Y Combinator Unbound

YC is the dominant force in American business today

Its ambition knows no bounds

Paul Graham is the best judge of business talent in history

Genius

What is the source of YC’s success?

There are two types of genius:

• The John Henry: This genius works really, really hard. About 10x harder than me. On my hardest working days I can sort of see that if I worked like this continuously for eternity I could keep up with John Henry.
• The Houdini: This genius pulls wisdom from an unknown source. When I work on an idea for two weeks, examining it from every angle, the Houdini will refactor and improve it in 30 minutes.

There’s a possibility that Paul Graham is a Houdini-type genius. If so, the success of YC cannot be duplicated: We can only hitch our wagon to its star.

My main evidence is that Mr. Graham keeps pulling rabbits out of a hat, the defining quality of a Houdini-type genius:

• Airbnb. A bad idea then and a bad idea now in the sense that only a handful of entrepreneurs in the last decade could have pulled it off: the three mofos who did and Travis Kalanick. How did Mr. Graham know?
• Mattermark. For over 20 years, companies large (Thomson) and small (Tradestation) have been crushed by Bloomberg. Mattermark is winning. How did Mr. Graham know?
• Cruise. Google, Tesla, Uber. Not a lot of suckers in that bunch. And yet Cruise is thriving. How did Mr. Graham know?

I am aware that Mr. Graham may not have been directly responsible for all of these investments (and that some of them are not the same as the idea/company that YC originally accepted). That makes the situation even more magical: How did Mr. Graham select and train the person who made the investment? The Imagine K12 story indicates that Mr. Graham can transfer his skill. I cannot over-emphasize how unique and extraordinary that is.

There is little doubt that part of Mr. Graham’s magic lies in selection and peer leveling. The education is increasingly being given away. In this sense, YC Core is somewhat similar to the typical Ivy League university which provides education but wins mostly because it is a place where all-star students connect.

To add to this three layer cake of Twilight Zone-ish insanity, Mr. Graham named his creation y combinator which suggests that he knew he could do this before he did it. Mr. Graham is the greatest judge of business talent in history.

Media

But how does he do it? YC is inscrutable in part because the media does a horrible job of covering YC:

• Mr. Graham is a billionaire. And yet he has never appeared on any list of billionaires.
• The Launchpad, a book about YC, is so inaccurate that it could be part of a disinformation campaign.
• The absence of coverage about Zenefit’s behavior is shameful.
• There is a blackout on negative information about YC. With the exception of David McClure and Mark Suster, no one publicly crosses YC. Jesus gets more bad press than YC.

The Public Record

Happily, the public record is not completely blank:

• Mr. Graham likes entrepreneurs who are naughty (his word, not mine). Mr. Graham subscribes to the Nietzschean idea that there is a class of superhumans — the YC founders — who do not need to abide by the rules. When Airbnb broke Craigslist’s TOS that was naughty. When Zenefits ignored insurance regulations that was naughty. When Socialcam pumped up its metrics right before being acquired that was naughty. When Zynga acquired OMGPop for about $200M and then shut it down a year later that was naughty.
• Techstars exists because Mr. Graham told David Cohen to “fuck off and die.” That’s not the behavior of someone who wants to help entrepreneurs. That’s the behavior of someone who wants to have a monopoly on helping entrepreneurs.
• Mr. Graham repeatedly insists that YC is nice. When was the last time someone whose values you value (Gandhi, Martin Luther King, Jr.) bragged about their virtuousness? That’s because virtue is experienced, not asserted.
• Mr. Graham is an elitist. A few months ago, this comment might have been controversial. With the publication of his Economic Equality essay, it’s now obvious.
• YC repeatedly creates rules and then violates them. Example: YC has a rule about avoiding conflicts of interest around investments, except when it comes to making Peter Thiel a partner. Sam Altman helpfully explained, “We generally won’t bring on people that are involved with other investing firms given the obvious conflict, but Peter is so good we felt like we had to make an exception.” Translation: We are nice, except when we stand to make a lot of money.
• The way that YC VC played its investors is so Machiavellian, it’s worthy of study.

I am not being critical of YC. I believe that it should be seen for what it is, instead of being viewed as a benign, benevolent force without selfish interests.

Bad Advice

Given that Mr. Graham might be a Houdini, becoming highly correlated with YC becomes imperative. Here is some bad advice:

If you are an angel investor like me, the good news is that we are all slightly positively correlated with YC because it sets precedents (valuation, exit) that lift everyone up. But it would be nice to directly invest, wouldn’t it? If, like me, you can’t get an invite to YC Demo Day, consider one of the funds that invest in YC companies. Like this one which I just invested in.

If you are an institutional investor and you failed to invest in the YC Continuity Fund, resign because you are an idiot or you work for an idiot. This line is more harsh than I would like it to be (I’m not a good writer) but, really, what were you thinking?

If you are an entrepreneur and you did not get into YC, consider buying a failing YC company. There are a lot of them. Heck, you could’ve bought Loopt and Mr. Altman. I don’t know if this actually works (I’ve never done it), but it’s worth a try.

If you are the CEO of a legacy Fortune 500 company, know that YC is launching 100 startups at your turd pile. If present trends continue, YC companies will incinerate approximately half of the legacy Fortune 500 in the coming decade. What Airbnb is doing to the hotel industry is fair warning. So, invest in the YC Continuity Fund. Buy a piece of every YC company that could possibly destroy you. From time to time, buy a YC company and let the CEO run one of your business units. Or, resign to start a YC company and compete with your former employer.

If you run an accelerator, know that YC is not an accelerator and is, therefore, not competition. Think of YC Core as a projection of YC onto a lower dimensional space. You, in contrast, are a 0-brane. You are surrounded in the sickest possible way. Mr. Graham is operating at such a high level of abstraction and skill the best you can hope for is to turn your accelerator into a startup index fund. And, yet, for the sake of humanity and entrepreneurs, we must prevent YC from continuing to increase its power:

• We should cheer when Uber and Slack happen since they are not YC companies.
• We should be thankful that Mr. Graham’s elitism makes him slow to grasp certain opportunities (shout out to David McClure who has consistently acted on his long held belief that diversity and international investing have intrinsic value).
• We should contact the DOJ since Mr. Altman has publicly said that YC has a monopoly.

Mr. Graham gave us the gift of fire but we must not let him burn us.

Bio: I interview founders of AI startups at AIStartups.org.