Ideal Conditions To Build A High Growth Startup Like Heyzap: Y Combinator & San Francisco?

    heyzapThere’s been a lot of talk lately about all kinds of accelerators and Y Combinator like set-ups in the Nordic and Baltic countries. Most recently Aalto Entrepreneurship Society announced that they are in the process of building their own ‘Y Combinator’, although this would be directed only to Aalto University, which really makes it a university incubator.

    Just as much there has been discussion on whether Seedcamp model or Y Combinator like model is the better one (Y Combinator leading the pack at the moment), the respective differences and most importantly whether you need to be a Paul Graham to make it work. And even the workings of Y Combinator model has been under strong scrutiny by those who don’t believe before they see the first major exit.

    To get to the bottom of the story, we decided to go and meet one of the recent Y Combinator backed startup called Heyzap since we where already in the neighborhood. Heyzap is a distributed, monetizing platform for casual games in which developers can monetize their games with in-game virtual goods and advertising, even though the team is focusing on the former and possible dropping the latter at some point.

    We talked to Heyzap co-founder and President Jude Gomila at the company’s nifty office in San Francisco’s Soma (South of Market) area. We asked Gomila how does it feel to be part of Y Combinator alumni, build a company is San Francisco and what the future holds for Heyzap.

    Jude told us that unlike say Kongregate, Heyzap don’t want to be a destination site but get their traffic from a number of different sites across the web. A smart move that is driven by their advanced API, with which the publisher can specify the games she wants to display on a website, get traffic rankings and a multitude of other statistics that are valuable for a content publisher.

    The business model is also somewhat similar to AppStore’s. It’s a revenue share model, where the publisher gets 15% and from the rest 85%, 70% goes to developer and Heyzap gets to keep 30%. With this model the one year old startup has been already able to get cash flow positive.

    Even though the really big exits are still missing, based on everything that Jude said, its clear that at least for the startups the Y Combinator model is working well. They not only get to attend the weekly dinners, meet the big name VCs at the Demo day where the investors discover the young teams, but also get to enjoy a real ecosystem that has grown around Y Combinator: Hacker News bringing all the smartest developers together, the Y Combinator backed companies going to movies and having BBQ together, and when a YC backed startup fails, the smart founders are gladly welcomed to join other Y Combinator backed startups. This recycling is a little know phenomena, but clearly one of the most important ones in creating a positive open culture. Another important factor contributing to the culture is the lack of competition against other companies in the program. Where as for example in Seedcamp the startups compete against each other during the Seedcamp Week in London, the Y Combinator backed companies don’t compete against each other in any point after they have been accepted to the program.

    Also, interestingly Y Combinator used to fund really visionary projects, but recently it has been funding ‘smaller ideas’ which have clear business models. There is also already several Sequoia backed companies in the alumni and Heyzap itself closed a $650K seed funding round from Union Square Ventures. This speaks of the high quality of the companies that come from the program.

    Not only is Heyzap Y Combinator backed startup, but for Heyzap’s co-founder, Immad Akhund, this is the second Y Combinator backed startup after Clickpass, which was acquired by Synthasite in 2008. There’s clearly something in Y Combinator why successful entrepreneurs go happily back to bootstrapping.

    Gomila is originally from UK, just as his two co-founders. But when asked, they firmly told us that they are happy building their company in San Francisco and not planning on going anywhere anytime soon.

    A benefit Jude listed that San Francisco and Palo Alto have over say London is the geographical concentration of the startup community: All the investors are in close proximity. In San Francisco you can have 7 meetings in an hour with VCs that all have massive funds. This means you can do 200 meetings, where as in UK you can do only about 20. It’s a lot less efficient raising money anywhere outside of the Silicon Valley. For example in the San Francisco’s Soma area that Heyzap is located there are three other startups on the same street, and Twitter, Scribed, Zynga, Ebaumsworld and Collegehumor just few blocks away.

    Another advantage is the recruitment. Everybody knows how a startup works in the Valley. There’s predefined terminology because people have used to the scene and know that you need a business person, the tech lead and so on. Hiring gets to be easier and much more efficient when everybody knows how the system works.

    When I asked Jude about his advice to European startups regarding where they should build their companies, he said that coming to Silicon Valley makes sense if you have proven product track record and need to scale it up, but that you should stay home to save money if you’re doing customer development and just trying to figure out what your product is all about.

    What comes to the European Y Combinator-like projects, it remains to be seen whether the model can prosper without the strong leadership of prominent figures like Paul Graham of Y Combinator or Saul Klein of Seedcamp, when the jury is still out there even with the original venture firms. We stay cautiously positive, but would advice those thinking about setting up similar machines to do their home work and make sure to understand what ingredients make a successful startup breeding ground.