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Y Combinator: Disneyland for investors

The incubator's demo day has become a theme park for investors. Startups are the attractions that investors will endure long lines for and pay big bucks to ride.

This is how investors feel after attending Y Combinator demo day.

Y Combinator is one of the most influential organizations in Silicon Valley. But thanks to the incubator's most recent demo day, it has become a Disneyland for investors, where startups are the attractions that VCs and angels are willing to pay to ride.

On Wednesday, YC graduated 65 startups from its program, its largest class yet. The room was wowed by pitch after pitch from companies like Sonalight, 99dresses, Ark and Socialcam. There were plenty of graphs depicting skyrocketing user growth and revenue, and investors (as they typically do at YC demo day) ate it up.

This demo day was different from previous ones, though. In past years, three groups of investors would cram into YC's small offices at three different times to hear companies pitch. This year, the incubator decided to host investors in one room for one massive demo day at the Computer History Museum in Mountain View. The result was a world-class group of investors that most entrepreneurs would give their left foot to meet.

It was a feeding frenzy, with startups collecting funding commitments left and right. I heard the phrases "uncapped note" and "no discount" from different investors multiple times throughout the day. These are phrases startups want to hear. Investors were happy and willing to give YC companies incredibly generous -- some would argue too generous -- investment terms.

I asked several investors and YC founders why YC companies are currently in demand. Here were some of their explanations:

"YC produces some of the best-in-breed technology teams in the Valley," said Jeff Tanenbaum of BlueRun Ventures, an attendee of this year's demo day. "We covet the opportunity to invest in these entrepreneurs in their early stages of growth."

"Paul Graham has built Y Combinator into the highest volume lead generator for great early-stage technology startups and founders," said Matt Schlicht, who represents celebrity investors such as Lil Wayne and Pitbull. "Because of the vast number of companies YC analyzes, we pay very close attention to the investment decisions YC makes."

"Y Combinator alumni are plugged into an incredible network," said Kathryn Minshew, co-founder of The Daily Muse, a graduate of the most recent YC class. "When we were first fundraising in New York, word got out that we had been accepted into YC, and suddenly everyone wanted in to our round. People who wouldn't talk to me just 10 days before suddenly changed their minds."

YC has a strong track record with companies such as Airbnb ($1 billion+ valuation), Dropbox ($4 billion+ valuation), and OMGPOP (acquired by Zynga last week for an estimated $180 million). YC's track record is only getting stronger. I've been to five YC demo days. The most recent class was, in my opinion, the strongest I have ever seen.

That's why I call Y Combinator a Disneyland for investors. Think about the characteristics that define a Disney theme park. It's a destination that people worldwide want to visit. It's a place where people are willing to wait in long lines and pay irrational amounts of money to experience. And most of all, it's a place people almost always leave happy, despite the lines and the money they had to spend.

The same applies to YC. Investors pay a shockingly high price to get into highly competitive funding rounds, but they're happy that they got in at all. It's borderline insanity, but investors continue to flock to YC companies because they believe there's method to the madness.