Hi everyone, my name is Sam Altman and this is How to Build the Future. Today our guest is Jessica Livingston, the founder of Y Combinator where I now work. Y Combinator has funded 1500 startups and they're worth more than $70 billion in total. More than 10 of them are worth a billion dollars or more. So in terms of how to create a unicorn, Jessica Livingston probably knows more about this than maybe anybody else in the world. So we are super delighted you came here today to talk to us.
What I really want to get out of you is how founders get on a path to build a huge company. So you have now for 11 years seen founders come in when they're just two or three people and an idea and sometimes those founders go on to do nothing most of the time. Sometimes they create a small success and sometimes they create these companies that really transform the world and YC has been very fortunate to be involved in a lot of those. Airbnb, Dropbox, Stripe, the list goes on. And what I think would be really helpful is to talk about what the companies do during Y Combinator that allows them to then go on and build these super impactful companies. So what have you observed the very best companies do when they're brand new?
Well, I've now seen more than a thousand companies go through YC, so I'm very familiar with what these companies do during YC. And I'm first going to say that there's not really one path for everyone necessarily. And a lot of times these successful startups get started almost accidentally. But when they're at the point where they say yes, I am going to take this company seriously. I'm going to apply to Y Combinator. And then they come here to Silicon Valley for three months. The most successful founders I've noticed are totally focused on two things: building their product and making something people want, which of course is our motto, and talking to their users. And they do not let themselves get distracted by anything else. And that seems so obvious, but what's not obvious is how easily distracted founders can be by lots of other things going on. And the most successful startups are hyperfocused on their product.
What are some of the things that distract founders that seem like good ideas at the time?
Oh, there's a lot of these. And in fact, in a talk that I gave at the female founders conference a couple months ago, I referred to some of these things as like the startup equivalent of wolves in sheep's clothing because they really do seem like you're doing business. A few of them are talking to big companies to try to form partnerships in an attempt to get better distribution or somehow get more users, to do a lot of PR before you've nailed down the product, to talk to corp dev people when you're not thinking about being acquired yet you'll still have meetings with these people, or you'll take meetings with investors when you're not in fundraising mode just to sort of build a relationship. I mean those or going to conferences, networking events, all these things that seem like important things to do as part of your business are not important in the very early stages when it's critical to build your product.
And how do you know when you have hit the product as you just said?
Well, I think when you have people using it, you can measure your growth and you can measure how many users you get and are they coming back, are they paying for your product? I mean, that's just the greatest thing of all if you can charge for your product and that growth rate is going up.
So, for all the YC companies that have gone on to be these sort of household names, did they all do this during YC? Were they just focused on their growth rate, writing code, talking to users, and are they the companies that ended up ignoring everything else?
Yeah, pretty much. If I had to think back on the most successful startups all during YC, they were super focused and they weren't all over the place in terms of ideas that they were working on or things that they were doing. They were definitely focused.
Did they have big plans even during YC? Like could Brian Chesky of Airbnb have told you during YC here's how we're going to be a $2 billion company and here's what we're going to look like seven years later?
I don't think they would have gone that far. I think that all of the most successful founders have ambitious plans. And they certainly start a lot smaller. Like they seem much less important when they're first getting started, but I think the founders do have a grand plan. I have to believe though that when they're all in the earliest phases, none of them can predict just how big they'll be. I don't think Brian Chesky knew that they'd be where they are today.
And how much strategizing do you think the companies do about how they're going to get from here to the next step to the step after that? Like during YC, are they really just focused on trying to make a few users really happy or are they thinking about well we need to build up a monopoly and so in Airbnb's case we'll have that because we'll have one marketplace or is it really just like let's build this product people love and see where it goes?
I really do think it starts as let's build this product and see where it goes. In some cases, let's solve our own problem and see where it goes. I'm specifically thinking of Stripe. I mean, they built that product because it was a pain in the ass for themselves. They were solving something for themselves. So, I do think that they are saying, 'Let's build this and see where it goes.' However, I think that the most successful ones do have that grander vision. I remember specifically during YC, Airbnb said to themselves and I think to investors, we plan to become the eBay of space. Like they were nowhere near the eBay of space at that point, but they had that vision and they were working toward that.
How much does the idea matter? Like you said Airbnb came with this idea that turned out to actually be the eBay of space. But a lot of founders I think don't get started because they don't yet feel like they have the idea that can be the hundred billion dollar company. So how important do you think it is to get the idea just right at the beginning or to just get started with something and then figure out where to take it?
I'm of the mind of just get started with something. And that's because we are funding companies at such an early stage that we're really funding the companies for the founders and for the attributes of the founders. Do they seem determined? Have they been able to ship something in the past? Do they seem open-minded about things? Are they domain experts? A lot of times they don't get the idea right the very first time. They might be in the general vicinity of being right but then they have to adjust their idea. Some founders totally fail with their idea and have to change completely. But I think it's more important to get started with something, build it, because your idea is always going to evolve. I mean Airbnb is to me one of the most famous examples of an idea that has evolved, right? They came to us with their idea which was at the time renting out air beds in your home while you were there during conferences. Like that's pretty focused, right? And then they said, 'Okay, now we're going to rent out air beds in your home, but not during conferences.' Then it was renting out your own home. So it morphed.
And did all of that morphing happen during the YC program?
No, it did not happen specifically.
I think it took about a year. I'm not 100% certain, but I remember what happened specifically was Airbnb was always very strict about the hosts being home so that they could provide breakfast because it was airbedandbreakfast.com. And then the famous story is that one of their hosts was Barry Manilow's drummer and he had this great place in New York City and he contacted them and said, 'Hey, Barry's going on tour. I'm going to be gone. Can I just rent out my apartment while I'm not there?' And the Airbnbs were like, 'Oh, that doesn't really fit with that's how they figured out how to rent out whole spaces.' And to this day, I think that that's the majority of their business. But it took something like that to get them to even consider doing it.
Could you tell the story of what you thought the first time you met the Airbnb founders when they came in to interview for YC? I mean, I know they were in kind of a rough place. They were totally out of money. Every investor had said no to them.
We actually did not know what a rough place they were in. I know that now from hearing stories, but they And this was 2009, right? This was actually in the fall of 2008. We did the interviews in November and for people that weren't around in the fall of 2008, it was really a grim time to be doing a startup in Silicon Valley because the macroeconomic conditions had collapsed. No one knew what was going to happen. Angels were closing their checkbooks. People were, oh, we're going to hold off on investing. It was really a scary time. And so I do remember we went into interviews saying, 'We're only going to choose companies that we think could make it to profitability really quickly on their own and then they can live as a cockroach because you just weren't sure they'd be able to raise any money at all.' Right? We weren't sure that come March at demo day that we had no idea what investors would be doing. And so we were really frightened. It would be a disaster if we had this big demo day and none of the startups could get more funding. That would be bad. So, we were very strict. So, the Airbnbs came in and they were sort of a last-minute addition to the interview process. I remember Michael Seibel, one of the partners here, said, 'Hey, can you slot these guys in? They're really good. At least come have them come in.' So, we said, 'Fine.' And I remember during the interview, Paul tried to change their idea. We thought this idea of renting out air beds was a little weird.
What did he try to change it to?
I don't even remember. It's embarrassing.
Well, good thing he didn't.
I know. I know. He did try to pitch them a new idea and they were like, 'No, no.' And that's just one of those things. They knew they were on to something because they themselves were hosts. And that is one of the key things about founders is that when you're using your own product or solving your own problem, you have all these insights that no one else has. And the Airbnbs were renting out their room in their apartment because they couldn't pay their own rent. So they had a lot of insights into this. It's sort of funny given the current controversy around Airbnb that Airbnb started as an affordable housing company. It's outrageous. So, they were using their own product. They had these insights that it was this wonderful experience when someone comes out of town to have hosts that can help them and show them around and they knew they were on to something. So, they convinced us that their idea had legs and that their users, the few users they had, loved them. What I remember more about the founders though. I really liked the founders. They were very convincing when they spoke. You could tell they had thought about this problem a lot. They didn't have all the answers by any means, but they just seemed like they had thought about this a lot. And I remember also they brought in as a gift these cereal boxes – Obama O's and Cap'n McCain's or something. And this was the 2008 presidential election and they had made these cereal boxes with like Cheerios and Cap'n Crunch in them and which sounds so silly because they're cereal, but I remember they said, 'Oh yeah, you know, we designed these and then we went out and got Cheerios and we stuffed them in there and glue-gunned the boxes together and we've been giving them away.' And I thought, 'Oh my god, these guys are glue-gunning the cereal boxes.' And why were they doing this? They really were doing this because they were out of money and this was like a Hail Mary for them and they did wind up making a lot of money from these but to us they were doing it as sort of a fun thing because they're Airbnb, they provide breakfast, coincided with the presidential elections but the original driving reason was just they couldn't raise any money, they couldn't do anything, they did what they could to survive. Oh my god, when you hear these stories during an interview, we did not know these stories, but when you hear the stories of the problems that they had trying to fundraise prior to YC, it's crazy. They had one investor leave in the middle of a pitch, just walk out without even saying goodbye. No one believed this idea was good or certainly would be big.
Did you know at the time that the idea could be great or was it for you really just a bet on those three guys as founders?
I have to admit it was more of a bet on the three founders. They seemed really good. I did sort of like the idea of being able to stay in people's homes, but I have to admit I was not thinking it was going to be huge.
That story was so interesting. What was it like when you met the Collison brothers? I think they were 19 and 17 when they started Stripe and they came in and said, 'We're going to do this crazy thing and we're teenagers and we're going to take on the financial system of the world.' How does that conversation go?
Well, I have to admit we met Patrick years earlier when he was 16 or 17, still living in Ireland because he looked up Paul and we had him over for dinner. So, it wasn't like we first met them at a YC interview. I think Patrick was working on some other idea first or something and we had high regard for him. He certainly was good at building things and he had like a Wikipedia app, so we knew he was a talented programmer. He introduced us to his 16-year-old brother. John was 16 when we met him. And I'm trying to remember when they said, 'Oh, we're going to take on the financial industry.' I think we were kind of like, 'Do you realize how hard this is?' and 'You don't have connections.' But they were intrepid. They were like, 'Well, we don't have connections. We'll find connections.' And they just that is actually a really good question that you bring up because it shows how determined they were and how focused they were. And I mean, you think the head of a bank is going to take a 19-year-old startup founder seriously? It seems pretty implausible, right? But they were good enough that they were able to convince these banks to work with them.
