M: Business 3rd Edition by O. C. Ferrell, Geoffrey Hirt, Linda Ferrell

Exercise 37

Although thousands of companies failed during the most recent recession, Y Combinator and the companies it assists were among those thriving. Founder Paul Graham (famous in tech circles for creating Viaweb—sold to Yahoo! for $49 million) launched Y Combinator in 2005. His method is somewhat like a school for startups, and his funding somewhat like financial aid. Graham gathers entrepreneurs for threemonth periods, during which time he provides them with small loans (typically under $20,000) to meet basic needs, allowing them to focus on developing their fledgling companies. In exchange, Y Combinator receives a 2 to 10 percent company stake.

Graham offers something more valuable than a simple loan—an experienced eye, solid advice, and a positive and creative environment. Y Combinator focuses on tech startups, with an emphasis on Webbased applications. Graham’s experience allows him to help direct, or redirect, founders toward workable concepts attractive to larger investors. His business motto is “Make something people want.” Graham also addresses running businesses, handling investors, and dealing with acquisitions. Y Combinator was rated number eleven in BusinessWeek’s top angel investors.

Small businesses like those funded by Y Combinator are making some Fortune 500 companies nervous. For example, eBay, for all of its success, does not often update its auction system. This leaves room for a small startup to gain market share if it can provide a superior service. These small companies are often less expensive and more flexible, making them better equipped to do well in a recession. Although Graham takes a risk with each startup, graduates such as Scribd (which partnered with literary giants and received over $12 million in venture capital funding) and Omnisio (purchased by Google for more than $15 million) make it worthwhile. Some of the companies flourish—and when they do, Graham makes a substantial profit.

What are the rewards for Graham in taking a risk in small tech startups?

Step 1 of 2

It is not easy to take the plunge and leave a full time job for a blurred potential of a start up. However, there are exceptions that worked for YC. Investing in startup is a risky business, but if implemented accurately can be very rewarding too.