[coffeemug]

I don't think traditional VC firms are competing with YC at all.

There are two "black holes" in venture capital right now. One black hole is YC + angel investment. When you're getting started, it's pretty much standard practice to go through YC and/or raise seed capital from angels to get your startup off the ground.

The other black hole are a few top VC firms (off the top of my head, a16z and Sequoia). These firms pretty much figured out that it's impossible to predict success, so they're putting large amounts of capital into companies that are already succeeding. They've essentially eliminated guessing; they can get away with it because they established themselves as the VC firms you go to if your company is succeeding (so they have no issues with deal flow).

Then there are traditional VC firms in the middle, who can actually operate by perpetually losing money due to a slightly weird wider financial climate and the incentives of their LPs (see http://pmarchive.com/truth_about_vcs_part1.html, http://pmarchive.com/truth_about_vcs_part2.html, http://pmarchive.com/truth_about_vcs_part3.html).

So everything is much more complicated (and much more interesting) than the original post would lead you to believe!

[billyhoffman]

uhhh, I think you mean "funds" not "firms." Defining 3 regions and pigeon holing firms is too much of a simplification of VC markets.

Firms raise funds, that can target specific markets/verticals, as well as company size/maturity.

a16z is a firm. They have multiple funds, including a seed fund, surprisingly named "Seed" which competes directly with YC.

http://a16z.com/portfolio/

Some Firms have only 1 fund. Firms manage and guide their funds, and charge a management fee. While managing a fund is a largely personal intensive business, much like consulting, there are some economies of scale which is why many Firms will have multiple funds. This also further protects against risk.

YC and other accelerators are Firms, potentially with multiple funds, but all of their funds are at the low/angel end.

[mathattack]

Having multiple stages of the process is perfectly ok. The risk is offloaded to those who can bear it. Small teams of very young people can take home run like risks by bootstrapping. YC diversifies the Angel risk by giving lots of advice and structure to large groups of firms. The top VC firms provide growth capital, but even there it's not about sure things. Many investments lose money, but it's not as risky so they can have relatively fewer investments with much bigger bets. By the time it's a so-called sure thing, firms have done their IPO.