On Applying to Y Combinator
I’ve decided to do a mini-series of sorts on our Y Combinator experience. Â Originally I was going to fold everything into one ginormus post, but I think it better to break it up and focus on different aspects.
So, let’s start at the beginning: Â Applying to YC.
This story starts a year earlier than one would assume. Â Summer of 2009 wasn’t the first time that we’d applied to Y Combinator.
Valentin and I decided to start a startup together and gave notice at our jobs in March of 2008. Â I’d been tinkering in the area of graph-based information organization for about 4 years already and had built a quick proof-of-concept of a recommender system based on some of those ideas.
Since I’d been reading Paul Graham’s essays since before the dawn of Y Combinator, applying seemed a natural step. Â We labored over the application — finishing it a full month before the deadline; we had friends proof-read it; we went through several iterations.
I mean, we had to get accepted. Â I’d previously been a fairly well-known open source developer, had been an invited speaker all over the world, had spent several years in R&D at Europe’s largest software company, I knew the problem space well and we were convinced that we’d just seen the tip of the iceberg in the shape of things to come in content discovery. Â Valentin had studied business and communications and worked in the web world for over 10 years and been the webmaster for some huge German sites. Â What could possibly go wrong?
We didn’t even get invited for an interview.
The really interesting part is what happened next. Â I started coding furiously. Â Paul Graham could go to hell. Â I’d show him.
That was our first taste of rejection. Â It’s a taste you get used to when starting a startup. Â You have to learn to thrive on it. Â We were starting a startup, dammit, and nobody telling us “no” was going to change that.
We’d already been going to some of the local founders meetups which were a great chance to get a taste for the scene. Â About a month after getting rejected from YC we got invited to the mini-Seedcamp in Berlin and met some of the people that continue to advise us to this day. Â We found our first pilot customer the next month after that — who subsequently died before they could go live — but it was the validation that “somebody wants our stuff” that was really important. Â By three months after YC we’d had an investor approach us for the first time. Â We pulled in more pilot customers, kept building out our demos, got our first press.
Even though I was certain that we were going to get into YC, I’d set aside enough money to live for a year on to get Directed Edge up and going. Â That was essential.
There are thousands of details that could be dropped in there — I mean, it was a year in the life of an early-phase startup. Â It was grueling.
We learned enormous amounts. Â The money that I’d set aside was the best spent money on education in my life. Â About midway through the year, Oliver Beste, one of the local startup luminaries, said something to us that’s stuck with me:
“It’s unclear in your first startup what the worth of your company will be, but the worth of your person is guaranteed to increase.”
The year flew by. Â We’d thought we wouldn’t apply to Y Combinator again, but at that point we knew a number of Y Combinator alumni that encouraged us to give it another swing. Â Like every point in that year, we were crazy busy.
Unlike the first time around, we did our application in a couple of hours, scarcely proof-read it, did a quick video and sent it off. Â I mean, we already knew they didn’t like our idea, so it was just something we knocked out and moved on.
And of course, that time around, we got an interview, and were eventually accepted to Y Combinator.
What was the difference? Â Team was the same. Â Idea was basically the same. Â I’m sure the application was better — I mean, we’d pitched 1000 times at that point, so it was a lot easier to just ad lib in talking about our company. Â Plus we had a better demo and pilot customers.
Paul later told me that the big difference was that he recognized me from Hacker News and that I said smart things there. Â So if that was the critical difference, the question is, “Why was I saying smart things?”
When we started with Directed Edge we were as ignorant about what starting a startup was about as the next set of fresh-off-the-employed-world-boat founders. Â Maybe worse.
It’d be flattering to think that maybe it was sheer intelligence that got us over the hump, but, uhh, no. Â It was that we kept going. Â You’d have to try really hard to run your first startup full-time for a year and not learn a huge amount.
So, now I’ll finally get around to the point of this entry: Â People now often ask me what they should do on their YC application to increase their chances of getting in. There are the usual things like concision, clarity of thought, quality of idea — those all help certainly. Â But I’m convinced that the single most important thing that you can do to increase your chances of getting into Y-Combinator is to do what you should be doing anyway: Â going full-speed ahead on your startup. That’s what teaches you about your company, your market, the real composition of your team.
It’s easy to look at some of the teams coming out of Y Combinator and assume that Y Combinator has been some great leveler making quality startups out of the raw founders, but the truth is that the teams that were moving the fastest at the end were the ones that were moving the fastest at the beginning (with a couple exceptions).
The term “accelerator” has been applied to the swath of Y Combinator-esque programs out there. Â I never really liked that term, but now I realize that it is in fact descriptive: Â Y Combinator operates on the first derivative of your speed — it doesn’t carry everyone a uniform distance; it speeds teams up.
In that sense, we’re lucky that we didn’t get into YC when we first applied. Â We’d not have gotten nearly as much out of it.
And contrary to a bit of the mythology that surrounds YC, a pretty big chunk of the teams had working products developed on day one. Â They weren’t teams that had decided to apply to YC — they had decided to start startups, and YC was a step along that path.
And that’s the second big point: Â Decide you want to start a startup, not that you want to be in Y Combinator.
The single biggest fear that Y-Combinator has for the teams it accepts is that they’ll give up. Â So if there’s something that you can have on your application that shows that you won’t I think that’s probably a lot more important than how you frame your idea.
So go build your company.
One final note: Â Most of the people reading this and planning on applying to YC will get rejected. Â Even if you’ve got a great company, they’re evaluating several hundred teams in a tiny span of time, so just bad luck might be enough for you to not get an interview. Â I’d advise you to take on the “To hell with Paul Graham” attitude I mentioned. Â He won’t hold it against you. Â I told him about it and he said he’d probably have reacted the same way. Â Rejection is part of starting a startup. Â Just in the last two weeks I’ve seen companies on TechCrunch that interviewed with our batch and were rejected.
Good luck, and stay tuned for the next installment.
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Micah:
My team applied to both YC and Techstars, and we’ve been rejected from both. As a way of counter-balancing posts like yours, I wrote a “How Not To Get In” post. My point was to get across the message that there is no magic formula, so don’t bother looking.
http://blog.aisleten.com/2009/04/06/what-we-did-to-not-get-into-techstars/
I really like the tone of your article. The main advice is to work on your company, and that was my takeaway as well. Don’t do anything for the YC application that would not also be beneficial for your company. Statistically speaking you’ll probably be rejected, so by furthering your company you’re making sure your time is well spent, no matter the YC outcome.
September 30, 2009, 11:08 amJuvenn Woo:
I come to understand that why you impressed Paul (and YCombinator), and what Paul told “You were saying smart things”.
September 30, 2009, 11:45 amThanks for sharing, a great rewarding of reading your bits.
Max Niederhofer:
Thank you, this was a great read.
September 30, 2009, 12:41 pmmdg:
Seriously considering a ‘To Hell With Paul Graham’ tattoo as motivation.
September 30, 2009, 1:35 pmJai:
Great read! Thanks. 🙂
The best line:
“decided to start startups, and YC was a step along that path.”
I am very much on that line, so feels good.
Waiting for the next installments, and hope they all come in before Oct 26 (YC submission date).
JV
October 1, 2009, 12:13 amDave McClure:
this is good stuff.
keep blogging. people will appreciate it 🙂
out,
October 1, 2009, 3:19 amAmir Chaudhry:
A great post and thanks for sharing
October 1, 2009, 3:47 amErik Unger:
Well it basically comes down to the rule: Never build your business for any grant/mentoring program/competition. Do it for the business sake of it. Any further support is nice to have if it doesn’t distract you from business.
October 1, 2009, 4:53 amAndrew Montalenti:
The big question I have is, after a full year of working on your startup, why did you still need YCombinator?
When your startup is just an idea, getting 15-20K for 5-10% of your company is probably a good idea. But a full year in, you are supposed to be a real company. YC’s standard investment seems like a terrible valuation.
I know YC will tell you it isn’t really a valuation. But at this point you should be weighing a YC investment against other potential investments, and I’d bet you could get way more than 15-20K for that significant a stake of your company.
I’d be interested to know if you looked elsewhere, and what your motivation was for even *considering* a YC investment after spending a full year to mature your startup beyond the risky “idea/early prototype stage” that YC usually funds.
October 1, 2009, 7:32 amScott Wheeler:
@Andrew
YC tells you that because honestly, it’s true. But if you’re worried about that, I’d suggest not going through YC. In our case, we were convinced, and still are, that being a part of YC would add enough value to our company that we would come out on top in the deal. We had other investors approach us, but after pitching the first couple we realized that raising money was going to be too large of a distraction for the point we were at.
Again, the mythology around YC would seem to indicate that it’s mostly teams with just an idea — but as the brand has gotten stronger, that’s less and less the case. There were a number of teams in our batch that had been on their project for 3-12 months by the time that YC started.
October 1, 2009, 10:02 amNika Jones:
Scott:
As you commented, there seems to be a great amount of value of getting the YC stamp of approval and being part of the internal YC community.
I have a question, as it’s not clear if the company is based in the US, Europe or both?
Nika
October 1, 2009, 10:29 amAndrew Montalenti:
@Scott, I hear ya about raising money being a potential distraction from product development. You wrote, “In our case, we were convinced, and still are, that being a part of YC would add enough value to our company that we would come out on top in the deal.”
I don’t doubt it. YC and PG are powerful and widely-appreciated endorsements in the investment community today.
“Again, the mythology around YC would seem to indicate that it’s mostly teams with just an idea — but as the brand has gotten stronger, that’s less and less the case. There were a number of teams in our batch that had been on their project for 3-12 months by the time that YC started.”
I’m sure that’s the case. But just because YC’s brand allows it to make less risky investments for the same terms doesn’t mean that it’s necessarily a good deal for the company receiving investment.
YC was created to allow founders to go from idea -> product/prototype without having to take on debt or waste time fundraising. My company was funded by a startup incubator (not YC) when we were in our idea stage, and I certainly appreciate the role that incubators like ours played in catalyzing our initial forward motion.
But I just wonder, with a healthy dose of skepticism: if an entrepreneur has already spent 12 months of his or her own time derisking a business idea and building out a product, isn’t that business, most likely, a much less risky investment than a back-of-the-envelope idea? Doesn’t that mean that taking the standard YC investment terms is a really “great deal” *for YC*?
I also wonder about something that an entrepreneur said to us at our incubator program this summer. That was, “The best strategy of a VC is to wait. If you need money / are unknown and they have money / are well-known, the way for them to get the best terms and ensure the deal is right is to simply *do nothing* and wait. While they are waiting, you spending through your savings and simultaneously derisk your business. Then, when you’re truly desperate, they’ll invest and dictate the terms, or take a pass. So why shouldn’t they wait?”
Did YC exhibit VC behavior by waiting on DirectedEdge? And if YC is funding companies that are a year in, is it really “incubating”, or is it behaving more like an early-stage investor (e.g. First Round Capital), but with poorer terms for the founders?
I don’t think these are unreasonable questions. That said, I appreciate your response and it sounds like you thought through the decision.
One final point of comparison: after 6 months of development, Mint.com founder Aaron Patzer raised $725K, including $325K from First Round Capital. (http://www.businessweek.com/technology/content/sep2009/tc20090915_065038_page_2.htm) You might argue he’s an exception — something to strive for. Sure. And I don’t know the exact terms of that deal, but entrepreneurs I’ve met from FRC-funded companies seem to think that their terms are generally among the best in the industry.
Though it would have been rational of Aaron to raise $20K for 5% on his first day of the project, 6 months later it looks like his company was much further derisked, which warranted a much higher valuation.
Imagine for a moment that Aaron had taken a YC investment at that stage, rather than raising from FRC and others? 🙂 I’m not a VC math expert, but here’s a rough estimate: a) Mint’s exit was at a $170M valuation; b) YC’s 20K earned 5% stake; c) YC’s stake would be worth around $8 million; d) that’s a 400x return.
October 1, 2009, 10:34 amScott Wheeler:
@Andrew I feel like you’re framing this all wrong. Most of what you’ve said is true, but honestly irrelevant. If something makes your company stronger without forcing you to compromise on your direction, why wouldn’t you take it?
There are a thousand things that could have gone differently in the trajectory of Directed Edge, but we basically thought, “What the hell, we’ll send in another app.” When we got invited to an interview, and eventually asked to be a part of YC, we didn’t stop to think, “What if we could have gotten a better deal?”
The largest unclear point seems to be in the nature of YC’s dilution — it’s simply not comparable to the way that VC-style dilution works: you give up no board seats, I’ve never heard of YC blocking an acquisition, they don’t bother in your day-to-day stuff unless you ask them to. So what you give up is a small slice of an eventual exit, if that happens.
So will YC get a huge return on their investment in us? I certainly hope so. If I end up with a $100+ million exit, I’m hardly going to begrudge YC their small slice.
October 1, 2009, 11:36 amAndrew Montalenti:
@Scott, You wrote, “Most of what you’ve said is true, but honestly irrelevant. If something makes your company stronger without forcing you to compromise on your direction, why wouldn’t you take it?”
It’s a great point. You’re saying that YC allows you to keep working on your company without making any compromises that larger investments might require. Trust me, I see where you’re coming from, and this is a commendable course of action to take. I was not trying to shoot you down in any way; in fact, your product seems pretty cool and I wish you the best of luck. And with YC’s backing, you may even be able to make your own luck 🙂
You wrote, “When we got invited to an interview, and eventually asked to be a part of YC, we didn’t stop to think, ‘What if we could have gotten a better deal?'”
Well, this statement pretty much says it all 🙂 In future deals (investment or otherwise) you will probably want to ask that question. I’m sure this will be hammered into you by the end of the YC speaker series, if it was anything like ours.
October 1, 2009, 12:20 pmScott Wheeler:
@Nika – we’re not firmly rooted anywhere at the moment, though the startup was founded in Berlin and we’re there at the moment.
October 1, 2009, 3:19 pmDirected Edge News » Blog Archive » The “Interview” with Y Combinator That’s Not:
[…] in our last installment of the Y Combinator saga, we talked about applying. Since a handful of folks will be gearing up for […]
November 5, 2009, 5:48 ammlangner:
…I mean, we already knew they didn’t like our idea, so it was just something we knocked out and moved on…
What exactly does this say about the arbitrary nature of selection process at YC? or any other source of start-up funding for that matter?
May 12, 2010, 8:36 pmValentin Hussong:
I think it says that people are more important than ideas for YC. Imagine the challenge of narrowing 1000+ applications down to 60-80 interviews and 25 teams funded with limited resources.
May 13, 2010, 2:50 am