On a recent afternoon, the offices of Y Combinator pulsed with confidence. Crowded around long white tables were the mostly young, mostly male, founders of two dozen startups all hoping to become the next successful website or tech company.
Flitting around the room in Birkenstock sandals was Paul Graham, 47, the creator of Y Combinator, a twice-a-year program that invests small amounts of funding in startups and offers them industry contacts and three months of guidance in exchange for a stake. During office hours founders can sign up to chat one on one with Graham, who may be the country’s most sought-after startup guru and is the leader of what participants fondly call a technology “cult.”
Graham wasn’t the first person to come up with the incubator idea–but he was first to turn it into a three-month boot camp that speeds product ideas to market, gives the founders a sense of community, and offers access to some of the biggest names in technology. In doing so, he has changed the way young entrepreneurs get started in the tech business and spawned a growing industry of imitators. Some, such as TechStars and 500 Startups, have also been successful, but none can yet match Y Combinator’s roster of alumni, which includes Dropbox, Airbnb, and Hipmunk.
Since Graham and three partners started Y Combinator in 2005 in Cambridge, Massachusetts (it is now based in Mountain View, California), the accelerator has shepherded 801 founders through the creation of more than 380 companies. Graham is one of seven partners now, including Gmail creator Paul Buchheit and Jessica Livingston, the author of Founders at Work: Stories of Startups’ Early Days (who is also Graham’s wife and mother of their three-year-old son, George).
Each startup receives seed investment averaging $17,500; in exchange, Graham’s group takes a 2 to 10 percent stake in the company. To date, Y Combinator has invested roughly $7 million and, according to Livingston, the organization is profitable. “We’re hackers, and so we tend to be good at judging hackers,” says Graham.
Venture capitalists say programs such as Y Combinator are greatly expanding the pool of companies they can invest in. Last year an investment group called Start Fund, which is a backed by angel investor Ron Conway, Russian billionaire Yuri Milner, and venture capital firm Andreessen Horowitz, began offering every Y Combinator startup an additional $150,000 once it passes through the accelerator. Graham “has a great barometer for where opportunities are in the market and helps guide teams in that direction,” says Chris Howard, a principal at Ignition Partners, a venture capital firm that has invested in a handful of Y Combinator alums as well as in startups formed through other incubators.
At least a third of startups entering the incubator end up changing their goals, sometimes completely. One of the first teams, for instance, wanted to develop a way for people to order fast food by text message. Graham steered the founders away from that idea, and they ended up creating the social news site Reddit, which was acquired by Condé Nast in 2006.