I just finished reading Wired’s in-depth piece on Y Combinator, the 6-year-old Silicon Valley incubator which in the words of author Steven Levy offers an “unmatchable entrée into the otherwise closed world of high-stakes Internet entrepreneurship.” It’s a great piece, partly because it describes how Paul Graham is shaking up the venture capital landscape through his hands-on approach with startups.
For example, Levy describes in great detail the moment at which Graham introduces the plan by angel investors Yuri Milner and Ron Conway to invest in all of the Y Combinator companies.
For a few seconds there is stunned silence as 99 founders try to process this news. It’s like a denial-of-service attack on their brains. Finally, there’s a collective exhale and a round of applause. This is good. Then Graham explains the terms that Milner is offering in collaboration with Conway’s firm, SV Angel: “$150,000 on a convertible note,” he says. “No cap.”
Translation: Instead of demanding a relatively large share as their ground-floor stake, Conway and Milner are agreeing to invest at whatever valuation the next round of investors sets. In other words, they get no advantage from taking such an early position. These are the most founder-friendly terms imaginable, with no downside. The room erupts into applause, hoots, and shouts. The budding entrepreneurs look like an Oprah audience after learning that everyone is getting a free Pontiac.
Conway and Milner are essentially betting on Paul Graham, investing in all of the companies that he has handpicked for YC. That’s one way of looking at it. Another is that Milner has just dropped more than $6 million on companies he knows almost nothing about—indeed, some of which haven’t yet decided what business they’re in—at terms that even one YC insider admits are “just crazy.”
After reading the piece, I was struck by a few things.
For one, largely due to the success of Y Combinator, incubators are hot again even if some still don’t like to use the term. Incubator did become a bad word after the failings of firms such as iStart Ventures, CMGi and others at the start of the last decade, and I am still “corrected” to this day when using the term.
Nonetheless, Y Combinator is proving that the model can work. And work very well.
Another thing that struck me was whether the Y Combinator approach could spark innovation beyond the typical group chat or social networking service. In other words, can these “idea labs” help solve some of the biggest problems facing society, from health and wellness to energy?
Lastly, I couldn’t help but draw parallels between Y Combinator and what TechStars is doing in Seattle. (Both organizations use much of the same terminology: Demo Day, seed capital, boot camp).
Of course, Y Combinator is more established at this point than TechStars Seattle, which graduated its first class last fall.
But if TechStars, which also operates in Boston, New York and Boulder, can serve as a catalyst to help spark more entrepreneurial activity then the entire region could potentially benefit.