Y Combinator reduces investment size to $125k, cites economic concerns

US-based seed-stage accelerator, Y Combinator (YC), is reducing the standard deal of its investment from $150 000 to $125 000. However, it is maintaining its 7% equity stake in backed startups.

The announcement was made on Friday (26 June) by Y Combinator president, Geoff Ralston. The announcement coincides with the accelerator’s call for application for the upcoming Winter batch 2021.

“We are making two changes to our standard deal in conjunction with a recent fundraise. Starting with the Winter 2021 batch, our deal will be $125 000 for 7% equity on a post-money safe,” he said.

Y Combinator has reduced its standard deal size to $125k

The accelerator will also reduce its pro-rata right to 4% when investing in follow-up rounds. In essence, if a YC-backed startup is raising a subsequent round, the accelerator has a 4% participation right to invest in that startup.

However, YC’s 7% stake will reduce after that round and when the accelerator stake in a startup goes below 4%, say 2.5%, the pro-rata right of YC drops to 2.5%.

The accelerator’s president said these changes will allow Y Combinator fund as many as 3,000 more companies in the future.

Equity and ticket size changes over the years

Founded in 2005, YC’s first investment size was $20 000 for 6%. In 2011, it increased to $150 000 for the same amount of equity.

However, from 2012 to 2013, YC reduced this standard deal to $100 000 but increased its equity stake to 7%.

In 2014, the accelerator increased its ticket size to $120 000 while maintaining its equity stake. It was during this period African startups like the defunct Afrostream, Paystack, Oolu, Flutterwave, OMG Digital got into the accelerator.

This continued until 2018 when the standard deal changed to $150 000 for 7%. Startups like Kobo360, Wallets Africa, Termii benefitted from this change.

From 2021, however, African startups will have to settle for the current standard investment deal of $125 000 for the same amount of equity.

According to TechCrunch, economy uncertainties caused by the coronavirus pandemic influenced the accelerator’s decision.

A spokeswoman speaking to the tech publication said “The future of the economy is unpredictable, and we feel it is prudent during these times to switch to a leaner model”.

For Ralston, this won’t be the last time the accelerator will change its standard deal, “but we feel this is the right place to be for the next several years,” he said.

The original version of this article appeared on Techpoint Africa on 27 June. See it here.

Read more: Y Combinator increases deal size to $150k, adds investment contract types

Featured image: Y Combinator via Facebook