My Thoughts on YC's $500k Deal
At Boost VC, we are the accelerator for Sci-Fi. We invest $500k into Sci-Fi founders, because $125k isn’t enough!
Many investors and founders have asked me what I think about the deal change at YCombinator. If you don’t know, YC moved their standard investment deal from $125k for 7% to $125k for 7% and a $375k SAFE that converts with Most Favored Nations.
Which is super similar to the Boost VC deal: $500k at between a $3m and $7m SAFE. But brilliantly they are standardizing the 7%.
Boost VC has been in the accelerator market longer than almost anyone now (But younger than YC). We understand the inner workings, the reasons that certain things exist and certain things don’t. The reason that many accelerators have failed and why YCombinator has ruled them all.
I’m happy to explain both why this is a great move and what they will learn by doing this - and we might be the fore-most expert on this move… because Boost VC did this too, two years ago. :)
YCombinator started as an experiment, or as they put it - a hypothesis - Can young hackers start viable companies? So Paul Graham, Jessica Livingston (Andover Alum), Trevor Blackwell, and Robert Morris ran a summer experiment.
To fast forward to today: YC invented a new business model to invest in a large number of companies. They have changed their deal 4 times from where I sit:
From $15k to $100k
From $100k to $150k
From $150k to $125k
From $125k to $500k (in two pieces)
They have invested in 3,000 startups and have turned the power towards the founder in almost every situation they could.
In my opinion the best marketing they ever did was invent the SAFE, which is so funny to think about and counter-intuitive — to use legal to build a network effect. This established a moat so large, that in almost every VC meeting, someone had to say the words “YC SAFE.” That was developed I believe by Kirsty Nathoo. Give her a high five.
Ok, so almost every move they made was about:
Standardizing business to hackers (Fundraising/Sales)
Standardizing VC to put hackers in the driver seat
And when you look through their decisions in that lens, you will see how powerful they have become. It doesn’t hurt that their experiment worked: Coinbase, AirBnB, Doordash, Twitch and 20 other Billion dollar companies came from the YCombinator program.
Now they have moved to $500k. It makes sense. We wrote a post about this 2 years ago - $125k isn’t enough money for founders building solutions to challenging problems. Again, YCombinator is providing a better service to the hackers. Instead of forcing founders to go fundraise an additional $325k to survive until the product works - they are giving it to them. Again, this is about putting hackers and founders in the power seat.
However, people are wondering what changes - and Boost VC has been running that experiment for 2 years.
What changes is this:
Founders don’t need to think about fundraising any more, they now need to think about sales and marketing, and building a product people want - so the guidance provided may shift a bit.
Founders get more time to build a great product before feeling any pressure to fundraise - Demo day will not be about each batch, it will be about which companies are ready to fundraise.
Seed funds will have mixed emotions on it, which I understand, YC charges a 7% tax to the investors, and now is increasing that tax.
Some will try to compete, and launch accelerators out of their larger funds.
Great companies will keep coming out of YCombinator, as great companies also keep coming out of Boost VC.
In some ways, Boost VC does compete with YC, and you may question why I should be so positive about a competitor going head to head. But without YC, I wouldn’t have started Boost VC - and Boost VC is awesome.
Before I founded Boost VC, I seed invested in 20 startups, some of those ended up being from YCombinator: Coinbase, Amplitude, Plangrid, Wave Mobile Money, ThisIsL… YCombinator made it easy for someone like me to understand the market when I was 26. They reduced the barrier to entry - not only for startups, but for investors. I saw that and wanted to replicate pieces of it.
Boost VC was founded on the idea that the YC model was the best in the business, but there were many markets being overlooked. We had an affinity and a love for those crazy “Sci-Fi” founders, and have ever since been building the Cal-Tech to YC’s Stanford.
10 years and 320 startups later, it still feels like there’s room to run.
This seems like a good move for both the entrepreneurs and YC. Rough numbers .... 125k for 7% is a $1.786m valuation. If you then go onto raise $2m on $8m pre ($10m post) YC would pick up a further 3.75%. The YC model works very well, The choice is to invest in more companies or take more of the companies they invest in. The latter seems easier.
Do you think this is a naturally occurring squeeze on both ends of venture? Great accelerators raising the bar early on and large brand platform investors coming in earlier and earlier.?
Adam: congrats on realizing 2 years ago that bumping up to $500K would be more meaningful for startups than just $100K... and I agree, even though the price of poker just went up, there's still room to run. But maybe you have to be a little more creative figuring out what race you choose to enter ;)