How the world's most successful startup incubator works
from the translator: Translation is a little free, do not blame me - the original is very large. But I tried to convey the meaning. Caution, a lot of letters!
Many people do not understand very well what Y Combinator (YC) does . The purpose of this article is to describe in detail the work process of perhaps the most successful startup incubator in the world.
YC conducts two three-month financing cycles per year: from January to March and from June to August. They ask the founders of each startup that they finance to come to the Bay Area for the entire funding cycle, during which YC works intensively with them to get the company in the best possible shape. Each cycle ends with an event called “Demo Day”, in which the startup is presented to an audience that currently includes most of the world's largest startup investors.
During each cycle, once a week, YC organizes dinners and invites a prominent figure from the startup world to talk. At this event, people begin to arrive around 6 pm. YC encourages each of the startup founders to treat dinners such as the mini Demo Days, and bring laptops or other mobile devices to show everyone else what they did in the week. A week as a deadline usually encourages people to bring their achievements to a state where they can be shown.
All the time before dinner, startup founders can communicate with each other and with the organizers in free form. The dinner itself starts at 19:15. Everyone is eating together at one white table.
The invited guest usually appears before seven and communicates with the founders of startups in an informal setting before dinner. Serious conversations begin closer to the dessert. Most of the invited guests are successful founders of startups, and they usually talk about how their startup was created in all colors. Since YC has been familiar with many of them for a long time, their relations are built on trust, so each of the invited guests is sure that the information said at the table does not leak anywhere and often share secrets that cannot be found anywhere else. This atmosphere allows people to reveal themselves in contrast to public lectures.
One of the founders of startups wrote:
“Most of the practical tips are superfluous, but they are of great importance when you hear the same thing over and over, from different angles, especially from the lips of famous people, they are increasingly settling in your head.”
Unfortunately, everything that happens at dinner remains only in the memories and in the short notes of those who attend these events. On the one hand, it would be nice to broadcast or record such events, but in this case it is unlikely that you will be able to hear at least part of what the invited guests are telling.
Conversations usually end with an active discussion of what has been said and answers to questions from the audience, after which everyone is divided into small informal groups, as before dinner. Almost all the invited stars stay for a while to talk with the founders of startups individually and everyone can do it. Sometimes the founders and invited guests exchange contact information to discuss the details later. But the guests are not the people responsible for advising startups. They are only a bonus. Advising mainly on Y Conmbinator, incubator alumni, and investor angels after Angel Day.
Half the time is occupied by events in which all startups take part. The other half goes through conversations with YC. The company has only three people who advise startups full time: Harj Taggar, Jessica Livingston and Paul Graham. Another 2 partners, YC Robert Morris (part-time professor of MIT) and Trevor Blackwell (founder of Anybots), advise startups on technical issues. The company also has a guest lawyer, Jon Levy, who provides legal advice to everyone and is engaged in legal work that is simple at first but nevertheless necessary for new companies for free. After the launch, when they begin to earn serious money, the founders of startups must acquire their own lawyers. In the second half of the three-month cycle, YC introduces them to the best startup lawyers,
Individual conversations with startups are reserved through a special online program. There are no restrictions. In practice, the number and duration of conversations depends on the startup and on the stage of the cycle at which it is currently. The program for the office hours phase was developed not just to provide the opportunity to reserve time for conversations, but also to show whether all startups get enough time for consultations. If necessary, more time is allocated.
What is being talked about is highly dependent on the startup and on the current situation in the funding cycle. This is usually a discussion of current issues. Sometimes, especially in the early stages, you need to figure out how things should be. No matter how simple it looks, it takes a lot of time to convince startup founders that they have nothing to worry about.
About 10% of the time, not urgent problems are discussed, but the vision of the future company as a whole. Someone already has it, but most do not. It is very useful to spend some time thinking about what will happen to the company from its launch to the giant company, even if these are not the current goals of the creators. Helping the founders develop this vision is one of YC's greatest strengths.
If the startup has not yet decided what it will work on or if they want to change the initial idea, it discusses what it will be necessary to do. Startups very often modify or even completely replace their original ideas. By the time of Demo Day, about 15% were working on new ideas that grew out of discussions and consultations during the cycle. And often they get some of the most successful startups.
If the question of what the company should do is resolved, then the next urgent question becomes "what to do first." YC usually advises breaking down work into stages and doing each of them as quickly as possible. This does not work for everyone, but it works for most. The advice to act quickly is due to the fact that initially the development is for hypothetical users. After the launch, communication with real users begins, the reaction of which may be a surprise, and they will try to learn how to do everything.
Usually, YC advises doing something substantially better than existing counterparts. So that users have reason to try a new product. And at least some will say: "I am glad that this has appeared and now you can do something else."
Deciding what to do is not a simple technical question, because a startup is a company, not just another software development. The product must have a business model. It can change, but there should be an initial idea of who will do what and how, how the project will develop, and how to achieve the goal.
If a startup has already produced something that can be launched, then discusses how to do it. And there are two main questions: how to present the project to future users, and how in front of the press and investors. If a startup has a website, then by joint efforts they try to bring it to a high level. As a rule, start-up websites mislead users who come to them for the first time and cannot understand what the company is doing, so it is very important to clearly and clearly convey the main idea and activities of a startup on a site. The YC team helps in writing good texts for sites.
With every startup ready to launch, we carefully work out the steps to present the project to the press and investors. Founders of startups send their plans for promotion in the press to YC, after which letters are sent to the media to the editorial office in the normal non-marketing language that many startups sin, and also to take the news seriously, given the reputation of the incubator.
If the company has already begun to work (and this is about a quarter of all those who come to YC), it discusses what happened at the time and after the launch of the product. In most cases, the founders' expectations are not met. And often this is due to the fact that the project was launched too quickly, paradoxically, and YC is trying to figure out how to solve existing problems. And they range from small technological issues to lawsuits. But the most common problem is that users don't like the released product enough.
Do not be afraid of this. Negative experience allows you to find out what went wrong of your ideas and you will already have some data for analysis. Therefore, such with such companies, YC is trying to find out the expectations of users, to obtain data on their behavior and interests. This is the area where the experience of YC in advising startups is most useful.
As you move along the three-month cycle, the topics for discussion are investors and the launch of the company. The main question is what should be the strategy for raising funds. How much to get, from whom and when to start. The answers depend on the startups themselves. Some of the most attractive startups can easily find and get money quickly. Other “ugly ducklings” that will turn into swans over time, but must first try to get at least a small amount from the investor in order to make the startup more attractive.
It is very important for startups to have an accurate assessment of the potential for obtaining funding. If you try to get too much money at the wrong stage, you will not only spend a lot of time and get nothing in the end, but also jeopardize the chances of getting a smaller amount, since your product will be treated “coolly”. Fortunately, this is another area where the YC experience will be useful. The experience of hundreds of previous startups helps predict investors' reactions and propose an appropriate strategy.
When the fundraising process begins, discussions move from strategy to tactics. The process of raising funds, unfortunately, is the solution to the issue of breaking down obstacles. And the main problem is to convince investors to invest in your company. It helps personal contacts and previous experience of interaction with investors YC. An incubator cannot afford to offer investors outright bullshit, because after that they can stop believing in YC. Thus, the goal is not just to receive money, but to receive funds from the investor who can help the project most of all.
By the time Demo Day draws near, discussions are dominated by presentation questions. This is one of the busiest pieces of work for YC. All startups are at different stages, and each one needs a different time to interact with the YC team in the remaining time. But a week before the presentation, they should talk only about what and how will be presented on the “Demo Day”. So this whole week turns into one big rehearsal. The situation at YC becomes exactly the same as on the day of the presentation, and the founders of startups come and rehearse in the same atmosphere that will be on “Day Demo”.
Usually, work begins with an explanation of the most important points to convey. After that, the founders of startups make a presentation to the YC team and the rest of the founders, after which the errors are sorted out and the cycle repeats.
Office hours do not stop after a three-month cycle. In fact, after 3 months only one thing stops - it's dinner. Work continues year-round, and startups from all previous cycles can book a time whenever they want. (Except 1 week of the cycle and a week before the “Demo Day”, which are reserved only for startups of the current cycle). For example, issues are still being discussed with some startups of the first cycle, which took place in the summer of 2005.
In the end, YC can reach some limit of the people to whom they can give advice, but so far it has not been reached. Only 4 weeks a year (2 in each cycle), when many people need enough time for discussions.
Around the middle of each cycle, an event called “Angel Day” is held, during which each startup forms pairs with two investor angels, who will meet with them regularly for several weeks before the “Demo Day”. Preparations for Angel Day take place almost like Demo Day, but the presentation is much shorter and more informal for him, and the audience consists only of top angel investors in Silicon Valley. After the presentation, angels choose startups with whom they want to continue working, and YC helps to make the best choice.
After an early look at startups, angels agree to talk to selected startups by phone or in person once a week before Demo Day. The purpose of this work is to enable startup founders to get answers to real questions from real investors so that before the Demo Day they can fix some problems that scare investors, or change something in their presentation. Any of the angels can invest in the development of any company in the future, if he wants. Usually these are top-class investors, so no one objects if they become a co-investor with such “sharks” in the next stages.
Angels that startups meet in Angel Days sometimes end up becoming their consultants and spend a lot of time together. But although “Angel Day” often helps startups a lot, they are not designed to find a mentor who will advise on how to develop a startup in the future, as they do in other incubators. Only the YC team can do this. Communication with large investors is the same bonus as invited guests for dinner.
"Day Demo" has become over time the largest event. From the first day, on which 15 investors gathered, it turned into a major event, during which more than 4 presentations are held in 3 days for an audience of about 400 people. It is unlikely that somewhere else there is such a large number of investors gathered in one place.
There are no specific things startups should introduce to Demo Day. Everyone is at different stages, someone is changing ideas in the process. The purpose of the presentations is to show the maximum of what is ready at this stage and development prospects. There are investors who are ready to invest at different stages, if a startup seems to them quite promising.
After presentations at Demo Days, investors and startup founders are given the opportunity to talk more and discuss further work during receptions hosted by YC. Investors do not write checks during Demo Days. The goal of these presentations for startups is not to convince investors, but to make themselves known. Some may wish to invest during Demo Day, but most prefer to discuss the terms of the deal during future meetings.
After the Demo Day, YC continues to maintain close contacts with start-ups, watching them negotiate, moving through the labyrinth of receiving funds, and helps them to “decipher” what investors really mean, giving difficult and ambiguous answers. Often they even communicate with investors in order to understand what they really think and, if possible, to persuade them to invest. Investors respect the work of YC and are ready to trust in many respects the opinion of the incubator team. And YC, in turn, works only with large investors who are ready to make decisions quickly.
During each cycle, YC holds several other events. Firstly, “Prototype Day”, which is held 4 weeks later. On this day, all startups show themselves to each other for the first time. The objectives of this event: to find out what others are working on, to make the founders think about how to demonstrate what they are working on. Nevertheless, at this stage, the founders of startups should be more engaged in production than promotion, so they are encouraged not to spend too much time speaking, since no one except startups from this cycle will see them.
After the Prototype Day, all founders are asked to vote in which of the projects they would invest as investors. This is done in order to enable founders to look at startups through the eyes of investors.
One week before Demo Day, Rehearsal Day is held. The format is the same as that of the “Prototype Day”, but it is already required to show the achievements that will be presented on the “Demo Day”. At the end, a vote is also taken for the project, which looks like the most attractive for investment.
Before the “Demo Day” itself, 5-6 incubator graduates are invited, who were able to attract large investments to talk frankly about their experience and give advice to startups, to direct their activities in the right direction. Tips from people like you are perceived much better.
Now that YC has many graduates, conferences are held periodically in which only graduates participate, where controversial things are discussed, so as not to allow them in the future. This is not part of a cycle, but when it is carried out during one of them, startups can take part in them.
Meetings are also held with a group of partners of the Sequoia venture capital fund. And each startup has half an hour to talk about their product with them. Here, Sequoia partners act as independent consultants, telling each startup which of their plans are feasible, and with what problems. Communicating with venture capitalists is very useful for startups.
The new event, which was introduced in the last cycle and is planned to be done in the future, is “Alumni Demo Day”. The day before the main “Demo Day”, all presentations are run before an audience of YC graduates (many of whom, truth be told, are now angel investors). The purpose of the event is to correct the latest mistakes before a real presentation, to hear about them from a friendly audience, and not from real investors. After the run, a vote is held among graduates in which they choose the best projects for investment.
The least interesting, but no less valuable part of YC’s activities is the work on the proper design of companies, with all documentation and legal aspects elaborated. The process starts from the moment when the founders of startups fill out the application form, as some of the questions from it can reveal problems that may harm the company in the future if measures are not taken.
Starting a startup company is not a trivial task. This is not the kind of work that you can entrust to your uncle-lawyer (unless of course he works for one of the companies specializing in startups). YC's own startup, Viaweb, faced serious legal problems due to things that were missed when setting up the company. But they would not have arisen, if at that time Y Combinator in the form in which it is now.
Investors are often not so much worried that the company will perform poorly, but rather about the “horrors” in their documents. Of course, this is not the main reason why YC does paper work. The main reason is to let startup founders focus on other things. For most of them, paperwork and other paper work are unfamiliar things, so distracting them from their main activities. It will be much better if they can spend their time working on their project. And every aspect of YC's business is designed to that end.
As YC begins to set up startups, the graduate network is becoming an increasingly important factor in it. No one initially thought that a byproduct of founding startups every 6 months would be a network of graduates. Now the more startups are launched, the faster the network of graduates grows.
Now, after 5 years, the YC alumni network is arguably the largest in the world. It is strong not only in its size, but also in the obligations of the participants to help each other. This commitment was originally a byproduct of the collaborative spirit that YC seeks to promote in every cycle.
This is the inner ring of support. People working with YC do a lot to help each other in the cycle and beyond. Many of them are friends long after the release. As soon as YC understood this, they began to help organize contacts between the founders of new startups and the people who had achieved success.
Of course, graduates are not blindly loyal. But they trust the company that helped them get on their feet, and believe that every company that has passed the YC filter is worthy of help and cooperation with colleagues in the workshop.
Initially, startups used a network of alumni in order to find people who know people with whom they would like to meet. But now more and more people themselves want to become graduates.
The most useful for other startups among the graduates were: the founders of Cloudkick (they like to solve other people's technical problems), Sam Altman of Loopt and James Lindenbaum of Heroku (who have excellent knowledge of fundraising and give many tactical advice in this matter). And these are only a few, there are a lot of them to list all. There are many things they do for each other that YC doesn't even hear about. The chain reaction has become independent.
The outer ring of support is Silicon Valley itself. There are no questions about starting startups elsewhere. No city can compare with the Bay Area. Other things being equal, Silicon Valley is the best place to start a startup.
Most of the YC-like organizations were created to enrich the startup community in different specific cities. But that was never the goal of Y Combinator. When they started in Boston, the goal was to help startup founders, not help Boston. That is why, after the first cycle, the company moved to Silicon Valley, as it was better for startup founders.
The first few years, every six months, the places were alternated and now it is clear how much Silicon Valley is better. For startups, she's like Los Angeles for the movie industry. But at the same time, YC remains aloof from the issue of startup startup location. Working with them takes 3 months, and like after any school, startups can go wherever they want. For some, it would be best to go to the YC in the Bay Area and return to their hometown at the end of their work, as if they were leaving to study at a college in a major city, and then returning to work home. But the choice always remains with the founders of startups.
Submissions and Communications
It is difficult to overestimate the value of YC bonds in various circles. They benefit startups in several ways. Firstly, thanks to its own and alumni connections, YC can organize a meeting and present a startup to almost anyone in the industry. Secondly, the incubator has many connections with the so-called platform companies, which help to get rid of the difficulties in placing startups on a specific platform. For communication between the founders of startups and specialists of platform companies, special meetings are organized.
This portfolio of quality partners allows any company that wants to work with the startup community to join and gain access to hundreds of high-class startups at the same time. In addition, journalists who write about startups can write to us, and we are always ready to give them examples that characterize what they write about independently of the scope of the described company.
The strength and cohesion of the graduate network also helps startups avoid intentional harm from competitors or envious ones. Since everyone in Silicon Valley understands the power of this network, it is a deterrent and it is unlikely that anyone will want to do anything bad for companies that have left YC. The terrible stories that you could hear from investors are unlikely to happen to the companies that we founded.
Initially, weekly dinners were exclusively socially oriented events. They allowed startup founders to communicate, and many of them became close friends. People organized their own communities.
The company understands the importance of the social aspect and does a lot for its cultivation.
For example, usually after 6 weeks after the end of the cycle, reunion dinners are held, because by this time many startups, having difficulties, may lose faith in themselves or begin to lose heart and they need unloading and discharge.
YC encourages startup founders to organize their own social events, which they do. This is a good tendency to stick together at the end of the cycle, as they all have a lot in common.
Y Combinator has founded a lot of startups. In the first cycle in 2005, there were only 8 startups. In the latter, in 2010 there were 36 of them. Continuous growth is beneficial for both the incubator and startups. Startups receive many benefits from colleagues in their cycle and from graduates. And the more startups, the more help for beginners, the more likely that a person who is an expert in the issue that you need to solve is hoping.
The size of the community also helps startups indirectly, as people and organizations are more willing to work with Y Combinator, and therefore with them. Famous people are more likely to come to more viewers. Investors are more interested in Demo Days when more companies are represented. Many companies are interested in cooperation, journalists are interested in communication, etc.
Another size advantage is the ability to learn more quickly from the YC team itself. The more companies are launched, the more knowledge the team receives not only about startups, but also about investors. They continue to monitor the development paths of hundreds of startups, and have seen the results of thousands of interactions between startups and investors. This allows you to predict results, even in the most unusual cases.
But the company is constantly thinking about the dangers of growth. He tries to eliminate thin spots as they appear, to ensure that all startups receive enough attention. That is why, for example, a program was written to reserve discussion time, as it shows how satisfied the demand is.
Of course, the best reward for YC is when startups become independent and they succeed. This is the main goal of YC. Moreover, their experience helps with equal success to talk about large and small companies, because they themselves were small before they became large.
The main goal of YC is to help startups really shoot. They come at different stages. Some have not yet begun to work, others have been engaged in the project for a year or more. But regardless of the stage, YC’s task is to help each of them get a much better shape 3 months after they arrive in the Bay Area.
For most of them, a better form means either making a better product that will appeal to more users, or getting more opportunities to make money. The ratio varies depending on the stage at which the company is located. A start-up startup will want to work more on product development, those who have experience, usually want to devote more time to attracting the attention of investors.
But every startup benefits from the intensity of working with YC. Every day, each of them, for 3 months. Everyone, from colleagues to investors and Silicon Valley itself, wants to help launch the project successfully. In such an atmosphere, it is difficult to be insufficiently motivated. And such increased motivation is just what is needed to do complex things that you have to face at the very beginning. Most people have much more potential than they realize. They often wonder what they are capable of.