Y Combinator startups to get less cash, more connections in strategic shift

In a big change for Silicon Valley’s oldest startup incubator, Y Combinator announced today that it would change how its classes of startups receive investments, with Y Combinator taking control of the funding process, changing which VCs make the investments and halving the amount of money given to startups.

The changes scale back how much money startup founders will receive with the YC program — $80,000, down from $150,000 — but YC said it would organize network connections with notable local investors, which is arguably what YC is all about — building connections and networking while getting critical feedback as your company gets off the ground. Sure, it’s less cash, but it seems unlikely the changes will halt the flow of applications that come to the incubator each year from startups desperate to join. And the group hopes it will decrease founder disputes without hurting any of the successful startups.

In a post, Y Combinator explained that the decision shouldn’t hurt successful startups — who can still go out and fundraise after Y Combinator — and will cut down on founder disagreements for the companies who go bust, since there will be less to fight over. The decrease in initial funding could prove tough for some hardware companies, who tend to need more cash upfront, or international founders looking to secure visas and relocate, but otherwise should be an improvement, said YC partner Harj Taggar.

“It just made the disputes more heated becasuse there’s more at stake,” he said.

Initially, all companies selected as part of a Y Combinator class were offered a convertible note for $150,000 from investors Yuri Milner and Ron Conway. While Y Combinator wasn’t directly making that investment, it explained in a blog post that it ended up taking part in the complicated process. So, YC decided to create its own investment to simply the process:

“Although we didn’t organize this program, over the years we ended up de facto managing it, and it was awkward to manage something we hadn’t started. So we decided to take control of the situation and replace it with something of our own design.”

Now, YC startups will still receive a convertible note, but only for $80,000, and it will come from $20,000 each from Milner, Andreessen Horowitz, General Catalyst, and Maverick Capital. Conway is notably absent from the list.

While upcoming classes of YC startups will likely be disappointed in the funding changes (who wouldn’t prefer twice as much money when starting a company?), the incubator has never been about making the most money possible in a few months. It’s about building connections with Silicon Valley investors, access to later funding rounds, and an alumni connection that can help with everything from finding office space to hiring programmers.