Y Combinator Closes New $8.25 Million Fund, Sequoia Is Lead Investor

Startup incubator Y Combinator has just closed $8.25 million new fund led by Sequoia Capital with Ron Conway, Paul Buchheit, Aydin Senkut, XG Ventures, and Geoff Ralston participating.

The new fund is four times larger than $2 million fund raised last year. This is because it’s meant to be a long term fund and Y Combinator is planning to increase the number of startups the incubator funds. At least 35 (give or take) startups will join the summer 2010 funding cycle. The previous YC funding cycle, winter 2010, had 27 startups, with 20 of the companies hitting profitability or securing commitments for further funding.

Y Combinator has invested in over 207 startups since summer 2005 and until last year, only invested capital provided by its four founders: Paul Graham, Jessica Livingston, Trevor Blackwell and Robert Morris. The larger fund created last year was designed to expand their war chest to include more startups and investments. Investments are small ($5,000 + $5,000/founder) in exchange for around 6% of equity, and the startups are typically very early, usually idea stage.

Graham tells me that the incubator has expanded significantly since its first session, which has only 8 startups. In terms of scaling the model, Graham hasn’t run into a lot of problems thanks to having the right amount of full-time staff and a healthy group of part-time advisors. He adds that this raises should last the incubator for 2-3 years. The incubator is currently seeing 1,000 applications per session, so the expansion is good news for fledgling entrepreneurs.

There’s good reason for founders to be clamoring to be a part of the incubator. Many of its startups have seen considerable success, including DropBox, Posterous, Loopt, Justin.TV, and Scribd. And several of the startups have been acquired – Reddit (by Condé Nast), Omnisio (by YouTube), Zenter (by Google), ClickPass (by Synthasite) Auctomatic (by Communicate), DivvyShot by Facebook and others.