Is The Facebook Fallout a Y Combinator Fallout too?

So today, Paul Graham of Y Combinator sent a letter to all the YC businesses, telling them that, as a result of the Facebook IPO, they should hunker down and reset expectations on the ease of capital and company valuations.

All I can say is, FINALLY!

It’s ironic that the very person to raise founders onto a pedestal and allow them to become starstruck within Silicon Valley is also the same person to warn them of disaster.  Is it unfair for seed investors like Bee Partners to expect some moderation from YC counselors and advisors of company valuations and financing structures?

All due respect to PG – he’s masterfully encouraged venture creation and has pooled extremely valuable resources towards major talent.  At the same time, I fear that many YC companies will falter as a result of under-representing the challenges that companies face post-seed funding.

I’ve seen YC convertible note caps rise 30+% year over year.  And I’ve heard the responses from entrepreneurs as to why their caps were so high (That’s the market, Michael.  Get onboard…FOMO!).  Perhaps to my detriment, I’ve passed, and instead decided to be valuation sensitive.

At the same time, non-YC companies with similar risk attributes and similar ‘early wins’ continue to raise on more realistic initial valuations.  They are equivalent seed investment opportunities in my mind, and the YC badge doesn’t deserve a 2-5x valuation.

Now what?

  • For other seed investors, let’s not let a little down round get in the way of funding some great businesses.

  • For lawyers, dust off your Conversion Amendments so companies can get a fresh start without the burden of a heavy note.

  • For vintage YC businesses returning to the market, come talk with me, I’m looking forward to hearing the story.

  • For new YC startups, please enter your fundraising phase with a more practical view to valuation.

Yes, the Facebook IPO will probably mark a blip in valuations, especially consumer plays.  New financings may dip for some time, but that has more to do with macroeconomic conditions than Facebook.

But good companies will continue to get funded.  So for all you founders out there, keep at it!

(Side note:  I’m a big fan of what YC and other accelerators offer to young founding teams.  Perhaps a topic for another post…)