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Y Combinator Matures: 1/4 of Startups Funded Before They Finish the Program

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When I think Y Combinator, I think a couple of scrappy college dropout co-founders for whom living on ramen is more than proverbial and coding is life. They pitch an idea, come out to California, drink in some startupy goodness and maybe make something of it.

But that incubator model, now five years old and widely replicated, is changing. At today’s Demo Day, Y Combinator’s “here’s what I did with my three months” set of presentations given to a group mainly composed of angel investors, a quarter of the 26 participating companies already had funding in the bank in addition to what Y Combinator gave them, said co-founder Jessica Livingston.

Others in the group have funding committed in the form of term sheets, to the point where some were turning away investors. One, Cardpool, which Om recently profiled, declined to give out growth stats out of a stated concern that they would be too impressive and encourage competition. “We’re just about to close our round and we’re massively oversubscribed,” said the company’s presenter. Some angel investors grumbled to me that they felt left out of the party, having not had a chance to get their hands on the startups before today.

There were also quite a few Y Combinator presenters in Mountain View today who looked nothing like scrappy college dropouts. One, James Felix Black of video playlist creator Nowmov, was a former senior video software engineer for the iTunes Store at Apple, and owned up to being 38 and having a life of his own in San Francisco. Others ran through credentials like making BusinessWeek’s Top 25 Entrepreneurs Under 25 list or leading a part of the Obama campaign’s tech team. CHROMAom, a site devoted to color, said it gets 6.5 million page views a month, is profitable, and has been a Webby award nominee for best community on the web for the past three years running.

Zencoder, another presenting startup, powers cloud-based video encoding for On2, which was recently bought by Google (s GOOG). That’s a pretty huge hookup to have, especially on the eve of Google presumably releasing an open-source video codec to compete with H.264 and make HTML 5 video viable. So why did 2-year-old Zencoder join Y Combinator, I asked co-founder Brandon Arbini. He said because he’s from Madison, WI, and his co-founders are spread around the country. They did Y Combinator for the introductions to the Silicon Valley technology scene.

Nowmov’s Black said the same thing, gesturing to the nearby swarm of investors including Ron Conway and Ashton Kutcher. And there will be two more encore Demo Day sessions for additional investors tomorrow. Maybe it’s increasing confidence in the economy, maybe it’s that effervescent Silicon Valley frothiness, maybe it’s just that Y Combinator has had a nice string of exits like reMail and AppJet. Livingston said that one thing Y Combinator had done differently with this session versus others before it was to match companies with angel advisors for regular check-ins. Those relationships may not have become direct investments but often resulted in introductions to other investors.

But if you looked hard enough today you could still find an iconic young founder living by the seat of his pants. Daniel Gross, an 18-year-old Israeli, presented Greplin, a unified search engine for users’ personal data and communications stored in the cloud. Multiple investors told me they thought it was one of the most promising ideas they heard. But as was whispered by his cohorts at the reception after the presentations, Gross admitted to me that he was working on a completely different project until all of three days ago (I loved his crossed-out name tag, pictured above). He switched ideas, honed his pitch, is counting the positive response today as market research, and will now gun for an angel round. A web app should be ready by next week, he said.

12 Responses to “Y Combinator Matures: 1/4 of Startups Funded Before They Finish the Program”

  1. For all the investors who have been ‘left out’ to invest into Cardpool; Seed Accelerator will be leading a series A fund raising round for a similar startup with a global focus: Cardnap ( Founded by 15 year old Australian serial entrepreneur Lachy Groom and 23 year old English web design talent Josh Davies, the team behind Cardnap has launched in Australia and will shortly launch in the UK, followed by many other countries around the globe.

    Any investors, who would like to receive the Cardnap IM, feel free to drop me a note.

    In response to the great article by Liz Gannes and the various insightful comments: after 2 years of R&D we developed the Seed Accelerator business model, which we have successfully been running in stealth mode since last year (100% self-funded). One of the conclusions of our R&D: do not turn Seed Accelerator into a fund, and do not take funding from VC’s nor from governments (e.g. grants). We’ve made these part of our core building principles.

    General feedback on our Seed Accelerator programs so far: it’s a fruitful combi of Y Combinator, Techstars and SeedCamp on steroids, mixed with kick-ass leaders/entrepreneurs who boost the personal & business growth of the selected techpreneur teams and their tech ventures.
    We are very selective and have set the bar very high; we go for quality, not quantity!

    Thanks & success,

    Patrick Driessen
    Founder & CEO at Seed Accelerator
    @PatrickDriessen / @SeedAccelerator

  2. Not sure if the model is going to sour anytime soon however I do think the emphasis has now shifted towards brands as oppose to team and viable product. I hope they continue to help start ups even though this article seems to point out that a lot of start ups can acquire funding on their own before they even get to YC. This is great news because it shows that investors are being active with their money.

  3. Does anybody else read this and think that the model is about to sour? The past success has certainly lowered the bar for these startups to get funded, and that can’t be good for future prospects of ycombinator, as people begin to invest more in the brand, and less in the teams and products.

    • Hi Ryan, I think that’s a totally valid response. It did seem like a lot of investors are just trusting the Y Combinator brand. It’s not that hard to show up, plop down in a chair, listen to 26 pitches and then open your checkbook. But I also think Y Combinator is getting access to a different crop of startups as a result of its success.

  4. Certainly an interesting change in the profile of “traditional” Y Combinator companies. Would be even more interesting if overseas companies started showing up. Perhaps we can lead the way the next time around (HomeCamera is based in Singapore).

    Thanks for an informative write-up, Liz.

    • Varun
      Co-founder, HomeCamera