Start-ups chasing the dream at unicorn factory

Silicon Valley’s Y Combinator has power to unleash the next tech giants, finds James Titcomb in San Francisco

On their first day at Y Combinator, the prestigious Silicon Valley start-up programme, entrepreneurs who have successfully applied are told to add a small piece of code to their web browser. The plug-in, a simple countdown clock, ticks down the weeks, hours and seconds to Demo Day, the climax of three months of intense planning, coding and pivoting.

At Demo Day, those three months are squeezed into three minutes in which company founders pitch to hundreds of potential investors, the cream of Silicon Valley. It is like Dragon’s Den in fast-forward. Every time a founder opens their computer, the countdown clock reminds them of what they should be working towards.

“It’s three minutes you’ll never have again in your life,” says Will Hodson, founder of energy switching firm Look After My Bills, which graduated from the programme last year, and was recently sold to Gocompare.

Y Combinator (the company, also known as YC, is named after an obscure mathematical function) is the Oxbridge of start-up “accelerators”, and draws comparisons to university.

Founders who have completed the programme are known as alumni; the online application and interview process is similar to that of an Ivy League school; and days are characterised by seminars, followed by intense evening cramming. It is similarly picky: 12,000 companies applied to be included in the latest “batch”, just 174 made it.

YC’S most famous students include Silicon Valley royalty such as Airbnb, Dropbox and Reddit. Since it began in 2005, around 5,000 start-ups have come through its doors. Between them they are worth about $150bn (£123bn). More than one hundred are worth over $100m, and 20 more than $1bn.

It is an enviable track record, which is why, just as the world’s biggest employers flock to careers fairs, hundreds of top investors pile into Demo Day, which was held this week in a refurbished pier on the San Francisco Bay. Despite the cavernous surroundings, space is tight: seats are scarce, and more than 1,000 people have to watch online. And like a top university, simply being accepted into

YC improves one’s market value. “It makes your valuation ridiculous. You can have a valuation of $3m-$4m but you go out there and you’re valued at $10m,” says one alumnus.

For a long time, the main beneficiaries of this were start-ups in Silicon Valley. But in recent years, British entrepreneurs and start-ups have been entering YC in much bigger numbers. Of the 174 companies in the batch at this year’s Demo Day, seven were from the UK, including Holy Grail, which seeks to improve battery research, and Listle, which converts articles on the internet to audio.

It is a major change from 2011, when Hiroki Takeuchi, Matt Robinson and Tom Blomfield, three Oxford graduates, entered their fledgling start-up Gocardless into the programme. “It was an age ago in terms of the UK tech scene,” says Takeuchi. “We thought ‘We don’t really know what we’re doing, there’s not a huge amount of expertise, let’s go to Silicon Valley’.”

All three now run successful British tech companies, and Monzo, founded by Blomfield, recently came full circle when YC’S late stage fund led a £113m investment in the digital bank.

When a company is accepted into Y Combinator, it gives up a 7pc stake. In exchange, the company gets $150,000 – enough for a small team to survive in Silicon Valley for a few months – and the opportunity to learn from the tech elite. Guests at group dinners have included Mark Zuckerberg and Al Gore, and founders are given regular access to “partners”, experienced entrepreneurs who guide them along, constantly critiquing, or offering advice at occasional workshops. It is hardly hands-on, but it seems to work.

“I thought it was going to be like business school,” says Amber Atherton, a former Made In Chelsea star who founded Zyper, a company that matches brands with social media “super fans” for marketing. “But what it actually does well is build a community.” Members of Y Combinator get access to a private social network, imaginatively named Bookface, that contains the contact details of the thousands of alumni.

Bookface users can grade investors on how helpful they were, and a bad review can prove damaging to venture capitalists seeking out the next Google. One founder says that when an investor dragged their feet on signing a cheque, a call to their YC partner quickly resolved the issue. “Nobody wants to be thrown out of the YC community.”

By far the biggest advantage, however, is being able to present at Demo Day. In the days leading up to it, says Hodson of Look After My Bills, founders have fine-tuned every aspect of their three-minute pitch. “By the time you’re on stage you’ve considered every word, every intonation, every dramatic pause, by the end it was impossible for me to think any thought other than what was scripted.”

Founders have no on-stage demo or prop, only a Powerpoint presentation and a microphone. As soon as one goes off stage, another begins; 45 companies have hit the stage by lunchtime. The range of industries set to be disrupted is bewildering. Tune out for a minute and the social network for over-50s has been replaced by a company making X-ray vision for SWAT teams.

The presenters do what they can to stand out, while staying serious enough to show they deserve to receive hundreds of thousands of dollars. On Monday, two property tech entrepreneurs wear hard hats on stage, although most settle for T-shirts with their company’s logo. There is little time for personal stories (although dropping out of a prestigious university appears to be worth mentioning): instead, data are king. Presentations are filled with facts about a company’s TAM (total addressable market) and ARR (annual recurring revenue).

Founders are refreshingly diverse, although the same cannot be said for the investors on the floor, in more ways than one. While an inescapably male bunch, British founders who have gone through Y Combinator add that the majority of venture capitalists who follow it are focused almost exclusively on the American market.

“You’ve got a problem if you’re going to Y Combinator and you haven’t got a product that is relevant or usable in the US,” says Hodson. Takeuchi concurs: “The investors there were quite US focused. [We had] a view to coming back [to the UK] so it was definitely more challenging raising money for our company.” The companies operate in energy switching and direct debits, two areas unfamiliar to Americans.

Atherton moved her company to the US after graduating from Y Combinator, but she says it is partly due to the bigger market opportunity.

YC’S president Geoff Ralston, a former Yahoo executive, says that it is making greater efforts to appeal to entrepreneurs outside of California.

While start-ups once had to fly to Silicon Valley’s Mountain View for interviews, this year YC travelled to Bangalore, a move that increased the number of Indian applicants, and is planning to expand this to other cities in future. Ralston says it “matters zero per cent” where companies are focused. “You need to be where your career should be.”

In the latest batch of companies, 38pc came from outside the US, although perhaps illustrating the point, less than half of those are focused on a market outside the US.

Britain now has its own start-up factory Entrepreneur First, a Londonbased accelerator with its own Demo Day, although it invests at an earlier stage than Y Combinator, perhaps reflecting a less mature tech scene.

But for the founders that have gone through it that doesn’t make the Silicon Valley boot camp any less worthwhile. “I think it’s more possible to start a company now, not go to YC and still be successful,” says Takeuchi. “But I don’t think that reduces the value of going out and doing it if you can.”