Y Combinator is arguably the most successful early-stage VC fund or accelerator ever. The issue, however, is that they never truly grasped the factors behind their success, which is why YC's peak is already behind them—it’s likely all downhill from here.

In particular, Sam Altman didn’t grasp what truly made YC successful. He did what he does best: being ambitious and scaling it up! To him, this seemed obvious—there were plenty of companies eager to join YC, and since predicting which ones would succeed was unreliable, why not just accept more? Even if it meant a few more failures, everyone knows VC is a power law game—one extra winner compensates for many flops. Plus, more companies naturally mean more management fees and carry!

What he failed to grasp (or didn’t care about, since the effects take a long time to unfold) is that reputation and prestige are everything. Take Harvard, for instance: the reason they don’t accept a higher percentage of applicants isn’t because they can’t scale—they have the resources to build more facilities or could even switch to remote like YC—but because they choose not to. Harvard knows its success lies in exclusivity. If everyone could get in, no one would care. People don’t attend Harvard for the lectures, which are all on YouTube anyway, but because being accepted there is a status symbol. Harvard thrives on its reputation and prestige—or simply, its brand.

Founders want to raise money from the top VCs—e.g. Sequoia or a16z—for the same reason. Sure, these firms offer some of the best support to their portfolio companies, much like Harvard offers top-tier lectures, but that's not the main draw. The real reason to raise from elite VCs is the prestige and legitimacy it confers on your startup. It signals to prospective employees, customers, and future investors that your company is the real deal. Naturally, this signal weakens the easier it becomes to secure funding from these VCs.

If the main appeal of joining YC isn’t the mentorship but the prestige of being able to write "YC W22" in your Twitter bio and on your company’s landing page, then they've got a problem because you can't scale that arbitrarily. What Sam initiated, and what YC continues to do, is trade their reputation capital for real capital (i.e., more money). However, they’ll soon realize that once their reputation capital is exhausted, rebuilding it will be nearly impossible. Put simply, once YC becomes uncool – which might have already happened – you can’t make it cool again.

We’re already witnessing the decline of YC in the current batch. For instance, one of the many "AI code editors" YC funded, PearAI, is simply a clone of another YC-backed, open-source AI code editor called Continue. Unsurprisingly, the PearAI team doesn’t appear super competent. People on Twitter were quick to mock the project, and as a reaction, Garry Tan (CEO of YC) retweeted a post defending it.

This is a telling defense. While he is likely correct about the legality of copying Continue's code, that completely misses the point. The issue isn't that PearAI did something illegal—it's that they got funded by YC with nothing more than a codebase copied from another YC-backed company. This shows that (1) YC is willing to fund just about anything, (2) they’re not doing any real due diligence, and (3) they don't particularly care about their existing portfolio companies. If PearAI can secure funding, it means anyone can, and the YC brand loses much of its prestige.

YC is no longer an exclusive club where membership signals legitimacy—it’s becoming a broad index of tech startups. This decline will continue until cool, innovative companies no longer see any reason to apply.