Y Combinator Gets an Historian: Inside YC’s Summer 2011 Session
Y Combinator, of course, is the exclusive school for startups in Mountain View, CA. It’s been described as a seed fund, a venture incubator, a startup accelerator, and (inaccurately, in Stross’s view) a startup “boot camp.” But at its core, it’s an investing operation. The goal is to suck in as many promising young hackers as possible, invest enough money in their startups so that they don’t have to worry about the rent and pizza bills for a few months, shepherd them toward product ideas that people might pay for, and hope that at least one of the teams in each batch grows into the next Dropbox, Airbnb, or Heroku.
It’s a model that has revolutionized the startup world. Y Combinator started from humble beginnings in 2005 (there were just eight companies in the first batch in Cambridge, MA) but has spawned scores of imitators across the country, as we’ve documented in our 2012 Guide to Venture Incubators. YC’s semiannual Demo Days attract a fleet of Tesla Roadsters and Fisker Karmas to Mountain View’s Computer History Museum, each with a checkbook-toting Sand Hill Road venture partner behind the wheel.
But getting into YC isn’t a golden ticket by any means. Even after soaking up three months of advice from the YC partners and the parade of prominent entrepreneurs and investors they invite in, many of the companies eventually sputter out. YC Founder Paul Graham makes it pretty clear to the admitted startups that most of them are unworthy of the money that YC, Start Fund, and SV Angel invest in them on such incredibly lax terms. (Starting in the winter of 2011, the two outside funds began putting $150,000 into each admitted startup in the form of uncapped convertible notes, meaning the equity shares they get back aren’t determined until the companies raise more money.) In the end, the startups are just variables in a giant risk calculation. “They’ve got to offer you all terms that sixty-two out of sixty-three of you don’t deserve, to make sure that they get the Dropbox,” Graham told the Summer 2011 batch, in a talk that Stross reports in his book.
YC’s job, however, is to make sure every team with the requisite talent, grit, courage, and nimbleness gets a shot at the jackpot. (Graham calls this black swan farming in a widely discussed essay published this month.) Stross, a PhD historian from Stanford who writes the weekly Digital Domain column for the New York Times’ Sunday business section and teaches business at San Jose State University, decided back in March 2011 that he wanted to understand how this process works. Luckily for him (and for readers), Y Combinator gave him unprecedented access to the program, letting him observe the Summer 2011 batch all the way from the application process in April to Demo Day in August.
The resulting book is not a tell-all or an exposé. You won’t find out which coders downed the most Red Bull, which ones broke up with their girlfriends, or which venture investors have the most colorful vocabularies. Stross’s approach is that of an historian with an anthropological bent, and the book is as close to a straight narrative of the summer session as one could get, considering the challenges of following 63 startups for three months.
Dialogue drives the story forward, but it’s not banter—it’s serious discussion between the YC partners and the startups about the challenges they face building compelling new products and services and getting customers interested in them. One nine-page passage focuses in unbelievable detail on the pluses and minuses of YC startup Tagstand’s plan to build a business around infrastructure services for near-field communications vendors. “Journalists shouldn’t get to be the only ones who do the first draft of history,” Stross says—and you definitely can’t call this draft sensationalistic.
The Launch Pad, published by Portfolio/Penguin ($26.95 hardcover), hits bookstores on September 27. You can read an excerpt now in this month’s issue of Vanity Fair. I spoke with Stross yesterday, and I’ve typed up the following edited version of our conversation.
Xconomy: As you point out in the book, the Y Combinator partners are always telling startup founders that they should be ready to answer the “why you” question—in other words, why are you the person who should be starting this company? So I’ll start by asking you a similar question: Why were you the person to write this book about Y Combinator?
Randall Stross: I’ve been paying attention to startups from the time I wrote a book about a startup that didn’t do very well, Steve Jobs’ NeXT Computer. I had a friend in grad school who went off to work at NeXT, and he urged me to write a book about what he thought of as the most interesting startup in Silicon Valley, and he was right, but not for the reasons we all expected.
A few years later I wrote a book about startups that were funded by Benchmark Capital and spent two years in the office at Benchmark, embedded in the firm and watching how they went about making investment decisions and following as many of the portfolio companies as I could. This was from 1998 to 2000. The book that came out of that experience was titled eBoys. And although I didn’t know it when I knocked on Paul Graham’s door, he had read and liked that book. So he was familiar with my work. I gather that was very helpful in … Next Page »