Y Combinator, a prominent startup accelerator, is currently in the process of raising $2 billion in new capital across three new funds. This includes exposure to its next four startup batches, as well as follow-on investments as these companies grow. The fundraise is actively ongoing, with a minimum target of $2 billion determined by sources familiar with the process. Y Combinator has not commented on the matter.
The fund structure of YC is different from traditional venture capital firms, as it commits to invest $500,000 in each company that goes through its program. This includes a $125,000 initial investment for 7% ownership, with an additional $375,000 that rolls into the company’s next equity round. Prospective investors in Y Combinator’s funds are being offered a chance to back all three funds together, covering the initial checks for hundreds of companies in the next two years of batches.
Investors interested in the main batch fund must back all three funds together. The carry, or percentage of future profits kept by Y Combinator, varies within the funds, with a total carry of just over 30% across all funds. This means that investors are putting their trust in YC and its partners to select the right companies and make wise investment decisions as companies grow. The streamlined fundraising process reflects a broader strategy shift under the leadership of CEO Garry Tan, who took over in January 2023.
Tan has made changes to return Y Combinator to its roots under co-founder Paul Graham, including shutting down the Continuity fund last year. The new post-batch fund will continue to make follow-on investments, with a focus on making pro rata investments more systematic and frequent. Y Combinator is not claiming to have fully automated the system for follow-up investments, but plans to have more input from the core team in the decision-making process.
The $2 billion-plus fundraise is a record number for Y Combinator to raise at once, but when factoring in previous funds, it is less surprising. Y Combinator previously raised $2.2 billion across two early-stage funds in 2021, in addition to a Continuity fund raised in 2017. Whether Tan can successfully raise the full $2 billion or more in one go will test the investor market’s interest in his vision for Y Combinator. Despite potentially steeper prices for early access to startup batches, one source believes that the economics are favorable for YC and that investors will still be eager to participate.
