US incubator Y Combinator has reduced its investment amount from $150,000 to $80,000, underlining the plummeting cost of starting a business, especially in the tech sector.
Niki Scevak, co-founder of Startmate, says because the cost of starting up has fallen so dramatically, the value is in the advice start-ups receive, rather than the capital.
“Start-ups need lots of advice rather than lots of capital,” Scevak says.
His comments come on the back of an announcement by Y Combinator founder Paul Graham, who said the new version of the YC program “involves less money and more engagement”.
“Two years ago, [venture capitalists] Yuri Milner and Ron Conway formed an informal coalition to invest $150k in every start-up we funded… The new version involves less money,” he wrote in a blog.
“The VCs will invest $80k in each start-up instead of $150k, and we’ll organise sessions of office hours in which partners from the VC firms advise the start-ups.”
“As before, the investments will be done as convertible notes with no valuation cap and no discount.”
Graham said the amount is being reduced because “experience showed $150k was too much”.
“It’s good for start-ups to get some amount of investment automatically; it lets them continue working on ideas that still look like ugly ducklings on demo day,” he said.
“But $150k was more than the successful start-ups needed, and it sometimes caused messy disputes in the unsuccessful ones.”
“Switching from $150k to $80k may not completely eliminate such problems, but it will make them at most half as bad.”
Graham said Y Combinator is still unsure what the optimal amount is, but $80,000 is “probably close”.
“That should give founders roughly a year (depending on the number of founders and their living expenses) to test whether a risky idea will pan out,” he said.
“While we’re asking VCs for less money, we’re asking for more time. Last batch we tried a new experiment where we invited partners from some of the top funds to hold office hours at YC.”
“It worked well, so this batch we’re combining office hours with the investments.”
Y Combinator has partnered with four investors, each of which will invest $20,000 per start-up. The investors are Yuri Milner, Andreessen Horowitz, General Catalyst and Maverick Capital.
Scevak says he can understand why Y Combinator is reducing its investment amount.
“If you have lots of money, you spend lots of money… [This is] a small tweak that can produce large changes in behaviour,” he says.
“More than anything else in Silicon Valley, you’re consuming the help of angel investors. It’s the money for sure, but their memory of what works and what doesn’t [is more valuable].”