Startup School Radio: 42Floors' Jason Freedman on How Startups Are Born Out of Problems

In Episode 19 of Startup School Radio, a podcast that features stories and practical advice about starting, funding, and scaling companies, our host Aaron Harris first sat down with Tyler Bosmeny, who talked about his experience going from the Harvard math department to co-founding education-oriented API platform Clever (YC S12). In the second half of the episode, Aaron interviewed Jason Freedman, who has co-founded two Y Combinator-backed companies: Flightcaster, which launched out of YC's Summer 2009 class, and 42Floors, which launched out of YC's Winter 2012 class.

You can listen to the episode on Soundcloud here, and iTunes here.

One interesting part of Jason Freedman's interview is where he talked about how all of his startups have been born out of a problem that he had personally encountered, rather than from a desire to "start a company":

Aaron: And the funny thing is, each of the ideas you've worked on, they weren't things that you'd written down in a notebook somewhere that you were going to do at some point in life. It's just 'Hey, I just realized that this problem exists. Let me go fix this.'

Jason: You know, when you think of a startup career, I don't have a startup career. What I've had is a succession of problems that have found their way into my life, and that I decided that I could figure out a way to solve.

Aaron: Yeah, it's interesting, because from what we've seen, that tends to be the places where the best startups get started. It's not the person going out and looking for a business to start or looking for a problem set that exists and to go create a startup against it. It's, 'Oh, wait, I've actually seen this. This doesn't make sense. It's in my life, let me fix it.' Because you have so much depth of understanding and so much experience.

Jason: With 42Floors, we're trying to make it easy for people to search for commercial real estate, and if I had started a startup to do that, I would've thought it would never work because it's going to be way too hard and I didn't really understand anything about commercial real estate. But solving a problem for myself, that I could figure out.

Aaron: It's interesting how sometimes ignorance is the thing that actually lets you drive and start something.

YC Digest - October 10-16

Top Stories from the YC World -- October 10 to October 16, 2015


YC News

YC Continuity

Q&A with YC Continuity's Ali Rowghani

Hacker News discussion on YC Continuity

Startup School Radio, hosted by YC's Aaron Harris, named in Forbes' "12 Best Podcasts For Entrepreneurs"


Upcoming events

Y Combinator at Make School - 10/24

YC Office Hours at Money20/20 - 10/27



Alumni news

Optimizely (W10) raises $58 million Series C

Smart luggage maker Bluesmart (W15) raises $11.5 million

Legal automation platform Ironclad (S15) on The Pitch podcast

Housing nonprofit New Story (S15) featured on ABC 7 and in Webflow (S13) video

Subscription fashion rental service Le Tote (S13) launches maternity line

MoveLoot (W14) launches retailer partnership platform Trade


CareMessage CEO Vineet Singal (W14) and Airbnb CEO Brian Chesky (W09) named in New York Times' "Five Visionary Tech Entrepreneurs Who Are Changing the World"

Stripe (S09) and Zenefits (W13) listed in Forbes' "These Four Tech Unicorns Could Reshape Their Industries"

FullStack Academy (S12) launches Grace Hopper Academy, a programming school for women

Markhor (S15) founder Waqas Ali's AMA on Tech In Asia

Home improvement platform BuildZoom (W13) raises $10.6 million

Q&A with YC Continuity's Ali Rowghani

Today we announced Continuity, a new venture capital fund run by Y Combinator. You can read our blog post here, and coverage from the Wall Street Journal here.

Below, Continuity's Ali Rowghani answers a few commonly-asked questions about what Continuity is, how it will work, where it fits within the venture capital landscape, and why he decided to lead this effort at YC.

What is the Continuity Fund?

Ali Rowghani: The Continuity Fund is YC’s follow-on investment fund that will allow us to provide capital to YC companies years after they graduate from our program.  

How will the Continuity Fund invest capital?

AR: The Continuity Fund will invest capital in two ways:
  • First, we will exercise YC’s pro rata investing rights in follow-on financing rounds, beginning with the Series A.  For rounds priced below $300M, we will exercise our pro rata rights in a programmatic fashion.  In other words, we expect to exercise pro rata rights in all YC companies that raise capital at valuations below $300M.  For rounds priced above $300M, we will exercise our rights more selectively.
  • Secondly, and on a purely elective basis, we will consider leading or participating in growth financing rounds of YC companies.  For these elective investments, we are open to taking Board seats where it makes sense for founders, but do not expect to do so in every investment.

Will the Continuity Fund invest in any non-YC companies?

AR: No. Our focus is exclusively on companies that have been through our program.
Why did YC decide to raise this fund?
AR: The idea actually came to us from our founders, many of whom have encouraged us to raise a fund so that YC could remain a financing partner for them as they grew their companies.  We ultimately decided to do so because we realized that the ability to provide capital beyond the seed stage was pretty crucial to fulfilling our mission of enabling more innovation in the world.

Isn’t this Fund going to bring you into conflict with VCs?

AR: We will not be competing with early stage VCs at all.  These investors are vital parts of the startup ecosystem, and we have no desire to compete with or otherwise disrupt this ecosystem.  So other than exercising our pro rata rights, the Continuity Fund will not be investing in seed or traditional Series A rounds.But as we all know, good companies are staying private longer, and the market for private growth capital has grown considerably. These later stage rounds tend to be larger, shared rounds rather than winner-take-all. 

So while some competition is unavoidable, we foresee a lot of collaboration with other late stage investors as well.

Why did you decide to lead the Continuity Fund?

AR: Over the last 15 years, I’ve worked at two iconic companies, Pixar and Twitter, and helped them manage rapid growth and scale.  I joined YC as a part-time partner last November precisely to help maturing companies in the YC portfolio with these same challenges.

I didn’t realize at the time how truly distinctive YC  is.  There’s no other organization in the world that has the kind of founder network and loyalty that YC possesses.  Having observed the last two YC batches closely, there’s no doubt in my mind that YC dramatically increases the probability of success for every one of its companies...not just the probability of raising Series A capital, but also the probability of building great long-lasting companies.  

So when Sam asked me if I would be interested in leading the Continuity Fund, I realized that this was an opportunity to extend the mission and impact of YC into more mature companies.  Supplying capital is one part of that mission.  But supplying meaningful company-building help and advice for rapidly scaling companies is even more important, and that’s something that my prior operating experiences have prepared me well to do.

YC Continuity

YC will fund its 1,000th company this year, and many of these companies are now scaling their organizations, revenue, and operations.  Though years removed from our program, these founders continue to come to YC for advice and support, and we would like to do more to help them.

To that end, I'm delighted to share that Ali Rowghani has joined YC as a full-time partner.  Ali has quickly become a trusted advisor to many of our growth-stage companies, and is helping a great deal with our vision of continued support for our alumni companies after they finish our program.

Also, in response to requests from a number of YC founders, we've raised a new fund called the YC Continuity Fund, which Ali will be running.  This fund will allow us to support YC companies well after Demo Day in two primary ways.

First, we're going to do our pro rata investment for every YC company in every round with a valuation below $300 million.  We believe we generally pick good companies for YC, and we want to be able to continue to support them in future financings.

Second, we will consider leading or participating in later stage growth financing rounds of YC companies.  We are open to taking Board seats where it makes sense for founders, but do not expect to do so in every investment.  We hope to be a founder-friendly partner for maturing companies in the same way we have been a founder-friendly early-stage investor.  Also, there are some companies we think are very good and important to support with growth-stage capital that traditional investors are less excited about, and we're looking forward to being able to do that.  Finally, we look forward to being a very long-term focused investor in a sector where most players are not.

We also want to be very clear on what we're not doing. We are not pursuing investments outside of the YC portfolio.  We are also not leading seed or traditional Series A rounds or trying to otherwise disrupt early-stage VCs, whose participation in the ecosystem is very valuable.  It'd be the wrong thing for our companies, as it would both create massive signaling issues for companies we didn’t fund and deprive companies of valuable additional advisors.  By doing pro rata in every company, we should avoid any signaling issues.

Our mission at YC is to be the organization that enables the most innovation in the world.  Capital especially long-term capital willing to invest outside of the current trends is an important ingredient in that mission, and I'm excited we are now able to better support some of our companies.  In doing so, I hope that joining YC is an even better deal for companies just starting out.

YC Office Hours at Money20/20 - 10/27

YC partner Aaron Harris will be hosting office hours with startups at Money20/20 on October 27.

Sign up here.

Aaron will meet teams from 2pm-6pm PT on Tuesday, October 27. Office hours are 20 minutes each. We recommend coming with a specific question or challenge that you want feedback on.

If you're selected, we'll reach out with your time slot and where you'll be meeting by Friday, October 23.

See you there! 

UI/UX for Startups Livestreamed on Platzi - 10/12

Y Combinator's Kevin Hale will be hosting a talk at Stanford about UI/UX for Startups this Monday, Oct 12 at 5pm PT. Find out more here

If you can't make it in person, the talk will be livestreamed on Platzi. Sign up to watch the class.

Kevin will walk you through best practices for UI/UX design. Learn what elements every startup needs on their site, and see him do live UX reviews of products built by people in the audience.

If you'd like your site to be considered for live review, let us know here: https://ycombinatorevents.wufoo.com/forms/live-ux-review-at-stanford/

The talk will be followed by Q&A.

YC Digest - October 3-9

Top Stories from the YC World -- October 3 to October 9, 2015

The application deadline for our Winter 2016 class is next Tuesday, October 13. Apply now!


YC News

YC Research

Welcome Jared!

Sam Altman in conversation with Elon Musk at the Vanity Fair New Establishment Summit

I am Sam Altman, President of Y Combinator. AMA!


Essays

Apply by Luke Iseman

How to Apply to Y Combinator by Cofactor Genomics (S15) founder Dave Messina


Alumni news

Paribus (S15) Raises $2.1 Million

Welcome Jared!

I'm delighted to share that Jared Friedman is joining YC as a full-time partner.  Jared co-founded Scribd, the world's online library, which was funded by Y Combinator in 2006.  He was the CTO there.  Jared has also been an investor in more than 30 YC companies.  Before Scribd, he studied computer science at Harvard.

There are now 16 full-time partners at YC.

YC Research

Our mission at YC is to enable as much innovation as we can.  Mostly this means funding startups.  But startups aren’t ideal for some kinds of innovation—for example, work that requires a very long time horizon, seeks to answer very open-ended questions, or develops technology that shouldn’t be owned by any one company.

We think research institutions can be better than they are today.  So we’re starting a new research lab, which we’re calling YC Research, to work on some of these areas.

We’re going to start YCR with one group (which we should be ready to announce in a month or two) and if that goes well, we’ll add others. 

YCR is a non-profit.  Any IP developed will be made available freely to everyone.  (The researchers will, of course, have full discretion over when they’re ready to release their work, and we’ll have a process in place to address technology that could be dangerous.)  Because of the openness, the researchers will be able to freely collaborate with people in other institutions. 

We’re not doing this with the goal of helping YC’s startups succeed or adding to our bottom line.  At the risk of sounding cliché, this is for the benefit of the world.  As we’ve seen throughout history, new technological breakthroughs help all of us.  Fundamental research is critical to driving the world forward, and funding for it keeps getting cut. [1] 

To start off, I’m going to personally donate $10 million, and we will raise more money for specific groups soon.

YCR researchers will be full-time YC employees (instead of us making grants to other organizations).  We’ll especially welcome outsiders working on slightly heretical ideas (just like we do for the startups we fund) and we’ll try to keep things small—we believe small groups can do far more than most people think.  Also, smallness usually means less politics, which has plagued science in recent decades.

The researchers will have full access to YC and the YC network.  YC has a very high problem flux at this point—we fund hundreds of companies per year.  Compensation and power for the researchers will not be driven by publishing lots of low-impact papers or speaking at lots of conferences—that whole system seems broken.  Instead, we will focus on the quality of the output.

We plan to do this for a long time.  If some of these projects take 25 years, that’s perfectly fine with us. 

We’re very excited to see what comes out of this.

 


[1] Funding for technological development is actually relatively high, but funding for fundamental research keeps getting cut.  Investors want to fund incremental progress—and the world has gotten very good at delivering that.  This is more valuable than it sounds; incremental progress compounds quickly. 

But it’s not all we need—we are dependent on the unpredictable breakthrough jumps to drive humanity forward.  Technology startups today work very well for making a super-efficient piston engine, but they are unlikely to fund the kind of open-ended R+D required to develop a jet engine.

Apply

At YC, we have a healthy problem. It’s cool to start a startup lately, and YC is an increasingly  popular place to do so. But this kind of popularity can be a double-edged sword: In the last month, I’ve spoken to more than 50 high-quality founders who would make strong candidates for our upcoming class but feel intimidated out of applying to YC. 

There are a lot of reasons.

Some think they’re too early. They don’t have a fully-functional prototype, user growth is lower than they’d hoped, their crowdfunding campaign fell short.

Some think they’re too late. They know exactly how they’ll manufacture their device, they already ran a 6-figure crowdfunding campaign, their site traffic is growing. They (nearsightedly) see a series A as the ultimate goal, and it’s just barely out of reach.

Some have been rejected previously. For their current startup or a past one, they tried and failed to gain a spot in one of our previous classes. They decide that it’s not worth trying again.

The reality is that there is no ‘just right:’ Each company is different, and there is no perfect time to apply.

If you think you’re too early, you probably aren’t. The questions in our application are all things you should be thinking about at the earliest stages of launching a startup. They will help you structure ideas around your fledgling company. These are questions you should have answers to regardless of whether you plan to apply for YC. Instead of wasting time pondering whether your company is mature enough to apply, answer the questions, add a video, and submit your application.

If you’re afraid you’re too late, think again -- particularly if you don’t fit into a traditional venture-capital-friendly category. Last year, hundreds of companies that raised over $200k applied. YC is great for entrepreneurs with ambitious visions in categories unusual to venture capital, and you’ll see us introduce additional tools to help here in the coming months.

Over 10% of our alumni were rejected the first time they applied (including Luna Sleep, a strong hardware company in our last class.) We love seeing companies apply again. Show us that you’ve progressed substantially towards product-market fit, and it will be a no-brainer to offer you an interview.

As of this posting, applications are open for another 8 days. Many of our best companies applied on a lark. Many of our best companies thought they were too late/early to apply. Apply!

[Thanks to Colleen Taylor, Denis Mars, Jared Friedman, Sam Altman, Aaron Harris and Kat Manalac for reading drafts / contributing]