The New Funding Landscape

After barely changing at all for decades, the startup funding business is now in what could, at least by comparison, be called turmoil. At Y Combinator we've seen dramatic changes in the funding environment for startups. Fortunately one of them is much higher valuations.

The trends we've been seeing are probably not YC-specific. I wish I could say they were, but the main cause is probably just that we see trends first—partly because the startups we fund are very plugged into the Valley and are quick to take advantage of anything new, and partly because we fund so many that we have enough data points to see patterns clearly.

What we're seeing now, everyone's probably going to be seeing in the next couple years. So I'm going to explain what we're seeing, and what that will mean for you if you try to raise money.

**Super-Angels**

Let me start by describing what the world of startup funding used to look like. There used to be two sharply differentiated types of investors: angels and venture capitalists. Angels are individual rich people who invest small amounts of their own money, while VCs are employees of funds that invest large amounts of other people's.

For decades there were just those two types of investors, but now a third type has appeared halfway between them: the so-called super-angels. \[[1](#f1n)\] And VCs have been provoked by their arrival into making a lot of angel-style investments themselves. So the previously sharp line between angels and VCs has become hopelessly blurred.

There used to be a no man's land between angels and VCs. Angels would invest $20k to $50k apiece, and VCs usually a million or more. So an angel round meant a collection of angel investments that combined to maybe $200k, and a VC round meant a series A round in which a single VC fund (or occasionally two) invested $1-5 million.

The no man's land between angels and VCs was a very inconvenient one for startups, because it coincided with the amount many wanted to raise. Most startups coming out of Demo Day wanted to raise around $400k. But it was a pain to stitch together that much out of angel investments, and most VCs weren't interested in investments so small. That's the fundamental reason the super-angels have appeared. They're responding to the market.

The arrival of a new type of investor is big news for startups, because there used to be only two and they rarely competed with one another. Super-angels compete with both angels and VCs. That's going to change the rules about how to raise money. I don't know yet what the new rules will be, but it looks like most of the changes will be for the better.

A super-angel has some of the qualities of an angel, and some of the qualities of a VC. They're usually individuals, like angels. In fact many of the current super-angels were initially angels of the classic type. But like VCs, they invest other people's money. This allows them to invest larger amounts than angels: a typical super-angel investment is currently about $100k. They make investment decisions quickly, like angels. And they make a lot more investments per partner than VCs—up to 10 times as many.

The fact that super-angels invest other people's money makes them doubly alarming to VCs. They don't just compete for startups; they also compete for investors. What super-angels really are is a new form of fast-moving, lightweight VC fund. And those of us in the technology world know what usually happens when something comes along that can be described in terms like that. Usually it's the replacement.

Will it be? As of now, few of the startups that take money from super-angels are ruling out taking VC money. They're just postponing it. But that's still a problem for VCs. Some of the startups that postpone raising VC money may do so well on the angel money they raise that they never bother to raise more. And those who do raise VC rounds will be able to get higher valuations when they do. If the best startups get 10x higher valuations when they raise series A rounds, that would cut VCs' returns from winners at least tenfold. \[[2](#f2n)\]

So I think VC funds are seriously threatened by the super-angels. But one thing that may save them to some extent is the uneven distribution of startup outcomes: practically all the returns are concentrated in a few big successes. The expected value of a startup is the percentage chance it's Google. So to the extent that winning is a matter of absolute returns, the super-angels could win practically all the battles for individual startups and yet lose the war, if they merely failed to get those few big winners. And there's a chance that could happen, because the top