By JENNIFER LEE
At 26, Phil Yuen’s identity lay somewhere between Dilbert and a Microserf. His office, on the first floor of Building 16 on the Microsoft campus in Redmond, Wash., did not have a window. Not to worry. “I could see the window from my manager’s office,” he said.
Mr. Yuen was a midlevel manager who wrote specifications for enterprise project management software — giant computerized flow charts. “I drew boxes and lines to help other people draw boxes and lines,” he said.
Then one night last spring, he was sitting in his apartment, surfing the Web. He went to Slashdot.org (“news for nerds”) and saw an article that Paul Graham, the essayist and guiding light of computer programmers, was establishing a start-up company, later called Y Combinator, which would be giving seed money to hackers to start businesses. The word “hacker” is not derogatory in the computer world, but it is someone who is creative and resourceful with code.
“It’s like Rob De Niro wants to start an acting school,” Mr. Yuen said. “Do you want to join it? You get to work with him every week, you might even get a small little movie deal out of it at the end.”
Mr. Graham, a 41-year-old dimple-cheeked entrepreneur who sold his company, Viaweb, to Yahoo in 1998, had developed a large following for his lucid and contrary essays in a geek community more comfortable expressing itself through programming code than coherent paragraphs. Among his essays, “How to Start a Startup” is a siren call, resonating with Gen Y programmers pondering quarter-life crises and with college students too inexperienced to be jaded.
After the establishment of Y Combinator, more than 200 teams, with two to four people a team, applied in just a few days for eight slots announced by the new company, which operates in Mountain View, Calif., and Cambridge, Mass.
After being accepted, Mr. Yuen and his team established two start-ups in the last seven months: one he gave up on; the other, called TextPayMe, is a service that sends cash payments to an online account through text messaging — akin to PayPal but using a cellphone.
Last month, Mr. Yuen was in Mountain View, in the heart of Silicon Valley, demonstrating his product to venture capitalists and other tech entrepreneurs. At a Y Combinator dinner, he asked Evan Williams, a co-founder of Blogger, who was a guest speaker at the event, for his cellphone number and then sent him $2 using TextPayMe. (Mr. Yuen, incidentally, has now accumulated a trove of cellphone numbers of Silicon Valley heavyweights and offers from three venture capital firms.) Mr. Williams, intrigued, mentioned he had the same idea earlier that day while brainstorming with friends. “It’s something in the air,” he said.
That night, at the dinner, Mr. Williams addressed a room full of refugees from Oracle, AOL, Microsoft and Accenture. “I think this is so cool what you guys are doing,” said Mr. Williams, who sold his company to Google in 2003. “I would love to be part of something like this. I’m so jealous.”
If it is possible to systematize the archetypal two guys in a garage (and they are generally guys), the year-old Y Combinator wants to do it. The company’s formula is to throw smart people together and provide them $6,000 in seed money per person to cover the initial costs of the company, cookie-cutter legal paperwork and an extensive network of business contacts.
In return, Mr. Graham and his partners — Jessica Livingston, Trevor Blackwell and Robert Morris — collectively own 1.2 to 12 percent of the company, with an average of 6 percent. The company holds two boot camps a year for about eight groups each session, a summer one in Cambridge and a winter one in Mountain View. Y Combinator is not so much an incubator as a hatchery for baby companies, and as with all things spawned in bulk, some will die, some will flourish and some will eke by.
“Y Combinator comes down to two kids in a room with two computers and ramen noodles for a summer,” said Chris Sacca, a principal of new business development at Google and a speaker at Y Combinator’s one-day start-up school conference in October at Harvard. “It takes ambitious geeks and puts them in a situation with no distraction and expects audacious outcomes from them. The reason we like it is that that is what Google is.” Indeed, Google has made acquisition overtures to one of the companies that was formed during the summer session, which the founders turned down.
Mr. Graham got the idea for starting Y Combinator after giving a talk to student entrepreneurs at Harvard, where he received his Ph.D. in computer science. He told them to look for seed money from rich people they knew, preferably ones who had made their wealth from technology. “Then I said, ‘Not me,’ and they all looked kind of downcast and then I felt like a jerk,” he said. Then, on reflection, Mr. Graham thought, why shouldn’t he try to support young hackers?
The goal for Y Combinator’s young entrepreneurs is twofold: to make something people want (which is the company’s motto); and to stretch their financing long enough for additional investment or to get acquired. For instance, Mr. Graham’s former company, Viaweb, which made software to build commercial Web sites, was bought by Yahoo and reborn as store.yahoo .com. One Y Combinator business created last summer, a company that uses cellphones for social networking, got financing from a venture capital firm. Two other Y Combinator companies, a calendar Web site called Kiko.com and a news site, Reddit.com, received additional angel financing.
Y Combinator relies on certain premises: that open-source software and falling hardware prices means that tech start-ups are cheap to finance; that large companies are no longer at the forefront of innovation; and that mature technology companies find it cheaper to buy than to build.
The company takes its name from an obscure mathematical term, describing a function that generates other functions. Y Combinator is a company that creates other companies — a sly reference that would elicit a smile from a very narrow set of people, but luckily the same set that the company is trying to appeal to. It is the philosophical triumph of the passionate computer hacker over the uptight M.B.A.
“Paul is telling us, ‘If you are having a good time, and you are building something that other people want, then the money is not going to be a problem,’ ” said Beau Hartshorne, 24, whose vision for a company he is calling Pixoh will allow people to resize and crop their photos within a Web browser.
Mr. Graham is more focused on creating cool products — that is, coding as art — than developing revenue models and protecting intellectual property. Thus, Y Combinator may not be as good at teaching participants how to build self-sustaining companies than it is preparing them to sell, or flip, their businesses. For Silicon Valley corporate war chests, acquisitions are often made for technical talent as well as product, which generally has to be rebuilt if it is kept at all. The whispered acquisition rate for companies is about $1 million to $2 million per technical employee.
“It’s a way for recruiting for Yahoo where you don’t have the risk and uncertainty of knowing if they can actually do something,” said Joel Spolsky, a technology entrepreneur in New York City who also has a wide readership on the Internet.
“The danger is that you will run out of money before a buyer shows up,” said Peter Rip, a managing director of Leapfrog Ventures, a venture capital fund in Menlo Park, Calif. “We are seeing a lot of guys being attracted to the ease with which they can start a company, but starting is really only the first step.”
From a financial standpoint, the Y Combinator investments are small in a world where valuations are measured in millions of dollars, if not billions. “In the traditional venture capital model, $6,000 isn’t enough to pay your corporate lawyer fees for your first financing,” said Mr. Sacca of Google.
“It’s not just about the money,” said Jeff Mellen, 24, who quit Oracle with three of his friends to build an operating system that works within a Web browser.
Y Combinator provides the validation that young techies should keep pursuing their dreams. “I could get the same amount of money from my parents, but that wouldn’t tell me if my business plan or idea was a good one,” Mr. Mellen said. “That tells me my parents love me.”
Source: New York Times