Y Combinator beats the odds in tech investing
Investing in tech startups is a risky business. But just as the MIT Blackjack team figured out how to beat the odds in Las Vegas, Y Combinator figured out how to beat the odds in tech investing.
Y Combinator, which started in Cambridge but now is in Silicon Valley, is the largest and most successful startup incubator in history. Over the past 10 years, Y Combinator provided seed funding and support to 842 companies. Nearly 80 percent of those companies are still operating — most early stage tech investors expect half their startups to fail — and 32 are worth more than $100 million each. All together, Y Combinator companies are worth a combined $30 billion.
Dropbox is one of the companies that went through Y Combinator’s Cambridge program. And it’s one that local investors missed. I remember the Demo Day in 2007 when Dropbox presented to about 30 Boston area investors. None invested, and Dropbox moved to Silicon Valley soon after.
Investors, including me, balked, largely because Microsoft, Google, and other big technology companies offered cloud storage and backup for free or very low cost. How could Dropbox possibly compete? Well, Y Combinator advised Dropbox to identify early adopters, focus on ease of use, and compete with the technology giants.
This year, Dropbox is expected to launch an initial public stock offering valued at more than $10 billion.
So, what is Y Combinator? It is a startup that creates more startups. Y Combinator attracts the best entrepreneurs, who in turn attract the best investors, which leads to the highest valuations, which attract the best advisers, who bring it full circle by attracting the best entrepreneurs.
For several years, Y Combinator held a summer session in Cambridge and a winter session in Mountain View, Calif. After comparing results, especially local investor participation, it became clear the program could be more successful holding both sessions in Silicon Valley. Despite deep local roots in Boston, Y Combinator moved west in 2009.
In Y Combinator’s early years, about 10 companies presented products and ideas to no more than 30 investors at the end of each session. The presentations at these “demo” days were folksy and unpolished. The companies were typically valued at around $3 million.
Recently, about 115 companies made pitches over two days to about 500 investors. Valuations have skyrocketed to $10 million, $20 million, or more. The hottest companies get funded very quickly.
Still, Y Combinator’s greatest legacy might be that it paved the way for many other startup incubators and accelerators. TechStars Boston and MassChallenge are doing a great job accelerating local startups. Bolt, Blade, UMass Venture Development Center, and several others are supporting the startup ecosystem.
For many years, Boston area investors have been more cautious than their West Coast counterparts. Mark Zuckerberg famously left here for Silicon Valley to find risk takers to help him build Facebook. Boston has great universities, experienced entrepreneurs, and plenty of venture capital. But we need a concerted effort from investors to step up, get involved, and put their money into local startups.
Don Dodge is a partner developer advocate for Google and an adviser to Google Ventures. Don is also an angel investor in over 30 technology startups, several of them from Y Combinator and TechStars.