Y Combinator, a seed stage venture firm that has invested in a whopping 118 startups since summer 2005, has to date only invested capital provided by its four founders: Paul Graham, Jessica Livingston, Trevor Blackwell and Robert Morris. Now they are raising $2 million in capital themselves, from Sequoia Capital and a number of prominent angel investors. Sequoia partner Greg McAdoo is leading the investment.
Sequoia and the angel investors (Ron Conway, Paul Buchheit and Aydin Senkut) aren’t investing directly in Y Combinator. Instead, they are putting money into a new entity, managed by Y Combinator, that will make investments in new startups going forward. In other words, Y Combinator won’t just be investing their own capital any more, and they’ve got a larger war chest to expand operations.
In the past Y Combinator has invested in 40 or so new startups a year. Investments are small ($5,000 + $5,000/founder) in exchange for around 6% of equity, and the startups are typically very early, usually idea stage. Still, they’ve had some notable successes. Several of the startups have been acquired – Reddit (by Condé Nast), Omnisio (by YouTube), Zenter (by Google), ClickPass (by Synthasite) Auctomatic (by Communicate) and others.
A number of Y Combinator’s current startups are doing very well, too. Their publicly launched portfolio includes: Reddit, Loopt, Scribd, Justin.TV, OMGPOP, Xobni, Disqus, Heroku, Dropbox, Posterous, Backtype, Clustrix and ZumoDrive, among others. Sequoia has invested in three Y Combinator startups in the past (Loopt, Clustrix and Dropbox).
The $2 million in new capital will go a long way for Y Combinator. They say they’ll increase the number of startups they invest in, from around 40/year to 60. But at an average investment of only about $15,000 per startup, that $2 million will last for about two years.
Y Combinator startups get a big head start in the competitive tech world. The founders, often just out of school (or still in school), get enough money to pay the bills for a few months as they work on their projects. They also get mentoring and polish from the Y Combinator team and a chance to present to prominent angel investors and venture capitalists at twice-yearly demo days (example). A surprising percentage of the startups go on to raise bigger venture rounds and become real companies. Many of the founders that fail come back and try again.
Y Combinator says that the investment by Sequoia and the angels won’t change how they do business (other a projected increase in the number of investments). The new investors won’t get any special investment rights in the new startups, or have any obligation to invest further in them. But it is a seal of approval in the Y Combinator model. And dozens more young founders will now get the chance to build their first startup.
Update: Y Combinator announces the news here.
Does this mean Sequoia etc. will have a small slice in every YC investment from here on?
I was wondering the same too.
I think that they will have a slice of YC, not YC’s cut of each company. At least, I hope not, too many chefs kills the little startup.
We are pumped about this summers program! Looking forward to hopefully seeing our team up in the San Fran area and putting the money to great use.
This is really a good strategy we follow always thanks.
Smart model.
Web investments require less capital and more sweat equity and good advice. Cloud computing, AJAX, and the ubiquity of the web has decreased the fixed capital needs to essentially zero. Great execution matters more than raising huge amounts of money. Lots of buzz helps, see http://vc.tEarn.com/ In particular, compare to the buzz about the average VC – which is nada.
This could be a milestone change for VC investing.
Thanks for stating the obvious, and thanks for the troll URL.
BTW, how exactly did AJAX decrease the fixed capital needs?
this is good news for early stage entrepreneurs, nice move YC!
interesting
sign of the times: serial prolific vc vultures hang out at y-ardsale for startups.
It is good to see that Ycombinator is moving forward and actually still looking for new ventures.
So, let’s see some of the P/L statements for some of those great Y-Combinator companies.
I suspect that they’re great at getting hype but real businesses — especially in this economy but, realistically, in any economy — need to make money. Some might carve out small amounts of profit but it’s tough to fathom how many of these are going to make sizable, scalable, substantial profit in the next 3-5 years.
The issue isn’t the companies stink, some are actually pretty interesting. But they’re all discretionary: none of them have offered anything that people actually need, rather than just nifty stuff they want, but won’t (or can’t) pay for. The days of high valuations for pretty baubles are over for a very long time.
“none of them have offered anything that people actually need…”
False. Checkout wufoo.com, weebly.com and I can go on. These folks offer premium services that folks are shelling out money for because they LOVE the service.
y-combinator has yet to produce a single company of significance, which is Sequoia’s avowed standard for investing.
Loopt is not going to make it unless they can pull off a powerset miracle. otherwise, not a single y-combinator company has every been worth $100 MM, which is not even a difficult standard to attain.
Excuse me. I run a small software company that was started on a shoestring a number of years ago. It’s nowhere near 100M, but it’s been profitable for years and it’s doing well. I can tell you from experience that 100M is a very “difficult standard to attain.”
Just curious. Where’s your $100MM? Could you spare some change? I have bills to pay…;)
@Jay
very cool. Early stage VCs make sense these days.
http://www.weal...re-capital-101/
isn’t the red-flag that no start-up worth its salt would take money on these terms? most good entrepreneurs I know would beg, borrow, go-without, etc (stop short of “steal” – i did say good) – particularly for only 15K or so?
Yes, that is correct.
Any expansion on opportunity for early-stage start-ups is a good one. I agree with WA that these investments just make sense in this market. This is a smart way for VC funds to diversify and take advantage of a depreciated marketplace for new companies.
These guys are brilliant! Micro start-up loans and mentoring to students for a sizable chunk of equity if it takes off!
This type of high risk micro investments is just what we need!
Good luck boys and Girls!
Don’t say “micro-loan” too loud or the SEC will step in and shut you down. Just ask propser.
Shutting down Prosper seems very suspicious. P2P micro-lending seems like a viable solution to improving credit. However, I’m sure the rationale for shutting Prosper down is more complex than it appears.
What Y-Combinator is doing is not lending. There is no loan to be paid back.
Yes, Ackles, it is more complex. There are two other p2p lending sites that have been approved by the SEC so it is possible. Lending Club and Pertuity Direct are making p2p loans right now.
View these guys like you would a PayDay Loan store opening up where the KFC used to be.
Yes, you get cash. No the terms are not favorable.
Yes, you get introductions. No, those don’t guarantee anything.
Yes, you can now open up an office. No, the money won’t pay for a good lawyer to review the terms.
Yes, you have a partner in Ycombinator. No, that doesn’t mean anything these days.
Great news! BUT – the problem is that the Y combinator model depends on a healthy early stage VC market. Without lots of VCs doing “A” rounds Y combinator companies will quickly run out of cash.
deleted a dozen low value comments. The poor state of the ones I left tells you just how bad those deleted ones were.
Michael – I don’t disagree with you, but I’ve noticed a similar trend in the comments section for any Y combinator related blog post. Any thoughts as to why Y combinator evokes such a strong reaction? Envy on the part of the commenters?
anything successful is trashed by a certain kind of person.
how true
Michael, have you considered doing something to raise the quality of comments, like requiring people to register? While that might discourage some valuable comments, especially from first-time or infrequent readers, I suspect it would screen out a lot more noise than signal. Moreover, you might get more good comments from people who have a greater expectation in their comments being read and thus invest the time in composing their thoughts.
Considering the state of the credit markets, an investment such as this could really stimulate innovation. In the recent articles by Reid Hoffman & Thomas Friedman regarding an innovative stimulus this seems to accomplish those objectives from the private sector. I hope these forms of finance become more prolific outside of the valley.
Oh boy, tech bubble 2.0 here we go.
How did that onion article go: Nation Demands Another Bubble?
these are $15k investments. not exactly a bubble even in the aggregate. its like you guys hear some phrase (bubble, conflict, whatever) and then try to work it into a comment to try to sound smart or funny.
oops..Michael beet me to it!
We are definitely in a tech bubble, but I don’t believe this is an indicator… The first bubble happened when a bunch of companies without a business model went public and out of blind exuberance investors had an IPO frenzy.
Modest funding rounds with a 6% equity stake doesn’t seem to indicate a bubble.
Tech bubble? You’re a little late to the party.. I believe that was last year.
This is a fantastic idea for Sequoia and Y Combinator.
Great for startups…. especially in this environment.
rock on
j
great point. Sequoia now gets an early look at what’s coming down the pipe.
One caveat is if the angel funding and series A funding dries up much more, these early stage start ups won’t be able to stay in business long enough to develop a revenue generating model.
Sequoia can’t get an early look at startups without Ycombinator?
Are you friggin retarded?
Writing things like “down the Pipe” is neat and all, but it has zero to do with the world of Venture Capital. There is nothing right now preventing Sequoia from looking at startups without Ycombinator. You miss the point entirely.
The focus should be on WHY Ycombinator needs seed money in the first place. If it were getting returns on its investments–i.e its companies being purchased–there would be no reason for any of this.
Also, the total number of Ycombinator stories being reported on TC—and no one else, BTW–should make readers wonder WHY Arrington is so intent on sharing the news, and spinning bad news into good news.
None of you question this? You can’t see that Ycombinator needs help, so they borrow money from Sequoia, and Ycombinator needs startup interest, so they kickback money or donuts or whatever to TC, which is losing ad dollars themselves.
The entire process is a Valley-made reacharound.
Nothing more.
are you kidding me? Sequoia is not looking at companies with 15,000 dollars with much interest….That would make no sense at all because they would spend too much time hand holding.
That’s where YCom comes in and gets them to the next level. Now Sequoia has a small piece of this development stage and gets to help the successful ones out with their series A, B. C, etc…
Your missing the point of the article here Retard.
YCom is simply trying to invest in more companies….40 companies per year to 60 companies per year with Seq Caps help.
It’s not that they aren’t successful, but Venture Capital is all about the sheer numbers of quality companies you’re vested in…My 3 year old knows that
spinning bad news? i’ve seen a lot of ridiculous comments, but saying an investment from sequoia is bad news is so absurd that i’m actually not going to delete your comment.
Wouldn’t Sequoia be acting as a LP to YC then? Which in turn, using that logic would indicate Sequoia’s in trouble becuase they’re still taking money from their LPs?
sounds good but $5k???
I sure hope you have a financial stake in your own company. $5k-15k is outside funding… It would be naive to assume this is the only start up capital available.
$5K is more than enough for a a few round trip tickets to Austin Texas and a bundle of silk screened ’startup’ tee’s.
Just blogged about this news
http://hellotxt.com/l/D3eA
This is great news and yet another validation for the model pioneered by YC. I run MVP, a similar initiative out of India.
@ michael : the low value comments just show the jealously of folks toward YC. But as Dhirubhai Ambani said “jealously is a sign of respect”. So all these guys are actually showing respect for YC
i believe we will see more and more deals like where VCs will outsource their early stage investments and will focus on big tickets only
http://www.capi...oia-capital-so/
How long before we see Arlington on the John Stewart Show?
Does anyone have the purchase prices of the companies that have been acquired? If we know Y Combinator invested in X amount of companies and X amount were acquired, I think that would be pretty easy to figure out to a certain extent. It wouldn’t be exact as there are so many investments on going. I guess they probably won’t truly be successful until they hit one out of the park.
What an intresting turn of events… VCs get MLM.
No really, Y Combinator really know their stuff and they’re keeping it real. Now that this happened, I wonder why it didn’t happen before. Maybe investing in YC is a lower-risk high-yield method that makes sense in the times of recession when sales are going south and VCs still have money to burn.
Cheers!
Shonzilla
no they don’t. they throw 15k at everything; and if even one sticks, they make millions…who fucking cares if its a good idea; 15k is close to nothing; dirt cheap. $1 million == 66 15K investments.
The 15K is just bait. The real value from YC is the seed/A round investment connections and free press on TC in exchange for Equity. Its like back when VC Consultants charged 5% to help you secure a investment through their connections except now you also get $5k.
Looks very interesting!
It will be interesting to see if a really big company can emerge from one of these seed investments. The law of large numbers pretty much guarantees that.
Yet, perhaps the YC model is flawed in not allowing these seedling companies from ever creating technology or business model barriers to entry
This is a cash flow thing as well as a future profit thing. Sequoia must be convinced of the model?
They’re also aiming to support 60 rather than 40 startups a year so it’s also about widening the portfolio. I don’t think it’s fair to say that YCombinator is a standard VC fund.
What YC is doing is fantastic for their tgt mkt, and its just as good they are now more formally connected with Sequoia as it also builds “a long bridge” (the type where it sways heavily in the middle) from the extremely low $10K to $1m+ funding.
However what would make this even more powerful for ALL, (a solid bridge so to speak) would be to have a stronger middle part of the “bridge” in b/n of angels at the $100K+ level with similar strength as the YC/SQ deal.
It beats having to wait for Angels to fly from the sky to hold the bridge.
JD
Very valid point about strengthening the centre of the bridge by having strong angels on board. That thinking is surely reflected in this deal, by bringing Ron Conway et al. on board.
Hope to see this trend happening in the UK.
they’ve got a cool name too.
I’m a fan of Y Combinator and what they have accomplished but, last time I checked into it, they want the coder to be part of the founding team. As long as the expertise to manage a project is in-house, I think coding is a task that can be efficiently outsourced.
If you’re building a web app worth squat your coder is one of the most important team members. That is my opinion, and that is how I treat our coders. I would never outsource my lead developer.. and if you were to do such you’d then need to replace them with someone who can spend hours upon hours writing spec’s.
I’ve worked with startups who’ve burned through millions trying to utilize outsourcing only to eventually bring it in house and have to rewrite alot of the application.
I’m just against Outsourcing coding..
Are you serious? Most of the most successful startups have been build by teams where the founding teams where engineers. Is there any major startup who built their core app by an outsourced team?
Coding is not a task – it’s the essence of a startup.
Ycombinator’s model is failing. Sleepy Sequoia lost its juju years ago. No one is buying.
Except unknowning college kids who think $15K in exchange for 10% of the company is a good deal.
It isn’t. Clearly, it isn’t.
“I think coding is a task that can be efficiently outsourced”
That could not be further from the truth.
Are there services like this in the UK beyond Seedcamp? Numerous concerns over here in the UK about how to catch up. Hope we follow suit.
Great news for Y Combinator and Startups. Especially with Ron Conway on board. As Jason Calacanis said – Rock on.
lookkk süper oky thanks
sonunda teşekkürrrrrrrrrrr
thank you very good
Only a fool would give up 6% for $5 K and some office space… then again there are a lot of fools out there, even fool students who would take a foolish deal like this
This looks very good and well made.
Apple’s iPod press conference tomorrow? Maybe, maybe not. But anyways, $200 sounds like a pretty good value