KludgeCode

is Ben Rudgers

“Startup” in the Silicon Valley Sense

Startups in the Silicon Valley sense (SSVS) are organized and operated as vehicles to attract and serve outside capital investment.

The first way a startup must serve investors is by accepting outside funding. In the Silicon Valley sense, there is no such thing as a bootstrapped (self-funded) startup. Without independent capital investment a bootstrapped company is of little interest to investors until it seeks outside funding.

Y-combinator (YC) only produces startups in the Silicon Valley sense – participation in a YC class requires the acceptance of outside investment (by YC) and consequently an organizational structure which readily facilitates further capital investment. In other words, there are no bootstrapped YC companies.

As an SSVS grows, its operations must continue to be conducted with one eye toward the needs of capital (e.g. a bootstrapped company doesn’t need to worry about option pools – Microsoft, perhaps the ultimate bootstrapped company, could offer Balmer 7% of the company as the 30th employee, at that point an SSVS would probably be draining its option pool without a new round of investment).

Finally, an SSVS has an exit timeline which is determined by the type of investment it accepts. Venture Capital (VC) investors need liquidity events timed to the life cycle of their funds. Timing of a sale or IPO will not just be determined by the strength of the market, the need for investors to cash out will also play a role; i.e. it is likely that the timing of an IPO or company merger will reflect the maturity of a VC fund. Likewise, the pursuit of venture capital may be affected by the time horizons of angel investors.

In short, a startup in the Silicon Valley sense is part of a capital ecosystem in a way that a bootstrapped startup or small business is not. YC illustrates that one of the things the Silicon Valley ecosystem produces is startups as investment vehicles.