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Copying Y Combinator – WHY and HOW

[UPDATE]– I’ve written an update 1.5 years later on the original post: “Looking back – 1.5 years since ‘Copying Y Combinator'”

Have you thought about starting a program like Y Combinator in your city? That doing so would not only build a startup ecosystem but would also bring a good financial return? I studied Y Combinator, TechStars, Seedcamp, and many more programs to develop a framework for “Copying Y Combinator”.

(With apologies to Chuck Palahniuk…)

  • The first rule of copying Y Combinator is: Do Not copy Y Combinator.
  • The second rule of copying Y Combinator is: DO NOT COPY Y COMBINATOR.

The key to copying Y Combinator is to figure out how you can be just as good, but in a different way, than Y Combinator.


Background

This last year I’ve been an MBA student at Cambridge University. In order to complete the degree we had to do a substantial piece of research, and I chose to do it on the rise of Y Combinator and similar “seed accelerator” programs. My hypothesis was that a lot of people/organizations are starting seed accelerators without really examining the full scope of innovations they need to think about in order to achieve their goals.

I wanted to take the opportunity to look into why entrepreneurs choose to go into a seed accelerator, why individuals choose to start a seed accelerator, and then propose a framework for designing new programs.

Key results are described in this post, and the full paper is embedded via Scribd (a Y Combinator company) below.

Data

The very first step in examining these programs is to get data; it’s almost all posted somewhere, but isn’t consolidated. Between the data that each program publishes on their website, press on the various programme Demo Days, and Crunchbase, I built a list of virtually every startup funded by every seed accelerator.

Click this link to see the spreadsheet on Google Docs.

The only accelerator where this data isn’t as comprehensive is for Y Combinator; I’ve put in placeholders where known (ie, 8 companies in cohort X but only 5 have launched). That said, it should only be missing a handful of companies at most. And please note that nearly all exit values are purely speculation, though educated speculation based on exits of similar companies.

I also surveyed the founders of companies that have either been funded by accelerators or are looking to be funded by accelerators (Y Combinator and others). Specifically, I wanted to find out what they cared about when choosing a seed accelerator. The results are as follows:

  • Connections to future capital: 8.51
  • Brand/Alumni connections: 7.83
  • Business support: 7.42
  • Product support: 7.13
  • Pre-money valuation: 5.25
  • Level of funding: 4.14

These numbers did vary somewhat between different programs and non-funded companies. (For example, the average Y Combinator founder valued Brand/Alumni connections much higher than the average respondent.) But the trends show that entrepreneurs value the elements of programs that give them long-term chances for success: connections to investors, other connections, and product/business support.

Financial Results

Since seed accelerators are still in their early days, it’s too early to make a definitive verdict on their success. But the early data is promising.

Y Combinator and TechStars are two of the oldest seed accelerators, and are the only two to have had substantial exits. The TechStars exits have likely already generated a profit, and there are several companies that may still exit at some point in the future. The Y Combinator company exits have likely already brought Y Combinator to break-even, even after having funded over 100 companies. More impressive is that there are a good number of companies in the portfolio that could reach substantial exits at some point in the future. (And potentially a handful that could reach the vaunted $1billion+ exit.)

Recommendations – How to Copy Y Combinator

The bulk of my paper goes through the elements that are involved in a seed accelerator program. But the fundamental decisions that can define the potential success of a program are simple.

Success derives from the program’s founders and focus; together they must create a distinctive and compelling reason for entrepreneurs to join them.

There will always be entrepreneurs looking for funding; what a seed accelerator should provide is the right match of resources for those entrepreneurs. If the resources that entrepreneurs get by participating aren’t compelling, the program simply won’t get the highest quality applicants, and thus will not achieve maximum success.

This is why there has been little true competition for Y Combinator thus far: they simply have truly compelling resources to offer through PG and the other Y Combinator founders, the YC alumni network, and the combined program network. Until another program can be more compelling than Y Combinator, they will attract the best startups. (See rules 1 & 2 at top about copying Y Combinator.)

The key when constructing a seed accelerator is to look critically (and honestly) about the resources a founder has available; the founders’ experience and the expertise available to the entrepreneurs. Find the focus point that is different from Y Combinator that makes it distinctive and compelling. For example, FbFund REV accelerates companies building applications on Facebook. The new Springboard program in Cambridge (UK) is focused on B2B software applications.

Maybe your expertise is in mobile technology, maybe it’s in medical devices or maybe its in enterprise software. The key is that the founders and the mentors they assemble for a program in that focus area are a distinctive and compelling reason for entrepreneurs to apply and attend. Once the founders and focus are decided, many other decisions fall into place. For example, the program length and funding level will need to be adjusted so that companies can reach a significant development milestone during the program. Just because Y Combinator is three months long doesn’t mean that your program can’t be 9 months long, provided that’s right for the companies involved.

The full paper has far more detail, the point to take away is that the founders and focus must align, and must align to create a programme where an entrepreneur would travel from around the world in order to participate. (Even if there was an accelerator in their own backyard.) The potential to do this in the field of web applications is diminishing quickly.

Final Thanks

I want to say a specific thank you to the program founders that agreed to be interviewed: Paul Graham, David Cohen and Reshma Sohoni. And a huge thank you to the people that commented on my blog posts and Hacker News posts over the summer and took the survey I described above; your feedback was invaluable!


The Documents

Copying Y Combinator

 

Appendix A – List of Seed Accelerators

Click here to view the list of seed accelerators. Only seed accelerator programs are listed; see main paper for details.

 

Appendix B – Example Seed Accelerator financial model

 

Appendix C – List of all companies founded by Seed Accelerators

 

OR

Click here to view the list via Google Docs.

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Y combinator – dissertation and request for help!

As I wrote in my last post, I am writing my master’s dissertation on Y combinator and the similar programs it has spawned. Y combinator is a really interesting program, but I think simply copying it and starting it in a different city isn’t the best way to do it.

This post will detail how I’ve structured the dissertation thus far, and ask for your help!

Request for help

Are you interested in startups, or have you been involved in a startup? Then I would love it if you could take my survey. I’m looking to get some data around what people really want out of a program like Y combinator.

*** Please click here to take the (very short) survey! ***

Secondly, in my draft papers I’ve been using the words “startup incubator” but really don’t like that term. Incubator implies a central office space, which isn’t part of some of these programs. I’ve also thought of “startup accelerator”, “startup boot camp”, but they don’t seem quite right.

If you have any suggestions for a better general name for these programs, please let me know in the comments section below!

My dissertation

The first step in the project was to get a handle on what programmes exist, how they’re structured, what companies they’ve funded and what kind (if any) exits they’ve had. It’s taken a lot of research, but I’ve developed the following files:

List of programmes – https://docs.google.com/Doc?docid=0AUkhSN3vaY4jZG1xenptZ18xMmZjcDdnN2M4&hl=en
List of funded companies – https://spreadsheets.google.com/ccc?key=0AkkhSN3vaY4jdF90b1l1Vnl5NmZjaTBNQWlJYVozMEE&hl=en

The biggest “holes” in the data are some missing company names from Y combinator, and a general lack of awareness of follow-on funding from all programmes (except TechStars and Seedcamp).

My goal is to establish a framework for thinking about startup incubator programmes. To do that, I’ve evaluated the needs of both types of participants: the programme founders and the entrepreneurs. What I’ve developed is this:

Entrepreneurs want:

  • Seed funding / Financial support
  • Product support (making product better)
  • Business support (how to run a business)
  • Connections to future sources of capital
  • Brand connections (and alumni connections)

Programme Founders want:

  • Financial return
  • To enjoy startups without the same risk/working hours
  • Local/regional influence
  • High-quality deal flow

(I’m currently working to verify and quantify these assumptions, and would appreciate any feedback in the comments below.)

There are a number of complications in setting up these programs, however. Mainly:

  • Non-financial goals (on part of programme founders) –
    • Particularly when a significant part of the funding comes from the government which has clear non-financial goals.
  • Location: where people want to live/work (and where they’re legally able to live/work) –
    • This is a question of desires in personal life versus efficiency and opportunities in business life.
  • Follow-on funding, where programme founders fund some of their companies but not all for further development –
    • This is a serious consideration depending on the angels/VCs involved and the structure of the program.

That said, there are a lot of areas for innovation when setting up future startup incubator programmes. Namely:

  • Focus on industry vertical or particular scope of technology
  • Length of programme
  • Funding level
  • Scope of education programme

Where this is all going to lead is a framework and recommendations for people or groups that want to start a startup incubator.

My biggest recommendation thus far is straightforward. What will make a new programme so compelling that founders would want to choose it over any other? That likely will not be because of the location, despite the fact that most Y combinator clones seem to be just that: Y combinator in a different city. But if a new programme can do something unique, like build an incubator around database technology, or sensing technology, or enterprise customers, or something else it could be a very compelling opportunity for entrepreneurs.

Decisions around industry verticals or technologies then lead into decisions on levels of funding and length of programme. While most programmes have copied Y combinator’s $15-25k for 5-10% equity, there is a lot of scope to change this when the programme isn’t just funding web applications.

Summary

This is what I’ve written thus far, and look forward to your comments and suggestions! If you’d like to get in touch with me privately, please contact me by clicking here.

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University of Michigan – 2 out of 3 ain’t bad

I’ve long had this theory that at any given time, the University of Michigan can only have two successful sports of the three top sports: football, basketball, and ice hockey. (Aka, the sports where Michigan has traditionally excelled.)

A key data point has come this year: Michigan’s football team collapsed. But to even out the cosmic karma and keep the 2 of 3 rule alive, Michigan’s basketball team has made it to the NCAA tournament!

Just something to keep in mind…

Go Blue!

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Cambridge MBA curriculum – Harvard’s moving closer to it

JBSlogo.jpg
It’s only after experiencing the Cambridge MBA, talking to my professors and doing a little research recently that I really learned exactly how unique the Cambridge MBA curriculum actually is compared to other top schools. It comes down to two simple differentiators: our small-group “soft skills” classes and the projects incorporated into the curriculum. As I’ve read a little more about it, it appears that Harvard Business School is trying to move more towards the Cambridge MBA way of doing things… fancy that!

Soft skills

If you look at Cambridge’s required first-term curriculum you see a rather bland title: Management Practice. But this course is a very in-depth soft skills class, and not very bland at all!

Management Practice is a course that runs from 9am-12:30pm and 2-3:30pm one day each week in the Michaelmas (first) Term. The morning involves a highly interactive lecture/discussion and a group activity/game; a game that’s always highly competitive! The afternoon session reviews what happened in the activity/game, and follows that up with how those principles can be applied to the real-life situations we’ve already experienced and those we will experience in the future. The games, by the way, are always fun and make for interesting learning.

The Cambridge Venture Project (CVP) is also a unique part of the Cambridge MBA. For about four weeks, teams of five students work part-time with small, local entrepreneurial companies on consulting projects. This is far more challenging than it sounds; our class of 150 people come from ~50 different countries and a wide variety of backgrounds. Everyone is very accomplished, and most are highly competitive Type A personalities, but everyone approaches problems from their own perspectives. I mention this now because in the latter weeks of Management Practice, the afternoon session is a small group “therapy” session, where our teams discuss with our instructors on how we’re working in our groups.

Management Practice been described by many Cambridge MBA graduates as one of the main courses they’ve been able to use long after they graduate, no matter what field of work they go into. After last term, I have to say that I completely believe it.

What’s interesting is that Harvard is looking at doing more of this, but they’re having issues because their school is so damn big! (900 new students/year vs. 150-180/year at Cambridge) From the Harvard Business School article:

  • In an increasingly globalized world, deans and recruiters generally believe that business schools have not gotten globalization right. They want students with heightened cultural awareness and a more refined global outlook. [Like 150 students from ~50 countries?–ahem]
  • Notwithstanding mission statements to the contrary, many deans and recruiters complain that MBAs don’t understand the practice of leadership or have sufficient awareness of their impact on others.

and this:

Deans and recruiters told Datar and Garvin that MBAs in general need more soft skills, such as self-awareness and the capacity for introspection and empathy. They also found MBAs lacking in critical and creative thinking, as well as communication skills. “These skills lie much more on the ‘doing’ side of the scale than the ‘knowing’ side,” says Datar.

Such soft-skills development by its very nature involves labor-intensive small groups and requires “high-touch” faculty involvement with students.

[…]

For example, adding small-group, soft-skill development may sound simple, but doing so for some 900 students would have a significant impact on faculty teaching assignments, recruitment, and research, as well as on the School’s facilities.

I’m very happy and encouraged that instead of trying to bolt on key soft-skills classes onto a mature program, the Cambridge MBA has begun their development with them as a core part of the curriculum.

Projects

There are three main projects as part of the Cambridge MBA. They are here (with descriptions from the Cambridge MBA Handbook):

Cambridge Venture Project – For the CVP, you will work in designated teams of 5-6 with a local entrepreneurial company on a real management issue related to marketing.

Global Consulting Project – The Global Consulting Project is the culmination of the core courses and it will allow you to apply the knowledge and skills gained throughout the programme in a real world context. It is undertaken in teams of your choice with 5-6 students and lasts one month.

Individual Project – The Cambridge MBA concludes with an individually supervised project for which a 12,000-word report is submitted. This project allows you to make an in-depth exploration of subjects of specific interest to you, which will typically be of direct relevance to your career objectives.

I would contrast this to Harvard’s programme, where there are no mandatory projects as part of the curriculum, though they note about half the class completes optional projects as electives. Does this really matter? Perhaps not. But I’m trying to take advantage of these projects to get some experience and contacts in fields/industries/companies that I may never work in again, and also those that I might want to try applying to in just a few short months. I’m always a fan of doing new things over learning new things. (Create >> Consume)

Summary

If you’re reading this post in the hope of getting a little more perspective on the Cambridge MBA program, I hope you’ve gotten a little better sense for it. While a one-year versus two-year MBA program is a big decision, top-tier programs like the Cambridge MBA do have some advantages over better known schools like HBS.