The market is changing; YC’s terms are not • TechCrunch

We had the opportunity to interview Geoff Ralston, outgoing president of Y Combinator, about the past, present, and future of the popular accelerator program last week at Web Summit. We covered a lot of ground during our 20-minute 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.

This is a portion of the conversation, lightly edited for clarity and length. You can either watch the full conversation or listen in.

TC: Let’s start with the news [that] You are leaving Y Combinator. You worked there for three years. It was quite surprising. [that you are stepping away]. Why not now?

GR: I count my tenure at YC as starting just after 2006, when Yahoo! was taken over by my wife. [and] Paul started hanging out [Graham] Company, so it’s almost 16 years. And I’ve been an employee at YC since 2011. So it’s been over a decade. It was over a decade since I felt a sense of urgency inside that it was time to make a change. You have to give that justice. I love what I do. I think it’s important work. It matters to me. We’re very mission driven. We believe entrepreneurship is essential and can make a significant positive impact on the world. It’s a pleasure to work with founders. It’s weird. It’s amazing. It was time for me to move on. So I’m moving on.

YC went through a number of cohorts, ranging from 12 to 18 founders, and then had 400 founders in the winter last year. Then it slowed down a bit. Let me tell you about the idea that startups can be infinitely scaled.

I’ve made what some people consider outlandish claims for how many companies we could possibly fund. It’s never been infinite. It can scale a lot. It offers incredible opportunities for entrepreneurs and founders to succeed in America and around the world in any demographic. We were only scratching the surface at the beginning.

I believe YC did something really special by democratizing the idea of entrepreneurship and opening it up to other people. The original idea was to make it accessible to hackers and technologists. 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. Because of this, our batches have grown. It’s supply and demand. There’s a demand for entrepreneurship.

Your predecessor, Sam Altman, said that YC truly innovated in five ways. Unlike VCs where you needed to be introduced warmly, YC allowed anyone to apply.

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. These essays were a major turning point in the way people think about entrepreneurship.

What is the structure of YC at this stage? You now have the Continuity Fond [for later-stage investments]. Where is the money? [for these new cohorts] Where did you come from? Is YC a company that holds investors’ stakes? Or is it very quiet in raising funds?

We raise money, but we do so quietly. It’s sort of our internal sausage making, and it’s not so relevant to talk about. We’ve evolved over time. YC began as a company and Paul’s funding. From a funding perspective, we began to take on the structure of most VCs. This is where we have limited partners and raise money on a fairly regular basis. We also have a number funds in which those LPs can invest their money. From that perspective, we look like a typical VC.

Are these funds evergreen? 

They’re not.

I’m guessing that a lot of alums are also welcome to invest? What is a virtue cycle?

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. It ties us all closer if that small group can reinvest the success they have found into YC.

With regard to that community, I’ve always wondered if there is a breaking point. It’s not difficult to imagine a founder launching a product that many YC alums would happily try or buy. 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.

We have great software. Our company is a platform for software development. We’ve all been software engineers. Paul has a PhD from the University of California in computer science. Sam was a software engineer. I’m a software engineer. Garry Tan is my successor. He’s a software engineer. We adopt a software approach to scaling and create tools that connect our founders and companies. Garry actually created the original community software that we use at YC.

Recently, you have reduced your class size.

It’s a new world, right? We had to reduce our batch sizes in order to adapt. 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 thriving in a more difficult economic situation.

Are the terms changing? Terms are constantly changing.

Okay, not in the immediate term. 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 credit: Web Summit

One of the members of the previous panel stated that no one 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 turning into 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 believe it should place as many wagers as possible on promising entrepreneurs and see who wins?

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 4,000 companies now. So it is inevitable that people will be in similar or the same space, it just, it’s okay, it happens.

Fintech has seen a lot in the last two 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]. Unfortunately, B2B SaaS tends be the largest component of batches, and has for some time, for the same reasons that Willie Horton used rob banks. [business customers] You 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 business relationship that is guaranteed with you

Is the application process changing over time? It used to take 45 minutes for an interview. Now it takes 10 minutes. Sam once said that there’s not much data involved, that [the interview process] YC can understand who can tell a tale and he found it quite easy.

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. We review all applications after they are received. We tend to receive around 20,000 applications per batch. We then select a few for interviews. We then do a 10-minute interview for each company we choose. We then select the batch based on their interview.

Sorry to make you the Silicon Valley representative here, but you’re in California, as am I. What do YOU think is happening in Silicon Valley? [as a tech hub]? A large proportion of your summer classes are located in San Francisco. This is somewhere around 25% to 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. In March 2020, 100% of our business was virtual. It remained this way for nearly two years, just like everyone else. 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. We did open a second office in San Francisco, and I did a straw poll with YC employees asking how often they would visit the office. The average response was 1.5 days. So we’re almost fundamentally a remote, virtual organization henceforth.

Another question is: What do our batches look? I mentioned earlier that we will be celebrating 2022’s summer. [returned to] In person [meaning]The 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.

The pandemic taught us so much about what works. Actually, we were able spend more time with founders. It turned out that office hours over Zoom are extremely efficient and effective. They were more frequent so we did more. 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. These are very important.