YC also has Yuri Milner, Andreessen Horowitz, General Catalyst, and Maverick Capital working with any company which takes a convertible note.
Furthermore, those companies taking the note have a much longer runway than hmexx will provide and will be plugged in to a network of later stage investors.
Finally, each YC company has access to the other companies in its class and the YC alumni...and lots of other things in the valley.
It's logically possible hmexx could approach a similar level of success but it looks unlikely.
I'm not sure about YC's case. But, at the base of it: Convertible Notes = Debt. Even though they provide a chance at equity in the future, that is not guaranteed. I have heard more than a few Angel Investors indicate they are in the business of investing in companies, not lending money.
For a while there was a standing offer from Yuri Milner to invest a substantial amount as a convertible note in any YC company (this has changed in the meantime, but it gives you an idea about how hot YC companies are).
YC itself didn't do convertible notes — other investors did. YC's investment as far back as 2011 was an equity mechanism (which I think was similar to the new Safe).
Other seed stage investors used convertible notes. These technically "debt", but only as a mechanism to keep from having to go through valuation exercises on <3 person companies that had plenty of other things to worry about.
Debt term limits and interest rate limits were bad for companies. It was not possible to have debt with, say, a 50 year term and a 0.1% interest rate. Instead, the debts had 5 year terms and non-negligible interest rates.
I look at the alumni companies and I get the feeling the YC never needed a unicorn. There are lots of interesting companies in there that will generate plenty of cash operationally, not necessarily via exit.
I'd guess that it's part of a diversified approach. Yes, they are capital intensive, but YC isn't the one who will be investing the hundreds of millions, and if one of these is successful, then I'd say it's likely to be hugely successful and a worthwhile return for YC.
If they're the kind of investors that know what "YC" is then your chances are probably good. If they're the stodgy old-world type investors (most of non-SV) then it may be tough. I've read blog posts where such people were whining about not getting the interest on convertible notes, believe it or not!
The notes have proliferated because they are quick and easy (no transaction costs, etc.) so it's the way many startups like to raise money. Priced rounds are fine too - they just tend to take more time and involve costs. YC and others have open-sourced streamlined equity financing documents, but so far, nothing has been as easy as raising on a convertible note.
YC is an investment company. They certainly do help their investments to do well, but I don't think they would keep from funding a similar company if they think it will increase their potential return.
After all, they expect a good deal of their companies to fail. If they didn't fail because of the idea then doubling up through a similar company is a good way to increase their odds. They might not fund competitors in the same cycle though.
YC is pretty huge now with over 1000 companies they've invested in. That's a lot of people involved. A lot of people that are in the same classes, meetings, dinners, etc. All of those people read HN.
From what I've seen over the years and heard from YC founders, it is not uncommon for YC to invest in competing businesses. They have a lot of companies, and it is very likely that at some point there will be companies that evolve into competing with other portfolio companies.
Not necessarily, if YC benefits from high-valuation liquidity events and no so much from continued, steady operating returns on a standalone business.
I understand that things are blurrier with YC than they are with VC firms in general. I know about and admire Wufoo. I know Graham has repeatedly stated how happy he is with the Wufoo outcome. I can see plain as day the network effect YC has created with the large number of operating businesses it has started and with its (even larger) alumni network. I am not picking on YC with this comment.
Maybe if YC is their /only/ investor? I'm not familiar with how YC's initial investment is structured. But your scenario won't exist for many (close enough to all?) startups who have investors. What likely happened is the startup either:
1) raised their money in a priced round. It's therefore unlikely they have unilateral control of the board.
or
2) didn't do a priced round but went with convertible notes. Those initial investments are now interest-accruing debt on their balance sheet.
In either of those scenarios there's going to be immense pressure to not let the business get comfortable.
Y C can command lower valuations (though I don't think they really take advantage of it) than most other investors due to their incredible value add, which may actually be the highest in the industry. There are probably zero investors who are going to put as little as $100k into a company that come anywhere close. So out of the gate I'd require a higher valuation from other investors.
The best way to look at the uncapped note is like investing in an index fund.
Rather than picking and choosing specific companies, the money behind YC VC is betting that the basket of companies as a whole is going to perform well on aggregate (thanks to power law).
It's really putting faith in the YC selection process / mentoring multiplier as a whole rather than any particular company (which they can do later after demo day).
It seems strange to ask, but given all the changes pushed by PG within seed stage investments, why doesn't YC take a convertible note? Why push one set of standards for other early investors but extract the highest price from young companies? I get the fact that 7% doesn't require all that much in increased valuation to pay for itself. But it seems strange to require the equivalent of a ~$250k valuation to participate and with a take it or leave it offer. Startups may rarely be bound to this valuation in subsequent financing but a $1M valuation would still give YC 1-2% equity on average without any discount. It seems strange that PG pushes for notes but then relies on equity. Why?
I guess this is a way for YC to participate in the upside of the most successful companies without creating signaling risk. But from a pure investment perspective, there's a possibility it might not end up being that prudent. It will all depend on the home runs. If YC can create a few multi-billion dollar companies, this will work out well.
Furthermore, those companies taking the note have a much longer runway than hmexx will provide and will be plugged in to a network of later stage investors.
Finally, each YC company has access to the other companies in its class and the YC alumni...and lots of other things in the valley.
It's logically possible hmexx could approach a similar level of success but it looks unlikely.
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