What I didn't know is that they take a substantial equity stake in your company for the money that they give you. From Techcrunch - the Y Combinator folks take basically 1% of your company for $1000 and TechStars takes the equivalent of $1% of your company for $3000.
I think that this is a bum deal for entrepreneurs. Here's my logic:
According to the National Venture Capital Association the average post money valuation for a early to seed stage company is a little over 12 million dollars (see page 3). Let's say that VCs take an average of 50% of the company so that is a 6 million dollar pre money valuation.
In the Y Combinator model seed companies that they fund are worth $100k. In the TechStars model the seed companies are worth $300k. I'll grant these seed funders the benefit of rounding in their favor.
This means that companies that Y Combinator is funding are at a 60x discount to what a VC is funding companies at. Techstars isn't so bad at only about 20x.
Granted that seed stage startups are a lot riskier than A round startups are, but are they really 60x as risky?
I know that not everyone has this option but I'd rather go beg/borrow the money and take a shot at growing the business that way instead of giving up that kind of equity position.