Entrepreneur Hotels, Y-Combinator, and Dead VCs

by Nathaniel Whittemore

Published January 05, 2009 @ 03:15AM PT

Working at The Hub in Rotterdam, NL

Last month, PhoneTag founder and entrepreneurship blogger James Siminoff wrote a post called "Y-Combinator is Dead." The provocative post claimed that the Y-Combinator model, in which a group of investors with tech experience and great venture capital connections invests just enough to give the founders of light-weight tech startups a 3-month lifeline while they get a product ready, is going to die. In his estimation, there just isn't going to be a venture capital market for the types of businesses suited to the small investments and quick turn-arounds.

I've written about the Y-Combinator model before and know that there are a lot of folks thinking about how to apply it's model to the social benefit sector. Given all this, its worth sharing a few thoughts.

1. Ramen Profitability
The interesting thing about Siminoff's post is that Paul Graham has suggested that venture capital firms aren't necessarily as important as he thought when he founded Y-Combinator. In fact, he goes so far as to say that VCs (at least in the web-tech world) could be a casualty of the recession. The reason is that if a firm effectively has no startup costs other than the founders living expenses, then all it takes is a few thousand dollars a month of revenue to achieve a sort of "Ramen Profitability." Sure this is only viable for extremely light weight companies, but Graham thinks it could break the tether between VCs and startups. As he writes: "The current generation of founders want to raise money from VCs, and Sequoia specifically, because (Google Founders) Larry and Sergey took money from VCs, and Sequoia specifically. Imagine what it would do to the VC business if the next hot company didn't take VC at all."

2. Beware the Kiva Curse
I frequently think about if and how the Y-Combinator model could be applied to social enterprise. The idea seems great: small investment + great connections = successful enterprise. But I think that, at least as it stands, its sort of a "Beware the Kiva Curse" situation.

Nonprofit consultant Curtis Chang wrote eloquently about why Kiva is a "menace" to other nonprofits just a few weeks ago. His point was basically that the particular combination of elements that makes Kiva such an incredible success, including one-to-one connections, the idea of loans instead of charity, great publicity, etc, are not necessarily seperable. Many nonprofits have tried to just take one piece, and without the power of the whole, it doesn't really do much.

Right now, I feel that way about Y-Combinator and social enterprise. If you lose the low cost, or the density of the next-step funder relationships, or something else, I'm not sure it holds together.

3. BOPportunity
There is one place where I can see an adapted Y-Combinator model having serious social benefit, and that's at the bottom of the pyramid. Many BOP businesses straddle the social-financial value line, if only because the new opportunities for income and entrepreneurship in low-capital settings have social value in and of themselves. One of the most exciting things to me about the reduced cost of web startups is that it lowers the barriers to entry for entrepreneurs in poor countries.

My friend Jonathan at Appfrica is investing heavily in this idea. His Appfrica Labs project is a very early stage incubator that's trying to help grow web developer talent in Uganda, East Africa, and eventually will support their projects in much the same way that Y-Combinator works with its US companies. His experience is important to note, however. No matter how low the barriers to entry are, access to computers, servers, and the time to learn how to code still limits the pool of people who can participate in the type of thing Jonathan is putting together. Still, I think there's a ton of potential here.

4. Density = Destiny
Siminoff's alternative idea of an Entrepreneur Hotel is a really interesting one, particularly because in the social enterprise space, something like it exists. The Hub is a collaborative working space for social entrepreneurs which sells time memberships rather than office space. Recognizing that the laptop has taken the place of the office for many social entrepreneurs, The Hub provides facilities for when startups do need actual physical space - meetings, events, teleconferences. Perhaps more importantly, it provides a social density (their term) around the space by packing it with social innovators who are pushing the envelope of how we approach change.

It seems to me that one of the lessons of the success of projects like Y-Combinator and The Hub is that social density = destiny. As in, the more smart, talented people who exist in circles proximate to you that you're connected to, the more likely to find the assets and opportunities you need to be successful.

So, here's what I'd like to see.
Someone combines The Hub model of collaborative working space for social entrepreneurs with the Y-Combinator model of funding low-cost tech startups. In this model, which is geared toward social enterprise, the Y-Combinator style investment would be focused on tech startups that are building services useful for other businesses and social startups (things like Yammer, which is great for keeping a team of volunteers or employees connected to one another). In addition to the cash investment, the tech startups get to work (and maybe even live?) in the Hub space. In return, they give up equity - but also a small chunk of their developer time (25%? 10 hpw?) to pro-bono or reduced cost projects for the nonprofit social entrepreneurs who are part of the same Hub community. This combines the density, talent and energy of the tech startup world with the mission focused of the social enterprise world. All it would take are the right partners. Sounds like a pretty good combination to me...

Update: Check out the cool discussion around this post going on on Hacker News here.