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.
Its the same reason you lock your door when you leave the house. You not accusing your neighbors of being criminal, its just wiser not to tempt fate. That way, you are not inviting bad things to happen.
This "peace of mind" factor has significant economic value, in that it frees up resources from "monitoring" potentially ambiguous motives and situations, and this improves the throughput for tasks related to running the business and making profits.
With respect to the "market equilibrium" notion, theory and practice differ. Gaming the (any) system increases in liklihood as the un-eveness of outcomes is exaggerated; information flows become more assymetric; and/or they become more opaque.
That is precisely the description of early stage investments. More or less. Hopefully this makes a bit of sense.
The counter-argument as to "letting the market" reveal the information, is that it is unlikely to do so. There simply are not formal mechanisms for privately trades companies to disclose such information in a timely and transparent way. Remember, the companies are private explicitly to prevent this from occurring.
This would devalue the signal of YC accepting a company, and inflate the value of the signal of a YC partner investing in company. In fact, not having both could be a negative signal, at which point YC is poisoning itself. This also leads to YC subsidizing one of their partners, and works against its best interests. YC's goal here is not to maximize efficiency of the market as a whole, it is doing this for self-preservation.
Aside from that, if PG feels that the signal is overvalued, the remainder of his own portfolio becomes toxic unnecessarily. So it's a bad outcome if the signal is accurate, and a worse outcome if it isn't.
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.
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.
It's in YC's best interest for every company accepted by them to succeed and get funding. When a YC partner funds startup A instead of startup B, the perception(which, again, probably is not reality) is that startup A has something better than the ones that aren't funded. So it puts startup B in a disadvantaged position from startup A.
It's a question of information asymmetry. You think that "given time," the system, whatever you mean by that, will equalize, but the essay describes difficulties in funding for those without separate investments by YC partners. That seems kind of like evidence of a signal they're trying to remove with this policy.
The interest of the individual YC partner (in this case) through a direct investment in the "best" ones, is not offset by the interest of YC as a whole (and those YC partners through their interests in YC as an entire entity) which would prefer investment in all their companies, or at least not providing a negative signal to those they choose not to invest in.
Incidentally, the new policy also masks YC partners' winner-picking success rate. If YC partners are seen as less successful in picking the winners than widely presumed, one could conclude that being accepted into YC itself is not a reliable signal.
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.