Photo: Scobleizer via Flickr
Y Combinator, Paul Graham’s startup accelerator program, recently announced a new venture fund, YC VC.Under the structure of the new fund, four investors, Yuri Milner, Andreessen Horowitz, General Catalyst, and Maverick Capital, will put $20,000 into each YC startup for a total investment of $80,000.
That’s nearly half the amount YC startups have been receiving — $150,000 — from an informal investment pool Yuri Milner and Ron Conway put together two years ago.
Paul Graham wrote his reasoning behind the decreased investment moving forward:
“We’re decreasing the amount invested because experience showed $150k was too much. It’s good for startups to get some amount of investment automatically; it lets them continue working on ideas that still look like ugly ducklings on Demo Day. But $150k was more than the successful startups needed, and it sometimes caused messy disputes in the unsuccessful ones.”
An intern at a Y Combinator startup, Sherjil Ozair, clarifies why he thinks Graham knocked down the investments to $80,000.
Simply put: $150,000 is too much money for the startups that fail, because it lets them try and pivot.
From Ozair on Quora:
The problem is that $150K is an awful lot of money. Among one group of startups, roughly 70% are bound to be failures. Now, even after startups have obviously failed, there is still some money left from the huge $150K pot, and since the co-founders are serial entrepreneurs, they might want to pivot, or start another startup, with the left-over money. Of course, if you just quit, then all the money goes back to the investors, but if you keep pivoting going from Social Network for Dogs to Rideshare for Elephants, you get to keep the money YC invested in the original startup.
So, by reducing the money to $80K, you roughly reduce the time the startup has to prove itself. They are not allowed to laze off, or keep pivoting. They only have one shot at it, and they got enough money for only one shot.