Fred Wilson at Union Square Ventures just wrote a post called “Can The Y Combinator Idea Turn Into A Movement?” that set of an interesting discussion at Hacker News. He says that because you can start a company for a small amount of money, investors should back many companies with a small investment instead of a few companies with a large investment ($25,000 * 10 instead of $250,000 * 1). If you have read Paul Graham, know anything about YCombinator, or even just know some basic economics (my current mental hobby horse), this isn’t news or even particularly insightful. It was the discussion around the post that raised some interesting points.

The first point was that while YCombinator might succeed, the copycats probably won’t. Only those that find an underserved niche will succeed. The reason to suspect lots of copycats is the seemingly low barrier to entry: money. Compared to mainstream venture capitalists, YCombinator doesn’t spend much money. They give a flat $5K + 5K per founder, so that the founders have 3-6 months of living expenses. This means that in two rounds of funding per year, ~8 companies per round, YC probably invests $300-400K annually. This is much less than mainstream VCs invest in a single Series A round, so it’s not much a financial barrier.

This $15-25K amount is not in place to save money, it is by design. Founders have 3-6 months to focus solely on producing a demo or product that can either fund the company’s future growth or attract future investment. This small amount serves two important purposes:

It filters out less determined applicants – if you want to surf, travel, eat out, have a nice apartment, etc more than you want to work on your startup, you may not be dedicated enough to succeed regardless of how much money you are given. If all you’re focused on is building your startup, then all you need are 1) computers (which you probably already own) and 2) living expenses (rent, food, etc), which conveniently can be paid for with $5K + 5K/founder.

It also puts such a severe constraint on spending that it redefines that “starting a company” problem and kills some preconceptions about what your company needs, right out of the gate. Do you need an office? No, code on your couch. Do you need a copy machine? Secretary? Marketing and sales staff? No, no, and no, not yet anyway. Until you have a working product with some traction (usage or revenue), you don’t need any of that. Those things make life easier, smoother, more convenient, but they don’t make a successful product. By removing even the temptation to spend money on those items, the focus remains on the application, the product, the innovation.

So if money isn’t what’s important, what’s the point of YCombinator? There was a discussion about this recently, with some benefits being:

1. product advice
2. help in dealing with later stage investors, lawyers, etc
   
3. the YC alumni network, which now comprises about 200 people
4. YC acceptance confers some baseline legitimacy, making meetings with other investors, press, etc easier
5. a fast schedule and competitive environment that will make you work harder than you’ve ever worked before

Looking at that list, #5 and maybe #2 are the only things a copycat could provide. (Incidentally, you don’t need an investor at all for #5 if you’re sufficiently driven). A successful copycat could develop #3 and #4 over time (YC has been going for 3 years now). #1 is totally dependent on who’s running the show, but those funds that provide useful product advice will produce more successful startups and be more successful. So a successful startup veteran would have a better shot at copying YC than someone who only has money. Seed and early stage companies aren’t at the point where their problems can be solved by money.

The other discussion was about selecting founders to fund. I summarize YCombinator’s selection criteria as: “Young, Smart, Cheap, Determined, Acquirable”. This fits in with Paul Graham’s philosophy and worldview, and by focusing on these kind of founders, they deliberately pass on many other ideas and founders. Are there any other investment niches in the space ignored by YCombinator? Of course, but it will take another creative individual to come up with that business model. Here are some ideas:

• A YC clone in (Toronto, Montreal, Sydney, Singapore, Helsinki, Stockholm, Tel Aviv, etc) for founders that can’t get US visas. US immigration policy keeps lots of smart people out of the US, so that’s an unexploited opportunity
• A hardware-centric fund that funds quick, small solutions based on FPGAs instead of burned-in hardware
• Focus on revenue generating startups as opposed to acquirable startups and collect dividends instead of exit payouts. This would create completely different companies than the ones YC has funded
• Encourage teams mixed with technical and business/marketing people to promote faster adoption people. Test the hypothesis that business adds value to early-stage startups
• Target more experienced professionals that are farther along in life and wouldn’t live on such a small amount.

Those are five ideas that I pulled out of my head in 5 minutes. Are they good ideas? Would they work? They all have strengths and weaknesses, but only a successful implementation would prove if the idea was good (YC sounded pretty ridiculous in 2005 when pg announced it). The point is there are worlds of other combinations waiting to be tried out, some undoubtedly better than YCombinator, they just haven’t been done yet.

That said, any unimaginative copycat with the same formula – 3 months to make a web app – has some pretty stiff competition. The YCombinators have experience, connections, talent, smarts, a track record, a strong brand, and a great alumni network. But there is plenty of market outside their space that you wouldn’t have to attack them head-on.

Discussion on Hacker News

UPDATE: The trackback below (YC in Singapore?) raised a good question: Why did I mention Singapore? (for that matter, why did I pick any of the cities I mentioned?)

I went to grad school for Urban Planning and so I’ve read a lot about creativity and economics and how it affects urban areas (Death and Life of Great American Cities, Rise of the Creative Class, Flight of the Creative Class, Flight Capital) and those cities are all praised as centers of talent, technology, and tolerance outside of the US. If I had to bet on one, I’d bet on Toronto or Montreal because they aren’t such a drastic difference from successful American cities, plus they’re close to the American economy. Tel Aviv and Silicon Wadi is supposed to be the second best innovation center after Silicon Valley, but I doubt they’ll attract lots of non-Jewish immigrants in the near future. Helsinki and Stockholm are beautiful but have a lot of cold and darkness. Singapore is more focused on life science, biotech, high tech manufacturing, and higher education – I haven’t heard of a single startup out of there, but they have lots of incentive in place and an open immigration policy for highly skilled workers. Sydney had weather, diversity, and tech, but it is pretty remote from the rest of the world. I think that if any city (US or international) will be the next Silicon Valley, it will be because something (what? who knows) causes people to move there in order to start startups. I’ve got a lot more to say on this later.