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Hey good morning thank you we have a lot to do today so I'd like to get my way my part out of the way as quickly as possible good morning again and welcome to our second day of start-up investor school my role is a little bit more but
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not much more than telling everyone not to park over there so don't park over there there's other parking apparently there's a lot of parking behind 3:35 there's parking here and there's parking on the street or you know there's this great services called uber and lyft they
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work really well too so we we had our you know startup growing pains yesterday a few things went a little bit wrong the toilets backed up of course the coffee was lukewarm and the the live stream was almost invisible maybe that was actually
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a feature since I was the first person talking and it got better after that I think we've corrected all those I I can at least testify to the fact that the coffee is now hot hopefully the toilets are working but I think we've got that figure it out so as a reminder
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can you put the the it's a reminder if you have questions out in livestream world you can tweet them to YC sis or with hashtag YC sis there's also now a slack channel for those of you who are here in person I think you've all been
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invited you can ask questions there's a there's a there's a slack channel for just communications between you guys and a slack channel for questions you can ask questions and then up vote those questions and we will hopefully get to some of them time time willing I will
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also go through all the questions afterwards and try to do a piece answering the questions that that that I can answer so there will be wine and beer on Thursday that's my big announcement yes wine and beer small amount of time for networking for you guys and I don't
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know how much time but I guess depends on how much wine and beery there are there are four that there was some really great feedback helpful feedback from you guys probably the biggest thing everyone said is point we'd really like
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to have more community in and we'd really like to be able to network mark and a few others sent me more detailed information about how we can do a better job of helping you all network we get that so so far we have a slack Channel and we'll think about that I don't know
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how much progress how much change we'll make during this version of start-up investor school but we really appreciate that feedback and we obviously take it really seriously I will point out as Sam said yesterday that one of the worst
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things you can do as an investor is to be sheep don't follow other investors the best investment decisions you'll make are the ones that other people aren't making like you know when people come by with really stupid ideas like you know having air beds in uh in
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someone's home after a conference stupid idea right no one's going to invest in that one except for you and then you'll make a billion dollars and then you can laugh so we covered a little bit about you know Sam's introduction and then a
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lot more about safes and and and how people do startup investing we're gonna cover moral today on the how so I'll get back to that in a sec just a quick word on on equities versus safes it's a very complex on the surface it seems like a
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simple topic is you heard yesterday it's not actually rather complex why would you do a safe well because it's simple it's easy it's fast and it's cheap it's better for founder's but there's a little hair we admit that it's sometimes
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hard to know what happens with the dilution there's tools there angel calc is linked on the site but we'll also put up I don't have it up yet but we will put up a spreadsheet if for those of you who are more comfortable with old fashioned tools and we and you'll be
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able to model cap tables and conversions it's a weird conversion it's circular and so yeah you know it's it's it's kind of bizarre but we actually do have a spreadsheet that helps you figure that out so dilutional can be a little weird to
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understand and it is important to understand it all four founders and obviously for investors as well okay so with that we're going to get to the top today and I am actually really excited myself to to listen today because hopefully I'm going to learn something
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about how to be a better investor because I have made many mistakes and you guys want to corner me later I can tell you about a few dozen mistakes that I have made so the topic really today is overall how to make smart investing
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decisions how do you do that well it's simple all you have to do is make correct predictions about the future easy right well the way you start off deciding whether to invest is you find companies you meet you you want to you you think you're interested in and meet
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with them so our very first presenter is my my friend and partner Dalton Caldwell who is the founder of a couple of companies imeem in app net he's been a founder YC a partner YC for four years now he knows a lot about many things he
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my favorite quote from Dalton because it's one of the few I could find but it's a good one is if someone tells a coherent story with the beginning middle and end explaining what their product is who wants it what's it does just that
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so here's Dalton Caldwell to talk about founder meetings thank you hi how's it goin so I'm going to be talking about founder meetings and process so this is the we're gonna break down how you think about making investments and how tactically to do it and we have lots of
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examples of you know maybe not the best approach the naive approach we'll talk about those so so let's get into it let's talk about the first principles everyone needs a process even if your process is I have no process that I've never
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done this before and I don't know what I'm doing that is in fact a process I would suggest so I would encourage you and what we're gonna talk about over the next few slides is to think about how you make a simple simple simple process for yourself just to get started with on
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how you make investment decisions right how you choose who to invest in how much to invest all this good stuff it's it's good to have the process it's good to have some sense of what your process funnel is and I'll talk about what that
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means in a second and I would argue one of the most important parts of a process is the face-to-face meeting the face-to-face meeting is pretty much where everyone that's done a lot of investing that's that's the meat and potatoes of how you tend to make
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investment decisions you do a bunch of qualification and then the face-to-face meetings are where you decide whether you're actually going to invest or not so we'll talk a bit about face to face meetings as well okay so here's a very
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basic process funnel it's just it's just like a sales funnel right you're gonna have some leads this is people that you might want to invest in it's maybe things that you read in the press it's people you see at demo day you know very straightforward
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you have intros these are folks that you have actually have some introduction to and you have some exposure to the company you do some qualification you know for instance is this even in an industry that I'm interested in or is
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this something that I'm excited about funding does this fit with whatever kinds of companies I said to myself that I wanted to fund so that's some very basic qualification then you have some decision-making process which is how do I decide whether I'm a yes or a No
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which is actually quite tricky and then finally the last bit is actually making the investment and and closing the deal right so again very straightforward just like a sales a sales funnel if you've done sales before but it's worth
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thinking about your investment process this way because again if you're not if what you're doing is saying well I don't know I'm gonna take some meetings and you know maybe and you have a very wishy-washy approach you you're probably not gonna make optimal investment
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decisions so here's an example of a process funnel the first thing is actually good to think about what your budget is I don't know if other folks have already talked about this or will talk about this but if you don't know how much
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you want to invest in what your budget is you're probably gonna be making suboptimal decisions so it's good to think here's how much I'm willing to invest across a bunch of startups beforehand versus being like well you know I have some money saved away and I
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was thinking about maybe doing something else with it but I'm gonna meet with some startups and maybe if three or four of them can convince me it's good then I'll invest in them that's a really tricky thing to do if that's the way you
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think about it because you're gonna end up negotiating against yourself and there's a good chance she'll end up in this wishy-washy maybe land and wishy-washy maybe land is just not a great place to be as an investor so say you you decide okay I have a 500k budget
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per year that I'm going to allocate to this asset class and I've talked to my wealth manager or whatever and everyone's on board with this I've talked to my significant other and this makes sense of to make this financial decision and so the way I'm going to
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stage out this is do a certain number of investments you know if you're gonna do it off YC doing it you can it's pretty straightforward you show up to demo day and you pick the five companies you would want to invest in but if you don't
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want to do it through YC demo day you want to allocate it in other ways put that on a calendar and then think about what is your the pass rate of your process funnel going to be for instance in this case that's about picking five
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out of your favorite twenty right so you probably don't want to meet with a hundred and fifty companies if you're only going to be making five investments probably not a good use of your time or the company's time so you want to do a little bit more on the qualification
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step on the other hand if you want to make five investments and you only meet with five companies probably you're not gonna be making optimal investment decisions so I would think a little bit I'd work backwards from what your financial commitment to making
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investments are to how you decide how many leads to qualify how many meetings to actually do still with me all right so let's talk about how you actually make a decision once you've gone through this this super basic funnel bit the
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most important thing is to have a process in your own mind about how you will make decisions you need to negotiate with yourself of what does it mean to make the decision to actually write the check right what what is my burden of proof to be convinced by the
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founder that I want to invest in their company there's some criteria that you should decide ahead of time and again it's good to actually think about these things versus ending up in this wishy-washy land where you're doing meetings you
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don't even know what you're looking for you're not even sure you also want to think about how many meetings or interactions it will take for you to end up with a yes or no something that we see a lot as an anti-pattern in investor behavior is folks that just
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do meeting after a meeting after meeting after meeting and don't ever make a decision and that's actually worse for founders than just saying no right the the investor that just wastes a ton of time and feels like they're just on the
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edge but never say yes that's very hard for a founder to deal with that and so it's actually better off just to figure out what your process is and if you're maybe that's that's probably no tell them no and move along that's a much better way to run a process like this
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the other thing that sometimes happen is someone will say yes but not actually Sadie and mouth are going to commit or they will say yes and then change their mind and please do not do that this is this is very important stuff and you
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know if you're new maybe you're not used to making decisions but once you make that decision that you say yes and you commit you are fully committed and trying to back out of the deal after committing is a huge faux pas and will you know have far-reaching negative
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reputational effects so once you reach this decision you're in and that's that so let's talk about what the criteria are to make investments it's really good if everyone has in different investment criteria that's really excellent we want
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everyone to have different investment criteria otherwise what's the point of having a bunch of investors that just be there just be a computer that does the math you feed in the four inputs and boom that's a yes or no and then the money goes in right this is an example
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of sort of a wisdom of crowds type thing where a bunch of people with different criteria are much more likely to find really interesting outlier companies and generate great returns versus if everyone has precisely the same criteria
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so what some examples of criteria the most straightforward one is the team the team is pretty important too I see that's definitely part of our investment criteria but you can make your own decision about just how important the team is and what does that mean how
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important is it that there are really strong programmers on the team how important is it that they have relevant experience in the industry they're in how important is it that you have some touch points that someone else you know
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knows them and about fruit pouches for them so it's a number of different ways that you can create in your own personal process different criteria around team market size is pretty important to a lot of folks for other folks marca size
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doesn't matter who cares because they'll figure it out later right if you did a market size on the original air B&B thing it'd be very hard to determine with the market of air beds were and you would probably say no if you're purely looking at market size
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similarly something like uber the the market size of people Colleen black cars was very very small at the time and so you could have easily you know just qualified that just on that criteria alone traction there's some investors that say I invest when there's no
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traction there's some investors that invest lots of traction so think about where you come in on the on the traction criteria the other thing is that a lot of folks decide no on investments if they don't have the relevant expertise
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we have a number of bio companies or hard tech companies at demo day and a lot of folks just hard pass on all of them because they don't have the relevant expertise and that's actually okay but it's good for you to know am I willing to invest in something that I
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have absolutely no background in or am I just gonna stay away from that and stick to what I know it's good if everyone has different ideas around that but it's worth thinking about beforehand how much you feeling like an expert in the field
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matters and then finally the last bit of investment terms some folks say oh I only pay very low prices some folks require certain amounts of structure and the deal or certain ownership goals and all the other good stuff and that's okay if that's what
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your actual model is but if you have no idea here it's worth thinking about a little bit how much the actual terms matter what often happens I mean you already heard groupthink you'll hear a lot of the sales again is the people's actual investment criteria
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is the thing that everyone else talks about and seems to think is gonna work is the thing they want to invest in and I would again suggest that this is not the optimal way to make investment decisions we see a lot so the other thing that's not great about groupthink
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just add a little bit more color on that is it creates non optimal returns everyone will just try to plow into the same deal and the company will end up being over funded if it's perceived by everyone if it's everyone's criteria and
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it's actually not super great for the company if it gets over funded investors tend a little get a little bit grouchy if they can't get into the deal and they all want to invest in it and as Jeff just mentioned really good investments
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are often contrarian or unfashionable or somehow are deeply unappealing to everybody else right those are the really good ones is that you see something that other folks don't and that that the fact that it's deeply unappealing is what creates such a great
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opportunity for you and so again why am i spending all the time bringing this up it's worth thinking about what your process is and knowing what it is versus having your process be I don't know I'm gonna go ask 10 people what they think is good and
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whatever they what's ever on their list of what they want to invest in it's gonna be on my list too and I'm gonna do that for everybody and then end up with this like meta group think list that's how a lot of people from what I can tell
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do it and I would not recommend that something super important in making investments is having personal conviction you have to really believe to make this kind of bet you know you're putting the money in and you're probably never getting it back there is no undo
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button on making an investment and if you do not have the personal conviction and even when you say yes it's sort of half-hearted you're going to have a very hard time as an investor so one thing that we hear a lot of especially for
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folks that haven't done much of this is they say okay I'm in once you go find the rest of the round and this is the cheapest of cheap shots that you can possibly do because what you're actually saying is I would like an option that's guaranteed
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in year-round but I do not believe you can actually raise it if you prove me wrong and you raise it and all the other investors invest then I'm in and I can understand why from the perspective of an investor this feels like a super clever like ninja move but holy cow is
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this not beloved by founders and not great from a reputational perspective right these are the folks these are the Fairweather friends these are the folks that didn't actually believe in you and all they want is the right to get in if the deal happens to be hot because
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everyone else invests in it right and so perhaps you've said things like this or perhaps this is a you know things that have happened to pass I just I wouldn't I wouldn't recommend phrasing this way I would just say the honest answer if
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you're in this situation which is I'm worried about the financing risk so I'm a no but let's talk later if we if more financing momentum happens because then you're being explicit that the answer is actually no and not like oh yeah I'm in
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just go get everyone up just go raise two million dollars and I'll be the last check-in right that is not a great move and one other thing that's kind of interesting if you think about investor mentality is you have to be willing to look stupid and be wrong
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on these things if the only investments you make are ones that are super defensible and makes sense to everyone and that could never be made fun of because that's just a fantastic business you're gonna be missing out on a lot of investments and by having the personal
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conviction that you know why you're investing in the company you should be okay with the fact that people are like oh well what companies be invested in and they're like wait you've invested in the airbed company why don't they tell
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you like why did you invest in the airbed company right you have to be willing to take that potential embarrassment that you're like yeah I did invest on the era bedded company and and feel good about it and so this is one of the reasons why conviction is so
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important versus just creating a portfolio of things that you think seem like that will make you look good from a reputational perspective so in terms of some anti patterns on decision-making that we see a lot one of them is just
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going really really slow disappearing for weeks not responding to emails not following up not great so I mean another anti-pattern is you're not really sure whether invest or not so you ask them to like meet your friend
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like hey meet my friend and you can keep doing this over and over and over again like oh me my other friend and that's a way to sort of defer making a decision-making process that's not not great the other thing is flip-flopping were you saying yes and
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you're like oh actually how about no or like how about you needyou this other thing and you're you're sort of moving the goalposts over and over again as I said a second ago the way you should think about is if you're not a yes you are no and you want to stay out of this
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middle flip-flopping I'm not really sure land and that's where you're gonna feel most of the time I know that's where I am most of the time when I make any investment decisions is you're just kind of in this like oh yeah this is maybe
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good and you're you want any kind of signal you can to get out of that and one of the piece of advice we tell founders run fund raising because they get confused so much by people see me interested in their company and not investing we tell the founders if
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they're not saying yes and giving you money it's a no because so many founders that we meet with when we ask them you know how it's going or how fun reason is going they say well there's a lot of interest okay well how many people have
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written checks well they're very excited they seem to really like the business and that is all the recipe for a failed fundraise is a lot of people telling you how much they like your business and how like exciting it is to talk to you if no
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one is writing checks it means it's not going well and so from the flip side from your side of the table if you're just meeting with a lot of folks I mean very excited and doing a ton of meetings but never actually saying yes you're you are telling them no whether you realize
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it or not right and then in terms of the actual meetings the best way to get the conviction is just to do meetings in person versus reading a deck or asking other people what they think so let's talk about medians very basic but just
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scheduling meetings in a non painful way will put you ahead of the pack from a lot of other angel investors being on time and picking a convenient location will put you ahead of the pack versus most angel investors I don't know why this is so I would just suggest part of
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being founder friendly and getting a good reputation it's just being easy to work with and not coming in across like someone that's just like thinks they're super awesome and important all the time and wants to just like rub it in the
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founders face how important they are right so this is like very basic stuff but I can't stress enough that doing these is definitely worth doing if you if you want to have a good reputation has a good investor or someone people want to work with in terms of things to
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ask in meetings it's always good to start from the basics to this day this is how we do YC interviews and we make all of our investment decisions is we ask we always start with the basics what does your company do who's on the team what progress have you made
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you know how much have you raised what terms you can get really complicated and complex on what you think you should ask and maybe that's okay at the end of the meeting but I would suggest always start in these meetings with first principles
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questions and making sure you understand the basics because it's not maybe you already saw their deck or maybe you already read about the company it's not necessarily about learning what you didn't already know it's about hearing
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the founder tell their own story in their own words and that's such a good reason to start from these first principles is you sort of want to forget everything you know and just hear the founders to tell their own story right and so this is how I'd always suggest
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starting a meeting is super basic questions and then only at the end do we get into advanced complex mode on the business if you want to do follow-up meetings say you're not yes or no after the first meeting and you want more information dig deep on the things that
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would give you either conviction to say yes or no don't waste time rehashing irrelevant stuff and one thing to look for in your own gut is if you feel more or less convinced the more you talk to the founder because it could be you hear
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about an idea you see their demo day pitch and it seems great and you're a yes and the more you talk to them the more you're getting lukewarm that is not a good sign that feels like a no right but if it seems kind of like mediocre
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and the more you talk to them more the more excited you get that feels like it's caring towards it yes right and so that's one good thing to look for is your gut reaction and if you can't get conviction that's a no in terms of how do you evaluate was that a good meeting
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or not are you exciting or energized and amped up out the business and you know just feeling awesome after you talk to the founders or are you feeling kind of like weirded out about it a really important question to ask is do you
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trust the founders Trust is super important and even if they're saying everything that's right but you come away with a feeling of not sure if they're telling you the truth that is definitely a red flag and a good sign that maybe you should disqualify
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them from your personal criteria right because it's possible for someone to say all the right things but your gut reaction is perhaps it's not all true would you want to work with their company hypothetically would you want them to be your boss can you imagine
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them running a really large company someday and having lots of people reporting to them that's a good criteria to think about and if things go not great which they often do are you willing to go through the hard times with these particular folks you're
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talking to that's a good thought experiment as well and so these are all the sorts of thought experiments that I would do after a meeting to decide if you're getting more or less conviction in terms of bad meetings one thing to think about is pretend that the investor
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meeting is your job interview where they're interviewing you for a job and not the other way around there's often a lot of power dynamic things of making it feel like the founder is like like an employee I guess and they are not an
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employee right you really want to feel like you're you're interviewing for the job of investor if they're startup and not that they're interviewing for the job of potential underling that wants your money and again just bad meetings have a
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lot in common a very common thing we hear a ton from founders is that investors that just look at their phone the entire meeting or otherwise act super distracted not recommended very basic but holy cow is that common that happens in a double-digit percentage of
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medians so just basic thing would not recommend and then the other thing is sometimes investors try to make themselves the center of the attention where they'll tell stories about how great they are and all the people they know and all these other good stuff just
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remember the point of the meeting is for you to listen to the founder to decide whether or not to invest you can build a rapport with them but to the extent you make the meeting about yourself I would just argue that's both counterproductive
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and probably not a great way to get a positive reputation among founders talking to each other another thing just to mention here is sometimes folks especially if they're new investors they want to differentiate by doing a lot of
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value-added services and so they'll use these meetings to just give a ton of product advice and tell the founder how they're doing everything wrong and how they need to redesign the website and like they need to change the name and they think their marketing strategy
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through and all this other stuff and the founder kind of has to take it because they're meeting with them and they want to raise money but man if you just blow them up with tons of advice on how to run their company for them that is not
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received well was what I would say also if you provide a ton of advice how their fundraising process is done and they should do it differently like oh you're raising on the wrong price and you should be doing this and you should never raise on a safe for like whatever
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it is that is not hopeful if you write them a check then your advice is a lot more valued but if you're just meeting with someone and it's a no and all you're doing is telling them how everything they're doing is wrong that is not value at right another thing that
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sometimes people do when they're trying to be value add is just do a ton of introductions like you know you do one meeting you don't invest in the company and you introduce them to like 20 people to seem really value add that is not
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value add that is wasting their time so the point here is you can easily do too much and that's actually worse than just being straightforward right and sometimes people are trying to differentiate themselves and create a name for themselves but this
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and stuff can really back for iron you if you're too heavy-handed with decision communication how do you say no what often happens with investors much like dating is they ghost the other party they they just never follow up the you
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never hear you do in a meeting with an investor and you know maybe the founder follows up with the investor hey how's it going what are the next steps never a response again that is not great I understand that it happens a lot but
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would not remit recommend it I would suggest you directly tell the founders that you will not be investing if possible if it's appropriate give them some reasons it's nice to know the reasons but you don't necessarily have to and the fact is in this business
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you're going to be saying no most of the time right that it just is what it is that's how the funnel works and so you need to be prepared to know how to say no to feel good about saying no and get practiced at it and make it part of the
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job if there's something about saying no that makes you very uncomfortable and unwilling to do angel investing I would suggest just breaking out of that habit avoidance alone is not great how to say yes say the moment you have conviction and you want to invest communicate that
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to them tell them how excited you are to work with them we have the handshake protocol which is covered on how to actually do this over email so there's no misunderstanding so follow that and then get the money get them the money
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sometimes things fall through where the investor says yes and then they ghost them for a while and the money actually never gets closed and the investor gets locked out of the round and there's a whole mess afterwards right so if you say yes and you follow the handshake
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protocol just invest declare victory and move on sometimes people say yes but then they introduce a bunch of weird stuff alongside of it so it's not actually yes so you know maybe if you're writing a huge check you can consider doing a term sheet or price Toronto
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things like that but if it's a very small amount and you're just part of a large syndicate don't make it hard it's only going to follow up the process and often the founders will just push back on all this stuff so sometimes people do
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especially when new angel investors they try to ask for a bunch of extra stuff not great okay so that's it for this bit I think we're gonna do an example meeting now I have a company from the current batch who I already invested in so I guess that's a
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little bit biased but we're going to do just an example investor meeting where I'm gonna ask some questions and once we're done with this bit then we'll do some Q&A all right so let's do it okay so we'll do the intro in the medium okay
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how's it going so first of all just introduce yourself and tell us a little bit about what your company does okay hey I'm Ben I'm founder of nectar and nectow does is pee in a box so we basically help people create into service providers okay so let's be super
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specific so you make software yep and it lets people start Internet service providers exactly and this is a little bit context it I don't have it you simultaneously run your own Internet service provider and you have the ability for anyone to create their own
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using your software right exactly so why we started doing this is the problem of what we see is people usually hate their internet providers right the lowest product score and the reason why is usually people live under regional
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monopolies right their internet is either coming from a national telecom or a small town has basically Comcast as the only option and the reason for that is two things it used to be very expensive to start an internet provider and then the second part is it's
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actually really hard the amount of knowledge that you need to start and turn a provider is really high and I went through this my as I was trying to start my own which is when I realized hey the cost has come down dramatically you can use wireless
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gears that can deliver gigabits of service so you know with like ten twenty thousand dollars you can start your own internet provider and so what you need is the knowledge which is what we provide and that's the part that can be
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skilled so meta point part of the reason I picked this company is this is actually kind of a complicated pitch okay this is kind of a complicated business and it's inherently complicated and so there's a way that I could immediately get distracted and start talking about I
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don't know hey maybe you should rename the company like I don't even know but there's a million ways that I can end up down in the weeds before really even understanding what they actually do and so what I'm going to do here is actually
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dig deeper and make sure that I completely comprehend what the company does and hopefully folks do here I think probably people pulled out oh it's some kind of ISP thing and you know probably little bits and pieces but I would guess
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based on what we've heard thus far the mechanics of what they actually do is not completely landed for everybody is that true anyway yeah okay so let's dig deeper what exactly have you what do you have today what is the current state of the company
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yeah so we have our own internet provider that came out of beta January 22nd and we okay so you have your own ISP right that you guys yourself started using your own software right exactly okay how many customers do you have live with that isp we have 47 okay and it
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where's that located that is in southern parts of San Francisco and Bayview Hunters Point okay so again meta to zoom out here's what we here's what we've learned they have they're making some kind of isp company they have a first location in
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san francisco they have 50 customers for it and it's live now okay that what do we learn okay this is a real thing they're live they have customers are you guys some kind of experts like how do you know how to start a nice P like we
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we just did ourselves we figured out all the all the bits and pieces with help from basically community around because they're actually a lot of experts darn retired they're like the original dot-com people are volunteers okay so we're gonna okay so we kind of get that
35:47
so then what's the big idea like why is this gonna be a good company like yeah so what what I have found is there are actual products that are out there that's basically an internet provider in a box right so it comes with the hardware and software but what it
36:02
doesn't do is actually tell you how to use it how do how to be successful with it and how to actually start a thriving Internet provider which is every part that we will be helping out people who who use our service okay cool so so to
36:17
zoom out a little bit and again because I'm familiar with the company what you're saying is that it's really hard to start a new ISP right your guys are gonna be able to build you have these ISPs in a box so that anyone anywhere could start their own local ISP right
36:32
okay so now here's the important part why does that matter and why is this a good idea so here's my context a bunch of people have tried to start ISPs there's Google Fiber there's web past there's a bunch of money that's been putting into
36:43
this this seems like a graveyard of bad startups what the heck is special or different about what you're doing oh yeah so it's actually really cool because I'm just reaching out to the YC Alumni community a lot of people have been trying to star in ISP and that
37:00
we're actually helping them out and what they have done is they've taken out loans or put up their own buildings and their own communities where they gathered their own customer and put in their own capex and all we do is become
37:11
their network operating center to help them set up and okay cool so again what I pulled out of here what would I be taking my notes are what I what I would continue to be pushing on is what you're saying is the big idea is that what made
37:23
all these other startup ISPs not work and is that you needed tons and tons of money to put like fiber on the ground and so you're saying by making the software to help people start ISPs locally they'll put all the money up themselves and so that you could scale very quickly
37:40
well without having to raise hundreds of millions or billions of dollars to put in fiber right that's correct okay right okay and then what evidence do you have that that will actually work that you can get people to use their software use your software to
37:55
start their own high speed and put up their own money yeah so evidence I have is you know we we we have two people who's signed on as franchise and you know they are and they have buildings in at least five cities that will be using
38:14
us as a network operating center and will be you know powering their software the landing page their billing and customer management follow that okay cool so again to zoom out the version of this meeting that is a not great meeting is where I immediately get distracted or
38:31
I immediately start asking questions and I never even understand what they really do because again like I said earlier this is a little bit complicated there's several moving parts here but I think my version of this that I can get the most
38:41
excited about is I do think more aspies are good I know you you agree and an innovation of having in customers put in their own capital to create their own local ISPs it could be really big so one metaphor that I've talked about with the
38:54
company in the past is in the same way that uber doesn't actually own any cars and Airbnb doesn't own any physical property you're going to be in high-speed that doesn't actually own any routers or fiber right right we we just own the rights to operate they're
39:11
they're exclusive right to operate their hardware okay that sounds pretty good right so anyway so this is sort of the line of thinking that got me convinced that this is actually really interesting I can come up with a million reasons why
39:21
this might not work but this does feel like in my opinion a fresh take on it and then I think last bit before we move out what's your guys why did you start the company like what was your inspiration here why are you working on this yeah so I mean my inspiration was
39:36
kind of the frustration with most people with their internet is its 2017 why does you know Internet in 20 20 18 I started sorry sorry why is Internet's no problem right and then you dig deeper and you realize it's not really a problem for for large
39:55
apartment buildings it's only a problem for you know rural areas or or suburbs areas where there's regional monopolies so how to combat this is to to basically increase the competition in these areas and there isn't one there
40:10
isn't competition because it's it's actually really hard to start an internet provider yeah okay cool so again zooming out one more time for every by the audience this is not a company for everyone but if you're excited about ISPs and excited about
40:23
taking on Comcast or you think it's the idea is you know you'd like to start your own ISP this is that's a sort of angel investor there's gonna be like wow this is exactly what I'm looking for right and so it's okay if we think about our
40:34
criteria every company is not gonna see him appealing to everybody but you want to ask the right questions to know if there's some some bit of this to get really excited about and so yeah I I was convinced after talking to them and you know sounds fun
40:48
so that's it for this bit let's say thanks thanks man all right so time for Q&A before I do that I'm going to announce four cars that are in the parking lot yes this is my job there is a red prius license plate five sjd one two three a green Lexus
41:21
it says hand symbol you know and Ari and I don't know there's a green Lex if you have a green Lexus a black Nissan 77 X FY eight nine six that sounds like too many letters and numbers and a black Tesla of course one Tesla seven BC t-888 if those are your cars please everyone
41:48
close your eyes please go move them right away thank you now let's do some QA and I will also for streamers be taking questions from YC sis and from the slack Channel all right great first yeah go for it yeah that's I think the questions lease
42:24
option was what do you do when you agree to invest and then you lose faith in the company so there's some subtlety here one if you agree to invest hopefully your investment closed immediately versus the commitment hanging out forever because that that can be
42:38
complicated and then in terms of the actual things that happens if the way that you lose faith in the company is what you find out is there a horrible at fundraising and they're just gonna like go out of business but they were like
42:50
nice about it then you lost your money congratulations welcome to angel investing you can't get your money back just because someone didn't raise some other people but if someone does something very very very bad lies there's reason there's just reason to
43:07
see that you were materially or deceived about the situation then I think you want to figure it out on a case-by-case basis I mean that's that's what we do like NYC we have a founder code of ethics and we do enforce that at times
43:21
and it's for extreme cases of true deception on the other hand if someone that we invest in just doesn't have a good company well that that's that's the brakes and so to the extent that you ever experience someone that goes way
43:36
beyond the line of what is a true breach of trust or conduct I think you want to yeah on a case-by-case basis talk with the founders talk with lawyers and figure that out and hopefully that will be rare hopefully that's where it's pretty rare okay [Music] yep
44:12
that's a great question okay so the question was how do you say no to someone if the actual answer is not you know not nice I don't know like if you just don't have faith in the people doing it so this is tricky I think you definitely want to say no and I think
44:28
you want to say something like I was not convinced that this is that this is going to work given the current strategy you're not you shouldn't say I think you're a bad founder well not say that but I think there's ways that you can conveyed that
44:44
you just were not convinced in an honest way because that's basically if the team cannot convince you I mean how do you say this Jeff I think this is that's actually a great and one of the hardest questions we actually struggle this with
44:55
it why see all the time because sometimes we interview people and we think it's a great idea but we just don't believe in the founders and that's the last thing you want to tell someone one because you might be wrong and you know you shouldn't stab someone in the
45:08
heart too because that's not a good interaction right and let's just keep in mind though there are always a million reasons not to invest in a company most companies will fail and it's a lack of your own imagination if you can't come up with a reason why you're not
45:31
believing in their version of the future and that's what you should that's what you should communicate to them I think the the bottom line is every interaction with the founder should be as helpful to the founder as it possibly can be and if
45:44
you can't be helpful then just don't say it but if you can if you can find some way to help them even if the real reason is not that so much that but it's still valid I would use that there's always something yeah in the back so the question was what are the
46:07
expectations for asking the founder for a deck or other data before the meeting um I think it depends on a case-by-case basis but let me tell you if it's like a regular YC company at demo day for the context we're talking about I usually
46:22
tell founders not to do that because it's a very quick meeting maybe maybe the founders could send a one page or a quick overview but you generally want to have the quick meeting I think it's not it doesn't do the companies I'm saying
46:37
this from the founders perspective it doesn't help my company to send decks to like 100 people and then have them just never reply is that usually what happens so to the extent that the investor is interested enough to ask for that info I
46:48
would be like well just get on a call with them or trying to meet them first and then present the information when you send people a ton of information without meeting them it feels very low ROI from a founder perspective but it's fine to ask for
47:02
stuff and they could just say hey we don't really have that which a lot of them probably don't yeah back corner yep so the question was milestone based financings so here's what I would say for what it's worth if it was a company that I was advising and an investor
47:35
suggested that I would say don't do that deal but if there's a specific reason in the company that that makes sense if this if these are the best terms that are available to the company or perhaps it really makes sense I think also if those were lots of money
47:52
maybe that wouldn't make more sense but if it's a relatively small check and I would consider 50k a relatively long check and someone tried to put milestone based payments that would not be my I would not tell the company that would be
48:02
my first choice and I would say maybe they could just maybe just get them to invest 25k now at the current terms and then you'll circle back with them later versus actually doing a deal that contains milestone payments does that make sense I'd rather do this simple
48:14
deal now and then there's an option invest more in the future than to do a more complex deal today can I add something to no 14 yeah milestone the abstract milestone based investments sound great but what you're really doing is asking result and
48:30
said for an option to invest in the future and I will always tell founders take if you like the investor take the upfront money but do not give them that option all you can say is like okay that's great idea but if we raise more
48:46
money in the future we'll talk to you and make no commitment that you have to talk they can commit to giving you money all they want but you do not have to commit to taking the money and so actually it's kind of a lose for the investor because they're you know you're
49:00
guaranteed you get that 25 and if things go fantastically and you'll want to get more money into bad you might not get it in cool yep yeah you so the question is if you are not there in person what how does that affect your overall deal flow I think that maybe
49:32
video can be okay it depends on the cheque sizes if you're writing relatively small checks and it's not a big deal to you you certainly can use video calls to get some sense of it but if if this is really your bread and butter
49:47
I would suggest flying around to folks on a regular basis for maybe you know a large part of your deal flow again to pay on your focus and then it does make sense if you're a locally present somewhere you're probably gonna be very helpful to those folks anyway as well so
50:02
you probably wanna do a little bit of both we do have a lot of investors that fly around the world and basically just show up at demo day and write checks and then disappear and you know there's a place for that right everyone doesn't
50:12
have to do it the same way yeah there's a place for that yes yep so the question is what do you do when you have an investment that you made and two or three years in it's not dying but it's flatlining my understanding we see a lot of this is uh
50:49
you just kind of got to write it with them usually these companies can turn into something big maybe someday they buy the shares back there's all these options but there's really not much you could do I would not recommend forcing them to sell or
51:03
something like that if you have a company that takes as a ten year time horizon you that's kind of what you're signing up to when you make the investment even the companies that go really well we are talking about a ten
51:14
year time horizon pb's about to talk and like you know a lot of the investments that he made in 2008 2007 are still hanging out there he's getting no liquidity from it so do you know that you don't have a ton of options but I've seen founders to paint on the
51:27
case-by-case find a way to to take care of their investors hey Dalton let me give you a couple of online questions one is how do you approach discussion discussing competition during founder meetings and sort of a related one was how would you handle information
51:46
asymmetry and the example is if you have informations that founders didn't share with you or didn't share with you or someone in the network and founders didn't share that with you okay okay so the first question was competition it's
52:01
definitely good to ask about competition in a meeting but there's certainly a way to talk about it that is perceived as rude by founders and so a good thing to think about is if they're in a competitive space ask them well how are you going to to win versus other folks
52:15
who are the other parties that are in the market and what are they doing well and what are they not doing well and try to aim for a very even keel conversation usually if the founder is super defensive and flips out about it that is
52:26
a good red flag for you right that is a very good red flag if the person has a very hard time peaking on an even tone about competition or is unwilling to admit the competition either exists so to the degree to which you can just ask
52:39
very neutral questions about it and see where they take it that's how I would get the most out of the competition question and the second question was this asymmetry one what was can you what were they saying I was reading it but it was just a little bit incoherent
52:57
so um okay I think the question is if if you know stuff somehow from your network that the founder doesn't know how should you deal with that can we give an example do you have an example do you have an example you seem to know examples yeah I mean and I guess
53:16
the real question is if it's not clear to you whether you're allowed to say like let's say you know another company is about to launch yeah it's going to be competitive that's working in the same space how should you deal with that yeah
53:28
generally speaking I see folks do this sometimes where they have proprietary information because they work at a big company or something and they know things are about to get really good or really bad on a startup and the founders don't know I would generally keep that
53:43
to myself because you can't I can think of a million ways that can go wrong but if that helps you inform your decision then that's really good that's an example of a differentiated decision-making process versus other folks but to the extent
53:55
that you I think I would always advise to keep that to yourself there's if you tell the founders you try to signal it to them in some way there's so many ways that can go wrong even if you do invest or don't invest so I would try to just
54:07
treat that as proprietary stuff to keep in your head and then use it to extent you can make good decisions yeah okay cool yes yep yeah what do you do if you're an investor in the position where it's unclear or basically you don't have a strong signal they're gonna raise from a
54:46
bunch of other people so ideally what you do is you're honest with them and you tell them that that's what you're worried about and that's not hey I'm in once you get other people it's you which you would say I am not comfortable
54:58
investing right now because the amount of capital you need my check alone will not get you there so let's brainstorm on how to eat how you can either convince me to write the check now because again an example of YC we write everyone checks without anyone
55:13
else being in write so either here's my criteria for you to convince me that I I'm willing to take that risk to be the only check-in or here is when we here's the milestones that I would want to see to have a further conversation and being
55:26
clear that that's basically a no until they do other stuff yeah that's also a great question in you know dalton mentioned that you know what we tell founders if an investor says i'm gonna invest i love you as soon as you get 900 k of the 1 million that you're trying to
55:42
raise i'm in and there's there's a there's a quandary for investors because if you have a company and you're you give them $25,000 they could spend that in a month and then die and it would be much better for you if they had a half a
55:58
million dollars and then you gave them your $25,000 but here's the problem by the time they get to a half million dollars they might not take your $25,000 so you have a trade off you have to decide how convinced are you in the in this company in these founders that they
56:17
will be successful fund reasons that's one of the criteria will they be successful fundraising that might be your only chance to get in and it might be the ten billion dollar company that you just missed because you said i wasn't sure they were gonna raise more
56:30
than 25 thousand the hard hard place to put yourself in that's why this job's hard by the way yeah but to the close you said yes and did they not close it okay and did you do the handshake protocol okay cuz okay okay so the question is what do you do
57:30
there's two things here what do you do if the founder is a little bit asks for a lot I guess and the other thing is why would someone be pushy to get the check wired we definitely encourage founders to get the money wired from the investor
57:44
we every there's so many sad stories that we know where someone commits to invest and then disappears we're like never actually wires the money and so we do encourage people to say once the person has committed get the money it's very very straightforward
57:57
so perhaps it's a completely reasonable thing to say on the other hand you do to the extent you can front-load in your interactions with the founder to make sure you will get along with them and that their personality type fits with
58:11
your personality type that's a good thing to figure out before you make the investment and so it could be there's some there's some personality types that just aren't a good fit for you that are just higher maintance okay one more question please and then we're gonna
58:24
take a quick break I will do you the question is how do we iterate on our process and learn from ourselves we actually have a fairly complex process inside of YC we keep track of everything we fund we keep it the track of things
58:42
we don't fund we track their progress we keep track of who does really well and who doesn't do really well and we take ample notes on everything so we do a lot of we're viewing our process and we try to get better every batch to the extent
58:56
that we can I can't say oh it's just you know we throw a eye at it and the AI tells us what to invest um it's not that it's really just literally looking through decisions and looking at our notes to understand well why do we say yes or why do we say no to that and
59:08
trying to pull out of that wisdom that we apply to future things and so this is the thing everyone says the team comes first everyone says that what does that mean well that's something that we learn every batch through trial and error is
59:21
sometimes we invest in really goofy ideas with really great founders and we make a lot of money and sometimes we invest in really amazing seeming startup ideas with tons of traction and maybe the founders are trickier to work with or they're just aren't good at
59:35
communicating their idea and we lose our money and so every batch there's these same lessons that we learn over and over and over again and I think that's how you build confidence in yourself as an investor is you get enough times to
59:46
iterate and you you actually you know have to lose money you have to have some winners or losers to feel the pain so we're gonna take a quick ten minute break grab what you need but thank you very much dalton for a great session you yes yes yes if you look on the site
1:13:32
today all the slides from yesterday are already up hello everybody please take your seats right away so um please take your seats we're gonna get started hello thank you meeting founders and making decisions is way more of an art than a science
1:14:29
and as Dalton says unfortunately in this game I think you have to lose some money before you can really become an expert as much as anyone is an expert at at at answering the questions you need to answer to make an investment the the
1:14:51
next person who's about to come up has more wisdom and knowledge about this than perhaps anybody I know before I introduce PB however first for the live streamers I apologize for the problems we're having with the live stream as I said this is the first time
1:15:10
we've done this here in Mountain View so we're bound to have kinks the good news is that everything is going to show up on the site and once it shows up on the site it will be more immune from networking issues they're less likely to
1:15:26
be ours and more likely to be yours at that point all of the slides will appear on the site within 24 hours after the session so I believe it's - all of the slides from yesterday are now up with the transcripts from yesterday at investor dr. Doug school.org and we'll
1:15:44
do our best to to make the live stream work as well as possible so the next investor the next presenter excuse me he's also an investor obviously it's Paul Buchheit who has been a partner at YC with me as long as I've been here
1:16:01
he's been at YC as long as anyone here I think it's probably seven years he's been hanging around YC for even loveland that he has also notably the inventor of gmail which sucks for me because I was part of the team that invented yahoo mail so we have a lot of good
1:16:19
conversations he's still my friend I think he he also created a company called FriendFeed which he sold to Facebook he knows a lot about a lot I guess that's the best way to talk about Paul but but one of the things he does know a lot about is
1:16:35
investing here's a quote from Paul that is actually an important one and I would think about it a lot is you think about investing I think the best kind of virality is a product that people like so much that they just want to tell people about it so here's one of the
1:16:59
smartest and best investors I know in the world Paul bouquet to talk about that all right so thank you Jeff that was probably studying the expectations too high so as Jeff mentioned I've been involved in startups for a while
1:17:31
probably about 20 years now I've been investing for the past 12 years I've invested in hundreds of companies I've seen thousands here at YC I've interviewed thousands of founders and so last year I kind of came to the realization that I needed to stop and
1:17:50
actually like think about what I had done because I spent most of those years just making somewhat haphazard decisions so I spent a bunch of time trying to actually figure out like what are the patterns that gave rise the favorable
1:18:06
outcomes for me and what are the patterns that gave rise to unfavorable outcomes with the idea that in the future I can maybe do better so really this is like something I more did for myself in my own investing process it may or may not work for anyone else but
1:18:24
it's what what I intend to do and so the structure of this is I'll tell a series of stories first of favorable outcomes things that went good for me and and some unfavorable outcomes things that did not go good for me and then
1:18:38
finally followed by some conclusions about you know how I plan to invest going forward so first there's this idea I'm not limiting myself to good ideas this actually started out as a joke about 20 years ago but then I kind of realized it was true a lot of my ideas
1:18:56
are not good but it's also a really relevant to startups because oftentimes the bad ideas I mean the good ideas look bad and the reason for this is that if the idea were obviously good like the opportunity wouldn't exist big companies
1:19:14
are not that dumb they're capable of executing they have lots of resources they have market power like if they thought there is this you know 10 billion dollar business sitting there they would just go do it themselves so necessarily for it to be a good startup
1:19:29
it kind of has to be something that inside of a big company would get shot down for being you know stupid or unimportant and actually the example I like the best is this company I don't know if who recognizes that logo that's the original Google logo when Google as
1:19:47
a research project at Stanford called backrub it's Larry page's hand in a flatbed scanner and so you know Google started out as this research project at Stanford Larry and Sergey were PhD students there and they actually wanted
1:20:03
to continue being PhD students and like finish their degree so they went off and tried to sell Google to one of the big internet companies at the time so Yahoo excite Infoseek they made the rounds to all these companies they wanted a
1:20:18
million dollars for Google fortunately everyone said no no what no one thought it was worth a million dollars they thought search was unimportant they thought it was just like a commodity sort of a flavor of the month thing they're like oh you're hot now but next
1:20:35
month it'll be you know some other startup and we'll just hop from one to the next so again like if if this opportunity were obvious Google wouldn't exist so necessarily it has to look kind of bad and so I'll start my story at Google and the reason here is I think
1:20:55
I really want to emphasize the absolute importance in this game of being extremely lucky so the good news is you're all accredited investors supposedly that means you're already among the luckiest people on earth but I also like to think about this a lot
1:21:13
because you know being a start-up employee is actually a lot like being an investor except you can really only do one at a time and so I've asked myself like how did I end up at Google like what what took me there in the first thing it's just that they actually had a
1:21:30
product that I used I was a very early user and so I just knew about it like they had made something people want namely me they made something I want and the second thing the second reason is Linux so I was really really really into
1:21:47
Linux a friend in college once put it shut the up not everything is about Linux so when I went looking for a start-up to go work at really my only criteria was that they'd be doing cool stuff with Linux and so that was how I ended up at Google is they were building
1:22:08
these like clusters of Linux machines and like nothing could be more exciting than that and when I interviewed there the people were really smart they asked good questions interviewed at another startup where the people asked dumb
1:22:20
questions and you could really tell the difference what I didn't know was that it was a good business I actually expected that Google would get squashed by like Alta Vista or something I didn't go in thinking like I was gonna make
1:22:34
money I went in thinking I would learn something about startups and in fact I did learn some stuff which was good so I had a good time there Jeff mentioned launched Gmail but eventually it was kind of turning into a big company and I'm interested in startups so kind of
1:22:52
got the itch again to get back involved in startups so I'm looking around and then in early 2005 I see this thing the summer founders program and this is this is sort of funny because I don't know a lot of you probably don't know this the very first
1:23:07
batch of Y Combinator it was pitched as like a replacement for a summer job so the idea was college students instead of going to work at Google as an intern we just come to YC and start a company materially bad idea to most people in
1:23:23
2005 in fact their original lawyers they tried to work with refused to do the work this is this is terrible we're not going to do it investors all thought it was a joke they're like no good company is ever gonna come out of this so how did I end
1:23:44
up here how did I end up connected to YC and the answer is that Paul Graham had written a lot of really good essays and so I had read a lot of his stuff he he was really smart I didn't know him I thought he was really smart I had really
1:24:00
good insights and I thought this was a really intriguing idea not necessarily a good idea but like intriguing interesting and for me I think interesting kind of includes this element of unpredictable like if I know what the outcome is then there's no
1:24:15
point in getting involved it's the things where I don't know the outcome where I can learn so basically I just cold email PG and it was like hey you know can I help out and so I started hanging out here got to know the first or the first batch that was in this
1:24:36
building which was the winter Oh six batch and there was about 12 years ago I actually since then haven't met with him invested in every batch I'm a repeat offender but my very first angel investment was was in a YC company
1:24:51
called wufu and here's what the internet thought about it for those of you who can't read it which is probably most of them person says is anyone keeping a list of all these new Y Combinator startups seems like it might be entertaining a year from now after all
1:25:07
the hype has died down to go back and look at it I mean sure it seems like it's written in Python and it uses XML HTTP requests as we confuse with this stuff like I have a business plan and my product satisfies a demand that consumers actually have and
1:25:22
I like this because it's both kind of like making fun of YC and wufu and it was very characteristic of the thinking at that time I mean in fact you know whoohoo never did IPO but my investment on that returned like 44 X when SurveyMonkey bought them and the founder
1:25:44
Kevin Hale who's extremely talented ended up being a partner here at YC some years later and no doubt therefore help earn me more money hi by helping our startups so you know that there's both an immediate return and then there's like the long-term return the following
1:26:05
year I invested in this YC company it's called justin.tv the idea was that Justin here was going to stick a camera on his head and then livestream it to the internet that was like the idea and at first I was like are you joking like
1:26:22
no we're gonna do it I don't like awesome like because again this is like really unpredictable what's gonna happen when you start live streaming your life 24/7 and I guarantee this is not the idea that would come out of Google right
1:26:37
like you're not going to see Larry Page with a camera strapped to his head 24/7 and Norton or should it come out of Google so again this was just like an unpredictable thing and in fact the company struggled for quite a while which I mentioned because someone asked
1:26:56
earlier Dalton you know what if the company is kind of going sideways should i I mean I think the implication was should I like kick the founders until they give me my money back the answer is no so this kind of mini they
1:27:08
actually even tried to do an aqua hire several years in but no one would a co hire them because they thought they didn't have any talent they couldn't do a talent acquisition because the choirs thought there was no talent fortunately they eventually pivoted to
1:27:23
twitch which was focusing on just the one part their product people were streaming all kinds of things on justin.tv but Emmet became interested in specifically video game streaming people were streaming their games which I never would have
1:27:39
thought was a business that was a total surprise to me but that turned out to be a great business which they sold to Amazon unfortunately for a billion dollars it's probably worth way more than that right now but the other interesting thing I want to point out
1:27:55
here is this company had four founders so Emmet who is the CEO of twitch is still the CEO of twitch at Amazon where it's estimated to be like a twenty billion dollar business at this point Justin Khan has started a bunch more
1:28:13
startups he was here as a partner at YC for a couple years now he has a new company called atrium which if you invest in any of our companies going forward you'll probably interact with because they're doing kind of like the default legal legal provider now for YC
1:28:28
companies Michael Seibel started a company called Socialcam which actually was a justin.tv spin-out sold that Autodesk for 60 million and then became a YC partner and actually he's now the CEO of Y Combinator and finally Kyle vote started a company called crews but you
1:28:50
may have heard of because GM bought them for a billion dollars so like that for a group of people who had so little talent that no one would talent acquire them have done some pretty remarkable things all right so eventually I wanted to
1:29:04
start my own company I was like alright I I think I see how this is done I can do better so so that leads me to FriendFeed know when I decided to start a startup I actually had a lot of ideas probably most of them were genuinely not
1:29:20
good but the one idea that was totally correct is that I thought the most important thing was having a really great team and so that was sort of the original focus is just like figuring out who I can get to join on to this and fortunately I managed to convince this
1:29:38
guy Brett Taylor to co-found friend fee with us in brett is someone that I knew from Google I hadn't worked with him but I kind of knew him you know but we had chatted I knew him by reputation and the story I like to tell about Brett is he
1:29:56
was the p.m. on maps not even or maybe like an APM not even an engineer and he was frustrated that the product was so slow and clunky this was before it was launched and so finally one weekend he he was just like you know what I'm just gonna fix it
1:30:16
and so he rewrote the entire JavaScript front-end over a weekend made it a third the size in ten times as fast as what an entire team of developers had been working on for a long time this is the kind of person you want to invest in
1:30:33
right like that is an absolutely great bet let's see so friend Pete generated a lot of buzz unfortunately it didn't generate a lot of growth in part because we ended up competing with this company Facebook so they they turned out to be a very formidable competitor I got a
1:30:57
chance to meet Zach he's like really impressive and eventually he came to believe that Facebook was unbeatable not by us not by Google not by anyone and that it would therefore be like a Google sized success and therefore we should
1:31:15
sell so we sold FriendFeed to Facebook for about half a percent of Facebook's equity which turned out to be a pretty good deal and so the the lesson here I really want to emphasize is find your betters like you want to find people who are smarter and everything more
1:31:37
insightful than than than you are and I think Brett and and Zach and the team at Facebook are great examples of this like they were just clearly better at it than I am so that's like one of my criteria when I'm meeting a founder if I'm thinking
1:31:53
like oh I could do this job better than you like I shouldn't fund right I only want to fund people who are better than I am right and so this is why it's not that I think idea and market don't matter like those things are of critical importance
1:32:10
you're not gonna build a big company in a tiny market but my belief is that if the founders are actually better than me then they're gonna have better insights they're gonna know more than me so I can kind of outsource that part of the thinking to the founder and then I just
1:32:27
have to figure out like does the founder believe it and so what you want to do here I believe is use your knowledge to probe to ask intelligent questions to see if they really do know what they're talking about right but but not using it
1:32:41
to decide not being like oh you know I'm an expert on air mattresses I know there's no business here right the challenge of course is finding these great founders so I want to go through a couple more examples that I think highlight some traits
1:32:56
the first is Meraki this is another early investment 2006 and when I went in to meet them in their little office and Mountain View they showed me around they introduced me to the team they showed me some of the hardware they were building these little
1:33:12
mesh Wi-Fi boxes at the time and I was like wow this is really impressive like how much money of you guys raised and they're like no reason that's why we're talking to you right like and I was shocked because they had like hardware
1:33:27
there they had they'd been selling these devices and they did it all by kind of like scraping together money here and there they got somehow a deal on this and a deal on that and someone lent them money and they were able to string the whole thing together for $0 which is
1:33:41
exactly what I like to see and so this is another one I like to think about as an example of like what you want and then just kind of for laughs I'll give you what would be an opposite of Meraki I would say is juice arrow like they
1:33:59
spent a hundred million dollars on their like juice bag squeezer without ever talking to a customer without ever trying to sell someone a bag of juice which by the way is what it is it's just a bag of juice and it squeezes it out it's horrible right so you want
1:34:17
the opposite of G Sarah you want Meraki and this was Cisco bought this for 1.2 billion which was like a seventy three extra turn once again they sold too early that company's worth ten twenty billion dollars now founders always sell
1:34:32
too early cuz a billion dollars I make the same mistake I sell too early next up is Cruz Cruz I mentioned earlier one of the founders of justin.tv Kyle vote started this company and my favorite Kyle story is actually from the early days of Justin TV where they came to me
1:34:54
with this problem I had invested and then they came to me that with this problem where they were burning up all of their money on streaming because it turned out streaming video was very expensive they could either use the streaming CD ends that were really
1:35:09
expensive or they could like license some kind of software to run their own streaming CDN but that was also really expensive so they're like what should we do you know we're gonna burn all of your money which I don't like so I was like
1:35:22
you know what this doesn't seem like a hard problem to me like bits go in bits go out like what's the big deal you should just write your own streaming media server and Kyle you know took me seriously he's like well okay I guess if you know PB he says it's possible and
1:35:41
actually I told him he should be able to do it in an evening thank you you should just build this tonight launch it tomorrow like I don't get what's so hard just make it work it turns out it took him maybe like a whole weekend but he
1:35:54
did in fact write their own streaming media server and this is actually the reason that justin.tv survived at all right because there was no way the business was viable if they were paying so much for streaming and and so again
1:36:08
it's a founder who's willing to like do something that a more reasonable person would say is impossible like 99% of Engineers if I told them oh yeah you should replicate this other company's product and you should do it too we'll just be like you're an idiot like
1:36:25
you don't know what you're talking about it would give me a big long list of reasons why it's impossible but instead he just did it and so the crews idea actually seemed four years ago kind of in a similar boat now self-driving cars are really soft driving car startups are
1:36:43
really hot but four years ago it actually seemed like an absurd idea like the technology is so hard Google has like a huge team working on it like there's no way like this is too much for a little startup there isn't there's no way it can work but of course
1:36:59
it had Kyle invest it anyway and as mentioned GM bought them for like a billion which was about a 50 extra turn not too bad again probably sold too early this company you may or may not have heard of they get a lot of press
1:37:18
because it's awesome they came out of YC two years ago they're building supersonic jets in ten years when you want to go to Tokyo you're gonna get there in like six hours like that's pretty exciting and so this is another great example the founder Blake he's
1:37:39
actually a software guy he doesn't know anything about he didn't he don't have like an Aeronautics background or anything he just became determined he's like you know it's the future we should have supersonic travel he's like I'm just gonna do it and so he took the time
1:37:51
to just go teach himself everything and figure out why like the Concorde it was such a huge failure and what was different now and what was so remarkable I remember when he was in YC is that he was able to very clearly explain to me
1:38:10
why he was going to do this thing that seems really impossible but he could very clearly outline to me essentially like the three things that were wrong with a Concorde that he was fixing the three the reasons that this was actually
1:38:26
a viable business in like work through the economics of it all and he laid out a very clean picture and again this is one of the of really great founders is there able to communicate what's a fairly complex idea I don't know anything about
1:38:41
supersonic aircraft I'm not an expert in supersonic aircraft right but he's able to explain this to me in a way that I understand very easily he's got good insights and just absurd ambition just like really ambitious something that again people would be
1:38:57
like there's no way I startup is gonna build a supersonic airliner I believe they are you know it's not yet proven but they're making amazing progress I always love to read their investor updates he also sends the best investor updates of any company I've ever
1:39:11
invested in and so the other point I want to make here actually is don't be afraid to invest in things that aren't software if you're if you're working according to this philosophy that like you want a really great founder and the founder brings the expertise then you're
1:39:28
able to invest in so much more and and we have so many great companies that are like in bio I think we're gonna have some just giant exits you know ten years from now and and I see every time at demo day cuz I work with a lot of the
1:39:43
bio companies because I really like them I see you know at least half the investors just like cross it off the list on principle because like I don't know anything about supersonic aircraft so don't do that all right now as promised I will talk
1:39:58
about some of the less flattering story ISM so in honor of the Dropbox IPO let's talk about Dropbox so this email again for those who can't read it there's me replying to Drew this is September 14th 2007 sorry I wasn't able to make it today
1:40:23
are you gonna be around this weekend so I had actually gone to Boston to meet the summer 7 batch which was only like 19 companies so it wasn't that hard Dhruv seemed really good he was definitely you know seemed like one of the strongest
1:40:40
invest founders in the batch but you know I had some questions about competition like what are you gonna do about Google Drive and all that so I set up a meeting meet with him when we're back in San Francisco and then on the day of the
1:40:55
meeting my previous meeting ran long and I cancelled I'm drew and I want to make a couple of points here one is that that's really shitty investor behavior because you're wasting the founders time don't do that and to karma kind of got
1:41:10
me back I missed out on what would have been like a thousand extra turn and an exciting IPO because I didn't show up all right so I missed Airbnb I mean a Dropbox but what about Airbnb so here's Michael Seibel introducing me this was June 26 2008 - to his company air bed
1:41:39
and breakfast and then just sort of like humorously four years later something three years later I respond I should have responded the thing that actually triggered this was that the Airbnb founders were like standing right here telling their story and I was like ah ah
1:41:54
this hurts so much I can't believe I like missed this company in my defense I had my own startup at the time and I think if you are a start-up founder you need to give your own company absolute priority over angel investing the thing
1:42:09
that actually makes is more painful is that this was just the first time this was before they were in YC once they're in YC p gu is like oh you got to talk to the air bean bees they're so good there's like the best company he was
1:42:22
just constantly hyping them and generally if PG gives that strong of an endorsement just like you just invest I'm like cool you know I'll invest I'll you know I'll watch for them on angel day which is what you used to call demo day now I show up on angel day and
1:42:37
there's no Airbnb so I email Brian and Mike hey misty guys today was you know hoping to chat and invest he's like yeah sorry we just signed a term sheet with Sequoia so again I had basically in my head decided to invest but then just kind of was
1:42:57
laxed a days ago and and and took some time fortunately I was able to get in to a later round but at a much higher price but again the point I want to make here is that if you move slow you're going to get adverse selection like the companies that you can string along for
1:43:16
months and you know give a hundred different meetings and like you need to talk to this person probably aren't going to be the best companies so like be very deliberate in your decision-making like do or do not right don't just be like yeah you know I'll
1:43:31
see what happens like when you identify a company is being really promising as something you want to invest in you could spend like another week thinking about it or you could pull the trigger and get air BnB alright what else
1:43:50
doesn't work ah a really good price this one I've been duped into a bunch where I'm like oh it's such a you know they're giving me a bargain like I'm trim today a bargain like all the valuations so low it's a steal like I'm gonna I'm getting a great deal
1:44:05
I've never gotten any return that's something that I invested in because it was a good deal they're really literally is no such thing as value investing in startups as as much as it seems like there should be every time I've done
1:44:21
this it's been a mistake another mistake not investing because of price and clearly there must be some limit at which this isn't true but I've never encountered it any time I've been like excited about something but then there's like ah the price is so high
1:44:41
yeah you know I'll invest in something else I've always regretted it like so now actually in my head I kind of turn around the rule I'm like if I'm dissuaded by their price I should probably invest more I just need to write a larger check this one is
1:45:02
probably kind of obvious I make this mistake a lot because I work with the founders I get emotionally attached and I just want to help them out they seem helpless if you're investing out of pity but is also have never made any money always
1:45:22
turned out bad because again like the really great founders just are so formidable you know someone like like Blake get boom it's just sort of like a force of nature like he's somehow just gonna will this thing into existence the people who come to me with like a sob
1:45:37
story oh no one wants to invest maybe if you write a check they will like I haven't made anything so I'm gonna try to keep myself for making this mistake I'll probably do it a little bit more cynical ideas this one is something where I'm actually not really that
1:45:54
excited about what they're doing and what it means for the future but it seems like it could make a lot of money and so you know if they're gonna make a lot of money I'd like some of it so far so far and I'm kind of actually happy
1:46:09
about this I've never made money on these companies somehow the cynical idea is I don't know why but they haven't they haven't worked out for me maybe I have the wrong kind of cynicism but the principle here I would suggest is invest
1:46:24
in optimism invest in the future you want to see not the future you fear and these are basically ideas where I invested in the future I fear I had this one idea at one point that I should just invest in anything that would not be out of place in the movie idiocracy
1:46:43
fortunately those investments didn't work all right another mistake really impressive numbers I think Sam touched on this yesterday it's really easy to get excited and good numbers on their own are not a bad thing obviously sometimes
1:46:59
really good companies have really good numbers but the thing that happens is you kind of get blinded by the numbers you're like wow it just keeps going up ignore the fact that like somehow the founders are kind of a or like the product doesn't really make sense to me
1:47:16
and again I never made money on these if I'm just investing because of the numbers it turns out to be a bad investment and I think the reason for this that the question to ask is is this company actually creating value like are they actually making the world a wealthier
1:47:35
place or are they maybe just exploiting some temporary inefficiency in like Facebook the Facebook's didn't change their album algorithm and that company's gonna be dead right all right so I've tried to boil that all down again just more for my own
1:47:54
use to a checklist because again my my thinking on startups is that it's really like the founders are absolutely critical and everything else kind of derives from that so if I'm just asking myself like is this person a great founder here's some of the traits clear
1:48:16
concise communication and I want to be clear this doesn't mean slick salesy kind of communication I mean people who can demonstrate a real depth of understanding and clarity of thought in the example actually probably one of the
1:48:31
best examples of this is just Paul Graham with Y Combinator like the whole reason why Combinator really exists is because he'd been writing these essays for years that were sort of like he's kind of like the Pied Piper of nerds like everyone would just read these
1:48:45
things and get excited and that was in to this day I believe it's like the number one or number two source of leads to people applying to Y Combinator we asked a question on the application how did you hear about Y Combinator and they
1:49:00
say from Paul Graham's essays but also you know essentially all of the other founders fall into this category right like Kyle was able to tell me a story about how he's gonna make a self-driving car boom again he's able to tell me the
1:49:15
story about how they're gonna do this impossible thing and so if people if I find myself struggling to understand or like doing the work for them it's always a bad time and it's the trap I sometimes fall into is all talk to them for so long
1:49:31
I'll come up with a story that makes sense and then I'll just sell myself on my own story you know I think maybe just not smart enough but no if they're a good founder they're gonna be able to communicate to me moves fast again like think of Brett rewriting maps
1:49:50
in a weekend or Kyle making a media server or you know the Meraki team building building that product with no money moving fast is absolutely critical and again it's something that I think most people don't do it's really easy to
1:50:09
come up with reasons why this should take longer or you know I really want to get this thing right or that thing right like founders will come up with infinite reasons to move slow and that's fine I just not going to invest him
1:50:23
accomplishes a lot with a little and so again like Meraki is the great example of this no money in there shipping hardware somehow juice arrow is the anti story of that most most startups unfortunately accomplish very little with a lot implausibly ambitious
1:50:42
or frivolous ideas and the reason that we're kind of at these two extremes is that if the idea is in the middle as I mentioned it at the start probably there's like a big company somewhere working on it or a hundred other startups and so you want to see
1:50:58
something that's either it sounds impossible like you know a supersonic jet or just straight-up stupid like putting a camera on Justin's head right things that seem like toys actually Aaron Harris had a good blog post about this I think last week you should you
1:51:11
should look up on the YC blog ideas that look like toys are oftentimes really great and the founders have the conviction to pursue these obviously bad ideas is a talent magnet so the best people want to work with the best people
1:51:30
and somehow the really great founders seem to be able to attract other great people and actually YC this is I think really the secret of YC is that it's just a giant top talent magnet like we could bring them in and do almost anything I think it was still sort of
1:51:47
work the key thing is that we're attracting the best people and the best people want to come be a part of a Y Combinator because this is where all the other best people are and so this and we see this with a lot of our top startups
1:52:00
like stripe you know really brilliant founders and then their team is also really impressive make something people want this is this is key this is our slogan make something people a lot Google is a great example like I actually was using the product if it's
1:52:21
if they're building the thing that you actually want that's a good sign if you can't identify anyone in the world who would possibly want the thing that they're making anyone who's who if you offer it to them they'll be you that's that's a bad sign I just can't say
1:52:40
something else about that but I remember oh right like actually another funny story here is door - which you may have seen it in the news they just raised another half billion when they interviewed here like actually in the room right over there I like one
1:52:57
question for them was like will you deliver to my house because at the time when they went through I see there was no food delivery where I lived and I get hungry and so they're like yes I was like you're funded so I mainly funded that company just because I wanted food
1:53:12
for myself but you know there didn't get I finally determined and committed and in fact peih-gee says determined is the number one most important trait in a start-up founder and the reason for this is because starting a start-up is really
1:53:30
really really hard and unpleasant and so if you're not super determined you'll probably give up at some point you'll be like why am I putting myself through hell I should just go get a job at Google and be like a normal person unfortunately I think like this can
1:53:49
sometimes be a little bit hard to suss out because the founders will of course be like oh yeah I'm totally committed but some of the things you can look for is are they hedging their bets like do they have kind of it's easy Plan B and
1:54:02
actually the group of founders where I've seen this happen most his founders who are on leave from med school doctors who realize they didn't really want to be a doctor so they're like I'll try out the startup thing and so they come in here they'll
1:54:18
work for six months or whatever in the big man this is hard I'm scared I'm gonna go back to medical school right like they have that easy out they've already made a huge investment and being a doctor and they don't want to throw that all away for some pipe dream
1:54:36
startup and I think the other thing that I like to look at is have the people made mistakes in their life I'm very nervous about people who've always gotten perfect grades they got into all the right things they did all the right
1:54:59
clubs the people who have the perfect resume the people who didn't up because these are people who've never failed and startup founder being a start-up founder you're basically failing day after day and so what these people do you know they're these are
1:55:17
people who are scared of failure and so they almost inevitably will take just like an early exit and then they can put on their resume oh you know started iyc startup and sold it to some other company right it doesn't say that they sold it for like zero dollars or
1:55:33
whatever but they can add it to their resume and they can go get a safe job at McKinsey or something all right so that is it thank you [Applause] Thanks so start asking questions so the question is with respect to making things people want how does how
1:56:25
do you evaluate that for like bio companies and things like that you know actually I find most of the time with those companies it's pretty obvious like you're making a cure for cancer I want a cure for cancer right the the risk on those companies is most often
1:56:45
not market risk it's it's not the risk that no one wants a cure for cancer the risk is that they don't don't actually have a cure for cancer right so with those companies more often it's one of these things where like the demand is
1:56:59
kind of obvious it's just like a question of whether you can actually create the product I have a question right just wondering I know Justin I know Michael I know I'm it I know Kyle what is it about those guys that made you invest cuz I mean that was you
1:57:17
didn't really say it but you have you heard this incredibly stupid idea and yet you invested in this know talented group of four people why I mean I think they did have talent III think they told a very simple story actually there's a good question
1:57:35
they they told a story that really connected with me which is we're gonna stick a camera on our head on Justin's head and then stream it and see what happens and that's the kind of thing I love because I'm like I don't know what's gonna happen right it's really
1:57:47
unpredictable but again the thing that I liked was that they weren't gonna go off and spend a lot of time like thinking about it and like making complex plans they were literally just gonna do it they they bought a camera stuck it on
1:58:00
Justin's head and like hacked together some of it so that they could stream it so they were gonna be able to test the idea very quickly and learn and iterate and again this is part of why the you know on the checklist here moves fast is
1:58:14
super important like you can almost defy or predict the I think success of a startup just based on how quickly they're able to iterate and the really great companies just like iterate really quickly the ones who you know do a release every two years fail juice arrow
1:59:23
sure so so the question is unlike private equity where you can do months and months of diligence like we kind of have to move fast as investors or as I mentioned face adverse selection of not funding Airbnb so how do we how do we
1:59:40
know if the founders move fast I think is what you're saying as well as all of these other things and what you can do is you can actually ask them like what have you done what have you accomplished in the past month right what what what
1:59:54
there's actually a really good blog post you should all go find where it says a little bit of slope is worth a lot of y-intercept I think is the title and the basically the idea is you can have something up here you know millions of dollars in revenue but it's kind of
2:00:09
flatlined or you can have this little toy down here with like almost nothing but it has an upward slope and you want to invest in the thing with slope and so this is what we look for in founders and companies is just like how quickly are
2:00:25
they moving forward how soon are they gonna do something right and so like the example of justin.tv it wasn't like we're gonna launch this thing next year it was like we're gonna launch this thing next week right and so and so just
2:00:37
talking to them about their schedule what they've done in the past and what you know what their anticipated future schedule is and I want and actually asking them like okay why aren't you doing this thing faster and seeing if they give me you know just kind of like
2:00:52
excuses or if they're maybe is a legitimate reason for not moving fast and you know you can also try pushing the founders you know probably more so after you you fund them pushing them to movie and faster and see how they respond and you know like my story with
2:01:08
Kyle I gave him what was maybe an unreasonable thing like you should rewrite some other company's product and an evening but he took it and ran with it right he didn't just like I've worked with a lot of Engineers 99% of Engineers
2:01:20
would just like tell me I'm smoking crack and like don't know what I'm talking about right but he just like took it and ran with it right so here at YC we actually fund the companies based on a 10 minute interview right so it is possible to get
2:01:37
amazing how much you can get out of people in ten minutes and actually this is again why I put for me number one on the list is clear concise communication if I spend 10 minutes interviewing a company and I still don't know what they do that's an easy no like it's so easy
2:01:55
to say no to that right like like if they can't if they can't tell me what it is and that's that's probably like you know at least a third of the companies that come in here to interview at the end of the interview we still don't know what
2:02:05
they're doing and so we don't fund them so the question is did I make any mistakes with respect to the fundamentals of the startup I mean okay the thing you have to remember is that most of your investments aren't going to work out and it's it's easy to spend a
2:02:50
lot of time kind of making up complex theories but what I find is the danger when I see investors who do that is they come up with clever ways of talking themselves out of good deals because like you know justin.tv if I give him
2:03:05
that like five minutes of thought I could have come up with you know a hundred reasons why it wasn't going to work right so yeah did the companies fail for fundamental reasons of course and you sometimes you never even know right like suppose justin.tv had managed
2:03:26
to actually do a talent acquisition someone thought they had talent they wouldn't be up on the slide right it's kind of random you know some some random person that Google flipped a bit one way or the other and I got a completely different outcome but if I were to then
2:03:43
look back on that let's say it wasn't a favorable outcome and then try to draw like deep conclusions about you know why I should never again invest in like a streaming video company or something like that I might miss out on something
2:03:57
really good so one of my other principles is don't over learn from past mistakes and it's really easy because it hurts it hurts so much to lose money like it hurts me at least that that you want to avoid it but if you're going to
2:04:11
be able to do this you kind of just have to bite the bullet and recognize that fundamentally investing at seed stage involves and I started with this a great deal of locking so the question is when I look at ICS do I see that as the open source of funding
2:04:51
or the G sera funding it's a good question I'm trying to figure out how do I like politely answer I think there's something really interesting going on in crypto so crypto is another one of these things like I gave Linux as an example
2:05:13
where the thing that brought me to Google was my enthusiasm for Linux and I think if you were paying attention to what like nerdy 21 year-olds we're excited about five six years ago you would have invested in coinbase and Bitcoin and all that stuff that said as
2:05:31
far as I can tell the vast majority of the ICS are scams or or just like these are companies that if they were trying to raise from the people in the room here maybe they'd be able to raise half a million dollars but instead they go do
2:05:46
an ICO and they raise let's say a hundred million dollars no way no way those are all going to zero i I don't believe any of those are gonna are gonna work and part of the reason for that - is this counterintuitive thing that I've learned working with a
2:06:02
lot of startups is that actually too much money is a huge liability because when you have a lot of money you start doing things the right way and that's actually kind of what happened with juice arrow as an example is they got you know a hundred and whatever a
2:06:18
million dollars if that company had only had 100k they would have had to go try to sell juice bags they wouldn't have been able to spend years building this stupid machine right they would have had had to actually talk to customers and so
2:06:31
having a giant mountain of money enables the founders to insulate themselves from reality to an unhealthy extent just a couple of questions from cyberspace or in this room and they're just too shy to speak it out one was directly to me but
2:06:53
I think it's an interesting question which is people tend to be nervous sort of deep deep technology companies investors especially how does how do you get over that and now do people in general get over not being afraid of some sort of hardtack I mean I guess I
2:07:19
also just like tend to invest in things that I'm excited about and it's so much easier for me to get excited about a supersonic jet then some sort of like obscure enterprise software or something like that and not that an enterprise
2:07:33
software is a bad investment but I don't know for me it's not really that hard because I sort of accept accept the fact that I actually don't know very much about almost anything so it's not just the hard tech companies like I don't know anything about almost any of what
2:07:50
the companies are doing that's why I have to invest in people who are better than me right and so it really just comes down to like do I believe in this founder and and their expertise and then therefore I can just rely I can like outsource my thinking to the founder I
2:08:05
don't think you answer this but if you're an hour meeting and I had a startup and you were trying to determine whether I was determined how would you do that actually to talk about this a little bit but I you know a lot of is kind of
2:08:19
probing for you know do they have any plan B right are they gonna go back to medical school they quit their job yet do they still have a job at some other company like and we get this a lot of times where we'll ask founders are you
2:08:35
going to leave your job and they're say well if I raise enough money that I can pay myself XYZ like they have these conditions on it and ideally you want the people who are just willing to charge straight into a brick wall it's necessary I think this is really deep
2:08:54
Paul Graham says this is the most important quality of a founder you should look for but it's extraordinarily difficult to know when someone has it one of the reasons by the way we ask questions on the YC application about
2:09:07
your past because that is one way I try to determine if someone's determined you know has that quality of getting punched in the face falling down and getting back up again it says that happened to them in the past Paul mentioned people who have never ever
2:09:22
failed that doesn't mean that they're not going to fail this time but you just don't have very much information about what happens when they get punched in the face right actually if they've never failed they're gonna be afraid of
2:09:32
failure and therefore they're gonna take a safe exit yeah and actually like to follow up on that what you can do to examine determination is actually also just ask about the history of the company so like air B&B is another one where they had actually worked on that
2:09:47
for a long time and you know Michael actually helped them out a lot with the pitch they pitched a number of investors everyone said no when they came to interview YC Paul Graham actually tried to talk them out of the idea they're like you know you guys seem really good
2:10:03
but this idea is terrible can you work on something else and they were just like no right like they he tried to talk them out of it if he had talked to them out of it that probably would mean it was a bad idea okay one more question
2:10:41
so the question is what about like I invest in things I don't know about what about things I do know about I have a trick here which is I don't know about anything I mean honestly like I think it's really easy to overestimate your own knowledge
2:10:58
and experience so like I said I try to avoid learning too much from the past specifically asked about email yeah I'm I am a little bit burnt out on email startups so there's like maybe kind of a high bar just because I know this is a
2:11:16
case where I can take my knowledge and I put this earlier when you're talking to the founder use your knowledge to probe and see if they have a good response and so you know a lot of the email stuff they're like tweaking Gmail and I'm like
2:11:29
okay what if Google just adds this feature what are you gonna do know right like okay that's not a good answer but I have had good email startups front it was actually recently in the news they just raised a big round from Sequoia I think really great founder again Matilda
2:11:49
she's she's great I you know that was an email thing but she could tell me a really clear story about why it wasn't just like a feature in Gmail you almost have to unlearn things that you think you know you know I I ran one of the very first ever personal services and I
2:12:11
might have thought it was done and never invested in any personal service again and I think that would have been a pretty bad mistake so so I I think we give I think a little bit contradictory advice here all the time it's it's part
2:12:28
of the game you should completely learn everything you can from your past mistakes and ignore the past at the same time so so it's not very easy to be a good investor but that's why we're all here right so thanks a lot Paul thank you [Applause]
2:12:54
okay we are nearly halfway through our class that went fast right I guess you can have really quick classes when there's no diploma or anything like that so just a couple of notes if you've noticed a lot maybe all of the presenters thus far are YC people that's
2:13:17
not going to end right now however the the rest of the course is is mostly almost exclusively perspectives on investing from outside of YC so don't worry we're not completely staring at our own navel here however I will also argue vociferously that the lessons that
2:13:41
you've heard from YC partners thus far excuse me are in fact quite general and relevant to investing in startups inside or outside of YC you still should invest in a lot of YC companies there's good reasons to do that however also I know
2:14:00
there's a lot of questions about icos and saps and and crypto if you can contain yourselves please try to hold those questions till day four because we're going to be we're gonna have a presentation by Andy Bromberg who's the
2:14:17
CEO of coin list and the right person to whom to pose those questions our next presenter is going to briefly talk about whatever he wants to he's one of that no-talent group of four people from justin.tv who it turned out did okay founding his own company
2:14:38
Socialcam selling it for a couple bucks and is now the CEO of Y Combinator and doing great amazing things here Michael is is an extraordinary person having front of us I'm really lucky he is the person who said you need to find problems so dire
2:14:58
that users are willing to try half-baked the one imperfect solutions he knows a lot about those exact things please welcome Michael Seibel thank you all right it's been a long day so I'm going to be pretty fast first how many of you
2:15:18
in the room are doing angel investing to make money raise your hand okay raise them high again son it's not a bad thing to make money great so I'm gonna tell you about my experience raising I'm sorry doing angel investing but I'll tell you straight away that I'm not
2:15:37
doing it to make money in effect I feel like where I came from on the East Coast when people want to give back they give money to charity and they go to Galus which I never understood and strangely here in the valley when people want to
2:15:51
give back their right angel investing checks and so that's really why I write checks I kind of think of it as charity someone described it to me is taking money flushing it down the toilet and then very rarely walking up on the
2:16:08
street to a million dollars just laying there and being like holy and so that's kind of how I see it so take all of this advice with that in mind so I wanted to give you a very realistic version of my scorecard I've been angel investing for 4.5 years
2:16:27
I've made 50 total investments invested in four angel funds forty-seven companies only three of them were not YC companies 46 of them were early stage one was late stage it's a little company called reddit I hope it's gonna continue to do well of those 50 investments for
2:16:51
our dead one is a billion dollar exit cruise 12 hour post series a and six have over a 50 million dollar valuation so I don't really actually consider myself of that good of an angel investor I'm fair certain that there are really big
2:17:14
companies that have gone through ICS since I've been here that I have not invested in thankfully because I work at YC I own a percent of every one of them that's how I sleep at night so what would my lessons the first lesson I actually learned about angel
2:17:32
investing is you have to write a big enough check and it's funny because the second I started writing angel investment checks Sam told me this lesson and then I ignored him for two and a half years what you really need to think about when writing angel
2:17:48
investment check is what are the realistic chances that I'm going to get a return and how much would I make at a billion dollar exit I talked to a lot of people who invest a check sighs that if the company were to become a billion dollar company they wouldn't make enough
2:18:06
money to really impact themselves at all so then I kind of asked the question why are you doing it then and so I've kind of made the mistakes of writing $25,000 checks and I don't do that anymore so really the way I think about this is
2:18:27
like model out a billion dollar exit with dilutions with taxes and make sure you're making enough money so that when you brag about investing in that company to your friends you're not whispering the back of my head oh but I only made like twenty
2:18:38
fifty thousand dollars the next thing that I learned is you have to create a flow a system to invest quickly like oftentimes you have hours or you know a day or two to make a decision so you need to be set up to be able to hear a
2:18:58
pitch sign a Clerke document and wire money and like investors who like don't know how to set that up just talk to your banker whoever else handles your money figure that out one of the things we tell YC companies all the time is that an a investor
2:19:16
grade-a investor gives you money quickly signs the paperwork quickly shuts the hell up that's an a investor there are very very few A+ investors in the world they're very very many less than a investors so don't be one of those people who founders are waiting
2:19:38
for signatures who you sign the paperwork but I can't send the wire because the money is over here and it's got to come over here like if you're in this game be able to write checks quickly the last rule that I've learned just in my co-founder taught me
2:19:57
and and he calls it the FOMO slash frnd rule if one of your friends is starting a company and you would have FOMO if it would become a billion dollar company just shut up and write him a check I wish I followed that rule more often
2:20:13
like basically I would have been much more wealthy um so when it comes to investing in YC and and this is kind of where I will end here and open up for questions the first thing that I think about is if you're there on demo day and
2:20:35
you have done no prior research you need to be prepared to move extra quickly because you're gonna be in a room of people some of whom have done their homework and this isn't the first time they've seen the name of this company on the screen so don't be surprised when
2:20:54
you see a founder moving quickly because there are a lot of people in that room whose primary job is to make money and they've done their work the second thing that I would think about is you can do your homework too these companies are
2:21:09
launching often many of them are launching publicly before demo day you can read about them on the blog you can read about the one product hunt on TechCrunch on Hacker News there's really no reason why you shouldn't already be interested in a large number of YC
2:21:26
companies before demo day you can reach out to them they might not want to meet straightaway they might want to wait till after demo day but certainly you don't have to see your work starting on demo day the last thing I'll say about demo day
2:21:41
is that I think not enough investors spend time thinking about what happens after demo day oftentimes even very good companies will raise a little bit of money before series a six to twelve months after demo day so even if you didn't get a chance to get into a
2:22:01
company on demo day where didn't know they were good make sure you're maintaining a relationship with that founder if you can be helpful be helpful and oftentimes there's actually an opportunity to invest later that I think people don't realize and I would argue
2:22:18
that for some people who are not gonna put in the work upfront it might be better to to take a pause and to the thing about investing six to twelve months after you're definitely gonna pay how higher valuations you're gonna have
2:22:33
more information and then one thing that PB said that I can't say enough the most hyped invest in on demo day is often not the best one very very often I think what's interesting is that the crowd on demo day is just not as smart as it
2:22:58
appears and I've been the beneficiary of investors who are very good at working the room and pumping up the investments they've already made and it's great when you're a founder because you get to raise at a you know twenty million dollar cap which is nice but needless to
2:23:20
say in my batch in winter twelve I my company was by no means the best investment Justin was in my batch as well he raised that uncapped super hyped also wasn't the best investment if you were investing in my batch you probably
2:23:39
wonder invest in the company called gusto they're pretty good so with that being said I just wanted to give you guys kind of some honest truths from my experience happy to answer some questions and I know you guys have a busy day thank you okay so go ahead
2:24:23
so I think the when you're trying to figure out how big of a cheque to write what's interesting is that this scales fairly well so if the amount of if you have less money when the billion-dollar company hits you have to make less of a
2:24:38
turn return for it to have a significant impact when you have more money you need to make more of a return have sniffing impact that really scales your check size so probably the number one thing I learned and the number one thing I changed was going from 25k checks to 50k
2:24:52
checks 100k checks if Sam was here he probably would tell me I should be writing to 50k checks I do also think there's something to an investment having a little bite like it like just a little bite just a little like mmm to make you think a little bit more sharp
2:25:16
sharply about whether this is a good thing you should be doing I think you should to make big returns you have to write bigger tracks however to the point there's a lot to be learned and you shouldn't write bigger checks once you
2:25:32
have conviction once you are able to get conviction and if you go through your angel career thinking oh my god am I gonna put money into justin.tv it's such a stupid idea and the founders don't have that much talent then then don't write a big check but if you can look at
2:25:54
this guy and actually notice about Michael that he's actually incredibly articulate and if you see Justin and you say like he's the kind of guy and his if you meet Justin you'll say he's the kind of guy if you punched in the face and
2:26:06
knock him down he's probably gonna get up and punch you back and you might think whoa these guys it's a stupid idea maybe but what do I know they might just make it and once you once you get that conviction then you should write bigger checks and before
2:26:21
then I wouldn't I would learn what makes an a-plus investor well I'll give you an example the Socialcam acquisition almost didn't happen and an a-plus investor nudged it in the right direction that's like pretty big impact so I would say that
2:26:58
it's extremely rare that an investor can have truly big impact another investor of ours pabu high he basically threw a piece of advice is the reason why we built a video system which is the reason why justin.tv could exist which is
2:27:13
reason why twitch could exist so like that that was a biggie I would say they're kind of like very specific moments where like a really impactful investor can actually change the direction of the company but that's very rare so most of the time I tell YC
2:27:29
startups to go after a investors many investors claim to be a-plus investors that's often not true so it's a great question what are the statistics on YC companies and how well they do so actually Arin works on this a lot more so he be better person asked
2:28:14
answer this question he's coming in on day four oh yes you should ask Erin that question what I will say is that we tell the batch that the vast majority of YC companies will fail and that's been a message in the kickoff meeting since PG
2:28:30
was given U and so that's for sure true and you know from my from my kind of memory of the numbers series A's tend to happen between 12 and 24 months post demo day and between 20 and 30 percent of companies will raise follow-on funding post demo day hey Michael um you
2:28:55
mentioned that you missed a lot of the big companies in YC what happened if you if you could concisely say what went wrong in your evaluation and is there any lessons that can be taken from that so when I missed companies let's say
2:29:17
probably two things and and he be covered one of them one was I was just on the fence and didn't move quickly and I think the second one is actually strangely unique to YC I was busy like I had a bunch of companies to help and so my first kind of thought when I go into
2:29:41
demo day is not which company should I invest in it's how are my companies doing and how do I make sure they do really well so I think that yeah that's it's it's different when you work here a little bit so um so I'll just elaborate
2:29:52
for one second because I've missed a lot of really great investments more than I have and I've missed more than Michael has it's true and and I think there is something that people forget about this which is to be a great investor is
2:30:08
incredibly hard-working so and most of you probably don't want to work that hard you're kind of dabbling right so you've gotta again walk this line I'll tell you contradictory things like if your angel investing the last thing you want to do is kill yourself angel
2:30:24
investing but if you really want to be successful you better get your sense of conviction and then do enough homework so that you can chase after work hard to get in the deals you want and if you don't do that your chances of getting that next big deal go down a lot couple
2:30:43
more questions yeah so to party around scare me no not at all the thing that scares me about cap tables is massively unequal equity splits or cap tables where the founders have already sold a large portion of their company very early but party
2:31:11
rounds don't scare me at all I think I think people talk about them as if they're really scary and like yes you have to get more people to sign more paperwork but as long as you're getting good a investors who sign paperwork
2:31:23
quickly I haven't had a problem I think Socialcam had 30 plus angels so in terms of how much equity the founders should have I think the way that I think about this is I model out a Series A that's gonna be between twenty and thirty five percent dilution in a
2:31:50
series B that's gonna be between twenty and thirty five percent dilution and I'd like it where the founders gonna be after that you know and if you're looking at a founding team that's at only fifteen or twenty percent equity after those two rounds they probably
2:32:03
still have a large amount of work to do to produce a great exit and not very much equity as motivation and so those I tend to be a little bit more careful about interestingly at YC oftentimes some of the work that we have to do when
2:32:20
we ingest companies has helped them clean up their cap tables and help convince their previous investors that the way the company is set up right now is actually harmful so that's actually work we do quite a bit identifying what kind of talent
2:32:58
you mean from the perspective of acquiring them so the question is are large companies today somehow better at identifying talent I guess to hire or to acqua higher than they were in the past yeah honestly I have no perspective on that I actually think the number of
2:33:21
things that have to go right for an acquisition to happen can introduce many problems even with very very smart people so seems unlikely to me that anything qualitatively has changed in terms of how big companies evaluate startup founders and their talent one
2:33:40
thing to remember and keep in mind is that often startup founders are unemployable not always but often the best ones so advice on processing getting to yes so what I will say is that it's a lot easier for us to get to yes then it
2:34:36
should be for you to get to yes it's easier for YC to fund the incremental company from my on the angel investing side one thing I think about is is kind of how I think a little bit about baseball like when you go up to the plate you know most likely you're gonna
2:35:01
strike out like you're not gonna get on base and so I think that for me that's kind of a calming feeling it's like I can apply as much intellectual rigor as humanly possible and I'm still gonna have a very very low hit rate so
2:35:15
sometimes I think that people over intellectualize these decisions I was talking to one investor who said that in order to get a two million dollar check they had to produce a hundred page document on how this company was going
2:35:29
to go and that was like wow that's impressive and it was a pre-launch company right that's probably a lot of waste of time I think that you have to be confident enough in your process that you're comfortable writing a lot of checks and then but I do think that
2:35:45
there's diminishing returns with analysis it's funny it's the Jeff mentioned it this is a hard game to be very good at and that's why I like for me what's comforting is that no matter what I'm making an impact in that founders life even if they don't go on
2:36:03
to do a billion-dollar company I'm helping them take a shot and someone helped me take a shot and so even if it all goes to at least I'm kind of continuing that cycle and making a valley a place where people have those opportunities that should be in my
2:36:20
opinion like a very big motivation for an angel okay last question mark so how does YC source I would say there's two secret powers to YC sourcing one is we have an open application process I think investors believe that having the skill to network to an
2:36:58
investor is an important characteristic of a good founder and I think kind of why C's core position from the beginning is that it's not and so especially in the days now where you can write software with relatively little money that has relatively large impact I think
2:37:16
the value of networking and being able to raise large amounts of money is less and less so I would say that's one kind of big secret the other peak secret PB mentioned when I go and talk at MIT my brother's there now I basically say like
2:37:31
what makes this school the buildings and the professors and the administration are the students you put the same students in a you know C level engineering school that's the best engineering school in the country all you have to do is move the students so
2:37:45
in an interesting way I think PG kept a very high bar very early when he didn't have to and that created this trend where people understood that if I'm gonna be at YC I'm gonna be around extremely talented people and as long as we don't screw that up I think that's
2:38:02
just perpetuating over and over and over again so I'm sorry and your second question was oh how do we you just repeat the question like yeah how do we kind of grade ourselves internally at YC because it takes so long to get feedback
2:38:19
it's actually interesting um one thing that we do that I witnessed when I first joined was we asked ourselves how did we feel I joined after summer 2012 which was the batch that killed YC and it looked like a bomb had gone off like literally partners had like this
2:38:39
like PTSD like look on their face and clearly something wasn't great about how that batch experience went not I think for the companies there were great companies but clearly something had to change what the organization to be able
2:38:52
to accept that number of come again I think that's a very important thing that we look at more recently we've implemented a series a program that helps companies raise series A's and that's basically allowed us to pay a lot more careful to tension to what's
2:39:08
the path from demo day to the next step and then I would say the last thing that is kind of glaringly obvious over time is we do a lot of office hours with alumni and so we don't really get caught like once you are the group partner for
2:39:26
a company like YC in many ways to that company is you and so they will keep on coming back and so you kind of still have to deal with the new class but you're always writing the story along with the previous classes and in that way it's actually it's interesting to
2:39:45
learn about what their experience is how we could help them better there's a lot of other things but I think those are the those are the big boys and of course we track stats and so on and so forth but yeah I think those are the big ones
2:39:58
I've seen make a difference hey Michael thanks very much thank you okay now we are well and truly half way in we will start again tomorrow at 10:00 a.m. promptly and for those of you are left already you're about to miss my last pearl of wisdom which is that Michael
2:40:24
mentioned what makes an a-plus investor and one thing that for founder's it's easy to tell when an investor is not an a-plus investors if they claim to be an a-plus investor and it's not always it is good to have a great track record if
2:40:42
you've invested in lots and lots and lots of big companies it's probably a good sign but just because you've made a lot of money investing do not forget there's a significant component of luck involved and it's great if you all are
2:40:59
the lucky ones that pick the one or two or three companies in this batch I see for example that become multi-billion dollar companies but just because you do that doesn't mean you're an a-plus investor thanks and we'll hopefully see you all tomorrow [Applause]