Y Combinator Says: “It Really is the Entrepreneur”

Over the years I have been asked many times which is more important to me – the idea or the entrepreneur.  My consistent answer is that ideas are largely fungible, and that what matters is execution.  Put another way, I have seen good entrepreneurs overcome lukewarm ideas, but I have never seen a great idea overcome a bad entrepreneur.  When I saw this today, I was initially not surprised:

 

 

However, as I think about this a bit more, I wonder if this is a good thing for accelerators as a whole.   Y Combinator is the leading acceleration program in the US (if not the world). It is very influential.  So if this effort is successful, you should expect that other accelerator programs around the US (and internationally) will also face pressure to adopt a similar model.  This could present a very interesting challenge to the acceleration model.

The concept that Y Combinator is proposing has an initial level of merit – since the entrepreneur matters the most.  Additionally, my own experience as an investor echoes Y Combinator’s viewpoint – every startup I have invested in modifies its business model a few times along the way.  What I think is troubling would be a path that results in a complete decoupling of entrepreneur from business model, combined with an acceleration model.

While it is true that having a baked business model is not always necessary for an experienced team to ultimately successful, the existence of a model allows investors and stakeholders to gather some very useful intelligence about how an entrepreneurial team thinks about a problem and business opportunity.  In other words – the existence of a model allows us to assess the quality of the entrepreneur’s execution skills.

By taking away from the equation the coupling of a business model from acceptance to accelerator program, Y Combinator is taking away one of the pillars that seed stage investors use to evaluate an entrepreneurial team.  If an acceleration program is financed by investors capital (and not government or not for profit capital) then it is properly described as a seed stage investment model.  The risk of failure must be compensated for appropriately for investors to want to fund the program. 

Y Combinator’s proposed change turns the business model of acceleration further away from an investment model, and much more into what I would call an “R&D model.”  Research and development is an essential function in ideation – there are few things as powerful as allowing bright people the luxury of “thinking things up.”  However, financing smart people to think things up is not really consistent with the mechanics of investment – investment requires a matching of opportunity with risk, which allows investors to rationally evaluate it against all other investments.  This change turns acceleration into much more of a black box and much less clear as a seed investment.

As my friends who are starting accelerators know, in order for the model to work you need investors to provide the capital for the acceleration program.  It is a model that requires the existence of a fund, both to provide financial fees to the accelerator promoters as well as to provide capital to the startups.   Turning an accelerator program in to a broad R&D effort may make it harder for acceleration programs other than Y Combinator to raise capital.  Or, for these programs to maintain an open source approach that doesn’t require harsh investment terms and stratify entrepreneurs under differing criteria.

Perhaps in Silicon Valley, where Y Combinator has a dominant market position as an accelerator program it can benefit from strong selection bias – it will get the best of the best.  But, for most accelerator programs it is much less straight forward to find great opportunities.  In many instances they are operating in less proven markets, or markets without the same level of integrated M&A as in the Valley.  Additionally, many of these programs operate in regions where the entrepreneurial class is less experienced.  Frankly these accelerators need more, not less, data to evaluate likelihood of success.  If Y Combinator’s change in behavior becomes widespread, other accelerators will look to mitigate risk in some way.  Otherwise, the economics of acceleration won’t work for investors.  I could see accelerator programs outside of Y Combinator adjust in three main ways:

  • Seek a larger ownership percentage of the startups they accelerate.
  • Back only experienced teams, or at least be more tolerant of a lack of business model clarity from experienced teams (which could undermine the uniform nature of accelerator programs).
  • Act more like traditional venture investors.

My overall conclusion is that what works for helping Y Combinator grow its business might be bad news for the broader acceleration movement.  Of course, that might be the point – by being more tolerant of entrepreneur risk, Y Combinator increases selection bias in its favor, and makes it harder for other  programs, particularly in less developed markets, to compete.   I don’t know if the Y Combinator team is that Machivellian, but if I was running an accelerator program I’d be keeping a close eye on them.

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