Y Combinator: The Institute of Innovation

Hey friends,

The first piece I ever wrote for The Generalist was about Y Combinator. Specifically, I wrote about the wacky dynamics at the accelerator’s Demo Day.

In the two years since, and as I’ve gotten further into analyzing different venture structures, I’ve come to find YC especially interesting. There’s no other player in the market quite like it and despite its prominence, the scale of its influence still feels underestimated.

For these reasons, I’m excited to be analyzing the company afresh, this time taking a look at every aspect of what Paul Graham and Co. have built. In today’s piece, we’ll examine questions like:

• Is YC worth the equity?
• How do YC’s terms compare against the broader market?
• Which geographies is YC funding most aggressively outside the US?
• Which massive market has YC failed to crack?
• How is YC doing in backing underrepresented founders?
• Which funds and accelerators might unseat YC?

…And a whole lot more. To understand why YC might have more weapons than any other fund in the world, jump in.

PS – I’d like thank Shree Bhanderi for his help in digging into YC’s data. We’ve gone deeper than in any previous piece, thanks to him.

Brought to you by FTX US

When it comes to crypto, I am a big believer in dollar-cost-averaging. Instead of purchasing $500-worth of Bitcoin all at once, you invest at a regular cadence. The result is that you average out your entry price. For volatile assets like cryptocurrencies, that can be especially important and take away the stress of trying to time the market.

​FTX US is a safe, easy-to-use, and inexpensive way to put your crypto investing on automatic. You can get started in minutes and set up recurring buys for assets like BTC, ETH, SOL, and many other tokens. You can also invest in NFTs and stocks, all without switching apps, and with either low or no fees.
​
​Get started today by downloading the FTX US app. Use the code GENERALIST, and after you trade $100, you’ll get a special $15 bonus.

Y COMBINATOR: THE INSTITUTE OF INNOVATION

Actionable insights

If you only have a couple of minutes to spare, here's what investors, operators, and founders should know about Y Combinator.

• Full stack venture. YC is best-known for offering a three-month program for new entrepreneurs. That mental model is outmoded. The organization founded by Paul Graham now helps from inception through pre-IPO.
• Network effects. YC is a venture capital firm with network effects. By batching its portfolio into cohorts and connecting them through internal tools like “Bookface,” it has created a structure that becomes stronger as it scales.
• Pricing power. As venture capital has become more competitive, valuations have risen. Not so at YC. The accelerator manages to invest in startups at a significant discount that has increased relative to the market over the past decade.
• Matters of diversity. Compared to industry benchmarks, YC invests in more women, black, and Latinx-founded businesses – but its numbers have stagnated in recent years. Many feel YC could do more to increase its share of underrepresented founders.
• A global presence. Just 49% of startups in the latest YC batch came from the United States. As more pre-seed and seed funds have come to market in America, YC has found success attracting promising entrepreneurs from countries like India, Mexico, and Nigeria. One nation that YC hasn’t cracked? China.

***

Y Combinator has more weapons than any other player in venture capital. No one else has such pronounced network effects, pricing power, and brand equity wrapped up in a single package. Perhaps that’s because YC isn’t really a VC firm – at least, not a traditional one. Depending on how you parse it, you can make a case that it’s any one of these five things:

1. A university that treats companies, not people, as the atomic unit
2. A startup that monetizes through an uncapped income share agreement
3. A for-profit college that scales (and is not a scam)
4. A social network for some of the world’s best entrepreneurs
5. An industrialized venture firm

With a bit of stretching, you might be able to conjure half a dozen other reasonable descriptors. This amalgamation of ideas may be part of the reason that, nearly two decades after it was founded, the tech industry doesn’t seem to be sure what to make of YC. Some think of it as entrepreneurship’s Ivy League, the institution responsible for catalyzing a wave of innovation that has changed the world for the better. For others, it’s an apex predator, inflicting harsh terms on naive founders.

Underlying either position is the understanding that Y Combinator is extremely powerful. It does not seem hyperbolic to suggest it may be among the most consequential entities across industries of the last twenty years. Not only did YC support Airbnb, Stripe, Coinbase, DoorDash, Flexport, Rappi, Reddit, Vanta, and many others, it popularized a now-ubiquitous philosophy of company building. “Make something people want,” “do things that don’t scale,” and “getting to default alive” are gospels that owe their proliferation to YC. Over time, it has turned its success into a series of compounding advantages that make it look very different than anyone else in the market.

In today’s piece, we’ll chart Y Combinator’s history and evolution and navigate the debates that surround it. Read on to learn about:

• Origins. Paul Graham, Robert Morris, Trevor Blackwell, and Jessica Livingston founded YC in 2005. Their new creation relied on four powerful, non-consensus beliefs.
• Product. YC has developed an arsenal of tools to help startups at each phase of their life. That includes programs like Startup School and Work for a Startup, as well as tools like Bookface and Hacker News.
• Investing. President Geoff Ralston wants YC to be helping tens of thousands of startups a year. At its current growth rate, how long would it take YC to reach such figures? We crunched the data to find out and better understand how the firm’s investing has evolved.
• Terms. Are YC’s terms fair? Seven percent for $125,000 represents a discount from median pre-seed and seed valuations. Supporters believe YC makes up for it elsewhere.
• Risks. Accelerators like Entrepreneur First, Hyper, and Pioneer have found different ways to compete for early-stage investments. Now, megafunds like Sequoia and a16z are entering the ring.

Let’s get to it.

IN A MEME
​​​​​For the pictorially inclined, here's the whole piece — all 8,800 words of it — in a single meme.

PUZZLER
​​​All guesses are welcome and clues are given to anyone that would like one. Just respond to this email for a hint.

Jim W is heating up. After responding fastest to our prior riddle, he repeated the feat this time around. He was followed by Greg K, Chen F, Samuel R, Krishna N, Sukumar R, Angela D, Ashi M, MD, Riley V, Attison B, Vivek J, Thomas K, David P, Kelly O, Robert H, Ankit J, Scott M, and Joe E. All found the auricular response to this puzzle:

The answer? The ear. Kudos to Jamie M who cleverly noted that these tools appear in the Soviet Union’s flag, which could fit the bill depending on its size.

Wishing you all a lovely day, wherever you are in the world.
​​
​Until next time,
Mario

PS – Come hang out and discuss this week's piece in The Generalist community. I’d love to get to know you.