Jessica Livingston : How to Build the Future

Hi everyone, my name is Sam Alman 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 1,500 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.

Jessica: Thank you for having me! 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. Sometimes those Founders go on to do nothing, most of the time. Sometimes they create a small success. Sometimes they create these companies that really transform the world, and Y Combinator has been very fortunate to be involved in a lot of those: Airbnb, Dropbox, Stripe, the list goes on. 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?

Jessica: 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. 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. They do not let themselves get distracted by anything else. That seems so obvious, but what's not obvious is how easily distracted Founders can be by lots of other things going on. The most successful startups are hyperfocused on their product.

Sam: What are some of the things that distract Founders that seem like good ideas at the time?

Jessica: Oh, there's a lot of these! In fact, in a talk that I gave at the Female Founders conference a couple of months ago, I referred to some of these things as the startup equivalent of wolves in sheep's clothing. 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, doing a lot of PR before you've nailed down the product, talking to Corp Dev people when you're not thinking about being acquired yet, taking meetings with investors when you're not in fundraising mode just to sort of build a relationship, or going to conferences and 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.

Sam: And how do you know when you have hit the product, as you just said?

Jessica: Well, I think when you have people using it. You can measure your growth, and you can measure how many users you get. 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.

Sam: So, for all the YC companies that have gone on to be these sort of household names, did they all do this during YC, where they just focused on their growth rate, writing code, talking to users, and are they the companies that ended up ignoring everything else?

Jessica: 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.

Sam: Did they have big plans even during YC? Could Brian Chesky of Airbnb have told you during YC, "Here's how we're going to be a $25 billion company and here's what we're going to look like seven years later?"

Jessica: 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. 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.

Sam: And how much strategizing do you think that companies do about how they're going to get from here to the next step, to the step after that during YC? Or 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"?

Jessica: I really do think it starts as "let's build this product and see where it goes." In some cases, it's "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." They were nowhere near the eBay of space at that point, but they had that vision and they were working toward that.

Sam: How much does the idea matter? 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?

Jessica: I am of the mind of just get started with something. 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, you know, 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 airbeds in your home while you were there during conferences. That's pretty focused. Then they said, "Okay, now we're going to rent out airbeds in your home, but not during conferences." Then it was renting out your own home. So it morphed.

Sam: Did all of that morphing happen during the YC program?

Jessica: No, it did not happen specifically.

Sam: How long did it take?

Jessica: I think it... I want to say it took about a year. I'm not 100% certain, but I remember what happened specifically was Airbnb was always very strict about the host being home so that they could provide breakfast because it was airbed and breakfast.com. 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?" The Airbnbs were like, "Oh, that doesn't really fit with what..." That's how they figured out this whole approach of renting out whole spaces. To this day, I think that's like the majority of their business, but it took something like that to get them to even consider doing it.

Sam: 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?

Jessica: 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.

Sam: Yes?

Jessica: Yes. We actually did not know what a rough place they were in. I know that now from hearing stories, but this was actually in the fall of 2008. We did the interviews in November. 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 going to hold off on investing. It was really sort of a scary time. I do remember we went into interviews saying we're only going to choose companies that we think could make it profitable 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. So we were really sort of 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.

Sam: So the Airbnbs came in. They were sort of a last-minute addition to the interview process.

Jessica: 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. I remember during the interview, Paul tried to change their idea. We thought this idea of renting out airbeds was a little weird.

Sam: What did he try to change it to?

Jessica: I don't even remember. It's embarrassing. Good thing he didn't!

Sam: I know! I know! But he did try to pitch them a new idea and they were like, "No, no!" That's just one of those things. They knew they were onto something because they themselves were hosts. That is one of the key things about Founders—that when you're using your own product or solving your own problem, you have all these insights that no one else has. 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.

Sam: You know, it's outrageous.

Jessica: 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. They knew they were on to something, so they convinced us that their idea had legs and that their users, you know, the few users they had, loved them. 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. I remember, also, they brought in as a gift these cereal boxes, Obama O’s and Captain McCain or something. This was the 2008 presidential election.

Sam: This was the 2008 presidential election!

Jessica: They had made these cereal boxes with like Cheerios and Captain Crunch in them, which sounds so silly because they're just 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." I thought, "Oh my God, these guys are like glue-gunning the cereal boxes."

Sam: Why were they doing this?

Jessica: They really were doing this because they were out of money, and this was like a Hail Mary for them. 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, and this coincided with the presidential elections. But the original driving reason was just like they couldn't raise any money—they couldn't raise any money! Anything they could do to survive!

Sam: Oh my God! When you—

Jessica: Again, during the 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.

Sam: 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?

Jessica: 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 just because that story was so interesting.

Sam: What was it like when you met the Cison 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?

Jessica: 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 them 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 a Wikipedia app, so we knew he was a talented programmer. He introduced us to his 16-year-old brother.

Sam: 16! There we go!

Jessica: He was 16 when we met him! John was! 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 like, you don't have connections?" But they were intrepid. They were like, "Well, we don't have connections. We'll find connections." That is actually a really good question that you bring up because it shows how determined they were and how focused they were. You think like 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.

Sam: Are there other traits in the Founders that go on to really change the future besides determination? Do you have you noticed any other traits that kind of Founders should aspire to that really want to have a big impact?

Jessica: Yes! If I had to say the most important traits of the most successful Founders, I've already mentioned determination. That is by far the most important quality—more than intelligence, more than previous success, you know, in school. I mean remember when we started Y Combinator—our hypothesis was, "Oh, we'll just fund all the best hackers from MIT and Harvard, and they'll turn out to be great startup Founders." That is not true! That is absolutely not true! A lot of them are good, and in fact, Patrick was from MIT, but it's not true for the most part. Determination is the most important thing. Again, sort of understanding your users and building a product with a great user experience is second most important—not being distracted, not getting lured down these paths that aren't going to be important for building your product. Being flexible-minded, I've always felt, is very important because you have this idea and you test it out and it doesn't always work the first time. So you have to be able to say "Okay, I thought I was going to do this, but let's try this, even though I have a lot of energy vested in this." Let's try this direction! You really have to be open-minded. Ultimately, you have to be a good leader. You have to be convincing and a good leader because you are going to be convincing employees to join you. You're going to be convincing investors to invest in you. When you do get to the point where you're doing deals with bigger companies, you have to convince them—like your whole world is convincing people. So you have to be able to communicate your idea and convince people why they should care about you more than any of the other hundreds of startups out there.

Sam: So now I'd like to talk about your startup, Y Combinator, and how you started that. Could you tell us the story of starting Y Combinator?

Jessica: Yeah! It was very much started in the same way that a startup is started, where Paul and I had this idea. We really felt that the investment world was broken. If you were an early stage startup and you just wanted to like test something out, you either had to go to a VC and get $5 million, which is virtually impossible at that early stage, or you had to know someone who was rich and could give you money. We thought there could be something better. We thought there could be like a standardized, branded form of funding. So if you wanted $25,000 or whatever, you could come to Y Combinator and we’d make it very easy for you. So we thought, "Okay, let's start an investment company," and it was just going to be Paul and me, and then we sort of lured in his old co-founders, Robert Morris and Trevor Blackwell, to be part of this even though they were full-time on something else. We said, "Gosh, none of us know anything about Angel Investing? Well, let's learn!" So how should we do that? Let's fund a whole bunch of companies at once and we'll learn a lot. So we set up a website and we said, "Come join the summer Founders program!" This was back in Cambridge, Massachusetts, in the summer of 2005. We started working on it, let's just say, in January, and we posted an application. We wanted to change a few specific things. We wanted to make it very easy for people to find us and apply. They didn't have to have a connection to us. We had an application of like 20 questions. We wanted to make it very simple on our side. We were giving you $112,000 you know per startup or $18,000 if you had three Founders, but it was a very specific amount for this amount of stock, and our paperwork was going to be real straightforward. You could see it in advance, and we're going to make the decision that day. We'll interview you and tell you that night, and that never happened back before us. No one got a same-day decision for the most part. So 200 people applied. They had known about Paul because of his essays.

Sam: You were one of them!

Jessica: I was! Came out from Stanford. I remember that interview very well! We found eight companies to fund that summer, and we learned very, very quickly into the three months that funding startups in a batch was incredibly powerful. It was powerful in that you could teach them all sort of the same things at once, and they became colleagues because starting a startup as one or two people is very lonely and very isolating. Back then, in 2005, there was no information online about early stage startups at all. So, no one knew what they were doing. It was sort of a nice atmosphere.

Sam: So even Y Combinator was an example of this: start with an idea you don't know much about, build something people want, and iterate?

Jessica: Yes! Yes! We started small, light, start small, do it lightweight, start small, and evolve. We realized we had dinners on Tuesday nights, which actually we still have to this day, and we have guest speakers come in. We had paperwork that we gave them. I personally helped everyone incorporate their company.

Sam: What else did you spend your time on that first summer?

Jessica: Oh my God! What didn't I spend my time on? Like any startup, there was like too much for everyone to do. Paul spent his time advising the startups on their ideas because I didn't really know that much about startups. I was doing everything to get Y Combinator up and running. I mean, we had to get our office, we had to cook dinners, I was going grocery shopping, and Paul was cooking the dinners. We were recruiting speakers to speak that summer.

Sam: This is not what most people picture doing when they think about starting a really important company.

Jessica: So, I think it's good to note that there's, in fact, oh my God, there's so much unglamorous work that Founders have to do early on, and you just have to do it. But I was delivering air conditioners to different people. We had eight startups in that batch, and they were all living scattered around the Harvard Square area, and there was a heatwave. We were like, "We can't have our Founders not being able to work!" So, I went to Home Depot and I bought like 10 air conditioners and delivered them to everyone.

Sam: When did you know that summer that Y Combinator was going to work?

Jessica: We had a feeling pretty early on, like first couple of weeks, I would say within the first month we were like, "This is really interesting and people are working on very interesting ideas." I mean, you were working on location stuff on your phone. This was before Reddit was in there. We were very interested in Reddit. The Justin TV and Twitch guys, Justin and Emmett, were working on a calendar. Unfortunately, Google Calendar launched and killed them. But I mean, these were interesting things, and so we were very excited about the ideas.

Sam: It's a great story about investing in people—that it was Justin's third Y Combinator startup, I think, that ended up being a billion dollar exit.

Jessica: Yeah! Yeah! We funded him three times!

Sam: And it worked out!

Jessica: Yes! It worked out the third time—a charm!

Sam: How is it that co-founders at all—and then how important is it that the co-founders have a pre-existing relationship like that?

Jessica: I think it's critical. I think there have been cases of successful startups with one Founder, but I'm sure they will tell you it's extremely hard and overwhelming, emotionally draining. You have no peer who you can rely on for moral support, and holding all of that, you know, it's a big burden for people emotionally. I think also at the very early stages, there's so much to get done that you need more than one person doing it. You know, you can't be out fundraising and building the product at the same time. So yes, it's important to have a co-founder—it's not impossible. I will say it's critical that you know your co-founder well because if you don't, if you like meet at a hackathon and think you're ever going to see that work out, rarely. I'm trying to think of an example. Off the top of my head, I can't think of an example.

Sam: Wow!

Jessica: Of two people who were introduced or sort of bolted onto each other at the last minute ever working. I'm sure there are examples of it having worked, but I can't think of them. The relationship becomes so stressed as the startup goes on its path. You could get sued and have to deal with this or you get an acquisition offer that's really tempting and that causes friction. So many things can cause friction and tension. It's really like a marriage. I know we all laugh at how we compare Founder relationships to a marriage, but in many ways, it's kind of like that.

Sam: So you said about within the first month you could tell Y Combinator was onto something, but how—when did you first realize that Y Combinator was going to be as big as it has turned out to be? Did you have any idea of that that summer?

Jessica: I don't think we had any idea of that that summer. We knew we were onto something, and after that summer, we knew we had to come out to Silicon Valley. That was an important next decision for us. We knew that people could easily copy us, and we didn't want someone else to be the Y Combinator of Silicon Valley. Like, we wanted to be the Y Combinator of Silicon Valley. I remember Paul saying, "We got to go out there," and I remember thinking like, "Ah, we have two months to do this!"

Sam: Was that really driven by not wanting to be copied?

Jessica: Yeah! Wow! We did not want someone else to be the Y Combinator of Silicon Valley!

Sam: You notice that with great startups a lot— they really hate getting copied.

Jessica: I think that's an interesting point. Well, you know, I think no one likes getting copied—absolutely! It's unpleasant! I'm used to it by now! And you just can't worry about it! You're always—if you are building something great, you're going to get copied! So anyway, we came out here, and that was also very important for us because we didn't have relationships in Silicon Valley. We didn't know the investors out here, and that's when we started to meet the investors. That's an incredibly important component of Y Combinator—that we have great relationships with investors, and they come do our demo days and they invest in our startups. Because again, we are like first gear for startups. We're helping them get started, and then we want to introduce them to like wonderful later-stage investors.

Sam: So once you got to Silicon Valley and started running the program out here, then did you know it was going to be really big?

Jessica: Not yet! Not yet! I think when we had a feeling that it was going to be really good was when, you know, Reddit got bought. That was very exciting news for us. But I think like when Dropbox started getting some traction, then we thought like "Whoa, this could be a contender here! This is someone doing really, really well!" And our companies were sort of flourishing, and that's when we knew, I think.

Sam: And what is it like looking back now, and you know, Y Combinator has become this pretty influential thing that has impacted a lot of people and a lot of industries. Looking back, is there anything you're like, "Well, if I knew YC was going to be as important as it's become, I would have done this differently," or anything—any lessons that you take away? Or is it just like, "Well, this happened and I was only ever looking one step ahead at a time"?

Jessica: You know, there's always things that you do a little bit differently. Possibly we would have hired more partners earlier on so that we could have accomplished more. I mean for many years it was just Paul and me full-time, and so there was only so much we could do. So we didn't do much outreach, and I wish maybe we could have done more of that earlier on. But, you know, in the grand scheme of things, there's not—there's no like massive massive mistake. I think we sort of grew organically.

Sam: And what is it that you did as you were growing organically that has made YC work so well? You know, someone recently told me there are now 2,500 accelerators around the world.

Jessica: Oh God!

Sam: However, every billion-plus dollar company so far ever to come out of accelerators, I think there's 11, has happened in part of YC. So that's, you know, a great credit to you and Paul, but what did you do in the early days that set up YC to do this well?

Jessica: There are a couple things and, you know, sometimes I would be nervous about sharing some of our secret weapons, but I'm going to share one because it would be great if people copied this, but they won't. One of the most important things is that Y Combinator always started to be Founder-friendly. We were not doing this to make money. We were doing this to see if we could encourage more startups to get started because we felt that would be good for the world—like more people starting startups, more innovation, that's good for the world. And so we didn't do it thinking we could make money, and we weren't trying to like squeeze out the best deals in every situation. We were always driven by what's best for the Founders, what's best for the startups. Our terms and our investment paperwork are very Founder-friendly, and I think that's attractive. Good Founders want to be treated fairly and not be taken advantage of.

Sam: It's interesting, you see that among many of YC's most successful Founders. They want to make a lot of money, but that is far from the primary motivation.

Jessica: Yes! You cannot be the most successful startup Founder if you are driven by money. You have to be driven by a greater purpose! So YC's version of this was just like it would be good for the world to treat Founders better and have a lot more startups.

Sam: Yes! Yes, now we hope we made some money, because we couldn't keep self-funding for the rest of our lives. We couldn't be self-sustaining if we didn't make some money by the way for many years—we didn't make money. It takes a... I remember that people forget that time. People forget how long it takes to make money as an investor! So we were always driven by like this benevolence, and I think it's still part of our DNA. I truly believe that. I think we gave great advice—you know, surprisingly hard to get from investors!

Sam: Yes! Yes!

Jessica: There are some great investors out there that do give great advice, but for the most part, getting really good advice is hard. I think Paul Graham's exceptional at giving startup advice and helping people with their ideas, and quite honestly, telling people like, "Hey, you're doing this—you're doing it wrong. Don't do it that way," in a way that's very straightforward. Founders can respond to that pretty quickly.

Sam: What else are our—you know, what are the important things about us?

Jessica: I mean, we've always attracted from the very first batch that you were in, I believe. We attracted talented Founders, and they've gone on to be role models and attract other people that are talented—like kind, intelligent Founders. I think it's just sort of grown organically and spread, and we've kept a pretty great community of Founders over the years.

Sam: So there are a lot of people that have realized startups are really great ways to impact the world and get new technology built and distributed. At a young age now, people are realizing they may want to start a startup someday. So if you're an ambitious teenager or college student, what should you spend your time on if you know someday you want to start a startup?

Jessica: Well, there's a lot of things you can do to sort of prepare yourself to be a startup Founder. The first is learn to code! There's a lot of great online courses now if you don't already know how to code, but I would strongly recommend that everyone learn to code—even if you're not great, you at least know how to do it and it helps you sort of judge other programmers. Build stuff with people! It doesn't have to be like the next Facebook, which by the way did start out obviously as a little project when it got started, but just build something that you might like to use. Try to solve your own problem. Work with other people! I mean especially if you're in college—that is just the best place to meet potential co-founders and get to know people and talk about interesting problems and try to solve them. It does not have to be the next startup, but it will at least get you thinking about problems. It will get you like practicing launching something and listening to users and talking to users. After that, if you're not ready to start a startup right away, go work at an early stage startup! You can learn so much working at an early stage startup that you wouldn't working at a big company.

Sam: Great! Okay, last question.

Jessica: Yeah?

Sam: You are probably the most successful female Founder in Silicon Valley at this point. Do you have advice for other female Founders or aspiring female Founders about what to do?

Jessica: Well, it's definitely a subject I think about a lot because when we first started Y Combinator, there were very few female Founders. They were scarce! I'm pleased that there are more these days, and there just continue to be more. I've spent a lot of time trying to help the women that we've funded to become more successful so that they can go on to inspire people because you have to have those role models so that you can think, "Gosh, maybe I could start a startup." But I will give some advice based on my own experience. You can't worry too much about what everyone's saying and all the noise and like, "Oh, it's so much harder as a woman." Yes, it's harder as a woman! I've been discriminated against, you know, but I have always kept focused on my product and, you know, what I'm doing. I don't listen to all this stuff going on, and I'm like building a product that people love. I think that the women we funded would say the same thing—they're startup Founders! You know, they're not like necessarily like female startup Founders—they're first and foremost startup Founders, and they are caring about their product and their users, and they are totally focused on that. So my advice is like, just do it! Start a company, apply to Y Combinator, and, you know, build something people want.

Sam: Great! Well, thank you so much for joining us and finding my company and hiring me. It was great!

Jessica: Thanks a lot!

Sam: Thanks, Jessica!