Ever since my co-founder and I went to startup school last year, we’ve been talking about how cool it would be to get accepted into the Y Combinator program. For those of you who don’t know, YC is a company that funds very early stage software startups. I stress the “very” in “very early” – YC prefers that the companies they fund aren’t even legally formed yet. YC picks a handful of these companies, give them each roughly $15,000-$20,000 (depending on the number of founders), and has all the founders to move out to either Cambridge, MA or the Bay Area. For the next three months, YC mentors the startups, has speakers come in weekly to give talks, and helps them make connections to investors. In exchange, each company gives up roughly 6% of their stock. That’s a very summarized version of what goes on, but trust me, it’s very cool.
Sounds like a perfect fit for us, right? Well, sort of. It turns out that our timing isn’t the greatest. YC takes applications twice a year – once in the summer and once in the winter (founders to go Cambridge in the summer and the Bay Area in the winter). Last winter, we were not ready to start the company, for a bunch of reasons I won’t get into. But now, we’ve been working on the company for several months and have enough money to fund ourselves for awhile. We already have started to develop connections and could pretty much form the company next week if we wanted. So while I think YC is a great opportunity for a lot of companies, we’re really not sure if it’s the best option for us.
Before I get into the details: this post isn’t supposed to be pro-YC or anti-YC. Your decision should be context-sensitive. But I’ll outline some of the stuff we considered. And remember that not all pros/cons are worth the same. I’m not sure I can attach a number to each one, but some of them are weighing much more heavily on our mind than others. The weights you apply will also differ depending on your situation.
Decision Factors (partially specific to us)
|– Work environment
– YC Advice
– Free press
– Money is nice
|– Giving away equity
– Money isn’t crucial
– Lose valuable time
– Poorer social scene
|Big question: How
much will YC help us, and is it worth it?
Let’s start with the positives.
I mentioned that all the founders move out to the same city. While they are there, they get tons of mentoring from YC as well as weekly speakers who are generally rock stars of the startup/software world. Since all the founders are in the same city, they try to get a lot of interaction and knowledge sharing between the founders.
There’s a couple of great thing here. First of all, being in Cambridge with other founders sounds like the best work environment I can imagine. I know that personally, I do my best work when surrounded with smart people who are working hard. Ideas flow easily, and my friendly competitiveness comes out. Being around smart people just makes me smarter and it’s a lot of fun, too.
Plus, the advice from the YC guys would be invaluable. My co-founder and I are not businessmen. We’re programmers. So, although we have been, and will continue to, learn as much about the business side as we can, it would be great to have advice from people who have started companies. We could save a lot of time not making dumb mistakes if other people are there to point those mistakes out.
Then there is the networking. We’ve already spent a lot of time looking at banks and lawyers, and we’ll need to spend even more looking at graphic designers, marketing people, accountants, and investors. YC can help with a lot of that, because they already have those connections and know good people. Its a few less things to worry about (so we can focus on actually, you know, writing code).
Besides the networking to the business community, we’d also get to know the other founders, who are sure to be a great group of smarter-than-hell people. Not only is there knowledge sharing while at YC, there is the possibility of knowing someone that you can hire (or might hire you) in the future.
Finally, since YC is so well known in the startup community, we’d get a ton of exposure just by being accepted. It would be amazing to get a ton of potential users (turning them into actual returning users obviously depends on how good our code is) without spending a dime on marketing.
But it’s not all positive.
For starters, we’d be giving away 6% of our company, which is 6% that we can’t give to any other investors. If we’re intent on keeping some percentage of our company, giving away 6% at this stage just makes that harder.
And there’s the $15,000. To start with, that money isn’t worth nearly as much in Cambridge as it would be in Denver. Plus, we’re likely going to have to spend at least $1500-2000 just to move out there from Denver (and another $1500-$2000 if we want to move back).
For some companies, the money that YC gives is the majority (or even all) of their money (at least at the time they get accepted). This makes YC more attractive, because without YC, the company wouldn’t be able to exist. The YC money makes a huge difference, because it gives them time to build a prototypes and gets them to the next round of funding.
But for us, this wouldn’t be true. We’ve been working the past year to put away a lot of money to fund our startup. I’ve already quit my job and my co-founder is putting in his notice today (congrats, man!). The YC money, while nice, doesn’t really allow us to do anything we can’t do with our own savings. We’ve already started. We could build a prototype on the money we have. And we’re still going to need another round of funding in the next 6 months to a year, regardless.
We also need to think about time. I’m not so worried about wasting time on the application – the application has great questions which we need to be answering now, regardless of whether or not we’re applying to YC. But, the move to Cambridge will be a disruption – probably 2-3 weeks worth, for both of us. That’s quite a bit of time that could be used to write code.
Socially, it’s going to be hard to leave Denver. It’s pretty hard to meet friends when you’re working you ass off at a company that only has two people (you’re certainly not going to meet anyone new at the office). But since we already have a group of amazing friends here in Denver, it’s not a big worry.
In Cambridge, it’s a different story. Yeah, we know a few people, but with our insane work hours and limited social sphere, I’m guessing we’re going to be pretty hard pressed to find friends in the few hours that we take off.
When I was going off to college, I was trying to decide whether to stay in a party dorm or a quiet dorm. Someone gave me following advice: “You can always leave to study.” And they were right – it was easy to leave the dorm to get work done. And when I needed a break, it was really easy to find someone who was up for some fun. The opposite situation doesn’t work so well. I expect to be working insane hours for the startup, but I don’t want to spend my free time looking for friends. I want to be spend them actually having fun.
Finally, there are some things that are neither pros nor cons, but just questions. My co-founder has a serious girlfriend. How is the move going to affect them? I have a good friend getting married in August and a family trip around the same time. Will I need to skip those?
That’s my best attempt at capturing all the jumbled stuff we wrote on our whiteboard about this. A lot of it is just gut feeling stuff, but, being nerds, we did try to formulate some of the biggest questions mathematically.
First, the way we look at the YC deal is this: we give away 6% of the company to get $15000 + x, where x is the sum of
a) The amount of money we’d spend on a marketing campaign to draw an equivalent number of users to our site
b) The money we’d waste on dumb business mistakes that the YC guys could have pointed out
c) The additional time we’d spend finding employees, investors, advisors, board members, lawyers, accountants, etc., over and above what we would have spent if we had access to the YC network (to make the units work, we have to convert time to money using some estimate of our hourly rate)
The question is: what is the value of x? I really have no idea, since I’m so new to this whole startup thing. But in theory, the YC guys, or the companies who have been funded by YC, should have some idea about this, at least enough to give a ballpark answer. It’s something we’d like to ask if we get past the first round.
Secondly, how much will getting YC funding increase our chances of success? We’re going to make this startup thing work with or without YC, but I’m all for making it a bit easier.
Unfortunately, this one is also hard to answer. There’s probably some data (I have yet to really search for it) about the number of startups that fail or succeed. Unfortunately, there probably isn’t very good data about the number of YC companies that fail or succeed, simply because they haven’t funded companies long enough to really get an accurate idea. Yes, Reddit got acquired, and there have some other successes, but as for the rest of the companies, it’s not clear whether they are going to make it or not. We may not know for another few years still.
Really, looking at it now, the first question is just a way one way to approach answering the second question.
Of course, even if we decide that YC would be great for us, there’s still the little problem of actually, you know, being accepted. But we want to feel strongly about doing it if we’re going to submit our application. I think a pretty good metric is whether or not we’d spend a few hundred dollars to fly out for the weekend to meet with the YC guys (they have the finalists out for a weekend before deciding, but only reimburse 500 per group, which would not cover us both going. This is almost certainly by design – its enough money that pretty much any team can make it, but it’s not all expenses paid, so as to weed out those who aren’t really serious).
The application is due April 2nd. Like I said earlier, I think filling out the application is useful just to make us answer some hard questions about our business. We’ll be thinking hard about whether or not we want to submit it, and if we do, what to do between now and the YC decision in order to make sure we don’t lose momentum either way.
At this point, we’re leaning strongly towards going for YC, but we want to make sure we’re really thought it out. I’m sure that there are hundreds of other teams applying for YC funding. At least some of those must be in somewhat similar situations. How did you decide? Any angles we haven’t considered?