Initialized Capital was venture capitalist Garry Tan’s answer to a need first highlighted by Y Combinator. As a partner at the accelerator from 2010 to 2015, Tan spent time working with companies to better understand what they needed from investors after they graduated.
“I literally built the seed fund that I wanted to exist for those companies,” he said in an interview over Zoom with TC. Today, Initialized Capital manages over $3.2 billion in assets under management and Tan is stepping back to return to the accelerator that was his muse – this time as the new chief executive and president of the entire institution. While Tan’s new gig is set to begin in January 2023, he sat down with TC to talk about his vision for the accelerator, its batches, and his goals going forward.
The investor is going to have a bigger scope. Initialized Capital just raised its largest fund to date last year and now works with over 200 active portfolio companies. YC, however, is operating at an entirely different scale: the accelerator has funded over 3,000 companies and worked with over 6,000 founders. YC declined to share AUM, but did confirm that portfolio companies have a combined valuation nearing $1 trillion.
“The world has just become so much bigger and there’s so many problems to solve — the chance to help make more prosperity in the world, that’s a super big draw,” Tan said.
Tan’s announcement comes at an active time for the accelerator. Next week is Y Combinator’s bi-annual Demo Day, in which startups present to the public for the first time after spending three months going through the accelerator. It’s different than demo days prior because it’s smaller. YC recently said that this summer’s batch is 40% smaller than the last batch in response to the funding environment and the economy.
While YC’s narrowing of focus addressed one of the most frequent critiques of the accelerator – that its batches have gotten too big and network has diluted as a result – Tan didn’t offer any details or sentiment that would support a similar approach going forward. He’s a former YC founder himself, and instead defended the accelerator’s approach to growing the batches year over year — something that his soon-to-be predecessor Geoff Ralston saw known for pushing forward.
“A lot of people talk about the batch size as being too big, but I think it’s like, dude, Metcalfe’s law is one of the most fundamental laws,” Tan said, eliciting the argument that the more number of nodes there are, the more interconnected and valuable a network is. “There are a lot more people who want to maybe escape the rat race, like me…and build their own.”
He views the network and community as YC’s biggest strength, instead of its biggest challenge (the latter of which he said it’s too early for him to say).
Tan hopes to engage YC’s alumni community more in the future of the institution although it’s unclear how that may materialize, whether through more events or if there’s a micro-community play to be seen. There are already some external efforts of this happening that loosely tie back to the accelerator. OrangeDAO, for example, is bringing together over 1,000 YC alumni who are interested in backing crypto companies together — and just last week raised $80 million for its debut fund.
While the number of YC alumni is undoubtedly vast, powerful and present in various sectors through some of the most richly-valued companies, it also has historically struggled with diversity within its batches. Last batch, YC’s cohort featured 90% male founders, up from 88% in the prior batch. It also had 12% Latinx founders, down 15% from the previous batch. It made incremental progress when it came to Black founders, with Winter 2022 having 6% Black founders up from 4% the batch prior.
When asked if diversity will be a focus for him going into YC, Tan noted that Initialized was named one of the most diverse firms in a research project conducted by tech outlet The Information. “I want to continue that because [YC] is the most growth mindset thing in the world, right? So you know that these are all things in the past that we want to carry forth.”
Tan’s love for the Bay Area could play a role in attracting founders. While it looks like YC will remain remote in some capacity going forward – especially considering its international focus — the entrepreneur talked about his personal story growing up in the Bay Area and said that YC is already moving in a great direction toward becoming re-focused on the region — including a Sonoma retreat this batch. “Let’s just keep that prosperity happening because, you know, something is magic in the San Francisco Bay Area,” he said. “As YC is a magnet, as the San Francisco Bay Area is… it has a big role to play in the future of technology.”
Tan’s exit is shaking up the firm he helped found. He held down the fort after the firm’s other co-founder, Reddit’s Alexis Ohanian stepped away in 2020. Now, with the impending change, the firm has appointed Jen Wolf and Brett Gibson to managing partners. Wolf, who was previously president and partner, will continue to invest and lead all of Initialized’s operations. Gibson, who previously served as general partner (focused on crypto, web2, SaaS and devops), will lead the firm’s early-stage investment strategy.
Sources noted to TC that Tan’s appointment, and the ensuing leadership handoff was not abrupt, some saying it has been a work in progress for more than a few quarters. Tan maintains that he heard about the opportunity somewhat recently.
The two worlds of Initialized and YC are similar beyond ethos and origin. For example, Tan hired YC alumni Scott Moss to be a principal over at Initialized. One of Tan’s most successful investments to date is cryptocurrency platform Coinbase. Through investments with Y Combinator and then Initialized, Tan’s investment was once estimated, using private secondary valuation, to bring a 6000X return. Initialized routinely invests in startups coming out of Demo Day.
Tan didn’t say how his new role at YC and his future role at Initialized, which is venture advisor, will overlap when asked about competitive or complementary dynamics. “You need a seed investor who’s going to be there for over the course of years and Initialized remains that,” he said. “The high level here is like I’m here to make the YC companies, the founders successful.”
