Tuesday, September 11, 2012

What Venture Investors Look For

Y. Combinator is the name of a venture investor firm looking for startups. It was covered in the October 2012 Vanity Fair business section in an article by Randall Stross. Paul Graham is head of Y Combinator, where Trevor Blackwill and Jessica Livingston are also founders.

The article infers that high tech start-ups tend to involve young adults in their twenties with advanced degrees but not yet homeowners nor parents with well-paying jobs. What Paul Graham of Y Combinator wants to see is a team that works well, since that is necessary to manage the stresses of starting something up. That teamwork means that no single member overwhelms the others. The members accommodate each other. Y.C. doesn’t want to fund "hackers in a cage," where a non-technical founder controls the organization and treats the technical experts as subordinates.

Graham tells the start-ups he may be funding that they will not be closely supervised. He won’t tell them when they are doing poorly. "Here, we don’t fire you. The market fires you," he tells start-ups applying for Y.C. funds. Graham says the most successful start-ups utterly eliminate distractions. "They just sleep, eat, exercise, and program," he says. The details of the start-up product as pitched to Y.C. are not the most important factor in funding them or passing them by, Graham tells Vanity Fair. The energy level, teamwork, the mutual accommodation, the ability to eliminate distractions are the important factors in deciding whom to back financially.

Graham has a formula for generating new ideas – use the start-up founders as target users. Build something the founders can build but few others can do. And select something that few people realize is a big deal. "Ask yourself: ‘What do I wish someone would start a start-up to do for me?’" Graham posits. "The next best thing: something for someone else that you know is a problem." Another question he suggests start-up founders should ask themselves: "What will people say in the future was an unmet need today?" And Graham gives as an example the time it takes for a computer to boot up – a delay of wasted time that will surely look ridiculous in the near future.

Graham suggests that when giving a presentation, a start-up founder must choose the part that is most animated. The presenter should not allow animation to happen spontaneously and without management while plodding through a presentation.

Graham further suggests that presenters be wary about statistics and avoid using nationwide universal numbers and macro-economic numbers.

Y Combinator interviews start-ups, selects and funds the approved groups for three months, and then hosts a live demonstration day for the remaining groups (63 groups demonstrated for the most recent year). The day is followed by a reception where the group founders can meet with potential investors. "It’s hard to say exactly what it is about face-to-face contact that makes deals happen," Graham observed a few years ago, "but whatever it is, it hasn’t yet been duplicated by technology."

If a start-up succeeds and becomes a smash success, then Y Combinator strongly recommends that it sell to a large tech firm, take its profits, and let Y.C. take its share as well.

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