The Best Deal In Startup Land

Sarah Lacy has a post up on Techcrunch about Paul Graham and Y Combinator. In the post, she says:

I’ve been a bit hard on Paul Graham and Y Combinator in the past. It’s not that I think he hasn’t been a great mentor to young entrepreneurs– he has. But that’s a lot of equity to give up and to date no Y Combinator company has really hit it huge.

I read that and went right to the comments and wrote:

it’s not a lot of equity to give up considering what he does for the YC companies. in fact, i think its the best deal in startup land

Our firm has investments in two YC backed companies, Disqus and HeyZap, and hope to make many more. We’ve been attending demo days since the very early days of Y Combinator and we’ve paid pretty close attention to what Paul and Jessica do and how they do it.

You could say that giving up 6% for $25k is a bad deal, that it values the business at less than $500k. But that would only be true if all you got from Y Combinator was $25k.

The cash is the smallest part of the Y Combinator value proposition. I’ve met dozens of Y Combinator backed entrepreneurs and every single one of them has come away from the experience with a really good mindset on the startup process. They have a set of core beliefs which come from Paul and Jessica. They are lean, mean, and focused on the right things. They are almost always strong technical teams and they are often working on interesting problems.

And on top of all that, they have the Y Combinator “seal of approval” and they have Paul and Jessica tirelessly working on their behalf to raise the next round of funding.

I am not going to try to value all of that, but I can tell you this. It is worth a multiple of $25k and it is the best deal in startup land.

But maybe the best thing Paul and Jessica have done for startup land is inspire a whole bunch of fast followers. I don’t think I can name them all right now as I am racing to get on a plane, but there are at least a half dozen quality programs that follow the Y Combinator model to some degree. So we now have hundreds of entrepreneurs every year going through one of these programs. That is a huge development and is making a difference. We may not have seen any of these companies IPO yet, but that will happen. It is just a matter of time.

Thanks, Fred!