Tech Billionaire Boot Camp 178
theodp writes "Forget the Summer of Code. If you've got a hot idea for a start-up, Newsweek says Y-Combinator, the boot camp where Silicon Valley meets 'American Idol', is the place you should be. 'Some critics scoff that Y Combinator's investment is peanuts for that amount of equity. But the opportunity is unparalleled -- total immersion into Silicon Valley start-up culture, advice from Graham and a fast track to the top angel investors and venture-capital funds. When Graham calls the winners, the founders have only five minutes to accept. "If people turn us down," he says, "as far as we're concerned they've failed an IQ test."'" We've previously discussed the program on the site, just over a year ago.
Living in the past (Score:5, Interesting)
Re:Barely an investment (Score:3, Interesting)
Hence the hard sell. This is not a particularly high powered bunch by Valley standards.
Graham probably hurt the spam world as much as he helped. He thought Bayesian filtering was a silver bullet, it isn't.
$20K for 6%? Thats idiotic. A VC looking at that type of deal is not going to be impressed. $20K should buy no more than a thenth that amount, and thats expensive.
Hmm, a bit like "We don't do NDAs"... (Score:2, Interesting)
What was more interesting was that these jerks weren't around during after dot-bomb, but money still was, and I got some of it.
These people might be fine, but anyone whose view of me is based on "He said no to me so he MUST be dumb" is likely to be someone I don't want to work with. I hate conflict and CEO-style sociopathic posturing. So in fact it all works out.
Rgds
Damon
Words of code? (Score:4, Interesting)
Taking VC is almost guaranteed to screw you (Score:5, Interesting)
Make no mistake: if you take VC funds, they, not you, get into the driver's seat. And it means that their priorities, not yours, are what will drive the company.
Back in the dotcom days, before the crash, it generally meant the VCs would attempt to groom the company for a quick IPO. That meant growing the company quickly and sacrificing the long-term viability of the company in order to do it.
It was common for the original founders of the company to be booted from the company or otherwise sidelined. The VCs would bring in their own executive management teams, all the way up to the CEO, which would answer only to the VCs, of course.
The end result is that the startups were unable to maintain their focus on their original mission and were vastly over-committed compared with their needs. And predictably, most of them tanked shortly after their IPO. The VCs usually made a nice profit when the companies IPO'd, but once stock investors finally realized what was going on, IPOs suddenly became worthless. And thus the dot-bomb ensued.
If I were the founder of a startup, the last thing I would do is take the money of a VC. That money is heavily tainted. Taking it would be akin to committing suicide. The only way I would take it is if it came with a contract that clearly stated that I would remain in complete control of the company as if I had not taken the funds at all. And I doubt any VC would ever sign such an agreement.
Re:Living in the past (Score:5, Interesting)
It's funny in that the engineering team that I work with (who cannot afford a house) agree with your sentiment, but of course, the management team (who do have houses) refuse to even consider relocating the company (or a part of it). My informal poll has showed that everybody in the engineering team would gladly pick up and move if given the chance. This company has no need to be in the Valley, the customers that we are going after are either outside of the United States, or have offices nationwide, which are generally not in the Valley. The company founder could easily save money by relocating us.
I would gladly take a small pay cut to live and work in a nicer area with a lower cost of living, and be able to lead a better life. After this job, I'm out of the Valley, and not looking to return. There's too much BS in the Valley, and California as a whole.
-- Joe
IQ Test (Score:5, Interesting)
Taking 5% of a company for TWENTY THOUSAND DOLLARS? Anyone who accepts that deal should be shot. Saying that "they failed an IQ test" just makes Graham out to be a fraud.
Also, and this is a personal pet peeve for me, he wrote "The Plan for Spam" in August 2002. Bob Boyer and I (Bill Kerney) while grad students at UC San Diego wrote a very similar statistical spam filter, which we open sourced and released in December 2000 (and which some people took and continued working on it). And we didn't invent the idea either -- we based our work on the UC Irvine Machine Learning Database.
And yet somehow he never corrects the notion that he invented the idea.
Re:$20k , ridiculous. (Score:5, Interesting)
The biggest draw is not the money, it's the connections, the advice, the hype and recognition you get for being a YCombinator grad, and the investor meetings they set up for you.
Precisely because the barrier to entry is so low on the web, getting people to take your idea seriously can be very valuable. I believe one of Paul Graham's arguments in favour of YCombinator is - which would you rather do, keep the 2-10% of a company that has few chances of succeeding, or give away 2-10% of a company with higher chances of success?
Most of the YCombinator projects are run by people in their mid-20s - not exactly experienced at running a business, and this is the point in life where connections and advice can be more valuable than standard of living.
Is it worth it for everyone? If you already have capital, connections, and a rock-solid business plan, no way. If you have a great idea and lots of energy, but you're not actually sure how to make it work, then it might be.
And yes, my co-founder for "the next digg.com or whatever web-two-point-oh site is hot this week" (see my signature) flew down to San Francisco about a month ago to pitch our site to Paul Graham & co. for this year's summer YCombinator. And no, we didn't get it (we weren't expecting to
Re:$20k , ridiculous. (Score:3, Interesting)
Trading in "connections" is the kind of ivy league old-school, old-economy BS that we have gotten past. Sure, many VC firms are stuck in it-- but this is a blessing in disguise-- VC firms will give you absolutely bad advice, charge you too much for your equity and then make you earn your ownership back-- the idea of founder vesting is so asinine that its amazing that people fall for it-- Venture capital is a total rip off. And they can get away with it because they are investing dumb money in dumb companies and getting dumb returns-- during the boom you would have done better investing in core tech stocks than in even the best VC funds which returned 2-3X over 7 years.
And as for the value of the advice: YC insists that you move to Cambridge or Silicon Valley-- the two places Paul Graham has lived. This isn't "Advice" this is laziness. The idea that you have to be in either of those places is absurd to anyone with a lick of business sense. If you're building a new business the last thing you want to do is go where the money is expensive, the offices are expensive and there are a thousand others trying to poach your employees, whom you have to pay top dollar to on top of top equity because the living costs are so high and the competition is so high.
But they are great places for getting venture capital and participating in the trade in "connections".
YC is popular among the people who have not yet realized that these activities are bad for business, not essential to it.
But they will learn-- move to Silicon Valley and pitch VCs for a few months. You'll surely get money, but if you are smart, you'll realize that the money will do more damage than good because the person giving it to you has no clue, and they will get control over your board.
The failures of the late 1990s are directly due to easy money from idiot VCs. Not bad management at startups-- bad advice from "venture capitalists" (who are generally people who went to harvard and have a sub 100 IQ.) The idea that VCs are smart or shrewedi s a carefully cultivated fallacy. The people you meet at VC firms are either 20 something fratboys who can barely operate a computer, or old guys who were funding oil companies back in teh 1970s and know even less about technology.
And you want to give these idiots control over your company, and a big chunk of the equity you built?
Re:Bad idea. (Score:3, Interesting)
Now, I'm completely aware that early stage valuation is largely speculation and hand-waving, but I have yet to see a pre-prototype, non good-old-boy management team valuation of over $2 million. The one valuation close to $2 million that I know of was back when VC's were throwing money at anything (and these were some very stupid VC's).
You've got to come up with one hell of a story to explain why this bright idea (and only the bright idea) is worth $12.5 million. That is one hell of a good story. Somehow, I don't think you're going to figure out a story quite that good.
Ross
Re:Barely an investment (Score:3, Interesting)
6% for $20K plus a seal of approval and a summer of mentoring and promotion from a guy who clearly knows how to toot horns, if mainly his own.
It's still not a deal I'd take. But it probably makes sense for some.
$20K should buy no more than a thenth that amount, and thats expensive.
Seriously? His valuation for some kids who have an idea and half-built prototype is circa $0.3m, which I agree is low. You're suggesting that it's low to put a $3m valuation on 20kloc, a neat notion, and people with no startup experience? If you think that's a good deal, I'll tell you where to send the checks, as I'm sure I can find you plenty of those.
Re:$20k , ridiculous. (Score:3, Interesting)
Want to hook me up with some of your billionaire friends? Send me an email and I'll share my ideas.
kfischer at g mail dot com
There's a good reason for "We don't do NDAs"... (Score:4, Interesting)
Take the following example: X comes to you with an idea. You reject X because the management team is weak (another perfectly valid reason). A few months later, Y comes to you with a very very similar idea. You like Y's management team and invest in it. As Y grows and becomes publicized, X reads about it, sees that you invested in it, and gets pissed off that "you stole X's idea!" Lawsuit.
Another example: You've been focusing on a certain field, say the Web 2.0 crap. You've by now gotten so much info, you've discussed it with so many companies, that when you're talking to X that came to pitch its idea, when you tell them why it'll fail you're probably going to say something that was covered under one of the dozens of NDAs you signed in the past year, but how are you going to know?
Signing NDAs would completely obliterate a VC's ability to operate. The problem is that most entrepreneurs are so obsessed about their idea being the one-and-only greatest thing ever that they aren't able to see the issue from a VC's perspective.
Re:$20k , ridiculous. (Score:3, Interesting)
A few moments elementary Googling, you're [yahoo.com] in Bellevue, Washington, so sure, you're in proximity to at least four of America's 372 billionaires [cnn.com].
But you post on YC's site, and comment [ycombinator.com] about how it's bad that Bay Area women are "skinnier (but more expensive)", of those that "want to date geeks". Complaining about women with expensive tastes isn't really the mark of someone has really climbed the financial walls of success.
So I'm really kinda curious, how many billionaires do you know, and how well do you know them?
VC 101 For the /. Developer (Score:3, Interesting)
There's a fork at the beginning of the road: Quit your job or keep your job and commit to your startup as best you can.
For the Quitting My Job crowd:
1. Make an actual living at it ASAP. If you can't, then forget it. If others around you are, and you can't for some reason, there simply isn't the time to learn the hard knocks. Either way, you have about 12 months. You should, after 12 or so months, have a good idea if it's gonna work. If you can't make that decision on your own, then you are in dire need of some Management. You don't need to go to Paul Graham to get it.
2. AFTER you are making some money with a workable widget 2.0. reassess. From here, you work with a great clarity that is not available to a Paul Graham graduate. If you want the big VC $$ it will take a great deal of time, effort and money to get. In fact, it's probably a full-time job on its own.
For the Moonlighting crowd:
You will need to work MUCH more smartly than the Quitting My Job starter because the pace of "ground breaking innovative Widget 2.0" is limited. If you are good at whatever you want to start, then there should be success despite the Job Quitter that is competing against you.
Your success STILL needs to be measured in dollars. Forget Youtube style VC burn for now, but concentrate on generating revenue. Despite working less at it, it MUST make money with a pretty clear path to replacing your salary and benefits.
________Tips for either group_________
You must know what you need and how much you are willing to give away to get it. Hint: 5% is a whole heck of a lot of equity to put on the table.
Grow on your own revenue. Don't be tempted by the other ways to do it. If you have a good business, it will grow on its own.
There are too many barriers to youtube-like startups in the U.S. Seriously consider starting it someplace you'd like to emigrate. VC capital is wasted largely on lawyers in some way, shape or form in the U.S. If you are tempted by the conventional public offering, the amount of money the banks sucks up is absolutely shocking. This is one reason why Google cut some of the bankers out in their IPO.
Stay flexible. Chances are excellent what you started out doing for money will be somewhat different than what actually brings the money in.
I co-founded a company funded by Y Combinator (Score:5, Interesting)
First up, about the equity. YC asks for between 2% and 10%. Mostly, it's 5 or 6 percent. The companies funded are all quite early stage. It's very rare for one to be launched, and even moreso for it to be profitable. In some cases, it's no more than a mocked up demo. YC are very early stage investors, usually getting involved before anyone else will touch it--they invest in smart people, not really ideas or businesses. In the three months I've spent meeting once a week with the other founders, no one has ever even hinted that they regret giving up equity to YC. We certainly don't, and we're one of the few that had a launched product and paying customers.
The "5 minute IQ test" is being misconstrued. Applicants know well in advance exactly what the terms are going to look like. You don't bother applying if you don't like the terms, so you never get to the yes/no IQ test. I don't think anyone has ever turned them down at that stage. It's a good punchline, and makes for good magazine copy, nothing more.
Paul Graham is extremely smart. Wherever he goes crowds gather round, and it's not just for his boyish good looks. He's got a touch of ADD, at this point, due to his popularity, but we've never had trouble getting advice when we needed it, and his advice has generally been spot-on. YC has three other partners, two of whom (Jessica and Trevor) were as deeply involved as Paul during WFP. Paul's celebrity leads to a ridiculous array of speakers at the weekly dinners...He has an uncanny knack for bringing in the most interesting people in the valley: Joe Kraus (Excite, JotSpot), Evan Williams (Blogger, Twitter), Paul Buchheit (Gmail), Greg McAdoo (Sequoia), Ron Conway (largest angel investor in the world), etc.
Which brings me to contacts. If you believe contacts don't mean anything, you're fooling yourself. I started a business outside of the valley in 1999, and now I've started one in the valley. Big difference. I paid my bills and bought myself a nice car with my previous business. I have much higher expectations with my current business, and a large percentage of those expectations have been brought nearer by our affiliation with YC. Try dropping a random investor an email sometime, to arrange a meeting to tell them about your great business. We've never received a "no thanks" to such a meeting, and I've been hearing from fellow YC'ers that they've always gotten the meetings they wanted (not just random VCs...they're talking to exactly the people they want to talk to). We're in talks with our first choice VC and it's going very well, and at least three of the other companies have already closed rounds. If you are in Y Combinator you increase your chances of getting funded by a good investor by a huge amount (and let's be clear: A bad investor brings nothing but money and disaster will follow...the right investor brings more contacts, good advice, expertise in the right areas, and also money...with the right investor your odds of explosive success are remarkably higher). YC brings the best contacts in the industry.
Some other bits that aren't obvious unless you think it through and actually read the YC information on their page:
YC pays for the incorporation and all legal stuff for issuing shares. It's about ten grand worth of legal work from a top valley firm.
YC feeds the company founders every Tuesday night for three months. Paul cooks the meals personally (I've seen it with my own two eyes). These dinners are the single most valuable aspect of the program (aside from providing the motivation needed to get people out to the valley). Chatting with fellow founders every week about what you're working on, what they're working on, and exchanging ide