White House Startup Investment Coincides with Sweeping Changes for TechStars, Y Combinator, Other Incubators: A Road to Recovery, or Another Bubble?

2/1/11Follow @wroush

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scour the country for compelling examples of investment in entrepreneurship and use the president’s bully pulpit to spotlight and promote them.

But some of the efforts may be going forward on a faster timetable thanks to White House encouragement. For example, Fortune reporter Dan Primack wrote yesterday, based on a conversation with TechStars co-founder Brad Feld, that the administration’s initiative “helped accelerate” the decision to launch the TechStars network—of which I’ll say more below. “Ultimately the important point of this initiative is that entrepreneurs are being heard,” writes Kauffman Foundation vice president Lesa Mitchell, who was at the White House ceremony, in a guest post for Xconomy today.

Shock Waves from Y Combinator Announcement

One of the surprises about yesterday’s White House event was the absence of any Bay Area tech celebrities. Yes, commitments were made by big Silicon Valley companies like HP, Intel, Google, and Facebook, but the momentum behind the Startup America Partnership seems to be coming from places like Washington, DC, where Steve Case’s foundation is based, and Kansas City, home to the Kauffman Foundation. As much as Silicon Valley investors and entrepreneurs complain about government under-investment or over-regulation, they’re remarkably content to operate within the Bay Area bubble, where the conceit is that all the resources, knowledge, and connections a technology entrepreneur might need are arrayed along the 101 and 280 freeways.

And there was a big story over the weekend to fuel this solipsism. As TechCrunch first reported on Friday, Digital Sky Technologies CEO Yuri Milner and SV Angel founder Ron Conway have joined to create Start Fund, a new venture fund that’s offering $150,000 in convertible debt to each of the 40 startups participating in the winter 2011 term at Mountain View, CA-based Y Combinator, probably the nation’s most famous startup incubator.

What’s remarkable about this offer is its blanket nature—startups are eligible for the money simply by virtue of getting into the Y Combinator program—and its lax terms: Milner and Conway aren’t asking for a valuation cap, an agreement that would guarantee them a fixed minimum stake when the startups go out to raise additional venture capital. (If a startup went on to raise $3 million on a $15 million valuation, for example, Start Fund’s $150,000 note would convert into a 1 percent equity stake. On a $30 million valuation, Start Fund would get 0.5 percent.)

Milner and Conway unveiled their offer to a gathering of Y Combinator startups Friday evening, and most of the companies in the current batch have already accepted, YC founder Paul Graham told Dow Jones VentureWire today. Graham called it a “no brainer” for startups to take funds offered on such easy terms.

In the grand scheme of things, 40 investments of $150,000 each adds up to only $6 million. That’s a small investment compared to the amounts venture firms routinely dole out to growing life sciences, infotech, and energy companies, and it’s also small compared to many of the other entrepreneurship initiatives unveiled this week. But the move had Silicon Valley entrepreneurs and investors buzzing over the weekend, in part because Milner and Conway apparently intend to make the same offer to all future YC companies. The prospect of an automatic $150,000 Start Fund investment—nearly 10 times the size of the stipend that Y Combinator itself offers to startups—is likely to alter the calculations of both entrepreneurs considering applying to the incubator program and the angels and venture capitalists competing to invest in them.

For entrepreneurs, the Start Fund investments could provide enough capital to extend the post-YC runway for six months to a year, thereby reducing the pressure to … Next Page »

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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  • AndrewW

    StartUpAmerica is just more useless public relations and cheerleading. Of course we should encourage start-ups, but it is much more important to seek breakthroughs.

    Energy is a good example – DOE and private industry have spent $400 billion in the last 20 years on R+D and financing for green technologies and yet we still haven’t found “clean, affordable electricity.” That’s the goal.

    During the last two years DOE (with Stimulus funds) has spent more than $30 billion on “development deals,” primarily for over-priced and under-performing wind and solar schemes. Most of these projects received 100% “loan guarantees” and those loans can never be repaid. They are grants.

    America (and the world) should get serious about finding a breakthrough by offering a $1 billion prize for a solution. DOE should hold an Energy Summit and review ALL potential solutions. We would either find a breakthrough or understand exactly where we are.

    It is delusional to continue to pretend that wind and solar can meet our energy needs – they never will. America has made progress because of competition and reward and now is a good time to remember that, Offer a PRIZE and let’s get busy seeking a real, sustainable solution.

  • http://www.backupify.com Rob

    I think it would be better if the government stayed out of startups. It’s best left to the private sector.

  • http://www.worldmotoclash.com Stanford Crane

    Has it occurred to anyone that we have a consumer based economy, but no real consumer VCs? Seems odd. A proper number for startup investment would be about $500M and span all industries and geographies. We live in a global community where helping business requires leadership, not the random walk approach.

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