How Y Combinator Is Remaking Silicon Valley in Its Image

Y Combinator put on a tour de force Thursday. After five impressive years’ worth of molding fresh batches of startups, it packed 150-odd people with money into a room and schooled them in the art of giving its companies funding. The incubator’s second Angelconf, held at its headquarters in Mountain View, Calif. today, hosted people with an interest in breaking into the frothy angel investing space — a mix of people from recently successful tech startups as well as those from outside the industry.

Y Combinator founder Paul Graham

In the Y Combinator world, as formulated by co-founder Paul Graham, the young, visionary, technical startup founder is king. And after YC graduates’ oversubscribed funding rounds, promising products, and increasingly frequent acquisitions by Google and Facebook, Silicon Valley seems eager to remake itself in Y Combinator’s image.

Archangel Ron Conway, who said he’s put money into 500 companies over the last 12 years, kicked off the day with an optimistic and generous recruiting speech: He said he believes every “entrepreneur who has the guts to start a company” should get funding, and added “I believe the more angels we have in Silicon Valley the better.”

Conway, along with well-known angels such as Ariel Poler, Mitch Kapor and Naval Ravikant, spoke of the joy of enabling smart and passionate founders to build great things. “You listen to those people tell you what it’s going to be like in the future,” said Conway, speaking of early meetings with the founders of Google, Facebook and Twitter. “I’m completely addicted to it.”

Be All You Can Be

The angels’ testimonials depicted a world of investing that anyone could break into with the right mix of smarts, humility and luck. Five years ago, “I was a washed up enterprise software guy from Austin, Texas,” said Mike Maples of Floodgate, now one of the most active and influential “superangels.” After he moved to Silicon Valley and spent 90 days sharing meals with the smartest people he could get meetings with, Maples landed his first investment in Odeo, the company that eventually gave birth to Twitter. And it all flowed from there.

Even Greg McAdoo, of the legendary VC firm Sequoia Capital (which is closely affiliated with Y Combinator) fluffed the egos of would-be angels, saying two-thirds of his firm’s early stage investments include angels. He encouraged angel investors to contact him, take him out for coffee, and talk about the industry or potential deals early on in the process. (While McAdoo said he would pick up the tab for this hypothetical coffee date, he wasn’t quite so generous as to give out his email address, instead inviting those present to get introduced to him by a Sequoia portfolio company founder.)

Engineering a New Kind of Funding

Graham took the session in a practical direction, proposing that the seed funding deal of the future would take on a new structure to better suit startup founders. “The way of the future,” Graham said of funding rounds, “is no fixed amount, no fixed closing date, and no lead.” He said the best Y Combinator companies are already taking funding on a rolling basis, because it requires less reliance on a lead investor, takes less time out of product development, and gives investors less room to drag things along or collude.

“The meta-trend is founders are going to be more powerful than investors,” said Graham. “If you want to know what the future of investing is going to be like, think what would the founders want it to be like.”

Startup lawyer John Bautista, a partner at Orrick who works on many Y Combinator deals, attested that he’s already seeing many startups closing rolling funding rounds, and that these convertible debt deals are structured favorably to angels, giving them the right to earn a return on their shares if the company is sold or update their terms if more money is raised later.

Are Talent Acquisitions Evil?

Thankfully, Y Combinator is not a cult, and it brought in Michael Arrington of TechCrunch as a counterpoint early in its program to rant about “dipsh*t” Y Combinator companies that sell out early, denying the world and investors the chance to be true game-changers. For good measure, he called out superangels for being complacent with their small successes and making companies like Facebook stronger through talent acquisitions.

But Arrington left shortly after his talk, giving 10 more angel investing believers such as Maples and Aydin Senkut the chance to convert the wannabe angels gathered. Paul Buchheit, the creator of Gmail who himself was brought to Facebook with its talent acquisition of his company FriendFeed, said in response to Arrington’s critique, “Talent acquisitions are very controversial, but all of [the ones I’ve invested in] got a 2, 3 4 or even 5x return. I can live with that.” Besides, acquisitions of young companies tend to be better for everyone involved, as compared to later-stage deals, said Geoff Ralston, who recently sold Lala to Apple. Integrations of billion-dollar companies almost never work, he said.

Loopt CEO Sam Altman, speaking on behalf of his Y Combinator peers, got the last word. He warned the angels-in-training: “It’s important that you pick the winners, but it’s absolutely necessary that the winners pick you.”