CC#21: A Brief History of Y-Combinator

Y-Combinator: From 8 startups in Paul Graham's kitchen in 2005 to over 350 startups on Zoom in 2021.

Last night’s GOOD TIME show covered the history of Y-Combinator (YC), which is the world’s most successful accelerator started in 2005 by Paul Graham (PG) and Jessica Livingston. The program just concluded their largest demo day to date last week.

Aarthi started it off by bringing up some numbers: “YCs demo day had over 350 startups from 41 countries.” She then asked Garry Tan to share his thoughts. Garry is the founder and managing partner at Initialized Capital (and a former YC partner).

Garry: ”The thing about YC that people don’t understand is that it continues to grow bigger and become more of a magnet. The cool thing is that it teaches more people all around the world that they can start companies and they don’t need to go to Stanford or Harvard, or have any other credentials for that matter. It teaches people all over the world that if you are good at building products and can create a good demo and get some customers, you can start a business and it can become a good startup and you can get crazy amounts of capital. YC demo day is the easiest place for any founder to go and get money.”

Sriram then requested that Garry share a brief history of YC.

Garry: “The funniest thing is that I don’t even know if I’m allowed to tell this story. Paul Graham is a computer scientist who wrote one of the big, really good books on LISP (programming language). At some point, he decided he wanted to solve the money problem, so he recruited the two smartest people he knew, Robert Morris and Trevor Blackwell to start a company with him. I believe they actually started helping artists sell their art online, kind of like NFTs before NFTs. What came out of it was Viaweb, which went on to be acquired and became Yahoo Store. He was able to do it as a software developer and they only raised $100,000. They were able to sell it for 10s of millions of dollars, which ended up being worth a lot more because of the Yahoo lockup. Paul and Jessica wanted to get into angel investing, so instead of doing it like everyone else was at the time, he decided to structure it based on what he learned from his first company. The investor that wrote viaweb a $100,000 check received 7% of the company and gave the founders a lot of help on the legal and business side of things. Paul would go around speaking at college campuses talking about his experiences building companies. Before YouTube and TikTok, he was able to attract people who would go on to do exactly what he did. He had perfected the essay and was giving people a world-view for those who were not meant to have a job. So he literally said, what if we put up this online application for a Summer Founder’s Program? They got about 1000 applications for 10-15 spots. They had founders such as Sam Altman with Loopt, Justin Kan / Emmett Shear of Twitch, & Alexis Ohanian with Reddit in that first cohort, which was one of the first early exits from YC. Back then they were at Garden St. in Cambridge, and Demo day was probably a bunch of dentists or pretty much anyone whom Paul could twist their arm into attending. Even Ron Conway was invited and refused to attend that first demo day. I believe Jessica published Ron’s email.”

Avichal: “A lot of people don’t remember this but YC was actually running a Cambridge program for its first 4-5 years. And it’s hard for people to realize this now, but in those first 4-5 years it was unclear if this thing was going to work or not.

Sriram: “Back then the idea was that finding access to investors was hard. Especially because these are often very young founders. I had actually heard that the Tuesday dinners Paul & Jessica hosted weekly was to make sure the founders had a good meal at least once per week. Aarthi actually went through the program”

Aarthi: “Mine was the last batch that PG was there. It was really bittersweet. In regards to the weekly dinners, I remember Jessica would talk about it saying things such as “We just want to make sure these kids are getting fed.” We would have incredible and famous guests all the time, and it was really fun to sit down and talk about off the record stuff. It felt like we were all in this together. Antonio, I’m curious to hear your thoughts on how it has changed since back then, since you were part of one of the first cohorts!”

Antonio: “It’s incredible that this batch was 350+ companies. I was in the batch Summer 2010. I remember Paul wrote an essay titled “So you want to start a startup.” and that was sort of the year where it started to really grow fast. I remember I shared that with my co-founders to convince them to work with me. You would imagine the program would feel like the ‘School of Socrates’ or an institution, but it is really scrappy. It didn’t feel like a business.”

Paul Davison: “I never. went through Y and now I feel like an imposter. At one point we were thinking about what do we call our accelerator, and we thought we should call it 'Y-Clubinator”

Sriram: “So why do you guys believe YC worked. What about it worked so well? What worked in regards to attracting amazing companies?”

Antonio: “For us, we didn’t have a product and we were lying through our teeth when we had that 10-minute interview for YC. I think what worked exceptionally well was that PG & Jessica would make bets on teams and then fully back them. At one point we were in legal trouble and they supported us through every part of it. Back when I was in it, I knew every other founder in the program, but I expect YC is very different now.”

Avichal: “My wife went through YC throughout the early days. The cost of doing a startup had dropped so the idea that you could give people that $100,000 and they could come up with something was amazing. The fact that the engineers shouldn’t bring on MBAs and that the 22 year olds should run companies was pretty contrarian at the time. It’s always interesting to hear founders who went through the first few years of YC, you always hear them say it was really just Paul and Jessica. For them it was deeply personal, they just love founders. The magic of product-market fit, You just care more than anyone else.”

Garry: “I’ve definitely studied the crap out of it. They try to see that which is signified not the signifier. Whether or not someone worked at Stanford or google, they tried to get deeper by asking questions about the users and the problem that startups were solving. They didn’t treat people like they were lottery tickets. It’s crazy to say that is unusual, but unfortunately it is. People treat it like lottery tickets. I think there is a human element to doing investing that they were able to embody. Demo day and YC is an interesting phenomenon.”

Sriram: “Can you guys share your best demo day incident stories.”

Gary: “I once invited Steven A. Cohen to demo day and I definitely cracked a joke about insider trading and he didn’t laugh. He later told me that YC was part of his education of investing in private companies.”

Antonio contrasted his embarrassing demo day story with another founder’s who’s pitch was incredibly smooth: “They used to have this prototype day, maybe half way through the program, which was basically a forcing function for all the founders to essentially get their acts together for demo day, I literally tripped over the slider projector and almost passed out on the floor. And then there’s people like, Rahul from Superhuman, who gave the most slick “James-Bond like” presentation. He had already raised $1m and was raising more.”

Avichal made an interesting point about how everything can change for a startup in just 1 day: “This is my favorite story cause it embodies what it is like to do a startup. It’s about Blake Scholl, Josh Krall & Joe Wilding of BOOM supersonic. At the time they went through YC, it had started to grow and they had split up demo day into 2 days. People don’t realize they went through the whole YC program and when they went to pitch on day 1, they didn’t even have a single LOI (letter of intent - basically a promise from a future customer who will pay for your product when it is ready). Therefore, things didn’t go very well for them. However, a few weeks prior to demo day, they’d actually heard Richard Branson would be in California and they finagled a breakfast meeting with him. Apparently, the meeting went really well because on the morning of Day 2 of demo day, a LOI to purchase 10 jets came in from Virgin valued at $2 billion. This is likely one of the most valuable LOI any YC founder has ever had! To me that’s a story of how close these companies are to going bankrupt, and how quickly things can change all of a sudden!” 

Aarthi shared that having gone through the program, one of her favorite things was the Alumni Demo Day. “It’s meant as a practice session for demo day. A few days before demo day, many of the alumni come to the YC headquarters and help the founders in the current cohort. You can ask them for feedback, you can practice pitch to them and ultimately they are just there to help. They’re not there for anything except support. There’s this environment of being in a room with so much support and people wanting to see everyone succeed. I thought this was awesome because startups are so hard, for 3 whole months you’re banging your head against the wall, and then at the end you have this room full of really smart, successful people who will just clap and cheer you on no matter how bad your pitch is.”

Garry shared a story that exemplifies how quickly YC began to grow: “When I became a partner in 2011, I tried to start this tradition that I would bring In-and-Out burgers for all of the founders on demo day. First it was 45, then it went to 60 and on my 3rd cohort of being there In-and-Out refused to make 80 burgers.”

Sriram: “What have you observed? Have you seen any trends?

Garry: “There are increasingly more and more companies that already have millions in revenue and then are raising series A’s instead of seed rounds at demo day. Companies like MessageBird. There were at least 3 we came across who were raising a series A of somewhere between $10m-$15m. There was even one that was raising $100m!!”

Avichal: “To add to that - the amount of non-US based companies have been increasing about 7-10% per year and this is the first time that over 50% of the founders in a cohort have been based outside of the US. A lot of these are in India and Latin America.”

Aarthi: “What do you think is happening?”

Avichal: “I think those ecosystems are coming online. India is activating. YC has also started making a push internationally.”

Garry: “A lot of my followers also follow YC on YouTube and from my followers, only 28% are in North America. About 15% are in India and 10% are in Africa. The knowledge is getting out there and spread by the internet. We’re now about 5 or 6 years since the international push began, so some of those first international companies we had are having exits and acquisitions and are going back to their regions to serve as angel investors to other startups.”

Siriram: “For the first time in India, we are seeing low cost mobile data accessible to the masses. Millions of Indians are suddenly getting online. If you look at the first generation of Indian startups like FlipCart, — the founders have become active investors. We’re now seeing pitches of companies who are 2nd or 3rd generation. How do you guys think remote has hurt or helped YC?”

Avichal: “To be honest, I don’t know. I think it will take a few batches to really see how successful companies are and how loyal they feel to the program. In the early days you saw these people would be at each other’s weddings. Can you go remote and retain some of those bonds? I’m not sure. I’ve actually been very impressed and surprised that YC has been able to scale to the degree that it has already while maintaining such high quality founders.”

Sriram: “When you talk to prospective founders today, how do you help them think through YC vs. other incubators, and VC firms?”

Garry: “I’m really really biased obviously. I think YC is the only incubator that people should even consider. If you’re going to give 7% of your company might as well give it to the best. The best is so big now. Some friends of friends of mine - I got them to quit their jobs to go all in on their startups. I would meet with them every other week. I just couldn’t get them to absorb the Silicon Valley cult culture, and it wasn’t until they went through YC that they truly got it. They actually just raised $40-$50m the other week. I can’t always get them to absorb what it means to run fast. Your coach always has to teach you in a practice, it needs to feel like this. I’m often trying to get that feeling across to founders. Theres no other group in the world that will teach a large group of founders how to run fast. There’s really no other place I would recommend people to go.”

Sriram: “Where do you see YC headed?”

Antonio: “I think it’s weird right because PG had this post with the last supper with the disciples, he was actually trying to create an institution that would last a long time. I really don’t know, it’s hard to say, getting so large feels (I wouldn’t say corporate) but definitely not like it used to. The acceptance rate has always been around 2%. It would seem weird for YC to say no we’re only gonna keep 35 people and make the acceptance rate .1%.”

Aarthi: I think YC has done a really good job going switching to 100% remote since the pandemic hit. IT still feels really high quality. Lots of good companies, lots of traction. I don’t really have thoughts.

Gary: “The best post to read, is by Jared Freedman in response to people saying that the program is losing its value because the bath size has gotten so large. The truth is, the larger the batch, the more companies there will be like yours and they will help you even more. Think about these ecosystems themselves. India would get there by itself, but with YC its getting there even faster. This is a thing that is pushing society forward even faster.“

Sriram: “It’s cool that Jessica is retired now and PG is back to programming languages again. It’s like everything came full circle.”

I still find it pretty fascinating to think about the fact that YC started just 16 years ago and that the first cohort was 8 college students eating in Paul & Jessica’s dining room, as compared to the last program that had over 350. I guess that’s why they say you should do things that don’t scale!

The OneSixOne Group is currently building the next YC on the east coast and we’ve already had 25 startups go through our Founder’s Program over the past year. Our fourth cohort will be kicking off in mid June, and founders can apply here.