How'd Sequoia Let Yuri Milner Grab this Sweetheart Y Combinator Deal?

Earlier tonight, Mike posted a bombshell that must have made super angels shudder. Not content with the grenade he threw into the late-stage investing world with aggressive investments in Facebook, Groupon and Zynga, tonight Yuri Milner announced a new partnership with Ron Conway that offers similar you’d-be-crazy-not-to-take-this-deal terms for every Y Combinator company.

But you know who might be even more bummed by the news than the super angels? Sequoia Capital. The top Valley firm led Y Combinator’s last funding, less than one year ago. At $8.5 million, this was a big step up for Y Combinator, dramatically allowing it to expand how many startups it could let into its incubator. And it should have been a big advantage for Sequoia too: A way to see a crop of new deals early in an increasingly competitive investing landscape, where most VCs are being shut out of early rounds by super angels. It seems Milner stole the opportunity right out from under Sequoia.

We haven’t talked to Sequoia, and it’s possible the partners don’t agree that Milner and Conway’s deal is a no-brainer. So far, most Y Combinator exits have been modest, and Sequoia isn’t known for giving sweetheart terms to entrepreneurs. I can’t think of many venture firms who would give a blanket investing offer before even seeing companies. Almost more than any other firm on Sand Hill Road, being a Sequoia Capital company has historically stood for something.

Then again, a few years ago, no Valley firms would invest in late stage Internet companies with the kinds of terms Milner was offering either– that is until Milner started doing it and locking in high paper valuation gains. The deal with Y Combinator isn’t classic venture capital any more than those late stage deals were. But a $6 million flier across 40 vetted companies sounds like a pretty safe way to hedge in a business where the rules have dramatically changed, barriers to entry have dramatically been lowered and money is an easily found commodity. Maybe Sequoia wouldn’t have done the same deal, but if the firm believed in Y Combinator enough to invest a year ago, it can’t be happy about this new arrangement.

Every VC will tell you that good deal flow is the biggest competitive advantage an early stage investor has. Milner may have just bought his way into this game for the low price of $6 million.