Startable – Healy Jones’ & Prasad Thammineni’s Blog

Pretty intense news this morning, with Y-Combinator announcing that every company graduating from its incubator will now automatically get a $150,000 investment from Yuri Milner (of DST, the Russian investment fund famous for putting money into later stage companies like Facebook.)

Reactions have ranged from “this is the best thing ever” to “threat to the valley.”

Here are my, uninformed 2 cents. Please keep in mind my thoughts are probably going to continue to evolve.

This is probably good for YC. It makes entering the program even more compelling, and is a great way to differentiate from TechStars and other mentoring/incubator models. Really smart move.

If you think that YC is producing anything at all of value then DST has a shot at making some money. So, again, perhaps a pretty intelligent move. I don’t think it’s fair to call this a spray and pray model, since it is just as focused as YC’s business model, although I can’t imagine that Mr. Milner will provide any significant level of mentorship to so many companies (well, at least any level that will add significant value over what the companies are getting out of the YC program.)

If you are one of the YC companies, this looks pretty darn good. But how soon will it be until people start freaking out over the “signaling factor” of having a deep pocketed investor in the seed round. Will Mr. Milner always invest in the Series A round? Or will he sometimes decide not to, thus freaking out all the people who highlight the dangers of taking seed money from venture capital firms? My personal reaction is that the signaling issue is over rated, and any seed stage company would be very happy to get a little extra runway, even if it comes from a deep pocket!

For hackers, developers and other startup dreamers with skillz, this can only be good. Extra $ at seed stage startups means some of you are going to get bigger salaries and higher quality ramen.

For other startups trying to hire developers, the inflation will continue, and this for sure doesn’t help. But it’s probably just a drop in the bucket.

The impact on other angel investors is unclear, since I don’t know the terms of the deal. If the $150k is no strings attached (or if it converts into a different security to match what other angel investors are doing) then it won’t really hurt other angels too much (other than perhaps making less space in YC companies.) Let me explain. If a YC company takes the $150k at the easy-money terms, but is also free to go out and get other angel funding at whatever terms it can negotiate then the outside angels are not really impacted. The startup just gets a little extra special $150k. But if the YC company HAS to take other angel investments at the same terms as this $150k there could be problems, since many angels may not like these terms (heck, it may even make it harder for the YC company to raise $ if this is the case). But I’d be surprised if this money doesn’t just convert into what ever the YC company is able to negotiate with other angels to fill out the round. So I’d guess it probably won’t really hurt angels… would love other people’s opinions.

For venture capitalists, this could be a good thing. More startups getting a little more runway to prove themselves. However, if the $150k comes with terms that it is allowed to participate/really step up at the Series A then it may cause some issues putting together a venture capital syndicate (i.e. may be hard for some VCs to get into these companies if Mr. Milner is always going to be the 2nd member of the Series A deals). But I’d be willing to be the terms of the $150k are pretty lax and that if the Series A investors don’t want to have participation by Mr. Milner’s group then he won’t get to invest a lot at the Series A.

Comments?

Additional thoughts by people smarter than me: http://launch.is/blog/2011/1/31/l006-angels-respond-anonymously-to-yuri-rons-all-in-150k-to.html#

Dharmesh Shah recently made it abundantly clear that the developer hiring wars have reached the East Coast in his massive bounty for new developer hires at his company, Hubspot.

I just heard of an interesting NYC program called the Turning Fellowship that aims to bring new developer talent to New York City. A couple of venture firms appear to be spearheading this effort; PE Hub quoted one of them as saying, “Entrepreneurs complain about a lack of talent in New York City.” No kidding! There is a lack of great development talent everywhere!

Anyways, the program sounds like a good idea, as it will provide students with programming skills paid internships at NYC startups. This could provide very positive experiences to students looking to gain some real-life skills (and help them figure out if they want to join startups when they graduate too!)

Anyone know of other programs like this in Boston?

I’m very pleased to announce that OfficeDrop has launched our first app in the new Mac App Store. ScanDrop Mac Scanner Software connects your Mac’s scanner directly with popular cloud storage provides like Google Docs, Evernote and OfficeDrop’s own cloud filing system. I’ll keep you updated as to how this new distribution channel does for us, especially since this is a paid download. Go to our listing here: http://itunes.apple.com/us/app/scandrop/id412518240?mt=12

We are launching the app for $1.99 in the app store, although we “pre-released” ScanDrop with a great piece of press from Lifehacker last Friday. You can also learn more about ScanDrop on our Mac Scanner Software page.

Awesome post on Quora from the CTO of Amazon.com (Werner Vogels) on the founding of Amazon Web Services. It wasn’t to use up spare capacity – it was a strategic decision to capitalize on Amazon’s technology leadership in building scalable infrastructure.

Amazon, thank you for pretty much inventing cloud computing for startups like mine!

Building a startup is hard. I’m very lucky to have a solid group of entrepreneurs who I get to hang out with and share trials, tribulations, war stories and triumphs.

One of those peers, Brian Balfour, has just written a great blog post on the importance of peer groups for startup executives. Check it out!

On MLK day it is fitting to point out how technology is helping to positively change our world. Twitter (and Facebook) are once again being used as critical communication tools in a regime change, this time in Tunisia. Read the TechCrunch commentary here. Of course, who knows what type of government will replace the old one in the country, but we can hope for the best…

NextView Ventures

NextView Ventures, a Boston are micro-VC/seed fund, has just launched their website. Rob Go, Lee Hower and David Beisel have a solid group of entrepreneur advisors, which I think is probably the most impressive aspect to this new fund. (And I’d highly recommend any of these three to any startup that would be lucky enough to get a term sheet from them.)

Scott Kirsner of the Boston Globe has a great article that highlights NextView and some of the other new local seed funds. One of the most important attribute of these new funds is the fact that they are willing to help unproven, young entrepreneurs get their first startup off of the ground. This is one of the Boston area’s biggest holes – I hope the new funds are able to fill it and are able to encourage other VCs to fund young founders and end up helping keep startups in Boston.

And local seed funds – don’t forget to report your local investments to the databases that keep track of venture investments! We want to make sure everyone knows that the Boston startup community is healthy!

CB Insights has a new post on NYC vs. Boston venture investing, and in particular how New York and Boston compare in internet investing. Since the internet is the sector I really personally care about their data is pretty interesting.

The trend is the really important part of CB Insights’ data, as Massachusetts still has larger volume both in terms of dollars invested and number of companies funded.

NYC vs Boston Internet Investments

The number of companies funded in New York seems to be rising year over year, as does the dollar volume (I’m looking at Q4’10 vs Q1 and Q4 from 2009), as does the dollar volume. Massachusetts’ dollar volume is flat to down and the number of companies is clearly down.

This seems like a potentially bad sign for the New England area… is the internet startup momentum stagnating right now here? I’m not really concerned that NYC is having a good year – in fact I’m happy that the funding environment there seems to be healthy. I’m more worried about Boston’s health.

The difference is even more pronounced at the seed level. While over 50% of the investments (as in companies, not dollar volume) in NYC are seed or series A deals, Boston is 40% of below. So, is there a less healthy seed and early stage environment in Boston right now? And will this result in fewer successful later stage companies?

IMHO what Boston needs is a big, successful late stage exit that spawns a lot of money in potential internet seed investors handing + a large number of new potential company founders. A single home run could really invigorate the local ecosystem.

Eric Ries has a good post on MBAs and startups. My favorite paragraph is:

General management is supposed to be orderly, “strategic” and mostly calm. I have seen founders replaced because their style seemed too chaotic, even though what’s really happening is that they are operating at startup speed. Pivots are disorienting, but necessary. Except when a startup is busy “pivoting” all the time, running around in circles. That’s a waste of time. How do you tell the difference? General management doesn’t have a good answer. As a result, founders get removed prematurely or even entirely exiled.

Eric goes on to explain that he sees a disconnect between the entrepreneurship courses at most business schools and the actual, current best practice at startups. I think he is correct – but isn’t there is also a lag between most academic courses? Anyways, the real point here is that Eric is not just complaining, but is also trying to be part of the solution. He will be an EIR at HBS this year, and he goes on to talk about how he hopes to bring the idea of the lean startup to entrepreneurship teaching. Pretty cool.

WSJ’s Venture Capital Dispatch has a very interesting article with Michael Kim of Cendana Capital. Michael invests as a limited partner is micro-VCs, and the interview by Tomio Geron really focuses on the health of the seed/micro/very early stage market. Pretty good stuff. My favorite question and answer is on what Cendana looks for in a venture fund; I really like the second part because Michael talks about the reserve issue (something I’ve really been thinking about in the angel financing world.)

The initial percentage ownership and the assumptions of percentage ownership after several rounds of financing are important. For example, would a single company return a substantial portion of the fund if the company sold for $100 million? So, the approach the VC is taking with reserves and follow-on investments is important.

Will you lean into winners? Do you have sufficient capital to protect ownership positions? How far can you go to follow on? Percent ownership is most important—having a thoughtful approach to how many portfolio companies in the fund with how much percent ownership in each of them. There’s some who want to incubate companies and own substantially more for helping develop ideas.