Entrepreneurs

4 traits investors look for when determining if a start-up will make millions

Sam Altman, president of Y Combinator
Photo by Bloomberg

For an entrepreneur, getting accepted into the start-up school Y Combinator is like getting into Harvard or Stanford: Since admission is ultra competitive, it gives your start-up validation and entrance into an invaluable alumni network.

There's the money, too. Y Combinator gives start-up teams $120,000 in return for seven percent of the company's equity.

Since opening in 2005, Y Combinator has funded almost 1,500 startups. Those companies are worth more than $80 billion. By the end of this year, "assuming there is not a macroeconomic meltdown," the collective total valuation of the Y Combinator portfolio will surpass $100 billion, says Sam Altman, president of Y Combinator's parent company, in his recent annual letter.

Runaway successes including Airbnb, Reddit, Dropbox and Stripe are all Y Combinator alumni. More than 50 Y Combinator start-ups are worth more than $100 million each, Altman says.

So, what does does it take to get into the elusive Silicon Valley start-up school? Altman says Y Combinator looks to answer four questions.

1) Will this company build something lots of people really love?

Y Combinator is not looking to fund niche start-ups. It's interested in start-ups that serve a large audience and have the potential to make a lot of money, Altman says.

2) Will this company be easy to copy?

Entrepreneurs that Y Combinator invest in have some specific knowledge set or expertise. "The most successful companies I've worked with have a significant competitive advantage — network effect, proprietary technology, complex coordination, or barrier to entry of some other sort," says Altman.

"I understand in theory it's possible to build a very successful commodity company, but I don't know how to do it."

Sam Altman, President of Y Combinator, arrives at the Hotel Taschenbergpalais Kempinski Dresden for the 2016 Bilderberg Group conference on June 9, 2016 in Dresden, Germany.
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Sam Altman, President of Y Combinator, arrives at the Hotel Taschenbergpalais Kempinski Dresden for the 2016 Bilderberg Group conference on June 9, 2016 in Dresden, Germany.

3) Will these founders develop into forces of nature?

Assessing the founding team is the hardest piece of the process, says Altman, because you are not only making a judgement on who the founding team is at the present moment but who that person will become in five years.

"Here are some questions I ask myself: Are these founders relentlessly determined? Are they original thinkers? Are they smart, and especially do they have new insights I haven't heard before? Are they good communicators (and so will they be able to hire, sell, raise money, talk to the press, etc)?

"Are they focused and intense? Do they always seem to find a way around obstacles? Would I work for them?"

"We especially like founders who have some sort of non-traditional background; we are somewhat suspicious of founders with extremely 'tracked' lives." -Sam Altman, President of Y Combinator

Y Combinator looks for obsessives, people relentlessly driven by a passion. Cookie-cutter resumes, no matter how pristine, are less exciting.

"We especially like founders who have some sort of non-traditional background; we are somewhat suspicious of founders with extremely 'tracked' lives," says Altman. "Start-ups are not a resume item, and we don't like founders who view YC as a stop on the way to B-school."

Altman specifically denounces nepotism.

"We have had great success funding 'unknown' people, and we will keep doing this — it's one of our two or three best secrets," he says. "Please help us spread the message: you don't need to be experienced, well-known, or have an impressive resume to get into YC.

"We fund smart, ambitious people with a great idea and evidence that they can build things."

4) Does this company have a clear and important mission?

An inspiring mission is important for a start-up to be able to hire good people, says Altman. "Companies that don't have this usually have a hard time recruiting enough great people to work with them, and thus struggle to become very large."

"Without this," says Altman, "I usually get bored."

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