I Don't Understand Y Combinator Hate

The vast majority of entrepreneurs I’ve spoken with who’ve been funded by seed stage VC/incubator Y Combinator are happy that they took the investment. And the ones that applied but weren’t selected generally have nothing bad to say, either.

So I continue to be surprised to see journalists write stories that suggest that the deal Y Combinator offers to entrepreneurs is somehow unfair. Unless they find a significant number of entrepreneurs who back up the claims, it seems a bit speculative to say the least.

Y Combinator isn’t designed to give companies the capital they need to grow a large business. Rather, they give investors less than $20,000 to give them the capital they need to take something at the idea stage through to a prototype. In exchange they take an average of 6% of the equity in the company. Their investment model has been widely copied.

Remember, these startups are usually 2-3 people with little more than an idea. Generally speaking there are few other investors who will be willing to invest in them until they have some sort of code written or an initial product out the door. Y Combinator fills a niche that even angel investors find too risky. And all they ask is a small amount of equity in the form of common stock. Most angels and venture capitalists demand preferred stock for their investment, which gives them more control over the company and the ability to take their money plus a guaranteed return off the table in the event of a sale or IPO. With Y Combinator, they take the same stock that the founders get.

To date Y Combinator has invested in 102 startups (the most recent batch is here). Of those, 18 have died. A handful have been acquired, and the rest continue to fulfill whatever destiny is in store for them.

There’s nothing bad about Y Combinator. They are a private company investing their capital at more than reasonable valuations with willing entrepreneurs. They give their companies a huge stamp of approval and a great launch platform. And their hit rate to date is impressive given how early stage these “companies” are.

Update: The Sarah Lacy post linked to above has been substantially rewritten with a lot of the negative comments about Y Combinator removed, so the link is not longer fully relevant.