My friend, Jonathan Aberman, investor and Startup Virginia leader, has an interesting piece in response to Y Combinator’s current experiment with accepting teams that do not have beta products or services or even an idea. Clearly Y Combinator is bowing to the reality of new venture iterations or pivots. From Aberman:
By taking away from the equation the coupling of a business model from acceptance to accelerator program, Y Combinator is taking away one of the pillars that seed stage investors use to evaluate an entrepreneurial team. If an acceleration program is financed by investors capital (and not government or not for profit capital) then it is properly described as a seed stage investment model. The risk of failure must be compensated for appropriately for investors to want to fund the program.
Y Combinator’s proposed change turns the business model of acceleration further away from an investment model, and much more into what I would call an “R&D model.” Research and development is an essential function in ideation – there are few things as powerful as allowing bright people the luxury of “thinking things up.” However, financing smart people to think things up is not really consistent with the mechanics of investment – investment requires a matching of opportunity with risk, which allows investors to rationally evaluate it against all other investments. This change turns acceleration into much more of a black box and much less clear as a seed investment.
As my friends who are starting accelerators know, in order for the model to work you need investors to provide the capital for the acceleration program. It is a model that requires the existence of a fund, both to provide financial fees to the accelerator promoters as well as to provide capital to the startups. Turning an accelerator program in to a broad R&D effort may make it harder for acceleration programs other than Y Combinator to raise capital. Or, for these programs to maintain an open source approach that doesn’t require harsh investment terms and stratify entrepreneurs under differing criteria.
Jonathan points out the change in model and the uniqueness of Y Combinator’s new approach — based on size, reach and location.
Read more about Jonathan, Startup VA, and the DC metro as an entrepreneurial goldmine.