For years, Y Combinator has shied away from doing any kind of follow-on funding. That’s out of concern that this would create signaling risk and ward VCs away from supporting startups that don’t get this seal of approval.
However, under the firm’s new leadership with Sam Altman at the helm, it’s possible that Y Combinator will consider doing growth-stage investments, according to sources familiar with the firm’s plans. Both YC and Altman declined to comment on this story. They also didn’t respond to comment for a Business Insider story reporting a potential $5 billion raise.
First off, the plans are very much “in flux,” a source tells us. The firm has discussed the possibility of growth-stage funding with external parties, but this is not at all finalized.
Second, it would definitely not involve any kind of Series A or B investments because of the signaling risk problem (e.g. companies that don’t get follow-on funding would have a much harder time raising funds from other investors).
A potential Y Combinator growth-stage fund would be much farther down the line, akin to Series E funding or growth capital that a company might need before going public. Think about it as being competitive with the kinds of firms that might invest in Airbnb at north of the $10 billion valuation.
If they were going to do it, they would think about how they could re-invent the category above and beyond offering commodity capital before an IPO. For instance, companies at this stage have this dual need to raise huge amounts of money to fuel growth and to provide liquidity to early employees. Y Combinator also, of course, has a huge talent network in their alumni pool.
Such a move would be consistent with overall trends in the venture world, which have produced a barbell-like effect favoring very early and very late-stage activity. The cost to build a minimum viable product and then distribute it to a potential audience of more than a billion consumers online or on mobile devices has dropped drastically over the past decade. That’s favored the emergence of founder-friendly firms like Y Combinator, the evolution of superangel funds, and then syndicates and individuals on platforms like AngelList.
At the same time, low interest rates have fueled a hunt for returns in the late-stage end of the market where firms like Coatue, Fidelity and T. Rowe Price have aggressively sought to put money into companies like Uber, Airbnb and Snapchat. That has driven the valuations of these companies into the billions of dollars. A Wall Street Journal report found 75 companies worth at least $1 billion including Y Combinator alums like Stripe, Dropbox, Airbnb and Instacart.
With more YC alums on their way towards joining this club, it’s no wonder why the firm is considering getting a piece of the action.