Start-up high-tech businesses usually look to their own resources and then to angel investors who typically invest in a handful of businesses. Venture capital funds are not interested in very small start-ups and prefer to make larger investments in established companies with high growth potential. YC’s founder, Paul Graham, took a deliberately different approach. He puts a small amount of money into a large number of companies. ‘We have applied classic mass-production techniques,’ he says. ‘Most people who put money into start-ups were finance types. We went about it like hackers.’[i]
Y Combinator provides seed money but compared to other funds it offers relatively little – $14,000 for start-ups with 1 founder, $17,000 for those with 2 founders, and $20,000 for those with 3 or more. In exchange it takes about 6% or 7% of the equity. However, as part of the deal it provides counseling, support, connections and its celebrated twice yearly programs.
These are intensive 100-day camps in Silicon Valley culminating in ‘Demo Days’. There are some 50 companies represented by around 120 founders in each program and the participants work furiously to build their business, which are typically software and internet enterprises. During the program there are weekly dinners. Everyone eats together at long white tables. The atmosphere is like a modernist version of an Oxford college dining hall, but without a high table. The dinners often feature eminent guest speakers (such as Mark Zuckerberg) and end with an intense question and answer session.[ii]
On Demo Day the entrepreneurs pitch their propositions to an audience of technology tycoons, investors and celebrities, with potentially millions of dollars of investment funds up for grabs. Wired magazine has called Y Combinator a ‘boot camp for start-ups’ and ‘the most prestigious program for budding digital entrepreneurs’.[iii]
Google has bought seven YC start-ups, Facebook six and Twitter four. Dropbox is one of the best known YC offspring. It is a cloud based file storage service valued at $4B.
Paul Graham is an English-born programmer whose family emigrated to the USA in the 1960s. He gained a PhD in computer science from Harvard. In 1995 he and Robert Morris founded Viaweb, a business which enabled clients to build their own internet stores. In 1998 Viaweb was sold to Yahoo! for $50m. He reads and analyses thousands of applications before selecting the 50 or more for each program.
… the biggest mistake in start-ups is building something interesting rather than something that people really need…
Entrepreneurs on the short list are called for interview where Graham discusses their business idea and assesses whether they have ‘determination and earnestness.’ Many are obsessive nerds and hackers. Once they arrive on the program participants are given a T-shirt which reads – ‘Make something people want.’ Graham believes that the biggest mistake in start-ups is building something interesting rather than something that people really need. His second key principle is to launch fast. He encourages the entrepreneurs to grow their business at 5% to 7% per week.
Y Combinator has become the world’s most successful model for mass producing digital start-up companies. It is an industrial process for driving innovation and creating millionaires.
By Paul Sloane
[i] The Pied Piper of Silicon Valley, The Sunday Times Magazine 27 July 2013, Rhys Blakely
Paul Sloane speaks on lateral thinking, innovation and leadership. He is the author of 20 books including The Innovative Leader and the Leader’s Guide to Lateral Thinking Skills.