What would the next Y Combinator look like?

13 December 2020
13 Dec 2020
West Lafayette, IN
6 mins

First, what does “the next Y Combinator” even mean?

This is a subjective question, but I think YC is set apart from its peers because the ecosystem around YC is the largest concentrator of capital and innovative talent at the center of a global startup hub. From this fact, other notable things, like YC’s productivity as an accelerator and its brand, fall out. There’s nothing inherently special about YC’s curriculum or investing strategy or size. It’s the second-order effects of a large but concentrated community that sets YC apart from other accelerators and other entrepreneurship ecosystems.

I think there are three components, roughly in order, that make the YC model “work” and will be essential for the next “YC” in any industry and locale.

1. Talent arbitrage

YC’s founding thesis is that good engineers build good companies, because a startup’s biggest risk is often the ability to execute better and more rapidly than their competition and cash burn. At a time when most early stage funds (of which there were relatively few) were looking for “balanced” teams with business expertise, YC focused on finding good hackers, on the conviction that good hackers were undervalued founders in the market. This talent “arbitrage” is something Paul Graham also refers to as a reason for the initial success of YC. They found an undervalued kind of talent in the venture capital industry, and invested liberally in those founders at the earliest stages.

Talent arbitrage isn’t unique to the software-fueled startup space (though talented outliers lie further out to the right of the curve in software engineering than other jobs). Any industry that’s projected to grow, where a key bottleneck is that some early-identifiable talent is being undervalued, is ripe for talent arbitrage.

2. Commoditization of tribal knowledge

Y Combinator, and the companies around or from the community, helped establish much of the modern startup canon. This isn’t so much an evidence of any secret that the early YC founders knew, as it is a sign that YC productively wrote, spoke, and shared how to do startups broadly and consistently enough for it to become canonized in the Valley. That work continues to pay off for YC’s brand and portfolio – good startups don’t make the same mistakes startups used to a decade or two ago. Other firms, like First Round, also built great brands sharing and writing content into the startup canon, but they didn’t execute on the other two points here as diligently.

In the early stages of any disruption in an industry, the knowledge on how to be a disruptor is tribal knowledge and an asset. It’s found only in the anecdotes and experiences shared among the few people who have been there, done that. This was the case for early YouTube. How to “be a YouTuber” was tribal knowledge before “YouTuber” was a viable career path and thousands of thought pieces were written on the topic. I believe the community industry is going through a similar inflection point. The know-how of how to run great lasting communities is locked behind the tribal knowledge of great community builders, and a canon has yet to emerge.

In the early days, Y Combinator gathered a community of experienced and early stage founders to talk about and experiment on these know-hows from tribal knowledge and codify the methods that seemed to work better (or at least, write down what never to do). Combined with the concentration of talent, this commoditization of previously tribal knowledge meant YC and YC founders learned faster, and made fewer mistakes together. Of course, this also helped grow YC’s brand as an accelerator later on.

3. A community flywheel driving scale

The previous two forces – talent arbitrage and commoditization of tribal knowledge – were there from the start. By contrast, YC had to build up in the beginning to a community flywheel, a network of partners, founders, and investors in the YC ecosystem who re-invest, both with capital and clout, into the YC community of companies. This means that the value YC provides to its companies grows with every batch, and scales beyond what the YC team alone can provide.

An effective self-sustaining flywheel is critical for any growing ecosystem or community, and Silicon Valley itself is fueled by the same mechanic: founders who exit with a windfall re-investing into Silicon Valley founders. YC just happened to craft a tighter, faster feedback loop driven by the same forces.

The next Y Combinator can’t reach a global scale of brand or network just on the shoulders of its founders or cohort members alone. It needs to develop a self-sustaining flywheel out of the community of current and past participants that can expand on its own network reach, brand, and capital. I think this also leads to a bias towards making many high-quality bets rather than just a few perfect bets, and this is what YC have done – communities have to grow at some fast enough rate to self-sustain.

These three forces are effective elements of any concentrated hub of disruption, not just Y Combinator.

  1. Talent arbitrage
  2. Commoditization of tribal knowledge
  3. A community flywheel driving scale

The next Y Combinator will identify an industry where most people are under-valuing a certain class of talent in an industry poised to grow rapidly, gather a community to commoditize tribal knowledge, and over time scale it into a self-sustaining flywheel that helps them grow their gravitational field.

As for which industry, my guess is as good as anyone else’s – unpredictability is a core element of disruption, almost definitionally – but I think there’s a good chance it’ll come from one of these areas:

  1. The creator economy – people who can independently grow an audience and monetize them sustainably. Entertainment, as an old, bureaucratic industry adjacent to this space, is also an interesting target.
  2. Communities – I’ve written extensively about my bullishness on communities elsewhere.
  3. Higher education – what replaces Harvard and Stanford?

One interesting observation about these markets is that the upper-limit for value creation of individual ventures here, one creator, one community, etc, is smaller than startups. There are only a handful of trillion-dollar communities in the history of humanity, and no trillion-dollar influencers or entertainers. Scale will come more from breadth, not just making one good bet, as is the case in startups.

A final note: any attempt to create a “YC of X region” is probably doomed, if focused on tech startups. Silicon Valley is the preeminent capital of startups because its gravitational field for software talent extends around the globe. You might be able to build a good feeder program into YC or Silicon Valley elsewhere in the world, but competing with the network effects of a global talent hub has historically not been a winning strategy.

I should note, I’m not particularly qualified to answer this question. I haven’t been through the program, and I’m not a partner. What I know about YC is from writings by YC partners, as well as lots of conversations with (ex-)YC founders.

With that disclaimer out of the way, I think this is still an interesting question on which to speculate from the perspective of someone who thinks a lot about community driven learning and innovation, startups, and entrepreneurship ecosystems at large.

Thanks to Samay Shamdasani for prompting some of the thoughts in this post.

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