Friday, September 12, 2008

Y Combinator’s firms mostly heed ‘go West’ advice

By Christopher Calnan

Entrepreneur Jeff Vyduna launched his Cambridge company, PollEverywhere Inc., in April. But he realizes that the odds are against him finding a local investor and remaining in New England.

The three-person company developed an application designed for organizations to gather feedback through text messaging. But Vyduna, who dropped out of the MIT Sloan School of Management to found PollEverywhere with a $20,000 investment from micro venture capital firm Y Combinator, said he’s not expecting local investors to back his business.

That means a move to Silicon Valley, where angel investors are aplenty and the interest is stronger in pre-revenue, consumer - focused startups, which is Y Combinator’s sweet spot. Indeed, only one local VC firm has invested in any of Y Combinator’s 102 companies.

“The East Coast angels scene is not as fond of risk when it comes to consumer web applications,” Vyduna said. “The Y Combinator family has a better hit rate on the West Coast.”

Just three of the 21 companies that Y Combinator funded during its most recent summer program remained in the Boston area following the program. And that was the largest number of portfolio companies to do so in any year since Y Combinator launched in 2005, partner Jessica Livingston said. Y Combinator spends six months in Cambridge and six months in California.

Most Y Combinator investments are pre-revenue, operated by first-time entrepreneurs, making them less attractive to East Coast investors, Livingston acknowledged. “Having revenue is a very good data point,” she said.

For example, Y Combinator-funded TipJoy moved back to Arlington in August after nine months in San Francisco. The company developed a tool that enables website users and blog readers to make small donations, or tips, to web content providers, co-founder Ivan Kirigin said.

But TipJoy generates revenue specifically by taking a percentage of the donations, he said. Kirigin, who was rejected by about 30 California angel groups, said he recently landed a small Series A financing from an undisclosed New York angel group.

On the other hand, in May, e-mail reporting service Xobni Corp. reportedly turned down a $20 million acquisition offer from Microsoft Corp. Xobni, which launched in Cambridge with a $12,000 Y Combinator investment, had moved to San Francisco before the offer.

Other Y Combinator portfolio companies have found some success by staying local.

In 2006, a division of media giant Condé Nast acquired Reddit.com, the Somerville-based online news aggregator that was started in June 2005 by two University of Virginia graduates with a $12,000 investment by Y Combinator.

TicketStumbler.com launched in August after moving to Somerville from Austin, Texas, for Y Combinator’s summer program. The website makes money and is drawing attention from local investors, founder Dan Haubert said. TicketStumbler.com, which aggregates the information of 10 ticket reseller websites, has prompted five to 10 investors to contact Haubert. Now in Medford, Haubert plans to remain in the area mostly because TicketStumbler’s revenue is outpacing its expenses.