Meet Y Combinator's Bold Whiz Kid Boss

Venture capital firm Y Combinator defied expectations when it replaced co-founder and longtime president Paul Graham with Sam Altman, the whiz kid behind social networking app Loopt. A year into his tenure, Altman continues redefining his firm’s identity, making bigger and bolder bets on startups from across the spectrum. Meet the new boss.

It was mid-2012, and it was time for a change. Computer programmer and entrepreneur Paul Graham realized that Y Combinator, the influential Silicon Valley venture capital firm and seed-stage accelerator he co-founded in 2005, needed to expand its horizons to keep pace with the explosive growth of the global startup culture. Graham also recognized that he was not the one to spearhead this next phase in the firm’s life cycle, so he began taking steps to relinquish his presidency and identify a successor.

Graham’s search eschewed the usual suspects and zeroed in on Sam Altman, the twentysomething co-founder of Loopt, a location-based social networking app and graduate of Y Combinator’s first-ever funding batch. After Loopt was acquired in 2012 by debit-card issuer Green Dot for $43.4 million, the Stanford-educated Altman launched early-stage venture fund Hydrazine Capital. It invested in startups like HR software provider Zenefits (now valued at $650 million) and DNA-printing tech developer Cambrian Genomics. He also was an angel investor in Y Combinator-backed companies such as digital payments juggernaut Stripe before joining YC in 2011 as a part-time partner.

Graham—who in 2009 had proclaimed Altman one of the five most interesting startup founders of the past 30 years, alongside icons like Apple’s Steve Jobs and Google’s Larry Page and Sergey Brin—knew he’d found his man.

“Sam is what YC needs at this stage in its evolution,” Graham wrote in a February 2014 blog post announcing Altman as president. “He’s one of those rare people who manage to be both fearsomely effective and yet fundamentally benevolent—which, though few realize it, is an essential quality in early-stage investing. Sam is one of the smartest people I know, and understands startups better than perhaps anyone I know, including myself.”

A year into his presidency, Altman is extending YC’s reach and scope, positioning the firm to capitalize on the next wave of entrepreneurial innovation across verticals like energy, artificial intelligence, robotics, human augmentation and virtual reality. Beyond diversifying his firm’s portfolio, Altman is driving efforts to diversify Silicon Valley itself by increasing opportunities for minority founders.

“I started Loopt when I was 19. All throughout my life I have been deeply immersed in startups, either because I was running one or investing in them or helping them. At this point, I’ve probably worked with a thousand startups in some way or another,” says Altman, who turned 30 in April. “After Loopt, it was YC vs. start a company. [YC is] going to be an incredibly important force in the world. I decided it was more impactful than any single company I could go run.”

Altman’s vision for Y Combinator’s future builds on the core principles and philosophies that Graham and co-founders Jessica Livingston (Graham’s wife), Robert Morris and Trevor Blackwell installed a decade ago.

The firm’s signature approach remains essentially the same: It still runs two three-month funding cycles each year, offering startups hands-on mentorship at its Mountain View, Calif., headquarters and $120,000 in financing in exchange for 7 percent of equity. The startup founders relocate to the Bay Area for the entirety of the program, which includes weekly dinners keynoted by special guests and culminates in Demo Day, when participants present their products and services to a handpicked audience of potential investors and advisors.

Participants applaud the experience. “YC is very tactical. It’s acutely useful,” says Max Hodak, founder and CEO of cloud-based life-science research lab Transcriptic, a member of YC’s winter 2015 class and the recipient of more than $14 million in venture funding from investors including IA Ventures and AME Cloud Ventures. “I’ve worked for a lot of VCs now—about 15 different funds and close to a hundred angels. YC is there for you. They’re really helpful. The lessons are very concrete. Other incubators are much fuzzier and much less useful.”

What has changed is the sheer breadth of startups under YC’s umbrella. Altman has vowed to boost the number of dollars invested by a factor of 10 over the next decade, and while he’s particularly bullish on verticals like biotech, nuclear energy and cyber-security, no compelling concept is off-limits. The winter 2015 batch ran the gamut from BuildScience, a platform for commercial real estate management, to curated wine-buying site Underground Cellar. And while software still dominates, hardware-focused companies made significant strides, accounting for about 15 percent of the group.

“We don’t have any preconceived notions,” Altman stresses. “We don’t know where the next $10 billion company is coming from. They’re all non-obvious. We try to have a totally open mind. I tell the partners our goal is to find as many $10 billion-plus companies as we can, and because that is so restrictive, we have no other restrictions. If we believe a company can be huge, then we’re going to fund it, no matter what their business is.”

Each new funding cycle yields thousands of pitches, but fewer than 3 percent of hopefuls gain entrance to the program.

Altman says candidates can dramatically improve their chances by following a basic five-step formula for success: Build a prototype of their idea; get it in front of users or customers; let those users identify flaws and potential improvements; focus on growth; explain the problem the startup is tackling with clarity and efficiency.

“The very best founders I’ve met were able to explain to me in two or three sentences why what they were doing was important or why it had a chance of being big,” Altman says. “And there was something in their two or three sentences that was new or not obvious. It’s easy to say, ‘I’m going to build something that already exists,’ but it’s difficult to clearly and succinctly describe something new.”

Tracy Young, co-founder and CEO at PlanGrid, a 2012 YC graduate that develops software for the construction industry, says Altman’s gift is not merely in recognizing promising startups but in offering insights and perspectives that make them even stronger.

“I remember explaining to him what we were doing. He just got it instantly,” Young recalls. “That’s Sam Altman—he understands things quicker or sees them in a clearer way than other people. He’s concise but eloquent, and he sees problems very simply and plainly. He’s like a wise old man stuck in a young man’s body.”

Adding in the winter 2015 class of 114 startups, Y Combinator has funded more than 800 companies since its inception. Among them are three so-called “unicorns” (privately held businesses valued at $1 billion or higher): home-sharing site Airbnb, valued at $10 billion; cloud storage provider Dropbox, also $10 billion; and Stripe, estimated at $3.5 billion. All told, YC startups have raised more than $3 billion in venture funding and boast a combined market cap in excess of $30 billion.

YC isn’t the only venture capital firm making noise and minting billion-dollar companies. According to the National Venture Capital Association and PricewaterhouseCoopers, VCs invested $48.3 billion in 2014, a massive 61 percent surge over the prior year and the highest total since 2000, remembered as the year the dot-com bubble burst.

Those eye-popping numbers have some experts claiming that a new tech bubble is looming; a handful of doomsayers believe it’s already here. Altman doesn’t know what’s next. He doesn’t much care, for that matter.

“We’re clearly not in the first inning of the cycle, but whether it’s going to go on for another year or another five years or whatever, who knows?” he says. “Whenever the cycle has a downturn, it only lasts like two years. When the 2008 collapse happened and everyone lost their shit, by 2010 things were back pointing in the right direction.

“I don’t invest in companies where my mental model is that they need to get themselves acquired in the next few years, or ever,” he adds. “I suspect the companies we’re investing in will go through multiple down periods between now and when they become $100 million companies. Because I think that way, I don’t worry about the cycle.”

Altman is more concerned with shaking up Silicon Valley’s sociocultural status quo, initiating efforts to recruit black and Hispanic entrepreneurs and campaigning for an end to gender discrimination across the tech industry. That starts with funding nonprofit organizations dedicated to progressive causes, as well as hiring more black and female partners, Altman says, noting that YC has four full-time female partners out of 15. Late last year, Michael Seibel—who previously served as CEO of Silicon Valley startups Socialcam and Justin.tv—joined as YC’s first full-time black partner.

Among the founders in Y Combinator’s winter 2015 batch, 11.1 percent are women, 3.7 percent are Hispanic and 4 percent are black. By comparison, companies with black founders make up just 1 percent of all venture-backed startups across the tech industry as a whole.

“Relative to everything else, 4 percent is great. Relative to how far we have to go, it sucks,” Altman admits. “But we will aggressively reach out to these entrepreneurs, convince them to apply to YC and fund them.”

Indeed, outreach is central to what YC does. Its website hosts a “Request for Startups” resources page outlining particular areas of investment interest, a move to “stimulate [entrepreneurs] to think about ideas.” And last fall, Altman returned to Stanford to teach a course called “How to start a startup,” later posting videos of all 20 lectures to the web for free. It’s all part of his unrelenting quest to discover the Next Big Thing.

“About a year ago I decided that biotech was going to be really important. So we hired a part-time biotech partner, we learned a lot, and now we fund a lot of biotech companies,” he says. “That’s the thing about us: We’re optimists. We want to believe. We want to find the next great company. It’s easy to get us to drink the Kool-Aid.”