An American Idol for the dot-com world—that’s one way Silicon Valley’s Y Combinator (YC) semiannual sessions have been described. In some respects, the comparison fits. YC’s young, talented contenders must endure a rigorous screening process and compete under intense pressure in the hopes of a shot at the big time. Run by computer science PhD turned entrepreneur and then angel investor Paul Graham and partners, YC is an ultraexclusive, 13-week accelerator for fledgling entrepreneurs trying to make their individual dot-coms—ranging from a rap-lyrics decoder to a marketplace for university-research lab work—take off. YC provides them with seed money, support and expert guidance. At the program’s end, the startups all receive the opportunity to pitch their ideas to the Valley’s savviest investors.
In YC’s seven-year history, more than 400 companies have been born this way, including game changers Reddit, Airbnb and Dropbox. To report The Launch Pad (which Portfolio Books will publish in October), author Randall Stross got rare access to the summer 2011 session. YC was the perfect subject for Stross, a New York Times columnist who’s made a specialty out of innovation-spotting. He was the author of a 1993 Steve Jobs book, and he’s also written books about Google, venture capitalists and American businessmen in China. For The Launch Pad, Stross watched as 63 teams tried to upgrade their ramen reality into a champagne-popping payoff. DuJour asked the author to download some of what he learned.
Y Combinator accepts about 3 percent of applicants. I know that Paul Graham likes people who are great programmers willing to work crazy hours. What else does he look for?
Randall Stross: He favors applicants whose team members have known one another and worked together for a long time. You don’t want to launch a startup by yourself—that’s clear. It’s just too hard to do well. You need two or three people with complementary skills, a person to buck up the team when spirits flag. Most importantly, you need someone day and night whom you can bounce ideas off of. That’s key.
What other conditions or factors can help lead to dot-com success?
RS: Failure. It’s one aspect that’s least appreciated by outsiders, but it’s a great teacher. It toughens, and you need toughening to get through the startup experience. If people can develop a capacity to absorb rejection and carry on, they greatly increase their chances. The best founders are ones who’ve been knocked around a bit. Steve Jobs achieved his greatest successes when he returned to Apple after going through 12 years of largely failed experiments to make his second company viable. He learned a lot from that. Graham seems to encourage many of the teams with ideas for consumer-focused startups to think in the business-to-business realm instead.
RS: Business-to-business or business-to-developers is less risky. It’s easier to identify your target customers. With consumers, you have to find a service that people will pay for and people hate paying for things. Too often you have to train them. You don’t have to train businesses to invest in software.
Let’s say a friend approaches me about investing in her dot-com venture. What red flags should I look for? Any positive signs?
RS: I’d caution people of average means from investing in only one or two companies. Angel investors who do this on a full-time basis invest in lots and lots of companies. They don’t believe they can pick major winners so they use a portfolio approach. It’s no different than any other investment strategy—you need the protection of a portfolio.
Is there anything most employers can learn from Graham about getting the best out of people?‘
RS: Y Combinator doesn’t attempt to micro-manage how the founders spend their time; in fact, it encourages them to work at home. I think it would be a wonderful thing if more employers were able to give that kind of autonomy to more of their workforce.
Do you think that some day historians will look back and think of the startup revolution as being as important as the industrial revolution?
RS: Comparison to the industrial revolution is not going to work. It would be hard to match that impact. But there doesn’t seem to be any limit to how many startups can be accommodated—their growth seems to continue unabated. I think it’s possible to imagine an economy in which the startup sector might be as big as services or manufacturing. That will be the test of its impact. Does it become something more than just a path you take? Take the university system. Not so long ago you had your select institutions that few people went to and you also had your state universities, but higher education wasn’t something that a significant portion of the population experienced. Then, in the 1960s, higher education expanded and now something like 40 percent of adults have postsecondary education. Maybe someday 40 percent of adults will have startup experience.
Do you think that would benefit our economy?
RS: I do, and the reason is very simple: No business is as agile as a small start-up.
Photographed by Henry Hargreaves