Here's What Insiders Have To Say About Yuri Milner And Ron Conway's $150K Handouts

Ron Conway

Photo: Flickr/DaveMc500hats

A week after our proposal for 500 Y Combinators (L005), the most exhilarating news in the history of internet startups broke this weekend. Well, perhaps second most exhilarating after AOL went flat-rate in 1996.  Yuri Milner of the Russian investment firm DST, along with legendary investor Ron Conway, offered all Y Combinator startups from this year’s class a $150K investment in the form of a convertible note — without a discount.  

This means the startups get $150K in (basically) free money that they can spend and convert to stock at whatever terms they can get in the future. If a startup can use that $150K to get to $15M valuation in six to 12 months — not an impossible task in this market — DST would get a meager 1% for taking all the risks of an angel investor.

In poker terms, Yuri and Ron have gone all-in blind (betting everything without looking at their cards). DST was considered the “dumb money” in Silicon Valley for the past couple of years, investing in startups at valuations that were well above what anyone — VC, angel or otherwise –would consider investing in. 

It’s a strategy that has worked brilliantly, getting DST into Facebook and Zynga at a price that would allow them to cash out at five to 10 times their money when — not if — these firms go public (or shortly there after).

While Yuri might be the “new money,” he’s anything but dumb. Ron Conway’s a legend, and having his stamp in your startup passport is worth giving him free shares. 

With this deal, they’ve established themselves as Silicon Valley’s new power couple: Ron in the early stage, and Yuri, the later stage. 

The people we’ve spoken with so far have been thrilled, livid and dumbfounded by the news. Of course, in the Valley, the money folks generally don’t comment publicly about other people’s strategies.

That’s not to say they don’t comment behind the scenes — or to us. 

After we heard the news, we emailed all 250 members of the Open Angel Forum, as well as around the top 250 folks on this list — as measured by a Klout score of over 40 (thanks, MailChimp), and asked them for their off-the-record comments.

And comment they did.  

1. Founder: “Dumb money investing in a dumb way.”

2. Founder/Angel: “We can call it a bubble now, right?”

3. Non-US VC: “LP without the management fee.”

4. Valley VC –> New York VC: “What happened to the concept of competition?”  

5. Valley Power-angel: “An important part of being a first-time entrepreneur is struggle of getting someone great to believe”

6. Media VC: “Bad news for super-angels, as it will drive up valuations even more.”

7. Founder/Pundit: “This is the end of angel investing.”

8. Angel: “As an Angel.. it takes most YC companies out of my target investment range.” 

9. Super-angel Dave McClure: “Great/smart move by Ron & Yuri”

10. Super-angel: “PR and ego drive this more than any sound market principle.”

1. Founder: “Dumb money investing in a dumb way.”


1. Founder: “Dumb money investing in a dumb way.”

LAUNCH Analysis: Cynics see this as an easy bet on Y Combinator’s awesome track record so far — and it is. Just about anyone who has aimed at the YC dartboard has picked a winner. That success in turn drives leading entrepreneurs into the program. It’s a wicked loop.

Betting on YC right now is like betting on Michael Jordan or Mike Tyson to win in their prime — not difficult andalmost safe.

Since Milner & Conway have billions in Facebook chips sitting in front of them, $6M to fund Y Combinator’s class of 40 startups is, essentially, nothing. 

In fact, because of the $2B to $3B they could make from Facebook and Zynga,  they could buy out YC’s graduating classes for the next 10 years–or 1,000 companies–and still be well in the black.

2. Founder/Angel: “We can call it a bubble now, right?”


Founder/Angel: “We can call it a bubble now, right?”

LAUNCH Analysis: While this announcement has yielded a lot of bubble headlines, it’s an insignificant amount of money to someone who has billions of dollars worth of Facebook stock. Consider this investment “monetized marketing” for Ron and Yuri. 

Of course, that doesn’t mean the national press will not obsess over this as “startup mania” or the “second internet gold rush.” How you execute something like this speaks volumes (e.g.,  Sequoia Capital became a limited partner (LP) in YC years ago, but didn’t signal it with fireworks and champagne corks). 


3. Non-US VC: “LP without the management fee”


Non-US VC: “If you invest as LP in a seed capital fund, you would love to have a

team like Y Combinator. [You] would give them the money and expect them to build a nice portfolio (and pay 2% management fees). Here Yuri and Ron are doing exactly that, but ex-post, after really knowing the GP is delivering, and not paying any fees…..

Is this a new model for early stage funds? ‘Show me the portfolio and only then I give you the money?'”

LAUNCH Analysis: Well said, and we’re sure this is not lost on some LPs. Look for a high-net worth individual to offer $50K to each graduate next.

4. Valley VC –> New York VC: “What happened to the concept of competition?”  


Valley VC: “What happened to the concept of competition?” 

New York VC: “The issue around all the Y Combinator deals being locked up in the YC club prior to opening up to investors in demo day may have just gotten worse.”

LAUNCH Analysis: Competition exists in two contexts right now: VCs investing in YC companies, and startups getting accepted to YC. 

On the first issue, YC founder Paul Graham is alienating angels by either giving “pocket listings” to power investors — or by giving the appearance of doing so. This deal reinforces the common belief — correct or not — that if you come to YC demo day looking to invest, you’re too late. 

Paul has a high-class problem: everyone wants to fund the companies he is accepting — blind. The only way to do this “fairly” would be to have a stock auction — and the U.S. Securities and Exchange Commission might have a problem with that.

That said, we’re probably only a year away from YC companies getting listed on SecondMarket before they graduate. 

Second, YC is starting to look like a lottery. Getting accepted is an  accomplishment, but let’s keep in mind it’s 12 dinner parties with really good guests, a killer mailing list and ramen-level funding. Just because you get accepted to YC doesn’t mean you’re worth investing $150K in — or that you’re going to have a huge exit. 

People are very turned off by the concept of investing blindly. The process is supposed to be more discerning then buying out the store. 


5. Valley Power-angel: “An important part of being a first-time entrepreneur is the struggle of getting someone great to believe in you.”


Valley Power-angel: “I believe an important part of being a first-time entrepreneur is the struggle of getting someone great to believe in you.

Just because Y Combinator endorses you doesn’t mean you’ll succeed. A huge part of your success is who you can attract to your business (employees, investors, advisors, etc.). This method of investing is akin to casting a net to catch a fish and might give entrepreneurs the false sense that they have been endorsed and have a chance at raising more money. 

Everything changes when your company has pre-revenue investment and you make decisions in a different way. It affects everything. I know 150k isn’t a lot, but it will still change how you run your business and will impact your future investors regardless of the terms. Who you get to follow on might not be who you would have gone after if you had turned the money down. I’m not sure how this money adds value other than helping to operate your business. It isn’t smart money, that’s for sure.

On the other hand, I know how hard it can be to get your first 100k and some would argue that you’d be dumb to walk away from what seems to essentially be free money.”

LAUNCH Analysis: This speaks for itself, and we agree. Taking the fight out of the game could be a dangerous move for the startup industry as a whole.  

6. Media VC: “Bad news for super-angels, as it will drive up valuations even more.”


Media VC: “Bad news for super-angels, as it will drive up valuations even more. Overall not great news for the marketplace in the long run: returns for early-stage investments will be driven down even more which will mean less money available down the road but hey, it is a free market.”

LAUNCH Analysis: Early-stage valuations are not sustainable, and the current crop of new angels is going to get disillusioned in 2017 when they look back on five years of investments and have largely negative returns. Valuations are turning, angels are the dumb money, and many smart angels are sitting 2011 out. 

7. Founder/Pundit: “This is the end of angel investing.” 


Founder/Pundit: “This is the end of angel investing.” 

LAUNCH Analysis: Absurd? Hyperbolic? Yes. Especially since the last time we checked, Facebook, Twitter, Zynga, Linked, Groupon and Netflix were not YC companies. There are many more startups out there that the latest centimillionaire can blindly fund.  

Second, $150K represents (in Silicon Valley’s 2x pay scale) one year of one senior engineer, a $15K placement fee and the $14 a day in free meals that is now standard. The typical angel investing round right now is $500K to $1M, meaning there’s room left for others.

But if five VCs, angels or high-net worth individuals show up at Paul Graham’s door tomorrow and say, “Here’s $6M for next year’s crop — and we put a little something for you in the envelope,” well, then we have a serious problem. 

8. Europen Angel/Founder: “As an Angel.. it takes most YC companies out of my target investment range.” 


Europen Angel/Founder: “As an entrepreneur I think it’s an amazing demonstration of a large/mid cap financier placing a large spread bet across a portfolio – and [I] love the statement that it makes. I also think it will pay off as YC has a demonstrated track record and should create some strong companies. I hope it will also encourage YC to expand their footprint across Europe, where they’ve been thin previously (DST is Russian-based with strong ties to the U.K.).

As an Angel investor, I hate it, as it takes most YC companies out of my target investment range. I think it will, in many case mean many of these firms will skip their Angel round entirely – which is a very bad thing. Not simply because I would like to invest in attractive companies, but because the strategic, mentoring and advisory role in operating, growing and business development that these firms would normally receive from Angels may be lost. As an investor I would worry the firms will have just enough money to move forward, but not enough coaches to improve their technique.

Lastly as a mechanism, I think this is a fascinating “spread bet” for a firm not short on cash. Outsourcing your due diligence to YC is, what I think, may become a model in the valley and elsewhere as VC’s cope with the challenges of investing in today’s businesses, which are more agile, have lower capital requirements and in a more competitive investment landscape.” 

LAUNCH Analysis: More confirmation on the theme of awesome in scope, intelligent to bet on YC and dangerous muting of angel investment in YC. 


9. Super-angel Dave McClure: “Great / smart move by Ron & Yuri.” 


Dave: “Great / smart move by Ron & Yuri. [It’s] also great for YC, increases their visibility and benefits to entrepreneurs and it keeps them at top of incubator food chain.

Obviously it’s a great deal for YC founders, and extends their runway by factor of 6+, likely gives them 6-12 months or more additional time to get product / market fit and secure larger funding.

It’s not clear how it impacts other angels / seed funds / VCs, although it reduces available early-stage opportunities in YC companies and perhaps forces them to set a higher valuation. It also probably squeezes seed funds / super angels a bit on the YC companies, although it likely impacts less well-known angels more than established investors.

Less impact on non-YC startups, since the terms are really about PG’s selection ability & YC screening, not the realities of the market. It may inspire competitive moves.

Overall: [I think] it validates the YC program, somewhat less so the rest of the early-stage incubator market. It probably pressures investors & other programs to differentiate — including our own 500 Startups. but since YC was already best-in-class, I doubt these terms get offered by others to rest of market… but we shall see how it plays out. [ ]

Certainly made for an interesting weekend :)

Above aside, we are probably more complementary than competitive with YC — we did ~10 YC companies last year — and we were already differentiating with design & marketing resources, focus on distribution platforms, larger check size, etc.. still, it sure did make me sit up and pay attention!”

LAUNCH Analysis: Dave’s wondering if he should offer $75K to each YC company for four years and rename his firm 500 *YC* Startups. :-) 


10. Super-angel: “PR and ego drive this more than any sound market principle.”


Super-angel: “There is no analysis in the world that supports this new program as being a good investing decision. PR and ego drive this more than any sound market principle.

The investing community will try to absorb this new way of doing business (no cap, no discount notes), but ultimately, value-added angels will leave the space if this takes hold. Replaced by armchair bull-marketeers who think it’s cool to be called an angel investor.

Blindly rallying around populist war cries of ‘let’s put entrepreneurs first!’ without deliberation will only serve to undermine the startup ecosystem.”

LAUNCH Analysis: Wow. 

In Summary: Obnoxious? Brilliant? Unfair? A Bubble? Yes!

At the end of the day, it’s considered poor taste in the Valley to flaunt wealth wildly like Yuri and Ron are doing.

It’s like walking into a fine-dining establishment, opening the menu and saying “Yes!” to everything. 

It’s Saudi Prince-level obnoxious to show up in the Valley and go Oprah on the market, “Look under your chairs… you’ve all got $150K!” 

And it’s extremely “bubbly” behaviour to throw money around like this. Everyone who lived through the dot-com bust is desperate to keep people quiet while the valuations of these companies rise steadily. 

Certainly everyone wants to make a lot of money, but they don’t want to send a new “bubble” message to the public via the press. When you start sending signals of easy money to the public, dentists or dry cleaners dump their life’s savings into Snowball or TheGlobe.

But just because it’s in poor taste doesn’t mean it’s not also totally awesome (and ballsy!) 

It’s just that buying out the store just feels, well… gauche… 

After all, Facebook’s not even public yet! Spending wildly like this feels like a bunch of house flippers coming into your neighbourhood and buying up houses [hey, real estate market crash – how’re you?]. 

On one hand you’re happy to see neighbourhood values go up, but on the other, you don’t want to be in a bubble when it pops. 


Well, I Iove it. 

 It’s the ultimate marketing campaign, and if I had $100M burning a hole in my pocket I’d do the same thing. 

By doing a little “splashy cashy,” Yuri and Ron have become LPs in YC without having to pay management fees to Paul.

Who amongst us wouldn’t want to do that? 


What does this mean for the accelerator space? Well, as we recommended in L005, it’s time to build 500 accelerators in order to inspire and educate a new generation.

And that’s already starting. The White House announced today that David Cohen is taking TechStars global by syndicating the model — for free — in a TEDx kind of way. Stay tuned for more on that this week from LAUNCH.  

all the best,

Jason & the LAUNCH Team (Kirin, Kate, Carolyn, Krute, Lon and Nick). 

This post originally appeared on the LAUNCH Conference blog.

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