Y Combinator = Growth
YC President Geoff Ralston says he isn't worried about the competition.
The first time Y Combinator President Geoff Ralston brought up the prospect that YC might one day enroll 1,000 companies in a single batch, I thought it might have been a blustery passing thought.
“If we want to fund 1,000 companies a batch, could we?” Ralston wondered aloud in a Zoom chat with me the other day. “Well, yeah. If we can hire another 10 or more folks — who have the same passion for startups that we do and want to spend a lot of time reading applications and working with startups and and creating those transformative experiences.”
YC has wrestled for basically its entire history as to how much it could expand its twice-a-year batches without weakening the quality of its network. I remember YC co-founder Paul Graham walking me through the tradeoffs when I first came to Silicon Valley.
I worried on Ralston’s behalf, wouldn’t that dilute Y Combinator’s brand? Wouldn’t it hurt YC’s signaling power?
“It’s only true if in doing so we fund a lower quality of founder and company,” Ralston told me. “Look, the fact is, we still fund a small percentage of the total number of startups every year.”
In June 2005, Y Combinator launched its first 11-company batch1, which included Reddit. This year, the summer batch included more than 400 companies. Across the United States, more than 10,000 startups raised venture capital funding last year. And YC is thinking globally.
Ralston steered us back to the number 1,000 — this time with more certain phrasing: “So I think that when YC does have a batch of 1,000 companies that we’ll find the same percentages of success.”
Geoff Ralston is no Sam Altman — and that’s part of the reason why I wanted to talk to him.
The media seems to have an endless appetite for writing about Ralston’s predecessor.
Whether it’s getting profiled in The New Yorker, or, more recently, when The Information launched its new weekend section, former YC President Sam Altman is a perpetual headline Silicon Valley character.
For The Information piece, Altman’s PR fixer at OpenAI, where Altman is now chief executive officer, suggested the reporter talk to the ultra-networker Diane von Fürstenberg. She apparently compared Altman to both Leonardo da Vinci and Albert Einstein.
Now that’s a good friend.
Altman may be among the most connected people in Silicon Valley, but he’s no longer formally tied to Y Combinator. The firm transitioned him from president to chairman and then after saying he would be an advisor, he ended up unaffiliated. (The choreographed exit was accompanied by a quiet edit of his Wikipedia page).
In his place, came Ralston, who first joined Y Combinator a decade ago.
For several years, Ralston ran an education technology accelerator of his own before eventually folding it into Y Combinator. Then — and you might not realize this thanks to the time-warping effects of the pandemic — more than two years ago now, in May 2019, Ralston took over as YC President.
So I wanted to know what to make of the Ralston era of YC so far.
Y Combinator is a startup-creation machine that keeps whirring no matter the personnel. That is part of the reason the Altman regime rankled some YC insiders — Altman had a tendency to make it about himself when in reality YC is largely about the process. Partners come and go. Close watchers will note that longtime YC partners Aaron Harris, Adora Cheung, and Eric Migicovsky have left in the past year.2
Based on its maturing investments, YC is flying high. YC boasts that the combined value of the companies it has funded has crossed $400 billion. One trillion feels like only a matter of time so long as the markets hold.
YC’s portfolio includes public companies like Airbnb, DoorDash, Ginkgo Bioworks, GitLab, Dropbox, and Amplitude. It also includes promising private companies like Stripe, Instacart, Cruise, Brex, Scale AI, Faire, Zapier, and Benchling.
But, of course, it’s harder to assess the current crop of companies. Is YC still picking winners or is it slipping as it tries to invest in more companies?
Ralston’s top priority seems to be about turning Y Combinator into a timeless institution and about broadening its reach. He clearly wants it to have the longevity of a Sequoia, which is almost 50 years old.
“I need to build an institution, or help build an institution, that’s durable and solid, and that can continue to do that for a very long period of time,” Ralston told me.
Ralston seems focused on expanding YC’s core mission by increasing the number of companies that it accepts into its startup accelerator.
The pandemic has made scaling up YC easier. “What we have learned is, wow, we can be super efficient,” Ralston says. “I can sit here in the morning and do 10 office hours before eight o’clock in the morning and get everyone like in Europe and like talk to a whole bunch of people.”
It’s not clear whether Y Combinator will ever again require companies to make the trek to Mountain View. Like the rest of the world, YC switched to all remote during the pandemic. That change made it easier to support a larger number of companies. YC won’t be back in person this coming summer, Ralston says. After that, YC hasn’t made up its mind.
Suddenly, software is making YC’s business easier to scale and it might be hard to give that up.
Graham once wrote in an essay titled Startup = Growth, “If you want to understand startups, understand growth. Growth drives everything in this world. Growth is why startups usually work on technology — because ideas for fast growing companies are so rare that the best way to find new ones is to discover those recently made viable by change, and technology is the best source of rapid change.”
The pandemic has meant that Graham (known as PG to everyone in the YC sphere) and his wife and fellow co-founder Jessica Livingston have been less involved in YC.
“They used to come back every summer, and meet a batch in person. And PG and Jessica would do a whole bunch of hours,” Ralston says. “I don’t know how that will evolve in the future. The pandemic has changed everything. They live in the U.K. now. So the pandemic made it particularly difficult. But, you know, I will say this about the founders, we are completely aligned — that YC ought to be around 100 years from now. And they’re very supportive of whatever I do, whatever the organization does to help make that more likely.”
While Ralston is steadily increasing the size of YC batches, he seems attached to two sessions a year. (YC subdivides those two sessions, called batches, into four smaller subsections — so in a certain light there are eight rounds of YC a year.)
As I see it, from Y Combinator’s position there are a lot of advantages to expanding the number of companies it accepts.
Even if the average quality of the company went down and even if YC only sees a few additional megahits a year, it’s probably a good return on investment. YC invests such a small amount of money — $125,000 per startup — that it’s obviously worth it to pay about $75 million a year more to invest in startups, considering that’s the size of some single growth stage startup checks. (YC is chasing those late stage deals too. YC Continuity, led by Ali Rowghani, has been an active late stage investor. This year the fund added 11 companies3 to YC’s portfolio, including Deel, Fivetran, and Whatnot.)
Increasing the size of the batches will allow for more racial and geographic diversity. (When I asked Ralston what question I’d failed to bring up in our conversation, he highlighted YC’s diversity efforts. He said, “We strongly believe that great founders exist everywhere in every demographic group in every country.”)
It puts Silicon Valley’s money where its mouth is. There are lots of people in the tech industry who think that selective private universities should massively expand the number of students that they admit. It follows from that thinking that YC should spend less time making it exclusive and more time teaching more startup founders how to build great businesses.
But expanding the batch size could make top seed and Series A investors less likely to track companies out of YC demo day if the average startup quality seems to go down. Already I hear from investors who are less focused on tracking YC companies than they once were.
There’s also a lot of YC envy when it comes to seed stage investors. Venture firms are expected to help out the company for as long as the company exists and certainly for the first couple of years. YC meanwhile promises intense instruction for a few months and then leans on the broader network to support its portfolio companies.
Venture firms’ brands hinge on the reputations of their partners and generational change can mean the end of a firm. But YC has already proven that the broader brand is more powerful than any one person.
But the biggest point of resentment from traditional early stage venture firms is YC’s capacity to hold pricing firm when other investors acquiesce to soaring valuations.
Every other early stage investor is feeling it.
Union Square Ventures partner Fred Wilson — who invested in Y Combinator company Coinbase, but passed on Airbnb despite Graham’s persistent exhortations — recently wrote a blog post worrying about $100 million seed stage valuations. “I think they are being delusional, comforted by the likelihood that someone will come along and pay a higher price in the next round. But it seems that person may also be delusional. Because when you model things out, the numbers just don’t add up,” Wilson wrote.
As seed and Series A investors are desperate to win deals, they’ve lowered their standards as to how far along a business needs to be before they’ll fund it. That means some early stage investors are competing with YC when they wouldn’t have before.
As a startup founder, why go to YC when you can raise a funding round directly at more favorable terms? YC would argue that it provides advice and connections that a traditional investor simply can’t match — but it’s far less flexible on deal terms.
YC takes a 7% stake. While the amount of money YC invests has changed over the years, its ownership stake coming out of YC has been relatively consistent.4
When I brought up the fact that YC has held firm on pricing even though other early stage investors are offering better terms for founders, Ralston pulled some expert level goalpost shifting.
“Here’s a small quiz for you,” he said. “One of the first venture investors ever was this guy named Georges Doriot, a French General actually, who started this company called ARDC — Advanced Research & Development Corporation. And in the ’50s, he invested in this company called Digital Equipment Corporation, DEC — one of the most famous computer companies ever. And he stuck a hard bargain.”
“He invested $70,000.” Ralston asked me, “Do you know what percentage he got to the company?”
Ralston answered for me: “70 percent.”
But Ralston wasn’t done there. Not content with that jujitsu framing, he flirted with whether YC should take a larger stake — as if I was worried YC was getting a raw deal.
“I don’t need it to be eight. It could be eight. But seven feels pretty good,” he said.
Ralston doesn’t seem particularly worried about the competition.
YC has always been several cuts above other startup accelerators for a long time now. There’s little evidence so far that upstarts like On Deck, which recently announced an accelerator, are going to be able to disrupt that. (One minor worrying sign for YC: Ryan Petersen, the YC-backed Flexport CEO, is creating a logistics-specific accelerator with the new YC rival.) Then there’s also Hyper, Josh Buckley’s new early stage venture program. And 500 Global has raced around the world while YC has been more focused on Silicon Valley, so the second-tier rival has a strong brand outside the U.S.
But none of that seems to worry Ralston.
“I’m not so interested in the competition right now because I think we’ve put ourselves in a really unique position of sort of having the first choice, first look at almost every startup that matters,” Ralston said. “I worry less about the competition and more about disruption, which is future competition that I don’t understand yet.”
He ticked through past potential disruptors that haven’t dislodged YC’s position.
“We used to maybe worry that was crowdfunding.”
“There’s a ton of of capital available, maybe more in the seed level than ever before. Does that matter to us? I don’t think so because they’re still investing in YC companies.”
“Does the blockchain have some effect in the future in how people fund startups and what makes for startups success? I don’t think so,” Ralston says.
As YC knows better than anyone, everyone doing something lucrative is at risk of getting disrupted. For now, YC seems to be in its prime and is pressing on the gas. If there’s disruption on the horizon, Ralston says, “I don’t really know what that is going to be.”
Techmeme!
My favorite tech headline aggregator, tweet tracker, and conversation setter — Techmeme — has been generously featuring me on their home page as part of a round-up of interesting tech newsletters. So I wanted to return the favor.
I check Techmeme literally every couple of hours and rely on it to do my job. It’s a free news aggregator for tech industry folks that’s updated constantly to show the most important tech stories of the moment and the commentary surrounding those stories. They also publish a daily newsletter with stories from the past day, which is useful if you forget to visit the site.
Eight companies presented at Demo Day and 11 participated in the batch, according to YC.
Cheung and Migicovsky are founding startups of their own. Migicovsky joined the summer 2021 batch of YC. Harris has told people he’s toying with becoming an investment banker of sorts for startup founders looking to raise big funding rounds.
Here are the deal highlights for YC Continuity per YC:
“Added 11 companies to our portfolio, including Deel, Fivetran, Pave, PostHog, RevenueCat, Vanta, Whatnot, and others (to soon be announced). Led Deel, Lob, Pave, Podium, PostHog, RevenueCat, Whatnot, and others’ recent funding rounds. Increased our investments in top companies like Brex, Deel, Faire, Groww, Lob, Podium, Whatnot, and others.”
There are definitely some open questions in my mind: Are there founders for whom YC quietly does negotiate terms? Do repeat YC founders get a better deal the second time around? There’s also a lot I’m curious about on the YC LP side that I haven’t gotten to in this story. I’m always happy to talk to YC founders and others anonymously on background! eric@newcomer.co
There are two things that I disagree with in this post, just as an N of 1 --
"Venture firms are expected to help out the company for as long as the company exists and certainly for the first couple of years. YC meanwhile promises intense instruction for a few months and then leans on the broader network to support its portfolio companies."
I have found YC's ongoing value-add, post YC, to be higher than many or even most venture investors, and I think most YC founders you speak with would say the same.
Second:
"As a startup founder, why go to YC when you can raise a funding round directly at more favorable terms? YC would argue that it provides advice and connections that a traditional investor simply can’t match — but it’s far less flexible on deal terms."
It's a huge mistake to do YC for the $125k you get from them -- math doesn't add up, as you say. The biggest reason to do YC IMHO is not financial -- it's the rigor of the 3 month program and the urgency it creates within your company. I truly believe that's the biggest value of the program -- but, most ppl, having not experienced it, will not believe that.
If you want to look at it financially, everyone is going to raise on better terms, post-YC, having been in YC, than they would have on their own. I don't care who you are or how connected you are -- you will have a better fundraising outcome if you do YC than if you did not do it, and that effect persists IMHO beyond seed rounds to series A, B, until you get into real late-stage financing territory. The really interesting thing about this is that, effectively, all the *other* investors in sillicon valley are subsidizing YC's business model. You aren't giving YC 7% b/c of the $125k they give you. It's b/c of the millions more dollars you'll raise from other investors, for the same dilution, because you went through YC.
When I went through YC the second time with Rippling, I could have raised seed financing on my own. In fact, early in the program, I raised ~ $7mm in seed financing on what were then considered great terms, mostly from investors in my previous co. That would have happened without YC, if I hadn't done the program. But *then,* what most ppl don't know, is that immediately after that seed round, I was able to raise *another* $10mm in seed financing, uncapped, at a discount to the next round price, for a total seed raise of $17mm. Uncapped financing is an incredible deal for the company (and in this case, at least so far, it ended up being a great deal for the investors as well). But there is *no way* I would have been able to do that without YC....