The Dropbox IPO is a transformative moment for Y Combinator

Dropbox on Feb. 23 announced plans to raise $500 million through an initial public offering (pdf), making the 11-year-old file-storage startup the first company in Y Combinator’s portfolio to make a market debut.

It’s a big moment, and a potential inflection point, for the influential incubator. Y Combinator has a roster of big companies, including Stripe and Airbnb, that plan to go public eventually.

Today, Y Combinator’s model is well-known: Its incubator program, held for three months each summer and winter, gives dozens of startup founders the chance to gain expert advice on refining and selling their products—and offers a $120,000 investment in exchange for a 7% stake in their companies.

But when Y Combinator launched in 2005, the idea sounded dubious to a lot of people. The incubator’s cofounders—Paul Graham, Jessica Livingston, Trevor Blackwell, and Robert Morris—set out to buck conventional wisdom about smart startup investing. As Graham explains in a 2012 blog post, his thinking was that “investors should be making more, smaller investments, they should be funding hackers instead of suits, they should be willing to fund younger founders.” Most importantly, Graham notes, Y Combinator decided to fund companies “synchronously,” launching with a summer program for the undergraduate founders of eight chosen startups in which young people would receive feedback and support on refining and selling their products.

The incubator program, described by the New York Times (paywall) as “a sleep-away camp for start-up companies,” and the incubator’s willingness to take risks on college students made it easy for critics to trivialize Y Combinator at first. “When people came to YC to speak at the dinners that first summer, they came in the spirit of someone coming to address a Boy Scout troop,” Graham writes. But among those first eight companies were some pretty choice picks, including Reddit, now valued at $1.8 billion.

As Y Combinator companies proved successful, its incubator program gained gravitas. Soon investors were flocking to Demo Day, the grand finale of the program, in which founders have the chance to pitch their startups. Meanwhile, applications flowed in: The boot camp now boasts an acceptance rate of less than 3%, lower than Ivy League universities. Articles about how to ace Y-Combinator interviews—and deal with inevitable rejections—have become their own internet genre. (In fact, Y Combinator famously rejected Dropbox founder Drew Houston the first time around, when he applied with an idea for an SAT prep company in 2005.)

It’s difficult to overstate Y Combinator’s impact on the startup scene. The prestige associated with the incubator made young people see startup life as both more exciting and potentially more lucrative than working for Microsoft or Apple. “By providing training and producing a group of successful alumni, YC has helped popularize the idea that startups are a viable career,” The Economist explains. The incubator also changed the relationship between investors and startups, as The Economist notes. Its alumni network functions as a kind of union, giving founders more bargaining power, while the incubator’s model has has increased the cost of early-stage investing.

As of August 2017, Y Combinator had founded 1,430 companies. Plenty of those failed, but that’s normal for young businesses. And the potential upside is huge. The accelerator says that 64 of its companies are valued at over $100 million, while 10 are worth more than $1 billion—including Dropbox, valued at $10 billion by private investors.

Under president Sam Altman, Y Combinator has kept expanding its ambitions, launching a free online Startup School to connect with thousands of aspiring entrepreneurs. As Wired explains, Altman is a true believer (paywall) in the power of startups to heal the world’s social ills, which means that launching them at a rate of 250 or 300 a year isn’t enough. That’s why his new goal “not just nurturing startups, but also fomenting startup-like innovation as a tonic to fix the world.”

But even as Y Combinator spreads the global gospel of startups, it’s still got a backlog of unicorns—companies worth more than $1 billion—that have yet to go public. Now that Dropbox has taken the jump, other unicorns will be watching closely, including its siblings at Y Combinator. The success or failure of Dropbox will reflect on Y Combinator, too, and its status as a Silicon Valley kingmaker.

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