Y Combinator will likely raise a fund that could be several billion dollars, three sources confirmed to Business Insider.
The seed capital company will use funding largely to support investments in its startups that are now on the cusp of either a big IPO, or, also, multi-billion dollar valuations, as hedge funds and non-traditional investors rush to plow cash into private tech companies.
For Y Combinator, this could mean doubling down in a big way on the startups it backed from its earlier years, like Dropbox and Airbnb.
Y Combinator has built a reputation for itself as one of the top seed-stage investors on either coast, but with its top startups all grown-up, the investor appears to be considering a big change in strategy.
Y Combinator in ‘very preliminary-stage discussions’
One source with direct knowledge of discussions between Y Combinator and investors cautioned “it is in very preliminary-stage discussions,” and the investor could still abandon the plan.
Details are still being ironed out regarding one of the newest and most influential venture firms in Silicon Valley, but executives at Y Combinator are telling potential investors some funds will be for “long-term capital” that allows startups to continue to operate in beta without having to go public.
Another source said Y Combinator could raise up to $US5 billion, although this figure was disputed by other sources. One characterised a late-stage Y Combinator fund as only being in “idea stage,” although limited partners that invest millions into VC firms confirmed the investor has expressed plans to raise a late-stage fund, possibly by the end of 2015.
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Paul Graham and Jessica Livingston
They have come a long way
Early-stage startup investing evolved in recent years thanks to investors like Y Combinator, which was founded in 2005 by the team of Trevor Blackwell, Paul Graham, Jessica Livingston and Robert Tappan Morris. At its inception, Y Combinator provided budding entrepreneurs with a five- to six-figure check, space in its Massachusetts incubator and as advice from its professional network.
In 2009, after years of working between Silicon Valley and Cambridge, the seed investor decided to locate its operations full-time on the West Coast, where it remains today.
Now, as some of its biggest investments encroach on pre-IPO territory, it appears as if Y Combinator will take on later-stage deals at much higher valuations, pitting them against investors like Fidelity and T. Rowe Price, as well as hedge funds that in recent years have stepped up major bets on startups like Twitter, Facebook and Uber — all before they went public.
A new breed of investors is dominating late-stage startup fundraising
According to one hedge fund source, the manner in which late-stage startups are being backed has dramatically shifted in the last 24 months. Non-traditional investors in the venture space — not just Fidelity and T. Rowe Price, but also hedge funds like Tiger Global, Maverick Capital and Coatue Management — are dominating venture funds, pumping billions of dollars into startups like Uber, Airbnb, Snapchat, and others.
Rounds being led by non-traditional investors, said the source, quoting from private research, go at a premium of six-times the prior round that was led by a traditional venture firm, suggesting this new wave of investors is driving up valuations. Further, the source said, non-traditional investors have led 75% of venture rounds greater than $US1 billion over the last 24 months.
Now, startups Airbnb and Dropbox are approaching valuations of $US10 billion or greater; Y Combinator has also backed valuable startups including Scribd and Stripe. Among Y Combinator successful exits are Twitch (sold to Amazon for roughly $US1 billion) and OMGPOP (sold to Zynga and later shuttered), among others.
Now, more early-stage investors are making big bets on startups
The strategy shift may not be a bad idea, especially at this point in the venture investing game: a flurry of early-stage investors, from TechStars to Homebrew to First Round Capital have raised capital to support startups earlier. And the abbreviated timeframe in which startups build scale, combined with some investors’ increasing eagerness to pump tens of millions of dollars into early rounds — something that was mostly unheard of, save recent years — have made the early-stage venture scene increasingly crowded, and turbulent.
For example: on Feb. 23, an auto-loan facilitating startup called DriverUp raised $US50 million — for its Series A round. One source said Y Combinator would reserve a portion of its fund for early-stage investments, but that it is unlikely it would pursue such a deal like this one, with such a high valuation, so early.
Business Insider reached out to several members of the Y Combinator team for comment; no comment was provided for the record by publication time.