Yuri Milner's Smart Y Combinator Move

Paul GrahamImage by davidcrow via Flickr
Wall Street Journal: Y Combinator’s Paul Graham On The $150K Per Start-Up Offer: “It’s probably one of the most surprising things that has happened so far,” Graham said. ..... Milner teamed up with SV Angel–the seed fund run by prominent angel investor Ron Conway–to offer $150,000 each in convertible debt in each company. .... Of the more than 250 companies that Y Combinator has produced since 2005, more than 20 have been acquired, but mostly for small amounts. The biggest success, by acquisition price, is Heroku Inc., which Salesforce Inc. bought in December for $212 million. ..... convertible debt–which converts to equity once the company raises venture capital at a set price–with no valuation cap and no discount, an extremely rare set of terms for entrepreneurs. ..... Y Combinator companies received $11,000 plus $3,000 per founder in exchange for 2% to 10% of equity ..... the average Y Combinator company raises $700,000 after the program. .... “The biggest change and huge change for better is now none of them are desperate,” Graham said. Fund-raising “takes a lot of time away from the company. Now they’re already there. They have that foundation.”
I don't think a Google or Facebook can come out of Y Combinator. The big iconic companies tend to have this streak of independence. But I think Y Combinator is great for middling companies. I'd be very surprised if any Y Combinator company goes IPO some day. But many have been and will be bought for a decent chunk of change. Many will stay mid size and profitable.

I like Y Combinator. I like it so much actually that I feel like there is a need for a Y Combinator in all sorts of economic sectors, not just web tech. But the Y Combinator model is uniquely suited for web tech. Coding is all you do.

This offer on the part of Yuri Milner and Ron Conway to make a guaranteed investment of 150K into every graduating Y Combinator company is a smart move on the part of the investors, and good for the startups. Now they only have to worry about the post-150K money. Paul Graham and team already did the due diligence for them. Saves a lot of work.

But this is also like investing in a fund indexed to the S&P 500. The big successes are probably not there. But overall you stand to make money.

This move is good for the industry and good for the ecosystem.
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