Y Combinator Gets The Sequoia Capital Seal Of Approval

http://www.techcrunch.com/2009/03/16/y-combinator-gets-the-sequoia-capital-seal-of-approval/

by vaksel • 17 years ago

153 44 17 years ago

pclark4• 17 years ago

Enormous. Shows the YCombinator model is working, or in the future it'll be working. (which it will)

vaksel• 17 years ago

I think this could be a way for Sequoia/Ron Conway to find good companies ahead of other investors. This way, they'll know all about the current crop of YC companies and will be able to spot the winners from day 1.

After all as investors, pg would probably have to report what companies he has selected for the program

mattmaroon5• 17 years ago

Investors who have a history of writing checks to YC companies tend to get previews ahead of the rest as it is. Still, for only $2m (a paltry sum for the VC and angels involved) it's well worth the good will.

pclark4• 17 years ago

surely if Sequoia or Ron Conway rang any YC startup today the startup would fall over themselves to meet?

pg8• 17 years ago

This deal explicitly does not include any provisions for anyone to get an early look at the companies.

That said, anyone who speaks at YC dinners obviously gets an early look at the companies in that cycle, since the point of the dinners is to introduce the startups to these experts, and you will notice that 3 out of 4 of the investors already speak at the dinners:

http://ycombinator.com/w8speakers.html

So the investors didn't need to do this deal to get an early look at the startups, because (along with all the other speakers) most of them already had it.

mattmaroon5• 17 years ago

This is a common fallacy, that investment confers some sort of validity. It doesn't. It means only that Sequoia et al. think Y Combinator's model will work. They don't have a crystal ball, and the model is no more or less likely to work than if they found $2m on the side of the road.

I've thought it will work (for them anyway, not for many of the competitors) since before I went through it, but I don't really consider this validation of my belief.

aristus• 17 years ago

Question for paul: your limiting factor is not money, but time, right? Are you just going to say yes to more interviewees or will you interview more startups? Will YC alums take a more active role between funding and demo day?

aneesh• 17 years ago

I don't think his time (or really, all 4 YC founders' time) was the reason YC started small. YC is an experiment, and you don't want to fund 100 startups at once if you're not quite sure what you're getting into. Now that they've learned from several cycles, they can start to scale up responsibly. At the same time, you don't want to start too small and inhibit the learning process.

pg8• 17 years ago

Because of the recession, money started to be the limiting factor. We didn't feel like we could prudently expand when there might not be any more returns for the next several years.

We are probably going to invite more startups to interviews, and we definitely hope to accept a higher percentage of those we invite. And yes, we're going to encourage YC alums to help the other startups. They already do a lot, but we're going to set up more ways for this to happen.

netcan2• 17 years ago

Is there an estimate of how long YC needs in order to become self sufficient?

ivankirigin3• 17 years ago

I really don't understand this. Why would YC want to manage a fund and investors? Is it more likely to get Sequoia to invest down the road?

sachinag2• 17 years ago

I also worry that it will hurt YC companies raising angel/VC money after YC. If these angels and Sequoia pass, won't other investors think that something is wrong with the company?

pg8• 17 years ago

No. The deal doesn't give them any special rights or access to the startups. So nothing changes in that respect.

pclark4• 17 years ago

aren't you over thinking this? YC simply took fund to expand their current operations.

Sequoia merely put money in, its like thinking the people that put money in the Sequoia funds get involved in who Sequoia finances.

ivankirigin3• 17 years ago

People that put money into Sequoia get a lot of attention from Sequoia partners. If I were YC I wouldn't want to manage that.

swombat• 17 years ago

I guess they don't have enough cash in the bank to keep investing half a million dollars twice a year with no mostly returns for 7+ years (typical time for a start-up to become valuable).

pclark4• 17 years ago

I read it that they wanted to expand their operations, rather than they were running out of money.

colins_pride• 17 years ago

How much did they rake in from reddit?

ajju4• 17 years ago

* YC gets:

- $2M more to invest in startups (more money can't hurt and they clearly enjoy what they do)

- Sequoia investing in YC makes YC that much more trustworthy in the eyes of a lot of potential investees and potential acquirers of their startups. Also YC's reach in terms of potential acquirers and potential round 2 investors probably increases.

- It gets YC startups almost all the advantages of having Sequoia as an investor without the dilution of a large Sequoia investment (eg: opens a lot of doors for the YC startups to get their products in the marketplace.)

* In return for $2M, Sequoia gets:

- YC acting as a filter / very high quality pipeline for them

- Early access to YC deals (though not exclusive)

- Most likely, great returns on the $2M itself in the long term.

dbul• 17 years ago

Great returns because the market is down now and will go up in the next 4 years. If you think about this in relation to the stock market it makes perfect sense. People are investing now because they think the bad times are over (even if they aren't, it is still not a bad time to start investing in something that will take 3 or 4 years to mature like a startup). So both YC and Sequoia win because the valuation of the startup whether it is public or not will be greater in just a matter of years. More small risk, much greater potential return.

pg8• 17 years ago

It gets YC startups almost all the advantages of having Sequoia as an investor without the dilution of a large Sequoia investment (eg: opens a lot of doors for the YC startups to get their products in the marketplace.)

I want to emphasize that this one isn't true. We're not claiming any such advantage. Sequoia won't be a direct investor in these startups.

sahaj• 17 years ago

pg, will you please comment on this?

pg8• 17 years ago

We wanted to increase the number of startups we funded, but we didn't feel we could do that in a recession. We probably had enough money to last out the recession at the current rate, but we noticed that thinking this way was starting to make us conservative, which is the last thing you want in the seed funding business.

I don't think this deal would increase the likelihood of Sequoia investing in a given YC startup. They make up their own minds about who to invest in. But it should increase the absolute number they fund, because the number we fund will increase.

mattmaroon5• 17 years ago

Hmm, legal question here, since I don't know exactly how this deal is arranged. Is this a fund in the traditional angel/vc model, or do they just now own a chunk of Y Combinator? And if so, do they therefore own a small chunk of past YC companies still in the portfolio?

If so, it would seem my startup is now partially owned by some of the many angels and VCs who turned us down, which will really kill some of my revenge fantasies :)

chiffonade• 17 years ago

The article states this is a third fund owned by Sequoia and managed by YC. More than likely some of Sequoia's investors got intrigued and wanted to get into the YC game, but didn't feel like taking their money elsewhere because Sequoia has been good to them. Best of both worlds.

mattmaroon5• 17 years ago

It was more of a joke than a serious question.

gcheong2• 17 years ago

Is this the first step towards a YC IPO?

ntoshev• 17 years ago

It is not really clear how is it structured, but it seems that Sequoia will own equity in the new startups funded by the YC-managed fund. In this way YC or that new fund won't need an exit strategy.

ajju4• 17 years ago

Venture capital funds (which is what YC is very very roughly) don't do IPOs because a public company has to produce returns every quarter with some degree of regularity and VC returns are always very very skewed. I can bet YC will never do an IPO.

More importantly, you typically do an IPO to raise money for your operations. VC funds raise money from private investors. So it doesn't usually make sense for VC funds to do an IPO.

gcheong2• 17 years ago

It's not something they would rush into for the reasons you point to, but it's not unheard of (e.g Harris and Harris), and if the goal of YC is to maximize the number of companies they can fund then an IPO may make sense at some point.

pg8• 17 years ago

No! Companies like YC don't go public, and even if it were an option, I wouldn't want to do it.

mattmaroon5• 17 years ago

Anymore I'm always skeptical of anyone that would. People now think "if they're doing so well, why would they want to IPO?" Seems like a tremendous bad beat for investors.

jacoblyles• 17 years ago

The most important part of this for me is a 50% increase in the number of startups funded. I approve of anything which increases our chances.

Of course, in the long term, this will mean that Y Combinator will be more sustainable if it is drawing interest from outside investors.

I wouldn't be surprised if Sequoia is doing this just for the publicity, or just to find out more about Y Combinator. $2 million might well be worth the price for information about how Y Combinator is doing, since it is a very popular but secretive fund.

smallpaul• 17 years ago

I love Robert Morris' crunchbase bio: "... He has published extensively on wireless networks, distributed operating systems, and peer-to-peer applications. In 1988 his discovery of buffer overflow first brought the Internet to the attention of the general public."

I think we know that the "discovery" of a vulnerability is never enough to get the general public interested...I didn't hear a peep in the MSM about the huge Debian/SSL debacle.

danielzarick• 17 years ago

Everybody is over speculating the significance of this. This just means more opportunity for each of us to seize. All of you can continue debating why this is good or bad, but I am going to go finish my YC application.

Y Combinator Gets The Sequoia Capital Seal Of Approval

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