Over 12 years, Silicon Valley accelerator-turned-seed-fund Y Combinator has invested in more than a thousand companies. Its success stories include Dropbox, Airbnb, and Stripe, and recipients of its investments are altogether worth an estimated $100 billion today.
Y Combinator accepts dozens of new companies into its three-month program each summer and winter. That’s preceded by an application process that sets the internet ablaze as anxious startup founders pose questions about the best way to gain entry. Entrepreneurs who secure an interview with Y Combinator face a brief inquisition by a panel of YC alum and associates. Questions are shotgunned at them about how well they know their market, product, co-founders, and themselves. It’s an intense process, and 10 minutes isn’t a lot of time. As a founder who once reached the final interview stage—full disclosure: they passed—I can confirm that it’s a nerve-wracking experience.
While venture capitalists have long debated the factor in startup success, the basic idea almost always boils down to three things: team, market, and product. An outstanding combination of these means you have a tiny, perhaps “.00006%,” chance of building the next $1 billion startup. Checking only one of those boxes makes that fate even less likely (although you can still build a great business without venture-style returns).
To dispel at least some of the mystery around YC’s process, president Sam Altman spent part of his annual letter on Feb. 16 detailing the four things the seed fund asks about a company before deciding to invest. Answer this quartet of queries correctly, and you might build the next Dropbox.
1) Will this company build something lots of people really love?
“If so, and if ‘lots’ is sufficiently large, the company has the chance to produce substantial earnings.”
2) Will this company be easy to copy?
“The most successful companies I’ve worked with have a significant competitive advantage—network effect, proprietary technology, complex coordination, or barrier to entry of some other sort. I understand in theory it’s possible to build a very successful commodity company, but I don’t know how to do it.”
3) Will these founders develop into “forces of nature”?
“As most people say, it’s hard to make money unless you invest in great founders. Defining what that means is usually left as an exercise to the reader. Here are some questions I ask myself: Are these founders relentlessly determined? Are they original thinkers? Are they smart, and especially do they have new insights I haven’t heard before? Are they good communicators (and so will they be able to hire, sell, raise money, talk to the press, etc)? Are they focused and intense? Do they always seem to find a way around obstacles? Would I work for them?
“This is the often the hardest factor for me to evaluate, because you have to make a judgment about trajectory—you are trying to predict where someone will be in five years.”
4) Does this company have a clear and important mission?
“Without this, I usually get bored. More importantly, companies that don’t have this usually have a hard time recruiting enough great people to work with them, and thus struggle to become very large.”
Altman notes that unconventional characters with ”non-traditional backgrounds” are among YC’s biggest success stories. By contrast, founders with extremely “tracked” lives (the pedigreed school, degree, and professional experience) may not be in startups for the right reason, a mindset Altman describes as “bringing an idea they’re obsessed with to life, and willing to do something unreasonable to see it happen.”