Y Combinator’s Young Startups Tout Revenue Over Users

Photograph by Rachel Psutka

University of Waterloo engineering grads (from left) Jay Shah, Aditya Bali, and Mike McCauley, along with employee Brad Moggach, show off their startup, BufferBox.

When Jamie Wong pitched her online travel startup Vayable to the hundreds of investors at an event yesterday put on by Y Combinator, one slide in her presentation drew an audible chuckle from the audience.

A graph showed that Vayable’s sales, now totaling $40,000 per month, were rising at the same rate as the early revenue growth of Airbnb, a website for renting rooms that is one of the most successful graduates of the tech incubator Y Combinator. Last year, Airbnb raised $112 million at a valuation of $1.3 billion.

In the wake of Facebook’s lackluster initial public offering and  concerns over its ability to make money from its vast number of users, entrepreneurs such as Wong are emphasizing to potential investors the revenue they’re generating.

“Investors are requiring founders to really be disciplined about connecting traction with users and revenue in a way that the last wave didn’t demand as much,” said Wong, who was one of the many young entrepreneurs attending Y Combinator’s demo day, a semi-annual showcase of early-stage startups.

Vayable, which helps travelers book reservations at tourist attractions, generates revenue by taking a fee from the local businesses. Another startup,  Filepicker.io, touted how it charges developers a monthly rate for simple file uploading. Meanwhile, FlightFox pitched how it has more than 3,000 customers paying for access to its online network of human travel agents.

The emphasis on business models stands in contrast to dot-com companies as well as more recent Web 2.0 startups such as Twitter and Foursquare, which raised money from VCs while having little or no revenue by emphasizing their adoption by users, said Josh Elman, principal at venture capital firm Greylock Partners.

“We’re seeing a new focus on people thinking about how they’re going to make money and build these big sustainable businesses,” Elman said in an interview at the event, held at the Computer History Museum in Mountain View, California. “It’s not just about how quickly you can attract a ton of users.”

Entrepreneurs in Y Combinator may be taking a cue from the program’s co-founder, Paul Graham, who in June penned an open letter urging young startups to focus on making money as a hedge against a potential downturn in Silicon Valley brought on by Facebook’s IPO. If venture capitalists see public investors sour on Facebook and other Internet stocks, they may be more cautious about pouring money into the next new things, he said at the time.

“The best solution is not to need money,” Graham advised in his letter. “The less you need investor money, the more investors like you, in all markets, and the less you’re harmed by bad markets.”

At demo day, Graham said he has noticed an improvement in the ability of Y Combinator startups to make money, though he doesn’t attribute it to his advice or wariness about the public markets.

“I always tell people the best thing you can have on demo day is a hyperlinear graph of revenue,” Graham said in an interview at the event. “I think the startups — this batch — are just better, and they’re more able to do the thing we tell everybody to do.”

Still, some startup founders expressed concern that the days of raising gobs of funding on generous terms may be numbered.

“It’s looking like the funding market won’t be as great for the next 6 to 12 months because of the macro economy,” said Aditya Bali, co-founder of BufferBox, a service for delivering e-commerce goods to physical kiosks in grocery and convenience stores. “If you’re just going to run through a whole bunch of money over the first couple months, but you haven’t actually figured out how you’re going to make money, we’re seeing less of those companies.”

BufferBox, founded in Waterloo, Ontario, last year, is in talks to raise money from top-tier VC firms, Bali said. He said those talks have been helped by fees the company takes from e-commerce sites.

“We don’t really need your money, because this is what we’re doing,” Bali said of the VCs. “But if we have your money, we can go that much faster.”

“That’s the whole way to get investors excited,” he said.

 

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