To YC or to VC? That is my question…

I’m a repeat founder and YCombinator groupie. I’m the wrong age group to apply to YCombinator, but I’ve still learned a lot from the incubator from afar — like, the virtues of micro-loans and “entre-sumers.” This is my story.

More than a decade ago, for my first startup, I was fortunate to have found a successful but semi-retired former VC as a Board member and a mentor. As I learned more about his background, I discovered that my low-key friend was actually quite famous and had made seed investments in Sun Microsystems and a few other pioneer semiconductor and networking companies in the late-70’s to late-80’s.

One day I asked him how he managed to find these choice companies, almost all of which had become the pillars of Silicon Valley. He smiled and said, “We were lucky”.

I believed him. Many successful entrepreneurs and investors were successful because they were at the right place at the right time. It helps too that when the right opportunity presented itself, they also had the right skills, right experience, right circle of acquaintances and the right financial resources.

So I constantly ask myself, “What made him so lucky in the past?”

And more importantly, “Would I ever be so lucky in the future?”

I was 15 years old when I immigrated to San Francisco. Back in those days (early 70’s), the dominant retail outlet was Sears Roebuck, which sat high on the hill on Masonic and Geary. I remembered every Wednesday, Sears would take out a full-center-page ad on the Chronicle, advertising all the items that would go on sales the coming Sunday.

And that was how people consumed. If my dad needed a new circular saw, he would wait for the Sunday sales. And if he had bought the tool a week earlier at regular price or if he had missed the sales by one day, that was just too bad. And if he had brought it home and didn’t like it, that was also too bad (unless it was defective which never happened since everything were over-designed and were made in America).

Today, the same store is occupied by an Office Depot and a Best Buy, both struggle to compete with Costco (which is only two miles away and has more parking). Today, if I need anything, I would search online, read all the reviews, and check to see if they are available from Costco. If they are not, then I check Best Buy, and so on.

The point is that I can buy anything anywhere at any time. If the item goes on sale the next week, I can bring the receipt back to the store and be refunded the difference. If I don’t like the item after using it, I can get my money back with no question asked. If I throw away the original packing material, it is not a problem. If I have lost the receipt, it is also not a problem. They would gladly look up my membership number and would know immediately when and where I had bought the item.

The point is that this dramatic change of consumer pattern over the last thirty-five years was completely enabled by technology. As an investor, my VC friend was lucky because he was presented with ample opportunities to invest in an unlimited number of innovative companies, each of which was to invent one particular building block for the emerging infrastructure. All he had to do was to trust his instinct in picking the right team and mitigate his risk by spreading the investment around.

So that was his luck. Where is mine?

I believe the trend hasn’t stop. The trend continues and is in fact accelerating. But instead of making the distribution channel more efficient for hard goods and making it easier for the consumers to spend discretionary money, we are now making the distribution channel more efficient for information and entertainment.

When I first came to United States, we didn’t have cable, we didn’t have satellite, we didn’t even have VCR or DVD (although we had a one-button remote). Instead we had a choice between VHF and UHF. For all practical purpose, we had only three TV channels. Ironically, this was called broadcasting even though the channels through which information was distributed were indeed very narrow.

But the idea was that since the distribution channels for information were so few and so limited, they had to “cast” the information to a broad base of audience in order to make money. So there were no customization and no targeting. Information and entertainment were created for the consumption of a mass audience and no one had any choice but to cater to the least common denominator.

Today we have the opposite; we have narrowcasting. With always-on Internet, search engines, peer reviewed aggregation portals and social medium sites of all variety, we have lots of channels (ironically “a series of tubes”). And it is possible for each of us to “cast” specific information to a very narrow niche of consumers and still make money.

So now the burden is not in gaining physical access into the channels, but rather in delivering information and entertainment that is both relevant and authentic to our target audience. Otherwise consumers would do the equivalent of channel “flipping” (with another one-button remote called the mouse), except now the choice is not between three channels, but perhaps between three million channels.

Last Friday, I wrote an article giving advice to the summer class of aspiring YC’ers. This week, the YC selections have been made and obviously lots of good candidates were selected and lots more were not.

So the question is what do you do next? If you were selected, what you do next is obvious and has already been prescribed by PG (or is it O.G.?). But if you didn’t get selected, then my guess is that most of you would continue anyway and chances are that you would be successful in spite of this minor setback.

Having had my shares of rejections as a struggling entrepreneur, I believe most of you would be wondering right now what you might have missed since you weren’t given a chance to be a member of the YC community.

So let’s have a discussion on what YC is. Because if you don’t know what YC is, then you wouldn’t know what you are missing. And if you don’t know what you are missing, then you wouldn’t know where else to look for the same support and benefits.

Interestingly, there has been lots of discussion among the YC’er on what YC is and whether or not it can be emulated, replicated, or extended into a different context.

YC is micro-loan program. Now don’t get me wrong. Everyone agrees that YC is not a VC and the value that it provides goes way beyond money (which by the way is very small amount of money if not a micro amount of money).

The point of this article is not to get into yet another argument about YC versus micro-loan. Although for your entertainment, I would submit the following, which is the mission statement of the Microloan Foundation:

“We provide … basic business training and continuing guidance … enables them to develop self-sustainable livelihoods …”

So in some respects, YC is a combination of a peer-support group, a boot camp, a finishing school, a spiritual guru, a den mother, a personal trainer, a career counselor, a dating service (for future investors), a therapist and a one-use ATM card. It is a glorious concept and I wish all of us struggling entrepreneurs were provided with such an opportunity.

But not having it does not mean that you cannot succeed because having it could not have prevented failure.

And that’s not even the true genius of YC.

To understand the true genius, we need to go back to the trend.

In summary, narrowcasting is the new trend. We can now deliver specialized products and services (i.e., information and entertainment) very efficiently and very cost-effectively to a small, well-targeted population and can make lots of money doing it.

The genius of YC is to understand that superimposing on this trend is another trend, which is that we are in the midst of a great intergeneration transfer of wealth (among the middle class), a wide spread phenomenon that has never been seen in the Western world.

I am not going to make the same mistake that Hillary had made when she spoke at her daughter’s graduation which is to say something to the effect that, “you young folks have it easy”. No, not at all. I don’t believe that for a minute.

But I do believe that the younger generation have more resources and have more financial support from their parents and their grandparents than we did. And I do believe that the younger generation has more discretional spending power and at an earlier age than their predecessors. But at the same time, they are inundated with demands on their time and attention span so their need more tools and more filters, not less.

So in a nutshell, by natural selection and by design, the YC’ers are younger and are representatives of their own generation and their need is a harbinger of what’s to come in terms of evolving consumer behaviors.

Understanding these two synergistic trends, one on distribution and one on consumption, is where opportunity begins. And I believe the YC’ers are in fact “at the right place at the right time” and could reap potential financial successes far greater than those of my VC friend of the last generation.

Therefore the true genius of YC is how it empowers and how it provides a nurturing environment for the young entrepreneurs who are both top-notch technologists and the perfect “surrogate” consumer for their own invention.

In the old days, we would take a bunch of money from the VC’s, build a product, and when it is ready, launch and see “if the dogs would eat the dog food”. Today there is no need to do that.

By being both the entrepreneurs who invent the product and the customers who consume the product, this new generation of “entre-sumers” are themselves the alpha “dogs”. And if they execute properly, there would be plenty more beta dogs from their generation who would follow.

So this is in fact like the lion looking for courage or the tin man looking for a missing heart. If you have been selected by YC, they would have given you the gift that you already have. If you didn’t get selected, it is now up to you to find validation elsewhere.

But every validation along the journey is temporary, even one from YC. In the end, the only permanent validation is if the other dogs are in fact eating your dog food.

So if you didn’t get selected by YC, it is now up to you to seek the gift that you would have received which is that as an entrepreneur and a consumer, you have within your grasp the synergy of the two that would put you in the right place at the right time.

Now that the YC summer contest is over, you should take the weekend off. Enjoy it with your friends and family but by Sunday night, it is time to get back on the proverbial bike again and peddle like hell.

In summary, whatever you do, don’t get stuck in time. No one needs permission to start a startup, not even from YC. It is time to make your dream a reality. There are no more weekly sales at Sears. In fact, there is no more Sears, at least not on Masonic and Geary.

Good luck!

Denny Miu is a cofounder and former CEO of Gigamon Systems. He has extensive experience in developing technology, products and business relationships. Denny has also been a Professor, an engineer, an entrepreneur, a team leader as well as an individual contributor. His previous post for Found|READ was Calling YCombinators: Lessons from a “Serial First-Timer”