the market is changing; YC terms do not • TechCrunch

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 in our 20-minute conversation, including why Ralston – a longtime associate at YC – decided to leave after taking on the role of president for just three years. before (Garry Tan took over the role in January). We also discussed where YC’s investment capital comes from and whether, amid a market downturn, YC would change its terms to reflect that decline.

Here’s the bulk of that conversation, lightly edited for length and clarity. You can clock Longer conversation here, or just listen in.

TC: Let’s start with the news [that] you are leaving Y Combinator. You were there for three years. It was a bit of a surprise [that you are stepping away]. Why now?

GR: I actually counted my tenure at YC right after 2006, when I left Yahoo [and] started hanging out with Paul [Graham] and the company, actually, almost 16 years. And I’ve been an employee of YC since 2011. So it’s been more than a decade. And, you know, I feel the urge in me that it’s time for a change. And I think you have to do that justice, when you feel it, even though I love YC. I love what I do. I think it’s important work. I think it’s important. We’re on a mission. We think entrepreneurship is important and makes a really positive difference in the world. And I love working with founders. It’s strange. I like it. But it’s just time to do something different. So I’m continuing.

TC: YC went from a pool of 12 or 18 to about 400 founders last winter, before downsizing a bit. Tell me about this idea that launching startups is infinitely scalable.

GR: I’ve made what some consider outlandish claims for how many companies we can fund. It is never infinite. It has a lot of scale. There are extraordinary opportunities for entrepreneurship and for founders to find success across the United States and around the world, in every demographic. In the beginning, we just scratched the surface.

One of the things that I think YC has done really specifically is democratize the idea of ​​a startup, to extend it to different people. Originally, the idea was to open it up to technologists, to hackers. It’s really a startup opportunity for people who really don’t have access. And we have continued that to this day. For that reason, our batches have continued to grow. It’s supply and demand. There is a need for entrepreneurship.

TC: Sam Altman, your predecessor as president, once said that there are five ways in which YC really innovates, including allowing anyone in the world to sign up for the program, in when with VC you have to be warmly introduced.

GR: Well, absolutely, and to be fair, the PG, Paul Graham, founder of YC, has started to open up the ideas behind entrepreneurship with his essays, which I’m sure a audience read. They really are a turning point for the way people think about entrepreneurship

I really don’t know at this point how YC is actually structured. Do you have a Continuity Fund? [for later-stage investments]. Where is the money? [for these new cohorts] from? Is YC a parent company in which investors have shares in the parent company? Or is it fundraising very, very quietly?

We raise funds, and we do it pretty quietly. That’s our in-house sausage making, and it doesn’t involve talking. We have grown over time. Initially, YC was sponsored exclusively by Paul and company. And then we take on, from a funding perspective, the nature of most VCs, where we have limited partners with whom we raise money on a relatively regular basis. And we have a number of funds where those LPs put their money. We look like a standard VC from that angle.

Is this evergreen fund?

Not so.

I guess a lot of alums are also welcome to invest? Infinite cycles and all?

YES. I want to point out that one of the innovations that Sam might have been talking about when you talked about this year of innovation is that we think about the people who have used Y Combinator as our alumni and we created this community of founders. If that tight-knit community can actually reinvest the success they find into YC, that will tie us all together more closely.

With regards to that community, I’ve always wondered if there’s a breaking point. I know a founder who will launch a product and a lot of YC alums will happily try it or buy it, for example. But when you’re dealing with thousands of teams like you are now, I wonder how do you keep your coins from getting overwhelmed.

The best answer to that is that we have really good software. More than anything else, we really consider ourselves a software platform. We are all software engineers. Paul has a PhD in computer science. Sam is a software engineer. I am a software engineer. My successor, Garry Tan, is a software engineer. So we have a software perspective towards scaling and towards creating tools that bring our companies and founders together. In fact, Garry built the original community software that we still use at YC.

Recently, you have reduced your class size even more.

It’s a new world, isn’t it? It changed in two fundamental ways, causing us to scale back a bit on our batch size. One is that the pandemic is coming to an end, and we are more people, and it’s harder to scale in person than virtual, which we’ve had from March 2020 until winter 2022. The second thing is that the economy is getting worse. do things a little differently than in 2021, so it’s really important to us to fund those with the best chance of surviving and raising funds into the future and thriving in tough economic times. more difficult

Will the terms change? The terms are changing across the board right now.

Not in the short term, okay. I mean, over the years we have changed the agreement we give to YC companies and you may know that we have recently changed the amount we give each company from $125,000 into $500,000. That will last for a while. We are really pleased that just as we are entering the stormy economic weather, every YC company can start with a minimum of $500,000 and thus have a great chance to make it through. the other side, and there will be another side. There is always another side.

I actually read a piece this morning with some VCs predicting that could be next year; Let’s hope.

I think someone on the previous board just said, no one really knows. And it’s true, no one really knows. But there’s reason to believe we might have a relatively soft landing, that maybe we’ll have a recession but it probably won’t last that long. There are pretty good employment statistics and pretty bad inflation and we’ll see how those balance out.

This winter, I led TechCrunch on YC Show Day and headlines [of our analysis piece] to be, “Did YC become some kind of fight club? “You’ve got a lot of very similar companies, at a similar stage, in the same area, seemingly solving the same problems. Does YC feel like betting as much as possible on promising entrepreneurs and seeing who succeeds?

I do not know. Fight club implies corporate pacifism and that is rare in our community; even if the companies end up in the same space, we all still feel like we’re fighting the same war. Look, we’ve sponsored over 4000 companies. So it’s inevitable that everyone will be in the same space or the same space, it’s just, okay, it happens.

There have been a lot of fintechs especially in the last few classes. I have not seen so many consumer startups. I’m also wondering if you’re following the creator trend and if YC has a foot in this.

We are driven by founders who apply. We rarely say: we will take 20 consumer businesses, 100 b2b Saas [teams] Sadly, b2b SaaS tends to be the biggest component of the batches and has been for a while for the same reason as Willie Horton used to rob banks, because [business customers] have money. If you want to convince consumers to spend money, it’s just a little harder than companies that when you offer a product actually want to spend money. [in order to] have a guaranteed business relationship with you.

Has the registration process changed over time? I know it used to be a 45-minute interview that was reduced to 10 minutes. Sam once said that there wasn’t much data involved, that [the interview process] It’s really a way for YC to understand who can tell a story, and he says it’s pretty clear pretty quickly.

The way our registration process works hasn’t changed much over time. There is an online application. It’s free, so anyone who wants to subscribe to YC should. It would be helpful for startups to go through the set of questions we asked and fill it out and take a few hours. There is also a short video, introducing only the founders. Once an application is submitted, we review all applications, one by one, and we tend to receive 20,000 applications per batch. We then selected a limited number of interviews. And we do a 10-minute interview with every company we choose. And based on that interview, we choose them for the batch.

Sorry for choosing you to represent Silicon Valley here, but you’re in California, and so am I. What do you think is happening there? [as a tech hub]? A sizable percentage of your summer class is in San Francisco, about 25% 30%.

It’s even higher than that. For us, it’s a double question of how we got out of the pandemic, and businesses everywhere are grappling with this question as a company. We became 100% virtual in March 2020. Like most, it remained that way for two years. And we’re just figuring out what YC as a company looks 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 poll of YC employees to ask how often they come to the office, and the average is 1.5 days. So we’re basically a remote virtual organization

The related question is, what do our plots look like? I mentioned that in the summer of 2022, we [returned to] face to face [meaning] components of the human body. We withdrew at the beginning of the wave, we have weekly meetups in this batch and we have an alumni event at the end of the wave and we will continue to work on the ‘live’ level. ‘ that we will bring back and how many virtual.

We’ve learned a lot during the pandemic about what works. In fact, we were able to spend more time with the founders, because it turned out that office hours over Zoom are really productive and really productive. So we did more of them. And we’ve connected with our founders through tools like Slack and WhatsApp, and in some ways, even though we haven’t met in person, these tools have brought us closer. So we’re trying to find a happy medium, the best of both worlds, where we can spend that quality time helping the founders and the human side, you you know, meet them in person, hug them when they need a hug. Those things are really super important.

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