Y Combinator raises billions in new funding

As Y Combinator’s latest batch of startups prepares to pitch for the accelerator’s April demo day, CEO Garry Tan is also busy pitching investors, but not least to YC itself. YC raises $2 billion in new capital; forbes learned through three new funds with exposure to the next four startup batches and follow-on investments as they grow.

YC expects to raise at least $2 billion, according to five people familiar with the process. However, the funding is an active process with ongoing discussions, and the total could be higher than that, two of the people added.

Y Combinator declined to comment.

As a startup accelerator that commits to investing $500,000 in each company that goes through the program, it will receive $125,000 for 7% ownership and an additional $375,000 for the next equity round. YC’s fund structure differs from venture capital firms that lead subsequent rounds. Among its participants. Prospective investors in Y Combinator’s funds will have one opportunity to back all three “stapled” funds, the people said. The main batch fund will cover initial checks to hundreds of companies in the next two years’ batch. What remains is his second fund for the committed first check and a follow-on fund to continue capitalizing as graduates grow.

Investors interested in the main batch fund (considered the crown jewel as it is an index of virtually all YC companies during this period) should back all three funds, the people said. Ta. forbes. But one of the people said the percentage of future profits, or carry, that Y Combinator retains varies within the underlying funds, with the typical market interest rate for subsequent funds (from 20% to 20% depending on performance). It is said that there is a range of up to almost 2000 (increased). Early stage batch funds have higher costs. Combined, YC’s approximate total carry amounts to just over 30% of his holdings, at the top end of the venture market, the people added.

Such a structure allows investors to not only choose the right company, but also to know when to double down. It means you have to trust your group partners. If Mr. Tan’s YC turns out to be better at the former than the latter, and YC’s early-stage funds perform far better than later ones, then Y Combinator itself will be more economically viable than its backers. You will get big profits.

For Tan, such a streamlined fundraising process is in line with a broader internal strategic shift over the past year since taking over as president and CEO in January 2023. There is. Tan has closed down YC’s Continuity Fund, where he previously ran and oversaw a separate investment team. Last year, it began investing in alumni companies as part of a mission to return Y Combinator to its bolder, leaner, meaner roots reminiscent of accelerators under the leadership of co-founder Paul Graham. (Reddit, one of the standout companies among YC’s first group, went public on Thursday after setting an IPO valuation of more than $5 billion.) forbes A feature on the Tan era, the bold and controversial move was popular among YC’s board and group partners. Additionally, 17 people suddenly lost their jobs, and some alumni of the company’s founders also protested the sudden dismissal of trusted directors.

Having raised $700 million and then $1 billion, Continuity writes $1 million checks for recently graduated batch companies (exercising non-dilutive investment rights known as pro rata) and YC unicorns. Issued checks in the company’s more than $100 million funding round. . We also bet on promising companies that are not on YC.

Tan’s Y Combinator will continue to make such additional investments through its new post-batch fund, but its recently reprioritized group partners will drive more decisions. In February, group partner Harj Taggar said: forbes The organization said it is working on financial software to better track fundraising by alumni and is helping YC budget and prepare for such opportunities. “The new goal is to make pro-rata allocation more systematic and more frequent,” said one official. “Continuity was doing it on a larger scale and more selectively.”

Y Combinator does not claim to investors that it has a fully automated system for follow-up investments, another person said. “They will still be making selections, but it will be broader with more input from the core team.”

The largest funding of over $2 billion marks a record amount for YC to raise at once. But when you take all parts into account, the amount isn’t all that surprising. Y Combinator had raised $2.2 billion in two early-stage funds in 2021, according to regulatory filings. Combined with the continuity fund raised in 2017, the commitment funds raised in the last cycle (longer term) totaled $3.2 billion.

But now such hikes are happening all at once, all under Tan, and all under one umbrella, with a timeline for achieving gains. Whether Tan can raise $2 billion or more in one go will be a big test of whether the investor market buys what he was selling during his time at YC.

One person said they expect Y Combinator to have little trouble finding backers who still want early access to the startup batch, even if it requires a substantially higher price tag. he said. “The economic situation here is very good for YC,” they said.