Start-Ups

How Y Combinator became the founder of startup accelerators

In less than a decade Y Combinator became the most successful startup accelerator in the US. We look at how their no frills approach has made them a force in Silicon Valley.

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Jessica Mah, cofounder of InDinero speaking at Y Combinator's Female Founders Conference.
Image: Y Combinator/Marla Aufmuth

"Running a startup is like being punched in the face repeatedly..."

That pungent description of the life of a founder comes from Paul Graham, one of the cofounders of startup accelerator Y Combinator. The program is one of the few accelerators whose name carries any weight in the startup world. For most companies, it's a badge of honor to carry the Y Combinator name, partly because they only accept around 2% of applicants.

Y Combinator offers the same three things that most accelerators offer — money, advice, and connections; but their special recipe somehow makes starting a startup suck less. They've backed more than 630 companies since they started in 2005, including Dropbox, Airbnb, Stripe, Teespring, Heroku, Optimizely, and Reddit.

Jessica Livingston, partner and cofounder of Y Combinator, said that targeting early stage companies is part of why they're successful, and why they're still having fun.

"Before YC there was a gap at the earliest stage," Livingston said. "There were plenty of VC firms doing multi-million dollar series A rounds, but the process of getting an initial seed investment was very haphazard.

"Also, personally, I think the early stage is the most fun. When startups succeed they turn into big companies. Airbnb has hundreds of employees now. But when they were in YC it was just the 3 founders. They could do whatever they wanted."

Livingston said that the goal of Y Combinator is simply to make it easier for people to launch startups. They thought if they were able to demystify the process, more people might be inclined to take the leap towards entrepreneurship.

Making it easy

Y Combinator was started by Paul Graham, Robert Morris, Trevor Blackwell, and Jessica Livingston. They began hosting sessions in both Cambridge, Massachusetts and Mountain View California; although in 2009 Graham announced that they were discontinuing sessions in Cambridge. The size of each batch differs, but they started with a batch of eight companies.

"At first we didn't know much about angel investing," Livingston said. "We decided the fastest way to learn would be to fund a bunch of startups at once, so we created a 'Summer Founders Program' where we funded eight startups at the same time.

"We quickly realized that funding startups in batches was a powerful idea, so we started doing two three-month sessions a year, one in summer and one in winter. The most recent [batch] had 68 for-profit and seven non-profit startups."

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Adora Cheung, founder of Homejoy speaking at a Y Combinator dinner.
Image: Y Combinator

Y Combinator still operates with this model. Twice a year the program starts with roughly $100,000 to invest in a relatively large number of companies. The companies move to Silicon Valley for three months to participate in the program where they receive mentoring and advice from partners. While they are known for funding for-profit business, as of late 2013 they are now funding non-profits.

They have received outside funding from VC juggernaut Sequoia Capital and angel investors like Paul Buchheit and Aydin Senkut. One of the unique aspects of Y Combinator is the fact that the advising partners do not have other jobs. Their full-time job is to help startup founders at Y Combinator.

According to Goldbely CEO Joe Ariel, the program is intense, but it pays dividends in refining your clarity and focus.

"Our time in Y Combinator was challenging. Really challenging, but really magical," Ariel said. "It was three months where we were able to focus entirely on building the product and talking to users. We accomplished as much in three months as it probably would have taken us in a year. We were able to shut off from the rest of the world and focus on a clear mission. That is incredibly powerful, and virtually impossible to do otherwise."

Most of the time what comes to mind when thinking about a startup accelerator is a lot of motivational talks and scheduled networking events. Y Combinator is far more focused on building businesses, mirroring some of the utilitarianism that Sequoia is known for in their no frills approach to startups.

Participating and pitching

Just because they don't emphasize the potential power of startup founder happy hour at the local swanky gastropub doesn't mean that Y Combinator devalues the power of connections. In fact, connections are part of what makes the program so successful.

"To have a support structure of smart people and advisors who have been through it before is tremendous," Ariel said. "It's tremendous for the advice, but it's also tremendous because you feel like you aren't the first. The mistakes have been made before you and will be made after you. Being a part of something with folks that have shared those experience is liberating."

Knowing you're going through the same process as someone who has been very successful can help you see the light at the end of the tunnel. For many founders, the light at the end of that tunnel is the prospect of raising their first round of institutional capital. Y Combinator gives participants the opportunity to run toward that light as their session crescendos with a pitch presentation called Demo Day.

"The biggest factor that is valuable to Y Combinator, and the reason I would do it again, is Demo Day," said Sameer Shariff, cofounder at Y Combinator alumni Cambly.

Each Y combinator batch session ends with a Demo Day presentation, where founders are given the opportunity to present a short pitch to a curated group of VC and angel investors. The Y Combinator team has pretty deep connections to the rest of the investment community, so it typically smoothes the investment process for their alumni.

Whether it is connecting with investors, or being inspired by the founders that came before you, participants in the Y Combinator program draw a lot of value from the people they meet. The value of these connections is not just in what they can do for you, but in how they can build you up as an entrepreneur.

"Confidence is a big thing when you are a startup. Everybody is shitting on you when you first launch a business," Ariel said. "To maintain clarity and sense of focus is crucially important. The bond of others who are going through the same thing is as well is really uplifting."

For those interested in joining the ranks of Y Combinator alumni, you can start by applying online. The deadline is passed for the summer 2014 session, but they are taking late applications.

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About

Conner Forrest is News Editor for TechRepublic. He covers startups and enterprise technology and is passionate about the convergence of tech and culture.

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