The startup accelerator boom...er, bubble

Accelerator programs are popping up everywhere, and Y Combinator's founder couldn't care less.

Y Combinator founder Paul Graham at Demo Day. Daniel Terdiman

MOUNTAIN VIEW, Calif. -- The pace of startups popping up seems matched only by the emergence of new "incubators," or "accelerators," whichever word you chose to describe these startup boot camps that have cropped up across the country.

And Paul Graham, the man behind the grandaddy of them all, Y Combinator, barely pays attention to them. What he is convinced of, though, is that many will die, and that they're formed for the wrong reason.

"People are doing it because it's the cool thing to do," Graham told me during a break at Y Combinator's Demo Day at the Computer History Museum here. "It's just the fashion, like what kind of clothes to wear."

The last time Graham checked, a few months back, he came across 65 incubator programs, although he dismisses both "incubator" and "accelerator" as bogus terms.

His research was hardly scientific. He took key phrases from the Y Combinator applications and plugged them into Google. Rivals quickly popped up, he said, because many have borrowed heavily from his application to create their own.

Even Graham's number might be low. David Cohen, the CEO of rival Techstars, which has accelerator programs in Seattle, New York, Boulder and Boston, says there are now more than 150 such programs, with a new one launching almost daily.

There are startup programs for every category imaginable, with one even designed specifically for women working in mobile.

The rush to create accelerator programs -- a term I prefer to incubators, which harkens back to late 1990s boom -- is happening at a time when the cost of starting a company has fallen so low that one can make a bet without a lot of money. The payoff, meantime, can be huge, so plenty of investors are looking for vehicles through which to invest in the next big thing.

David Tisch, a founder and managing director with TechStars in New York, said TechStars intentionally steered clear of Silicon Valley, which is home not just to Y Combinator but such big programs such as 500 Startups.

"There is a ton of interesting stuff outside the Valley, in hubs like NYC and Boston and Boulder," said Tisch. "The ecosystems in these cities are strong and continuing to grow...to overlook these cities seems silly."

That's certainly true. Great startups are emerging everywhere. But Graham says that setting up accelerators based on geography just doesn't make sense.

That's because pretty much the same group of aspiring entrepreneurs -- usually two or three-person teams -- apply to all the good programs, the same way a high school student might apply to all the best colleges, regardless of location.

"At this stage, all these companies are mobile," said Graham. "When you have just two guys and laptops, they can go anywhere."

In other words, starting a Y Combinator rival in St. Louis might sound smart to someone keen on the scene in St. Louis. But to Graham, it's pointless.

Once a startup reaches about six people, said Graham, location still makes a difference when it comes to fund-raising. The fact remains that VCs don't like to travel, he said, which is why Silicon Valley remains the premium location.

"Once VC said to me that the East Bay is too far," said Graham.

No one questions Y Combinator as the top dog in this field. Graham, who made his fortune selling Viaweb to Yahoo in 1998, started Y Combinator in 2005, investing small amounts of money and helping mentor startups.

"We just started and couldn't stop," he said. "Now we have to ride with it."

Today, Y Combinator claims such alum as Dropbox and AirBnb, and accepts about 3 percent of all the applicants it gets. It runs two programs a year, with 384 companies in this winter's class. There's no sign of a slowdown.

A spot at Y Combinator comes with smart money. Y Combinator puts in about $20,000 and three other investment groups -- Ron Conway's SV Angel, Andreessen Horowitz, and Yuri Milner -- each put in $50,000. So from the get go, a startup begins with about $170,000.

So is Y Combinator flourishing as a business?

Graham said that Y Combinator has been in the black since 2010, but that the big payoffs should come later on.

"We're rich on paper," he said. "We own chunks of AirBnb and Dropbox and many things that are so far in the future. So we'll certainly be rich or screwed."

He says that with tongue firmly in cheek. Graham and Y Combinator are doing just fine. As is TechStars and probably a handful of other accelerator programs.

"There aren't too many companies," said Graham. "But all these accelerators...a lot of them will just fail."

Corrected at 9:00 p.m.: Graham did not refer to Y Combinator's annual revenue.

 

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