The world of venture investing is going through its best ever period in history helping create businesses disrupting the status quo and scaling them to unprecedented sizes in years not even decades. Last week, we featured a piece on factors enabling the Indian startup ecosystem and how Indian start ups are set to raise over $25bn this year alone. But that pales in front of the global figure – a staggering $580bn invested in start ups in 2021 alone. The funding ecosystem ranges from well known VC firms like Sequoia and A16Z to high networth individuals including celebrities and successful founders themselves after having cashed out in part or full. But among them all is a now not so unique but a pioneer of sorts of a startup incubator model called Y Combinator (YC) which has for 17yrs now been not just investing but also handholding startups and more importantly their founders to convert the seed of an idea to solve a real world problem to a successful business that makes money. Some of the well known names to have emerged from YC include Airbnb, Dropbox, Doordash and Stripe.
“In its most recent batch, YC selected 401 companies out of a pool of more than 16,000 applicants to receive its imprimatur along with coaching from veteran founders on building products, formulating business plans, and raising funds. On August 31 and September 1, 377 of them pitched their companies—remotely, of course—to the investment community in the semiannual ritual called Demo Day. Each company’s founders had one minute to explain themselves: just enough time to plant a seed in a potential funder’s mind.
Their ideas reflected YC’s implicit view that for every problem in the world, there is a startup solution, though some solutions may sound familiar. There was a ghost kitchen in the Philippines. A “Stripe for former Soviet Union countries.” A “Vanguard for India.” One founder promised to boost the income of dental practices by using deep learning to identify cavities. Another founder claimed, “We’re building a better search engine than Google!””
So, why do founders come to YC?
“…there’s the mentorship. YC has also vastly simplified tasks that used to take weeks—incorporating, trademarking, getting web services set up, and above all, connecting with the right investors–a lot of it through software, of course. “We’re sort of like Crispr for startups,” says Geoff Ralston, YC’s president since 2019. “Startups come into YC with raw DNA. We edit the DNA so that they have the alleles that make it more likely for them to be successful.”
The article talks about YC’s origin – its founder Paul Graham, someone whose essays are full of wisdom:
“THE STORY OF how Paul Graham started Y Combinator is legendary. In 2005, Graham, a computer scientist who had sold his company to Yahoo, formed a three-month boot camp near his home in Cambridge, Massachusetts. His collaborator was Jessica Livingston, a banker who later married him. Eight founder teams participated, including the hackers who built Reddit and the 19-year-old Sam Altman, who succeeded Graham as YC’s leader in 2014.
Graham and Livingston have “retired” from the program and are living in England. But every so often, Graham will send off a transcontinental bolt from his countryside Olympus. In his essays he has written that the best founders were hackers, and he has espoused a philosophy of what might best be called founderism. If Y Combinator were a movie, the plot would be a hero’s journey, with intrepid founders overcoming obstacles to attain glory and eventually win the T-shirt that YC bestows upon companies achieving liquidity by buyout or IPO: “I built something someone wants.” As “a professional billionaire scout,” Graham believes in the goodness of founders. “Bad people make bad founders,” he argued in a recent essay.
Under the laws of founderism, the sheer audacity of ambition makes the craziest plans the most valuable—the long shots that can pay off big. The YC company that Graham gushes about the most is Airbnb, whose business plan was actually insane; it hinged on people renting their couches to out-of-towners visiting conferences. It wasn’t the idea but the energy and creativity of the founders that made Graham fall in love with them.
….When YC started, its focus on founders made it an outlier. Livingston has written that no one thought the experiment would pan out: “It seemed so lame–our own lawyers tried to talk us out of it.” But the world has come around. “There is a lot more talk about founders now,” Graham says. “Instead of seeing the company based on its business model, and replacing the founders with some professional manager, you choose a company based on founders, and you help founders.”
Livingston says YC’s founder focus has helped outside investors become much faster at making decisions. “At some point, it is a leap of faith,” she says. “If you feel like these founders have a good kernel of an idea, and they approach the problem the correct way, and they seem like thoughtful, smart people, then it’s worth a shot.””
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