Schooling start-ups at Stanford
You’re still in your 20s and you’ve already netted two blockbuster successes. What do you do next?
Give others a shot at an Internet fortune.
Jawed Karim, who lucked out as co-founder of YouTube Inc. and an early employee of PayPal Inc., is taking part in a unique Silicon Valley tradition: helping the next generation of entrepreneurs with cash, counsel and connections.
Despite netting $65 million in Google Inc. stock when the search giant bought YouTube, Karim, 28, lives in a dorm at Stanford University, where he’s working toward a doctorate in computer science with the goal of becoming a professor.
He also is schooling start-ups through Youniversity Ventures, a twist on the traditional tech investment firm. Instead of opening their wallets and doors in shiny offices on Sand Hill Road, Silicon Valley’s famed venture capital strip, Karim and his two partners hold office hours at Stanford every quarter. They hear start-up pitches from current and former students at the birthplace of such Internet greats as Google and Yahoo Inc.
His collaborators are two successful 38-year-old entrepreneurs from his PayPal days. Keith Rabois is vice president of strategy and business development at Slide Inc., which makes fun features for social networking sites, and Kevin Hartz is chief executive of online event service EventBrite.
With their youthful carriage and casual dress, they could easily pass as students during their campus visits. But these guys are all business.
On a recent Friday, they listened intently as entrepreneurs presented ideas, interrupting with sharp questions and insightful advice.
They brushed aside boasting and name-dropping -- one team trying to create digital coupons for mobile phones said Jeffrey Ullman, Sergey Brin’s doctoral advisor, hadn’t been this excited about a start-up since Google.
And they wowed young go-getters with war stories. Rabois recounted that in 2001, PayPal had resisted buying Google despite the urging of famed venture capitalist Michael Moritz because “at the time, we had a more proven revenue model.”
Uplifted by angels
Entrepreneurs-turned-investors are crucial to the ecosystem here, an unparalleled incubator of innovation that so many regions have tried to re-create.
Typically the first to take a chance on start-ups born in dorms or garages, these “angel” investors roll up their sleeves well before venture capitalists do. They write small checks in exchange for minor upfront stakes or convertible notes that can be turned into equity.
Then they coach entrepreneurs through a Darwinian contest in which flameouts far outnumber jackpots.
“There are smart hackers in Pittsburgh or Ithaca [N.Y.]. There are plenty of rich people in Miami,” said Paul Graham, 43, an entrepreneur who runs Y Combinator, which hands out seed money and loads of advice to young entrepreneurs. “But what makes Silicon Valley unique is the number of people who became rich from start-ups. That’s where all the top angel investors come from.”
The Youniversity guys scrutinize each start-up for that rare combination of the right team in the right market at the right time. They decide jointly but invest separately. And they go with their guts.
That’s what Rabois did in July 2005, when he ran into Karim at a barbecue. They slipped away to their host’s computer, where Karim showed off his new project, a video-sharing website. Rabois took one look and blurted: “Can I invest?” That deal netted Rabois $4 million in Google stock when the Internet leader bought YouTube for $1.65 billion.
Why do these busy executives, who already put in long hours running their own start-ups, sacrifice sleep and time with their families to act as guidance counselors? Hartz said it was “what we do instead of playing golf.”
It’s what Karim does when he’s not in class or hitting the books.
Shunning the spotlight
He dropped out of college in 2000 to join PayPal, which EBay Inc. bought in 2002 for $1.54 billion. After finishing his undergraduate degree at the University of Illinois at Urbana-Champaign, he co-founded YouTube with Chad Hurley and Steven Chen. Karim remained an advisor when he started grad school, and the Google acquisition landed him nearly $65 million in stock.
A soft-spoken engineer who loves to learn, Karim didn’t have much use for the spotlight that comes when your path leads from start-up to stardom. Yet he is gripped by start-up fever.
About a year ago, he reconnected with Hartz and Rabois. They hit on a new concept: to exclusively back current and former students at Stanford, where Rabois and Hartz received their undergrad degrees, and Illinois, which has produced such famous computer scientists as Netscape co-founder Marc Andreessen.
“I want to help students take their idea to the next level and have the mentorship I wish I had had early on,” Karim said.
Youniversity is providing that mentorship in the midst of the second major Internet gold rush. With technology making it far easier and cheaper to start a company than ever before, throngs of young wannabe entrepreneurs have swarmed Silicon Valley and its environs.
Some of them make the grade at Y Combinator. Hundreds apply each semester to get face time with Graham, whose online essays are considered an entrepreneur’s how-to manual. He shares advice on how to build a successful company and make connections to top investors.
Since launching in 2005, Y Combinator has funded 104 companies. Each gets $5,000, plus $5,000 per founder, in return for an equity stake of 2% to 10%. For three straight months in Mountain View, Calif., or Cambridge, Mass., entrepreneurs immerse themselves in building their technologies, then pitch their accomplishments to potential investors during a 10-minute demo.
Six companies have hit the jackpot and been bought. Many others are on the fast track, generating page views and interest from major Internet players.
Y Combinator’s spreading influence was on display during its daylong start-up school at Stanford last month. About 700 people, mostly young guys toting geeky T-shirts and iPhones, came from all over the country, trading Saturday sunshine for fluorescent lights and dreams of becoming the next YouTube. They camped out in the seats and aisles to hear tech luminaries such as Andreessen and Amazon.com Inc. founder Jeff Bezos.
Andreessen was mobbed after his speech and doled out advice the way he does on his popular blog. Andreessen says the advice he received from current and former entrepreneurs was essential to his success.
Netscape to Ning
Now worth hundreds of millions of dollars and hard at work on his third start-up, a social networking company called Ning Inc., Andreessen has returned the favor by investing in roughly 30 companies, including Digg Inc., Meebo Inc. and Twitter Inc., over the last four years.
“I think the value I bring is that I’ve . . . done what they’re doing,” he said.
That’s what Youniversity does when it holds court in a small conference room in Stanford’s William Gates Computer Sciences Building, named after the Microsoft Corp. co-founder. Rabois said they review dozens of business plans in search of young, hungry entrepreneurs with the “unreasonable amount of tenacity” and “raw intellectual horsepower to solve problems others don’t see or can’t solve.”
So far, Youniversity has offered lots of free advice and held quite a few hands, but it has backed just two companies: online prediction marketplace BluBet Inc. and video chat service TokBox Inc.
Its investments are small by Sand Hill Road standards -- $100,000 to $300,000. The two companies’ founders say the knowledge and experience they get is more crucial.
“These guys really work with you to build up the company,” TokBox co-founder Ron Hose said. “They don’t put their money in and then disappear into the ether.”