What role does Y Combinator play in the startup ecosystem for investors?

YC acts as a crucial filter, dramatically reducing the number of applications from 20,000 to around 200. This provides investors with a more curated and promising set of companies to evaluate, saving them time and effort.

Why are venture capitalists hesitant to be the first investor in a startup?

VCs often avoid being the first check because they can get disintermediated if founders talk to multiple investors. They prefer to see more data, avoid conflicts of interest, and build brand equity with founders by appearing as a desirable later-stage investor.

How do seed funds differ from VCs in their investment strategies with YC companies?

Seed funds aim for larger ownership percentages (10-20%) and crucially want to be the first check. YC companies, having often secured early funding, present higher valuations and present a conflict for seed funds who might miss their primary opportunity.

What's the best advice for founders receiving conflicting investment advice?

Founders should seriously consider advice from individuals or firms who are actively offering to invest. Be wary of those who aggressively discourage investment or offer excuses for why you're 'not ready,' especially if they are not offering to invest themselves.

How can founders determine the true intentions behind investor advice?

Founders should look at an investor's actions rather than just their words, memes, or tweets. If top VC firms and seed funds are consistently investing in YC companies, it indicates their genuine interest and belief in the program's output.

Key Moments

The Secret That Silicon Valley's Top Investors All Share

Y Combinator

Science & Technology6 min read12 min video

Aug 23, 2023|51,680 views|973|25

YC Y Combinator yt:cc=on

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Key Moments

TL;DR

Top VCs publicly dismiss Y Combinator but secretly invest billions in its startups, leveraging YC as a sophisticated vetting service to de-risk their own investments.

Key Insights

Andreessen Horowitz (a16z) has made 234 investments in YC companies, Sequoia has made 139, and Founders Fund has made 104, demonstrating significant VC capital allocation to YC alumni.

VCs claim startups are 'too early' to invest directly, but YC acts as a crucial 'hopeful filter,' significantly reducing the due diligence burden and de-risking investments for these firms.

YC provides essential early-stage funding and support, helping companies survive long enough to become attractive to VCs, a service VC firms actively consume.

VCs often prefer to be the 'first check' to avoid disintermediation and maintain control, yet YC's model encourages founders to speak with multiple investors, creating a tension.

Seed funds face a conflict with YC because YC companies typically command higher valuations post-demo day ($15-25M) compared to direct investments ($5-10M), impacting seed fund ownership strategies.

Founders should prioritize investors who are willing to commit capital and scrutinize advice from those who offer excuses or discourage raising funds, especially from reputable programs like YC.

The public vs. private VC stance on Y Combinator

A significant disconnect exists between what top venture capital firms publicly communicate about Y Combinator (YC) and their actual investment behavior. Many prominent VCs, including Andreessen Horowitz (a16z), Sequoia, and Founders Fund, often publicly dismiss YC, suggesting direct investment into their funds is superior. This rhetoric is common, sometimes framed as 'YC sucks' or 'it's not as good as going directly to us.' This position is often conveyed to founders they are passing on, acting as a subtle way to manage expectations or perhaps redirect founders. However, the data reveals a starkly different reality: these same VCs are consistently and heavily investing in YC-backed companies, indicating that YC is a critical part of their deal flow and investment strategy.

Quantifying VC investment in YC companies

The sheer volume of investment from top-tier VCs into YC companies is substantial, providing clear evidence of their engagement. Andreessen Horowitz (a16z) alone has made an impressive 234 investments in YC companies. Sequoia follows with 139 investments, and Founders Fund, known for its contrarian approach, has invested in 104 YC companies. These numbers are not isolated incidents but represent a consistent pattern across the venture capital landscape. The YC top companies list, publicly available, consistently shows investments from the most respected and successful venture firms, validating YC's portfolio with significant capital.

YC as a vital filter and de-risking mechanism for VCs

The primary reason top investors 'secretly love' YC is the value it provides as an highly effective 'hopeful filter.' For venture capitalists, a major hurdle in early-stage investing is identifying truly exceptional companies amidst a vast sea of applicants. The core of their job is to find 'epic standout companies,' but they typically only make one to two deals per year due to firm size and deal flow limitations. They often reject startups with the blanket statement that it's 'too early.' YC addresses this by filtering through approximately 20,000 applications to select around 200 companies. This rigorous selection process, coupled with the 'YC stamp of approval,' provides VCs with a significantly de-risked pool of potential investments, saving them immense time and resources in initial due diligence.

YC's role in company survival and development

Beyond filtering, YC plays a crucial role in ensuring companies even survive long enough to be attractive to VCs. Many startups seeking funding are told they are 'too early' by potential investors. Without intervention, these companies might simply shut down. YC provides crucial initial capital and provides a supportive environment. This funding allows companies to reach a more mature stage, better technical capabilities, and develop a stronger track record. Furthermore, YC offers invaluable advice, network access, and guidance on pivoting. A significant number of successful YC companies have undergone substantial pivots during the program, demonstrating YC's role in refining business models and ideas, ultimately making them more palatable and promising for later-stage VC investment.

The 'farmer vs. purveyor' analogy for VC deal sourcing

An analogy can illustrate the VC relationship with YC: top VC firms are like high-end restaurants that often project an image of personally sourcing rare ingredients. However, in reality, many of their menu's best dishes rely on specialized purveyors who identify, prepare, and deliver high-quality ingredients already packaged. YC acts as such a purveyor for VCs. Instead of sifting through thousands of raw startups, VCs receive a curated selection from YC, a service that aligns with their need for efficiently sourced, high-potential investments. This 'pre-packaged' nature of YC companies is highly desirable for firms facing high demand and limited capacity.

The tension between 'first check' preference and YC's model

VCs publicly state a desire to be the 'first check' into a company, which gives them significant influence and leverage. However, YC's model encourages founders to speak with multiple investors simultaneously. This directly conflicts with a VC's preference for an exclusive relationship, as it increases competition for their investment and potentially drives up valuations. Moreover, VCs worry about being disintermediated by a successful YC investment, wanting to avoid situations where a competitor receives their capital early. Their ideal scenario involves founders loving them and pitching them repeatedly with progress, ensuring they can invest at later, more data-rich, and higher-valuation stages without the risk or conflict associated with early, direct involvement in a YC batch.

Seed funds' unique conflict with the YC model

Seed funds experience a particularly acute conflict with YC companies. While traditional VCs may miss an A round but can still invest in B or C rounds, seed funds' primary opportunity to invest is often at the earliest stages. YC companies, especially after demo day, tend to command higher valuations. A seed fund might invest at a $5-10 million valuation in a company identified outside of YC. However, the same company post-YC could be valued at $15-25 million. This makes it difficult for seed funds to achieve their desired ownership percentage at an attractive price, leading many to discourage founders from participating in YC. Their business model relies on acquiring significant stakes early, making YC's role in potentially increasing valuations a direct challenge.

Founder's perspective: discerning advice

Ultimately, founders should critically assess advice regarding YC. The underlying principle is to observe actions over words. If an investor or firm is actively marketing against YC or providing elaborate excuses why a founder shouldn't raise money from another source, including YC, while not offering direct investment themselves, founders should be wary. Conversely, if an investor is willing to commit capital and genuinely believes in the company's potential, their advice and offers should be taken much more seriously. The most formative advice often comes from those prepared to back their conviction with investment, regardless of whether the company has gone through a program like YC.

Mentioned in This Episode

●Organizations

YC Company Investments by Top Venture Capital Firms

Data extracted from this episode

Venture Capital Firm	Number of Investments in YC Companies
a16z	234
Sequoia Capital	139
Founders Fund	104

Common Questions

Top investors often publicly criticize YC to avoid disintermediation and maintain the perception of being the first check. Secretly, they value YC for filtering and packaging promising startups, reducing their investment risk.

Topics

Business & Entrepreneurship Investment Strategy Venture Capital Startup Funding Founder Advice Seed Funding Career & Skills Startup Accelerators

Mentioned in this video

Organizations

a16z

A well-known venture capital firm that has made a significant number of investments into YC companies.

Sequoia Capital

A prominent venture capital firm that has invested in numerous YC companies.

A prominent startup accelerator that provides funding, mentorship, and resources to early-stage companies. Top investors often invest in YC companies, despite sometimes publicly criticizing the program.

Companies

Founders Fund

A venture capital firm known for its controversial and counter-intuitive investment strategies, which also has a substantial number of YC company investments.