Startup Investor School Day 2 Live Stream
Y Combinator2018-03-06
24K views|6 years ago
💫 Short Summary
The video covers various aspects of making smart investment decisions, emphasizing the need for unique choices, a structured decision-making process, and face-to-face meetings. It discusses the importance of personal conviction, avoiding groupthink, and setting clear criteria for investments. The speaker advises on effective communication with founders, providing helpful feedback, and the significance of follow-up in investor-founder relationships. Additionally, the video addresses the challenges in the internet provider industry, innovative approaches to starting ISPs, and handling situations where investors lose faith in companies. It concludes with insights on successful investing, determination in startup founders, and the impact of clear communication for startup success.
✨ Highlights
📊 Transcript
✦
Importance of Feedback and Networking Opportunities.
01:24Encourages questions through Twitter and Slack, highlighting the value of feedback for networking.
Announces wine and beer networking event to foster community building.
Acknowledges feedback on the need for more community and networking support.
Urges investors to make unique investment decisions, avoid following the crowd, and consider unconventional ideas.
✦
Importance of making smart investment decisions by predicting the future correctly.
05:06Meeting with companies of interest to determine investment potential is crucial.
Insights from Dalton Caldwell on founder meetings and the investment process.
Examples of investment tactics and the significance of storytelling in explaining product value.
Learning from past mistakes to become a better investor and make informed decisions for successful investments.
✦
Importance of having a structured process for making investment decisions.
07:37Process funnel for selecting investments starts with leads and moves through intros, qualification, decision-making, and final investment.
Emphasis on face-to-face meetings in the investment process for optimal outcomes.
Need for a structured approach to decision-making to optimize investment outcomes.
Consideration of budget constraints in determining investment decisions.
✦
Setting a budget and clear investment strategy before meeting with startups is crucial to avoid wishy-washy decision-making.
09:31Qualifying leads and setting criteria ahead of time can help streamline the investment process.
Negotiating with oneself and establishing a process for decision-making are crucial steps in making sound investment choices.
Avoid meeting with too many companies or too few to ensure optimal decision-making and maximize the use of time and resources.
✦
Importance of Timely Decisions in Investor Behavior.
11:29Indecisiveness can have a negative impact on founders.
Commitment once a decision is made is crucial to success in investments.
Diverse investment criteria among investors can lead to identifying unique opportunities and generating substantial returns.
Key criteria for investments include team strength, relevant experience, and market size.
✦
Importance of evaluating necessary background in a field before investing.
14:21Groupthink can lead to non-optimal returns as everyone invests in the same deals.
Good investments are often contrarian or unfashionable.
It is crucial to think independently and consider unique opportunities for successful investment decisions.
✦
Importance of Personal Conviction in Investing
17:28Half-hearted decisions in investing can lead to challenges and lack of success.
Founders value investors who genuinely believe in the deal, not just when it's popular.
Being honest about financing risks and avoiding empty promises is crucial in investing.
Investors should be willing to take risks, look foolish, and accept being wrong in order to make successful investments.
✦
Importance of Personal Conviction in Investment Decisions
21:55Founders should be willing to face potential embarrassment and avoid decision-making anti-patterns like indecision, flip-flopping, and seeking constant validation.
Lack of financial commitment should be interpreted as a 'no' despite positive feedback, as excessive interest without actual investment can lead to fundraising failure.
✦
Building a good reputation as an investor through in-person meetings and founder-friendly approach is crucial.
22:22Start meetings with basic questions about company progress, team, and funding to gain valuable insights.
Focus on the founder's story and allow them to share their own words before delving into complex details.
Follow-up meetings should gather information leading to a clear decision, avoiding irrelevant topics.
Trusting gut feelings during conversations with the founder can be a valuable indicator of conviction.
✦
Key Highlights of Evaluating a Startup Pitch:
24:52Trust your gut reaction and level of excitement when assessing a startup pitch.
Founder credibility is crucial - doubts about their honesty are a red flag.
Consider if you would want to work for or have the founders as your boss.
Evaluate if you are willing to endure tough times with the team.
Treat investor meetings like job interviews, focusing on mutual fit.
Watch out for distracted investors or those trying to dominate the conversation.
✦
Investors should focus on listening to founders during meetings and deciding whether to invest rather than making it about themselves.
27:17Providing excessive product advice and criticism can negatively impact the founder's perception and be counterproductive.
Overloading founders with advice on how to run their company or fundraise can be off-putting, and it's more valuable to offer advice after providing financial support.
Trying too hard to differentiate oneself by offering introductions or excessive feedback can be perceived as a waste of time.
Communication and follow-up are key in investor-founder relationships to avoid misunderstandings and ghosting.
✦
Key highlights on navigating the process of angel investing.
29:51Emphasizes the importance of being comfortable with saying no and following a clear protocol for investments.
Recommendations include expressing enthusiasm for investments, avoiding unnecessary complications, and being cautious of additional requirements introduced by investors.
Highlights the importance of communication and clarity in the investment process, as well as the potential challenges faced by new angel investors in negotiating terms.
Provides an example investor meeting to demonstrate practical application of the discussed concepts.
✦
Overview of the internet provider industry and historical regional monopolies and barriers to entry.
33:11The speaker shares their experience of starting their own internet provider, emphasizing decreased costs and increased accessibility due to technological advancements.
The company mentioned successfully launched their own ISP, serving 47 customers in the southern parts of San Francisco.
Discussion on the complexity of the business and the importance of having a deep understanding to navigate the industry effectively.
✦
New approach to starting ISPs with a box containing hardware and software to eliminate the need for huge capital investments.
36:33Individuals can start their own local ISPs by becoming a network operating center to assist in setting up the ISP.
Scalability is possible without the need for raising substantial amounts of money.
Two signed franchise agreements with buildings in multiple cities demonstrate the success of this method.
✦
Importance of Customer Investment in Local ISPs
38:41Drawing parallels to Uber and Airbnb, the speaker discusses the idea of customers investing their own capital to create local ISPs.
Emphasizing the need for increased competition in areas with regional monopolies to enhance internet service quality.
Encouragement for those interested in challenging big companies like Comcast to consider starting their own ISP.
Discussion on the challenges and opportunities present in the internet service provider sector.
✦
Handling situations where investors lose faith in a company they invested in.
42:21Emphasis on immediate closure of investments and distinguishing between bad fundraising and true deception.
Advice to address breaches of trust on a case-by-case basis, involving founders and lawyers.
Rare occurrences warranting thorough examination and communication.
Insight into saying no to investments with lack of faith, suggesting polite but firm communication.
✦
Providing helpful feedback to founders is important during interactions with investors.
45:35Sending decks or data before a meeting may not be beneficial for quick interactions.
Milestone-based financings are suggested for companies to align funding with achievements.
Meeting with investors first is recommended before presenting extensive information to avoid low ROI.
✦
Advice on deal structures and future investments.
49:24Avoid milestone-based payments and opt for simple deals to maintain flexibility.
Prioritize in-person meetings over remote communication for significant investments.
Value of both local and global investors emphasized, with active engagement and networking recommended for successful partnerships.
✦
Dealing with underperforming investments, long-term horizon, competition discussions, and information asymmetry.
50:41Successful investments may take years to yield returns.
Approach competition discussions with founders neutrally and be mindful of defensive reactions.
Handle information unknown to founders carefully and transparently to avoid issues.
✦
Importance of handling sensitive proprietary information in investing.
53:51Proprietary information should be kept internally to avoid influencing decision-making.
Investors should be transparent with founders about funding concerns.
Establishing clear investment criteria is crucial for investors.
Investors face a dilemma in providing funding amounts, as both too little and too much can have negative consequences.
✦
Key highlights on successful fundraising in startups.
57:51Importance of reasons for successful fundraising and encouraging founders to get money wired from investors to avoid commitment disappearances.
Ensuring compatibility between investor and founder personality types before making an investment.
Y Combinator (YC) follows a process to track funded and non-funded projects, progress, successes, and failures to improve with each batch.
Emphasis on prioritizing the team first and learning through trial and error with investments.
✦
Importance of experience and iteration in investing in startups.
01:14:26Learning from failures and successes is crucial for building confidence as an investor.
Making decisions in the startup world is more of an art than a science, requiring the acceptance of losses to gain expertise.
Emphasizes the need to lose money before becoming an expert and the value of learning from past experiences to improve decision-making.
Introduces Paul Buchheit as an experienced investor with significant achievements in the tech industry.
✦
Importance of Analyzing Past Decisions for Future Improvement
01:18:18Paul discusses the value of both favorable and unfavorable outcomes in shaping investment strategies.
Identifying unique startup opportunities that big companies may overlook is crucial, using Google's humble beginnings as an example.
Emphasizing the need for startup ideas that may seem bad at first but have the potential to disrupt established markets.
Paul's approach involves storytelling, reflecting on past experiences, and drawing conclusions for future investment decisions.
✦
Google founders attempted to sell the company for a million dollars to Yahoo, Excite, and Infoseek, but were rejected as search was seen as undervalued.
01:20:11Luck is a significant factor in the success of startups.
The speaker ended up at Google because of his interest in their product and Linux.
Initially, the speaker did not believe Google would succeed but joined to gain knowledge about startups.
The speaker left Google as it grew into a large company and wanted to return to startups in early 2005.
✦
Early days of Y Combinator and its role in replacing summer jobs for college students.
01:24:37Despite skepticism, a speaker reached out to get involved after being impressed by Paul Graham's essays.
Investments in YC companies, including Wufu, resulted in successful exits like SurveyMonkey acquisition.
Founder of Wufu, Kevin Hale, became a partner at YC, highlighting the long-term benefits of early investments in startups.
✦
Success story of YC company Justin.tv leading to the creation of Twitch.
01:27:27The company initially faced struggles and uncertainty, but pivoted to focus on video game streaming.
Twitch became a successful business and was eventually sold to Amazon for a billion dollars.
The company had four founders, with Emmet continuing as the CEO of Twitch and Justin Khan starting multiple new startups.
Other founders also went on to start successful companies or take on leadership roles within Y Combinator and beyond.
✦
Importance of having a great team in starting a company.
01:29:35Convincing Brett Taylor to co-found FriendFeed due to his exceptional skills and dedication.
FriendFeed struggled to compete with Facebook and was eventually sold to them.
Surrounding oneself with people who are smarter and more insightful, like Brett and the team at Facebook.
Emphasizing the significance of team quality over individual prowess in investing in founders.
✦
Importance of founder expertise and insights in assessing startups.
01:32:56Meraki's success through bootstrapping and strategic deal-making.
Juicebag's failure due to excessive spending without customer validation.
Cisco's $1.2 billion acquisition of Meraki showcasing value of strong startup foundations.
Challenges faced by founders who sell early or lack financial planning, using Justin.tv as an example.
✦
Importance of Innovation and Unconventional Approaches in Business Success.
01:35:31Justin.tv founder opted to build their own streaming server to avoid high costs, leading to business survival.
Startup founder in supersonic jets lacked background but self-taught to pursue vision successfully.
Founders tackling impossible challenges and innovating unconventionally are key to achieving success.
✦
Importance of Investing in Founders with Expertise
01:38:03Founder effectively communicated complex ideas and had ambitious goals in supersonic aircraft development.
Emphasis on potential for success in biotech investments and not dismissing opportunities due to lack of personal knowledge.
Less flattering story shared about missed meeting with founder of Dropbox.
Founders with expertise in various fields beyond software should be considered for investment.
✦
Importance of Prioritizing Own Startup Over Angel Investing.
01:41:19Speaker shares experience of missing out on investing in Airbnb and Dropbox due to hesitation, leading to higher costs.
Key takeaway is to be decisive and proactive in investment decisions to avoid missed opportunities and low valuation traps.
Speaker advises being deliberate and quick to act when identifying promising investment opportunities.
✦
Investing based on perceived value or price can lead to regrets, as it's not a reliable indicator of success.
01:44:51Emotional attachments to founders or investing out of pity often result in losses.
It's important to invest in optimism and the future you want to see, rather than fear.
Good numbers don't always translate to success, so focus on the overall potential and vision of the investment.
Avoid being blinded by impressive figures and make sure to consider the bigger picture.
✦
Importance of communication and speed in startup success.
01:48:09Successful founders excel in clear and concise communication, displaying depth of understanding and clarity of thought.
Paul Graham and Y Combinator demonstrate the impact of effective communication in achieving success.
Founders who can effectively convey their vision and plans are more likely to succeed.
Moving quickly, as shown in examples like Brett rewriting maps in a weekend, is crucial in the startup world.
✦
Importance of pursuing ambitious and seemingly impossible ideas in startups.
01:50:25YC's success in attracting top talent through bold and innovative concepts.
Founders with strong convictions in risky ideas attract talented individuals.
Successful startups like Stripe prioritize building products based on customer demand.
Google and DoorDash's success from creating products that fulfill user needs and address real-world problems, respectively.
✦
Importance of determination in startup founders for success.
01:53:30Founders who hedge their bets or have easy outs are less likely to succeed.
Individuals with perfect resumes and no history of failure may lack resilience needed for startup challenges.
Taking early exits and selling startups for symbolic value can hinder genuine entrepreneurial growth.
Strong commitment is needed to withstand daily failures and uncertainties of being a startup founder.
✦
Importance of fast movement and quick iteration in evaluating startups.
01:59:23Founders who act fast and show progress are more likely to succeed.
Focus on companies constantly moving forward, even with minimal revenue.
Invest in startups with potential growth rather than stagnant ones.
Asking founders about their recent accomplishments can provide insight into their speed and agility in developing their business.
✦
Importance of Clear and Concise Communication in Startup Interviews
02:01:40YC funds companies based on a 10-minute interview, requiring clear explanation of the company's product.
Failure to clearly explain the product in 10 minutes leads to quick rejection from investors.
Overcomplicating investment decisions with complex theories is cautioned against as most investments may not work out.
Companies fail for fundamental reasons and there is a risk of talking oneself out of good deals with overthinking.
✦
Importance of learning from past mistakes in investing.
02:04:04Risks associated with ICOs, including scams.
Negative impact of excessive funding for startups.
Significance of engaging with customers and staying grounded in reality.
Caution against relying solely on large amounts of money.
✦
Investing in what excites investors is key.
02:08:14Relying on founders' expertise and passion is crucial for investment decisions.
Determining a founder's determination and risk-taking willingness is important for success.
Paul Graham stresses the significance of founders who are ready to face challenges head-on.
Past experiences and failures can give insight into a founder's determination and ability to overcome obstacles.
✦
Paul Graham emphasizes the importance of learning from past mistakes and the complexity of being an investor.
02:12:31Graham discourages founders from pursuing their ideas without considering past experiences.
Contradictory advice is given on leveraging past experiences as an investor.
Being a good investor is acknowledged as a challenge, with an emphasis on continuous learning.
The segment concludes with gratitude towards Paul Graham for his insights and a transition to perspectives on investing from outside YC.
✦
Angel investing as a form of charity and giving back through investments in startups.
02:16:21The speaker's personal experience in angel investing, focusing on early-stage YC companies.
Reflecting on investments over 4.5 years, including a billion-dollar exit and investments in Reddit.
Investing in other successful startups with high valuations.
Viewing angel investing as an opportunity to support innovative ventures and make a positive impact.
✦
Importance of substantial investment checks for angel investors.
02:17:43Creating a system for quick investment decisions is crucial for maximizing returns.
Acting promptly, signing paperwork swiftly, and avoiding delays in the investment process are key tips for investors.
Introducing the 'FOMO/frnd' rule to support friends' ventures with potential for success.
Efficiency in financial transactions and timely investment decisions are essential for maximizing profitable opportunities.
✦
Key highlights from demo day investing.
02:21:36Investors should do their homework beforehand to make informed decisions quickly.
Maintaining relationships with founders post-demo day can lead to future investment opportunities.
Hyped investments on demo day may not always be the best, as crowd judgment can be flawed.
Raising funds at a high valuation is advantageous, but not always the best investment opportunity indicator.
✦
Factors to Consider in Startup Investing
02:24:50The size of the investment check determines the impact on the startup, with larger investments leading to greater influence.
Transitioning to larger investments requires conviction and the ability to see potential success in founders, even if initial impressions are negative.
Successful investors can shape a startup's future by influencing key decisions and trajectory.
Building a strong portfolio and making strategic investments based on thorough analysis and belief in founders' potential are crucial for becoming a top-tier investor.
✦
The impact of investors on a company's direction is rare but significant.
02:28:02YC startups are advised to pursue multiple investors to ensure beneficial partnerships.
Most YC companies are expected to fail, with only a small percentage securing follow-on funding post demo day.
Success as an investor requires hard work, diligence, research, and maintaining conviction.
Missing out on great investments can be attributed to being busy and prioritizing existing companies.
✦
Importance of equity ownership for founders after funding rounds.
02:32:29Cleaning up cap tables and addressing harmful setups with previous investors.
Challenges and complexities of acquisitions in startups.
Difficulty for startup founders to be employable and the necessity of intellectual rigor in decision-making processes.
✦
Importance of Confidence and Networking in Startups
02:35:25Overanalysis can lead to diminishing returns in the startup process.
Raising large amounts of money is crucial in the current startup landscape.
Y Combinator's open application process and focus on talented individuals contribute to their success.
Internal evaluation at YC and the impact of the summer 2012 batch on the organization are also discussed.
✦
Importance of Change and Progress in Companies
02:39:01Implementation of a program to assist companies in raising Series A funding and focusing on progress.
Emphasis on maintaining relationships with alumni and learning from their experiences.
Qualities of an A-plus investor and the role of luck in investment outcomes.
Caution against relying solely on past success in investments.
00:03Hey
00:04good morning thank you we have a lot to
00:11do today so I'd like to get my way my
00:15part out of the way as quickly as
00:18possible good morning again and welcome
00:21to our second day of start-up investor
00:22school my role is a little bit more but
00:27not much more than telling everyone not
00:28to park over there so don't park over
00:30there there's other parking apparently
00:34there's a lot of parking behind 3:35
00:36there's parking here and there's parking
00:39on the street or you know there's this
00:41great services called uber and lyft they
00:44work really well too so we we had our
00:47you know startup growing pains yesterday
00:50a few things went a little bit wrong the
00:52toilets backed up of course the coffee
00:54was lukewarm and the the live stream was
01:01almost invisible maybe that was actually
01:03a feature since I was the first person
01:04talking and it got better after that
01:06I think we've corrected all those I I
01:08can at least testify to the fact that
01:10the coffee is now hot hopefully the
01:13toilets are working but I think we've
01:16got that figure it out so as a reminder
01:19can you put the the it's a reminder if
01:24you have questions out in livestream
01:27world you can tweet them to YC sis or
01:32with hashtag YC sis there's also now a
01:34slack channel for those of you who are
01:36here in person I think you've all been
01:39invited you can ask questions there's a
01:41there's a there's a slack channel for
01:42just communications between you guys and
01:45a slack channel for questions you can
01:47ask questions and then up vote those
01:48questions and we will hopefully get to
01:51some of them time time willing I will
01:54also go through all the questions
01:55afterwards and try to do a piece
01:58answering the questions that that that I
02:01can answer so there will be wine and
02:08beer on Thursday that's my big
02:10announcement yes wine and beer small
02:13amount of time
02:13for networking for you guys and I don't
02:17know how much time but I guess depends
02:19on how much wine and beery there are
02:21there are four that there was some
02:24really great feedback helpful feedback
02:26from you guys probably the biggest thing
02:28everyone said is point we'd really like
02:30to have more community in and we'd
02:32really like to be able to network mark
02:34and a few others sent me more detailed
02:36information about how we can do a better
02:38job of helping you all network we get
02:41that so so far we have a slack Channel
02:44and we'll think about that I don't know
02:47how much progress how much change we'll
02:50make during this version of start-up
02:53investor school but we really appreciate
02:55that feedback and we obviously take it
02:57really seriously I will point out as Sam
03:01said yesterday that one of the worst
03:04things you can do as an investor is to
03:06be sheep don't follow other investors
03:09the best investment decisions you'll
03:11make are the ones that other people
03:13aren't making like you know when people
03:16come by with really stupid ideas like
03:18you know having air beds in uh in
03:21someone's home after a conference stupid
03:24idea right no one's going to invest in
03:25that one except for you and then you'll
03:27make a billion dollars and then you can
03:28laugh so we covered a little bit about
03:35you know Sam's introduction and then a
03:37lot more about safes and and and how
03:40people do startup investing we're gonna
03:43cover moral today on the how so I'll get
03:45back to that in a sec just a quick word
03:47on on equities versus safes it's a very
03:52complex on the surface it seems like a
03:54simple topic is you heard yesterday it's
03:56not actually rather complex why would
03:58you do a safe well because it's simple
03:59it's easy it's fast and it's cheap it's
04:04better for founder's but there's a
04:06little hair we admit that it's sometimes
04:09hard to know what happens with the
04:11dilution there's tools there angel calc
04:13is linked on the site but we'll also put
04:16up I don't have it up yet but we will
04:18put up a spreadsheet if for those of you
04:20who are more comfortable with old
04:22fashioned tools and we and you'll be
04:25able to model cap tables and conversions
04:27it's a weird
04:28conversion it's circular and so yeah you
04:30know it's it's it's kind of bizarre but
04:32we actually do have a spreadsheet that
04:33helps you figure that out
04:36so dilutional can be a little weird to
04:38understand and it is important to
04:40understand it all four founders and
04:42obviously for investors as well okay so
04:46with that we're going to get to the top
04:48today and I am actually really excited
04:50myself to to listen today because
04:52hopefully I'm going to learn something
04:53about how to be a better investor
04:55because I have made many mistakes and
04:59you guys want to corner me later I can
05:01tell you about a few dozen mistakes that
05:03I have made so the topic really today is
05:06overall how to make smart investing
05:09decisions how do you do that well it's
05:14simple all you have to do is make
05:17correct predictions about the future
05:18easy right well the way you start off
05:23deciding whether to invest is you find
05:26companies you meet you you want to you
05:28you think you're interested in and meet
05:30with them so our very first presenter is
05:32my my friend and partner Dalton Caldwell
05:34who is the founder of a couple of
05:37companies imeem in app net he's been a
05:40founder YC a partner YC for four years
05:44now he knows a lot about many things he
05:48my favorite quote from Dalton because
05:52it's one of the few I could find but
05:53it's a good one is if someone tells a
05:55coherent story with the beginning middle
05:57and end explaining what their product is
05:59who wants it
06:00what's it does just that
06:04so here's Dalton Caldwell to talk about
06:07founder meetings thank you hi how's it
06:15goin so I'm going to be talking about
06:18founder meetings and process so this is
06:21the we're gonna break down how you think
06:23about making investments and how
06:25tactically to do it and we have lots of
06:27examples of you know maybe not the best
06:31approach the naive approach we'll talk
06:32about those so so let's get into it
06:35let's talk about the first principles
06:38everyone needs a process even if your
06:41process
06:42is I have no process that I've never
06:43done this before and I don't know what
06:45I'm doing that is in fact a process I
06:47would suggest so I would encourage you
06:49and what we're gonna talk about over the
06:51next few slides is to think about how
06:53you make a simple simple simple process
06:55for yourself just to get started with on
06:57how you make investment decisions right
06:59how you choose who to invest in how much
07:02to invest all this good stuff it's it's
07:04good to have the process it's good to
07:06have some sense of what your process
07:07funnel is and I'll talk about what that
07:09means in a second and I would argue one
07:12of the most important parts of a process
07:14is the face-to-face meeting the
07:16face-to-face meeting is pretty much
07:17where everyone that's done a lot of
07:20investing that's that's the meat and
07:22potatoes of how you tend to make
07:24investment decisions you do a bunch of
07:26qualification and then the face-to-face
07:28meetings are where you decide whether
07:30you're actually going to invest or not
07:31so we'll talk a bit about face to face
07:33meetings as well okay so here's a very
07:37basic process funnel it's just it's just
07:39like a sales funnel right you're gonna
07:42have some leads this is people that you
07:43might want to invest in it's maybe
07:45things that you read in the press it's
07:47people you see at demo day you know very
07:49straightforward
07:50you have intros these are folks that you
07:52have actually have some introduction to
07:54and you have some exposure to the
07:55company you do some qualification you
07:58know for instance is this even in an
08:00industry that I'm interested in or is
08:03this something that I'm excited about
08:04funding does this fit with whatever
08:06kinds of companies I said to myself that
08:08I wanted to fund so that's some very
08:10basic qualification then you have some
08:12decision-making process which is how do
08:14I decide whether I'm a yes or a No
08:16which is actually quite tricky and then
08:18finally the last bit is actually making
08:20the investment and and closing the deal
08:22right so again very straightforward just
08:24like a sales a sales funnel if you've
08:26done sales before but it's worth
08:28thinking about your investment process
08:29this way because again if you're not if
08:31what you're doing is saying well I don't
08:32know I'm gonna take some meetings and
08:34you know maybe and you have a very
08:36wishy-washy approach you you're probably
08:39not gonna make optimal investment
08:41decisions so here's an example of a
08:45process funnel the first thing is
08:47actually good to think about what your
08:48budget is I don't know if other folks
08:50have already talked about this or will
08:52talk about this but if you don't know
08:54how much
08:55you want to invest in what your budget
08:56is you're probably gonna be making
08:58suboptimal decisions so it's good to
09:00think here's how much I'm willing to
09:02invest across a bunch of startups
09:04beforehand versus being like well you
09:07know I have some money saved away and I
09:09was thinking about maybe doing something
09:10else with it but I'm gonna meet with
09:11some startups and maybe if three or four
09:13of them can convince me it's good then
09:14I'll invest in them that's a really
09:17tricky thing to do if that's the way you
09:19think about it because you're gonna end
09:20up negotiating against yourself and
09:22there's a good chance she'll end up in
09:23this wishy-washy maybe land and
09:25wishy-washy maybe land is just not a
09:28great place to be as an investor so say
09:31you you decide okay I have a 500k budget
09:34per year that I'm going to allocate to
09:36this asset class and I've talked to my
09:38wealth manager or whatever and
09:39everyone's on board with this I've
09:40talked to my significant other and this
09:42makes sense of to make this financial
09:44decision and so the way I'm going to
09:46stage out this is do a certain number of
09:48investments you know if you're gonna do
09:50it off YC doing it you can it's pretty
09:51straightforward you show up to demo day
09:52and you pick the five companies you
09:54would want to invest in but if you don't
09:56want to do it through YC demo day you
09:57want to allocate it in other ways put
09:59that on a calendar and then think about
10:02what is your the pass rate of your
10:03process funnel going to be for instance
10:05in this case that's about picking five
10:10out of your favorite twenty right so you
10:12probably don't want to meet with a
10:14hundred and fifty companies if you're
10:15only going to be making five investments
10:17probably not a good use of your time or
10:20the company's time so you want to do a
10:21little bit more on the qualification
10:23step on the other hand if you want to
10:25make five investments and you only meet
10:26with five companies probably you're not
10:28gonna be making optimal investment
10:29decisions so I would think a little bit
10:31I'd work backwards from what your
10:33financial commitment to making
10:36investments are to how you decide how
10:39many leads to qualify how many meetings
10:40to actually do still with me all right
10:45so let's talk about how you actually
10:46make a decision once you've gone through
10:48this this super basic funnel bit the
10:52most important thing is to have a
10:54process in your own mind about how you
10:56will make decisions you need to
10:58negotiate with yourself of what does it
11:00mean to make the decision to actually
11:02write the check right what what is my
11:04burden of proof to be convinced by the
11:07founder that I want to invest in their
11:08company
11:09there's some criteria that you should
11:11decide ahead of time and again it's good
11:14to actually think about these things
11:15versus ending up in this wishy-washy
11:17land where you're doing meetings you
11:18don't even know what you're looking for
11:19you're not even sure you also want to
11:23think about how many meetings or
11:24interactions it will take for you to end
11:26up with a yes or no something that we
11:29see a lot as an anti-pattern
11:31in investor behavior is folks that just
11:33do meeting after a meeting after meeting
11:35after meeting and don't ever make a
11:38decision and that's actually worse for
11:40founders than just saying no right the
11:42the investor that just wastes a ton of
11:45time and feels like they're just on the
11:48edge but never say yes that's very hard
11:52for a founder to deal with that and so
11:53it's actually better off just to figure
11:55out what your process is and if you're
11:56maybe that's that's probably no tell
11:59them no and move along that's a much
12:00better way to run a process like this
12:02the other thing that sometimes happen is
12:04someone will say yes but not actually
12:07Sadie and mouth are going to commit or
12:09they will say yes and then change their
12:10mind and please do not do that this is
12:14this is very important stuff and you
12:17know if you're new maybe you're not used
12:19to making decisions but once you make
12:20that decision that you say yes and you
12:22commit you are fully committed and
12:24trying to back out of the deal after
12:26committing is a huge faux pas and will
12:29you know have far-reaching negative
12:32reputational effects so once you reach
12:35this decision you're in and that's that
12:39so let's talk about what the criteria
12:41are to make investments it's really good
12:45if everyone has in different investment
12:48criteria that's really excellent we want
12:51everyone to have different investment
12:54criteria otherwise what's the point of
12:56having a bunch of investors that just be
12:57there just be a computer that does the
12:59math you feed in the four inputs and
13:01boom that's a yes or no and then the
13:03money goes in right this is an example
13:05of sort of a wisdom of crowds type thing
13:07where a bunch of people with different
13:10criteria are much more likely to find
13:12really interesting outlier companies and
13:15generate great returns versus if
13:17everyone has precisely the same criteria
13:19so what some examples of criteria the
13:22most
13:22straightforward one is the team the team
13:26is pretty important too I see that's
13:27definitely part of our investment
13:28criteria but you can make your own
13:30decision about just how important the
13:32team is and what does that mean how
13:34important is it that there are really
13:36strong programmers on the team how
13:38important is it that they have relevant
13:40experience in the industry they're in
13:41how important is it that you have some
13:44touch points that someone else you know
13:46knows them and about fruit pouches for
13:48them so it's a number of different ways
13:49that you can create in your own personal
13:51process different criteria around team
13:53market size is pretty important to a lot
13:56of folks for other folks marca size
13:58doesn't matter who cares because they'll
14:00figure it out later
14:00right if you did a market size on the
14:05original air B&B thing it'd be very hard
14:08to determine with the market of air beds
14:09were and you would probably say no if
14:11you're purely looking at market size
14:13similarly something like uber the the
14:15market size of people Colleen black cars
14:17was very very small at the time and so
14:19you could have easily you know just
14:21qualified that just on that criteria
14:23alone traction there's some investors
14:26that say I invest when there's no
14:27traction there's some investors that
14:28invest lots of traction so think about
14:30where you come in on the on the traction
14:32criteria the other thing is that a lot
14:35of folks decide no on investments if
14:37they don't have the relevant expertise
14:39we have a number of bio companies or
14:42hard tech companies at demo day and a
14:43lot of folks just hard pass on all of
14:45them
14:46because they don't have the relevant
14:47expertise and that's actually okay
14:49but it's good for you to know am I
14:51willing to invest in something that I
14:52have absolutely no background in or am I
14:56just gonna stay away from that and stick
14:57to what I know it's good if everyone has
15:00different ideas around that but it's
15:01worth thinking about beforehand how much
15:03you feeling like an expert in the field
15:04matters and then finally the last bit of
15:07investment terms
15:08some folks say oh I only pay very low
15:11prices
15:12some folks require certain amounts of
15:14structure and the deal or certain
15:16ownership goals and all the other good
15:17stuff and that's okay if that's what
15:19your actual model is but if you have no
15:22idea here it's worth thinking about a
15:24little bit how much the actual terms
15:27matter what often happens I mean you
15:32already heard groupthink you'll hear a
15:33lot of the sales again is
15:36the people's actual investment criteria
15:37is the thing that everyone else talks
15:39about and seems to think is gonna work
15:41is the thing they want to invest in and
15:43I would again suggest that this is not
15:45the optimal way to make investment
15:47decisions we see a lot so the other
15:53thing that's not great about groupthink
15:54just add a little bit more color on that
15:57is it creates non optimal returns
16:01everyone will just try to plow into the
16:04same deal and the company will end up
16:05being over funded if it's perceived by
16:07everyone if it's everyone's criteria and
16:10it's actually not super great for the
16:12company if it gets over funded investors
16:14tend a little get a little bit grouchy
16:16if they can't get into the deal and they
16:18all want to invest in it and as Jeff
16:22just mentioned really good investments
16:24are often contrarian or unfashionable or
16:27somehow are deeply unappealing to
16:29everybody else right those are the
16:31really good ones is that you see
16:32something that other folks don't and
16:34that that the fact that it's deeply
16:37unappealing is what creates such a great
16:39opportunity for you
16:40and so again why am i spending all the
16:42time bringing this up it's worth
16:44thinking about what your process is and
16:46knowing what it is versus having your
16:48process be I don't know I'm gonna go ask
16:5010 people what they think is good and
16:51whatever they what's ever on their list
16:53of what they want to invest in it's
16:54gonna be on my list too and I'm gonna do
16:56that for everybody and then end up with
16:57this like meta group think list that's
16:59how a lot of people from what I can tell
17:01do it and I would not recommend that
17:07something super important in making
17:09investments is having personal
17:11conviction you have to really believe to
17:17make this kind of bet you know you're
17:19putting the money in and you're probably
17:21never getting it back there is no undo
17:24button on making an investment and if
17:28you do not have the personal conviction
17:31and even when you say yes it's sort of
17:34half-hearted you're going to have a very
17:36hard time as an investor so one thing
17:40that we hear a lot of especially for
17:42folks that haven't done much of this is
17:43they say okay I'm in once you go find
17:46the rest of the round and this is the
17:49cheapest
17:49of cheap shots that you can possibly do
17:51because what you're actually saying is I
17:54would like an option that's guaranteed
17:56in year-round but I do not believe you
18:00can actually raise it if you prove me
18:03wrong and you raise it and all the other
18:05investors invest then I'm in and I can
18:09understand why from the perspective of
18:10an investor this feels like a super
18:12clever like ninja move but holy cow is
18:17this not beloved by founders and not
18:21great from a reputational perspective
18:23right these are the folks these are the
18:26Fairweather friends these are the folks
18:27that didn't actually believe in you and
18:29all they want is the right to get in if
18:32the deal happens to be hot because
18:34everyone else invests in it right and so
18:36perhaps you've said things like this or
18:38perhaps this is a you know things that
18:42have happened to pass I just I wouldn't
18:44I wouldn't recommend phrasing this way I
18:46would just say the honest answer if
18:48you're in this situation which is I'm
18:50worried about the financing risk so I'm
18:53a no but let's talk later if we if more
18:58financing momentum happens because then
19:00you're being explicit that the answer is
19:01actually no and not like oh yeah I'm in
19:03just go get everyone up just go raise
19:05two million dollars and I'll be the last
19:06check-in right that is not a great move
19:10and one other thing that's kind of
19:15interesting if you think about investor
19:16mentality is you have to be willing to
19:20look stupid and be wrong
19:21on these things if the only investments
19:27you make are ones that are super
19:28defensible and makes sense to everyone
19:30and that could never be made fun of
19:31because that's just a fantastic business
19:33you're gonna be missing out on a lot of
19:36investments and by having the personal
19:38conviction that you know why you're
19:39investing in the company you should be
19:42okay with the fact that people are like
19:44oh well what companies be invested in
19:45and they're like wait you've invested in
19:46the airbed company why don't they tell
19:49you like why did you invest in the
19:50airbed company right you have to be
19:52willing to take that potential
19:54embarrassment that you're like yeah I
19:57did invest on the era bedded company and
19:59and feel good about it and so this is
20:02one of the reasons why conviction is so
20:03important
20:03versus just creating a portfolio of
20:05things that you think seem like that
20:10will make you look good from a
20:11reputational perspective so in terms of
20:16some anti patterns on decision-making
20:17that we see a lot one of them is just
20:20going really really slow disappearing
20:22for weeks not responding to emails not
20:24following up not great
20:27so I mean another anti-pattern is you're
20:30not really sure whether invest or not so
20:31you ask them to like meet your friend
20:33like hey meet my friend and you can keep
20:36doing this over and over and over again
20:37like oh me my other friend and that's a
20:40way to sort of defer making a
20:41decision-making process
20:42that's not not great the other thing is
20:45flip-flopping were you saying yes and
20:47you're like oh actually how about no or
20:50like how about you needyou this other
20:51thing and you're you're sort of moving
20:52the goalposts over and over again as I
20:59said a second ago the way you should
21:01think about is if you're not a yes you
21:04are no and you want to stay out of this
21:06middle flip-flopping I'm not really sure
21:10land and that's where you're gonna feel
21:12most of the time I know that's where I
21:14am most of the time when I make any
21:15investment decisions is you're just kind
21:17of in this like oh yeah this is maybe
21:18good and you're you want any kind of
21:21signal you can to get out of that and
21:23one of the piece of advice we tell
21:25founders run fund raising because they
21:27get confused so much by people see me
21:28interested in their company and not
21:30investing we tell the founders if
21:31they're not saying yes and giving you
21:33money it's a no because so many founders
21:36that we meet with when we ask them you
21:37know how it's going or how fun reason is
21:39going they say well there's a lot of
21:40interest okay well how many people have
21:45written checks well they're very excited
21:49they seem to really like the business
21:51and that is all the recipe for a failed
21:55fundraise is a lot of people telling you
21:57how much they like your business and how
21:58like exciting it is to talk to you if no
22:01one is writing checks it means it's not
22:02going well and so from the flip side
22:04from your side of the table if you're
22:06just meeting with a lot of folks I mean
22:07very excited and doing a ton of meetings
22:09but never actually saying yes you're you
22:11are telling them no whether you realize
22:12it or not right and then in terms of the
22:16actual meetings the best way to get the
22:17conviction is just to do meetings in
22:19person versus reading a deck or asking
22:22other people what they think so let's
22:24talk about medians very basic but just
22:32scheduling meetings in a non painful way
22:34will put you ahead of the pack from a
22:36lot of other angel investors being on
22:40time and picking a convenient location
22:41will put you ahead of the pack versus
22:43most angel investors I don't know why
22:45this is so I would just suggest part of
22:48being founder friendly and getting a
22:49good reputation it's just being easy to
22:51work with and not coming in across like
22:53someone that's just like thinks they're
22:56super awesome and important all the time
22:58and wants to just like rub it in the
23:00founders face how important they are
23:01right so this is like very basic stuff
23:03but I can't stress enough that doing
23:06these is definitely worth doing if you
23:08if you want to have a good reputation
23:09has a good investor or someone people
23:11want to work with in terms of things to
23:15ask in meetings it's always good to
23:16start from the basics to this day this
23:18is how we do YC interviews and we make
23:20all of our investment decisions is we
23:22ask we always start with the basics what
23:26does your company do who's on the team
23:28what progress have you made
23:30you know how much have you raised what
23:33terms you can get really complicated and
23:37complex on what you think you should ask
23:39and maybe that's okay at the end of the
23:40meeting but I would suggest always start
23:43in these meetings with first principles
23:44questions and making sure you understand
23:46the basics because it's not maybe you
23:49already saw their deck or maybe you
23:50already read about the company it's not
23:51necessarily about learning what you
23:55didn't already know it's about hearing
23:57the founder tell their own story in
23:58their own words and that's such a good
24:01reason to start from these first
24:02principles is you sort of want to forget
24:04everything you know and just hear the
24:05founders to tell their own story right
24:07and so this is how I'd always suggest
24:09starting a meeting is super basic
24:12questions and then only at the end do we
24:14get into advanced complex mode on the
24:18business if you want to do follow-up
24:22meetings say you're not yes or no after
24:24the first meeting and you want more
24:25information dig deep on the things that
24:29would give you either conviction to say
24:30yes or no
24:31don't waste time rehashing irrelevant
24:33stuff and one thing to look for in your
24:36own gut is if you feel more or less
24:37convinced the more you talk to the
24:38founder because it could be you hear
24:40about an idea you see their demo day
24:41pitch and it seems great and you're a
24:43yes and the more you talk to them the
24:44more you're getting lukewarm that is not
24:46a good sign that feels like a no right
24:48but if it seems kind of like mediocre
24:51and the more you talk to them more the
24:52more excited you get that feels like
24:54it's caring towards it yes right and so
24:57that's one good thing to look for is
24:58your gut reaction and if you can't get
25:01conviction that's a no in terms of how
25:05do you evaluate was that a good meeting
25:06or not are you exciting or energized and
25:10amped up out the business and you know
25:12just feeling awesome after you talk to
25:16the founders or are you feeling kind of
25:17like weirded out about it a really
25:20important question to ask is do you
25:22trust the founders Trust is super
25:24important and even if they're saying
25:26everything that's right but you come
25:29away with a feeling of not sure if
25:32they're telling you the truth
25:32that is definitely a red flag and a good
25:35sign that maybe you should disqualify
25:37them from your personal criteria right
25:39because it's possible for someone to say
25:41all the right things but your gut
25:42reaction is perhaps it's not all true
25:45would you want to work with their
25:46company hypothetically would you want
25:48them to be your boss can you imagine
25:49them running a really large company
25:51someday and having lots of people
25:53reporting to them that's a good criteria
25:55to think about and if things go not
25:59great which they often do are you
26:01willing to go through the hard times
26:02with these particular folks you're
26:03talking to that's a good thought
26:04experiment as well and so these are all
26:06the sorts of thought experiments that I
26:07would do after a meeting to decide if
26:09you're getting more or less conviction
26:13in terms of bad meetings one thing to
26:17think about is pretend that the investor
26:20meeting is your job interview where
26:22they're interviewing you for a job and
26:23not the other way around there's often a
26:25lot of power dynamic things of making it
26:28feel like the founder is like like an
26:33employee I guess and they are not an
26:35employee right you really want to feel
26:38like you're you're interviewing for the
26:40job of investor if they're startup and
26:42not that they're interviewing for the
26:43job of
26:45potential underling that wants your
26:47money and again just bad meetings have a
26:51lot in common a very common thing we
26:52hear a ton from founders is that
26:55investors that just look at their phone
26:56the entire meeting or otherwise act
26:58super distracted not recommended very
27:01basic but holy cow is that common that
27:03happens in a double-digit percentage of
27:05medians so just basic thing would not
27:07recommend and then the other thing is
27:09sometimes investors try to make
27:11themselves the center of the attention
27:11where they'll tell stories about how
27:13great they are and all the people they
27:14know and all these other good stuff just
27:17remember the point of the meeting is for
27:18you to listen to the founder to decide
27:20whether or not to invest you can build a
27:22rapport with them but to the extent you
27:23make the meeting about yourself I would
27:27just argue that's both counterproductive
27:29and probably not a great way to get a
27:31positive reputation among founders
27:33talking to each other another thing just
27:37to mention here is sometimes folks
27:38especially if they're new investors they
27:40want to differentiate by doing a lot of
27:42value-added services and so they'll use
27:44these meetings to just give a ton of
27:45product advice and tell the founder how
27:47they're doing everything wrong and how
27:48they need to redesign the website and
27:49like they need to change the name and
27:51they think their marketing strategy
27:52through and all this other stuff and the
27:54founder kind of has to take it because
27:56they're meeting with them and they want
27:57to raise money but man if you just blow
28:00them up with tons of advice on how to
28:01run their company for them that is not
28:05received well was what I would say also
28:09if you provide a ton of advice how their
28:11fundraising process is done and they
28:13should do it differently like oh you're
28:14raising on the wrong price and you
28:16should be doing this and you should
28:17never raise on a safe for like whatever
28:18it is that is not hopeful if you write
28:21them a check then your advice is a lot
28:23more valued but if you're just meeting
28:26with someone and it's a no and all
28:27you're doing is telling them how
28:28everything they're doing is wrong that
28:30is not value at right another thing that
28:33sometimes people do when they're trying
28:34to be value add is just do a ton of
28:36introductions like you know you do one
28:38meeting you don't invest in the company
28:39and you introduce them to like 20 people
28:41to seem really value add that is not
28:44value add that is wasting their time so
28:45the point here is you can easily do too
28:49much and that's actually worse than just
28:51being straightforward right and
28:53sometimes people are trying to
28:55differentiate themselves and create a
28:56name for themselves but this
28:57and stuff can really back for iron you
28:59if you're too heavy-handed with decision
29:03communication how do you say no what
29:07often happens with investors much like
29:10dating is they ghost the other party
29:13they they just never follow up the you
29:16never hear you do in a meeting with an
29:17investor and you know maybe the founder
29:20follows up with the investor hey how's
29:22it going what are the next steps never a
29:24response again that is not great I
29:28understand that it happens a lot but
29:30would not remit recommend it I would
29:32suggest you directly tell the founders
29:34that you will not be investing if
29:35possible if it's appropriate give them
29:37some reasons it's nice to know the
29:39reasons but you don't necessarily have
29:40to and the fact is in this business
29:44you're going to be saying no most of the
29:46time right that it just is what it is
29:48that's how the funnel works and so you
29:50need to be prepared to know how to say
29:52no to feel good about saying no and get
29:54practiced at it and make it part of the
29:55job if there's something about saying no
29:57that makes you very uncomfortable and
29:59unwilling to do angel investing I would
30:02suggest just breaking out of that habit
30:04avoidance alone is not great how to say
30:08yes say the moment you have conviction
30:11and you want to invest communicate that
30:13to them tell them how excited you are to
30:14work with them we have the handshake
30:16protocol which is covered on how to
30:18actually do this over email so there's
30:19no misunderstanding so follow that and
30:21then get the money get them the money
30:23sometimes things fall through where the
30:25investor says yes and then they ghost
30:26them for a while and the money actually
30:28never gets closed and the investor gets
30:30locked out of the round and there's a
30:31whole mess afterwards right so if you
30:33say yes and you follow the handshake
30:35protocol just invest declare victory and
30:38move on sometimes people say yes but
30:43then they introduce a bunch of weird
30:45stuff alongside of it so it's not
30:46actually yes so you know maybe if you're
30:50writing a huge check you can consider
30:52doing a term sheet or price Toronto
30:55things like that but if it's a very
30:56small amount and you're just part of a
30:58large syndicate don't make it hard it's
31:04only going to follow up the process and
31:06often the founders will just push back
31:08on all this stuff so sometimes people do
31:11especially when
31:11new angel investors they try to ask for
31:13a bunch of extra stuff not great okay so
31:18that's it for this bit I think we're
31:19gonna do an example meeting now I have a
31:22company from the current batch who I
31:26already invested in so I guess that's a
31:28little bit biased but we're going to do
31:31just an example investor meeting where
31:33I'm gonna ask some questions and once
31:36we're done with this bit then we'll do
31:37some Q&A all right so let's do it okay
31:48so we'll do the intro in the medium okay
31:54how's it going so first of all just
31:56introduce yourself and tell us a little
31:58bit about what your company does okay
32:07hey I'm Ben I'm founder of nectar and
32:11nectow does is pee in a box so we
32:15basically help people create into
32:16service providers okay so let's be super
32:23specific so you make software yep and it
32:29lets people start Internet service
32:31providers exactly and this is a little
32:35bit context it I don't have it you
32:36simultaneously run your own Internet
32:39service provider and you have the
32:42ability for anyone to create their own
32:43using your software right exactly so why
32:47we started doing this is the problem of
32:50what we see is people usually hate their
32:53internet providers right the lowest
32:55product score and the reason why is
32:59usually people live under regional
33:01monopolies right their internet is
33:04either coming from a national telecom or
33:05a small town has basically Comcast as
33:09the only option and the reason for that
33:11is two things it used to be very
33:14expensive to start an internet provider
33:16and then the second part is it's
33:18actually really hard the amount of
33:20knowledge that you need to start and
33:22turn a provider is really high and I
33:24went through this my
33:25as I was trying to start my own which is
33:28when I realized hey the cost has come
33:30down dramatically you can use wireless
33:33gears that can deliver gigabits of
33:35service so you know with like ten twenty
33:39thousand dollars you can start your own
33:41internet provider and so what you need
33:45is the knowledge which is what we
33:47provide and that's the part that can be
33:48skilled so meta point part of the reason
33:51I picked this company is this is
33:53actually kind of a complicated pitch
33:54okay
33:55this is kind of a complicated business
33:56and it's inherently complicated and so
33:58there's a way that I could immediately
34:00get distracted and start talking about I
34:02don't know hey maybe you should rename
34:04the company like I don't even know but
34:06there's a million ways that I can end up
34:08down in the weeds before really even
34:10understanding what they actually do and
34:12so what I'm going to do here is actually
34:13dig deeper and make sure that I
34:15completely comprehend what the company
34:17does and hopefully folks do here I think
34:19probably people pulled out oh it's some
34:21kind of ISP thing and you know probably
34:23little bits and pieces but I would guess
34:25based on what we've heard thus far the
34:27mechanics of what they actually do is
34:29not completely landed for everybody is
34:30that true anyway yeah okay so let's dig
34:34deeper what exactly have you what do you
34:37have today what is the current state of
34:39the company
34:40yeah so we have our own internet
34:42provider that came out of beta
34:44January 22nd and we okay so you have
34:49your own ISP right that you guys
34:50yourself started using your own software
34:52right exactly
34:54okay how many customers do you have live
34:56with that isp we have 47 okay and it
34:59where's that located that is in southern
35:02parts of San Francisco and Bayview
35:04Hunters Point
35:07okay so again meta to zoom out here's
35:09what we here's what we've learned they
35:11have they're making some kind of isp
35:13company they have a first location in
35:16san francisco they have 50 customers for
35:18it and it's live now okay that what do
35:22we learn okay this is a real thing
35:24they're live they have customers are you
35:26guys some kind of experts like how do
35:27you know how to start a nice P like we
35:30we just did ourselves we figured out all
35:32the all the bits and pieces with help
35:35from basically community around because
35:37they're actually a lot of experts darn
35:39retired they're like the original
35:41dot-com people are volunteers okay so
35:46we're gonna okay so we kind of get that
35:47so then what's the big idea like why is
35:49this gonna be a good company like yeah
35:51so what what I have found is there are
35:54actual products that are out there
35:56that's basically an internet provider in
35:59a box right so it comes with the
36:01hardware and software but what it
36:02doesn't do is actually tell you how to
36:04use it how do how to be successful with
36:06it and how to actually start a thriving
36:09Internet provider which is every part
36:12that we will be helping out people who
36:14who use our service okay cool so so to
36:17zoom out a little bit and again because
36:18I'm familiar with the company what
36:21you're saying is that it's really hard
36:24to start a new ISP right your guys are
36:26gonna be able to build you have these
36:28ISPs in a box so that anyone anywhere
36:30could start their own local ISP right
36:32okay
36:33so now here's the important part why
36:34does that matter and why is this a good
36:36idea so here's my context a bunch of
36:39people have tried to start ISPs there's
36:41Google Fiber there's web past there's a
36:42bunch of money that's been putting into
36:43this this seems like a graveyard of bad
36:46startups what the heck is special or
36:48different about what you're doing
36:49oh yeah so it's actually really cool
36:52because I'm just reaching out to the YC
36:55Alumni community a lot of people have
36:57been trying to star in ISP and that
37:00we're actually helping them out and what
37:01they have done is they've taken out
37:03loans or put up their own buildings and
37:05their own communities where they
37:07gathered their own customer and put in
37:08their own capex and all we do is become
37:11their network operating center to help
37:13them set up and okay cool so again what
37:16I pulled out of here what would I be
37:18taking my notes are what I what I would
37:19continue to be pushing on is what you're
37:21saying is the big idea is that what made
37:23all these other startup ISPs not work
37:25and is that you needed tons and tons of
37:27money to put like fiber on the ground
37:28and so you're saying by making the
37:32software to help people start ISPs
37:35locally they'll put all the money up
37:37themselves
37:37and so that you could scale very quickly
37:40well without having to raise hundreds of
37:42millions or billions of dollars to put
37:43in fiber right that's correct okay right
37:46okay and then what evidence do you have
37:49that that will actually work that you
37:51can get people to
37:52use their software use your software to
37:55start their own high speed and put up
37:56their own money yeah so evidence I have
38:00is you know we we we have two people
38:04who's signed on as franchise and you
38:07know they are and they have buildings in
38:10at least five cities that will be using
38:14us as a network operating center and
38:15will be you know powering their software
38:18the landing page their billing and
38:19customer management follow that okay
38:23cool so again to zoom out the version of
38:27this meeting that is a not great meeting
38:29is where I immediately get distracted or
38:31I immediately start asking questions and
38:32I never even understand what they really
38:34do because again like I said earlier
38:35this is a little bit complicated there's
38:36several moving parts here but I think my
38:39version of this that I can get the most
38:41excited about is I do think more aspies
38:44are good I know you you agree and an
38:46innovation of having in customers put in
38:49their own capital to create their own
38:50local ISPs it could be really big so one
38:53metaphor that I've talked about with the
38:54company in the past is in the same way
38:56that uber doesn't actually own any cars
38:59and Airbnb doesn't own any physical
39:03property you're going to be in
39:04high-speed that doesn't actually own any
39:06routers or fiber right right we we just
39:09own the rights to operate they're
39:11they're exclusive right to operate their
39:13hardware okay that sounds pretty good
39:15right so anyway so this is sort of the
39:17line of thinking that got me convinced
39:18that this is actually really interesting
39:20I can come up with a million reasons why
39:21this might not work but this does feel
39:24like in my opinion a fresh take on it
39:27and then I think last bit before we move
39:29out what's your guys why did you start
39:31the company like what was your
39:32inspiration here why are you working on
39:34this yeah so I mean my inspiration was
39:36kind of the frustration with most people
39:39with their internet is its 2017 why does
39:43you know Internet in 20 20 18 I started
39:46sorry sorry
39:49why is Internet's no problem right and
39:52then you dig deeper and you realize it's
39:53not really a problem for for large
39:55apartment buildings it's only a problem
39:57for you know rural areas or or suburbs
40:00areas where there's regional monopolies
40:03so how to combat this is to
40:05to basically increase the competition in
40:08these areas and there isn't one there
40:10isn't competition because it's it's
40:11actually really hard to start an
40:13internet provider yeah okay cool so
40:15again zooming out one more time for
40:16every by the audience this is not a
40:19company for everyone but if you're
40:21excited about ISPs and excited about
40:23taking on Comcast or you think it's the
40:26idea is you know you'd like to start
40:27your own ISP
40:28this is that's a sort of angel investor
40:30there's gonna be like wow this is
40:31exactly what I'm looking for right and
40:33so it's okay if we think about our
40:34criteria every company is not gonna see
40:37him appealing to everybody but you want
40:38to ask the right questions to know if
40:40there's some some bit of this to get
40:41really excited about and so yeah I I was
40:44convinced after talking to them and you
40:47know sounds fun
40:48so that's it for this bit let's say
40:50thanks thanks man all right so time for
41:03Q&A before I do that I'm going to
41:05announce four cars that are in the
41:09parking lot yes this is my job there is
41:13a red prius license plate five sjd one
41:15two three a green Lexus
41:21it says hand symbol you know and Ari and
41:26I don't know there's a green Lex if you
41:27have a green Lexus a black Nissan 77 X
41:31FY eight nine six that sounds like too
41:34many letters and numbers and a black
41:36Tesla of course one Tesla seven BC t-888
41:44if those are your cars please everyone
41:48close your eyes please go move them
41:50right away thank you now let's do some
41:54QA and I will also for streamers be
41:57taking questions from YC sis and from
41:59the slack Channel all right great
42:02first yeah go for it
42:21yeah that's I think the questions lease
42:24option was what do you do when you agree
42:27to invest and then you lose faith in the
42:29company so there's some subtlety here
42:31one if you agree to invest hopefully
42:33your investment closed immediately
42:35versus the commitment hanging out
42:37forever because that that can be
42:38complicated and then in terms of the
42:41actual things that happens if the way
42:43that you lose faith in the company is
42:45what you find out is there a horrible at
42:46fundraising and they're just gonna like
42:48go out of business but they were like
42:50nice about it then you lost your money
42:53congratulations welcome to angel
42:54investing you can't get your money back
42:56just because someone didn't raise some
43:00other people but if someone does
43:02something very very very bad lies
43:04there's reason there's just reason to
43:07see that you were materially or deceived
43:08about the situation then I think you
43:12want to figure it out on a case-by-case
43:13basis I mean that's that's what we do
43:15like NYC we have a founder code of
43:18ethics and we do enforce that at times
43:21and it's for extreme cases of true
43:23deception on the other hand if someone
43:25that we invest in just doesn't have a
43:29good company well that that's that's the
43:31brakes and so to the extent that you
43:35ever experience someone that goes way
43:36beyond the line of what is a true breach
43:39of trust or conduct I think you want to
43:41yeah on a case-by-case basis talk with
43:44the founders talk with lawyers and
43:46figure that out and hopefully that will
43:47be rare hopefully that's where it's
43:50pretty rare okay
43:53[Music]
44:10yep
44:12that's a great question okay so the
44:13question was how do you say no to
44:15someone if the actual answer is not you
44:19know not nice I don't know like if you
44:21just don't have faith in the people
44:23doing it so this is tricky I think you
44:25definitely want to say no and I think
44:28you want to say something like I was not
44:31convinced that this is that this is
44:34going to work
44:34given the current strategy you're not
44:37you shouldn't say I think you're a bad
44:39founder well not say that but I think
44:42there's ways that you can conveyed that
44:44you just were not convinced in an honest
44:46way because that's basically if the team
44:48cannot convince you I mean how do you
44:49say this Jeff I think this is that's
44:51actually a great and one of the hardest
44:52questions we actually struggle this with
44:55it why see all the time because
44:56sometimes we interview people and we
44:59think it's a great idea but we just
45:01don't believe in the founders and that's
45:02the last thing you want to tell someone
45:04one because you might be wrong and you
45:06know you shouldn't stab someone in the
45:08heart too because that's not a good
45:09interaction right and let's just keep in
45:13mind though there are always a million
45:16reasons not to invest in a company most
45:19companies will fail and it's a lack of
45:23your own imagination if you can't come
45:26up with a reason why you're not
45:31believing in their version of the future
45:33and that's what you should that's what
45:35you should communicate to them I think
45:36the the bottom line is every interaction
45:39with the founder should be as helpful to
45:40the founder as it possibly can be and if
45:44you can't be helpful then just don't say
45:45it but if you can if you can find some
45:48way to help them even if the real reason
45:50is not that so much that but it's still
45:52valid I would use that there's always
45:54something yeah in the back
46:06so the question was what are the
46:07expectations for asking the founder for
46:10a deck or other data before the meeting
46:11um I think it depends on a case-by-case
46:14basis but let me tell you if it's like a
46:16regular YC company at demo day for the
46:20context we're talking about I usually
46:22tell founders not to do that because
46:26it's a very quick meeting maybe maybe
46:28the founders could send a one page or a
46:30quick overview but you generally want to
46:32have the quick meeting I think it's not
46:35it doesn't do the companies I'm saying
46:37this from the founders perspective it
46:38doesn't help my company to send decks to
46:40like 100 people and then have them just
46:42never reply is that usually what happens
46:44so to the extent that the investor is
46:46interested enough to ask for that info I
46:48would be like well just get on a call
46:50with them or trying to meet them first
46:51and then present the information when
46:53you send people a ton of information
46:54without meeting them
46:55it feels very low ROI from a founder
46:59perspective but it's fine to ask for
47:02stuff and they could just say hey we
47:03don't really have that which a lot of
47:04them probably don't
47:06yeah back corner
47:23yep
47:25so the question was milestone based
47:28financings so here's what I would say
47:31for what it's worth if it was a company
47:33that I was advising and an investor
47:35suggested that I would say don't do that
47:37deal but if there's a specific reason in
47:42the company that that makes sense if
47:45this if these are the best terms that
47:47are available to the company or perhaps
47:48it really makes sense
47:49I think also if those were lots of money
47:52maybe that wouldn't make more sense but
47:54if it's a relatively small check and I
47:55would consider 50k a relatively long
47:56check and someone tried to put milestone
47:59based payments that would not be my I
48:01would not tell the company that would be
48:02my first choice and I would say maybe
48:04they could just maybe just get them to
48:06invest 25k now at the current terms and
48:08then you'll circle back with them later
48:09versus actually doing a deal that
48:11contains milestone payments does that
48:13make sense I'd rather do this simple
48:14deal now and then there's an option
48:16invest more in the future than to do a
48:17more complex deal today can I add
48:20something to no 14
48:21yeah milestone the abstract milestone
48:25based investments sound great but what
48:27you're really doing is asking result and
48:30said for an option to invest in the
48:32future and I will always tell founders
48:35take if you like the investor take the
48:38upfront money but do not give them that
48:40option all you can say is like okay
48:42that's great idea but if we raise more
48:46money in the future we'll talk to you
48:49and make no commitment that you have to
48:51talk they can commit to giving you money
48:52all they want but you do not have to
48:54commit to taking the money and so
48:56actually it's kind of a lose for the
48:57investor because they're you know you're
49:00guaranteed you get that 25 and if things
49:01go fantastically and you'll want to get
49:03more money into bad you might not get it
49:05in cool yep yeah you
49:22so the question is if you are not there
49:24in person what how does that affect your
49:27overall deal flow I think that maybe
49:32video can be okay it depends on the
49:36cheque sizes if you're writing
49:37relatively small checks and it's not a
49:38big deal to you you certainly can use
49:41video calls to get some sense of it but
49:44if if this is really your bread and
49:46butter
49:47I would suggest flying around to folks
49:51on a regular basis for maybe you know a
49:54large part of your deal flow again to
49:56pay on your focus and then it does make
49:57sense if you're a locally present
49:58somewhere you're probably gonna be very
50:00helpful to those folks anyway as well so
50:02you probably wanna do a little bit of
50:03both we do have a lot of investors that
50:05fly around the world and basically just
50:06show up at demo day and write checks and
50:08then disappear and you know there's a
50:10place for that right everyone doesn't
50:12have to do it the same way yeah there's
50:15a place for that yes
50:39yep so the question is what do you do
50:41when you have an investment that you
50:42made and two or three years in it's not
50:44dying but it's flatlining my
50:47understanding we see a lot of this is uh
50:49you just kind of got to write it with
50:51them usually these companies can turn
50:53into something big
50:54maybe someday they buy the shares back
50:57there's all these options but there's
50:59really not much you could do I would not
51:01recommend forcing them to sell or
51:03something like that if you have a
51:05company that takes as a ten year time
51:08horizon you that's kind of what you're
51:10signing up to when you make the
51:11investment even the companies that go
51:12really well we are talking about a ten
51:14year time horizon pb's about to talk and
51:16like you know a lot of the investments
51:18that he made in 2008 2007 are still
51:21hanging out there he's getting no
51:23liquidity from it so do you know that
51:25you don't have a ton of options but I've
51:26seen founders to paint on the
51:27case-by-case find a way to to take care
51:31of their investors hey Dalton let me
51:33give you a couple of online questions
51:36one is how do you approach discussion
51:40discussing competition during founder
51:42meetings and sort of a related one was
51:45how would you handle information
51:46asymmetry and the example is if you have
51:49informations that founders didn't share
51:52with you or didn't share with you or
51:55someone in the network and founders
51:56didn't share that with you okay okay so
51:59the first question was competition it's
52:01definitely good to ask about competition
52:03in a meeting but there's certainly a way
52:05to talk about it that is perceived as
52:07rude by founders and so a good thing to
52:10think about is if they're in a
52:11competitive space ask them well how are
52:13you going to to win versus other folks
52:15who are the other parties that are in
52:17the market and what are they doing well
52:18and what are they not doing well and try
52:20to aim for a very even keel conversation
52:22usually if the founder is super
52:24defensive and flips out about it that is
52:26a good red flag for you right that is a
52:29very good red flag if the person has a
52:31very hard time peaking on an even tone
52:34about competition or is unwilling to
52:35admit the competition either exists so
52:38to the degree to which you can just ask
52:39very neutral questions about it and see
52:41where they take it that's how I would
52:43get the most out of the competition
52:45question and the second question was
52:47this asymmetry one what was can you
52:51what were they saying I was reading it
52:55but it was just a little bit incoherent
52:57so um okay I think the question is if if
53:01you know stuff somehow from your network
53:04that the founder doesn't know how should
53:07you deal with that
53:09can we give an example do you have an
53:11example do you have an example you seem
53:12to know examples yeah I mean and I guess
53:16the real question is if it's not clear
53:18to you whether you're allowed to say
53:19like let's say you know another company
53:21is about to launch yeah it's going to be
53:24competitive that's working in the same
53:25space how should you deal with that yeah
53:28generally speaking I see folks do this
53:33sometimes where they have proprietary
53:34information because they work at a big
53:36company or something and they know
53:37things are about to get really good or
53:39really bad on a startup and the founders
53:40don't know I would generally keep that
53:43to myself
53:44because you can't I can think of a
53:45million ways that can go wrong but if
53:47that helps you inform your decision then
53:49that's really good that's an example of
53:51a differentiated decision-making process
53:52versus other folks but to the extent
53:55that you I think I would always advise
53:58to keep that to yourself there's if you
54:00tell the founders you try to signal it
54:01to them in some way there's so many ways
54:03that can go wrong even if you do invest
54:04or don't invest so I would try to just
54:07treat that as proprietary stuff to keep
54:09in your head and then use it to extent
54:12you can make good decisions yeah okay
54:15cool yes
54:36yep yeah what do you do if you're an
54:39investor in the position where it's
54:43unclear or basically you don't have a
54:44strong signal they're gonna raise from a
54:46bunch of other people so ideally what
54:48you do is you're honest with them and
54:50you tell them that that's what you're
54:52worried about and that's not hey I'm in
54:54once you get other people it's you which
54:56you would say I am not comfortable
54:58investing right now because the amount
55:01of capital you need my check alone will
55:02not get you there
55:04so let's brainstorm on how to eat how
55:08you can either convince me to write the
55:09check now because again an example of YC
55:11we write everyone checks without anyone
55:13else being in write so either here's my
55:15criteria for you to convince me that I
55:17I'm willing to take that risk to be the
55:19only check-in or here is when we here's
55:22the milestones that I would want to see
55:24to have a further conversation and being
55:26clear that that's basically a no until
55:28they do other stuff yeah that's also a
55:30great question in you know dalton
55:33mentioned that you know what we tell
55:35founders if an investor says i'm gonna
55:38invest i love you as soon as you get 900
55:40k of the 1 million that you're trying to
55:42raise i'm in and there's there's a
55:46there's a quandary for investors because
55:49if you have a company and you're you
55:50give them $25,000 they could spend that
55:53in a month and then die and it would be
55:55much better for you if they had a half a
55:58million dollars and then you gave them
56:00your $25,000 but here's the problem
56:03by the time they get to a half million
56:05dollars they might not take your $25,000
56:08so you have a trade off you have to
56:12decide how convinced are you in the in
56:15this company in these founders that they
56:17will be successful fund reasons that's
56:19one of the criteria will they be
56:20successful fundraising that might be
56:23your only chance to get in and it might
56:26be the ten billion dollar company that
56:27you just missed because you said i
56:29wasn't sure they were gonna raise more
56:30than 25 thousand the hard hard place to
56:34put yourself in that's why this job's
56:36hard by the way
56:55yeah but to the close you said yes and
57:00did they not close it okay and did you
57:15do the handshake protocol okay cuz okay
57:25okay
57:27so the question is what do you do
57:30there's two things here what do you do
57:31if the founder is a little bit asks for
57:36a lot I guess and the other thing is why
57:39would someone be pushy to get the check
57:40wired we definitely encourage founders
57:42to get the money wired from the investor
57:44we every there's so many sad stories
57:47that we know where someone commits to
57:48invest and then disappears
57:50we're like never actually wires the
57:51money and so we do encourage people to
57:53say once the person has committed get
57:55the money it's very very straightforward
57:57so perhaps it's a completely reasonable
58:00thing to say on the other hand you do to
58:05the extent you can front-load in your
58:06interactions with the founder to make
58:07sure you will get along with them and
58:08that their personality type fits with
58:11your personality type that's a good
58:12thing to figure out before you make the
58:14investment and so it could be there's
58:16some there's some personality types that
58:18just aren't a good fit for you that are
58:20just higher maintance okay one more
58:22question please and then we're gonna
58:24take a quick break I will do you
58:31the question is how do we iterate on our
58:34process and learn from ourselves we
58:36actually have a fairly complex process
58:38inside of YC we keep track of everything
58:41we fund we keep it the track of things
58:42we don't fund we track their progress we
58:45keep track of who does really well and
58:46who doesn't do really well and we take
58:48ample notes on everything so we do a lot
58:51of we're viewing our process and we try
58:53to get better every batch to the extent
58:56that we can I can't say oh it's just you
58:58know we throw a eye at it and the AI
59:00tells us what to invest um it's not that
59:01it's really just literally looking
59:03through decisions and looking at our
59:05notes to understand well why do we say
59:07yes or why do we say no to that and
59:08trying to pull out of that wisdom that
59:11we apply to future things and so this is
59:14the thing everyone says the team comes
59:15first everyone says that what does that
59:17mean
59:17well that's something that we learn
59:19every batch through trial and error is
59:21sometimes we invest in really goofy
59:23ideas with really great founders and we
59:25make a lot of money and sometimes we
59:27invest in really amazing seeming startup
59:29ideas with tons of traction and maybe
59:32the founders are trickier to work with
59:34or they're just aren't good at
59:35communicating their idea and we lose our
59:37money and so every batch there's these
59:40same lessons that we learn over and over
59:41and over again and I think that's how
59:43you build confidence in yourself as an
59:45investor is you get enough times to
59:46iterate and you you actually you know
59:49have to lose money you have to have some
59:51winners or losers to feel the pain so
59:54we're gonna take a quick ten minute
59:57break
59:57grab what you need but thank you very
59:59much dalton for a great session
01:00:16you
01:13:29yes yes yes if you look on the site
01:13:32today all the slides from yesterday are
01:13:33already up hello everybody
01:13:39please take your seats right away so um
01:14:09please take your seats we're gonna get
01:14:12started hello thank you
01:14:21meeting founders and making decisions is
01:14:26way more of an art than a science
01:14:29and as Dalton says unfortunately in this
01:14:34game I think you have to lose some money
01:14:37before you can really become an expert
01:14:42as much as anyone is an expert at at at
01:14:47answering the questions you need to
01:14:48answer to make an investment the the
01:14:51next person who's about to come up has
01:14:55more wisdom and knowledge about this
01:14:56than perhaps anybody I know
01:14:58before I introduce PB however first for
01:15:03the live streamers I apologize for the
01:15:06problems we're having with the live
01:15:07stream as I said this is the first time
01:15:10we've done this here in Mountain View so
01:15:11we're bound to have kinks the good news
01:15:12is that everything is going to show up
01:15:16on the site and once it shows up on the
01:15:20site it will be more immune from
01:15:24networking issues they're less likely to
01:15:26be ours and more likely to be yours at
01:15:28that point all of the slides will appear
01:15:31on the site within 24 hours after the
01:15:34session so I believe it's - all of the
01:15:36slides from yesterday are now up with
01:15:38the transcripts from yesterday at
01:15:40investor dr. Doug school.org and we'll
01:15:44do our best to to make the live stream
01:15:48work as well as possible so the next
01:15:51investor the next presenter excuse me
01:15:54he's also an investor obviously it's
01:15:55Paul Buchheit who has been a partner at
01:15:58YC with me as long as I've been here
01:16:01he's been at YC as long as anyone here I
01:16:04think it's probably seven years he's
01:16:05been hanging around YC for even loveland
01:16:08that he has also notably the inventor of
01:16:12gmail which sucks for me because I was
01:16:16part of the team that invented yahoo
01:16:17mail so we have a lot of good
01:16:19conversations
01:16:21he's still my friend I think he he also
01:16:25created a company called FriendFeed
01:16:27which he sold to Facebook he knows a lot
01:16:30about a lot I guess that's the best way
01:16:32to talk about Paul but but one of the
01:16:34things he does know a lot about is
01:16:35investing here's a quote from Paul that
01:16:40is actually an important one and I would
01:16:44think about it a lot is you think about
01:16:46investing I think the best kind of
01:16:48virality is a product that people like
01:16:52so much that they just want to tell
01:16:54people about it so here's one of the
01:16:59smartest and best investors I know in
01:17:00the world
01:17:01Paul bouquet to talk about that all
01:17:16right so thank you Jeff that was
01:17:18probably studying the expectations too
01:17:21high so as Jeff mentioned I've been
01:17:29involved in startups for a while
01:17:31probably about 20 years now I've been
01:17:35investing for the past 12 years I've
01:17:38invested in hundreds of companies I've
01:17:39seen thousands here at YC I've
01:17:42interviewed thousands of founders and so
01:17:45last year I kind of came to the
01:17:48realization that I needed to stop and
01:17:50actually like think about what I had
01:17:53done because I spent most of those years
01:17:55just making somewhat haphazard decisions
01:17:57so I spent a bunch of time trying to
01:18:00actually figure out like what are the
01:18:04patterns that gave rise the favorable
01:18:06outcomes for me and what are the
01:18:08patterns that gave rise to unfavorable
01:18:09outcomes with the idea that in the
01:18:12future I can maybe do better so really
01:18:15this is like something I more did for
01:18:18myself in my own investing process it
01:18:21may or may not work for anyone else but
01:18:24it's what what I intend to do and so the
01:18:27structure of this is I'll tell a series
01:18:29of stories first of favorable outcomes
01:18:31things that went good for me and
01:18:34and some unfavorable outcomes things
01:18:36that did not go good for me and then
01:18:38finally followed by some conclusions
01:18:40about you know how I plan to invest
01:18:42going forward so first there's this idea
01:18:46I'm not limiting myself to good ideas
01:18:49this actually started out as a joke
01:18:52about 20 years ago but then I kind of
01:18:54realized it was true a lot of my ideas
01:18:56are not good but it's also a really
01:19:00relevant to startups because oftentimes
01:19:02the bad ideas I mean the good ideas look
01:19:05bad and the reason for this is that if
01:19:09the idea were obviously good like the
01:19:12opportunity wouldn't exist big companies
01:19:14are not that dumb they're capable of
01:19:16executing they have lots of resources
01:19:18they have market power like if they
01:19:21thought there is this you know 10
01:19:22billion dollar business sitting there
01:19:24they would just go do it themselves so
01:19:26necessarily for it to be a good startup
01:19:29it kind of has to be something that
01:19:31inside of a big company would get shot
01:19:33down for being you know stupid or
01:19:36unimportant and actually the example I
01:19:38like the best is this company I don't
01:19:42know if who recognizes that logo that's
01:19:44the original Google logo when Google as
01:19:47a research project at Stanford called
01:19:49backrub it's Larry page's hand in a
01:19:52flatbed scanner and so you know Google
01:19:56started out as this research project at
01:19:58Stanford Larry and Sergey were PhD
01:20:01students there and they actually wanted
01:20:03to continue being PhD students and like
01:20:06finish their degree so they went off and
01:20:08tried to sell Google to one of the big
01:20:11internet companies at the time so Yahoo
01:20:13excite Infoseek they made the rounds to
01:20:17all these companies they wanted a
01:20:18million dollars for Google fortunately
01:20:22everyone said no no what no one thought
01:20:25it was worth a million dollars they
01:20:28thought search was unimportant they
01:20:30thought it was just like a commodity
01:20:31sort of a flavor of the month thing
01:20:33they're like oh you're hot now but next
01:20:35month it'll be you know some other
01:20:37startup and we'll just hop from one to
01:20:39the next so again like if if this
01:20:42opportunity were obvious Google wouldn't
01:20:45exist
01:20:46so necessarily it has to look
01:20:47kind of bad and so I'll start my story
01:20:51at Google and the reason here is I think
01:20:55I really want to emphasize the absolute
01:20:57importance in this game of being
01:21:00extremely lucky so the good news is
01:21:04you're all accredited investors
01:21:06supposedly that means you're already
01:21:08among the luckiest people on earth but I
01:21:11also like to think about this a lot
01:21:13because you know being a start-up
01:21:17employee is actually a lot like being an
01:21:18investor except you can really only do
01:21:21one at a time and so I've asked myself
01:21:24like how did I end up at Google like
01:21:25what what took me there in the first
01:21:28thing it's just that they actually had a
01:21:30product that I used I was a very early
01:21:33user and so I just knew about it like
01:21:37they had made something people want
01:21:38namely me they made something I want and
01:21:41the second thing the second reason is
01:21:44Linux so I was really really really into
01:21:47Linux a friend in college once put it
01:21:51shut the up not everything is about
01:21:54Linux so when I went looking for a
01:21:58start-up to go work at really my only
01:22:01criteria was that they'd be doing cool
01:22:03stuff with Linux and so that was how I
01:22:05ended up at Google is they were building
01:22:08these like clusters of Linux machines
01:22:09and like nothing could be more exciting
01:22:11than that and when I interviewed there
01:22:15the people were really smart they asked
01:22:16good questions interviewed at another
01:22:19startup where the people asked dumb
01:22:20questions and you could really tell the
01:22:22difference what I didn't know was that
01:22:25it was a good business I actually
01:22:27expected that Google would get squashed
01:22:29by like Alta Vista or something I didn't
01:22:32go in thinking like I was gonna make
01:22:34money I went in thinking I would learn
01:22:36something about startups and in fact I
01:22:39did learn some stuff which was good so I
01:22:40had a good time there Jeff mentioned
01:22:43launched Gmail but eventually it was
01:22:46kind of turning into a big company and
01:22:48I'm interested in startups so kind of
01:22:52got the itch again to get back involved
01:22:53in startups so I'm looking around and
01:22:55then in early 2005 I see this thing the
01:22:59summer founders program
01:23:01and this is this is sort of funny
01:23:03because I don't know a lot of you
01:23:05probably don't know this the very first
01:23:07batch of Y Combinator it was pitched as
01:23:09like a replacement for a summer job so
01:23:11the idea was college students instead of
01:23:13going to work at Google as an intern we
01:23:16just come to YC and start a company
01:23:20materially bad idea to most people in
01:23:232005 in fact their original lawyers they
01:23:27tried to work with refused to do the
01:23:29work this is this is terrible we're not
01:23:31going to do it
01:23:32investors all thought it was a joke
01:23:34they're like no good company is ever
01:23:37gonna come out of this so how did I end
01:23:44up here how did I end up connected to YC
01:23:47and the answer is that Paul Graham had
01:23:50written a lot of really good essays and
01:23:52so I had read a lot of his stuff he he
01:23:56was really smart I didn't know him I
01:23:58thought he was really smart I had really
01:24:00good insights and I thought this was a
01:24:02really intriguing idea not necessarily a
01:24:04good idea but like intriguing
01:24:06interesting and for me I think
01:24:10interesting kind of includes this
01:24:11element of unpredictable like if I know
01:24:14what the outcome is then there's no
01:24:15point in getting involved it's the
01:24:18things where I don't know the outcome
01:24:19where I can learn so basically I just
01:24:23cold email PG and it was like hey you
01:24:27know can I help out and so I started
01:24:30hanging out here got to know the first
01:24:34or the first batch that was in this
01:24:36building which was the winter Oh six
01:24:37batch and there was about 12 years ago I
01:24:43actually since then haven't met with him
01:24:45invested in every batch I'm a repeat
01:24:47offender but my very first angel
01:24:50investment was was in a YC company
01:24:51called wufu and here's what the internet
01:24:55thought about it for those of you who
01:24:57can't read it which is probably most of
01:24:59them person says is anyone keeping a
01:25:01list of all these new Y Combinator
01:25:03startups seems like it might be
01:25:06entertaining a year from now after all
01:25:07the hype has died down to go back and
01:25:09look at it I mean sure it seems like
01:25:11it's written in Python and it uses XML
01:25:13HTTP requests as we
01:25:14confuse with this stuff like I have a
01:25:16business plan and my product satisfies a
01:25:19demand that consumers actually have and
01:25:22I like this because it's both kind of
01:25:24like making fun of YC and wufu and it
01:25:27was very characteristic of the thinking
01:25:31at that time I mean in fact you know
01:25:35whoohoo never did IPO but my investment
01:25:38on that returned like 44 X when
01:25:41SurveyMonkey bought them and the founder
01:25:44Kevin Hale who's extremely talented
01:25:46ended up being a partner here at YC some
01:25:50years later and no doubt therefore help
01:25:54earn me more money hi by helping our
01:25:58startups so you know that there's both
01:26:01an immediate return and then there's
01:26:02like the long-term return the following
01:26:05year I invested in this YC company it's
01:26:08called justin.tv the idea was that
01:26:11Justin here was going to stick a camera
01:26:13on his head and then livestream it to
01:26:17the internet that was like the idea and
01:26:20at first I was like are you joking like
01:26:22no we're gonna do it I don't like
01:26:23awesome like because again this is like
01:26:27really unpredictable what's gonna happen
01:26:29when you start live streaming your life
01:26:3124/7 and I guarantee this is not the
01:26:34idea that would come out of Google right
01:26:37like you're not going to see Larry Page
01:26:39with a camera strapped to his head 24/7
01:26:42and Norton or should it come out of
01:26:44Google so again this was just like an
01:26:48unpredictable thing and in fact the
01:26:50company struggled for quite a while
01:26:52which I mentioned because someone asked
01:26:56earlier Dalton you know what if the
01:26:57company is kind of going sideways
01:26:59should i I mean I think the implication
01:27:02was should I like kick the founders
01:27:03until they give me my money back the
01:27:05answer is no so this kind of mini they
01:27:08actually even tried to do an aqua hire
01:27:09several years in but no one would a co
01:27:12hire them because they thought they
01:27:13didn't have any talent they couldn't do
01:27:15a talent acquisition because the choirs
01:27:16thought there was no talent
01:27:20fortunately they eventually pivoted to
01:27:23twitch which was focusing on just the
01:27:27one part
01:27:28their product people were streaming all
01:27:30kinds of things on justin.tv but Emmet
01:27:33became interested in specifically video
01:27:35game streaming people were streaming
01:27:38their games which I never would have
01:27:39thought was a business that was a total
01:27:42surprise to me but that turned out to be
01:27:45a great business which they sold to
01:27:47Amazon unfortunately for a billion
01:27:49dollars it's probably worth way more
01:27:51than that right now but the other
01:27:54interesting thing I want to point out
01:27:55here is this company had four founders
01:27:57so Emmet who is the CEO of twitch is
01:28:02still the CEO of twitch at Amazon where
01:28:05it's estimated to be like a twenty
01:28:07billion dollar business at this point
01:28:09Justin Khan has started a bunch more
01:28:13startups he was here as a partner at YC
01:28:16for a couple years now he has a new
01:28:18company called atrium which if you
01:28:20invest in any of our companies going
01:28:22forward you'll probably interact with
01:28:24because they're doing kind of like the
01:28:25default legal legal provider now for YC
01:28:28companies Michael Seibel started a
01:28:31company called Socialcam which actually
01:28:36was a justin.tv spin-out sold that
01:28:38Autodesk
01:28:39for 60 million and then became a YC
01:28:42partner and actually he's now the CEO of
01:28:44Y Combinator and finally Kyle vote
01:28:48started a company called crews but you
01:28:50may have heard of because GM bought them
01:28:52for a billion dollars
01:28:53so like that for a group of people who
01:28:55had so little talent that no one would
01:28:56talent acquire them have done some
01:28:59pretty remarkable things
01:29:00all right so eventually I wanted to
01:29:04start my own company I was like alright
01:29:06I I think I see how this is done I can
01:29:08do better so so that leads me to
01:29:12FriendFeed know when I decided to start
01:29:15a startup I actually had a lot of ideas
01:29:17probably most of them were genuinely not
01:29:20good but the one idea that was totally
01:29:24correct is that I thought the most
01:29:26important thing was having a really
01:29:27great team and so that was sort of the
01:29:31original focus is just like figuring out
01:29:33who I can get to join on to this and
01:29:35fortunately I managed to convince this
01:29:38guy Brett Taylor to co-found friend fee
01:29:41with us in brett is someone that I knew
01:29:45from Google I hadn't worked with him but
01:29:47I kind of knew him you know but we had
01:29:50chatted I knew him by reputation and the
01:29:53story I like to tell about Brett is he
01:29:56was the p.m. on maps not even or maybe
01:29:59like an APM not even an engineer and he
01:30:02was frustrated that the product was so
01:30:05slow and clunky this was before it was
01:30:08launched and so finally one weekend he
01:30:12he was just like you know what I'm just
01:30:14gonna fix it
01:30:16and so he rewrote the entire JavaScript
01:30:18front-end over a weekend made it a third
01:30:24the size in ten times as fast as what an
01:30:27entire team of developers had been
01:30:29working on for a long time this is the
01:30:32kind of person you want to invest in
01:30:33right like that is an absolutely great
01:30:36bet let's see so friend Pete generated a
01:30:42lot of buzz unfortunately it didn't
01:30:43generate a lot of growth in part because
01:30:47we ended up competing with this company
01:30:49Facebook so they they turned out to be a
01:30:54very formidable competitor I got a
01:30:57chance to meet Zach he's like really
01:30:59impressive and eventually he came to
01:31:03believe that Facebook was unbeatable not
01:31:05by us not by Google not by anyone and
01:31:09that it would therefore be like a Google
01:31:12sized success and therefore we should
01:31:15sell so we sold FriendFeed to Facebook
01:31:20for about half a percent of Facebook's
01:31:23equity which turned out to be a pretty
01:31:25good deal and so the the lesson here I
01:31:29really want to emphasize is find your
01:31:31betters like you want to find people who
01:31:34are smarter and everything more
01:31:37insightful than than than you are and I
01:31:39think Brett and and Zach and the team at
01:31:42Facebook are great examples of this like
01:31:45they were just clearly better at it than
01:31:48I am
01:31:48so that's like one of my criteria when
01:31:51I'm meeting a founder if I'm thinking
01:31:53like oh I could do this job better than
01:31:54you like
01:31:55I shouldn't fund right I only want to
01:31:57fund people who are better than I am
01:31:59right and so this is why it's not that I
01:32:06think idea and market don't matter like
01:32:08those things are of critical importance
01:32:10you're not gonna build a big company in
01:32:12a tiny market but my belief is that if
01:32:16the founders are actually better than me
01:32:18then they're gonna have better insights
01:32:20they're gonna know more than me so I can
01:32:23kind of outsource that part of the
01:32:24thinking to the founder and then I just
01:32:27have to figure out like does the founder
01:32:29believe it and so what you want to do
01:32:32here I believe is use your knowledge to
01:32:34probe to ask intelligent questions to
01:32:37see if they really do know what they're
01:32:38talking about right but but not using it
01:32:41to decide not being like oh you know I'm
01:32:43an expert on air mattresses I know
01:32:44there's no business here right the
01:32:48challenge of course is finding these
01:32:50great founders so I want to go through a
01:32:51couple more examples that I think
01:32:54highlight some traits
01:32:56the first is Meraki this is another
01:32:58early investment 2006 and when I went in
01:33:02to meet them in their little office and
01:33:07Mountain View
01:33:07they showed me around they introduced me
01:33:09to the team they showed me some of the
01:33:11hardware they were building these little
01:33:12mesh Wi-Fi boxes at the time and I was
01:33:17like wow this is really impressive like
01:33:19how much money of you guys raised and
01:33:21they're like no reason that's why we're
01:33:23talking to you right like and I was
01:33:26shocked because they had like hardware
01:33:27there they had they'd been selling these
01:33:29devices and they did it all by kind of
01:33:31like scraping together money here and
01:33:33there they got somehow a deal on this
01:33:35and a deal on that and someone lent them
01:33:37money and they were able to string the
01:33:38whole thing together for $0 which is
01:33:41exactly what I like to see and so this
01:33:45is another one I like to think about as
01:33:47an example of like what you want and
01:33:50then just kind of for laughs I'll give
01:33:52you what would be an opposite of Meraki
01:33:54I would say is juice arrow like they
01:33:59spent a hundred million dollars on their
01:34:01like juice bag squeezer without ever
01:34:04talking to a customer without ever
01:34:06trying to sell someone a bag of
01:34:09juice which by the way is what it is
01:34:11it's just a bag of juice and it squeezes
01:34:12it out it's horrible right so you want
01:34:17the opposite of G Sarah you want Meraki
01:34:19and this was Cisco bought this for 1.2
01:34:23billion which was like a seventy three
01:34:25extra turn once again they sold too
01:34:27early that company's worth ten twenty
01:34:29billion dollars now founders always sell
01:34:32too early cuz a billion dollars I make
01:34:34the same mistake I sell too early next
01:34:39up is Cruz Cruz I mentioned earlier one
01:34:42of the founders of justin.tv Kyle vote
01:34:44started this company and my favorite
01:34:48Kyle story is actually from the early
01:34:50days of Justin TV where they came to me
01:34:54with this problem I had invested and
01:34:56then they came to me that with this
01:34:57problem where they were burning up all
01:35:01of their money on streaming because it
01:35:04turned out streaming video was very
01:35:05expensive they could either use the
01:35:07streaming CD ends that were really
01:35:09expensive or they could like license
01:35:11some kind of software to run their own
01:35:12streaming CDN but that was also really
01:35:15expensive so they're like what should we
01:35:17do you know we're gonna burn all of your
01:35:19money which I don't like so I was like
01:35:22you know what this doesn't seem like a
01:35:25hard problem to me like bits go in bits
01:35:28go out like what's the big deal you
01:35:30should just write your own streaming
01:35:31media server and Kyle you know took me
01:35:36seriously he's like well okay I guess if
01:35:39you know PB he says it's possible and
01:35:41actually I told him he should be able to
01:35:42do it in an evening thank you you should
01:35:45just build this tonight launch it
01:35:46tomorrow like I don't get what's so hard
01:35:48just make it work it turns out it took
01:35:51him maybe like a whole weekend but he
01:35:54did in fact write their own streaming
01:35:56media server and this is actually the
01:35:58reason that justin.tv survived at all
01:36:00right because there was no way the
01:36:03business was viable if they were paying
01:36:05so much for streaming and and so again
01:36:08it's a founder who's willing to like do
01:36:12something that a more reasonable person
01:36:14would say is impossible like 99% of
01:36:18Engineers if I told them oh yeah you
01:36:20should replicate this other company's
01:36:21product and you should do it too
01:36:22we'll just be like you're an idiot like
01:36:25you don't know what you're talking about
01:36:26it would give me a big long list of
01:36:27reasons why it's impossible but instead
01:36:30he just did it and so the crews idea
01:36:34actually seemed four years ago kind of
01:36:37in a similar boat now self-driving cars
01:36:40are really soft driving car startups are
01:36:43really hot but four years ago it
01:36:44actually seemed like an absurd idea like
01:36:48the technology is so hard
01:36:49Google has like a huge team working on
01:36:52it like there's no way like this is too
01:36:54much for a little startup there isn't
01:36:56there's no way it can work but of course
01:36:59it had Kyle invest it anyway and as
01:37:03mentioned GM bought them for like a
01:37:06billion which was about a 50 extra turn
01:37:09not too bad again probably sold too
01:37:12early this company you may or may not
01:37:16have heard of they get a lot of press
01:37:18because it's awesome they came out of YC
01:37:21two years ago they're building
01:37:23supersonic jets in ten years when you
01:37:26want to go to Tokyo you're gonna get
01:37:27there in like six hours like that's
01:37:30pretty exciting and so this is another
01:37:33great example the founder Blake he's
01:37:39actually a software guy he doesn't know
01:37:40anything about he didn't he don't have
01:37:42like an Aeronautics background or
01:37:43anything he just became determined he's
01:37:46like you know it's the future we should
01:37:47have supersonic travel he's like I'm
01:37:49just gonna do it and so he took the time
01:37:51to just go teach himself everything and
01:37:54figure out why like the Concorde it was
01:37:58such a huge failure and what was
01:38:00different now and what was so remarkable
01:38:03I remember when he was in YC is that he
01:38:06was able to very clearly explain to me
01:38:10why he was going to do this thing that
01:38:12seems really impossible but he could
01:38:15very clearly outline to me essentially
01:38:20like the three things that were wrong
01:38:22with a Concorde that he was fixing the
01:38:24three the reasons that this was actually
01:38:26a viable business in like work through
01:38:28the economics of it all and he laid out
01:38:30a very clean picture and again this is
01:38:34one of the
01:38:36of really great founders is there able
01:38:37to communicate what's a fairly complex
01:38:39idea I don't know anything about
01:38:41supersonic aircraft I'm not an expert in
01:38:43supersonic aircraft right but he's able
01:38:45to explain this to me in a way that I
01:38:48understand very easily
01:38:51he's got good insights and just absurd
01:38:53ambition just like really ambitious
01:38:55something that again people would be
01:38:57like there's no way I startup is gonna
01:38:58build a supersonic airliner I believe
01:39:02they are you know it's not yet proven
01:39:04but they're making amazing progress I
01:39:06always love to read their investor
01:39:07updates he also sends the best investor
01:39:10updates of any company I've ever
01:39:11invested in and so the other point I
01:39:14want to make here actually is don't be
01:39:16afraid to invest in things that aren't
01:39:18software if you're if you're working
01:39:20according to this philosophy that like
01:39:22you want a really great founder and the
01:39:25founder brings the expertise then you're
01:39:28able to invest in so much more and and
01:39:30we have so many great companies that are
01:39:33like in bio I think we're gonna have
01:39:36some just giant exits you know ten years
01:39:38from now and and I see every time at
01:39:42demo day cuz I work with a lot of the
01:39:43bio companies because I really like them
01:39:45I see you know at least half the
01:39:47investors just like cross it off the
01:39:49list on principle because like I don't
01:39:51know anything about supersonic aircraft
01:39:53so don't do that
01:39:55all right now as promised I will talk
01:39:58about some of the less flattering story
01:40:02ISM so in honor of the Dropbox IPO let's
01:40:07talk about Dropbox so this email again
01:40:12for those who can't read it there's me
01:40:16replying to Drew this is September 14th
01:40:202007 sorry I wasn't able to make it
01:40:22today
01:40:23are you gonna be around this weekend so
01:40:26I had actually gone to Boston to meet
01:40:30the summer 7 batch which was only like
01:40:3319 companies so it wasn't that hard
01:40:35Dhruv
01:40:37seemed really good he was definitely you
01:40:39know seemed like one of the strongest
01:40:40invest founders in the batch but you
01:40:43know I had some questions about
01:40:44competition like what are you gonna do
01:40:46about Google Drive and all that so I set
01:40:48up a meeting
01:40:49meet with him when we're back in San
01:40:51Francisco and then on the day of the
01:40:55meeting my previous meeting ran long and
01:40:58I cancelled I'm drew and I want to make
01:41:01a couple of points here one is that
01:41:03that's really shitty investor behavior
01:41:04because you're wasting the founders time
01:41:06don't do that and to karma kind of got
01:41:10me back I missed out on what would have
01:41:13been like a thousand extra turn and an
01:41:15exciting IPO because I didn't show up
01:41:19all right so I missed Airbnb I mean a
01:41:22Dropbox but what about Airbnb so here's
01:41:31Michael Seibel introducing me this was
01:41:34June 26 2008 - to his company air bed
01:41:39and breakfast and then just sort of like
01:41:41humorously four years later something
01:41:45three years later I respond I should
01:41:47have responded the thing that actually
01:41:49triggered this was that the Airbnb
01:41:51founders were like standing right here
01:41:52telling their story and I was like ah ah
01:41:54this hurts so much I can't believe I
01:41:57like missed this company in my defense I
01:42:01had my own startup at the time and I
01:42:03think if you are a start-up founder you
01:42:04need to give your own company absolute
01:42:06priority over angel investing the thing
01:42:09that actually makes is more painful is
01:42:12that this was just the first time this
01:42:15was before they were in YC once they're
01:42:17in YC p gu is like oh you got to talk to
01:42:20the air bean bees they're so good
01:42:21there's like the best company he was
01:42:22just constantly hyping them and
01:42:24generally if PG gives that strong of an
01:42:26endorsement just like you just invest
01:42:28I'm like cool you know I'll invest I'll
01:42:31you know I'll watch for them on angel
01:42:33day which is what you used to call demo
01:42:35day now I show up on angel day and
01:42:37there's no Airbnb
01:42:39so I email Brian and Mike hey misty guys
01:42:41today was you know hoping to chat and
01:42:44invest he's like yeah sorry we just
01:42:46signed a term sheet with Sequoia so
01:42:50again I had basically in my head decided
01:42:53to invest but then just kind of was
01:42:57laxed a days ago and and and took some
01:42:59time fortunately I was able to get in
01:43:03to a later round but at a much higher
01:43:05price but again the point I want to make
01:43:08here is that if you move slow you're
01:43:11going to get adverse selection like the
01:43:13companies that you can string along for
01:43:16months and you know give a hundred
01:43:18different meetings and like you need to
01:43:20talk to this person probably aren't
01:43:22going to be the best companies so like
01:43:24be very deliberate in your
01:43:26decision-making like do or do not right
01:43:30don't just be like yeah you know I'll
01:43:31see what happens like when you identify
01:43:34a company is being really promising as
01:43:36something you want to invest in you
01:43:39could spend like another week thinking
01:43:41about it or you could pull the trigger
01:43:43and get air BnB alright what else
01:43:50doesn't work ah a really good price
01:43:53this one I've been duped into a bunch
01:43:56where I'm like oh it's such a you know
01:43:58they're giving me a bargain like I'm
01:44:00trim today a bargain like all the
01:44:02valuations so low it's a steal
01:44:04like I'm gonna I'm getting a great deal
01:44:05I've never gotten any return that's
01:44:09something that I invested in because it
01:44:11was a good deal they're really literally
01:44:14is no such thing as value investing in
01:44:16startups as as much as it seems like
01:44:18there should be every time I've done
01:44:21this it's been a mistake
01:44:23another mistake not investing because of
01:44:27price and clearly there must be some
01:44:31limit at which this isn't true but I've
01:44:33never encountered it any time I've been
01:44:35like excited about something but then
01:44:39there's like ah the price is so high
01:44:41yeah you know I'll invest in something
01:44:44else I've always regretted it like so
01:44:47now actually in my head I kind of turn
01:44:49around the rule I'm like if I'm
01:44:51dissuaded by their price I should
01:44:53probably invest more I just need to
01:44:57write a larger check this one is
01:45:02probably kind of obvious I make this
01:45:05mistake a lot because I work with the
01:45:06founders I get emotionally attached and
01:45:09I just want to help them out they seem
01:45:11helpless
01:45:13if you're investing out of pity but is
01:45:17also have never made any money always
01:45:22turned out bad because again like the
01:45:24really great founders just are so
01:45:26formidable you know someone like like
01:45:28Blake get boom it's just sort of like a
01:45:31force of nature like he's somehow just
01:45:33gonna will this thing into existence the
01:45:35people who come to me with like a sob
01:45:37story oh no one wants to invest maybe if
01:45:39you write a check they will like I
01:45:41haven't made anything so I'm gonna try
01:45:43to keep myself for making this mistake
01:45:45I'll probably do it a little bit more
01:45:48cynical ideas this one is something
01:45:53where I'm actually not really that
01:45:54excited about what they're doing and
01:45:56what it means for the future but it
01:45:58seems like it could make a lot of money
01:46:00and so you know if they're gonna make a
01:46:03lot of money I'd like some of it so far
01:46:06so far and I'm kind of actually happy
01:46:09about this I've never made money on
01:46:10these companies somehow the cynical idea
01:46:14is I don't know why but they haven't
01:46:17they haven't worked out for me maybe I
01:46:19have the wrong kind of cynicism but the
01:46:21principle here I would suggest is invest
01:46:24in optimism invest in the future you
01:46:26want to see not the future you fear and
01:46:29these are basically ideas where I
01:46:31invested in the future I fear I had this
01:46:34one idea at one point that I should just
01:46:36invest in anything that would not be out
01:46:39of place in the movie idiocracy
01:46:43fortunately those investments didn't
01:46:45work all right
01:46:48another mistake really impressive
01:46:51numbers I think Sam touched on this
01:46:52yesterday it's really easy to get
01:46:54excited and good numbers on their own
01:46:57are not a bad thing obviously sometimes
01:46:59really good companies have really good
01:47:00numbers but the thing that happens is
01:47:03you kind of get blinded by the numbers
01:47:05you're like wow it just keeps going up
01:47:08ignore the fact that like somehow the
01:47:10founders are kind of a or like the
01:47:13product doesn't really make sense to me
01:47:16and again I never made money on these if
01:47:20I'm just investing because of the
01:47:22numbers it turns out to be a bad
01:47:23investment
01:47:25and I think the reason for this that the
01:47:27question to ask is is this company
01:47:29actually creating value like are they
01:47:32actually making the world a wealthier
01:47:35place or are they maybe just exploiting
01:47:37some temporary inefficiency in like
01:47:40Facebook the Facebook's didn't change
01:47:42their album algorithm and that company's
01:47:44gonna be dead
01:47:45right all right so I've tried to boil
01:47:52that all down again just more for my own
01:47:54use to a checklist because again my my
01:47:57thinking on startups is that it's really
01:48:02like the founders are absolutely
01:48:04critical and everything else kind of
01:48:06derives from that so if I'm just asking
01:48:09myself like is this person a great
01:48:11founder here's some of the traits clear
01:48:16concise communication and I want to be
01:48:19clear this doesn't mean slick salesy
01:48:21kind of communication I mean people who
01:48:24can demonstrate a real depth of
01:48:26understanding and clarity of thought in
01:48:29the example actually probably one of the
01:48:31best examples of this is just Paul
01:48:33Graham with Y Combinator like the whole
01:48:35reason why Combinator really exists is
01:48:37because he'd been writing these essays
01:48:39for years that were sort of like he's
01:48:42kind of like the Pied Piper of nerds
01:48:44like everyone would just read these
01:48:45things and get excited and that was in
01:48:48to this day I believe it's like the
01:48:51number one or number two source of leads
01:48:54to people applying to Y Combinator we
01:48:56asked a question on the application how
01:48:58did you hear about Y Combinator and they
01:49:00say from Paul Graham's essays but also
01:49:03you know essentially all of the other
01:49:05founders fall into this category right
01:49:07like Kyle was able to tell me a story
01:49:09about how he's gonna make a self-driving
01:49:11car boom again he's able to tell me the
01:49:15story about how they're gonna do this
01:49:16impossible thing and so if people if I
01:49:19find myself struggling to understand or
01:49:22like doing the work for them it's always
01:49:25a bad time
01:49:26and it's the trap I sometimes fall into
01:49:30is all talk to them for so long
01:49:31I'll come up with a story that makes
01:49:33sense and then I'll just sell myself on
01:49:36my own story you know I think maybe
01:49:39just not smart enough but no if they're
01:49:41a good founder they're gonna be able to
01:49:43communicate to me moves fast
01:49:47again like think of Brett rewriting maps
01:49:50in a weekend or Kyle making a media
01:49:55server or you know the Meraki team
01:49:58building building that product with no
01:50:00money moving fast is absolutely critical
01:50:03and again it's something that I think
01:50:06most people don't do it's really easy to
01:50:09come up with reasons why this should
01:50:11take longer or you know I really want to
01:50:14get this thing right or that thing right
01:50:15like founders will come up with infinite
01:50:17reasons to move slow and that's fine I
01:50:20just not going to invest him
01:50:23accomplishes a lot with a little
01:50:25and so again like Meraki is the great
01:50:27example of this no money in there
01:50:30shipping hardware somehow juice arrow is
01:50:33the anti story of that most most
01:50:36startups unfortunately accomplish very
01:50:37little with a lot implausibly ambitious
01:50:42or frivolous ideas and the reason that
01:50:47we're kind of at these two extremes is
01:50:49that if the idea is in the middle as I
01:50:51mentioned it at the start probably
01:50:52there's like a big company somewhere
01:50:54working on it or a hundred other
01:50:56startups and so you want to see
01:50:58something that's either it sounds
01:50:59impossible like you know a supersonic
01:51:01jet or just straight-up stupid like
01:51:03putting a camera on Justin's head right
01:51:05things that seem like toys actually
01:51:07Aaron Harris had a good blog post about
01:51:09this I think last week you should you
01:51:11should look up on the YC blog ideas that
01:51:13look like toys are oftentimes really
01:51:16great and the founders have the
01:51:19conviction to pursue these obviously bad
01:51:22ideas is a talent magnet so the best
01:51:26people want to work with the best people
01:51:30and somehow the really great founders
01:51:33seem to be able to attract other great
01:51:35people and actually YC this is I think
01:51:40really the secret of YC is that it's
01:51:41just a giant top talent magnet like we
01:51:44could bring them in and do almost
01:51:45anything I think it was still sort of
01:51:47work the key thing is that we're
01:51:50attracting the best people and the best
01:51:52people want to come be a part of a Y
01:51:53Combinator because this is where all the
01:51:55other best people are and so this and we
01:51:58see this with a lot of our top startups
01:52:00like stripe you know really brilliant
01:52:03founders and then their team is also
01:52:05really impressive make something people
01:52:10want this is this is key this is our
01:52:14slogan make something people a lot
01:52:15Google is a great example like I
01:52:18actually was using the product if it's
01:52:21if they're building the thing that you
01:52:22actually want that's a good sign if you
01:52:24can't identify anyone in the world who
01:52:26would possibly want the thing that
01:52:27they're making anyone who's who if you
01:52:30offer it to them they'll be you that's
01:52:34that's a bad sign I just can't say
01:52:40something else about that but I remember
01:52:41oh right like actually another funny
01:52:46story here is door - which you may have
01:52:48seen it in the news they just raised
01:52:50another half billion when they
01:52:52interviewed here like actually in the
01:52:54room right over there I like one
01:52:57question for them was like will you
01:52:59deliver to my house because at the time
01:53:02when they went through I see there was
01:53:03no food delivery where I lived and I get
01:53:05hungry and so they're like yes I was
01:53:08like you're funded so I mainly funded
01:53:11that company just because I wanted food
01:53:12for myself but you know there didn't get
01:53:17I finally determined and committed and
01:53:21in fact peih-gee says determined is the
01:53:24number one most important trait in a
01:53:26start-up founder and the reason for this
01:53:28is because starting a start-up is really
01:53:30really really hard and unpleasant and so
01:53:34if you're not super determined you'll
01:53:37probably give up at some point you'll be
01:53:39like why am I putting myself through
01:53:41hell I should just go get a job at
01:53:43Google and be like a normal person
01:53:47unfortunately I think like this can
01:53:49sometimes be a little bit hard to suss
01:53:51out because the founders will of course
01:53:52be like oh yeah I'm totally committed
01:53:54but some of the things you can look for
01:53:57is are they hedging their bets like do
01:54:00they have kind of it's easy Plan B and
01:54:02actually the group of founders where
01:54:04I've seen this happen
01:54:05most his founders who are on leave from
01:54:09med school doctors who realize they
01:54:12didn't really want to be a doctor so
01:54:14they're like I'll try out the startup
01:54:15thing and so they come in here they'll
01:54:18work for six months or whatever in the
01:54:20big man this is hard I'm scared I'm
01:54:24gonna go back to medical school right
01:54:25like they have that easy out they've
01:54:28already made a huge investment and being
01:54:31a doctor and they don't want to throw
01:54:34that all away for some pipe dream
01:54:36startup and I think the other thing that
01:54:42I like to look at is have the people
01:54:46made mistakes in their life I'm very
01:54:51nervous about people who've always
01:54:54gotten perfect grades they got into all
01:54:57the right things they did all the right
01:54:59clubs the people who have the perfect
01:55:01resume the people who didn't up
01:55:04because these are people who've never
01:55:07failed and startup founder being a
01:55:10start-up founder you're basically
01:55:11failing day after day and so what these
01:55:15people do you know they're these are
01:55:17people who are scared of failure and so
01:55:18they almost inevitably will take just
01:55:21like an early exit and then they can put
01:55:24on their resume oh you know started iyc
01:55:27startup and sold it to some other
01:55:29company right it doesn't say that they
01:55:31sold it for like zero dollars or
01:55:33whatever but they can add it to their
01:55:35resume and they can go get a safe job at
01:55:38McKinsey or something all right so that
01:55:42is it thank you
01:55:44[Applause]
01:55:57Thanks so start asking questions
01:56:19so the question is with respect to
01:56:23making things people want how does how
01:56:25do you evaluate that for like bio
01:56:27companies and things like that you know
01:56:32actually I find most of the time with
01:56:34those companies it's pretty obvious like
01:56:36you're making a cure for cancer
01:56:39I want a cure for cancer right the the
01:56:42risk on those companies is most often
01:56:45not market risk it's it's not the risk
01:56:47that no one wants a cure for cancer the
01:56:49risk is that they don't don't actually
01:56:51have a cure for cancer right so with
01:56:55those companies more often it's one of
01:56:57these things where like the demand is
01:56:59kind of obvious it's just like a
01:57:00question of whether you can actually
01:57:01create the product I have a question
01:57:04right just wondering I know Justin I
01:57:08know Michael I know I'm it I know Kyle
01:57:11what is it about those guys that made
01:57:16you invest cuz I mean that was you
01:57:17didn't really say it but you have you
01:57:18heard this incredibly stupid idea
01:57:20and yet you invested in this know
01:57:23talented group of four people why I mean
01:57:27I think they did have talent
01:57:29III think they told a very simple story
01:57:33actually there's a good question
01:57:35they they told a story that really
01:57:37connected with me which is we're gonna
01:57:38stick a camera on our head on Justin's
01:57:40head and then stream it and see what
01:57:42happens and that's the kind of thing I
01:57:44love because I'm like I don't know
01:57:45what's gonna happen right it's really
01:57:47unpredictable but again the thing that I
01:57:50liked was that they weren't gonna go off
01:57:52and spend a lot of time like thinking
01:57:54about it and like making complex plans
01:57:56they were literally just gonna do it
01:57:58they they bought a camera stuck it on
01:58:00Justin's head and like hacked together
01:58:02some of it so that they could stream it
01:58:04so they were gonna be able to test the
01:58:06idea very quickly and learn and iterate
01:58:08and again this is part of why the you
01:58:11know on the checklist here moves fast is
01:58:14super important like you can almost defy
01:58:18or predict the I think success of a
01:58:20startup just based on how quickly
01:58:22they're able to iterate and the really
01:58:24great companies just like iterate really
01:58:25quickly the ones who you know do a
01:58:28release every two years fail juice arrow
01:59:23sure so so the question is unlike
01:59:27private equity where you can do months
01:59:29and months of diligence like we kind of
01:59:32have to move fast as investors or as I
01:59:34mentioned face adverse selection of not
01:59:37funding Airbnb so how do we how do we
01:59:40know if the founders move fast I think
01:59:42is what you're saying as well as all of
01:59:44these other things and what you can do
01:59:47is you can actually ask them like what
01:59:49have you done what have you accomplished
01:59:51in the past month right what what what
01:59:54there's actually a really good blog post
01:59:57you should all go find where it says a
02:00:00little bit of slope is worth a lot of
02:00:03y-intercept I think is the title and the
02:00:05basically the idea is you can have
02:00:06something up here you know millions of
02:00:08dollars in revenue but it's kind of
02:00:09flatlined or you can have this little
02:00:12toy down here with like almost nothing
02:00:14but it has an upward slope and you want
02:00:16to invest in the thing with slope and so
02:00:19this is what we look for in founders and
02:00:22companies is just like how quickly are
02:00:25they moving forward how soon are they
02:00:27gonna do something right and so like the
02:00:29example of justin.tv it wasn't like
02:00:31we're gonna launch this thing next year
02:00:33it was like we're gonna launch this
02:00:34thing next week right and so and so just
02:00:37talking to them about their schedule
02:00:39what they've done in the past and what
02:00:42you know what their anticipated future
02:00:44schedule is and I want and actually
02:00:47asking them like okay why aren't you
02:00:49doing this thing faster and seeing if
02:00:50they give me you know just kind of like
02:00:52excuses or if they're maybe is a
02:00:54legitimate reason for not moving fast
02:00:56and you know you can also try pushing
02:00:59the founders you know probably more so
02:01:02after you you fund them pushing them to
02:01:04movie and faster and see how they
02:01:06respond and you know like my story with
02:01:08Kyle I gave him what was maybe an
02:01:10unreasonable thing like you should
02:01:11rewrite some other company's product and
02:01:13an evening but he took it and ran with
02:01:15it
02:01:15right he didn't just like I've worked
02:01:18with a lot of Engineers 99% of Engineers
02:01:20would just like tell me I'm smoking
02:01:22crack and like don't know what I'm
02:01:24talking about right but he just like
02:01:26took it and ran with it right so here at
02:01:29YC we actually fund the companies based
02:01:32on a 10 minute interview right so it is
02:01:35possible to get
02:01:37amazing how much you can get out of
02:01:38people in ten minutes and actually this
02:01:40is again why I put for me number one on
02:01:43the list is clear concise communication
02:01:45if I spend 10 minutes interviewing a
02:01:49company and I still don't know what they
02:01:50do that's an easy no like it's so easy
02:01:55to say no to that right like like if
02:01:57they can't if they can't tell me what it
02:01:58is
02:01:58and that's that's probably like you know
02:02:00at least a third of the companies that
02:02:02come in here to interview at the end of
02:02:04the interview we still don't know what
02:02:05they're doing and so we don't fund them
02:02:27so the question is did I make any
02:02:29mistakes with respect to the
02:02:31fundamentals of the startup I mean okay
02:02:41the thing you have to remember is that
02:02:43most of your investments aren't going to
02:02:44work out and it's it's easy to spend a
02:02:50lot of time kind of making up complex
02:02:52theories but what I find is the danger
02:02:55when I see investors who do that is they
02:02:58come up with clever ways of talking
02:03:00themselves out of good deals because
02:03:03like you know justin.tv if I give him
02:03:05that like five minutes of thought I
02:03:08could have come up with you know a
02:03:09hundred reasons why it wasn't going to
02:03:11work right so yeah did the companies
02:03:17fail for fundamental reasons of course
02:03:20and you sometimes you never even know
02:03:22right like suppose justin.tv had managed
02:03:26to actually do a talent acquisition
02:03:29someone thought they had talent they
02:03:32wouldn't be up on the slide right it's
02:03:34kind of random you know some some random
02:03:37person that Google flipped a bit one way
02:03:39or the other and I got a completely
02:03:40different outcome but if I were to then
02:03:43look back on that let's say it wasn't a
02:03:46favorable outcome and then try to draw
02:03:48like deep conclusions about you know why
02:03:51I should never again invest in like a
02:03:52streaming video company or something
02:03:55like that I might miss out on something
02:03:57really good so one of my other
02:03:58principles is don't over learn from past
02:04:01mistakes and it's really easy because it
02:04:04hurts it hurts so much to lose money
02:04:06like it hurts me at least that that you
02:04:09want to avoid it but if you're going to
02:04:11be able to do this you kind of just have
02:04:13to bite the bullet and recognize that
02:04:15fundamentally investing at seed stage
02:04:17involves and I started with this a great
02:04:20deal of locking
02:04:46so the question is when I look at ICS do
02:04:49I see that as the open source of funding
02:04:51or the G sera funding it's a good
02:05:00question I'm trying to figure out how do
02:05:02I like politely answer I think there's
02:05:06something really interesting going on in
02:05:08crypto so crypto is another one of these
02:05:11things like I gave Linux as an example
02:05:13where the thing that brought me to
02:05:16Google was my enthusiasm for Linux and I
02:05:19think if you were paying attention to
02:05:20what like nerdy 21 year-olds we're
02:05:23excited about five six years ago you
02:05:25would have invested in coinbase and
02:05:27Bitcoin and all that stuff that said as
02:05:31far as I can tell the vast majority of
02:05:33the ICS
02:05:34are scams or or just like these are
02:05:38companies that if they were trying to
02:05:40raise from the people in the room here
02:05:42maybe they'd be able to raise half a
02:05:44million dollars but instead they go do
02:05:46an ICO and they raise let's say a
02:05:49hundred million dollars no way no way
02:05:52those are all going to zero
02:05:53i I don't believe any of those are gonna
02:05:55are gonna work and part of the reason
02:05:58for that - is this counterintuitive
02:06:00thing that I've learned working with a
02:06:02lot of startups is that actually too
02:06:06much money is a huge liability because
02:06:08when you have a lot of money you start
02:06:10doing things the right way and that's
02:06:13actually kind of what happened with
02:06:14juice arrow as an example is they got
02:06:16you know a hundred and whatever a
02:06:18million dollars if that company had only
02:06:20had 100k they would have had to go try
02:06:23to sell juice bags they wouldn't have
02:06:25been able to spend years building this
02:06:26stupid machine right they would have had
02:06:28had to actually talk to customers and so
02:06:31having a giant mountain of money enables
02:06:33the founders to insulate themselves from
02:06:36reality to an unhealthy extent just a
02:06:42couple of questions from cyberspace or
02:06:47in this room and they're just too shy to
02:06:50speak it out one was directly to me but
02:06:53I think it's an interesting question
02:06:55which is people tend to be nervous
02:06:59sort of deep deep technology companies
02:07:03investors especially how does how do you
02:07:06get over that and now do people in
02:07:08general get over not being afraid of
02:07:10some sort of hardtack I mean I guess I
02:07:19also just like tend to invest in things
02:07:22that I'm excited about and it's so much
02:07:25easier for me to get excited about a
02:07:27supersonic jet then some sort of like
02:07:29obscure enterprise software or something
02:07:32like that and not that an enterprise
02:07:33software is a bad investment but I don't
02:07:36know for me it's not really that hard
02:07:37because I sort of accept accept the fact
02:07:40that I actually don't know very much
02:07:42about almost anything so it's not just
02:07:46the hard tech companies like I don't
02:07:48know anything about almost any of what
02:07:50the companies are doing that's why I
02:07:51have to invest in people who are better
02:07:53than me right and so it really just
02:07:56comes down to like do I believe in this
02:07:58founder and and their expertise and then
02:08:01therefore I can just rely I can like
02:08:03outsource my thinking to the founder I
02:08:05don't think you answer this but if
02:08:08you're an hour meeting and I had a
02:08:09startup and you were trying to determine
02:08:11whether I was determined how would you
02:08:14do that
02:08:16actually to talk about this a little bit
02:08:17but I you know a lot of is kind of
02:08:19probing for you know do they have any
02:08:22plan B right are they gonna go back to
02:08:24medical school they quit their job yet
02:08:26do they still have a job at some other
02:08:29company like and we get this a lot of
02:08:31times where we'll ask founders are you
02:08:35going to leave your job and they're say
02:08:38well if I raise enough money that I can
02:08:40pay myself XYZ like they have these
02:08:43conditions on it and ideally you want
02:08:47the people who are just willing to
02:08:48charge straight into a brick wall it's
02:08:51necessary I think this is really deep
02:08:54Paul Graham says this is the most
02:08:56important quality of a founder you
02:08:58should look for but it's extraordinarily
02:09:00difficult to know when someone has it
02:09:03one of the reasons by the way we ask
02:09:05questions on the YC application about
02:09:07your past because that is one way I try
02:09:10to determine if someone's determined
02:09:13you know has that quality of getting
02:09:15punched in the face falling down and
02:09:17getting back up again it says that
02:09:18happened to them in the past Paul
02:09:20mentioned people who have never ever
02:09:22failed that doesn't mean that they're
02:09:24not going to fail this time but you just
02:09:26don't have very much information about
02:09:28what happens when they get punched in
02:09:29the face right actually if they've never
02:09:31failed they're gonna be afraid of
02:09:32failure and therefore they're gonna take
02:09:34a safe exit yeah and actually like to
02:09:38follow up on that what you can do to
02:09:40examine determination is actually also
02:09:42just ask about the history of the
02:09:44company so like air B&B is another one
02:09:46where they had actually worked on that
02:09:47for a long time and you know Michael
02:09:50actually helped them out a lot with the
02:09:52pitch they pitched a number of investors
02:09:54everyone said no when they came to
02:09:57interview YC Paul Graham actually tried
02:10:00to talk them out of the idea they're
02:10:01like you know you guys seem really good
02:10:03but this idea is terrible can you work
02:10:06on something else and they were just
02:10:07like no right like they he tried to talk
02:10:10them out of it if he had talked to them
02:10:12out of it that probably would mean it
02:10:13was a bad idea
02:10:14okay one more question
02:10:41so the question is what about like I
02:10:44invest in things I don't know about what
02:10:46about things I do know about I have a
02:10:50trick here which is I don't know about
02:10:51anything
02:10:52I mean honestly like I think it's really
02:10:56easy to overestimate your own knowledge
02:10:58and experience so like I said I try to
02:11:01avoid learning too much from the past
02:11:05specifically asked about email yeah I'm
02:11:08I am a little bit burnt out on email
02:11:10startups so there's like maybe kind of a
02:11:12high bar just because I know this is a
02:11:16case where I can take my knowledge and I
02:11:18put this earlier when you're talking to
02:11:20the founder use your knowledge to probe
02:11:22and see if they have a good response and
02:11:24so you know a lot of the email stuff
02:11:27they're like tweaking Gmail and I'm like
02:11:29okay what if Google just adds this
02:11:31feature what are you gonna do know right
02:11:35like okay that's not a good answer but I
02:11:38have had good email startups front it
02:11:42was actually recently in the news they
02:11:44just raised a big round from Sequoia I
02:11:46think really great founder again Matilda
02:11:49she's she's great I you know that was an
02:11:53email thing but she could tell me a
02:11:55really clear story about why it wasn't
02:11:58just like a feature in Gmail you almost
02:12:00have to unlearn things that you think
02:12:03you know you know I I ran one of the
02:12:07very first ever personal services and I
02:12:11might have thought it was done and never
02:12:13invested in any personal service again
02:12:15and I think that would have been a
02:12:17pretty bad mistake so so I I think we
02:12:22give I think a little bit contradictory
02:12:24advice here all the time it's it's part
02:12:28of the game you should completely learn
02:12:30everything you can from your past
02:12:31mistakes and ignore the past at the same
02:12:34time so so it's not very easy to be a
02:12:40good investor but that's why we're all
02:12:41here right so thanks a lot Paul thank
02:12:43you
02:12:44[Applause]
02:12:54okay we are nearly halfway through our
02:12:57class that went fast right I guess you
02:13:01can have really quick classes when
02:13:03there's no diploma or anything like that
02:13:06so just a couple of notes if you've
02:13:12noticed a lot maybe all of the
02:13:15presenters thus far are YC people that's
02:13:17not going to end right now however the
02:13:20the rest of the course is is mostly
02:13:26almost exclusively perspectives on
02:13:29investing from outside of YC so don't
02:13:33worry we're not completely staring at
02:13:36our own navel here however I will also
02:13:38argue vociferously that the lessons that
02:13:41you've heard from YC partners thus far
02:13:44excuse me are in fact quite general and
02:13:49relevant to investing in startups inside
02:13:52or outside of YC you still should invest
02:13:55in a lot of YC companies there's good
02:13:56reasons to do that however also I know
02:14:00there's a lot of questions about icos
02:14:02and saps and and crypto if you can
02:14:08contain yourselves please try to hold
02:14:10those questions till day four because
02:14:13we're going to be we're gonna have a
02:14:16presentation by Andy Bromberg who's the
02:14:17CEO of coin list and the right person to
02:14:22whom to pose those questions our next
02:14:25presenter is going to briefly talk about
02:14:28whatever he wants to
02:14:29he's one of that no-talent group of four
02:14:31people from justin.tv who it turned out
02:14:35did okay founding his own company
02:14:38Socialcam selling it for a couple bucks
02:14:40and is now the CEO of Y Combinator and
02:14:45doing great amazing things here
02:14:48Michael is is an extraordinary person
02:14:52having front of us I'm really lucky he
02:14:53is the person who said you need to find
02:14:57problems so dire
02:14:58that users are willing to try half-baked
02:15:01the one imperfect solutions he knows a
02:15:04lot about those exact things please
02:15:06welcome Michael Seibel thank you all
02:15:12right it's been a long day so I'm going
02:15:15to be pretty fast first how many of you
02:15:18in the room are doing angel investing to
02:15:21make money raise your hand okay
02:15:25raise them high again son it's not a bad
02:15:27thing to make money great so I'm gonna
02:15:31tell you about my experience raising I'm
02:15:34sorry doing angel investing but I'll
02:15:36tell you straight away that I'm not
02:15:37doing it to make money in effect I feel
02:15:41like where I came from on the East Coast
02:15:43when people want to give back they give
02:15:46money to charity and they go to Galus
02:15:47which I never understood and strangely
02:15:50here in the valley when people want to
02:15:51give back their right angel investing
02:15:53checks and so that's really why I write
02:15:56checks I kind of think of it as charity
02:15:59someone described it to me is taking
02:16:01money flushing it down the toilet and
02:16:04then very rarely walking up on the
02:16:08street to a million dollars just laying
02:16:10there and being like holy and so
02:16:14that's kind of how I see it
02:16:16so take all of this advice with that in
02:16:18mind so I wanted to give you a very
02:16:21realistic version of my scorecard
02:16:24I've been angel investing for 4.5 years
02:16:27I've made 50 total investments invested
02:16:31in four angel funds forty-seven
02:16:34companies only three of them were not YC
02:16:37companies 46 of them were early stage
02:16:41one was late stage it's a little company
02:16:44called reddit I hope it's gonna continue
02:16:46to do well of those 50 investments for
02:16:51our dead one is a billion dollar exit
02:16:54cruise 12 hour post series a and six
02:17:00have over a 50 million dollar valuation
02:17:04so I don't really actually consider
02:17:08myself of that good of an angel investor
02:17:10I'm fair
02:17:11certain that there are really big
02:17:14companies that have gone through ICS
02:17:15since I've been here that I have not
02:17:18invested in thankfully because I work at
02:17:21YC I own a percent of every one of them
02:17:23that's how I sleep at night
02:17:24so what would my lessons the first
02:17:29lesson I actually learned about angel
02:17:32investing is you have to write a big
02:17:35enough check and it's funny because the
02:17:37second I started writing angel
02:17:39investment checks Sam told me this
02:17:41lesson and then I ignored him for two
02:17:43and a half years what you really need to
02:17:47think about when writing angel
02:17:48investment check is what are the
02:17:51realistic chances that I'm going to get
02:17:54a return and how much would I make at a
02:17:57billion dollar exit I talked to a lot of
02:18:00people who invest a check sighs that if
02:18:02the company were to become a billion
02:18:04dollar company they wouldn't make enough
02:18:06money to really impact themselves at all
02:18:08so then I kind of asked the question why
02:18:11are you doing it then and so I've kind
02:18:16of made the mistakes of writing $25,000
02:18:18checks and I don't do that anymore
02:18:22so really the way I think about this is
02:18:27like model out a billion dollar exit
02:18:28with dilutions with taxes and make sure
02:18:31you're making enough money so that when
02:18:33you brag about investing in that company
02:18:34to your friends
02:18:35you're not whispering the back of my
02:18:36head oh but I only made like twenty
02:18:38fifty thousand dollars the next thing
02:18:42that I learned is you have to create a
02:18:44flow a system to invest quickly like
02:18:48oftentimes you have hours or you know a
02:18:52day or two to make a decision so you
02:18:55need to be set up to be able to hear a
02:18:58pitch sign a Clerke document and wire
02:19:01money and like investors who like don't
02:19:04know how to set that up just talk to
02:19:07your banker whoever else handles your
02:19:09money figure that out
02:19:11one of the things we tell YC companies
02:19:13all the time is that an a investor
02:19:16grade-a investor gives you money quickly
02:19:22signs the paperwork quickly
02:19:25shuts the hell up that's an a investor
02:19:28there are very very few A+ investors in
02:19:31the world they're very very many less
02:19:34than a investors so don't be one of
02:19:35those people who founders are waiting
02:19:38for signatures who you sign the
02:19:41paperwork but I can't send the wire
02:19:42because the money is over here and it's
02:19:44got to come over here like if
02:19:47you're in this game be able to write
02:19:49checks quickly the last rule that I've
02:19:54learned just in my co-founder taught me
02:19:57and and he calls it the FOMO slash frnd
02:20:00rule if one of your friends is starting
02:20:03a company and you would have FOMO if it
02:20:05would become a billion dollar company
02:20:07just shut up and write him a check I
02:20:10wish I followed that rule more often
02:20:13like basically I would have been much
02:20:17more wealthy um so when it comes to
02:20:20investing in YC and and this is kind of
02:20:24where I will end here and open up for
02:20:26questions the first thing that I think
02:20:30about is if you're there on demo day and
02:20:35you have done no prior research you need
02:20:39to be prepared to move extra quickly
02:20:42because you're gonna be in a room of
02:20:44people some of whom have done their
02:20:47homework and this isn't the first time
02:20:50they've seen the name of this company on
02:20:51the screen so don't be surprised when
02:20:54you see a founder moving quickly because
02:20:57there are a lot of people in that room
02:20:58whose primary job is to make money and
02:21:01they've done their work the second thing
02:21:05that I would think about is you can do
02:21:07your homework too these companies are
02:21:09launching often many of them are
02:21:12launching publicly before demo day you
02:21:14can read about them on the blog you can
02:21:16read about the one product hunt on
02:21:17TechCrunch on Hacker News there's really
02:21:21no reason why you shouldn't already be
02:21:24interested in a large number of YC
02:21:26companies before demo day you can reach
02:21:29out to them they might not want to meet
02:21:31straightaway they might want to wait
02:21:32till after demo day but certainly you
02:21:34don't have to see your work starting on
02:21:36demo day
02:21:38the last thing I'll say about demo day
02:21:41is that I think not enough investors
02:21:44spend time thinking about what happens
02:21:46after demo day oftentimes even very good
02:21:50companies will raise a little bit of
02:21:52money before series a six to twelve
02:21:56months after demo day so even if you
02:21:59didn't get a chance to get into a
02:22:01company on demo day where didn't know
02:22:03they were good make sure you're
02:22:05maintaining a relationship with that
02:22:07founder if you can be helpful be helpful
02:22:09and oftentimes there's actually an
02:22:12opportunity to invest later that I think
02:22:14people don't realize and I would argue
02:22:18that for some people who are not gonna
02:22:22put in the work upfront it might be
02:22:24better to to take a pause and to the
02:22:28thing about investing six to twelve
02:22:29months after you're definitely gonna pay
02:22:31how higher valuations you're gonna have
02:22:33more information and then one thing that
02:22:39PB said that I can't say enough the most
02:22:44hyped invest in on demo day is often not
02:22:48the best one very very often I think
02:22:53what's interesting is that the crowd on
02:22:57demo day is just not as smart as it
02:22:58appears and I've been the beneficiary of
02:23:05investors who are very good at working
02:23:08the room and pumping up the investments
02:23:11they've already made and it's great when
02:23:13you're a founder because you get to
02:23:15raise at a you know twenty million
02:23:16dollar cap which is nice but needless to
02:23:20say in my batch in winter twelve I my
02:23:24company was by no means the best
02:23:27investment Justin was in my batch as
02:23:30well he raised that uncapped super hyped
02:23:34also wasn't the best investment if you
02:23:37were investing in my batch you probably
02:23:39wonder invest in the company called
02:23:40gusto they're pretty good
02:23:43so with that being said I just wanted to
02:23:46give you guys kind of some honest truths
02:23:48from my experience
02:23:49happy to answer some
02:23:51questions and I know you guys have a
02:23:52busy day thank you okay so go ahead
02:24:23so I think the when you're trying to
02:24:26figure out how big of a cheque to write
02:24:28what's interesting is that this scales
02:24:30fairly well so if the amount of if you
02:24:34have less money when the billion-dollar
02:24:36company hits you have to make less of a
02:24:38turn return for it to have a significant
02:24:40impact when you have more money you need
02:24:43to make more of a return have sniffing
02:24:44impact that really scales your check
02:24:46size so probably the number one thing I
02:24:49learned and the number one thing I
02:24:50changed was going from 25k checks to 50k
02:24:52checks 100k checks if Sam was here he
02:24:57probably would tell me I should be
02:24:58writing to 50k checks I do also think
02:25:02there's something to an investment
02:25:05having a little bite like it like just a
02:25:10little bite just a little like mmm to
02:25:14make you think a little bit more sharp
02:25:16sharply about whether this is a good
02:25:17thing you should be doing I think you
02:25:19should to make big returns you have to
02:25:23write bigger tracks however to the point
02:25:27there's a lot to be learned and you
02:25:30shouldn't write bigger checks once you
02:25:32have conviction once you are able to get
02:25:36conviction and if you go through your
02:25:37angel career thinking oh my god am I
02:25:42gonna put money into justin.tv it's such
02:25:46a stupid idea and the founders don't
02:25:47have that much talent then then don't
02:25:52write a big check but if you can look at
02:25:54this guy and actually notice about
02:25:57Michael that he's actually incredibly
02:25:59articulate and if you see Justin and you
02:26:00say like he's the kind of guy and his if
02:26:03you meet Justin you'll say he's the kind
02:26:05of guy if you punched in the face and
02:26:06knock him down he's probably gonna get
02:26:08up and punch you back and you might
02:26:10think whoa these guys it's a stupid idea
02:26:14maybe but what do I know
02:26:16they might just make it and once you
02:26:18once you get that conviction then you
02:26:20should write bigger checks and before
02:26:21then I wouldn't I would learn
02:26:33what makes an a-plus investor well I'll
02:26:41give you an example
02:26:42the Socialcam acquisition almost didn't
02:26:45happen and an a-plus investor nudged it
02:26:51in the right direction that's like
02:26:53pretty big impact so I would say that
02:26:58it's extremely rare that an investor can
02:27:00have truly big impact another investor
02:27:04of ours pabu high he basically threw a
02:27:08piece of advice is the reason why we
02:27:10built a video system which is the reason
02:27:11why justin.tv could exist which is
02:27:13reason why twitch could exist so like
02:27:16that that was a biggie
02:27:18I would say they're kind of like very
02:27:19specific moments where like a really
02:27:21impactful investor can actually change
02:27:24the direction of the company but that's
02:27:25very rare so most of the time I tell YC
02:27:29startups to go after a investors many
02:27:33investors claim to be a-plus investors
02:27:36that's often not true
02:28:02so it's a great question what are the
02:28:05statistics on YC companies and how well
02:28:06they do so actually Arin works on this a
02:28:11lot more so he be better person asked
02:28:14answer this question he's coming in on
02:28:16day four oh yes you should ask Erin that
02:28:18question what I will say is that we tell
02:28:20the batch that the vast majority of YC
02:28:23companies will fail and that's been a
02:28:26message in the kickoff meeting since PG
02:28:30was given U and so that's for sure true
02:28:33and you know from my from my kind of
02:28:37memory of the numbers series A's tend to
02:28:40happen between 12 and 24 months post
02:28:43demo day and between 20 and 30 percent
02:28:48of companies will raise follow-on
02:28:49funding post demo day hey Michael um you
02:28:55mentioned that you missed a lot of the
02:28:58big companies in YC what happened if you
02:29:03if you could concisely say what went
02:29:06wrong in your evaluation and is there
02:29:08any lessons that can be taken from that
02:29:10so when I missed companies let's say
02:29:17probably two things and and he be
02:29:21covered one of them one was I was just
02:29:24on the fence and didn't move quickly and
02:29:27I think the second one is actually
02:29:29strangely unique to YC I was busy like I
02:29:34had a bunch of companies to help and so
02:29:38my first kind of thought when I go into
02:29:41demo day is not which company should I
02:29:42invest in it's how are my companies
02:29:44doing and how do I make sure they do
02:29:46really well so I think that yeah that's
02:29:48it's it's different when you work here a
02:29:49little bit so um so I'll just elaborate
02:29:52for one second because I've missed a lot
02:29:53of really great investments more than I
02:29:55have and I've missed more than Michael
02:29:57has it's true and and I think there is
02:30:03something that people forget about this
02:30:05which is to be a great investor is
02:30:08incredibly hard-working so and most of
02:30:12you probably don't want to work that
02:30:13hard you're kind of dabbling right so
02:30:16you've gotta again walk this line I'll
02:30:19tell you contradictory things like if
02:30:21your angel investing the last thing you
02:30:23want to do is kill yourself angel
02:30:24investing but if you really want to be
02:30:26successful you better get your sense of
02:30:28conviction and then do enough homework
02:30:31so that you can chase after work hard to
02:30:36get in the deals you want and if you
02:30:38don't do that your chances of getting
02:30:39that next big deal go down a lot couple
02:30:43more questions yeah
02:30:54so to party around scare me no not at
02:30:58all the thing that scares me about cap
02:31:00tables is massively unequal equity
02:31:04splits or cap tables where the founders
02:31:07have already sold a large portion of
02:31:09their company very early but party
02:31:11rounds don't scare me at all I think I
02:31:14think people talk about them as if
02:31:16they're really scary and like yes you
02:31:18have to get more people to sign more
02:31:19paperwork but as long as you're getting
02:31:21good a investors who sign paperwork
02:31:23quickly I haven't had a problem I think
02:31:26Socialcam had 30 plus angels
02:31:39so in terms of how much equity the
02:31:41founders should have I think the way
02:31:42that I think about this is I model out a
02:31:46Series A that's gonna be between twenty
02:31:48and thirty five percent dilution in a
02:31:50series B that's gonna be between twenty
02:31:51and thirty five percent dilution and I'd
02:31:54like it where the founders gonna be
02:31:55after that you know and if you're
02:31:57looking at a founding team that's at
02:31:58only fifteen or twenty percent equity
02:32:00after those two rounds they probably
02:32:03still have a large amount of work to do
02:32:06to produce a great exit and not very
02:32:09much equity as motivation and so those I
02:32:13tend to be a little bit more careful
02:32:15about interestingly at YC oftentimes
02:32:18some of the work that we have to do when
02:32:20we ingest companies has helped them
02:32:21clean up their cap tables and help
02:32:22convince their previous investors that
02:32:26the way the company is set up right now
02:32:29is actually harmful so that's actually
02:32:31work we do quite a bit
02:32:44identifying what kind of talent
02:32:58you mean from the perspective of
02:32:59acquiring them so the question is are
02:33:03large companies today somehow better at
02:33:08identifying talent I guess to hire or to
02:33:13acqua higher than they were in the past
02:33:16yeah honestly I have no perspective on
02:33:19that I actually think the number of
02:33:21things that have to go right for an
02:33:22acquisition to happen can introduce many
02:33:26problems even with very very smart
02:33:28people so seems unlikely to me that
02:33:31anything qualitatively has changed in
02:33:33terms of how big companies evaluate
02:33:36startup founders and their talent one
02:33:40thing to remember and keep in mind is
02:33:41that often startup founders are
02:33:43unemployable not always but often the
02:33:47best ones
02:34:28so advice on processing getting to yes
02:34:32so what I will say is that it's a lot
02:34:34easier for us to get to yes then it
02:34:36should be for you to get to yes it's
02:34:39easier for YC to fund the incremental
02:34:42company from my on the angel investing
02:34:47side one thing I think about is is kind
02:34:52of how I think a little bit about
02:34:55baseball like when you go up to the
02:34:57plate you know most likely you're gonna
02:35:01strike out like you're not gonna get on
02:35:04base and so I think that for me that's
02:35:06kind of a calming feeling it's like I
02:35:08can apply as much intellectual rigor as
02:35:11humanly possible and I'm still gonna
02:35:13have a very very low hit rate so
02:35:15sometimes I think that people over
02:35:18intellectualize these decisions I was
02:35:20talking to one investor who said that in
02:35:23order to get a two million dollar check
02:35:25they had to produce a hundred page
02:35:27document on how this company was going
02:35:29to go and that was like wow that's
02:35:31impressive and it was a pre-launch
02:35:32company right that's probably a lot of
02:35:36waste of time I think that you have to
02:35:38be confident enough in your process that
02:35:41you're comfortable writing a lot of
02:35:42checks and then but I do think that
02:35:45there's diminishing returns with
02:35:48analysis it's funny it's the Jeff
02:35:52mentioned it this is a hard game to be
02:35:54very good at and that's why I like for
02:35:56me what's comforting is that no matter
02:35:59what I'm making an impact in that
02:36:00founders life even if they don't go on
02:36:03to do a billion-dollar company I'm
02:36:05helping them take a shot and someone
02:36:08helped me take a shot and so even if it
02:36:11all goes to at least I'm kind of
02:36:14continuing that cycle and making a
02:36:16valley a place where people have those
02:36:17opportunities that should be in my
02:36:20opinion like a very big motivation for
02:36:22an angel okay last question mark
02:36:44so how does YC source I would say
02:36:47there's two secret powers to YC sourcing
02:36:50one is we have an open application
02:36:52process I think investors believe that
02:36:56having the skill to network to an
02:36:58investor is an important characteristic
02:37:01of a good founder and I think kind of
02:37:04why C's core position from the beginning
02:37:07is that it's not and so especially in
02:37:10the days now where you can write
02:37:12software with relatively little money
02:37:14that has relatively large impact I think
02:37:16the value of networking and being able
02:37:17to raise large amounts of money is less
02:37:19and less so I would say that's one kind
02:37:21of big secret the other peak secret PB
02:37:24mentioned when I go and talk at MIT my
02:37:28brother's there now I basically say like
02:37:31what makes this school the buildings and
02:37:33the professors and the administration
02:37:34are the students you put the same
02:37:37students in a you know C level
02:37:39engineering school that's the best
02:37:41engineering school in the country all
02:37:43you have to do is move the students so
02:37:45in an interesting way I think PG kept a
02:37:48very high bar very early when he didn't
02:37:52have to and that created this trend
02:37:54where people understood that if I'm
02:37:55gonna be at YC I'm gonna be around
02:37:57extremely talented people and as long as
02:38:00we don't screw that up I think that's
02:38:02just perpetuating over and over and over
02:38:04again so I'm sorry and your second
02:38:08question was oh how do we you just
02:38:14repeat the question like yeah how do we
02:38:15kind of grade ourselves internally at YC
02:38:17because it takes so long to get feedback
02:38:19it's actually interesting um one thing
02:38:23that we do that I witnessed when I first
02:38:25joined was we asked ourselves how did we
02:38:27feel
02:38:29I joined after summer 2012 which was the
02:38:34batch that killed YC and it looked like
02:38:36a bomb had gone off
02:38:37like literally partners had like this
02:38:39like PTSD like look on their face and
02:38:42clearly something wasn't great about how
02:38:45that batch experience went not I think
02:38:48for the companies there were great
02:38:49companies but clearly something had to
02:38:50change what the organization to be able
02:38:52to accept that number of come
02:38:53again I think that's a very important
02:38:56thing that we look at more recently
02:38:59we've implemented a series a program
02:39:01that helps companies raise series A's
02:39:02and that's basically allowed us to pay a
02:39:06lot more careful to tension to what's
02:39:08the path from demo day to the next step
02:39:11and then I would say the last thing that
02:39:14is kind of glaringly obvious over time
02:39:17is we do a lot of office hours with
02:39:18alumni and so we don't really get caught
02:39:24like once you are the group partner for
02:39:26a company like YC in many ways to that
02:39:30company is you and so they will keep on
02:39:33coming back and so you kind of still
02:39:36have to deal with the new class but
02:39:38you're always writing the story along
02:39:40with the previous classes and in that
02:39:42way it's actually it's interesting to
02:39:45learn about what their experience is how
02:39:47we could help them better there's a lot
02:39:50of other things but I think those are
02:39:52the those are the big boys and of course
02:39:53we track stats and so on and so forth
02:39:55but yeah I think those are the big ones
02:39:58I've seen make a difference hey Michael
02:40:00thanks very much thank you okay now we
02:40:11are well and truly half way in we will
02:40:14start again tomorrow at 10:00 a.m.
02:40:17promptly and for those of you are left
02:40:19already you're about to miss my last
02:40:21pearl of wisdom which is that Michael
02:40:24mentioned what makes an a-plus investor
02:40:27and one thing that for founder's it's
02:40:31easy to tell when an investor is not an
02:40:34a-plus investors if they claim to be an
02:40:36a-plus investor and it's not always it
02:40:40is good to have a great track record if
02:40:42you've invested in lots and lots and
02:40:43lots of big companies it's probably a
02:40:46good sign but just because you've made a
02:40:48lot of money investing do not forget
02:40:50there's a significant component of luck
02:40:53involved and it's great if you all are
02:40:59the lucky ones that pick the one or two
02:41:01or three companies in this batch I see
02:41:04for example that become multi-billion
02:41:07dollar
02:41:07companies but just because you do that
02:41:10doesn't mean you're an a-plus investor
02:41:12thanks and we'll hopefully see you all
02:41:13tomorrow
02:41:16[Applause]
🎥 Related Videos
a16z Podcast | Things Come Together -- Truths about Tech in Africa
a16z Podcast | The Infrastructure of Total Health
The Robot Lawyer Resistance with Joshua Browder of DoNotPay
a16z Podcast | Bots and Beyond
Design Sprints as a Tool for Organizational Change
a16z Podcast | Valuing Today's Fast-Growing Software Companies
🔥 Recently Summarized Examples
![How To Succeed As A NEW & YOUNG Realtor [Deals Every Month + Luxury Listings]](/_next/image?url=https%3A%2F%2Fi.ytimg.com%2Fvi%2FrtrRghgTayc%2Fhqdefault.jpg&w=3840&q=75)
Former Priest REVEALS Jesus' MYSTICAL Lost Years & His Connection to BUDDHA! | Fr. Seán ÓLaoire
Kim Kardashian's Plastic Surgery Reversal: Is She Trying to Rewind Time?
How To Succeed As A NEW & YOUNG Realtor [Deals Every Month + Luxury Listings]
BITCOIN EMERGENCY: NEXT PRICE TARGETS REVEALED!! Bitcoin News Today & Ethereum Price Prediction!
Uncovering Ancient Atlantean Ruins: Exploring Evolutionary Pathways and Psychic Phenomenon