It's the fundamentals behind investing. Basically, you make no money gambling $10 ten times on 10% chance of success with $100 returns, but you make money if the returns are $10,000.

So, for investing in companies, there is no point funding companies aiming for millions as you can't get a good return because of the failure rates. They're basically taking up one of the slots of a potential billion $$$ company.

The point is for every 10 companies funded, have 1 become a billion $$$ company, while most of the rest will fail.

Say YC has a 6% stake, which gets diluted down to 1%(? I don't really understand this side of it) and then the company sells for $10 mill. Great for the founders, but YC only make $100,000. That doesn't cover the other 9 companies that failed (10 * $16,000 = $160,000 = $60,000 loss).