Y Combinator: accelerator investments need to change focus

Next week, Y Combinator will hold its 35th Demo Day. Tech start-up founders will have just one minute to present their ideas to potential investors. This year the stakes are particularly high, as new chief executive Garry Tan will be aware. His recent appointment coincides with a sharp downturn in start-up investment.

In the second quarter of the year, global start-up funding fell 23 per cent from the previous quarter to just over $108.bn, according to CB Insights. Megaround investments of $100mn or more fell almost a third. This drop reflects the fall in public market share prices. In May, Y Combinator warned start-ups to plan for the worst.

So-called accelerators live at the sharpest end of the start-up funding ecosystem, backing ideas that may not yet be products. Few make it to the next round of funding. The rise of software companies that do not carry big upfront costs has made the business of early-stage investing more lucrative. But if venture capital firms reconsider their investment plans, accelerators could struggle to sell their start-up stakes.

Launched in 2005, Y Combinator is the best known of the Silicon Valley accelerators, offering funds and support to new companies. Its alumni includes room-booking site Airbnb and payments company Stripe. As more rivals have appeared, it has sought to differentiate itself by offering more money. In January it announced it would update its terms, providing companies with $500,000. In addition to offering $125,000 for 7 per cent of equity, it offers $375,000 in the form of notes that convert to equity. It has also increased the size of its intake. A decade of ago, Y Combinator would take on just a handful of start-ups twice a year. Its last batch had more than 400.

The slowdown offers a chance to reflect on this model. Instead of trying to elbow out rivals by backing ever-increasing numbers of start-ups, Y Combinator could return to its roots and focus on a smaller number of companies, providing them with more assistance. The next round of world-changing start-ups could be in the making.