We told a select few people that we had applied to YC with RescueTime. A bunch of people “got” why we were doing it– though quite a few people expressed concern. YC offers a fairly small chunk of cash for a comparatively large slice of equity (2-10%, depending on the startup). “How could that possibly be a good deal?” was a question that was not uncommon. We also often got, “doesn’t YC only fund college kids?” (actually, no– the average age is quite a bit higher than you’d guess).
I’d like to run through a few of the thoughts that we have on the YC value issue.
1. The biggest is hubris. Or (we hope) a lack thereof. Our team consists of three people who have built and sold companies before (little ones)– we could easily fall into the trap of believing we’re actually GOOD at it. Glenn Kelman’s guest post at TechCrunch couldn’t say it better– most startups fail. Most entrepreneurs fail. As it turns out, succeeding before only marginally increases your odds of startup success in a subsequent effort (source: The E-Myth Revisted– a cheesy but smart book on entrepreneurship… Glen’s post also cites a study in this area).
With a little success under your belt, it’s easy to start feeling infallible– you start calculating how many millions of dollars you’re giving away with 2 or 3 percent of stock and it stings. But, the vast likelihood is that you’d be better served focusing on getting to the “finish line” rather than how full your pockets could be when you get there. If you can embrace this idea, the idea of giving away a few percentage points of common stock to increase your chances at ANY success is a no-brainer.
2. Negotiating power. YC has proven itself (in just a few short years) to produce above-average startups and is a high-efficiency source of deal flow for Angels and VCs. YC does investors a great service by sorting through a mess of them, mentoring the best, and making those connections. Because of this, a YC company is bound to get treated with a lot of respect when negotiating with VCs. If the VC suckers the YC company into accepting crappy deal terms, there’s a pretty good chance that they will no longer have access to future YC companies.
3. Connections and introductions. Throughout the 3 month program we’ll be going to weekly dinners and mixers with the other founders as well as assorted interesting Valley folks. At the end of the three month period, YC puts you in front of a room full of VCs and Angels (commonly known as “Demo Day”).
4. Recruiting (and being recruited). We’d love to think that this isn’t our last startup (whether it succeeds or fails). We’d love to think that RescueTime is going to succeed. If either of those hopes come true, we’re going to need to know smart people who might want to work with us (or want us to work with them). YC alums are a great network for this. Many hackers would rather work for a YC company than Google!
5. Mentoring. This goes back to hubris a bit. We have a lot to learn. There are very few ways to spend three months that would have a better shot of making us smarter entrepreneurs than spending with a pile of geeks hand-picked by Paul Graham and friends.
6. Marketing. Having the YC “stamp” can get you in the door with a lot of publications (both on and offline). It’s not a sure thing, of course. I’ve worked with a lot of marketing firms (and seen a lot of dollars change hands) and can honestly say that the cash value of this cannot be overestimated.
7. Fun. Mom always said to enjoy life. How could the YC experience not be amazingly fun and rewarding?
So, is YC a good deal? At the end of the day, it comes down to math. But we’re willing to bet that it is.