Thứ Hai, 15 tháng 6, 2009

Four Lessons from Y-Combinator's Fresh Approach to Innovation

A central tenet in The Silver Lining is that the tough times today are actually a hidden boon for innovation — scarcity will drive discipline, forcing innovators to focus on critical assumptions and make quick decisions. 

One organization that is trying to live these principles is Y Combinator. For those who haven't heard about it, the company was founded in 2005 by Paul Graham, who sold a startup venture to Yahoo in 1998 for about $50 million. 

In just a few years, Y Combinator has funded 150 different software and Web services startups. Well known Web 2.0 companies Scribd, Xobni, and Loopt are Y Combinator alums, and me-too funds are springing up across the United States. Sequoia Capital invested $2 million in the business earlier this year.

Y Combinator's basic approach is to give promising ideas a small amount of seed capital (the average investment is less than $25,000), then house those startups for a short period of time. The startups get the capital, strategic input from the Y Combinator team (Graham and his wife), access to a robust network of potential investors, and the opportunity to learn from other Y Combinator–funded startups. In return Y Combinator gets a slice of the business.

In essence, Y Combinator is trying to develop a process to systematize early-stage angel investing. As Fred Wilson, a well known venture capitalist, told Inc. magazine, "Y Combinator is transformative. Paul gives these kids money, but he also gives him a methodology and a value system." 

There are four lessons that corporate innovators can draw from Y Combinator: 

You can do a lot for a little. It amazes me when corporations complain that they lack adequate financial resources for innovation. With open source software, online market research tools, and the ability to create virtual prototypes, you can do a huge amount for $10,000. A lack of financial resources is very rarely a rate limiter.
Tight windows enable "good enough" design. Most Y Combinator–funded companies are expected to release a version of their idea in less than 3 months. That tight time frame forces entrepreneurs to introduce "good enough" software packages that can then iterate in market. This approach contrasts to efforts by many companies to endlessly perfect ideas in a laboratory, only to fail the real test of being exposed to real market conditions. 
Business plans are nice, not necessary. Y Combinator doesn't obsess over whether entrepreneurs have detailed business plans. Again, the focus is getting something out in the market to drive iteration and learning. After all, if you are trying to create a market, most of the material in a business plan is assumption-based anyway.
Failure is an option. One of the benefits of the Y Combinator approach is it forces quick decision making — if the team can't produce a prototype, or the prototype bombs in market, the end comes quickly. And the low, up-front investment makes it easier to wind down ideas. Corporations that say they lack resources often have those resources tied up in the wrong projects. Saying no is not a bad thing.

One open question is whether Y Combinator has the right up-front screens to make sure it is picking the right businesses. The best process in the world can only do so much if inputs are sub par. Nonetheless, corporations seeking to improve their ability to innovate should carefully consider the merits of Y Combinator's approach.

(By Scott Anthony -

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