Y Combinator Extends Invitation to Alumni Entrepreneurs for Investment in New Funds
In an exclusive scoop, Axios has learned that Y Combinator (YC) is extending an invitation to its alumni entrepreneurs to invest in the trio of funds it is currently raising.
The significance of this move lies in the integral role YC’s alumni play in the organization’s diverse operations.
The accelerator is taking a bold step by requiring limited partners to invest in all three of its new funds, a move that, while not unprecedented, may raise eyebrows among LPs in the current economic climate.
Here’s how it works: Alumni are expected to invest a minimum of $250,000 total, which will be distributed among the three funds.
These funds encompass one focused on providing initial checks to the next four cohorts of program participants, another centered on additional capital commitments, and a third aimed at making pro rata investments, facilitating additional seed and bridge rounds, and handling other special situations.
The deployment timeline for the first two funds is set to commence in late 2024, spanning two years, while the third fund will begin this month and run for three years. While the exact size of the funds is still under finalization, recent communications to alumni suggest that they aim to reach a total of approximately $2 billion.
Investors’ committed capital will be divided across the funds as 10%, 28%, and 62%, respectively. All contributions from alumni will be consolidated into a single investor entity in the funds’ capital tables and managed by an external service.
Zooming out, it’s worth noting that alumni have a long history of direct investment in other YC startups. The program has traditionally included a special “demo day” exclusively for alumni to observe pitch presentations from the latest cohort on the eve of the official event for investors and the press. Additionally, many of YC’s full-time and part-time partners, who are involved in selecting and coaching participating startups, are alumni themselves.
Commenting on this development, Joe Binder, a partner at law firm Debevoise & Plimpton specializing in fund formation, highlighted the historical interconnectedness of early-stage and growth-stage investments. He emphasized the importance for managers to convey to LPs that these stages should not be viewed in isolation.
In the broader landscape, the practice of “stapling” funds, as it’s known, was more common during the recent bull market characterized by low-interest rates. However, there’s been a shift, with firms focusing on early-stage investments increasingly refraining from mandating investors to back both flagship and late-stage funds.
Yet, YC’s approach is likely to receive a favorable reception from LPs due to the close relationship among the three funds. While two of them are essentially extensions of YC’s investment in each accepted company, albeit with varying terms, the third maintains a focus on YC’s portfolio companies but with heightened selectivity.
Y Combinator declined to offer a comment on this matter.
