From TechCrunch to Bloomberg News to The Wall Street Journal, the business world is consumed these days with trumpeting the arrival of each new startup launched from a business accelerator.
Never mind that most of those startups have yet to earn a dollar. Or that they’re usually run by founders barely old enough to order a beer. Or that those young hotshots rarely know just what it is they will be selling three months down the line. Simply by entering the hallowed gates of a Y Combinator or a Dreamit Ventures, the companies they create are showered with attention, greeted like the Googles of tomorrow.
To understand what makes these enterprises worthy of such fuss, consider the story of Eli Portnoy. On Jan. 7, 2011, at age 29, he quit his job as a senior product manager at Amazon to join the winter startup class in TechStars’ Colorado program. Twenty-two months later, he sold the company he had ushered into life, a mobile ad service named ThinkNear, to the GPS navigation firm Telenav—for $22.5 million.
And believe it or not, that’s chump change compared to the value placed on Dropbox ($4 billion) and Airbnb ($2.5 billion), which both sprang from Y Combinator, but it clearly illustrates the mythmaking power of the accelerator process. In the end, Portnoy and co-founder John Hinnegan earned $1 million for each month they spent building the business.
At a glance, their path to success looks so simple, like boarding a private jet to a weekend retreat on Fiji, but it’s not. Portnoy once compared the experience to riding a roller coaster, “except there are no seat belts—and a lot of people do end up falling off.” It’s not by any means for the faint of heart. Think of it more like a warp-speed master’s degree. First, you have to successfully navigate a rigorous application process. Then you have to uproot your life, often moving halfway across the country to submit yourself to intense peer pressure and demanding mentorship. And then you have 13 weeks to build a business, test it, tweak it, test it again and squeeze everything you learn into a dazzling, seven-minute sales pitch. If all goes well, you emerge on Demo Day with a million dollars in venture capital.
If that sounds like a real-life version of Survivor
It was Paul Graham of Y Combinator who came up with this devilish exercise back in 2005, a few years after he had sold his own startup, a software company that helped retailers peddle their wares online, to Yahoo for $49 million. At the time he was writing essays about business and technology. He agreed to speak to a class at Harvard about the challenges of fundraising. Midway through the speech he realized the students were looking at him not as the distinguished alum he was, but rather as an angel investor. Long story short, Graham rounded up 227 business proposals and selected the eight most worthy of $6,000 to $12,000 in seed money. The catch: The founders had to agree to work together in Cambridge—under his watchful eye.
In the eight years since, Y Combinator has shifted its base of operations to the heart of Silicon Valley and birthed Dropbox, Airbnb and Reddit, as well as the app development platform Heroku and the DIY website creation service Weebly. Today you can find copycat programs in Austin, Texas; Bloomington, Ind.; and Norfolk, Va. Overseas options include Israel, France and Cameroon. TechStars alone has operated offices in Boulder, Colo.; Boston; Seattle; New York; and London. And so it’s not uncommon to find scores of would-be entrepreneurs dashing through the world’s airports or traveling the nation’s highways, U-Haul trailers in tow.
When Weebly CEO David Rusenko got accepted into Y Combinator in 2007, he dropped out of school, packed up the servers on which the company’s early prototypes were stored, and set off by car on the 2,700-mile drive from State College, Pa., to San Francisco. The only thing that slowed him down was a midwinter whiteout in Wyoming.
To join TechStars’ 2011 class in Colorado, Ben Uretsky of the cloud hosting service DigitalOcean left his wife of nine months behind in New York City and moved into a three-bedroom ranch-style house with four men. He slept each night in a bunk bed, above the company’s chief systems architect. “People make tremendous sacrifices,” he says. “They treat it as a once-in-a-lifetime opportunity.”
ThinkNear’s Portnoy trekked to New York from Seattle and faithfully reported to work each day in TechStars’ bright white office, above a yoga studio in Cooper Square. The space once belonged to Foursquare. The elevators smelled of sweat. A digital clock hanging on the wall ticked off the hours and minutes to Demo Day. A sign above the door read: It’s about doing. Do more faster. The aura was not unlike that of an NFL training camp. “There’s massive competition,” he says. “Everyone knows who the smartest guys are and the hardest-working guys. If you care deeply about what you’re doing—and I think everyone there does—you want to show that you’re doing all you can.”
More than 600 applicants had vied for spots in that office. Half of them received in-person interviews. Only 11 startups made the final cut.
These days, it’s even harder to crack the lineup—especially at Y Combinator and TechStars, the two clear frontrunners in the field. In the last two years, accelerator applications have nearly doubled worldwide, according to The Wall Street Journal. TechStars’ latest New York class was assembled from a pool of more than 1,700 candidates—all because of the program’s reported success. Founder David Cohen makes a point of posting the figures: the number of companies that have passed through TechStars; the amount of funding raised by each; the number of startups that have failed. For TechStars’ rivals, the track record is much less clear. Beyond Y Combinator, there’s not much data to evaluate. “Most accelerators have never gotten a single company funded,” Cohen says.
And yet it’s hard to dismiss the rave reviews, to discount the possibility that maybe, just maybe, you might be the next Dropbox or Airbnb. Rusenko describes his time at Y Combinator as a transformative experience. “Plenty of people I know don’t even need the capital,” he says. “They do it just to be able to participate in the program.” Portnoy is just as emphatic about his stretch at TechStars. “Within three months of starting the business, we were able to raise $1.6 million,” he says. “I don’t think we would have been able to do that had we not been part of an accelerator.”
"We’re not looking for people who did what they were told in life.”
Those are Paul Graham’s words, plucked from an essay he wrote on PaulGraham.com on the attributes of an ideal Y Combinator candidate. “Though the most successful founders are usually good people,” he explains, “they tend to have a piratical gleam in their eye.” This so-called “naughtiness” is one of the five qualities he hopes to find in each applicant. The others are determination, flexibility, imagination and a tight bond with fellow team members. “Startups do to the relationship between the founders what a dog does to a sock,” he writes. “If it can be pulled apart, it will be.”
As Graham points out, history tends to favor companies with more than one founder: Bill Gates and Paul Allen, Steve Jobs and Steve Wozniak, Larry Page and Sergey Brin. The rigors of startup life seem to demand two to three bodies to shoulder the workload. Youthful vigor helps, too. In Graham’s view, the perfect founder is 25 years old—seasoned enough to have a clear sense of priorities, but free of the entanglements of spouses, children and mortgage payments. The goal is to fully commit to the task at hand.
Graham’s writings are filled with carefully considered snippets of advice. How to get startup ideas, the anatomy of determination, a fundraising survival guide. His peers are far less vocal. Many, however, tend to agree that a quality founder trumps a quality idea nearly every time in the selection process. “TechStars looks for six things when funding companies,” Cohen says. “Team, team, team, market, progress, idea—in that order.” His accelerator has been known to back strong teams with weak ideas. Graham’s has, too.
Upon acceptance into the TechStars program, founders receive $18,000 in seed funding and a $100,000 convertible note for a 6 percent stake in the company. Y Combinator offers $14,000 to $20,000 and an $80,000 convertible note in return for 2 to 10 percent in equity. The money is not meant to raise founders’ fortunes. It’s there to cover living expenses. To put cheap food on the table, which makes a startup “ramen profitable,” in Graham-speak.
Indeed, once they cross the threshold of an accelerator, founders are quickly exposed to the realities of entrepreneurial life. “Accelerator does not mean super awesome maker,” one participant wrote on DigitalOcean’s blog. “It means it is going to accelerate everything—your strengths, your weaknesses, your flaws, those little things you try to hide away in a dark closet—everything!”
The first month is a sea of feedback, meeting after meeting with mentors. If there’s a hole in your logic, somewhere along the way one of them is going to spot it. “You’re constantly stress-testing the hypotheses you made about the problem you’re trying to solve,” Portnoy says. Within days of arriving in New York, he and John Hinnegan were informed that their original idea for ThinkNear was “asinine, childish and stupid.” They decided to pivot.
What began with an online dashboard that allowed small-business owners to make their own mobile ad buys turned into an automated solution that determined when business was slow—using variables such as traffic, weather and nearby sporting events—and started sending customers to the door via special offers. Soon after graduation the duo pivoted once more, creating a simple way for businesses to target their ads to people within 100 meters of a given location. This eventually led to deals with BlackBerry, eBay, GNC, Reebok and Exxon Mobil. The sudden volume put ThinkNear’s network to the test.
The TechStars experience taught the team to be flexible, to move quickly when change was required. The challenge was to pinpoint the useful advice, especially in the early days of the program. “You’re going from meeting to meeting to meeting and everyone’s got feedback, but not all of the feedback is constructive or good,” Portnoy says. Rusenko agrees. “Not all advice is made equal,” he says. “It’s really critical that you judge the caliber and the reputation of the people giving it.” At TechStars, founders refer to the disorientation that accompanies this flood of input as “mentor whiplash.” In contrast, a meeting with the right tutor, someone who truly understands the challenges confronting your business, can bring startling clarity and save you months of indecision. For DigitalCloud’s founders, who invented a platform that creates online cloud servers in under a minute, that man was Jason Seats, co-founder of the network hosting service Slicehost. The team also met with an operations expert who was instrumental in building Amazon’s cloud network.
A good accelerator will guide you through the more routine challenges, as well. How to recruit top-notch talent, resolve team squabbles, distribute equity effectively. TechStars even provides recommended reading: the book Do More Faster
The next windfall in the accelerator process is a quick infusion of street cred, very useful when you roll up your sleeves and get down to work on business development. Ties to a Y Combinator or a TechStars will bring potential partners and customers quickly to the phone. The big fish, not the minnows. The media reach out to you. And the hotshots in your class and in the alumni network become evangelists for your product, often providing early outlets for sales.
The biggest benefit by far, however, arrives in the program’s final month, when everyone’s racing to court investors. In a remarkable twist of fate, TechStars’ founders don’t have to beg venture capitalists for meetings. The VCs come to them for meetings. “At the end of the day, fundraising is a game of numbers,” says Portnoy. “You have to pitch and pitch and pitch until you find the instance where everything aligns. So getting to pitch a lot of people in a very short period of time is very helpful.” In the real world, you might line up one meeting every few weeks. At a TechStars or a Y Combinator, you get to huddle with five or six inquisitive VCs a day. You can literally schedule them back to back to back. And that’s just a prelude to Demo Day, when they arrive en masse, snatching up seats in the audience.
Business accelerators have various drawbacks, too. For starters, the top programs are not open to everyone.
The TechStars website specifically states that restaurants, consultancies and local service-oriented companies need not apply. The truth is if you’re not looking to conquer the world with disruptive technology, odds are good you’re not going to find a welcome mat at the front door.
The classes are overwhelmingly male, too. Y Combinator’s Paul Graham attributes this to a dearth of applications from female founders, suggesting that boys are more likely than girls to embrace the idea of “hacking” as children. The accelerator doesn’t have precise numbers—the application form does not ask for gender—but, two years ago, Y Combinator estimated that only 4 percent of alumni were women. That’s less than a handful in any given class. To be fair, though, the whole tech world seems to be wrestling with this issue, wondering what it will take to expand the pool of qualified coders.
The sudden explosion of rival programs has stripped some of the luster from accelerators as well. These days there are programs for women, minorities and veterans; programs for cloud-based services and medical, green tech and education startups. Colleges and universities have entered the arena. Government, too. There’s even a program in California’s San Quentin State Prison. Just last year Graham conceded that Y Combinator itself had grown too fast, moving to reduce the head count in each class from a record high of 84 companies to fewer than 50.
The greater ill for applicants, however, may be the programs’ breakneck pace, which often leads to a skewed view of the world. Three months is hardly enough time to come up with a fully formed product. “You end up publishing something that’s not ready,” says Portnoy, who now oversees Telenav’s mobile advertising division. “That can be dangerous when you go fundraising.” Others talk of the pressure to change course. “We tried to pivot three or four times like everyone else,” Uretsky says, “only to realize that the smartest thing to do was just refine the message.”
In the end, all sorts of things can go wrong when you’re racing to meet the Demo Day deadline. “It’s your make or break moment,” Rusenko says. “You just won’t have another opportunity like it again.” In June 2012, Robert Gaal, the 27-year-old CEO of Wi-Fi hotspot provider Karma, took the stage and boasted about his company’s partnerships with American Airlines and the car sharing service Uber. By midafternoon Uber CEO Travis Kalanick had challenged that claim, calling Gaal out on Twitter and accusing him of lying to secure funding. As Gaal later wrote in a blog post, “We jumped the gun and that was a big mistake.” Turns out the American Airlines deal wasn’t locked in yet, either.
“A lot of the metrics come down to how much funding you got,” says Portnoy. “And that creates all sorts of unnatural incentives.” Indeed, the press reports following Demo Day are rife with approving nods toward plump venture capital figures. Who received $1 million? Who earned more? For many fledgling companies, argues Portnoy, a more modest round of angel investment might be wiser, maybe even a year or two of continued bootstrapping.
And when you get right down to it, not all of the media attention is valuable. The made-to-order drama of the accelerator process invites tabloid headlines. Bloomberg TV recorded much of the behind-the-scenes action in TechStars’ 2011 class, and Melanie Moore, the founder of the online fashion retail site ToVieFor, paid a steep price for granting that access. She has accused the producers of editing the footage in a way that altered the company’s timeline. “They literally fabricated events,” she says. “They played up the problems and made them seem worse than they were. It was pretty unfair.”
At the end of the day, it’s no small challenge to pick up your budding business and move across the country, cutting yourself off from the support of family and friends. When he wrapped up his Demo Day presentation, Uretsky couldn’t wait to go home. “Ben was sprinting to the airport. ‘Get me back to New York!’ ” says DigitalOcean Chief Marketing Officer Mitch Wainer, with a hearty laugh.
You won’t find many alums who trash the experience, though. When all is said and done, Uretsky is a fan. Portnoy, too. Like retired athletes, they fondly remember the heady rush of their days in the program, the friendships they forged, and the thrills of working in an arena filled with the giants of modern business. Even the much-maligned Moore feels that way. Despite the unflattering portrait on Bloomberg TV, she views her decision to enter TechStars as one of the best in her life. When asked by a supporter for an appraisal of the program, she wrote via her blog: “I would emphatically and unreservedly suggest that you do TechStars if given the opportunity.”
