Wed · Nov 25

Jessica Livingston on the Accidental Origin of Y Combinator

In this episode of Startup School Radio, host and YC partner Aaron Harris sat down with Jessica Livingston.

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Jessica Livingston is the co-founder of Y Combinator and also the author of the bestselling book Founders at Work, a collection of in-depth interviews with successful tech startup founders about the earliest days of building their companies.

Later in the episode, Harris and Livingston were joined by Nick Damiano and Shreya Mehta, the co-founders of medical device tech startup Zenflow. You can listen to the entire episode in Soundcloud right here, or via iTunes.

It was particularly interesting in this episode to hear Jessica Livingston talk about the inception of both Y Combinator and Founders at Work, which both took root at around the same time in 2004 as she was considering leaving her job in investment banking. Both YC and Founders at Work began as experiments — which, she says, is how many of the most successful startups begin as well.

Aaron : I want to focus first on the founding of YC itself. We interview a lot of founders of startups, but YC itself is kind of a startup, right?

Jessica : I definitely think of Y Combinator as a startup in many ways. There are origin stories very similar to the way a startup would get started. We were kind of thinking about a problem, and thinking we could do some cool things to solve it. We started this by accident, and never realized it would become as big as it has.

So how do we get started? Paul and I, Paul Graham, we were dating at the time, and we're talking a lot about the investment landscape. I was working in an investment bank, but I was thinking of joining a VC firm. And he was sort of interested in doing angel investing, because he had sold his startup to Yahoo and wanted to help other founders as he had been helped once himself. We just spent a lot of our time talking about what was broken. What was broken at the time was that there was no standardized and branded source of seed funding -- and this was in Boston.

Back in 2004, when we were doing a lot of talking about this, the option if you were just wanting to get into first gear of your startup, you'd have to find some rich relative or friend who would give you some money. And after that, the next option really were venture capitalists, and they wanted to put millions of dollars into a company. And we thought, "Gosh, there's really this void of a place you can go to and get a small amount of funding to help you live and pay your expenses and build the product."

…We were targeting, what we were thinking back then, was that most of the people who started startups were programmers. Also at the time we were realizing, "Hey, it's a lot cheaper to start a software company. I mean, all you need is a computer and to pay some of your server costs." So we thought, "Why don't VCs write smaller checks?" And finally we said, "Let's do something. Let's create an investment company that does standardized branded funding. We'll have an application process and this will be a new thing."

But we always had thought that we'd do asynchronous investing just like every other investor.

Aaron : Right.

Jessica : But then we said, “Neither of us know anything about angel investing. Let's learn quickly by funding a bunch of startups at once." And the timing was, it was in January or February that this was coming together, and so we said, "Let's do a summer founders program and we'll bring students to Cambridge. We'll fund a bunch at once. We'll help them, and we'll learn a lot about angel investing." …The whole thing was just, "Hey, let's just try this out as an experiment."

One other important thing to point out is, I was quitting my job because I had gotten a book deal for Founders at Work. I had made this huge decision for me, to leave a job with medical insurance to just drop out of the rat race to write Founders at Work.

And I thought, "Well, Paul, I have some extra time since I'm going to be working on this book. We'll do this together and start this new kind of investment thing, the summer founders program." So Paul wrote a website, we put it up and thought, "Gosh, we hope people apply."

Aaron : Can I pull back for one second and ask what inspired you to write a book about founders? Because that's not something you normally hear someone who works in banking say they're going to go do.

Jessica : I'll try to make this quick, but it was actually a pivotal part of my professional career.

I was kind of bored at my job. …I was heading up marketing there, and the bubble had burst, so my budget was cut and I was sort of bored, thinking of doing new things. Having been dating Paul, I had met a lot of startup people and tech people, and I was so fascinated by the stories that they told -- about like, the near-death experiences of their companies, the things they had to do, the things that went wrong. And I remember reading the book Startup by Jerry Kaplan which chronicled the story of GO Corporation... It had a fascinating story, and I could not put it down. I thought, "Gosh, this world is so interesting to me, yet there's really no information out there about it."

And also, having worked at a tech investment bank, I really wanted to work a couple levels closer to the actual founders, because there it would seem so interesting to me. That's what led me to sort of want to get into writing this book, because it was a side project. While I was bored at my job I thought, "I'm going to conduct some interviews based on the Writers At Work series by Paris Review."

And I did one with Paul, to just test, and it was really interesting. And then I did it with a couple more friends and I thought, "Oh, I'm on to something here. There's just such fascinating information that's not out there in this world."

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