Apr 10, 2020
Welcome to the History of Computing Podcast, where we explore the history of information technology. Because understanding the past prepares us to innovate (and sometimes cope with) the future! Today we’re going to look at Y Combinator.
Here’s a fairly common startup story. After finishing his second book on Lisp, Paul Graham decides to found a company. He and Robert Morris start Viaweb in 1995, along with Trevor Blackwell. Some of the code came from Lisp - you know, like the books Graham had worked on. It was one of the earliest SaaS startups, which let users host online stores - similar to Shopify today. Viaweb had an investor named Julian Weber, who invested $10,000 in exchange for 10% of the company. Weber gave them invaluable advice. By 1998 they were acquired by Yahoo! for about $50 million in stock, which was a little shy of half a million shares. Viaweb would became the Yahoo Store. Both Graham and Morris have PhDs from Harvard.
Here’s where the story gets different. Graham would write a number of essays, establishing himself as an influencer of sorts. 2005 rolls around and Graham decides to start doing seed funding for startups, following the model that Weber had established with Viaweb. He gets the gang back together, hooking up with his Viaweb co-founders Robert Morris (the guy that wrote the Morris worm) and Trevor Blackwell, and adding girlfriend and future wife Jessica Livingston - and they create Y Combinator.
Graham would pony up $100,000, Morris and Blackwell would each chip in $50,000 and they would start with $200,000 to invest in companies. Being Harvard alumni, it was called Cambridge Seed. And as is the case with many of the companies they invest in, the name would change quickly, to Y Combinator.
They would hold their first session in Boston and called it the Summer Founders Program. And they got a great batch of startups! So they decided to do it again, this time in Mountain View, using space provided by Blackwell. This time, a lot more startups applied and they decided to run two a year, one in each location. And they had plenty of startups looking to attend. But why?
There have always been venture capital firms. Well, not always, but ish. They invest in startups. And incubators had become more common in business since the 1950s. The incubators mostly focused on planning, launching, and growing a company. But accelerators we just starting to become a thing, with the first one maybe being Colorado Venture Centers in 2001. The concept of accelerators really took off because of Y Combinator though.
There have been incubators and accelerators for a long, long time. Y Combinator didn’t really create those categories. But they did change the investment philosophy of many. You see, Y Combinator is an investor and a school. But. They don’t provide office space to companies. They have an open application process. They invest in the ideas of founders they like. They don’t invest much. But they get equity in the company in return. They like hackers. People that know how to build software. People who have built companies and sold companies. People who can help budding entrepreneurs.
Graham would launch Hacker News in 2007. Originally called Startup News, it’s a service like Reddit that was developed in a language Graham co-wrote called Arc. I guess Arc would be more a stripped down dialect of Lisp, built in Racket. He’d release Arc in 2008. I wonder why he prefers technical founders…
They look for technical founders. They look for doers. They look for great ideas, but they focus on the people behind the ideas. They coach on presentation skills, pitch decks, making products. They have a simple motto: “Make Something People Want”. And it works. By 2008 they were investing in 40 companies a year and running a program in Boston and another in Silicon Valley. It was getting to be a bit much so they dropped the Boston program and required founders who wanted to attend the program to move to the Bay Area for a couple of months. They added office hours to help their founders and by 2009 the word was out, Y Combinator was the thing every startup founder wanted to do. Sequoia Capital ponied up $2,000,000 and Y Combinator was able to grow to 60 investments a year. And it was working out really well. So Sequoia put in another $8,250,000 round.
The program is a crash course in building a startup. They look to grow fast. They host weekly dinners that Graham used to cook. Often with guest speakers from the VC community or other entrepreneurs. They build towards Demo Day, where founders present to crowds of investors.
It kept growing. It was an awesome idea but it took a lot of work. The more the word spread, the more investments like Yuri Milner wanted to help fun every company that graduated from Y Combinator. They added non profits in 2013 and continued to grow. By 2014, Graham stepped down as President and handed the reigns to Sam Altman. The amount they invested went up to $120,000. More investments required more leaders and others would come in to run various programs. Altman would step down in 2019.
They would experiment with some other ideas but in the end, the original concept was perfect. Several alumni would come back and contribute to the success of future startups. People from companies like Justin.tv and twitch. In fact, their cofounder Michel Seibel would recommend Y Combinator to the founders of Airbnb. He ran Y Combinator Core for a while. Many of the founders who had good exits have gone from starting companies to investing in companies.
Y Combinator changed the way seed investments happen. By 2015, a third of startups got their Series A funding from accelerators. The combined valuation of the Y Combinator companies who could be surveyed is well over $150 billion dollars in market capitalization. Graduates include Airbnb, Stripe, Dropbox, Coinbase, DoorDash, Instacart, Reddit. Massive success has led to over 15,000 applicants for just a few spots. To better serve so many companies, they created a website called Startup School in 2017 and over 1,500 startups went through it in the first year alone.
Y Combinator has been quite impactful in a lot of companies. More important than the valuations and name brands, graduates are building software people want. They’re iterating societal change, spurring innovation at a faster pace. They’re zeroing in on helping founders build what people want rather than just spinning their wheels and banging their heads against the wall trying to figure out why people aren’t buying what they’re selling.
My favorite part of Y Combinator has been the types of founders they look for. They give $150,000 to mostly technical founders. And they get 7% of the company in exchange for that investment. And their message of finding the right product market fit has provided them with massive returns on their investments. At. This point they’ve helped over 2,000 companies by investing and countless others with the startup School and by promoting them on Hacker News.
Not a lot of people can say they changed the world. But this crew did. And there’s a chance Airbnb, Doordash, Reddit, Stripe, Dropbox and countless others would have launched and succeeded, but we’re all better off for the thousands of companies who have gone through YC having done so. So thank you for helping us get there.
And thank you, listeners, for tuning in to this episode of the History of Computing Podcast. We are so, so lucky to have you. Have a great day.