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New YC Partner Investment Policy

• mathattack 13y ago
  This seems to solve one problem, but does it create another? Does it diminish the incentive for partners? Or wind up penalizing the winners (better firms coming out of demo day) by reducing their exposure to firms most likely to invest in them? My sense is net this is positive.
  • outericky 13y ago
    I don't think it diminishes incentive for partners - if anything, it gives them a bigger window to decide who to invest in based on a larger market response - though I think for most of them this isn't really necessary as they tend to be forward thinking already (and have spent 3 months with the founders) vs having "herd mentality" and reacting to the market.
  • kevin 13y ago
    I can't speak for the other partners, but I love that we're willing to do whatever it takes to help our startups succeed. I don't work at YC for the money. I work there because they are the best at what they do and are always trying to do the right thing for their founders. It was my experience when I went through the program and it's reinforced by actions like this.
    • mathattack 13y ago
      Ahh - I misinterpreted partners. I thoughts it was the coinvestors providing converts. This makes much more sense to me now, and is obvious in hindsight.
• kirpekar 13y ago
  Interesting snippet: "... a startup's fundraising trajectory is almost always established, one way or another, by 3 weeks after Demo Day..." I never knew fund raising worked so quickly.
  • deleted 13y ago
    [deleted]
  • petenixey 13y ago
    It really doesn't anywhere except after that particular event.
• pbiggar 13y ago
  "This should fix the problem. If it doesn't we'll try something else." That's an interesting phrase. This should really be implicit in everything we say or do. It stands to reason, if something doesn't work, you try something different. But when you're famous and have thousands of people who constantly try to undermine you or misquote you or take something out of context, you start to need to be explicit in calling this out. Otherwise next month's tech rag headline says "YC partner recants failed investment policy".
  • Zikes 13y ago
    Oh I'm sure it'll happen, they'll just ignore the existence of this policy altogether when they do: "PG Prevents Partners from Investing in Minority-Founded Startup"
    • thenmar 13y ago
      Come on, mocking straw men just makes things worse for everyone.
      • jessriedel 13y ago
        That's not a straw man, it's satire.
        • hueving 13y ago
          satire is a subset of a strawman
          • ZoF 13y ago
            If either of those is a subset of the other then strawman would be a subset of satire.
            • hueving 13y ago
              Yeah, subset wasn't the right term. The sets intersect. Exaggeration (a form of satire) is a strawman.
• codex 13y ago
  It sounds like YC serves as a vehicle to bring deals to YC partners, who make a killing funding the most promising candidates from the YC batch. This has made so much money for YC partners that they still want to continue to pick winners, but they don't want to kill the golden goose, so they withhold their blessings for three weeks. YC companies will still prefer the partners for funding over some random VC, so they still get the deals, but now the relative losers from the YC batch will get more funding from the more clueless VCs.
  • CyrusL 13y ago
    That's not true. An angel investment after demo day is worth a lot less equity than the YC investment. Most YC companies raise their seed rounds at $5 million - $20 million valuations, so it would take many hundreds of thousands or even a couple million to end up with the same 7% that YC gets.* That kind of money would usually be put in by a larger fund. Most angels write checks for $25k-$100k. * One difference being that the demo day investors will have preferred shares upon conversion and YC takes the same common shares that the founders and employees get.
    • brayton 13y ago
      Yes it could be worth a lot less equity but you can still make a killing with those small investments in the right companies
    • lawnchair_larry 13y ago
      Yeah, what individual would want to even bother with only 1% of AirBnB or Dropbox!
• pjg 13y ago
  I am assuming that "YC partners not able to invest till the start has raised atleast $500K or 3 weeks after demo day" will mean YC founders follow the rule in letter and spirit i.e. no pre-discussions with YC partners leading to pitching claims like "One of the YC partners has committed to investing after first $500K" ...
  • pg 13y ago
    We're small enough that we can enforce things easily on our side. We can't control what founders say to investors. But experienced investors wouldn't believe a YC partner had agreed to invest without being able to confirm it.
• lbr 13y ago
  I think the most interesting bit is that it decreases a sort of self fulfilling prophecy. Investors "treat investment by YC partners as an accurate sign of how promising we thought a startup was." So then, the company raises more money - and appears to look more promising. Sure, partners may have less incentive immediately (as mathattack said) - but the real winners will be more clear to the partners after demo day (and three weeks). They will have a list of winners (in their mind) before demo day. Then, investors at demo day will pick a list of winners (who they invest in). And YC partners will see the overlap - those who are picked as winners by YC Partners and independent investors.
  • pg 13y ago
    The reactions of investors after Demo Day don't change our opinions much. We've just spent the last 3 months working closely with these companies.
• mattmaroon 13y ago
  That's smart. When we did it (Summer 2007) investors we talked to still didn't even know you guys did that. A couple asked, most didn't. I won't lie, we used it to our advantage. I'm sure it only took a couple rounds before people started noticing you (and some alums) in the cap tables and realizing what's going on. Word spread. I have no doubt that now it is considered a signal. Investing is like dating. You need to be right for them, and they need to be right for you. Just because you don't want to invest in someone doesn't mean they're a bad investment. Smarter angels & VCs probably realize this, but there's plenty of perfectly good money that would not go to companies who might be a good fit amongst the less savvy.
  • ivanplenty 13y ago
    Super interesting story, and thanks for sharing. I think you're referring to your time at DraftMix, right? Admittedly that was a really hard connection to find online [see below]. That said, quietly using partner/alumni investment as a signal for VCs doesn't quite fit the "Startups are a perfect meritocracy" narrative I'd prefer to believe... [below] Interestingly, searching for "Matt Maroon" (on Google, Crunchbase, AngelList, etc) yields results like [0] that only mention Blue Frog. Same for your blog. Wouldn't care otherwise, but I wanted to know if your story could be true or to dismiss as an internet rant. However there was one interview-like-thing [1] still hanging around the Google Index that connected DraftMix [2] with a "Matthew Maroon" as the CEO [3] [0] http://www.crunchbase.com/person/matt-maroon http://www.crunchbase.com/person/matt-maroon [1] http://en.wikioffuture.org/DraftMix http://en.wikioffuture.org/DraftMix [2] http://www.crunchbase.com/company/draftmix http://www.crunchbase.com/company/draftmix [3] http://www.crunchbase.com/person/matthew-maroon http://www.crunchbase.com/person/matthew-maroon
    • argonaut 13y ago
      For some reason this strikes me as kind of creepy.
      • nitrogen 13y ago
        ...and people talk about the death of privacy like it's no big thing. Remember, the real creeps don't post their research on a public forum (unless it's for harassment).
• drp4929 13y ago
  This might impact startup fundraising trajectory. Investors may prefer to wait out for 3 weeks if VC partner's investment is a strong enough signal for them.
• borski 13y ago
  For what it's worth, 500startups has done this for long time. They don't tell companies whether they are going to provide follow-on funding (even though it's in the original terms as an option) until significantly after Demo Day, for the same reason.
  • argumentum 13y ago
    That's not the same, YC has never provided follow-on investment and this doesn't change that. This policy affects investments made by individual partners. I'm sure 500 startups does not stop it's mentors from investing right after demo day, or does it explicitly do that?
    • borski 13y ago
      It actively encourages mentors to invest. The reason is because a) there are so many that most companies can raise a little from at least one mentor, b) all companies in a batch are encouraged to raise a small amount of money prior to demo day, and c) mentor investment isn't typically seen as a signaler as they aren't 500 partners. It helps, as any outside investment helps, but 500 following on is the real signaler, at least in my experience.
      • mrkurt 13y ago
        Does Dave McClure wait to invest personally? I could see his investment having a similar signaling effect.
        • borski 13y ago
          He actually has a rule of not investing personally. Granted I don't know if that's explicitly true, but I haven't heard of him investing personally since 500 was founded.
          • adambenayoun 13y ago
            Partners can't invest. 500startups mentors != YC partners - the closest to that is basically 500startups investing a follow-on, it has the same signal as YC partners investing in YC companies during the accelerator program. P.S: I'm the co-founder of a company who was in Batch 6 of 500startups.
• blazespin 13y ago
  Question for PG: Do the partners commit to fund companies in secret immediately on demo day or do they now make decisions based on how well external funding goes? In some ways, it sort of seems we have the same problem, but now the partners are the ones to take advantage of 'signals'.
  • lawnchair_larry 13y ago
    If a YC company could no longer get a personal investment from a YC partner, it doesn't matter much. If they can't get funding from any VC, they almost certainly die. So even if one thinks that the comparatively low-value signal of a VC investment is now going to be exploited by a partner, YC is not worse off.
• United857 13y ago
  Is this a common policy in the VC world in general (prohibiting personal investments by general partners in the firm's companies)?
  • pg 13y ago
    It is in VC funds in the narrower sense, because their LP agreements often forbid any individual investments in startups. VCs' LPs don't want the VC partners siphoning off the best of the firm's deal flow for themselves.
    • larrys 13y ago
      Long long time ago when I was a kid and my dad was buying real estate I asked him why the realtor didn't buy the property if it was so good. He answered by saying that if he did that you might then infer that the properties that he didn't buy were not good. I also point this out because what I've found in business is that so many basic principles end up repeating themselves in different situations. Things that you don't learn in school or in books but by listening to others and real life experiences. One reason that certain people who have grown up in business families have a nice advantage over those that don't. [1] You have a seat of the pants feel for things because everything is just a variation of something that has already happened. [1] But it's not just growing up in the family but also interacting and listening and thinking. My siblings grew up with the same parents but are vastly different than I am in their thinking and understanding even given the same trough of water.
      • gertef 13y ago
        Any realtor who knows a good investment becomes an investor, not a realtor.
        • lawnchair_larry 13y ago
          This sounds nice rolling off the tongue, but there is clearly no truth to it. Did you just make it up?
• United857 13y ago
  Is this a common policy in the VC world in general (prohibiting personal investments by general partners in the firm's companies)?
• dsugarman 13y ago
  this seems really smart, although I worry that it could affect many startups ability to raise the initial $500k.
  • argumentum 13y ago
    True, perhaps even more than the first $500k, I worry about those that are trying to raise $100-$250k.
• kartikkumar 13y ago
  Maybe I have the wrong end of the stick but this seems unnecessarily forced. Surely, given time, the system should equilibrate. If YC partners investing in startups is treated as a signal of winners, investors will be able to derive their own conclusions in time about whether this is a trustworthy metric. If it is trustworthy, then surely this would mean that great startups prosper faster and those that aren't that great know it even earlier, meaning that they can pivot after spending much less time on building their business. If it is not trustworthy, the numbers will show that to be the case, with investors being able to directly assess which companies backed by YC-partners actually make it big. In this case, surely investors will wise up and not go by YC-partner investments as a signal of success. If I'm missing something, I'd appreciate it if someone could point out where my logic falls short. Otherwise, I stand by my conclusion that this seems unnecessary.
  • cube13 13y ago
    The problem isn't really whether or not the YC partners are good investors, it's really more of a question if they know something that the startups aren't telling everyone. Early investment by any of the YC partners after a startup has been accepted to YC could give the impression that the YC partners may be doing some sort of insider trading based on the meetings that they had with the company. That probably isn't an issue at all, but the perception is there.
    • kartikkumar 13y ago
      I don't really understand the issue with that perception, cause surely it is true that YC partners have the inside scoop. Isn't that the wonderful deal of being involved with YC in any capacity? I don't see what the "insider trading" part of the deal is. To me it just makes common sense that YC partners reap the rewards of the clamour that exists for people to get into the system. I think I might just be missing the point entirely. We are not talking about publicly listed companies, so if you're smart enough to have fashioned a position as a YC-partner for yourself, then kudos to you and surely that just challenges external investors to get better at picking YC winners even earlier.
• deleted 13y ago
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• nhangen 13y ago
  Why not just prevent partners from individually investing?
• deleted 13y ago
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• deleted 13y ago
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• lyime 13y ago
  Seems good.
• Skywing 13y ago
  But then isn't this just the other way around? Now will YC invest in the company if they see that they're not raising much from outside investors?
• williamle8300 13y ago
  What's wrong with being a 'signal' to investors? There are multiform reasons why YC chooses to invests or not. Those startups that join demo day realize that they're putting themselves on a public platform to be assessed, etc. If they don't get funded by YC, that's their problem; not YCs. There's a problem with PGs policy since it rules out the possibility of YC being a first rounder. Which is a huge reason why VCs exist in the first place.
  • mikeg8 13y ago
    Seeing has how YC has an equity steak in every startup, how is a startup who can't receive funding not a problem for them? From an investment point of view, they want ALL of their companies to receive funding. If signaling is negatively influencing how investors evaluate every company, than this policy makes a ton of sense.
• bluishgreen 13y ago
  It looks to me like this is going to put pressure on the window size (currently 3 weeks). Folks can now wait for 3 weeks if they really want the YC signal to kick in, unless other forces are working to counter act the waiting. Think of it as a star which is trying to explode because of all those gases burning away, and gravity is keeping it together. The size of the star is the equilibrium point of the differential equations describing this dynamic. One of the signals that was keeping the 3 week window to 3 weeks could have been the YC investments (gravity), but now that gravity has been set to a lower level, the 3 week window will expand..to account for this.
  • argonaut 13y ago
    That's not how things work. Most YC companies tend to be oversubscribed, anyway, so what keeps the window small is competition between angels/VCs.
• mjmahone17 13y ago
  This is interesting, and actually similar to a policy that a lot of elite high schools in the US follow: not ranking their students. If you have good unis accepting 50% of your class, ranking your students unnecessarily makes your 50th percentile weaker candidates than the 95th percentile at schools that rank (often even if those schools only have 2-3% getting into top-flight unis). However, the downside of not ranking is that your top 1-5% of students are not clear to the extreme elite (Harvard, Stanford, MIT) schools, meaning there is no one who is "guaranteed" those positions, as even your top 5% has to compete with students in the top 20 or 30% for admittance. For high schools that couldn't hope to admit more than 5% of their class in top tier unis, it makes sense to rank (as then you get to showcase your top students as being exceptional). If you expect 20% or more to be competitive candidates though, it's usually better to stay quiet on relative success.
  • gertef 13y ago
    This is a nice example of what's wrong with elitism in higher-education, mis-applying metrics to "rank" students.
    • jtbigwoo 13y ago
      Yeah, it's funny. A friend of mine got one B in high school and ended up outside the top 5% of his class (which matters for some scholarships) because there were twelve kids with straight A's. If he had been a year younger he would have been second in his class.
      • commandar 13y ago
        Yeah, my high school stopped publishing class ranks in transcripts as of my graduating class because something like you got down to 50 or 60 out of a class of nearly 300 before you got below a 4.0 GPA and it was hurting kids on college admissions.
        • philwelch 13y ago
          20% of the student body had straight A's? Sounds like grade inflation to me.
• aelaguiz 13y ago
  Kudos. This was an issue in my batch. If you didn't have YC partner money you weren't necessarily a black sheep, but you definitely weren't awesome.
  • jdavid 13y ago
    Getting YC Partner Buy-In sounds like pledging a fraternity.
    • aelaguiz 13y ago
      It isn't, at all. It's not some popularity contest. The best companies do in fact tend to have YC partners invested in them. It's just because they are..the best companies. The only reason it's bad is because there are lots of great startups in the batch that can be hurt by it, which is obviously not what the partners intend.
• larrys 13y ago
  " Which meant we were now making it harder for the startups that partners didn't invest in to raise money." An analogy to this is what happened during the financial crisis when they got all banks to agree to take money so as not to send a signal showing what banks were the weaker ones.
• deleted 13y ago
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• melindajb 13y ago
  Seems like a great idea, PG. Are the partners prohibited from signalling to favored investors their intentions? What's to stop someone from giving a wink to a friend?
  • TheCowboy 13y ago
    Partners who decide that they are not going to follow the rules to the detriment of the founders, and therefore YC and other partners, would likely be excluded from participating in future batches. YC is in a strong enough position that they are likely not dependent upon one particular partner, and most partners would prefer to have access to future batches. They probably don't need to have a contract that slaps on additional legal damages, because at such an early stage the small gain for favoring their own investments does not outweigh the longterm gains from continued early access.
    • melindajb 13y ago
      Theoretically your point makes sense. But in practicality, sounds like nothing prevents a partner from winking at their buddy in a VC. After all, who's to know? And how could it ever be enforced? Insider trading didn't stop just because it became illegal. This is not in any way meant to cast aspersions on the partners per se. Color me jaded when it comes to money.
• EGreg 13y ago
  You think this might cause startups to close their funding later as investors all wait around to see who pg chose? :)
• markhelo 13y ago
  YC company approaches VC and says we have a soft commit from a YC partner. VC calls the YC partner and invests. I am not saying there is anything wrong in the old world. It is what it is. When its your company and there is money involved people get creative and work around rules. Some companies raise successfully and some others dont. If VC's (with all their resources) are taking their cues from YC Partners then something else is broken not the entrepreneur.
  • lawnchair_larry 13y ago
    Obvious answer: YC partners are not allowed to soft commit either.
    • markhelo 13y ago
      Not realistically enforceable.
• aaronchriscohen 13y ago
  I wager the % of the YC companies that raise $500k within three weeks of demo day is <10% making this rule effectively meaningless.
• amirmc 13y ago
  Impressed that this issue is recognised and a mechanism created to mitigate it. However, doesn't this merely delay the signal (which is mentioned) so it may simply defer the problem down the line. If after $500k you haven't had a YC partner join, raising more becomes difficult (assuming you were trying to raise more than that to begin with). Curious whether this will actually matter in the long run but I guess they'll adjust if needed.