Apr 6, 2024 - Business

Scoop: Y Combinator invites alums to invest in new funds

Illustration of a hand presenting the Y Combinator logo over green squares and orange rectangles.

Illustration: Brendan Lynch/Axios

Y Combinator is letting some alumni entrepreneurs invest in the trio of funds it's currently raising, Axios has learned.

Why it matters: YC's alums keep all facets of the organization going.

  • The accelerator is requiring limited partners invest in all three of its new funds, a somewhat bold move in the current environment.
  • Although the practice isn't new in the industry, the timing could elicit some sighs from LPs.

How it works: Alumni must invest a minimum of $250,000 total, which will be split among the three funds.

  • The funds include one focused on the initial checks into its next four cohorts of program participants, one focused on the additional capital committed, and another aimed at making pro rata investments, additional seed and bridge rounds, and other special situations.
  • The first two funds will begin deploying capital in late 2024 and will last two years; the third will begin this month and last three years.
  • The exact size of the funds is not yet final, per recent communication sent to alumni. But Forbes reported last week that they're aiming to total about $2 billion.
  • An investor's committed capital will be split across the funds as 10%, 28% and 62%.
  • All the capital from alumni will be bundled as a single investor in the funds' cap tables and managed by an outside service.

The big picture: Alumni have long invested directly in other YC startups.

  • In fact, the program has for years hosted a special "demo day" just for alumni to watch the latest cohort's pitch presentations. That usually happens on the eve of the official event for investors and press.
  • Many of YC's full-time and part-time partners — who select and coach participating startups during the program — are alumni themselves.

What they're saying: "It's historically been a positive for both managers and LPs to think about early-stage and growth stage as a continuum," Joe Binder, a partner at law firm Debevoise & Plimpton who specializes in fund formation, tells Axios.

  • "The return profile of early-stage and later-stage companies is different, but if you're a manager, what you want to tell your LPs is 'Don't think of those as totally separate.'"

State of play: "Stapling" funds, as it's called, was more prevalent during the recent zero-interest bull market, according to one longtime LP focused on backing venture funds.

  • Now, firms especially focused on early-stage investing are more often dropping the requirement that their investors back both their flagship and opportunity or late-stage funds. And in part, that's because many aren't raising new later-stage funds for the moment.
  • Another LP whose portfolio includes top Silicon Valley names tells Axios that even those well-established, multistage firms that still command big trust from investors have backed off from fully requiring a commitment to all funds.

Yes, but: It's likely YC's approach gets a warmer reception from LPs, given the close relationship between the three funds.

  • Two of them are essentially part of the investment that YC now makes into each company it accepts into its accelerator program, albeit in different tranches and terms. The third is still focused on YC's portfolio companies, but with more selectivity.
  • That's quite different from requiring LPs to invest in funds with more distinct aims.

Y Combinator declined to comment.

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