A Short Primer on Investing in YC Companies

Intro

“I just sent in my YC application—fingers crossed,” is something that tens of thousands of hopeful founders say every few months, when Y Combinator opens up applications for their next quarterly batch.

Fewer than 2 percent of those founders usually get in. The acceptance rate is lower than Harvard’s.

Once a startup does get accepted to Y Combinator, though, things tend to go well. Almost half of Y Combinator companies raise a Series A, and as of 2024 the median annual recurring revenue (ARR) of Y Combinator companies was more than $1 million. These are almost unbelievable numbers.

Those numbers are why, even if you don’t know much about startups or tech, there is a good chance you’ve heard of Y Combinator. It is hard to overstate just how impressive of a resume Y Combinator has built for itself over the decades. They invested early in startups like Stripe, Airbnb, Doordash, Twitch, and thousands of others that have gone on to become major successes. Sam Altman, current CEO of OpenAI, was YC’s president for years. YC has become synonymous with the gold standard in startup investing.

But what does YC actually do? How do they select such great companies (and help them succeed)? And if you wanted to invest in YC companies, how would you go about it?

What Y Combinator actually does

Most venture capitalists will tell startup founders that they can add a lot of value. Maybe they think they have some valuable connections, or a talent partner, or experience in a founder’s industry. But it’s an open secret amongst founders that VCs, on the whole, do not generally add much value.

Y Combinator is different. It’s not a normal VC fund: it is a startup accelerator that invests $500k in early-stage startups, then helps them launch (if they haven’t already) and grow their companies. The Y Combinator program runs four times a year, for three months each, and its explicit goal is to “help companies really take off”. During the program, founders meet the other founders, participate in weekly office hours with YC Partners, and get the opportunity to network with successful YC alumni who were just in their shoes.  

Finally, at the end of each YC batch, every startup attends what’s called Demo Day: an invite-only event where they can show off their product to Tier1 investors and the press. This is often a launching pad for startups to introduce what they’ve been working on to some of the top names in venture capital.

Of course, Y Combinator is not the only startup accelerator. But, if we are going to judge based on resume, they are far and away the most successful one ever. Why?

Why YC companies can be so successful

The success of a startup accelerator (and thus the companies it invests in) relies on three things:

• Receiving applications from the best founders.

• Successfully identifying the best founders from that group of applications.

• Being extremely helpful to those founders as they work on launching or growing their company.

If you launch a brand new startup accelerator today, the odds that the best startup founders in the world will apply are quite low—they have better options. YC does not have that problem: they have already established themselves as the premier startup accelerator. Being accepted by YC also means having a gold star on your resume for future investment rounds, getting access to a community of some of the world’s best founders, and building a network you may be able to use for the rest of your life. In other words, Y Combinator is not lacking applications from great founders—they have plenty.

So, then, how do they choose?

Paul Graham, one of YC’s founders, makes it clear they are interested in a few key facts.

• What the company is going to make

• What impressive things its founders have achieved

• The level of insight that founders have about the space they’re building in

Most startup founders are not actually great at talking about these things. The default answer to ‘what are you going to make?’ tends to be a jumble of confusing language and buzzwords rather than a clear statement, for example. These things are hard. Few do it well.

The more writing you read from Paul Graham and the people involved in the YC selection process, the clearer it becomes that, above all else, they mostly optimize for finding great founders. Graham writes that he would even fund a “group of founders with no idea,” if he thought they were good enough.

Of course there is both an art and a science to choosing great companies. If you walked up to a random person on the street and handed them a list of YC criteria and access to applications for the most recent YC batch, it’s unlikely they would pick a list of companies nearly as good as the ones that the folks at YC would pick. Part of what makes YC special is that they are genuinely good at identifying great founders.

All of this leads to a rather obvious question: how do you get access to invest in YC companies? Learning about YC’s successes suddenly makes these companies attractive—a group of proven professionals has selected what they believe to be the best up-and-coming startups. Why don’t you invest?

While it can be rather complicated, there are a few clear paths to investing in YC companies.

Why invest in YC companies?

The classic pitch for why you should invest in early-stage startups is simple: investing early is how you maximize your upside. Take two investors, for example—one who invested at the seed stage and one who invested at the startup’s Series E. Now imagine the startup goes public at a valuation 10% higher than their Series E. While that’s nice for the latter investor, who sees a marginal gain, the seed investor might see a return that’s at least ~10X higher than what the Series E investor sees.

If you want a chance at a true 10X, or 100X, on your money, investing in startups early is one of the paths you may consider taking. But then you may have heard some of this before—you know investing earlier tends to give you more upside than investing later. If you are reading this essay, you may be interested.

The pitch to invest in YC companies builds on the pitch for investing in early-stage startups: why invest in just any startup when you could invest in the startups backed by the world’s most successful accelerator?

One way to think of it is like poker. If you play in a poker tournament with a grand prize of $1M, would you rather play solo or with one of the world’s greatest poker players screening your hand and giving you advice on how you should bet? Yes, there’s still a chance you lose—but having an expert weed out the bad hands and select the promising ones increases your chance of winning. It’s not the perfect analogy, but investing in YC startups is sort of similar; instead of investing in a large pool of non-vetted startups, you’re investing in a smaller group of expertly vetted startups that may be more likely to succeed.

Of course there is also the question of risk: even though a startup selected by YC is more likely to succeed than a startup picked at random, you’re not investing in a broad market index fund here. Most startups, even those backed by Y Combinator, fail. That’s a risk you need to be okay with.

But if you’ve thought about your goals and decide that you’d benefit from some portion of your wealth being invested in early-stage startups, the next question is how to get access. 

How can you invest in YC companies?

Investing in startups is an intimidating world. But if you’re interested in investing in companies that have been backed by Y Combinator, there are a couple clear paths you can take.

Path #1: Investing via private funds

YC startups are often the best of the best, which means they aren’t going to let just anyone onto their cap table (meaning, they won’t let anyone invest directly in them). This means it can be hard to get access to these startups early-on if you’d exposure to these companies but aren’t part of a fancy fund.

At GoodFin, we don’t believe investing in some of the world’s best startups should be gatekept behind having tens of millions of dollars (though it’s fine if you do) or by having to know someone in venture capital. That’s why, a couple times a year, we create our own funds that invest in our favorite YC companies from that year’s batches. If YC is the best of the best, then GoodFin’s funds are the best of the best of the best. We select just a handful from each batch. Our primary criteria? Finding a great, uniquely talented team that executes. This isn’t easy, of course, but picking from YC batches makes it easier.

If you are a GoodFin member and an accredited investor, you can invest in these funds—getting access to our picks of the most promising YC companies in each batch.

We also offer something rare: you, or you and a group of people, can create your own custom funds. If, for example, you scan the list of YC companies from 2024 and see a group that you think are especially promising, we can help you create a fund to invest specifically in those companies. This is a bigger undertaking and requires a much higher minimum investment—but it can be done.

In 2024, we introduced a new piece to our YC funds: you can now vote on which companies you’d like to be in our YC funds. For every $1k you invest in the fund, you will receive one vote. We still participate in choosing the companies that make up the fund, but this is a new way we’re giving agency to investors.

Path #2: Investing in individual companies via private secondaries

One way to get access to private startups—and this applies to more than just YC startups—is to invest in private secondaries. This is when you agree to purchase shares of a startup from another investor who already owns shares of that startup (like how public markets work, but more manually and more logistically complicated). If you’d like to learn more about private secondaries, you can do so here.

There is some downside, though: private secondaries usually become accessible once startups gain more traction, more investors, and become more mature. While this may reduce the risk—the startups are more proven—it may also reduce the upside. Private secondaries can be a wonderful way to get exposure to startups, yes, but they do not always have quite the same upside as investing in a YC startup earlier on.

What’s next?

Y Combinator has one of the best track records in the industry for selecting promising startups at almost impossibly early stages. Its alumni companies have hundreds billions of dollars in market cap and have fundamentally shaped the world. If you’re looking for a way to get exposure to the next generation of billion dollar companies, there is no better way than investing in startups that were accepted by the world’s best startup accelerator.

Sign up to GoodFin if you’d like to learn more and explore our YC funds.