The market is changing; YC’s terms are 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 of ground during our 20-minute-long chat, including why Ralston — long a partner at YC —  decided to leave after assuming the role of president just three years ago (Garry Tan assumes the role in January). We also discussed where YC’s investing capital comes from and whether, given the market slowdown, YC will be changing its terms to reflect that slowdown.

Here is much of that conversation, edited lightly for length and clarity. You can watch the 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 little bit of a 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 inside me an urgency that it was time for a change. And I think you have to do that justice, when you feel that, even though I love YC. I love what I do. I think it’s important work. I think it matters. We’re very mission driven. We think entrepreneurship is important and makes a real positive difference in the world. And I love working with founders. It’s weird. I love it. But it was just time to do something different. So I’m moving on.

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

I’ve made what some people consider outlandish claims for how many companies we could possibly fund. It’s never been infinite. It scales a lot. There is extraordinary opportunity for entrepreneurship and for founders to find success across the United States and across the world, in every demographic. In the beginning, we were just scratching the surface.

One of the things that I think YC did that was really special was to democratize the idea of entrepreneurship, to open it up to different folks. Originally, the idea was to open it up to technologists, to hackers. That was really an opening of entrepreneurship to folks who really didn’t quite have the access. And we’ve continued that to this day. For that reason our batches have continued to grow. It’s supply and demand. There’s a demand for entrepreneurship.

Sam Altman, your predecessor as president, once said there are five ways that YC really innovated, including letting anybody in the world apply to the program, whereas with VCs, you had to get a warm introduction.

Yeah, totally, and to be fair, PG, Paul Graham, the founder of YC, started opening up the ideas behind entrepreneurship with his essays, which I’m sure a number of people in the audience have read. They were really a turning point for how people thought about entrepreneurship

I honestly don’t know at this point how YC is really structured. You have the Continuity Fund [for later-stage investments]. Where is the money [for these new cohorts] coming from? Is YC a holding company where investors have stakes in a holding company? Or does it raise funds very, very quietly?

We raise funds, and we do it rather quietly. It’s sort of our internal sausage making, and it’s not so relevant to talk about. We’ve evolved over time. Originally, YC was funded exclusively by Paul and company. And later on, we took on, from a funding perspective, the nature of most VCs, where we have limited partners from whom we raise money on a relatively regular basis. And we have a number of funds in which those LPs place their money. We look like a standard VC from that perspective.

Are these evergreen funds? 

They’re not.

I’m guessing that a lot of alums are also welcome to invest? Virtuous cycle and all?

Yeah. I would like to point out that one of the innovations that Sam probably talked about when you talked about these five innovations was that we think of the folks who go through Y Combinator as our alumni and we’ve created this community of founders. If that tight community can actually reinvest the success they found back into YC, it ties us all more tightly together.

With regard to that community, I’ve always wondered if there is a breaking point. I know a founder will roll out a product and a lot of YC alums will happily test it out or buy it, for example. But when you’re dealing with thousands of teams as you are at this point, I wonder how you keep your alums from getting overwhelmed.

The best answer to that is we have really good software. We actually consider ourselves, more than anything else, a software platform. We’ve all been software engineers. Paul has a PhD in computer science. Sam was a software engineer. I’m a software engineer. My successor, Garry Tan, is a software engineer. So we take a software attitude toward scaling and toward creating tools that bring our companies and our founders together. In fact, Garry built the community software originally that we still use at YC.

You did pare back your class size more recently.

It’s a new world, right? It changed in two fundamental ways, which caused us to retrench a little bit on our batch size. One is that the pandemic sort of is coming to an end, and we’re much more in person, and it’s harder to scale in person than purely virtual, which we were from March 2020 until the winter of 2022. The second thing is the economy is doing somewhat different things than in 2021, so it’s really important for us to fund those that have the best chance of survival and raising funds in the future and and thriving in a more difficult economic situation

Will the terms be changing? Terms are changing across the board right now.

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 that recently, we changed the amount of money we gave each company from $125,000 to $500,000. That’ll stick for a while. We’re actually sort of super pleased that just as we’re coming into stormy economic weather, every YC company gets to start off with a minimum of $500,000 and has a great chance therefore of making it through to the other side, and there will be another side. There’s always another side.

I actually read a piece this morning with some VCs predicting that maybe it’s next year; let’s hope.

Image Credits: Web Summit

I think someone on the previous panel just said, nobody really knows. And it’s true, nobody really knows. But there’s reason to believe that we might have a relatively soft landing, that maybe we’ll have a recession but it probably won’t last for that long. There’s pretty good employment statistics and pretty bad inflation and we’ll see how those balance out.

This winter, I led TechCrunch’s coverage of YC’s Demo Day, and the title [of our analysis piece] was, “Is YC becoming a kind of fight club?” You had so many companies that were very much alike, at a similar stage, in the same region, seemingly tackling the same problems. Does YC feel it has to make as many bets on promising entrepreneurs as possible and see who succeeds?

I don’t know. Fight Club implies pugilism between the companies, and that seldom happens within our community; even when companies end up being in the same space, we still all feel like we’re fighting the same fight. Look, we’ve funded over 4000 companies now. So it is inevitable that people will be in similar or the same space, it just, it’s okay, it happens.

There has been a lot of fintech especially in the last couple of classes. I haven’t seen as many consumer startups. I’m also wondering if you’re following the creator trend and whether YC is dipping its toe into this.

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

Has the application process has changed over time? I know it was once a 45-minute long interview that got down to 10 minutes. Sam once said that there’s not much data involved, that [the interview process] really is a way for YC to understand who can tell a story and he said it was pretty clear pretty quickly.

The way our application process works hasn’t changed much over time at all. There’s an online application. It’s free, so anyone who wants to apply to YC should. It’s very helpful for startups to go through the set of questions that we ask and fill it out and it takes a few hours. There’s also a short video, just introducing the founders. After the applications come in, we review all the applications, every one, and we tend to get on 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 that 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, as am I. What do you think is happening there [as a tech hub]? A fairly large percentage of your summer class is in San Francisco, something like 25% 30%. 

It’s even higher than that. For us, it’s a twofold question of how we come out of the pandemic, and businesses everywhere are struggling with this question as a company. We became 100% virtual in March of 2020. Like almost everyone else, it stayed that way for two years. And we’re just figuring out what does YC as a company look like in 2022, 2023 and beyond. The good news for me is mostly it’s Garry’s problem. But we did open another office in San Francisco and I recently did a straw poll of YC employees to ask how often they were going to come into the office, and the average was something like 1.5 days. So we’re almost fundamentally a remote, virtual organization henceforth

The related question is, what do our batches look like? I mentioned that in the summer of 2022, we [returned to] in person [meaning] components of in person. We had a retreat at the beginning of the batch, we had weekly meetups during the batch, and we had an alumni event at the end of the batch, and we’ll continue to incrementally work with how much ‘in person’ we’ll bring back and how much virtual there is.

We learned so much during the pandemic as to what works. In fact, we were able to spend more time with founders, because it turns out office hours over Zoom are really effective and really efficient. So we did more of them. And we connected with our founders over tools like Slack and WhatsApp and in some ways, even though we weren’t in person, these brought us closer. So we’re trying to find the happy medium, the best of both worlds where we can spend that sort of quality time helping founders and also kind of the very human aspect of, you know, meeting them in person, hugging them when they need a hug. Those things actually are super important.