It’s a great point. You’re saying that YC allows you to keep working on your company without making any compromises that larger investments might require. Trust me, I see where you’re coming from, and this is a commendable course of action to take. I was not trying to shoot you down in any way; in fact, your product seems pretty cool and I wish you the best of luck. And with YC’s backing, you may even be able to make your own luck

You wrote, “When we got invited to an interview, and eventually asked to be a part of YC, we didn’t stop to think, ‘What if we could have gotten a better deal?’”

Well, this statement pretty much says it all In future deals (investment or otherwise) you will probably want to ask that question. I’m sure this will be hammered into you by the end of the YC speaker series, if it was anything like ours.

There are a thousand things that could have gone differently in the trajectory of Directed Edge, but we basically thought, “What the hell, we’ll send in another app.” When we got invited to an interview, and eventually asked to be a part of YC, we didn’t stop to think, “What if we could have gotten a better deal?”

The largest unclear point seems to be in the nature of YC’s dilution — it’s simply not comparable to the way that VC-style dilution works: you give up no board seats, I’ve never heard of YC blocking an acquisition, they don’t bother in your day-to-day stuff unless you ask them to. So what you give up is a small slice of an eventual exit, if that happens.

So will YC get a huge return on their investment in us? I certainly hope so. If I end up with a $100+ million exit, I’m hardly going to begrudge YC their small slice.

I don’t doubt it. YC and PG are powerful and widely-appreciated endorsements in the investment community today.

“Again, the mythology around YC would seem to indicate that it’s mostly teams with just an idea — but as the brand has gotten stronger, that’s less and less the case. There were a number of teams in our batch that had been on their project for 3-12 months by the time that YC started.”

I’m sure that’s the case. But just because YC’s brand allows it to make less risky investments for the same terms doesn’t mean that it’s necessarily a good deal for the company receiving investment.

YC was created to allow founders to go from idea -> product/prototype without having to take on debt or waste time fundraising. My company was funded by a startup incubator (not YC) when we were in our idea stage, and I certainly appreciate the role that incubators like ours played in catalyzing our initial forward motion.

But I just wonder, with a healthy dose of skepticism: if an entrepreneur has already spent 12 months of his or her own time derisking a business idea and building out a product, isn’t that business, most likely, a much less risky investment than a back-of-the-envelope idea? Doesn’t that mean that taking the standard YC investment terms is a really “great deal” *for YC*?

I also wonder about something that an entrepreneur said to us at our incubator program this summer. That was, “The best strategy of a VC is to wait. If you need money / are unknown and they have money / are well-known, the way for them to get the best terms and ensure the deal is right is to simply *do nothing* and wait. While they are waiting, you spending through your savings and simultaneously derisk your business. Then, when you’re truly desperate, they’ll invest and dictate the terms, or take a pass. So why shouldn’t they wait?”

Did YC exhibit VC behavior by waiting on DirectedEdge? And if YC is funding companies that are a year in, is it really “incubating”, or is it behaving more like an early-stage investor (e.g. First Round Capital), but with poorer terms for the founders?

I don’t think these are unreasonable questions. That said, I appreciate your response and it sounds like you thought through the decision.

One final point of comparison: after 6 months of development, Mint.com founder Aaron Patzer raised $725K, including $325K from First Round Capital. (http://www.businessweek.com/technology/content/sep2009/tc20090915_065038_page_2.htm) You might argue he’s an exception — something to strive for. Sure. And I don’t know the exact terms of that deal, but entrepreneurs I’ve met from FRC-funded companies seem to think that their terms are generally among the best in the industry.

Though it would have been rational of Aaron to raise $20K for 5% on his first day of the project, 6 months later it looks like his company was much further derisked, which warranted a much higher valuation.

Imagine for a moment that Aaron had taken a YC investment at that stage, rather than raising from FRC and others? I’m not a VC math expert, but here’s a rough estimate: a) Mint’s exit was at a $170M valuation; b) YC’s 20K earned 5% stake; c) YC’s stake would be worth around $8 million; d) that’s a 400x return.

As you commented, there seems to be a great amount of value of getting the YC stamp of approval and being part of the internal YC community.

I have a question, as it’s not clear if the company is based in the US, Europe or both?

Nika

YC tells you that because honestly, it’s true. But if you’re worried about that, I’d suggest not going through YC. In our case, we were convinced, and still are, that being a part of YC would add enough value to our company that we would come out on top in the deal. We had other investors approach us, but after pitching the first couple we realized that raising money was going to be too large of a distraction for the point we were at.

Again, the mythology around YC would seem to indicate that it’s mostly teams with just an idea — but as the brand has gotten stronger, that’s less and less the case. There were a number of teams in our batch that had been on their project for 3-12 months by the time that YC started.

When your startup is just an idea, getting 15-20K for 5-10% of your company is probably a good idea. But a full year in, you are supposed to be a real company. YC’s standard investment seems like a terrible valuation.

I know YC will tell you it isn’t really a valuation. But at this point you should be weighing a YC investment against other potential investments, and I’d bet you could get way more than 15-20K for that significant a stake of your company.

I’d be interested to know if you looked elsewhere, and what your motivation was for even *considering* a YC investment after spending a full year to mature your startup beyond the risky “idea/early prototype stage” that YC usually funds.