We’re making a change to the rule for YC partners making follow-on investments. Previously, partners could invest in companies after they had either raised $500k or 3 weeks after Demo Day. This reduced a lot of the conflict and signaling issues, but not enough—partners investing during the batch still caused issues. So the new rule is that partners can only invest some amount of time after Demo Day (we’ll experiment a little to figure out exactly how long) or as part of a Series A.
Our hope is that this will further reduce investors looking for signal from YC partners.
We put this policy in place for the summer 2014 batch, and it seems to be working well.
We will continue to make exceptions to the investing rules when a company is running out of money and about to die, but we think they are good and no one else wants to invest. We may make other exceptions, which uninvolved partners will approve on a case-by-case basis.
While I’m on the topic of reducing conflicts, I also want to talk about our relationship with VCs. Over the years, we’ve had direct LP (with Sequoia) or LP-like (with Andreessen Horowitz, Maverick Capital, SV Angel, Yuri Milner, General Catalyst, and Khosla Ventures) relationships with several VC firms. This caused other investors a lot of consternation.
We still like all those firms a lot, and they continue to invest in a lot of our companies. But they no longer have LP relationships with us, and no information rights or anything like that. We do still have some VCs come in and meet companies about 10 days before Demo Day so they can get some pitch practice. We expect to rotate through a list of trusted investors for different batches.
In the interest of a level playing field, we have created a new email distribution list that we will use for all of our companies raising rounds outside of Demo Day (before or after). We’ll use this email list instead of individual introductions so that we don’t unintentionally miss an investor who might be really interested in a company.
The rules for membership are simple—5 total investments in YC companies of any size or 2 big ones, a positive reputation among our alumni, and no history of bad behavior like breaking term sheets without great cause, pressuring founders into advisor shares in addition to an investment alongside others in a round, etc.
We will of course continue to make introductions to newer investors not on this list as it makes sense. In fact, some day, we’d like to have a larger distribution channel for all interested investors that we’d send companies to and integrate with some crowdfunding companies. But we have to sort through the rules around that first.
In general, we don’t start introducing startups to investors until a maximum of 10 days before Demo Day (and most wait until Demo Day). We also suggest startups take at least about 10 days to get to know major investors before making a decision. We appreciate investors cooperating with us on this; it’s in everyone’s best interest for the startups to be able to focus on their product during the YC batch.
This should address all of the issues around investing we’re currently aware of at YC.