After filming so many successful graduates of the world-famous preparatory academy for entrepreneurs, Y Combinator, for A TOTAL DISRUPTION, I was inspired to journey up the river and find their leader. I quickly discovered that Paul Graham doesn’t like the word “incubator.” Or, for that matter, “accelerator.” The “guru of startups” prefers to compare himself and, Y Combinator (affectionately called YC by its legions of believers) to J.R.R. Tolkien’s Lord of the Rings – in that it invented the genre.
When I caught up with Paul after one of his famed Demo Days, he explained: “Tolkien didn’t think of himself as inventing the fantasy novel. He thought of himself as having written The Lord of the Rings and then a bunch of other people write books about elves, and he probably looks at these books and thinks what a crappy imitation of The Lord of the Rings.” Idea Lab in Pasadena, CA, founded by Bill Gross back in 1996, is oft-credited with creating the first-ever incubator – but Graham’s Y Combinator has certainly sold the concept with its meteoric success.
As of 2012, the 172 companies that have participated in Graham’s program have a total value of $7.78 billion, for an average of $45.2 million per company. Over the past eight years, Graham has provided hands-on mentorship, guidance, and funding to launch over 460 successful companies including the top tech stars from Reddit, AirBnb, Justin.tv, Scribd, Earbits, and Dropbox before they went on to disrupt the old order and change our lives. After a rigorous application process, Y Combinator invites the class of startups to a three-month program to be mentored on everything from naming their company to getting incorporated, ultimately culminating in the opportunity to pitch to top investors ranging from Ashton Kutcher to Michael Ovitz during Demo Days. One thing they don’t get, though, is office space. Graham believes that for startups, setting up their own shop is a key ingredient in developing company culture and identity.
Meanwhile, this method of investing in companies has exploded. Today, there are over 172 seed accelerators worldwide for budding startups looking to catapult themselves to success, but not all accelerators are created equal. For instance, Tech Stars has accelerators in five cities from Boulder to Boston, offers free office space, and $18,000 of funds in exchange for a 6% stake in your company. There’s Dave McClure’s 500 Startups (coming soon on ATD) which – as the name suggests – funds over 500 emerging companies from around the world, bringing them to Silicon Valley for 4 months and providing $50,000 for 5% equity.
In this week’s ATD episode in our Wizard series, we head to Mountain View to follow the action inside the legendary Y Combinator and speak with the man behind the seed-funding firm that Forbes has knighted the top in the U.S. Hearing Paul’s passion firsthand and his process in choosing and grooming startups for success gave me great insight into the magic of YC.
Like many groundbreaking movements, Y-Combinator began by accident. Graham didn’t set out be the pre-eminent Silicon Valley master for young entrepreneurs and create a new model for seed funding, rather he began as a programmer with a great idea. In 1996, he founded Viaweb with Robert Morris, and it was the first ASP (application service provider). Viaweb gave users the power to make their own stores on the Internet. By summer of 1998, Graham and Morris sold Viaweb to Yahoo for shares valued at close to $50 million. Graham walked away with a huge pay day, but instead of buying an island or taking early retirement, he decided to become an angel investor for fledgling startups.
Without any hardcore investing experience or track record, he came up with an experiment to help him learn how to become a good investor. He set up a summer program and invited undergraduates to come and create startups. Graham was charting new territory for the tech world – no one had attempted to fund startups synchronously before. He figured it wouldn’t amount to much, “No one takes summer jobs seriously, so if it turned out to be a disaster no one would blame us.”
The first batch of startups not only proved Graham wrong, but they went on to fundamentally change the shape of the web. The first participants included Alexis Ohanian and Steve Huffman of Reddit, the giant social news site, and Justin Kan of Justin. tv. Reddit was initially rejected from the program. As Ohanian recalls, “Paul basically said, we don’t like your idea, but we like you guys. If you’re willing to change your idea and come up with something new, we’ll fund you.” Huffman and Ohanian took Graham up on his offer, changed their idea, and Reddit was born. According to Graham, this humanistic approach is the key factor in Y Combinator’s success: “We don’t look for ideas, we look for people.”
From Y Combinator’s first batch of eight startups, it has continued to grow every year to host around 60 sixty startups every six months. In addition, they just opened up a satellite office in Downtown San Francisco’s Union Square tech haven. Graham is still beside himself at the success of Y Combinator, “I have a PhD in computer science, I’m not a financier, I’m not an investor, look at me, I’m a programmer!” But the success keeps coming – most recently, a Y Combinator alum, Watsi, a medical crowdfunding platform, became the first charitable company to raise over $1 million in funding in Silicon Valley.
Toward the end of our conversation, Graham offered me his bold vision for Y Combinator, “If you look at history, there have been a few big collections of smart and ambitious people like Los Alamos during WWII, The New Yorker in the 50’s, Xerox PARC, Florence in the late 1400’s – a lot of the great stuff in the world has been done in these collections of ambitious people, and that’s what I am trying to create.”