2 is a significant date for many early-stage entrepreneurs as this is
the deadline for applying to Paul Graham's Y Combinator this summer. If
you don't know about Y Combinator, then I encourage you to read up on
it as they are one of the few groups doing anything remotely
interesting as it relates to very early-stage investment in startups
(with an emphasis on software startups).
I've been following
Y Combinator for a while now and have known people that have applied
and been accepted, applied and not been accepted or consciously chose
not to apply at all. In preparation for this article, I contacted
several of these people to get a sense of the high-level pros and cons
of joining the group. Thanks to all of those that offered their insights and
Disclaimer: I am in no way affiliated with Y
Combinator other than having followed the group for a while and having
met both Paul Graham and Jessica Livingston. As an early stage investor myself, I guess I compete at some level, but my investment activity is not that significant and my approach is very different.
So without further preamble, here are my thoughts:
Why You Should (Or Shouldn't) Apply To Y Combinator
1. Forced Focus: Lots
of early stage entrepreneurs have several ideas in their heads (and
sometimes even several semi-working projects too). One of the toughest
things to do in this situation is to actually pick one of the
ideas and dig into it a little bit deeper. Since it is unlikely that Y
Combinator will fund a "portfolio of ideas" from a single founding
team, it forces a degree of focus. This is a good thing.
2. Great Network: I
must admit that I'm a little envious of the network of exceptional
people that are involved with Y Combinator. This extends beyond just
Paul Graham and Jessica Livingston and goes to all the great people
starting companies and those that are following what Y Combinator is
doing and provide their support.
3. Instant Early Adopters: One
of the hardest things to do when getting a new project off the ground
is finding that early mass of users to actually try it and tell you why
it sucks. No doubt it sucks, because all early software projects suck
in some ways, you need to know why it sucks. Y Combinator is
exceptionally good at delivering some instant users for any
project/company that it is involved with.
4. Limited Funding: The
amount of capital invested by Y Combinator in any founding team is
limited. The amount is $5k base + $5k per founder. So, if you're a two
person team, you can expect about $15k in funding. This is not a lot of
money, but it seems to be enough for many teams of "capital efficient"
founders to get a prototype built over the summer. I think the amount
if a bit arbitrary, but I can't fault them for that as trying to make
case-specific decisions doesn't scale. As an entrepreneur (even an
early stage one), I just don't think that level of capital is
interesting enough to make it worth taking outside capital. So, if
you're applying to Y Combinator, chances are, you aren't really doing
it for the funding – but mostly the other benefits.
5. Follow-On Investments: Y
Combinator has a reasonably good reputation for producing "interesting"
companies. As such, for those startups that need funding beyond what YC
puts in, the fact that they've been one of the chosen few likely gives
them an edge over a random startup looking for angel/VC money. Paul's
network is also pretty strong and he can "draw in" outside investors. I
was invited to the last "Angel Investor Day" the company held whereby
each of the YC startups had a chance to present to a group of
interested potential investors. What I liked about this particular
forum (from the entrepreneur's perspective) is that it is held on their
"home turf" and was relatively informal and easy-going. Very different
from the unpleasantness that is usually associated with meetings with
6. Relocation Requirement: If you're
accepted, YC requires you to relocate to one of two locations
(Cambridge for the summer program and the bay area for the winter
program). Whether you want to relocate or not is a personal decision,
but I agree with the forced relocation. There is a lot to be gained by
being in the physical proximity of both the YC network and
being in one of the major centers of startup activity here in the U.S.
I think for early-stage software entrepreneurs building web companies,
it's particularly important to be in a conducive environment.
7. Projects vs. Businesses: Personally,
I think YC is really selecting interesting teams and projects and not
really concerned with selecting what may (or may not) become "real"
companies. Though there's nothing intrinsically wrong with that – it's
simply an investment selection thesis they've formed, I'm not convinced
that it's really good for the entrepreneur. Though I like the idea of
focusing on users/customers first and letting the details work
themselves out later (i.e. projects), I think there's some value to
actually thinking about business models earlier in the process. Simply
identifying market opportunity (i.e. how do you make money) does not
necessarily reduce creativity and your ability to succeed at building a
product people will like. I think YC leans a bit too heavily towards
the "build it and they will come" model and for inexperienced
entrepreneurs (just about all of the YC founders), this can distort
reality. It's much for fun to think about the project, and I'm all for
being passionate about the right thing – but a little bit of balance is
8. Teams vs. Individuals: YC
leans strongly towards selecting startups that two or more founders.
I'm a strong advocate of this myself as I believe that having two or
more founders in an early-stage startup significantly improves the
chances of success. By explicitly stating this requirement, YC forces
early-stage entrepreneurs to find co-founders. This is a good thing as
if there's a problem with finding a co-founder, that's an early signal
of a problem (either with the founder or the idea or both), and
everyone's better off knowing that sooner rather than later.
9. Startup Valuations:
valuations are a black art. There's very little data to go on, so it
simply ends up being a combination of market forces (who else is
looking to invest) and prior precedence ("…most Series A VC startups
are getting between a $4MM - $6MM pre-money valuation…"). Though the
valuations that YC provides for early-stage companies is rumored to be
low (< $500k in most cases), it's not really fair to call this
valuation low. For one, they're not competing with many other
early-stage investors. This is the stage I like to invest in (i.e.
smart founding teams with a decent idea and the ability to crank out a
product people might love), but to be candid, I'm no Paul Graham. So,
in the absence ofno multiple potential buyers, there's no real "market"
so it'd be wrong to call the valuation low or high. It just is what it
is. If it were me, and all the other positive YC forces weren't in
play, I'd be bootstrapping in the early days, validating the idea as
quickly as possible and then
looking for outside investors.
all I have for now. Overall, if it were me and I was just out of
undergrad and looking to build a software startup, I think I probably
would have applied to YC. I started my first company with $10k (so the
funding itself is not that important nor necessary), but the other
components are extremely helpful.