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The emphasis on "downturn" concerns me. Aren't reputed firms like YC supposed to look at a 10+ year horizon? If this is true, it indicates that earlier investm

The emphasis on "downturn" concerns me. Aren't reputed firms like YC supposed to look at a 10+ year horizon? If this is true, it indicates that earlier investments were based on the market than the fundamentals of the founding team, market, and product.

bdcravens 4y ago
> earlier investments were based on the market than the fundamentals of the founding team, market, and product False dichotomy
- melony 4y ago
  40% is a massive cut. If the heavy weighing of the market doesn't constitute a dichotomy, then nothing does.
  - tptacek 4y ago
    It's a massive cut after a sequence of massive, program-redefining increases in batch sizes. The current size is, as their representative says, still a lot bigger than batches were until recently.
  - deleted 4y ago
    [deleted]
    - deleted 4y ago
      [deleted]
  - bdcravens 4y ago
    There are a massive amount of applications; they still base acceptance on quality. Otherwise, when market conditions were good, they were letting in a number of terrible companies.
fsckboy 4y ago
the 10 year horizon of a first mover who grows every one of the 10 years looks a lot better than the 10 year horizon of a first mover who is expected to do nothing the first couple years. And you can only invest money your investors give you, and they give you money out of their own funds that are depleted by the downturn, so while you may be right that this is the perfect time to make a 10 year investment, you can't take blood from a stone.
deleted 4y ago
[deleted]
cheriot 4y ago
These startups will need to raise funding within the X months. The amount of money invested in series A rounds next year is not something YC controls.
cortesoft 4y ago
Even if you think things will look good in 10 years and want to build a company to succeed at that time, you still need the money NOW if you want to invest in a company now, and the availability of money for investment now is completely dependent on the current financial markets. In other words, the amount of money available to invest is independent of the fundamentals of what that money is invested in.
- __alexs 4y ago
  Are VCs funded by debt? I thought the funds would largely have come from existing cash or equities and were only down 15% from ATH on SPY. Is this just people being risk averse right now?
  - otikik 4y ago
    The fact that they cite the current market means that at some point in their process they borrow money. And now that’s more expensive to do. That doesn’t mean necessarily that they are “funded by debt”. It could just mean that getting into some temporary debt is part of how they work.
    - q-big 4y ago
      > at some point in their process they borrow money I would be somewhat careful with such claims. As an investor who has money available, you have two options (in this example) where none involve borrowing money: a) invest in some startups b) lend this money to other entities Increased market interest rates mean that b) becomes more attractive. In other words: the startups that you invest in for a) have to be much more promising than in a market environment with lower interest rates. This means less investing in startups.
      - yunohn 4y ago
        Sure, but we’re talking about a VC fund. I’m not convinced that YC reduces investing in startups to pivot and profit from increased lending rates.
nostrademons 4y ago
You have the luxury of patience when it's your own money. YC has been raising outside capital for several years (a decade?) now. As soon as you're investing other people's money you're at the mercy of other people's willingness to invest.
- andy_ppp 4y ago
  They could sell some of their holdings in these huge companies they have 7% of but basically they are saying everything is screwed right now and they expect a decade or more of depression.
  - anu7df 4y ago
    I don't read it that way. There is reduced funding available now . So the current batch is smaller. They are still thinking of more than 10 year horizon to mature opportunities but the funds available for that runway is smaller. Hence the small batch. That is my read any way. The depression may be over in 2 years (say), but that does nothing for investor sentiment and available cash right now.
    - balaselvam 4y ago
      This argument holds true for most VC firms in general. My contention is that YC's stance on defining the "bar for acceptance" seems to be on how much cash they have. So a mediocre company and founders could have got in the previous batch and a deserving one may not this year. I agree that this is fair and square in market economics. I simply expected more from this institution.
      - anu7df 4y ago
        I am not sure how you came to that conclusion. This reduction can still be consistent with a fixed bar for acceptance. Say that earlier everyone who cleared the bar got funded. Now, only 60% of those who clear the bar gets funded. The further selection can be on the basis of a performance criteria like value expectation or risk of failure, or it could be on the basis of investor preference to certain areas.
RC_ITR 4y ago
It’s code for “actually the program isn’t as scalable as we thought and a high % of a cohort not getting interest from traditional VCs is probably not a good look” Remember that something like 25%+ of all YC companies ever are In the post-pandemic cohorts (due to said mega scaling).
woweoe 4y ago
In my opinion the pandemic era saw a significant increase in employee headcount, and now we are seeing a "correction" of the employee headcount. But I think the bigger point is that venture capital funding is really drying up and investors aren't investing as much. A lot of the market is basically "taking a loan to cover a loan that covers a loan.." and the market is no longer giving out loans as easily due to higher interest rates.
- rishav_sharan 4y ago
  > In my opinion the pandemic era saw a significant increase in employee headcount I am interested in hearing why you think that. I would have thought that the whole "Great Resignation" theme of the two pandemic years would suggest that people are instead looking to move away from the established companies.
  - JumpCrisscross 4y ago
    > the whole "Great Resignation" theme of the two pandemic years would suggest that people are instead looking to move away from the established companies That period was characterised by easy money boosting the job pool relative to applicants. Employees had heightened mobility and many capitalised on the opportunity. That window is now closing, with firms focussing on survival over growth.
    - indymike 4y ago
      Even if unemployment rates triple, we're still not in an employer's market. Companies will lay off to survive, but there will be jobs for laid off to land in.
      - JumpCrisscross 4y ago
        > Even if unemployment rates triple, we're still not in an employer's market Broadly, no. We had 0.6 unemployed per job opening in May [1]. So a ~70% increase in unemployment would have neutralised the market. We saw a 5% MoM reduction in job openings in June [2]; if that continued into July then the ratio is currently about 0.7. Still tight! But tightening, and with all signs pointing to a neutral market before Halloween. (I said the "window is now closing." Not that it’s closed.) [1] https://www.bls.gov/charts/job-openings-and-labor-turnover/unemp-per-job-opening.htm https://www.bls.gov/charts/job-openings-and-labor-turnover/u... [2] https://tradingeconomics.com/united-states/job-offers https://tradingeconomics.com/united-states/job-offers
allenleee 4y ago
YC/VC don't get paid to be founder-friendly. Friendships rely on the returns (mostly from later rounds).
spoonjim 4y ago
Survival is a precondition for growth. YC companies will run out of their $500K in under a year and will need to raise money in the VC markets. If they can't, there's no 10-year horizon to worry about.
badpun 4y ago
It's clear that the valuation of the unicorns that YC and other VCs have been producing for the past ten years was way overblown. Now (i.e. with non-zero interest rates) that there will be less stupid money on the market, the returns on unicorns will be lower.
substation13 4y ago
The problem is that their investors are chasing a return - they don't care specifically about start-ups, only that they can beat safer assets like T-bills, high grade corporate bonds, SPY, etc. Cheap credit is what fueled this start-up boom and bought us the Juicero, 21 Inc, etc. Now rates are rising and that era is over. I'm sure VCs still believe in their portfolios / thesis.
Kukumber 4y ago
That's the feeling i get too, they are more preoccupied by short term gains rather than long term commitment Wich usually mean they do not trust the products they are funding Not looking good
nojito 4y ago
>Aren't reputed firms like YC supposed to look at a 10+ year horizon? Hard to see a bubble when you're literally inside of it.
dustingetz 4y ago
> Earlier folks / seed funds have more than enough money and even if they take hits on marks the reality is that they invest at such low prices they are still 'good', but (a) they don't know exactly what to buy because they don't know what the later-stage folks are in the market for and (b) they really don't know what prices the later-stage folks will pay for things (which directly impacts what they are willing to pay)... — https://twitter.com/lessin/status/1528750068932788225 https://twitter.com/lessin/status/1528750068932788225 VC is a https://en.wikipedia.org/wiki/Keynesian_beauty_contest https://en.wikipedia.org/wiki/Keynesian_beauty_contest As a founder, you aren't paying the VC, the VC is paying you; you are the product and this meta-market is the actual real game you are playing. See: "Series A Exit Clause" – it's baked into your capitalization structure
- htrp 4y ago
  > See: "Series A Exit Clause" – it's baked into your capitalization structure Thanks! Learn something new everyday [1]https://startupjuncture.com/2017/05/16/vc-deal-terms-explained-the-exit-clause/ https://startupjuncture.com/2017/05/16/vc-deal-terms-explain...
  - jacquesm 4y ago
    That's an excellent article and worth posting on its own.
f0e4c2f7 4y ago
Or that you expect a downturn that will last more than 10 years. Check out how the 10 year T note has been performing against the 2 year. Markets are not optimistic about the long term.
- nequo 4y ago
  There was that headline that half of all Americans are expecting a civil war. Or maybe it’s the on-going showdown with the CCP. Or Russia’s disqualification of itself as an energy supplier. Or maybe it is climate change? Seriously, what’s driving these market trends, I don’t know.
  - f0e4c2f7 4y ago
    Ray Dalio wrote a book theorizing about some of these possibilities. I haven't read it yet but this video summary of it is pretty interesting. https://youtube.com/watch?v=xguam0TKMw8 https://youtube.com/watch?v=xguam0TKMw8
  - politician 4y ago
    Americans are expecting a generation-defining change in the way the world works.
deleted 4y ago
[deleted]
oneoff786 4y ago
Money is more expensive with higher interest rates.
pessimizer 4y ago
> it indicates that earlier investments were based on the market than the fundamentals of the founding team, market, and product. Is that supposed to be a bad thing, to consider the market? Less good teams and products will do better in better markets, only the best teams and products do well in hard markets. Shouldn't you adjust?
indymike 4y ago
> Aren't reputed firms like YC supposed to look at a 10+ year horizon? VC is affected by available capital. A lot of investors are dealing with climbing interest rates and loss of value in other investments. That means less money to place bets with, even if you want a 10+ year return.
collegeburner 4y ago
doesn't matter if LPs get scared

bdcravens 4y ago

> earlier investments were based on the market than the fundamentals of the founding team, market, and product False dichotomy

melony 4y ago
40% is a massive cut. If the heavy weighing of the market doesn't constitute a dichotomy, then nothing does.
- tptacek 4y ago
  It's a massive cut after a sequence of massive, program-redefining increases in batch sizes. The current size is, as their representative says, still a lot bigger than batches were until recently.
- deleted 4y ago
  [deleted]
  - deleted 4y ago
    [deleted]
- bdcravens 4y ago
  There are a massive amount of applications; they still base acceptance on quality. Otherwise, when market conditions were good, they were letting in a number of terrible companies.

fsckboy 4y ago

the 10 year horizon of a first mover who grows every one of the 10 years looks a lot better than the 10 year horizon of a first mover who is expected to do nothing the first couple years. And you can only invest money your investors give you, and they give you money out of their own funds that are depleted by the downturn, so while you may be right that this is the perfect time to make a 10 year investment, you can't take blood from a stone.

deleted 4y ago

[deleted]

cheriot 4y ago

These startups will need to raise funding within the X months. The amount of money invested in series A rounds next year is not something YC controls.

cortesoft 4y ago

Even if you think things will look good in 10 years and want to build a company to succeed at that time, you still need the money NOW if you want to invest in a company now, and the availability of money for investment now is completely dependent on the current financial markets. In other words, the amount of money available to invest is independent of the fundamentals of what that money is invested in.

__alexs 4y ago
Are VCs funded by debt? I thought the funds would largely have come from existing cash or equities and were only down 15% from ATH on SPY. Is this just people being risk averse right now?
- otikik 4y ago
  The fact that they cite the current market means that at some point in their process they borrow money. And now that’s more expensive to do. That doesn’t mean necessarily that they are “funded by debt”. It could just mean that getting into some temporary debt is part of how they work.
  - q-big 4y ago
    > at some point in their process they borrow money I would be somewhat careful with such claims. As an investor who has money available, you have two options (in this example) where none involve borrowing money: a) invest in some startups b) lend this money to other entities Increased market interest rates mean that b) becomes more attractive. In other words: the startups that you invest in for a) have to be much more promising than in a market environment with lower interest rates. This means less investing in startups.
    - yunohn 4y ago
      Sure, but we’re talking about a VC fund. I’m not convinced that YC reduces investing in startups to pivot and profit from increased lending rates.

nostrademons 4y ago

You have the luxury of patience when it's your own money. YC has been raising outside capital for several years (a decade?) now. As soon as you're investing other people's money you're at the mercy of other people's willingness to invest.

andy_ppp 4y ago
They could sell some of their holdings in these huge companies they have 7% of but basically they are saying everything is screwed right now and they expect a decade or more of depression.
- anu7df 4y ago
  I don't read it that way. There is reduced funding available now . So the current batch is smaller. They are still thinking of more than 10 year horizon to mature opportunities but the funds available for that runway is smaller. Hence the small batch. That is my read any way. The depression may be over in 2 years (say), but that does nothing for investor sentiment and available cash right now.
  - balaselvam 4y ago
    This argument holds true for most VC firms in general. My contention is that YC's stance on defining the "bar for acceptance" seems to be on how much cash they have. So a mediocre company and founders could have got in the previous batch and a deserving one may not this year. I agree that this is fair and square in market economics. I simply expected more from this institution.
    - anu7df 4y ago
      I am not sure how you came to that conclusion. This reduction can still be consistent with a fixed bar for acceptance. Say that earlier everyone who cleared the bar got funded. Now, only 60% of those who clear the bar gets funded. The further selection can be on the basis of a performance criteria like value expectation or risk of failure, or it could be on the basis of investor preference to certain areas.

RC_ITR 4y ago

It’s code for “actually the program isn’t as scalable as we thought and a high % of a cohort not getting interest from traditional VCs is probably not a good look” Remember that something like 25%+ of all YC companies ever are In the post-pandemic cohorts (due to said mega scaling).

woweoe 4y ago

In my opinion the pandemic era saw a significant increase in employee headcount, and now we are seeing a "correction" of the employee headcount. But I think the bigger point is that venture capital funding is really drying up and investors aren't investing as much. A lot of the market is basically "taking a loan to cover a loan that covers a loan.." and the market is no longer giving out loans as easily due to higher interest rates.

rishav_sharan 4y ago
> In my opinion the pandemic era saw a significant increase in employee headcount I am interested in hearing why you think that. I would have thought that the whole "Great Resignation" theme of the two pandemic years would suggest that people are instead looking to move away from the established companies.
- JumpCrisscross 4y ago
  > the whole "Great Resignation" theme of the two pandemic years would suggest that people are instead looking to move away from the established companies That period was characterised by easy money boosting the job pool relative to applicants. Employees had heightened mobility and many capitalised on the opportunity. That window is now closing, with firms focussing on survival over growth.
  - indymike 4y ago
    Even if unemployment rates triple, we're still not in an employer's market. Companies will lay off to survive, but there will be jobs for laid off to land in.
    - JumpCrisscross 4y ago
      > Even if unemployment rates triple, we're still not in an employer's market Broadly, no. We had 0.6 unemployed per job opening in May [1]. So a ~70% increase in unemployment would have neutralised the market. We saw a 5% MoM reduction in job openings in June [2]; if that continued into July then the ratio is currently about 0.7. Still tight! But tightening, and with all signs pointing to a neutral market before Halloween. (I said the "window is now closing." Not that it’s closed.) [1] https://www.bls.gov/charts/job-openings-and-labor-turnover/unemp-per-job-opening.htm https://www.bls.gov/charts/job-openings-and-labor-turnover/u... [2] https://tradingeconomics.com/united-states/job-offers https://tradingeconomics.com/united-states/job-offers

allenleee 4y ago

YC/VC don't get paid to be founder-friendly. Friendships rely on the returns (mostly from later rounds).

spoonjim 4y ago

Survival is a precondition for growth. YC companies will run out of their $500K in under a year and will need to raise money in the VC markets. If they can't, there's no 10-year horizon to worry about.

badpun 4y ago

It's clear that the valuation of the unicorns that YC and other VCs have been producing for the past ten years was way overblown. Now (i.e. with non-zero interest rates) that there will be less stupid money on the market, the returns on unicorns will be lower.

substation13 4y ago

The problem is that their investors are chasing a return - they don't care specifically about start-ups, only that they can beat safer assets like T-bills, high grade corporate bonds, SPY, etc. Cheap credit is what fueled this start-up boom and bought us the Juicero, 21 Inc, etc. Now rates are rising and that era is over. I'm sure VCs still believe in their portfolios / thesis.

Kukumber 4y ago

That's the feeling i get too, they are more preoccupied by short term gains rather than long term commitment Wich usually mean they do not trust the products they are funding Not looking good

nojito 4y ago

>Aren't reputed firms like YC supposed to look at a 10+ year horizon? Hard to see a bubble when you're literally inside of it.

dustingetz 4y ago

> Earlier folks / seed funds have more than enough money and even if they take hits on marks the reality is that they invest at such low prices they are still 'good', but (a) they don't know exactly what to buy because they don't know what the later-stage folks are in the market for and (b) they really don't know what prices the later-stage folks will pay for things (which directly impacts what they are willing to pay)... — https://twitter.com/lessin/status/1528750068932788225 https://twitter.com/lessin/status/1528750068932788225 VC is a https://en.wikipedia.org/wiki/Keynesian_beauty_contest https://en.wikipedia.org/wiki/Keynesian_beauty_contest As a founder, you aren't paying the VC, the VC is paying you; you are the product and this meta-market is the actual real game you are playing. See: "Series A Exit Clause" – it's baked into your capitalization structure

htrp 4y ago
> See: "Series A Exit Clause" – it's baked into your capitalization structure Thanks! Learn something new everyday [1]https://startupjuncture.com/2017/05/16/vc-deal-terms-explained-the-exit-clause/ https://startupjuncture.com/2017/05/16/vc-deal-terms-explain...
- jacquesm 4y ago
  That's an excellent article and worth posting on its own.

f0e4c2f7 4y ago

Or that you expect a downturn that will last more than 10 years. Check out how the 10 year T note has been performing against the 2 year. Markets are not optimistic about the long term.

nequo 4y ago
There was that headline that half of all Americans are expecting a civil war. Or maybe it’s the on-going showdown with the CCP. Or Russia’s disqualification of itself as an energy supplier. Or maybe it is climate change? Seriously, what’s driving these market trends, I don’t know.
- f0e4c2f7 4y ago
  Ray Dalio wrote a book theorizing about some of these possibilities. I haven't read it yet but this video summary of it is pretty interesting. https://youtube.com/watch?v=xguam0TKMw8 https://youtube.com/watch?v=xguam0TKMw8
- politician 4y ago
  Americans are expecting a generation-defining change in the way the world works.

deleted 4y ago

[deleted]

oneoff786 4y ago

Money is more expensive with higher interest rates.

pessimizer 4y ago

> it indicates that earlier investments were based on the market than the fundamentals of the founding team, market, and product. Is that supposed to be a bad thing, to consider the market? Less good teams and products will do better in better markets, only the best teams and products do well in hard markets. Shouldn't you adjust?

indymike 4y ago

> Aren't reputed firms like YC supposed to look at a 10+ year horizon? VC is affected by available capital. A lot of investors are dealing with climbing interest rates and loss of value in other investments. That means less money to place bets with, even if you want a 10+ year return.

collegeburner 4y ago

doesn't matter if LPs get scared