In the last few months I have seen a number of people write about the amount of innovation we can expect to come out of the current economic recession.  Many people talk about necessity being the mother of invention  and the shift from larger to small, and as I  started reading about Y Combinator that I got a real glimpse of this incredible innovation in action.

In just a few years, Y Combinator has funded 150 different software and Web services startups, with small investments: $25,000. But more then the cash, it is the co-location of these firms, housed together at Y Combinator which I believe really makes the difference.

Scott Anthony, writing for the Harvard Business Review summarized four elements of their model which he believed were a cornerstone of their success:

  1. You can do a lot for a little. It amazes me when corporations complain that they lack adequate financial resources for innovation. With open source software, online market research tools, and the ability to create virtual prototypes, you can do a huge amount for $10,000. A lack of financial resources is very rarely a rate limiter.
  2. Tight windows enable “good enough” design. Most Y Combinator–funded companies are expected to release a version of their idea in less than 3 months. That tight time frame forces entrepreneurs to introduce “good enough” software packages that can then iterate in market. This approach contrasts to efforts by many companies to endlessly perfect ideas in a laboratory, only to fail the real test of being exposed to real market conditions.
  3. Business plans are nice, not necessary. Y Combinator doesn’t obsess over whether entrepreneurs have detailed business plans. Again, the focus is getting something out in the market to drive iteration and learning. After all, if you are trying to create a market, most of the material in a business plan is assumption-based anyway.
  4. Failure is an option. One of the benefits of the Y Combinator approach is it forces quick decision making — if the team can’t produce a prototype, or the prototype bombs in market, the end comes quickly. And the low, up-front investment makes it easier to wind down ideas. Corporations that say they lack resources often have those resources tied up in the wrong projects. Saying no is not a bad thing.

Maybe we need more Y Combinators – VC companies lead by former entrepreneur’s who will push, prod, and coax start ups, encourage them to share ideas, information and resources, and learn from each other.   If small is the new big, then companies like Y Combinator are are the center of it all.