Alexis Ohanian and Steve Huffman, co-founders of the social news site Reddit, have become Y Combinator (BusinessWeek, 9/26/07) poster children since their company was snapped up by Condé Nast for an undisclosed (but no doubt, tidy) sum in 2006. Their success is one example tech superstar Paul Graham points to when he says Y Combinator, his ultracompetitive seed-funding program, is a better way of developing early-stage companies than traditional incubators, venture funds, or business plan competitions.
The difference, Graham says, is that Y Combinator picks people, not business plans—or even business ideas. "The idea is going to change anyway, so the most valuable thing about the idea is what it tells you about the people," he says. Of course, picking people is easier said than done. In fact, Reddit's co-founders were initially Y Combinator rejects—like 95% of the program's applicants.
At the time, the two University of Virginia seniors had their own doubts about Y Combinator. Ohanian says it took several months to convince Huffman that "he didn't want to take the very appealing job close to his girlfriend back in Virginia, and to instead try living with me in near-poverty for some indefinite period of time." Even after submitting their Y Combinator application, the two debated the wisdom of picking up and moving to Cambridge, Mass. Why not just stay in Charlottesville, Va., where at least the rent was cheap? "Of course," Ohanian says, "as soon as they rejected us, we desperately wanted to get in."
After drowning their sorrows at a local pub, the two decided they'd go ahead with the startup anyway. Huffman would take the software development job he'd been offered in Virginia, Ohanian would do freelance Web design, and they'd live together and collaborate when they had time. It's a strategy that, in hindsight, Ohanian says almost certainly would not have worked. Launching a successful startup, he says, "really does require nearly undivided attention." (That's another Graham tenet—and the rationale for insisting that Y Combinator startups commit to relocating for three months of full-time work.)
The next day, however, they got a second phone call from Graham—he'd changed his mind. While he hadn't been crazy about their business idea (a mobile application), Graham said he thought Ohanian and Huffman had potential, and he was offering them a slot in the Y Combinator program. The two jumped on the first train to Boston.
Opening Wallets and Doors
When they got there, Ohanian says, Graham sat them down for a talk. "I believe his words were, 'Let's come up with something for you guys to do.'" At the end of the conversation, Ohanian and Huffman left with a $12,000 check and a brand-new business idea that would become the social news site Reddit.
Ohanian says they didn't waste much time thinking about how they would make money from the idea, confident in Graham's conviction that "if you make something that people want, there's always some way to make money from it." Soon after, a dinner conversation with another software guru, Joel Spolsky—who asked them to create a white-label version of Reddit for his own site—led the team to a business model and, indirectly, to a successful exit, when a licensed version of Reddit created for Condé Nast turned into an acquisition offer.
For Y Combinator, which had close to a 10% stake in what was likely a multimillion-dollar figure, the Condé Nast deal was a handsome return on the fund's initial $12,000 investment, an amount Ohanian concedes he and his partner could have easily bootstrapped. But Ohanian says the valuable publicity—in particular, mentions in several of Graham's widely read essays—that he credits with jump-starting the site's popularity would have been harder to achieve. While the Y Combinator model isn't the best fit for every startup, he says, "For what we did with Reddit, it was definitely worth it."