Mike Maples and Ann Miura-Ko on The Limits of Incubators, the Right Fund Size, and the True Meaning of “Pivot”

6/13/11Follow @wroush

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the right kind of structure and the networks that really help them accelerate their companies. And I think that’s true. Any student of mine who comes and asks me if they should apply to YC, I give them a wholehearted yes.

X: Okay, but in addition to Y Combinator we also have AngelPad, Kicklabs, 500 Startups, and many others. Is there room for all of these incubators? Can they all have equal success?

AMK: The business of angel investing, incubating, and venture capital is what we call a business of exceptionalism. It’s never been scalable. Whether it’s a handful of VCs who are really awesome, or angels. There are going to be a handful of incubators that are really awesome.

MM: No matter what your strategy is, if you are an incubator or a seed fund like we are, or a VC or a mezzanine fund or even a public market investor, if you don’t have some proprietary strategy for getting into the very best tech companies, you don’t have a business. If you can’t, off the tip of your tongue, say what is your unique advantage that gets you into these companies, you lose. I think we are one response to the democratization of innovation that seems to be working, and I think that Y Combinator is another that is working.

There is one other related thought. Sometimes we talk about how business school doesn’t prepare people for technology entrepreneurship. Steve Blank even goes so far as to say there should be something called Entrepreneurship School. And in some ways Y Combinator is a version of that. But instead of getting a degree, you start a company. But what a true e-school might do on top of what YC does would be to teach a little more about board structure, governance, pivoting, and go-to-market—real, grounded knowledge. I don’t know if that will happen, but to me Y Combinator is a completely logical step on the way.

X: Mike, why go to all the trouble of starting a seed-stage investing fund? Why not just be an angel investor, or go to work for an established venture fund?

MM: Well, first of all, I couldn’t get a job at a venture fund that I respected, or I might have done just that. But when I got here [to Silicon Valley] and saw what was happening, I got totally uninterested in being in a big VC firm. I said “Somebody is going to create a true early stage firm and I hope I’m not too late because it’s so obvious.”

I had moved here from Austin, and had been an entrepreneur, not an investor, and an enterprise software guy, not a consumer guy. So not a lot of people were taking me seriously as a micro-VC. So, originally, I said “Fine, I’ll just invest my own money.” Some of my early deals started working, so I raised a fund. What was interesting was that when I raised my first fund, there were a lot of other guys out trying to raise microfunds, and I took a totally different approach. My philosophy was, the right fund size is whatever you can raise in 30 days. I went to a lot of guys and said, “Invest an amount where if you lost it all, you wouldn’t be furious at me.” In 30 days I was able to scare up $10 million, so that was the fund size. I looked at Fund One not as a sustainable model, but as a booster rocket. I said this is either going to boost me into orbit, in which case I will raise a proper fund, or it will be a failed experiment. And $10 million was a lot more money than if it had just been my own money.

In Fund One I had a pretty good string of beginner’s luck. Then for Fund Two, I raised from institutional folks, and that is when Ann came on. I think there are a lot more things we can do now. I always believed that somebody would create a firm that was the absolute standard-bearer of … Next Page »

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

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