The startups that presented at Y Combinator’s Demo Day last week were remarkable in their own right, but perhaps the most striking thing was the sheer number of them.
With 66 companies and 180 founders in this season’s batch, the auditorium at Mountain View’s Computer History Museum was practically bursting with angel investors and reps from every notable venture firm last week. And that was just the latest class. Since 2005, Y Combinator has since spawned more than a dozen batches of startups including Dropbox and Airbnb. The last two classes alone have created more than 120 companies.
So it raises the question of how Y Combinator has been able to grow in size while sustaining both the quality of startups it churns out and the value it provides for founders.
Essentially, how do you scale a company that creates companies?
The Strategy and Vision
“Our whole approach to scaling Y Combinator is the standard approach to scaling software,” said Paul Graham, Y Combinator’s co-founder.
There are a couple rules, he said. 1) You can’t predict in advance where the bottlenecks will be so you just keep going until you hit the next one and 2) You can always scale a lot more than you originally predicted. ”When you scale things, they often turn into other stuff that you would have never imagined,” he said.
Graham doesn’t have an exact size in mind when accepting companies for a new class. The early-stage venture firm accepts as many companies as the team thinks are worthy. Nor does Graham know how large Y Combinator should ultimately be.
“Imagine if you had asked Mark Zuckerberg that question when Facebook had just two universities,” Graham said. “A lot of what drives us is curiosity about what happens when something like this gets bigger.”
Indeed, some of the other partners liken working at Y Combinator to building a university or a new type of institution that’s never been seen before.
“If you think of YC as a corporation or a company, it has these characteristics that every big company would love to have,” said Harj Taggar, an alum who later became a YC venture partner. “It’s a bunch of smart people working on projects that they love and have upside in. But they are all linked together and get the benefits of being a part of a larger group. YC is effectively inventing a new form of organization.”
Given the scale of Graham’s ambition (which shouldn’t be surprising since he tells founders to have “frighteningly ambitious” startup ideas), we walked through some of the many bottlenecks YC has faced through the years:
Y Combinator’s increasing cachet has brought a ballooning number of applications. Last October, Graham said that the firm was seeing about one submission per minute on deadline day for the most recent class.
Every one of the firm’s venture partners used to read every application. Now they don’t. They might read one-third of the applications. It’s the alumni who make the first pass, depending on how much time they have. Some do none while others read as many as 100 applications or more.
“We went back over the years and saw that we had never accepted a company for an interview where the alumni were majority ‘No,’” Taggar said. “This weeds out really bad applications so we can focus on the borderline ones, which take more time.”
But just in case they miss a potentially good company, Y Combinator is starting to use data mining software. They’ve fed a program all of the old Y Combinator applications to find predictors of success and apply them to new submissions, creating a backstop in case they miss something.
“There are two kinds of mistakes: funding a bad startup or missing a good one. Our biggest fear is missing a good startup,” Graham said, adding that Dropbox’s co-founder Drew Houston was actually rejected the first time around. They’ve used the program to generate a top 10 list of factors predicting the probability of acceptance. ”I don’t want to share it, but it was fascinating,” Graham said.
After they pick a cohort of companies to interview, they fly them in. They used to do a single track interview process where every single partner had to be present in the room. Last time, they did two interview tracks with half the partners in one of two rooms that went through half the finalists each. This time, they might do three tracks simultaneously.
Following the interview, the partners decide immediately within the next five minutes about whether they should accept the company or not.
“We have to be very disciplined,” Taggar said. “By the end of the day, when you’ve done twenty-something interviews, you can barely remember what happened in the first one.”
Y Combinator’s big initial bottleneck was that there was one Paul Graham, and he only had 24 hours in a day. So the company brought on additional venture partners like Gmail creator Paul Buchheit and alumni like Taggar, Posterous co-founder Garry Tan and Aaron Iba, who successfully sold AppJet to Google. Geoff Ralston, who was chief executive of Lala, the music startup that exited to Apple in 2009, is joining as a partner for this round. Plus there are part-time partners like Loopt co-founder Sam Altman and Justin.tv founders Emmett Shear and Justin Kan. They joined YC’s original partners Jessica Livingston, Trevor Blackwell and Robert Morris.
“It turns out that this is almost perfectly parallelizable,” Graham said. “I know from experience that one partner can deal with 20 startups and if we have 66 startups, we’re at more than 2X over capacity.”
All of the partners are available for office hours and there’s an internal scheduling tool that Y Combinator uses to gauge demand and urgency from founders. Ash Rust, who co-founded SendHub, had an HR issue once. He was able to get office hours within 30 minutes and the right documentation almost immediately after that.
“I know how hard it can be to get help as a founder if you’re not the belle of the ball,” Rust said. “But I’ve never experienced that here.”
If that still sounds a little impersonal for something as unpredictable and idiosyncratic as founding a startup, Buchheit points out that YC’s alumni network is now so large that the firm is starting to have world-class experts on running companies in many areas.
“As YC gets larger, it actually gets better,” Buchheit said, pointing to the firm’s 800 alumni. ”Half the time, I’m sending founders to talk to different alumni. If you’re doing a video startup, then I know the person you really ought to talk to is Justin Kan.”
The firm taps this alumni network when it holds mini-conferences around issues like user acquisition or iOS development.
“There’s this real feeling of appreciation,” Buchheit says. “The founders are very grateful for the experience, so they have a real loyalty and want to help out other companies. There’s a little bit of a pay-it-forward model built into the network.”
Tan even built a private social networking tool for YC founders. Taggar says it’s useful for putting faces to names and that they’ll probably add a section for skills like the ability to code in Python and so on.
Y Combinator’s emerging network effects:
Not only are alumni helping with admissions and advising, they can serve as market-makers for new startups. Many of mobile payment startup Stripe’s customers are part of Y Combinator while Exec is now offering special corporate accounts to run errands for other startups.
“Y Combinator has a built-in economy,” Buchheit says. “We have this tremendous network and another YC company can be your first reference customer when others won’t take the risk.”
Then if one company isn’t quite a home run, its founders and employees will likely be able to find work at another Y Combinator startup. When Jeff and Dan Morin were considering next steps after working on event startup Anyvite for a few years, Graham paired them with another founder, Olga Vidisheva, from the most recent batch. Now they’ve rounded up funding from Greylock Capital, Andreessen Horowitz, SV Angel and Benchmark Capital to bring independent fashion boutiques online at Shoptiques.
The alumni also come back to Demo Day to angel invest in startups from later batches and companies like Parse, Carwoo and Dropbox have raised angel funding from other alums.
Demo Day and Investors:
Maybe the next big bottleneck is the most obvious one: helping investors wade through the dozens of startups it launches every half-year. The firm had to move Demo Day to The Computer History Museum because its offices no longer had space to fit the hundreds of investors. Y Combinator is also reaching the upper limit of how many startups can pitch in a single day.
Getting through 66 pitches is a slog. ”I don’t think we could handle a Demo Week,” Buchheit joked.
Taggar says he’s thinking about how to make it more efficient for investors to set up meetings with the right startups following Demo Day. Right now, the partners just have a mental map of the investor landscape and try to route the right companies to the right investors.
The week after Demo Day is an especially intense one as entrepreneurs and investors try to lock down deals. It’s kind of a weird biannual version of mating season.
With all the investor interest, the founders clearly don’t see Demo Day as the issue.
In fact, Rust had something else on his mind — how to efficiently get food on speaker nights. ”Seriously, the only scaling problem is the enormous dinner line,” he said.
Y Combinator is a venture fund which focuses on seed investments to startup companies. It offers financing as well as business consulting along with other opportunities to 2-4 person companies looking to take an idea to a product. Y Combinator looks for companies with “good” ideas over companies with experience and a business model. The company made its first investments in Summer 2005. Y Combinator selects companies to finance and consult with twice a year. They are located in...