Saturday, July 21, 2007
A Gourmet Meal for Hungry Entrepreneurs
If you must live on a diet of Lean Cuisine, try the Swedish meatballs. So advises Wayne Crosby, a 29-year-old computer programmer who recently spent three months subsisting on the frozen dinners. He also slept on an air mattress, used a box as a coffee table, and worked about 14 hours a day. He gave up a good job at Amazon.com to do it. Crosby participated in a unique program for aspiring tech entrepreneurs called "Y Combinator." Founded by Paul Graham, a computer programmer who struck it rich during the dot-com boom, Y Combinator combines mentoring with venture capital in hopes of getting the next Google off the ground. (The name comes from a mathematical term.)
Graham and his team gather a small group of startups in Cambridge, Mass., each summer and California's Silicon Valley each winter. Fledgling companies get a bit of money -- usually no more than US$20,000 -- and access to Graham's extensive network of tech executives, venture capitalists, lawyers and other industry insiders. In exchange, Y Combinator takes a share of the companies' equity, usually about 6 percent.
After three months, the startups show off their work in hopes of getting acquired or attracting other investors. The 2 1/2-year-old program's biggest hit so far has been Reddit, a social news site acquired by magazine giant Conde Nast for an undisclosed amount.
However, Y Combinator has had enough smaller successes to be marginally profitable --and to generate tons of Web 2.0 buzz. They include:
Loopt, a cellphone mapping service (which recently struck a deal with Sprint to use its service). It raised $5 million in funding from other venture capitalists.
Scribd, a Web site that lets you publish documents online. It raised $3.5 million after graduating.
Justin.tv, a much talked-about Internet television company. For more than 100 days, founder Justin Kan has been broadcasting his life around the clock from a camera mounted on his head.
Y Combinator is a big change from the way business is usually done in tech circles. Startups are typically funded by wealthy individuals known as "angel investors," who dole out money though a complicated, clubby system of who-knows-whom.
Breaking in is nearly impossible for a young, unconnected programmer, says Robby Walker, Crosby's 23-year-old business partner. The two friends had kicked around several ideas for companies, but had no idea how to start until Walker stumbled on Y Combinator's Web site. They applied and got in. Crosby quit his job. (Walker had completed his Ph.D. in computer science.)
Crosby and Walker used their time at Y Combinator to start Zenter, a service allowing people to create PowerPoint-like presentations online. Last month, after only half a year in business, Zenter was acquired by Google for an undisclosed amount.
However, the path wasn't easy. Walker and Crosby had to pack their belongings into a Honda Civic and move halfway across the country on a meager budget. Walker left a girlfriend behind in Chicago; Crosby's pregnant wife stayed in Phoenix. "It was the scariest thing I've ever done in my whole life," Crosby says.
They settled into their sparsely furnished apartment and began frantically writing computer code. Once a week, they attended a weekly Y Combinator dinner with other members of the program. Graham hosted and cooked. (Chicken stew is his specialty, even though he's a vegetarian.) At each meal, tech insiders would come and speak with the young entrepreneurs. One of these speakers, JotSpot CEO Joe Kraus, talked about having his company bought by Google. Introductions were made, and soon he was helping broker the Zenter deal.
That kind of connection is what Graham had hoped for when he founded Y Combinator. He came up with the idea after giving a speech at Harvard University about his own e-commerce startup, Viaweb, which he sold to Yahoo for $49 million in 1998. He was telling students they needed to find successful entrepreneurs to fund their startup ideas. "I realized that all these people were staring at me expectantly," Graham says. "I had this vision of getting a thousand business plans in the mail, so I suddenly added 'but not me!'" "And then I felt sort of guilty," he says. Y Combinator was born. The program started small. However, it's growing fast. More than 400 companies applied for the 19 spots in this summer's program.
However, the limits of Y Combinator's model remain unclear. A typical young tech company should be spending a little less than $40,000 a month, says Seth Levine, a venture capitalist at Foundry Group. Y Combinator gives companies a fraction of that, leaving entrepreneurs "eating ramen and not paying themselves," he says. Six percent is a huge amount of equity to give up for such little money, he says.
Although Levine has shared his expertise with TechStars, a new Colorado program that's similar to Y Combinator, he says it's rare to find a business with serious long-term prospects in such a program. Most startups would be better off taking money from friends and family, or seeking it from a business that would benefit from their product, he says. Once a company bootstraps for a little while, it can then approach traditional venture capitalists and seek investment, he says. "I like to hear about businesses early," he says.
One thing Levine and Graham do agree on: It costs a lot less to start a company than it used to. Computers are cheaper, and free open source software is widely available on the Internet, Graham says. Software improvements have also made coding easier, he says.
David Zhao and Kevin West are two fledgling entrepreneurs who hope it pays off for them. The two 24-year-olds just quit their jobs at Amazon.com and Microsoft to join Y Combinator's current program. They're developing a Web site called "Versionate" that lets work groups collaborate on a single document. "The advice and the connections [Y Combinator] provides are invaluable... and the equity stake they take is totally fair," says West, who is subletting an apartment with Zhao for the summer.
"It's been a very good experience so far," Zhao says.
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Graham and his team gather a small group of startups in Cambridge, Mass., each summer and California's Silicon Valley each winter. Fledgling companies get a bit of money -- usually no more than US$20,000 -- and access to Graham's extensive network of tech executives, venture capitalists, lawyers and other industry insiders. In exchange, Y Combinator takes a share of the companies' equity, usually about 6 percent.
After three months, the startups show off their work in hopes of getting acquired or attracting other investors. The 2 1/2-year-old program's biggest hit so far has been Reddit, a social news site acquired by magazine giant Conde Nast for an undisclosed amount.
However, Y Combinator has had enough smaller successes to be marginally profitable --and to generate tons of Web 2.0 buzz. They include:
Loopt, a cellphone mapping service (which recently struck a deal with Sprint to use its service). It raised $5 million in funding from other venture capitalists.
Scribd, a Web site that lets you publish documents online. It raised $3.5 million after graduating.
Justin.tv, a much talked-about Internet television company. For more than 100 days, founder Justin Kan has been broadcasting his life around the clock from a camera mounted on his head.
Y Combinator is a big change from the way business is usually done in tech circles. Startups are typically funded by wealthy individuals known as "angel investors," who dole out money though a complicated, clubby system of who-knows-whom.
Breaking in is nearly impossible for a young, unconnected programmer, says Robby Walker, Crosby's 23-year-old business partner. The two friends had kicked around several ideas for companies, but had no idea how to start until Walker stumbled on Y Combinator's Web site. They applied and got in. Crosby quit his job. (Walker had completed his Ph.D. in computer science.)
Crosby and Walker used their time at Y Combinator to start Zenter, a service allowing people to create PowerPoint-like presentations online. Last month, after only half a year in business, Zenter was acquired by Google for an undisclosed amount.
However, the path wasn't easy. Walker and Crosby had to pack their belongings into a Honda Civic and move halfway across the country on a meager budget. Walker left a girlfriend behind in Chicago; Crosby's pregnant wife stayed in Phoenix. "It was the scariest thing I've ever done in my whole life," Crosby says.
They settled into their sparsely furnished apartment and began frantically writing computer code. Once a week, they attended a weekly Y Combinator dinner with other members of the program. Graham hosted and cooked. (Chicken stew is his specialty, even though he's a vegetarian.) At each meal, tech insiders would come and speak with the young entrepreneurs. One of these speakers, JotSpot CEO Joe Kraus, talked about having his company bought by Google. Introductions were made, and soon he was helping broker the Zenter deal.
That kind of connection is what Graham had hoped for when he founded Y Combinator. He came up with the idea after giving a speech at Harvard University about his own e-commerce startup, Viaweb, which he sold to Yahoo for $49 million in 1998. He was telling students they needed to find successful entrepreneurs to fund their startup ideas. "I realized that all these people were staring at me expectantly," Graham says. "I had this vision of getting a thousand business plans in the mail, so I suddenly added 'but not me!'" "And then I felt sort of guilty," he says. Y Combinator was born. The program started small. However, it's growing fast. More than 400 companies applied for the 19 spots in this summer's program.
However, the limits of Y Combinator's model remain unclear. A typical young tech company should be spending a little less than $40,000 a month, says Seth Levine, a venture capitalist at Foundry Group. Y Combinator gives companies a fraction of that, leaving entrepreneurs "eating ramen and not paying themselves," he says. Six percent is a huge amount of equity to give up for such little money, he says.
Although Levine has shared his expertise with TechStars, a new Colorado program that's similar to Y Combinator, he says it's rare to find a business with serious long-term prospects in such a program. Most startups would be better off taking money from friends and family, or seeking it from a business that would benefit from their product, he says. Once a company bootstraps for a little while, it can then approach traditional venture capitalists and seek investment, he says. "I like to hear about businesses early," he says.
One thing Levine and Graham do agree on: It costs a lot less to start a company than it used to. Computers are cheaper, and free open source software is widely available on the Internet, Graham says. Software improvements have also made coding easier, he says.
David Zhao and Kevin West are two fledgling entrepreneurs who hope it pays off for them. The two 24-year-olds just quit their jobs at Amazon.com and Microsoft to join Y Combinator's current program. They're developing a Web site called "Versionate" that lets work groups collaborate on a single document. "The advice and the connections [Y Combinator] provides are invaluable... and the equity stake they take is totally fair," says West, who is subletting an apartment with Zhao for the summer.
"It's been a very good experience so far," Zhao says.
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