Y-Combinator and Alphabet Inc.
New models for the company of the 21st Century
Summary: large companies often get displaced by new entrants, failing to innovate and/or adapt to new technologies. Y-Combinator can be seen as a new type of company, where innovation is brought in as an entrepreneurial experiment, largely for seed stage ideas; Google’s Alphabet, on the other hand, tries to stimulate innovation and risk by dividing a large company into smaller pieces and reassign ownership and responsibilities to different CEOs.
Which one is better? Hard to say now.
Take General Electric (GE), or Sony, or Shell, or Deutsche Bank, or Tata, or Samsung, or Apple, or Amazon.com.
They are LARGE companies.
They mostly do two things:
1) They continuously improve their existing products and services, and
2) They INNOVATE.
Why do they innovate? To stay relevant; possibly to even expand into new markets; to stay alive. If they don’t innovate, someone else will, at their expense.
There’s a problem with innovation at big companies: every once in a while a new startup emerges which will eventually disrupt the big company. Most of the time, it’s actually the combination of a few startups, doing something different and novel, AT THE RIGHT TIME.
Example: Polaroid. When your name is the product, well, you’ve made it, right?
And yet, with the advent of digital photography, Polaroid lost any relevance, until it went bankrupt in 2005. Was there a specific company, or startup, that killed Polaroid? Maybe not. But for sure Polaroid failed to innovate.
Another example: Borders (Books and Music). Do you remember it at all? Borders was a big company back then. At some point, when the Internet was becoming a thing, from 2001 until 2008, Border outsourced its online sales to Amazon.com (in 2001, after the dot-com crash, Amazon was already worth 4.5 Billion dollars and Borders only 1.5 Billion dollars).
Then, in 2007, the Amazon Kindle came out.
Then, in 2008, Border realized it was a mistake. But it was too late.
Amazon.com WAS a startup twenty years ago. Its IPO was on May 15th, 1997 (my 20th birthday). If you had invested ONE dollar in Amazon’s stock in 1997, It would be worth roughly 700,000$ today!
But Borders? Borders gradually lost relevance, pushed to the “border” of the market by (mostly) Amazon.com.
In 2011, Borders closed shop, laying off more than 10,000 people. End of the story for them. Not for Amazon.com: in 2015, it became bigger than Walmart itself.
See these two examples? They both show that a good company can sometimes fail to innovate properly. A large company has a lot of baggage, a lot of politics, a lot of bureaucracy to deal with.
There should be a better way.
Y-Combinator, a new type of company
Take Y-Combinator now. There’s an excellent, very recent, interview (and transcript) with Paul Graham, in which he describes how Y-Combinator was born.
But my view is that Y-Combinator is different, and much more powerful and interesting, today.
Y-Combinator is becoming a new model for the company of the 21st century.
Instead of having a large pool of R&D employees, Y-Combinator invests a small amount of money (roughly $120,000) into promising ideas and teams, in exchange for a single digit equity (typically 7%).
It then brings its “network” of alumni, and connections, and mentoring, and then watches this experiments grow into huge successes like AirBnB (probably worth about 25 Billion dollars right now) and Dropbox, or into smaller successes.
If not, it lets these experiments quickly die into oblivion.
If you examine this process closely, this is the equivalent of a very large (and very cost efficient) R&D department.
In addition to this, owning only a small percentage of equity means that you empower the founders with the responsibility of growing this into a large business at scale, completely ignoring any previous “baggage” that you might have in a traditional company.
You don’t need to heavily fund this “R&D experiment” , because many other people want to do it for you — from Demo Day onwards.
Therefore, even if you only own 7% or so of these experiments, the COST of running them is extremely low. You can run hundreds of them at once. Across different domains. And you can mostly focus on things that are not bound by physical limitations (software stuff, instead of hardware stuff).
But then, how do you attract entrepreneurs? How do you convince them that your contribution (120,000$, the network, the brand, etc) is worth 7% of their equity? Why should they join you?
Well, you have to innovate yourself. You have to open up. You have to be influential (my 2013 review). You have to stimulate the right conversations.
And if you are interested in long-term experiments, the original “startup” model won’t work well, and you should find a different way to attract interest and be a protagonist there as well: YC Research.
It’s a new company, and it doesn’t behave like one.
You don’t have a VP of Sales, a VP of Product, and such.
You become a container for ideas to blossom. In the future, this might even be automated so much that it becomes the standard template for any kind of company, although it’s still very hard to FILTER.
In fact, let me argue that Y-Combinator could be considered a company: a company that sells filters. Great filters, indeed.
A while ago, Google created Alphabet, a “container” for many companies and projects, including Google itself.
“We’ve long believed that over time companies tend to get comfortable doing the same thing, just making incremental changes. But in the technology industry, where revolutionary ideas drive the next big growth areas, you need to be a bit uncomfortable to stay relevant.” — Larry Page
What’s the main difference between Y-Combinator and Alphabet?
Alphabet wants to control how resources are deployed into various “experiments”. One of them happen to be the “goose that lays the golden eggs”, a.k.a. Google, a wildly profitable and mature business. But over time, Alphabet hopes that there will be several Googles, and that they will all benefit from this separation of concerns. (my bet and hope is that Google Compute Platform will have a chance to quickly become a multi-billion dollar business, for example. Diane Greene, I have suggestions for you.)
Think about it.
Larry, and Sergey (well…), will continue to control Alphabet, while appointing a CEO for every single “letter” of the alphabet, reporting to them. Some of these won’t be early stage startups, of course, but perhaps some others will.
But is this enough to stay competitive? Is this enough to keep attracting great talent? Hard to say. Alphabet might be in its first phase, and it will take time to evolve into an amazing innovation machine (if it will ever).
My bet is that some pages will be taken from Y-Combinator’s book, especially the “fund a group of smart guys, make sure they can execute, and then get out of the way” approach that has worked so well for early stage startups.
Or has it? As in The Unbearable lightness of being, a man can only live one life, and cannot really know what would have happened if he had made a different decision. Would Dropbox be Dropbox, without Y-Combinator? Better? Worse? And AirBnB? And Stripe?
It doesn’t matter much that most of the founders say so.
They really can’t say for sure. But that’s also true for any R&D project in any conventional company. What you can observe is the overall outcome: is Y-Combinator successful? For sure. Is Alphabet successful? Too early to say, but we will be able to know one day.
So, Y-Combinator, or Alphabet, or what else?
In conclusion, and IMHO (In My Humble Opinion), Y-Combinator is successfully able to attract the type of talent that excels at running early stage experiments, and makes huge monetary gains when one of these experiments is successful.
Google’s, whops, Alphabet’s approach is to create a structure to possibly run ANY type of experiment, without the usual anxiety that comes with quarterly results and the stock market, and it’s still too early to know if it will be successful.
Both models can learn from each other.
Both suggest that the company of the 21st century can’t be run as we used to, especially now that innovation can quickly disrupt established companies and/or create new markets (Uber, AirBnB).
[Oct 19th, 2016 update: a NewYorker article on YC mentions that “It’s a measure of Altman’s ambition that he compares YC to Alphabet, Google’s parent company, which is also composed of independent units that collaborate, and likewise has a moon-shot division, the X research group.”]
What is very clear to me is that acquiring the best talent, and being able to motivate them to execute on a brilliant idea, is going to be the single most important factor in the success of today’s and future companies.
I can’t wait to see how this will evolve.