7 ms·

Why $150k for YC companies is a huge deal

92 points by tommy_mcclung 16y ago

bretpiatt 16y ago
Agree with everything said here. The "being poor will make them work harder" might apply to other groups of people but the YC company founders are already working as hard as possible -- they are motivated to succeed and do their best. With 3 founders this $150k is now enough for them to go through their cycle and go "ramen" level for another 6-12 months depending on the costs beyond food/rent of their idea. Assume they need to start raising money 3-6 months before being out of cash and this gives them a good amount of time to do 100% product work then work with folks on funding without the pressure of "having to get the round done in a week or we can't make rent". With the ability to move the funding along at a reasonable pace some of the members can focus on still building product while one person leads the effort as well.
keiferski 16y ago
I believe what you’ll see are more YC companies launching with bigger, more complete businesses. Notice I said businesses and not ideas, or features. This is probably the real benefit of the 150k. Sure, the money will help to alleviate rent-worries, but it also lets founders tackle serious (more expensive) business problems.
- deleted 16y ago
  [deleted]
- yoojk 16y ago
  You can hire 1 full-time Silicon Valley engineer for a year with $150K. While it's a great deal, let's not get too ahead of ourselves.
nir 16y ago
Yuri Milner definitely guaranteed his spot in future articles about the '10 bubble.
- bretpiatt 16y ago
  Why is it a bubble buy? They are getting in on the A round of every YC company with the same terms as the other participants and with their deep pockets the ability to lead A rounds as well as B, and C rounds for those that take off is worth way more than the $150k each. Consider this acquisition costs, like buying a really expensive key word on Google. The ~$6M every 6 months is worth it for the seat at the table. An additional benefit is getting to see the terms at which all of these rounds are financed at -- this will help them ensure they are paying properly on non-YC deals they get in.
  - hugh3 16y ago
    Basically, he's investing in everything that YC is investing in, except he's investing at much worse terms than YC gets (that is, YC typically invests in companies at a valuation of a couple of hundred grand, while Series A rounds are typically at a significantly higher valuation than that). It may, in the end, pay off, but I don't think it's a good investment strategy to follow someone else's investments and pay systematically more than they did.
    - jackowayed 16y ago
      He's getting much worse terms, but he's also doing a lot less work. YC picks the companies, does office hours, finds speakers for dinners, cooks the dinners, works out deals like this one and the Facebook one, etc.
    - bretpiatt 16y ago
      The terms are only worse in the beginning, the YC organizers do not have a $1B fund to lead on A, B, C rounds and beyond. Because of the ability to double down on the winners the terms may actually be better than what the YC team gets.
- wheels 16y ago
  People have been talking about how crazy deals he's lead have been already for several years. History has quickly proven them foolish.
alexophile 16y ago
Reminds me of pgs "Fundrising Survival Guide": "More often than not the company comes to a standstill while raising money. And that is dangerous for so many reasons. Raising money always takes longer than you expect. What seems like it's going to be a 2 week interruption turns into a 4 month interruption. That can be very demoralizing. And worse still, it can make you less attractive to investors. They want to invest in companies that are dynamic. A company that hasn't done anything new in 4 months doesn't seem dynamic, so they start to lose interest. Investors rarely grasp this, but much of what they're responding to when they lose interest in a startup is the damage done by their own indecision." http://paulgraham.com/fundraising.html http://paulgraham.com/fundraising.html
kloncks 16y ago
Student here. What confuses me is why 90% of the companies, according to TechCrunch, took the funding. From what it seems like, the $150k is for each YC company to decide upon. Why now? Surely most (if not all) YC companies don't need an additional $150k after just a few weeks in the program. It's great that the $150k is there for everyone when they need it. Raising money, which is usually a distraction, is now much more easily expedited. While that's great, I just question the timing. Why did 90% accept the money now? No one needs it. Within the next few weeks, we might see better deals. Sequoia and others might want to compete. There might be better offers. That's my one concern so far with this.
- fizx 16y ago
  Who doesn't want free money? I don't need $150k, but if someone offered a zero-interest loan with a repayment date I can push off arbitrarily long, why wouldn't I take it before they changed their mind?
  - kloncks 16y ago
    It's not like that. I offer you $150k to take anytime within the next few months. You can take them now...or wait and see if you get a better deal in a few weeks. The $150k is still here. For you, if you need it. Just don't rush is all I'm saying.
    - jackowayed 16y ago
      What better deal? This turns into an extra $150k of investment in any future deal you get. If someone takes this and then Sequoia knocks on their door the next day offering them $20M at a $100M valuation, the fact that they took this deal just means that they get $20M+$150k at a $100M valuation.
- lacker 16y ago
  Deals fall through. Money in your bank account doesn't. http://www.paulgraham.com/startupfunding.html http://www.paulgraham.com/startupfunding.html
- 16y ago
deleted 16y ago
[deleted]
tonybordonaro 16y ago
From all I have read ...YC founders are pretty focused on building their dream ...I dont think the money will get blown on foolishness...and I do think it will enable them to keep their minds on the most important things ...and not where do we get our next dime.
deleted 16y ago
[deleted]
jasonervin 16y ago
Ok, I don't think $150k will actually make you less poor, nor make you work any less. What it does allow is a little more leeway, say if you have bills that need to be paid. Maybe you are not right out of college so car payments, house payments, etc... might need to be paid while you take 3 to 6 months off form work. I like that it shakes things up in the VC & Angel world because they need to be shaken up. You are dealing with statups, you can't be risk averse... go invest in mutual funds if you don't want risk. Congrats YC and Yuri, wise investments. Oh, this is not a bubble this is the same pattern that came about in the 1930's and 1940's with Great Depression and the auto industry. It's simply happening again with the internet industry (steam engine == bubble/economically unfeasible long term && combustion engine == years of growth/redistribution of power and wealth; dial-up == bubble/economically unfeasible long term && mobile/high speed == years of growth/redistribution of power and wealth)
Wolf_Larsen 16y ago
"I would say the fund raising thoughts, conversations, meetings stole 3-4 solid weeks of time that we could have been focusing on building an even better product." - This is HUGE. If this speaks for the other companies then it means that everyone will have 25%-33% more time to build their product / customers / business. "Funny thing is, anyone could have done this deal with the YC companies. You have to hand it to Yuri for stepping up and taking this risk. It will be a huge win for him and it is already a huge win for YC and the future of entrepreneurship in general. Congrats." - Awesome.
ipster 16y ago
Any explanation as to why other investors were not included in this deal? I understand this is a huge deal but being able to select an guaranteed investor from a panel seems like it would be beneficial to both sides?
ebaysucks 16y ago
I'm wondering about the 10% who didn't take the money and if there is adverse selection at play here.
- bhousel 16y ago
  IIRC, there are a handful of companies in the program now that were already funded prior to being admitted. For a company like that, a 150k convertible note might not make much sense.
- btilly 16y ago
  Here is one possibility. Suppose that you're planning to bootstrap. Then there will be no future round where you get the loan magically paid off, and this becomes just a loan with a not very great interest rate.
zrgiu 16y ago
can someone explain to me please how exactly are these money given? The startups receive the $150k in exchange for a percentage, or how ? I keep hearing the "no cap" and "no debt" thing, but I can't figure out what that means. Thanks!
- OLAGUNJUOLADAYO 16y ago
  NB: You meant "no cap...no discount". Now to your question: These sums are notes (loans, debt). The money is either given as a check or wired. That is all. Just that simple. It is real money. Since it is a note, the investor gets zero equity (percentage, ownership). Rather, he gets [1] a compounded interest over time, in the case where the company has to repay, and [2] a percentage of the company "in the future". Since startups go on to raise an A-round, investors who give startups loans (convertible debt), like to put a cap (maximum) on the amount of $ that may be raised in the future A-round. They do this because the higher the $ raised in an A-round and subsequent rounds, the more dilute the % the seed investor owns (if he does not follow-up). In this case, Yuri/SV Angels -- without fear of dilution -- are allowing the companies to "feel free to raise as huge a sum as they like/can in the future". There is, "at large", one main reason why a seed investor would do this: because he intends to and can participate in the future round. More basically, it is a branding statement that earns the entrepreneurs' trust or fondness. The second provision is that of "discount". A discount simply answers the question: "How much % slack will you give me compared to your next round investor? i.e. How much cheaper "for me" will your stock be in your next round?". In this case, Yuri/SV Angels say they don't want any slack/discount. What we don't know is if there is/was a liquidation preference (exit-clause or clause in case of a default). But that is another story.
  - zrgiu 16y ago
    thanks!
andreasklinger 16y ago
Am i the only one who has the feeling that if you are already in an ecosystem where you need _3 weeks_ to raise a perfect ("silicon valley level") angelround you even almost not need the 150k$.
mfringel 16y ago
I think there's something much simpler going on. If YC's track record has been pretty good (or at least, better than average), then Yuri Milner now has a pre-vetted list of companies in which to invest, without having to do any research at all. The simplicity of the strategy is actually pretty brilliant.
- erik_landerholm 16y ago
  This is what everyone should take away from this. What he is really saying is the diligence and track record of YC is good enough that he doesn't need to do any more diligence himself. If that isn't the highest level endorsement possible I don't know what is.
damoncali 16y ago
One would think you could put the same amount of cash into just the winners at pretty similar terms. (Apparently, exactly the same terms for series A). This implies that simply getting a spot at the table for a Y Combinator Series A has become prohibitively difficult, even for the likes of SV Angel. Am I missing something? How does this work from the investor's side? Or is this just for-profit philanthropy?
alanh 16y ago
div.entry-content { letter-spacing: 1px; } Why? It makes this text harder to read!

92 points by tommy_mcclung 16y ago

Agree with everything said here. The "being poor will make them work harder" might apply to other groups of people but the YC company founders are already working as hard as possible -- they are motivated to succeed and do their best. With 3 founders this $150k is now enough for them to go through their cycle and go "ramen" level for another 6-12 months depending on the costs beyond food/rent of their idea. Assume they need to start raising money 3-6 months before being out of cash and this gives them a good amount of time to do 100% product work then work with folks on funding without the pressure of "having to get the round done in a week or we can't make rent". With the ability to move the funding along at a reasonable pace some of the members can focus on still building product while one person leads the effort as well.

keiferski 16y ago

I believe what you’ll see are more YC companies launching with bigger, more complete businesses. Notice I said businesses and not ideas, or features. This is probably the real benefit of the 150k. Sure, the money will help to alleviate rent-worries, but it also lets founders tackle serious (more expensive) business problems.

deleted 16y ago
[deleted]
yoojk 16y ago
You can hire 1 full-time Silicon Valley engineer for a year with $150K. While it's a great deal, let's not get too ahead of ourselves.

nir 16y ago

Yuri Milner definitely guaranteed his spot in future articles about the '10 bubble.

bretpiatt 16y ago
Why is it a bubble buy? They are getting in on the A round of every YC company with the same terms as the other participants and with their deep pockets the ability to lead A rounds as well as B, and C rounds for those that take off is worth way more than the $150k each. Consider this acquisition costs, like buying a really expensive key word on Google. The ~$6M every 6 months is worth it for the seat at the table. An additional benefit is getting to see the terms at which all of these rounds are financed at -- this will help them ensure they are paying properly on non-YC deals they get in.
- hugh3 16y ago
  Basically, he's investing in everything that YC is investing in, except he's investing at much worse terms than YC gets (that is, YC typically invests in companies at a valuation of a couple of hundred grand, while Series A rounds are typically at a significantly higher valuation than that). It may, in the end, pay off, but I don't think it's a good investment strategy to follow someone else's investments and pay systematically more than they did.
  - jackowayed 16y ago
    He's getting much worse terms, but he's also doing a lot less work. YC picks the companies, does office hours, finds speakers for dinners, cooks the dinners, works out deals like this one and the Facebook one, etc.
  - bretpiatt 16y ago
    The terms are only worse in the beginning, the YC organizers do not have a $1B fund to lead on A, B, C rounds and beyond. Because of the ability to double down on the winners the terms may actually be better than what the YC team gets.
wheels 16y ago
People have been talking about how crazy deals he's lead have been already for several years. History has quickly proven them foolish.

alexophile 16y ago

Reminds me of pgs "Fundrising Survival Guide": "More often than not the company comes to a standstill while raising money. And that is dangerous for so many reasons. Raising money always takes longer than you expect. What seems like it's going to be a 2 week interruption turns into a 4 month interruption. That can be very demoralizing. And worse still, it can make you less attractive to investors. They want to invest in companies that are dynamic. A company that hasn't done anything new in 4 months doesn't seem dynamic, so they start to lose interest. Investors rarely grasp this, but much of what they're responding to when they lose interest in a startup is the damage done by their own indecision." http://paulgraham.com/fundraising.html http://paulgraham.com/fundraising.html

kloncks 16y ago

Student here. What confuses me is why 90% of the companies, according to TechCrunch, took the funding. From what it seems like, the $150k is for each YC company to decide upon. Why now? Surely most (if not all) YC companies don't need an additional $150k after just a few weeks in the program. It's great that the $150k is there for everyone when they need it. Raising money, which is usually a distraction, is now much more easily expedited. While that's great, I just question the timing. Why did 90% accept the money now? No one needs it. Within the next few weeks, we might see better deals. Sequoia and others might want to compete. There might be better offers. That's my one concern so far with this.

fizx 16y ago
Who doesn't want free money? I don't need $150k, but if someone offered a zero-interest loan with a repayment date I can push off arbitrarily long, why wouldn't I take it before they changed their mind?
- kloncks 16y ago
  It's not like that. I offer you $150k to take anytime within the next few months. You can take them now...or wait and see if you get a better deal in a few weeks. The $150k is still here. For you, if you need it. Just don't rush is all I'm saying.
  - jackowayed 16y ago
    What better deal? This turns into an extra $150k of investment in any future deal you get. If someone takes this and then Sequoia knocks on their door the next day offering them $20M at a $100M valuation, the fact that they took this deal just means that they get $20M+$150k at a $100M valuation.
lacker 16y ago
Deals fall through. Money in your bank account doesn't. http://www.paulgraham.com/startupfunding.html http://www.paulgraham.com/startupfunding.html
16y ago

deleted 16y ago

[deleted]

tonybordonaro 16y ago

From all I have read ...YC founders are pretty focused on building their dream ...I dont think the money will get blown on foolishness...and I do think it will enable them to keep their minds on the most important things ...and not where do we get our next dime.

deleted 16y ago

[deleted]

jasonervin 16y ago

Ok, I don't think $150k will actually make you less poor, nor make you work any less. What it does allow is a little more leeway, say if you have bills that need to be paid. Maybe you are not right out of college so car payments, house payments, etc... might need to be paid while you take 3 to 6 months off form work. I like that it shakes things up in the VC & Angel world because they need to be shaken up. You are dealing with statups, you can't be risk averse... go invest in mutual funds if you don't want risk. Congrats YC and Yuri, wise investments. Oh, this is not a bubble this is the same pattern that came about in the 1930's and 1940's with Great Depression and the auto industry. It's simply happening again with the internet industry (steam engine == bubble/economically unfeasible long term && combustion engine == years of growth/redistribution of power and wealth; dial-up == bubble/economically unfeasible long term && mobile/high speed == years of growth/redistribution of power and wealth)

Wolf_Larsen 16y ago

"I would say the fund raising thoughts, conversations, meetings stole 3-4 solid weeks of time that we could have been focusing on building an even better product." - This is HUGE. If this speaks for the other companies then it means that everyone will have 25%-33% more time to build their product / customers / business. "Funny thing is, anyone could have done this deal with the YC companies. You have to hand it to Yuri for stepping up and taking this risk. It will be a huge win for him and it is already a huge win for YC and the future of entrepreneurship in general. Congrats." - Awesome.

ipster 16y ago

Any explanation as to why other investors were not included in this deal? I understand this is a huge deal but being able to select an guaranteed investor from a panel seems like it would be beneficial to both sides?

ebaysucks 16y ago

I'm wondering about the 10% who didn't take the money and if there is adverse selection at play here.

bhousel 16y ago
IIRC, there are a handful of companies in the program now that were already funded prior to being admitted. For a company like that, a 150k convertible note might not make much sense.
btilly 16y ago
Here is one possibility. Suppose that you're planning to bootstrap. Then there will be no future round where you get the loan magically paid off, and this becomes just a loan with a not very great interest rate.

zrgiu 16y ago

can someone explain to me please how exactly are these money given? The startups receive the $150k in exchange for a percentage, or how ? I keep hearing the "no cap" and "no debt" thing, but I can't figure out what that means. Thanks!

OLAGUNJUOLADAYO 16y ago
NB: You meant "no cap...no discount". Now to your question: These sums are notes (loans, debt). The money is either given as a check or wired. That is all. Just that simple. It is real money. Since it is a note, the investor gets zero equity (percentage, ownership). Rather, he gets [1] a compounded interest over time, in the case where the company has to repay, and [2] a percentage of the company "in the future". Since startups go on to raise an A-round, investors who give startups loans (convertible debt), like to put a cap (maximum) on the amount of $ that may be raised in the future A-round. They do this because the higher the $ raised in an A-round and subsequent rounds, the more dilute the % the seed investor owns (if he does not follow-up). In this case, Yuri/SV Angels -- without fear of dilution -- are allowing the companies to "feel free to raise as huge a sum as they like/can in the future". There is, "at large", one main reason why a seed investor would do this: because he intends to and can participate in the future round. More basically, it is a branding statement that earns the entrepreneurs' trust or fondness. The second provision is that of "discount". A discount simply answers the question: "How much % slack will you give me compared to your next round investor? i.e. How much cheaper "for me" will your stock be in your next round?". In this case, Yuri/SV Angels say they don't want any slack/discount. What we don't know is if there is/was a liquidation preference (exit-clause or clause in case of a default). But that is another story.
- zrgiu 16y ago
  thanks!

andreasklinger 16y ago

Am i the only one who has the feeling that if you are already in an ecosystem where you need _3 weeks_ to raise a perfect ("silicon valley level") angelround you even almost not need the 150k$.

mfringel 16y ago

I think there's something much simpler going on. If YC's track record has been pretty good (or at least, better than average), then Yuri Milner now has a pre-vetted list of companies in which to invest, without having to do any research at all. The simplicity of the strategy is actually pretty brilliant.

erik_landerholm 16y ago
This is what everyone should take away from this. What he is really saying is the diligence and track record of YC is good enough that he doesn't need to do any more diligence himself. If that isn't the highest level endorsement possible I don't know what is.

damoncali 16y ago

One would think you could put the same amount of cash into just the winners at pretty similar terms. (Apparently, exactly the same terms for series A). This implies that simply getting a spot at the table for a Y Combinator Series A has become prohibitively difficult, even for the likes of SV Angel. Am I missing something? How does this work from the investor's side? Or is this just for-profit philanthropy?

alanh 16y ago

div.entry-content { letter-spacing: 1px; } Why? It makes this text harder to read!