Cities standing back

Case study 8: Y combinator, Silicon Valley California

This high tech business incubator is an example of how a private business growth acclerator can build on informal alumni networks and support a thriving group of high-growth firms without public funding or direct university support. Y combinator was founded in 2005 by Stanford alumni with private funding from alumnus Paul Graham, as a way to encourage students to start companies rather than take internships during holidays.

The incubator retains strong but informal links with Stanford professors and alumni. This includes regular guest lectures from Stanford professors as well as ad hoc sharing and learning about cutting edge technological developments between the organisations.

In some cases, cities do not need to directly intervene in collaborations, as high-growth firms link to universities without public funding or formal support.

Y combinator shows how some of the most successful incubators can operate without direct funding but instead a supportive policy environment. As a profit generating growth accelerator it is free from bureaucracy that often comes with publicly funded grants or university investment. 172 companies have been through the incubator’s three month programmes, with a capitalisation value of $7.78 billion including high profile technology companies such as Dropbox, Airbnb and Scribd. Although seed funding is comparatively low, businesses are attracted by the offer of accelerating their growth through networking and alumni relations.

Cities should consider when it’s best to ‘stand back’.

Cities with strong local economies should consider if their networks have the potential to be self-financing, and if they are, support businesses to gain access rather than fund a network itself. Much of the success in Silicon Valley’s technology firms is attributed to businesses with strong links to Stanford, however these are often informal or issue based rather than due to any city or university interventions. Many successful collaborations happen between alumni and professors through individual relationships, these may not need interventions but benefit from wider business support.

Cities should engage with high-growth firms and university departments to understand the barriers to growth and collaboration outside of more formal structures.

Y combinator’s entrepeneur community have an active and significant shared voice49 when considering local city level decisions that affect their businesses. The growth-accelerator community engages both its entrepeneurs and professors on specific issues that they identify through informal networks (e.g. website message boards). This has lead to a single voice from ‘y combinator firms’ that has some local influence with local San Francisco policy.

For many businesses, local government or even universities don’t have a formal role, instead, supporting an environment of ‘open innovation’ helps growing businesses to benefit. Cities can also use successful private networks to highlight barriers to their business growth and use their resources to address these issues directly.

The lessons from here must be taken in context. Firstly Silicon Valley is something of a singular example of success, and attempts to simulate the conditions for it in other areas have often been expensive mistakes.50 Secondly, whilst there hasn’t been direct funding or interventions in the case of Y combinator, the incubator is both borne out of and benefits from the area’s culture of open innovation, which has received indirect support and funding from both the city and the university.

The city’s role in this example is minimal but it can benefit from engaging with successful university-business networks. Cities don’t always need to support networks through funding or direct interventions. Instead in industries or areas where there are already successful relationships they should engage with these firms to identify barriers to further growth.

Footnotes

  • 49 Y combinator, 2014 ‘influencing local politics’. Available at https://news.ycombinator.com/newest
  • 50 MIT technology review, 2013 Why Silicon Valley Can’t be Copied. Available at http://wadhwa.com/2013/07/03/mit-technology-review-why-silicon-valley-cant-be-copied/