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Y Combinator has nailed the start-up incubator model, most likely because of its visionary leader.
Many famous incubators, from Idealab to CMGI, have come and gone over the years, and there are predictable autopsies suggesting the incubator model is flawed (see a list of articles about incubators here). Without doubt, the incubator flavor of the year is Y Combinator. Few of its companies have matured enough to judge its success, but we’re seeing promising ideas emerge. Reddit, for example, was sold to Wired parent, Conde Nast. Its guiding light is leader Paul Graham, who thinks and writes deeply (we’ve linked to him often) about start-ups, and nurtures young founders with the best practices of the day. It provides a cooperative environment, and draws people who want to help. Paul Buchheit, the creator of Google’s Gmail, has since left Google and spends a good deal of his time advising these companies, sometimes making investments.
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The Mercury News has a good description of how Y Combinator works:
Here’s how it works: twice a year, Y Combinator invites “hackers,” or programmers, to fill out an online application, outlining who they are and a business idea. One winning batch of teams is funded in winter and the other in summer. With Y Combinator’s help, each becomes a real company - one that is expected to create its product within three months. The amount of money Y Combinator gives each group - $5,000, plus an additional $5,000 per founder - is a pittance for what it asks in return, which is, on average, a 6 percent stake in their start-up. That money has to really stretch. Beyond their living and working expenses, it must also cover relocation costs, as the winter winners must relocate to the Bay Area and the summer winners to the Boston area.
Here is Y Combinator’s winter Class
Here are some alums.
Update: See our follow-up, which addresses the critical comments below.
7 Comments
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James Nicholson said:
I’m a big fan of Y Combinator. Unlike other incubators of the past, Paul Graham realizes that it’s not money that creates a successful product - it’s talent, relationships, and a great idea. By watering lots of seeds with just a little water Y Combinator has been able to keep expenses low and watch lots of interesting products sprout up.
I’d liken Y Combinator’s approach to that of Google - create an environment in which many good ideas can blossom and then step back and see which ones catch on. It’s surprising that by this point in time more large companies don’t take this approach.
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lee said:
wow - i think paul graham has done a good job - but once again the commentary by matt goes way overboard - “Y Combinator has nailed the start-up incubator model”
really what have they done other than one small dinky exit exit - how can you say they nailed it? once again bad journalism and hype coming from silicon valley reporters.
you cant even compare them to idealab that started companies in the internet era that returned billions of dollars to the investors including idealab , which unfortunately squandered its gains, and now has had a great deal of success in the clean tech era.
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Nicholas said:
What model and how exactly does Ycombinator actually use that nailed the start-up incubator model?
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Mark Wendman said:
I think that Matt is perfectly right. Spot on in his skilled analysis.
By “nailing it”, implicit is that the expenses are low, the incubation time is properly short (intended merely to risk mitigate and seed teams, rather than do multiple iterations of things that don’t sell, nor preordaining who succeeds after admission to the program), and the critical aspects of teaming and motivation are enhanced by their methods.
Money is not the (only) magic sauce in startup viability, and many ventures use fundraising successes, as an excuse to hide their lack of ability to develop, field and sell a product.
There are numerous examples of $100m plus “funding successes” that never made it to ship a product - even larger funding examples of comparable failures.
Y-Combinator is a good balance to a not so rare type of silly and often futile exercise in overfunded failure.
IE $ raised is not a validation of product nor business success, as some might well understand.
Product revenue, successful product development and customers are real validation of success.
Incubators properly give teams a chance, the more the merrier and the cheaper the better. And yes prescreen for substance, concept and team, at minimal cost, as Y-Combinator does.
Giving enthusiastic, talented yet mostly inexperienced teams a chance, is the true calling of cost effective incubation - a means of natural selection, unfettered by artifacts of merely knowing the right folks, or having attended the “right” school.
How many of those failed? Probably little different than those far better funded, nor any worse than pedigrees that might on paper be stellar. Success in startups is not equated to scholarly skills, nor financing success.
Startup success often draws upon unique hard to quantify soft skills, after some modest amount of hard skills are present. Pragmatic deep expertise, efficiency, motivation, persistence, teaming and commercial focus come to mind. Aside from the core of the product…(ie if you build it will they come, or will your marketing bear fruit)
In the end, academic pedigree (as contrasted vs. academic performance) is not a strong predictor of entrepreneurial success, albeit it can be helpful, it is not the only predictor of commercial product development viability nor business success.
An example of the power of inexperience was the success of Digital Instruments which grew from 0->$60m sales in 10 years, on peak employment of 100 folks, with little seed money other than the founders $50k, and mostly inexperienced staff, some right out of school.
Firm quickly developed an interim revenue generating product, that fed capital needs until the first DSP based digital control scanning probe (tunnneling) microscope was fielded - and then led the world market for the scanning probe instruments by over 50% global market share nearly continuously, where otherwise the Japanese might have dominated this product segment.
The 40+ patents granted might have had something to do with this, as the founders insistence to not ship any new product until it works - since you have many chances to ruin your reputation with bad products….
The firm’s sales to Japan for quite some time constituted some 50% of sales dollar volume.
And later acquired for about $150m in stock by Veeco. All the while in most prior years spinning off about 30-40% profits on sales for close to 10 years…
Key there was the team took no salary till shipments generated revenue, and was largely made up of the students who had been in the President’s graduate level instrumentation program at UCSB.
Motivation is quite powerful.
Y-Combinator feeds motivated teams of mostly students to give them a chance. Occams Razor definition of incubator mission and practiced at Y-Combinator.
That is the true calling of incubators, not as a business model.
And my guess is that the eggs hatched at Y-Combinator will be very prodigious … near the best in the true meaning of culture of startups.
Kudos to the team behind Y-Combinator !! and best of luck to the hatchlings.
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Bobby Martyna said:
It’s an interesting play that will be very successful, not to mention a lot of fun, in my opinion.
A number of reasons stand out:
a) They have created and are perpetuating a mythology (thanks in a large part to the Livingston book) and an environment to attract a top class of hundreds of qualified applicants.
b) With their tiny funding model, a much smaller percentage of successes are required than traditional VC and last-generation incubators.
c) Hackers whose ideas aren’t as good can be shepherded to any number of those whose are — so top talent is easily found. And ideas, concepts and methods can be re-used and transformed. Don’t know this for a fact, but I would guess there is a vibrant “intra-Combinator” open-source model being employed.
c) They seem to have a focus on social networking (at least now), where new grads have more intuition and hands-on experience than traditional entrepreneurs. Their tiny seed funding model targets those very founders — who are just fine living on Kraft Easy Mac and who haven’t yet received a corporate paycheck to change that lifestyle.
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Marcus said:
If you ask me, they’re playing the lottery.. at $5k - $20k a pull tab..
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Without doubt, the incubator flavor of the year is Y Combinator. Few of its companies have matured enough to judge its success, but we’re seeing promising ideas emerge. Reddit, for example, was sold to Wired parent, Conde Nast. Its guiding light is l…