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The Secret Million That Y Combinator Invests In All Its Startups

How Transcriptic, an on-demand life sciences lab, benefits from the startup factory's growing array of free services.

The Secret Million That Y Combinator Invests In All Its Startups

[Image: Everett Collection on Shutterstock]

"This is the heart of the business. This is our server rack."

Max Hodak and I are standing in front of a large clear acrylic box about the size of a shipping container. Inside, a robotic arm grabs a tray from a plate reader—a gadget that looks a bit like an office laser printer, but which uses light waves to measure the content of chemical solutions and costs tens of thousands of dollars—and then glides it to a shelf a few feet away. There, a tiny eyedropper swings out, dips into a capsule, and grabs a bit of liquid. "It’s a pipetting robot," explains Hodak, a boyish yet intense 25-year-old who is vaguely reminiscent of Jason Schwartzman's character in Rushmore. He then smiles and adds, "I don’t know what it’s going to do next."

Hodak is using "server rack" metaphorically. We're looking at a next-generation biomedical research machine that Hodak’s company, Transcriptic, created. Hodak built the initial prototype himself, with $1 million in angel investment and the help of two engineers, starting in 2012. Today, Transcriptic is one of the stars of the current Y Combinator batch with 26 employees and three of these container-sized laboratories located in the back of a Menlo Park warehouse. But unlike a conventional lab, Hodak’s "work cells," as he calls them, are not staffed by men and women in white coats; all the experiments are handled by robots, meaning that each of the three boxes can perform 30,000 chemical reactions or take 400,000 measurements in a single day.

But what makes Transcriptic truly special—and the reason Silicon Valley investors have been clamoring to give Hodak their money—is that you don’t have to be in the Bay Area to use it. Anyone, anywhere in the world, can order an experiment using Transcriptic’s web interface, paying for lab time by the hour, the same way startups buy cloud-based server time from Amazon Web Services. (Any materials or chemical compounds are shipped directly to Transcriptic’s office for an additional fee.) "The value of any drug company is in the drugs that it has and the drugs that it will develop," Hodak says. "And yet, more than half of these companies are employed in maintaining equipment. They dilute their focus." Hodak’s hope is to lower the barrier to entry for basic lab research, making it possible for even the scrappiest biotech startups to compete against giant firms, doing basic medical research and eventually developing drugs for a fraction of the current cost.

When I met Hodak at a Y Combinator Tuesday-night dinner back in January, he seemed to be a curious fit for YC, which I’ve been following over the past two months as part of a Fast Company series. After all, Hodak had already started and sold a company—he did so, rather improbably, while taking a one-year leave of absence after his sophomore year at Duke—and he raised more than $14 million for Transcriptic, from IA Ventures and Silicon Valley Bank among others, at about the same time he applied to YC. (The latest round of fundraising was announced last week.) Not only did Transcriptic seem too rich for YC, which rose to prominence by giving entrepreneurs just enough money on which to subsist while they built a prototype and acquired a few customers, but it seemed out of place among so many software startups.

Hodak, though, is betting on two things: 1) Y Combinator's expanding ambitions into biotechnology products, something president Sam Altman has said will be a focus moving forward, and 2) that he can use that influx of startups to acquire customers. "There are 11 biotech companies in our batch," Hodak says. "We wanted to put ourselves at the center of that."

Entry into Y Combinator has long come with perks. One of the by-products of packing more than 100 startup founders together at dinners every week is that everybody uses everyone else’s products. Nearly every YC founder I’ve met in the current batch who takes credit cards does so with Stripe, which went through YC in the summer of 2010, provides the back-end processing for Apple Pay, and is now valued at $3.5 billion. At one time, angel investors Yuri Milner and Ron Conway offered every YC startup $150,000 in seed funding upon graduation (more on Conway in a future installment of this series). And Amazon Web Services became a trusted service in part by offering hosting credits to YC companies like Dropbox and Airbnb, which grew their businesses on Amazon's platform long after graduation.

Since Altman took over as president of Y Combinator, he has taken significant steps to upgrade the YC goodie bag into more of a gifting suite. Most recently, he announced that Microsoft would offer a bundle of cloud-based services to YC startups, most notably, up to $500,000 in free hosting on its Azure hosting platform. Meanwhile, in keeping YC's newfound interest in hardware-related startups, it has a new partnership with Bolt, a seed stage venture capital firm that gives founders free access to a prototyping shop that it operates in San Francisco. In all, new YC startups now get about 200 such deals, amounting to more than $1 million in discounts and freebies.

Hodak and Transcriptic, then, represent both sides of the value proposition for being part of Y Combinator. It too is part of that $1 million bonanza: Transcriptic offers each YC founder $20,000 in company credit. "It’s not necessarily a hard limit," Hodak says. "It’s just, 'Let’s get you up and running.' It should be enough to thoroughly evaluate a proof of concept." The hope is that when the other 10 biotech founders raise funding after Demo Day, they’ll become paying customers. And the higher profile of Y Combinator grads will help attract even more, much as it did for Amazon Web Services.

Transcriptic is also benefiting mightily from its own dip into YC's offers, and this too was part of the draw for Hodak in joining Y Combinator. The company is taking advantage of the free cloud computing services provided by Heroku (a winter 2008 YC alum) and Amazon. "The YC investment is much more substantial than it looks on the surface because there are so many things you don’t pay for," he says. "We’re just not paying for cloud computing." As Altman noted in his blog post announcing the Microsoft deal, hosting can be a startup's second-largest expense after salaries. Hodak tells me that some of his investors initially questioned whether it was wise to give up any equity to Y Combinator, given that he already had raised a healthy amount of capital already. With all the benefits of membership, though, "I don’t think there is any doubt anymore," he says.

Next Week: Inside the mind of an investor in Y Combinator companies. This is part eight in a series.

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