Yesterday i was compelled and glad to learn that Sequoia is investing in Ycombinator. When the best established VC (Sequoia) in the world invests in the smartest super early stage VC in the world (YCombinator), i think it's worth a pause and some thoughts.
Although most VCs claim they do seed deals, most of their real activity is post seed (you can also call it early stage). But very rarely you ll find them working in the way Ycombinator does: a very little amount of money (up to 50k) at the idea stage to support the intial product development and some traction.
We tried with lgilab to learn from the Ycombinator approach. But the expectation and mechanism and legitimately different. Most of the times we decline a project, not because it is not interesting but because of the size of the opportunity. Most VCs who do seed deals still have expectations of big exits. With Ycombinator like models the expectation is not that big. An exit sub 50m USD is considered as a success.
With the exponential growth of the TinyWeb (meaning small companies, solving tiny problems with nice revenues possibly big one) models like Ycombinator totally make sense. Sequoia is aware that they are not adressing those startups and they are aware that more and more exits in the future will happen in that direction. Investing in Ycombinator is a smart move. Sometimes some of the YCombinator babies will grow beyond expectation and Sequoia will probably be happy to have a preferred access to some deals.
I twitted yesterday that it was the first time i thought a VC was investing in another VC. But i was wrong. Actually partly wrong. A few persons rightly pointed me to the fact that this is something that has already happened in the US and India (problably because of the size of the market).
But i never heard of anything equivalent in Europe and in Israel -at least not something that marked me recently (maybe i missed something because i am new to this country and profession).
I believe like i said many times that the most of the upcoming exits in the Israeli internet market will be small one (sub 50m USD) that are not adressable by VCs. I hope to see the birth of equivalent models like YCombinator here and think that established VCs should be the first investors in those organisations. For that it requires them to negotiate a special mandate with their LPs (own investors) so they can do that. It also requires to do it right (a whole post in itself) meaning investing in extremely low cost structures with proven management and access to deal flow.
I would be happy to hear what other VC colleagues/Investor think about that?
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