Ycombinator: a new model for Web 2.0 investing

In its one year of operations, Ycombinator seems to have hit upon an interesting model for funding young Web 2.0 companies. Dispensing funds in two cycles a year, Ycombinator focusses on startups in Silicon Valley for the winter months, and the Boston area for the summer.

The amount invested is small - $5,000 per founder - which buys Ycombinator 2-10% of the Company. The real value appears to be in the extended mentoring. Investees are expected to relocate to one of the above locales for a three month period, to avail themselves of Ycombinator's advisors and to attend a Startup School whose faculty is impressive. I wish we had such an offering here in Toronto.

It's difficult to see how Ycombinator itself makes money. Certainly, the program a terrific marketing tactic for someone who wants to embrace the next generation of startups. Its website text has got to be music to every university grad with an idea: " We're the right choice for a group of two or three young hackers who have an idea, and want some money and advice to get it launched... We make funding decisions based on our application form and personal interviews. We love demos, but we never read business plans."

Y Combinator claims it will let founders sell early, too: "We think startups will increasingly opt to sell themselves when they're small for a few million, rather than take more funding and roll the dice again. Google and Yahoo both like to do this sort of acquisition, and we expect it to become increasingly common...[W]e realize (having been there) that an early offer from an acquirer can be very tempting for a group of young hackers."

For an entrepreneur, there's loads of near term value in this offering. Take advantage while it lasts, if you can.