Reid Hoffman: Y Combinator Is “Definitely Seeing Some Stress Signs From Size”

With 75 companies pitching last Demo Day, Y Combinator is bigger than ever. The early-stage firm has gone from some very humble roots with about a dozen founders out of Boston seven years ago, to hosting what is arguably the highest-quality and most-anticipated demo day every season in Mountain View’s packed Computer History Museum.

But is it too big? Reid Hoffman, who co-founded LinkedIn and is a partner at Greylock Partners, says the firm may be starting to feel some pressure in terms of what it can provide its ever-growing class.

“I think they’re definitely seeing some stress signs from size, like them knowing all of the class in depth and being able to provide the right level of help,” Hoffman said on-stage at the TechCrunch Disrupt conference in San Francisco.

But he added that Y Combinator is well aware of this. In fact, in a story I wrote earlier this year, the firm’s partners discussed the advantages of scale. For example, the Y Combinator family is now so large that founders often mentor each other, and older companies serve as an initial customer base for newer companies.

“[The size issue] is from their perspective, which I think is correct,” Hoffman said. “They’re making a decision between — do we stay at this level and gear up our services? Or do we take it down a little bit?”

Hoffman added, “They’re trying to fight this notion that there’s only five, 10, or 15 companies per year that matter. But if we could get a broader set of founders, we could add more possible break outs, and I think that’s a really good mission.”

So far, it’s not clear whether this is actually the case. Y Combinator’s returns so far mirror what’s seen in other venture funds where a hugely disproportionate amount of value is created by one or two companies. Co-founder PaulĀ Graham said that, while the total value of Y Combinator companies is now around $10 billion, only two companies — Dropbox and Airbnb — account for three-quarters of it.

The reality of highly unequal returns across a portfolio puts pressure on the firm to accept even more companies on the chance that just one of them will be another Airbnb. Graham’s weekend essay, entitled “Black Swan Farming” in a reference to Nassim Taleb’s book on highly unpredictable long-tail outcomes, went into how he wrestles with taking purposeful bets on what initially seem like bad ideas.

“The fact that the best ideas seem like bad ideas makes it even harder to recognize the big winners,” Graham wrote. “It means the probability of a startup making it really big is not merely not a constant fraction of the probability that it will succeed, but that the startups with a high probability of the former will seem to have a disproportionately low probability of the latter.”

Hoffman also weighed in on the controversy between Y Combinator and Google Ventures. Last week, a memo from Graham leaked. It warned Y Combinator entrepreneurs about Google Ventures’ tendency to lowball financing offers.

Hoffman said the fracas is way overblown. “What Paul tried to do is take what are largely a set of university kids and just kind of say, be careful with this. He never intended it to be public. He probably would have changed a couple of sentences,” Hoffman said. “He was saying, ‘Be careful about these sorts of things.'”