Business Report

The Startup Whisperer

By offering young company founders advice and about $17,500 each, Paul Graham is reshaping the landscape of the tech business.

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.

Dear leader: Paul Graham, 47, created a successful incubator for startup companies called Y Combinator.

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.

Graham’s tech roots run deep. His mother, he says, was a computer, back when that was a profession for humans: she performed actuarial computations for a bank. His father was a nuclear physicist who worked in research labs in the U.K. Graham himself got involved with computers early on, programming an IBM 1401 using punch cards before getting a PhD in computer science from Harvard.

Graham came into some money when Yahoo bought Viaweb, a company he’d cofounded, in 1998. Graham figured he’d become an investor, but instead became occupied writing a series of essays that became the 2004 book Hackers & Painters: Big Ideas from the Computer Age. When he was asked to give a talk to an undergraduate computing club at Harvard a year later, he talked about how to start a company; any of the students listening to his talk could easily do so, he thought, and helping them would be a great way for him to begin investing.

Y Combinator was meant to be an experiment—an alternative to a summer programming job for students—but within a few weeks Graham realized he was on to something bigger. In addition to Reddit, the first group of startups included TextPayMe, which Amazon bought in 2006. “We were like, ‘Holy shit,’” Graham says. “This wasn’t supposed to be serious.”

The incubator model works because the cost and time needed to develop a viable Web company has fallen so steeply. And for participants, the program offers an intense atmosphere that’s conducive to successful business ideas. “We wanted to be in the company of people who are grinding 24/7 because it gets you to grind,” says Michael Seibel, 29, who is in his second trip through Y Combinator, this time as a cofounder of a video sharing app called Socialcam.

In addition to offering office hours with Graham and other partners, Y Combinator holds weekly group dinners with speakers that have included former vice president Al Gore. The sessions end with a “Demo Day” in which each team gives a two-minute presentation to a crowd filled with journalists, potential investors, and peers.

The median age of participants is in the mid-20s, Graham says. A few are over 40 or as young as age 17. Graham says young founders are better at building products aimed at young users. True, they need advice—but he is there to give it.

His favorite tip? Build something people want. It sounds obvious, but he says failing to fill a need is the top mistake startups make. One way to ensure you’re on the right path, says Graham, is to build something you already want yourself. That way, he says, you’ll have at least one customer. “It’s a damn good piece of advice for founders of any age,” he says, “but essential for young founders.”

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