Setting the record straight

But the limits of Y Combinator’s model remain unclear. A typical young tech company should be spending a little less than $40,000 a month, says Seth Levine, a venture capitalist at Foundry Group. Y Combinator gives companies a fraction of that, leaving entrepreneurs “eating ramen and not paying themselves,” he says. And 6% is a huge amount of equity to give up for such little money, he says.

Although Levine has shared his expertise with TechStars, a new Colorado program that’s similar to Y Combinator, he says it’s rare to find a business with serious long-term prospects in such a program.

While it’s great to get quoted in the national press, I actually laughed when I read this article in USA Today earlier this week that managed to completely misrepresent my views on the efforts of Y Combinator and TechStars (a program running down the street from me in Boulder this summer with which I’ve been spending significant time and energy helping out). After my initial amusement I didn’t think much of it.

But then I got a few emails about it . . . and a few TechStars companies pinged me to ask me if that’s really how I felt . . .and Paul Graham took me to task in a post he wrote in reaction to the article . . . and it seemed like perhaps I should set the record straight. So here’s the deal:

First, I’ll take responsibility for the error – I broke the cardinal rule of interviewing when I gave a phone interview rather than responding to questions over email (and I didn’t review the article before it went out as I often do). The fact that there was no actual quote about my views on Y Combinator and TechStars should be a tip-off that perhaps this sentiment wasn’t conveyed correctly. The majority of my interview was actually about a recent post I wrote on the importance of controlling cash burn at various stages of company growth. We also talked at length about various ways that young companies find angel investors and different efforts around the country to bring angels together in organized investment groups which is what I understood the article was about. In the course of a 10 minute conversation we probably talked about Y Combinator and TechStars for about one minute.

The actual quote in the article from me is accurate in the sense that I told her that at some point entrepreneurs need to find a source of capital so they could pay themselves (preferably from selling something to customers, but potentially from friend & family, angel investors or venture capitalists) but was taken completely out of context (I wasn’t talking about that in relation to the money companies get from Y Combinator or TechStars).

More importantly, this wasn’t a statement about the deal that programs like Y Combinator and TechStars make with their participants. At all. In any way. As it turns out, I actually think these programs are a great deal for entrepreneurs and don’t think the equity they give up has much, if anything, to do with the cash they receive. Significantly more important than money, companies in these programs get amazing access to groups of mentors – business leaders, venture capitalists, lawyers, other successful entrepreneurs – whose time and willingness to help out is worth significantly more than the $5k-$15k that is provided as a stipend in the program. The companies also get access to free office space, regular feedback on their ideas and prototypes and get to interact with other companies in a similar stage of development who share learnings, successes and failures along the way. For all this, 5% or 6% is a bargain. I’ve spent a countless hours working with TechStars companies this summer in support of this belief.

It is true that I told her that many companies in these programs wouldn’t end up as viable businesses and frankly, that’s probably true. However, that’s true of any set of early stage ideas (and many projects enter TechStars or Y Combinator as more of a concept than a working business) – not everything has the makings of a real business (although it’s not “rare” as was ascribed in the article, although again not in an actual quote). One of the great things about participating in a program like TechStars or Y Combinator is that entrepreneurs have the chance to get real time feedback on what they’re doing in an effort to maximize their chances of exiting the program with a viable business. In fact – that’s the entire idea behind these efforts.

With apologies to Paul, David, Y Combinator and TechStars – I hope this will set the record straight.

I will not do interviews over the phone. I will not do interviews over the phone.

I will not do interviews over the phone. I will not do interviews over the phone.

I will not do interviews over the phone. I will not do interviews over the phone.

I will not do interviews over the phone. I will not do interviews over the phone.

I will not do interviews over the phone. I will not do interviews over the phone.

I will not do interviews over the phone. I will not do interviews over the phone.