My guest on Decoder this week is Michael Seibel, managing director of Y Combinator, one of the most well-known and successful startup incubators in Silicon Valley. YC has funded some of the biggest names in tech, including Dropbox, Airbnb, and Stripe. It’s a big deal.
Michael is also a co-founder of Justin.tv, known now as Twitch, and he recently joined the board at Reddit after co-founder Alexis Ohanian stepped down and asked the company to replace him with someone who is Black. That means Michael is uniquely suited to talk about a lot of things that I’m really interested in exploring on Decoder: starting and growing tech businesses, finding opportunities for new ideas, the growing creator economy, and making sure the next generation of business leaders doesn’t look exactly the same as the last one.
Micheal and I sat down last week and had a really direct, really interesting conversation about all those things. Then a couple days later, two startup founders who had been a part of Y Combinator tweeted that they had been kicked out of the program for criticizing it. One founder, Paul Biggar, said he was kicked out for tweeting about other founders skipping vaccine lines in March, and another, Katia Damer, said she was kicked out for raising issues with the program she thought were misogynistic. “YC has systematically disadvantaged female founders for years,” she wrote.
These are big issues, and given that Michael and I had specifically talked about making it easier for diverse founders to succeed, I invited him to come back and talk about them. He declined, and Y Combinator sent along the following statement, which, you will note, does not address the substance of the issues at all.
We don’t provide details into why people get removed from the YC community, but both tweet threads are not accurate. They were not removed for the content of their posts but for breaking the terms of the community. One of our most important rules: we don’t share anything from the forum with anyone outside of YC. This is a community built on trust and privacy.
I don’t really know what to make of that statement, especially because one of the things Michael talked about the most passionately in our conversation was demystifying YC by widely and openly sharing information. And the criticisms of YC on display here are not new, so I thought it would be appropriate for Michael to come and explain all of this himself. We followed up, we tried to make the case, and we were told Michael was unavailable.
I do think there’s a lot in this conversation worth thinking about, and I did enjoy speaking with Michael. But I talk to a lot of leaders about making decisions on this show, and I have to say, I don’t understand that decision at all.
Transcript has been edited for clarity.
Michael Seibel, you’re a managing director at Y Combinator, which is one of the most famous startup incubators in the world. You are also the co-founder of both Socialcam and Justin.tv, which is the company that became Twitch. Welcome to Decoder.
Thanks for having me.
Here’s my understanding of what YC does: Y Combinator takes small investments and very small, scrappy startup teams. You put them through a bootcamp, which has gained somewhat mythical and legendary status for how rigorous it is.
Then you have a pitch session called Demo Day, which also has a somewhat mythical status. And that Demo Day helps people get larger rounds of funding. That seems very simple, but like I said, there’s a lot of myth around it. I know there’s a lot of actual process inside of Y Combinator. Walk people through that entire cycle and kind of demystify it a little bit.
I’m happy to. I think we want to start with, what were the problems that YC was created to solve? The first problem for any founder raising funding traditionally is that they needed warm introductions, they needed preexisting relationships. The second problem is, they have to know all the best practices around creating a deck.
A PowerPoint deck.
PowerPoint deck, exactly.
It’s a very small but very big problem.
Exactly. It’s actually extremely scrutinized and, I think, almost silly. It reminds me of, like, a TPS report in Office Space in its stupidity.
The third problem is they’re negotiating against an investor first. So the first relationship with the investor is a negotiation and one that’s not transparent. They don’t know if the company before them or after them raised more or less, or got better or worse terms.
The fourth problem is, for the longest time, technical people were not being funded. Only business people, only people with MBAs. And the fifth problem was that after funding, the relationship was only with the investor. The founder wasn’t given a community of founders to learn from, to get support from, to grow with.
YC was essentially created to solve all five of those problems. And so if we go through; one, you don’t have to know us. All you have to do is go to the website and apply.
Two, you don’t have to do a deck. Literally all you have to do is fill out an application that’s kind of like a college application or a job application, which most people have done.
Three, you don’t have to negotiate with us. All of our terms are right on the website, both the general terms and the legal documents. So before you even ask us for money, you know the exact terms we’ll invest at.
Four, we put you in a cohort of other companies so that you’re not only getting help from us, but you’re getting a community of people who can help you.
And that’s YC. That’s what makes it great. And so it turns out that those problems still exist, even though YC’s 16 years old. And that’s why, you know, 16,000 companies apply to YC every six months.
Y Combinator was started to solve those problems. In some ways, you have helped to solve a lot of them. Those problems will continue to exist; you will continue to try to solve them. But after 16 years, Y Combinator is kind of the center of the universe for startup accelerators. It has gravity. It is very influential, the way that it works, influences how other people do things, how other accelerators are started.
You’re not in that disruptor lane anymore.
I don’t know that we’re not in that disruptor phase. Most successful companies still don’t do accelerators.
I would argue that most founders today are still starting their process by negotiating with normal investors and confronting those same problems. I would say that there are more investors now, and certainly more investors are tech-friendly and founder-friendly, than they used to be 16 years ago. What’s interesting is that half of YC’s investments now are international. And in those communities, they look like the Valley in 2005 or even worse in terms of founder friendliness.
I don’t think the disrupting task isn’t done yet. Now, of course, there’s new things that we’re doing too, that we didn’t do in 2005. But I would say that man, if the disrupting task was done, if all founders didn’t have to encounter those five problems I mentioned in the beginning, I’d retire. I’d be like, “Hey, we changed our community for the better.” But to speak to the new challenges, what’s interesting about the group of people who run YC now is that so many of us were YC alums.
I did YC in 2007, and then again in 2012. And during that period of time, YC was really just focused on the batch. And one of the things that alums always talked about was, “What are the other services YC could provide you after the batch?”
After you graduate and you’ve gotten your investment.
After you’ve raised your seed round. And, we came up with this tag phrase, you know, “YC is with you from cradle to IPO.” But we had to kind of ask ourselves, “Well, what are we doing after the batch?”
And so what’s been great is in the last six years or so, we’ve really stacked more products post-batch for our alumni. We have a program called Series A to B, which is a program for companies after they’ve raised their Series A to help them figure out, how do you encounter the next stages, the next challenges of a company post-Series A? We actually put them in a new batch of YC companies, and a smaller batch, so they had to have new peers who are at their stage. We have a growth program for companies that are way post-product market fit. They’re really focusing on hiring and company scaling, building out an executive team. Once again, put them in a new batch.
And we have the Continuity Fund, which is a growth fund that can actually write $25, $50, $75 million checks in the companies that are further along. We also have a little product that I love, that I desperately wished existed when I was going through YC, which is called Work At a Startup. So we basically built a common application that allows anyone to apply to all YC companies at the same time. So anyone who wants to work at a startup, they can apply on one website. And then all of our companies can sort through the people who are applying, reach out to them. And the really cool part about that product is, for the most part, founders are the ones using it, not recruiters. So if you apply with Work At a Startup and you look interesting, a founder will actually reach out to and engage with you, which I think is a completely unique experience. So we gotta nail the early stage, and then we have to figure out at every stage of our companies, how do we help them succeed?
That sounds like a lot of work. How does Y Combinator make money on the back of all that work?
We invest, so we’re an investment shop. So for YC, the standard deal that every early-stage company agrees to is, we invest $125,000 for 7 percent of the company. And then Continuity is a growth fund, they invest at whatever market terms founders are interested in. And so we make money as a fund. What’s interesting about YC, though, is just how much of the operation of the fund is funneling back into, “How do we make our program better?”
The early program?
How do we make the early program better? How do we make the Series A to B program better? How do we make the growth program better? Basically, a lot of what we’re trying to do is figure out how to give our companies more and more advantages as opposed to just how to line our pockets.
You said 16,000 companies apply now. That’s a lot more than in the beginning. You have multiple batches per year. How big are the current batches?
The current batches range anywhere from between 300 to 400 companies. And you mentioned applications increasing, it’s crazy. In the last 10 years, applications have increased 20 [times]. And YC has around a 2 percent admissions rate. So it’s still pretty hard to get in, but as more and more talented founders have applied, our strict goal has been, “How do we make sure YC can scale to support as many deserving founders and companies, as possible?” So as more apply, we figure out how to make YC bigger and better.
I ask every executive for their decision-making process. I feel like with you, there’s only one decision-making process people want to know about. How do you decide who gets into a YC batch?
I think what is so weird about YC is that because we’re funding batches of companies, we have a very different decision-making process than a normal investor. You know, a normal Series A investor might only write two checks a year. The other thing that’s different about YC is a lot of companies change, iterate, pivot after getting into YC. So you can’t get too caught up in the idea. And the third challenge we have is that we’re often among the first investors. So we have founders who are aiming for some moment 10 years from now.
We have this saying, we don’t want to be too smart. We don’t want to be too thesis-driven. We don’t really know how the world’s going to be 10 years from now. Founders invent that world. And so the more opinionated we are about their idea or their market, the more we’re being too smart. So what do we look for? That’s a bunch of stuff we don’t really care about.
What are the things we care about? First, does the team have the ability to build the product? You know, our original DNA of YC was funding technical founders. And the reason why was because we felt like they had an advantage in building a product in a software world. That’s still core. So almost all of our teams have a technical co-founder and can build the product themselves. They’re not relying on contractors or consultants or anything else.
Number two, does the team have a preexisting relationship? It’s extremely stressful to do a startup. And YC is stressful as a program as well. If the team has some preexisting personal or work relationship, the founders have some confidence that that relationship will survive the stress. [If] the founders met two weeks ago — harder.
Three, can the founders clearly communicate what they’re working on? Now, this is one that, like, I never understood as a founder. I was like, “Judge me on my graphs. If my graphs are going up, give me money.” And I think what I didn’t realize was that the founder’s journey goes from being kind of “doer” to “inspirer” when the product works. And so one of the things you’re trying to figure out is, “Can these folks inspire the 10 employees, the 100 employees, the 1,000 employees who will ultimately be the doers in the company?” And it’s really hard to inspire people if you don’t communicate clearly.
The next one that we try to figure out is, what is your connection to the problem? Like, what is going on? Why do you care about this customer, about this problem? And if we go a step deeper, are you going to care about this problem for the next one year or the next five years or the next 10 years? Because the startup journey takes a long time. We’re really trying to figure out, are you in this kind of get-rich-quick category, or is there something deeper tying you to this problem that you’re solving that’s going to keep you motivated over the long time?
And then I think the last thing that we think about a lot is how much have you accomplished in the period of time you’ve been working? I think there’s a set of founders who basically believe that step one in their company is to raise money. And so you’ll see some folks who, “Oh, we’ve been doing our startup for two years. We haven’t built a product yet. We’ve just been pitching the whole time.”
As opposed to teams where they’re saying, “Hey, look, we’re technical. We can build. Even if we have to do it nights and weekends [be]cause we’re bootstrapping, we want to get the first version of the product out there. We want to drive, get the first 10 customers.”
We want to look at how long you’ve been working in the startup and what you’ve accomplished, and we want to be impressed and a little afraid because we believe that if you can accomplish a lot with a little, then if given more resources, you can do even more. So that’s what we look at. And to be honest, we default positive. Like, if you’re telling us this is a problem, we’ll kind of assume it is.
If you’re telling us this is a big market, we’ll kind of assume it is. Like our job isn’t to kind of second-guess your idea, it’s really to figure out, can you execute towards it?
How do you square that with how often Y Combinator companies pivot inside the bootcamp? That’s maybe the most common story; you get accepted to YC, it was really hard. You got an idea. You’re a week in. “Oh man, that idea collapsed.” You pivot, and suddenly something else entirely exists. How do you square all of that?
You know what’s funny? We aren’t great.
[To] put it another way. We aspire to hit all of those points that I mentioned. I wouldn’t even give us an A at doing it. Maybe a B, maybe a B minus. And so what’s cool about our model is that it accommodates that. What’s also cool about our model is sometimes those pivots are good. I was co-founder of Justin.tv. We pivoted to Twitch, it worked out.
Sometimes in the process of working on your startup, you learn something. You learn that your core assumptions were wrong, and that’s okay. But let’s be clear, if you can execute, then when you acquire that new information, you can incorporate it and you can do something with it. If you can’t execute, you might not even learn that you’re doing the wrong thing. And when you learn you’re doing the wrong thing, it’s very hard to switch. So we don’t mind when people pivot. Now let’s be clear. Most YC companies don’t pivot. I think there’s this perception, like, you know, 90 percent of companies are pivoting all the time. And I think pivot is being used in extremely aggressive ways nowadays. It’s kind of the cool term.
Vox Media has a whole podcast called Pivot. It’s the hip thing to do.
There you go. You know, someone described YC’s model as anti-fragile. We don’t try to be too right. And there’s a very, very small downside if we’re wrong. Which allows us to give founders the benefit of the doubt. And what’s funny is that so many people who are at YC were alums, and I think that we would argue that YC definitely gave us the benefit of the doubt. I mean, Justin.tv started as an online reality TV show where my co-founder, Justin, was wearing a camera on his head and broadcasting his life 24/7.
There has been a very long, contentious debate about diversity in tech — in the Valley specifically, but broadly in tech. What you’re describing is a set of questions that, if you read them narrowly, funnel towards one kind of founder. Someone from a technical background who can communicate to another group of founders clearly. Who can devote nights and weekends to getting something built to show that they have started solving their problem, that has a network or a set of relationships with other people devoted to the same problem. You can see how that narrows the funnel.
How do you expand the funnel while keeping the barriers that you’ve described high?
So, I don’t like describing them as barriers, because it implies that people can’t accomplish them. It’d be a barrier if we only accepted people who were above six foot six tall. I don’t know any way to make yourself taller.
So let’s be clear. Can you have experience with the problem you’re solving? Yes. Can you have a relationship with your co-founders before you start the company? Yes. Can you recruit a technical co-founder or learn how to code yourself? Yes. Can you make progress on your product? Yes. So none of these things, I think, are barriers. I think that what I’ve appreciated about this is, people want to know what they have to reach for. Like they know they’re trying to accomplish something that’s almost impossible. Like, it’s just as hard to become an NBA basketball player as a successful startup founder.
They know the challenge is hard. And what they want to be given is accurate information about how to accomplish the challenge. They don’t want to be coddled. And so when I think about my approach to how we increase the number of underrepresented founders in the startup world — I can’t speak to the tech world. I’ve never really worked in a big tech company. Different challenges, I’ve been in the startup world — I’ve always thought about it in four chunks.
One is information. For the longest time, the information about how to access this world was only distributed vocally. You had to know someone. YC spends a ridiculous amount of time publishing information about the startup world. Everything that I’ve told you so far has been written and recorded in six different places online for free. And I’m doing it here again. Because we don’t believe information should be a barrier to getting access to this world. And to further that, we created a program called Startup School, which is a free online MOOC that hundreds of thousands of startup founders have participated in, that distributes all of the information about how to get started with a startup. So that’s the first one.
The second one’s cash. It’s a big deal, the cash. With YC, we not only have to fund companies. But we have to make sure that they raise money on Demo Day.
The third one’s advice. Of course, advice on how to run your startup.
And then the fourth, of course, is community. So YC is kind of structured to try to help outsiders become insiders. And, you know, to be honest, a disproportionate number of underrepresented founders are outsiders. And so I think it’s one of the reasons why I was attracted to YC both as a founder, and to work here.
Now in terms of the challenges, one of our YC partners, Dalton Caldwell, he often refers to this idea that a lot of times people look for silver bullets, one silver bullet. When they should be looking for 12 lead bullets. And I’ve been working on how to increase diversity at YC since I joined. And what I’ve realized is that there are so many things to do. And I wish there was a silver bullet, but I haven’t found one.
So in the last six years, YC has funded about 150 Black founders, about over 400 Latinx founders. And close to 600 female founders. And after doing that, I still feel like, one, there’s a ton of work to be done, like an absolute ton of work. And two, every time I think that I’ve figured out a problem, another problem arises.
Get specific. What are some of these problems? What’s a problem that you’ve solved, that another problem has arisen?
I’ll be ridiculously specific. Socio-economic. When I talk to people who have the technical skills, who are interested in software, who are interested in startups, socio-economic barriers are really tricky. So at 23, I’m working at Google. And I am part of the safety net of my extended family — when people need money, they come to me. Do I have the same freedom to do a startup as somebody who grew up, went to the same school, has the same level of education, and same interest, but whose parents were doctors and lawyers? No.
I think that we don’t talk about that. I was talking to a woman who was working at Apple as an engineer, and absolutely murdering it. And she was just like, “I have people who depend on me. And I need to make sure that no matter what, my family doesn’t fall down.” Now I think that, you know, parents are used to that responsibility. Almost everyone’s used to that responsibility for their kids. But disproportionately, it’s underrepresented founders who are used to that responsibility for the generation above them, and for the generations to the side of them. How do we solve those problems? You know, part of the solution is making sure that I can tell them, if you get into YC and you do well, I guarantee you, you will be able to raise money. But wow, that’s still risky.
There’s a geographic problem, especially pre-COVID. “My family needs me there physically. I’ve got family members with health issues. I’ve got family members who I’m helping out with child care.” And, you know, historically, YC has deeply encouraged people to move to the Bay Area. Well, that creates a barrier. Now that YC’s remote, that becomes a little bit easier. So it’s like, we can do these tweaks to kind of make things a little bit easier. But you know, what I’ve noticed is that like, man, I can’t solve the general socio-economic disparities in America.
And to some extent, I have to help founders overcome those. Where there’s a whole other set of founders who that’s not even their challenge. I think that’s kind of one of the more depressing parts of my job, is that there exists a whole set of founders who have experience with a ton of real-world problems, and have structural socio-economic issues that prevent them from solving them by creating startups. There’s a whole other set of founders who grew up in an upper-middle class, just beautiful setup, almost never experienced any real problems, who have all the ability and all the skill to build great products. But they don’t even know what to apply that skill to.
I feel like I talk to those folks a lot.
Me too. It’s frustrating.
Isn’t the solution just more cash? If you want to remove risk from a choice like that, the simplest way to do it is to just throw more cash at that problem. So you’ve got a longer window of opportunity to take the risk.
If you’re great at Apple and you leave for a year, and you can still float your family, you can go back into big tech at the end of that year.
You know what’s interesting? So that’s what I thought. I thought, look, if you get a job at Facebook, that’s your safety net. You can always get that job at Facebook. So I was talking to some college kids a couple years ago. You know what they told me? They told me that the recruiter told them, if they didn’t take the offer out of school, they would never get an offer again from Facebook.
They were like, “Michael, that’s too risky. I should definitely work at Facebook for a couple years just …” And I’m like, “Oh my God.” So let’s be clear. It’s not like everyone wants these kids to do startups.
So one, that’s very, very hard. Two, Apple’s not going anywhere. I can’t tell a founder that if they raise enough money, their startup will succeed. We know that’s false. And I don’t want to lie to a founder. I gotta tell the founder the truth; most startups fail. Almost all startups fail. So the chances of Apple failing, basically nil.
The chances of your startup succeeding, closer to nil. And like, I don’t want to lie. So it doesn’t matter. Like the typical YC company raises enough money on Demo Day to pay the founders for years, if they didn’t hire a bunch of people. And that’s clearly documented. But it’s still like, “I’m going down a path where probably I’m going to fail.” And I think what’s so interesting about this is that there’s a lot of people who are saying, “Why aren’t underrepresented people doing startups more?” And they’re not recognizing that like, for some people, it’s not the logical choice.
These are smart people who should make the choices that are better for their lives and their families. You know, when I started this job, I tried to twist people’s arms to do startups. And these are the stories that I heard, “I’m supporting my mom. I have a family member with health problems. And I was like, “Fuck. I shouldn’t be guilt tripping someone into doing a startup.” Like that’s, that’s bullshit. Everyone should have their freedom to choose the right choice for them. I should make sure that they understand this choice. I should make sure that this choice is well-documented and they can access it. I have the responsibility to promote success cases and say, “Hey, if you want to do this, we’re here to help.”
At the end of the day, we have to treat people like they’re intelligent people making the best choices possible for their families and for themselves. We gotta do that. That’s basic respect.
2020 was the heart of the pandemic here in the States. Y Combinator did go fully remote. The whole program was remote.
Are you going to go back to in-person? Or are you going to keep it fully remote? How’s that going to work for you?
I was shocked at how well remote worked. And I was shocked at how it forced YC to get better. And I was shocked at how it made YC more accessible to founders around the world. I was nervous. I went through YC in person twice. And I was nervous. “Could we make something that was as good or better during COVID?” was unclear. And, the silver lining of COVID was it forced us to look at some of the sacred cows of how YC worked and ask, “Why?” It forced us to innovate. And that was a great process.
I think that everyone who runs any kind of organization is being asked some version of this question right now, and the only correct answer is some version of, we want to take what’s best from the in-person program, we want to take what’s best that we’ve learned from the remote program, and use it to make the best product possible, and the most accessible product possible. And that’s not a one-time decision. I think one of the fun things about YC is that between every batch, we survey our founders, and we ask ourselves, “How do we make the damn thing better?”
There’s a whole bunch of serendipity that happens from having people in the office. People are wandering around, they can see each other’s screens. They can talk in the hallways. Some idea that you were never going to have happens because of serendipity in the office.
Then I look on the flip side. I look at our own staff meeting, which is now in Zoom. And the chat in our staff meeting is rockin’. So the meeting has become more participatory. I have no idea how to re-create that in person. I’ve got this thing that I want, which is serendipity in person. And I’ve got this thing that I have now, because of remote work, which is serendipity in virtual spaces.
How do you bridge those things together? What’s the thing that you had before that you want to capture? And what’s a thing that you gained from the remote program that you want to keep?
I’ll give you a perfect example in kind. When we did office hours with founders before COVID, oftentimes they’d have to drive to our office, either in Mountain View or San Francisco. Figure out how to park. Get in through security signing, dah, dah, dah. And inevitably we were running a couple of minutes late, so wait around. Talk for half an hour, and then reverse that whole thing. So to get a half hour of advice, they probably had to invest about two hours. Sometimes longer.
In the remote program, half an hour of advice takes half an hour. So YC partners did 50 percent more office hours with companies. But it’s harder to build a personal connection with someone through a screen. Not impossible, but harder. So I think a future YC is going to one, need to put people together enough that they feel like they’re getting that personal connection. But really, really, really needs to preserve the time-saving components of remote, because if every office hour is done in-person, we’re giving a worse product to the founders. So that’s just a single example.
I’ll give you another example. We had events down in Mountain View. The set of speakers that I can bring to Mountain View is entirely different than the set of speakers that I can bring on Zoom. If you want to hear from a speaker that’s halfway around the world, well, they’re not flying to Mountain View for a two-hour talk.
If I want to give you the most diverse set of speakers that can help you the best, I gotta do that on Zoom. But there should be events where you can actually see alumni who are further ahead than you and start building a relationship with them in person. So I have to provide that kind of product too.
I think the question we’re going to have to answer in YC is, what parts of it work better in person? What parts of it work better online? And let’s be clear, a lot of people think of YC like school. This, like, 24/7 thing. YC programming historically has been one night a week.
One night a week for three months. So most of the time, 95 percent of the time, you are in your apartment working on your startup. You’re not hanging out with us. You’re not in some classroom learning. That’s not YC. And so I want to be careful to make sure people understand, like, from an expectations perspective, it’s not like pre-COVID all the founders were at my house 24/7.
So I think that we’re going to be able to strike that balance. And what’s cool is that we have all these great feedback mechanisms. I still work with founders directly. I still help run a group. All the group partners still run a group. We’re all going through this experience with the founders in addition to serving them and looking at all the data, etc. So I’m confident we’ll make it work. I’m actually excited to make it work. This job’s boring if it doesn’t change. I think running a school that hasn’t changed in 50 years sounds like the most boring thing in the universe.
Do you think of it as a school?
You know, it’s tricky. I would say that it’s almost how I would want a school to be. I would love a school that was more project-oriented and less classroom-oriented, that was more about working on something that you’re passionate about than working on something that someone told you to work on, but that still gave you a feeling of a community, that still gave you support, that gave you even more support after you graduated from the school than a lot of schools do.
In a weird way, we’re trying to take the best from investors and the best from schools and we’re trying to figure out how to make something great. What’s interesting, I was having this conversation with Geoff Ralston, who’s the president of YC, just yesterday where he said, “I think we’re the only fund where people who raise money from us call themselves alumni.” And I like that. I like that there’s a relationship with the community, not just a relationship with us. The more I think about YC in this context, we’re part of the larger YC community, but we’re not the center of it. You know? We’re just another entity within it.
There’s alumni. There’s big companies. There’s small companies. There’s people who go off and work at companies. There’s all this other stuff that’s going on. And we’re just trying to support this community. We’re not trying to dominate it.
The dynamic of money has just really changed in the pandemic. What you are describing is school. It’s a rigor. You’re probably going to fail. You’re going to get an alumni network of people who are going to be as hard on you as your friends from college. Or you could just chase the dumb money.
So here’s the thing, I’m so happy about this stuff. It’s hard for me to look at the speculation that’s going on in crypto, and that’s going on in the stock market or certain parts of the stock market, and say it’s good. It’s hard for me to say that. The silver lining of that activity, though, that is probably positive for the startup community in the long run, is that I think startups were getting too popular. It was starting to attract people who were more interested in the results than in the work. That were more interested in getting rich quick than solving an important problem or giving a shit about their customers.
And there were all these forces that were kind of telling people, “Oh, it’s super easy. Oh, you can get accu-hired. Oh, you don’t need to write code, you just use no-code tools.” Like, there are all these tools, these things kind of communicating to people who want to get rich quick that startups was the place to do it. Now with GameStop, with the crypto trading, I’m kind of hoping that that’s a brighter light that’s attracting those people.
Wow. That’s like honey-potting people with AMC trades.
Go there. All you have to do is put some funds on your computer, and you can theoretically make money, maybe.
If that sounds appealing to you, I’d rather not work with you. And so go over there. Now, is it good for the economy at large? Like, no. You know, I wish we had a better way of educating the get-rich-quick people that maybe they shouldn’t just be get-rich-quick people. But in the meantime, I’m actually seeing in the startup world, and especially in the international startup community, more mission-driven founders, not less. That’s really appealing to me.
One thing I see often with YC companies in particular is they think they can solve societal problems with a pure application of technology. I’ll just give an example. I interviewed Chris Best, who’s the CEO of Substack. Substack’s a YC company.
As I reflected on that conversation afterwards, I realized I was talking about very specific journalistic problems, and Chris was talking to me about very specific technical solutions. And we might not have been speaking the same language. I just wonder if that tight focus on “we can use technology and technology solutions to solve a range of huge problems,” whether that kind of leaves out an entire category of founder?
The first thing I will say is that in some large part, I think it’s all of our responsibilities to try to solve societal problems. Like, that’s part of being part of our society. That’s part of civic responsibility. And when I look at the entities that do that, it’s government, it’s nonprofits, it’s kind of loosely organized communities, your neighbors, your friends, it’s individuals and it’s business.
And at the end of the day, all of them are trying to address societal problems in one way or the other. Now, some of those problems might seem trite or not significant. The problem of entertainment is often shat on. Like, oh, people want to be entertained. But, hey, people like entertainment. I don’t think people should be insulted for that. Like, it’s a problem, and there’s a lot of businesses that solve it.
When I go back to your question, I think business of course is solving societal problems. Does it always do it well? No. Can it do it with just software alone? No. Like of course problems are multifaceted. But I love founders who want to solve societal problems, because to me the opposite of that founder is the founder that just wants to get rich.
If I had to choose between those two, I’d much rather a founder who’s mission-oriented 100 percent. And, like, eventually, anyone who builds a successful product has to become mission-oriented. They have to be consumer-focused. They have to care about their customer, or else in the long run, they’re not going to be building a sustainable business. So sometimes I think that founders get confused into believing that society isn’t their problem, that they’re just in the mode of “get theirs while they can.”
They’re kind of shitting on the commons. And I find this more with US founders than international founders. I find US founders really sometimes take the US for granted.
There are some international founders who are just like, “I wish I had half of what you have.”
I love mission-oriented founders. Now, let’s be clear, right, governments can do things with unintended negative consequences. Nonprofits can do that. Communities can do that. Individuals can do that. Businesses can too. All of those entities have to be held to account for what actual impact they’re having. But society has problems, and if you want to build a business to try to solve them and it’s an ethical, fair business, I want to help you.
You co-founded Justin.tv and turned it into Twitch, which is at the forefront of a bunch of creator economy stories. Recently, you joined the board of Reddit after Alexis Ohanian stepped down and encouraged the company to diversify. So now you sit on the board of one of the most influential user-generated content companies that exists.
Reddit is like everybody’s homepage all the time. It has a lot of weight in the culture. It has a lot of thorny moderation problems. It has had some weird governance problems in the past. How has your perspective on Reddit changed after you joined the board?
I’m not a spokesperson for Reddit, so I’d rather answer this question more broadly. This is what I would say. The economy in America has always been very friendly to small businesses, and it’s always been part of our culture. And I think one of the things that we’re witnessing is how small business is changing. And for the longest time, small business meant starting a shop or a barber shop or a restaurant, and getting a loan from a bank.
And it’s obvious that as software takes over the economy, that has to change. And I think what’s interesting is that if you look at that in the creator world, the old-fashioned thing was you have to go through the gatekeepers, the studios, or the agencies and dah, dah, dah, dah. And only a small number of people become really popular and can make money. And I think software’s changing that. I think all of these tech platforms are changing that.
And I think that what you see in the creator economy is creative people trying to figure out, “How do I build a business online?” just like you would see shop owners of the 21st century saying, “How do I build a shop online?” And so the creators might go to a YouTube or a Twitch or TikTok or wherever. The shop owners of the 21st century would go to a Shopify or something like that. And what’s cool about it is it seems that at least in some areas, it seems to be both increasing the size of the pie and increasing the number of people who participate in the pie. And both of those things are very good.
If a Reddit community forms, it’s still inextricably tied to Reddit. If you develop a great Twitch channel and you have a career as a Twitch streamer — we have now seen this — you still can’t leave. Your relationship has become tied to the platforms in a way that the shop owner who got a loan from the bank was not forever necessarily beholden to one chain of banks.
I disagree. I would say that that shop owner was just as tied in. I don’t think any business can survive on its own. It was tied into the advertising it was doing in the yellow pages. It was tied into the bank that was giving you the line of credit. It was tied into all the different institutions in that community. I think this is the same thing.
I remember when Emmett Shear, the CEO of Twitch, I remember when he came up with the insight for Twitch. And I think everyone thought that the Twitch insight was that people wanted to stream video games or watch video gaming streaming, and that was not the insight at all. The core insight was that video game streamers wanted streaming video games to be their job. They wanted to quit their day job and do this, and Twitch had to figure out how to enable them to do that.
Before that insight, we were lost as a company. I mean, we did a bunch of stuff. We got a lot of traffic. We grew, our technology grew. As a product, we didn’t have a user and a user’s motivation in mind. And Emmett and Kevin Lin spent months talking to our video game streamers, and they all kept on saying the same thing, “How do I make money so I can quit my job and do this full-time?” And that’s what Twitch did. It gave those people jobs.
And so it’s weird that you would make the case, “Oh, it’s not giving them a platform that allows them to stream video completely independently of Twitch.” That’s really hard.
But what it is doing is allowing them to quit their job that they hate and do their job that they love. That’s pretty good. Now, I would argue that, like, in the entertainment industry, that’s still hard because it’s still kind of this thing where most of the viewers want to look at relatively few streamers. It’s still very, very hard to make that dream available to everyone. But when we started, nobody was making money streaming video games.
I think we’re at a maturation point in the industry. A lot of those assumptions are being questioned.
I think that’s fair. I think maybe the question I would say is that, as much as I love Twitch, maybe Twitch isn’t inventing what’s next. As much as I use YouTube, maybe YouTube’s not inventing. Like maybe that’s what the next startup needs to do.
Like before we started Twitch, you couldn’t put live video online.
As you think about why YC startup classes, who you’re funding their businesses, it seems like creator economy-focused businesses are going to run into the restrictions that the platforms place on these products.
So last week, we talked to Horacio Gutiérrez from Spotify. I asked, “Why don’t you have a button that just lets me pay an artist on Spotify and your whole problem with musicians goes away?” And he stammered, and he couldn’t really answer. And the answer was, because they would have to pay Apple 30 percent.
You’ve got Reddit. It seems like I should just be able to pay my favorite Redditors for the best jokes on Reddit. I’m sure Reddit doesn’t want to pay Apple 30 percent. Do you think that platform tax is a barrier to innovation as you think about the startups that YC is investing in?
Here’s my entirely unsatisfactory answer. It both enables and is a barrier. In order for these companies to be successful, they had to enable some amount of new activity. They have to build a new part of the economy. Of course they want to own as much of it as possible. And so from an ecosystem question, I feel like the question you’re asking me is, “Should founders be trying to disrupt the big companies of today?” Yes. Disrupt away. Go nuts, because one of two things will happen. Either you’ll win and your users will get more value than they’re getting today, or in the effort of pushing these companies, the companies will have to improve and get better.
Like Slack forced Microsoft to get better. And either way, users get served a better product. So, I, as a startup investor, can’t be protectionist. Kill everyone. Like, go nuts.
But at the same time, Microsoft forced Slack to get eaten.
I’ve talked about this with a lot of people. I don’t think big companies competing hard is a bad thing.
I personally believe Slack was in a great position, but it is very, very hard to build another Microsoft. Not because Microsoft’s there, although that’s a factor, but just building a Microsoft is hard, even if there were no Microsofts. And this is a hidden thing that I think people don’t talk about a lot. Not only is it hard from an execution perspective, but think about it from a founder’s perspective. You don’t have to build the next Microsoft in order to make a life-changing amount of money. So, your motivation has to be far beyond serving your customers, because your product’s available, you can serve customers. It has to be far beyond making a life-changing amount of money. There’s gotta be something else intrinsically driving you to make something as big as a Microsoft or as a Google or as an Apple.
And I think we don’t talk about that enough. I don’t think we talk about enough what it takes to make something that big because there are all of these economic successes. Investors and founders can make money at success levels that are way below “you made the next trillion-dollar company”. But hey, if you want to have a massive impact as a founder, that’s where you have to be aiming. And so do I believe that Slack had the potential to be a Microsoft? To be a top player? Yes. We’re using Zoom right now. Do I think Zoom has the potential to be a top player? Yes. It’s gotta get lucky, it’s gotta execute really well, but I think the potential is there for sure.
But let’s be clear. All the big players are going to be fighting against them. They’re all going to be fighting back. So they’re going to have to build a better product. But in this day and age, especially with software, I feel like loyalty is going down and down and down. People want to use the product that works the best. Google has had live-streaming for how many years?
A software founder who’s mission-oriented, who sees a big opportunity, they chase it and chase it and chase it, they build a software product they can scale without them, so they could get sick and take a day off, and the database in AWS is going to keep serving their product to people and they’re still getting paid.
You take a streamer on Twitch or a YouTuber or an Instagram influencer or whoever, they’re fundamentally unscalable, so they might be still mission-driven, they might still work just as hard. But if they take a day off, they make less money. But the platforms that enable them will still collect that money.
Let’s put this up into two different things, right. So, you are a restaurant owner, and yes, if your restaurant is not operating on Sundays, you don’t make money on Sundays, of course, right. The power company who delivers power to your business is always open.
It’s always open. Twitch is always open. Reddit is always open. The platforms are always open. So, it’s a different kind of business.
We don’t go to the power company and say, “It’s fundamentally unfair that you make money when I’m at work and at home.”
We say, “Thanks for the lights,” and “Don’t charge me too much money, and “Hey, if my power’s not working, screw you. I’m going to go somewhere else.” A different kind of business.
If creators don’t want to be in the creator economy, don’t be in it. Right? That’s fine. And like if creators want to be in it, but they want it to be better, agitate, complain, build something new, right. I’m not saying you should deny the desire for something better. You should be vocal about it. But I can’t change the fundamental nature of that kind of business.
I can’t change the fact that your viewers will leave you if you’re not providing them enough content, because in a weird way, if you take a company like Twitch, they’re building a product, a tool for streamers to give something their viewers want. And I can’t control what your viewers want. Emmett [Shear, CEO of Twitch] can’t control what your viewers want. Like, we are all the viewers, and if we want something, we will reward the person who gives it in the content world with more views and allow them to make more money.
And so to me, that’s the economy we’re in. It doesn’t help us to shit on the platform that’s enabling that economy. Critique is great. I love critique. But let’s just acknowledge it’s created jobs that didn’t exist before. It created opportunities that didn’t exist before. There are more entertainers in the world now than there were 25 years ago. There are more people who could pay their rent creating content today than there were 25 years ago, and these platforms are the ones that enabled that. That’s pretty good, right?
It is. I just think maybe we’re past the point where you can pay down the new problems with the old credit, you know what I mean? The platforms are really big.
I would agree with that 100 percent. I would agree that a platform has to earn your loyalty every single year, and if it screws you long enough, it will get disrupted.
Do you see a wave of applicants to YC that are aiming to disrupt Google Search or YouTube or Instagram? That to me is one of the most confounding mysteries. The end of every YouTuber’s lifecycle is the video they make where they say how mad they are at YouTube, and they have nowhere to go. And I’m mystified at why there’s not a crop of startups aiming to take those creators and that revenue and that audience away.
You know what’s interesting? It’s not obvious to me that the thing that disrupts one of these platforms even looks like it. So like we funded OpenSea, right, and they’re enabling these NFTs. And hey, maybe there’s a chance that NFTs are a tool, then, creators can use to monetize. And if that’s the case, then in a weird way, the creator will be less tied to the platform of sending them checks. And so, disruption doesn’t always look absolutely straightforward. And I don’t know what disruption’s going to look like, you know? TikTok doesn’t look like YouTube at all. It is very, very different, and in ways that people would argue are bad. If you were to pitch TikTok to someone when YouTube was dominant and TikTok was started, they’d be like, “So you don’t get to browse what you want? You can’t search for what you want?” People would tell you it was wrong.
I don’t know what the killers of these platforms will do. And it could be a direct disrupter and it could be something that just renders them slightly less influential every year until they become kind of like MySpace one day. We’ll see.
Our feeling of apprehension that innovation isn’t happening enough, unfortunately, I think one of the biggest things — especially in the consumer world that that’s tied to — is that the platforms haven’t changed. So like, you and I came up during a time where the internet happened,
Web apps happened. Laptops happened. Mobile phones happened. Each of those changes enables a whole set of new companies to compete with the old ones, but since iPhone, have we seen one yet? Most of our young career, we saw these things happening all the time, but at least me, I’m 38, most of my middle career, I haven’t seen one happen.
And if you’re trying to compete with these platforms on their home field, it’s way harder than if VR were to happen, or something else were to happen, and you compete with them in an area where you can be better than them.
I see the action in the creator economy, and what it feels like to me is a lot of being on someone else’s turf, even if that turf enabled your business to exist. But what I don’t see yet is the classic founder story. Here’s a creator who was frustrated with YouTube and went off and started something that was better than YouTube that solved his problems or her problems better. And that seems very, very hard to me.
Here’s an analogy that might apply here. I feel like what you’re asking me is why is it hard to go from creating a family restaurant to creating McDonald’s. And I would argue that like in some fundamental way, even though they’re both restaurants, they’re not really the same thing. And so, you actually have to fundamentally change what you want to do in order to build a McDonald’s. And there are sacrifices to that. I think a lot of people who are running family businesses would say, “I will never want to be a McDonald’s franchise owner, let alone inventor of the next McDonald’s.”
I think that that’s a fundamentally different business. If you want to have the power, influence, and money of a platform creator, then probably you’re going to have to switch from being a content creator to a platform creator.
It’s really hard to stay a content creator and have the money, power, and influence of a platform creator. It’s really hard. They’re different businesses with different ceilings. In the gaming world, we saw this a little bit with esports, where people kind of went from being gamers to being organizers of teams and then organizers of tournaments. I think that you see it with influencers, like Mr. Beast, starting food brands. You’re starting to see these people realize that they’re not content creators. They’re entrepreneurs.
And entrepreneurs can create all different kinds of businesses. And so that’s another angle, right. Like as more and more of your money doesn’t come from the platform because you’re the entrepreneur and you use your audience to build other businesses, your allegiance goes away from that platform. And it’s funny because if you look at this in the sports arena, in basketball, right, you can make more money off the shoe deal than you make off of your contract.
That leverage counts.
What is next for Y Combinator? What does it look like in the next year?
Next is going to be figuring out YC in the post-COVID world, which I think is going to be a lot of fun. And I think next is going to be more international. I think investors have pivoted impressively to being able to fund companies over Zoom, which to me means that the startup communities around the world are going to get more and more and more funding, and problems around the world are going to be addressed by more companies. I think it’s going to be great. A hundred years from now, we’re going to look back at this moment and say, “This moment was birthing five, 10, 15, 20 global startup communities.” Which would be great.