Written by Emre Sokullu and edited by Richard MacManus.
Paul Graham, as a combination of investor and uber geek, is a unique figure in the web industry. There's an increasing trend of entrepreneur-friendly blogging among investors; Guy Kawasaki, Baris Karadogan and Fred Wilson are perhaps the best examples of this. But Paul Graham has always been seamlessly close to the entrepreneurs, especially young and inexperienced ones. His essays and books have been the best friends of wannabes and his seminars enlighten many students with entrepreneurial flame. Possibly that's why his investment company, Y Combinator, specifically targets young entrepreneurs - albeit their investment size is generally much lower than the standard. In this article, we look closer at Paul Graham and examine the current status of his investments, his investment patterns and discuss some of the effects of his essays.
About Paul Graham & Y Combinator
Paul Graham is an interesting personality. He became well known after his startup Viaweb was sold to Yahoo in 1998, for the neat sum of $50M . Viaweb later became Yahoo Stores. Paul is a Harvard grad who spent some of his youth in Florence, Italy, studying painting. He's a great Lisp hacker who is creating an alternative Lisp dialect, Arc [Wikipedia fact: Lisp is the second-oldest high-level programming language in widespread use today; only Fortran is older].
Y Combinator is the investment company Graham co-founded with hackers like himself - Trevor Blackwell, Jessica Livingston, Robert Morris. Y Combinator makes seasonal investments twice a year and their investment size is initially lower than $30,000.
Y Combinator Investment Pattern
Their recent investments indicate that Y Combinator invests not in the next Googles or YouTubes, but in the next Flickrs and OddPosts. In other words, they don't invest in ventures with high intellectual property or which require heavy investments. This is also because these kinds of ventures probably don't prefer Y Combinator and demand higher valuations. In general, the barrier to entry in their investment areas are low; Paul seems to believe in good marketing and originality, aka the Aspirin effect. Y Combinator loves to invest in simple ideas.
First and foremost, you need to be in your early twenties to receive Paul's funding. Because according to him, web businesses are risky and require real commitment, so it's best to start them while you have less to lose.
Also if you are not studying at an Ivy League college or Stanford, your chances of getting funded are lower. If you are a single founder or outside the USA, it's again very difficult. Finally, Y Combinator prefers real geeks who have a history with open source.
And now let's check out some of their previous investments...
reddit has been the most successful investment of Y Combinator so far. The team consisted of 2 University of Virginia, 1 Harvard and 1 Stanford grads/drop-outs. The personalized news site quickly became popular in the geek community. They licensed their code and finally sold their company to Conde Nast for an undisclosed sum - apparently under $5M. The site was criticized by some because its personalization engine did not appear to work properly. See Read/WriteWeb's article Personalized News: A Market Overview for more details on this.
Kiko is an online calendar and was one of Y Combinator's first investments. It was redesigned several times and ended up being sold on eBay for $260K - which probably covered their expenses.
YouOS was founded by 2 MIT, 1 Cal-Tech, 1 Stanford grads. YouOS aims to create the leading WebOS - and it has received a lot of attention from geeks for this reason. However, like most of the other sites in Graham's portfolio, YouOS lacks stability and is currently an early stage product.
Flagr is a mapping startup and is a very good example of what Paul Graham's investment pattern is. The idea is simple and the site is trying to create a new consumer behaviour - which is to map and write about places you visit. A noteworthy marketing tactic of Flagr was to send free stickers to their fans. The founders dropped out of college to pursue their dreams.
Other investments include:
- loopt - a mobile service that was subsequently co-invested in by Sequoia Capital, the leading VC company.
- snipshot - a very nice, but currently too basic, online picture editing site.
- clickfacts - fraud protection.
- thinkature - real time collaboration board.
Although there has been no big decisive success so far in the Y Combinator portfolio, there have been no big losses either. Most sites have good potential and are growing fast. The full list of their investments can be seen here.
There are a few general criticisms that have followed Paul Graham and Y Combinator.
Firstly, in his essays Paul Graham calls for young smart people to start their own startups. So in some sense, he's offering quick cash dreams against a long academic career. These dreams may cause young people to drop out of college for a very risky web business.
Another criticism Graham gets is the high equity stake he typically takes in return for a very low investment, like $20K. But the Paul Graham name is more than enough for most startups to be taken more seriously - so besides the money he puts in, he also injects his business and marketing power to these startups.
And the final criticism some people throw at Graham is a perceived lack of quality in many of his Y Combinator ventures - due to inexperienced, very young teams. This could also be a result of Graham's "release early, release often" principle.
Paul Graham's model is now being taken on by many others. For example Charles River Ventures offers a CRV QuickStart Seed Funding Program (essentially a loan of up to $250k, but with equity options). VC companies have started to make small but many investments, instead of just spending millions on a few high risk ventures. The reasoning behind this is the decreasing development costs of new startups. This is arguable though, because from another point of view the costs are increasing - due to technologies getting more complex and the increasing cost of things like video streaming.
All in all, if you are a young entrepreneur, bookmark this: http://paulgraham.com. Paul Graham's company may not satisfy your investment needs, but his theories and wise words can help you a lot.