Exploding term sheets are nasty. If you don’t know what they are, it’s a fairly literal definition. Someone gives you a term sheet to invest in or acquire your company (or some other transaction), but they put an expiration date into the term sheet and if you don’t accept by that date, the offer explodes. Investor Y Combinator (recently in the news for taking an investment from Sequoia Capital) posted an advisory tonight that their competitors are using exploding term sheets, and suggesting companies ignore them.
Companies use exploding for a variety of reasons. But the goal is to put additional pressure on the company to accept the terms and quickly, without much further negotiation. In particular, they don’t want to see a deal “shopped,” which is when you take their term sheet and go to other buyers/investors looking for a better deal (which is exactly what you should be doing as soon as you get a term sheet from anyone).
But they are bad news for startups, who can’t take their time to find the best deal possible when presented with one. I’ve received a couple of these in the past and have always ignored the clauses. Generally speaking, the day after the explosion they’re still very happy to do business with you. If they’re not, they weren’t good partners anyway. (there are exceptions, such as when certain financial milestones or other important dates are coming up, but those situations are fairly obvious).
The Y Combinator letter is fairly straightforward in its advice. In particular, competitors (which are mainly TechStars and DreamIT, although they aren’t mentioned) are giving exploding term sheets that expire prior to Y Combinator getting a look at the companies. Lawsuits have also been threatened:
Advice to Summer Applicants
March 2009If you’re also applying to one of the other YC-like organizations, you may find yourself in an awkward situation. Last summer several of them gave startups offers timed to expire before YC interviews.
At least one made groups who got offers sign something promising not to tell anyone. Another actually threatened to sue a startup if they didn’t show up for their program.
Using so-called “exploding termsheets” to pre-empt other offers is not uncommon in the VC world, though even there it’s considered a slightly dubious tactic. But VC funding happens asynchronously. Using this tactic in a stage where funding happens synchronously is not very ethical. It would be like colleges doing it.
(YC asks people to decide that day whether or not to accept an offer from us, but we do this because at that point they already know all they need to, not to pre-empt other offers. There is no other seed firm that decides after us.)
What can you do if you find yourself being pressured to decide before you’re ready? We advise approaching the situation with confidence. If your startup is going to succeed, you’re going to have to learn how to push back against people who try to take advantage of you. So try negotiating. The better you are, the more willing they’ll be to wait for your decision, no matter what they say about their deadlines or the number of “spots” they have.
If you really get into a pinch, let us know and maybe we’ll be able to figure out some way to interview you early.
Sorry about this. We started YC to make it less stressful to start a startup, not more. We never anticipated this sort of situation would arise.
There’s just one problem with the advisory, though. Y Combinator themselves ask companies to make a decision on the day they get their offer. So it’s somewhat hypocritical to complain about the same actions by their competitors. As they say, though, they are the last to interview new startups in each summer and winter class. So startups know who has accepted them by then, and the Y Combinator deal terms and even the contracts they’ll sign are on the website for review.
I’ve emailed both TechStars and DreamIT for a comment. TechStars Executive Director David Cohen writes:
No, TechStars does not ask the founders that it makes offers to not to disclose the offer. We do ask them to accept it quickly (usually in 24-48 hours) or we move on.
TechStars issues a letter of intent when it makes an offer. Once our offer is accepted and signed by both parties, it includes non-disclosure (but not before).
The reason for this is two-fold. First, we are by definition still making offers and we may have to move down the list if some are not accepted. We don’t make all offers at once – it happens over a period of about a week, usually in personal meetings. So we don’t want other applicants that we’re planning to make offers to thinking they won’t get one, etc. Second, we generally advise our startups not to make a bunch of noise on the way in to the program as this is typically too much publicity too early. So, if they enter into the letter of intent, we ask them for confidentiality until such time that we can coach them on working with the media. Then they decide what they want to do. Again, this only happens upon acceptance, and not before.
TechStars has never once threatened to sue a startup or applicant for any reason. I have heard this rumor about another program (not ours), but I have no idea if it’s true or not.
will also tell you that regardless of lots of random innuendo, we have never once set our application or offer deadlines based upon those of any other program. Our program historically sits in the exact dates of the University of Colorado summer break, in order to maximize the likelihood of available temporary housing. We set our dates completely around this, and not based on anything else. In Boston this year, we simply added a two week offset for logistical reasons.
We’ve also heard back from Michael Levinson, Managing Partner at DreamIt Ventures:
At DreamIt our focus is to help the entrepreneur. This is summed up in our mission statement which is “To help great people with great ideas build great companies.” We not only offer money and speakers, but we offer as part of our program (and at no charge) a dedicated “been there done that” mentor, accounting services and legal services from top notch firms, and a great community of shared office space.
Like Y Combinator and TechStars, DreamIt asks companies to accept our offer quickly or we move on. We ask our companies to let us know within 48 hours.
Our process is fully-described on our website, and is very similar to the process TechStars described in its comment. We make rolling offers. As we interview companies and find ones we think are a great fit with DreamIt, we make an offer. We have hundreds of applicants and scores of highly qualified candidates for a very few number of places. We need to know quickly whether a company is in or out so that other entrepreneurs are not denied an opportunity to participate in DreamIt (or for that matter any of the other programs, since an acceptance into one program might open up a spot for another entrepreneur in another program).
Each of these programs (YCombinator, TechStars, DreamIt) have different schedules based on a variety of factors. In our case, DreamIt officially starts with a Kick-Off weekend April 17-18 where we bring in all of the DreamIt `09 companies, introduce them to each other and to many of the resources at their disposal (e.g., each company’s dedicated law firm, accounting firm, mentor, and other support services), and start them on the process of accomplishing the milestones that they set to achieve by August. Not only does this enable companies to hit the ground running when they return for the immersion part of DreamIt from May through August, but with the DreamIt resources available to the companies starting in April, companies can make extraordinary progress from April to May.
Our acceptance cutoff is set without regard to other programs but instead so that the companies participating in DreamIt can participate in Kick-Off Weekend.
We have high regard for Y Combinator, TechStars and other accelerator programs. All are providing opportunities for entrepreneurs to launch new companies in exciting ways.
What would be best is if founders didn’t have to make decisions on any of these small incubators/investors until they’d pitched all of them. That’s unlikely to happen, since Y Combinator carries most of the brand weight and would likely get most of the best startups (like Stanford gets all the best students). My guess is we’ll be seeing more of this, not less, over time.
if you have a great exploding term sheet story, i want to hear about it here in the comments.
My favorite personal one was when i interviewed at a law firm out of law school. they took me to a great dinner, and afterwards brought out an unopened bottle of expensive champagne and made the offer. I said i had to think about it of course. They said they couldn’t open the champagne unless I said yes.
I told them I had made my decision when they said they wouldn’t open the champagne. They sent it back.
The funny thing is, if they had just skipped the champagne and made the offer, I likely would have accepted. But it left a bad taste in my mouth.
LOL! LOL!!!! That’s so cheap!
Is this really such a serious issue? I may be missing something here as I live very far away from the valley, but if you have a good company and a VC offers you terms that you do not like, can’t you just turn them down and move on and be done with it? Last time I checked, VC was a competitive and highly fragmented industry with no one having a monopoly power.
So, how is this that different from a “One Day Sale” at a department store? No one is forcing people to buy the department store items at gunpoint, and similarly, no one is forcing entrepreneurs to accept the terms.
I agree that this may place some pressure on an entrepreneur, but if an entrepreneur cannot even manage this level of pressure, they will find themselves completely overwhelemed by all the other real pressures of running a startup.
Of all the “sins” of VCs, this seems to me to be rather minor. I agree it may leave an entrepreneur with a bad taste in their mouths, but just like you, they can just say no.
Anjali
You obviously have never run a start-up; or at least not that was externally funded. There is no guarantee that there will be another term-sheet. And you have a company to run, employees to pay. You probably are running low on cash since you decided to optimize the timing of the funding until you got further along.
Your choices are – take the offered terms to ensure survival without any leverage, refuse them and risk complete shut-down, or try and get competitive offers so you can get a fair deal.
Having been at the receiving end of such a deal, let me assure you, it blows.
@Sammy — Exactly. Only a true entrepreneur understands this, because of experience.
Paul
MedixNet.info
I maybe wrong but I thought organizations like YC only provided seed capital? Somewhere in the low 5 figures. In my view, Angel or potentially series A funding (half a million and above) would hold a bit more weight. My advice to all entrepreneurs is that if you really believe in your product, do not make any hasty decisions for a low figure sum. Others may disagree with me.
“There is no guarantee that there will be another term-sheet. And you have a company to run, employees to pay. You probably are running low on cash since you decided to optimize the timing of the funding until you got further along.”
Um … I’m sorry, no one owes you a term sheet. If you are running low on cash, no one owes you a bailout.
If you want to succeed in a free market, and in a world on competition and creative destruction, and you cannot manage to find another funder, then I would say the fault is with you. Of course, the way that the world is heading these days, free markets may not be around much longer, but that is another story.
Instead of whining about a contract which no one is forcing you to accept, maybe you should build a better company?
@ Anjali:
The point of the article is about unethical clauses in a term sheet. An unreasonable time-line for acceptance and a no-shop clause being two such examples. The point isn’t whether you are owed a term-sheet or anyone forcing you to accept.
Look up the conversion metrics for companies started : angel funded : addl rounds of funding. And you will see why any smart entrepreneur holds on to a decent shot of keeping her/his company alive.
And perhaps I see your point in a theoretical (sort of) debate. but the reality of a start-up is very different. Which brings us to the real question – exactly how many companies have you founded, m’aam?
Maybe you need to buy some street-cred with these kind of profile details on your blog instead of just spamming TC with inane comments.
If you are in negotiations with another party, and they offer you terms you don’t like, you walk.
If you put yourself in a situation where without this specific VC giving you funds, then I am sorry, you have mismanaged this business. No one owes you a term sheet. If you think it is unfair, and your company is good enough to get a better one, then do it, instead of whining about it.
If you cannot get a better term sheet, the the free market has rendered its verdict on your company.
No one owes you funding.
As for real entrepresneurs, these guys definitely are not whiners: http://smartbab...learn-from.html
You, maam, are an idiot.
That Image is LOlz..
http://www.smartbloggerz.com
Moron Alert:
Ok, kiddies. Let’s break this down. Wikipedia style:
“advertorial” is a portmanteau of “advertisement” and “editorial.” Merriam-Webster dates the origin of the word to 1946.[1]
Contents [hide]
1 Characteristics
2 Legal issues
2.1 United Kingdom
3 References
4 External links
5 See also
[edit] Characteristics
Advertorials differ from traditional advertisements in that they are designed to look like the articles that appear in the publication. Most publications will not accept advertisements that look exactly like stories from the newspaper or magazine they are appearing in. The differences may be subtle, and disclaimers—such as the word “advertisement”—may or may not appear. Sometimes euphemisms describing the advertorial as a “special promotional feature” or “special advertising section” are used. The tone of the advertorials is usually closer to that of a press release than of an objective news story.
Advertorials can also be printed and presented as an entire newspaper section, inserted the same way within a newspaper as store fliers, comics sections, and other non-editorial content. These sections are usually printed on a smaller type of broadsheet and different newsprint than the actual paper.
Many newspapers and magazines will assign staff writers or freelancers to write advertorials, usually without a byline credit. A major difference between regular editorial and advertorial is that clients usually have content approval of advertorials, a luxury usually not provided with regular editorial.
A related practice is the creation of material that looks like traditional media (for instance, a newspaper or magazine) but is actually created by a company to market its products. One familiar example are airline in-flight magazines, which may feature reports about travel destinations to which the airline flies.[2]
[edit] Legal issues
hehehe, that’s true. Added pressure really doesn’t help so much. Interesting post Michael, it was very helpful to see a legal view to investments.
TechFilipino
Hey do you know how I order a mail bride from Phillipines?
Hi hahaha, I don’t know how that’s done. You probably want to Google that and *maybe* you’ll get lucky.
TechFilipino
Hilarious. And deserved.
have done over a dozen transactions at several different startups, both financings and exits. every term sheet had an expiry date, and we negotiated well past every one of them. as long as you negotiate in good faith, the VC’s and acquirers continue to negotiate. if they dont, then they are really not interested in the deal.
I will pay $1 million Bolivian Boleros to any Ycombinator former employee who will come onto this site and post the REAL TERMS behind Arrington’s shilling of this incredibly weak company and its clumsy Advertorial arrangement with TC.
Journalism left this site years ago. The world is going to hell, with Ycombinator paying dopey college kids pizza and beer money in exchange for…
…um, what?
TommyTune11234@yahoo.com
> I will pay $1 million Bolivian Boleros to any Ycombinator former employee
It’s a good thing that there aren’t any Ycombinator former employees to be paid because Boleros isn’t the currency of Bolivia. (Bolivia uses the boliviano.)
Chickenhawk FraudaPalooza Ycombinator corners the seedmoney VC market because Arrington and TC write about everything it does.
Can I ask how you came up with the image for this post?
Mike, just a suggestion, can you use a presentation service (Google Docs to Facebook app) that just does the following:
Everything is in 60pt, red, bold and some really hard rock font. And it *shouts* out:
“STARTUPS, DON’T DO THIS!”
May not sound very professional to the VC community, may lower your “social networking expert attorney” image among the stiff suits, but might just work out well due to the simplicity of the message.
Twitter -> slideshow (red, bold, 60pt font remember) is not a bad idea.
A DailyWTF for the VC+startup gang, maybe?
Assuming I understood the case decently, may I add that this looks like day-trading. High speed transactions of huge amounts to and fro, is a component. The nuts are trying to implement a trading model – a “frenzied development” model to the *tech* startup crowd. This ain’t gonna work. Code has to be written and that needs a technical standard, not a quick profit standard. Trading and suing are as old as trade and sewing. And that didn’t make the internet. Engineering did. And that took a lot of time.
When will these guys learn :/ ?
You are right that the concept of term sheet is going to continue to rise, but in my opinion it will only happen for some time. Businesses have been existent for thousands of years globally and traditionally it is expected that profit is the best source of cash to be put back into business. I see a little paradigm shift with all the VC money coming in and looks like many businesses are created just so that they can be sold off to a bigger or more established business.
The whole thought process somehow does not go well with the basic concept of how businesses have emerged over the years. Call me paranoid but I think in the near future we will see VC money would be focused majorly on growing businesses and then entering into a positive cash flow. That is how the whole law works.
Regarding term sheets well its can be equated to a basic negotation also. People have to be on their toes and be able to take quick decisions, sometimes even in demanding circumstances. That will continue to happen.
Excellent Graphic by the way Mike. Though it looks like it has been photoshopped but nonetheless conveys the sense of the article beautifully
I didn’t realize it till i saw your post … good graphics.
i borrowed it, no idea who made it. if anyone knows, please let me know and i’ll contact the creator for permission.
Mike – just to clarify… TechStars has a limited number of spots. We can’t offer one of just ten spots, and then have the offer sit there for weeks. That’s why we ask for a fast response. If it sits there, then it’s hard to fill that spot if they say no. We’ve lost too much time toward the summer start date. Remember, we have a summer program to run on a certain timeline. People need to move and there are many logistics involved. This is not the same situation as a the VC scenario you describe, because there is no forcing function (start date of a program) to worry about.
24-48hrs?
Some of your reasoning is logical (from YOUR point of view)… But all you are doing is insuring that startups go elsewhere before going to you.
Your should be careful of strategies that discourage great startups from making you the first choice.
well, they already sold one startup to AOL, so they’re doing something right at least.
This is really good article. Good to know about it. BTW Mike … Kudos to you for the decision to not accept the offer with Law Firm. They shouldn’t have brought the Champagne bottle if there was a condition to open it. Really bad on their part.
so revise the term sheet, and put your own “Explosion Date” on it and send it back.
What’s all this fuss about? An offer or contract without a term or drop-dead date isn’t worth anything anyways
Mike, Y combinator gives you 6k per developer.
I just blew more than that in used servers for the LA region of the CDN alone. Click my name link to see.
It’s not enough. A real term sheet is for millions of dollars.
Y Combinator is a freaking joke. pedatacenter.com
has real term sheets. Just a membership to view the real term sheets is more than a Y combinator investment practically.
Why does Y Combinator even exist?
Here kid, here’s a nickle, go buy yourself a server farm to stream some video???
The value, besides getting a few thousand dollars to cover rent, is in the mentoring and the massive bump you get on demo day, which is full of investors. Y Combinator is a brand, and people get tons of value out of it. Not to mention that the companies that apply are usually little more than idea stage. It’s a hell of a deal and Y Combinator could grab a lot more equity if they wanted to.
Sorry my ignorance, how much equity do they get?
From http://ycombina...or.com/faq.html
“How much do you invest?
Usually $5000 + $5000 per founder. So $15,000 for two founders, $20,000 for three. Occasionally we invest more. The goal is usually to give you enough money to build an impressive prototype or version 1, which you can then use to get further funding.
What does Y Combinator get out of this?
Stock in the startup, from 2-10% of it. Usually about 6%. “
I have heard it’s somewhere under 10%. 2-7% depending on the company is what I want to say?
Thanks. I guess if you’re just out of school or still in school it might be an ok deal to get your first thing going.
How many YC companies have received Series A? Less than 10%?
I’m sorry but this is a failure of the brand.
I agree.
Your college fund is probably a better capital pool.
the problem is you guys keep thinking of it as a source of capital. It is that, but it’s much more, too. Any entrepreneur can tell you how lonely the world is when you are just starting out. Y Comb brings a family to the table. Like i said, you wouldn’t understand it until you started your own company.
Isn’t there a valid question that this article and comments don’t touch on?
Is there any evidence that startups that receive mentoring from YC perform better that startups that get seed money from elsewhere or bootstrap?
A failure? Are you aware that there are companies that do well without millions of dollars from a series A? Are you aware of the existence of angel investors? Are you aware that angel rounds can and do sometimes exceed the amounts raised in series A rounds? Are you aware that there are many different ways to raise capital?
And the questions go on and on…
Great post. I indeed seems to be a bit of a joke to sign a term sheet for the numbers that are floating around those kind of investments.
Anything below $100K I’d try to get the seed from family and friends if you can’t make the $$ yourself with the good old utility called work. If you really believe in your idea you’ll be able to make it happen (I lugged around tourist’s luggage in a hotel in Heidelberg / Germany to create my first startup funding 19 years ago.) When your own (or family /friend’s) money is in it, that is where you become a real entrepreneur *REALLY* quickly. This way you also don’t have to sell the shop for two bucks fifty before you’ve wrote your first line of code.
I strongly agree that when you think you’ve got something investment worthy at your hands its better to ignore clauses and shop around before making a decision. If they don’t want you after hat it would have gone foul pretty soon anyways.
Great post Michael, I have missed these types of posts while you were gone. It’s good to have you back.
Also loved the law/legal connections.
If any professional firm uses “force” or “lawsuits” to ensure that a startup works with them, that relation will essentially go no where. But I guess these things are part of the evolution of this segment.
I pretty much echo @david’s point of view. At MVP we adopt a similar approach. We send the top selected startups “letter of intent” via e-mail and ask them to accept or reject it in the next 24-48 hrs. If we hear a NO or Dont hear back, we move to other startups in the pipeline. Its important to handle the scenario that in the real world some startups would like to change their decision even after signing the agreement, reasons could be anything – an offer from competition, a major difference in opinion etc. If they do want to backout, its best to let them go in a manner which is fair to both sides.
For this reason MVP has kept a termination clause in the Agreement. This clause gives both parties right to terminate the engagement with a 15 days notice. If termination is done before beginning of the program, we try to fill that slot from the existing pipeline. In case the termination happens during the program, we return the equity on pro rata basis. For example: if the termination takes place right in the middle of the program – we return 50% of equity. In fact there have been a couple of cases when we have used the clause to handle mid-program termination of engagement.
Its slightly easier to handle for us, since MVP as a firm only invests sweat capital / Intellectual capital in companies, we dont have to handle capital investment aspects. But firms like YC/Techstars can ask the startups to return the investment in full in case of termination, since the amounts are quite small and managable and have some formula to determine how much equity they will retain.
MVP is a scam…
How do you expect any smart founder to offer you equity without any capital investments…
@ ravi: You question is totally valid and its been tough executing the model with zero capital. But we have currently got 10 very good portfolio companies.
@Sameer – thats a case of adverse selection. Good companies who are REALLY confident of their success will not share equity without investments.
What the fuck is MVP?
“Exploding term sheets are nasty. If you don’t know what they are, it’s a fairly literal definition.”
That first sentence completely turned me off to this post. If it’s a “literal” definition of an “exploding term sheet” it fucking explodes – as in boom – all over your face. I literally hate the middle school-esque misuse of of the term “literal”. Literally.
Chill!
no, they do. they literally explode. like Mission Impossible. It’s so cool. Sometimes if you drive down Sand Hill Road you can see these flashes of light in cars driving away. It’s crazy.
They’re written on flash paper with a pencil that has a core of crushed gunpowder. It makes it easy to find out which startup founders smoke cigarettes.
Mike,
This is a very disingenuous post!
You failed to mention that Y Combinator’s term sheet is NUCLEAR! They ask you to IMMEDIATELY make a decision after the interview & their decision!
And you’re complaining about 48 hrs?!
Seriously, how about criticizing YC’s RIDICULOUS terms??? Why are you giving them a free pass and instant coverage here on TC?
Dave
“Why are you giving them a free pass and instant coverage here on TC?”
Hate to break it to you… it’s because you aren’t Y Combinator. Unfortunately TechCrunch has a nasty personal vendetta against you, and now because you’ve criticized this post it’s going to get worse. Dude, you’ve committed startup suicide!
… Get real or get a tissue and next time try to understand the context of what Mike is saying with respect to exploding term sheets. He’s saying that the other term sheet deadlines are artificially short to prevent startups from joining Y Combinator.
Sorry to inform you but I don’t have a horse in this race. I’m not a startup guy. I’m just calling spade a spade and Mike’s free lunch pass to YC is embarrassing for this site.
Man, this really sucks. I was wrong on the internet… Thanks for the apology.
It’s really awesome when you meet people who ‘tell it like it is’, because then you never need your own opinion about anything.
I worked for a startup at Dreamit last summer, thats probably who YC is talking smack about. What happen was we had a company sign up with Dreamit and we all got to meet them and whatnot, then suddenly they stopped showing up and we heard through the grapevine it’s cuz they got an offer from YC. Dreamit thought they could sue, but decided against any action and just let’em go.
BTW, Dreamit is a really great value – as are the other seed programs I’m sure.
We have a more detailed response coming but I’ll add a few comments.
First… not only did the company referred to drop out, but AFTER they attended the start of our program and AFTER they deposited our seed money. We actually tried to work things out but ultimately decided we didn’t want people who would do this in our program and we just walked away.
Second, if you want to make an informed decision, check out http://www.news...ek.com/id/34734 where the founder of YCombinator indicates that people only have FIVE MINUTES to accept their offer and that if they don’t “as far as we’re concerned they’ve failed an IQ test.”
Mike,
I was featured in that article, and I can tell you the reasoning behind it:
It was written when YC was the only micro-seed firm around, so there were no competitive offers to be had. Since YC paperwork is completely standard, the only variables involved were amount invested and valuation — and a smart person would have already come to a decision on what acceptable values were for each. In reality, the 5 minute decision time is really just a formality, as the decision should have been well thought through at that point, and could be made instantly.
Obviously, things would be a little bit different if there were competitive offers to be had at a later point in time, but this is still not the case, so this is really a moot point all around.
1. TC writes a story warning startups against Exploding Term Sheets citing Ycombinator as the source of said information.
2. Your comments point out that Ycombinator in fact was the architect behind the concept of
Expoding Term Sheets years ago, yet that is NOT mentioned in the story.
3. A Ycombinator Hack comes on anc confirms this, saying a smart person would have come to immediate decision on what acceptable valus or not. So why not 5 days? The shill doesn’t explain, nor should he.
4. This story illustrates how TC is so in bed with the VC not the startup. How can you credit Ycombinator with warning against this behavior that THEY invented?
5. Incredible. Carelesss. Irresponsible. Dangerous.
6. Mike: What’s next. An story on the dangers of executive bonuses with quotes from your buddies at AIG?
Dear God.
I really have to get this off my chest, YC is a joke. I never understood why people fell for it. You get $5000 + $5000 per founder in exchange of 2-10% of your company. Of course you’ll have to grovel for days to get that, and be lucky to be ‘chosen’ by the YC Gods.
Ramen Money? Not even. 10K usd is 6842 pounds. Rent for an average 2 bed house outside london (say, wimbledon) is 1300 + charges (400). I don’t know what ‘ramen money’ represents but 7K won’t pay the bills for more than a few months. If you couldn’t come up with that yourself then you have other, more pressing problems in your life.
Honestly YC is for desperate students living in the middle of nowwhere who are facing homelessness otherwise. Anyone not in the above situation could just borrow 10k usd from friends and family.
Or, alternatively, spend a month or do doing turbo-consulting and save up a short runway-egg. It *is* a fair deal, since YC is basically valuing your idea at $100,000 (which seems pretty generous) but really going from the idea stage to working prototype stage is in many ways one of the easiest stages of a startup with the biggest bang on valuation. It’s def better to bootstrap this stage yourself if you can.
What would be much better for the entrepreneurs is if YC just took convertible debt with some special strings attached due to the extra benefits they provide. They’d never do this though, because their goal is to have a home-run here and there that will bring a few million in the door.
Repeat after me: money is not the same as mentoring. You may not value the mentoring as much as some of the YC or TechStars companies. Fine. I know I would’ve killed to have the mentoring and connections offered by them when I started my first company.
I managed to raise $1.4 million from scratch with no network. 18 months later the investors all made a very good profit on an acquisition, so all’s well that ends well. Nonetheless I think they would’ve made even more if I’d had more mentoring early on.
+1
Ha! Love the image.
What a conversation…I think YC is certainly the brand name but others like DreamIt and Techstars are more exclusive and need to build their brand image so they are probably offering more tools to help the entrepreneurs and build a brand for themselves. I think you probably get more for your money with one of the other companies that doesnt accept 60 companies in one summer.
I’m new to this start-up talk, but how much of a finished product do you need before you pitch or show off at a conference. I mean, if you get VC funding that obv goes to improving the site and project but also you can’t pitch if your site isn’t working properly. I’m starting a project but I don’t know how long or how much money it will take for me to launch a decent product.
Family?
Like the Manson family?
Church of Scientology?
Ycombinator’s model is such a failure that IT needs seed money from sleepy bloated Sequoia.
Big deal, Neal.
Hey I think someone told someone to write this article. What great connections YCombinator has, join the program for the TC connection at least
> “So it’s somewhat hypocritical to complain about the same actions by their competitors. As they say, though, they are the last to interview new startups in each summer and winter class.”
Not entirely true — AlphaLab (http://alphalab.org) has a deadline after YC.
Just out of curiosity seeing as though all these VC companies require you to sign an NDA and it not being unusual for a start-up to be in complete sealth mode until release day, whats to stop a cunning startup from shopping the same idea to multiple VCs and getting funding from each. They all pretty much use the same indicators when deciding what things to invest in so if you have an idea that one likes its more than likely there’ll be a few others out there that will like it too.
For the big final release, you pull the plug on all of them except one and move along, from this assuming you get funding from just YC, TechStart and DreamIt for a 3 person company you could easily be looking at roughly 75-100k cash in hand, plus all the services and contacts each of those companies provide, trick is to make sure your face from the startup to the VC is different for each VC.
Just an idea….
Welcome back Mike, great article – they’re usually good, but you did some homework for this one.
Nice.
I was a venture investor in the first round of incubators (circa 1999) and found that the equity stake required as the price of admission had two negative consequences. First, it created an adverse selection dynamic, chasing off the entrepreneurs who had the highest opinions of themselves and their start-ups. Second, once the entrepreneur was in the incubator, there was a pretty consistent focus on value for money and whether the “free” services were as advertised.
This doesn’t mean the model doesn’t work and the conflicts created by the financial relationship are not unlike those experienced between an entrepreneur and conventional venture investors, but these two issues do detract from the mission of attracting launching great companies.
When colleagues and I created GoodCompany Ventures (www.goodcompanyventures.org), an incubator for forprofit social and evironmental entrepreneurs, we decided to operate the incubator itself as a nonprofit and raised enough funding to operate without an equity kicker. We are asking our companies to commit to various forms of social re-investment and are offering our sponsoring VCs a right of first offer, but there is no “pay-to-play” aspect. Not only has the it made the recruitment process easier, but the lack of conflict between the incubator and its mission has attracted lots of support. In terms of content and community building, our experience so far is that we are getting a lot more effort and commitment from really qualified experts who share our sense of mission than we would from paid staff. Our first residential incubation session begins this summer, so we’ll see how the model works soon enough.