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Speaker 1: It's time for VC Spotlight, and today we're going to

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Speaker 1: talk about why Combinator. YC hosts two three month programs

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Speaker 1: a year to help a select group of startups and

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Speaker 1: founders in an accelerator program. One program runs from January

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Speaker 1: through March, and the other from June through August. The

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Speaker 1: Summer twenty twenty three batch has officially started, and for

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Speaker 1: the first time since the pandemic, YC is hosting the

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Speaker 1: group in person and all in the Bay Area. Of

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Speaker 1: the four thousand startups yc's funded since two thousand and five,

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Speaker 1: many have become household names, including Airbnb and Stripe. Joining

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Speaker 1: us to discuss Gary Tan, the CEO of y Combinator,

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Speaker 1: Welcome to Bloomberg Technology. It's great to have you here

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Speaker 1: in person.

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Speaker 2: Thank you so much for having me in San Francisco,

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Speaker 2: in the epicenter of tech.

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Speaker 3: And we will get to that.

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Speaker 1: And that is your message to this class of Summer

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Speaker 1: twenty twenty three. Why so insistent that this group be

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Speaker 1: here in person?

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Speaker 4: Absolutely so.

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Speaker 2: As you know, hy Combinator funds people at the earliest

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Speaker 2: possible stage, sometimes when it's literally just an idea and

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Speaker 2: a couple co founders, and so really in order to

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Speaker 2: go from zero to one, to create something that has

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Speaker 2: never existed before. There's nothing like having the energy of

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Speaker 2: people in person, not just right next to each other,

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Speaker 2: writing the code and shipping it to users. You know,

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Speaker 2: that you could do from any living room or any

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Speaker 2: bedroom in the world. There's something special about hundreds of

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Speaker 2: founders coming together and actually helping each other. And that's

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Speaker 2: really why YC has been so successful over the number

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Speaker 2: of years.

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Speaker 1: Really were the same Bay area, but really the message

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Speaker 1: from you is time Francisco.

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Speaker 2: Yeah, I think San Francisco in particular, what the AI

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Speaker 2: boom is really about. Cerebral Valley, which we call Hayes

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Speaker 2: Valley right down the street. There's something very special happening

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Speaker 2: here where literally the foundational models, the open source, the

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Speaker 2: smartest people in the world are sitting in those cafes.

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Speaker 2: You're having discussions not just about starting their companies, but

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Speaker 2: also what is the cutting edge of what these AI

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Speaker 2: models can do.

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Speaker 3: Let's go through the mechanics of it.

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Speaker 1: You know, the initial investment pledge is five hundred thousand

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Speaker 1: US dollars to each of the startups and then a

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Speaker 1: three month program, you know, going through the operational side

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Speaker 1: of things.

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Speaker 3: But what happens in that time.

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Speaker 2: Absolutely, I think the most important thing that's crazy to

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Speaker 2: me is the people who.

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Speaker 4: Start these companies.

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Speaker 2: They are the most eminent of all of the people

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Speaker 2: who could be starting companies at that moment. So we

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Speaker 2: had more than twenty four thousand applications for about two.

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Speaker 4: Hundred and forty spots.

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Speaker 3: Twenty four thousand was a record.

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Speaker 4: That's right.

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Speaker 2: So our acceptance rate was just under one percent, which

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Speaker 2: it's never been as selective as today.

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Speaker 4: But that means that those people in that.

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Speaker 2: Room, they actually go on to become the most eminent

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Speaker 2: people in startup them.

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Speaker 1: Sorry to interrupt, but what does that data represent If

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Speaker 1: you had the most applications on record and you're accepting

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Speaker 1: the fewest on record, what does that tell you about

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Speaker 1: the big picture of this economy.

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Speaker 2: Well, I think at the end of the day, we're

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Speaker 2: trying to set these founders up for success, and so

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Speaker 2: if there is ongoing high interest rates, one of the

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Speaker 2: things that we're really trying to focus on is how

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Speaker 2: do we make sure the founders we do fund are

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Speaker 2: the people who are most likely to go on and succeed.

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Speaker 2: And so, you know, in a time of cheap capital

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Speaker 2: that means that maybe we can fund more people in

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Speaker 2: a time of more distress, like right now, we have

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Speaker 2: to be much more mindful of what are those businesses

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Speaker 2: and can we see really great revenue, great gross margin.

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Speaker 2: And that's one of the big reasons why today we

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Speaker 2: launched our top Companies list that's on our website.

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Speaker 1: Today we can discuss the top companies this I think

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Speaker 1: I want to go back to the mechanics because what

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Speaker 1: surprises so many people, whether you cool hy combinator, an accelerator,

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Speaker 1: or an incubator, it's just a three month program.

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Speaker 3: How can you get anything done in that time?

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Speaker 2: Well, I think the cool thing that I get to

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Speaker 2: do is I get to work with twelve of some

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Speaker 2: of my closest friends who are known as group partners.

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Speaker 2: And the big thing that's different now is actually as CEO,

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Speaker 2: I am actually also a group partner, So we actually

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Speaker 2: have thirteen people working with the companies. And so these

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Speaker 2: are some of the people who literally worked with these

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Speaker 2: top revenue and top valuation companies from the zero to

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Speaker 2: one stage, literally a few people just starting out. For me,

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Speaker 2: I got the privilege of working with a por Vimetta

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Speaker 2: from instacart or Brian Armstrong from coinbase, or Kyle Vote

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Speaker 2: from Cruz Automation. These are all companies that have gone

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Speaker 2: on to sort of change both their industry but also

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Speaker 2: tech broadly. But I can't tell you how crazy it

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Speaker 2: is to meet people when it's literally a YC application

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Speaker 2: on the web. And that's really I think one of

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Speaker 2: the great innovations of our time that Paul Graham, the founder.

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Speaker 4: Of YC, came up with.

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Speaker 2: Here's this website where you go to y combinator, dot com,

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Speaker 2: slash apply and anyone with an idea anywhere in the

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Speaker 2: world on the Internet can apply and someone will go

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Speaker 2: and read it, and our community will figure out, hey,

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Speaker 2: should this person be a part of our community.

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Speaker 1: Of the twenty four thousand that applied and then the

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Speaker 1: two hundred and forty that were accepted, I guess the

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Speaker 1: question goes to, like, what do they have in common?

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Speaker 1: Or paradoxically, are any of them not AI companies?

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Speaker 4: Oh?

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Speaker 2: Yeah, so, actually only thirty five percent of the companies

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Speaker 2: in this batch are specifically AI focused. I'd say maybe

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Speaker 2: half of them have some AI component. YC has always

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Speaker 2: been generalists, you know, That's how YC was able to

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Speaker 2: fund Coinbase. Really even years before anyone he'd even heard

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Speaker 2: of bitcoin. And I think the key message here is

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Speaker 2: that the best people in the world to sort of

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Speaker 2: create these startups are actually the technologists, the builders, who

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Speaker 2: are just a few people writing lines of code. It's

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Speaker 2: a very fringe thing. And what YC does.

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Speaker 4: Is take people who otherwise would be.

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Speaker 2: On the fringe, but they're some of the most technically

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Speaker 2: and engineering wise.

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Speaker 4: Brilliant people in the world, and you know, we sort of.

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Speaker 2: Teach them how the pieces move, you know, we teach

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Speaker 2: them chess, the part of you know, building business that

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Speaker 2: frankly is the easier part to being highly technical and

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Speaker 2: being on the cutting edge of what's happening in technology.

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Speaker 1: Gary, how do you ensure you've got the funds to

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Speaker 1: deploy every year for two programs? Is there still LP

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Speaker 1: interest in backing you?

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Speaker 4: Absolutely?

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Speaker 2: I Mean one of the amazing things about YC is

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Speaker 2: if you look at every single top venture capital firm

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Speaker 2: in the world, pretty much all of them have a

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Speaker 2: YC company that is either on their homepage or often

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Speaker 2: multiple of them that have become fund returners for those

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Speaker 2: VC funds.

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Speaker 1: So to me, why stays becoming LPs in themselves? I mean,

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Speaker 1: where are you getting the funds from oh and really speaking.

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Speaker 2: All the same kind of limited partners that you would

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Speaker 2: expect in venture capital. And that makes sense because YC

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Speaker 2: to me is actually the fountain of prosperity for this

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Speaker 2: type of activity.

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Speaker 4: In the world.

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Speaker 1: Two pieces of news. So we've got through the class

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Speaker 1: of summer twenty twenty three. You're also publishing this list

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Speaker 1: of of the top net revenue generating companies you backed

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Speaker 1: in twenty twenty.

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Speaker 3: Two, private or otherwise.

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Speaker 1: Why, I mean, those are two different scales, ends of

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Speaker 1: the scale.

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Speaker 2: Yeah, you know, the reality is, and this is no

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Speaker 2: news to anyone, you know, twenty twenty one was such

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Speaker 2: an extreme sort of time and one of the things

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Speaker 2: that we became very concerned about, because we actually want

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Speaker 2: to be a bellweather of trying to teach the next

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Speaker 2: generation what they should focus on. There was this over

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Speaker 2: reliance on thinking about what's my next round. You know,

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Speaker 2: the fast money meant that you were going to chase

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Speaker 2: top line growth at all costs, and of course now

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Speaker 2: we're on the other side of a very deep hangover

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Speaker 2: about that, and so we thought, how do we as

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Speaker 2: a community put forward the things that founders and people

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Speaker 2: who are sort of creating this technology.

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Speaker 4: What should they be thinking about?

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Speaker 2: And right now you know now more than ever, it's

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Speaker 2: about gross margin. It's actually about net revenue sort of.

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Speaker 2: One of the things I'm calling it is literally edible revenue.

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Speaker 2: And one of the wild things edible just can you

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Speaker 2: pay people? Can you pay salaries? Can you actually run

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Speaker 2: your operations on this revenue? And what's funny is looking

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Speaker 2: at the different financial and accounting sort of shenanigans that

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Speaker 2: people pull often it's about sort of hiding this number.

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Speaker 2: So I think maybe we should make this an industry standard,

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Speaker 2: like should you know whether or not it's a marketplace

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Speaker 2: or you know, there are lots of different specific accounting

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Speaker 2: rules for specific comps.

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Speaker 4: But why is that.

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Speaker 2: Shouldn't we just use one metric that actually will allow

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Speaker 2: founders to make the right decision, which is to build

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Speaker 2: great sustainable companies and know that they can grow.

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Speaker 4: Over the long term.

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Speaker 1: We should talk about San Francisco and where to build

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Speaker 1: for the long term. I mean, your position on this

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Speaker 1: city is well known, but as of today, where is

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Speaker 1: your head at?

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Speaker 4: Yeah? Absolutely, you know.

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Speaker 2: The great thing about San Francisco to me is that

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Speaker 2: it gave me everything I have I learned a code

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Speaker 2: in the city taking bart into Petrero Hill in web

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Speaker 2: one point zero, I learned how to make database backed websites.

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Speaker 2: And what I realize is San Francisco and the Bay

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Speaker 2: Area is the place that is a magnet for all

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Speaker 2: of the most technical people in the world. And when

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Speaker 2: you have those type of agglomeration effects, when you have

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Speaker 2: all the smartest, most brilliant, most driven people in the

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Speaker 2: world coming here, of course they're going to create wealth.

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Speaker 1: But we have problems as well, and you've been very

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Speaker 1: vocal acknowledging them absolutely. And I guess where my question

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Speaker 1: goes is how much more deeply you would be involved

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Speaker 1: in political cycles, putting money into initiatives and candidates, you

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Speaker 1: yourself being involved in politics.

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Speaker 2: Well, some of my friends started an organization called growsf

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Speaker 2: which is one of the most important things. How do

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Speaker 2: we take really some of the smartest people who have

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Speaker 2: created this wealth, and how do we have an impact

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Speaker 2: that's positive on our local economy. We want that wealth

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Speaker 2: to actually be shared with everyone. I think a lot

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Speaker 2: of people criticize tech and tech people broadly as sort

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Speaker 2: of Anne Randian libertarians, and speaking for myself and my friends,

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Speaker 2: you know, We're not Randians where Gene Rodenberry type of

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Speaker 2: Gene Rodenberry is sort of our spiritual future. You know,

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Speaker 2: what we believe is Starfleet Academy was in San Francisco

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Speaker 2: for a reason, and we can actually build San Francisco

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Speaker 2: into San Francoccio if we actually have the right policies

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Speaker 2: and the right politicians in place. And in November of

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Speaker 2: twenty twenty four, I think if.

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Speaker 4: You follow GROWSUF, you'll see our plan to make that happen.

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Speaker 1: This is the first opportunity I've had speech to you

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Speaker 1: since the collapse of Silicon Valley Bank, and the commonality

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Speaker 1: of y Combinator is that SVB was often the first

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Speaker 1: institution to.

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Speaker 3: Write a check.

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Speaker 1: Bloomberg reported last week that the FDIC had mistakenly released

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Speaker 1: this document to our news organization that revealed the backstop

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Speaker 1: on all depositors with balances exceeding two hundred and fifty thousand.

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Speaker 1: Was also inclusive of Sequoia and many large tech startups

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Speaker 1: that didn't need it. Frankly, and you were an advocate

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Speaker 1: for that initiative in the first place. On the mot

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Speaker 1: side of things, what's your kind of thoughts on that

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Speaker 1: and reaction absolutely.

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Speaker 2: You know, I think the hard part about SVB is

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Speaker 2: that it really did hit the little guy.

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Speaker 4: You know what I realized for us.

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Speaker 2: You know, YC has funded over four thousand companies, and

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Speaker 2: of course the top one hundred, top two hundred are

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Speaker 2: some of the biggest names that you could think of.

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Speaker 2: But what the backstop was really about was saving the

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Speaker 2: tens of thousands of small and medium sized businesses that literally.

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Speaker 4: Would not be able to make payroll.

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Speaker 2: And I think this fact coming out doesn't change any

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Speaker 2: of that. We would have set back technology perhaps you know,

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Speaker 2: five years, perhaps a decade if you just suddenly killed,

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Speaker 2: you know, at a very early stage of company. And so,

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Speaker 2: you know, I hear that argument, but the truth remains

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Speaker 2: that there were hundreds of thousands of jobs that were

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Speaker 2: saved in that moment. And I think the FED and

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Speaker 2: the FDIC and the people in charge they did the

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Speaker 2: right thing.

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Speaker 3: Gary.

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Speaker 1: When I think of you, I think have also that

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Speaker 1: initialized and you returned to I see in January. You

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Speaker 1: are the key man alongside Alexis Ahanian and you've kind

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Speaker 1: of come back to Y see quickly. How did that

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Speaker 1: conversation go with LPs of initialized and is it now

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Speaker 1: just all alexis initialized.

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Speaker 2: Oh so alexis left to start his own fund called

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Speaker 2: seven sent six a number of years ago. The new

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Speaker 2: managing partners are Brett Gibson and Jen Wolf.

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Speaker 4: They've done an incredible job.

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Speaker 2: I mean, the number one thing I love is that

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Speaker 2: in venture, the best and highest to me is not

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Speaker 2: to elevate a single person, but to really create an

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Speaker 2: institution that lasts well beyond anyone who sort of started

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Speaker 2: the business. And you know, I looked at Paul Graham

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Speaker 2: and Jessica Livingston who created YC for us. They're still there,

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Speaker 2: but they made space for what is now an institution,

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Speaker 2: and I am merely the steward of that institution going forward.

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Speaker 1: Why he culminated to see a Gary town. Was so

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Speaker 1: grateful for your time here in San Francisco.