The Y Combinator Model

I started a bit of chatter that lead to a bit more in these parts for the need for a Y Combinator in Atlanta.  It dawned on me that lots of the FoG faithful may have no idea what this means.  On their web site it explains that Y Combinator "is a new kind of venture firm specializing in funding early stage startups. We help startups through what is for many the hardest step, from idea to company." 

So what exactly does Y Combinator do?

1.  Focuses on Web apps:  Y Combinator focuses on software and Web services.  Most of the companies that I have heard coming out of there are Web apps.  Regardless they  focus.

2.  Has an application process:  Y Combinator has two application processes.  One in the spring for a Boston summer session and one in the fall for a winter bay area session.  The app is a straightforward web form. They do not ask for business plans.  The most promising applicants are asked to travel to one of the above places to make a presentation.  $500/person in travel expenses is reimbursed.  The app process is about three weeks long.

3.  Requires relocation:  Astute readers will gather from the above that the program requires relocation. 

4.  Seed investments:  Y Combinator typically invests $5,000 plus $5,000 for each founder.  A startup of 2 would get $15,000.  This is an equity investment of between 1% and 10% of the company.  Typical is 6%.  If I am doing my VC math right that is $235,000 pre.  Not bad for an idea.

5.  Offers no space.  Y Combinator is not an incubator and claims that the startup can do anything it wants with the money it receives. However, Y Combinator does strongly encourage companies to work out of wherever they find to live.  It seems that lots of them end up renting in the same place so they have what Paul Graham refers to as an exobator.

6.  Short programming.  The Y Combinator program lasts about 10 weeks.  There are weekly dinners on Tuesdays and open houses at Y Combinator on Wednesdays for entrepreneurs that want to show off their stuff or talk strategy.

7.  Product orientation.  Y Combinator wants their companies to create a demo of their product.  The demo focuses on a problem the company is trying to solve and shows how the product solves it.

8.  Not business plans.  Y Combinator does not care too much about the business plan.  In the app process or while in the program.  They rightly think that it is too early to have a solid business plan that is not going to change. 

9.  An investor day.  The program ends on Angel Day when Y Combinator invites all the angel investors it knows to come in and see the demo presentation.  I hear tell that Paul Graham knows lots of angels.

10.  Success.  At his talk at Startup School, Paul said Y Combinator had invested in 8 startups and 4 succeeded. Batting 50% thus far for early stage ain't bad.  They expect this figure to settle in the 25% range. 

So there you have it.  So the question then becomes would it be possible to replicate this activity in Atlanta? That is the subject of a bit of research and a future post.