Y Combinator

How many of these companies have you used or heard of? AirBnb, Dropbox, Coinbase, Stripe, Monzo, Reddit, Twitch, The Athletic. 

They all have one thing in common: They are Y-Combinator companies. But what does that really mean?

Y Combinator (YC)

We want to tell you about YC, the most successful startup investor ever.

We’re going to cover three things:

1. Who they are

2. Some of the most successful companies they’ve backed

3. What makes them different

Who are they

Y Combinator is ostensibly a venture capital fund but with a massive twist. 

Back in 2005 if you were an early-stage company and wanted to get funding you had a few options: find some wealthy individuals (Angel investors), go to traditional venture capital funds, or self-fund/bootstrap. There were also some incubators, which gave things like office space, management training and general advice but not money.

YC took the bold move to combine the traditional venture capital funds with an incubator. They would give the startups the money they needed to get off the ground AND incubate them at their campus in San Francisco with the world’s top advisors and investors. It’s been dubbed startup school.

They created an entirely new way of thinking about startups, that looking back almost 20 years seemingly could not have been much more successful.

Some of the most successful companies they’ve backed

AirBnB - worth over $100 billion and one of the most famous companies to come out of Silicon Valley.

An interesting anecdote from their time at YC - Paul Graham has a famous expression for early-stage founders, “do things that DON’T scale” (watch the video below of Paul talking about why). Brian, Joe and Nathan (AirBnB founders) took this to a new extreme where they would go, personally arrange the furniture, photograph their host’s homes and post it for them. This allowed them to get ‘inside the head’ of their hosts and guests. It worked.

Stripe - Founded by two brothers, they now transact over $1 trillion dollars annually as a payment platform, and a lot of things you buy on the internet will probably go through Stripe (all Shopify payments are Stripe-powered). They are a critical part of the infrastructure for commerce on the internet.

DoorDash - now worth over $50 billion provides home-food delivery and has over 19,000 staff. See their interview to get into YC here:

OpenAI (not technically a YC company but a part of YC Research) - They are already worth in excess of $80 billion and could quite possibly be the next trillion-dollar company as the pioneer in the AI revolution.

What makes them different

Fund the founder, not the idea

Traditionally investment would work by the founders going (physically) to see investors, where they would pitch their idea. The investors would consider the idea, the market, and the experience of the founders and make a judgment call. There is of course nothing intrinsically wrong with this. YC took a different approach though.

When considering people’s applications the YC Partners weigh their decision much more heavily on the founders and their ability than they do the idea. In fact, teams have got into YC without anything being built, and barely a half-baked idea. In their eyes, a good idea with poor founders is a poor investment, whereas a bad idea with great founders is a much better investment. Great founders will find a way to pivot and make it work.

Here’s a great story of a pivot from founder Tom Blomfield.

Tom and his cofounders were on Batch Summer 2011. They devised an idea for a company called Groupay - a cost-sharing app that allows people to split costs with their friends/groups. After months of building and testing, they discovered this specific product had no place in the market (YC calls this kind of business ‘tarpit ideas’ as so many people come up with them and they are bound for failure).

The Groupay team knew they needed to pivot, so they took the underlying payment infrastructure they’d already built and instead of trying to get young people to sign up, they targeted businesses instead. Specifically, businesses making frequent small payments. This company is now called GoCardless and is now worth $2.1 billion. Tom then went on to found Monzo - which I’m sure a lot of people reading this will use daily.

The Batch

As I mentioned above Tom Bomfield was part of the Summer 2011 Batch - you might think that’s an unfamiliar term for a venture fund. This is one of the key differentiators of YC.

Much like a school or a university, they have intakes/batches - 2 per year, 3 months each. The founders gather in person, in San Francisco, multiple times per week to share tips with other founders, and have office hours with a host of YC partners who impart not only their own wisdom but the wisdom garnered from seeing literally hundreds of startups try, meet investors and receive talks from the likes of Mark Zuckerberg, Sam Altman and Patrick Collison.

They know the pitfalls you are about to fall down before you even see them and have an objective view without being in trenches every day.

The density of founder talent and advisor talent is unparalleled and gives the founders the maximum chance of success.

To top it off, at the end of the batch they have what’s called “demo day”. This is where all the founders pitch their product to a select group of investors.

For the founders, they get great access to capital and for investors, they get excellent deal flow to some of the hottest startups in the world. At the moment, somewhat alarmingly, many of the startups are coming out with a $20-25 million PRE-money valuation - did someone say AI bubble?

The video below is a recording of Brian Armstrong's (Coinbase) practice pitch for demo day. Pretty fascinating to see that the company he’s pitching is now worth over $100 billion.

Democratising entrepreneurship

YC’s approach has lowered barriers to entry for new entrepreneurs by not requiring extensive networks or great career lineage as prerequisites for acceptance. This opened the door for a more diverse range of founders to pursue startup ambitions. YC’s emphasis on the founder quality, rather than the experience of the entrepreneur, has helped some of the most ambitious but underserved entrepreneurs in the last few years.

Michael Siebel who is now one of the big cheeses at YC, was accepted into batch 2007, with his startup Justin TV. He’s been open about having a very challenging childhood and YC taking a big bet on him. Justin TV became Twitch and sold to Amazon for $940 million in 2019, and is now worth over $40 billion.

Not only has it democratised startups but it has also created a new wave of optimism in startup communities - YC now is a brand in itself. They produce YouTube videos, host public events, and are now one of the most coveted educational entities in the world inspiring huge tranches of founders.

To sum up

As we’ve said before in this newsletter, “If you want to go fast go alone, if you want to go far, go together”.

This quote sums up what makes YC so special. They are in the business of finding and empowering Change Makers, and they’re damn good at it. They have a consistent track record of finding founders who go on to change the world and provide the framework needed for incredible growth.

They are a Change Maker Factory, so watching where they are focused will give you a good sense of what’s coming next in business and the world more broadly.

Some interesting resources:

[Watch] - Paul Graham Essays
[Watch] - Y Combinator Youtube Channel