In an interview with Ryan Lawler of TechCrunch, Graham discusses the value of the YC investments, how the accelerator dealt with too many companies in a previous batch, and why venture capitalists should move quickly:
Well VCs have financial models for how much they need to invest, and what percentage of the company they need to buy for it, in order to get positive returns. And they’re really nervous, somewhat justifiably so, because if you’re going to lose money as a VC firm you wont know it til about six to eight years later. So these models, they become sort of religious about them. But, they really feel like they can’t buy less than 20% of the company in the Series A round…and in a competitive deal since that number can’t move, then the only number that can move is the valuation.. That means that the amount invested increases, arbitrarily. These companies would like to sell half as much stock for half as much money, but that’s not one of the options. If there was a VC that broke ranks and said they would give companies the money they actually need instead of it being determined by random external forces, they would get all the good startups.