After hitting the jackpot, tech entrepreneurs school start-ups at Stanford

After hitting the jackpot, tech entrepreneurs school start-ups at Stanford

Investor-coaches listen to pitches and dole out advice and sometimes money.
By Jessica Guynn, Los Angeles Times Staff Writer

May 26, 2008

PALO ALTO —
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.

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."

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