I don't think this guy made that assertion. What he said was that PG needs to be part of the VC game in order to make money.

The whole notion of YC is that they are seed funding, with the expectation that the startups they fund will be bought (or have some other favorable monetary transaction) by the big companies PG says are unnatural. The article is a nice way of calling PG a hypocrite.

It's a great argument. One of the best counters I've seen to PG's essay, and an angle I didn't even think of. I really hope Paul responds to this, as I'm interested in his thoughts on the matter.

Actually, he explicitly called pg a venture capitalist...specifically, he said:

"He’s a venture capitalist."

You can't possibly take that any other way.

He's using the literal definition though, which basically describes YC: http://en.wikipedia.org/wiki/Venture_capital

From the front page of YC: "Y Combinator is a new kind of venture firm specializing in funding early stage startups."

In essence he's correct, but at this point it's just semantics.

That's sort of a semantic debate, isn't it? PG might not be a traditional venture capitalist, but nevertheless, he invests money in companies in order to see a return. YC just does it on a much smaller scale than typical VC firms.

> That's sort of a semantic debate, isn't it?

No.

There's one very significant difference between a VC and YC. VC's invest other people's money. YC doesn't. VC's may also invest their own money, but this is incidental to their primary business, which is to assemble investment portfolios for other people to invest in. They charge a fee for this, and many VC's make most of their money from these fees, not from the returns on the investments.

This has real consequences. VC's are much more risk-averse than YC, because if they have a bad year it can put them out of business. (No one will want to invest their money in a VC which lost money for their previous investors.) If YC has a bad year they can just shrug it off, learn from the experience, and try again.

This dynamic also changes the VC's risk posture in another way. A VC has much more to lose from a loss than they have to gain from a really big win. If a VC has a really big win, most of the money goes to the investors, not to the VC. The VC's primary benefit from a Really Big Win will be that more people will want to participate in their next round of investments, which is nice, but that in and of itself doesn't make you a billionaire. So VC's are much more interested in avoiding loss than in going after a Really Big Win. YC, by contrast, has nothing to lose from a loss except the money they put in (which is not much), and a lot to gain from a Really Big Win (since they are the investor). This makes YC willing to take much bigger gambles than a VC would. It also aligns YC's interests with the interests of the companies they invest in, since the bigger the company wins, the bigger YC wins.

You're confusing being a VC with the standard VC fund.

You don't need to have the latter to be the former. A VC can use their own money exclusively, and do so all the time. The professional VC's that manage pooled investments of other people are only a subset of the term Venture Capitalist.

In the industry, the term "VC" is used exclusively for people who manage venture capital firms. I'm not considered a VC. Closer to an angel. But that usually implies an individual person. There's no name yet for the kind of thing YC is.

"But that usually implies an individual person"

Not really... http://www.bandangels.com/ What's the difference between YC and these guys? Maybe in the amounts invested.

These angel groups usually have a different structure. You go and present to them and the angels individually decide whether they want to invest. Whereas YC itself is the investor in the startups we fund, as with a VC firm.

Ok and I guess this is a lot different too... (the mgmt team bit)

Q: What does the Band look for in their initial review?

As with most venture funds, the Band seeks to invest in companies with a strong management team, unique technology and a large potential market.

Usually, the term "venture capitalist" refers to those people who manage other people's money by investing in startups, and the term "angel investor" refers to people who manage their own money by investing in startups.

Agreed, but to say PG is a VC is not technically wrong. Under the "real" definition, all Angels are VC's too.

That's why I'm suggesting it's all semantics.

yc has time and effort to lose in addition to money. not the end of the world, but they do have a limited amount of those. i agree yc has less to lose than a big VC investing other people's money, but it does matter to them whether they are making good funding choices or not.

The point is that whatever YC loses, it's theirs and not someone else's. They do not have a fiduciary duty to anyone but themselves. This significantly changes their risk posture. It's not just a semantic quibble.

Yes I agree with that, I was just pointing out that they invest more than the $15,000 per company.

You totally got the intent even if I was wrong on the literal definition.

I'm definitely not calling PG a hypocrite. YC is amazing, is a good opportunity for founders, and is definitely saving some good people from some bad years in the corporate world. I just think that after you've made one big intellectual leap (starting an amazing new genre of investing) it's easy to focus on polishing that discovery rather than realizing that there's yet another leap to make.

(I wrote the original article) Ok, I'm convinced that he's not a VC for the reasons you mention and because he says in this thread that he's not a VC. On top of that the incubation support and the genuine care he gives to the founders is very non-VC.

However, none of that makes me want to change my argument which is based on the exit pressures and structure by which YC recoups it's investment. That pressure is very VC.