Y Combinator's Graham Says Startups Must Improve Lives

welcome back to Bloomberg West I'm Emily Chiang with Rupe on LinkedIn and Pandora all over the headlines you might think moving a company from the idea phase to an IPO is a snap but it's no easy task and some in Silicon Valley take on that challenge every day joining us here in San Francisco is Paul Graham founder of Y Combinator a company that helps entrepreneurs take their ideas and make them the next big thing why common error has been dubbed the Harvard of Silicon Valley and welcome back Paul ever since the last time you are on our fans have been clamoring for another Paul Graham appearance so have you see what I can do so given how fast innovation seems to be happening across the country what is startups these days need to do to have a successful exit whether it's an IPO we're just building a great business they have to make something that actually makes people's lives better like it's it's funny how straightforward it is people often think that business requires some sort of trickery you have to like corner the market and something or something like that but actually what you have to do is you have to make people's lives better and the amount of value that you create is the sort of rectangle where one side is the number of people and the other side is how many you know how much you make their life better big rectangle big value you're rich when you see companies like Pandora and Groupon two very different companies but similar in the sense that they don't have profits how does that strike you in this environment I don't know much about them specifically I feel like some sort of securities analysts would actually understand better than I would I haven't looked at their books you know I mean I know Andrew Mason is a really smart guy right I know Andrew he's a smart guy so if I were betting on Groupon I wouldn't be looking too closely at the numbers I would just be like thinking I like Andrew he seems like a good guy it'll probably work over the last few weeks we've seen Twitter announced a photo service which then invalidate a number of photo businesses that have built themselves on Twitter Apple at the Developers Conference announced a whole slew of things that hitted a lot of different startups how do you advise your companies to work on things that Apple Facebook Twitter couldn't just come along and say we're gonna do that now you know actually the right thing to do startup is not worried about it too much the right thing to do in a startup is just like you're a mosquito right and like maybe it'll work maybe it won't and you just like zoom along and don't spend your time looking over your shoulder and like if you get killed okay like you do another startup for example Dropbox which is a very successful YC startup but when Apple announced the iCloud that kind of was a little punch to that wasn't it I don't get this I get I don't get the impression they were worried about it I didn't worry about it um there's only ever been one out of 316 companies we funded there's only ever been one that was actually killed by a competitor but do you think that company shouldn't depend so much on one particular ecosystem or is it all about just as you said in the beginning making people's lives better just just work on making people's lives better don't spend your time worrying about like trying to make people's lives better but also do it in a way that Apple won't do who knows what Apple's gonna do you just have to hope that they don't right and mostly they won't Apple can't do 500 different things so there's a small chance they'll kill you you just take that risk another one of your companies Airbnb is making a huge splash it seems to be the breakout success of Y Combinator actually Dropbox is bigger well Airbnb raising money at a 1 billion dollar valuation when you hear that kind of a number is that fair if you knew their numbers it wouldn't seem so crazy you know I don't know I don't know if or I don't mean I don't know if this is public knowledge or we're still talking about rumors are you tricking me um but this should there be a fund of funding around the participants it was reported should there have been a funding round or be a funding around the participants are not exactly fools um they know what they're doing I'm gonna bring in Cory Johnson now I know he's got a lot of questions for you Cory go ahead I supposed to be the bad cop here Paula he said well only one of your companies was killed by a competitor which one it was called keiko and the founders later went on to do justin.tv it was an online calendar and then Google introduced Google Calendar and they lost half their users in one month Wow well so I assume you've had some other companies die if they weren't killed by competitors what kills young company they make something that users don't like they make dog food the dogs do not like to eat that is the killer of all startups they build something that users look at and they say yeah that's what the back button well-well talk more about that because I want to know as an investor what do you do obviously every company's first iteration is not its best what do you do to try to swindie win you know to to fish or cut bait well the first iteration may not be very good but as long as you get it out there very quickly it doesn't matter as if it's if it's not great because you start the conversation with users and users will say oh well I sort of like this but I wish you would do such-and-such and then you do such-and-such and you repeat that process 200 times or so and then you'd have something really good so that so back to your thing about this backing a smart guy backing in Andrew Mason what if the business model just doesn't make sense what if it says Paul Coski said about Groupon on our air you know selling a dollar for $0.50 is real makes a really smart guy would know that that'd be very popular but that's not a great business model are we talking about Groupon specifically I mean I think the general any company any company back in a smart guy with a bad idea doesn't make it a good investment a smart guy by definition will eventually realize that a bad idea is a bad idea and will tweak it until it becomes good I mean however whatever you think of Groupons current idea it's a lot better than the idea they started with when back when they were the point the point lost less money yeah last perhaps less on lower revenues right it just it just didn't matter at least Groupon matters go ahead Corey no sorry I'm curious about the idea of competition you know you have so many you know people that you've invested in some of them compete with each other directly some of whom compete with each other accidentally but how do you think the competition can be used as a tool to motivate entrepreneurs you know honestly ice and a lot more time telling people to stop thinking about their competitors than I do telling them to like you know use their competitors to make them make themselves work harder people who are good have this inner drive that makes them work hard anyway I found the really successful companies they don't spend a lot of time obsessing about their competitors its companies that get old and are starting to suck they're looking over their shoulders worrying and trying to imitate their competitors alright good companies don't Paul stick around we're going to talk to you more about this after the break I know you got more applications than ever for your latest bootcamp I want to hear all about that and the highlights coming up next on Bloomberg Westhoff this is Bloomberg West I'm Emily Chang we are speaking with Paul Graham founder of Y Combinator a company that helps entrepreneurs turn ideas into marketable concepts before the break we were discussing tech companies like linkedin group hunt and the process they went through to get from idea to IPO and I want to talk to you about your program in the break you were talking about how the startup world is an optimistic place where the boss is half full rather than half empty you got more than two thousand applications for your latest class 64 startups yeah when it gets to be that big how do you find the gems you know we have a lot of practice we have a lot of practice we've been doing this for six years now and when we first started if somebody had dropped two thousand applications in our lap and said to sift through them we would have we wouldn't have been able to do it but we have so much practice now trying to try to pick winners we've been through 13 batches where we've picked people and seen what happened and now we know what works and what doesn't sort of practice and you said some of the craziest ideas become the biggest successes right right that is why that's why we look for people we don't care that much about ideas right if the people seem really good then either the idea is better than it seems if the people are really good or maybe the idea is bad but they'll come up with something else right and you yourself as an entrepreneur founder of Y Combinator had a great idea that has become a huge success there are now many other incubators and when we started we didn't think we were on do you anything you were just doing it is like this little throwaway summer and look at all the incubators now that are across the country one in particular TechStars has been giving a lot of attention what do you think about them I don't know what's that face I think they're fine people fine people you know YC has been criticized for having now so much control over this startup ecosystem because you guys have been so successful how do you address those concerns oh you know even though we funded a lot of startups it's still only a small percentage of the total number of startups I mean when we got if we got to the point where we were funding 50 or 60 percent of the startups and in the valley then you know maybe we would be this mulling influenced having too much control but you know it's probably like five percent or even less than that all right Cory wants to jump in here Cory yeah Paul let me ask you about one of your investments I won't ask you about a bunch of investors will start with Hipmunk Hipmunk is thought to be so ridiculous by our managing editor he's banned the saying of it on the air convince us that Hipmunk is something to pay attention to all you have to do is look at the alternatives think about what it's like to do a flight search you search for a flight you get page after page of search results and it includes flights that like take 14 hours and have a layover overnight right why do they show you all that crap it's possible to do better and Hipmunk does better just shows you everything on one page and it just jumps out at you what's the right flight so when you looked at a comfort like Hipmunk dude are you trying to imagine well the reason that you know Orbitz shows you a bunch of ads and a bunch of crummy flights is because they more pages you click through the more ad revenue they generate from clicks exactly that's what they're trying to do so you're trying to think of a day of something that's really useful maybe less profitable like where's the business part of this well actually nobody makes that money that much money out of flights search the big money is in hotel search and so for Hipmunk I mean this is not flight search is not the last thing they're doing it's just sort of a way to get a way to make people happy a way to make people's lives better and get people's attention and then once they got their attention they can sell them other things so it is getting their attention and selling something there you're sort of imagining a business that comes after getting the attention yeah you make money from hotels the margins on hotels are immensely higher than flights so when you're looking at a business like what tell me about the research you do when someone walks into your office and says I'm gonna make I'm gonna make the flight with search results a lot better and we're gonna get to hotels and those are going to be really loved by consumers what kind of homework do you do as an investor to understand that market the potential market better you know it's a lot lower tech than you would think the answer is I had known both of the founders of Hipmunk for five years oh I knew I knew Adam since he was in high school I just knew these guys were good and I think Adam too had like gone through college thinking when he graduated from MIT he was gonna apply to Y Combinator so there was we never had any thought that we were we would reject them they could have applied with the stupidest idea in the world and we still would have funded them we have had Adam on this show and he did a good job and we'll be watching this is nearly 22 or so but we'll be watching to see how Hipmunk performs in the world of travel websites but I want to ask you of the startups that you're investing in now what areas or trends are you most excited about one big thing that's happening now is startups competing in industries that people didn't really think we're susceptible to competition by startups before what do you mean by that um well Airbnb is an example right like online rentals and stuff like the space rental like it's they're kind of competing with the hotel business and I don't think the hotel business realized that like they were that they were in a world that was even susceptible by invasion by startups but what's happening is that more and more of the world is becoming susceptible to startups disruptive startup said that yeah yeah like yeah just things written to run on tablets like the iPhone right they're replacing everything iPhones replaced your GPS and your camera and now your keys just about everything can be replaced by software running on an iPhone but it's not Apple per se that's replacing those things it's some startup writing an app that's running on that tablet and that's where innovation comes from Paul Graham we could we could talk about this for hours amazing to watch what you've done with Y Combinator and again always great to have you here thank you for quest

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Keywords: Combinator's, Graham, Says, Startups, Must, Improve, Lives, Airlines, All, Media, Video, Audio, Visual, Bloomberg, West, Company, News, Computer, Software, Corporate, Actions, Finance, E-commerce, English, Multimedia, Internet, Interviews, Markets, Team, Asia, North, America, Syndicated, AV, Reports

Id: 2lcp0uZsY7k

Length: 13min 45sec (825 seconds)

Published: Thu Jun 16 2011