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#
Healy Jones | 
06 16th, 2011| 
