Investing on Both Sides of YC
Back in 2016, when I joined 500 Startups, we saw ourselves as the competitor to Y Combinator. The gap was smaller than it is today, but still substantial. We were a distant second or third on that leaderboard imo.
I had always been fond of YC as I grew up watching lectures on YouTube. Investing in YC companies and encouraging our founders to apply felt completely natural.
2016-2019: our portfolio companies applied with substantial traction.
YC seemed to invest in 2 broad categories at the time: companies with limited technical risk but exceptional execution momentum and companies with enormous technical risk.
Most of our pre-YC investments belonged to the first category. Our post-YC investments were often in the second.
The most notable was BillionToOne, which went public last year and returned 4x our entire fund. 4x dragon investment.
There was also another company I will not name. They committed fraud and nobody was ever able to find the founder again. Funny story.
After 2020, YC’s founder persona shifted
The batches became increasingly technical: developer tools, open-source infrastructure, bottoms up adoption and software heavy markets. We followed.
We backed around a dozen deeply technical founders operating in blue ocean categories and building impressive open source traction. Five of our companies eventually joined YC after our initial investment: Ubicloud, Refine, Intryc, Patientdesk and Caretta.
We also doubled down after YC, particularly around AI. These highly technical founders naturally gravitated towards AI and YC’s batches moved in the same direction. At one point, the batch felt 150% AI.
We wanted more AI exposure in Fund II and more exposure to the Bay Area. YC offered both. We made five post-YC investments so far: BillionToOne, Fume, Polymet, Yoneda and Brainbase.
One before YC. One after YC.
2024 started another era.
AI created the possibility of blitzscaling at a speed we had not seen before. YC increasingly backed very young founders with extraordinary technical potential. Many lacked traditional domain expertise but they compensated it with their youth.
They had started coding at seven years old. They were native in software in the way others are native in a spoken language. They often attacked obvious problems, but with a technical edge. They pivoted repeatedly until the product, distribution and message finally clicked.
We followed again and backed exceptionally young founders who had been preaching entrepreneurship since watching The Social Network as toddlers, learned to code before they could write, and began building companies as teenagers.
With twenty years ahead, the ceiling is hard to imagine
Our thesis has always been to back great people capable of building outlier companies.
YC is also an effective landing pad for our San Francisco bridging strategy. For founders who are new to the ecosystem, it provides an immediate community, a network and a reason to relocate.
We will continue backing founders who want to go through the program and helping them become strong enough to get in.
And for every pre-YC investment we make, we will aim to make one post-YC investment.
It hedges the portfolio, averages our entry points and gives us exposure to both ends of the YC spectrum including founders we could never have discovered before the program.