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Tech Startups - Y Combinator is the New Model

Seed Money and Advice for Startups

By

When Steve Jobs or Mark Zuckerberg started their businesses, the garage or dorm room was the stereotypical startup environment. Things have changed. Startups are turning to incubators to accelerate the development of an idea or to assist in getting funding. The idea of a startup incubator is to nurture an entrepreneurial company. The incubators can bring business expertise into the mix and increase the odds that an idea gets transformed to a successful business.

Incubators come in all shapes and sizes these days. Some provide infrastructure such as offices, telephony and technology resources. Others focus on nurturing an idea to move along the process of obtaining venture capital funding.

Y Combinator was founded in 2005 with a new approach in terms of startup funding. Y Combinator invests seed money, provides expertise, and most importantly, makes connections for startups. In exchange for approximately 7% of the startup's equity, Y Combinator runs 3-month programs (2 each year) where select startups pack up and move to the Bay Area in hopes of launching the next Twitter or Facebook.

What's interesting is that Y Combinator invests relatively little money in each startup. The amount varies but is somewhere between $17,000 and $20,000. While many incubators provide things like office space and infrastructure, Y Combinator expects you to work out of wherever you live. They do have space if you need it.

Y Combinator has grown significantly from eight startups in the program in 2005 to today with more than 60. This is likely because some of the best known companies today got their start through Y Combinator. Reddit, Justin.tv, Dropbox and Scribd all participated in the program.

Y Combinator runs two three month programs every year. The founders of around 60 startups move to the Bay Area in California and spend three months trying to get their startup off the ground. Here are a few nuggets about the Y Combinator funding program.

  • Y Combinator doesn't read business plans. They rely on the application and interview. Don't waste your time.
  • Their expertise is with companies that write software. Others may apply, however.
  • Y Combinator can receive over 1,000 applications for the program of which they select around 60. The average age of a founder is around 26. You better hurry!
  • Y Combinator states in the application instructions that contributing to Hacker News helps them decide who is smart.
  • Y Combinator doesn't sign NDAs.
  • Y Combinator has experts on staff to help startups with legal, technology and business matters.
  • Y Combinator gives each startup $600 to travel to the Bay Area.
  • The startup's time is split between group events and individual meetings. Individual meetings are tracked to make sure they are getting the time they need.
  • Y Combinator hosts a dinner for the startup founders once a week where someone from the world of startups speaks.
  • Y Combinator help startups with developing their "pitch" to venture capitalists. Fund raising is one of the fundamental challenges for startups.
  • There is an Angel Day where founders are paired with angel investors who help the startups get prepared for Demo Day.
  • The Demo Day is where rubber meets the road. This is when the startups present their ideas to investors. Recent demo days brought together about 400 investors and lasted 3 days.
  • The Y Combinator alumni, which increases every year, helps startups in the program.
  • After the three month cycle, Y Combinator continues giving advice to the startups. This make sense as they own 7% of each company.

If you are interested in applying for Y Combinator, they will be taking applications for the winter 2012 funding cycle in the next couple of months.

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