Y Combinator seeks startups in new ways

As the head of Y Combinator, one of Silicon Valley’s best known and most unusual incubators, Paul Graham practically drowns in ideas for startups.

A couple of thousand ideas a year pass through the Mountain View, Calif.-based offices of Y Combinator, and only 52 of those get small amounts of funding and a place in Y Combinator’s three-month startup camp.

Graham, who four years ago founded Y Combinator—which this year raised $2 million in funding from Sequoia Capital and undisclosed individual investors—has not done much to change the way would-be entrepreneurs pitch him ideas.

But earlier this month in a blog post (at www.ycombinator.com), Graham issued a request for startups (RFS). He asked that candidates applying for Y Combinator’s winter cycle consider creating a company that would develop an idea that either deals with the future of journalism or new paths through product space (which refers to how products are sold online).

The ideas are just sketched, not filled in. And although Graham suggests types of teams that might be good at tackling these ideas, he wants to see if entrepreneurs can figure out the rest themselves.

“I feel like the evolution of technology is mostly inevitable,” he says. “If there’s something you’re thinking of doing this year and you don’t, someone else will do it next year. So when we notice problems that someone should work on, we can’t sit on them forever.”

Investors in startups often make introductions to important people or offer guidance on business plans, but they’re not known for handing out ideas like what Graham is doing. Some early stage investors don’t have the resources to develop both ideas and companies at the same time, while others don’t like to do both.

“We believe more in organic growth,” says Dylan Rosario, who founded sfCUBE, an incubator that opened in San Francisco this month. “We want entrepreneurs to feel their ideas so they’re endeared and follow through. If you go the other route, you’re an R&D lab hiring people. It’s a different business.”

Also, the share structure for companies based on ideas that don’t come from founders can get complicated for investors who come in later, says Joyo Wijaya of Tandem Entrepreneurs, another investor in early stage companies.

“If you have an idea for a company, you want to own 80 percent and maybe the engineers would own 10 percent,” Wijaya said. “But if you’re the operating founder, what does that mean?”

Stock structures aren’t an issue for Y Combinator, Graham says, because entrepreneurs—as they go through boot camp—may completely re-do their ideas and come out with a different company than the one they started with.

He also says that all but a fraction of Y Combinator investments will continue to be in ideas that originate with entrepreneurs.

He cautions in his blog post that regardless of what he asks, “the people matter more than the idea. Plus you can’t do a good job on something unless you’re genuinely interested in it. So don’t apply with an idea described in an RFS if there’s some other idea you’d rather work on.”

Y Combinator is no stranger to launching successful startups.

The incubator, which was started in Boston, has supported several early stage startups that have since been acquired, including Anywhere.FM Inc. and Omnisio Inc., according to Thomson Reuters (publisher of PE Week).

Y Combinator has also invested in Reddit, which was sold to Condé Nast Publications, and Loopt, a startup that subsequently raised funding from Sequoia and New Enterprise Associates.

More recently, Y Combinator seeded San Francisco-based casual-game developer Heyzap, which earlier this year raised an additional seed stage round from Union Square Ventures.

Y Combinator says that it annually funds between 40 and 60 startups, and the startups rarely raise more than $20,000 each.

Graham says that offering ideas to entrepreneurs is a natural step for Y Combinator because the hardest part of any startup is developing the idea. A year ago in a blog post he hinted at 25 ideas, ranging from simplified browsing to dating to a buffer against bad customer service, that he said Y Combinator was waiting to see.

“A problem for people working on startups themselves is that they commonly have ideas for other startups, and you have to say ‘No, don’t do it,’ because distraction is fatal,” he says. “A lot of people have this problem, but not everyone is in a position to do something about it.”