Y Combinator is viewed as the world’s most successful accelerator program, and many see it as the model for accelerators. Though a lot of people are familiar with its program, few know how it was established and the path it took to get where it is today. Aaron Harris founded and sold Tutorspree, a Y Combinator participant, and in 2013, he joined the accelerator where he is now a partner. On a brief visit to Israel, Harris participated in a joint Geektime-LeumiTech event on Tuesday.
In a panel discussion led by Yaniv Feldman, Harris explained that 10 years ago, Trevor Blackwell, Paul Graham, Jessica Livingston and Robert Tappan Morris decided they would like to invest in startups but did not really know how. In the end, they settled on a different model, investing in a large number of startups at the same time and not just one. In its first year, Y Combinator invested in eight startups, including Reddit. Since then, the model has not really changed, and according to Harris, Y Combinator still gives companies a relatively small investment in exchange for a fixed percentage of the company ($120,000 for 7 percent).
A Shocking Business Model?
Harris admits that the accelerator business model is “terrible”, but Y Combinator was “blessed” with four founders with money, and they did not really think about it as a business. In Harris’s view, if they had started with the idea of establishing a fund that would build Twitch or Airbnb, that would have been something else, but they wanted to attract small and very ambitious startups, and this was a “happy accident.” The model is based on the idea that you invest a small sum and then ten years later, you get something. At first the business model was based on investments by the founders. Later they raised money from investors (mainly Sequoia), and recently they have raised a large fund to make significant investments.
So How Do You Get Accepted?
Harris says that Y Combinator looks for a team whose founder and idea together can lead to a multimillion-dollar company. Since every product requires different personality traits, for some businesses they will seek a super-aggressive and sales-oriented entrepreneur, but there are other products for which that is not appropriate. Ultimately, he says, in almost every scenario, they want to see engineers on the team and a mix of group members who can confront the problem they are trying to solve. They are not expected to have all the answers, but they should have scenarios for logical solutions, so that Y Combinator can at least try to chart a path to profitability.
According to a Geektime survey, companies that participate in Y Combinator increase their odds of success by 31%, whether in profitability, exits or IPOs. Is this because the people at the accelerator are simply better at selecting and filtering or because startups that participate in Y Combinator leave there with a sort of stamp of quality assurance that automatically gives the funds or other institutions confidence in them? In other words, is it Y Combinator’s reputation that helps these companies succeed?
Harris likes to think that companies Y Combinator invests in would succeed even without its help — maybe at a different pace, but they still met with success. In his opinion, the brand can help the companies raise money, but he does not think this is an indication of success. In other words, it does open doors for them, but at the end of the day, the bigger thing that happens is that they become part of a well-connected network and get a push. The founders are the ones who come up with the best ideas, he says, adding that what Y Combinator tries to do is to deal with the problems using the knowledge it has developed by working with hundreds of companies.
One thing people have been saying, especially in the past two years, is that Y Combinator has caused an overvaluation of startups. According to Harris, it is a free market. There are investors who are willing to invest these amounts, and they are the ones pushing to invest more. He adds that Y Combinator’s partners actually encourage companies to raise lower sums of about $5 million, which is still a lot, but not as high.
Another issue raised in the discussion was Y Combinator’s location, San Francisco. What if they took the spirit of Y Combinator and placed it somewhere else? Harris noted that when he was working on his own startup with the accelerator, there was an energy there that cannot be explained. They know, of course, that there are many founders and fascinating ideas all over the world, and for a long time they have been investigating areas outside of Silicon Valley. He emphasized that the largest and best companies are not necessarily American. There are many immigrant entrepreneurs in Silicon Valley who come for a certain period of time (say to the Y Combinator program), and then return to their country of origin. According to Harris, until now, it made sense for people from startups to stay in the Valley for about three months and then to return to their country.
And what about the Israeli market? Harris says that “there are strange ideas here,” without an ounce of negativity in his assessment.