Everything just changed in the angel investing world.
Two years ago Yuri Milner, through his investment firm DST, disrupted the traditional Silicon Valley venture capital model when he began investing in the hottest startups – companies like Facebook, Zynga and Groupon – at very high valuations and extremely easy deal terms. He looks brilliant in hindsight, with all of his U.S. investments at significantly higher valuations since he invested.
Most top VC firms have begun emulating DST’s deal structure.
Now he’s partnering (as an individual, not as part of DST) with Ron Conway’s angel fund, SV Angel. And they’re making a bold investment move. This evening they’ve just made a blanket investment offer to every Y Combinator startup in the most recent batch. They’re going to invest in all of them. Every single one. And this is the biggest Y Combinator class to date – some 40 new startups.
The new fund is called Start Fund. SV Angel’s David Lee is managing the fund.
They haven’t even seen most of the startups yet. This is a bet on the quality of Y Combinator startups in general.
All of the new Y Combinator entrepreneurs gathered at Y Combinator headquarters in Mountain View California on Friday evening to hear about the offer, They weren’t told why they were supposed to be there, just that something important was happening. The SV Angel team was there in person. Milner joined from Europe by video conference.
The terms? $150,000 in convertible debt. With no cap and no discount. If you’re an investor you know exactly what that means and you just shuddered a little. Those aren’t terms that most angels can match.
If you’re not an investor, here’s what it means. Yuri and SV Angel just offered to loan each company $150,000. That loan will convert if/when the company raises a proper angel or venture capital round at the same valuation that’s set in that round. Most convertible debt has a valuation ceiling and also gets a discount on conversion. This debt doesn’t.
It’s the most entrepreneur friendly investment that I can think of, short of just handing people money as a gift.
Each startup can choose to take the investment or not. If all 40 of the startups accept the loan then a total of $6 million will have been invested. And Milner/SV Angel say they intend to offer this for each Y Combinator startup in the future, too. That means Y Combinator entrepreneurs will not only get the $15k – $20k from Y Combinator during the first few months of their project, but they can look forward to another $150,000 a few months later. That’s usually enough to complete development and launch a product.
This is a huge win for Y Combinator, and cofounder Paul Graham seemed very pleased when we spoke by telephone this morning. He also says it’s a smart investment strategy. If only a couple of the startups have a large liquidity event it’s likely to be a good investment for Milner and SV Angel, he noted. “This is a hits driven business,” he said.
This also spreads incredible goodwill throughout the young entrepreneur community.
This also puts Y Combinator further ahead of competing early stage incubators/investors. Entrepreneurs now know they’ll be offered easy terms on $150,000 in capital just for being part of Y Combinator. That’s an incredible marketing advantage.
This is not such a big win for other angel investors, who are still struggling with business models and rising valuations. They tend to mob Y Combinator startups generally. And now they’ve got to deal with startups that don’t need cash as desperately, and who already have Milner and SV Angel as investors. That’s two more steps behind than they were before.
SV Angel says that this is a separate process from their normal investing. They’ll invest additional sums in some of the Y Combinator startups just as they always have. They’ve already invested in two from this batch so far, says David Lee, and it’s extremely early in the process.