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…
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.
Wufoo is another typical Paul Graham investment with a talented team
(Particletree and TreeHouse), focused on a very
simple and narrow idea – form building.
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.
Criticism
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.
Conclusion
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.
