Y Combinator is the undisputed king of accelerators. The startups that have come out of the program, including Airbnb and Dropbox, have raised more than $1 billion combined. But a new breed of accelerators and incubators springing up around the world threaten to dilute Y Combinator’s brand.
Fast Company recently spoke with Y Combinator partner Harjeet Taggar to learn whether YC welcomes the competition or sees these new accelerators as a threat. The conversation is part of our ongoing Fast Talk series on accelerators in the September issue. Yesterday, we spoke with TechStars’ David Tisch about why most accelerators will fail. Later this week we’ll hear from SeedCamp and Tech Wildcatters. If you’re an entrepreneur who has ever wondered about the pros and cons of entering an accelerator, you’ll want to pay attention.
FAST COMPANY: Are there too many accelerators at this point?
HARJ TAGGAR: It’s hard to say without knowing exactly which ones add value. What we worry about is if this trend is because people see Y Combinator doing well, and they just want to replicate us to make a quick buck–if they don’t actually help the companies but hurt the companies. Every now and then we see people apply to Y Combinator from one of these incubators that took some huge chuck of equity and really didn’t help the company. I would worry if there were more of those. But it’s hard for founders to tell the difference.
How can they tell the difference?
Track record would be one obvious differentiator. YC has been around longer than any of the other accelerators, and it’s produced larger companies. There’s just a lot more data and a lot more people who have gone through YC, which gives us an advantage. Paul Graham is probably the most prominent founder of Y Combinator, but he was also prominent before Y Combinator, and that’s the type of person you would want.
Paul Graham is very well known in the Valley. How much of an accelerator’s success, or even a traditional VC firm’s, comes down to reputation and brand perception?
In the investment world, brands are kind of everything. Especially amongst VCs, there’s a self-fulfilling prophesy where the best VCs always see the best deals. I think five or six VC firms dominate returns in the entire industry. Their brands are clearly important, and I think the same applies to Y Combinator. We’ve never had someone turn down YC for another one of these incubator programs. I think a lot of that is about our brand, and hopefully the brand is justified.
Do you view other accelerators as competitors?
We don’t view them in competition. We haven’t changed anything about our operation in response to something we’ve seen from other accelerators, for example. Maybe we would if we started losing applicants to other accelerators; then we’d have to think more about why they were picking places other than YC.
The thing is, anytime you work with an investor, I see there being three possible outcomes. One is they add positive value to the company, and the company is able to do things it wouldn’t have been able to do if it hadn’t taken investment or been a part of an accelerator. Then you have the middle scenario, which is that nothing changes. Which is better than the third scenario, and this is the one I worry about regarding this trend of accelerators: Where taking investment and being part of these programs actually puts you back and hinders the company in some way. That’s my worry. The worry is that people see this accelerator model; they think it’s an idea they could totally do; and they set one up in every city they possibly can.
What do you think about corporate incubators?
A lot more corporations are starting to do these incubator-type things, and I don’t think they will ever produce any kind of interesting companies. It’s a subset of a bigger problem–the biggest problem that this entire space faces and the reason why YC is different. The problem that incubators or accelerators–call them what you will–face is a massive adverse selection bias, right? If you observe an incubator where you have this adverse selection bias, whereby the best founders never wanted to apply to your thing because they just assume it was going to be bad or lame, then you never are going to create anything interesting. So Y Combinator is possibly the first incubator to get above that trend: It’s the first one that can scale and grow and continue to attract a quality founders.
With corporate incubators, the incentives are just not aligned the right way. The incentives behind a corporate accelerator are not to produce really big independent companies. Most of the time they start some in-house incubator just to get a feel for what’s interesting. It’d be hard to imagine Mark Zuckerberg wanting to apply to the in-house corporate incubator. It’d be harder to imagine a good quality team wanting to go work there. Corporate incubators just suffer from an even more intense flavor of the adverse selection bias, which is the problem that all these other accelerators and incubators face.
Kevin Systrom was once at Google, where he had access to resources and the like. But that didn’t lead to Instagram because you arguably wouldn’t want to start Instagram at Google since Google would just eat it alive, like it did with Dennis Crowley’s Dodgeball.
Right, right, that’s exactly right.
For entrepreneurs though, could you say whether Y Combinator would make them more successful than if they took traditional VC dollars or angel investments?
It’s way too early to tell. It’s actually impossible to formulate an argument from a returns perspective that YC has been more successful than Sequoia, say. They just do two very different things, and I don’t think one is going to eat into the other. If anything, I think YC could amplify the returns of these VC funds. But what’s changed over the last few years is that people who could raise money or VC funding are still opting to do YC. They seem to want to do it because of our YC alumni network infographic.
[Image: Flickr user lisbokt]