There’s some life in the venture-funding world after all. Seed investment fund Y Combinator is starting a new fund backed by Sequoia Capital and angel investors Ron Conway, Paul Buchheit and Aydin Senkut. The fund will focus on the small bets Y Combinator specializes in — seed bets of about $5,000 to $20,000 that take 5 percent to 10 percent stakes in startups, usually at just the idea stage. The total size of the fund will be $2 million and it will make about 60 bets a year, 50 percent more than Y Combinator typically makes.
Sequoia’s investment in the new Y Combinator fund is a validation of the micro-investment model, which funds companies that usually fly under the radar of a player like Sequoia Capital. Y Combinator has a good track record as an angel investor, having made bets on startups like justin.tv, omgpop.com and loopt.com, among others. Unlike VC funds or larger angel funds, Y Combinator doesn’t seek controlling stakes in companies it is funding. Instead, after placing small investments at the seed stage, it remains invested in the company as it grows and takes on additional funding, usually from large VC funds or strategic partners.
Sequoia Capital, on the other hand, is one of the pre-eminent VC firms in Silicon Valley, having invested in such companies as Apple (NSDQ: AAPL), Oracle, Yahoo (NSDQ: YHOO), Google (NSDQ: GOOG), and YouTube. By investing in a fund that will be managed by Y Combinator, Sequoia gains access to these companies early on while not sapping valuable time and resources from its large VC bets.