It’s not unusual for startups to create a new concept in an established market space. But when you do it with an entirely new approach and try to shift the balance of power in the process, you can probably expect some blowback.
That’s what happened when Mountain View, California–based accelerator Y Combinator came on the scene in 2005 with a new approach to fostering new companies, trying to give founders more resources and negotiating ability to help them get better investment deals.
The concept seemed simple: Give the startup a small amount of money—about $12,000 at the time, and still rarely more than $20,000—some office space and, for a few months, help with everything from incorporating to networking with some of the brightest minds and prospects in their industry.
Partners like Paul Graham, who co-founded the platform that became Yahoo Store and created the concept behind today’s spam filters; Jessica Livingston, former vice-president of marketing at investment firm Adams Harkness; Paul Buchheit, creator of Gmail, and FriendFeed; and others pore over their contact lists to help founders make the right connections. In exchange for a bit of money and a lot of counsel, they take a 2% to 10% equity stake in the company.
There were a few problems with the introduction of this model, Livingston says. First, some thought that founders were being ripped off. After all, who sells an average of 6% of their company for $12,000?
Y Combinator had some trouble getting attention from business media because "there was no such thing as accelerators—no one was doing what we did," she says. "They couldn’t find a place for it in their brains."
The founders avoided responding to accusations that they were exploiting founders. Instead, they worked on attracting businesses, and started with eight in their first class, including Reddit. The first group was a result of Paul Graham’s following and contacts, Livingston says. The accelerator continued to provide more opportunities for its startups, hosting weekly dinners with high-profile founders like Mark Zuckerberg, and designing its "Demo Day," which attracts investors to meet with its current crop of companies.
Livingston says Y Combinator faced rumblings about its motives and lack of awareness until early 2007. However, as startups completed the program and moved on to attract big-dollar deals, it was the very audience the accelerator was accused of exploiting that was responsible for the attitude adjustment.
"Our founders were out there saying, ‘Y Combinator was the best thing I’ve ever done in my life. I’d give up twice as much stock to do that.’ We just kept moving forward," she says.
And investors were beginning to sing its praises, too. Demo Days delivered high-quality deal flow in one afternoon. Founders didn’t have to make appointment after appointment, wasting time with investors who weren’t appropriate or weren’t willing to make the kind of financial commitment the founders needed. Investors got to invest in companies right away.
The Y Combinator team created templates for founders to use, allowing them to take back some control in negotiating their deals. People were starting to understand the vision, she says. In the beginning, Y Combinator attracted about 60 investors. Today, Demo Days can attract hundreds.
Building community and staying focused on the best way to help founders paid off in other ways, too. While the accelerator has developed various platforms to communicate with its startups and alumni, they also network with each other, offering introductions to their own contacts and investors. They help each other solve problems, Livingston says. That assists the Y Combinator team in remaining focused on their latest batches of startups—74 in the last class.
"They’re helping us scale," she says.
It would have been easy to rise to the bait or to be intimidated into upping their investment dollars to quiet the haters. But, looking back, Livingston says the most important lesson other founders can take away is to always remain focused on what you’re trying to do. That’s the lesson they’ve also tried to impart to their alumni, which include companies like Dropbox, Loopt, Weebly, Airbnb, and many others—more than 630 startups in all.
"We always try to stick to our knitting—to do what we do best, which is advising startups. We’ve tried to be founder-friendly, that’s what’s guided us," she says. The bigger and more well-known Y Combinator gets, the more that focus helps guide them, she adds.