YCombinator’s Further Evolution Into A Seed Fund

YCombinator has just announced that it will replace its $17k for 7% pre-seed equity investment with a $120k for 7% seed investment deal. From the WSJ:

Previously Y Combinator’s standard deal was about $17,000 for 7% of the company, plus an $80,000 note from a group of venture investors and firms eventually known as YCVC, which most recently included Andreessen Horowitz, General Catalyst, Maverick Capital and Khosla Ventures.

So, startups will now get $120,000 from Y Combinator, instead of $97,000 from a combination of Y Combinator and select venture firms. That means the implicit valuation for YC startups rises to about $1.7 million from the previous $1.4 million (YC might deviate from the standard deal “in exceptional cases,” presumably for an ultra-hot startup that merited a higher valuation).

The $120,000 will come directly from YC and a fund it manages that has limited partners, though the accelerator itself has no limited partners, Altman said.

Over the past few years, numerous incubators and accelerators came up that copied YC’s model of offering $15-25k pre-seed investment for 7% of the company model. VentureBeat analyzes the implications of the YC announcement on these firms:

1. Better and better results for YC.

There’s a winner-takes-all market in accelerators. Application quality is the most important determinant of returns and this pushes YC even further into the lead?—?into a place most programmes can’t afford to follow.

2. Outside YC, accelerator economics will increasingly not be about investment returns.

As you know, I have always believed that incubators and accelerators that truly want to do incubation / acceleration work should not use an equity model. My recent post Are We in an Accelerator Bubble? elaborates on the subject.

I am in agreement with both of VentureBeat’s conclusions, that YC will produce better and better results because it will get better and better deal flow. The 7% equity for $17k wasn’t a great financial deal for startups. $120k for 7% is a reasonable seed deal. Given their immense network and leverage, entrepreneurs would be willing to pay the price.

The reality, however, will be that they will be selecting later-stage companies, not exactly incubation-stage ones. Why? Because they can. Because they will have the deal flow. And because that’s what would make sense, all other things being equal.

Finally, incubators and accelerators relying on an investment return business model will either leave the business, or morph.

1M/1M, as you know, doesn’t use the investment model. We use a $1000 annual membership fee (renewable) as the ONLY charge to join. Our most recent funding, Avaz, has been in the program for 3 years. It wasn’t a fundable business when Ajit joined. However, now it is. My point: It takes time and patience to actually incubate companies, rather than just screen them and polish a pitch in 3 months.