October 4th, 2010

Portland Seed Fund: Y Combinator, it’s not. (Unconstitutional, it may be.)


Portland Seed Fund: Y Combinator, it’s not. (Unconstitutional, it may be.)
[HTML1]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.
Ahem. 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.)

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Background that may help (or may not)

31 Responses to “Portland Seed Fund: Y Combinator, it’s not. (Unconstitutional, it may be.)”

  1. Bob says:

    As long as things are sticking in one’s craw. . .

    Competition, fair trade, public monies being routed into the hands of private businesses who have a conflict of interest between their core business and the business of the public money? Where are the ground rules for evaluation and control?

    To boot, you go to the Seed Fund site and it says: Proposals must be submitted by 3:00pm on Friday, July 23, 2010

    Huh?

  2. Mike Rogoway says:

    Rick —

    I should have been clearer on one point. Angela and Jim do intend to provide mentoring assistance during the first 90 days. It’s surely not as comprehensive nor as intense as what Y Combinator does, but they certainly intend to try to help the companies they’re backing.

    Mike

    PS to Bob — The seed fund site is outdated. The deadline you cite is for proposal to manage the fund. Applications for funding won’t be open before next year.

  3. Ryan Williams says:

    Interesting to see two camps getting fired up about this, those that think we’re wasting public money and/or it may be illegal, and those in the startup (tech) community who think they chose the wrong marketing message to send.

    I had a angry reaction myself when reading the article on Saturday. Ok, so they’ll do some mentoring and have a demo day, but like you point out, that’s a pretty loose translation from YC to this. At the core, YC is entrepreneur friendly and seeks out the best ideas, and the Portland Seed Fund appears to be taking an adversarial approach (pay us to apply, tough love, 90 days and you’re out, etc.) that will limit its potential.

    Hopefully they’ll never mention YC again in their press/marketing outreach. That’s a first step, then we can really judge this on its merits.

  4. Well … OK … my craw is open for stuff sticking in it too. ;-) I’m not a big fan of the “bright *young* *male* hackers drop out of school for three months, work in small teams 168-hour weeks living on ramen put together a “minimal viable product” and compete for funding” model of starting a business. It doesn’t matter whether it’s Y Combinator, Silicon Valley angels, super angels, VCs, or whatever – it’s got so many strikes against it that I don’t know where to start.That nonsense may work in Silicon Valley but I don’t think it works here.

  5. Kurt Sussman says:

    Honestly, there’s just not enough there to talk about. I suspect that it will be a good thing, and if Diane Fraiman is involved I’d give good odds that it will be profitable.

    Mr. Bogdanski seems to be Portland’s own Glen Beck wannabe; let’s get the facts before we bitch, m’kay?

  6. Dan Blaker says:

    To expand on Ryan’s thoughts, the biggest difference between the Portland Seed Fund and Y Combinator is that PSF “…is not run by serial entrepreneurs”.

    It’s exceedingly rare that a person who’s good at raising money is also good at writing software or managing people. Unfortunately, the tiny seed funding that PSF distributes will only pay off with flawless execution by the founders. Will the fund managers recognize and reward execution, or will they be looking for the best pitch? And do they have the experience to truly mentor a handful of small startup founders?

    A quick perusal of the fund managers’ LinkedIn pages reveals nothing that indicates they’re qualified to mentor startup entrepreneurs. Don’t get me wrong: there’s nothing there to indicate they’re incompetent, either; but there’s a massive difference in skill-sets between a Managing Director at Intel Capital and a mentor for small startups.

    Y Combinator, on the other hand, is led by accomplished nerds and experts on startups. That personal experience in software and startups is invaluable not just when mentoring, but also when assessing a field of funding applicants.

    Perhaps it’s unrealistic to expect to find another Paul Graham in our fair city, but I’d at least like to see this led by somebody with an actual website.

  7. While I agree with the article I also want to emphasize as to how important these micro-seed / VC / Angel / whatever we want to call them programs are. $10,000 alone can go an incredible distance in getting an idea off the ground and generating revenue. I’ve been there.

  8. Rick Turoczy says:

    @Thomas, Totally agree. Totally. But let’s call a seed fund a seed fund, shall we? And not try to make it appear that it’s something it’s not.

  9. Rick, I completely agree. And as highly successful seed funds have shown, money is just part of the equation. The mentorship as well as the connection to potential investors *and* potential clients are monumental components.

    Sometimes I wonder if it isn’t the seed capital we are lacking in portland, but the oversight and mentorship for the young startups…

  10. I also don’t get the whole “tough love” concept. That’s what a business has *competitors* for! ;-) But my real problem with the whole concept is that I just don’t think the Silicon Valley model, at least the way it looks to me from the outside through the lens of Chirp, TechCrunch Disrupt and the other “hackathon” / “Demo Day” / Startup Weekend competitions I’ve seen, works for Portland. It’s sexist, ageist and gladiatorial. I much prefer the collaborative, CivicApps / Open Source Bridge / Unconference way we do things here.

  11. Pete Grillo says:

    What?
    The Portland tech community has struggled for years seeking adequate funding sources and we greet this new one by pointing out their shortcomings and asking them to re-tune their message? The tech community should be greeting this effort with open arms. Instead we accuse them of false advertising?

    And as far as comments implying ‘we don’t want to be like Silicon Valley’, I respectfully point out that perhaps the reason Portland is full of consultants with back-room projects and NOT entrepreneurs is, well, exactly this attitude.

    Unbelievable.

  12. Bill Lynch says:

    @Pete – hear hear. Well said.

  13. Ryan Williams says:

    @Pete With all due respect, publishing one vague flow chart and doing an interview is hardly enough to show it’s going to be an adequate source. Forgive me for challenging the “we’re the only game in town, so pay up for the privilege of applying” attitude that has been passed down from PAN and OAF to this. For $750 you could apply to all those. Or you could buy a couple plane tickets to the valley, or even a few train tickets to Seattle. Does that help keep the great and/or potentially great businesses around?

    But, like I said, and unfortunately I was distracted by the message, when there’s more details, let’s see then.

  14. Dan Blaker says:

    <a href="http://siliconflorist.com/2010/10/04/portland-seed-fund-y-combinator-unconstitutional/comment-page-1/#comment-18184"@Pete and @Bill: It’s called “tough love”.

    The type of investors that hype their new fund with completely inaccurate comparisons are the type of investors that waste my tax dollars on slick-talkers with shiny Powerpoint presentations. Or maybe not. We have no way of knowing, since the PSF website is “out of date” and the fund managers have no web presence to speak of.

  15. Pete, first of all, are you over 38? Paul Graham says that’s the practical upper limit for a founder’s age. Now I’m sure *exactly* the right founders with *exactly* the right idea and *exactly* everything else right whose only “problem” was that they were over 38 would be welcomed with open arms by Y Combinator. But would they waste their time competing for his attention, or would they spend their time bootstrapping their idea and their market and working with *customers* as opposed to investors?

  16. Pete Grillo says:

    Hi Ed,
    Sounds like neither you nor I will have to worry about how we spend Mr Grahams money, huh? ;)

    My experience is that you only can get so far on bootstrapping. In order to capitalize on an opportunity often a business needs capital above and beyond what it can generate itself. Otherwise the opportunity just blows on by as someone else builds a similar mousetrap, gets it funded and turns it into a business. Certainly there are exceptions to this but they are few.

    So it often comes down to this; the difference between small dreams and big dreams is the willingness and ability to raise investment capital.

  17. Amber Case says:

    I wrote a long response that I decided not to post, as it was negative, and I’m generally a positive person.

    The positive part of it was this: good post, Rick. Y Combinator is a startup fund I highly respect. Thank you for quoting it.

  18. Ricardo says:

    Nice to see some conversation going on here…

    Portland will never be Silicon Valley. The money is too small. The sense of risk and adventure with money is too low. The acceptance of high failure rates doesn’t exist.

    It’s not the entrepreneurs who are different, it’s the money. So, trying to treat or get entrepreneurs into a Valley-mindset when the Money isn’t in that mindset is a wasted effort.

    Creating an environment that is a win::win for Portland based (let’s say N.W. based) investment and entrepreneurs, that works within the peculiar nature of Oregon, is what’s needed. The problem (IMHO) with Portland is that the entrepreneur elite (you know who you are) and the rare-Angel/Seed elite (likewise) are far too incestuous (combined with government types in this space).

    It’s not a friendly or conducive space for most of us. The rare exceptions that focus on mentoring and trying to navigate this for All, are a bit pricey and don’t really have the financial clout to add comprehensive value.

    If this 500K had been managed differently, in some manner to break down the barriers to entry that many feel exist (whether you’re not in the right club, or you’re over 38, which is blatant discrimination and a Class Action suit should be brought to bear in those cases); well, if it had been announced differently and also was used as a method to generate more Seed monies and independent efforts (matching funds, etc.), that would have been interesting.

    If it had been used to balance the sense of “responsible risk” with realistic results, that would have been interesting. The “pay me $250 now and, if I play, I’m telling you upfront that I’ll have no compassion for you later” approach is just wrong. It’s not a formula for intelligent investment or entrepreneurship — At least, not here.

    If the “money” says: “You achieve this in x-months and I’ll double-down, the money is escrowed and waiting for you.” Then, you have a balanced relationship. The “You achieve this or I cut you off” (without any guarantee or send that real First Round or an Enhanced Seed Round is even available) is one-sided and not even remotely attractive.

    There are some very good people in this town on all sides of the table. But, there is a disconnect that goes on at that same table — like an awkward Thanksgiving dinner with a dysfunctional family.

  19. “My experience is that you only can get so far on bootstrapping. In order to capitalize on an opportunity often a business needs capital above and beyond what it can generate itself. Otherwise the opportunity just blows on by as someone else builds a similar mousetrap, gets it funded and turns it into a business. Certainly there are exceptions to this but they are few.

    “So it often comes down to this; the difference between small dreams and big dreams is the willingness and ability to raise investment capital.

    Absolutely true! But we *have* the incubators: four of them – Webtrends 101 Degrees, PIE, Portland Ten and OTBC. Mentoring: check. Coaching: check. Low-cost legal and accounting help: check. Sales training: check. Contacts with investors in Portland and elsewhere: check. Low-cost office space: check. Networking with other entrepreneurs and tech people: check. So Rick is right – it’s not Y Combinator, but then again it doesn’t have to be.

    What I think it *does* have to be is transparent. Tell me what I get for my $250. Tell me why I should spend $250 just to be *considered* for an investment. These are experienced investors – I think they can tell a good business plan from one that stinks. I think they can tell competent people from incompetent ones. I don’t think they need founders’ money to do this.

    And I also think they can get sucked into a marvelous story that will ultimately fall on its sorry behind or supply enough capital to get a solid business with a few ragged edges off the ground and able to defend itself against the competition and achieve a successful exit. But just as Paul Graham won’t hear my story because I’m over 38, they won’t hear my story because I won’t pay $250 for the privilege of telling it to them.

  20. Pete Grillo says:

    Hi Ed,
    And this is yet another source of funding. And that is good, right?
    Are you really that upset about the $250 fee? I see that as nothing more than a way to filter out every nut-job who thinks they have a cool idea. Jeez it’s only $250.

    #seriously, I am embarrassed to see how these folks are being treated. I know Jim Huston from Intel days and he is a professional and a true gentleman. What this effort has done to generate such hostility is beyond me – truly – and speaks poorly of the so-called Portland entrepreneur community.

  21. Pete, *is* it truly another source of funding? Or is it existing City of Portland funding being “managed”? That’s not at all clear from any of the discussions I’ve seen. In any event, I’m by no means an expert on corporate finance – I know the math and the options pricing theory and all that but not the intricate maze of laws, regulations, taxes and fees that are designed to do whatever the heck it is that they’re designed to do.

    I’m not trying to “treat anyone poorly” – I’m simply stating how I think. $250 doesn’t filter out the nut-jobs – interviews and due diligence do. The $250 only filters out people without $250 to spend just for admission to the interviews and the due diligence. I’m the *customer* here – I want to know what I get for the $250. And please, don’t say it’s “advice”. It’s got to be either a *product* or a *service*.

  22. Ken Westin says:

    I am all for seed funding, I think this is a critical piece missing here in Oregon and it is great to see ANY initiatives to help, it is also great they have good people whom I respect managing the fund. However, I strongly agree with the need for mentorship, particularly from entrepreneurs who have done it before. I really hope that this component is simply in the works.

    In Portland there are lots of people who will take a chunk of your company in exchange for getting you “investor ready” with promises of connecting you with investors, lots of attorneys and accounting firms willing to take your business when you have funding, but not a lot of “real” entrepreneurs to provide advice and guidance simply for the sake of wanting to see more startups in Portland succeed.

    I joined Starve Ups around two years ago and it was there that I not only learned from those who have built successful businesses in Portland, but also a strong support network of people who want to see each other succeed. This group I can say has been the most beneficial group to both my company as well as me personally as a founder. In many way it is like a Fight Club for entrepreneurs where you will get some tough love, in the form of advice, connections and mentoring. They do not fund your company, but the support you get and advice has saved me a lot of money and helped me avoid costly mistakes. I hope that some mentorship will be provided in addition to the funding, sometimes the money itself is less important than knowing where to spend it and how to prolong your runway.

  23. Dan Blaker says:

    “seriously, I am embarrassed to see how these folks are being treated. I know Jim Huston from Intel days and he is a professional and a true gentleman.”

    Half a million bucks is real money, and I think we’re all justified to point out where the Portland Seed Fund obviously differs from the fund it was loosely based on. Pete, perhaps you could drop Jim a quick email and suggest he join the conversation?

    My point is that raising capital is less than half of what’s necessary to get a startup off the ground; yet the backgrounds of the two fund managers are exclusively in capital management and intellectual property (ignoring Mr Huston’s experience in Chemical Engineering).

    Think of it this way: if the Portland Seed Fund were managed by a couple expert software developers who nonetheless had no experience managing capital or pitching investors, would it be embarrassing for us to ask questions?

  24. Pete Grillo says:

    Hi,
    This just magically appeared – a light-hearted video characterizing typical fund raising experiences:

    http://www.xtranormal.com/watch/7203877/

  25. Billy McGee says:

    The Portland Seed Fund small tastes of capital would provide a much needed primer to those seeking help with the initial development costs. Portland10 fits better as a comparison to the Y combiner model, even if it still just an egg.

    The OAF proves that collaborative private and public imitative, a unique opportunity pioneered here in Oregon, has bourne significant fruit and generated real economic growth, jobs, and a few thriving companies. Putting “it’s unconstitutional” rants aside (along with rants about income tax being unconstitutional, 1oth amendment hoo-ha and other jack’d up geezer arguments by those who fancy wearing an onion on their belts)

    The greatest challenge in Portland is that while the under 35 generation leads the most compelling start-ups in the Valley – has little of no voice here, and those with financial resource don’t relate. In 2010, audience members of OEN criticized a mobile app company by asking about “what about those who don’t use smartphones” Portland has one of the best resources – creative youth, and the best perks- epic nature in every direction, and the most confounding reality.

    Sure this seed fund initially has a look of the same systems … There is room for fresh ideas, like doubling down on meeting development targets, crowd sourcing from local tech users. Let’s do our best to help it evolve…make it cool and full of win!

  26. Mel says:

    90-days? Blink of an eye. Tough love? More like Investor-ADD and over-simplifying a structure that will result in more failures, not successes. I’ll “pass” on sending them a check.

    Benchmarks are a good thing. But, they need to be realistic and understand the business and what it takes to get from “a” to “b.” Seed Investor and Entrepreneur should be a mutually supportive relationship. When it’s one-sided, it always fails. If one success comes out of this, I’d be shocked.

    BTW: The ratio of successes for start-ups when the teams include or are comprised of Founders over age 40 is astonishing. It may not be attractive, but, it’s a far safer bet.

  27. [...] may have read—or even participated in—the discussion that ensued after Mike Rogoway’s article on the Portland Seed Fund, a new program designed to help fund [...]

  28. [...] Portland Seed Fund: Y Combinator, it’s not. (Unconstitutional, it may be.) [...]

  29. [...] Portland Seed Fund: Y Combinator, it’s not. (Unconstitutional, it may be.) [...]

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