Forty-four-year-old multimillionaire Paul Graham has developed computer programs that changed the World Wide Web, studied art in foreign countries, written critically acclaimed books and blog entries and developed programs with hackers who have been honored by top universities and investigated by the Feds. He has amassed a small fortune because of his technological talent and spent some of it helping other programmers get off the ground. Still, this talented entrepreneur describes himself as a “nerd.” He was in the chess club in high school and sat at a table of outcasts in the lunch room.
“I grew up in the suburbs of Pittsburgh,” Graham tells WEALTH magazine. “My interests when I was a kid were much the same as today: writing and hacking.”
But like many former nerds, today Graham is having the last laugh. As co-founder of Y Combinator with longtime friends and fellow hackers Robert Morris and Trevor Blackwell, along with Founders at Work author Jessica Livingston (who married Graham in 2008), he is changing the landscape of startup funding, helping launch 144 new businesses in just four years.
Graham named Y Combinator after a mathematics principle. A Y Combinator is a math formula that generates other formulas, and since Graham and his partners’ venture would be spawning other ventures, it seemed like the perfect name.
Their Y Combinator program is unique: Young entrepreneurs concentrated in the area of technology are invited to Silicon Valley for three months, where Graham feeds them dinner of “goo over rice” once a week and invites experts in to give the new entrepreneurs top business advice. The creators spend 12 weeks intensely focused on turning their great ideas into fledgling companies, perfecting their products and pitches.
Graham operates under the philosophy that companies can be started fast and cheap, and so far the numbers are pretty impressive. Of the 144 startups that have come through the YC program, “One hundred are still operating, nine got acquired, two merged with other YC companies, and 33 died,” Graham says.
At the end of the three months, the startups are offered seed money by YC, reportedly about $5,000 plus $5,000 for each founder, in exchange for a 6 percent stake, on average. When a startup gets the YC call, the decision-makers have five minutes to make up their mind. Graham wants people who can think on their feet, and he figures they’ve already spent 12 weeks learning what YC is all about and has to offer.
“What makes YC work? Honestly, it’s not something structural about YC, just that we execute fairly well,” Graham says. “We have a huge amount of experience with startups, we care a lot, and we understand how to build stuff because we’re hackers ourselves.”
Graham is a hacker, and a good one by all reports, but he’s not just a typical geek. He writes extremely well, and is known for his essays. He majored in philosophy at Cornell but didn’t want to be a philosopher. After getting his doctorate in computer science at Harvard, he took classes at the Rhode Island School of Design and moved to Florence, Italy, to enroll in the Academia di Belle Arti, with plans to become a painter.
While computer programming and painting may seem worlds apart, to Graham they fit hand-in-hand. Programs and paintings are both new, inspired creations. In a recent essay on his site, paulgraham.com, Graham calls programmers “makers,” as opposed to “managers,” and explains that they need blocks of time to create their art.
“Most powerful people are on the manager’s schedule. It’s the schedule of command,” Graham writes. “But there’s another way of using time that’s common among people who make things, like programmers and writers. They generally prefer to use time in units of half a day at least. You can’t write or program well in units of an hour. That’s barely enough time to get started.”
A few years after returning from Italy, Graham first partnered with Harvard friend Robert Morris, and the two decided to write a program that would help people become retailers on the Internet. (Incidentally, Morris is known for landing three years on probation and 400 hours of community service for releasing the Morris Worm in 1988, which wreaked havoc on the web and exposed several flaws. Today, he teaches at MIT.) They named their startup Viaweb, and spent long hours for the first couple of years trying to get it off the ground.
“No one in my family was particularly entrepreneurial,” Graham says. “I ended up starting a startup mainly because I couldn’t stand having anyone telling me what to do. Why voluntarily have a boss? Why not just start your own company?”
Together, Morris and Graham created the web’s first application service provider (ASP). In other words, he was instrumental in turning the Internet into a cash register for businesses. After three years, Yahoo! bought Viaweb for stock valued at nearly $50 million.
“Our most valuable mentor was Julian Weber, who gave us the seed money for Viaweb, and did all the legal and administrative stuff,” Graham says. “He was the inspiration for Y Combinator, actually. We know from our own example that all you need to start a startup is ten thousand 1995 dollars and someone to handle the paperwork.
“The most important thing Julian taught us was not to panic. Things are never as bad, or as good, as they seem. He taught us that by example. We’d be alternately elated or crushed by whatever was happening to the company at the moment. He would just raise an eyebrow, or at most two.”
Graham decided to become an angel investor because he said he felt guilty after giving a talk at the Harvard Computer Society.
“I’d always planned to do some angel investing,” Graham says. “Then in 2005 I gave a talk to some undergrads about how to start a startup. I told them the best way to raise money was from angels who’d gotten rich from their own startups. Then I noticed they were all looking at me expectantly, and I added ‘but not me.’ I didn’t want them all emailing me business plans. But afterward I felt kind of guilty. It had been seven years since we sold Viaweb, and I still hadn’t made any angel investments.
Where would we have been if our investors had been as lazy as me? So I decided I’d better get to work and do some investing.”
Initially, YC was just going to be a group handing out angel investments “in the usual way,” Graham says. “But once we got into the problem, we started thinking of novel things we could do, so the result ended up being very far from what we started with.”
The result so far is that last year BusinessWeek listed Graham in its annual feature, “The 25 Most Influential People on the Web.” And YC can count new companies Clustrix, Dropbox, Heroku, Justin.TV, Loopt, Posterous, Reddit, Scribd, Wufoo, Weebly, and Xobni among its success stories. Loopt is probably the standout, with its cell phone application that is location-aware. That means if you put it on your iPhone, BlackBerry or other compatible device, it will show you where your friends are at that moment. You’ll know whether they’re close enough to hook up for lunch. Xobni (“inbox” spelled backwards) helps you organize your Outlook email, and Justin.TV lets you create your own online broadcast channel.
After investing their own money for the first couple of years, the YC partners recently raised funds from Sequoia and several of their own angels. Graham says they continue to grow regardless of market conditions.
“We don’t make a product people buy. Economically, we are ourselves buyers, of stock,” Graham says. “So recessions are good for us. That was one of the reasons we raised outside money, actually, to be able to invest on a larger scale during the recession.”
That’s good news for up-and-coming nerds who may look to YC for a leg up, as long as they’re willing to work hard for little in order to have a potentially big payoff down the line.
“Initially we thought what made good startup founders was intelligence,” Graham says. “Actually determination is much more important. I hope one day we have visible impact on the startup world. That may already be true, if you have sufficiently sensitive instruments. But maybe five years from now it will be more obvious.”
Tags: angel investments, Paul Graham, startup funding, Y Combinator