The vast majority of entrepreneurs I’ve spoken with who’ve been funded by seed stage VC/incubator Y Combinator are happy that they took the investment. And the ones that applied but weren’t selected generally have nothing bad to say, either.
So I continue to be surprised to see journalists write stories that suggest that the deal Y Combinator offers to entrepreneurs is somehow unfair. Unless they find a significant number of entrepreneurs who back up the claims, it seems a bit speculative to say the least.
Y Combinator isn’t designed to give companies the capital they need to grow a large business. Rather, they give investors less than $20,000 to give them the capital they need to take something at the idea stage through to a prototype. In exchange they take an average of 6% of the equity in the company. Their investment model has been widely copied.
Remember, these startups are usually 2-3 people with little more than an idea. Generally speaking there are few other investors who will be willing to invest in them until they have some sort of code written or an initial product out the door. Y Combinator fills a niche that even angel investors find too risky. And all they ask is a small amount of equity in the form of common stock. Most angels and venture capitalists demand preferred stock for their investment, which gives them more control over the company and the ability to take their money plus a guaranteed return off the table in the event of a sale or IPO. With Y Combinator, they take the same stock that the founders get.
To date Y Combinator has invested in 102 startups (the most recent batch is here). Of those, 18 have died. A handful have been acquired, and the rest continue to fulfill whatever destiny is in store for them.
There’s nothing bad about Y Combinator. They are a private company investing their capital at more than reasonable valuations with willing entrepreneurs. They give their companies a huge stamp of approval and a great launch platform. And their hit rate to date is impressive given how early stage these “companies” are.
Update: The Sarah Lacy post linked to above has been substantially rewritten with a lot of the negative comments about Y Combinator removed, so the link is not longer fully relevant.
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I’ll be the first to state for the record that I have had nothing but great experiences with Y Combinator. Their model works, and they provide a leg up for companies that can’t bridge that initial seed stage capital gap.
Maybe it’s the name. Try renaming to ‘D Terminator’ and people will like them.
Y-Combinator is a mathematical expression that is important in programming theory that allows the concept of recursion to occur. It’s a clever name for a company that helps business “iterate” while they be the “fixed point operator.”
Maybe they hate TechCrunch for writing about every single YC venture.
we have a winner
As long as those articles keep you coming back to post thought-provoking and high-quality comments, I see no reason why TC would defer from writing about them.
cuz most of them are stupid features and ppl just want to make quick cash. and michael seems so excited about each of them. trying to kiss their asses.
What’s the affiliation between TechCrunch and Y Combinator? Are you disinterested commentators?
I totally agree Mike. I love what Y Combinator is doing. Reminds me that I need to do more interviews with them.
What do you like about “them”?
Shut up Robert.
x2
Maybe they hate the internet and TC for covering YC startups when they so blatantly ignore other struggling startups which are equal if not better than YCs. Perhaps, and justifiably, it is the blind faith in YC and its associated bias which is troubling for many journalists.
Read past the 1st graph — seems like the person had a fair reaction to YC:
“Like them or not, the future of the web depends on these seed fund incubators like YCombinator, TechStars, SeedCamp and Highland Capital Partners, among many others. For those startups that can’t generate the funds necessary to keep their dreams alive thru the regular channels, these alternatives are a Godsend. The most important thing every entrepreneur and investor needs to ask themselves about any new startup is this: “Is this a nice to have or a must have?” “
Thanks Cakewalk! I didn’t try to hide the fact that I like what YC does and that we need more like them. I just wanted to ask some questions about the money side of things. I love that it’s sparked a great deal of debate and opened communication anyway. Boy has it.
Pai
then why did you rewrite the post?
I like Y Combinator, they seem to be funding some pretty interesting start-ups, and the way the have their funding structure.
http://blabtech.blogspot.com
Here here. Paul and Jessica have a nose for talent… and for creating optimal environments for that talent to thrive. Each crop of startups they groom is more interesting than the last… I’m a fan. As you say, it’s not for everyone. That’s fine. But I think they provide a ton of value and they’re upfront about the economic tradeoffs.
Maybe it’s what we in Australia call Tall Poppy Syndrome?
http://en.wikipedia.org/wiki/Tall_Poppy_Syndrome
Mike, I have nothing against them either but do you have to cover every single one of them? Some are so silly, it’s laughable. Majority of them are clearly made-to-flip and majority are just chasing fads hoping to get acquired. Very few of them have business plans!
So my only complaint is that TC gives all these silly websites coverage while you ignore more serious ones.
Dave
Y Combinator are the best - because we’ve got the body (youtube bigfoot parody for those who have seen it)
Seriously though they are the best and their imitators TechStars and LaunchBox are giving it a good go but are not on the same field.
When I first heard about Y Combinator (a friend was trying to convince me to apply with him) I didn’t think it was a good idea at all. $15K?? Who are these people who can’t get $15K?? I’m far from rich, but please, ask your parents, friends, take a loan, work for 5 months and really save money et voila!, you have your $15K.
The advantage is what some people have mentioned above: You move and you’re on TC, Scoble, etc. No matter how silly your “company” is…
“No matter how silly your “company” is…”
I think that’s a big reason why people dislike YC coverage here: they get a free pass and reviews of them are never critical of them. 1 in 20 have a viable business plan and TC never gives them a critical eye.
@felipe: you’re missing the point if you think they’re doing it for the money… they’re doing it to get access to Paul Graham & team who can help them make it to the next level. while those opportunities may not be uniquely provided by YC, it’s enough of a benefit that it’s worth the small amount of equity.
that said, you’re correct that for that small amount of money there are other sources of capital that are less expensive… tho as noted, cash often isn’t the most important thing for startups at that stage.
(disclaimer: i also invest in startups, albeit i usually only have about $5 and a cup of coffee to offer them
>access to Paul Graham & team who can help them make it to the next level.
What is this ‘next level’ you speak of?
@Dave, not the McClure,
I’ll take a guess and say “next level” means the next set of goals. Each company is different, so that “next level” will vary.
There’s no denying that the right contacts can help a company succeed. Who’s going to get farther - the guy in Antarctica building widgets, with no access to outsiders… or someone who is connected to experienced mentors that can help secure additional funding, prove a concept, etc?
You’re definitely missing the point. Blog coverage on TC is important (especially if you want funding), but it’s not a free pass to success. Having gone thru YC, I’d put the press coverage towards the bottom of the list in terms of the value we received.
I would assert that many (most?) YC Founders would give up some equity in their company and go through the program even if there was no cash investment from YC.
Think of YC as advisors - this is where almost all of the value is. The money is just a practicality (i.e. most YC founders need the money to pay rent and eat
R
But if entrepreneurs are the soul of America, and if investors are money grubbing greedy bastards, and those satanic investors are paying filthy lucre for a piece of the noble entrepreneurs’ dreams and hoping to make a (gasp) profit… how could anyone *not* hate Y Combinator?
My only real dislike of YC echoes Paras Chopra’s: I am plenty tired of TechCrunch and everyone else writing about companies solely because they are funded by YC. If a startup is interesting, it should get attention. If it’s not interesting, it should be left to die. The sheer fact that a company with fantastic PR is funding the startup to the tune of $10k or $15k does not ipso facto make it interesting.
I have to disagree with the assertion that YC is somehow robbing people of their hard earned equity. This isn’t a dumb-money cash-for-stock deal. You earn the time and advice of the YC partners, which is invaluable. Then there’s the incredible community of those 80+ startups that help each other in tremendously helpful ways.
Furthermore, the reality of life is that people look for stamps of approval — be it what college you went to, or which investor you took money from. In addition to great advice and great community, YC is one-such stamp of approval that indicates your idea and your team can pass a certain quality gate. It’s not necessarily 100% fair, but then again not everyone gets into Harvard either.
If anything, YC is a shining beacon of hope in a relatively harsh environment that is venture funding, especially for talented, driven engineer founders who don’t have the clout and experience of more connected repeat entrepreneurs.
I am surprised to know that there is such thing as Y Combinator hate.
I agree with Mike Arrington and Garry Tan, and would say even further. When you agreed on a deal, you agreed on a deal. Unless you were threatened or were cheated, it was your voluntary engagement. If you don’t think it is fair, do not do the deal. If many people think the YC deal does not make sense, then YC will have no applicants and they will go out of business. Isn’t this simple?
In a free market, a company with an unfair price is simply being stupid, as they are charging more than they are worth. You could call them stupid, but you cannot try to force them, using violence or violent public pressure, to change their price. Actually, the ones who really think they are stupid won’t publicly criticize. They would start a better business model silently.
Today, I have read and commented on another blog post which in my mind have similarity. Is business becoming politics?
http://www.marginalrevolution......of-co.html
Um, I think you missed the sarcasm in my first paragraph. I thought “satanic” would make it clear, but apparently not.
Everyone is complaining about TC coverage of YC start ups. Perhaps, that’s one of the advantages that YC offers over other firms: if YC funds you, you know you’ll get a lot of press that you won’t elsewhere.
As they say on their site, YC offers a lot more value than the $15k.
I concur with your comment.
That’s exactly one of the hidden USPs of Y Combinator. You are getting branded or tagged. What’s wrong in getting some free PR coz you are associated with YC ? Apart from giving visibility for startups, YC also attract investors by giving them confidence to invest in early startups. Coz already a due diligence of the upcoming startup is being done by YC before the VC invests.
Now an investor would be happy investing in a company frm YC rather than picking up some one off the street.
Ive been through a similar model of incubation in India, and I can vouch for the success of the YC model.
There’s absolutely nothing wrong with getting PR because you’re funded by YC. However, it makes places like TechCrunch less interesting because it creates the perception — to me at least — that the source of a few thousand dollars of seed money makes an otherwise boring startup suddenly interesting.
YC startups absolutely should accept free PR, and YC absolutely should work to provide it. It would be nice, however, if news outlets were a little more discerning when it comes to *giving* the attention.
I applied for a YC spot a few times with no success. The questions they asked in the application helped make me understand my own businesses just a bit more. Granted, I did not need YC for that, but nonetheless, I found the experience worthwhile.
I’ve got to say I don’t really see the relevancy of TC coverage of YC websites with “…journalists write stories that suggest that the deal Y Combinator offers to entrepreneurs is somehow unfair,” as per some of these comments. In regards to the idea of unfair, I don’t see how. No product necessary, no business plan necessary, investment in an idea for a 2-10% stake doesn’t sound unreasonable in the least bit.
ROI, it’s a simple concept. Establishments don’t just give money away without expecting something in return. If Y Combinator is a lousy deal to some, I don’t know what kind of funding they expect concept stage companies to seek.
6% for 20k may seem low but what are the terms of this money? does YC ask for any rights on the next round to protect that 6%? Do more experienced investors enjoy working with YC on the following rounds?
I’ve only have had good reports about YC - from several groups of founders. Life ain’t fair. If you want your startup to get YC-style coverage, then go apply - rather than complaining… Obv doesn’t fit for everyone though.
Paul Graham has created a nice concept.
A lot of what Y Combinator do is more akin to gambling than investment. $20k is generally not going to get any truly innovative ideas off the ground, and 6% is over the top for the best ideas.
As a result, they end up with a lot of very average start ups - and a greater than average proportion of total dross (most of which gets featured prominently here for no good reason).
Should have more Y Combinator likes
Have you ever grilled a Y Combinator startup on anything remotely to do with a business model? That’s what I find unpalatable. It’s all very well throwing peanuts at disruptive tech, but all investors, big and small, should surely make sure entrepreneurs focus on the numbers.
Startups should not be focused on “the numbers”
I just don’t think there’s any pt grilling a three month old start-up on their business model. Whether or not the company has one or has in fact thought of one, it’s likely to change anyway.
I’m trying to recall what Google’s business model was when they launched…
This is what business school teaches you, and for early-stage companies it is bad advice. You would know that if you had ever started a company.
Paul Graham likes the motto “build something people want”. He believes if you do that a business model (or other exit) will come naturally.
This is especially true for type of founders YC accepts: hardcore hacker types with an entrepreneurial spirit but usually not a lot of business experience. Build something awesome (which is what they’re good at) and the “business plan” will follow.
Whether or not you agree with this way of doing things, it seems to have worked out pretty well for YC.
Bring it.
Part of the reason for YC hate may be that Paul Graham comes across as arrogant.
What I don’t understand is the TC hate…
I think part of the problem is that people are looking at this from a purely economic perspective. In that sense, there are usually better and cheaper ways to get $20,000.
But Y Combinator and the like bring a lot more to the table than what you could normally get from a seed stage financing of that size - connections, active guidance, etc. I have friends in this summer’s TechStars program, and at first we were talking about how it was a “raw deal” but it’s clear that the guidance and mentoring and, well, “outside authority” has been invaluable - worth well more than $20,000 in cash.
YC is great and provides an amazing service to a lot of aspiring entrepreneurs with no other place to look for early early early seed money. And money aside, I bet you that 99% of the YC companies would do it again in a heartbeat for the experience and networking even if they didn’t receive a dime and still had to give up 6% equity.
If 1 out of 20 actually become a financial success that would mean that Y-Combinator has paid about $400K for a 6% stake. That’s around $6M valuation - for a company with only a beta product (ie there is likely to be more dilution down the line). Even a 1 in 5 success rate is about a $1.5M pre-money! Suddenly Y-Combinator doesn’t sound so evil after all !
Actually many people do not consider this into the mix, being a ycombinator startup gets you attention - from the media, like Techcrunch, Mashable, GigaOM…etc.. so it’s a given that their startup will get featured somehow along the way… Of course that alone is not worth giving up 10% of your startup. It’s just an extra little caviar to sweeten the deal.. that’s it.
Start-ups going to YC are buying management consulting (+PR) work with 6% of their equity. They also get 20 000$ cash.
Even if founders value 6% of their company more than $20 000, it’s good as long as 94% stake of the YC-funded company is more valuable than 100% of pre-YC company.
PR alone might do the trick.
Pessimistic approach: Due to huge failure rate of start-ups, 94% of 0$ is as much as 100% of 0$… but with 94% you got 20k cash + YC-experience.
Mike, you’re Y Combinator hyperlink in the article doesn’t work.
I totally agree with your post… I loved the whole concept of YC the minute i heard about it. and 6% well thats really not bad to part with at that stage… I wish they would fund outside the US too though… but thats a discussion for another day…
on the other front…the other ways to get USD 20,000 well I don’t know many which are as good as this. Bank loans …too much hassle and borrowing money doesn’t really amount to much…
if they hate let them hate, watch the money pile up.
I completely agree with deepak chopra’s comments. My own startup was a victim of the Y combinator PR machine. If tech crunch hadn’t been so focused on Y combinator, perhaps we would have had a chance.
WHO THE FUCK WROTE THAT COMMENT?? I sure didn’t.
What a complete fucking asshole.
-Russ
Who the hell wrote that last comment refuting my comment?
I agree, Y Combinator fills a niche that VC and even angels are not covering but pullleaaseee change the stupid name.
The more options that are available to startups, the better off they will be. Y Combinator and other incubators are giving opportunities to budding companies that don’t have their own access to capital. Of course, these kinds of deals aren’t designed for every entrepreneur, but having this path available opens opportunities.
The press associated with the deals are just part of the package. When seeking funding, companies should be looking for more than just dumb money. A smart investor also comes with the credibility and connections that their firm represents. The press watches these investors because of their reputation and track record.
People can hate all they want, but if YC and its projects are succeeding, I think the results speak for themselves.
I’ll be baack!
I think there’s a confusion between hate and criticism here. It’s especially apparent in the first line of the last paragraph in this article… “There’s nothing bad about Y Combinator.”
I propose dirty website to Y Combinator, they say no. I hate them.
Michael,
Perhaps Y-Combinator’s moderate success has something to do with the fact that TechCrunch covers every last startup in the program that launches?
Just a thought.
“Rather, they give **investors** less than $20,000 to give them the capital they need to take something at the idea stage through to a prototype.”
Did you mean entrepreneurs
I’m in a similar space to YCombinator and it takes real guts to do what they do, because they take all the early risk without wiping out the entrepreneur. All funding is a crap shoot, but early funding is the biggest crap shoot at all because you are really taking most of the team risk as well as the market risk and the technology risk.
Getting access to free publicity and top notch advice for 6% equity seems like a bargain to me. Oh and yes, you get $20,000 to start the ball rolling, where is the issue? or would you rather have a VC come in and ask for a fair ahem ahem stake?
YC make it easy by creating ‘great-to not so great’ raw material for TC to write articles, that fill blog posting quotas.
YC understands how to promote their cause well. They have a robust media strategy for each of the companies that they foster. Other organisations don’t, and so they miss out on the TC exposure. If more companies honed this aspect, I’m sure that TC would be happy to facilitate the process. Attacks on YC are the result of them being good players, in a desert of poor start-up media strategy.
Sarah writes “…but they have no choice but to give up a sizable chunk of potential revenue.” Hmm really? Never heard of a VC taking portion on your revenue!
And do we say YouTube and Twitter are a ‘want’ or a ‘need’! I guess we too have to ’slink away’ then.
While the cash investment is less than $20K, the hand holding you get is twice that value. Plus the savings in time and money by avoiding common stuff like incorporating and other legal stuff that a typical entrepreneur has to go through ‘all alone’ is worth another $25K to $50K. So, the value contribution of YC is more in the range of $60K to $100K, IMHO. And 6% for that is a fair game.
I bet there are many startups ready to get into YC, even if they have to pay the $20K themselves.
I don’t hate Y Combinator. I think it has its audience.
The money isn’t attractive. Some people mentioned that the advisors/mentors are the true value, but I think this is a bit overrated. Yes, they’re all very influential, successful people, but they don’t necessarily know everything about your business or user base. You’d get much better advices if you find power users and listen to what they want.
The true value is PR, plain and simple. You get good reviews on TC, good reviews from whatever other blogger you “mentor” knows, and then all the other copycat tech blogs, et voila, you start the buzz around your startup.
It’s all about marketing. The technology behind all of these companies are very simple (as they can all do from start to finish in less than 3 months)… a 15 year-old can do it on his spare time. It’s all about PR and marketing.
They seem fine, but now that they have scaled up in the raw number of companies per program, I think the participants aren’t getting the same impact. Paul, apply a finer screen to the applicants, scale back down to 60-70% of the current number of participants, and help those in the program more.
As founder of one of the companies that went through Seedcamp (Y-combinator inspired European competition) I have to say these kind of startup pipelines really make a difference.
They do help many entrepreneurs and if you don’t like it, well, don’t take the deal!
I also met Paul Graham while he was in London and he’s very straightforward guy, so I have no doubt entrepreneurs have as good experience going through Y-Combinater as we had going through Seedcamp.
Andraz Tori, Zemanta
Justin.tv was a wild ride in the beginning…
quiero ver mas fotitos por favor
lucuuu
you har