I am obviously late to the Start Fund party (since I don’t blog on weekends and wrote about games instead yesterday).  The Yuri Milner + SV Angels deal to fund YC companies is interesting but I think for slightly different reasons than I have seen mentioned (I have only read a few posts, so quite possible that someone else has pointed this out already). 

First, it aims squarely at the critical funding gap that all accelerator programs have.  Teams can make impressive progress in just a few months, but few of them really get far enough for a full on Series A round to make sense (by which I mean a priced $1m+ round with the majority coming from a VC firm).  I know several teams that went deep into credit card debt following accelerator programs.  YC had already made a ton of progress in addressing that funding gap by assembling a really impressive roster of angels to come in and AngelList has further improved this process.  Now YC essentially has an “underwriter” for that interim round.  This raises the bar for other accelerator programs at a time when several of them are planning to expand (Techstars apparently is adding 10 more cities and DreamIt just announced New York).

Second, this announcement should make clear just how much of a tempest in a teapot “angel gate” was.  When an individual and a single fund can promise to supply capital to an entire graduating class of YC companies, it should be eminently clear that collusion among angels to sustain “unreasonable” deal terms was never in the cards.  The total amount of capital needed by these companies is tiny compared to the overall supply of capital and it was simply a question of time for capital to flow in that direction. 

Third, the economics of this deal seem more like a savvy “media buy” than an investment.  I am saying savvy because I don’t think it will wind up costing much (although patience will be necessary as it may take quite some time for the money to come back).  But because there is no discount to the first round, this debt really does constitute and index on the first round of financings for YC companies and that’s where an index would seem to perform worst as the breakout companies get bid up.  YC’s own index – by contrast – is good because they get in at such a low valuation.  That’s why this is more like a “media buy” in that it directs attention to DST and SV Angels within and beyond YC.

Fourth, it would be great if someone were to try the accelerator model aggressively in other domains.  The Internet is great and I say at least a couple of times a week that it will be transformative, but there are other areas that have experienced amazing disruption and sudden ability to get started at much lower cost that also deserve a similar approach.  In particular I am thinking of manufacturing and biotech.  Disclosure: I am out of my field here, so it is entirely possible that somebody is already doing accelerators for these areas.

All in all then I believe this is a good thing for YC startups, for other startups to the extent that it further improves convertible debt terms across the board, and even for VC firms as even more companies make it across the post YC period.  The only people for whom this is a potential challenge are those angels who were investing primarily as a way to generate returns as opposed to for the joy of being associated with startups and supporting a next generation of entrepreneurs.

I am obviously late to the Start Fund party (since I don’t blog on weekends and wrote about games instead yesterday).  The Yuri Milner + SV Angels deal to fund YC companies is interesting but I think for slightly different reasons than I have seen mentioned (I have only read a few posts, so quite possible that someone else has pointed this out already). 

First, it aims squarely at the critical funding gap that all accelerator programs have.  Teams can make impressive progress in just a few months, but few of them really get far enough for a full on Series A round to make sense (by which I mean a priced $1m+ round with the majority coming from a VC firm).  I know several teams that went deep into credit card debt following accelerator programs.  YC had already made a ton of progress in addressing that funding gap by assembling a really impressive roster of angels to come in and AngelList has further improved this process.  Now YC essentially has an “underwriter” for that interim round.  This raises the bar for other accelerator programs at a time when several of them are planning to expand (Techstars apparently is adding 10 more cities and DreamIt just announced New York).

Second, this announcement should make clear just how much of a tempest in a teapot “angel gate” was.  When an individual and a single fund can promise to supply capital to an entire graduating class of YC companies, it should be eminently clear that collusion among angels to sustain “unreasonable” deal terms was never in the cards.  The total amount of capital needed by these companies is tiny compared to the overall supply of capital and it was simply a question of time for capital to flow in that direction. 

Third, the economics of this deal seem more like a savvy “media buy” than an investment.  I am saying savvy because I don’t think it will wind up costing much (although patience will be necessary as it may take quite some time for the money to come back).  But because there is no discount to the first round, this debt really does constitute and index on the first round of financings for YC companies and that’s where an index would seem to perform worst as the breakout companies get bid up.  YC’s own index – by contrast – is good because they get in at such a low valuation.  That’s why this is more like a “media buy” in that it directs attention to DST and SV Angels within and beyond YC.

Fourth, it would be great if someone were to try the accelerator model aggressively in other domains.  The Internet is great and I say at least a couple of times a week that it will be transformative, but there are other areas that have experienced amazing disruption and sudden ability to get started at much lower cost that also deserve a similar approach.  In particular I am thinking of manufacturing and biotech.  Disclosure: I am out of my field here, so it is entirely possible that somebody is already doing accelerators for these areas.

All in all then I believe this is a good thing for YC startups, for other startups to the extent that it further improves convertible debt terms across the board, and even for VC firms as even more companies make it across the post YC period.  The only people for whom this is a potential challenge are those angels who were investing primarily as a way to generate returns as opposed to for the joy of being associated with startups and supporting a next generation of entrepreneurs.