Last week at Web Summit, we were asked to interview outgoing Y Combinator President Geoff Ralston about the past, present, and future of the popular accelerator program. We covered a lot of ground during our 20-minute-long chat, including why Ralston – a long time partner at YC – decided to leave after assuming the role of president just three years ago (Garry Tan assumed the role in January). We also discuss where YC’s investment capital comes from and why, given the market slowdown, YC will change its terms to reflect that slowdown.
TC: Let’s start with the news [that] you left Y Combinator. You were there for three years. This is a little bit of a surprise [that you are stepping away]. Why now?
GR: I actually count my tenure at YC from just after 2006, when I left Yahoo [and] started hanging out with Paul [Graham] and the company, so true, almost 16 years. And I’ve been an employee at YC since 2011. So it’s been over a decade. And, you know, I felt inside me an urge that it was time for a change. And I think you have to do it justice, when you feel like it, even though I like YC. I love what I do. I think it’s an important work. I think that’s the thing. We are very mission driven. We think entrepreneurship is important and makes a real positive difference in the world. And I love working with founders. Strange. I love it. But it was time to do something different. So I moved on.
YC went from cohorts of 12 or 18 to roughly 400 founders last season, before downsizing a little. Tell me about this idea that startup launches can’t scale.
I have made what some people consider an extraordinary claim for how many companies we can fund. There was never a limit. It’s very scalable. There are tremendous opportunities for entrepreneurship and founders to find success in the United States and around the world, in every demographic. In the beginning, we are just scratching the surface.
One of the things that I think YC does that is really special is to democratize the idea of entrepreneurship, to open it up to different people. Originally, the idea was to open it up for technology, for hackers. It’s an entrepreneurial opening for people who really don’t have access to it. And we continue that to this day. Because of that our batch continues to grow. It’s supply and demand. There is a demand for entrepreneurship.
Sam Altman, your predecessor as president, once said there are five ways YC really innovated, including letting anyone in the world apply to the program, whereas with VC, you have to get a warm introduction.
Yes, indeed, and to be fair, PG, Paul Graham, the founder of YC, started to open up the idea behind entrepreneurship through his essays, which I’m sure a number of people have read. It was a turning point for how people thought about entrepreneurship
I honestly have no idea at this point how YC is really structured. You have a Continuity Fund [for later-stage investments]. Where is the money? [for these new cohorts] come from? Is YC a holding company where investors own shares in the holding company? Or is it raising funds very, very quietly?
We collect funds, and we do it quite quietly. It’s kind of our internal sausage, and it’s not relevant to talk about. We have evolved over time. Originally, YC was funded exclusively by Paul and company. And later, we take, from a funding point of view, the nature of most VCs, where we have limited partners that we raise money regularly. And we have some funds where those LPs put their money. We look like a standard VC from that perspective.
Is this evergreen fund?
I’m guessing that many alums are also welcome to invest? Virtuous cycle and all?
Hehehe. I want to point out that one of the innovations that Sam seems to be talking about when you talk about these five innovations is that we think of the people who went through Y Combinator as our alumni and we’ve created this community of founders. If that tight community can actually reinvest the success they find back into YC, it brings us all closer together.
Regarding that community, I always wonder if there is a breaking point. I know the founder will roll out the product and many YC alums will happily test or buy it, for example. But when you’re facing thousands of teams when you’re at this point, I wonder how you keep your alums from getting overwhelmed.
The best answer is that we have good software. We actually consider ourselves, more than anything else, a software platform. We have all been software engineers. Paul has a PhD in computer science. Sam was a software engineer. I am a software engineer. My successor, Garry Tan, is a software engineer. So we took a software attitude to scale and created a tool that brings our company and founders together. In fact, Garry built the original community software that we still use at YC.
You don’t have to change the size of your class more recently.
It’s a new world, right? That changed in two fundamental ways, which caused us to step back a bit in our batch sizes. One is that the type of pandemic will end, and we will be more in person, and it will be more difficult for a personal scale than a pure virtual one, which we will be from March 2020 to the season of 2022. The second thing is that the economy will do things a little differently from 2021 , so it is very important that we fund those who have the best chance to survive and raise funds in the future and to thrive in a more difficult economic situation.
Will the terms change? Requirements are changing across the board today.
Not in the short term, okay. I mean, over the years, we’ve changed the deals we give to YC companies and you probably know that recently, we changed the amount of money we give each company from $125,000 to $500,000. It’ll stay for a while. We actually really like that as we head into the stormy economic weather, every YC company should start with a minimum of $500,000 and have a good chance of making it to the other side, and it will. be the other side. There is always another side.
I actually read a piece this morning with some VCs predicting that maybe it’s next year; let’s hope.
I think someone on the previous panel just said, no one really knows. And it’s true, no one knows. But there is reason to believe that we may have a relatively soft landing, that maybe we will have a recession but probably not for that long. There are good employment statistics and good inflation and we will see how that balances out.
This winter, I led TechCrunch’s coverage of YC’s Demo Day, and the title [of our analysis piece] that,”Is YC becoming a fight club type?” You have a lot of similar companies, at the same stage, in the same area, seemingly solving the same problem. Does YC feel the need to make as many bets on promising entrepreneurs as possible and see who succeeds?
I do not know. Fight Club shows pugilism between companies, and that rarely happens in our community; even though the company is finally in the same room, we still feel like we are fighting the same fight. Look, we have funded more than 4000 companies now. So it’s inevitable that people will be in the same or the same space, it’s just, it’s okay, it happens.
There is a lot of fintech especially in the last few classes. I haven’t seen many consumer startups. I’m also wondering if you’re following the creator trend and if YC is dipping its toe into this.
We are encouraged by the founders who apply. We rarely say: we’re going to take 20 consumer businesses, 100 b2b Saas [teams] Sadly, b2b SaaS tends to be the biggest component of the batch and has some time for the same reason that Willie Horton used to rob banks, because [business customers] have money If you want to persuade consumers to spend money, it’s a little more difficult than a company that, when you provide a product, really wants to spend money. [in order to] have a guaranteed business relationship with you.
Has the application process changed over time? I know it was once a 45 minute long interview that got down to 10 minutes. Sam once said that there is not much data involved, that [the interview process] really is a way for YC to understand who can tell the story and said it is pretty clear pretty fast.
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. This is very helpful for startups through a set of questions that we ask and fill it and it takes a few hours. There is also a short video, just introducing the founders. After the applications come in, we review all the applications, one by one, and we tend to get in the order of 20,000 applications per batch. Then we select a limited number for interviews. And we do a 10-minute interview with each company we choose. And based on that interview, we selected them for the batch.
Sorry to make you Silicon Valley’s representative here, but you’re in California, like me. What do you think happened there. [as a tech hub]? A fairly large percentage of your summer classes are in San Francisco, like 25% 30%.
Even higher than that. For us, it’s a two-fold question of how we get out of the pandemic, and businesses everywhere are struggling with this question as a company. We went 100% virtual in March 2020. Like almost everything, it stayed that way for two years. And we’re figuring out what YC as a company will look like in 2022, 2023 and beyond. The good news for me is mostly Garry’s problem. But we opened another office in San Francisco and I recently did a straw poll of YC employees to ask how often they want to come to the office, and the average is like 1.5 days. So we’re almost essentially a remote virtual organization
A related question is, what do our bets look like? I mentioned that in the summer of 2022, we [returned to] personally [meaning] component in people. We have a retreat at the beginning of the batch, we have a weekly meeting during the batch, and we have an alumni event at the end of the batch, and we will continue to work with how many ‘people’ we will bring back and how many virtual ones there are.
We learned a lot during the pandemic about what works. In fact, we can spend more time with the founders, because it turns out that the office hours on Zoom are really effective and efficient. So we do more than them. And we connect with our founders on tools like Slack and WhatsApp and in some ways, even if we’re not in person, this brings us closer. So we’re trying to find a happy medium, the best of both worlds where we can spend quality time like helping the founders and also kind of the human aspect, you know, meeting them in person, hugging them when they need it. hug Those things are actually super important.