Last week at Web Summit, we were asked to interview Y Combinator’s outgoing president, Geoff Ralston, about the past, present, and future of the popular accelerator program. We covered many topics during our 20-minute talk, including why long-time YC partner Ralston decided to leave after taking over as president just three years ago (tan garry takes office in January). We also discuss where YC’s investment capital comes from and whether, given the market downturn, YC will change its terms to reflect that downturn.
TC: Let’s start with the news. [that] is leaving Y Combinator. You were there for three years. it was a bit of a surprise [that you are stepping away]. Because right now?
GR: Actually, I count my tenure at YC right after 2006, when I left Yahoo [and] She started dating Paul. [Graham] and company, so really, almost 16 years. And I have been an employee of YC since 2011. So it has been more than a decade. And, you know, I felt within me an urge that it was time for a change. And I think you have to do justice to that, when you feel that, even though I love YC. I love what I do. I think it’s an important job. I think it matters. We are very mission driven. We believe that entrepreneurship matters and makes a real positive difference in the world. And I love working with founders. Is rare. I’m lovin ‘it. But it was time to do something different. So I keep going.
YC went from cohorts of 12 or 18 to about 400 founders last winter, before scaling back a bit. Tell me about this idea that launching startups is infinitely scalable.
I have made what some people consider outlandish claims about how many companies we could finance. It has never been infinite. It scales a lot. There is an extraordinary opportunity for entrepreneurs and founders to find success in the United States and around the world, across all demographics. At first, we were just scratching the surface.
One of the things that I think YC did that was really special was democratize the idea of entrepreneurship, open it up to different people. Originally, the idea was to open it up to technologists, to hackers. That was really an opening of entrepreneurship for people who didn’t really have access. And we have continued to this day. That’s why our batches have continued to grow. It is supply and demand. There is a demand for entrepreneurship.
Sam Altman, his predecessor as president, once said that there are five ways YC really innovated, including allowing anyone in the world to apply to the program, whereas with venture capitalists, you had to get a warm introduction. .
Yes, totally, and to be fair, PG, Paul Graham, the founder of YC, began to open up the ideas behind entrepreneurship with his essays, which I’m sure several people in the audience have read. They really were a turning point in the way people thought about entrepreneurship.
At this point, how is YC structured? You have the Continuity Fund [for later-stage investments]. Where is the money [for these new cohorts] from? Is YC a holding company where investors have shares in a holding company? Or do you fundraise very, very discreetly?
We raise funds, and we do it quietly. It is a kind of internal manufacturing of sausages, and it is not so relevant to talk about it. We have evolved over time. Originally, YC was financed exclusively by Paul and company. And later on, we assume, from a funding perspective, the nature of most VCs, where we have limited partners from whom we raise money on a relatively regular basis. And we have a number of funds that those LPs put their money into. We look like a standard VC from that perspective.
Are these evergreen backgrounds?
They are not.
I guess many alumni are also welcome to invest? Virtuous cycle and all?
Yes. I would like to point out that one of the innovations that Sam probably talked about when he talked about these five innovations was that we think of the people who go through Y Combinator as our alumni and have created this community of founders. If that united community can really reinvest the success they found in YC, it binds us all more closely.
Regarding that community, I’ve always wondered if there is a breaking point. I know that a founder will launch a product and many YC alumni will gladly try or buy it, for example. But when you’re dealing with thousands of teams right now, I wonder how you keep your students from feeling overwhelmed.
The best answer to that is that we have some really good software. In fact, we see ourselves as a software platform more than anything. We have all been software engineers. Paul has a Ph.D. in computer science. Sam was a software engineer. I am a software engineer. My successor, Garry Tan, is a software engineer. So we take a software attitude toward scalability and building tools that bring our companies and founders together. In fact, Garry originally created the community software that we still use at YC.
You most recently reduced your class size.
It’s a new world, right? It changed in two fundamental ways, which caused us to reduce our lot size a bit. One is that the pandemic is coming to an end, and we’re much more in person, and it’s harder to scale in person than purely virtual, which we were from March 2020 to winter 2022. The second thing is the economy is doing slightly different things than 2021, so it’s really important for us to fund those who have the best chance of surviving and raising funds in the future and thriving in a more difficult economic situation.
Will the terms change? Terms are changing across the board right now.
Not in the short term, that’s fine. I mean, over the years we’ve changed how we treat YC companies and you probably know that we recently changed the amount of money we give each company from $125,000 to $500,000. That will stay for a while. In fact, we’re super pleased that just as we’re entering a stormy economic climate, every YC company starts with a minimum of $500,000, and therefore has a great opportunity to make it to the other side, and there will be another side. . There is always another side.
I actually read an article this morning with some venture capitalists predicting that maybe next year; Let’s hope.
I think someone on the previous panel just said, no one really knows. And it’s true, no one really knows. But there is reason to believe that we could have a relatively soft landing, that we may have a recession, but it probably won’t last that long. There are some pretty good employment statistics and some pretty bad inflation and we’ll see how they balance out.
This winter, I directed TechCrunch’s coverage of YC’s Demo Day, and the headline [of our analysis piece] I was, “Is YC turning into some kind of fight club??” There were so many companies that were very similar, at a similar stage, in the same region, seemingly tackling the same problems. Does YC feel like you have to place as many bets as possible on up-and-coming entrepreneurs and see who succeeds?
I don’t know. Fight Club involves pugilism between companies, and that rarely happens within our community; even when companies end up being in the same space, we all feel like we’re fighting the same battle. Look, we have already financed more than 4,000 companies. So it’s inevitable that people will be in the same or similar space, it’s just, okay, it happens.
There has been a lot of financial technology, especially in the last two classes. I have not seen so many new consumer companies. I also wonder if you are following the trend of creators and if YC is getting into this.
We are driven by founders who apply. We rarely say: we are going to take 20 consumer companies, 100 B2B Saas [teams]. Unfortunately, B2B SaaS tends to be the biggest component of batches and has been for a while for the same reason Willie Horton used to rob banks, because [business customers] having the money If you want to persuade consumers to spend money, it’s a little harder than companies that, when they offer a product, really want to spend money. [in order to] have a guaranteed business relationship with you.
Has the application process changed over time? I know there was once a 45-minute interview that was cut down to 10 minutes. Sam once said that there’s not a lot of data involved, that [the interview process] it’s really a way for YC to understand who can tell a story and he said it became pretty clear pretty quickly.
The way our application process works hasn’t changed much over time. There is an online application. It’s free, so anyone who wants to apply to YC should. It’s very helpful for startups to go through the set of questions we ask and fill it out, and it takes a few hours. There is also a short video, just introducing the founders. After the apps come in, we review every single app, and we tend to get on the order of 20,000 apps per batch. We then select a limited number for interviews. And we do a 10-minute interview with each company we select. And based on that interview, we selected them for the batch.
I’m sorry to name you the Silicon Valley representative here, but you’re in California, and so am I. What do you think is happening there? [as a tech hub]? A fairly large percentage of your summer class is in San Francisco, between 25% and 30%.
It is even higher than that. For us, it is a double question how we get out of the pandemic, and companies around the world are struggling with this question as a company. We went 100% virtual in March 2020. Like almost everyone else, it stayed that way for two years. And we’re just finding out what YC looks like as a company in 2022, 2023 and beyond. The good news for me is that it’s mainly Garry’s problem. But we opened another office in San Francisco and I recently did an opinion poll among YC employees asking how often they would come to the office, and the average was about 1.5 days. From now on, we are almost fundamentally a remote and virtual organization.
The related question is, what are our lots like? Did I mention that in the summer of 2022, [returned to] in person [meaning], components of in person. We had a retreat at the beginning of the batch, we had weekly meetings during the batch, and we had an alumni event at the end of the batch, and we will continue to work incrementally with how much ‘in person’ we bring back and how much virtual there is.
We learned a lot during the pandemic about what works. We were actually able to spend more time with the founders, because Zoom office hours happen to be really effective and efficient. So we made more of them. And we connected with our founders through tools like Slack and WhatsApp and somehow, even though we weren’t in person, they brought us closer. So we’re trying to find the happy middle ground, the best of both worlds where we can spend that kind of quality time helping the founders and also the very human aspect of, you know, meeting them in person, hugging them when they need it. A hug. Those things are actually very important.