is Start Fund a “smart” fund?

Techcrunch reported today about the new joint venture between Yuri Milner of DST fame and super angel Ron Conway. Called Start Fund, this new investment vehicle will give every single YCombinator company a $ 150K debenture with no cap and no conversion discount.

As an investor, I see some potential issues with this. For one, YCombinator and similar accelerators may have different objectives than venture /super angels. They are quite happy when companies get to break even on tiny amounts of capital. Are Start Fund’s investment objectives and criteria fully aligned with YC?

Also, while Yuri is investing his own dosh, Conway’s SV Angel Fund raised $ from outside LPs for the 1st time last year (I think). So, now the investment decisions for a portion of their money are being outsourced to Paul Graham (founder of YC). If I were an LP there, I might have some concerns. As TC reports, the team behind Smart has not even met all the companies it has committed to invest in.

Finally, this move increases the already massive hype around YC and its companies. I just hope that does not translate into bad (read: over-priced) follow on financings.

Investing in companies you have not even met is bubble-like behaviour. Even if the $ amounts are small. I am not sure it’s the smart way to go.

  • http://www.google.com/profiles/ademello Aaron deMello

    Jason Calacanis did a great analysis in his newsletter, carefully writter after speaking with various VC "cognoscenti." Personally I think that Yuri & Ron are very smart, and this is an efficient way to put their capital at risk. It would be nice to see a clone of this in Canada, or especially in India where I am now. Free access to capital for worthy startups is what is desperately needed, and small amounts like $150k are enough to prove web-based startups these days. It would be nice to see a clone of this in Canada, or especially in India where I am now.

    • http://startupcfo.ca Mark MacLeod

      Aaron, how long are you over in India for? That sounds like a great market for accelerator funding like this. India now produces as many engineers at the US.

      We are launching an accelerator in Canada. Extreme U is up and running as well.

      Details to follow.

      • http://www.google.com/profiles/ademello Aaron deMello

        Mark, I am here for a while, at least for the foreseeable future. Amazing how the market in this part of the world is exploding, but the risks / issues are the same as at home. I'll be in touch with my plans, right now I am just surveying the market, meeting entrepreneurs, and looking at some of their markets close to home i.e. the rest of Asia, Africa, and the Middle East. Exciting times!

  • http://danielharan.com Daniel Haran

    If SV and Yuri Milner are executing a data-driven strategy, it will appear foolish until they’re in a position of information dominance.

    Most investment decisions today are made on the basis of gut feel.

    Mortgages used to be given out on the basis of an in-person meeting. Credit scores removed most of the subjectivity. Where “negroes” might have been refused a mortgage, the credit scores helped level the playing field. No doubt more of them started applying.

    Making those decisions based on fuzzy criteria was not only horribly risky and bad business, it was bad for equality.

    It’s the same with seed-stage investment. Whoever figures out a more objective way to size up investments stands to win big. The only way to get the data for this is to start with a carpet-bombing approach. YC and SV are probably the 2 organizations with the best ability to create predictive models, simply because they’ve evaluated enough opportunities to dis/prove theories with decent statistical significance.

    Many investors will protest that formulas can’t do as good a job as their human intuition, just like bankers didn’t like having their job outsourced to a credit score.

    • http://startupcfo.ca Mark MacLeod

      It will come as no surprise to you that I am a bit proponent of data driven approaches and am always looking for patter recognition both in selecting startups and in advising thames as they grow. In ny ideal World, I would have a playbook for my startups and would have a higher than average hit rate.

      I don't advocate gut as an approach. If your gut says 'no' you should not do the deal. If it says 'yes' that is not enough.

      But, as much as I want this ideal, I am not sure it is possible. There is too much that is unknown with anything that is worth making a seed investment in.

      Also, look at Ron's investment volume. The dude has data.

      Youbare right though that he will have a big portfolio to choose from. But my guess is every YC company would have taken his money anyway. So not sure it increases his dealflow

    • http://startupcfo.ca Mark MacLeod

      Check this out: Conway's entire portfolio. Think he already had a lot of data points http://www.businessinsider.com/sv-angel-portfolio…

  • http://twitter.com/evan_moses @evan_moses

    I agree that that while not necessarily a smart investment strategy, I think it's a fantastically clever strategy for an investor. Let me qualify what I see as the difference:

    Let's say that the start fund's $150K gets them an average of 2% of every YC company at the ask round (probably a fair average as next round valuations for YC companies are above average to say the least). That means this year's round of 40 companies has to make around $300M on exit for them to get their money back. Given YC's past, you'd think that's pretty likely, but it's not exactly a recipe for monster returns either.

    However, what it does do is guarantee priority access to what are generally the hottest deals in the valley. Come the next round, DST and SV Angel can cherry pick the YC companies that have turned their $150K into real traction and growth. They become lead investor for all the hits. Of course, it's not like Ron Conway has problems with dealflow, and I imagine Yuri wouldn't either, even if he's new to this stage of investing. But it allows them, for what is for them a fairly low price, to outsource all the hard stuff about sourcing the very best deals. I think that in the new, capital-light entrepreneurship model, this becomes the new customer acquisition cost for certain types of investors. It's also really fantastic "we're entrepreneur-friendly" marketing.

    • http://startupcfo.ca Mark MacLeod

      Great points Evan. But this would mark a real change in Conway's investment strategy. As a seed investor he typically buys his stake up front. He would need a much bigger fund to pull off the approach that you mention.