Y Combinator (YC) is a
small Cambridge-based firm that for the past few years has been
carrying out a remarkable experiment. What they’ve been doing is
investing money and training in (mostly) young hackers, helping
them get technology companies up and running to the point where
more more conventional investment processes like venture capital
can kick in. Many YC funded companies have been successful, with
several making their founders wealthy at an early age.
At first glance, YC may appear only of interest to business or
technology people. In fact, there are broader things one may learn
from the model, with applications and importance outside business
and technology.
If you’re not familiar with how YC works, it goes something like
this. Twice a year, YC calls for applications to be submitted,
either for its Winter or its Summer programs. Applications are
submitted by small teams of people (”founders”), typically in their
twenties, who would like to start or have recently started a
technology company. YC evaluates the applications, and the best are
asked to join the YC program. Successful applicants typically
receive $5k + $5k per founder to support them for three months, and
are required to move to Boston (for the Summer program), or the San
Francisco Bay Area (for the Winter program). All the YC teams meet
together once or twice a week, to talk with each other and with the
YC partners, as well as with a changing cast of expert entrepeneurs
specially brought in from outside. The three month program
concludes with “Demo Day”, where the founders demonstrate what
they’ve built to a large group of angel investors and venture
capitalists, in the hopes of sparking further interest. In return
for this program, the founders give up a small percentage of their
company, typically between 2 and 10 percent.
What makes the YC program successful is that YC have identified
a large group of people whose talents were previously undervalued
and underutilized, in large part because of their age and lack of
experience. For more than thirty years, high-school geeks have
played with technology, gone off to university, where they continue
to play with technology, often doing astounding and innovative
things, but rarely having the entrepeneurial skills or connections
to turn their ideas into marketable products. At the end of it all,
they go off to work for a big established technology company like
Microsoft.
YC has asked a big “what if?” question: what if we gave these
talented people an opportunity to build their own company, from the
ground up, and gave them training in entrepeneurial skills they
lack, complementary to their existing technical ability? Might it
be that if we provide this training (which is relatively easy to
do), then these people will create more value than if they were off
working for big existing technology companies?
It is evident from the above description that this process can
be abstracted away to a core unrelated to technology:
- Identify a talented group of people who are at present
undervalued, i.e., not being given an opportunity to
contribute commensurate with their talents.
- Set up a competitive program whereby people in your target
group can apply for support.
- Select the best applicants for support.
- Help educate successful applicants, trading off the costs of
the education against the value that comes from their increased
probability of success.
- Make sure you market yourself to the desired group of people,
so you get the best possible pool of candidates (e.g., here and here).
What’s special about YC is the group they’ve identified: young
hackers, whose lack of experience means they often have a hard time
being considered seriously by existing investors such as venture
capitalists. Ironically, this is in part because the venture fund
model typically involves investments that are, at a minimum,
hundreds of thousands of dollars. Given a choice between investing
that money in a 35-year old Harvard MBA’s startup, and a team of
three unshaven 21 year-old hackers, most venture partners will go
for the Harvard MBA. Part of YC’s insight is that in 2008 many
technology companies can be launched for just a few tens of
thousands of dollars, far less than the venture funds provide.
Other organizations have adopted an analogous strategy to YC,
but for a different group of otherwise undervalued people. A good
example is microfinance organizations like the Grameen Bank, which
provide small loans to assist entrepeneurs in the developing world.
The success of the Grameen Bank indicates that investors previously
underestimated the talents of the lendees to build successful
businesses. An interesting social consequence common to YC and the
Grameen Bank is that both empower people who are otherwise somewhat
disenfranchised. (Obviously, the effect is far greater in the case
of the Grameen Bank.)
This process of identifiying a talented group of people who are
undervalued by the investment market is a curious one. An
uncritical advocate of the free market might counter that such
people shouldn’t exist - surely investors would have already
tracked them down, and offered to invest. In fact, YC is a clear
case where (up to now) the market has failed badly, due to the
blinkered narrowness of investors. Is it more risky to offer one
million dollars to finance a Harvard MBA in their new technology
venture, or to fund twenty groups of talented twenty-one year old
hackers, at a cost of about $50k each (including the training costs
and other overheads)? My money would be on the twenty-one year olds
to make a greater aggregate return, but I suspect most investors
would feel much safer going with the Harvard MBA - even if they
fail, it’s a lot easier to defend your choice to your peers.
What other undervalued sources of human capital might this
general model be applied to? When I started to think about this
question, I quickly came up with dozens of possible groups. Here’s
the first few that came to mind:
- Talented people who happen to have been born in the wrong place
for their talents to flourish. The top students at (for example)
the big IITs in India are incredibly talented. While India offers
increasing opportunities for technology entrepeneurs, imagine the
results of bringing some of the more entrepeneurial students to
Silicon Valley, and helping them get set up with technology
companies. Think YC with a visa program.
- The elderly. As a society, we cut many extremely talented and
active people off from contributing society, at great cost to them,
and to society as a whole. It’d be great to find ways their talents
could be made better use of.
- Bright PhD students in insanely competitive and challenging
academic subjects, where even extraordinary students may have
trouble getting good academic jobs, and where those same students
may lack the connections to find jobs outside academia that make
good use of their talents.
- My current hometown of Waterloo, Canada, is a pretty good
setting for a YC style program. It has a growing startup culture,
and two universities (University of Waterloo and Wilfred Laurier
University) with, respectively, strong technology and business
programs. As a rough indicator of student quality, in programming
and mathematics competitions, University of Waterloo students are
routinely competitive with the best from MIT and other top US
Universities. At present, many of these students go to work for
large technology companies elsewhere - the University of Waterloo
is sometimes said to be Microsoft’s single largest recruiting
target. Something like YC would, I think, be highly successful
here, although it would need to compensate for a relative paucity
of local investors.
, and thinking
about what makes some collaborations work, and others fail.