Monday, November 1, 2010

Disruptor In The Valley

Paul Graham's Y Combinator has stormed Silicon Valley and pioneered a better way to build a company.


Justin Kan and Emmett Shear watched their first startup, an online calendar called Kiko, implode when Google decided to do the same thing in 2006. They sold Kiko's scraps on eBay for $258,000 and wondered what to do with their lives. So the pair did the only thing they could think of: They went to see Paul Graham at his house in Cambridge, Mass., near Harvard Square. Graham sat them down and helped bang out a plan to create, now the Web's biggest portal for live video, with 31 million users a month and staked with $7.2 million of venture capital. is hardly the first, nor the last, company Graham has sent sprinting. Graham is the father of Y Combinator, a startup-rearing juggernaut that's part incubator, part drill sergeant and part liaison to the investor class. Y Combinator--a computer term for a program that runs other programs--has fired up 200 companies since 2005, jarred the balance of power between entrepreneurs and Silicon Valley's elite money, and chiseled a new paradigm for launching technology companies. Graham's formula: Get up and running (bugs and all), gather feedback, tweak and grow.
YC's three-month boot camp for startups, run twice a year in Mountain View, Calif., attracts 1,000 applicants for roughly 40 spots. Graduates are expected to emerge with a working product, customers and revenue. They also get a crack at pitching their ideas to investors on Demo Day, an event that lures venture capital's Sand Hill Road crowd and every prominent angel investor in the Valley.
YC puts up $11,000, plus $3,000 per founder, for each company in return for a piece of pure equity of around 5%. That equity could be worth real money should the companies take off. A high price for founders, perhaps, until you see scores of venture capitalists and angel investors jousting to pay handsome premiums for companies bearing the YC stamp. Of the 36 startups in YC's recent class, ended in August, 30 have raised fresh capital, many of them over $1 million.
"We didn't mean to invent this new model," says Graham, who at 45 has sandy hair and a youthful earnestness. "It all happened by accident."
The accident was a summer program Graham started in 2005 for college students who were tinkering with business ideas. Instead of working a boring internship at a big company, Graham's pitch went, win $5,000 to work on your startup in Cambridge with guidance from Graham and his friend, MIT professor Robert Morris--two guys who launched Viaweb, a maker of software that built storefronts online, and sold it to Yahoo for $50 million in 1998.
"It was supposed to be a throwaway project for these students," recalls Graham. "By the end of the summer we were like,"'Whoa, we've got something here!'"
Graham received 400 applications for the summer program. Of the 8 he accepted, 4 had blossomed into serious ventures by the end of the summer: Loopt, a social-mapping service, now with 4 million users; Reddit, a user-aggregated news site acquired by Condé Nast in 2006; TextPayMe, a mobile payment service bought by Amazon in 2006; and Kiko, thwarted by Google.
Y Combinator's influence in Silicon Valley has burgeoned ever since. Some refer to its growing network of graduates as the YC mafia. They protect their own, collaborate and, to a person, regard Graham as their sensei. Some go on to be investors and mentors in their own right.

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