A New Venture Animal

****

| March 2008, rev May 2013(This essay grew out of something I wrote for myself to figure
out what we do. Even though Y Combinator is now 3 years old, we're still
trying to understand its implications.)
I was annoyed recently to read a description of Y Combinator that
said "Y Combinator does seed funding for startups." What was
especially annoying about it was that I wrote it. This doesn't
really convey what we do. And the reason it's inaccurate is that,
paradoxically, funding very early stage startups is not mainly about
funding.Saying YC does seed funding for startups is a description in terms
of earlier models. It's like calling a car a horseless carriage.When you scale animals you can't just keep everything in proportion.
For example, volume grows as the cube of linear dimension, but
surface area only as the square. So as animals get bigger they
have trouble radiating heat. That's why mice and rabbits are furry
and elephants and hippos aren't. You can't make a mouse by scaling
down an elephant.YC represents a new, smaller kind of animal—so much smaller
that all the rules are different.Before us, most companies in the startup funding business were
venture capital funds. VCs generally fund later stage companies
than we do. And they supply so much money that, even though the
other things they do may be very valuable, it's not that inaccurate
to regard VCs as sources of money. Good VCs are "smart money," but
they're still money.All good investors supply a combination of money and help. But
these scale differently, just as volume and surface area do. Late
stage investors supply huge amounts of money and
comparatively little help: when a company about to go public gets
a mezzanine round of $50 million, the deal tends to be almost
entirely about money. As you move earlier in the venture
funding process, the ratio of help to money increases, because
earlier stage companies have different needs. Early stage companies
need less money because they're smaller and cheaper to run, but
they need more help because life is so precarious for them. So
when VCs do a series A round for, say, $2 million, they generally
expect to offer a significant amount of help along with the money.Y Combinator occupies the earliest end of the spectrum. We're at
least one and generally two steps before VC funding. (Though some
startups go straight from YC to VC, the most common trajectory is
to do an angel round first.) And what happens at Y Combinator is
as different from what happens in a series A round as a series A
round is from a mezzanine financing.At our end, money is almost a negligible factor. The startup usually
consists of just the founders. Their living expenses are the
company's main expense, and since most founders are under 30, their
living expenses are low. But at this early stage companies need a
lot of help. Practically every question is still unanswered. Some
companies we've funded have been working on their software for a
year or more, but others haven't decided what to work on, or even
who the founders should be.When PR people and journalists recount the histories of startups
after they've become big, they always underestimate how uncertain
things were at first. They're not being deliberately misleading.
When you look at a company like Google, it's hard to imagine they
could once have been small and helpless. Sure, at one point they
were a just a couple guys in a garage—but even then their
greatness was assured, and all they had to do was roll forward along
the railroad tracks of destiny.Far from it. A lot of startups with just as promising beginnings
end up failing. Google has such momentum now that it would be hard
for anyone to stop them. But all it would have taken in the beginning
would have been for two Google employees to focus on the wrong
things for six months, and the company could have died.We know, because we've been there, just how vulnerable startups are
in the earliest phases. Curiously enough, that's why founders tend
to get so rich from them. Reward is always proportionate to risk,
and very early stage startups are insanely risky.What we really do at Y Combinator is get startups launched straight.
One of many metaphors you could use for YC is a steam catapult on
an aircraft carrier. We get startups airborne. Barely airborne,
but enough that they can accelerate fast.When you're launching planes they have to be set up properly or
you're just launching projectiles. They have to be pointed straight
down the deck; the wings have to be trimmed properly; the engines
have to be at full power; the pilot has to be ready. These are the
kind of problems we deal with. After we fund startups we work
closely with them for three months—so closely in fact that
we insist they move to where we are. And what we do in those three
months is make sure everything is set up for launch. If there are
tensions between cofounders we help sort them out. We get all the
paperwork set up properly so there are no nasty surprises later.
If the founders aren't sure what to focus on first, we try to figure
that out. If there is some obstacle right in front of them, we
either try to remove it, or shift the startup sideways. The goal
is to get every distraction out of the way so the founders can use
that time to build (or finish building) something impressive. And
then near the end of the three months we push the button on the
steam catapult in the form of Demo Day, where the current group of
startups present to pretty much every investor in Silicon Valley.Launching companies isn't identical with launching products. Though
we do spend a lot of time on launch strategies for products, there
are some things that take too long to build for a startup to launch
them before raising their next round of funding. Several of the
most promising startups we've funded haven't launched their products
yet, but are definitely launched as companies.In the earliest stage, startups not only have more questions to
answer, but they tend to be different kinds of questions. In later
stage startups the questions are about deals, or hiring, or
organization. In the earliest phase they tend to be about technology
and design. What do you make? That's the first problem to solve.
That's why our motto is "Make something people want." This is
always a good thing for companies to do, but it's even more important
early on, because it sets the bounds for every other question. Who
you hire, how much money you raise, how you market yourself—they
all depend on what you're making.Because the early problems are so much about technology and design,
you probably need to be hackers to do what we do. While some VCs
have technical backgrounds, I don't know any who still write code.
Their expertise is mostly in business—as it should be, because
that's the kind of expertise you need in the phase between series
A and (if you're lucky) IPO.We're so different from VCs that we're really a different kind of
animal. Can we claim founders are better off as a result of this
new type of venture firm? I'm pretty sure the answer is yes, because
YC is an improved version of what happened to our startup, and our
case was not atypical. We started Viaweb with $10,000 in seed money
from our friend Julian. He was a lawyer and arranged all our
paperwork, so we could just code. We spent three months building
a version 1, which we then presented to investors to raise more
money. Sounds familiar, doesn't it? But YC improves on that
significantly. Julian knew a lot about law and business, but his
advice ended there; he was not a startup guy. So we made some basic
mistakes early on. And when we presented to investors, we presented
to only 2, because that was all we knew. If we'd had our later
selves to encourage and advise us, and Demo Day to present at, we
would have been in much better shape. We probably could have raised

[...]

Original source