Don Dodge on The Next Big Thing

John Doerr of Kleiner Perkins and Mike Moritz of Sequoia investment rules

John Doerr of Kleiner Perkins and Mike Moritz of Sequoia are giants in the VC world. They interviewed each other at the National Venture Capital Association (NVCA) annual meeting this week. It was a humorous, nostalgic, and insightful discussion. I had the pleasure of sitting next to Pat McGovern, founder of IDG, and a VC legend in his own right.

John Doerr started his career at Intel in 1974 as a salesman and later moved into marketing. He moved into the VC business in  1980 joining Kleiner Perkins.

Mike Moritz was a writer for Time magazine before joining Sequoia in 1986.

History of success - Kleiner Perkins and Sequoia have invested together in 50 companies, and separately in hundreds more. Some of the notable successes include; Google, Yahoo, Amazon, AOL, Apple, Citrix, Netscape, Intel, Intuit, Palm, PayPal, Plaxo, Sybase, Sun, Lotus, Electronic Arts, 3COM, Cisco, Oracle, YouTube, and many more.

Pattern recognition - John Doerr reflected back on the many successful investments in his career and noted a pattern that is perhaps not politically correct, but a pattern none the less. The most successful investments were in founders that were white, male, under 30, nerdy geeks, with no social life. He rattled off a list of founders that included; Steve Jobs, Steve Wozniak, Larry Page, Sergy Brin, Jerry Yang, David Filo, Jeff Bezos, Steve Case, Marc Andreessen, Scott Cook, and Mitch Kapor. He could have gone on...but he made his point. So, he said when Larry Page and Sergy Brin came along the decision was simple. Hmm...I'm sure there was more to it than that, but there is no doubt it worked out well for Kleiner Perkins and Sequoia.

Kleiner Perkins 7 rules - Doerr and Moritz didn't reveal a lot about their investment philosophy so I dug back in my archives for more insight. I was on a "Future Of Software" panel at TiECon East two years ago with Ajit Nazre, a partner at Kleiner Perkins. Ajit said KPCB has 7 rules for startups they invest in. They are;

• Instant Value to customers - solve a problem or create value with the first use
• Viral adoption - Pull, not push. No direct sales force required
• Minimum IT footprint, preferably none. Hosted SaaS is best.
• Simple, intuitive user experience - no training required.
• Personalized user experience - customizable
• Easy configuration based on application or usage templates
• Context aware - adjust to location, groups, preferences, devices, etc.

John Doerr and Mike Moritz show no signs of slowing down. They both enjoy the challenge and love helping entrepreneurs build great companies.

UPDATE: The Wall Street Journal also has a story on John Doerr and Mike Moritz talk at NVCA. The WSJ mentioned one exchange between them that points to something new Sequoia has going that is still very secret.

But then Doerr asked Moritz, clad in a conservative dark suit, about a sensitive issue that was certainly on the minds of many in the audience, referring to press reports that Sequoia has hired two managers from Stanford University's endowment to prepare for an investment fund that would invest in multiple asset classes.

"We're keeping our lips very tightly sealed on these things," Moritz said. "The stuff in The Wall Street Journal about the hires is true. But it's far too early for us to elaborate."

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The Future Of Social Networking - Consolidation or Mass Customization?

The Future Of Social Networking was the topic of a panel at Microsoft's ReMIX Silicon Valley. Will social networks consolidate into a few big players like Facebook and MySpace, or will it splinter into thousands of special interest social networks? The opinion of the panel and audience was split.

What about the financial success of social networks? FastCompany published a timely article about Ning raising $60M at a $500M valuation. Beebo recently sold to AOL for $850M. Facebook recently raised more money at a $15 Billion valuation. Valuations are one thing...profits are another. Sometimes the correlation between the two requires creative math.

The future of social networks is an interesting, and potentially very lucrative, question to ponder. Will there be a few giant networks or thousands, even millions, of special interest social networks? It is interesting to note that Facebook started out as just a network for Harvard students and alumni. Mark Zuckerberg quickly discovered that other schools wanted a Facebook too. Schools were added slowly and you had to have an email address with the school domain name in order to join that Facebook network. It was a cozy social network for college students and alums to stay in contact...and express themselves. You know the rest of the story. Facebook allowed a few companies to have social networks, then opened the floodgates and let anybody in.

Ning, and others, believe there will be millions of smaller social networks based on special interests. Ning reportedly has 230,000 social networks on its service. Other social network players include Microsoft Spaces, Beebo, MySpace, iMeem, and even services like Flickr, Seesmic, Twitter, and various blog networks.

Do page views equal profits? It seems clear that both big social networks and small special interest networks will continue to grow. The distinction may be that only the big social networks will gain the "critical mass" and "audience demographics" to be financially successful. Not all page views have the same financial value for advertisers.

A penny for your thoughts? I talked to a Facebook App developer at the ReMix conference. He told me his app is generating 300 million page views per month. Wow! Then I asked what kind of CPM (Cost Per Thousand) ad rates he was getting. He shrugged and said somewhere between $0.02 and $0.05 per thousand. That pencils out to between $6K and $15K of advertising revenue per month for those 300 million page views. Pretty good for a couple of young hacker/coders with very low overhead, but not the kind of business that  commands million/billion dollar valuations.

Other industry insiders at the conference said they see CPM rates of between 10 cents and 50 cents per thousand for social networks, but it can go much higher ($2.00 to $5.00) for highly targeted demographics.

Is Web 2.0 financially viable? A small moderately successful software company can generate $12M in annual revenues by focusing on a narrow niche market. What would it take for an advertising based Web 2.0 company to generate the same revenues? Lets assume a $2.50 CPM rate. To generate $1M in monthly ad revenue you would need 400,000,000 monthly page views. Hmmm...how many web sites or services generate that kind of traffic?

So, what does the future hold? Social networks are clearly a hot area. We are in the early stages of evolution. Facebook is here to stay, but other approaches and models may emerge and be even more successful. The monetization of social networks is also in the early stages. Will the current valuations prove out? Remember a few years ago when some people thought paying $580M for MySpace was insane? It looks like a pretty good deal now. Friendster is an example of an early leader that went in the other direction.

What do you think? What are your favorite social networks and Web 2.0 services? Who do you think will be the winners? Leave a comment and join the discussion.

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The Capital Gap or Where are the $Billion Startups?

Paul Graham wrote an interesting essay "Why There Aren't More Googles" where he basically places the blame on reluctant VCs who won't invest small amounts on tiny startups.

So what's the real reason there aren't more Googles? Curiously enough, it's the same reason Google and Facebook have remained independent: money guys undervalue the most innovative startups.
The reason there aren't more Googles is not that investors encourage innovative startups to sell out, but that they won't even fund them.

There is a Capital Gap between the $50K from Friends and Family, and the $3M to $5M from VCs. But, that gap is being filled by Angel Investors who invested $26B in over 57,000 companies in 2007.

How many Billion dollar ideas are there? Angels in vested $26 Billion in 57,000 companies last year, while VCs invested another $29.4B in 3,813 companies in 2007. The problem isn't a lack of capital, or even a lack of entrepreneurs. It is a lack of disruptive big ideas that can generate a Billion dollars.

Most startups are acquired before they reach $1B. Look at the M&A numbers over the past few years. Last year there were $25.4B in M&A transactions compared to just $10.3B in IPOs.

Paul Graham and Y Combinator are hatching some really cool companies. Is there a Billion dollar company in there? Certainly there are some $50M ideas, but a Billion? Possibly, but unlikely.

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Venture Capital returns in 2007 best since 1999

Venture Capitalists have been in a very good mood lately. That is because 2007 was the best year for VC returns since 1999. I have been following the investments and returns (IPO and M&A) for a long time. See the chart below, all figures in $Billions;

	Investments	Returns
Year	VCs	M&A	IPO
2001	$32.1	$16.8	$3.5
2002	$22.1	$7.9	$2.1
2003	$19.6	$7.7	$2.0
2004	$22.4	$15.4	$11.0
2005	$23.7	$16.0	$4.5
2006	$25.5	$17.1	$5.1
2007	$29.4	$25.4	$10.3
Totals	$174.8	$106.3	$38.5

A couple of trends are clear from these numbers;

• VC investment has been growing steadily since 2003
• M&A has been the best exit every year...by far
• Exits have exceeded investments just twice in 7 years

VC investments usually take 5 to 7 years to get to an exit. So, you would expect, on average, that the 2001 investments would exit in 2006 or 2007. However, over the long term, any snapshot in time should show exits exceeding investments. Not so recently.

By any measure 2007 was a great year for VC returns. Both the M&A and IPO markets were very strong. Investments were also at the highest level since 2001.The break down for 2007 by investment stage shows the clear trend towards bigger deals at later stages.

• Seed Stage -  $1.2B
• Early Stage - $5.2B
• Expansion - $10.8B
• Late Stage - $12.2B

Angel Investors are filling the void at the Seed/Early Stage investing $10.2B in 2007.

There is a popular refrain heard around Silicon Valley "Party like its 1999". From an investment return perspective it is a lot like 1999. The difference, I hope, is that the stock market is not in a similar bubble condition.

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Boston startup events and resources

Boston loves startups. The Massachusetts Technology Leadership Council is doing a great job setting up events. Watch the MTLC site for future dates. MITX, The Capital Network, the Angel Capital Assoc, and others are also putting on events. Here are just a few of the upcoming events this week and next.

Tech Tuesday - is a regular monthly meet-up organized by Dan Bricklin, of Visi-Calc spreadsheet fame. Tech Tuesday is for geeks, tech savvy professionals, DIY-ers, press, and other industry luminaries for an informal gathering. Bring your laptops, robots, OLPC XO's, Amazon Kindles, new cell phones, gadgets, and other new-fangled devices. Tech Tuesday meets the second Tuesday of every month. Microsoft is a sponsor this month.

New England Angel Capital Conference - The Angel Investor groups of greater Boston meet once a quarter to review their best companies. Each group nominates companies to present. They are all looking for a round of funding that is bigger than any one Angel Group can handle. This meeting lets all the groups get a look at promising companies and pool their investment dollars.

Entrepreneurial Team Building - a panel of entrepreneurs that have built companies from the ground up and know the ins and outs of building great teams. What really makes a team come together? How can you be sure that you are bringing in the right folks? Who should be hired first, second, next? We'll talk about teams at the senior management level and at the BOD level.

Entrepreneurial Series - Plain English Term Sheets - This is a webinar for startup entrepreneurs who want to understand the details of financing term sheets. What to ask for...and what to avoid.

MITX - Mass Innovation & Technology Exchange have lots of great events for technology based startups. The next session is "Building Social Applications and Widgets".

The Capital Network - TCN's network consists of entrepreneurs on their way, entrepreneurs who have lessons and talents to offer and investors who may have themselves drifted across the entrepreneurial line. TCN has 3 or 4 events a month. The next one is on Founders Equity Issues.

The 128 Innovation Capital Group -  The regular meetings are held on the second Thursday of every month at the Best Western Hotel on Totten Pond Road in Waltham. Every month an investor provides our formal program. After Q&A, our speaker generally remains to speak with audience members, one on one. After the meeting, a roster with the contact information of all attendees is made available to those who came to the meeting.

Web Innovators Group - WebInno was founded by David Beisel of Venrock Capital. Scott Kirsner is also deeply involved. WebInno has regular meetings. The usual format; early stage start-ups and individual innovators will briefly demo their product/service in two different forums. First, there will be a couple center-stage presenters giving five minute demos for the entire crowd (aka “main dishes”) at 7pm. In addition, there will be a number of tables set up at the periphery of the room for live informal demonstrations to smaller groups during the schmoozing sessions (aka “side dishes”). Each will help provide the community a glimpse of current local endeavors in the space and offer the basis for further conversation.

Nantucket Conference - The 2008 Nantucket Conference audience will consist of approximately 150 of New England's top entrepreneurs, investors, and tech executives. Rather than sitting through a series of speeches and PowerPoint presentations, the audience will be engaged in a dialogue - and sometimes a heated debate - with Conference presenters.

Boston based bloggers

Scott Kirsner, a writer for the Boston Globe, and a blogger at Innovation Economy is always organizing and promoting startup events. Watch Scott's blog for announcements of upcoming events.

Jeff Bussgang - VC partner at Flybridge Capital Partners (formerly IDG Ventures Boston). Jeff is a former entrepreneur and now a VC. His blog is appropriately called Seeing Both Sides.

Xconomy - Bob Buderi, Rebecca Zacks, and Wade Roush cover Boston based startups, technology trends, and VC investments.

Mike Hirshland - VC partner at Polaris Venture Partners in Boston.

Nicholas Carr - Nicholas is a former Harvard Business Review editor and author of several books.

Boston based entrepreneur bloggers - Ben Saren (founder & CEO of CitySquares Online), Matt Douglas (founder & CEO of Punchbowl Software), Pito Salas (former CTO of eRoom).

BlogString has an extensive list of Boston events. Thanks to Nathan Burke for the link.

Come on out to these events. I try to attend all of them, and would love to say hello. However, for the next two weeks I am working in Silicon Valley...my second home.

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Me.dium - a social web browsing experience

Me.dium is a web browser plug-in for Microsoft's Internet Explorer that turns web browsing into a social experience. It gives you a personalized map of the Internet showing where you are, and what web sites your friends are visiting in real time. You can use it to discover new people and places that are relevant just to you. It also allows you to surf with friends in real-time. It's just like hanging out in the real world, but online. 

How it works

Go to Me.dium.com and sign-up for a free account. Download the plug-in and install. You will be up and running in minutes.

After your account is set up you can add friends by either finding them on Me.dium or inviting them to join via an email invitation.

See where your friends are. Once you have built your friends network, and they have Me.dium installed, you can see what web sites they are on, and watch them as they move from site to site. You can go to the same site, see what they are looking at, and start up a chat discussion...all in real time.

It is fascinating to watch the Me.dium cloud change as your friends move from site to site. We already follow our friends with Instant Messaging, RSS feeds, email, Twitter, and other ways. But to see them move in real time in your browser is amazing.

Microsoft Startup Accelerator Program

Me.dium is part of Microsoft's Startup Accelerator Program. Listen to what David Mandell, VP at Me.dium has to say about the program;

Getting direct connections to developers within Microsoft speeded our own internal development time significantly, I would estimate about a 50% velocity increase. In addition, gaining exposure to some of the Microsoft MVP’s gave us critical product feedback that we simply didn’t have the manpower to gain on our own. Getting on the Windows Marketplace site quickly took our customer mix from almost completely Firefox users, to a ratio of 75% IE to 25% Firefox, all through new customer acquisition. 

The Emerging Business Team and The Microsoft Startup Accelerator Program have truly turned into an invaluable resource for Me.dium.  We would never have imagined that a company as large as Microsoft would have the desire to focus on a small startup such as Me.dium, but we were completely blown away by the attention and access to people that we were given and owe much or our current success to that relationship.

Me.dium has an All-Star management team. Founded by Robert Reich, Peter Newcomb, and David Mandell. Kimbal Musk, a serial entrepreneur is the CEO.

The investors are top shelf too. My good friend Brad Feld was an early investor. Another good friend, Elliot Katzman of Commonwealth Capital was a major investor in the second round. Spark Capital and Appian Ventures are also investors.

Check out Me.dium and let me know what you think.

Here comes another bubble - bubble economics

Here Comes Another Bubble...a painfully funny video about Bubble 2.0. created by Richter Scales. Mike Arrington (pictured below), founder of TechCrunch makes a cameo appearance in the video.

Richter Scales, is a non-profit singing group in Silicon Valley. What makes it funny is that it is all true, yet people inside the bubble don't see. The video starts with Peter Thiel (Paypal) saying "There is absolutely no bubble in technology".

Some of the lyrics are priceless...

"Thought I had the perfect plan, took the job at WebVan"

"Suffered through the market crash, lost a giant wad of cash"

"Make your elevator pitch, code it up and flip the switch"

There are a lot more nuggets in the video. Take two minutes and watch it. It will make you smile...and perhaps rethink your investments.

A reader reminded me of a post I wrote earlier this year on bubble economics entitled "I'll Trade My Two $50K Cats For Your $100K Dog". Given the astronomical bubbl-flation I should edit the title to "Two $5M Cats For Your $10M Dog". This post explains how bubble acquisitions acquired with bubble inflated stock have no cash impact to the company, but they certainly do dilute existing shareholders. In the last bubble the impact was devastating.

In case you are scratching your head about the dogs and cats reference, here is the relevant passage;

I grew up in Maine, and I am reminded of the negotiations between two farmers from Maine at the county fair. One farmer was showing off his "blue ribbon" dog and proposing to sell it for $100,000. The other farmers were laughing hysterically at the idea of a $100K dog. Dogs don't produce income. How could a dog be worth $100K? Then one farmer stepped up and offered to trade two of his $50,000 cats for the $100K dog. The dog owner quickly agreed and bragged to all his friends how he sold his dog for $100K.

Enjoy the video...and the bubble while it lasts :-)

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John Doerr - the VC legend from Kleiner Perkins

John Doerr of Kleiner Perkins is a Silicon Valley legend. He made some of the most successful investments in the history of venture capital. Some of the big ones include; Google, Amazon, Intuit, and Sun Microsystems. John did an interesting session at Web 2.0 Conference.

As smart as he is, he really had no idea that Google would be as big as it has become.

Do you worry that Google is trying to do too much? No, there is enormous opportunity in search, ads, and applications. They spend 70% of their time on improving search, 20% on ads, and 10% on new stuff. I was worried about competition so I thought we should get massive ditribution of search tool bars. Sergey said no...that is not the way we are going to be competitive. We are going to hire 1,000 of the best engineers. That is how we will remain competitive.

So, what do you worry about? Keeping the Google culture. Staying competitive.

Why didn't you invest in Facebook? Because of loyalty. We had already invested in Friendster, and we don't invest in competing companies.

How is that going? Well, Friendster is the 13th largest site. Did we miss something? Yes, but we are loyal. Entrepreneurs know that when we invest, we will not invest in a competitor next year.

Where else are you investing? We are looking for new companies. We are a quality VC, not quantity. We have backed 20 high quality startups in the past couple years. We haven't missed Web 2.0. We are investing on the edge...things that are not yet obvious and popular. Search is of course the killer app, but personalized applications will be big. There is a lot to be done in network connectivity...local and wide area.

What is your view on the 700 Mhz spectrum? This is the beach front property auction. This is the last spectrum available for a long long time. We want to bid and win some of this. This is a great opportunity to build an open network, maybe the last opportunity we will have.

Who else can win this with $5 Billion as table stakes? It is not just a question of open or closed, it is a question of money. We will know by February who will win...the incumbents or the innovators. There will be winners and losers. There always are when innovation happens.

How do you work with Washington? It was an interesting process. The incumbent wireless operators have lobbyists for every congressman. Our arguments and logic had to be better. We had to find policy leaders who would support openess, competitiveness, and innovation. We support those people and we don't support those that don't.

What about "Green" energy? Yes, we are really high on "green" everything. There has been no innovation in energy for a long long time. Better bio-fuels are critically important, and van make a lot of money. Everyone cares about being green, but we need entrepreneurs to innovate. This is a huge problem. Bigger than the Apollo project to put a man on the moon. It will be expensive, but we must do it. It will take a lot of capital. But that isn't all we have going on at KP.

Is anyone at KP looking at open source hardware? It isn't a trend I haven't thought about. We haven't made any investments there.

What is the 5 year horizon for green energy? This is the biggest problem we have ever seen. But never underestimate the power of a small group of entrepreneurs. I don't know how long it will take.

Who are you supporting for president? I am looking for a candidate. No one has a good plan. Al Gore winning the Nobel Prize will help focus attention on the environmental issues.

What about nuclear? There is a lot of government policy involved. The technology can and should be done. But, none of us are going to change until clean and green is cheaper than dirty and wasteful. We need to tax and penalize polluters and provide incentives for alternatives.

What is the scenario where Google doesn't need to bid on the 700 Mhz spectrum? Google doesn't need to be involved if the networks will be open. Google needs to be involved to ensure that the networks are open. This is really important to lots of high tech companies. This isn't just Google against Verizon.

What is the governments role? The total federal investment in renewable energy is less than half a billion. Exxon/Mobil makes $1 Billion every day. We need to invest more in energy research. You know how much they invest in R&D? Less than 1%.

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Customer pitch vs Investor pitch - TechCrunch40

I was at an Angel Investor group meeting last week where we had several startups presenting, looking for first round funding. I stopped one of the presenters about 20 minutes into his presentation and said "You are pitching to us like we are customers. We aren't customers. We are investors".

Pitching to investors is different than pitching to customers. Investors care about some of the same things, but not to the same depth as a customer. Investors care about management teams, competitive advantages, competition, market size, cash flow, and how you will use the investment dollars.

Entrepreneurs should have two very different pitches for investors and customers. If you are raising a round of financing go to a couple investment conferences and see what works. Put yourself in the shoes of the investor. Try to decide in 10 minutes if you are interested in a company, and keep track of which factors are most important to you as an investor.

The customer pitch needs to be different too,  for technical audiences versus business people. The technical audience wants deep technical content. They want to know how it works, how it integrates with what they already have, and why it is better. The technical people are usually advisors...they don't have budget control and they don't make the purchase decision. But, they can eliminate you from the approved vendor list.

Business people care about solving business problems. They do NOT care about how it is done from a technical standpoint. Business people care about how your product or service will help them provide better products or services to their customers. They care about customers and business. If you are trying to sell a productivity product or service (better, faster, cheaper, smaller) it better translate in some way to customer benefits, not employee benefits. Business people have the budget and usually make the purchase decision

The 10 minute investor pitch can be very effective if done properly. The best presenters cover; what problem do we solve, what are the alternative solutions, why are we better, how big is the market, what have we accomplished so far, a sampling of customers, experience of the team,  how much money are we looking for, and financial projections. Nine slides in 10 minutes. Leave plenty of time for questions. Perfect!!

For most of you this is boring, been there, done that, stuff. But, you would be amazed how many start-ups miss these simple "truths" when pitching their company to investors or customers.

TechCrunch40 Conference - Mike Arrington asked me to be on an expert panel of judges at the TechCrunch40 Conference in San Francisco on Monday. It is an All Star panel. I have no idea why Arrington put me in with these guys...but it will be fun!

I will be watching carefully to see how these companies deliver their pitch. It will be interesting to see how they cover the basic questions above. My favorite question for any startup is "Is this a vitamin or a pain killer?" Vitamins are nice to have, but pain killers are a must have. Being able to articulate why your product or service is a pain killer means you really understand your value proposition, and are well on your way to a working business model.

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Y Combinator accepting applications for Winter 2008

Y Combinator is now accepting applications for their winter start up boot camp in San Francisco which runs from January through March 2008. I attended the Summer 2007 Y Combinator Investor Day recently.

Y Combinator is a seed stage investor with a large network of entrepreneurs, VCs, and all the people you need to start a company. It is hard to explain but it is a cross between a startup boot camp and a traditional startup incubator. The best description of Y Combinator is on its application page.

Here it is in its entirety;

1. If you want to apply, please submit your application online by 10 pm EST on October 11, 2007. Groups that submit early have a slight advantage because we have more time to read their applications.
2. We'll review applications by October 18 and invite the groups that seem most promising to meet us in Cambridge on the weekend of November 3-4. We'll reimburse up to $600 per group for travel expenses.
3. We'll decide who to fund that weekend, and tell you by phone on Sunday evening.
4. Yes decisions will include the amount we'll invest and the percent of the company we'd want for it. We usually invest $5000 + $5000n, where n is the number of participating founders (i.e. 2 founders get $15,000, 3 get $20,000), in return for between 2% and 10% of the company. The median is 6%.
5. If you accept our offer, we'll write you a check immediately for as much as you need to cover your initial expenses.
6. If we invest in you, your group is expected to move to the Bay Area for January through March 2008. (You can of course leave afterward if you want, but it's a good place for a startup to be.)
7. After you're accepted, we'll set up all your paperwork for you, including getting you incorporated.
8. Once your company exists, we'll write a check to it for the rest of the money. You can spend the money however you want.
9. Y Combinator is not an incubator. We have space you can use if you need to, but we expect you to work out of wherever you find to live. It is no coincidence that so many successful startups have started this way; it's the ideal setup for the initial phase.
10. From January through March we'll have dinners every Tuesday for all the founders. At each dinner we'll invite an expert in some aspect of startups to speak.
11. On Wednesday afternoons we'll have an open house at YC for founders who want to demo their latest work or talk about strategy. You can arrange to meet with us any time during the week, but the open houses ensure no one has to wait more than a week.
12. You're encouraged to ask the founders of other YC-funded companies for help. There are now almost 150 of them, and they're usually very willing to give advice or make introductions.
13. About 10 weeks in, we'll organize an investor day at which startups that want additional funding can present to investors. You can of course seek additional funding from any investor whenever you want.
14. YC doesn't really end after three months; only the dinners do. We continue to give advice and make introductions as long as founders need—and so does the informal network of YC-funded companies.

How do we choose who to fund? The people in your group are what matter most to us. We look for brains, motivation, and a sense of design. Experience is helpful but not critical.

Your idea is important too, but mainly as evidence that you can have good ideas. Most successful startups change their idea substantially.

We're more likely to fund people we know are smart from their submissions and comments on Hacker News. In fact, that was one of the main reasons we wrote it: so that we could get to know people before they applied.

The ideal company would have two or three founders. We'll consider those with four or five. We're very reluctant to accept one-person companies, though we have funded a couple.

We don't expect you to have a formal business plan yet. All you have to do is fill out our application.

$5000 + $5000n is not a lot, but it turns out to be enough. It will cover at least 4 months' living expenses, and that is enough time to build something nontrivial. It's in your interest to take little money in the earliest stages, because you give up less control for it.

The original motivation for Y Combinator was benevolent, but this is not a charity. If our investments pay off, we can invest in more startups, and if they don't, we can't keep doing this indefinitely. So we're looking for startups we think will succeed.

My next post will be an interview with Paul Graham, founder of Y Combinator. I ask Paul lots of questions about how the program works and his philosophy on building startups.

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