Y-Combinator and Techstars Performance – Lessons Learned?

The first look at Techstars historical data came out last month and the results showed performance very similar to the early results posted by Y-Combinator. The quality returns would lead us to believe that a.) the guys running these shops are geniusesb.) The systems they use are superior systems for identifying quality teams and opportunities; or  c.) both… Of course its probably d.) none of the above – which isn’t a knock on these organizations – not at all.  Instead, I think its d. because of the sheer size of the opportunity that these firms are tapping.

In both cases, the survival rate  of companies that have been seeded through these programs is around 70% (survival rate meaning that the seeded firms have either seen a successful exit or continue to operate either by attracting follow-on capital from Angels or VCs or have become **gasp** self-sufficient.)

And while the notion of “survival” as a measure of success would seem a bit weak at first blush, in reality its probably a pretty good proxy in this case given the small sums invested in each company at the earliest stages – meaning any company that is still operating after a period of time will more than likely be worth enough to cover the initial investment at a minimum.  It doesn’t take a rocket surgeon to figure out that if 70% of these firm’s investments are above or near-above water, a handful of moderate wins can result in strong returns.  But enough about that… that’s not the interesting part.

What is more interesting to me is 1.5%… that’s the rough estimate for acceptance to these programs – lower than the most prestigious undergraduate schools, far lower than the best b-schools – hell lower than the Rhodes Scholarship.  For instance, Techstars claimed over 600 applicants for 10 spots last year. I suspect its even lower for Y-Combinator.

Now think about the 70% survival rate in context of the above…

How can one evaluate the impact that the people or process at these organizations have on generating successful start-ups in the face of such selectivity?  Can’t.  Not that I disagree with what these firms are doing – I think its spot on.  In my mind – what these numbers are telling me, though, is that the important thing about Techstars and Y-Combinator isn’t what they do, or how they do it, or who they are – but that they do it at all in the first place.

The genius of Techstars and Y-Combinator is that they have found a way to provide opportunity to a market of entrepreneurs (real, imagined, or would-be) that is flat-out starved for that shot.  And while that’s more interesting than the fact that these firms have had good results,  that’s still not what I found most interesting…  What I found most interesting is what these results imply regarding the opportunity out there to back these kind of start-ups.
While I am certain that the help provided to start-ups by YC and TS  has been invaluable – odds are when you are choosing from the top 2% of applicants that you could give those teams an anvil with their $20K, a pep talk, and toss them over the side of a boat and they’d probably survive provided they are instilled with the proper belief in themselves (which the mere act of accepting them and giving them $20K provides).  The next 2% of applicants would probably perform similarly well.  In fact, what I find most interesting when thinking about these results is the notion of how rich this “starved-for-a-shot” universe may be – and what that implies about how capital is allocated at the earliest stages of company development.

It would appear that on the first issue – the answer is “rich and getting richer.”  On the second – the answer “its terrible.”

If true, this represents a huge opportunity for investors, the challenge will be how to get involved – Y-Combinator has invested in roughly 145+ companies – at $20K per that is less than $3MM (not a very big asset class).

For would be entrepreneurs this truth is at the core of a serious restlessness and dissatisfaction – even outright animosity toward the state of funding for start-ups today.  And for all the opportunity that TS and YC provide entrepreneurs – they still suffer from selection bias and a lack of scale that leaves many quality would be entrepreneurs on the outside looking in…  (Imagine being the 11th team of the 600 Techstar’s applicants… even the 66th NCAA basketball team has the NIT – unfortunately there is no NIT for entrepreneurs.)

Solve this issue for the latter without destroying the opportunity for the former and we are on to something.

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