When startup incubator Y Combinator changed the terms of its seed funding last year, it quietly added two prominent investors as de-facto backers of every company in the program.
Stanford University’s endowment fund and Willett Advisors LLC, the fund managing Michael Bloomberg’s investments, now invest a combined $100,000 in every startup to go through YC, according to people familiar with the matter. The investments take the form of convertible notes, which convert into equity when startups go to raise their next round of funding.
As The Wall Street Journal details in a story Thursday, the two investors are also behind YC’s new $700 million fund aimed at boosting YC’s stakes in the most promising companies to emerge from the incubator. The “continuity fund” recently made its first investment, leading a $30 million for Checkr, a service for running background checks on workers used by sharing-economy companies including Uber Technologies Inc., according to a person familiar with the matter.
Sam Altman, YC’s president, brought in Stanford and Willett last year amid growing concerns that the incubator’s practice of working with venture-capital firms to provide startups with funding could create negative signals about companies who didn’t receive follow-on investments. In a blog post last year, Mr. Altman didn’t disclose the new investors but said he hoped the change would help “level the playing field” for YC startups. Stanford and Willett have now invested in three of YC’s classes since summer 2014, the people familiar with the matter said.
Mr. Altman declined to confirm the names of any investors.
Y Combinator has struggled to hold on to its founder-friendly mentality that makes it attractive to entrepreneurs as it expands to hundreds of companies a year and attempts to cash in on its valuable network.
For Stanford and Willett, putting a small amount of cash in every YC startup is akin to an index fund for a large crop of Silicon Valley’s youngest startups each year.
Each startup that goes through the three-month program now receives$120,000 in cash — $20,000 from Y Combinator, plus $100,000 from the outside investors – in exchange for 7% equity in their company.
The investment is an extension of a program which began in 2011, when Russian billionaire Yuri Milner and Silicon Valley networker Ron Conway in 2011 put up the initial capital for the Start Fund, a bundle of cash offered to every Y Combinator company.
Over about three years, Mr. Milner estimated those small investments have roughly tripled in value, mainly because of stock it gave him in a few big winners.
“This portfolio is doing well because of the big wins,” Mr. Milner, the founder of prominent late-stage venture firm DST Global, said in an interview.
In 2012, the program was renamed YC VC and added four new VC backers: Andreessen Horowitz, General Catalyst, Maverick Capital and Khosla Ventures.
The new “continuity fund” gives Stanford and Willett even more exposure to YC companies since it will continue investing in each company up to a $300 million valuation, then make discretionary bets after that.