GigaOM

Editor’s note: For the sake of accuracy, we have replaced the edited questions and answers with their unedited version (save for some minor stylistic changes). We sincerely apologize for any confusion.

This week Found|READ interviews software entrepreneur Paul Graham, co-founder of the influential startup incubator, Y Combinator.

Since 2005, Y Combinator has seed-funded 250 founders and over 45 startups including Justin.TV, RescueTime, Weebly and Zecter. Many other “YC shops” have quickly achieved liquidity events, among them Reddit (Condé Nast), Auctomatic (Live Current Media). most recently, Xobni (Microsoft). Fresh from Y Combinator’s fourth annual Startup School ‘08, Graham talks about the competition, various success factors, and how Y Combinator picks its winners. Below is an edited version of our e-conversation.

F|R: Y Combinator takes its name from a mathematical function. What is it, and why did you choose this?

Graham: The Y Combinator is a function that builds a recursive function without them needing to have name. It seems miraculous when you first encounter it. We named the company after it partly because we thought it was such a cool concept, and partly as a secret signal to the kind of people we hoped would apply.

F|R: What characteristic best indicates potential success to Y Combinator, and how quickly can you see it in your applicants?

Graham: We can never tell for sure. No investor can. But we are trying hard to get better at predicting. I think the key quality is determination. The founders who do the best are the type of people who just refuse to fail. Most startups have one low point where any reasonable person would give up. The only people who get through it are the ones who have an unreasonable aversion to failing.

F|R: Several copycat incubators have sprung up since Y Combinator launched in 2005 (TechStars, Y Europe, Seedcamp, BoostPhase). Can your model be replicated?

Graham: There are a few things they haven’t copied correctly, but it is not our model that distinguishes us. It’s the people that make the difference — not just the YC team, but the 250 or so founders we’ve funded. The knowledge accumulated in all these heads is remarkable.

F|R: Is it true that Y Combinator gives its winners just five minutes to accept a funding offer, and that you think those who turn you down “have failed an IQ test”?

Graham: The reason people are supposed to decide quickly is that they already know everything except the [equity] percent we’ll ask for. Since all they have to do is subtract one integer from another, five minutes should be enough. In the median case we take 6 percent, meaning we have to improve a startup’s outcome by 6.4 percent for the founders to end up net-ahead. That’s a ridiculously low bar. The “IQ test” is whether they grasp that. One startup turned us down because they received an acquisition offer the weekend we did interviews. It was a good offer; I’d have taken it in their position. There have only been three others who turned us down. I don’t know of any who went on to succeed.

F|R: How did you determine the 12-week term of each Y Combinator class? Why is two months too short, or six months too long to “incubate” a startup?

Graham: We discovered it by accident. When we started YC, we began with a summer program. We were trying to learn how to be investors, so we invited college students to come to Cambridge instead of getting summer jobs. Now we’re looking for founders who consider the startup a real job, not a summer one. But we kept the three-month cycle because it is a good length of time to build a Version 1. Some startups may not be able to “launch” in that time, but they all should be able to build something impressive.

F|R: Name one thing founders can do to increase their odds of being selected by Y Combinator.

Graham: Get good co-founders. You can’t change who you are, at least not in a short time. And the idea doesn’t matter to us as much as the people. So the best thing any individual can do is find good people to work with. I think Marc [Andreessen] may be right that market is the biggest determinant in the outcome of successful startups. But that’s not unrelated to the qualities of the founders. Smart people will find big markets.