Tom Monaghan couldn’t believe his luck. By the fall of 1983, he’d turned $900 into a restaurant empire with 1,100 locations, up from 200 locations just 5 years earlier. Remarkably, the best was yet to come. The following year, Domino’s Pizza — the brainchild of Tom and his brother James, who traded his early stake for a VW Beetle — launched its now iconic promise: get your pizza in thirty minutes or less, or get your pizza for free.
Over the course of the next decade, that promise would vault the business forward swelling to 5,300 stores. It would also become synonymous with the brand, for good and bad.
Cambridge Seed began in 2005, and as its name suggests, was rooted in the Boston. Founded by Jessica Livingston, Paul Graham, Robert Morris and Trevor Blackwell, the ersatz-incubator set out to seed early-stage technology companies, just as Graham, Morris and Blackwell’s Viaweb had received $10K in exchange for 10% of equity when they were starting out. It would not take long for them to change both names and location, moving to Mountain View and taking the wraps off the moniker that would go on to loom large in startup consciousness over the next decade and a half: Y Combinator.
I am what you might describe as a YC fanboy. For years, I admired the company from a distance, following the companies they funded, reading Graham’s essays, watching pitch videos on YouTube, and applying for a place in their 2016 summer batch. (They were right not to accept me.) So when I got the chance to attend 2018’s winter session as an investor, I approached it with the mix of nerves and excitement that you might have approaching a favorite celebrity, or visiting a country that has lived large in the mind before you’ve had a chance to set foot on soil.
A favorite pastime of VCs at Y Combinator is to complain about Y Combinator. Perhaps it’s because YC has built a top-3 fund, without even playing the game. What other investor is able, not only to back active competitors, but to do so in the same class? How many get to dictate terms, and in some cases, have startups lining up for the privilege of a round that undervalues them? Who else so reliably secures mark-ups within a mere 3-month period? How many funds turn portfolio founders into zealots? (If you graphed the NPS of VCs, YC would require a scale break.) There are other accelerators and incubators, but YC is in a league of its own.
Within a few hours of being there, it was clear why that was the case.
Robotic exo-skeletons to aid quadriplegics? Sure. A flying car? Absolutely. Delicious, synthetic, dairy-free ice cream? One minute, please.
This was a place that brought together the best and brightest, gave them a platform to share their thinking. I felt lucky to be there. Sitting in the audience, listening to the day’s pitches, was like studying by strobe-light, the future unfolding in 90 second jump cuts. Not only did you get to attend a blitzkrieg-lecture-series but you got to meet the minds behind the microphones, to ask them about their breakaway businesses and wild technologies. Or, you kind of did.
There seemed to be a strange cadence to conversations at Y Combinator, as if each interaction had been stamped out in advance on an assembly line. Business are described in as few words as possible, experience is reduced to a byword (usually the name of big tech firm), traction (of some kind, the units are not important) is inexorably up and to the right. And, the round is always closed, closing, oversubscribed. Questions, or requests for clarification, are treated with impatience; there are simply too many believers in the room to waste time trying to convert a skeptic.
This is not a commentary on the individuals themselves. Almost everyone I met was gracious and affable and impressive. But even the most generous of souls seemed to have a caginess, an impatience, that didn’t seem to be solely explainable by the magnitude of the event. It seemed to be coached.
After two incredible days, I felt as elated as I had upon arrival. But if there was one niggle, one point of friction it was this: the sense of inescapable speed that laced conversation. I have heard this newest incarnation of YC called “Coachella for startups”, which captures the scale and polish of it all. But there were times where it brought to mind a tent revival — both well-organized and frenetic; perhaps organized to be frenetic, to produce a certain mindset, a certain urgency.
Perhaps, like many visitors to Coachella, I am suffering from a serotonin withdrawal. But in the days and months after Demo Day, it is that feeling — one of manufactured pressure — that persists. If anything, the more I have engaged with the YC cohort, the more clearly I feel it.
There are two open secrets worth discussing.
The first is that VCs know about YC’s batch long before it has been announced, even before the first few LinkedIn profiles have been changed. There are lots of ways to figure it out. Some firms have moles on the inside (former or concurrent YC founders, usually) while the more fortunate have direct relationships with the incubator itself. Google Sheets are made and collaborated on and circulated. All of which to say that if you want to speak to the companies in the batch, you need to get on it, starting a few months before Demo Day.
There are pragmatic reasons to do this. But it serves another purpose as well. Data suggests that VCs infrequently determine a company’s ultimate performance, but at its best, making and receiving an investment represents the inauguration of a decade long relationship. One’s choice of VC may not be the most important factor — it cannot compensate for a misguided go-to-market, a flawed product, a gap in the management team — but it absolutely can make a difference. Perhaps perversely, this is especially true when times are bad, when things are not going according to plan. I have heard many founders say that it was during the difficult moments that they needed their investors most, not only as strategists, but as emotional support. As people, who know them, not just their business. It’s this purpose that is served by speaking early, by having multiple conversations with a founder, by building a relationship beyond ‘ARR, ACV, and Growth Rates’ in advance of Demo Day. And, it is precisely this rapport that YC’s process thwarts.
This is the second open-secret: unless you are a member of YC’s inner circle, the firm discourages founders from meeting investors before the mania of Demo Day.
In preparation for YC S19, I’ve reached out to a number of founders. While a few have been open to having conversations early, and some may simply think I am not worth their time (fair enough), a disconcerting number follow a clear playbook, just as patterned as my conversations in winter: (i) engage over email, (ii) discuss setting up a call, (iii) push call/meeting, (iv) suggest meeting up during Demo Day.
There are variations on this theme. Some begin by sharing that they are oversubscribed, only to assent to a call moments later. Some tell you the round is closed, only to tell you that it will reopen (on the same note?) as soon as Demo Day begins. In one particular exchange, a founder asked a question I had never heard before:
Are you able to make a decision after a 30 minute call?
If you were looking for signs that we are the top of the market, this might be it. Maybe there are those wise enough, brilliant enough to assess a business, assess a person, in the time it takes for a pizza to arrive on your doorstep. But from my current vantage, this appears to be inculcated lunacy. How can any investor, especially those that are stewards of another party’s capital, make such a decision in good faith? Why would a founder want that sort of person, unthinking in the extreme, to be a part of their brain trust?
It is not the fault of any individual entrepreneur. Rather, it’s a consequence of the structure YC has built, and the advice they give. In his essay “A Unified Theory of VC Suckage” Graham makes his distaste for VCs clear. (Strange given the way venture has gone. As VCs have hurried to replicate the strength of YC’s platform, YC, in turn, now looks more like other VCs than ever.) It is a remarkable essay, in that it is characteristically entertaining and uncharacteristically un-nuanced. If all not all heroes wear capes, perhaps not all villains wear Patagonia vests; I have met saints and charlatans on both sides of the table.
All the same, it is revealing in the image of investors that YC (or at least its godfather) holds: as thieves, as sneaks, as assholes. From this vantage, the VC is not so much counterpart or collaborator in a fundraising conversation, but an adversary. When viewed through this lens, YC’s strategy makes a lot more sense. Why wouldn’t you try and build froth and FOMO, get as many offers around the table, optimize for the cowboy capitalists, the greater fools? If you believe the other side is trying to con you, it only makes sense to respond in kind.
In 1989, Jean Kinder was hit by a car. She sustained head and spinal injuries. The car in question? A Domino’s vehicle that had run a red light to make its delivery on time. In many ways, Kinder was lucky. There were a score of accidents involving Domino’s vehicles over the course of the 1980s. Another woman, Susan Wauchop died in a collision with a Domino’s van. But it was Kinder’s case, and the $78MM in damages she won that finally convinced the company to drop its policy. Tom Monaghan would dispute the validity of customer concern, but the damage had been done.
In the ‘VC Suckage’ piece, Graham describes how the business models of VCs create negative outcomes. Discussing oversized rounds, Graham notes that “like steroids, these sudden huge investments can do more harm than good.” I agree with him, both in the specific and general case. Business models, and their incentives, can lead to bad outcomes, especially if applied unthinkingly. Big rounds bloat businesses. Manufactured urgency leads to crashes.
It is a privilege to go to YC. I really mean that. I look forward to Demo Day and seeing the future, albeit in tiny, bolted doses. I look forward to meeting and speaking with the founders at the vanguard of our industry, both those I have spoken to in advance, and those I haven’t. But I do so with the belief that the connections made huddled by a coffee dispenser should not be sufficient to make an investment. And by making that determination, I will move too slowly, and I will miss out.
We are creating bad drivers. By optimizing for speed above all else, by seeing each other as adversaries, we are fostering destructive partnerships built primarily on recklessness. VCs are not the enemy. Founders are not chum in the shark tank. Connections, genuine connections, are not only possible, but necessary. But they take work, and just as importantly, time.