Jessica Livingston, Partner at Y Combinator
How Jessica Livingston Launched the Greatest Startup Launchpad
Dubbed “the world’s most powerful startup incubator” by Fast Company, Y Combinator (YC) has been plucking startups from garages, dorm rooms, coffee shops, and assorted founder hangouts for over a decade.
With a combined valuation of more than $65 billion among its alumni, a list that reads like a who’s who of startup fame—think AirBNB, Reddit, Dropbox, Instacart, Scribd, Weebly—YC has become a Silicon Valley institution. It is described as an elite founders boot camp, a place where ideas are incubated, annihilated, refined, and polished for a period of three months, ready to be served up to a bevy of hungry investors.
As co-founder of this entrepreneurial playground, Jessica Livingston has seen it all: the tears, the tantrums, and the triumphs, while getting a bird’s eye view of some of the startup world’s biggest success stories.
Sharpen your pencils founders, this is a masterclass.
It started back in 2005, when Livingston and husband Paul Graham had observed how broken the funding world was for early stage startups.
Livingston was partway through her book Founders at Work, while Graham, a well known computer scientist and essayist, was making a foray into angel investing, having sold the software service he co-founded, Viaweb, to Yahoo for just shy of $50 million in stock.
At the time, the startup world was quite a closed community, making it tough for aspiring founders to pin down early stage funding. As Livingston recalls:
“You had to have a rich uncle, or go straight to venture capitalists who only wanted to invest millions of dollars, which doesn’t make sense when you’re just two people just testing an idea.”
Graham and Livingston, along with Graham’s Viaweb co-founder Robert Tappan Morris and Anybots founder Trevor Blackwell, set out to create a disruptive seed funding program that would favor founders, providing them with a leg up in an industry that was notoriously hard to crack. By offering a standardized form of early funding, they could use their collective expertise and networks to help founders get into first gear, in exchange for a piece of the pie. YC offers $120,000 to startups in return for a 7% stake.
Their first call out netted 200 applications, with the founders eventually settling on eight startups to fund. It was an impressive first class, featuring Reddit, the founders of Justin.tv (which later became Twitch, acquired in 2015), and Sam Altman, now YC’s president.
“It was an exciting first batch and we quickly learned we were onto something unique and powerful,” Livingston says. “There was a huge pent up demand from people who were interested in launching a startup but weren’t sure how to begin. Funding groups of startups at once also allowed us to build a community during what can be a very lonely and isolating time for founders.”
To date, YC has funded more than 1,000 startups with a staggering 127 in the current batch. The intake happens twice a year, and the decision-making team, on average, whittle 5,000 applications down to a lucky 350 who are granted an interview. Successful founders then relocate to Silicon Valley for an intensive three-month program, during which they have access to some of the entrepreneurial world’s most influential movers and shakers. The program culminates in Demo Day, when founders pitch to a high-profile investor audience.
Top of the Class
One of Livingston’s favorite founder case studies comes from the indomitable Airbnb team of Joe Gebbia, Brian Chesky, and Nathan Blecharczyk. Prior to receiving Y Combinator funding in early 2009, the founders had received a ton of setbacks. In one incident, a potential investor walked out, mid-pitch, without so much as a “thanks for your time.”
In Livingston’s view, one of the things that worked in their favor, however, was how focused the founders were on their original idea.
“A lot of people don’t realize how humble their beginnings were and how often they were rejected. But also how focused their idea was when they got started, which is important for aspiring entrepreneurs to take note of. You don’t start building the grand idea, you start in an extremely focused and narrow way and you go from there. These guys started out renting air mattresses in their apartment during conferences.”
Livingston believes that Gebbia, Chesky, and Blecharczyk persisted well past the point where most “normal” people would have given up, and suggests founders keep the fact that everybody starts small in mind. Although it appears to be a fine line between determination and knowing when you’re flogging a dead horse.
“One question we get a lot from founders who are struggling is when to ditch an idea. It’s a very tough question. No one ever knows 100 percent what the answer is, but if you can’t get anyone interested in using your product or you don’t have something that’s much better than what’s out there already, it could be time to think of alternatives. But if you are using your product and it’s really solving a need for you, or if you have a small group of people using it, it might not be time yet. It’s a delicate balance.”
Top 4 Successful Founder Qualities
When it comes to picking winning ideas, Livingston states that while it’s incredibly hard to predict, there are some commonalities among YC’s big-time success stories.
- Determination separates the wheat from the chaff
Contrary to popular belief, Livingston believes the most important thing is not who you know or where you went to college, but pure guts and determination.
“When we first started, we thought if someone is a really good programmer that will translate into them being a really good founder. But that’s not true. It’s determination—how much you can persevere through all the problems you’re going to have, and keep pushing forward.”
- Knowing the problem you are trying to solve
Most successful entrepreneurs focus on solving a problem they have experienced, taking that direct user experience to come up with a new or improved solution.
“Stick to an area in which you have a deep knowledge, and can understand the nuances around what is broken and how any current solutions might be improved upon.”
- Being fanatical about user feedback
Livingston explains that all standout founders create strong user feedback loops from the beginning, and are prepared to use that information to better their product.
“You can’t just lock yourself in a room, build some wonderful program, and then just expect it’s going to work. You really have to be iterating on the product, showing it to users, asking them if they aren’t using it then what would they change. Making sure every decision is what’s best for the user experience is a really important quality.”
- Being open-minded
While it’s easy to get attached to your initial idea, many startups begin as one idea before evolving in a completely new direction. Often, they will retain the kernel of the original concept, but will end up in a very different place.
“If you get too attached to a certain direction, you’re probably going to fail. Reinvention is part of the process.”
Top 4 Red Flags
Potential roadblocks can be many and varied for startups, but in Livingston’s 10+ years of experience she believes there are several red flags to watch out for.
- Flailing founder relationships
Founder breakups are one of the biggest causes of startup failures—second only to there being no user interest in a product.
Livingston likens the co-founder relationship to a marriage, in that you spend large quantities of time together going through ups and downs, and immense stress, all while needing to make tough decisions. She believes open lines of communication including regular, honest conversations, are absolutely crucial to maintaining a healthy relationship.
“These days, founders get started together less organically than 10 years ago. A founder might want to start a company but they don’t have a programmer, so they bring in someone they have no history with. It’s not really surprising if they don’t get along. I have seen many founders break up because they don’t have experience working together, or because they have different work ethics or goals.”
She suggests two practical pieces of advice if you are considering working with someone you don’t know. First, test the waters on an informal project. Working together for even one month will give you a sense of how well you collaborate. Next, have a lengthy conversation about what your end game is—a quick money spinner, or an in-it-for-the-long-haul adventure.
- Financial squabbles
Equity split is another hot topic of contention between founders. At YC, Livingston says they try to encourage founders to split things evenly whenever possible. Over the course of a long journey, an equal partnership is fairer and less likely to cause friction.
“There may be one founder who came up with the idea and has been working on it for a year already. In that case it’s reasonable for them to bring in a co-founder with less equity. But you still need to have that conversation where you are both happy with the level of equity.
I’ve seen many people agree to only 10%, versus the original founder getting 90%. Then, when things progress, they think ‘I’m working just as hard why do I only get the small amount?’ You don’t want that situation bubbling up when your company is doing well.”
- Taking funding for granted
Over the past five years, Livingston has seen a growing trend of founders who have received one round of funding taking it for granted that more will be forthcoming. What this doesn’t take into account, she says, is that investors have much higher expectations second times around, wanting to see real growth and traction, backed up by evidence.
“The average fund raise after YC is one to two million dollars. Fundraising is always hard, but for the most part, companies that seem promising are able to raise that amount of money. Then a year later they need more, and the founders think because they have done it before it shouldn’t be a problem. They let the money in the bank dwindle down and then they get burned.”
- Being unprepared
Launching into a startup with no real idea of what is involved can also lead to some founders coming up short. Livingston recommends founders mentally prepare themselves, and their life circumstances, for what is to come. This includes being able to handle long hours and a low wage while your business is getting off the ground.
“It’s different for different people, but you need to go into it knowing you are doing something extremely hard. If you go in halfheartedly, you will give up immediately. I often worry that the press make startup lives sound really glamorous. But it’s a really hard road to get to the point where you’re on the cover of Forbes magazine.
Life is just a rollercoaster when you’re in a startup. One day you can think you’re going to take over the world, the next day that you’re failing miserably. It helps if you have a support system—surround yourself with people who can balance you out. Working in a place where there are other startup founders can also be really helpful.”
- How to close the gap between a failed startup and a wildly successful one
- What Y Combinator is looking for when they take on new startups
- The exact process that Y Combinator puts startups through in order to ensure success
- The key traits and qualities shared by ever successful founder
- What signs to look out for that your startup may be doomed
Full Transcript of the Podcast with Jessica Livingston
Nathan: Hello, and welcome to another episode of the “Foundr Podcast.” My name is Nathan Chan, I am your host coming to you live from cold, windy, rainy Melbourne, Australia. Get me out of here. Not really enjoying the Melbourne winter. So that’s why I’m actually going to the States, which is really, really exciting. Looking forward to enjoying the American summer. So that’s what’s happening in my world, just trying to wrap everything. I’m actually going for at least a month, so I’m just bulk recording all these podcast episodes. It’s all about batching, eh?
I just wanted to share with you guys a little lesson that I’ve learnt recently along my journey, which you might find interesting, and I’ll try not to ramble too much. But one thing that I’m learning is as an entrepreneur, as a founder, you just can’t win all the time. And we’ve been having a lot of wins with the business. And at the moment, you know what, to be honest with you, we’re not having as many wins, and I’m used to winning. And that’s a problem, I think.
Sometimes, you can get so caught up drinking your own Kool-Aid and you just think you can do anything; you think you’re unbeatable. And the truth is, you’re not. And you know, I think it’s just an interesting part of the journey that we all have to go through. So I just wanted to share that with you guys.
So let’s talk about today’s guest. I’m really excited and honored that I got to speak to today’s guest, and her name is Jessica Livingston, and she’s one of the co-founders of Y Combinator. Now, for those of you that are not aware of Y Combinator, these guys run the largest and most reputable and biggest and coolest and baddest incubator, startup incubator in the world. And you know, they’ve had some amazing companies out of there; Airbnb, Dropbox, Twitch, so many. And it’s really cool because some of our actual guests have gone through Y Combinator, which is really, really cool. And pretty much, these guys see so many pitches, they see so many interesting business ideas. They’re based out of Silicon Valley.
And what I talked to Jessica about, which is really, really interesting, is the things that make or break a startup. And we talk about, you know, her role within Y Combinator and playing counselor to a lot of co-founders, and really getting an insight to what happens amongst co-founders, and why a lot of these businesses and startups actually end up failing. And a big part of it is the relationship that the co-founders have. And we talk about, you know, picking winning startups, and you know, what Y Combinator look for when they’re, you know, doing intakes. And all sorts of things that you need to look for in terms of red flags in regards to, like, the relationships that you have with your business partners and your fellow co-founders.
So this was a fascinating conversation. I know you guys are gonna love it. We talk about so many different things. And pretty much, this is not to be missed. So I’m really, really pumped about today’s episode. So that’s it from me. Now let’s jump into the show.
The first question I ask everyone that comes on the show and we interview is how did you get your job?
Jessica: How did I get my job? Well, the good news is that when you start your own company, you never look at it as, like, landing a job. You look at it as, like, “Oh, boy. How did that experiment work out?” But I’ll take you back to 2005 when my husband, Paul Graham, and I were just sort of talking about how broken the funding world was for early-stage startups. The world was extremely different ten years ago. It was very hard to find early-stage funding. You either had to have a rich uncle or go straight to VCs who only wanted to invest millions of dollars. And that just doesn’t make sense when you’re first starting and you’re just a couple people testing an idea.
So we were talking a lot about, “Gosh, there needs to be a standardized, branded form of early-stage funding that can just work with the founders and help them sort of get into first gear of starting a startup.” Because we think more people should be starting startups, but instead, they’re, you know, taking jobs at Google or whatever. So we said, “Let’s just try to do this ourselves.” And I said, “Great.” I was writing founders at work at the time and had some extra time, and Paul really wanted to do angel investing because he had a startup himself that he had been helped out by someone, and he wanted to sort of give back to the community. So we said, “Great, let’s start this investment company. But gosh, neither of us know how to do angel investing. How are we gonna learn?” So we said, “Let’s fund a whole group of startups at once over the summer, and by investing in a bunch, we’ll really get exposed to a lot of the things that come up, and we’ll learn, and then we’ll go back to funding startups asynchronously like most people do.”
So we built a website and explained what we were doing. We were running this three-month program called the Summer Founders Program in Cambridge, Massachusetts. We were targeting programmers who wanted to come learn about startups. We’d help them incorporate, we’d help them launch their product, and work with them with the idea, and maybe help them get more funding.
Lo and behold, we got 200-something applications, and we interviewed a bunch of groups, and decided to fund eight startups that summer. In that summer batch, that first one in 2005 was Reddit. There was the founders of Justin.tv, which turned into Twitch, which, you know, got acquired last year. And there was Sam Altman who’s now the president of Y Combinator.
So it’s a pretty exciting first batch, and we quickly learned that we were on to something very unique and very powerful funding groups of startups at once. And what that really was, it was sort of we provided a community in what usually is a sort of very lonely, lonely and isolating time when you’re just two people. But it helped to have sort of other colleagues that understood what you were going through or could help you with various problems.
And that’s kind of how we got started. It was just all an experiment. It was never…you know, we never intended it to be as big as it is now, although we knew we were doing something novel. But that’s kind of how we got started.
Nathan: Yeah, wow. And what do you think it was around that first batch? Because, you know, Reddit and also… you know…yeah, Justin.tv or Keiko, I think. Either way, like, these are massive success stories. And then I think was it a later…when was the Dropbox? When did the guys from Dropbox…what round were they?
Jessica: That was summer 2007. So still very early on. That was two years into Y Combinator.
Nathan: Yeah, so what was it, do you think, from those latest batches? And how did you find people?
Jessica: Okay, so there are two questions there. We found people mainly because Paul was kind of a well-known essayist on, you know, technical things and programming languages. So we had a bit of a following amongst programmers. And that was sort of our first audience. And then, you know, we started visiting some colleges and giving talks. We hosted Startup School in the fall of 2005. Startup School is our annual big event that we do for founders, and we have a whole day full of really cool talks by successful startup founders. We did that really early on. And that was kind of our sole outreach.
But I’ll tell you, I’ll answer the second part of your question, which was what was it. There was just, I think, a huge, pent-up demand for people who were interested in starting startups, but weren’t sure how to get started. It seems so simple to think like, “Gosh, okay, you incorporate your company, and you go get a bank account, and then you work on this idea.” But sort of that first step can sometimes be the most intimidating if you don’t know how to do it. And again, back in 2005, there was not a lot of information online about how to get started as a startup. Now, things have drastically changed. I think you can, you know, incorporate online very easily.
But by helping people just get started and saying, “Hey, here’s a place you can just apply to get funding. You don’t have to know anyone, you don’t have to be well-connected or go to an Ivy League school, just apply.” I think that spoke to a lot of people out there who were talented people that wanted to start their own startups, but weren’t sure what the first step might be.
Nathan: Look, let’s fast-forward to know, and let’s talk about the latest batch. How many pitches have you had? How many do you guys accept? How much funding do you give? How much equity do you guys take? I think people will find that really interesting.
Jessica: Okay, so let me just tell you about some of the basic components of our program; I’ll start with the latest batch. We’re in the middle of our winter funding cycle right now. In fact, we’re just a mere three weeks away from demo day. We give startups now $120,000 in return for 7% of their startup. And it’s a standard deal. We use standard paperwork. And you know, that’s different from a lot of other investors where each investment is kind of a negotiation. We just have the standard deal.
We have funded…there are 127 startups in this current batch, which is our biggest batch ever. Again, just to give you a perspective back in 2005, we had eight startups. And we’ve just grown organicallay over the years, and now, we’re up to 127.
How many applications did we get? I think we got about…I want to say 5,000 applications? And then we interview…we have ten-minute long interviews over the course of a week. And I think we interviewed roughly 350 startups to get down to the 127.
Nathan: Yeah, wow. And in regards to, I guess, picking the winners, what do you guys…can you give me some common things that you see when you’re looking…do you guys choose the founders or the idea? What do you guys specifically look for? And can we get some insight into, you know, what are some common things that you see from the, you know, the Airbnb founders or the Dropbox founders? Like, is there anything that is very unique that you can see now from doing this for, like, such a long time?
Jessica: Yeah, I’ll tell you. Picking the big winners is the hardest thing we do. It’s practically impossible to predict, to be quite open with you. That said, you know, having done this now for eleven years and interviewed over, you know, or had thousands of startup founders pitch us, there are some themes. When we first started Y Combinator, we thought, “Gosh, if someone’s a really talented programmer, that will translate into them being a really good founder. And lead this hugely successful company and they’ll build this sophisticated thing.” That’s not true, we found out.
What we found out very early on was the most important quality in a founder is determination. It’s not where you went to college or, you know, who your connections are or anything like that. It is like “How much can you persevere through all the stuff and the bad problems you’re gonna have? How are you gonna push things forward?” And that really separates people a lot. I mean, a lot of the…to touch on the Airbnb founders, I mean, most normal people would have given up on their idea 20 different times. I mean, I have, like, 20 different stories of these times when they seemed to be near death.
But they knew they were on to something special because they themselves were hosts. They rented…they started the company because they couldn’t pay their rent. And they were renting out an air bed in one of their spare bedrooms. And because they themselves were using their product, they knew there was something in there, they knew it was something special. Although, to be honest, when we interviewed them, neither them nor us ever might have predicted that it would be as big as it is today.
But this leads me to a second point about commonalities between successful founders. And that is, when you are solving your own problem, it’s much better than kind of making up an idea that you think the world needs and working on that. When you’re solving your own problem, you have, like, sort of a deep expertise of the problem. You’re a domain expert. And you understand, like, all the nuances, and what, specifically, is broken. How much better does it have to be than the current solution out there? And so, we are always looking for people who are domain experts. That really is important when you’re starting a startup, to sort of solve your own problem.
What other traits are common? You really…you have to be almost fanatical about listening to your users. You can’t just rock yourselves away in a room and build some wonderful program and expect that to just work. You really have to be iterating on the product and showing it to users, asking them, “Hey, if you’re not using this, why? What needs to change? What do you like about this? What do you not like about that?” And really make sure that every decision you’re making is based on, like, what’s best for the user experience. We found that as a really important quality.
One last thing I’ll mention is you just really want to be open-minded about things. It’s very easy to get attached to your idea. And what we’ve noticed in funding so many startups is how many of them start out sort of one way and evolve in a different direction. It might be…sort of have a kernel of the original idea, but it really winds up being a different thing. And if you get attached to one certain direction, you’re probably gonna fail. Whereas if you, you know, say, “Okay, this isn’t working, but I know I’m . Why don’t I expand to reach this audience?” You really have to be able to let sort of the users drive things a bit.
So those are sort of some themes in the successful founders we’ve founded that come to mind for me.
Nathan: Okay. And can you tell us an interesting story or…I think stories are really powerful, and I think people will find this really interesting. Are there any stories that you could share from the early days that maybe showcases the struggle from maybe a, you know, one of the startups that you guys have funded and taken under your wing that people might find interesting or inspiring? Or maybe a favorite story of yours?
Jessica: Oh, gosh. There are so many stories. And I am a big fan of stories of like…that’s how you learn, because they’re real. And you just can’t believe some of these things that happened. I think some of my favorite stories really revolve around the Airbnb company, because it is such a big deal now. And what a lot of people don’t realize is how humble their beginnings and how often they were rejected. And also, how focused their idea was when they first got started. This is very, very important for aspiring entrepreneurs to keep in mind. You don’t start building the grand idea. You start in an extremely focused and very narrow way, and you expand from there. And let me tell you the story around that.
So I mentioned earlier that the Airbnb founders couldn’t pay their rent, and they were like, “Oh, god, it’s due, you know, next week. What are we gonna do?” Two of them were designers, and there was a big design conference happening in San Francisco, and there were all these news articles about how all the hotels were sold out and people were in trouble. So they said, “Gosh, let’s, like, rent out our air bed in our spare bedroom and, you know, not only can we help some of our fellow designers attend the conference, but we’ll make some money and we can pay our rent.” And it was…they had three people stay with them that weekend, and it was such a great experience for everyone that they said, “Hmm. Let’s test out this idea.”
So remember, their idea getting started, honestly, it was on their website, was, you know, renting out air mattresses in your apartment or house during conferences. Like, that is how focused it was when it just got started. I mean, that’s nowhere where it is today. But that’s how big ideas get started. And because they get started so narrow and focused many times, they’re just sort of dismissed as irrelevant by other people. Investors, you know, are not interested, the press certainly isn’t interested, and even the Airbnb’s, like, family members questioned what they were doing. They sort of thought that they were crazy.
The investors I remember specifically really rejecting Airbnb early on, we were actually the only ones that would fund them. Luckily for us.
Nathan: Yeah, wow.
Jessica: They were pitching angel investors early on. And literally, an angel investor got up and walked out of the cafe without even thanking them or saying goodbye. He just was so bored, he left the pitch. I mean, that’s pretty…
Nathan: Yeah, wow.
Jessica: …that was a pretty low point for them, you know? So the point is, like, you get rejected early on, and you just have to keep moving forward, you have to keep trying. You have to hear “No” so many times before you hear the word “Yes.” And the reason I think these stories are pretty powerful is because, like, that is how one of the most successful companies in Silicon Valley started. You always have to remember, everyone starts small and they just build from there.
Nathan: And I’m curious, you know, a lot of companies give up. How do you know when to give up and when to keep going?
Jessica: Knowing when to give up is a very tough question because, you know, reasonable people, for instance, would have probably agreed that the Airbnb guys should have given up early on. But I think…you know, we get that question a lot from our founders who are struggling. You know, they say, like, “Ah, should we just ditch this idea and try something new?” No one ever knows 100% what the answer is. But if you can’t get anyone interested in using your product, if you don’t have something that’s sort of a better alternative than what’s out there already, like a much better alternative–it can’t be just a little bit better, it’s got to be a lot better–then maybe, if you can’t do that and no one’s, you know, using your product, it could be time to think of alternative ideas.
But if you…you know, if you’re using your product and it’s really solving a need for you. If you have a small group of users who, like, love your product, it might not be time to give up yet. And it’s just a delicate balance that no one has the perfect answer for.
Nathan: And you know, right now, I’m curious what are the biggest problems you guys are seeing that, you know, startup founders are facing, especially in your latest batches?
Jessica: I’ll tell you one thing and hope that it will be interesting to people. We have, over the past, say, five years, have felt like our founders who go through the batch have had a pretty okay time raising a seed round. And what I mean by that is, you know, the average fund raise after YC is, like, maybe $1 million to $2 million. And so, you know, always fundraising is hard.
But for the most part, you know, companies that seem promising are able to raise that amount without, you know, too much difficulty. So they raise that seed round, and then they think, you know, year-end of things, they need more money. And they think, “Oh, well, I did it before so easily. This should not be a problem.” And they sort of let the money in the bank dwindle down and think that they’ll be able to raise another round, you know, in the matter of a couple months, and they’re getting burned by this. It is much harder to raise, you know, a Series A round these days here in Silicon Valley. There’s just a higher level of expectation on the part of the investors. They want to see real growth, you know, real traction, and they’re not just betting on the founders and the idea, they want the data to back it up.
So we happen to be seeing people, like, struggling to raise a Series A, whereas the earlier rounds had not been quite as hard.
Nathan: That’s really interesting. And also, in regards to…and I’m really excited to ask this question. In regards to, I guess, playing counselor, that’s something that you do quite often, you play counselor to squabbling co-founders and founder breakups. Can you tell us about that? Like, what is the common thing that happens here in teams, like founding teams?
Jessica: Yeah, that’s a really interesting question. You know, over the past eleven years, I have spent a lot of time counseling founders. So I have a lot of insights; I’ll try to share the most interesting ones. Founder breakups, you should know, are what we see as the second-biggest cause for startup failures. The first being, you know, no one’s using your product. Like, you’re not making something people want. But after that, the reason we see early-stage startups fail is that the founders don’t get along. Which is, you know, heartbreaking because a lot of times, they’re working on some fabulous idea that you want to see come into this world and it just dies.
So how do I try to help? I mean, the first thing is just trying to get founders to communicate and be open and honest. I mean, like any kind of relationship, I mean, a lot of people sort of joke that a co-founder relationship is like a marriage, but in a way, it’s very simpler. You are sort of locked in with this co-founder for a long time. You know, startups take five, seven, ten years, and in some cases, it’s your life’s work. So are you with that co-founder. And you are in a very high-pressure situation. There’s a lot of stress, especially if you have employee whose, like, lives are kind of…you know, depending…their, you know, professional lives are depending on you, a lot of tough decisions to be made, and there’s no, like, one playbook for every startup. So you’re sort of sometimes blindly thinking, like, “Are we doing the right thing?” And that can cause a lot of stress for founders.
And if they don’t have a sort of trusting, strong relationship, it just can break their relationships. And, you know, these days, I think that sometimes, founders get started together less organically than even ten years ago. Like, if you look at…like, just to use, you know, Larry and Sergey of Google, as an example, they were friends in the same PhD program at Stanford, and they began sort of naturally collaborating with each other. And, you know, that relationship grew organically. Sometimes, you see people now saying, “Hey. I want to start this company. I don’t know how to program, so I’m gonna try to find a technical person to be my co-founder.” And they, you know, meet at some hackathon one weekend and have no real history together. And so, it’s not surprising that they might not get along.
So it can be very complicated, very tense, because there’s a lot at stake, especially when they’re coming through YC and we’ve given them this funding. They have, like, the opportunity ahead of them, and they’re not getting along, it’s really sort of they’re squandering this opportunity. So it can be hard.
But my advice always, always, is to, like, you’ve got to just lay it all out there and have these open and honest conversations, and then go from there. Because if you’re not talking openly, like, nothing’s gonna get solved.
Nathan: And do you recommend people should test their relationship much before? Like, instead of just pairing up from a hackathon? Do you have any recommendations there when choosing your co-founder?
Jessica: Yes, yes, a milion times, yes. Like, you have to be careful. You have to take your co-founder relationship seriously. You know, I get really excited when I’m reading applications for YC, and the founders are, like, childhood friends or college roommates, or have, you know, worked together for five years. Because I think, you know, if they’re childhood friends, these people know each other’s shortcomings, right? And they’re still choosing to work together. It’s so important. I’ve seen, again, so many founders break up, and a lot of times, it’s just they’ve had no working together experience, and it just does not…they might have different work ethics, they might have different goals.
Oh, that’s another practical piece of advice I should share. As you’re deciding to work together, there are two bits of practical advice. You should not say, “Okay, we’re gonna start a startup together. Let’s do this.” Just start a project informally with your friend or whoever you’re considering, and just test the waters. You could probably tell in a month of working together, even on a, like, side project on weekends, you kind of get a flavor for the way you work together, try it out before you formalize things legally. And the second bit of advice I’d give is if you are gonna, you know, co-found a company together, have a conversation upfront for, like, what your goal is, you know, with this company. Do you just want to build something and flip it, and try to make some, you know, quick money? Try to make, you know, $500,000 or $1 million and sell it in a year? Or do you really want to solve a problem to make the world a better place? And when that, you know, $10 million acquisition comes through, you’re gonna turn that town because you want to work on this, you know, for ten years.
These are important things to think about with your co-founder. Because if you’re not aligned, there’s gonna be a lot of tension if you do go on to build a successful company.
Nathan: And what about equity? Does that cause a lot of squabbling? Because I imagine it would. Like, equity split.
Jessica: Yes. Yes. Equity splits can certainly cause a lot of squabbling with co-founders. I mean, again, this goes back to, like, open and honest conversations upfront before you do things legally. We always recommend the founders, you know, split things evenly. Just go 50/50. Because even if one person, you know, sort of came up with the idea…we get a lot of people saying, “Well, I came up with the idea. I’ve been working on this startup for two months. She just joined or he just joined. They’re gonna get less.” It’s like, “Oh, my god, you guys. Like, you’re talking a ten-year journey. You know, the past two months is gonna just be, you know, a tiny little bit of the road ahead. It’s gotta be an equal partnership.”
Now, in some cases, there is a founder who came up with the idea and maybe they’ve been working on it for a year. And so, they bring on a co-founder who will get less equity, and that’s totally fine. That is completely reasonable. But again, you want to have an open conversation and say, “You know, are you okay with this level of equity? Because I have seen, over and over, people going through YC who maybe have agreed to only get, like, 10% versus the other founder getting 90%.” And then when things get hard and progress gets made and they’re doing well, they think, “Well, I’m working just as hard as my co-founder. How come I only get this small amount?” And it can cause an extreme amount of tension. So you don’t want that situation bubbling up when your company’s doing well. You want to have these open and honest, you know, real conversations early on where everyone feels good about their equity split.
Nathan: And look, we have to work towards wrapping up, Jessica, but are there any other red flags that people should be looking for when they’re, I guess, in the thick of things between co-founders?
Jessica: Again, I don’t want to repeat myself, but just remember, like, startups are extremely hard, which is why, like, most people don’t do them. They’re a long-term commitment if you do it right. They’re extremely stressful. And so, if you are not partnered with someone whose, like, work you respect immensely, who you trust their value, they have the same work ethic, they have the same aspirations as you do for the company. If you’re, like, not in agreement on those things, it’s bad.
The other red flag is you’ve got to be clear about who’s the CEO, what the other roles are. We’ve definitely seen, you know, groups who there’s two founders, and they’ve never talked about who the CEO is. They’ve kept it very informal. And you know, later-stage investors like to know who the CEO is.
And if you haven’t, you know, agreed that one person’s gonna be the CEO, that can lead to a lot of conflict. So it’s a good idea to sort of carve out some responsibility and not have, you know, all the founders do everything.
Nathan: A couple more questions, because you mentioned something that I really have to ask you. You said that starting a startup is extremely hard, it’s extremely stressful. What do you guys recommend to your batches and your startup founders that you guys are funding in regards to handling and managing stress? Because Silicon Valley and, you know, just…even in a startup world, it’s kind of like…you know, like, what Gary V. talks about. He’s just like, “Hustle, hustle, hustle, work extremely hard.” Like, 80 hours a week. What is your take on that?
Jessica: That’s a tough question to answer because it’s gonna be different for different people. But if I had to sort of paint things with a broad brush, you have to go into it knowing that you’re doing something extremely hard. You’re probably doing something that’s…you know, your exact idea has never been done. And you’ve got to be ready for it. You can’t go in half-heartedly or you will give up immediately. So you have to just sort of be mentally prepared.
And make sure your life circumstances work for what you’re doing. Like a lot of times, you know, founders can’t pay themselves very much when they’re first getting started and can’t raise funding. So you have to, you know, be okay…not have a lot of, you know, financial obligations. We always think, you know, it’s certainly probably ideal to start a startup when you don’t have, you know, four kids to put through college and a mortgage to pay, and all of that. When if you can live sort of cheaply, that’s sort of one good thing, is to just sort of know what you’re getting into, as obvious as that sounds. Like, it is not glamorous, and I do worry that sometimes these days, the press kind of makes startup lives seem glamorous. But it is a really hard road to get to the point where you’re, you know, on the cover of Forbes Magazine and, like…so you want to, like, know that’s what you’re getting into and be comfortable with it.
There’s this phenomenon that people talk about, and I’ve certainly witnessed myself, where life is just a roller coaster with a startup. And one day, you can wake up and think, like, “We’re doing so well. We’re gonna take over the world.” And the next day, you’re failing miserably. And, like, not much has really changed in that 24-hour period. But, like, that’s the way it is.
So if you’re, at least, again, aware that you’re gonna have these emotional ups and downs, and you have sort of a support system of your co-founder of, you know, your spouse or significant other needs to be very supportive of your journey through, you know, being a startup founder, friends, family. If you can sort of surround yourselves with people who can just help you balance out the ups and downs of being a startup founder, I think that helps.
I think working on a startup in a place where there are other startup founders around can be really helpful. Because sometimes, you think you’re, like, a martian or something. And if you can interact with someone else who’s like, “Yeah, I’m going through the same problems myself,” you suddenly think, “Okay. I’m not this complete weirdo. There’s other people who are struggling just like me and they can lend support.” I kind of think…those are some of my general ways to sort of manage distress.
Nathan: Awesome, awesome. Well, look, we’ll work towards wrapping up, Jessica. I’m super mindful of your time. I really, really appreciate you taking the time to speak with me. Last question is where’s the next best place people can find you?
Jessica: You know, so honestly, if you wanted to learn more about, you know, starting a startup or what we’re doing, I just…I really would just go to our website, which is ycombinator.com. We have tons of, like, fabulous articles or blog posts that we’ve written, collected. We have, you know, helpful information about what it’s like to start a startup. We have, you know, even investment forms. We use a thing called The Safe that we created, which is a really simple investment document.
So there’s, like, just a wealth of information on ycombinator.com, and that’s where I would recommend going. And I’d also recommend applying to Y Combinator. Like, anyone, we’re happy to get applications from anyone. And I think that just the process of filling out the application is a useful one for anyone who’s starting a company. It just sort of helps crystallize the thoughts.
Nathan: Yeah. Look, you guys are known as the leading and the number one accelerator in the world, incubator. So yeah, I wish I had applied to Y Combinator when I first started my company. But yep, thank you so much, Jessica. I really, really appreciate your time.
Jessica: It’s my pleasure. It was fun talking to you. Thank you.
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