Transcriptic, which was founded earlier this year, has built out a biological testing lab using robotic equipment that researchers use to prepare samples. What’s cool about this is Max Hodak, the company’s founder, is trying to take expensive and proprietary equipment, hack it so people can program the machines via the web and then offer the results as a service to academia.

Building a bio-cloud

In biology labs around the country graduate students spend their days filling test tubes and testing samples. It’s boring work and something that well-funded companies in the pharmaceutical industry automate or outsource. But the equipment used in automating those processes are hundreds of thousands of dollars and generally out of range for biology departments. So are the services of outsourcers that sometimes work on behalf of the industry.

So Hodak created what he calls a cloud for biology, but what is really more of a collaborative consumption model aided by open source software and robotics, than an on-demand cloud. In a Menlo Park, Calif. lab Transcriptics owns several large pieces of used testing equipment such as centrifuges, incubators and high-powered microscopes that it purchased for roughly 10 cents on the dollar whose software it has reverse engineered. The company then wrote new software that controls the machines and can run common biological operations such as closing plasmids with other options coming later.

Customers pay for the process and the materials they use on a pay-as-you-go basis, much like you only pay for an Amazon EC2 instance when you are running it. Hodak’s goal is to continue buying gear and building better software for job scheduling to keep the equipment running as often as possible. Of course, that type of scheduling software is a tough problem, since there are so many variables and an unpredictable number of jobs coming in. But for now, he can’t really over-provision at the costs that Amazon has.

For the researchers who use the service, they spend less time doing hundreds of tests by hand, because they can instead pay Transcriptic to run a synchronous process. And because it’s robotic the idea is that it is more repeatable and less prone to human error. As for the potential customers, Hodak estimates that it gets grad students away from grunt work and into real research. They control the robotics and design their experiments over the Internet.

“We think of ourselves as a very long pipette over the internet,” Hodak told me in an interview earlier this year.

Man, that’s a lot of investors!

As for the relatively rare step of bringing in more than 60 investors for a seed round, Hodak explained that he probably wouldn’t do it for the next round, but it made sense for the current one. In general having a huge number of seed investors can leave an entrepreneur with too many people to appease when negotiating future rounds. Additionally with so many investors it can be hard for someone to take a leadership role in shepherding the company to new opportunities or providing good advice.

Hodak however stressed those investors don’t have the full rights of a larger investor, so can’t cause troubles in later funding rounds. He also said via an email exchange last night that he hasn’t seen a lack of leadership with so many participants. “The major investors (Naval, Google, Founders Fund / FF Angel, etc) are being very helpful already, and the minor investors are dozens of cheerleaders for the company now,” he wrote.

Transcriptic is a really interesting company trying to apply lessons learned from cloud providers and taking advantage of better broadband and cheaper automation to deliver a unique service. Add to that the bold decision to bring on so many angels and I can’t wait to see how this one turns out.

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And the search is already on for the next class of potential startup superstars. Y Combinator is currently accepting applications for the winter 2012 funding cycle, and the competition is stiff: Y Combinator generally accepts only three percent of the applications it receives, an acceptance rate lower than MIT or Harvard.

I recently sat down with Y Combinator co-founder Jessica Livingston to find out what YC’s partners look for in entrepreneurs — you can watch our video below. Here are a few of her main points:

• Co-founders should be buddies. Y Combinator prefers founding teams that consist of two or three people — and the friendlier they are with each other, the better. People who just met each other a month ago and decided to start a company usually raise YC’s red flags.
• Hackers necessary. Being technical is important for the YC folks; Livingston is the only member of YC’s three-person founding team who does not know how to code. While they’ve loosened up their standards a bit by allowing in non-technical co-founders, YC insists that at least one member of a founding team have serious technical chops.
• Flexibility is everything. If you’re a control freak, you probably won’t fit in at Y Combinator. YC looks for founders who are willing to take advice — and change everything about their startup if it’s not working out. Determination is important, but folks who seem stubborn during their YC interviews won’t make the cut.

Watch Jessica Livingston talk about what Y Combinator looks for in founders here:

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With the costs of starting a web business and creating a web-based product dropping dramatically over the last few years, it doesn’t take much funding to at least see if you have something worth doing. That’s probably the leading factor in the rise of angel investments. There are also motivations on the part of angels themselves — including the desire of newly minted entrepreneurs to give back after their startup has been bought, as well as the drive to get in early before a web service goes big and everyone gets priced out.

I wrote a longer post recently about the frothy state of angel investing in web startups, which seems obvious from an industry observation standpoint but was hard to get data on because so many angel deals go unreported. CB Insights was the only company I asked that was able to offer me anything in the way of numbers; it said U.S. angel investment deal flow was up 33 percent year-over-year in the first quarter of 2010.

Now, CB Insights has delved into the numbers a bit more deeply, coming up with data that shows 26 percent of all early-stage deal flow in the first quarter this year was for seed investments, with the remaining 74 percent for Series A. That’s up from 4 percent of early-stage deals in the first quarter of 2009 being labeled “seed.” The firm notes that this is not just a matter of semantics; median deal sizes for seed rounds are still around $1 million, while median deal sizes for Series A rounds are about $3 million. (We’ve also seen anecdotal evidence that seed-deal prices are going up, but that’s not reflected in CB Insights’ data.)

Angel investor Chris Dixon says he thinks seed funding may account for an even greater portion of overall Internet financings, saying that of the 10 or so deals he’s funded in the last two months “less than half are known about.” What’s interesting is how the rise of angel funding and so-called “super angels” will affect the traditional venture business. In a story last week headlined “Angel investors as the new rockstars,” peHUB’s Dan Primack noted:

Angels, like rock stars, are feared (and sometimes resented) by their elders. As IT startups get cheaper and cheaper to build, some traditional venture capitalists are beginning to feel disintermediated. If you only need $250k, why raise it from a VC firm that treats it like an option and presents a boatload of signaling risk? Plus, do those old guys even get it?

The typical VC response is to emphasize past experiences. But that’s a lot like an accomplished 60-year-old jazz musician complaining that Kurt Cobain only knew three chords. It just doesn’t matter because, sometimes, three chords are all you need to rock.

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What the VC Industry Upheaval Means for Startups

Where to raise funding is an important decision every startup founder has to make. The three viable sources at the very early stages of a company are:

• Venture capital.
• Angel investors. Usually wealthy individuals, but includes outfits such as Y Combinator.
• Friends and family. Yourself, if you can afford it.

To decide which option is best for your startup, you need to understand how investors evaluate companies. There is a range of criteria, of course, but the three most important ones are team, technology and market, and angels and VCs evaluate them in different ways. Here’s how.

How Venture Capitalists Evaluate Startups

• Market — VCs want to invest in companies that produce meaningful returns in the context of their fund size, which typically is in the hundreds of millions of dollars. To interest a VC firm, a company needs to be addressing a large market opportunity. If you cannot make a credible case that your startup idea will lead to a company with at least $100 million in revenue within 4-5 years, then a VC is not the right fit for you. It’s often OK to use consumer traction as a substitute for market opportunity; many VCs will accept a large and rapidly growing user base as sufficient proof that there is a potentially large market opportunity.
• Team — VCs use simple pattern matching to classify teams into two buckets. A founding team is deemed “backable” if it includes one or more seasoned executives from successful or fashionable companies (such as Google) or entrepreneurs whose track record includes a least one past hit. Otherwise, the team is considered “non-backable.”
• Technology — VCs aren’t always great at evaluating technology. To them, technology is either a risk (the team claims their technology can do X; is that really true?) or an entry barrier (is the technology hard enough to develop to prevent too many competitors from entering the market?) If your startup is developing a nontrivial technology, it helps to have someone on the team who is a recognized expert in the technology area, either as a founder or as an outside adviser.

Here’s the rule of thumb: To qualify for VC financing, you need to pass the market opportunity test and at least one of the other two tests — either you have a backable team, or you have nontrivial technology that can act as a barrier to entry.

How Angels Evaluate Startups

There are many kinds of angels, but I recommend picking only one kind: someone who has been a successful entrepreneur and has a deep interest in the market you are targeting or the technology you are developing. Here’s how angels evaluate the three investment criteria:

• Market — It’s all right if the market is unproven, but both the team and the angel have to believe that within a few months, the company can reach a point where it can either credibly show a large market opportunity (and thus attract VC funding), or develop technology valuable enough to be acquired by an established company.
• Team — The team needs to include someone the angel knows and respects from a prior life.
• Technology — The technology has to be something the angel has prior expertise in and is comfortable evaluating without all the dots connected.

Here’s the angel rule of thumb: You need to pass any two out of the three tests (team/technology, technology/market, or team/market). I have funded all three of these combinations, resulting in either subsequent VC financing (e.g. Aster Data, Efficient Frontier, TheFind), or quick acquisitions (Transformic, Kaltix — both acquired by Google).

Friends and Family, or Bootstrap

This is the only option if you cannot satisfy the criteria for either VC or angel. But beware of remaining too long in “bootstrap mode.” An outside investor provides a valuable sounding board and prevents the company from becoming an echo chamber for the founder’s ideas. An angel or VC can look at things with the perspective that comes from distance. Sometimes an outside investor can force something that’s actually good for the founder’s career: Shut the company down and go do something else. That decision is very hard to make without an outside investor. My advice is to bootstrap until you can clear either the angel or the VC bar, but no longer.

But back to Greg Linden and Findory. By my reckoning, Findory passes the team and technology tests from an angel’s point of view — if you pick an angel investor who has some passion for personalization technology. But it doesn’t pass any of the VC tests. Given this, Greg should definitely have raised angel funding. My guess is that this route would likely have led to a sale of the company to one of many potential suitors: Google, Yahoo or Microsoft, among many others. Of course, hindsight is always 20-20. I have deep respect for Greg’s intellect and passion and wish him better luck in his future endeavors.

Anand Rajaraman is a co-founder of Kosmix.com and a founding partner of Cambrian Ventures. Full disclosure: He is also an investor in GigaOM.

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