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 discussed a lot during our 20-minute chat, including why Ralston – long a partner at YC – decided to leave after taking on the role of president just three years ago (Garry Tan will take the role in January). We also discussed where YC’s investment capital is coming from and whether given the market slowdown, YC will change the terms to reflect that slowdown.
TC: Let’s start with the news [that] you leave Y Combinator. You were there for three years. It was a little 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 company, so really, 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 an urgency inside that it was time for a change. And I think you should do that justice, if you feel that way, even though I love YC. I love what I do. I think it’s important work. I think it matters. We are very mission driven. We believe entrepreneurship is important and really make a positive difference in the world. And I like working with founders. It’s weird. I love it. But it was just time to do something different. So I continue.
YC went from cohorts of 12 or 18 to about 400 founders last winter, before downsizing a bit. Tell me about the idea that starting startups is infinitely scalable.
I’ve made what some people consider bizarre claims for how many companies we could fund. It has never been infinite. It scales enormously. There is an extraordinary opportunity for entrepreneurship and for founders to find success in the United States and around the world, in every demographic. In the beginning we were just on the surface.
One of the things that I think YC did very special was to democratize the idea of entrepreneurship, to 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 really didn’t have access. And we have continued that to this day. That is why our parties have continued to grow. It’s supply and demand. There is a demand for entrepreneurship.
Sam Altman, your predecessor as president, once said that there are five ways YC really innovated, including signing up anyone in the world for the program, while getting a warm introduction to VCs.
Yes, totally, and to be fair, PG, Paul Graham, the founder of YC, started revealing the ideas behind entrepreneurship with his essays, which I’m sure a number of people in the audience have read. They really were a turning point for how people thought about entrepreneurship
I honestly don’t know how YC is really structured at this point. You have the Continuity Fund [for later-stage investments]. where is the money [for these new cohorts] originating from? Is YC a holding company where investors have interests in a holding company? Or is it very, very quietly raising funds?
We’re raising money, and we’re doing it pretty quietly. It’s kind of our in-house sausage making, and it’s not that relevant to talk about. We have evolved over time. Originally, YC was funded exclusively by Paul and his company. And later, from a funding perspective, we adopted the nature of most VCs where we have limited partners from whom we raise money relatively regularly. And we have a number of funds in which those LPs put their money. From that perspective, we look like a standard VC.
Are these evergreen funds?
They are not.
I’m guessing many alums are also welcome to invest? Virtuous cycle and all that?
Yes. I want to point out that one of the innovations that Sam was probably talking about when you talked about these five innovations was that we consider the people who go through Y Combinator as our alumni and that we’ve created this community of founders. If that close-knit community can actually reinvest the success they have found in YC, it will bind us all closer together.
As far as that community goes, I’ve always wondered if there’s a breaking point. I know a founder will roll out a product and many YC alums, for example, will be happy to test or buy it. But if you’re dealing with thousands of teams right now, I wonder how you can keep your alums from getting overwhelmed.
The best answer to that is that we have really good software. We actually see ourselves primarily as a software platform. We’ve 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. That’s why we take a software stance on scaling up and creating tools that bring our companies and our founders together. In fact, Garry originally built the community software we still use at YC.
You recently reduced your class size.
It’s a new world, right? It changed in two fundamental ways, forcing us to downsize our batch size a bit. One is that the pandemic is coming to an end, and we’re a lot more personal, and it’s harder to scale in person than purely virtual, which we were from March 2020 to the winter of 2022. The second is the economy is doing something different things than in 2021 so it’s really important for us to fund those who have the best chance of survival and raise funds in the future and and prosper in a more difficult economic situation
Will the conditions change? Conditions are currently changing across the board.
Not in the short term, okay. I mean, over the years we’ve changed the deal that we give to YC companies and you probably know we recently changed the amount we gave each company from $125,000 to $500,000. That lingers for a while. We’re actually super happy that just as we come into stormy economic weather, any YC business can start with a minimum of $500,000 and therefore has a great chance of reaching the other side, and there will be another side . There is always another side.
I read a piece this morning where some VCs predict it might be next year; let’s hope.
I think someone on the previous panel just said, nobody really knows. And it’s true, nobody really knows. But there is reason to believe that we will have a relatively soft landing, that we may have a recession, but it probably won’t last that long. There’s pretty good employment statistics and pretty bad inflation and we’ll see how those balance out.
This winter I led australiabusinessblog.com’s coverage of YC’s Demo Day, and the title [of our analysis piece] was, “Is YC going to be some kind of fight club?” You had so many companies that were very similar, at a similar stage, in the same region, seemingly tackling the same issues. Does YC think it should bet as much as possible on promising entrepreneurs and see who succeeds?
I don’t know. Fight Club implies battle between the companies, and that rarely happens in our community; even if companies end up in the same space, we all feel like we’re fighting the same battle. Look, we’ve funded over 4,000 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 has been a lot of fintech especially in the last few lessons. I haven’t seen that many consumer startups. I’m also wondering if you’re following the maker trend and if YC is sticking its nose in this.
We are driven by the founders who apply. We rarely say: we take 20 consumer companies, 100 b2b Saas [teams] Unfortunately, b2b SaaS is usually the largest part of batches and has taken a while for the same reason that Willie Horton robbed banks, because [business customers] have the money. If you want to convince consumers to spend money, it’s just a little more difficult than companies who, when you deliver a product, want to spend real money [in order to] have a guaranteed business relationship with you.
Has the application process changed over time? I know once it was a 45 minute interview cut down to 10 minutes. Sam once said that there isn’t a lot of data involved, that… [the interview process] is really a way for YC to understand who can tell a story and he said it was pretty obvious 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 join YC should do so. It’s very helpful for startups to go through and complete the series of questions we’re asking, and it takes a few hours. There is also a short video introducing the founders. After the applications come in, we review all applications, one at a time, and we tend to be 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 every company we select. And based on that interview, we select them for the batch.
Sorry to make you the Silicon Valley representative here, but you’re in California, just like me. What do you think is happening there [as a tech hub]? A fairly large percentage of your summer class is in San Francisco, about 25% 30%.
It’s even higher than that. For us, it’s a two-pronged question of how to get out of the pandemic, and companies everywhere as a business are struggling with this question. In March 2020 we became 100% virtual. Like almost everyone, it stayed that way for two years. And we’re just figuring out what YC will look like as a company in 2022, 2023 and beyond. The good news for me is that it’s mostly Garry’s problem. But we did open another office in San Francisco, and I recently conducted a straw poll of YC employees to ask how often they would come to the office, and the average was about 1.5 days. So from now on we are almost a virtual remote organization
The related question is, what do our batches look like? I already said that in the summer of 2022 [returned to] personal [meaning] parts 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 will bring back and how much virtual there is.
We have learned so much during the pandemic about what works. We were able to spend even more time with the founders as it turns out that office hours via Zoom are really effective and really efficient. So we made more of it. And we got in touch with our founders through tools like Slack and WhatsApp and in some ways, even though we weren’t personal, these brought us closer together. So we’re trying to find the middle ground, the best of both worlds where we can spend that kind of quality time helping founders and also the kind of the very human aspect of, you know, meeting them in person, hugging them when they that need a hug. Those things are actually super important.