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.
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.
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.
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
> My point was simply that, as a matter of strategy, it would not be in YC’s interest to “vertically integrate” as you suggest.
Why do you believe this to be the case?
YC has sucked a substantial amount of oxygen out of the lower tiers, to the point where no matter where in the world you are as an early stage investor YC competes. What in particular do you feel will stop YC from doing the same thing for higher tiers, where - as far as I can see it - the only differentiating factor is the size of the tickets?
We won’t compete for traditional Series A deals because it would damage our core program to do so. It would be self-defeating to try to “vertically integrate” and disrupt the vibrant investor ecosystem that we have cultivated around Demo Day. Not to mention the fact that founders would hate us for denying them the ability to choose their own investors if, as you write, we made Demo Day “disappear” in order to compel founders take more money from us.
Ok, but you could do a better job than traditional VCs, just like what you did with the original program. So: better alignment of interest between founders and capital providers, better terms and so on. Just like right now YC does not have exclusivity in the early stage, it could be a viable alternative, and if that viable alternative has better terms and other intangibles it could easily work out as a win-win for both founders and YC.
Demo day would then shift down the road to series B and later.
Anyway, that is just speculation. Thank you for taking the time to answer me.
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.
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.
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.
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.
Not getting accepted isn't seen this way. YC itself says they can't fund all the companies they want to. I know a number of founders who were rejected from YC and while they don't plaster it on their website, they don't hide it if it comes up.
YC is not some magic oracle at picking startups. They just have way better dealflow because of their reputation and how simple their process is.
Just to add a specific example - we applied to YC, got to the interview stage, and completely flunked it. But five years on we're successful (although probably not in a large enough market for YC). Wrote about this recently here - https://clutter.errantscience.com/2017/07/31/reflecting-on-t...
> YC itself says they can't fund all the companies they want to.
No reason that won't change, and even if it did why would they ever make that public? In other words, they'd say that, even if it were not true.
> I know a number of founders who were rejected from YC and while they don't plaster it on their website, they don't hide it if it comes up.
It stands to reason that there are in a pool that large founders that feel one way or the other.
The HN wisdom is that if you let such a rejection affect you then you weren't successful start-up founder material to begin with but in reality it isn't all that simple.
> YC is not some magic oracle at picking startups.
That must be why the chances of getting follow on investment from other investors is so much lower once you reach demo day /s. YC start-ups are generally oversubscribed, especially when compared to non YC start-ups, so even if YC is not an oracle it definitely is a stamp of approval. Lack of such a stamp after trying to obtain it is a negative signal of sorts. And getting continuity funding or not is another signal of that kind.
> They just have way better dealflow because of their reputation and how simple their process is.
Yes, that reputation is what this is about, and that reputation is in a feedback loop. The process being simple has little to do with it, most start-up accelerators have a simple process.
The big factors are: founder friendly, huge alumni network with vast amounts of knowledge, huge pool of people willing to work for YC backed start-ups, coming to America, large chance of finding follow on investment once you are accepted.
Note how all it would take to make a play at this is to drop one single line from the YC continuity program terms, which is that YC continuity won't take the lead. The existence of that one line is the sign that they are not yet ready for a play like that. But that won't always be the case and at some point YC will be flush enough that they can run their incubator at the next higher level.
I've been through YC. I'm on the board of a YC company that has raised an A round. The negative signaling affects you're talking about just aren't there.
YC does have a positive signal - meaning that any stamp of approval from YC will make you do better than not. This is why demo day rounds are frequently oversubscribed. They do not have a negative signal - by that I mean getting rejected will be treated the same as not applying.
Let me try to elaborate here to make sure that my point is clear, it worries me that you has a YC company board member and YC founder are missing the point because if you don't get it most likely lots of people don't get it.
There are two elements to this, a signalling element and a numerical element, let me get the first - and easiest - one out of the way first before addressing the second.
In a world with an infinite supply of money ready to be thrown at any founder you would be right, absence of a positive signal would not be a net negative.
But we do not live in a world with an infinite supply of money available to start-ups, we live in one where the supply of funds is arguably larger than can be allocated efficiently but that's not the same as saying that it knows no bounds.
And if there is a bound - any bound, really - to this supply then whatever money gets taken out by YC backed companies is by definition no longer available to non-YC backed companies.
And so, these companies will have less funds available to them, and those investors that would as a first choice allocate their funds towards YC backed companies would have less available to allocate to companies not backed by YC.
Which will make it marginally harder for those companies to raise funds, regardless of the signal of having applied to YC and having failed.
Then, secondly there is the signal of applying for a successful program and not making it. It is obviously in YCs interest to ensure that those companies that don't make the cut to be included in a batch do not face diminished chances of raising funds compared to not applying at all since this may make it harder to convince companies to apply in the first place. So YC has built in a lot of ways to ensure that the damage to applicants that do not make it is limited.
But VCs are not quite as rational as one would hope and are super sensitive to concepts such as validation and tend to try to play it safe when it comes to placing their bets.
And in that context, not having a stamp of approval because you did not apply trumps not having a stamp of approval because you did apply but did not make it.
All this besides the psychological effects of rejection on the founders.
When you combine the two is where the problem sits, a company that has applied to YC and has been rejected compared to a company that has not applied at all stands less of a chance of raising from both those VCs that are present at demo day because they have less money remaining and stands less of a chance of raising from other VCs because of their perceived ability to 'have what it takes' to enter YC. It's obvious they are not the top pick and if there is one thing an investor hates it is to pick through the left-overs of a first tier program. It pretty much defines that VC as being second tier. And so it is smart for a company not to advertise that they have applied to YC but did not make the cut.
The herd mentality in VC makes this problem larger than it probably should be.
So, to make a long story short, I'm sympathetic to your claim that it does not matter but I've seen enough of the world from an investors point of view to know that it really isn't all that clear cut and that there are a lot of data points in my periphery to support my claim, just as I'm sure that you have a lot of data points to support yours.
The only real way to get to the bottom of this is to quantify it by doing an exhaustive survey of YC applicants and non-YC applicants and to compare how easy it was to raise funds for those companies that have been public about their rejection compared to those that have kept that quiet with the ones that did not apply at all as a control group.
I'd love to see that study, but absent such a study I'll go by what bits and pieces of evidence I have in front of me.
A big part of how <insert startup here> got where they are was to do unscalable things, and then they did things that scaled. This is the parent's point - the strategies and behaviors companies exemplify when they are in the early stages is very different from the ones they utilized when they hit scale.
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)
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.
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.
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).
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.
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.
> 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.
"...we think companies approaching 100 employees are ideal candidates." ? But WhatsApp only needs 50 engineers for its 900M users back then (After Series B).
"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."
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?
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/