Silicon Valley might should just start an altogether new Y Combinator. The existing Y Combinator is a privately-owned venture capital firm free to conduct business in its own way. Y Combinator also exclusively reserves the right to choose the companies it funds. And yet, there’s two recurring controversies about Y Combinator: perceived prejudice and too much influence.
Paul Graham recently made the following comment in an interview with Inc.: “One quality that’s a really bad indication is a CEO with a strong foreign accent. I’m not sure why. It could be that there are a bunch of subtle things entrepreneurs have to communicate and can’t if you have a strong accent. Or, it could be that anyone with half a brain would realize you’re going to be more successful if you speak idiomatic English, so they must just be clueless if they haven’t gotten rid of their strong accent.” Paul Graham made an eerily similar comment a few months ago in The New York Times: “You have to go far down the list to find a C.E.O. with a strong foreign accent.” Those comments have sparked critical responses from investors like Mark Suster (“Bring Me Your Accents“) and popular bloggers like GigaOM founder Om Malik (“Patterns & fallacies: Why they have no place in my Silicon Valley“). Paul Graham himself finally wrote an essay devoted to founders’ accents.
Prejudice at Y Combinator has been discussed prior to the accent issue. In 2011, there was a CNN report about diversity in Silicon Valley. At the time, I made my own comments about Y Combinator’s lack of diversity. My observation was the Y Combinator application process itself excluded potential candidates that don’t resemble pre-conceived notions of how a founder should look. I specifically expressed concern over the requirement of a founder introduction video be submitted with Y Combinator applications. On Bloomberg TV, Emily Chang asked Paul Graham about diversity at Y Combinator in a video interview. She suggested “gender blind, race blind application process… that might lead to a different outcome.” Mr. Graham responded “The applicant pool has the same problem that we see in our output.” He elaborated the problem may be more “upstream” in that there exists an overall lack of diversity in people that begin using computers at an early age.
Influence Over Portfolio Companies
Influence over its portfolio companies is also sometimes an issue with Y Combinator. For example, the leaked email by Paul Graham urging founders to avoid the “lowball offers” at Google Ventures. VentureBeat then accused Y Combinator of being the real VC that lowballs founders. From Google Ventures, Kevin Rose got on the defensive. And Unpaid Blogger Michael Arrington had his own perspective on the matter.
Y Combinator is a venture capital company rightfully entitled to seek the greatest possible return on its investments. The Y Combinator process largely involves taking unknown founders, advising them over the course of three months, and then presenting them to potential later stage investors. Through this process, it seems reasonable to conclude that many of the founders feel they owe a psychological debt to Y Combinator. Later stage investors are then unable to effectively advise the startups in any way that might conflict with advice from Y Combinator. My personal opinion is that an inability to advise startups after Y Combinator was a contributing factor to the abrupt termination of the $150,000 Start Fund.
I’ll repeat what I said at the beginning: The existing Y Combinator is a privately-owned venture capital firm free to conduct business in its own way. Y Combinator also exclusively reserves the right to choose the companies it funds. Criticism about perceived prejudice and too much influence may be justified. However, Y Combinator doesn’t have any greater obligation to Silicon Valley, society, mankind, or anybody else.
There’s room for more than one seed-money venture capital firm in Silicon Valley. 500Startups is similar to Y Combinator, albeit with a different application process. If you don’t like Y Combinator getting first-choice at early-stage investments, then start a competitor. The result would be more efficient fundraising: more competition by investors and better terms for founders.
The existing Y Combinator was largely funded by Sequoia Capital in 2009 with $2 million dollars and then another $8 million dollars. Y Combinator is now apparently self-funded, proving this “new model of startup funding” does indeed work. So if you don’t like the way they do things, then start your own damn Y Combinator.