# Dalton & Michael: Why Investors (Secretly) Love Y Combinator

**Author:** Dalton Caldwell, Michael Seibel
**Type:** Video
**URL:** https://www.ycombinator.com/library/Jd-dalton-michael-why-investors-secretly-love-y-combinator
**YouTube ID:** bgp5QZwuNQI

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It's incredible how many very successful YC startups there are. Just look at the [**YC Top Revenue
list**](https://www.ycombinator.com/topcompanies/revenue).

Almost all of those companies raised their first rounds from investors that saw them debut at YC Demo Day. YC is
undeniably an integral part of the venture capital ecosystem, helping to shine the first spotlight on many of the
companies that go on to be featured high up in a huge font on the top VC portfolio pages.

But how do investors *really* feel about YC? In this episode, Michael and Dalton dig in\!

## Transcript

if you look at the YC top companies list anyone can look at this this is on the internet and you actually look at who invested in them it's all the biggest restaurants so this is Dalton plus Michael and today we're going to talk about why the best investors secretly love YC very secretly put this up first yeah so so the key word here that Michael is saying is secretly because if you you know if you talk to a lot of investors if you read

their blog post to social media a recurring theme is YC sucks oh man maybe it's you know why seeing okay if you must but it's you know not as good as just going directly to our funds because we're number one and you should raise from coast and so we are very used to seeing this and we often get questions about this from Founders which is like hey I I heard from investor X that they said that you know doing YC doesn't make sense for me what

what's your guy's response to that often while passing by the way yeah that's the best part is of course the investor is not investing in them either yes they leave them with a partying gift yeah um and so what we wanted to talk about in the video today is what's actually going on and the fact is the top investors invest in YC companies a lot all the time all the time and there's a there's a bit of a gap between what they will say to folks that they are passing on yes and how they actually

behave as investors so we're going to jump into that so let's start with some stats right so a16z Andrews Nora it's pretty famous impressive investors so they've done 234 investments into YC companies uh Sequoia another impressive investor 139 investments into YC companies Founders fund a very controversial counter-intuitive investor has done 104 Investments NYC companies and I could keep going yeah

and so if you look at the YC top companies list anyone can look at this this is on the internet and you actually look at who invested in them it's all the biggest it's all the biggest restaurants and so so by definition these investors are voting with their pocketbook to invest lots of money yes across the board into the ycee portfolio because they like money and they're smart and there were a lot of excellent YC companies to invest in well let's dig into that right so in some ways it we're kind of providing a service to VCS

and like what what do you think the vcues are consuming here like why why do you think they like to invest in ycee yeah the major reason um a normal venture capitalist would not invest in a startup is that it's too early yes and too early just means there's not enough signal that this is one of these epic standout companies which is their job to invest in yes the average VC only does one deal a year maybe two deals a year yes and the average firm has what five to ten Partners there actually just aren't that many Slots of deals to do

and so the feedback is generally this is too early for us right the service that YC provides is it is a very hopeful filter yes for what is good and worth paying attention to yes by getting the YC stamp on it it's odd we we are filtering it we're doing that job for them we're taking what is a 20 000 applications yes and turning it into 200 something companies and even then they can get to know the YC companies

and keep filtering even after that yes and so having any kind of signal is very helpful yes in addition the fact that we get the companies financed they don't just run out of money what often happens uh when you're going to to race from VCS they say this is too early and the Founder's like whoa we're too early for them and you know we don't want to do YC and so then just uh shut down yeah the company doesn't exist yeah and so to the extent that YC just gives these companies money to have a shot at getting far enough along for a VC to

invest yeah that is a helpful service yes in addition the advice and the network we give the companies helping them with sales helping them with pitching helping them pivot a lot of a lot of these companies on our top 100 list are companies that pivoted during YC yeah and that's a value-added service we're providing to the investor Market is um giving these companies an Avenue yes to change their idea I'm going to try out a a really really crazy kind of analogy on you I think these best VC

firms are like really high-end restaurants and I think that um they like to give the impression that they go out to farms and they hand select live chickens and live they're farming themselves right the chef is exactly literally it's farming them exactly yeah but when you actually look at most of the products on their menu they come from purveyors who do that work for them who identify the best ingredients who prepare the ingredients who deliver the ingredients in a nice box in

a nice package and I think that it makes sense if you're one of those firms and they had so much demand that you'd prefer things in a nice package pre-selected so the service that YC provides VCS But It's tricky because these VCS also all say we want to be your first check yep so what's the difference between them seeing that and why it's hard for them to actually be the first check in most companies I think in practice it's it's scary when your customers first

talk to someone else before you because you can get disintermediated in the future and one of the things that YC does that investors don't love is we encourage you to talk to many investors yes instead of talking to just one investor and so again you can imagine that is not their favorite thing that we encourage Founders to speak to many investors in parallel instead of one sure and so that is a bit frightening and so when push comes to shove they want to be the first people to talk to you to get the first check so it's a non-competitive conversation

but look they just are not in a position to do that many deals because of how the firms are set up yes they also have to worry about conflicts where if they invest in the wrong company earlier they're not going to be in a position to invest in one of their competitors in the future if they're taking board seats they invest in an Uber competitor super early and then Uber comes makes it harder they can't write a check um in addition they're just they don't have enough data like they need data to invest in things at a higher valuation at a later stage and so what they want

the perfect situation for a VC is to see everything to meet with every company that they can have the founder love them yes and think that everyone else that is not them is bad like it's a luxury good like you're trying to create brand Equity with the founders fair enough yes and then when every six months the founder should come back and Pitch them again with a smile on their face yes so they're never in a position that someone else funded them yes and so what can often be tricky

with YC companies is once a company does YC they're less likely to do all those things all those things and they're much more likely to be desired by a number of other investors which is again competition is often bad for profit margins and so you know again you can see the dynamic here but at the end of the day if one of these investors we just you know Michael just listed them if there's a really great company they have to invest they're not going to say no we don't want to invest in this company um if they need YC because they're smart

so if we think about this conflict right why do they love YC because we can kind of package companies for them in a much better way and because YC companies tend to be further along than the average company walks in the door and more technical than the average company walks the door why is that love secret because all things in Miko of course they'd rather be the first check yep and they know if the company does YC they won't be the first check so it's kind of a really tricky game what about seed funds how does seed funds kind of play in this dynamic

yeah I mean again they want to be first checks they have various ways where they want to meet with as many companies as possible maybe some of them have a thesis yeah but essentially they want to buy 10 to 20 of a lot of the companies yes which is completely not compatible with a company doing YC and so it's much more of a zero-sum situation where any kind of content marketing or viral memes you could put out yeah about about ycee

are are essential if you're doing a seed fund yeah because your job is to be is to get a big ownership in the company and then try to get the VCS to fund them in the next round yeah I would say that seed funds are also more limited than traditional VC funds because if a VC fund misses your a they can still do your b or your C whereas your seed fund kind of knows their primary opportunity to invest in you is at the first round yeah they can't catch you in the next round and they also know that from that round forward they're probably diluted and that's why they try to get as big of

a chunk at as low as a price I think you know seed funds we could have given numbers for seed funds every thousands tens of thousands of checks NYC companies but the reality is is that when they write those checks NYC companies they're at higher prices yeah and so you know you can't blame seed funds for saying we don't want you to do YC when if they find you outside of YC they pay five to ten million dollar price their evaluation when they find you after demo day they pay a 15 to 25 million dollar price you can't they can't blame them but I think as a

Founder you need to understand these Dynamics right like the people who are marketing to you are running their businesses and those businesses have Dynamics you understand those Dynamics we're running a business too right um You can make the best decision for your company and the important thing you should be thinking about as a Founder when someone is giving you advice about all this stuff is are they offering to invest yes and if someone is literally offering to invest you should take them a lot more

seriously if someone says I want to invest this amount of money yes and you should you know not even apply to YC and take the money and all that yeah man maybe you wanna that's not crazy it's not the worst offer yeah like that's that is reasonable but the weirdest formative advice is someone that is aggressively not investing and coming up with excuses about why you're not ready or you need to talk to some other people or come back in six months yes and that are actually giving you advice to not raise money from another investor including you know such as YC yeah

because reasons so no I think to to wrap this up right I think that I love about what you said is that if you were to look at the best YC companies all the best VC firms and all of the best seed funds have invested in them and so maybe you should spend a little bit more time looking at what people do rather than what they say or they meme or they tweet yep all right great chatting thanks

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