Y Combinator Considerations

3 points by echan00 2 months ago

The skeptic in me has yet to come to a firm decision about why it makes sense to try join Ycombinator.

Ycombinator provides ($150k) in return for 7% equity. If a startup is hoping to give up 10-20% stake in the company after their seed round, the majority of the funding is going to have to be at a high valuation after already giving up 7%.

Say I'm trying to raise a $1.5M seed round, the math requires a post-valuation of ~$10M and give up ~20% OR a post-valuation of ~$16M and give up ~15%. IMHO, those are sky high valuations for an early startup.

While having a high valuation means your company is valuable (and the YC brand helps with that), the company is already offset by the YC $150k. This could cause trouble for your next round of funding for reasons pertaining to existing and/or new investors expectations if the trajectory doesn't stay rocketship.

Let's just presume the downside of joining YC is the high valuation after a seed round. So what are the benefits?

1. Easy access to investors - I think this matters tremendously to folks who are brand new to startups. But useful if you are already connected through your existing work or academic affiliations? At the end of the day, all investors are looking for great companies and they are trying to find you too.

2. YC Mentoring - YC startups have probably endured the majority of pitfalls, challenges, and issues that can occur. Their experience is super useful and valuable, but 7% useful? I suppose if you argue startups tend to end in a 0 or 1. I just feel such reasoning can lead any company astray..

3. Anything else I'm missing?

echan00 2 months ago

I would also add that by the time a company is accepted into YC, they tend to already have something going for themselves, usually momentum or traction of some sort. If that is the case, what is the value of their 7% buy-in vs. doing more of what the company is already doing right and trying to raise a similar seed round (possibly at lower valuation)?

PS I'm not trying to say Ycombinator is bad, I'm just trying to solicit opinions and make sure I understand the reality.

tempsjfjfjdfgkk 2 months ago

> At the end of the day, all investors are looking for great companies and they are trying to find you too.

I actually don’t find this to be true. If you watch YouTube videos of these investors and read their blogs, they openly admit to being FOMO. So much that they all invest blindly base on what other investors are signalling and the pedigree of the founder. Despite the fact the founders idea might be terrible.

Examples: 1. Juice squeezer that was invested and destroyed by Bloomberg 2. Bird having to lay off 5% workforce already because it turns out their product isn’t useful during winter 3. Even YC invested in men’s scented detergent because the founders had a good pedigree

Getting the attention of VC requires more than having a good company. It’s a populatriy contest and you have to be in the club to get introduced.

VCs as a investment manger have historically been bad at picking winners. There is a reason they invest in multiple companies doing the same thing. They are all hedging their bets because they know their own judgement will most likely be wrong.

mimixco 2 months ago

It does seem like they are focused now on companies who already have traction, which makes the 7% offer and the mentoring less valuable. If you're really early stage, then it's a good deal but if they don't take early stage companies anymore then there's a mismatch.

I've seen the same thing happen with Shark Tank which used to take wild gambles on unproven entrepreneurs but now wants everyone to have sales before they invest.