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YC is supposed to be an exclusive program funding companies they believe will work. I find it interesting that they choose to change their investing program in

YC is supposed to be an exclusive program funding companies they believe will work. I find it interesting that they choose to change their investing program instead of changing their application program. Why not keep the program smaller and more exclusive instead?

deleted 6y ago
[deleted]
jonathankoren 6y ago
As the article says, YC is running out of money. They can’t fund the existing companies at the original levels. Shrinking number of companies helps in the long term, but not in the immediate.
- leroy_masochist 6y ago
  That is true, but I still don't get why this YC announcement wasn't accompanied by an announcement to reduce the class size, which will definitely help in the long run in terms of retaining funds. I do wonder whether this was actually a strategic decision -- if it simply is more profitable to pick winners in deciding whether to participate in follow-on rounds; or perhaps YC would describe it as not picking the companies that don't have a clear path to monetization. In other words, I wonder whether the "we didn't realize how hard it would be to raise the quantum of capital implied by our initial commitment, and also, it turns out we don't like running a big fund" explanation is not the real reason they're doing this; and whether the real reason is in fact that they've realized that being able to exercise discretion in follow-on rights has a tangibly positive effect on fund returns. Which makes sense! The question for YC leadership is whether, in a world in which there were no issues with fundraising or fund operations, they would commit to follow-on participation for every company. If that's the case, and they would like to maintain a YC culture of committing to all future funding rounds for all YC companies, why not fundraise a special purpose vehicle for the funding shortfall to fulfill the commitment that was just abrogated? Give first dibs to current LPs....I bet it would be multiples oversubscribed. With that covered, YC could downscale class size to the point they can continue the full funding commitment using LP funds.
  - jonathankoren 6y ago
    Agree. The blanket investments on later rounds seems like a weird policy regardless of fund size. Some YC participants are going to be weaker than others, and as someone said elsewhere in these comments, YC probably has an idea even before the class is over simply due to having more intimate exposure to the the companies. Unless there was some sort of implicit pump and dump, why bother throwing good money after bad on the underperforming alums?
- snowmaker 6y ago
  A few points here that might help: 1) It's not quite accurate to say that YC is running out of money, though I could see how the article could read that way. YC is fortunate to be well-funded. However, we saw that if we continued our previous pro rata policy, that that could eventually happen someday, so we made a proactive adjustment well ahead of time. 2) One of the consequences of our old pro rata policy was that it left us without control of how much money we spent. Because we committed to investing in every round of every YC company, our spending was dependent on how many companies raised money, which turned out to be hard to predict. Imagine running a company where your monthly budget could vary by millions of dollars and you wouldn't know until the end of the month how much you'd need! 3) As far as I know, no other investor in the world has a programmatic pro rata policy (what YC tried from 2015-2019, which we are stopping now per the article). The whole idea was a bit of a crazy invention, and while its motivation was good, unfortunately it turned out to have too many drawbacks.
  - frankdenbow 6y ago
    This makes it pretty clear, point #2 is a tough one that I hadn't considered!
  - say_it_as_it_is 6y ago
    YC invested in the long-term success of its startups by participating in every round. Is YC no longer interested in a long term partnership? Seems so. Imagine investing in only one round and pretending that you care about, or even understand, the trials of a startup!
deleted 6y ago
[deleted]
bcx 6y ago
Automatic Pro-rata was a relatively recent addition to YC. (i.e. when we went through in 2009 it did not exist) It also clearly isn't scaleable without infinite capital. Plus, if you had complete information, why would you ever want to automatically invest any time a company in your portfolio raised money? My guess is the only reason they made it automatic, was to minimize the impact of a negative signal. It sounds like they hope the new changes will still minimize that signal.
- crazypyro 6y ago
  If anything, the new changes will be a huge signal (YC doesn't think this company is one of its most valuable investment opportunities), except in this case, outside investors without insider information will be the ones left holding the hot potato.
- s17n 6y ago
  If LP's are willing to fund automatic pro-rata it's pretty clearly in YC's interests to take them up on it. Apparently that used to be the case but now it's not.
  - Judgmentality 6y ago
    > If LP's are willing to fund automatic pro-rata it's pretty clearly in YC's interests to take them up on it. This assumes that automatic pro-rata is a winning investment strategy. YC's goal ultimately is to turn money into more money, or at least that's (almost certainly) the most significant metric of success for them.
nogabebop23 6y ago
Because they want to have their cake and eat it too. YC has followed a similar trajectory to many successful tech innovations. A novel approach that has aligned goals with their clients, strong & visible leadership, a huge emerging market, an appetite for a new approach - we're now essentially 2 generations of leadership removed from PG & co and while I have no doubt the people in charge are very smart and good at VC'ing, YC is now a totally different beast from 10+ years ago. It's motivations, goals and practices have changed and I have no doubt the next incarnation will come along and eat their lunch too.
- sillysaurusx 6y ago
  It's astonishing how quickly it happened, too. People underestimate the effect of a decade, but a decade feels so short. I still remember YC startup school in 2007-ish.
- Harj 6y ago
  In what ways does it seems the motivations and goals have changed? I’m particularly interested in this as I just rejoined YC as a partner after running a startup for five years. I first joined as a partner 10 years ago.
  - felipellrocha 6y ago
    For starters, back in the day, YC was mostly seen as a place anyone could get funding and build a great company whether or not they had a great network. Nowadays, it seems more and more like having that network is the primary thing that gets you in YC. (Not a criticism, and I can see the merits of that choice. But, when I talk to my friends about YC that usually comes up.)
    - chii 6y ago
      > YC was mostly seen as a place anyone could get funding and build a great company whether or not they had a great network. that's likely because before the success, there was no way anyone with the network would come to YC as a first port of call. And with technical partners able to judge the incoming seed company on the merits the founders themselves, YC managed to pick the successful ones (mostly - obviously there are failures). When the success of YC's model became so prominent that it is a culture all on its own, the technical partners no longer work the same way as the old way. I don't think it's possible. So network, and human capital is used as a filter, rather than deal with the massive amounts of no-name people.
momokoko 6y ago
The reason for the original idea was because if YC invested in a later round, or chose not to, that was a huge signal to the other investors. Most companies at the time could not raise later rounds if they were not promising. But, since YC was not providing any additional signal by investing in everyone, the original signal carried so much weight that even obviously failing companies so keep raising rounds based upon the original YC signal. So the "hack" about letting the market guide YC's later rounds was foiled by the same reason they came up with it in the first place. I personally enjoy the irony of it.
nelsonic 6y ago
Arguably YC is not meant to be exclusive at all. The idea is to give as many promising people (and products) as possible a chance to get started who might not otherwise have the opportunity. Their application process is still rigorous and weeds out 95%+. Lowering their pro rata stake will only serve to increase applications from people who thought 7% was too high.

deleted 6y ago

[deleted]

jonathankoren 6y ago

As the article says, YC is running out of money. They can’t fund the existing companies at the original levels. Shrinking number of companies helps in the long term, but not in the immediate.

leroy_masochist 6y ago
That is true, but I still don't get why this YC announcement wasn't accompanied by an announcement to reduce the class size, which will definitely help in the long run in terms of retaining funds. I do wonder whether this was actually a strategic decision -- if it simply is more profitable to pick winners in deciding whether to participate in follow-on rounds; or perhaps YC would describe it as not picking the companies that don't have a clear path to monetization. In other words, I wonder whether the "we didn't realize how hard it would be to raise the quantum of capital implied by our initial commitment, and also, it turns out we don't like running a big fund" explanation is not the real reason they're doing this; and whether the real reason is in fact that they've realized that being able to exercise discretion in follow-on rights has a tangibly positive effect on fund returns. Which makes sense! The question for YC leadership is whether, in a world in which there were no issues with fundraising or fund operations, they would commit to follow-on participation for every company. If that's the case, and they would like to maintain a YC culture of committing to all future funding rounds for all YC companies, why not fundraise a special purpose vehicle for the funding shortfall to fulfill the commitment that was just abrogated? Give first dibs to current LPs....I bet it would be multiples oversubscribed. With that covered, YC could downscale class size to the point they can continue the full funding commitment using LP funds.
- jonathankoren 6y ago
  Agree. The blanket investments on later rounds seems like a weird policy regardless of fund size. Some YC participants are going to be weaker than others, and as someone said elsewhere in these comments, YC probably has an idea even before the class is over simply due to having more intimate exposure to the the companies. Unless there was some sort of implicit pump and dump, why bother throwing good money after bad on the underperforming alums?
snowmaker 6y ago
A few points here that might help: 1) It's not quite accurate to say that YC is running out of money, though I could see how the article could read that way. YC is fortunate to be well-funded. However, we saw that if we continued our previous pro rata policy, that that could eventually happen someday, so we made a proactive adjustment well ahead of time. 2) One of the consequences of our old pro rata policy was that it left us without control of how much money we spent. Because we committed to investing in every round of every YC company, our spending was dependent on how many companies raised money, which turned out to be hard to predict. Imagine running a company where your monthly budget could vary by millions of dollars and you wouldn't know until the end of the month how much you'd need! 3) As far as I know, no other investor in the world has a programmatic pro rata policy (what YC tried from 2015-2019, which we are stopping now per the article). The whole idea was a bit of a crazy invention, and while its motivation was good, unfortunately it turned out to have too many drawbacks.
- frankdenbow 6y ago
  This makes it pretty clear, point #2 is a tough one that I hadn't considered!
- say_it_as_it_is 6y ago
  YC invested in the long-term success of its startups by participating in every round. Is YC no longer interested in a long term partnership? Seems so. Imagine investing in only one round and pretending that you care about, or even understand, the trials of a startup!

deleted 6y ago

[deleted]

bcx 6y ago

Automatic Pro-rata was a relatively recent addition to YC. (i.e. when we went through in 2009 it did not exist) It also clearly isn't scaleable without infinite capital. Plus, if you had complete information, why would you ever want to automatically invest any time a company in your portfolio raised money? My guess is the only reason they made it automatic, was to minimize the impact of a negative signal. It sounds like they hope the new changes will still minimize that signal.

crazypyro 6y ago
If anything, the new changes will be a huge signal (YC doesn't think this company is one of its most valuable investment opportunities), except in this case, outside investors without insider information will be the ones left holding the hot potato.
s17n 6y ago
If LP's are willing to fund automatic pro-rata it's pretty clearly in YC's interests to take them up on it. Apparently that used to be the case but now it's not.
- Judgmentality 6y ago
  > If LP's are willing to fund automatic pro-rata it's pretty clearly in YC's interests to take them up on it. This assumes that automatic pro-rata is a winning investment strategy. YC's goal ultimately is to turn money into more money, or at least that's (almost certainly) the most significant metric of success for them.

nogabebop23 6y ago

Because they want to have their cake and eat it too. YC has followed a similar trajectory to many successful tech innovations. A novel approach that has aligned goals with their clients, strong & visible leadership, a huge emerging market, an appetite for a new approach - we're now essentially 2 generations of leadership removed from PG & co and while I have no doubt the people in charge are very smart and good at VC'ing, YC is now a totally different beast from 10+ years ago. It's motivations, goals and practices have changed and I have no doubt the next incarnation will come along and eat their lunch too.

sillysaurusx 6y ago
It's astonishing how quickly it happened, too. People underestimate the effect of a decade, but a decade feels so short. I still remember YC startup school in 2007-ish.
Harj 6y ago
In what ways does it seems the motivations and goals have changed? I’m particularly interested in this as I just rejoined YC as a partner after running a startup for five years. I first joined as a partner 10 years ago.
- felipellrocha 6y ago
  For starters, back in the day, YC was mostly seen as a place anyone could get funding and build a great company whether or not they had a great network. Nowadays, it seems more and more like having that network is the primary thing that gets you in YC. (Not a criticism, and I can see the merits of that choice. But, when I talk to my friends about YC that usually comes up.)
  - chii 6y ago
    > YC was mostly seen as a place anyone could get funding and build a great company whether or not they had a great network. that's likely because before the success, there was no way anyone with the network would come to YC as a first port of call. And with technical partners able to judge the incoming seed company on the merits the founders themselves, YC managed to pick the successful ones (mostly - obviously there are failures). When the success of YC's model became so prominent that it is a culture all on its own, the technical partners no longer work the same way as the old way. I don't think it's possible. So network, and human capital is used as a filter, rather than deal with the massive amounts of no-name people.

momokoko 6y ago

The reason for the original idea was because if YC invested in a later round, or chose not to, that was a huge signal to the other investors. Most companies at the time could not raise later rounds if they were not promising. But, since YC was not providing any additional signal by investing in everyone, the original signal carried so much weight that even obviously failing companies so keep raising rounds based upon the original YC signal. So the "hack" about letting the market guide YC's later rounds was foiled by the same reason they came up with it in the first place. I personally enjoy the irony of it.

nelsonic 6y ago

Arguably YC is not meant to be exclusive at all. The idea is to give as many promising people (and products) as possible a chance to get started who might not otherwise have the opportunity. Their application process is still rigorous and weeds out 95%+. Lowering their pro rata stake will only serve to increase applications from people who thought 7% was too high.