YCombinator and other uber-early stage investors have made a splash in the investment and startup worlds since 2005. They give a small amount of funds ($10,000-$25,000) and mentoring to get founders to build a demo/beta product in a short period of time (usually 3 months). They attract founders that are typically younger and less experienced than those that would apply directly for angel or venture funding. The initial thought about YCombinator was that the founders would be too inexperienced or there wouldn’t be enough money to make something worthwhile. Instead, they attracted some very smart founders and connected them with investors who got some good exits. Now with exits like reddit, booming businesses like DropBox, and efficient cash machines like Wufoo, YCombinator is attracting better and better founders and getting increasing attention from investors and acquirers. I’m less familiar with the other incubators like TechStars, SeedCamp and Alpha Labs but they seem to be following similar trajectories as YC, with the location disadvantages of being outside of Silicon Valley made up by the trailblazing success of YC.
It has always bugged me that there was nothing like this in Chicago. Chicago has a sneakily large tech community. All the businesses here need lots of IT talent, but the lack of large software product companies means there is little recognition of all these workers. When the programmers are second, third, (or worse) class citizens at a company they aren’t driving the culture. In the tech community, the most prominent companies are 37signals and Threadless, each of which have dozens of employees. Google it’s not, HP it’s not, MSFT it’s not. So despite the fact that there are hundreds of thousands (?) of tech workers, many organized and active user groups, and some visible companies, all of which would make a good setting for a seed investment program.
What would it take? One or more people who are connected to the local tech and broader financing communities and a million dollars or so dollars. I’m not exactly sure about the time requirements because I don’t know how much time they spend each week while YC is in session or how much time they spend during the off season, but it is probably more like a seasonal than full time job. If each round consisted of ten companies given $20K, then you could launch 5 seasons for a million. Two or three million would give more runway to get an exit to replenish the fund. Surely there’s someone in Chicago with a couple million bucks that would like to be the Brad Feld or Paul Graham of Chicago.
But a recent study by [NAME] of all of the seed programs found that in order to be successful, you can’t just copy the model – you have to provide something unique. YC has four years of track record, hundreds of companies, trust from investors, and some of the most charismatic and talented mentors. They also draw from a worldwide audience, so if someone in Pittsburgh or Denver wants to build a quick demo and gets admitted to YC and AlphaLabs or TechStars, they would probably go with YC rather than their local program. So if you want to matter and get access to high quality founders, you need to offer a differentiated experience.
So what could a Chicago program offer? Not access to investors – Chicago is so remote from the VC and angel communities as to be basically off the map. Not access to tech media. What does Chicago have? Businesses! Not just big non-tech business, but the whole principle of the companies is to do business. Simple formula – create value and sell it for less than it cost you to build. While Steve Blank and Eric Ries have gotten a lot of play lately with the #leanstartup principles, but it’s the same principles that 37signals and Threadless were built on a decade ago. Maybe it’s because of the Chicago Big Shoulders legacy, or just becasue the lack of VC funding means there’s no other choice. But bootstrapping is part of the Chicago culture and the best distinguishing feature Chicago can offer.
So how could you structure a seed-size investment with a bootstrapping focus? Take the same $20K for two founders but space out the disbursal *so it’s not enough to live on*. Maybe $2K a month over 10 months, or disburse more money when you hit pre-agreed metrics, or some twist like that. This would serve two purposes – first, to put the heat on to deliver some value immediately and get paying customers right away, and build off of that. People would have to either have jobs, a pre-built demo, or some deep domain expertise and connections. Second, it would send a very clear message that it is NOT for speculative technology products. Not that there’s anything wrong with those, we just don’t do them here. Chicago has little to offer those kinds of founders and it would be a disservice to them and the city to encourage them to be here. Other than that, I would say it’s straightforward execution. I’d recommend against centralized office space because there would be a temptation to put it in the Loop but that’s probably the wrong place. Maybe Lakeview of Ravenswood.
Who would run it? My obvious choice would be Jason Fried. He’s the most vocal and prominent proponent of bootstrapped startups, not just in Chicago but probably the world. He has the money, the clout, the media presence, the influence, and the experience to drive it. I don’t know if he would take time away from 37signals to run it, but I’m sure that much of the activity would coincide with his usual speaking engagements, and his connections and popularity mean that he could probably make the arrangements with less work than someone less prominent. I don’t know who else would be a good fit but that doesn’t mean that person’s not out there. So Jason, if you’re listening, or anyone else who thinks they could do the job, email me at peter at pchristensen dot com and let’s talk. There’s an opportunity here to vastly increase the visibility and success of the bootstrapping/lean startups message by letting prospective entrepreneurs prove your point.