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This article was published on January 29, 2011

Will an assured $150k investment hurt the spirit of Y Combinator?

Will an assured $150k investment hurt the spirit of Y Combinator?
Brad McCarty
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Brad McCarty

A music and tech junkie who calls Nashville home, Brad is the Director TNW Academy. You can follow him on Twitter @BradMcCarty. A music and tech junkie who calls Nashville home, Brad is the Director TNW Academy. You can follow him on Twitter @BradMcCarty.

Here’s a gutsy move, but one that could pay off extremely well in the long run. According to TechCrunch, Angel investor Yuri Milner and SV Angel have just laid down an offer that will be exceedingly difficult to refuse: $150,000 to every startup in the current Y Combinator, plus every group to come. While it’s great news for the 40-some hackers who are hoping to claw their way to victory right now, it just might do more harm than good in the grand scheme.

Y Combinator, if you’re not familiar, is a startup boot camp of sorts. Twice a year, the venture fund takes a group under its wings and provides a very small seed investment (generally less than $20k, according to the YC FAQ) in exchange for an equally small stake in the company. The money allows the groups to remain on a ramen-fueled diet while hacking away to make a product the best that they can make it.

For 3 months, the startups move to the valley, receive coaching and then pitch on “demo day” to potential investors. Many of the companies are funded during demo day, and a good number have historically not even completed the full YC time before receiving full funding or being acquired.

What Milner and SV Angel have done, in essence, is take away part of the difficulty that makes YC so infamous. That boot camp mentality is one that has been groomed for quite some time and it has taught many companies how to develop a product on the leanest of investments. What concerns us about the Milner/SV offer is that $150k is nearly 10 times the typical investment given to a YC company, and that money might just take away the edge that we often see from YC success stories.

Neither Milner nor Ron Conway (co-founder of SV Angel) are fools. Taking a look at the investment track records of each shows that they have considerably more hits than misses. YC companies are generally eaten alive by the Angel community and the growing concern over a valuation bubble has only made that scenario more acute. Neither SV nor Milner have had a chance to see the current crop at YC but, as Rackspace’s Rob La Gesse notes, “they are betting blind, but knowing the house wins most of the time. Brilliant.”

I had the chance to talk with Adam Goldstein, founder of Hipmunk and Y Combinator alumni. The question I asked to him was simple — if it had happened to his group, would Hipmunk have been as good as it is today? His overall view? Yes.

“I think that there are a number of companies that negotiate with YC to get non-standard funding or deals. They know, no matter what they do, they’re likely to get funding [because of the Y Combinator credentials].”

An interesting twist to this scenario, though, is one that is not widely advertised. While YC startups might be hungry, increasingly, they’re not as hungry as they once were. According to Goldstein:

It seems like they [Y Combinator] are funding more and more startups that are no longer at seed stage. In many cases they are funding startups that have raised outside capital from Angels, if not Series A…By the time they reach YC, they’ve already raised $150 [thousand] if not more.

Goldstein offers the opinion that $150k extra funding isn’t enough to change the spirit of YC. Sadly, I didn’t get to write his quote down, but his thought is that if we’re not talking millions in additional funding, then the work that we see coming out of Y Combinator will not change.

At The Next Web, we’re privileged to be able to see the best and brightest, and to be able to tell you about them. It’s our sincere hope that, regardless of what today’s announcement will do to the Angel and VC community, the spirit of Y Combinator will not change. We love seeing the future of our Internet world, and Y Combinator is a prime source of that new blood. Anything that could change what Y Combinator is deserves a bit of investigation.