Source: VentureBeat | Originally published August 23, 2015
Twenty-four-year-old Brian Liou was a little nervous. But he had to focus. His turn was next. Liou is the cofounder of Leada, a startup to help businesses train better data analysts, and he had a lot riding on this. After all, his company had just pivoted two weeks ago. So, no pressure.
Over the past three months, Liou, along with his fellow founders from the 2015 summer batch of 104 companies, had been preparing for this fateful day: Demo Day. The Day.
This was perhaps the single most important day these startups would have during their time together. This was when each founder needed to present their product in front of hundreds of venture capitalists who were eager to find the “next big thing,” and impress upon them why their idea is important for the world.
Each founder had just two minutes to show the results of their team’s late nights slaving away in front of the computer to get that app working, making sure that the hardware and software did what it was supposed to do…
Welcome to Y Combinator’s Demo Day, and the program that’s become a major part of the Silicon Valley tech ecosystem.
‘First Gear For Startups’
Every year, thousands of early-stage companies submit applications, hoping to be included in Y Combinator’s next batch of startups. Founders have to not only wait to find out if their answers to the questionnaire were good enough but also successfully pass through an interview process before even being considered as finalists.
It’s fascinating to think that this all began 10 years ago, thanks to a small summer event that took place in Cambridge, Mass. Y Combinator was not conceived as an “accelerator,” even though that’s what many consider it to be. First and foremost, the organization sought to be a resource for startups.
“We always wanted to fund the best startups,” Y Combinator partner Jessica Livingston told VentureBeat. “We wanted to help startups at whatever stage they’re in become a billion-dollar company.”
The history of Y Combinator has been well documented by cofounder Paul Graham, but Livingston shared some additional thoughts: “We started talking about the brokenness of the funding world in 2004 … and it was. What we wanted to do was create a standardized branded form of funding. If you were thinking of starting a company, you didn’t have to meet with various people [to get things started]. Y Combinator wanted to be the ‘first gear’ for startups.”
Eight founders joined Graham and Livingston’s Summer Founders Program in Cambridge, including Justin Kan, Alexis Ohanian, and Sam Altman — the man who would eventually take over as president of Y Combinator.
Over the course of that summer, Graham and Livingston helped the founders launch their startups, connecting them with the right people and even bringing in speakers to share advice (the start of the program’s renowned Tuesday Dinners).
“Originally we were targeting programmers and wanted to teach them the business side of running a startup,” Livingston explained.
Don Dodge, a developer advocate at Google and also an angel investor, happened to be at one of the early demo days. “There were maybe 20 investors at the first demo day. It was a collection of traditional venture capitalists and angel investors, and none were overly impressed with the companies that presented. No one there, including the Y Combinator founders, could have predicted that Y Combinator would become the largest and most successful startup accelerator in the world.”
Soon after the inaugural event, Livingston and Graham knew that they were onto something that could scale. Along with their other partners, Trevor Blackwell and Robert Tappan Morris, they set out to formally create what is now known as Y Combinator.
Benevolence For Founders
After 10 years and 20 batches of startups, what has surprised Livingston most? Three things, she told us — first, how difficult it is for anyone to predict which startup will wind up becoming a billion-dollar company. It’s not easy to determine a company’s potential just by interviewing them for 10 to 15 minutes. The startup’s fortune could change dramatically in six months.
Second, Livingston said, Y Combinator was never able to detect a pattern that could determine what would make a great founder. Livingston said that there wasn’t a set pedigree (e.g. Computer Sciences degree from Massachusetts Institute of Technology) that determined if someone was good. The key in her words: “Just be determined, and have a little luck.”
Lastly, Livingston said that there’s no such thing as a “perfect startup.” Every company is broken in some way, with a degree of craziness behind the scenes. It’s important to recognize that “the journey is a roller coaster ride” where things can blow up in your face.
Undeterred, Y Combinator has continued to press forward with its mission to help startups in practically any way possible. Throughout our interviews with the partners, startup founders, and investors, a common theme emerged: This is a benevolent organization.
Benevolence is an act of kindness or an inclination to be kind.
Livingston said that a common misconception about Y Combinator is that it’s all about making money — it’s not. The program is run by a group of people who “are devoted to helping startup founders.” It’s a funding company originally conceived as “a charitable experiment.”
A Bellwether For Investors?
More than 37,000 startups have applied to Y Combinator since the program began accepting applications for its Summer 2007 batch. Since that time, it seems likely that Livingston, Graham, Altman, and the entire team have seen it all. But are the startups it invests in a testament to the program’s role as a bellwether for investors?
“I believe whatever smart, ambitious people are working on will be the trend of the future,” said Altman. “I do think that it’s worth thinking critically about what the future will be.”
According to Livingston, Y Combinator tends to spot trends early on. She pointed out, as an example, that it began funding hardware companies before that was popular, and reminded us that Pebble was an alumnus of the program.
However, the partners rejected the idea that Y Combinator identifies themes or topics that it wants to target with each new batch of startups. Yes, Altman believes it is valuable to think critically about trends, but he stressed that the program has never, in the past decade, established a specific policy stating that it was going to put more emphasis on nonprofits, biotech, bitcoin, hardware, or any other area. For Y Combinator, it’s more about the people.
It may be tempting to imagine correlations between startups that investors sink their money into and the types of companies Y Combinator admits, but you would probably be mistaken. “The best indicator of what will happen is what smart people are working on,” said partner Qasar Younis. “Venture capitalists and angel investors don’t make the market. Those that make it are the individual founders creating the products and things the world will be using.”
An Education In Running A Startup
These days, if you asked any of the 943 startups that have passed through the halls of Y Combinator where they first heard about the program, chances are that it was through an alumni referral. However, in the early days, Graham’s essays, which have been touted as stuff of legend, played a big part in getting founders to apply.
Take David Rusenko, founder and chief executive of Weebly. As a student at Penn State University, he worked on his website creation service part-time until one fateful evening when he was reading Slashdot and came across an article from Y Combinator, reminding everyone of the upcoming batch deadline. Rusenko said he had become familiar with the program thanks to Graham’s essays, which were a great selling point, sparking his desire to participate in an accelerator-type program.
Weebly was accepted to participate in the winter 2007 batch and the result was both “game-changing and life-changing,” according to Rusenko. “It was a complete perspective shift,” he said. “You sort of look at before and after: three smart kids living in central Pennsylvania disconnected from the startup world. [Startups] weren’t popular back then. If you mentioned that you were working on a startup or had a new product, the most common response was overwhelming skepticism — you have no legitimacy.”
The $20,000 provided by Y Combinator helped the company’s three founders survive and paid the rent for four months. After Demo Day, the startup raised $650,000 from Ron Conway, Mike Maples, and others. It would become cash-flow positive in 2009. Fast-forward to the present, and more than 30 million people have signed up for Weebly, with 250 million visiting a Weebly-powered site every month. The company now has 275 people on staff.
“We probably wouldn’t be where we are today without Y Combinator,” Rusenko testified.
The alumni are not just a loose-knit group of people who have passed a certificate program. It’s more like being in a fraternity or having gone into battle and bled together. In Rusenko’s case, he has gone back to speak to other batches and also gives advice to companies when he has time. Since June 2014, he has also been on Y Combinator’s “board of overseers” where he helps Altman guide the firm.
Stripe’s cofounder, John Collison, thinks that Y Combinator’s application process is pretty great for filtering applicants: “It’s a very smart and meritocratic way of hoovering up talent from around the world, often far beyond Silicon Valley. [Stripe cofounder] Patrick and I were just some random kinds from Ireland, nobody knew us. But Y Combinator plucked us out from the other side of the ocean, mentored us, and gave us connections to a great bunch of developers and startups who would become some of Stripe’s earliest users.”
While most people would call Y Combinator an “accelerator,” it’s not a term the partners are comfortable with. They’d rather view what they do as akin to a university program. For Altman, this is the future for startups: “The better we make the network, the better the companies we get. We grade ourselves on net innovation out in the world. The more we can build the support system and help the innovators, the better we are.”
Startups that come to this program won’t receive a formal education like they would in a traditional university. But they are taught the things necessary for developing business acumen, such as negotiating terms with investors, registering a company, marketing, design, and all the basics of being chief executive in a startup.
Furthermore, as often happens in post-secondary education, those that graduate will form a bond with other alumni, and that network will not only support its members, but will also lead to new applicant referrals, helping Y Combinator find the next group of founders to invest in.
Is It Best For The Founders?
With the exception of Livingston, Graham, and a few others, Y Combinator is run by partners who themselves have gone through the program previously. Those that have participated include Altman (Loopt), Younis (TalkBin), Kan and Michael Seibel (Justin.tv/Twitch), Ohanian (Reddit), Aaron Harris (Tutorspree), Garry Tan (Posterous), and Kevin Hale (Wufoo).
Altman, who was a founder in the inaugural batch, reminisced about his time in Y Combinator’s program. “It’s always cool when you’re going through something for the first time,” he said. “No one took it seriously. Everyone thought it was a joke and it happened when old-school investors ruled.”
That thinking didn’t bother Altman, who at the time was working on Loopt, a mobile application that connected people to their community. He participated because he didn’t know anything about business and was desperately in need of money and advice. The company sold in 2012 to Green Dot Corporation for $43.4 million, but not before Altman showed it off at Apple’s Worldwide Developer conference in 2008.
Did Y Combinator assist Altman in snagging that prized opportunity on stage with Apple? No. But Altman is proud of his time with the program.
“Loopt wouldn’t have happened without Y Combinator,” said Altman. Now that he’s president, he’s carrying on the lessons that were imparted to him and his team a decade ago to help other startups. “If we don’t invest in these companies, they don’t happen…The thing about Y Combinator that’s cool is that most companies won’t happen if we don’t fund them.”
“Y Combinator is like a startup boot camp where you can learn everything you need to know about how to build a company in 12 weeks, and do it with the best mentors and advisors in the world,” said Dodge. “The alumni network is incredibly valuable to startup founders for advice, introductions, hiring, etc. Perhaps most importantly, Y Combinator has leveled the playing field with investors by creating competition for deals, standardizing terms, and boosting valuations.”
Other founders we’ve spoken with expressed similar appreciation for the program. Chase Adam, founder of crowdsourcing medical platform Watsi, said that Y Combinator not only helped his team focus, but provided resources he had never encountered before: “A lot of communities say they have a network, but we’ve never been part of one that has the quality of Y Combinator.”
Adam’s experience is especially telling because the inclusion of Watsi marked the first time the program had accepted a nonprofit into the batch (you can read Adam’s story here). For Y Combinator, adding a nonprofit was an interesting experiment, and one Graham conducted outside normal channels. Adam had posted something about Watsi on Hacker News, and it caught the attention of the Y Combinator cofounder. Graham offered to invest and extended an invitation to Watsi to participate in the program.
Excited but nervous, Adam and his team set about winning over investors. “The Y Combinator stamp of approval was big, especially from foundations that respect Y Combinator. It says that someone vetted us.” But how would Watsi fit in with its technology-centric startup brethren? Adam said that his team fit right in — the only struggle was internal, as they felt that they had a lot to prove and didn’t want to leave a bad taste in people’s mouths about nonprofits.
It comes back to Y Combinator’s core philosophy – it’s about the people. Younis explained that the partners want to work with people who will be great members of the community. “You can have someone that’s compelling and a jerk, but Y Combinator isn’t interested in that.” Later he added that the relationship Y Combinator has with founders is paramount: “We always want founders to think that Y Combinator is in their corner.”
‘Experimentation Is In Our DNA’
Not one to stick with just one thing, Y Combinator periodically explores new efforts and initiatives. Some experiments include Startup School, the Female Founders Conference, admitting Quora as a late-stage startup in 2014, making it possible to apply to Y Combinator without an idea, and, most recently, the Fellowship.
Over the past 20 batches, the number of total startups in each has grown and now totals 107. In 2015, Y Combinator had 222 startups (115 in winter and 107 in summer), making it the most active year in the program’s history. In all, the percentage of companies accepted from total applications submitted is approximately 1 to 2 percent.
At what point will the program become “too big”? Younis thinks that as long as founders believe Y Combinator is worth it, the program will continue. It has experimented with ways to keep things fresh, while also expanding its reach in under-served areas, such as tapping those still in high school or college who are looking for advice on how to launch their startup. Additionally, it’s targeting those who may not be ready for the big leagues, but instead just need a little extra help to get their idea off the ground.
Altman doesn’t think that Y Combinator is anywhere near its breaking point: “People said this about the batch after mine. People hate change and they hate the idea that one startup organization can be this central force. Yes, it can get too big, but are we anywhere near there? No.”
The idea behind Y Combinator is one that seems to have persevered throughout the years in Silicon Valley. And it’s amusing to think about how far things have come since that fateful day when Graham named his organization Y Combinator. The name is rooted in a mathematical term for a recursive calculus function and fits the mission of the program: a startup creating a bunch more startups.
As Dodge pointed out in an essay back in April: “Y Combinator acts like a recursive loop that attracts the best entrepreneurs, which attracts the best investors, and the highest valuations, which attracts the best advisors, which comes full circle to attract the best entrepreneurs.”
Worth The Hype?
Do investors buy into what Y Combinator is selling? If this week’s Demo Day was any indication, certainly so — the room was filled to capacity with more than 500 investors eager to find out what the startups had to sell. But that’s not to say they were without reservations.
Angel investor Jason Calacanis told us that while Y Combinator has a “killer network” and would “double your valuation”, he believes the batch size is too large,which doesn’t allow startups enough time to present their product to investors in order for them to properly understand what’s going on. And by the time you get to the bottom third of the group, well, they can get lost in the mix.
In 2014, Calacanis opined that the valuations of Y Combinator companies were too high, which other investors have cited as a concern. However, he said now: “It feels like [Y Combinator] addressed that and things are in the still very rich $6-12 million range. If the price is too high, top angels simply opt out and invest in 2 or 3 startups that are just as good that are not part of Y Combinator. Of course, you have to source those deals yourself, which the neophyte investors or dentist doesn’t have the ability to do.”
Dodge agreed with Calacanis about the valuations, but also added that unwanted pressure on founders may be detrimental to startups. After all, many perceive Y Combinator as having a pretty good success rate and living up to expectations could be tough for some entrepreneurs.
If you’re looking for reasons why you shouldn’t be a part of Y Combinator — here are a few culled from our interviews. If you’re worried about equity (the program takes a 7 percent stake), then you might want to rethink things. Also, if you’re not wholly invested in your startup (a.k.a. working on it part-time), then Y Combinator isn’t something that’ll work for you.
There are even startups that have rejected admission to Y Combinator — though that’s certainly uncommon. Social media conversion service Snip.ly successfully applied to the program but ultimately turned the invitation down. The company’s CEO Michael Cheng told us that it wasn’t the right time for his company and said he thinks every founder should honestly ask themselves that question:
“Startups go through many phases; some seeking product-market fit, some focused on acquiring customers, some raising capital, etc. Accelerators like [Y Combinator] can most certainly accelerate your startup regardless of which step you’re on, but it’s important for you to choose which step you want accelerated.”
While many think of Y Combinator’s program as a sacred right of passage in the industry, it’s important to realize that it’s not. A startup will not fail or succeed just because Livingston, Graham, Altman, and the entire Y Combinator partnership have invested in it. It’s going to depend on the success of the founders and their teams.
But what is apparent is that regardless of whether they win or lose, Y Combinator sticks by its companies and will do what it can to help the founders build the best business they can. In the end, as Younis pointed out to us, Y Combinator’s lasting legacy is to make Silicon Valley more “founder-friendly.”
This is an experiment that Y Combinator doesn’t plan on ending any time soon.