Y Combinator reducing investments to $80K per startup, but including regular office hours from VCs

Y Combinator has made an announcement today about a reduction in its initial investment package from $150k to $80k per startup funded. The announcement indicates that, though the initial investment will be reduced, there will be sessions of office hours with partners from the top funds included with the new YC VC Program.

“We’re decreasing the amount invested because experience showed $150k was too much,” says Y Combinator’s Paul Graham. “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.”

The new arrangement of $80K per startup is something that Graham says is ‘probably close’ to optimal. The new arrangement will see investors Yuri Milner, Andreessen Horowitz, General Catalyst, and Maverick Capital contributing $20K a piece. Investments in the new YC VC program will continue to be offered as convertible notes with no discount and no valuation cap.

The Startup Fund was not YC’s idea, it was started by Yuri Milner and Ron Conway as a way to invest in all YC companies. Now, YC is taking the reins itself, as it had been managing the previous fund anyway.

We spoke to Graham about the changes a bit. Graham says that the experiment in opening up Y Combinator’s office hours portal last year was a success and it will be offering it to the four investors mentioned above and some other hand-picked ones.

The changes in funding, he says, are designed to help the ‘ugly duckling’ cases. Startups that don’t look great on Demo Day but actually are. The earlier $150K amount would probably help them a bit more than the $80k will, but they’ll probably benefit from it just the same. The startups that get massive funding on Demo Day don’t really need the $150K anyway, so they’re fine.

Where it will change things, however, is those startups that are doomed. With $150k at stake, there are more fights, and more issues that YC has to moderate. Graham refers to the new amount “as a kind of jet fuel that has the same thrust but less potential to explode on impact.”

The new investment will include office hours at YC with partners from some of the top funds participating and some others. The YC VC program replaces The Start Fund as Y Combinator’s funding vehicle.

The new structured inclusion of office hours from outsiders, basically time for the startups to get guidance and for the VCs to field important questions, is a great improvement. Under the previous fund, office hours were an experiment or scheduled with internal YC people only. Basically, YC VC is about less money but more guidance, something the investors hope will result in more assistance where needed to their startups.

Image Credit: Paul Miller