October 4th, 2010
Portland Seed Fund: Y Combinator, it’s not. (Unconstitutional, it may be.)
There comes a time—not often mind you—but there comes a time when even I—admittedly often naively optimistic in my cheerleading of the Portland startup scene—have to admit that something just isn’t right. This is one of those times.
Over the weekend, Mike Rogoway at The Oregonian published an overview piece on the new Portland Seed Fund, a project designed to help provide funding for bootstrapping startups to get their legs under them. It’s not Mike’s piece with which I have trouble. I was happy to see it. That with which I have trouble is the Portland Seed Fund comparing its program to Y Combinator, an incubator and mentoring program for tech startups.
What it is
The Portland Seed Fund, as near as I can tell, is—you guessed it—a fund. It’s run by Angela Jackson and Jim Huston of Bridge City Ventures (no Web site found) who were selected to manage the fund by a team led by Brent Bullock of Perkins Coie and Diane Fraiman of Voyager Capital. Angela and Jim are seasoned investors, with a wealth of experience assessing startups and allocating funds.
No problem there. (Well, no problem except that Jack Bogdanski mentions that the idea might be unconstitutional in Oregon—and has a good discussion going about it.)
None of that stuck in my craw.
The Portland Development Commission (PDC) allocated funds for a seed fund based on direction from the City of Portland’s Mayor’s Office. And they hired people to manage it. That makes sense. The scope of the fund manager’s responsibilities also makes sense.
The Fund Manager will manage the Fund and will have ultimate legal authority with respect to investment decisions, including decisions such as terms and conditions of investments, selection and oversight of portfolio companies and the timing of and terms of sales of or realization of gains or losses on investments.
To participate, companies pay $250 to apply. For the chance to get $25,000 or more with which to work. And they’re held up to scrutiny every 90 days to figure out if they get to keep going or if they get cut off.
So yeah. None of that seemed out of the ordinary. It seemed very much like funding models that have existed in the past. Just in smaller portions.
No, you see, what stuck in my craw was this.
Bridge City loosely based its format on a well-known Silicon Valley startup fund, Y Combinator, which has spawned a string of tech seedlings by putting small amounts into a broad swath of companies.
In the Y Combinator model, Jackson said, successful businesses adapt quickly and demonstrate that their ideas — and management — can deliver results under pressure.
I think they may be using the term “loosely” loosely.
What it isn’t
For those of you unfamiliar with Y Combinator and what it does.
Y Combinator runs two three-month funding cycles a year, one from January through March and one from June through August. We ask the founders of each startup we fund to move to the Bay Area for the duration of their cycle, during which we work intensively with them to get the company into the best shape possible. Each cycle culminates in an event called Demo Day, at which the startups present to an audience that now includes most of the world’s top startup investors.
They provide distinct mentoring opportunities for the startups.
During each cycle we host a dinner once a week at Y Combinator and invite some eminent person from the startup world to speak. It’s a bit misleading to call these events “dinners” though, because they last half a day.
Half of YC is events in which all the startups participate. The other half happens in individual conversations with us. There are three of us who advise startups full-time: Harj Taggar, Jessica Livingston, and me. Two other YC partners, Robert Morris (also a professor at MIT) and Trevor Blackwell (also the founder of Anybots), advise startups on technical matters. We also have a lawyer on retainer, Jon Levy, who gives all the startups legal advice and does their basic legal work for free.
In addition, they pair the startups with Angel investors midway through.
About halfway through each cycle we hold an event called Angel Day, at which each startup is paired with 2 angel investors, who will meet with them regularly in the weeks leading up to Demo Day. The setup is just like Demo Day, except the presentations are much briefer and more informal, and the audience consists of only the Valley’s top angel investors. After the presentations, the angels list the startups they’d prefer to be paired with, and we try to do an optimal match.
In return for this early look at the startups, the angels agree to talk to their startups on the phone or in person once a week between then and Demo Day, and let the founders practice pitching them. The goal is to give the startups experience with the sorts of questions real investors ask, so by Demo Day they can either fix any problem that frightens investors, or at least pre-emptively address it in their presentations.
And finally, they have Demo Day, where they get to pitch investors on their ideas.
Demo Day has become a big deal. From the first one, which had 15 investors, it has grown into an event that spreads over 4 presentations on 3 days to a total audience of about 400. The important thing is not the audience size, however, but who those 400 people are. I doubt there’s another occasion when such a large percentage of the top startup investors are all in one place.
After the presentations on Demo Day, we fold up all the chairs and for the next couple hours the room becomes a reception where founders and investors mingle and talk further. Investors don’t literally write checks on Demo Day. The goal is not to convince investors on the spot, but just for startups to introduce themselves. Occasionally investors will say “I’m in” at Demo Day, but most of the convincing happens in subsequent meetings.
But perhaps, most importantly for this discussion, the focus of Y Combinator? It’s not money.
Half (maybe more) of the startups we fund don’t need the money. And in fact the money is a only a small part of what YC does. The money we invest works more like financial aid in college: it ensures that the people who do need money can cover their living expenses while YC is happening.
Y Combinator isn’t about seed funding. It’s about the mentorship. And the collaboration. And the introductions to those purse strings of angles and maybe, just maybe, some folks on Sand Hill Road.
Portland Seed Fund is no Y Combinator
So Portland Seed Fund? It’s no Y Combinator.
True. They are both involved with helping startups. But that’s like saying a cow is like an onion because they both wound up in my burger. Or that whole breakfast analogy. You know, the chicken is involved, but the pig is committed? Well and the potato is just damn tasty.
So as near as I can tell, the Portland Seed Fund…
- … is not designed to be a source of mentorship [See Mike Rogoway's comment below]
- … is not going to manage its portfolio of companies as a group of colleagues
- … is not planning to hold events for its portfolio companies
- … is not run by serial entrepreneurs
- … is not relegated to tech companies (although the minimal amount of capital allocated may make it difficult for traditional companies to participate)
- … is not focused on preparing and introducing portfolio companies to investors
Which isn’t bad. In fact, it’s interesting and good and a step forward.
The Portland Seed Fund is a fund that provides small amounts of startup capital to worthy companies. And they reassess those companies every 90 days based on their performance.
That makes sense.
But it’s not even loosely based on Y Combinator. Not by a long shot. And I sincerely hope they reconsider positioning it as such.
Then again, if the City were interested in forming something like Y Combinator in conjunction with this effort…
(Image courtesy FotoosVanRobin. Used under Creative Commons.)