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Being a resident of the Phoenix area, which is a significant distance from Silicon Valley, I wasn't able to attend the Demo Day show-and-tell pitch-fest at the end of Y Combinator (YC), but luckily, other reporters were there and have been slowly releasing stories about the companies and the event. Peter Kafka of All Things Digital published a video interview Thursday with YC co-founder Paul Graham from Demo Day in which he provides some interesting insights into how the investment community is rebounding and possibly how incubators are beginning to have influence on the larger VC firms. Sponsor This group of YC grads included 26 companies, of which 20-25% Graham would expect statistically to go on to receive Series A funding. However, this number could potentially be higher with this newest class as Graham has seen a drastic change in the attitudes of the investors. "Judging by the reactions of investors, the recessions seems to be over," Graham said in his interview with Kafka. "I don't think we've ever had a batch that had so much investor interest so early as this one." As Graham points out, some of the companies had spoken with or secured angel funding well before demo day - another surprise, he says. An interesting opinion he shared in his interview included the idea that it is hard to place a statistical number on how many companies emerge from YC to become "successful" businesses. Who defines what "successful" is? Graham says that historically, 70% of YC companies have raised additional funding since leaving the program, or have not needed to because they managed to become profitable without additional help. But how does Graham truly gauge success for the entrepreneurs? "The founders end up rich, basically. That's the definition," he says. The other interesting quote Graham gave during his brief interview sparked an interesting thought in my mind about the state of the start-up and investment community as a whole. When Kafka suggested that angel investors tend to get squeezed how by more powerful VC firms that flood companies with cash in future rounds of funding, Graham replied that firms would be foolish to attempt this with YC startups. To paraphrase, Graham basically said, "The firms wouldn't dare squeeze out the angels on YC companies because that would mean they would be squeezing us too, and that wouldn't be wise if they wanted to continue to have access to our alumni." What this got me thinking about is how the growing popularity of incubator programs like Y Combinator and TechStars is affecting the venture capital community. Are firms less likely to squeeze out angel investors from these kinds of companies because the incubators continually graduate companies with high potential? Is Graham saying that if the VCs want continued access to the best startups around that they had better play nice with the angels? If so, is this good or bad for the startup community? If this is really having a significant impact on how VC firms approach these companies, then it surely benefits the angel investors, but do the startups ultimately gain anything from it? I wonder if there has been a case of VC firms deciding not to invest in a YC company because they would rather be able to have more control over term negotiations. I would think that a VC firm would be more interested in the opportunity to work with high-potential companies than in a power struggle in the board room, but I could be wrong. Or I could just be over analyzing a simple quote. Photo by Flickr user pragdave . Discuss
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Are Incubators and Angels Gaining Leverage On Larger VC Firms?
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Silicon Valley angel investor Mike Maples Jr., known for his early investments in Digg and Twitter , announced recently that his firm Maples Investments has rebranded as FLOODGATE in an effort to fulfill his experiment of becoming a "super angel" firm. The term "super angel" mostly speaks for itself: instead of carefully picking a few select companies to invest in each year, super angels broadly place more money in a larger number of early-stage startups. Sponsor By making the shift from Maples Investments to FLOODGATE, Maples is jumping into the super angel game with both feet in attempts to take the firm to "the next level." He hopes that the creation of FLOODGATE will "address a big gap in venture capital" between seed level angel investments and larger rounds from traditional VC firms. According to the newly rebranded homepage, the super angel strategy is a response the growing number of startups, the falling number of IPOs, and the rising level of VC investments - all of which make finding early-stage funding more difficult. Additionally, the site offers that super angel investments can provide more exit options. "If a business raises a small amount of initial capital, then exceeds its early milestones and decides to swing for the fences, it can then raise a larger sum at a higher price, while preserving ownership," the site says. "If the business is not ready for rapid growth, it preserves the option for an exit at around $50 million, while still delivering a high return for investors. This dual-track model is less available to companies that raise large amounts of money early." Are we witnessing the birth of a new branch of venture capital? It is interesting to consider the gap that Maples is attempting to fill; smaller individual seed level angel investments at one end, and the hundreds of millions of dollars that VC firms have been known to invest at times. It certainly seems that there is an opportunity for endowed individuals to invest at a higher level than a typical angel would, but at the same time there are smaller VC firms that focus smaller investments on young companies. Can super angels sit in the space between angels and firms that target smaller amounts at early-stage startups? Will more of the larger firms begin to invest smaller amounts instead of waiting for the companies worthy of a nine-figure investment? Will angels start investing more of their own money closer to super angel levels? Is FLOODGATE's method of casting a wide net in hopes of catching one or big fish a wise choice? Will their approach put pressure on other angels to invest more or at a higher level? It is unclear what, if anything, will happen, but what is clear is that FLOODGATE plans to push more money into the early-stage startup market, which is great news for the entrepreneurs out there looking for funding. Let us know how you feel about the idea of super angels and their effects on the VC industry in the comments below. Discuss
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"Super Angel" Firm Maples Investments Rebrands as FLOODGATE
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A decade ago, entrepreneurs saw seed funds as a means to an end. There was little effort to brand the separate groups, there were few celebrity angels and the entire VC community seemed shrouded in mystery. Enter the seed incubator model. Between Paul Graham of YCombinator , David Cohen of TechStars , Naval Ravikant of Venture Hacks and Josh Baer of Capital Factory , yesterday afternoon's Seed Combinator SXSW panel showcased some of the pioneers of the seed fund model. Sponsor When moderator Marc Nathan asked audience members to raise their hands if they'd applied to one of the featured programs, more than a third came forward. With a group like this it was inevitable to hear the same old questions asked: How important is it to live in SIlicon Valley? Those in the Valley, including Graham and Ravikant, noted the wider availability of late stage funding and the breadth of mentors in the Bay. Those outside of the Valley including Baer in DC and Cohen in Boulder, maintained that you can create a startup anywhere. How do you calculate the incubator participant's investment? Graham explains that his $5000 investment per founder was calculated to match the same amount alloted to MIT graduate students over a 3 month period. How do you choose the participant companies? Said Ravikant, "Beyond having a good idea it's important that you're intelligent, energetic and that you've got integrity. Integrity is especially important. Without that you've got an intelligent and enthusiastic crook." Agreed Graham, "It's true. You need to be a good egg - someone who is willing to help other startups after they've graduated." Said Baer, " You also need to be the type of person who is willing to take advice. We've had those that are unwilling to change and that makes it tough to justify a spot." Once the obvious questions were answered, it was interesting to hear the questions fielded from the floor. They ranged from those on mentorship and incubator logistics to the more personal/political. One particularly animated audience member asked the question: Do you fund founders over 40? Explained Graham, "We're totally open to funding those over 40, but we honestly don't get many applications. It's a matter of social overhead. There aren't many over 40 who can afford to live like College students. And given that we prefer people who are willing to move and we prefer teams over individual founders, this makes it even more difficult." As a follow up, the audience member asked, "Why does it have to be a team? I'm over 40 and I've started a startup." Replied Ravikant, "Can you start a startup alone? Yes, of course. it's entirely possible to raise kids alone, but it's easier to do it in a marriage." Discuss
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Seed Incubator Panel: YCombinator, VentureHacks, Capital Factory, TechStars
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We hear a lot about how starting a company takes some serious entrepreneurial DNA with traits like ambition, drive, relentlessness, and above all, passion. But some might argue that these are just the good sounding attributes that can lead to success; what about the other characteristics that may not sound so great? According to WePay co-founder Rich Aberman, starting a company also requires some arrogance and naïveté, so here's his advice on founding a startup straight from the entrepreneurial front-lines. Sponsor Aberman and his partner Bill Clerico started working on WePay, an online community where groups and organizations can pay each other electronically, back in August of 2008 and have since raised $2 million in funding after participating in Y Combinator 's incubator last summer. In a recent blog post , he equates starting a company for the first time to jumping in a boxing ring with "the champ" and thinking you can take him, hence the arrogance and naïveté; no matter how much work you've done to get ready for this moment, nothing has prepared you for the force of that first punch.
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Founding a Startup? Credibility is Your Best Friend
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It seems the 17-year-old truant who created Chatroulette has applied for a visa. The youngster, be he lucky or brilliant, has indicated he might want to transition to the American scene at some time in the near future. With all the media attention he and his service have received and the explosion of traffic - and monetization potential - on his site, his application further opens the can of worms we've been discussing tonight: Where's the best place to raise your startup? Sponsor In December 2009, Chatroulette had 500 users. Today, just four months later, the site sees 1.5 million daily visitors. That statistic alone is enough to inspire investors to beat down the door of its creator, Russian high school student Andrey Ternovskiy. But what's much more interesting to many is the mechanics of the site itself. "It's video 4chan. Unbeatable formula," said Muhammad Saleem , considered by many to be an excellent authority on engineering virality. Others have called it "brilliant," "the purest form" of the Internet and its userbase, and "a great way to kill time," one of the most common uses of the social web. I've frequently described it as a box of game pieces with no rules. Users are invited to create any kind of experience they choose given a simple set of constraints. It's inherently viral, addictive, imaginative and essentially human. Here's the rub: The site is currently unfinanced and non-commercial. The site's creator, a teenaged school kid, has been placed at the crux of nationalistic, capitalistic and technological debates by being asked to choose between Russian financing and a yellow brick road to Silicon Valley. According to one site, the Russian investors involved are seeking to "break the American hegemony in cyberspace - an ambitious plan, particularly as the United States is home to many of the market leaders in the Internet economy. "The combined value of Google, Microsoft and Facebook amounts to roughly $500 billion, or about a third of the Russian economy's annual output. So if Russia - which has more than 50 million Internet users and boasts one of the fastest-growing markets - hopes to catch up, then it will need to keep talents like Ternovskiy at home." The Russian investors who have contacted Ternovskiy also invest in Facebook and Zynga; clearly, they have an eye for social virality and profit and see a great deal of potential in Chatroulette. But Ternovskiy, a longtime hacker, dreams of founding a Silicon Valley startup of his own. Will this young man reinforce the American idiom of Silicon Valley by relocating his seemingly overnight success to the Bay Area? Or will he prove that the startup economy is truly becoming global by accepting Russian financing and remaining in north Moscow? A more interesting question: Can Ternovskiy sustain this wild success? Or has he simply become lucky with Chatroulette? Let us know your opinions in the comments. Discuss
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Chatroulette Creator Coming to America?
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