Y Combinator
= investment firm that plugs seed money ($18,000 on average) into early stage startups in exchange for mentorship and access to its ever-growing network of alumni. [1]
Introductory Citation
"You know what’s great about the YC network? It gives the benefit of being part of a large company without being part of a big company," Graham says. "The problem with doing a startup--even though it’s better in almost every other respect--is that you don’t have the resources of a big company to draw on. It’s very lonely; you have no one to give you advice or help you out. In a big company, you might be horribly constrained, but there are like 1,000 other people you can go to to deal with any number of problems. Now [with YC] you have 1,000 people you can go to to deal with problems, and you don’t have all the restrictions of a big company." The YC network, he says, now operates as a "distributed peer-to-peer replacement" for the traditional company." (http://www.fastcompany.com/1818523/paul-graham-why-y-combinator-replaces-the-traditional-corporation)
Discussion
Criticism of the VC Funding Model
"Generally speaking, in venture capital, it is not a case of too much many for too few deals, it is again a case of the inefficiencies of the matching mechanism. I see a lot of waste with the VC model coming from many things. And while the model works for VCs, it does not work for startups or for investors (the Limited Partners who give their money to VCs). The problem goes 3 ways:
- there is example above, which is a case of not enough experts to screen all the deals, and they can only be good at screening deals that fit their area of expertise which means that they are limited in the number of startups they can truly address.
- there is the fact that venture capital is only working as it is for deals that are $5M or more (the famous funding gap caused by the limitations of VC partners who are limited in the number a deals they can handle). Meanwhile starting a business requires less and less initial fund because the cost of infrastructure has dropped, so a lot of the flow of deals has moved below their radar in recent years, and it will probably stay that way. Some funds are trying to do "early stage" but it is still very limited and the model is unproven for these firms. The only one that seem to have something that makes sense is Atlas Venture with their Y combinator program, which is very close to what Entrepreneur Commons is offering (YCombinator is still very agressive and not as interesting as an option for entrepreneurs, but I am biased when I say this).
- there is an abondance of ideas that have no business legs too, so it is true as well that there is a need to mentoring of these people to turn an idea which is a beautiful intellectual construct into a cash generating machine. Today, the waste is that these entrepreneurs with ideas spend a lot of time (at least in Silicon Valley) trying to raise money from VCs or angels when they should be spending time trying to sell what they have to customers. This is another aspect that Entrepreneur Commons resolves with self help groups (peer mentoring), allowing entrepreneurs to share their experience, and allowing them to realize as they work with the group the true status of their venture, because other entrepreneurs will have no problems shooting holes in their business plans." - Marc Dangeard
Startups are unnesscessarily wedded to corporate capitalist values
Computer (software) startup culture idealizes the popular figures and companies of the corporate world: Steve Jobs and Apple, Mark Zuckerberg and Facebook, Bill Gates and Microsoft, Larry Page and Sergey Brin of Google and so on. Becoming a big company is the goal.
Simultaneously, startup culture idealizes small companies: the flat political structure, nibbleness, the innovation, resource efficiency and so on.
The third factor is the desire of angel and VC funding. Startup get millions up front. But VCs require high returns and a stake in control. Startups need more control to help address customer needs.
Finally, plummeting startup cost are the final factor. Software, particularly web apps, don't need lots of upfront capital--another layer of irony.
Peer-funding, through things like Kickstarter and peer-loans, not only provide funding, bur allow the freedom startups want. Diaspora, became the first Y Combinator startup to use this model. But the key thing it opens up is access to collective expertise. Multitudes of investors are a pool of collective intelligence unmatched by a small pool of VCs.