A Guide to Micro Seed Funding

 

Micro Seed Funding Emerges Through Y Combinator

Y Combinator (YC) is a company founded in 2005 that was created to take advantage of the changing dynamics in the startup world.  It was started by Paul Graham and the other cofounders of ViaWeb, a company that sold to Yahoo! for $50 million back in the late 90s. [1]  Their philosophy is that new companies, especially those in the internet space, do not need hundreds of thousands of dollars to get off the ground.  They also feel that there are a lot of young, but smart college age entrepreneurs who if given the opportunity, could succeed in Silicon Valley when provided the resources of Y Combinator.

As stated on www.ycombinator.com:

Y Combinator is a new kind of venture firm specializing in funding early stage startups. We help startups through what is for many the hardest step, from idea to company.

We invest mostly in software and web services. And because we are ourselves technology people, we prefer groups with a lot of technical depth. We care more about how smart you are than how old you are, and more about the quality of your ideas than whether you have a formal business plan.

Y Combinator funds two batches of companies per year.  The summer batch lives and works in Cambridge, MA while the winter batch is located in Silicon Valley.  As of June 2007, YC has funded 58 companies, with a rough average of 10 startups per batch.  These companies are usually founded by entrepreneurs with little to no prior experience running a startup.  Most are recent college graduates, with an average age of 25. [2]  Given this inexperience, it would be difficult for these entrepreneurs to raise money from angel or venture capital investors without first proving themselves and their product.

Y Combinator provides each startup with $5000, plus $5000 per founder.  Thus, a group of 3 people starting a company would receive $20,000.  This money is intended to cover all living and business related expense for the 3 months this company is part of the YC program.  While this doesn’t seem like much, it’s usually more than enough money and time to develop and launch a functional product.  In addition to the money, Y Combinator facilitates the incorporation process for the new company, organizes weekly dinners with a variety of influential people, provides one on one product level advice, connects the startup to media and press contacts, and arranges an event for the startups to demo their products to a wide selection of angels and venture capitalists.  For these benefits, a portion of the company’s common stock equity is provided to Y Combinator, usually around 6%.

Thus far, a number of YC companies have been successful.  Reddit.com, a startup from the original YC group, created a social news website that was acquired by Condé Nast a little over a year after launch for an undisclosed sum.  In total, Reddit raised less than $100,000 from formation to acquisition. [3]  Loopt, a mobile phone service used to locate your friends on a digital map, has raised around $17 million in Series A and Series B from Sequoia Capital and other prominent investors. [4] The service is expanding quickly and recently be came available nationwide to cell phone users on the Sprint network.  Zenter, a YC company formed in the Winter 2007 batch, was acquired by Google six months later, again for an undisclosed sum. [5] In addition to these companies, there are a number of others, such as Xobni, who are performing well and have raised follow on funding from a variety of angels and venture capitalists in the valley.


NEXT: Other Mirco Seed Funding Programs >>


NOTES:
[1] http://docs.yahoo.com/docs/pr/release184.html
[2] http://ycombinator.com/faq.html
[3] http://www.talkcrunch.com/
[4] http://mashable.com/2007/07/19/loopt/
[5] http://googleblog.blogspot.com/2007/06/more-sharing.html