Paul Graham's Search for the Next Facebook

Silicon Valley is famous for innovations such as speedy microprocessors and slender phones. Paul Graham is helping to reinvent innovation itself.

Graham's Y Combinator, founded in 2005, is an early-stage investment firm and boot camp for entrepreneurs. It seeks to find the country's most promising startups. Twice a year, Graham and his five partners invite several dozen entrepreneurs to move to Silicon Valley for three months. (Think MTV's Real World, but for geeks.) The entrepreneurs attend weekly dinners, meet technologists, and receive coaching and a modest amount of money for their business ideas. In return, YC takes a small equity stake. It's "mass production techniques applied to startup funding," says Graham, 46.

In January, Graham's knack for selecting entrepreneurial talent got a high-profile endorsement: Yuri Milner's Digital Sky Technologies and Ron Conway's SV Angel, two prominent investors in Internet companies, said they would together give a $150,000 convertible loan to every YC startup. "This is the Harvard, so to speak, of entrepreneurship," says Conway. "That's why we felt so good about betting across the whole class." Another vote of confidence: The wave of copycat Y Combinators that have sprung up around the country, with names like TechStars and AngelPad.

Graham's model ultimately will be judged by its financial success. He now has to answer to outside investors: In 2010, YC accepted $8 million from venture capital firms to help finance its bets. While there are some high-profile graduates, including document-sharing site Scribd and location-based network Loopt, few have been acquired for large sums. In December 2010, YC broke even on its past investments when (CRM) bought YC company Heroku, which sells software that helps developers build Web apps, for $212 million.

Graham sold his own startup, a service called Viaweb that made it easier to set up online stores, to Yahoo! (YHOO) in 1998 for $50 million, so he knows what it takes to build a business. He treats YC itself as a startup and says he can double its size—there are 43 companies in the current class—but first needs "to see where the bottlenecks are and fix them." He worries that he and his partners can't devote enough time to the entrepreneurs and that they've outgrown their office space; he plans to bring in another partner and knock down a wall of the warehouse where YC is headquartered. "We had eight startups our first summer," Graham says. "If you told me we would do 43, it would have seemed impossible. I'm sure a few years from now we will have a number that seems impossible now."

In any case, the entrepreneurs don't seem to be complaining. The last time he asked them about their biggest gripe, "they thought we should organize more happy hours," he says.


Yahoo! bought his first company, Viaweb, for $50 million in 1998


Loopt, Scribd, and many more have come out of Y Combinator


Y Combinator is "the Harvard of entrepreneurship"

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