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How to get $20M pre-money:

Stashed in: YCombinator, @vkhosla, @paulg, Google Ventures!

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“Twenty-pre? I can’t believe? You think that’s cheap? For a company you started with your dog last week?”

The debate rages on:

In one corner is Paul Graham or PG from YCombinator who told his companies this week to just say no to Google Ventures if taking money from them meant having to lower the cap on notes from other committed investors. In the other corner are Google Ventures and Vinod Khosla. They argue that startups are better off working with value-added investors even if that means taking a lower price. For Graham, it is a departure from his stated philosophy: “The most important thing to remember about fundraising is to get it over with and get back to working on the company.”

Like any VC, Google Ventures is offering valuations that they believe are appropriate. Others believe the prices are hyped up. One way of looking at it is that any investor is offering a major increase in valuation from what the startup accepted just 90 days prior when they entered YC. Graham invests at between a $200k-$300k valuation on entry. If Google Ventures offers $3M pre-money, that is a 10-15x step-up. Another view of this is that accelerators are not really investing in a priced round, but rather playing more of a co-founder role. Either way you interpret this, the stakes and emotions are high.

For any accelerator, it may not be the best strategy to alienate active investors like Google. To be successful, YC needs investors to keep showing up to demo days and funding these companies. And more importantly, incubators need other investors to take the lead at mentoring these companies for the 8+ years after their 90 days are complete. Vinod Khosla makes this point loudly, that YC companies need “help not hype.” But Graham seems to not agree: “Maybe you’ll find enough from other sources that you can blow off GV.” Paul Graham later clarified that he did not think GV was ‘a bad investor’ but was rather offering advice on how to handle a down-round-capped-convertible situation.

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