If you don’t know, Yuri Milner and SV Angel just invested $150k in every YC startup in this class.
CarWoo! was a part of Y Combinator during the summer of 2009. Back then, angel money wasn’t falling off of trees and raising an angel round was considered a big win for most of the companies in the class. A handful of companies did get an angel or VC round, but there were a lot that didn’t… some by design, as they wanted to bootstrap to better funding days, others simply couldn’t get enough interest to raise a round. They had solid ideas and extraordinary teams, but they just couldn’t make the $15-20k last long enough to figure it all out.
I remember a conversation I had with Paul Graham during that summer. I told him one of the biggest things he could do for YC would be to find a way to ensure a follow-on angel round of funding was easy for all of the companies to get. My reasoning was it would free up the companies to really forget about raising money until after YC was over and allow them to focus exclusively on building a great product. Which, after all, is supposed to be the goal of your time at YC. $15-$20k does not go very far, it is exactly enough money for most of the companies to make it through their YC experience and survive. I remember the “have you raised money?” or “are you going to raise money?” conversation coming up in every conversation I had with other YC companies at our Tuesday night dinners. This was a huge issue on the minds of all the YC companies and I know for a fact that it was a distraction. I know it was for us.
So what does it mean for YC companies to have a $150k cushion. Well, here are the biggest three things it would have done for us.
1. The distraction of raising money would have been delayed until after YC was over and our team would have focused 100% of our energy building our product. I would say the fund raising thoughts, conversations, meetings stole 3-4 solid weeks of time that we could have been focusing on building an even better product.
2. Instead of distracting ourselves with fundraising, we could have distracted ourselves with experimenting with customer acquisition. Ultimately this would have led to a higher valuation when we did finally raise a round of financing. “How are you going to get users?” is always a huge question investors ask and we really didn’t have any solid answers to this because we didn’t have the funds to start trying stuff.
3. We could have focused more on figuring out our business model. Again, another big question mark that comes up when fundraising… The more concrete answers you have to the business model question, the higher your valuation. In some cases the result of this will be companies that don’t take follow-on capital, and if they do, it’s to scale instead of figure this part of the equation out.
My prediction is this is going to change the game for companies coming out of YC and for the funding landscape in general. YC has weathered a lot of criticism for pushing out companies that are “features” and not real companies. I believe what you’ll see are more YC companies launching with bigger, more complete businesses. Notice I said businesses and not ideas, or features. You’ll also see much better quality in the products and business models as companies, if they have to, won’t worry about funding until the 6 month mark. Also the “failure” rate will drop. I predict most YC companies will find success. You’ll still have the few that fail because of founders issues, and the rare bad idea, but most will make it.
Funny thing is, anyone could have done this deal with the YC companies. You have to hand it to Yuri for stepping up and taking this risk. It will be a huge win for him and it is already a huge win for YC and the future of entrepreneurship in general. Congrats.