Mutual funds and VCs have an incentive to increase fund size due to the 2/20 compensation. They make a 2% of funds under management win or lose, so it pays to up-size the bucket.
With early stage that is not an incentive, and the merit lines are so much fuzzier (is the fund adding value) and for smaller funds - how do you maximize odds of finding and funding the few winners. With increased late stage funding, the early money also get less priority, not to mention the delayed liquidity (unless they can sell to later investors).
Some real perks of having YC in the startup ecosystem is that it:
1. Grows the "seed variety" and "size of land planted" to get more founders with broader backgrounds and in more disciplines to build startups. That dramatically increases the odds of an unintuitive next-big-thing sprouting in Silicon Valley.
and
2. Fertilizes the soil - as YC alumnae help each other and can strike better deals or give each-other an early lift.
Demo day pressure-cooks many to fail or fly fast, and if too many are raising money means they is either a selection problem or a program decision to make:
- Startups picked are too early, or in less VC-worty sectors that need more incubation, or founders don't always have an incentive or plan to build a sustainable business beyond doing YC and raising a lot of money for bragging rights. They can easily an expectation that fundraising happens in 3 months, or narrow the selection of RFPs to later stage more immediately provable.
- Or YC just lets startups pick any demo day they want, but has to carry an ever-increasing load of zombies, or startups too-niche to accelerate with every increasing demand on partner's time. The latter helps both 1 and 2, but it has to be done in a sustainable way. Use Startup School as alumnae-expandable program for on-going incubation?