mega-hits exits and YC really becomes flush that door will open wide enough for another evolution. I think the tell-tale will be once YC contracts will start to include language giving them the option to fund all future rounds through a right of first refusal or other language with similar effects. This is a huge exercise in leverage and critical mass, one of the most interesting stories of the last 2 decades in start-up land. The end game is pretty obvious and I really wonder what the next steps will look like. But from the moment the continuity program was launched the cards are essentially on the table for all to see.
    - cornellwright 9y ago
      A big part of how YC got where they are is by being more founder friendly than anyone else, creating an impressive positive feedback loop. Adding exclusivity would destroy that. The partners have a much more long term focus than this.
      - jacquesm 9y ago
        > Adding exclusivity would destroy that. Not necessarily as long as founders believe they are 'the lucky few' and as long as going through YC substantially increases your chances to make it. And thinking you are part of the lucky few is something a lot of founders do intuitively. No further action required there. And if the numbers are good, why not, as long as the chances of going through YC substantially increase your ability to hit one out of the park those companies that really believe in themselves will still apply. Keep in mind that 'failed YC' (not getting accepted after applying) is already a negative signal and founders are not likely to disclose that they applied for YC but did not make it when looking for alternative funding. So there already is a potentially negative signal in play, it's just that it isn't public enough to make a difference. The ratio between YC funded start-ups and start-ups funded by outsiders (for follow on investments) is the one to watch, that will be the signal.
- arowghani 9y ago
  Hi…Ali from YC here. There are a couple of things I’d like to address in the comment above from YC’s perspective. First, YC has no “vertical integration strategy” to make “demo day and A round financing by outsiders” to “disappear.” In fact, it’s quite the opposite. We work very hard to make sure that there is a vibrant investing ecosystem around YC. Our core program is attractive to founders because there are hundreds of investors who come to Demo Day to invest in YC companies. YC would be much less valuable if this ecosystem did not exist, so it would not be in our interest (or in the best interest of our founders) to make these investors “disappear” or otherwise compete with them for Series A deals. In fact, YC's Continuity Fund expressly does not compete for Series A deals. Secondly, it's highly unlikely that companies who do not participate in our Growth Stage program will find it more difficult to raise money because they will be labeled “damaged goods.” YC’s signal at the growth stage is largely irrelevant. Investors evaluate growth stage companies based on their business metrics. There is enough data at this stage to evaluate whether a business is working or whether it’s not. Companies with robust metrics attract investors; those with weak metrics don’t. It’s as simple as that. No late stage investor will care whether a company participates in our program or not.
  - jacquesm 9y ago
    Hey Ali, I totally understand where you are coming from but a similar dismissive comment was made when I first suggested YC would eventually do follow on investments and tada, that is now the case. Long term plans or long term reality and short term strategy do not necessarily overlap. No malice is inferred or intended, just a change of perspective over time. As for > "Secondly, it's highly unlikely that companies who do not participate in our Growth Stage program will find it more difficult to raise money because they will be labeled “damaged goods.”" I meant that to be related to the combination of funding and growth stage program, not to be related to the growth stage program by itself.
    - deleted 9y ago
      [deleted]
    - arowghani 9y ago
      Thanks Jacques. I don’t read any malice in your words and I certainly don’t mean to sound dismissive. My point was simply that, as a matter of strategy, it would not be in YC’s interest to “vertically integrate” as you suggest. And I can assure you it’s not in our plans. I also don’t believe that YC’s actions have a profound impact on how growth stage companies are perceived by investors because these companies thrive or suffer based on their own measured performance rather than based on YC’s signal. I think a lot of your comments on this thread were quite smart, but wanted to add some color on these two points
ereyes01 9y ago
As a little boy, it feels like more and more of the big boys are leaving the playground and taking their ball home?
- jacquesm 9y ago
  It's a pretty logical next step and just like start-up school but at a higher level. The ones that are slowly squeezed out are the later round investors and it is very much in YC and the founders interest to have those founders make the very best decisions in later stages of their companies. Think of it as start-up high-school.
- Analemma_ 9y ago
  That's just the business cycle: early-stage investment is drying up as interest rates go up and it becomes clear who the winners of the last "Cambrian explosion" were. Probably we'll have a recession soon and early-stage investment will pick up again towards the tail end of it.
  - tedmiston 9y ago
    What makes early stage investment pick up again with respect to a recession?
    - toomuchtodo 9y ago
      Cheap money from central banks to stoke the economy causes capital to scrounge for returns, leading dollars into venture funds. As interest rates climb once the economy is growing (we are here), capital no longer needs such risk to obtain returns, hence the flight to safer financial instruments (and the seed/A squeeze currently occurring).
deleted 9y ago
[deleted]
lquist 9y ago
Would love if this were open to non-YC startups!
- jacquesm 9y ago
  "Although the program will focus on active YC startups, the accelerator plans on including a few companies that did not previously participate in YC’s core program."
marknadal 9y ago
This makes sense, ycombinator always seemed more risk-averse and later stage anyways, from my interactions with them (I've raised from billionaires like Tim Draper and Marc Benioff, but YC only asked us for an interview once). This isn't a bad thing, but it is sad because seed stage funding has been drying up since 2014 (when I raised for gunDB.io), there are some good TechCrunch articles on this "dry up" and I think it is gonna make the lives of a lot of developers harder. But I can blame YC, it matches their model, and they've obviously done a good job at everybody knowing their name.
- jacquesm 9y ago
  > ycombinator always seemed more risk-averse and later stage anyways Huh? YC is fairly universally seen as doing quite a few investments that nobody else would back and as early stage, your personal data point is an important one but you have to see it against the backdrop of all the other investments they did make.
- top256 9y ago
  Afaik YC if anything is that they're not very not risk averse and that's because they accept tons of companies
- tedmiston 9y ago
  It'll be interesting to see what effect the seed stage investment drought has on innovation at a macro level. It seems to imply devs that would be founding will instead find themselves at bigger startups, working as "intrapreneurs", or something like that. Does this mean we're entering a (seed-stage) startup dark age now? I haven't heard anyone talk about it yet.
- wellboy 9y ago
  Which investor-group is more risk-friendly than yc then or is yc the most risk-friendly investor-group that exists?
StephenSmith 9y ago
Limiting this to Founder-CEOs may limit their ability to solve some of the problems at hand. Many of these companies post series A may be seeing stagnated growth (This is a 'growth' program). Many companies in this boat may have already gone through founder/CEO/organizational changes that really don't fit this bill. I would just be worried that they are narrowing their pool too much. -Mostly YC Companies -Post Series-A -50-100 Employees -Founder-CEO with 3-4 hours a week that can attend -Company who identifies this as a need for their company (or a board that dictates it)
- jacquesm 9y ago
  - Mostly YC Companies That makes good sense from YCs perspective. - Post Series-A This kind of effort would be wasted earlier on, the number of entrants would be too large for that kind of attention to detail and effort required. - 50-100 Employees A growth program needs a set of skills and a certain organizational structure already in place to be effective. - Founder-CEO with 3-4 hours a week that can attend How else would you do this? A video course? - Company who identifies this as a need for their company (or a board that dictates it) Just like YC applications are initiated by the company and start-up school applicants are not conscripted it makes no sense to force this on a party that is not ready to receive the input.
reiderrider 9y ago
I’d love to see them make a video series like startup school out of this.
allenleein 9y ago
"...we think companies approaching 100 employees are ideal candidates." ? But WhatsApp only needs 50 engineers for its 900M users back then (After Series B).
- jacquesm 9y ago
  Not every company is a WhatsApp, in fact, the reason you are quoting this is because WhatsApp was exceptional.
wonderoo 9y ago
What % of YC investments are now driven by activism vs business potential? Political projects selected because partners and alumnae are voting in something they want to see happen vs something likely to generate high returns?
dbuder 9y ago
I don't want to go to dinner, just give me your money.

153 points by ascertain 9y ago

The next step to vertical integration and an eventual much bigger slice of the pie in the successful few. You can expect that eventually 'demo day' and A round financing by outsiders will disappear[1], that's the part where YC now loses out on a large chunk of still relatively cheap equity. I suspect it will eventually be replaced by some kind of voting mechanism where partners and alumni decide who gets to make a run of it. Those that don't make that cut will then be forced to go outside of YC for follow on funding with the stamp 'damaged goods' on them, a similar effect will be present for those companies that do not make it into this new program they announce and the continuity program established earlier. It will be interesting to watch what kind of unintended side effects this will generate and how the success rates of those companies in YC continuity and outside of it will compare. Keep in mind that YC makes almost all of its returns on very few companies and that either increasing their stake in those companies or widening the pool of companies that have a shot at making it (in which case the founders goals and YCs goals are much closer aligned) are the only ways they can grow themselves unless they manage to pick more winners out of the gate, which is a super hard problem. In a way what we are watching is YC slowly coming of age and doing what every successful start-up would do: to become more efficient at what they do. Programs like these are an important step along that way, it's a soft entry with relatively little risk into a larger role in the life cycle of the start-ups they initially funded. [1] https://www.ycombinator.com/continuity/ https://www.ycombinator.com/continuity/

cornellwright 9y ago
The counter argument to this is the YC Continuity fund [1]. It already does invest in some YC co A rounds, and them not investing does not have a negative signal. It is in YC's best interest to try to avoid negative signaling about any companies they've funded as that potentially limits YC's upside. [1] https://www.ycombinator.com/continuity/ https://www.ycombinator.com/continuity/
- jacquesm 9y ago
  I think I covered that. Do you realize that this is not yet in a stage where there is any kind of exclusivity? That's the biggest hurdle to overcome. There was a time when YC needed outside financiers more than they needed YC, but that's rapidly changing and once one of the mega-hits exits and YC really becomes flush that door will open wide enough for another evolution. I think the tell-tale will be once YC contracts will start to include language giving them the option to fund all future rounds through a right of first refusal or other language with similar effects. This is a huge exercise in leverage and critical mass, one of the most interesting stories of the last 2 decades in start-up land. The end game is pretty obvious and I really wonder what the next steps will look like. But from the moment the continuity program was launched the cards are essentially on the table for all to see.
  - cornellwright 9y ago
    A big part of how YC got where they are is by being more founder friendly than anyone else, creating an impressive positive feedback loop. Adding exclusivity would destroy that. The partners have a much more long term focus than this.
    - jacquesm 9y ago
      > Adding exclusivity would destroy that. Not necessarily as long as founders believe they are 'the lucky few' and as long as going through YC substantially increases your chances to make it. And thinking you are part of the lucky few is something a lot of founders do intuitively. No further action required there. And if the numbers are good, why not, as long as the chances of going through YC substantially increase your ability to hit one out of the park those companies that really believe in themselves will still apply. Keep in mind that 'failed YC' (not getting accepted after applying) is already a negative signal and founders are not likely to disclose that they applied for YC but did not make it when looking for alternative funding. So there already is a potentially negative signal in play, it's just that it isn't public enough to make a difference. The ratio between YC funded start-ups and start-ups funded by outsiders (for follow on investments) is the one to watch, that will be the signal.
arowghani 9y ago
Hi…Ali from YC here. There are a couple of things I’d like to address in the comment above from YC’s perspective. First, YC has no “vertical integration strategy” to make “demo day and A round financing by outsiders” to “disappear.” In fact, it’s quite the opposite. We work very hard to make sure that there is a vibrant investing ecosystem around YC. Our core program is attractive to founders because there are hundreds of investors who come to Demo Day to invest in YC companies. YC would be much less valuable if this ecosystem did not exist, so it would not be in our interest (or in the best interest of our founders) to make these investors “disappear” or otherwise compete with them for Series A deals. In fact, YC's Continuity Fund expressly does not compete for Series A deals. Secondly, it's highly unlikely that companies who do not participate in our Growth Stage program will find it more difficult to raise money because they will be labeled “damaged goods.” YC’s signal at the growth stage is largely irrelevant. Investors evaluate growth stage companies based on their business metrics. There is enough data at this stage to evaluate whether a business is working or whether it’s not. Companies with robust metrics attract investors; those with weak metrics don’t. It’s as simple as that. No late stage investor will care whether a company participates in our program or not.
- jacquesm 9y ago
  Hey Ali, I totally understand where you are coming from but a similar dismissive comment was made when I first suggested YC would eventually do follow on investments and tada, that is now the case. Long term plans or long term reality and short term strategy do not necessarily overlap. No malice is inferred or intended, just a change of perspective over time. As for > "Secondly, it's highly unlikely that companies who do not participate in our Growth Stage program will find it more difficult to raise money because they will be labeled “damaged goods.”" I meant that to be related to the combination of funding and growth stage program, not to be related to the growth stage program by itself.
  - deleted 9y ago
    [deleted]
  - arowghani 9y ago
    Thanks Jacques. I don’t read any malice in your words and I certainly don’t mean to sound dismissive. My point was simply that, as a matter of strategy, it would not be in YC’s interest to “vertically integrate” as you suggest. And I can assure you it’s not in our plans. I also don’t believe that YC’s actions have a profound impact on how growth stage companies are perceived by investors because these companies thrive or suffer based on their own measured performance rather than based on YC’s signal. I think a lot of your comments on this thread were quite smart, but wanted to add some color on these two points

ereyes01 9y ago

As a little boy, it feels like more and more of the big boys are leaving the playground and taking their ball home?

jacquesm 9y ago
It's a pretty logical next step and just like start-up school but at a higher level. The ones that are slowly squeezed out are the later round investors and it is very much in YC and the founders interest to have those founders make the very best decisions in later stages of their companies. Think of it as start-up high-school.
Analemma_ 9y ago
That's just the business cycle: early-stage investment is drying up as interest rates go up and it becomes clear who the winners of the last "Cambrian explosion" were. Probably we'll have a recession soon and early-stage investment will pick up again towards the tail end of it.
- tedmiston 9y ago
  What makes early stage investment pick up again with respect to a recession?
  - toomuchtodo 9y ago
    Cheap money from central banks to stoke the economy causes capital to scrounge for returns, leading dollars into venture funds. As interest rates climb once the economy is growing (we are here), capital no longer needs such risk to obtain returns, hence the flight to safer financial instruments (and the seed/A squeeze currently occurring).

deleted 9y ago

[deleted]

lquist 9y ago

Would love if this were open to non-YC startups!

jacquesm 9y ago
"Although the program will focus on active YC startups, the accelerator plans on including a few companies that did not previously participate in YC’s core program."

marknadal 9y ago

This makes sense, ycombinator always seemed more risk-averse and later stage anyways, from my interactions with them (I've raised from billionaires like Tim Draper and Marc Benioff, but YC only asked us for an interview once). This isn't a bad thing, but it is sad because seed stage funding has been drying up since 2014 (when I raised for gunDB.io), there are some good TechCrunch articles on this "dry up" and I think it is gonna make the lives of a lot of developers harder. But I can blame YC, it matches their model, and they've obviously done a good job at everybody knowing their name.

jacquesm 9y ago
> ycombinator always seemed more risk-averse and later stage anyways Huh? YC is fairly universally seen as doing quite a few investments that nobody else would back and as early stage, your personal data point is an important one but you have to see it against the backdrop of all the other investments they did make.
top256 9y ago
Afaik YC if anything is that they're not very not risk averse and that's because they accept tons of companies
tedmiston 9y ago
It'll be interesting to see what effect the seed stage investment drought has on innovation at a macro level. It seems to imply devs that would be founding will instead find themselves at bigger startups, working as "intrapreneurs", or something like that. Does this mean we're entering a (seed-stage) startup dark age now? I haven't heard anyone talk about it yet.
wellboy 9y ago
Which investor-group is more risk-friendly than yc then or is yc the most risk-friendly investor-group that exists?

StephenSmith 9y ago

Limiting this to Founder-CEOs may limit their ability to solve some of the problems at hand. Many of these companies post series A may be seeing stagnated growth (This is a 'growth' program). Many companies in this boat may have already gone through founder/CEO/organizational changes that really don't fit this bill. I would just be worried that they are narrowing their pool too much. -Mostly YC Companies -Post Series-A -50-100 Employees -Founder-CEO with 3-4 hours a week that can attend -Company who identifies this as a need for their company (or a board that dictates it)

jacquesm 9y ago
- Mostly YC Companies That makes good sense from YCs perspective. - Post Series-A This kind of effort would be wasted earlier on, the number of entrants would be too large for that kind of attention to detail and effort required. - 50-100 Employees A growth program needs a set of skills and a certain organizational structure already in place to be effective. - Founder-CEO with 3-4 hours a week that can attend How else would you do this? A video course? - Company who identifies this as a need for their company (or a board that dictates it) Just like YC applications are initiated by the company and start-up school applicants are not conscripted it makes no sense to force this on a party that is not ready to receive the input.

reiderrider 9y ago

I’d love to see them make a video series like startup school out of this.

allenleein 9y ago

"...we think companies approaching 100 employees are ideal candidates." ? But WhatsApp only needs 50 engineers for its 900M users back then (After Series B).

jacquesm 9y ago
Not every company is a WhatsApp, in fact, the reason you are quoting this is because WhatsApp was exceptional.

wonderoo 9y ago

What % of YC investments are now driven by activism vs business potential? Political projects selected because partners and alumnae are voting in something they want to see happen vs something likely to generate high returns?

dbuder 9y ago

I don't want to go to dinner, just give me your money.