>> it has been called the harvard of silicon valley. y combinator is perhaps the most prestigious incubator in the world. it has funded more than 700 companies including dropbox, airbnb, and stripe. behind the start of machine is a couple with their own start up story. how did they build y combinator into what it is today? joining me today on the addition

-- this edition of "studio 1.0," husband-and-wife paul graham and jessica livingston. thank you for joining us. paul, it has been six months since you stepped down from the helm. >> about that, yeah. >> how is it going? >> it is so great. i wish i had done in two years before. >> why? >> it was hard running y combinator. i'm not really an administrator. y.c. had gotten big. i was never suited to it. >> you would get your brain back. did you get your brain back? >> yeah. >> you are still doing office hours. >> i had, this afternoon, the best conversation i've ever had. i had lunch with patrick collison. founder of stripe. 100% was about ambitious plans. that is like the best possible office hours. >> how involved are you, jessica? >> i'm doing all of the same things i used to do. if not engaged in different things. i miss working with paul but i also love working with sam. >> sam was the founder of one of your first companies. people said he is not cut out to be you. >> it is a good thing.

i was not cut out to run something as big as y combinator. he is better than me at this. >> come on, jessica. >> i was good to giving advice to founders. >> is sam going to be better? >> they're going to be different. sam brings a lot of things to the table that neither of us had. this amazing amount of energy and patience that is needed to broker deals with investors. y combinator is doing a lot of different things as a result. >> i want to talk about each of you and where you came from. your parents. >> my family came here from england when i was 3 1/2. and we lived in pittsburgh. my father worked in the nuclear business. when you design a nuclear reactor, he figured out if it was going to explode. >> what kind of kid were you? >> i was a bad kid. half the kids in my neighborhood were forbidden to play with me. >> what did you do? >> i was always, always getting

in trouble with everybody, constantly. i was suspended from school, i think, at least once every year from like first grade to 12th grade. >> and you got into computers. did that help? >> they didn't teach computers in school. it was something you did on the side. >> when did you start coding? >> i think when i was 15. on an ibm 1401 with 12k of memory. >> you went on to get your phd in computer science from harvard. and you took art. >> it was a very disorganized trajectory. i never knew what i was going to do. it was always a mess of random accidents. >> jessica, what about you? >> i grew up outside of boston,

and i was an angel. [laughter] >> totally the opposite. >> i grew up with my father and my grandmother, his mother. i lived a very happy childhood and friends wanted to play with me. [laughter] i knew i liked to write, but i had no idea what i wanted to be or what i wanted to do. >> you ultimately ended up at a boutique investment bank. were you technical? did you ever learn to code? >> i never learned to code. i'm not technical in the least. someday when i retire, i'm going to learn to code, but i was not interested in it. >> you started another company. tell me about viaweb. the idea was revolutionary. >> the reason the company was called viaweb, is that the software worked via the web. it was known as a web app. it was the first one. it was an online store builder and got bought by yahoo!. and it is yahoo!'s store. >> what was it like working at yahoo!? how long did you last there? the guy who was suspended every year. >> i was basically getting suspended from yahoo! too. i hereby apologize to the people i ever worked for.

i barely lasted a year. >> you went on to write. >> yeah. >> and you started building your following. >> i suppose so. i didn't think i was building the following. >> what were you writing about? >> i was writing about software and i realized that no one would drag me away if i started writing about other things, too. >> at what point did you guys meet? >> we met at a party in paul's house in cambridge that i almost didn't attend. >> y combinator almost didn't exist. >> it's scary how close it was. >> how did you come up with the idea for y combinator? >> jessica was writing a book. >> that was the first book that i read when i moved to silicon valley. >> really? >> your book about founders. >> that's great. i never tire of hearing stories like that. it was hard to find any information about startups, and i was fascinated by all the stories i heard from these guys. and you did the talk at harvard. >> yeah.

it became about how to start a start-up. one of the things i told them was they should raise money from people who had gotten the money from starting a start-up. then they could get advice. they were looking at me expectantly, like baby birds looking at their mother to feed them. and afterwards, i felt sort of bad because i had thought i was going to do angel investment, but i didn't know how. i thought, i'll do it and start finally doing angel investing. it wasn't supposed to grow into this big thing. this is one of the things we tell founders. the best way to start a start-up that is going to take over the world, is don't even try to start a startup, just start a start a project. something you think would be cool to work on. y.c. was an instance of this. >> how did you come up with the name y combinator? >> the original name was cambridge seed. >> we were in cambridge. >> it was too tied to one place. the y combinator is a trick,

which is a formal expression to express algorithms, a math concept. >> how did you decide to work together? you were not married yet? that is a big decision. >> it was scary. we had only been dating for a year. ♪

>> there are myths about so many of the great companies, start-ups, founders that are boiled down into legends and what is the myth of y combinator and what is the reality? >> people don't realize how much we were not interested in making money. i'm thinking of all these people, all these forums, all self-serving, we weren't trying to make money.

>> it was an experiment to see if these new ideas could work. >> a lot of people think of it as paul graham's y combinator. >> there is a myth. >> you call jessica the secret weapon. >> nothing has happened that jessica did not like put her seal of approval on. she has veto over everything. >> this is the first time you guys have been interviewed together? >> yeah. >> i can't believe that. >> let's face it, i'm not as interesting as you. [laughter] i don't make colorful remarks. i have chosen to be behind-the-scenes. i'm more comfortable behind the scenes. i like running things. >> that is why she is the secret weapon. she has perfect pitch for character. she can talk to somebody and fairly quickly feel whether they are a good person or not. >> tell me about the first class, eight companies, but you didn't know if anyone was going to apply, right? >> we didn't know if people were going to apply. we had a few hundred applications. >> the most critical innovation was to fund a bunch of startups at once. it is great for the investigator and for the investors because they have colleagues.

that's the big thing you're missing. in a startup, it is so lonely and it has some of the advantages of being part of a company without the disadvantages. >> at what point did you decide to take money from investors? >> we had to, frankly. i ran out of money. and it takes -- god, how long does it take? we don't know how long it takes. 10 years maybe. >> you are going into your 19th funding cycle. what do you consider the most successful? >> it is pretty much the ones with the highest valuations. airbnb, dropbox, and stripe. >> did you know they were going to be hits? >> we know the founders were good. >> what was it about them?

>> different things. different things about the two of them. in drew's case, he was the guy who could write this software. dropbox suceeded by solving an impossibly hard problem. airbnb is different. it is this mass movement where everyone is staying in other people's houses worldwide. >> we were skeptical and i remember thinking we don't remember what the idea is. these founders are awesome. we are funding them. >> patrick from stripe, i have known him since he was 14. back when he was a high school kid in ireland, he used to email questions and i had no idea he was a kid. >> now these companies are worth multi- billions of dollars, if you look back, would they have sold? >> if someone came along with a big enough offer would have taken it. we do know with drew, actually, because in the y combinator application, we used to ask if someone offered you money, what is the least you would take. drew answered $1 million. it was convenient that no one wanted to buy dropbox early on. >> can you identify the future dropboxes sooner than everybody else?

>> we might be able to identify them better than other people, but there are limits to how well you can identify them. there is a good deal of luck. if you had to boil it down into one word what you are looking for, it's authentic. people who are real friends, not people who got together for purposes of a start-up or in it for the money. zuckerberg turned down the yahoo! acquisition offer. without having done that, facebook wouldn't be what it is today. >> how was the interview process

evolved? >> we first started out with what was it, 40 minutes? >> 40-minute interviews and now with the 10-minute interviews we don't have a pitch. >> how can you really know? >> you can't know for sure. here is an interesting test. after each minute, how likely are you to change your mind? if you had another 10 minutes, you might only change her mind to 2% of the time. >> what is the average valuation of all of the companies? >> the valuation is is $30 billion. >> what is your stake in the $30 billion? >> all the money is in the few big hits. and you have to ask what percentage you end up and we assume it will be end up being 3%. 3% of $30 billion. i have never done this. $900 million. until you asked me that, i never actually multiplied those numbers together. >> an article said sequoia has made more money than y combinator has. >> i believe that more of that $30 billion of equity along stew sequoia, rather than us. >> and your policy is you don't make follow-on investments, right? >> yeah. >> would you consider changing that policy in order to make money off the hits that you picked? >> we never say never. the problem with that, emily, is there is a signaling thing.

if we are going to do follow-on investments, that would hurt the founders who are probably great investment opportunities but we didn't choose to do a follow on. >> does it bother you sequoia has made more money? >> no. who cares?

>> i'm happy for them. i like sequoia. >> y combinator has gotten so much praise and a lot of criticism. why do you think it is so controversial? >> one of the most surprising things why y combinator became successful, the more famous something becomes, the more people want to attack it. >> it has always been a mystery to me though. every night i go to sleep, i think did we help the founders today? and the answer is almost always, yes. >> she goes to bed and say why are people saying mean things about us? it's so not true. >> you have said that other investors have tried to stab you in the back? are they a jealous? >> there have been some things where you can't believe someone is going to do that to you. it probably boils down to money and power. i don't know. >> one thing that people have said to me is that, well, y.c. has invested in 700 companies, there is only a handful of hits. is that a good track record? >> a couple hits or no hits. those are the only two options. so, yes. >> are y.c. companies overvalued? >> maybe. maybe all startups are. i have heard investors claiming that y.c. startups are 2 times over valued. that is the greatest compliment. that means we can take people into y.c. and if nothing else, they would get twice the value they would have had otherwise. >> is it a good thing if they are not worth it? >> if it is worth it, it is a bargain. >> i know something that jessica has said, not enough women. is that true?

>> we don't have enough women applying. we are making an effort in trying to do. we don't ask on the application what someone's gender is. we're trying to get the word out there that more women should be starting start-ups. we hosted a female founders conference where we bring successful female founders and tell their stories to inspire more women. >> some of the words that people use are harsh. they call y combinator a frat house. how many women have you funded? >> in the past were 4% were female, and now it is more like 12%. and obviously, that's not ideally where we want to be. but it is moving in the right direction. >> how do we get more women founding women? >> examples are what makes everyone to start start-ups. >> how have you changed the interview process to make sure you are getting the best people? that you are not discriminating, that everyone has an equal shot. >> one thing that has changed is we have a female partner in the interview rooms. >> why not completely blind screen everyone? >> i couldn't observe their interaction.

>> you've got two kids. what kind of parents are you? >> paul is the best father i ever met. i'm going to say that. because you wouldn't say that yourself.

he spends so much time with them, speaking to them, exposing them to things, rarely seen that other fathers have done. i lucked out. >> how do you manage being married and being colleagues? >> it always worked really well. >> it's really easy. we never disagreed on anything. >> have you ever fought about y combinator? >> i don't think so. >> no. >> i don't believe it. >> it's really true. and the secret is the same secret for co-founders in general -- you have different responsibilities. each person is in charge of their own thing and experts in their own thing. >> what is the hottest thing about a y combinator company? >> boosted boards. >> why boosted board? >> let's just say they have bigger ambitions then making skateboards. >> what is the biggest fire you had to put out? >> at least one a week of co-founder dispute, that and fundraising, interactions with investors and investors mal-treating the start-ups. we intervene.

>> how do you protect a start-up from its own investors? >> you don't have to make explicit threats. you just sort of say, come on, guys. be nice. but the investors know that behind that, if you don't, we won't send any more start-ups to you. >> if you don't, all of the y combinator founders will know

about it the next day. >> biggest regret? >> it is a bit grim. but it is very easy to say what my biggest mistake is. >> i'll do my answer. my biggest regret is i kind of squandered my college education. i didn't learn as many things as i could learn or work as hard as i could have and i compare myself to the founders, who are doing so many interesting and ambitious things and i kind of squandered a little bit of my youth. >> paul. >> i have to say it very carefully. so i can remain in control of myself. but remind your parents to be screened for colon cancer. >> i understand. my father passed away. there are many things i would like to tell him. and you for him. >> colon cancer. if they catch it early, it's so preventable. you have to make them go get screened. >> what is next? is yc it? or will there be a second act from paul and jessica? >> i'm fully just as enthusiastic about y combinator

as i was the day we started, if not more so. we are doing so many exciting things. >> now it actually seems like a good idea. [laughter] >> how about you, paul? >> i'm going to go back to writing. that was what i was doing before y combinator. that is what i was always hoping to do. >> how do you guys want yc to be remembered? >> i want us to still exist. i want yc to be this institution that persists for a long time. it could last a lot longer than a product company does because structurally it is like a university. it could, in principle, last for hundreds of years. >> i want us to be remembered for changing a lot of people's lives and making the world a better place. >> thank you so much. thank you for doing this. and being our guests on "studio 1.0." ♪