For the first time in five years the University of Waterloo's entrepreneurship program, Velocity, doesn't have a company in the multibillion-dollar startup bootcamp known as Y Combinator.
Following a year in which six companies that participated in the Velocity program went through the Palo Alto, Calif.-based accelerator, Y Combinator's summer 2015 cohort has none. Of the 13 companies with links to Velocity that participated in Y Combinator (YC), several have received funding and there was at least one acquisition.
"There were five Velocity companies in the summer of 2014 program, and there was only one in the winter one," said Mike Kirkup, the director of Velocity program. "When I talked to Sam Altman [president of Y Combinator] he said, 'Don't take this as a trend.' It just happened that we hit a jackpot with five. On average, we have between one and two in every batch."
Some of the bigger names in Waterloo region tech – Thalmic Labs, Vidyard and Pebble Inc. – reached their heights thanks in part to attending the hottest tech accelerator in the world. Companies that have come through Y Combinator are estimated to be worth more than $50-billion and include some truly global companies, including Reddit, Stripe, Airbnb and Dropbox.
Y Combinator's model is deceptively simple: Companies get three months to work on their product with support from veteran Silicon Valley executives and investors, then at the end the companies pitch some of the world's most successful tech investors in a bonanza event called Demo Day.
The process for application is shrouded in secrecy and there is an incredible competition level – the winter 2014 cohort saw 5,600 companies compete for 114 slots.
But the terms of YC participation should also give Canadian startups pause. The standard agreement is YC takes 7 per cent for about $120,000 (U.S.), a potentially very lucrative stake for the accelerator.
"You're selling these guys a huge chunk for a very small amount of money," said Mr. Kirkup, though he contrasts that with a belief YC adds significant value.
"What they are doing is Black Swan farming, and there is an elephant graveyard of companies [that] have been through YC," says Michael Litt, chief executive of Vidyard, who attended YC in 2011. "Only seven of 60 companies in our batch got to Series B funding, which is a massive number, but then there's a huge drop-off."
Recently, Mr. Altman, who now runs the company since Paul Graham, the accelerator's co-founder, stepped away, told The New York Times that his own alma mater Stanford wasn't as high on his list of impressive schools as Waterloo, at least when it comes to entrepreneurs whose ideas are ready to take flight.
"There's this old saying: Harvard doesn't make the best people, they just let in all the best people and take all the credit. Right now, the Harvard of accelerators is Y Com," says Ted Livingston, the CEO of Waterloo-based chat app Kik. "They are helpful, but they have a brand, and so any other accelerator is always going to get worse-quality candidates than that."
He never applied for the program.
For Nathan Blecharczyk, chief technology officer and co-founder of Airbnb, his company might not have disrupted the global hospitality industry if it were not for YC.
"We were seriously on the verge of quitting," Mr. Blecharczyk said. "We'd been paying for the company out of pocket, so we were in debt and the [2008-09] financial recession had just begun, the fact that we had gotten into Y Combinator for 6 per cent, we didn't even think to negotiate that." These days, that stake is worth at least $1.5-billion, as Airbnb (which helps people rent their homes on a casual basis) is now worth more than $25-billion by some estimates.
"It was a turning point for our company, as it wasn't until during Y Com that the business actually started to take off … prior to that there had been no real growth and it was, frankly, trending down," Mr. Blecharczyk said. "In retrospect, was it a good deal [for YC]? Of course it was, but what were our reasonable alternatives? There weren't really [any]."
The university's own guidebook quotes Mr. Graham, saying, "Something is going on in Waterloo because the applications we get from Waterloo students are better than those we get from students of any other university."
The initial response by Kitchener's Communitech – which tries to stoke the local startup scene – to Y Combinator inducting local startups into its California network was to set up its own incubator.
"The reason we started Hyperdrive is that too many companies were being accepted into accelerators in the U.S. and not coming home," says Iain Klugman, CEO of Communitech. "And it was when one company [Eric Migicovsky's Pebble] said, 'Yep, we just got accepted into Y Combinator,' that I thought we've gotta do something because they are not coming home. They go down there, they raise money and they don't come home."
Around the same time, another Velocity company, Couple, also relocated to San Francisco.
Just three years later, Hyperdrive was shuttered, without producing the kind of hit company Communitech hoped for. But more importantly, it shut down because the premise was faulty: After Pebble, most Y Combinator companies from Waterloo did come back, starting with Mr. Litt and Vidyard.
"You've got to credit Michael for being the pack leader here: [He] went and then came back. This is what they all do now," Google's Waterloo site director Steven Woods said. "You make a big impression down there, and then have to get back to Waterloo and hire some people that are great."
Mr. Litt's view on the value of Y Combinator is one of access. "YC helps this community in the same way the university does, and Velocity and Communitech. We have a [Silicon] Valley network because of YC. We have SV investors [including Bessemer Venture Partners, which led Vidyard's January $18-million fundraising] because of our time in that program."
Mr. Kirkup says that when Velocity companies participate in YC and return, it creates positive incentives for newcomers to his program.
"Basically all the time we have two or three companies from YC sitting in here," Mr. Kirkup said, gesturing to the Velocity Garage workspace in downtown Kitchener. "That just tends to reinforce the same cycle – people wanting to go into YC … because they go, 'Hey, those guys are doing really well. I want to be like them.'"