Super. Rather than taking rejection by YC as end-of-story they went on to success.
Remember when applying to YC and other batch based accelerators: you might not get in but in some cases that says more about the accelerator than it does about you and there are plenty of other roads to success.
And there is a definite limit on the number of people who would ever consider using Overleaf. I detest MS Word (and word processors in general) and use Overleaf, but the market for TeX solutions is obviously not in the same league of scale as Dropbox.
Well, if I were YC and I'd be trying to improve my betting average the ones I bet on that were misses and the the ones I didn't bet on that were hits would be studied very carefully.
1. Whether you're an incubator or a VC, batting average doesn't really matter. All that really matters (from a financial perspective anyway) is that you don't miss out on the super successful hits. I think it was one or two years back that pg said that something like 70% of YC's total return, since founding, was Dropbox and AirBnB. Thus, while Overleaf has become successful, at the end of the day it's not something that would really move the needle much for YC.
2. It's all about percentages, so of course you're bound to miss some winners. It's also possible that since Overleaf's addressable market (scientific paper writing) is not gigantic, YC might be less rigorous in finding "diamonds in the rough" if a startup's addressable market is not that big (pure speculation on my part).
3. Numbers 1 and 2 should highlight that the needs and goals of investors and founders are not 100% aligned. Investors want to find the few mega home runs, while I think most founders would be happy with a double or a triple. Kudos to Overleaf for their perseverance and success!
While the math here certainly works out, I don't think it's the whole truth, at least not with regards to YC. While they probably want to maximise the chances of betting on the next dropbox, they also fund plenty of companies that very clearly are not the next dropbox, probably because their mission is also to fund good, profitable ideas in general, and that each of these clearly-not-dropbox bets is quite cheap.
So I would guess their strategy is more like 'try to fund all potential future unicorns, and fund a bunch of others that seem cool and in a way so that those don't lose money on average'. That's certainly the strategy I would have chosen!
This is probably not true, though. Many of the people at YC have said, many times, that what they're trying to do is find the next Dropbox, and everything else doesn't matter. They pretty explicitly talk about how hard to do this is, but how their efforts should go towards that anyway.
The thing is, it's hard to to tell, especially from the outside, whether a company can viably become a billion dollar company. Sure, you've seen plenty of YC companies that ended up either not going for it, or not looking like it's possible for them to end up as unicorns, but this is in some cases too late - you aren't hearing their pitch, in which they explain why they could be the next billion dollar startup.
Investors who want to make money take seriously the idea that one real success is the only thing that matters.
Also, in this case (and presumably others) rejection is exactly what founders needed. Judging by the write-up they were ill prepared and rejection is what forced them to take a huge step back and re-evaluate their approach. Would it happen if they were accepted or let go less harshly? Who knows.
Remember when applying to YC and other batch based accelerators: you might not get in but in some cases that says more about the accelerator than it does about you and there are plenty of other roads to success.