Y Combinator, Sequoia, and Lessons for the Recession

In January, Paul Graham announced that Y Combinator would no longer operate in the summers out of Cambridge, MA, but instead would stay year round in its other home of Mountain View, CA. The reason he put forth was the impending birth of his new child and the decision that California was the better place to raise his child.

Today, though, Graham divulged another factor—that Y Combinator has been negotiating since December with legendary Silicon Valley venture firm Sequoia Capital for an infusion of capital that will allow it to invest in more startups than ever. All told, Sequoia and a group of prominent angel investors are putting $2 million into Y Combinator to allow it to boost the number of companies it backs by some 50 percent—from about 40 per year to 60. As Graham explains on his website, this expansion makes more sense if Y Combinator is in California: “It’s easier to expand in Silicon Valley, because the startup community is so much larger here,” he wrote.

To me, the interesting part of the announcement wasn’t the added insight into why Y Combinator left Boston—it was Graham’s view of the recession. As he also wrote on his site: “Y Combinator is celebrating the recession by expanding. We’re so convinced recessions are good times to invest in startups that we’re increasing the number we fund…”

And as he added in an e-mail to me: “We have a hunch 2009 will later be seen as a turning point for startups, in the sense that an unusually large number of good ones got started during it. There’s a lot of evidence things are changing. Founders are still founding, and investors are still investing– much more than either did in the aftermath of the Bubble, even though the actual state of the economy is so much worse.

“We’re hoping that by expanding YC when the rest of the world is running for cover, we’ll be able to send a message to would-be founders to go ahead and do it. And of course fund a significant fraction of these new startups.”

This is a great attitude to have during a recession—and more people should have it. It comes from having confidence in what you are about. At Xconomy, we see this same attitude in a fairly large fraction of the companies we deal with—off the top of my head, I would say maybe 20 percent. They have the attitude that there is more to be gained than lost during hard times, and that innovation will be the way out of the recession. They want to take an active part in that transformation—growing their business and separating from the competition in the process.

In more classic psychological terms, it’s a desire for success outweighing a fear of failure. Y Combinator won’t be here in Boston to impart that lesson directly, but entrepreneurs and big companies alike should heed the message.

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