I started writing this post a month ago after reading an article on Paul Graham and Y Combinator in Inc. Magazine. I left it and got busy with life and only now, while on holiday on the beautiful Gulf Coast of Florida, have I found the time and inclination to come back to it.
As with one of my previous posts, after reading this magazine article, I am left wondering if there isn’t a different incubator model that doesn’t require what Graham refers to as “ramen profitability,” in reference to the cup-a-noodles the Y Combinator attendees live on under his tutelage. Here’s where I left off when I started this last month…
Reading Inc. Magazine’s article this month on Paul Graham and Y Combinator got me thinking about the topic of these incubator models… again!
Cheap meals are, in a strange way, part of Y Combinator’s formula for start-up success. Graham wants founders to spend as little money as possible. Live cheaply enough, he believes, and you can become cash-flow positive without going on a lot of sales calls or spending too much time talking to investors. Graham calls this “ramen profitability” and says it allows companies to say no to bad investment terms and forces them to think about long-term viability. It also ensures that most Y Combinator founders are in their 20s — or, for the few who happen to be older, that they are capable of living in dormlike conditions. “That culture of frugality and discipline is really important for the Y Combinator mindset,” says Sam Altman, founder of Loopt, a graduate of Y Combinator’s first class. “The start-ups that do well are the ones that are working all the time.”
In reference to my previous post on this topic, it is clear that Y Combinator and similar models are no place for entrepreneurs with children, mortgages, debt… you know, your average thirty-something professional who hasn’t cashed in on their first startup success and doesn’t necessarily have a spouse/partner/family who can pick up the slack while they give it a go. Enough with my apparent whining on this matter – I already did that before. I’m more interested in getting some discussion on the development of another model that might be entirely different from the incubators out there today.
From the perspective of capital, this likely calls for a return to the earlier days of VC funding where substantial series A funds could be raised without product/customers/revenue/etc. Given that VCs cannot, or don’t need to follow that approach anymore, then the investment comes from the angel community. This is fine, although I believe it is in the amount of money raised through this investment group (for the most part and especially in Canada) that is the problem for the thirty-something founder. He/she might need enough capital to build product and give it a real go over the course of 12-18mths, not the 3mths that Y Combinator provides. This longer period and subsequently larger investment both speaks to what might be required to really get something going and what it takes to motivate the entrepreneur who won’t leave their stable, well paying job to take a chance with funding that covers them for 3-6mths, and at a greatly reduced salary (if they are any good in their current job).
I appreciate that a lot of money was wasted in the initial dot.com boom where VCs and their LPs lost billions by pouring too much money into ideas and businesses that were never going anywhere. Still, rather than completely changing the model, perhaps we can learn from those mistakes and simply be more prudent in our investments. Instead, the investment community has simply said, let’s invest a lot less until the idea is fully proved out and then everyone will race to get in and at much higher valuations. Personally, I think this might leave a lot of good ideas on the table that never get funded and we’ve left the world of tech innovation to the twenty-something, recent-grad crowd and the small group of previously successful entrepreneurs. In today’s economy, I’d like to think that there are some creative ideas out there to figure out how to motivate and capitalize on the creativity and drive (maybe not the ramen-eating drive) of the large thirty-something crowd who have ideas and experience to go along with their kids, mortgages, student debts and who knows what else.
Just to reiterate my intentions here… Please do not take this as a whole lot of whining and very little action but rather, a call to all those that care about developing a stronger entrepreneurial community, to start discussing ways to motivate and support a group that I refer to as the thirty-something group (which really means anyone who has good ideas and experience but cannot eat cup-a-noodles and leave their families for 3mths to do a startup – I really need a proper name for this demographic!). Please start discussing here and anywhere else where there are people to discuss!
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