YC's 7% Investment Model

YC has a unique and simplified approach to early-stage investing that has produced exceptional returns. Here's their framework for success.

Core Investment Strategy

• Takes 7% equity stake in every company, no negotiation
• Uses 10-minute interviews to make investment decisions
• Primarily funds technical founders who can build products
• Focuses on founders who are "smart and earnest"
• Provides same deal terms to every company for fairness and simplicity

Investment Performance

• Top decile investors (2018-2020) achieved 16x returns
• Top quartile achieved 8x returns
• Median performance was 5x
• Bottom quartile still achieved 3.3x returns
• Significantly outperforms traditional VC metrics where only top 25% make money

YC's Success Factors

• Simple, standardized process that removes complexity
• High volume of applications (6,000+ reviewed by Garry Tan)
• Focus on technical talent who can build products
• Strong network effects from bringing top founders together
• Creates "magic" by putting top 1% of builders in same room
• Resembles college model but pays founders instead of charging tuition

Key Founder Traits They Look For

• Technical ability to build products
• Smart and earnest personality
• Ability to adapt and pivot when needed
• Strong problem-solving capabilities
• Willingness to learn and grow

YC's Support Model

• Provides initial capital and network
• Throws founders "in a room" with other top builders
• Offers high standards but welcoming environment
• Maintains very earnest, straightforward communication
• Focuses on helping founders who traditionally lack access to capital/networks

Results

• 5-10% of companies become worth $1B+
• Creates approximately $3B in market cap per batch
• Generates ~$20M per year per employee in carry
• Produces ~$100M per year per employee in total value created