Michael Seibel is synonymous with Y Combinator’s growth over the past decade.
He has opinions on bigger batch sizes, a growing standard deal, competition, the power of venture capital and why startup founders should be prioritizing more than just a check after Demo Day.
Seibel spoke to TechCrunch’s Equity podcast, co-hosted by Natasha Mascarenhas and Alex Wilhelm, about Y Combinator amid market change.
He sees the institution, which has backed thousands of entrepreneurs — some of which went on to build billion-dollar companies — as a software play at heart. His perspective matters, as one of the longest-tenured denizens at Y Combinator, he helps power its selection process and priority ranking.
The entire conversation is live now wherever you find podcasts, so take a listen. Below we extracted four key excerpts from the interview to analyze further. The questions and answers were edited lightly for clarity.
The future of the standard deal
Mascarenhas: At the beginning of this year, Y Combinator expanded its standard deal from $125,000 to $500,000, months before the downturn and layoffs started to really play out publicly. Did you have insight that there was a downturn about to happen? Why did that bigger check size get announced then?
Seibel: When we released this news, everyone was like, “Oh my god, YC is having a hard time competing, they have to give more money.”
We have a Slack that shows every single YC financing, so all day it’s new companies raising money — every single deal. In the middle of last year, we started asking the question, “What’s the revenue multiple here?” And we started seeing companies raising at 100x to 350x their revenue.
So if I have $3 million in revenue, I have a billion-dollar company. Any of us who’ve been around for longer than two seconds [knows] that doesn’t feel sustainable. So our partners, Dalton Caldwell, Jared [Friedman] and I sat down that fall and we were like: “Let’s say that this doesn’t continue,” because that seems to be for sure. “What can we do to help YC companies in a downturn?”
One of the things that we had been doing that a lot of people don’t know about is work with Harvard in the past to create an investment for every underrepresented founder. And it was at the same structure [with an] uncapped [most-favored nation note like the new Standard Deal], and we saw that operate at scale [because] about 30% [to] 35% [of YC companies] have at least one underrepresented founder. So we saw that mechanism [work], and we were like, “Huh, if we could apply that same mechanism and effectively pre-invest in a company’s Demo Day round, it’d be super helpful to the founder, especially in an economic downturn.”
It’s going to do two things. One, if the company can’t raise, they won’t die. But two, if I’m an angel investor or a seed fund, and I’m comparing a YC company with half a million in the bank versus another company without, I think, “Give the YC company money, [because the] company’s gonna last longer.”
[A] number of the people who spend [the] most time with our LPs literally turned that argument into this new deal by going and getting our LPs to agree — which thankfully, they did. We released this in January, and then [we said] “OK, let’s see, when craziness starts to happen.”
And we didn’t know, but it seemed like by April or May it was pretty obvious, right? We put a video out about it. And lo and behold, our advantage of not being too caught up in the craziness allowed us to plan ahead … that’s what good folks are supposed to do. Right?
Equity’s take: That the new, larger deal came together ahead of the downturn makes sense, given that it takes time to organize a change of that size. But it’s good that we now understand the reason behind the decision to execute the change. The Harvard program was also news to us; we’ll dig more into that in time.
Later on in the interview, Seibel mentioned that one of the only things that is certain is that the standard deal will change, pointing to the fact that it was around $20,000 when he went through the accelerator as a founder. It’s a good point and one that we don’t consider much (maybe because the deal is advertised as, well, standard). It would be interesting to see how different batches with different checks spend their money — and if that has ever caused any strife.
No matter the nuance, however, Y Combinator’s new, larger checks are a differentiator and one that other accelerators may have to match.
In defense of the Demo Day
Mascarenhas: Something that Alex and I love to debate is the utility of a demo day. My perception on that has changed: During a very hot market, you don’t really need to splash up on stage and ask investors for money, especially if you have the YC stamp of approval. I feel like when there’s a down market or a market where things are more challenging, demo day becomes more important. I would love for you to set the record straight on what your most recent reasoning is for wanting Demo Day to be part of YC, or if we’re going to ever enter a world where YC doesn’t need a Demo Day to launch and announce its companies.
Seibel: It’s hard for me to generalize on demo days. There’s a lot of different demo days out in the world, and I don’t really know how they work.
I would say YC’s Demo Day has two functions. The first is the obvious one, which is: present the companies and drive leads. The second is as a forcing function to the founders, right? Just [as] YC doesn’t necessarily need an application deadline. In fact, we read applications all year ‘round. But as a forcing function to [say] “Hey, there’s this date that we want to accomplish this thing by and it’s important,” [it] really, really helps the founders get up to top speed faster, as opposed to a more generalized system.
I would say [Demo Day] also helps the investors. If I’m an investor, and I’m talking to a company, and I know that they’re going to be raising [at] Demo Day in a week, I might make my decision a little faster. So one of the things we tell founders who go through YC is [that] different companies will leverage Demo Day differently. And that’s OK. It’s a tool and your job is to use it as best you can for your company.
A lot of YC is like that. I think from the outside [it] looks like a program or a factory where everyone goes through the same thing. On the inside, what we really say to the founders is, “This is a toolbox full of tools. It’s your job to learn how to use the tools.” That’s why we get founders like Tracy [Sun of Poshmark] who’s done YC after building an $800 million company, and that’s why we get founders doing it for the first time — because they can all appreciate the tools. That’s why I came back to do it twice — because I appreciate the tools.
Equity’s take: Longtime listeners know the point of a demo day is one of our favorite debates on these airwaves. Seibel’s argument, in some ways, supports some of our points: It’s not a day to land your first investment check or really to prove anything other than that you have hit a certain milestone. Instead, the point of Demo Day is a little more complicated than smart marketing. And we’re not going to disagree with the idea that deadlines — even arbitrary ones – make a huge difference.
It is still hard to create a startup
Mascarenhas: Alex and I hear the argument that it’s never been easier to start a company thanks to AWS, remote work, etc. It’s kind of refreshing to hear that it’s still hard to create a company.
Wilhelm: I think that the problem with that statement is that it is easier to start a company; it’s [also] harder to build a startup, because I think there’s more competition out there. One thing that I’ve noticed, Michael, is that when I uncover a neat company, let’s say Monte Carlo working in DataObs, the moment I begin to dig into that space I find that there’s like seven companies, all of which have smart founders and institutional backing. And they’re all going head to head. OKR startups are the same thing. Lots of very smart people are competing in a very, very specific market that ends up being relatively large, but they’re not all going to be winners. They’re all smart people beating each other’s heads in. And sure they didn’t have to go buy servers and load balancers. But that doesn’t mean that the market has gotten easier. It’s like, you can buy a car and go racing, but that doesn’t mean you know how to take a corner.
Seibel: That’s a very good point. I think that the hard parts have remained very, very hard.
Wilhelm: Have they gotten harder? Because one thing that I’ve noticed is that cultural expectations for startups have changed. I noticed this when I was at Crunchbase. A lot of attention was paid to the company culture, team building, making connections internally and trying to build a very cohesive team. When I think back 10, 15 years ago, I don’t remember that being as much of the conversation. It feels like the bar has gone up for building the company’s insides, as much as it has become difficult, as it always has been, to scale the business results portion of the company.
Seibel: I agree with you that it’s gotten harder. I might point to two different causes: I would say the first cause is that consumer distribution is now controlled by monopolies. So all of the social networks, anything involving social or most things involving consumers, are very aware that startups want to disrupt them and are fighting back.
So I think that’s a big thing that’s happening. What we haven’t seen is some paradigm shift [such as] mobile, high-speed internet and Web 2.0 that evens the playing field.
The second thing is I think that we’ve seen the rise of B2B companies who, even though they’re late, they stay in the game. Microsoft [and] Microsoft Teams is a perfect example [in that they] can be 10 years late and just on time.
So I think that that power on the B2B side, and the distribution blocking on the consumer side, has meant that startups have to be even more niche-y. They have to be exploring areas that are more regulated — they basically have to be more resourceful. I think there’s an advantage to that. We’re going to get a lot more interesting problems solved. I think there’s a disadvantage to that, which is that, you know, we were talking earlier, and when I was starting the whole thesis was, “Put live video on the internet.” And the whole justification was “because there was no live video on the internet,” right? That’s all we needed. You need a lot more now. So almost by definition, it’s harder now.
Equity’s take: It’s somewhat infrequent that folks are as honest as Seibel was in the above, calling social platforms monopolies and clearly stating the issues that B2B startups face. Since this conversation, the Figma-Adobe deal came to light, backing the investor’s point regarding seeing more interesting problems solved; by tackling collaborative design instead of merely trying to build a better Adobe, Figma managed to start in a niche and wound up extracting 11 figures from an incumbent. There’s still opportunity out there, even if it remains difficult to capture.
Diversity
Mascarenhas: I guess another challenge that I see that both YC alumni and people who tune into Demo Day alongside us is the diversity angle. People want to hold YC and tech and venture at large to a higher standard. This batch had a 1.3% acceptance rate, and I was bummed to see a drop in women founders. How are you thinking about changing YC’s focus on diversity? Since 2015, YC has funded over 800 women, over 350 Black founders and over 675 Latinx founders. So, yes, big investments have been made. But how do we do better from here?
Seibel: One thing that is really challenging when I talk to underrepresented founders as a group, and I’ll be honest with you, [is that] I don’t have great answers for our disproportionate economic challenges. So when I talk to a Black software engineer who’s making $375,000, working at a big tech company, and I go into my spiel: “You should do a startup, you have the skills!” Here’s the answer they provide: I am the safety net for my immediate and extended family. If someone can’t make a phone bill or water bill, if someone needs an extra thing, or someone’s car breaks down, everyone calls me. And you know, they’re not ashamed by that. They’re proud of that. So then my spiel starts sounding really freakin’ stupid, right?
I’ve tried to lessen the information burden. Let’s make sure the reason why someone’s not doing a startup is because they don’t understand how to get started, how to come up with an idea, where to go for funding — they don’t understand that stuff that used to never be written down, that used to only distribute through certain networks. And the second is the economic piece; we increased the deal. A lot of founders will tell me, “Well, if you would only give me $125,000, how do I pay my salary? How do I pay my mortgage?” And a lot of what we have to tell founders is like, this $500,000? If you need it to pay your bills, that’s the best use for it.
The unfortunate fact is that we have to assume that underrepresented founders are smart and making smart economic decisions for themselves. If we don’t change the information game or the economics game, they’re going to continue to not choose those super-risky, most-likely-to-fail paths.
Mascarenhas: But I want to clarify one thing, which is this idea over the small percentages of women and diverse founders in the batches. Is it because they’re not applying? Or is it that once they apply, they’re not making it through the admissions process? As I’m hearing you explain it, it sounds like you’re thinking it’s more the issue that they feel that they can’t take the risk in the first place. There are not many applying?
Seibel: One is that certainly there’s an application pool issue — people who are opting into doing a startup tend to be more economically secure, both them and their families. And then I would also say there isn’t an even distribution of skills. If you look at the skills that are required to do a startup, specifically writing code, there isn’t an even distribution of software developers out there. And so those two things combined really [have an] impact. Now, one thing I will say, though, is that as YC becomes more international, you know, the global story is slightly different, right?
While there are global problems, America does have a host of its own somewhat unique racial and gender problems. So one of the things that has certainly been interesting is being able to be global and being able to see how other cultures are far more likely to encourage kids to do computer science, are far more likely to encourage women to be entrepreneurs and are far more likely to have different cultural biases. So I think being global helps, but at the end of the day, these are the challenges of our whole society.
Equity’s take: The managing partner’s commentary matches with his perspective shared in March 2021, in which he similarly spoke to economic challenges as a hurdle impacting the diversity of batches. Yet then, and even now, people question whether “there’s a pipeline problem” is a suitable answer to the dwindling numbers. Seibel did not directly address the question around application numbers, beyond saying that there is an issue on who opts into YC versus who remains on the sidelines.
Seibel talked to YC’s historical diversity just days after we got our hands on demographic information on the latest batch. In our coverage, we indicate that the latest data shows that about 15% of companies have a woman founder, a slight dip from the last cohort’s 17.9%. According to the metrics on the YC website, around 7% of this cohort’s companies have a Black founder, followed by 12% for those with a Latinx entrepreneur. Those numbers are slightly below the last cohort’s metrics, which contained 8% Black-founded companies and 13% Latinx-founded startups.