FAST COMPANY: The Silicon Valley startup factory that birthed Airbnb and Dropbox has grown even more ambitious under its new leader.
“¡Este sábado, a la una de la tarde Pacific time, a las cuatro de la tarde en Colombia, a las tres de la tarde en México, a las diez de la noche en España…”
I’m sitting in a cramped living room, listening to Christian Van Der Henst and Freddy Vega host Platzi Live. the two young men, who are from Guatemala and Colombia, respectively, produce the weekly web series to promote their education startup, Platzi.
The show is aimed at audiences in the Spanish-speaking world, but we’re actually sitting in a condo in Mountain View, California, where Van Der Henst and Vega are in the middle of a three-month sprint to try to grow their business.
Vega and Van Der Henst founded Platzi in Bogotá, Colombia, offering classes in subjects such as digital marketing and web design, live-streaming them online. Right now, Platzi has 80,000 monthly viewers and 15,000 paying customers, and is on track to take in $1.5 million this year. Unlike well-funded competitors such as Coursera and Udacity, which have struggled to get more than 10% of students to finish courses (and which use prerecorded video), 70% of Platzi students complete their classes, an astounding figure in online ed.
Or it would be, if Platzi could raise its profile among anyone interested in education-technology companies. Vega, the company’s CEO, knew that the best way to be more than merely big in Bogotá was to fill out a short application form and send it to Y Combinator, the startup factory that has emerged as the most effective gateway to Silicon Valley success. Last December, Platzi was one of just 114 startups selected for the three-month program, out of 5,600 applications. Before, Vega wouldn’t have dreamed of getting five minutes with a big-name Silicon Valley investor. But here he is, promising viewers an audience with Sam Altman, Y Combinator’s presidente.
Altman, 30, had been a marginal figure in Silicon Valley until February 2014, when he was named president of YC and instantly became a tech celebrity. “There are these surreal moments when people come up to me and ask, ‘What’s it like to run the most powerful startup organization in the world?’ ” says Altman, who now receives 400 meeting requests a week from founders and investors. What they want, mostly, is access—an introduction to a current YC–backed hotshot or a YC partner, or a chance to enter the program themselves. Founders who are accepted relocate to the Bay Area for three months, giving Altman’s firm 7% of their companies in exchange for $120,000 and the chance to be advised by a stable of tech bigwigs. The best graduates can expect to attract hundreds of millions of dollars in venture capital, to hire the best engineers, to get any meeting they ask for—in short, to be made men and women of Silicon Valley. Investors who willfully mislead YC graduates are blackballed—banned from Demo Day, the twice-a-year event when YC’s graduates show off what they’ve made, and shunned by the 2,000 alumni who have passed through the program. “Our founders talk to one another,” says Jessica Livingston, a YC partner and cofounder.
The total value of YC–birthed startups is approximately $50 billion; the value of the current YC investment portfolio is likely over $1 billion. Dropbox and Airbnb are both valued at more than $10 billion. Stripe, which looked like a PayPal knockoff in its early days, is now worth $3.5 billion and processes payments for Apple and Kickstarter. YC’s reputation for manufacturing success is now so deeply ingrained in the Valley zeitgeist that the legendary angel investor Ron Conway calls it “a one-stop shop for the best-quality Internet companies.”
Altman’s career was born here. In 2005, he was selected to take part in the first Y Combinator class, at the time a sort of experimental summer camp created by Paul Graham, the programmer and essayist who is simply referred to as PG by those in the know. (Altman has a nickname too, “Sama,” though it’s less widely used.) Over the span of just a few years, Graham went from being an obscure figure in Silicon Valley—a Birkenstock-wearing butt of jokes about the dopiness of some web 2.0 ideas—to, as venture capitalist Fred Wilson put it, “a cult leader.” Investors began clamoring to attend Demo Days, pressing for introductions to Graham’s billion-dollar babies. Last year, Graham, who still favors the sandals, turned the organization over to Altman, with a mandate to grow it as fast as he could.
Altman hasn’t been shy. Y Combinator’s winter 2014 “batch,” as YC calls each cohort, was the last Graham helped run, and included 75 startups. The current group, which I’ve spent the past four months following as part of a Fast Company series, is nearly 50% larger. The plan is to keep expanding. And Altman isn’t just trying to make YC bigger; he wants to be broader. He’s accepted dozens of outfits pursuing world-changing ideas in biotech, alternative energy, and, yes, education. Which is why he agreed to go on Platzi’s show, and why, when I see Altman at the YC offices earlier that day, he is reviewing a speech that begins with the words, “Bienvenido, yo soy Sam Altman.” Altman doesn’t speak Spanish—not really, anyway—but he’s not bad on Google Translate and he’s got confidence to spare. “People appreciate when you make an effort to speak their language,” he says.
There’s audacity here, and hubris too. Y Combinator was, for years, a one-man show, fueled by the charisma of its founder. Now Altman has to prove he can turn it into an institution.
Altman, the son of a dermatologist and a real estate developer, and the oldest of four children, found his way to Y Combinator by way of St. Louis. He was, he says, a weird kid: a vegetarian in smokehouse country, a computer geek who happens to love classical music, a young gay man from a city not renowned for its tolerance. He spent two years at Stanford, where he majored in computer science before cofounding Loopt, a smartphone app that allowed friends to share their locations with one another. Then he applied to YC. The first-ever group included eight startups from a pool of around 200 applicants. They were all young men from top-tier colleges, and most were software hackers in their mid-twenties. Altman could program well enough, but he was only 19 when he applied. Graham suggested that he might be better off waiting a year. Altman’s response was succinct and definitive: He was coming. Graham was charmed.
Graham, who’d sold a startup to Yahoo in 1998 for $49 million, created YC as a venue to test ideas he’d been developing in the wake of the dotcom bust. Graham hypothesized that the commodification of computer hardware had made it much cheaper to start a big tech company than anyone realized. He gave each startup $6,000 per founder, cooked them dinner every Tuesday, and, at the end of three months, gave them each 15 minutes to pitch a few of his investor friends. YC participants were discouraged from hiring lawyers, PR people, bankers, salesmen, or anyone else. Graham told his charges to do all that work themselves and to aim not for greatness, but for “ramen profitability,” living cheaply enough to cover their costs without raising huge amounts of seed capital. Graham preferred small hacks over big ones. Founders, he believed, should simply “make something people want,” and iterate from there.
The approach was radical, flying in the face of the standard venture-capital playbook at the time, which focused on making a small number of multimillion-dollar investments in exchange for large equity stakes and an active role in management. Most VCs didn’t bother writing $600,000 checks, let alone one for $6,000. In 2007, Nick Denton, the founder of Gawker Media, described YC derisively as churning out startups that were “built to flip.”
Amazingly, Graham’s approach worked. Reddit, the now wildly popular social-news site, staggered its way out of the inaugural program and sold itself to Condé Nast in 2006, making its founders millionaires. Justin Kan and Emmett Shear auctioned their online calendar app, Kiko, on eBay for $258,000, then reentered YC with a video startupthat eventually became Twitch, which Amazon purchased last August for $1 billion. Altman raised $17 million for Loopt from investors—at the time, more than any of the other founders in the group—and talked his way into deals with cell-phone carriers such as Boost Mobile, Sprint, and Verizon. In 2012, Altman sold the business to the gift-card company Green Dot for $43 million, including a $9.8 million earn-out for Altman and his employees.
Today, Altman speaks of Loopt as a failure, which, by Silicon Valley innovation standards, it sort of was. “The market is way smaller than we thought,” he says wistfully, before adding, “I would be really bummed if someone came along and made it work.” But Graham was impressed. “Loopt was a smartphone app, but it was created before there were smartphones,” he says. “Anybody would have run into a wall. It was only because Sam is this master negotiator that he did not have it thrust in his face that ‘This is a stupid idea.’”
The boundlessness of Graham’s admiration for Altman—”Sam is Superman,” he tells me at one point—can seem unearned. In 2009, as Loopt struggled to acquire users, Graham put Altman on equal footing with Steve Jobs, writing on his blog, “On questions of design, I ask, ‘What would Steve do?’ But on questions of strategy or ambition, I ask, ‘What would Sama do?’ ” When Graham announced that he’d tapped Altman as his successor last year, some questioned the choice. It came just weeks after Graham became embroiled in a minor scandal over comments he’d made to The Information that seemed to shrug at the low percentage of women starting tech companies. Valleywag, the elbows-out blog that has been critical of Y Combinator, referred to Altman as Graham’s “younger model,” quoting anonymous sources that dissed Altman’s technical abilities and skill as an investor.
On the other hand, Graham was never a perfect fit as YC’s public face, either. Most notoriously, in 2013, he joked to a New York Times writer: “I can be tricked by anyone who looks like Mark Zuckerberg.” He was attempting to poke fun at investors’ biases. But taken out of context, it looked as if the most important gatekeeper in Silicon Valley was saying that he only wanted to fund white brogrammers. “It sort of crept up on me,” Graham now says. “Everyone talked about YC being a big deal, and I realize now that it’s sort of a big deal. But you don’t realize it when you’re running it.”
Altman, for his part, is approaching his new role like a political operative. During our interviews, he often tried to direct the story I would write. (“What’s the first sentence?” he asked playfully at one point. “What am I going to like least?”) He is also acutely aware of the impression he makes on others. “Our first rule is that we will not fund any company that cannot be a $10 billion company,” Altman says, forearms resting on the table, elbows bent, head jutting forward. He’s silent for a moment and then rearranges his body, letting out a little grunt. “Heh,” he says. He has been straining to read my notebook. “I can’t help it,” he says, apologetically.
“David, Sam,” Altman barks into an iPhone, and names a sum in the millions. “I’m in.”
Altman is hunched over a spiral notebook with about 50 to-do items written in a tiny chicken scratch while he talks to David Kirtley, CEO of Helion Energy, a YC–backed startup. Helion is special to Altman. The company is attempting to build a commercial nuclear fusion reactor—a long-sought-after ambition of scientists that could simultaneously end our dependence on fossil fuels and dramatically lower the cost of energy production. Funding a fusion company is as close Silicon Valley has ever gotten to betting on an invisibility cloak manufacturer, and it’s part of a push by Altman to seed more ambitious technology companies. “The areas where it is possible to have a fast-growing company have expanded dramatically,” Altman explains later. Ten years ago, YC’s model only worked for two kinds of businesses: consumer-facing websites and enterprise-software companies. Now, Altman says, the plummeting prices for computer hardware and the increasing importance of software in all areas of life have caused YC’s scope to widen to include what he calls “hard technology” companies. Over the past year, YC has seeded a driverless car company, 20 biotech companies, and two nuclear energy companies.
Investors have responded somewhat ambivalently so far. Helion, with a team of just seven full-time employees and $1.5 million from investors, has already built a functional prototype that can heat plasma to more than 50 million Celsius, but it hasn’t managed to raise additional funds. Altman’s funding pledge will be a stretch for him, but he believes that jump-starting Helion and its promising tech is worth it. “Shame on Silicon Valley for not funding this company yet,” he tells me that evening.
Altman has been granted unusual leeway to reshape YC. As part of the hand-over, Graham gave up most of his equity stake. Altman then divided the equity among YC’s partners and installed a board of “overseers,” composed of Livingston (Graham’s wife and a partner), Altman, and seven YC alums. Over the past 14 months, Altman has nearly doubled YC’s full-time partner count and added a half-dozen new part-time partners, including Ali Rowghani, the former Twitter COO, and Peter Thiel, the entrepreneur and venture capitalist. Graham still spends a few hours a week talking to YC startups, but he has no operating role. He skipped that week’s YC dinner—Ron Conway was speaking—to take his 6-year-old to dinner.
Altman is getting animated. We are sharing meze and a bottle of syrah at Evvia, a Greek restaurant in Palo Alto, and he’s talking passionately about Y Combinator’s role in pushing VCs to act differently. With top investors increasingly taking cues from the mix of companies at YC’s Demo Day, “figuring out what YC should do,” as Altman puts it, has cascading impact. “If we start funding more science companies, then other people will start funding science companies,” Altman reasons. “To finish my rant on VCs,” he continues, “these partners have $5 million salaries. They don’t want to risk losing that. If they invest in another iPhone app and it doesn’t work, they’ll keep their salaries going. But if they lose money on an ambitious technology company, that’s seen as pretty dumb.”
I point out that Altman may be partly responsible for the current state of affairs. He’s a guy who made his money by creating an iPhone app, after all; Y Combinator, meanwhile, has served as a filter for VCs, pointing the way to startups with less risk. He rejects this characterization. “Most VCs passed on Airbnb, Dropbox, Zenefits,” Altman notes, citing the YC–backed benefits-management company. He was the first outside investor in Zenefits, which is now rumored to be worth $1 billion. As Altman likes to say, outcomes of startups are rarely clear during their early years. Airbnb seemed silly when it was three guys, a couple of air mattresses, and a whole lot of Paul Graham’s chili; now it’s reshaping the hospitality business and was recently reported to be raising additional funding at a $20 billion valuation. Platzi may look dinky now, but then again, it looks less dinky than Airbnb did at this stage.
Altman’s criticism of venture capitalists is more than armchair quarterbacking. Some of his moves signal a desire to compete with Silicon Valley’s top VCs. For example, last year he announced that YCVC, a syndicate of top-tier firms that had invested $80,000 in each Y Combinator startup, would no longer accept money from traditional venture capitalists, instead drawing funds only from so-called limited partners, such as wealthy individuals and university endowments.
Altman says he has no plans for YC to lead Series A and B investments—the financing rounds worth between $5 million and $50 million that are the bread-and-butter for many top Silicon Valley VCs—but the negotiation I witness is proof that he’s not ignoring the space, either. Over the past year, Altman has reportedly invested his own money in nine companies, including Instacart, Change.org, and Reddit—which received a $50 million Series C investment that Altman led as part of the company’s spin-off from Condé Nast. The round was in many ways a flag-planting moment. Altman insisted that 10% of the shares purchased by his syndicate—which also includes Andreessen Horowitz and Sequoia Capital—will be returned to Reddit users, a move with little precedent in Silicon Valley or anywhere else.
One afternoon, I watched Altman take meetings with founders. He made introductions, offered advice, and suggested other YC partners for them to speak with. At one point he scolded a pair of founders for pressing him for fundraising advice prematurely. “You shouldn’t try to manufacture progress,” he said. “Everyone is looking for the hack, the secret to success without hard work,” he tells me later. “They think, ‘Well, if the YC partners love me, they’ll talk me up,’ or ‘The press will write about me and investors will like it.’ And they talk about it like it’s the shortcut to actually being good. The answer is just to be a great company.”
Over the four months that I spent reporting this story, I saw Altman act as a fixer to YC’s startups—alternately pragmatic and exhorting wild ambitions. One of the stars of the current YC class, a company called Plus Labs, began with a plan to create a virtual medical-device business. Customers could use its iPhone app in conjunction with an off-the-shelf blood pressure gauge to track their hypertension. The app would warn them by text message if they seemed in danger of a stroke or heart attack and offer stress-relieving tips. The app did well, but it didn’t catch fire. So CEO Mike Chen built a side project, Magic, that promises “whatever you want on demand with no hassle” using the company’s old text-message interface. (Orders are fulfilled with delivery services like Instacart and Postmates.) By the end of February, demand for Magic was so high that Chen had hired 15 friends and had accumulated a waiting list with 30,000 names clamoring to use the instant-gratification gambit. With YC’s blessing, Chen put the blood pressure business on hold to focus on Magic. “YC says, ‘Make something people want,’ and you’re like, ‘Really, that’s all?’ ” says Chen. “But it actually is.”
The current batch still includes five medical-device companies, two working to improve cancer treatment, and one creating a new kind of low-cost public transportation. There are dopey-sounding startups too, and there are audacious ones like Bagaveev Corp., which wants to deliver very small satellites into earth’s orbit on 3-D–printed rockets.
Bagaveev’s founder, Nadir Bagaveyev, was born in central Russia and dreamed as a boy of becoming a cosmonaut. He emigrated to the U.S. at age 19 and enlisted in the U.S. Army as a helicopter mechanic—because it was the closest he could get, as a noncitizen, to flying a military plane. Bagaveyev eventually landed a job at the private aerospace company XCOR, then quit 18 months ago to start Bagaveev Corp., which raised $1 million and was accepted into Y Combinator. “I thought, Let’s build our own rockets,” Bagaveyev says. “It’s the American way.”
When I met Bagaveyev, he was a few weeks from testing his first prototype. The plan is to send a 15-foot rocket 10 miles into the troposphere from the back of a homemade launchpad in the Mojave Desert, then allow it to parachute back to earth. That’s not even close to outer space, but he thinks it’ll be far enough to persuade investors.
Altman is already convinced. He tells me he plans to fly out to the Mojave with a few other partners. The prospect of Y Combinator, which could barely springboard iPhone apps a few years back, launching a literal rocket is too delicious for him to ignore, though he reminds me that, as with all early-stage companies, it’s important to keep one’s expectations muted.
“I mean, it could blow up,” he says, offering a goofy shrug. “Either way, it’s going to be great.”