As the article says, YC is running out of money. They can’t fund the existing companies at the original levels. Shrinking number of companies helps in the long term, but not in the immediate.
1) It's not quite accurate to say that YC is running out of money, though I could see how the article could read that way. YC is fortunate to be well-funded. However, we saw that if we continued our previous pro rata policy, that that could eventually happen someday, so we made a proactive adjustment well ahead of time.
2) One of the consequences of our old pro rata policy was that it left us without control of how much money we spent. Because we committed to investing in every round of every YC company, our spending was dependent on how many companies raised money, which turned out to be hard to predict. Imagine running a company where your monthly budget could vary by millions of dollars and you wouldn't know until the end of the month how much you'd need!
3) As far as I know, no other investor in the world has a programmatic pro rata policy (what YC tried from 2015-2019, which we are stopping now per the article). The whole idea was a bit of a crazy invention, and while its motivation was good, unfortunately it turned out to have too many drawbacks.
That is true, but I still don't get why this YC announcement wasn't accompanied by an announcement to reduce the class size, which will definitely help in the long run in terms of retaining funds.
I do wonder whether this was actually a strategic decision -- if it simply is more profitable to pick winners in deciding whether to participate in follow-on rounds; or perhaps YC would describe it as not picking the companies that don't have a clear path to monetization.
In other words, I wonder whether the "we didn't realize how hard it would be to raise the quantum of capital implied by our initial commitment, and also, it turns out we don't like running a big fund" explanation is not the real reason they're doing this; and whether the real reason is in fact that they've realized that being able to exercise discretion in follow-on rights has a tangibly positive effect on fund returns. Which makes sense!
The question for YC leadership is whether, in a world in which there were no issues with fundraising or fund operations, they would commit to follow-on participation for every company. If that's the case, and they would like to maintain a YC culture of committing to all future funding rounds for all YC companies, why not fundraise a special purpose vehicle for the funding shortfall to fulfill the commitment that was just abrogated? Give first dibs to current LPs....I bet it would be multiples oversubscribed. With that covered, YC could downscale class size to the point they can continue the full funding commitment using LP funds.
Agree. The blanket investments on later rounds seems like a weird policy regardless of fund size. Some YC participants are going to be weaker than others, and as someone said elsewhere in these comments, YC probably has an idea even before the class is over simply due to having more intimate exposure to the the companies. Unless there was some sort of implicit pump and dump, why bother throwing good money after bad on the underperforming alums?
