20VC Sam Altman, Y Combinator President on What Makes Truly Great Leaders, Why We Will See A Compression of Seed Funding & The Future Scaling of YC



In this episode of "20 minutes VC," host Harry Stebbings interviews Sam Altman, president of the influential startup accelerator Y Combinator, and co-chair of OpenAI. They discuss the qualities of great leadership, with Altman emphasizing the importance of conviction in non-consensus ideas and the ability to persevere despite others' doubts. Altman also touches on his accidental journey from hacking on a project to becoming a venture capitalist. The conversation shifts to how Y Combinator has scaled and innovated in the venture space, and Altman's desire to see growth-stage investing improve in conduct and support for founders. Additionally, he shares insights on what he values in founders, such as determination, communication skills, and the ability to exceed expectations regardless of their background. The episode also covers the future of YC, its global reach, and its expansion into new sectors, with Altman hinting at ambitious plans for the next five years without revealing specifics.

Summary Notes

Introduction to Sam Altman and Y Combinator

  • Sam Altman is the president of Y Combinator (YC), a highly successful startup accelerator.
  • Y Combinator's alumni include Airbnb, Dropbox, Reddit, and Flexport.
  • Sam is also the co-chair of OpenAI, a nonprofit AI research company.
  • Before YC, Sam co-founded and was the CEO of Loopt, which Y Combinator funded in 2005 and was acquired by Green Dot in 2012.
  • Sam founded Hydrazine Capital, with a portfolio including Xenophys, Flexport, and Soyland.

"Sam is the president at Y Combinator, the world's most successful accelerator with alumni that includes the likes of Airbnb, Dropbox, Reddit, Flexport and many more incredible companies."

The quote highlights Sam Altman's role as the president of Y Combinator and its significance in the startup world.

Sam Altman's Entry into Startups and Venture Capital

  • Sam's entry into startups and venture capital was accidental.
  • Originally a student working on a project, Sam learned about Y Combinator and turned the project into a startup.
  • He ran his company for seven years, during which he also advised other companies.
  • After his CEO tenure, Sam began investing and eventually moved to venture capital full-time.

"I was a student, I started hacking on a project and I heard about this thing called Y Combinator, and I thought maybe then that it could become a startup."

This quote explains how Sam's initial project led him to Y Combinator, setting the stage for his future in startups.

The Theme of Greatness and Leadership

  • The podcast episode focuses on the theme of greatness, particularly in leadership.
  • The discussion includes leadership within Y Combinator, among investors and founders, and a broader view of the future.

"And today I want to focus around one core theme, and that theme being greatness."

The quote sets the main theme of the podcast episode, which is to explore the concept of greatness in various contexts.

Conviction in Leadership

  • Great leaders in Silicon Valley often have conviction in ideas that are not yet consensus.
  • They persist with their vision despite others doubting or disagreeing with their approach.
  • Y Combinator was initially seen as an unlikely success, but its leaders stuck to their beliefs.

"I think one of the things that is in short supply in Silicon Valley these days, and certainly required of great leaders is conviction around ideas that are right but not consensus."

This quote emphasizes the importance of conviction in leadership, a trait that is rare but essential for success.

The Balance Between Conviction and Adaptability

  • Leaders must differentiate between firm conviction and stubbornness.
  • It's important to update mental models with data and be intellectually honest about whether an idea is working.
  • Understanding exponential growth is crucial, as many people underestimate its impact.

"You can look at the data and if you're intellectually honest about it, you can have some opinion about whether you are right."

Sam Altman discusses the importance of being data-driven and honest in evaluating the success of a venture.

Sam Altman's Partnership with Paul Graham

  • Sam Altman and Paul Graham (PG) share a similar vision for Y Combinator.
  • Their partnership is strong because of their shared history and understanding of the organization.
  • Sam was in the first YC batch, which gave him deep insight into YC's potential and operations.

"I think we just had a very similar vision for what YC could be. I had known Paul, I had known YC for a long time."

The quote reflects on the aligned vision between Sam Altman and Paul Graham, contributing to their effective partnership.

Shared Context and Organizational History

  • Understanding the organization's development is crucial for a smooth leadership transition.
  • Reflecting on what strategies have worked or not is part of the transition process.

"Shared context and history of understanding how the organization had developed, what we had tried, what had worked, what hadn't worked."

This quote emphasizes the importance of having a comprehensive understanding of the organization's past strategies and their outcomes to ensure a seamless change in leadership.

Relationship Dynamics in Leadership Transition

  • The transition from founder to team member to leader did not alter relationship dynamics.
  • Maintaining consistent interactions is possible despite changes in roles.

"No, it didn't. I still think we interact the same way."

Sam Altman indicates that the shift in his role within the organization did not affect how he interacts with others, suggesting stability in relationships despite changes in organizational hierarchy.

Partnership Dynamics

  • Good organizations are influenced by the strength of their partnerships.
  • Y Combinator (YC) aims to improve partnership dynamics among its 17 partners.
  • Large partnerships in organizations are challenging but can be successful with the right communication and decision-making processes.

"That's the whole thing that makes YC so good, is that we have an incredible partnership and a lot of people."

Sam Altman attributes YC's success to its strong partnership, highlighting the significance of collaborative dynamics within the organization.

Addressing Partnership Dynamics

  • Addressing partnership dynamics involves open discussion about decision-making and tensions within the group.
  • Continuous evaluation and adjustment are necessary to maintain effective partnerships.

"You just sit in a room and have long conversations about where we're making good decisions, where we're making bad ones, where things are working smoothly, where there's tension and figure out what to do and try something new, and if it works, great. If not, you adjust it."

Sam Altman describes a hands-on approach to refining partnership dynamics through regular, candid discussions and a willingness to make adjustments as needed.

Founder Characteristics and Investment Decisions

  • Observing founders in their daily operations provides deeper insights than rehearsed pitches.
  • Determination, communication skills, intelligence, management, and vision are key founder traits.
  • Real-time observation of founders can reveal their true capabilities and potential.

"I learned so much more doing that than I did meeting with a founder and hearing a rehearsed pitch."

Sam Altman explains that shadowing founders provides a more authentic understanding of their qualities and work ethic, which is more informative than formal presentations.

Influence of Other Investors

  • Investors often make the mistake of being overly influenced by the decisions of their peers.
  • Independent evaluation of investment opportunities is crucial to avoid following the herd.

"I basically should not pay any attention whatsoever to whether or not other investors are investing in a company, even if they're people that I thought highly of."

Sam Altman advises against allowing the investment choices of others to sway one's own decision-making, emphasizing the importance of independent judgment.

Founder Paranoia and Success

  • The right kind of paranoia involves constant vigilance about potential product or strategy failures.
  • Successful founders maintain a sense of urgency and awareness of the risks, even during successful periods.

"It's just sort of this constant thinking through all of the branches of the tree and how a strategy could go wrong or how a product could go wrong or how a competitor could beat you."

Sam Altman describes the productive paranoia that successful founders exhibit, which involves continuously considering the various ways in which their strategies and products might fail.

Naivety in Founders

  • Naivety can sometimes be an asset for founders, as it allows them to take risks that more experienced individuals might avoid.
  • Many successful founders admit they might not have started their company had they known the challenges ahead.

"That's clearly something a lot of really good founders say."

Sam Altman acknowledges that naivety has played a role in the success of some founders, as it can lead to taking chances that ultimately pay off.

Differences Between Seed and Series A Investors

  • The distinction between a great seed investor and a great Series A investor may not be significant.
  • While there are specific needs at different stages, the overall qualities of a good investor remain constant.

"I don't think they're that different. You hear these founders say, this is exactly what I want from my seed investor, my a round investor, my b round investor, my on and on."

Sam Altman suggests that the fundamental characteristics of what makes an investor valuable do not change drastically between investment stages, despite some practical differences in the type of support needed.

Investor Traits

  • The importance of investors who help reduce stress in difficult situations is undervalued, especially by first-time founders.
  • Good investors often possess a calm demeanor during stressful times, but most investors tend to exacerbate stress.

"Someone who is going to make difficult situations less stressful instead of more stressful."

This quote emphasizes the value of investors who can alleviate stress in challenging circumstances, which is a desirable trait for founders seeking investment.

Identifying Investable Companies

  • Distinguishing between treatable and untreatable issues in companies is critical for investors.
  • A treatable issue could be a poor sign-up flow or lack of retention strategies, which are fixable and can significantly improve the product's performance.
  • Untreatable issues include a fundamental lack of product appeal to users, which is a red flag for investors.

"A very bad wart is a product that no one likes. That one I would stay away from."

This quote highlights the importance of product appeal and likability as a non-negotiable aspect when considering investment in a company.

Role of Pricing in Investments

  • Pricing plays a role in investment decisions, but it is not the sole deciding factor.
  • A significant underpricing may attract special attention, but small overpricing is acceptable if the potential growth is substantial.
  • Investors should not get overly fixated on precise valuations as predicting exact future values is highly challenging.

"If something feels overpriced by a factor of two and I think it's going to increase by a factor of 2000. That's okay."

The quote suggests that a potential high return on investment can justify a higher initial investment price, indicating a flexible approach to pricing.

Market Dynamics and Y Combinator (YC) Pricing

  • The market dictates the pricing of YC companies, which tends to be higher due to demand.
  • Founders are advised against exorbitant pricing to ensure future fundraising rounds are successful and to avoid attracting undesirable investors.
  • The influx of capital into seed investing has likely compressed returns over the past decade.

"I fully expect the returns of seed stage investing as a whole to compress."

This quote indicates an expectation of decreasing returns in seed stage investing due to market saturation, reflecting on the cyclical nature of investment returns.

Excess Capital in the Market

  • There is a concern about the amount of capital entering the market, leading to subpar companies receiving funding.
  • The market is believed to self-correct if the influx of capital proves to be ineffective or unsustainable.

"It definitely feels like too much."

The quote expresses concern over the excessive capital in the market, which could lead to inefficient allocation of resources and talent.

Scaling Y Combinator

  • YC aims to scale its advisory services, having already advised 3000 companies in a year through an online course (MOOC) and alumni network.
  • The organization seeks to continue scaling without compromising quality, with a short-term goal of doubling its scale.

"We did a mooc this year. We advised 3000 companies at once around the world."

This quote illustrates YC's initiative to scale its impact by leveraging technology and its alumni network to advise a large number of companies simultaneously.

Lifecycle Funding and Growth

  • YC has expanded into lifecycle funding and growth funding without intending to replace traditional venture capital.
  • The goal is to improve the growth investing space by ensuring fair treatment of founders and providing more than just financial support.

"I would like it if more growth investors did that."

The quote conveys the desire for growth investors to offer comprehensive support to companies, including mentorship and networking opportunities, similar to YC's approach with early-stage companies.

Sector Expansion

  • YC is looking to expand into different sectors, with a focus on areas of personal interest.

"Another area of particular expansion is sector wise, especially for know you've got particular interest in every"

This incomplete quote suggests an intention to diversify YC's sector focus, although specific sectors of interest are not mentioned.

Vertical Expansion at YC

  • Sam Altman discusses the strategic growth of Y Combinator (YC) into various verticals.
  • He emphasizes his role in scaling the organization rather than being involved in day-to-day operations.
  • The startup model, according to Altman, is applicable to many areas, driving YC's expansion.
  • Identifying potential $10 billion companies is a key goal for YC, necessitating a lack of constraints.
  • Altman leans into areas that others find crazy or unworkable, viewing skepticism as a sign to pay extra attention.

"Well, the thing that I am doing is figuring out how to scale know, I'm not running the continuity fund, I'm not running the accelerator, I'm not advising all these companies, I'm not running our admissions process."

The quote explains that Sam Altman's focus is on scaling YC as a whole rather than managing its individual components.

"Let's find the $10 billion companies, the companies that could be $10 billion companies, and that that is such a difficult constraint, those are so rare. We can't have any other constraints."

Sam Altman highlights the ambition of YC to identify and invest in companies with the potential to reach $10 billion in value, which drives their strategy to avoid other limitations.

"I think it's always a good sign when we start doing something new and people say, well that's crazy, that's not going to work. I'd never touch that. That makes me lean into it more."

This quote illustrates Altman's contrarian approach, where skepticism from others is an indicator that YC might be onto something potentially groundbreaking.

YC's Approach to the Asian Market

  • YC is interested in global talent and funds founders from dozens of countries.
  • The talent in China is particularly notable, but YC's vision is to find the best people worldwide.
  • Sam Altman believes that limiting the search for talent to the US would result in missing out on a majority of the best founders.

"China is, I think, particularly interesting in terms of the entrepreneurial talent coming out of there."

Sam Altman acknowledges the significant entrepreneurial talent emerging from China.

"If you believe that talent is evenly distributed and you're only looking at the US, you're going to miss like 95% of the best founders."

The quote emphasizes the importance of a global perspective in the search for entrepreneurial talent, as focusing solely on the US would be too restrictive.

Personal Preferences and Beliefs

  • Sam Altman discusses his current reading interests and his preference for books over shorter content.
  • He shares his personal belief that America is still the greatest country on earth.
  • Altman mentions enjoying survivalist activities as a hobby but clarifies he doesn't believe the world is ending.
  • He acknowledges his brother Jack has a warmer personality, which makes him more lovable.

"The one that I am rereading now that I'm really enjoying the second time through from years ago, is the making of the atomic bomb."

Sam Altman shares his current reading choice, highlighting his interest in historical and scientific literature.

"America is still the greatest country on earth?"

This quote captures Sam Altman's belief, which he suggests is not commonly held by those around him.

"No, I don't actually think the world is about to end, but if it does, I'll be ready."

Altman expresses his interest in survivalism as a hobby rather than a serious concern about an impending apocalypse.

"He certainly has a warmer personality than me. I would say that he's got the lovability down."

Sam Altman comments on his brother Jack's personality, acknowledging his warmth and lovability.

Future Plans for Sam Altman and YC

  • Sam Altman is discreet about his and YC's future goals, preferring to reveal plans after they have been successful.
  • He indicates that YC telegraphs new programs on a one-year timeframe for planning purposes.
  • Altman does not commit to sharing a detailed five-year vision, suggesting that YC's plans should prove themselves first.

"We do try to telegraph somewhat the new programs we're thinking about on like a one year time frame so that people can plan their lives around."

This quote implies that YC provides some foresight into upcoming programs to allow potential participants to prepare.

"I'd rather talk about our grand plans once they've worked."

Sam Altman expresses a preference for discussing YC's plans post-success rather than speculating about the future.

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