How does the most successful startup incubator in the world work?

from the translator: The translation is a little free, do not blame me - the original is very large. But I tried to convey the meaning. Careful, many letters!

Many people do not understand very well what the Y Combinator (YC) does. The purpose of this article is to describe in detail the process of work, perhaps the most successful incubator of startups in the world.
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YC holds two three-month financing cycles per year: from January to March and from June to August. They ask the founders of each startup fund to come to the Bay Area for the entire funding cycle, during which YC works intensively with them to get the company in the best possible shape. Each cycle ends with an event called “Day of the Demo”, in which a startup represents the audience, which currently includes the majority of the world's largest startup investors.

Dinners

During each cycle, once a week, YC organizes dinners and invites some prominent personalities from the world of startups to talk. At this event, people begin to arrive around 6 pm. YC encourages each of the founders of startups to treat such dinners as a mini “Days of Demo”, and bring laptops or other mobile devices to show everyone else what they did during the week. A week as a deadline, as a rule, pushes people to bring things to a state where they can be shown.

Starting founders can communicate with each other and with the organizers in free form all the time until dinner. The dinner itself begins at 19:15. All eat together at one white table.

The invited guest usually arrives before seven and communicates with the founders of startups in an informal setting before dinner. Serious conversations begin closer to the dessert. Most of the invited guests are successful founders of startups, and they usually talk about how their startup was created in all colors. Since YC is familiar with many of them for a long time, their relationship is built on trust, so each of the invited guests is sure that the information said at the table will not leak away and often share secrets about which you cannot find anywhere else. This atmosphere allows people to unfold in contrast to public lectures.

One of the founders of startups wrote:
“Most practical advice is superfluous, but they are important when you hear the same thing, again and again, from different sides, especially from the lips of famous people, they are more and more settled in your heads.”
Unfortunately, everything that happens at dinner remains only in the memories and short notes of those who attend these events. On the one hand, it would be good to broadcast or record such events, but in this case it is unlikely that you will be able to hear at least a part of what the invited guests say.
Conversations usually end with an active discussion of what has been said and answers to questions from listeners, after which all are divided into small informal groups, just like before dinner. Almost all the invited stars stay for some time to talk with the founders of startups individually and everyone can do it. Sometimes founders and invited guests exchange contact information to discuss details later. But the guests are not the people responsible for advising startups. They are just a bonus. Consultation mainly deals with Y Conmbinator, incubator graduates, as well as investor angels after Angel Day.

Office hours

Half the time is occupied by events in which all start-ups take part. The other half takes place in conversations with YC. There are only three people in the company who advise full-time start-ups: Harj Taggar, Jessica Livingston and Paul Graham. 2 more partners YC Robert Morris (part-time professor of MIT) and Trevor Blackwell (founder of Anybots) advise start-ups on technical issues. The company also has a visiting lawyer, Jon Levy, who gives legal advice to everyone and is engaged in idle time at first but, nevertheless, legal work necessary for new companies. After the launch, when they start earning serious money, the founders of start-ups are sure to acquire their own lawyers. In the second half of the three-month cycle, YC introduces them to the best start-up lawyers with whom they can sign pending contracts.
Individual conversations with startups are reserved through a special online program. There are no restrictions. In practice, the number and duration of conversations depends on the startup and on the stage of the cycle in which it is currently located. The program for the office hours phase was designed not just to provide the possibility of reserving time for conversations, but also to show whether all start-ups get enough time for consultations. If necessary, more time is allocated.

What is being talked about strongly depends on the startup and on the current situation in the financing cycle. This is usually a discussion of current issues. Sometimes, especially in the early stages, you need to figure out how things should be. It doesn't matter how simple it looks, but it takes a lot of time to convince the founders of startups that they have nothing to worry about.

About 10% of the time, not pressing issues are discussed, but the vision of the future company as a whole. Someone already has it, but most don't. It is very useful to spend some time thinking about what will happen to the company from launch to the giant company, even if these are not the current goals of the creators. Helping founders to work out this vision is one of the greatest strengths of YC.

If the startup has not yet decided what it will work on, or they want to change the initial idea, then what will be needed is discussed. Startups very often modify or even completely replace their original ideas. By the time of the “Day of the Demo”, about 15% were working on new ideas that grew out of discussions and consultations during the cycle. And often they get some of the most successful startups.

If the question of what the company should do is resolved, then the next pressing question becomes “what to do first of all”. YC usually advises to break the work into stages and do each of them as quickly as possible. It does not fit all, but works for most. The advice to act quickly is related to the fact that initially development is carried out for hypothetical users. After the launch, it starts communicating with real users, the reaction of which may come as a surprise, and they will try to learn how to do everything.

Usually YC advises to do something significantly better than existing analogues. So that users have reason to try a new product. And at least some will say: "I am glad that it has appeared and now you can do others."

Deciding what to do is not a simple technical issue, because a startup is a company, and not just another software development. The product must have a business model. It may change, but there must be an initial idea of ​​who will do what and how the project will develop, and how to achieve the goal.

If a startup has already produced something that can be run, then how to do it is discussed. And here are two main questions: how to present the project to future users, and how to the press and investors. If a startup has a website, then by joint efforts they are trying to bring it to a qualitative level. As a rule, websites of startups mislead users who come to them for the first time and cannot understand what the company does, therefore it is very important on the website to clearly and clearly convey the main idea and activity of the startup. The YC team helps in writing good texts for sites.

With each startup ready for launch, we carefully work out steps to present the project to the press and investors. The founders of startups send their plans for promotion in the press to YC, after which they send letters to the media editorial offices in a normal non-marketing language, which many startups sin, and also to take the novelty seriously, given the reputation of the incubator.

If the company has already started working (and this is about a quarter of all coming to YC), what is happening at the time and after the launch of the product is discussed. In most cases, the founders' expectations are not met. And often this is due to the fact that the project was launched too quickly, paradoxically, and YC are trying to figure out how to solve existing problems. And they range from small technological problems to lawsuits. But the most common problem is that users do not like the released product enough.

Do not be afraid of this. Negative experience allows you to find out what your ideas went wrong and you will already have some data for analysis. Therefore, such companies with such YC is trying to figure out the expectations of users, to obtain data about their behavior and interests. This is an area where YC's experience in advising startups is most useful.

As you move through the three-month cycle, the topics for conversation are investors and the launch of the company. The main question is what should be the fundraising strategy. How much to get, from whom and when to start. The answers depend on the startups themselves. Some of the most attractive startups can quickly find and get money. Other "ugly ducklings" that will turn into swans with time, but first should try to get at least a small amount from the investor in order to bring the startup into a more attractive form.

It is very important for startups to have an accurate assessment of the funding potential. If you try to get too much money at the wrong stage, you will not only spend a lot of time and end up with nothing, but also put at risk the chances of getting a smaller amount, because your product will be treated cool. Fortunately, this is another area where YC experience will be useful. The experience of hundreds of previous startups helps to predict the reaction of investors and suggest an appropriate strategy.

When the fundraising process begins, discussions move from strategy to tactics. The process of raising funds, unfortunately, is the solution to the problem of breaking down obstacles. And the main problem is to convince investors to invest in your company. Personal contacts and previous experience of interacting with YC help here. An incubator cannot afford to offer investors frank nonsense, since after that they can stop believing YC. Thus, the goal is not just to receive money, but to receive funds from the investor who can help the development of the project the most.

By the time of the “Day of the Demo”, the questions about the presentation dominate in the discussions. This is one of the busiest parts of the job for YC. All startups are at different stages, and each needs a different time to interact with the YC team in the remaining time. But a week before the presentation, they should only talk about what will be presented on Demo Day. So this whole week turns into one big rehearsal. The situation in YC becomes exactly the same as on the day of the presentation and the founders of startups come and rehearse in the same setting that will be on Demo Day.

Usually, work begins with finding out the most important points that should be conveyed. After that, the founders of startups make a presentation in front of the YC team and the other founders, after which the mistakes are analyzed and the cycle repeats.

Office hours do not stop after a three-month cycle. In fact, after 3 months only one thing stops - it's dinners. Work continues all year round and startups from all previous cycles can book a time whenever they want. (Except for 1 week of the cycle and one week before Demo Day, which are reserved only for startups of the current cycle). For example, issues are still being discussed with some startups of the first cycle, which took place in the summer of 2005.

In the end, the YC can reach some sort of people to whom they can offer advice, but not yet. Only 4 weeks a year (2 in each cycle), when many take enough time for discussions.

Day Angel

Approximately in the middle of each cycle, an event called “Angel Day” is held, during which each startup forms pairs with two angel angels who will meet with them regularly for several weeks before “Demo Day”. Preparation for “Angel's Day” is almost like “Demo Day”, but the presentation for it is much shorter and more informal, and the audience consists only of top angel investors of Silicon Valley. After the presentation, the angels choose startups with whom they want to continue working, and YC helps to make the best choice.

After an early look at startups, the angels agree to talk to selected startups by phone or in person once a week until Demo Day. The goal of this work is to enable start-up founders to get answers to real questions from real investors, so that before Demo Day they can fix some problems that scare investors or change something in their presentation. Any of the angels can invest in the development of any company in the future, if they wish. Usually, these are top-class investors, so no one objects if it becomes a co-investor with such “sharks” in the next stages.

Angels that startups meet at Angel Days sometimes become their consultants and spend a lot of time together. But although “Angel Day” often helps start-ups strongly, they are not designed to find a mentor who will advise how to develop a startup in the future, as they do in other incubators. Only the YC team can do this. Communicating with large investors is the same bonus as the invited guests to dinner.

Day Demo

“Day Demo” has become over time, the largest event. From the first day, which brought together 15 investors, it has become a major event, during which more than 4 presentations are held in 3 days for an audience of about 400 people. There is hardly anywhere else such a large number of investors gathered in one place.

There are no specific things that startups must submit to the “Day of the Demo”. Everyone is at different stages, someone changes ideas in the process. The purpose of the presentations is to show the maximum of what is ready at this stage and the development prospects. There are investors who are ready to invest at different stages, if a startup seems to them to be quite promising.

After the presentations in Days of the Demo, investors and founders of start-ups are given the opportunity to communicate more and discuss further work during the receptions organized by YC. Investors do not write checks during the “Days of Demo”. The purpose of these presentations for startups is not to convince investors, but to make themselves known. Some may declare their desire to invest during the “Day of the Demo”, but most prefer to discuss the terms of the deal during the next meetings and conferences.

After the Day of the Demo, YC continues to maintain close contacts with startups, watching how they negotiate, moving through the maze of receiving funds, and helping them to “decipher” what investors really mean by giving uneasy and ambiguous answers. Often they even communicate with investors in order to understand what they really think and, if possible, to persuade them to invest. Investors respect the work of YC and are willing to largely trust the opinion of the incubator team. And YC, in turn, works only with large investors who are ready to make decisions quickly.

Other events

During each cycle, YC holds several other activities. Firstly, the "Day of the Prototype", which is held after 4 weeks. On this day, all startups show themselves to each other for the first time. The objectives of this event are to find out what the rest of them are working on, to make the founders think about how to demonstrate what they are working on. Nevertheless, at this stage, the founders of startups should be more engaged in production than promotion, so they are encouraged not to spend too much time on performance, since no one except startups from this cycle will see them.

After the “Prototype Day” all founders are asked to vote in which of the projects they would invest, being investors. This is done in order to give founders the opportunity to look at startups through the eyes of investors.

A week before the “Day of the Demo” passes the “Day of Rehearsal”. The format is the same as that of the “Day of the Prototype”, but it is required to show the best practices that will be presented in the “Day of the Demo”. Upon completion, a vote is also taken on a project that looks like the most attractive for investment.

Before the “Day of the Demo” itself, 5-6 incubator graduates are invited, who were able to attract large investments in order to speak frankly about their experience and give advice to start-ups and direct their activities in the right direction. Tips from the same as you are perceived much better.

Now that YC has many graduates, conferences are periodically held in which only graduates participate, where controversial issues are discussed in order to prevent them in the future. This is not part of a cycle, but when it is conducted during one of them, startups can take part in them.

Meetings are also held with a group of partners of the Sequoia venture fund. And every startup has half an hour to talk about their product with them. Here, Sequoia partners act as independent consultants, telling each startup which of their plans are feasible and which problems they will have. Communication with venture capitalists is very useful for startups.

The new event, which was introduced in the last cycle and is planned to be done in the future, is “Graduate Demo Day”. The day before the main “Day of the Demo”, all presentations are run in front of an audience of YC graduates (many of whom, in truth, are now angel investors themselves). The purpose of the event is to correct the last mistakes before the real presentation, to hear about them from a friendly audience, and not from real investors. After the run, a vote is taken among graduates in which they select the best projects for investment.

Paper work

The least interesting, but no less valuable part of YC's activity is working on the correct design of companies, with all the documentation and legal aspects. The process starts from the moment when the founders of startups fill out the application form, since some of the questions from it may reveal problems that could damage the company in the future if not to take action.

Starting a startup company is not a trivial task. This is not a job that you can entrust to your uncle-lawyer (if he certainly does not work for one of the companies that specialize in start-ups). YC's own startup, Viaweb, faced serious legal problems due to things that were missed when creating the company. But they would not have arisen if Y Combinator were in the form it is now.

Investors are often not so much worried that the company will work poorly, as about the "horrors" in their documents. Of course, this is not the main reason why YC does paperwork. The main reason is to give start-up founders a focus on other things. For most of them, paperwork and other paperwork are unfamiliar things, therefore distracting them from their main activities. It will be much better if they can spend their time working on their project. And every aspect of YC activity is designed for this purpose.

Graduates

As YC works on the foundation of startups, the alumni network is becoming an increasingly important factor in it. No one initially thought that a network of graduates would be a byproduct of the foundation of startups every 6 months. Now the more startups are launched, the faster the network of graduates grows.

Now, after 5 years, the network of graduates of YC, perhaps the largest in the world. It is strong not only by its size, but also by the obligations of the participants to assist each other. This commitment was originally a by-product of the spirit of cooperation that YC tries to encourage in each cycle.

This is the inner ring of support. People working with YC do a lot to help each other through the cycle and beyond. Many of them are friends after many years after graduation.As soon as YC realized this, they began to help organize contacts between the founders of new startups and people who achieved success.

Of course, graduates are not blindly loyal. But they trust the company, which helped them to get on their feet, and believe that every company that passes the YC filter is worthy of help and cooperation with colleagues in the shop.

Initially, startups used a network of graduates to find people who know people they would like to meet. But now more and more people themselves want to become graduates.

The most useful for other start-ups among graduates were: the founders of Cloudkick (they like to solve technical problems of others), Sam Altman from Loopt and James Lindenbaum from Heroku (who have excellent knowledge of how to get money and give many tactical tips in this matter). And these are just a few, a lot of them to list all. There are a lot of things they do for each other that YC can't even hear about. The chain reaction became self-reliant.

Silicon Valley

The outer ring of support is Silicon Valley itself. There are no questions about the foundation of startups somewhere else. No city can compare with the Bay Area. Other things being equal, Silicon Valley is the best place to start a startup.

Most YC-like organizations were created to enrich the startup community in various specific cities. But that was never the goal of Y Combinator. When they started in Boston, the goal was to help the founders of startups, not help Boston. That is why after the first cycle the company moved to Silicon Valley, as it was better for the founders of startups.

The first few years, every six months, the places alternated and now it is clear how much better the Silicon Valley is. For startups, it’s like Los Angeles for the film industry. But at the same time, YC stays away from the question of the startup startup location. Working with them takes 3 months, and how, after any school, further start-ups can go where they want. For some, coming to the Bay Area to YC would be optimal, and returning to their hometown at the end of work, as if they were leaving to study in a large city, and then returning to work home. But the choice always remains for the founders of startups.

Representations and links

It is difficult to overestimate the importance of YC bonds in various circles. They benefit startups in several ways. Firstly, thanks to its own alumni connections, YC can arrange a meeting and present a startup to almost anyone in the industry. Secondly, the incubator has a lot of connections with the so-called platform companies, which help to get rid of difficulties when placing startups on a particular platform. For communication between the founders of startups and specialists of platform companies, special meetings are organized.

Such a portfolio of quality partners allows any company that wants to collaborate with the startup community to join and gain access to hundreds of high-class startups at the same time. In addition, journalists who write about startups can write to us, and we are always ready to give them examples that characterize what they write about independently of the field of activity of the described company.

The strength and cohesion of the alumni network also helps start-ups to avoid intentional harm from competitors or envious. Since everyone in Silicon Valley understands the power of this network, it is a deterrent force and it is unlikely that anyone would want to do something bad for companies that have emerged from under the wing of YC. The horror stories that you could hear from investors are unlikely to happen with the companies we founded.

Social events

Initially, weekly dinners were exclusively social events. They allowed startup founders to communicate, and many of them became close friends. People organized their own communities.
The company understands the importance of the social aspect and does a lot for its cultivation.
For example, usually after 6 weeks after the end of the cycle, reunification dinners are held, because by this time many startups, faced with difficulties, may lose faith in themselves or start to lose heart and need unloading and discharging.
YC encourages startup founders to organize their own social events, which they do. This is a good tendency to stick together at the end of a cycle, as they all have a lot in common.

The size

Y Combinator has founded a lot of startups. In the first cycle in 2005 there were only 8 startups. In the latter, in 2010 there were 36 of them. Constant growth is beneficial for both the incubator and start-ups. Startups receive many benefits from colleagues in their cycle and from graduates. And the more startups, the more help for beginners, the more chances that a person who is an expert in the issue that you need to solve hopes.

Community size also helps startups indirectly, as people and organizations express a greater willingness to cooperate with Y Combinator, and therefore with them. Famous people are more eager to come to more viewers. Investors are more interested in the “Demo days” when more companies are presented to them. Many companies are interested in cooperation, journalists are interested in communication, etc.

Another value advantage is the ability to quickly learn the YC team itself. The more companies are launched, the more knowledge the team receives not only about start-ups, but also about investors. They continue to follow the development paths of hundreds of startups, they have seen the results of thousands of start-up interactions with investors. This allows you to predict results, even in the most unusual cases.

But the company is constantly thinking about the dangers of growth. He tries to eliminate thin places as they appear, to ensure that all startups receive enough attention. That is why, for example, a program was written to reserve the time of discussions, as it shows how satisfied the demand is.

Of course, the best reward for YC is when startups become independent and everything works out for them. This is the main goal of YC activity. Moreover, their experience helps to talk with equal success about large and small companies, since they themselves were small before they became large.

purpose

The main goal of YC is to help start-ups to really shoot. They come from different stages. Some have not yet begun to work, others have been involved in the project for a year or more. But, regardless of the stage, the YC task is to help each of them get a much better shape 3 months after they arrive in the Bay Area.

For most of them, the best form means either making the best product that more users like, or getting more money making opportunities. The ratio varies depending on the stage at which the company is located. An aspiring start-up will want to work more on product development; those who have experience will usually want to devote more time to attracting the attention of investors.

But each startup benefits from the intensity of working with YC. Every day, each of them, for 3 months. All around, from colleagues to investors and Silicon Valley itself, they want to help the successful launch of the project. In such an atmosphere, it is difficult to be insufficiently motivated. And such increased motivation is just necessary to do the difficult things that you have to face at the very beginning. Most people have much more potential than they realize. They often wonder what they are capable of.

Instead of conclusion
On the application of the model of the work of Y Combinatior in Russia they wrote on Habré: here and here .