On the $500k Y Combinator standard deal

  1. YC will get *a lot* more applications. From a founder’s perspective, there’s a huge difference between $125k and $500k in guaranteed capital upon acceptance to YC. This will get the attention of thousands of startup founders from around the world who otherwise wouldn’t have applied to YC and motivate them to do so.
  2. The profile of YC founders will evolve. YC founders are already older and more accomplished than most people realize, and the new standard deal will attract even more experienced founders — the kind who may not find $125k that compelling but will find $500k so. It may also attract more startups with capital-intensive and/or risky business models, since they’ll have more cash to throw at hard problems from day one of the batch.
  3. YC batch quality will improve. As a natural consequence of #1 and #2 above, YC admissions can afford to be even pickier. This means stronger companies at Demo Day and more unicorns per batch.
  4. Early pre-Demo Day investors will get squeezed out. Many YC founders these days raise their rounds in traunches, starting with smaller checks at lower valuations early in the batch, and ending with larger checks at higher valuations after Demo Day. Founders will no longer feel the need for the former since they’ll be well-capitalized right off the bat, and in addition, they’ll be disincentivized to raise capital at lower valuations since YC’s SAFE will convert at the lowest cap they raise money at due to the MFN clause. This likely means radio silence on the fundraising front until right around Demo Day when they’re in the best position to raise.
  5. YC startup valuations will increase. Due to all of the effects above, it’s hard to imagine YC startup valuations not increasing. Not only will the founders be higher caliber, but their companies will be further along by the time they raise capital. The shifts the balance of power from investors to founders, which let’s face it, has been YC’s modus operandi from the start. I don’t think this is bad for investors though, because even though their equity in YC startups will get costlier, they’ll also be investing in better capitalized, more developed, more ambitious startups with stronger founding teams — and presumably better outcomes.

Winners:

Y Combinator — They’ll get more and better applicants, higher batch quality, and a larger equity percentage in YC startups to boot

Losers:

Rejected YC startups — The downside of YC’s greater selectivity is that more startups will be rejected from the program, in both absolute and percentage terms. If it’s any consolation, YC misses great startups all the time, so keep pushing forward!

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Jared Heyman

Jared Heyman

Tech guy and investor. Founder at Rebel Fund and previously Pioneer Fund. Chairman of Infosurv and CrowdMed (YC W13). Former Bain consultant. Data nerd.