So this is Dalton plus Michael, and today we're going to talk about why the best investors secretly love YC very secretly.

So the keyword here that Michael is saying is secretly, because if you talk to a lot of investors, if you read their blog posts and social media, a recurring theme is...

YC sucks

You know, maybe it's, you know, YC okay, if you must. But it's not as good as just going directly to our funds because we're number one and you should raise from course. And so, we are very used to seeing this, and we often get questions about this from founders, which is like, hey, I heard from investor X that they said that doing YC doesn't make sense for me. What's your guy's response to that?

Often well-passing, by the way.

Yeah, no, that's the best part is, of course, the investor is not investing in them either. And so, they just leave them with a parting gift. 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 bit of a gap between what they will say to folks that they are passing on 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, Andreessen Horowitz, pretty famous, impressive investors. So they've done 234 investments into YC companies. Sequoia, another impressive investor, 139 investments into YC companies. Founders Fund, a very controversial, counterintuitive investor has done 104 investments in YC companies. And I could keep going.

Yeah. And so if you look at the YC top companies list, anyone could look at this, this is on the internet, and you actually look at who invested in them.

It's all the big investors.

It's all the big investors. And so by definition, these investors are voting with their pocketbook to invest lots of money across the board into the YC portfolio because they like money and they're smart. And there are a lot of excellent YC companies to invest in.

Well, let's dig into that, right? So in some ways, We're kind of providing a service to VCs and what do you think the VCs are consuming here? Why do you think they like to invest in the YC companies?

The major reason a normal venture capital would not invest in a startup is that it's too early. 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. The average VC only does one deal a year, maybe two deals a year, and the average firm has, what, five to 10 partners. So 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 for what is good and worth paying attention to. By getting the YC stamp on it, we are filtering it, we're doing that job for them.

We're taking, what is it, 20,000 applications? And turning it into 200 something companies.

And even then, They can get to know the YC companies and keep filtering even after that. And so having any kind of signal is very helpful. In addition, the fact that we get the company's finance, they don't just run out of money. What often happens when you're going to race from VCs, they say this is too early. And the founder's like, well, we're too early for them. And, you know, we don't want to do YC. And so then they just shut down. The company doesn't exist. And so to the extent that YC just gives these companies money to have a shot at getting far enough along for VC to invest, that is a helpful service. 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 these companies on our top 100 list are companies that pivoted during YC. And that's a value added service we're providing to the investor market is giving these companies an avenue to change their idea.

I'm going to try out 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 they like to give the impression that they go out to farms, and they hand select live chickens and live cows.

They're farming themselves.

Exactly. But when you actually look at most of the products on the 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 that's the service that YC provides VCs. But it's tricky because these VCs also all say, we want to be your first check. 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 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 instead of talking to just one investor. And so again, you could imagine that is not their favorite thing, that we encourage founders to speak to many investors in parallel instead of one. 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. 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 the 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.

In addition, they don't have enough data. They need data to invest in things at a higher valuation at a later stage. 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 and think that everyone else that is not them is bad. It's a luxury good. You're trying to create brand equity with the founders. ANd when every six months, the founders should come back and pitch them again with a smile on their face. So they're never in a position that someone else funded them. And so what can often be tricky with YC companies is once a company does YC, they are less likely to do 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 can see the dynamic here. But at the end of the day, If one of these investors, 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 if they need YC because they're smart.

So if we think about this conflict, why do they love YC? Because we can 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 in the door. Why is that love secret? All things in EECO, of course they'd rather be the first check. And they know if a 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. But essentially, they want to buy 10% to 20% of a lot of the companies. 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 about YC are essential if you're doing a seed fund because your job is to get a big ownership in the company and then try to get the VCs to fund them 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 seed funds, we could have given numbers for seed funds at a rate thousands, tens of thousands of checks in YC companies. But the reality is, is that when they write those checks in YC companies, they're at higher prices. 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 $10 million price evaluation. When they find you after demo day, they pay a $15 to $25 million price. You 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? 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? 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, and you should not even apply to YC and take the money and all that, that's not crazy.

It's not the worst offer.

Yeah. 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. And they're actually giving you advice to not raise money from another investor, such as YC. Because Reasons.

I think to wrap this up, 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.