emily: it has been called the harvard of silicon valley. y combinator is perhaps the most prestigious start-up incubator in the world. it has funded more than 700 companies to date, including dropbox, airbnb, and stripe. but behind the start up 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 this edition of "studio 1.0," y combinator founders and husband-and-wife paul graham and jessica livingston. thank you so much for joining us.

jessica: thank you. emily: so paul, it has been six months since you stepped down from the helm. paul: about that, yeah. emily: of y combinator. how is it going? [laughter] paul: it is so great. i wish i had done it two years before. emily: why? paul: it was so hard running y combinator. i mean, i'm not really an administrator. y.c. had gotten kind of big. suddenly i was running this big thing. i was never suited to it. emily: you said you would get your brain back. did you get your brain back? paul: yeah. emily: you are still doing office hours. paul: i had, this afternoon, i had the best conversation with a founder that i've ever had. i had lunch with patrick collison. founder of stripe. 100% of the conversation was about giant, take-over-the-world ambitious plans. and that is like the best possible office hours. emily: how involved are you, jessica? jessica: i'm still very much involved. i'm doing all of the same things that i used to do. if not engaged in different things. i miss working with paul, but i also love working with sam altman. emily: now sam was actually the founder of one of your very first companies.

paul: yeah. emily: loopt. when you stepped down, there were certainly people out there who said he is not cut out to be you. paul: it is a good thing he's not cut out to be me, because i was not cut out to run something as big as y combinator is now. he is better than me at this. emily: come on, jessica. paul: i was good to giving advice to founders. emily: is sam going to be better than pg? jessica: well, they're going to be different. sam brings a lot of things to the table that neither of us had, which is 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. emily: i want to talk a little bit about each of you and where you came from. where you grew up. your parents. paul: my family came here from england when i was 3 1/2. and we lived in pittsburgh, because my father worked in the nuclear business. when you designed a nuclear reactor, he was the one who would figure out if it was going to explode. emily: so what kind of kid were you? paul: i was a bad kid. half the kids in my neighborhood were forbidden to play with me. emily: what did you do?

paul: i was always, always getting in trouble with everybody, just constantly. i was suspended from school, i think, at least once every year from like first grade to 12th grade. emily: and then at a certain point you got into computers? did that help? paul: they really didn't teach people computers in school. it was something you did over -- you did off on the side. emily: so when did you start coding? paul: i think when i was 15. on an ibm 1401 with 12k of magnetic core memory. emily: and then you went on to harvard to get your phd in computer science. paul: yes. emily: but you also took art classes on the side. paul: it was a very disorganized trajectory. i never knew what i was going to do. it was always a mess of random accidents. emily: jessica, what about you? jessica: well, i grew up outside of boston, and i was an angel. [laughter] paul: totally the opposite. jessica: i grew up with my father and my grandmother, his mother. had 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. emily: i know ultimately you ended up at a boutique investment bank. were you technical? did you ever learn to how to code? jessica: i never learned to code. i'm not technical in the least. someday when i retire from y combinator, i'm going to learn to code, but i was interested in it. emily: now paul, before y combinator, you started another company. tell me about viaweb. the idea, at the time, was quite revolutionary. paul: well, the reason the company was called viaweb, is that the software worked via the web. right? it was what is now known as a web app. it was the first one. it was an online store builder and got bought by yahoo!. and eventually became -- still is -- yahoo!'s store. emily: what was it like working at yahoo!? how long did you last there? the guy who got suspended every year. paul: i was basically getting suspended from yahoo!, too. i hereby apologize to all the people i have ever worked for.

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

paul: yeah. about -- it became the essay "how to start a startup." one of the things i told them was that they should raise money from people who had gotten the money from starting a start-up. because then they could get advice. they were all looking at me expectantly, like baby birds looking at their mother wanting to feed them. [laughter] but then, afterwards, i felt sort of bad, because i had always thought i was going to do some angel investing, but i still hadn't gotten around to it because i didn't know how. i thought, alright, i'll do it, i'll do it, i'll finally start doing some angel investing. it was not supposed to grow into this big thing. this is one of the things we tell founders so often. the best way to start a start-up that is really going to take over the world, is don't even try to start a startup, just try and start a project you think would be cool to work on. and y.c. was an instance of this. emily: how did you come up with the name y combinator? paul: the original name was cambridge seed. emily: ooh. paul: yeah, but then we thought -- i mean, it's a cool name. jessica: we were in cambridge. paul: but it was too tied to one place. the y combinator is a trick

under lambda calculus, which is a formal expression for expressing algorithms, a math concept, basically. emily: how did you guys decide to work together on this? because you weren't married yet, but that is a big decision. paul: that was -- it was scary. because we had only been dating for a year. ♪

emily: there are myths about so many of the great companies, start-ups, founders that are boiled down into legend. and what is the myth of y combinator and what is the reality? paul: people just don't realize how, like, not interested we were in making money. i'm thinking of all these people, saying on forums, "oh, it's so self-serving," but honestly, in the beginning, we weren't trying to make money. jessica: it was all an experiment to see if these new

ideas could work. emily: a lot of people think of it as paul graham's y combinator. paul: oh, there is a myth. there is a really big myth. emily: you call jessica the secret weapon. paul: like, nothing has ever happened at y combinator that jessica did not, like, set her seal of approval on. right? she basically has veto over everything. emily: and this is the first time that you guys have been interviewed together? jessica: yeah. emily: i can't believe that. jessica: well, 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. paul: this is why she is the secret weapon. she is one of these people who has perfect pitch for character. she can talk to somebody and fairly quickly tell whether they are a good person or not. emily: so tell me about the first class. eight companies, but you didn't know if anyone was going to even apply, right? jessica: right. we had no idea if people were going to apply. and we had a few hundred applications. paul: the most critical

innovation with the y.c. model is to fund a bunch of startups at once. so it's better for the investor, but also better for the startups, because they have colleagues. that's the big thing you're missing. in a startup, it is so lonely, and now it is like it has some of the advantages of being part of a company without the disadvantages. emily: at what point did you decide to take money from investors? because obviously, you have feelings about vc's. paul: we had to, frankly. i ran out of money. and it takes -- god, i mean, how long does it take? we don't even know yet how long it takes for the big exits. but, like, 10 years maybe. emily: you are going into your 19th funding cycle. jessica: mm-hmm. emily: what do you consider the most successful y.c. companies? paul: it is pretty much the ones with the high valuations. the three with the highest valuations are airbnb, dropbox, and stripe. emily: did you know early on that they were going to be hits? paul: we knew the founders were good. emily: what was it about drew houston and brian chesky? what was it about them that -- paul: it was different things. jessica: yeah.

paul: 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 almost impossibly hard problem. whereas airbnb is different. airbnb is like this mass movement, where everyone is staying in other people's houses worldwide. jessica: we were skeptical, though. i just remember thinking, we don't really care what the idea is. these founders are awesome. we are funding them. paul: patrick collison from stripe, i have known since he was, like, 14. back when he was this high school kid in ireland, he used to email me questions about the lisp programming language, and i had no idea he was a kid. emily: now that these companies are worth multi-billions of dollars, when you look back, if they had had the opportunity, would they have sold? paul: almost everyone, if someone came along with a big enough offer at the right moment, would have taken it. we do know with drew, actually,

because in the y combinator application early on, we used to ask, if someone came along and offered you money for your company right after y.c., what is the least you would take? i think drew answered $1 million. so it's really convenient for everyone involved that no one wanted to buy dropbox early on. emily: now that you have been doing this for so many years, can you identify the future drew houston's and brian chesky's, the future dropboxes and airbnb's, earlier? sooner than everybody else? paul: we might be able to identify them better than other people, but there are limits to how well you can identify them. jessica: yeah. paul: 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. you are looking for people who are real friends, not just people who got together for purposes of this start-up. you don't want people who are just in it for the money. zuck's not in it for the money. he never was. and that's why he turned down

the yahoo! acquisition offer. and without having done that, he would never -- facebook wouldn't be what it is today. emily: how has the interview process evolved? paul: we first started out -- was it, 40 minutes? jessica: i think it was 40-minute interviews, and now with the 10-minute interviews we really don't have a pitch. emily: how can you really know in 10 minutes? paul: 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 your mind 2% of the time. emily: what is the average valuation of all of the y.c. companies? paul: i know what their valuation is. it just crossed $30 billion. emily: what is your stake in the $30 billion? paul: all the money is in the few big hits. right? so you have to ask, what percentage do you end up with a few big hits with after dilution? and we assume it will be end up being 3%. something like that. so 3% of $30 billion -- see, i have literally never done this calculation. emily: $1 billion. paul: $900 million. but until you asked me that, i had never actually multiplied those numbers together. emily: an article was written recently that sequoia has made more money on y combinator than y combinator has. paul: yeah. strictly speaking, i believe more of that $30 billion worth of equity belongs to sequoia than us.

emily: and your policy is you don't make follow-on investments, right? paul: yeah. emily: would you ever consider changing that policy? in order to make money off the hits that you picked? jessica: we never say never. but the problem with that, emily, is that there is a signaling thing. emily: right. jessica: and so, if we were to do follow-on investments, we are telling other investors who we believe are going to be the best, and that would hurt the founders, who are probably great investment opportunities, but we just didn't choose to do a follow on in. emily: does it bother you that sequoia has made more money than you have? paul: no. jessica: no. paul: who cares? jessica: i'm happy for them. i really like sequoia. emily: y combinator has gotten so much praise but also a lot of criticism. why do you think it is so controversial? paul: one of the most surprising things, i realized, as why y combinator became more successful, is that the more famous something becomes, the more people want to attack it. jessica: it has always been a mystery to me though. because, honestly, every night i go to sleep, i think did we help the founders today? and the answer is almost always, yes. paul: actually she goes to bed

at night and she says, why are people saying all these mean things about us? it's so not true. emily: you have said that other investors have tried to stab you in the back? do you think they are -- are they jealous? jessica: there have been some things that you just can't believe someone is going to do that to you. i don't know why they -- i mean, it probably boils down to money and power. i don't know. emily: one thing that people have said to me is that, well, y.c. has invested in over 700 companies, there is only a handful of hits. is that a good track record? paul: you either have a couple hits or no hits. those are the only two options. right? so, yes. emily: are y.c. companies overvalued? paul: maybe. maybe all startups are. so, i have heard investors claiming that y.c. startups at demo day are two times over valued. and that is the greatest compliment. that means we can take people into y.c. and even if we did nothing else, they would be able to get twice the valuation they

would have had otherwise. emily: but is that a good thing if the company is not really worth that? paul: if it is worth a lot, then it was a bargain anyway, even if it was overpriced. emily: now something else that you've been -- and i know this is something that jessica has thought a lot about -- is not admitting enough women. is that true? jessica: we don't have enough women applying. which is what we are really making an effort now on encouraging -- on 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've hosted a female founders conference that we're going to do again this winter, where we bring, you know, successful female founders and tell their stories to inspire more women. emily: some of the words people use are harsh. i mean, they have called y combinator a "frat house." how many women have you funded? jessica: in the past, it was

usually around 4% of the founders in the batches were female, and now it is more like 12%. and obviously, that's not where we ideally want to be. but it is moving in the right direction. emily: how do we get more women founding -- women who are larry and sergey's? paul: examples are what makes everyone want to start start-ups. emily: how have you changed the interview process in subtle ways to make sure you are getting the best people? that you are not discriminating, that everyone has an equal shot? jessica: well, one thing that has changed recently is that we have a female partner in every one of the interview rooms. emily: why not completely blind screen everyone? paul: how could you tell if they are telling the truth then? jessica: then i couldn't observe their interaction. ♪

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

yourself. he spends so much time with them, teaching them things, exposing them to things, things that i've rarely seen a lot other fathers do. paul: thank you. jessica: so, i lucked out. emily: now how do you manage being married and being colleagues? paul: it always worked really well. jessica: it's really easy. we never disagreed on anything. emily: really? have you ever fought about y combinator? paul: i don't think so. jessica: no. no. emily: i don't believe it. paul: it's really true. it's really true. and the secret is the same secret that's true for co-founders in general, which is you have different responsibilities. right? each person is in charge of their own thing and they're experts in that thing. emily: what is the hottest y combinator company that we don't know about yet? paul: boy. jessica: oh, that's hard. paul: boosted boards. emily: why boosted boards? paul: let's just say they have bigger ambitions then making skateboards. [laughter] emily: what is the biggest fire you have had to put out at a startup? jessica: i've put out fires at least one a week of co-founder disputes.

that and fundraising. interactions with investors and investors mal-treating the start-ups. we intervene. but can you think of the biggest fire? emily: how do you intervene? like, how do you protect a start-up from its own investors? paul: at this point, you don't have to, like, make explicit threats. right? you just sort of say, come on, guys. be nice. but the investors know that behind the "come on, guys, be nice," is, if you don't, we won't send any more start-ups to you. jessica: and if you don't, all of the y combinator founders will know about it -- paul: like the next day. jessica: the next day. emily: biggest regret? paul: it is a bit grim. but it is very easy for me to say now what my biggest mistake -- jessica: i can answer. 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 always compare myself to the founders we fund, who are doing so many interesting and ambitious things, and i think i kind of squandered a little bit of my youth. emily: paul? 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. emily: i understand. my father passed away. there are many things that i would like to tell him. paul: yeah. emily: and do for him. paul: colon cancer, man, it's just -- if they catch it early, it's so preventable. you know? you have to make them go get screened. jessica: yeah. emily: so what is next? i mean, is y.c. it? or will there be a second -- jessica: well, not from paul. emily: act from paul and jessica? jessica: i'm, like, fully just

as enthusiastic about y combinator as i was the day we got started, if not more so. we are doing so many exciting things. paul: now it actually seems like a good idea. [laughter] emily: how about you, paul? paul: i'm going to go back to writing. that was what i was doing before y combinator. and that is what i always was hoping to do. emily: how do you guys want y.c. to be remembered? paul: you know, i don't want y.c. to be remembered, i want us to still exist. right? i want y.c. 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 more like a university. it could, in principle, last for hundreds of years. jessica: i want it to be remembered as changing a lot of people's lives and hopefully making the world a little bit of a better place. emily: paul graham and jessica livingston, thank you so much. jessica: thank you for having us. emily: thank you, thank you, for doing this and being our guests on "studio 1.0." ♪

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