Jessica Livingston founded Y Combinator in 2005 with Paul Graham, Robert
Morris, and Trevor Blackwell. Y Combinator developed a new approach to venture
funding: to fund startups in batches, giving them just enough money to get
started, working closely with them to refine their ideas, and then introducing
them to later stage investors for further funding. In three years they have
funded more than 100 startups.
When did you start Y Combinator?
Livingston: We started Y Combinator in March 2005. Around that same time, I
had gotten a book deal for Founders at Work, so I had planned to quit my job
doing marketing at an investment bank and work full-time for a little while on
the book. But we started Y Combinator simultaneously, so I didn't really get to
spend much time on the book.
What was the process when Y Combinator got started?
Livingston: That would assume that we had a process. There was no process.
Remember, Y Combinator started off as an experiment. Paul had wanted to do
angel investing. He wanted to help people start companies. But he didn't really
want all the requirements that come with being an angel investor, so he thought
he should start an organization that could handle all of this for him. I said, "That
sounds interesting. I'd love to work with entrepreneurs." So we sort of hatched
this idea for Y Combinator, and I was the one in charge of doing a lot of the
business stuff.
We decided to do a batch of investments at once, so that we could learn how
to be investors. We decided, "OK, we'll invest in a group of startups, and we'll
do it over the summer since a lot of people are free over the summertime."
How did the summer turn out?
Livingston: A lot better than we'd have ever thought. Not that I went into
things with a whole lot of expectations. The idea with Y Combinator was that we
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Jessica Livingston
Cofounder, Y Combinator
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were going to invest small amounts of money in startups and help them get set
up legally, just like Viaweb had been helped out by Paul's friend Julian. Get
them set up, work closely with them on their products, and then introduce
them to investors to hopefully get more funding.
I remember when we first got started, we thought, "How do we even tell
people about this?" So Paul built a website--I think he stayed up all night
building it. We had a couple pages online that loosely described what we were
planning to do--we didn't really fully know what we were planning to do--and
we had an application, with about 20 questions on it, and then Paul launched it
on paulgraham.com, which had a lot of traffic because of his essays. We started
getting some applications in. I was still working at the time, and I remember
Paul saying, "We have some good applications, you better quit your job."
What was the point when you quit?
Livingston: If I remember correctly, it was the Monday after we conducted the
interviews. We got a lot of applications, more than we thought we would. And
then we chose about 20 groups to come to Cambridge to interview--over a
Saturday and Sunday, all day long. On Sunday night we called everyone.
We chose eight that we had wanted to fund, and all of them but one said
yes. I give the founders a lot of credit, because this was a brand new concept
and Y Combinator had no track record. The deal was: move to Cambridge for
the summer and get $12,000 or $18,000, depending on whether you were two
or three founders. We based the amount of money on the MIT graduate
student stipend, which was a couple grand a month. We said, "Come to
Cambridge and we'll work with you, and we'll get together for dinner and hear
from guest speakers every week." (Unfortunately for Paul, we hijacked his personal
office to use for Y Combinator.) So seven of them said yes, and I went into
work on Monday thinking "Y Combinator is real now"--even though we didn't
even have Y Combinator legally set up at this point. I gave my notice that day,
I think.
But that day something else very memorable happened. There had been
one group, two guys from UVA, who were still seniors and were graduating that
spring--Alexis Ohanian and Steve Huffman. They came to us with an idea that
we just thought was wrong for two young guys with no connections in the fast
food industry. Their idea was ordering fast food through your cell phone. And
we didn't fund them. We told them, "Sorry, we really liked you guys, but we just
think your idea would be a bit too challenging." But that morning when I was at
work, Paul called them and said, "We like you guys. Would you be willing to
work on another idea?" They were on an Amtrak train heading back to Virginia.
I remember Paul emailed me and the subject line was "muffins saved." I had
nicknamed them "the muffins," because I just loved them. It was just sort of an
affectionate name.
I remember thinking, "This is so exciting." They had gotten off the train in
Hartford or something and headed back to Boston to go meet with Paul to
brainstorm new ideas. I thought, "These are the kind of people I want to
fund--people who would get off the train and go back and make it happen." So
we wound up funding eight companies that summer.
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Do you remember anyone else in that first batch?
Livingston: Looking back, it was an amazing group that we had. Sam Altman of
Loopt was in that batch. There's actually a funny story about him, too. He had
submitted an application and at the time he'd been working with a few other
people, but he was the only one who could come to Cambridge that summer.
So Sam emailed us saying he was the only one who could come and Paul wrote
back to him, saying, "You know, Sam, you're only a freshman. You have plenty
of time to start a startup. Why don't you just apply later?"
Sam wrote back something to the effect of, "I'm a sophomore, and I'm coming
to the interview." I'll never forget that--how we tried to brush him off.
Sam was in a Stanford business plan contest the same weekend as our interviews.
He wound up winning on Saturday and he took the red-eye to Boston
that night and arrived for his interview--just him--on Sunday. We met with
him for 25 minutes or so and I remember thinking in the first 5 minutes, "This
guy is amazing." All of us were just blown away by Sam. His poise and intelligence,
and just the way he was. We knew that there was something special
about him.
We also had Justin Kan and Emmett Shear of Justin.tv. We originally
funded them to make an online calendar called Kiko. They built it that summer
and got a little bit of angel funding, but Google Calendar came out soon after
and crushed them. So they came to us later on and said, "I think we're gonna
move on from Kiko," and they started talking to Paul and Robert about new
ideas. I remember I walked in and Paul said, "Hey, Jessica, listen to their new
idea. Justin's going to wear a camera on his head 24 hours a day and film his
entire life." I thought this was one of the craziest ideas I'd ever heard. But
Y Combinator funded them because we really liked them, and Paul, Robert,
and Trevor liked their idea.
And we had Phil Yuen, who started TextPayMe, which was acquired by
Amazon. Originally he was working on a different thing called FireCrawl,
which was going to crawl your company's website and find errors and broken
links, etc. But Phil and his cofounders found they weren't super excited about
that, so in the fall they switched to a new idea for cell phone payments.
Do you remember learning anything surprising that summer?
Livingston: I learned a lot that summer, because it was our first run at everything.
Looking back, I think the most surprising thing was all the convincing we
had to do that this idea of Y Combinator--providing small amounts of funding
to batches of startups--would work. It had never been done before, so everything
was brand new. I tell founders this all the time--that if your idea has
never been done before, everyone will think it's crazy.
A lot of people either pooh-poohed our idea or didn't care at all. Very early
on, we met with a big VC firm and one of the founding partners was there. We
told them all about our new model and hoped they'd be interested in meeting
with some of the startups. At the end, we invited them to come to one of our
dinners to meet the startups and the senior partner made it very clear that he
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would be sending a junior guy, not coming himself. I don't think he meant any
harm, but I remember feeling like such a loser.
I also remember thinking how weird it was that we had this totally groundbreaking
idea and yet no reporters cared at all. Ryan Singel of Wired News and
Jenny Lee at the New York Times wrote about Y Combinator early on, which
was really cool, but not many others. It wasn't until the fall of 2006 that the PR
tides kind of turned for us. Reddit was acquired by Conde Nast about the same
time that Charles River Ventures announced a new program where they would
invest much smaller amounts of money. Suddenly, because a well-known VC
firm was acknowledging that some startups could get started with less money,
and one of our startups had been acquired, a lot of reporters began to write
about "new models" of venture capital. We'd been at it for a year and a half at
that point.
Was there anything that surprised you about startups, since you'd been
working at a big company before?
Livingston: I was surprised how much people could create in a short time.
There were only about 10 weeks before Demo Day, when the startups present
to investors, and every one of these groups started from square one. None of
them had a working product before YC. So it amazed me how much they
accomplished. Sometimes they'd come to dinner and say, "This is the first time
I've left the house in 2 days." I'd never really seen that before. They could build
something in a week that would've taken an IT department in a big company
6 months--with about 20 different meetings to approve things.
There's no bureaucracy at an early-stage startup. You want to test out a new
idea, you just do it. You don't need to get anyone's approval, build consensus, or
put together a proposal. If it doesn't work, you try something else.
Also, I saw all the stuff startups would do to pretend to be bigger than they
actually were. It was new for me to be behind the scenes with startups. I
remember Alexis of Reddit would--this is a 2-month-old company that had just
launched--email reporters saying he was going on a "media tour" to San
Francisco and would they like to meet with him? Reporters were like, "Yeah,
we'd love to meet you." I'd done PR for a long time and it was so amusing to me
that this 21-year-old startup founder could just email reporters at important
publications pretending to be a big deal.
Was there anything, looking back, that you'd do differently now?
Livingston: The truth is, Y Combinator worked out surprisingly well. I can't
think of anything major that I'd change. I was going to say things are much easier
for us now, because we know so many more investors than we did at first.
But that's not something we could have done differently. We grew organically
so it's natural that we'd become more well known and more people would be
interested in investing in the new startups.
I remember the first Demo Day--called Angel Day back then--we contacted
every rich person we knew in the area and I was praying that the seats
would be filled. That first Demo Day, we had about 15 investors. Now we have
to have two Demo Days just to accommodate all the people who want to come.
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What happened after that first batch?
Livingston: The biggest milestone for Y Combinator after the first summer
batch was when we decided to move out to Silicon Valley for the winter. I
remember not being too excited about that idea at first. Paul said, "You know,
we should do this out in Silicon Valley," and I thought, "Dammit, we just got
everything set up, working well here in Cambridge. Do I really want to uproot
my entire life and move out to California?" But it turned out to be one of the
best things we've ever done.
I think we decided to do it in October, so we had only 2 months to renovate
part of Trevor's Anybot's office to make space for Y Combinator. We posted the
application and we got ten groups for the winter funding cycle in January. But it
was very last-minute. The paint on the walls was literally wet when we had the
first dinner.
So what happens when a startup comes to Y Combinator? Walk me
through the process.
Livingston: I help them get set up legally. The paperwork can be intimidating
to anyone who hasn't done it before, but it's really important to be done right.
Like being sure your company owns all of its IP, or that you have vesting set up
so your cofounder can't quit 6 months into things and walk away with 30 percent
of the company. Most hackers don't like to worry about this stuff, but it can
cause real trouble later if it's not dealt with properly.
My partners begin working with them immediately on their idea. It's amazing
how much the ideas evolve from the time of the interview to Demo Day.
That's what we spend the most time on. In some cases, we even encourage
them to ditch the idea and start over. This is hard given the short amount of
time before Demo Day, but it has definitely been done successfully.
The most "formal" parts of Y Combinator besides Demo Day are the weekly
dinners. Each Tuesday, all the founders come to our office for dinner, and
there's a guest speaker. We bring in experts from all parts of the startup world to
share advice and offer feedback. Talks are always off the record, so the speakers
are very candid. We've heard a lot of stories that have never been published.
We've found the dinners are really good for the founders' morale. Paul used
to cook the dinners himself. Usually bean-type dishes, so it's always very
healthy. Because dinners are the same day every week, they end up being a sort
of milestone. Founders say it gives them an incentive to get something concrete
done--a new feature or something. People bring their computers to show what
they built over the week.
This all leads up to the most important day, Demo Day. This is when the
startups present to investors. They each have about 7 minutes, so they have to
be good. A week before Demo Day, we have Rehearsal Day, which is basically a
dress rehearsal for the next week. We give them feedback on the content of
their presentations as well as the delivery. Hackers aren't usually the best when
it comes to presentation skills, but we work really hard with them to make sure
they are impressive. I am always so proud of how much effort the founders put
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in. You can tell they care a lot. As they should, since it's their introduction to
pretty much the whole investment community.
After Demo Day, we work with the founders to help them get more funding.
It's a tricky thing to do, and the founders need a lot of advice in this area.
Even though we stop the dinners, our relationship never stops with the
founders. This is why we're so busy even in the "off season" between cycles.
Is there one idea that's the key to Y Combinator? If a VC asked, "What's
your secret sauce?" what would you say?
Livingston: There are two things. First are Paul, Robert, and Trevor. They built
the first web-based software application, which is what most of the startups we
fund do, so they understand how to solve a lot of the problems the founders
have. They all actively program, which is unusual for investors. Most investors
are business people and can't offer super in-depth technical advice.
The second--and this is going to sound corny--is that we try always to be
good. When we're faced with decisions, we always ask ourselves, "What's the
best choice for the founders?" I'm not saying we're a charity or anything, but
we'd never want to maltreat a founder. When I hear about investors bullying
founders or something like that I just think how wrong it is. Not just wrong, but
shortsighted.
How do things work between the partners?
Livingston: I love working with my three partners. I'm the only non-technical
partner, and I hear them talking with the startups about technical stuff and it
just blows my mind. They have such an understanding of it.
We work really well together. We have fun. We've never argued. Right from
the start, Paul, Robert, Trevor, and I just always seemed to agree on most
things.
What was the biggest disagreement you've had?
Livingston: Honestly, I don't think there has been one. The hardest thing is for
me to keep the interview schedule running on time. Seriously, that's the biggest
thing I can think of, because they're not as organized as I am when it comes to
time.
I think it's nice that the three of them had started a company before. And of
course, all three of them are involved in other things, too, so it's not like
Y Combinator is their entire life. We're doing Y Combinator because we want
to, not because we need the money, which I think takes some of the pressure
off and allows us to make good decisions.
Have there been startups that surprised you?
Livingston: All the time. There are startups that you think are going to die, but
the founders keep working and things get better and then suddenly investors
are all over them, even though no one would talk to them 6 months before. But
there are also people we fund who we think are hotshot hackers with this great
idea, and their startup just doesn't take off.
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Have you gotten better at recognizing which founders are likely to
succeed?
Livingston: I really hope so. That's the whole goal, right, for Y Combinator to
get better at picking successful startups. But let me tell you, it's really hard
to judge at the stage we are investing at. Ground zero.
We have learned that determination matters a lot more than founders'
resumes or where they went to college. I'd say that determination is the most
important quality in a startup founder, because we've seen so many of the startups
hit difficult times, and some of them quit and some of them don't. It's hard
to keep going.
If they've built something really cool before, that's usually a good sign--that
they can actually build and launch something.
You've watched over 100 startups now. How do you make a successful
startup? If you had to tell would-be startup founders in a few words,
what's the secret?
Livingston: Unfortunately, I don't think there's one answer. It depends on so
many things. Some are under your control and some aren't. But as I said before,
determination is most important. You have to be able to endure all of the bad
things that are going to happen to your company--times when you think you
are just dead, but you have to find the will to keep on going.
Choose a cofounder that you have a good relationship with, where there's a
lot of trust between you. One of the biggest reasons for failures in startups
we've funded are blowups between founders in the first 6 months. I see that
and it's painful to watch.
Unless you have revenues after 3 months or have a lot of personal savings,
you've got to be able to get more funding. So you have to have a good idea with
a large addressable market.
What are your plans for Y Combinator in the future?
Livingston: We're always changing things, so it's hard to say what will happen in
the future. I definitely want to keep doing it. For me it's a dream job. We've
helped a lot of people start startups and I think they are happier and more fulfilled
because of it. I want to keep having an impact like that.
What started off as about 20 founders has now grown into an alumni network
of more than 250 people. It's an amazing community. The founders all
help each other out. They have the same problems and deal with the same
investors and it's nice to have people to ask for advice.
We'll keep trying new things. We're always experimenting and trying to
come up with new ways to scale. Y Combinator feels like a startup in that sense.