As Y Combinator’s latest batch of startups prepare their pitches for the accelerator’s April Demo Day, CEO Garry Tan is busy pitching investors, too — but on YC itself.
Investor eyes are focused on Garry Tan and his partners as they raise new funds.
Y Combinator
YC is raising $2 billion in new capital, Forbes has learned, across three new funds that include exposure to its next four startup batches, as well as follow-on investments as they grow.
At a minimum, YC expects to raise $2 billion for the funds, five sources with knowledge of the process said. But the fundraise is an active process with ongoing discussions, they added, meaning its aggregate total could tick upward from that, two of the sources said.
Y Combinator declined to comment.
As a startup accelerator that commits to invest $500,000 in each company that goes through its program — $125,000 for 7% ownership, with another $375,000 that rolls into its next equity round — YC’s fund structure is different from the venture capital firms that lead those later rounds in its participants. Prospective investors in Y Combinator’s funds are being offered one opportunity, the sources said, to back all three funds ‘stapled’ together: the main batch fund, covering the initial checks into the hundreds of companies of its next two years of batches; a second fund for the remaining committed first checks, and a follow-on fund to continue to deploy capital into its graduates as they grow.
Investors interested in the main batch fund — considered the crown jewel because it’s effectively an index of all of YC’s companies over such a period — must back all three funds, the sources told Forbes. But the percentage of future profits, or carry, kept by Y Combinator varies within the underlying funds, one of the sources said, ranging from closer-to-typical market rates (20% and increasing, depending on performance) for its follow-on fund, to costlier for the early-stage batch fund. Blended together, the approximate total carry kept by YC would reach just over 30%, the source added — at the top end of the venture market.
Such a structure means that investors must trust Tan and YC’s group partners, who are responsible for interviewing, first investing in and mentoring its startups, to not just select the right companies, but also know when to double down. If Tan’s YC proved better at the former than the latter, and YC’s early-stage fund far outperformed its follow-on one, Y Combinator itself would financially benefit more than its backers.
Related
For Tan, such a streamlined fundraising process is consistent with a broader internal strategy shift over the past year-plus since he took over as president and CEO in January 2023. Tan shuttered YC’s Continuity fund, which had previously operated a separate investment team and overseen investment in its alumni companies, last year as part of a mandate to return Y Combinator to brasher, leaner and meaner roots more reminiscent of the accelerator under the leadership of cofounder Paul Graham. (One standout from YC’s first-ever batch, Reddit, went public on Thursday after pricing its IPO at a valuation of more than $5 billion.) As detailed in a recent Forbes feature story on the Tan era, the bold and controversial move was popular with YC’s board of directors and group partners; it also led 17 people to abruptly lose their jobs, while some alumni founders also protested the sudden removal of trusted board directors.
Continuity, which raised funds of $700 million and then $1 billion, wrote both million-dollar checks for recently-graduated batch companies (exercising non-dilutive investment rights known as pro rata) and led checks in $100 million-plus funding rounds in YC unicorns. It also placed bets on promising companies that hadn’t participated in YC.
Tan’s Y Combinator plans to continue making such follow-on investments through its new post-batch fund, but with its recently re-prioritized group partners driving more of those decisions. In February, group partner Harj Taggar told Forbes that the organization was working on financial software to better track fundraises by alumni, helping YC budget for and prepare for such opportunities. “The new goal is to make pro rata more systematic and more frequent,” said one source. “Continuity was doing it bigger and more selectively.”
Y Combinator is not claiming to investors that it has fully automated its system for follow-up investments, however, noted another source. “They’ll still be picking, but it’ll be broader, and with more input from the core team.”
A topline $2 billion-plus fundraise will represent a record number for YC to raise at once. But it’s less surprising of a sum when all of its parts are factored in. Y Combinator previously raised $2.2 billion across two early stage funds in 2021, according to regulatory filings; combined with the Continuity fund raised in 2017, that would amount to $3.2 billion in committed capital raised in its previous cycle (a longer period).
But now, such raises are happening together, all under Tan, and all under one umbrella and time horizon for profits. Whether Tan can raise all $2 billion, or even more, in one fell swoop represents a major test for whether the investor market is buying what his era of YC is selling.
One source said they anticipated that Y Combinator would have little problem identifying backers still eager for early access to its startup batches, even if doing so now came at an effectively steeper price. “The economics here are so, so good for YC,” they said.
Look back on the week that was with hand-picked articles from Australia and around the world. Sign up to the Forbes Australia newsletter here or become a member here.
