Why Not Y? I’ll Tell You.

2011 Blog AvatarI recently finished reading The Launch Pad, by Randall Stross, subtitled, “Inside Y Combinator, Silicon Valley’s Most Exclusive School for Startups”. It’s a good book, a tale of hope and despair, greed and…. well, more greed. It’s the story of investor Paul Graham and his merry band of sixty-four startups trying to make their way in the world. Paul Graham is a self-described computer hacker, a former entrepreneur who wanted to cash in on the enthusiasm and growth potential of startup software companies, so he started Y Combinator, a business incubator, first in Cambridge MA, then in Silicon Valley CA. Twice each year, hand-selected teams of business startups are admitted into the hallowed halls of Y Combinator and allowed to succeed or screw up over the next three months. Y Combinator provides the teams with a modest amount of capital in exchange for 7% equity in the startup company (supposing it succeeds) and provides the teams with advice and encouragement as needed. The incubator’s motto is, “Make Something People Want”, which seems like a good enough idea.

In the class that Randall Stross followed, summer 2011, there were 64 different startup teams. Stross was given complete access to Y Combinator and the startup teams, so he has a great overview of the whole process, from admittance interviews to the end of the process, when the startups present their work to some of the most prestigious venture capital firms in Silicon Valley on “Demo Day”. The book is well-written, and the prose style gets out of the way of his story. No, I have no problems with the book – my problems are with the whole incubator process.

I’m not fully sure why I have such problems with Y Combinator. Perhaps it’s an issue of personalities. The leader of YC, as they call it, is Paul Graham, who does not come across as a particularly nice guy, one of those types who sees “tough love” as the way to solve a problem. As far as he is concerned, the way to success is to remove all distractions; the successful teams, quote, “just eat, sleep, exercise, and program”. No personal relationships, no art, no music, just work. Anything that takes you away from work is seen as suspect. Comparisons of YC with graduate school life are apt. Participants are encouraged to live and eat cheaply, on the theory that it will all be worth it in the end. You put everything into the startup.

Even if your chance of success are only 10 per cent, so what? You might become a billionaire… The other advisors at YC, all successful entrepreneurs and investors themselves, have varying personalities but hoe to the YC line: there’s no business like keeping your nose to the grindstone. And of course, like in any lottery, there are a few tantalizing YC success stories to keep you motivated, such as Dropbox and Airbnb, companies that are worth billions now.

The problem is, where would we find the suckers, I mean, entrepreneurs, to go ahead against such difficult odds and under such difficult conditions? Who would put up with this level of difficulty? Why, the young of course! They don’t know any better. And so it is that the participants are fairly young, generally college-age or recently graduated, though a few are older. The company founders at YC are mostly programmers, indicating the strong preference at the incubator for technical founders and software solutions to problems.

Despite some successes, and there have obviously been some, there are many problems with the YC approach. For one, there is the focus on work above all else. Don’t get me wrong, work is important, and the right kind of work can be fulfilling.  But it can end up being very self-contained and insular without the influence of the greater world around. It is no surprise to me that the greatest YC success story is Dropbox – Dropbox is a service created by computer nerds, for computers, about computers. That’s a no-brainer for a tech guy to come up with. However, a product that captures the greater world of art, music, or society is harder. Ideas like that cannot originate from a person staring at a computer screen.

For another, Graham expects his charges to solve the world’s problems, but these kids haven’t been in the world long enough in many cases to know what the world’s problems are. They are capable mainly of solving the problems of the young, and while there can be money to be made there, they miss out on larger problems in the world. Participants are encouraged to look for business-to-business solutions, but as far as I can see, these newbies haven’t been in the work world long enough to know what businesses need and want. Not surprisingly, there are no “social do-gooders” in the bunch, even though there is a lot of talk these days at TED conferences and elsewhere about using capitalism to solve the world’s ills through innovation. No, these stories are all about becoming wealthy overnight through innovation, not about making the world a better place.

There is also a big push at YC on “create it now, worry the details later”. That’s fine for software solutions because the starting costs are so low. In other businesses with larger upfront development costs, such as hardware solutions to problems, the “worry later” approach can lead to big expensive mistakes. Ask the people at WebVan, who went through nearly a billion dollars without anything to show for it because they didn’t worry the details. Many, probably most, startups benefit from a fairly extensive development period, where the founders discover what people want in their product – or if they want it at all. However, there’s not time to do that and get your software ready for the YC “Demo Day”, so the “worry later” approach is favored.

So how successful are the teams that Stross follows? Do startups succeed at a greater rate than they would outside of YC? It’s hard to tell, because the companies in the book were not followed long enough. About one-fifth fail to attract additional funding beyond what they received from YC. A lucky few golden startups achieved some income, or better yet, had some income before they even arrived at YC – they are seen as rare birds, even though these successes are so modest that they would embarrass a reasonably ambitious restaurant. If you count success as the ability to attract further funding, certainly some of them did well, though attracting the interest of venture capitalists seemed to owe as much to your ability to present your ideas as the content of the idea itself. It would be interesting to see a follow-up on the startups, to get some idea of their successes.

In all, it was useful to know what one of these startup accelerators is like, but for me? No, thanks. The pressure to succeed is tremendous, and I like my world outside of work as well. My method is slower than I would like, but is more careful and, I believe, more likely to succeed. The book was good primer on the life in Silicon Valley and a reminder of why I don’t live there. Yes, they can accomplish a lot quickly, but at what cost?

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