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Tuesday, May 21, 2024

How Y Combinator Changed the World

This month a successful entertainment-business newsletter written by an influential reporter joined forces with publishing legend Janice Min to form a news startup. Buried in the story was a fascinating detail: The cofounders had signed up to go through the three-month Y Combinator accelerator program.

If you haven’t been paying attention, this news might have startled you. Why would a magazine diva join a horde of hoodied nerds, giving up 7 percent of her company for the $125,000 stake that YC offers its startups? But after almost 17 years and 3,200 companies, Y Combinator has evolved into something far beyond a boot camp for tech bros.

In its most recent batch, YC selected 401 companies out of a pool of more than 16,000 applicants to receive its imprimatur along with coaching from veteran founders on building products, formulating business plans, and raising funds. On August 31 and September 1, 377 of them pitched their companies—remotely, of course—to the investment community in the semiannual ritual called Demo Day. Each company’s founders had one minute to explain themselves: just enough time to plant a seed in a potential funder’s mind.

Their ideas reflected YC’s implicit view that for every problem in the world, there is a startup solution, though some solutions may sound familiar. There was a ghost kitchen in the Philippines. A “Stripe for former Soviet Union countries.” A “Vanguard for India.” One founder promised to boost the income of dental practices by using deep learning to identify cavities. Another founder claimed, “We’re building a better search engine than Google!”

At the end of each 60-second pitch came a Spartacus-like battle cry with the company name.

We are … Whalesync!

We are … Strive Pay!

We are … Yemaachi Biotechnology!

There is no sure thing when it comes to starting a business, and indeed most fail. But inclusion in the Y Combinator program is definitely a thing; YC has launched companies whose total valuation tops $400 billion; its alumni include such luminaries as Dropbox, Airbnb, Stripe, CoinBase, and DoorDash. There are other names you might recognize: Substack, Instacart, Scribd, OpenSea. In most cases, the companies entered the program with a valuation of zero, but many YC founders have more lucrative options and understand that what might look like a bad deal on paper is actually a bargain. Even experienced founders have decided to go through the program, some for multiple stints. And then there’s the stray publishing icon like Ms. Min.

So what do you get when you join? Sure, there’s the mentorship. YC has also vastly simplified tasks that used to take weeks—incorporating, trademarking, getting web services set up, and above all, connecting with the right investors–a lot of it through software, of course. “We're sort of like Crispr for startups,” says Geoff Ralston, YC’s president since 2019. “Startups come into YC with raw DNA. We edit the DNA so that they have the alleles that make it more likely for them to be successful.” Those techniques have been widely distributed—hundreds of thousands have attended the program’s open Startup Schools—and have been adopted by hundreds of copycat accelerators, incubators, and boot camps, even some inside corporations like Google’s Area 120. Y Combinator has hosted more than 3,500 companies, but countless more have used its blueprints.

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But while YC has helped launch major companies, its Weltanschauung has also had a major impact on tech, business, and even culture, some of it good and some of it more questionable. When Marc Andreessen opined in 2011 that software was going to eat the world, he was simply stating the operating principle that YC had been executing for years.

You can see the impact in the growing ambitions of its companies. Tiny startups are now taking on the kind of problems—fusion energy, supersonic travel, autonomous vehicles—that only giant institutions and corporations once considered. Last summer’s batch included startups to remove space debris and eliminate incontinence. “We’ve seen investors willing to do deals they wouldn't have considered a decade ago,” says Michael Seibel, the YC managing director in charge of the batches. Those throwing money at YC companies are not only venture capital firms and seed funds but a horde of actors (including Ashton Kucher), sports figures (Joe Montana), and angel investment clubs where allergists and kombucha makers can take a shot at backing the next Github. By and large the allergists don’t stand a chance with hot YC companies, whose founders get to be picky. But the interest of retail investors creates a wider market for startups in general.

It is even fair to say the economy itself has organized around YC’s shotgun-style investment philosophy rather than the traditional VC rifle shot. Global investment in young companies has never been higher—an estimated $580 billion in 2021. “If you have outsize success for a relatively small number of companies—and we have a relatively large number of companies that find outsize success—you can afford to invest in lots of companies and still have really great economic returns,” Ralston says. “The math works really well.”

While that works for YC, all those shotgun blasts can make for a messy investment picture. What Ralston doesn’t say is that YC’s track record of producing lottery hits often creates a frenzy among investors desperate to hold a ticket. Many YC companies get funding well before Demo Day, and certainly before they have proven themselves viable. Despite YC’s general advice to founders not to take more funding than they need, the cycle keeps going in subsequent funding, and sometimes leads to down rounds–taking investments at valuations lower than the previous estimate—or even IPOs that disappoint. But the enticement of a startup going nuclear is irresistible, and even when some YC companies such as DoorDash or Airbnb looked overvalued going into their IPOs, investors drove up the stock prices. And that’s what the market looks like now: tossing money at companies, sectors, and currencies in hopes of a lottery hit. (To be sure, this is also a consequence of the limited options for investments in general.) A glance at the stock market shows that even years-old companies on the big exchanges—some with values in the trillions—now seem to be regarded as startups, just on the cusp of explosive growth (looking at you, Tesla).

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But maybe YC’s biggest contribution was to champion a way to look at founders. Over the course of the last decade and a half, founders have become central figures in the drama of our time. These days all sorts of people perform founder cosplay. They don’t even have to start traditional companies or be involved in tech. They might be artists, athletes, or influencers. They call themselves builders. They call themselves makers. They call themselves creators. Whether they know it or not, they have cast themselves in the mold of Y Combinator founders.

The story of how Paul Graham started Y Combinator is legendary. In 2005, Graham, a computer scientist who had sold his company to Yahoo, formed a three-month boot camp near his home in Cambridge, Massachusetts. His collaborator was Jessica Livingston, a banker who later married him. Eight founder teams participated, including the hackers who built Reddit and the 19-year-old Sam Altman, who succeeded Graham as YC’s leader in 2014.

Graham and Livingston have “retired” from the program and are living in England. But every so often, Graham will send off a transcontinental bolt from his countryside Olympus. In his essays he has written that the best founders were hackers, and he has espoused a philosophy of what might best be called founderism. If Y Combinator were a movie, the plot would be a hero’s journey, with intrepid founders overcoming obstacles to attain glory and eventually win the T-shirt that YC bestows upon companies achieving liquidity by buyout or IPO: “I built something someone wants.” As “a professional billionaire scout,” Graham believes in the goodness of founders. “Bad people make bad founders,” he argued in a recent essay.

Under the laws of founderism, the sheer audacity of ambition makes the craziest plans the most valuable—the long shots that can pay off big. The YC company that Graham gushes about the most is Airbnb, whose business plan was actually insane; it hinged on people renting their couches to out-of-towners visiting conferences. It wasn’t the idea but the energy and creativity of the founders that made Graham fall in love with them.

The opposite holds as well—even an apparently pedestrian concept can be twisted into a plan to take over the world. Stripe, for example, originally sought to help fellow startups streamline payments. That was just an onramp to its current ambition of being the essential toolkit for all businesses on the internet. Back in the time of small batches and in-person demo days, I used to marvel at the mundane tasks young founders promised to disrupt. I imagined their parents glancing at these business plans and saying, “We paid for you to go to Stanford and you’re starting a company to do laundry?” But they’re founders, and attention must be paid! Graham would encourage them to make a slide showing how their idea would scale into something humongous. Sure, our point of sale system for barber shops might not look like the Next Big Thing, but our real plan is to remake how everything is sold, and kill WalMart/Amazon/military supply chains/God.

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When YC started, its focus on founders made it an outlier. Livingston has written that no one thought the experiment would pan out: “It seemed so lame–our own lawyers tried to talk us out of it.” But the world has come around. “There is a lot more talk about founders now,” Graham says. “Instead of seeing the company based on its business model, and replacing the founders with some professional manager, you choose a company based on founders, and you help founders.”

Livingston says YC’s founder focus has helped outside investors become much faster at making decisions. “At some point, it is a leap of faith,” she says. “If you feel like these founders have a good kernel of an idea, and they approach the problem the correct way, and they seem like thoughtful, smart people, then it’s worth a shot.”

YC didn’t invent the founder trope but acted as a catalyst: Its rise overlapped with the ascendance of Mark Zuckerberg, who set the cultural image of a fuzzy-cheeked college dropout in a hoodie. (Zuckerberg is a friend of YC who spoke at several of its Startup Schools.) For years, critics noted that YC was dominated by young, white Zuckerbergian clones, but in recent years the program has consciously become more diverse. This makes founders even cooler.

Of course YC’s run has had its bumps. An effort to start a branch in China fell through. The clubbiness of the Y Combinator community has helped fuel a culture war where those cosseted founders and their enablers—entrepreneurs, investors, and tech cheerleaders in general—see themselves as victims of envious criticism from the press and policymakers. And YC had its own mini-Theranos experience when a company called uBiome promised improved diagnostics by testing poop. The FBI raided the firm, charging that the testing was unnecessary and the billing fraudulent. When I asked Ralston and Seibel about it, they told me the outcome was unfortunate, and that uBiome had been banned from the YC community. But they didn’t believe the incident compelled a change in practices.

Indeed, YC doesn’t see its role as vetting the science or monitoring the business practices of the companies it funds. The partners aren’t necessarily betting on a business model, they’re just putting a few chips on the founders, some of whom might have come up with their ideas just days or even hours before interviewing.

Meanwhile, YC has itself become a giant business. Ralston won’t say how profitable, but holding onto a slice of $400 billion in valuation—with a steady flow of potential decacorns enrolled every year—shows why it’s a sure thing to toss $125K to hundreds of crazy startups every year.

And soon even more. Geoff Ralston recently remarked that future batches of YC may well include more than a thousand companies. Going remote, he says, demonstrated that the YC model scales even better than its leaders suspected. Maybe the congestion will mean 30-second Demo Day presentations. No matter, says Michael Seibel. “In any Demo Day presentation, the investor is most likely going to only remember four to six sentences, max. You have to make sure that they're remembering the right four to six sentences.”

If it doesn’t work out, there’s always a few hundred other YC companies to bet on. And thousands more inspired by the YC model. It’s Y Combinator’s world, and we’re all invested in it.


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