Like many recent graduates who adopt this pose, Graham quickly ran out of money. The following year, he dropped out of school and went to work as a software engineer at a Boston start-up. From 1991 to 1995, he bounced among art school, temporary software-development jobs, and long periods spent painting. "I was doing this thing where I would consult for a while and then run out of money and be in a panic," he says. Eventually, he decided it was time to make some real money.
Graham teamed up with a friend he had met at Harvard, a brilliant hacker named Robert Morris, who is notorious for crippling the Internet in 1988 by accidentally deploying a computer worm. Their idea was to build software for retailers. "Netscape was about to do this big IPO, and they had a huge PR campaign," Graham remembers. "Netscape was saying that people were going to buy and sell a lot of stuff online. So we thought, OK, we'll write software for people to buy and sell things online."
In the fall of 1995, Graham and Morris raised $10,000 from a friend named Julian Weber, a corporate lawyer who was married to one of Graham's painting teachers. They used the money to buy a Web server and then started writing code. "It was one scary moment after another," Graham says. "We didn't know what a term sheet meant or what a valuation was or that companies had boards of directors. All of those things just seemed like words we'd read in a newspaper."
By the end of the year, Viaweb had a product, and Graham started calling on potential customers, offering to set up and manage their online stores for a fee of $100 to $300 a month. He was a lousy salesman but managed to persuade a few retailers to try it out. Because Viaweb was a software program that ran inside a Web browser -- hence the name -- Graham was able to continually respond to customer feedback. "We learned quickly by paying attention to the users," Graham says.
By Christmas of 1996, Viaweb had 70 clients, including Rolling Stone and International Male. A year later, the number had quintupled, and Yahoo came calling. In 1998, Viaweb accepted a $49 million buyout offer. "Viaweb was the prototype for the kind of company we fund now," says Graham. "The reason we know that it's possible to start a start-up with about $10,000 and someone to help with the paperwork is because that's exactly what we had."
Graham worked at Yahoo for a year and a half and seems to have suffered through every minute of it. "Running a start-up is like being punched in the face repeatedly," he says. "But working for a large company is like being waterboarded."
After leaving Yahoo, Graham spent most of his time writing essays about technology and business and developing a new programming language. His best work was collected in a book, published in 2004, called Hackers & Painters: Big Ideas From the Computer Age. "Everything around us is turning into computers," he writes in the preface. "So if you want to understand where we are, and where we're going, it will help if you understand what's going on inside the heads of hackers."
In March 2005, Graham was invited by the Harvard Computer Society, an undergraduate group, to talk about starting a company. "I told them to raise money from angel investors, preferably people who have started start-ups themselves," he says. After delivering that line, he glanced at the audience and noticed that everyone was looking at him expectantly. Fearing a deluge of bad business plans from bright-eyed Harvard students, he quickly added, "Not me." Later that day, while having coffee with some of the students, he remembered that if he hadn't been able to find his own angel investors, Viaweb never would have gotten off the ground. He decided it might be worth seeing what these kids could come up with.
Y Combinator began as an experiment in angel investing, conducted during the summer of 2005. Graham recruited Morris, Livingston, and a Viaweb employee named Trevor Blackwell to join him. The pitch was straightforward: $6,000 for a company with one founder, $12,000 if the company had two founders, and $18,000 if the company had three. In exchange, Y Combinator would get roughly 6 percent in common stock. (Exact ownership stakes vary. The most Y Combinator has taken is 10 percent; the least is 1.4 percent.)
Graham promoted the program with an essay that he posted on his website and that quickly found its way to many college students' e-mail inboxes. "We give you enough money to live on for a summer, as with a regular summer job," he wrote. "But instead of working for an existing company, you'll be working for your own; instead of showing up at some office building at 9 a.m., you can work when and where you like; and instead of salary, the money you get will be seed funding."
Graham received 227 applications, mostly from computer science students, and he invested in eight start-ups. Half went on to raise additional funding, and two turned down acquisition offers. Graham knew that most of the companies would probably die, but he also believed he was onto something. For example, Loopt, which develops software for cell phones that allows users to see where their friends are, managed to raise $13 million from two Sand Hill Road firms. Another company in the first batch, Reddit, operates a social news website similar to Digg. It was acquired by Condé Nast just a year and a half after its founding and before it had hired any full-time employees. Though the price was not disclosed, reports have pegged it at anywhere from $10 million to $13 million, which means that Y Combinator generated a sizable return, as much as 25 times its initial investment.
Reddit is a good example of what happens to a Y Combinator company when most things go right. But few Y Combinator start-ups enjoy such a straight line to success. That, in part, explains why Graham encourages companies to release products quickly. Doing so, he says, is the best way to turn a bad idea into a good one. "As long as you pay attention to your users, you can change a bad idea," he says.
