Setting the record straight

But the limits of Y Combinator's model remain unclear. A typical young tech company should be spending a little less than $40,000 a month, says Seth Levine, a venture capitalist at Foundry Group. Y Combinator gives companies a fraction of that, leaving entrepreneurs "eating ramen and not paying themselves," he says. And 6% is a huge amount of equity to give up for such little money, he says.

Although Levine has shared his expertise with TechStars, a new Colorado program that's similar to Y Combinator, he says it's rare to find a business with serious long-term prospects in such a program.

While it's great to get quoted in the national press, I actually laughed when I read this article in USA Today earlier this week that managed to completely misrepresent my views on the efforts of Y Combinator and TechStars (a program running down the street from me in Boulder this summer with which I've been spending significant time and energy helping out). After my initial amusement I didn't think much of it.

But then I got a few emails about it . . . and a few TechStars companies pinged me to ask me if that's really how I felt . . .and Paul Graham took me to task in a post he wrote in reaction to the article . . . and it seemed like perhaps I should set the record straight. So here's the deal:

First, I'll take responsibility for the error – I broke the cardinal rule of interviewing when I gave a phone interview rather than responding to questions over email (and I didn't review the article before it went out as I often do). The fact that there was no actual quote about my views on Y Combinator and TechStars should be a tip-off that perhaps this sentiment wasn't conveyed correctly. The majority of my interview was actually about a recent post I wrote on the importance of controlling cash burn at various stages of company growth. We also talked at length about various ways that young companies find angel investors and different efforts around the country to bring angels together in organized investment groups which is what I understood the article was about. In the course of a 10 minute conversation we probably talked about Y Combinator and TechStars for about one minute.

The actual quote in the article from me is accurate in the sense that I told her that at some point entrepreneurs need to find a source of capital so they could pay themselves (preferably from selling something to customers, but potentially from friend & family, angel investors or venture capitalists) but was taken completely out of context (I wasn't talking about that in relation to the money companies get from Y Combinator or TechStars).

More importantly, this wasn't a statement about the deal that programs like Y Combinator and TechStars make with their participants. At all. In any way. As it turns out, I actually think these programs are a great deal for entrepreneurs and don't think the equity they give up has much, if anything, to do with the cash they receive. Significantly more important than money, companies in these programs get amazing access to groups of mentors – business leaders, venture capitalists, lawyers, other successful entrepreneurs – whose time and willingness to help out is worth significantly more than the $5k-$15k that is provided as a stipend in the program. The companies also get access to free office space, regular feedback on their ideas and prototypes and get to interact with other companies in a similar stage of development who share learnings, successes and failures along the way. For all this, 5% or 6% is a bargain. I've spent a countless hours working with TechStars companies this summer in support of this belief.

It is true that I told her that many companies in these programs wouldn't end up as viable businesses and frankly, that's probably true. However, that's true of any set of early stage ideas (and many projects enter TechStars or Y Combinator as more of a concept than a working business) – not everything has the makings of a real business (although it's not "rare" as was ascribed in the article, although again not in an actual quote). One of the great things about participating in a program like TechStars or Y Combinator is that entrepreneurs have the chance to get real time feedback on what they're doing in an effort to maximize their chances of exiting the program with a viable business. In fact – that's the entire idea behind these efforts.

With apologies to Paul, David, Y Combinator and TechStars – I hope this will set the record straight.

I will not do interviews over the phone. I will not do interviews over the phone.

I will not do interviews over the phone. I will not do interviews over the phone.

I will not do interviews over the phone. I will not do interviews over the phone.

I will not do interviews over the phone. I will not do interviews over the phone.

I will not do interviews over the phone. I will not do interviews over the phone.

I will not do interviews over the phone. I will not do interviews over the phone.

Comments

[Jay (living in First Life)]

Let's look at your argument. You claim that it's not about the money. Good point, that money is meaningless. They could get that from friends & family or from credit card debt.

You claim that what the real value lies in delivering feedback and contacts. A small pre-product startup doesn't need contacts. It needs a product. Most of these products cost next to nothing to produce - two hackers can sit there and get a beta product ready in 2 months.

So why don't they suck it up and go develop this product, beta launch it, see if it gets any traction, and if it does, go raise money to blow it up?

It strikes me as silly to give up 6% of your company to these incubators when as an entrepreneur developing internet apps with low start-up costs, you should test your product with the market first, prove it, then raise capital.

[fewquid]

... Nothing quite like a reporter who's trying to write a particular story regardless of the facts.

Ain't old media wonderful :-)

[David Cohen]

Thanks for the clarification. It's obviously nonsense - why would you be participating as a mentor in TechStars while simultaneously not viewing programs like it as beneficial and worthwhile?

Based on the fact that I've been misquoted (or had my quotes taken out of context) at a rate of approximately 50% when doing phone interviews, I agree with your policy of not doing phone interviews any longer and have started to practice it myself.

As a side note, I think it was a classy move for Paul to remove the portion of his post referencing your views from this article. I'm sure once he heard the whole story, it made perfect sense to him that this was all out of context.

[Derek Scruggs]

"A small pre-product startup doesn't need contacts. It needs a product."

He didn't say they get access to "contacts" - that's they kind of bullshit bogus agents sell wannabe starlets just off the bus in Hollywood. (Or more recently, "consultants" in China he claim they have lots of guanxi with the local party officials.) He said they get access to mentors. Huge difference.

I started and sold a software company successfully in the late 90s, made a lot of money for me and my investors. Knowing what I know now, I would've happily given up 6% to gain the perspective of so many succesful software/Internet entrepreneurs. There were a lot of things I didn't know and didn't know who to ask. I was just another wannabe who didn't know anyone, and back then there weren't even any VC blogs on which to post snarky comments.

6% of nothing is still nothing. Mentors can help you find out more quickly whether you have something or nothing. And even help you refine the product before you go down a blind alley.

[Graeme Thickins]

Seth, keep up the great work with TechStars. Misquotes or not, the positives about programs like these will keep shining through. We need some of this mojo in the Twin Cities!

[Micah Baldwin]

My lesson on phone interviews continues to "follow" me around. In 2003, I had a 45min phone interview with a Fast Company reporter, who misquoted me. That quote, which was nowhere near what I really felt, was indexed in Google for my name, which when building a search agency was searched enough, making the quote a bit embarrassing.

It would be hard to imagine that you would have your level of involvement in the local tech community if you didnt think programs like TechStars had intrinsic value.

When reading each article/post, the message I got was that YC/TS should be viewed as no more than what they are a "hyper kick-start," not a guarentee of success.

[Tom Chikoore]

I am news-free for a few days and this is what I find when I get back? The quotes in the USA Today article are laughable. I, personally, have seen how much time and effort you put into TechStars. You are there early for meetings, spend a lot of time doling out advice, participating and are usually the last person to leave the conference room. I have observed, first hand, the infectious passion you have for the product at TechStars and the genuine desire you show to see the product succeed. The quote in USA Today is very inconsistent with the time and energy that you have put in at TechStars. It is no secret that the survivability of a lot of early stage companies is questionable (some will and up as products, some as features, some as nothing). As a TechStars participant, I know all TechStars companies know that; that is not news to them. I don’t care what they say at USA Today, I am keeping you as an advisor any day Seth.

[Jay (living in First Life)]

Seth - thank you for emailing me and asking me to respond.

Derek - you make a good point but I don't thing the incubator model of institutionalized mentoring is the way to go. Different businesses need different mentors. Mentors should be chosen to compliment the team's personal strengths so I agree with you for the most part.

That being said, why give up 6% for some ambiguous set of mentors rather than going out to 6 people you really want and giving them each 1%?

I think everyone who is willing to put in the effort and really trying to create something big will choose the latter.

[Jay (living in First Life)]

Seth - thank you for emailing me and asking me to respond.

Derek - you make a good point but I don't thing the incubator model of institutionalized mentoring is the way to go. Different businesses need different mentors. Mentors should be chosen to compliment the team's personal strengths so I agree with you for the most part.

That being said, why give up 6% for some ambiguous set of mentors rather than going out to 6 people you really want and giving them each 1%?

I think everyone who is willing to put in the effort and really trying to create something big will choose the latter.

[Jay (living in First Life)]

Seth - thank you for emailing me and inviting me to respond.

Derek - I think you have a good point that mentors are valuable, but I disagree with your fundamental assumption - that giving up 6% to an incubator to have a set of mentors that they have pre-selected is worthwhile.

This isn't 1950 that you need someone to really help you break into the old boys club. In the tech world, connections do matter, as always, but you can email whomever you want, call them, and see if they like your idea and are willing to give advice.

I would rather go find 6 people I want to be on my board of advisors and give them each 1% of the company rather than hand over 6% to people who may or may not help me and who may or may not be relevant to my business. It just seems like a crapshoot on top of the many risks one already takes as an entrepreneur.

That being said, good luck to everyone who is participating in these programs.

[Derek Scruggs]

Jay,

That's what I did with my first company. It's probably a little easier now, but finding six people who are 1) knowledgeable, 2) have time to even meet with you once, and 3) like you and your idea enough to be on the board is *hard* and time consuming. I've spent the last 12 years building a network of these kind of people and could probably make it happen in a few months. (In fact, I did it last year for my current company.) But imagine a 21 year old kid trying to do that?

Also, their mentors hardly strike me as ambiguous. There's a list of them at here.

Re: the 6% - in my experience the average first-time entrepreneur has no idea what percentage is appropriate. I gave 2% to the lawyer for my first company. I had no idea if that was high, low, whether it should vest etc. More of that kind of info is available now, but the overwhelmingly most common answer to those kinds of questions is "it depends." The people most equipped to answer those questions are mentors. So here we are again in a catch 22.

Finally, I personally know many of the people behind TechStars so I'm biased. Brad Feld is on my board and I've known him for eight years. Giving up 6% to these guys is the equivalent of taking a low salary initially in exchange for the chance to have a leading role in a sitcom pilot. If the network picks it up and it goes big, no one will care about the 6%. And if it doesn't, the 6% won't matter.

[Jay (living in First Life)]

Derek - I do think you're right that there is a lot more information available. You can just go to someone's site or blog and email them. There are lots of events one can gain visibility at.

I will give incubators one thing - they do make life easier for those young entrepreneurs who lack any of the following:

1) Tremendous alumni network (Stanford, MIT, Harvard, etc.)
2) Personal network (family friends, parents of friends, relatives)
3) Access to contacts in a major city (Silicon Valley, Boston, LA, San Diego, NYC, Austin, Seattle, etc.)

I won't comment on the average 21 year old, but I do know a decent number who have had the initiative to pull off getting their act together and launching a real business. I think that Generation Y is too used to being spoon fed and needs to have a little more chutzpah.