Startup Investor School Day 4 Live Stream
Y Combinator2018-03-08
11K views|6 years ago
💫 Short Summary
The video segments cover topics related to early-stage investing, the evolution of venture capital, fundraising methods, ICOs, token investments, and the importance of reputation in angel investing. It discusses trends in the market, liquidity, and the impact on companies, along with advice for investors, founders, and maintaining positive relationships. The video emphasizes the importance of integrity, transparency, and making informed decisions to navigate the complexities of angel investing successfully. It also highlights the significance of mentorship, quick decision-making, and adding value to startups for long-term success in the industry.
✨ Highlights
📊 Transcript
✦
Key highlights from the last day of startup investor school include discussions on ICOs, parking issues, and the importance of taxes in angel investing.
05:11The session emphasized the impact of qualified small business and section 1202 on potential tax liability, urging attendees to research these topics.
The previous day focused on angelic advice from experienced investors, highlighting insights into finding billion-dollar companies and motivations behind angel investing.
The audience's diverse reasons for being in angel investing were discussed, including making money and driving change.
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Importance of investing in billion-dollar companies and building a strong network like Page Mon's.
11:10Jeff stresses the significance of portfolio construction and asset allocation for amateur angel investors to be organized and professional.
Budgets, check size, and sectors are crucial factors in investing.
Personal brand is essential for success, with software founders like Microsoft and Google being successful examples.
The key takeaway is to look for brilliant founders in big markets with seemingly bad ideas.
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Andy Bromberg discusses early stage investing trends and market liquidity.
12:39Bromberg highlights decreasing costs for starting companies and investing.
Understanding the history of venture capital is important to comprehend current trends.
Despite overall trend towards liquidity, there have been occasional speed bumps in recent years.
The talk provides insights into the evolution of early stage investing and factors influencing investment opportunities.
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The history of venture capital and its growth over the years.
15:09Spain's Isabella and Ferdinand were one of the first investors in a venture - Christopher Columbus' expedition.
The 1940s and 1950s saw the emergence of the first venture capital firms, with investments like Digital Equipment Corporation.
US government legislation in 1958 boosted venture capital growth by providing leverage and loans for startups.
Silicon Valley companies flourished during this time, alongside the establishment of the two-and-twenty fee structure.
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Evolution of Venture Funding in the 1970s
17:26Venture funding in the 1970s required significant personal investment before receiving support from venture funds.
Companies like KP, Mayfield, CRV, and Sequoia were founded with smaller funds compared to today.
Angels emerged in the 70s, with technology angels investing in companies like Apple and Genentech.
Institutional capital started investing in venture for the first time, creating a trend of alternative assets.
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Venture capital boom in the 1980s.
19:39Over 650 funds were established by the end of the decade, providing institutional capital for companies like Kray and Apple.
Rise in tech IPOs due to increased funding.
Market dip in late 80s attributed to factors like stock market crashes.
Emphasis on investing earlier, with firms competing to secure deals within weeks or days, a shift from previous practices.
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Overview of Capital Availability in the 80s and 90s.
21:55Capital availability in the 80s led to competitive deals and earlier investments for desired returns.
The market saw leveraged buyouts and investments in slow-growth consumer brands and fast-growth startups.
The stock market crash at the end of the 80s dampened growth.
In the 90s, there was a significant capital influx, with venture funding increasing from $12 billion AUM in 1996 to $120 billion in 2000.
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Evolution of Venture Capital Landscape in the late 90s and early 2000s.
24:34The early 2000s experienced a decline in venture returns, leading to the emergence of new funding structures such as YC and Techstars.
Convertible notes became popular from 2005 to 2009, simplifying the fundraising process for startups.
Super angels and micro VCs like SoftTech VC and First Round Capital grew in the mid to late 2000s, providing more capital for startups.
These developments made it easier for entrepreneurs to start a company and brought significant changes to the venture capital industry.
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Evolution of Early-Stage Funding Landscape
27:20Angel investors and seed funds increased, resulting in smaller investments and million-dollar seed rounds.
Early-stage investors raised significant funds before startups gained traction in the market.
Shift towards preferred stock occurred from 2010 to 2013 due to rising institutional capital.
Platforms like AngelList democratized the fundraising process by connecting investors and startups, while legislation such as the JOBS Act post-2008 benefited venture funds by exempting them from certain regulations.
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Overview of fundraising options for startups.
30:19Evolution from traditional convertible notes to safes, with benefits of each approach highlighted.
Discussion on general solicitation, 506 C offerings, 506 B offerings, and crowdfunding.
Rise of initial coin offerings (ICOs) as a trend in early-stage fundraising.
Emphasis on creating efficient and cost-effective fundraising structures for startups to make it easier for angel investors to participate in funding rounds.
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Rise of remote fundraising due to low startup costs and online investing opportunities.
33:12Democratization of investing in early-stage startups through platforms like Republic and equity crowdfunding.
Increase in education for angel investors through programs like Maiden Lane's spearhead.
Shift towards everyone becoming an angel investor, resembling the early days of venture capital with an emphasis on providing support, capital, advice, and connections to new companies.
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Contrasting traditional seed fundraising with token fundraising through ICOs.
36:32Tokens represent ownership in a network, not equity in a company, resulting in different governance structures.
Valuation for tokens differs significantly from traditional fundraising, with ICOs raising substantial amounts.
The investment process for tokens involves unique considerations not present in traditional methods.
Token holders have limited voting power in decision-making compared to equity shareholders, emphasizing the unique nature of token fundraising.
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Overview of Token Investment Process
38:33Tokens provide quicker liquidity events with minimal interaction between investors and founders.
Decision-making on exiting tokens is more flexible compared to traditional seed fundraising.
Tokens are categorized into protocol, application, and securities tokens.
Caution is advised in the ICO space due to its young and unpredictable nature.
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Filecoin was created by Protocol Labs to address decentralized file storage.
40:37The platform incentivizes users to store files on unused hard drives.
Filecoin utilizes a token and incentive model, requiring users to stake or bond Filecoin when offering to store files.
The trustless network eliminates the need for a central party, ensuring secure and reliable file storage.
Filecoin aims to provide decentralized file storage without the risk of censorship or downtime.
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The concept of proof of space-time in a decentralized network.
43:30Verifiers and miners ensure correct file storage without directly viewing the files.
Participants are motivated through token rewards and a built-in market system.
Trust and value are created within the network for token transactions and staking.
Continued search for liquidity and trends in the network, emphasizing investing in tokens for network participation.
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Market trend moving towards faster liquidity in secondary trading and equities.
45:49Companies becoming cheaper to start and raise funds for, with a push towards earlier liquidity.
Investors finding it easier to invest with options like tokens, Reg CF, and crowdfunding.
Evolving structures in the ICO market leading to a mix of equity and tokens investments.
Investors advised to exercise discretion and conduct due diligence when investing in ICOs.
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Importance of in-person meetings with founders in the ICO market for assessing quality and potential success.
49:05Early IC rounds are akin to traditional seed funding.
Evaluating ICOs includes examining technology, team backgrounds, and interacting through platforms like Slack or Telegram.
Success stories, such as investing in Bitcoin, showcase high return potential even without meeting the founder in person.
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Overview of the ICO market and opportunities for big funds.
51:35Importance of diligence notes and following good investors for quick liquidity in ICO investing.
ICOs and token investing are a global phenomenon, with Europe raising as much as the United States.
Significant value creation and capital investment in the cryptocurrency market, highlighting its global reach and accessibility.
Impact of increasing regulations on fundraising activities and the active market in Europe, Russia, China, and Southeast Asia.
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Influence of venture capital and lobbyists in the crypto industry.
53:33Lobbying efforts have impacted government regulations like the JOBS Act.
Organizations like Coin Center are involved in lobbying activities in the crypto and venture capital sectors.
Challenges of modifying agreements, such as the SAFE, to accommodate future ICOs by companies.
Complexity of owning equity and tokens in a company, highlighting the evolving nature of the industry and uncertainties around asset classes.
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Evolution of token ecosystem and parallels with cryptocurrency and hedge funds.
58:19Importance of looking to the future in startup investments rather than focusing on current trends.
Slower liquidity often results in bigger returns in investments.
Pros and cons of faster liquidity in markets are raised, with potential benefits of longer liquidity for greater returns highlighted.
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Impact of liquidity on companies in the public markets.
01:00:15Importance of considering long-term effects of liquidity timelines on investors.
Early stage investors play a crucial role in supporting companies through their lifecycle.
Trend towards liquidity in the token market with early investors being locked up for stability.
Challenges of conducting a second round in the token world and the concept of ICOs relinquishing control to the network.
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Challenges faced by token companies in raising additional funding after the initial raise.
01:02:36Suggestions to build entrenched fundraising mechanisms to support later raises.
Comparison between IPOs and ICOs, with ICOs being more similar to seed fundraising.
Details on ICOs involving selling illiquid securities under Reg D offerings, with a lock-up period of one year.
Importance of differentiating between sales of securities and illiquid offerings under Reg D in ICOs.
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Challenges of direct ICOs and lack of mechanisms for supporting the market.
01:05:08Potential for investment banks focused on ICOs, but regulators may classify tokens as securities.
Importance of treating tokens properly to avoid price fluctuations and protecting buyers.
Insights on being a good angel investor, including decision-making and actions in investments.
Introduction of Aaron Harris as an experienced investor and YC partner, discussing key aspects of being a good investor.
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Importance of reputation in startup investing.
01:22:45Reputation is key in startup investing for better prices and access to top deals.
Networks and relationships are essential for getting into pre-sales and securing advantageous positions in startups.
Identifying successful startups early on can be challenging, but leveraging networks is crucial for gaining a competitive edge.
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Importance of reputation and ability to help startups for angel investors.
01:25:28Positive actions lead to more deal flow and opportunities to assist companies, while negative actions can harm investor relationships.
Founders have long memories and startups operate in a small world, emphasizing the need for a positive reputation.
Four key opportunities for angel investors to demonstrate value to founders: sourcing deals, meeting founders, negotiating terms, and maintaining relationships post-investment.
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Building relationships with founders for investment opportunities requires respect for their time and boundaries.
01:28:54Investors should avoid pestering or stalking founders, as it can negatively impact the relationship.
Etiquette rules for meetings with founders include keeping meetings short and paying for meals or coffee.
It is advisable for investors to pay for expenses when meeting with founders, regardless of the founder's financial status.
The key to successful relationships with founders is showing respect and building a positive connection.
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Show genuine interest and respect founders' time during investment discussions.
01:32:40Focus on the founder and avoid distractions during conversations about investments.
Understand investment terms like SAFEs and liquidation preferences and their implications.
Avoid asking for complex terms like board seats or drag-along rights in angel investments.
Be transparent and avoid surprising founders with additional demands post-agreement.
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Importance of negotiating in good faith and understanding leverage in investor relationships.
01:34:30Avoid investors who only invest if others are involved to prevent groupthink and bad decisions.
Some of the best companies from YC's demo day were those that didn't attract all investor interest, highlighting the value of thinking differently.
Smart founders recognize unique opportunities and are willing to invest independently, leading to better prices and more ownership.
Recognizing and supporting these founders can lead to successful investments in the long run.
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Importance of Honoring Agreements in Negotiations.
01:37:11Following up promptly after reaching an agreement is crucial for building trust and credibility.
Leading by example in securing investment funds and bringing in other investors is recommended.
Investors should avoid assuming the role of CEO post-investment, especially if they have previous leadership experience.
Establishing positive relationships and promptly fulfilling obligations are key to maintaining trust and credibility.
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Importance of investor feedback and commitment in startup relationships.
01:39:52Investors advised to provide constructive feedback on product flaws and website issues, while avoiding overwhelming founders.
Positive example of investor swiftly wiring funds after meeting founders, demonstrating commitment and support.
Negative example of investor making empty promises and failing to deliver funds promptly, emphasizing the importance of integrity.
Lesson learned to never commit funds you don't have, as seen in founder's refusal to hold open investment due to investor's unfulfilled promises.
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Importance of Communication and Transparency in Investor-Founder Relationships.
01:44:17Investors should avoid making unfulfilled promises to protect their reputation.
Maintaining a good relationship with companies through transparency and ongoing communication is crucial for success.
Founders who provide regular updates tend to have better performance than those who disappear for extended periods.
Investors should respect the confidentiality of sensitive company information and seek permission before sharing it.
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Importance of Respect and Honesty in Startup Relationships.
01:46:01Founders should not be pressured to share sensitive information, especially if it involves competitors.
It is crucial to offer help and advice when possible, but always be honest with feedback.
Transparency and honesty are key in building trust and fostering better communication and results.
Constructive criticism delivered in a supportive manner is more effective than attacking mistakes.
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Managing pro-rata rights in investor relationships can be contentious.
01:49:06Founders may feel pressured to limit pro-rata rights by later stage investors like Sequoia or Excel.
Miscommunications through lawyers or partners can worsen the situation.
It's crucial to be firm yet reasonable in negotiations to uphold agreements.
Understanding and flexibility are essential in navigating complex investor dynamics.
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Prioritizing the greater good over financial interests is crucial for long-term success in investing.
01:50:56Being helpful and building relationships is more important than fame or money in the investment world.
Good investors are honest, move quickly, and provide capital when needed.
Smart money investors who understand the business can provide valuable insights and support.
Seed stage companies may not need external board members, as internal board members can handle decisions effectively.
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Importance of forming a board after raising over four million dollars.
01:54:53Regular investor updates are essential for tracking progress and keeping investor interest.
Reputation systems can fail, allowing investors with bad reputations to appear reputable.
Bad actors may not always be exposed, emphasizing the need to verify actual investments made by individuals.
Avoid misleading claims by verifying the credibility of successful investors.
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Importance of Power Dynamics in Investor-Founder Relationships
02:00:40Founders may face pressure to accept unfair terms, like losing pro-rata rights, due to power imbalances.
Founders should advocate for themselves and not let investors exploit them.
Maintaining a positive reputation and focusing on the startup's success are crucial in these situations.
Understanding and safeguarding one's rights, especially with tools like the YC safe, is essential for early investors.
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Importance of Pro Rata Rights in Contracts and Negotiations.
02:02:10Understanding the implications of agreements can prevent future conflicts related to pro rata rights.
Requesting pro rata rights and side letters during negotiations is reasonable.
Knowing your leverage and advocating for what you deserve is crucial.
Balancing relationships with founders and investors is essential to prevent conflicts down the line.
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Recommendations and Credibility
02:08:43It is recommended for investors to only recommend companies they have personally invested in to maintain credibility.
Honesty in Recommendations
If uncomfortable with a founder's request for recommendation, it is important to be honest about it.
Due Diligence in Early Stage Investing
Early stage investors should focus on limited due diligence to avoid unnecessary information requests.
Post-Investment Advice
Providing advice on founder agreements post-investment is more appropriate than pre-investment.
Understanding in Early Stage Investing
Asking for excessive detailed financial projections may show a lack of understanding in early stage investing.
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Ron Conway is a valuable resource for learning about angel investing.
02:11:03SV Angel and Ron recommend a reading list for aspiring investors.
Ron emphasizes the importance of ambition and drive in entrepreneurs.
Ron founded Altos Computer in the late 70s, disrupting the mini computer industry.
Don Valentine mentored Ron in angel investing, leading him to start investing full-time in 1994.
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Discussion on investing in founders and their determination in the internet software industry.
02:14:21Emphasis on prioritizing founders over ideas and the importance of determination in building successful companies.
Strategy of investing in companies like Ask Jeeves and PayPal based on the character of the founders.
Advocacy for founders who show determination and perseverance in growing their businesses.
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Key highlights in angel investing success.
02:19:0060% of investments may fail, emphasizing the need for acceptance of failure as part of the process.
Successful investors must have big wins to compensate for losses and be prepared for the possibility of founders being dishonest.
Mark Zuckerberg's success was attributed to focusing on metrics and user experience over personal fame.
Mistakes are inevitable in investing, but recognizing and learning from them is crucial for making better decisions in the future.
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Importance of Co-Founders Getting Along.
02:20:16Conflicts between co-founders can lead to disruptions and one founder leaving.
Observing how founders interact during presentations can help gauge potential conflicts.
Meeting the entire team, including key members like the operations expert, is crucial for investors to assess company dynamics.
Mentoring involves introducing portfolio companies to team members, assisting in hiring key roles, and facilitating partnerships for growth.
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Importance of quick decision-making and action in startups.
02:23:53Founders are encouraged to move forward, make mistakes, and learn from them.
Personal anecdote shared about giving advice to founders.
Y Combinator praised for providing impeccable guidance and mentorship to startups.
Y Combinator's screening process and mentoring approach positioned as top in the industry.
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Tips for new investors:
02:26:45Invest in sectors where you have expertise to increase chances of success.
Spread investments across multiple companies to reduce risk.
Focus on adding value to companies to secure a win.
Success in angel investing involves identifying potential hits early, building relationships with founders, and solving their problems.
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Fostering civic engagement and activism for positive societal change.
02:30:33Student-led movements, such as those advocating for gun safety, are highlighted for their impact.
Individuals play a crucial role in influencing political decisions and advocating for social causes.
Blockchain and cryptocurrency are seen as a promising investment sector with potential for innovation.
Investors are advised to focus on sectors they are familiar with to better support founders and drive success.
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Recap of key topics covered in the video segment.
02:34:50Motivations for investing, mechanics of investing, and creation of tools for understanding investments are discussed.
Mention of safe investments and potential unintended consequences.
Plans to provide tools for modeling investments and possible tweaks to the safe.
Importance of deal flow, meeting with companies, making key investment decisions, and being serious and rigorous in investing.
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Importance of angel investing and equity in the long term.
02:38:05Emphasis on being a good investor and fostering transparency in the system.
Working together to improve the ecosystem and maintain consistency, honesty, integrity, and transparency.
Providing information to investors about conversion prices and calculations, advocating for high-integrity requests.
Welcoming feedback for course improvement and future sessions, expressing gratitude towards the speakers for their participation.
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Appreciation for event organization and team.
02:41:58Thanks to speakers, YC team, and video crew for their hard work.
Effort required to create the course acknowledged and gratitude expressed for everyone involved.
Attendees wished luck and success, with upcoming demo day invites to be handled the following week.
05:03Galatians you've made it to the very
05:06last day of start-up investor school
05:11thank you all again so much for being
05:14here and for being part of this I am
05:17excited to provide the last day so
05:21finally you guys can get some of your
05:23questions answered about icos
05:26so can anyone tell me where you're not
05:31supposed to park there okay
05:34there's parking there's plenty of
05:36parking there's fewer of you today so
05:37there shouldn't have there sort of been
05:40less of a parking issue I hope I hope I
05:42hope it wasn't too bad and I apologize
05:43for the issues with that for for people
05:49online again hashtag YC sis for
05:52questions during Q&A and there's still
05:55the check the slack channel of course
05:58today we'll try to stay more on time
06:01than we did yesterday
06:03I trust we'll be we'll be better but the
06:05good news is as you know there's wine
06:09and beer wine do we have wine or just
06:12beer wine and beer and pizza afterwards
06:15for those of you were gonna say yay
06:17right no sushi just nothing nothing
06:21there will be nothing healthy just we're
06:24investors we can take it so there was
06:32one note that someone had that I thought
06:34was a little interesting and he pointed
06:38out that that Karl Karl thank you that
06:40we haven't really talked about taxes I
06:42can't imagine why we haven't talked
06:44about taxes well taxes are an
06:47interesting issue when when you're doing
06:51angel investing actually if you're new
06:55to this you actually realize it's a pain
06:57in the butt
06:58because when there's an exit it's not
07:01like a simple thing you have to do this
07:03thing call it in a an installment sale
07:06because usually there's an escrow and
07:07you get paid you have to figure out how
07:09to what your basis is it's a pain in the
07:10butt so I'm not going to talk about it
07:13but there's this also this other thing
07:14that's worth investigating called
07:16qualified small biz
07:17or section 1202 which can have an impact
07:22on a significant impact in past years it
07:25had a huge impact on your potential tax
07:28liability so look it up I won't say any
07:30more than that it was there a question
07:31on taxes because I don't know anything
07:33about taxes oh okay high five just a
07:40quick summary of yesterday before we get
07:42going
07:43so yesterday was our day of angelic
07:47advice the web whether you realize it or
07:51not those people up here are amazing
07:54investors so hopefully you paid close
07:55attention to their words of wisdom I
07:57always do I've learned a ton from all of
08:00them aloud talked about how he finds
08:03billion-dollar companies which you know
08:05if the game you're into is to make money
08:08here actually raise your hands if the
08:12main reason you're an angel investing is
08:13to make money I think only like two or
08:15three of you raise your hands raise your
08:16hands like none of you are here to make
08:17money what are you doing here because
08:22maybe because you want to change the
08:23world and you care about things which
08:25which is great but you know investing in
08:29billion dollars companies gives you more
08:30fuel to do that so it's still a good
08:33idea and he talked a lot about how he
08:36helps companies and one of the things
08:38you hear if you ask people again it is a
08:40dear very tight network if you ask
08:42people about a lot they'll all tell you
08:44incredibly helpful and you know why does
08:47that matter well that matters because
08:48everyone knows he's incredibly helpful
08:50so you want him on your cap table page
08:53Mon is kind of special and if there's
08:55one thing you should take away from page
08:57Mon other than the fact that T is really
08:59helpful it's that anybody can get deal
09:04flow right anybody can figure out how to
09:07get deal flow and getting deal flow
09:09matters because you have to have choice
09:12Jeff talked about portfolio construction
09:15and asset allocation and I think the
09:19takeaway from me there what I've really
09:20learned from Jeff is that even you know
09:23most of us who are angel investors are
09:25not pros we're amateurs word-a blurs in
09:27the game we're doing it for for personal
09:30reasons that
09:31doesn't mean you can't be professional
09:32and rigorous about how you go about
09:35doing this and that's the right way to
09:36do to be organized to think about your
09:38portfolios to remember that it's a long
09:40game and to pay attention to pay
09:44attention to what goes right and wrong
09:45he pointed out like you know his
09:48portfolio construction was ex post facto
09:49right he looked back and said oh yeah I
09:52have a portfolio now that's awesome that
09:54doesn't mean it you have to do it that
09:56way
09:57budgets matter cheque size matters
09:59sectors matter etc and then Andreia
10:03talked about personal brand and how much
10:08that matters do not ignore that do not
10:12think that that every one of those folks
10:15isn't successful in particular because
10:17they have fantastic personal brands and
10:21I liked her laugh - Swiss is think like
10:22a boss that's back to what I was saying
10:25before about being professional and
10:26thinking through how you're how are you
10:27doing this and I think Ali had a little
10:32bit of a different perspective on things
10:34which is interesting he points out that
10:37so many of the great companies huge
10:40companies have been built on the backs
10:42by software founders were software
10:45engineers that's kind of interesting
10:47right
10:47I mean Microsoft Facebook Amazon Google
10:50Yahoo Netflix all of those there's a
10:52quite a bit of market cap you had those
10:54up together so it's something to think
10:56about think thinking about I guess we
10:59came up with our little little um
11:02aphorism at the end which is you want to
11:05look for the three B's right brilliant
11:07founders in big markets with ideas that
11:10seem bad right so today's the conclusion
11:15of start-up investor school I think it's
11:18gonna be a great day we're gonna start
11:20with Andy Bromberg who's going to talk
11:23about early stage investing and the past
11:25present the future he is the CEO of coin
11:29list the person who will answer every
11:33single one of your questions about the
11:37past president of future start investing
11:39and who has said for the first time he
11:43can give someone a product without them
11:44during whether they want it in advance
11:46the best guerilla marketing
11:48ever after Andy we're going to have
11:52Aaron Harris who's going to talk about
11:54being good you'll want to pay attention
11:56to that one and then our final guest is
12:00a special guest my friend Ron Conway
12:03who's probably the most famous investor
12:05angel investor ever so please welcome
12:07Andy Bromberg thank you all right good
12:16morning everyone see if we get this
12:17clicker to work nice alright my name is
12:22Andy Bromberg I'm the CEO and co-founder
12:23of coin list
12:24we are the platform we're the best
12:26digital asset companies are on their
12:27token sales and we're investors like
12:29hopefully you all find high-quality
12:31deals in the space but that is mostly
12:33not what I'm talking about today we're
12:36talking about the past present and
12:37future of early stage investing and
12:39we're gonna start with some trends that
12:42we'll see throughout the entire history
12:43of early stage investing move on to some
12:46history the early days of venture 19:40
12:491950 1960 1970 1980 the Middle Ages up
12:53to 2000 and then kind of recent history
12:56and going all the way to to the present
12:58and then go back to some trends and
13:00talking about that I think it's really
13:02important to talk about the history of
13:05venture to understand what's happening
13:06today a lot has happened in this space
13:08and it is a relatively new space
13:10relative to other industries talking 70
13:12or 80 years old and what has happened in
13:14the past really informs what's happening
13:16today and you'll see a lot of the same
13:18trends surface throughout all of these
13:20all these decades so some of the trends
13:24that we'll see over and over again
13:25talking about early stage investing
13:27first decreasing costs to start
13:30companies 1940 was very expensive start
13:32companies as we'll see today it's very
13:34cheap that cost is constantly going down
13:36second a decrease in cost to invest for
13:40investors like you all are for funds the
13:42cost to invest and the barrier to entry
13:44there has gotten lower and lower over
13:45time and we see that happen over and
13:47over again in this ecosystem and then
13:50the last is the arc of the market bends
13:52towards liquidity and we'll see this
13:54over time starting early and going all
13:56the way to now that liquidity and faster
13:58look
13:59quiddity is some of the markets always
14:00pushing towards now there's a there's a
14:02caveat here which is there are speed
14:03bumps and all these trends and certainly
14:05in the last few years we've seen the
14:07speed to liquidity go down we think
14:09that's going to revert back and we're
14:10gonna see that that come faster again
14:11and then the the kind of mega trend that
14:13we'll see through all of this in all of
14:14these inform is more and more capital
14:17being available to startups as it
14:19becomes easier to start companies and
14:20you see more and more companies being
14:21started and as it becomes cheaper to
14:23invest in companies and easier to invest
14:25in companies this availability massively
14:27increases which means more startups more
14:29people trying to change the world all
14:30the things we've been learning about for
14:31the past past few days so let's get into
14:35it 1942 1960s Jeff told me actually that
14:38when he talks about the history of
14:40venture capital he starts even earlier
14:41than this back around 1492 when as he
14:45says it Spain VC with with partners
14:47Isabella and and Ferdinand invested in
14:49Christopher Columbus labs on a on a
14:52venture to to find a new world they got
14:5590 percent of the equity in that company
14:57which is a great deal for them
14:59unfortunately for you all does not
15:00happen anymore
15:02but we're gonna skip you know four or
15:04five hundred years to the 1940s and
15:071950s when the first venture capital
15:09firms emerged and these are kind of the
15:11two that we talked about most often as
15:12the earliest ones jate Whitney and Coe
15:13and an ard see emerging in the 40s and a
15:18rdc really had what we consider to be
15:20the first venture win they invested in
15:22Digital Equipment Corporation and
15:24returned about 500x in 11 years there
15:28and that was the beginning of this trend
15:30towards our first kind of recognizable
15:33venture funds what we think of as
15:34venture funds today in the in the 1950s
15:401958 we saw small business investment
15:42companies which was legislation
15:44introduced by the US government which
15:45effectively pushed this forward they
15:47said if you want to start a company
15:49that's a venture fund as we would call
15:51it today will actually give you leverage
15:52will loan you money to invest in
15:54startups and allow that to increase and
15:56so that really pushed the industry
15:58forward way faster than it could have
15:59otherwise because there just wasn't
16:00capital available at that point to
16:02invest in startups and then you know as
16:05we look towards the early days some
16:07names you might recognize funded around
16:09this time Venrock Greylock Sutter Hill
16:11Draper and Johnson around
16:12and at the same time and we won't in
16:14this history the valley was coming into
16:15its own sooo soft Fairchild
16:17Semiconductor some of the first Silicon
16:19Valley companies were started around
16:20this time a couple other noteworthy
16:23things about this period one this is the
16:24first time we saw the two-and-twenty
16:26structure emerged so 2% management fee
16:2820% carry that hadn't really existed up
16:30until this point in private equity firms
16:32for the first time started using that
16:34structure we still obviously use that
16:35today for for a lot of venture funds and
16:38then and then briefly you know talking
16:40about what these deals look like in this
16:41period what we saw was that hundreds of
16:44thousands of dollars which is obviously
16:45even more in today's dollars was
16:47invested into these companies by the
16:49principles by friends by family before
16:51it ever got to a venture fund so we're
16:53not talking about having a product at
16:54the seed stage or having a really good
16:56deck or anything like that we're talking
16:58about something being out in the market
16:59and making money on the basis of having
17:01a lot of friends and family and
17:02principal investment going in so very
17:04high barrier to entry and what we'll see
17:06as we go through this is that that
17:07didn't change for 40 years we saw that
17:10for basically the first 40 years of
17:12venture you had to invest hundreds of
17:13thousands of dollars of your own money
17:14or scrounge it up from someone before a
17:17venture fund would invest in you and and
17:19that you know feeds into the trends that
17:20we were we were talking about earlier so
17:23we move into the 1970s you know some
17:26more names that you might recognize here
17:28KP Mayfield crv seven rows in Sequoia
17:30NEA all fun founded in this time they
17:33were different than they are today in
17:351970 CRV was a five million dollar fund
17:39and KP was a seven million dollar fund
17:41those are smaller than most investments
17:44those funds make today in raw dollars
17:45but that was the entire fund size at
17:47that point in the 1970s you know we also
17:50saw the emergence of angels in the 70s
17:52as a historical note here we think the
17:56term angels actually came about in the
17:571920s but it was obviously not in start
18:00a plan there it was for Broadway the
18:02first angels were theater angels who
18:04were investing in you know shows on
18:06Broadway to get them off the ground and
18:08allowed them to start to make money but
18:09we saw technology angels emerge in the
18:111970s for the first time and then some
18:14major companies in the 70s that you will
18:16certainly recognize Apple Genentech
18:18tandem Cray Compaq EA 70s to early 80s
18:22all of these companies were founded and
18:24obviously still massive success stories
18:26today and we started to see more and
18:28more funds being founded as you can see
18:30here and a lot of that was because
18:32angels which were emerging were becoming
18:35funds for the first time but that could
18:37only happen because there was capital
18:39available and what was happening in the
18:4070s to make that make that a trend start
18:43is that institutional capital was
18:46investing in venture for the very first
18:47time endowments and big corporations
18:50created a new thing called
18:52alternative assets that they were
18:53willing to put money into and they were
18:55investing non-traditional assets for the
18:57first time that included venture and so
18:59angels that had successful track records
19:00in the early 70s went on to found some
19:02of these funds on the basis of for the
19:04first time institutional capital being
19:07uh being available to them moving into
19:11the 1980s I've got a few charts here
19:14actually courtesy of a great website
19:16called reaction wheel that I recommend
19:17everyone check out some really good
19:18articles about the history of venture on
19:20there 1980s was a boom time for venture
19:24capital if you look at this number of
19:26funds by vintage year in the on the left
19:28side you've got the 60s and 70s and then
19:31that first big jump the third bar is
19:331980 and then it's year by year after
19:35that there were a few dozen funds in the
19:39early 80s there were more than 650 at
19:42the end of the 80s so that was really
19:44caused by this trend of more and more
19:47institutional capital being available
19:48and by this idea of just venture being
19:50an attractive asset class it hadn't been
19:52around for that long and people were
19:53realizing that there were crazy returns
19:55available to them if they started these
19:57these venture funds and so this was this
19:59was certainly boom times what's
20:01interesting here is that if you look
20:02back at kind of the mid 70s not a lot
20:04happened so we saw this early boom in
20:07the 50s and 60s and then 72 to 78 there
20:10weren't a lot of good deals it was kind
20:12of a low time for venture and then as we
20:14moved into the 80s some of those
20:15companies that I showed on the last
20:16slide started to get funded the the
20:18Krays and apples and Genentech's they
20:21got really interesting again and we saw
20:22literally hundreds of firms we started
20:24through the decade of the 80s but at the
20:28same time here's a chart of tech IPOs
20:30through the 80s 1980 on the Left 1990 on
20:33the right early 80s things look really
20:36good
20:371983 we had more than a
20:3950 technology IPOs and 1984 we were down
20:42at less than a third of that and it
20:44stayed down there for the rest of the
20:4580s deals were changing and these IPOs
20:50skyrocketed that fueled the rise in the
20:53number of funds and then as things
20:55trickled down towards the late 80s the
20:57market went down again certainly stock
20:59market crash affected that and the
21:02number of IPOs went down really really
21:05sharply secular trend in the 80s was
21:09that you needed to invest earlier so
21:11this is what I was talking about before
21:12that up until this point you had to
21:14invest hundreds of thousands of dollars
21:16of your own money to start a company but
21:18now there were 650 firms to get money
21:20from it was competitive those firms
21:22needed to beat each other to the deal
21:24Eugene kleiner had this quote that it's
21:26now a matter of weeks or even days to
21:28make up their minds because if they
21:30don't someone else will that was not
21:31true for the first 30 or 40 years of
21:33venture they could take their time they
21:35could take months to sight on a deal
21:36because there was just not a lot of
21:37capital available but as we moved into
21:39the 80s that capital skyrocketed deals
21:41became competitive and funds had to
21:43invest earlier and earlier to get the
21:44returns that they wanted because
21:46otherwise they would lose it on deals
21:47and and be left with with the losers in
21:52the 80s you'll also see the market
21:53bounce around a whole lot there was the
21:55rise of leveraged buyouts a lot of
21:57venture investments were actually made
21:58in slow growth consumer brands for the
22:0080s which was kind of an odd trend that
22:02happened but there was just so much
22:03capital coming up the ecosystem it had
22:05to be allocated somewhere and we saw it
22:07going to slow growth brands in addition
22:10to to fast growth startups and then of
22:13course at the end of the 80s the stock
22:14market crashed and that kept things down
22:17for a few years this is uh you know tech
22:21companies formed in the United States 80
22:22to 84 85 to 89 and and 90 to 93
22:26boom times in the 80s and as we got
22:29towards the 90s the stock market crashed
22:31amped everything down very very
22:33aggressively and and we did not see a
22:36lot of companies get found in the early
22:3790s but in the 90s we did get software
22:43and services and jondura funding Netflix
22:45and Amazon and for the first time we're
22:48seeing some of the recognizable software
22:50companies that we know today and the
22:52the movement towards funding that from
22:54from venture capital to give you a sense
22:57of what happened in the 90s in 1996 the
23:00venture industry as a whole had an AUM
23:03of about 12 billion dollars in the
23:05calendar year 2000
23:06LPS put a hundred and twenty billion
23:08dollars into venture so that's not that
23:11it went from 12 billion AUM 220 billion
23:14AUM in four years that's that the AUM
23:16was 12 billion and then in a single year
23:19they put in ten times that for it four
23:21years later so massive boom times in the
23:2490s in terms of capital availability
23:25going back to that trend of more and
23:27more capital always being available to
23:28these startups over time as we know in
23:31the 90s companies were getting backed
23:33because they could go public we saw this
23:35path to liquidity start to increase in
23:36people trying to get liquid very quickly
23:38companies starting and we've all heard
23:40the stories months or a year or two
23:42years later going public and and that
23:45was a big part of the driver of this
23:46this capital because they saw these
23:47immediate returns that they could put in
23:50the structure changed a lot Kerry
23:52changed funds were getting 30 sometimes
23:53even 40 percent carry on these deals
23:55because there was liquid so quickly and
23:58people couldn't put enough money into
23:59the space so the venture funds could
24:01start to do whatever they wanted and and
24:04take a lot more of the the economic
24:05upside these were boom times and and
24:08there was a bust and I actually won't
24:09dwell on the bust here we all know about
24:11it it's really not that interesting for
24:13the sake of think about the history of
24:14venture capital these markets are
24:16cyclical and we see that in early-stage
24:17fundraising in late stage fundraising
24:19but every once in a while there's a bust
24:21and there happen to be a really big one
24:22at the end of the 90s early 2000s and
24:25and then we we moved on and as we get to
24:29the 2000s things were okay but not great
24:34in the early 2000s 2002 to 2009 was
24:37about two hundred five billion invested
24:38in venture about 220 billion returned so
24:42not really the venture returns that were
24:43looking for although certainly some of
24:45those companies have since since
24:47returned more more capital there but
24:50things things cooled off for for a
24:52little bit there in the in the 2000s and
24:54then for the first time in a while
24:58we saw the rise of some new structures
25:01some new methods of funding and a new
25:04wave of
25:05of models 2005 YC this fine institution
25:10that we were standing in right now and
25:12then to six tech stars accelerator
25:15started to rise and this contributes
25:16again to this trend of the decreasing
25:18cost to start a company making it easier
25:20and easier to start a company and and
25:22there was certainly capital available
25:24for those companies obviously around the
25:29dot-com bubble bursting Angels went away
25:31in a large part because most people lost
25:33a lot of money that they would have
25:35otherwise invested but we saw the
25:36re-emergence in the mid 2000s leading up
25:38to 2008 and the and the recession when
25:41of course that got stamped out a little
25:43bit more again and this is a really
25:46important one for and and I think
25:49underrated in the history of venture
25:50capital which is the rise of convertible
25:51notes actually in a large part due to YC
25:54standardizing the terms and encouraging
25:56founders to raise money on convertible
25:57notes historically all of these deals
25:59have been done with just equity straight
26:02equity selling preferred stock but there
26:05are downsides to that as I'm sure you've
26:06talked about this week it's you have to
26:08close all at once you have to you know
26:11go through this extensive legal process
26:12you can't do these rolling closes and
26:14get things out there quickly and and YC
26:16work to standardize these terms and we
26:18saw the rise of convertible notes 2005
26:21to 2009 as as more companies started
26:24raising faster than the cost to start a
26:27company again went down thanks to thanks
26:30to that and then super angels and and
26:34micro VCS soft tech I know you heard
26:36from Jeff SV angel you hear from Ron a
26:38little bit lower case leases even seed
26:41funds first round capital really came
26:43into its own in the in the mid to late
26:452000s and and this was again just more
26:48capital early on and startups lives
26:49making it easier and easier to start a
26:51company early on
26:58some more trends in 2010 after the
27:00recession more angels more seed funds
27:02investing smaller and smaller amounts at
27:05the same time we saw seed rounds crest a
27:07million dollars for the first time and
27:08start started to be able to raise really
27:10meaningful amounts of money from early
27:11stage investors often before they had
27:14before they had real real traction in
27:16the in the market we saw a little bit of
27:20a reversion to preferred stock likely
27:24due to this increasing institutional
27:26capital at the early stage in the
27:28earlier 2000s most of the early stage
27:29seed capital was coming from angels who
27:32didn't really want to deal with legal
27:33docs on their own they were just
27:34investing their own money now we started
27:36to see those funds that I mentioned on
27:37an unless slide invest and and their
27:40preference was often for preferred stock
27:42early on and so we we saw this move back
27:44to preferred stock really just from
27:46about 2010 to 2013 there and then as the
27:50markets pushed towards driving this cost
27:53to start a company down platforms
27:55emerged for the first time really two
27:57categories here you've got platforms
28:00like Angelus that connect investors to
28:02or at least at that point connected
28:04investors to to startups and made it
28:06easier and easier to raise capital as
28:07well as easier and easier to invest in
28:10startups an angel has really
28:11democratized that process to a large
28:13degree as well as perks based funding so
28:16IndieGoGo and Kickstarter making it so
28:18that without actually raising equity you
28:20could raise early money obviously pebble
28:22is a phenomenal example from from around
28:24here that was able to really get this
28:27business off the ground without selling
28:28equity and raising enough money to do
28:30things like build hard Hardware in a
28:32time when when that really wasn't being
28:34funded effectively with with equity
28:36rounds and even a little bit more
28:42recently going to the 2010s in 2012 this
28:46is another underrated item in the
28:48history of early-stage fundraising the
28:50JOBS Act and then subsequent legislation
28:52over over the next couple years led to
28:55some really massive changes in the early
28:56stage funding ecosystem after 2008 all
29:00of securities law and investment
29:02advisory law got much much tighter and
29:04much harder to invest in things as the
29:06government imposed regulation to avoid
29:08or attempt to avoid recessions like that
29:11happening again
29:12except for venture venture is really the
29:14one class that got the exception to that
29:16you can argue whether or not that's
29:17because it was common sense in the
29:19government or if it's because the
29:21venture industry Lobby to really
29:22effectively but at the end of the day
29:23the JOBS Act came out and and and
29:26following a legislation and a few things
29:29came out of that one venture funds got
29:31this exemption from being a registered
29:33investment advisor which made it much
29:34easier to operate a venture fund and
29:36avoided going down the path of that
29:38becoming really heavily regulated
29:40we got general solicitation what we call
29:42506 C offerings where you can publish
29:45that a startup is raising on the
29:47internet and people can invest in that
29:48obviously angellist took took advantage
29:50of that in a pretty meaningful way 506 B
29:53got further solidified which is private
29:56non general solicitation fundraising and
29:58allowing that to be done in an easier
29:59fashion and an eventually crowdfunding
30:02what we call reg CF equity crowdfunding
30:04so the Kickstarter IndieGoGo model where
30:07anyone can vest in a startup but small
30:09amounts of money and and really lowering
30:12the bar to becoming an angel investor or
30:14startup investor and allowing more and
30:15more people to get stakes in these
30:17early-stage companies and again making
30:19it easier for startups to raise money
30:22around here as well we got angels got a
30:26no action letter from the SEC which made
30:27it much easier to run syndicates and do
30:29this general solicitation but really the
30:31early 2010's and going all the way to
30:34now have been a boom time for angels and
30:37making it easier and easier for angels
30:38to invest in startups we did see this
30:43this speed bump of liquidity times
30:45increasing as startups got some leverage
30:47and realized they could stay private
30:48longer we certainly think that's gonna
30:49revert as we move forward o speeding
30:55forward there see here in 2014
31:02YC created the safe which I'm sure
31:05you've heard about the simple agreement
31:06for future equity and we got back to
31:09convertible structures so we'd seen that
31:10rise of convertibles largely thanks to
31:13YC 2005 2009 reversion back to preferred
31:15stock and now with the standardization
31:17of of this document of real move back to
31:20convertible structures and the vast
31:22majority of startups today raised with
31:23either a safe or convertible
31:25but using a convertible structure and
31:27and the core idea there is that and the
31:29core difference or at least one of them
31:31between a safe and a more traditional
31:32convertible note is that safes don't
31:34have interest on them
31:35so most convertible notes that startups
31:37raise on say that you get a percentage
31:39point or two of interest every year and
31:41if your debt gets paid back or whatever
31:43you get a little bit more interest if
31:45you were investing in a start-up on the
31:47basis of a couple points of interest you
31:49were in the wrong game and wise he
31:51realized that said this is creating
31:52accounting nightmares there's no reason
31:53for this let's remove that term from
31:55this let's build a structure it's
31:57convertible without it being debt and
31:58and be able to to move back to this much
32:01easier faster a lower cost solution for
32:04raising early-stage money and then the
32:09latest and greatest 2017 really in its
32:13more profound sense we saw I SEOs
32:16initial coin offerings and I'll touch on
32:17them briefly here we can certainly talk
32:20more in the in the QA after but I SEOs
32:24are an incredible trend for early-stage
32:26fundraising it's this proliferation of
32:30companies going out that can raise money
32:32without meeting with people and that's
32:34such a new concept you heard yesterday
32:36about how to run effective founder
32:38meetings this is a world where companies
32:40don't even need to do that the cost to
32:42start a company is so low now you can
32:44create something put it out on the
32:46internet and have people invest in it
32:47online without ever talking to those
32:49people and that's not true in every case
32:51for every IC o---- and certainly as many
32:53of them still meet with with high
32:54quality funds and angels but it's this
32:57real move towards absolute
32:58democratization of investing in in
33:01early-stage startups and then I would
33:03argue that there's an even more recent
33:05trend than I SEOs in 2017 which is every
33:08one an angel and and there's a couple
33:10components here that I would talk about
33:12one is ICS so certainly I see us
33:15contribute to this idea that anyone can
33:17invest online in in these in these
33:20companies and get access because you
33:22don't need the company to give you
33:24access anymore for a lot of these deals
33:25they just fundraise and you invest and
33:28you get tokens or you get shafts or
33:30whatever you might be purchasing so
33:32anyone can do it without having access
33:33to those companies second platforms like
33:36Republic and equity table equity
33:38crowdfunding platform
33:39that allow actually anybody to invest in
33:41whether you're accredited or
33:43unaccredited in insecurity sales online
33:45again thanks to the JOBS Act and
33:47subsequent legislation and then things
33:50like this that you all are sitting here
33:52right now the idea that angels are
33:54getting educated and taught how to
33:56invest and learning and meeting each
33:58other and engaging in the community is
34:01is a really new trend historically
34:04that's been just word of mouth you've
34:05known someone who's an angel they've
34:06given you the tips but we're seeing this
34:08move towards education I would argue
34:10probably no or better than then here and
34:12and one more program to mention that I
34:14think is interesting is a program from a
34:16fund called Maiden Lane called spearhead
34:18which is giving founders education about
34:21how to become an angel investor and also
34:22giving them capital to invest leveraging
34:24their investment and I see real real
34:28similarities between what's happening
34:29now with everyone being an angel and the
34:31earliest days of venture capital which
34:33we were talking about earlier in the 40s
34:34and 50s when now there's this flood of
34:37new money coming in there's education
34:38becoming available and there's leverage
34:40being offered to people that are good at
34:41their jobs and so you know moving
34:43towards this and here the icos and
34:46everyone in angel process really speaks
34:48to this societal trend of the
34:50co-creative process that as companies
34:53are starting they need help getting
34:54started they need capital they need
34:56advice they need connections and and
34:58moving towards a place where angels and
35:00anyone can be helpful in that endeavor
35:02is certainly a big macro trend one thing
35:06I would note here just going back to the
35:07regulation is that in the same way we
35:09saw the JOBS Act in 2012 I wouldn't be
35:10surprised if the ICO industry needs
35:13something similar if there's a non
35:15exempt of safe harbor or some
35:16legislation around codifying some of the
35:19rules and guidelines around ICO
35:22ICO fundraising so where are we now
35:28what does the early stage fundraising
35:30ecosystem look like today there's normal
35:33seed fundraising which you've spent most
35:34of this week talking about mostly safes
35:37or convertible notes raised from
35:39accelerators seed funds angels like
35:41yourselves larger funds with with seed
35:43programs usually call it a million to
35:45two and a half million dollar rounds
35:46obviously we see outliers on either side
35:48of that as well and this is what we call
35:51what I would call normal seed
35:52fundraising
35:53but huh also this other thing token
35:56fundraising I see owes mostly raised on
36:00what are called saps
36:01simple agreements for future tokens you
36:03will note that that bears a real
36:04similarity to safe simple agreements for
36:07future equity its document really
36:09modeled off the YC safe structure except
36:13for tokens instead of equity mostly
36:15raised from hedge funds venture funds
36:17institutions and again angels you're
36:19putting money into these icos
36:21but they're they're raising ten to two
36:24hundred million dollars and so there's a
36:27question here of how we could be talking
36:31about these two early stage fundraising
36:32mechanisms where one is an order of
36:35magnitude or more more money than than
36:38the normal normal seed fund raising
36:39process so we'll talk briefly about this
36:43and again happy to answer questions
36:44about icos in the in the Q&A and a
36:46little bit more detail but what is what
36:48is going on here it's very different
36:50from equity investing and and you have
36:52to remember this
36:53you own part of a network not part of a
36:57company and I'll talk about what a token
36:59is in a second here but this is a really
37:01important distinction for a few reasons
37:02one governance when you're a equity
37:05holder and a company you're a
37:06shareholder you can vote on what that
37:08company does and you can be a part of
37:10that decision-making process not so for
37:13token holders except in token governance
37:16mechanisms but they don't own a stake in
37:18the company valuation is wildly
37:20different we can talk a lot about
37:22valuation how do you value these tokens
37:23it is not the same as seed fundraising
37:26obviously if you're if the normal seat
37:28valuation is 5 or 10 million dollars and
37:30a token company is raising 10 to 200
37:32million dollars those valuations cannot
37:35be done in the same way the investment
37:37processes I alluded to is very different
37:39all of a sudden you're not going and
37:41meeting with the company a few times
37:42going back and forth sitting down coming
37:43to terms and doing it most of the time
37:45you're reading information online and
37:47then choosing to invest in sending the
37:48money and so that's a very different
37:51investment process from normal seed
37:53fundraising and the future interactions
37:55are really different in the same way if
37:57you're an angel you probably get pretty
37:59personal investor updates and the
38:01founder might come to you and say I need
38:03help with this or ask for connections
38:05in a token world
38:07they often have hundreds or thousands of
38:09investors they aren't doing that for
38:10most of their investors maybe they do if
38:12you know them already and you've been a
38:14helpful angel to them kind of personally
38:16but if you're a normal ICO investor you
38:19are not getting that level of
38:20interaction with the founders of the
38:21network that that you invested in and
38:24then last of all exits so you talked
38:26about exit slot this week you know you
38:28wait five or seven or ten or more years
38:30and then you get a liquidity event but
38:33with tokens you're often liquid almost
38:35immediately maybe there's a little bit
38:37of a waiting period maybe their networks
38:38not quite live yet when you when you
38:39invest but at some point you're just
38:41liquid and now you're holding a liquid
38:43asset often months or a year after you
38:45invested and the decision-making there
38:47as to whether or not you exit at that
38:49point or hold even longer-term is very
38:51different from from normal seed
38:53investing where you're locked up and you
38:54you don't have a donor of a choice
38:57we could take ours on on all these
38:59differences one last thing I want to say
39:01on the ico front is people break down
39:04different categories of tokens
39:05differently but I tend to break it down
39:07into three categories one protocol
39:09tokens this is an example this would be
39:11aetherium where it's a platform that
39:15other tokens are built on top of so it's
39:17biggest value comes from being a place
39:18where other tokens use the protocol to
39:21build their own networks there's
39:23application tokens which are those
39:25tokens built on top of platforms like
39:26aetherium an example would be New Marais
39:28which is a distributed network of data
39:31scientists solving market optimization
39:33problems but a very specific use case
39:36there and then there's securities tokens
39:38or asset backed tokens where you take an
39:40existing security real estate or startup
39:43equity or something else and you put a
39:44token on top of it that represents that
39:46ownership I would say with icos a word
39:51of caution be careful it's a new
39:54industry it's a year old really and
39:56prices are a little bit irrational
39:58maybe norms aren't really set yet and so
40:01you know the markets young and and it
40:03should be treated as such I won't talk
40:08about tokens really quickly what is it
40:11token and I'll speed through this here
40:13but I think it's important to understand
40:15what you're buying when you're buying
40:16into an IC o tokens an incentive layer
40:19on top of a network so we
40:20like networks Facebook's and Network
40:22right it's a social network it's a
40:23series of nodes that are connected
40:24together and and now we can build an
40:27actual economic incentive layer on top
40:29of that network in layer markets on
40:31these decentralized networks but what
40:34what does that mean so let's talk about
40:37an example file coin which was created
40:38by protocol labs which is a YC company
40:41and it was the first sale that ran on
40:43coinless we were actually birthed out of
40:45the file coin sale and and the
40:48combination of protocol labs in angel oh
40:50so we have some some YC DNA in our in
40:53our company so file coin tries to solve
40:57this problem of storing files and the
41:00obvious solution to storing files is
41:02Amazon s3 which is I'm gonna go people
41:05want to store files I'm gonna go buy a
41:06bunch of servers then I will allow those
41:08people to pay me for storing their files
41:10on my servers great there's a couple
41:13things there one is you might not want a
41:15centralized party storing files they can
41:17censor what you're doing they might go
41:19down there's downtime possibilities
41:20there's all sorts of reasons to not like
41:21centralized systems and on top of that
41:24we've got an Airbnb situation here where
41:27there's actually abundant unused
41:28resources for storing files this empty
41:30hard drives everywhere that aren't
41:32strong files and could be used and so
41:35how could we try and fix that how we
41:37connect those two sides the market the
41:39simple and naive solution to that is put
41:42spyware on everyone's hard drives and
41:44monitor how much space they have and
41:46allow people to pay this centralized
41:47company to store files on unused hard
41:49drives but again you run into these
41:51centralization problems that there's
41:52censorship possibilities that there's a
41:55there's other potential downsides of
41:56having a central party and people just
41:58don't want spyware on their hard drives
41:59so the question is is there a way if
42:02Jeff has files to store and I have
42:04storage space in my computer to connect
42:06us in a trustless way without a central
42:09party involved and that's a hard problem
42:12because if Jeff has files to store and
42:14he sends them to me he needs to trust
42:16that I'm strong those files and that's
42:18not something we want to build in people
42:19don't always do the right thing it's a
42:21quibble the trustless Network and the
42:23way file coin has solved this and I'll
42:24oversimplify a little bit here actually
42:26a lot it's a very complicated technical
42:28system is with a really clever token and
42:31incentive model there's two pieces of
42:33this
42:34one is that when I offer to store files
42:36I have to take some file coin and do
42:39what's called staking them or bonding
42:41them so I take file coin and I put it
42:43out on the network I don't give it to
42:44anyone but it's basically an escrow and
42:46I'm saying I'm putting these out there
42:48if I get caught doing something bad not
42:50giving Jeff the reliability guarantees
42:51he needs not properly storing the files
42:53then I lose those tokens so I now have
42:56an incentive to do the right thing and
42:58actually act in the best interests of
43:00the network but now there's a second
43:03problem which is how do you make sure
43:04I'm doing the right thing without
43:05trusting someone to verify they're doing
43:07the right thing because I would just
43:08always say of course I'm strong as files
43:10they're always available and so the
43:12second element of the system is what
43:14they call the verifiers
43:15and the miners and so we could take all
43:18of you in this room and you could try
43:20and check if I'm storing the files
43:21correctly but how do we do that without
43:24actually giving you the files so one
43:27example you might do and they have a way
43:28more complicated and interesting thing
43:30called proof of space-time which they
43:32use is you could all go to Jeff and ask
43:35him if we're strong tax files
43:37what's the 40th one hundred one hundred
43:39and seventy second letter in your file
43:41and Jeff would say it's B it's a at C
43:44and then you come to me and you ask me
43:46the same questions and I say I've got B
43:48a and C and now all of a sudden when
43:50enough of you have done that we can get
43:52confidence that I'm actually storing the
43:54files correctly without you ever seeing
43:55those files because we have this
43:57distributed network of verifiers and you
43:59now need to be paid for this work so the
44:01network mines new tokens
44:03it's inflationary and gives you two that
44:05gives them to you for doing that work
44:06and at the end of the day we have this
44:09network of verifiers
44:10of people with storage space of people
44:13with files to store who are all
44:14connected none of us actually trusting
44:17each other but all of us incentivized to
44:19do the right thing
44:20and we've added this incentive layer on
44:22top of this network and we've built a
44:23market on top of it so now there's
44:25there's a value for these tokens and as
44:27a result of the work that's being done
44:28in the network and you can you can value
44:30those tokens that way certainly get into
44:33that more in QA but that is an example
44:35of what you're investing when you buy
44:36into the file coin sale or bought into
44:38the Falcone sale in August what you were
44:40buying is tokens on this network tokens
44:42that will be minted and inflated over
44:44time for verifiers and tokens they'll be
44:46used to transact
44:47on the network and token that will be
44:48used to stake as as stores on the
44:52network so really briefly what's next
44:58where we going and I think we just go
44:59back to the trends on this first of all
45:02continued search for liquidity and I
45:04think the the trends that we're seeing
45:05there are one tokens as we discussed
45:07often instant liquidity are very fast
45:09and moving towards faster and faster
45:11liquidity there as well as I think moves
45:13towards secondary trading and more and
45:14more equities secondaries being done in
45:16startups and the market pushing towards
45:18earlier liquidity second the trend
45:21continuing companies are going to be
45:24cheaper to start and cheaper to raise
45:26for platforms
45:27seed funds and angels legal automation
45:29and standardization Clerke a great YC
45:31company that uh that can help with that
45:33and and so we're gonna see it be cheaper
45:36and cheaper for companies to start and
45:37then as always easier for investors to
45:40invest tokens reg CF and crowdfunding
45:42506 B and C an education like we're like
45:46we're seeing here so these trends will
45:49continue as far as we can see liquidity
45:51and and cheaper and easier to start
45:53companies and raise for companies that
45:56is it early-stage fundraising past
45:58present and future thank you
46:00[Applause]
46:22all right questions about a our DC and
46:27the investing in the 50s yeah yes the
46:36question was can you invest in both
46:38equity and coins at the same time the
46:40answer to that is yes and in the same
46:42way we saw structures evolve in the 40s
46:4450 60 70 s we're gonna see the
46:46structures evolve in the IC o---- market
46:48there is I would just say the priors are
46:50so low on us haven't figured out the
46:52perfect IC o---- fundraising structure
46:54already we're a year into the market
46:56there's no way we've hit the right thing
46:57we're seeing a lot of investors push for
46:59equity in the company in addition to
47:01tokens you'll hear about the safety the
47:04simple agreement for future equity and
47:05tokens or people just raising on safes
47:09or convertible notes or equity with
47:11conditions in the company governance
47:13that you know they will also get pro
47:15rata shares of tokens and so it really
47:18but at this point it really depends on
47:19the company and an investors don't have
47:22a ton of leverage at this point in the
47:24cycle right now it's very very heavily
47:26weighted towards the companies but more
47:28and more companies are allowing you to
47:29invest in their equity in addition to
47:31tokens or investing in equity and at
47:34some point that equity converting into
47:35tokens as the network goes live
47:52first of all well the question was
47:54should you you know you were told
47:55earlier not to invest in companies
47:57without meetings and even video calls
47:58are probably not enough I am not telling
48:00you to invest in anything and in fact I
48:02would argue you should exercise a real
48:03discretion when investing in icos
48:05as it is such a new market but it's a
48:07very good question it's a trade-off and
48:09at this point the norms in seed and
48:13normal seed investing are such that if a
48:15company's not willing to give you a
48:16meeting or a video call at the very
48:18least there's probably something going
48:20on there unless it's the most hotly
48:22contested round in the world the
48:24founders don't have time that's a whole
48:25separate decision if they're not willing
48:26to meet with you that's a problem in the
48:29ICL market if you want to invest in the
48:31ico market and you want to see some of
48:33the returns that are possible in the ico
48:34market it's just a fact of life at this
48:36point in the cycle
48:37I think that'll change over time I think
48:39we'll see more bifurcation between
48:40really early IC arounds and later IC
48:42arounds where in the early rounds it'll
48:44look a lot more like traditional seed
48:46funding than it does today but you know
48:49at some point you just have to make a
48:51decision as to whether or not the the
48:53upside of investing the IC o---- market
48:55in the interest in doing so outweighs
48:57the downside of not getting the
48:58guarantees and the interactions that you
49:00want to have so Andy the purpose of the
49:03in-person meeting more than anything
49:05else is to get a sense of the quality of
49:07the founders and how are you to judge an
49:15IC o---- if you're if there's really I
49:18mean if there's thousands of investors
49:20you're not getting your in-person
49:21meeting how do you make that call if
49:23that's the main thing that's going to
49:25determine whether this this the the
49:28company underlying the IC o---- is going
49:32to be successful
49:32yeah it's the the billion ten billion
49:36trillion dollar question of how to
49:38evaluate an IC o---- you know the first
49:40thing I would say is some of the most
49:42success one of the most successful angel
49:45investments in the past decade was
49:47investing in Bitcoin and if you invested
49:50in Bitcoin when the first markets came
49:52out for Bitcoin in around 2010 2011 you
49:55have made returns unlike almost anything
49:57in the startup ecosystem I you could not
50:00have met with the founder of Bitcoin
50:01because the founder of Bitcoin is an
50:03thirdly pseudonymous and so you had to
50:05make a decision there on the basis of
50:07the future potential of the product you
50:09know a coin list when we think about
50:11evaluating these icos
50:13we look at things like technology we
50:16look at the backgrounds of the team we
50:18try and interact them as much as we can
50:19and there's a different mode of
50:20interaction so oftentimes these teams
50:22are available on their slack channels or
50:24their telegram groups and you can try
50:26and attract them it's not the same as an
50:27hour-long meeting or a couple meetings
50:29or a video call but you can get a sense
50:31for their quality and get a sense for
50:33their backgrounds you can read and see
50:34if they've actually developed some
50:35meaningful technology you can look and
50:37see how thoughtful they are about
50:38structuring the sale and then you know
50:41in what's probably heresy to say here
50:44follow-on investing in the ICO market is
50:46a real thing right now and you know the
50:48biggest funds will get access to these
50:50teams if one of the top crypto funds is
50:53investing in a sale and they're
50:54investing five or ten million dollars
50:55they are not doing that sight unseen
50:57they are getting access and so you can
50:59either try to get access through one of
51:00those funds or you can talk to those
51:02funds and get the sense for their
51:03diligence notes or if you want and I'm
51:05not recommending this you can follow
51:07them and what's maybe a little bit
51:10better in the ICO market about following
51:12good investors is that the time to
51:13liquidity is so much faster so at the
51:16very least you can get out quickly after
51:18the the token gets liquid that's not to
51:20say it's always gonna be a successful
51:21investment and the hype cycle is
51:23certainly high right now but at the end
51:25of the day looking at things like the
51:27technology the team their history of
51:29shipping product how they're structuring
51:30the deal as well as the people involved
51:32in the deal already that have gotten the
51:33chance to do really deep diligence those
51:35are some of the the key items that we
51:37look for so a question from out in
51:40cyberspace is around the around whether
51:46I SEOs and and and token investing is
51:52more of a u.s. thing an international
51:54thing or how should we think about about
51:56how global this new trend is yeah hello
52:00hello cyberspace the it's a good
52:03question the right now it is a very
52:06global phenomenon so about as much money
52:07has been raised by icos
52:09based in Europe as based in the United
52:10States was raised in ice shields in 2017
52:142017 saw
52:16couple billion raised in AI SEOs and it
52:21sounds like real money it's real money
52:23it is real money and and and the speed
52:25with which we've gotten to the real
52:27money phase of this ecosystem is
52:28incredible Bitcoin the original
52:30cryptocurrency is less than a decade old
52:32less than a decade old and we have
52:35already seen hundreds of billions of
52:36dollars of value created at least on
52:38paper in this market and billions of
52:40dollars of real capital put into the
52:42market and so when we look at that the
52:45scope one of the beautiful things about
52:47crypto is that it is global that anyone
52:49can start and anyone can send crypto
52:51anywhere now that has been truly
52:55accurate in the early Wild West days of
52:58crypto and icos as regulation starts to
53:00increase we will see a lot more
53:02restrictions put on the fundraising and
53:04on the activity by these tokens we could
53:06spend hours talking with a regulation
53:07here but you need to follow it and a lot
53:10of these tokens are securities and you
53:11need to follow relevant securities law
53:13but you know certainly it is still a
53:15global phenomenon and and we're seeing a
53:17ton of activity in Europe in Russia in
53:20China and Southeast Asia awesome more
53:22questions yes are there yes are there
53:33venture capital obvious are there crypto
53:34lobbyists there are absolutely venture
53:35capital lobbyists the the National
53:37Venture Capital Association as well as
53:39even kind of the Internet Association
53:41and some of the other entities out there
53:42are very active in in lobbying the
53:45government and I would make a very
53:46strong argument that the JOBS Act and
53:48all the good that it did for the
53:49ecosystem in 2012 and a lot of the
53:51subsequent legislation came from really
53:53smart and aggressive lobbying efforts by
53:56very smart and and connected people and
53:58on the crypto side there are some but
54:02not a lot you know we as great
54:05organizations like coin Center which is
54:07not a lobbying firm but it's an industry
54:08advocacy group based in DC that sends a
54:10lot of time educating our legislators
54:13and other folks in government as well as
54:15a few lobbying shops popping up but I
54:16think especially given the the attention
54:19given to regulation in the space we will
54:21see way more lobbying happening in
54:23crypto and in venture capital over the
54:25coming years Susan
54:51so the question is whether YC has
54:54considered modifying the safe to somehow
54:57take into account of future ICO by the
55:02company so we're thinking a lot about
55:05the implication of ICO s and we think
55:08about modifying the SAF all the time
55:11unfortunately every single modifier we
55:15ever think about would require us to
55:16take the s away and make it an agreement
55:19for future equity but it will not be
55:20simple and imagining trying to account
55:24for what an ICO might mean when nobody
55:28knows that and that's the hard truth is
55:30what does it mean to own equity and
55:32token how do the two different asset
55:36classes interact clash what happens in
55:39conflict is is unknown so yeah we think
55:44we think there's going to be evolutions
55:46and changes here but we don't know what
55:48they are so it's premature for us to
55:49make any changes actually could I just
55:52touch on that really quickly to go back
55:53to the earlier question about equity and
55:55tokens there's a question of in a token
55:58world
55:59what does owning equity in a company
56:00mean if the networks built well we would
56:03argue that no value actually accrues to
56:05the company itself the purpose of the
56:07token is to remove the centralized party
56:09and so the the company itself that the
56:12LLC of the corporation shouldn't get
56:14transaction fees they shouldn't get
56:15subscription fees they shouldn't be
56:17rent-seeking on the network so what that
56:19company becomes is an investment company
56:21that company holds tokens so protocol
56:24labs holds a bunch of file coin tokens
56:26and in theory these companies as they
56:29develop the networks and release these
56:30networks out into the wild sure they may
56:32still help with ongoing maintenance of
56:34the network they may help with
56:35contributing code to it but they should
56:37next be getting any any rent from the
56:39network they shouldn't be getting fees
56:40in any way and so owning equity in the
56:42company if they do a successful token
56:44sale may actually just be the same as
56:47owning tokens because the company's only
56:49value will come from sure a little bit
56:51from a small team but then mainly from a
56:54holding of tokens that you know
56:55hopefully increases over time so if I
56:57can translate and you know when when
57:01Eddie's talked about the future might
57:02bring maybe this means equity of app
57:04doesn't exist anymore so you can just
57:08forget about these last four days yeah
57:26yeah the question was you know where
57:28does the interest in in the history of
57:30venture capital come from and you know I
57:32would really answer that as why is that
57:34interesting and important and I think it
57:37really goes to if we think about the the
57:40token ecosystem right now and I
57:41mentioned this a few times the
57:42presentation there are a lot of
57:44parallels to how this is evolving over
57:46time and as you look at the rise of
57:48cryptocurrency funds we're seeing a lot
57:50of parallels to the early hedge fund
57:52industry as you look at the rise of
57:53token fundraising we see a lot of
57:54parallels to the early fundraising
57:56industry and I think the most important
57:59thing as in all these things we're all
58:01striving to do in this startup ecosystem
58:03is to skate to where the puck is going
58:05and if we sit and look at where things
58:07are right now that's not that
58:09interesting they're not going to stay
58:10there that's not where the really
58:11successful products and investments are
58:13made they're made by looking into the
58:15future and realizing how these things
58:16are gonna be structured in a year or two
58:17years five years ten years twenty years
58:19and I don't think there's really a
58:23better way to think about the future
58:25than by looking at the past and seeing
58:27how those trends changed and trying to
58:29think about how those might apply in the
58:30future so for me that the interest comes
58:32from trying to understand how the
58:34venture capital industry is gonna evolve
58:36how the token industry is going to
58:37evolve and and be people to the punch
58:39there by looking at the past and then
58:41thinking critically about the future
58:42what an interesting conversation we've
58:46been having is about liquidity and you
58:49mentioned George Torrio's of ard sees
58:53investment in in in Dec which in 11
58:58years later yield at a 500x return
59:01interestingly Dropbox is going public
59:04this year just 11 years afterwards and
59:08it turns out that the slower liquidity
59:13is usually the bigger returns you get so
59:17is it a positive thing that we have this
59:18trend towards faster liquidity yeah I
59:22think it's a really interesting question
59:24as with anything there are pros and cons
59:25to the markets moving like that and the
59:29I would say there's even setting aside
59:32returns because I think that you know
59:35the longer liquidity may lead to greater
59:38returns at the moment of liquidity but
59:39if the company continues to be
59:40successful in the public markets and you
59:42wait out for a longer liquidity timeline
59:44you may make just as much money as if
59:45they had stayed private that whole time
59:46but there are other considerations here
59:49too and one of them for which is really
59:51big for token companies right now is
59:53that do you want your big dollar
59:55investors to be liquid right after they
59:58invest they might get out and one of the
01:00:01greatest things about having early stage
01:00:03investors in your company is them
01:00:04supporting you all through the lifecycle
01:00:06in venture it just so happens that's
01:00:08forced they don't have a choice
01:00:10once you invest it's really hard to get
01:00:11out and so you're stuck with the company
01:00:13through its ups and downs and as
01:00:15everyone here is as seen companies go
01:00:18through ups and downs and it's often
01:00:20worthwhile not often in the in the right
01:00:22cases that it's worthwhile to stick
01:00:23through those ups and downs companies
01:00:26can be killed prematurely by early
01:00:28liquidity and so that's what I would say
01:00:29is the real downside of this liquidity
01:00:30trend is if a company has a down time
01:00:33the market has a down time all of its
01:00:35biggest investors exit that drives the
01:00:38price down that can kill the company and
01:00:40so what we're seeing that in the token
01:00:42market is that even though tokens in
01:00:44general are liquid much faster early
01:00:47investors are offering locked up now and
01:00:48it's probably not for long enough yet
01:00:50it's for a year or two years or 18
01:00:52months but I think we'll see a trend
01:00:54towards sure the market trend is towards
01:00:56liquidity the tokens will be live people
01:00:58can buy and sell and trade and move
01:01:00around but early investors will be
01:01:02locked up for a long time because you
01:01:03need that support and you need that base
01:01:05of investors to stay with you and
01:01:07support the company and in fact file
01:01:08coin did precisely that absolutely yep a
01:01:10great example okay we'll take a couple
01:01:12more questions and we will have a quick
01:01:13break yet
01:01:22it's another trillion-dollar question
01:01:24the question was a not a problem right
01:01:27now but how do you do a second round in
01:01:30the token world not I don't have a great
01:01:34answer for that question other than to
01:01:36to say that the the crypto world answer
01:01:39to that question if I were to represent
01:01:40the whole community is you shouldn't
01:01:42ever do one and the reason for that is
01:01:45that and this goes back to what I was
01:01:47saying earlier the idealized kind of
01:01:50platonic form of an ICO is raise enough
01:01:53money to release this network release
01:01:55the network and then it is not yours
01:01:57anymore
01:01:58it is the world's and and you may be
01:02:01incentivized by you know Holdings that
01:02:05you have of that token to continue
01:02:08developing it as the as the network
01:02:09developer but you're no longer in need
01:02:12of the company having money and so the
01:02:15the argument that people would make is
01:02:16that in this perfect world you you just
01:02:20don't need to raise again you raise
01:02:21enough to launch it you launch it you
01:02:22put it out there you develop it over
01:02:23time or at some point you might give up
01:02:26on developing it and someone else takes
01:02:27it over or someone might fork the
01:02:29network and start a new trend of it but
01:02:32at the end of the day you shouldn't need
01:02:34to raise a second round the reality of
01:02:36the situation is that a massive number
01:02:38of token companies are going to crash
01:02:41and burn because they've run out of
01:02:42money and and their network will never
01:02:45really reach its potential so perhaps
01:02:47there are ways where we can start to
01:02:49build the entrenched fundraising either
01:02:51scheduled or unscheduled or allow for
01:02:54more support for it for later raises but
01:02:56the ideal form does not involve ever
01:02:58raising again after your first raise
01:02:59okay do we have a last question
01:03:27absolutely yes the question is IPOs icos
01:03:31might be similar in some ways but with a
01:03:33nuanced perspective of the initial price
01:03:36matters and how can we use what what we
01:03:39have learned in the IPO market to
01:03:40support the ICO market not causing crazy
01:03:43fluctuations in price early on a couple
01:03:46pieces one and and this is not what you
01:03:48were saying but just to correct a
01:03:49misconception that other people have I
01:03:51don't think I see is there anything like
01:03:53IPOs I think it's a really actually
01:03:54unfortunate naming convention that we
01:03:56have called them the same thing they're
01:03:59much more similar to seed fundraising
01:04:01that's all we drew the parallels up
01:04:02there between those two things i POS
01:04:04happen when a company's mature they have
01:04:06a million disclosures to make they've
01:04:07got revenue they're supported and and
01:04:10that's just not the case with icos
01:04:11they're much more similar to early stage
01:04:13seed financing of companies recognizing
01:04:16that that's not what you said there are
01:04:17still some similarities you know and and
01:04:19we've gotten really good as a market at
01:04:21stabilizing IPO prices for the most part
01:04:24there are always exceptions through a
01:04:26variety of things green shoes and
01:04:28different mechanisms around the the IPO
01:04:29I think that one piece that will be
01:04:33critical here is the divide between
01:04:36really two types of I SEOs there are
01:04:39sales of securities which I would argue
01:04:41is almost everything that has been sold
01:04:43so far and these things are illiquid so
01:04:45most these securities are offered under
01:04:47what's called a reg d offering which is
01:04:48the same way most of us raise money
01:04:50which means that the security is
01:04:52actually locked up for a year so once
01:04:53you buy it you actually can't sell it
01:04:55for a year the network might go live and
01:04:58you might have liquidity at that point
01:04:59but that's well after the IC o---- and
01:05:01so the in those cases it's actually not
01:05:04a huge consideration you buy once you
01:05:06wait a while and then a market gets
01:05:07created and you start to sell into that
01:05:08market the other case is direct icos
01:05:12where you're actually buying the token
01:05:13as it is live and then immediately
01:05:15starting to trade it I don't think we
01:05:18figured out good mechanisms for that I
01:05:19think there are smart things to do
01:05:21reserving tokens trying to support the
01:05:23market I think there will be investment
01:05:25banks built around concepts like this
01:05:27but I also think that that latter class
01:05:29is going to be so rare because I think
01:05:31that what will happen is that the
01:05:33regulators are going to say these are
01:05:35almost all securities you can't just
01:05:37sell these tokens to anyone on the
01:05:38public markets you've got to treat them
01:05:40properly and
01:05:41and when you treat them properly there
01:05:43are built-in protections against you
01:05:45know price fluctuations early on because
01:05:47they're lock ups on on securities once
01:05:48you bought them awesome thank you so
01:05:50much Andy
01:05:51thank you okay ten minute break grab
01:05:58some coffee arrest
01:06:07you
01:18:39or they're still eating
01:18:54I can hear them in there
01:19:22all right who thinks we should dedicate
01:19:26more time to Q&A in these things anyone
01:19:30is it about right okay I feel like that
01:19:35QA could have gone on for another 45
01:19:37minutes easily a lot of questions around
01:19:42icos in the future but I guess that's
01:19:46natural okay people are filtering back
01:19:51in
01:20:03so as we're concluding a course in
01:20:10start-up investing
01:20:13we're gonna focus on probably the most
01:20:19important aspect of being a great angel
01:20:26investor and that's how to be good
01:20:33interestingly it's not a neutral
01:20:35question it's the most important
01:20:38question that you're gonna have to ask
01:20:40yourself as you have decisions to make
01:20:42as you do investments and things happen
01:20:45things always happen sometimes not great
01:20:47things and you have to decide how you're
01:20:49going to act my good friend and partner
01:20:53Aaron Harris is going to walk us through
01:20:57what it means to be a good investor he
01:21:01knows a lot about this he has started
01:21:02companies he has been an investor
01:21:04himself many times and he's been a YC
01:21:06partner for five years now is that right
01:21:10five years so he has seen thousands of
01:21:12companies like the rest of us Aaron you
01:21:19should note as you listen to him has
01:21:21said that experts are generally right
01:21:26until they're wrong Aaron
01:21:35thanks Jeff thankfully I don't consider
01:21:39myself an expert and much I don't know
01:21:42if that means I'm right more wrong more
01:21:43but alright so let's get this started
01:21:49so when Jeff and I talked about this
01:21:52idea of doing a session on how to be a
01:21:54good investor I thought about it for a
01:21:56while and realize there's actually a
01:21:58definitional challenge here in
01:22:02questioning what the word good actually
01:22:06means in the context of being an
01:22:07investor and one of these is really
01:22:09obvious you think of good investors you
01:22:11think of people who make lots and lots
01:22:12of money right you generate returns
01:22:14that's the goal of being an investor
01:22:16that's what we expect when we hear
01:22:18someone is a good investor but in
01:22:21startups particularly there's another
01:22:24definition that I'd argue is actually
01:22:27more important than just generating
01:22:29returns and that's in your reputation
01:22:34now it seems a little strange that
01:22:36reputation is something we think about
01:22:38because when we think about investing we
01:22:40tend to think about money because you
01:22:43give money to generate returns that's
01:22:45about that's how markets work right
01:22:47that's taking risk but reputation
01:22:50actually drives your returns when it
01:22:52comes to investing in startups and
01:22:54here's why in public markets it doesn't
01:23:00matter who you are you can buy the stock
01:23:02this is why a lot of hedge fund bosses
01:23:05are doesn't matter they make
01:23:08lots and lots of money no matter what
01:23:09they do and so you hear ridiculous
01:23:11stories about the things that they do
01:23:12and the way that they mistreat people I
01:23:14know a little bit about this because I
01:23:16worked on Wall Street for four years and
01:23:17I can tell you that inside of a standard
01:23:20investment bank where many of my friends
01:23:22worked and where I worked we never
01:23:25really thought of the people we worked
01:23:27for as people we liked or wanted to hang
01:23:30out with they were simply good at doing
01:23:32deals and making money and the same is
01:23:34true across the hedge fund world but
01:23:35it's not true when it comes to startups
01:23:38and that's because this isn't an open
01:23:41market and the supply and demand of
01:23:43investors to good startups aren't
01:23:46matched in an opening
01:23:47exchange there is nowhere where you can
01:23:50go and buy access at your discretion in
01:23:54any startup that comes out of YC now
01:23:57obviously this is changing a little bit
01:23:59when it comes to IC OS but even in IC OS
01:24:01if you want to get in on the pre sale or
01:24:04the pre presale or the pre pre pre pre
01:24:06pre sale you're going to have to know
01:24:09someone and I've watched the way these
01:24:11networks have developed even in that
01:24:12space and what you see happening is
01:24:15people with good reputations get the
01:24:17best prices and get in on the best and
01:24:19most oversubscribed deals this is
01:24:23particularly true for hot companies for
01:24:26the good startups the great startups
01:24:28this is a little tricky because as
01:24:31people have talked about this week you
01:24:33don't really know who the good ones are
01:24:34ahead of time and often a rush of
01:24:37investors towards a startup is a contra
01:24:40indicator of that startups long-term
01:24:41success however you have to go with what
01:24:44you can see at any given point in time
01:24:46and if there is a deal that you want to
01:24:49get into you need to find ways to
01:24:51advantage yourself to get into that deal
01:24:53and that's why you need your advantage
01:24:57when it comes to investing in companies
01:24:59and I think that that advantage is
01:25:01primarily a function of how good your
01:25:04reputation is here this is how this kind
01:25:07of works being good is directly
01:25:11correlated to your deal flow so let's
01:25:14say you get your first investment what's
01:25:15your job with that investment as an
01:25:17angel well because again these aren't
01:25:20massive public companies that are immune
01:25:22to your help your goal as an angel
01:25:25investor is to improve the likelihood of
01:25:28that startups success
01:25:31can you help that company be really
01:25:35really really good yeah I forgot to
01:25:39advance that sorry if you can do this if
01:25:44you can help companies do better the
01:25:47founders will talk about you there just
01:25:48aren't that many founders in the world
01:25:50who are completely unnecessary so if
01:25:53there is a rumor out there that you're
01:25:55really helpful then you'll get more
01:25:57deals and if you get more deals then
01:25:59you'll have more opportunities to help
01:26:01companies succeed and if you help
01:26:03companies more companies succeed then
01:26:05you'll see more deals it's recursive
01:26:07loop as you do this more you get better
01:26:10at it and more companies talk about you
01:26:13of course the opposite is true if you
01:26:16screw this pattern up if you're seen as
01:26:18someone who hurts the companies then
01:26:20your deal flow will dry up I know this
01:26:24very very well because I had investors
01:26:27who were not very good to me who did
01:26:30things that I would consider to be bad
01:26:31they don't get many invitations to demo
01:26:34day
01:26:34I think L odd said yesterday that there
01:26:37was an investor who like tried to screw
01:26:39him on his acquisition or his sale of
01:26:43his company and Jeff was his quote I'll
01:26:45never work with him again
01:26:46yeah founders have long memories and
01:26:52startups are a small world so remember
01:26:55this this thing reinforces on itself in
01:26:58either direction and it can happen very
01:27:00very quickly so if you want to do this
01:27:04thing if you want to be good if you want
01:27:06to increase the likelihood of success of
01:27:07companies and get more deals how do you
01:27:10do it in my mind there are four places
01:27:13at which you have the opportunity to
01:27:15demonstrate that you are good to a
01:27:17founder through the course of and
01:27:19through an investment and those four
01:27:21stages are before you make the
01:27:24investment which is in sourcing your
01:27:26deals during when you're meeting the
01:27:29founders for the first time and
01:27:30negotiating the terms of your investment
01:27:32as you transition into being from being
01:27:37a pursuer to an actual investor or from
01:27:40an investor into a shareholder which is
01:27:43closing the deal and then after the deal
01:27:46is closed which is your ongoing
01:27:47relationship with the company at each of
01:27:50these places you have the opportunity to
01:27:53become helpful and to become good so
01:27:57let's go through these one by one how do
01:28:01you source deals well what do you do
01:28:04it's important to find out good places
01:28:07to locate investments I highly recommend
01:28:09demo day will bring out about a hundred
01:28:12and fifty companies all in one day you
01:28:14can do all of your
01:28:15sourcing for six months at one demo day
01:28:18but you know that you want to try to get
01:28:21an edge in that relationship and so what
01:28:23a lot of people do is they'll start
01:28:25emailing founders they'll find a list
01:28:27they'll find a founder who knows a
01:28:28founder who knows a founder who knows a
01:28:29founder who's brother heard that a
01:28:31founder was in YC and they'll email that
01:28:33person and maybe that founder won't
01:28:36respond because they're busy and then
01:28:39the investor has a choice and it's a
01:28:42pretty stark choice they can either a
01:28:45respect the founders decision that they
01:28:48don't want to talk right now and
01:28:49politely email back and say hey I know
01:28:52you're busy is it okay if I keep
01:28:54following up and find a time when you're
01:28:56not so busy to me that's great or they
01:29:00can start pestering the founder they can
01:29:02start stalking the founder and showing
01:29:04up at coffee shops they can drive around
01:29:06the circle here on pioneer Way hoping
01:29:08that a founder comes out of the building
01:29:09such that they can talk to them these
01:29:12things have happened we've had investors
01:29:15literally hanging around outside the
01:29:17door in the hopes that they'll find some
01:29:19founder that they want to meet don't do
01:29:21that not only is it creepy it's unlikely
01:29:27to endear you to the founder in a way
01:29:29that will get you the deal that you want
01:29:31and this is weird because you think oh I
01:29:34need to be persistent I need to do
01:29:35everything if I do everything I'll win
01:29:37I'll get the deal that's not how it
01:29:39works when the company is need capital
01:29:42they tend to go looking for it if you do
01:29:48end up sourcing a deal and you make that
01:29:50first contact and you go and have a
01:29:52conversation with someone there are some
01:29:54pretty easy etiquette rules when you
01:29:57meet with the founder the first is you
01:30:00need to respect their time do not ask
01:30:02for a three-hour meeting for for a new
01:30:05company if the founder says yes I can
01:30:07meet keep it to half an hour if the
01:30:09relationship is good if things are going
01:30:11well then you can make it more than that
01:30:12if you go out for coffee or a meal you
01:30:17pay my friend Bubba maracas who was one
01:30:20of my angel investors and has also been
01:30:23a professional investor for quite a
01:30:24while
01:30:25gave me a great rule of thumb if an
01:30:27investor meets with the
01:30:28founder the founder pit the investor
01:30:30pays if two investors go out whoever has
01:30:33the higher AUM pace I think it's a
01:30:37really great rule of thumb and I use it
01:30:39all the time and you should do this
01:30:41because it doesn't matter whether or not
01:30:44the founder is wealthy or poor it
01:30:47doesn't matter whether or not the
01:30:49founder owns the coffee-shop you're in
01:30:51it doesn't matter if the founder bought
01:30:54really nice avocado toast and all you
01:30:57got was a cup of tea you are trying to
01:31:00be good to this founder and show that
01:31:02you want to help them and if you're
01:31:04discussing the idea of giving that
01:31:06founder five ten fifteen hundred
01:31:08thousand dollars what the hell is a
01:31:10price of coffee a cup of coffee right go
01:31:13the extra distance to show that you want
01:31:16to help that founder they will remember
01:31:18it and they'll tell stories about you if
01:31:20you don't now meeting and negotiating
01:31:24again respect the founders time right so
01:31:27in that meeting when you're talking to
01:31:28them as that conversation develops
01:31:30you're gonna ask questions and they're
01:31:32gonna have the answers to some of the
01:31:34questions and they're not going to have
01:31:36the answers to other questions that's
01:31:38okay in all likelihood it's a brand new
01:31:41company that doesn't know all the
01:31:43answers and if you expect them to know
01:31:45everything you will be sorely
01:31:47disappointed and the founder says no to
01:31:50a question or says I don't know it's
01:31:53okay to ask once or twice in slightly
01:31:54different ways to see if you can get the
01:31:56information but don't ask
01:31:5715 times this is a way to certainly
01:32:00annoy the founder and probably push on
01:32:02something that they might wish they knew
01:32:04but might be completely irrelevant when
01:32:07you're speaking to that founder focus on
01:32:09the founder this is really hard to do in
01:32:11something like a cocktail hour after
01:32:14demo day
01:32:14where there's all these other founders
01:32:16going around any of them might be
01:32:18starting a multi-billion dollar company
01:32:20and so what you do is you're talking to
01:32:22someone you're talking you're talking
01:32:23who who's that over there
01:32:24can I and you sort of start walking away
01:32:27as the persons talking to you this is
01:32:29just basic human conversation stuff
01:32:31which people often get wrong don't do
01:32:34that
01:32:35focus on the person you're talking to
01:32:36give them your time because they might
01:32:39be an incredible founder and you might
01:32:40want to get into the deal and they will
01:32:42remember if you were a jerk to them now
01:32:49when you're discussing what it is you
01:32:51want to invest you need to understand
01:32:53the terms understand what you're asking
01:32:56for what it means and what's okay one of
01:33:01the challenges here is that a lot of
01:33:02this stuff is pretty opaque which is why
01:33:04we're doing investor school we're
01:33:06talking about what each of the terms in
01:33:08a safe means what a cap is what a
01:33:11liquidation preference is by the way
01:33:13don't ask for those in angel investments
01:33:15I saw an investor just last week agree
01:33:20to terms with a founder a standard safe
01:33:22they were going through the motions okay
01:33:24sending back and forth oh we send you
01:33:25safe okay great great great and then the
01:33:27investor sent back an email hey just one
01:33:30last thing and listed ten demands
01:33:32including a board seat 2x participating
01:33:36preferred dragged along rights right to
01:33:40block a sale I can't remember the other
01:33:44ones and the founder came to me and said
01:33:46what do we do we had an agreement you
01:33:49know for all this money which we do I
01:33:51said walk away there are other investors
01:33:53out there and this is a bad investor and
01:33:56enter it your friends right it's pretty
01:34:00open secret that YC has an investor
01:34:02database this information goes into the
01:34:04investor database and those investors
01:34:07don't get a lot of deal flow afterwards
01:34:10when you're in this negotiation it is
01:34:14natural for one side to have more
01:34:16leverage than the other that's fine
01:34:18that's how negotiations work understand
01:34:21where the balance of leverage is use it
01:34:24wisely and don't push it too far this is
01:34:29something that will come up again and
01:34:30again in your relationships with with
01:34:32founders there are always unexplored
01:34:36pockets of
01:34:37probably that you could get if you
01:34:40pushed beyond what seems appropriate it
01:34:44seems like the right decision in the
01:34:45micro it's the wrong long-term decision
01:34:49because you're trying to do more than
01:34:52one deal over time and it is unlikely
01:34:54that any small thing you do that a tiny
01:34:57tiny bit more ownership that you get in
01:34:59one deal is going to be the difference
01:35:01between greatness and badness over the
01:35:04arc of your career as an angel investor
01:35:08always negotiate in good faith if you
01:35:11say you're gonna do something do it and
01:35:13if you are negotiating with someone do
01:35:16it with the intention that you're
01:35:17actually negotiating for a reason one of
01:35:20the worst things that fat that investors
01:35:22do and we tell all of our founders about
01:35:23this is to avoid investors who are
01:35:27negotiating to the point where they can
01:35:28find out if other people are investing
01:35:30and this is this weird thing they'll say
01:35:32oh yeah you know I want to invest it and
01:35:34that this term in this term oh who else
01:35:35is investing nah it's cool no just tell
01:35:38me like what else can you tell me and
01:35:42they will only make a decision if they
01:35:44see a lot of other investors have come
01:35:45in this is terrible idea for two reasons
01:35:47one groupthink usually leads to bad
01:35:49decisions and two as I've seen again and
01:35:53again over the last few years some of
01:35:54the best companies that have come out of
01:35:56Y C's demo day have been the ones that
01:35:59didn't attract all of the investor
01:36:01interest and it's the investors who
01:36:03think differently and go against the
01:36:05curve and find the things that they
01:36:06genuinely find interesting regardless of
01:36:08what other people do they find not only
01:36:10companies that are going to do
01:36:11incredibly well they get in at better
01:36:14prices and they get more ownership and
01:36:16we remember that remember the smart
01:36:18founders I look back and I say oh wow
01:36:19those guys are a lot smarter than I
01:36:21thought
01:36:21and I start to send them things I say
01:36:24hey you should look at this one it's a
01:36:25lot like this other deal that you did
01:36:27other people are not smart enough to
01:36:29look at this but you are that's great
01:36:30that's the position you want to be and
01:36:33finally when you do finish a negotiation
01:36:36and you do agree to something I don't
01:36:39care if it's a handshake I don't care if
01:36:41it's verbal I don't care if it's in an
01:36:43email or a contract your word is your
01:36:47bond this is something we drill into our
01:36:50founders
01:36:51if you agree to something that agreement
01:36:53is final I understand that there can be
01:36:56circumstances in which something wasn't
01:36:58revealed which there's material new
01:36:59information that changes the agreement
01:37:02that's okay but do not break a handshake
01:37:06everyone will know it will not stay
01:37:09secret and people will understand that
01:37:11you are not someone to be trusted and
01:37:13you're trying to start a trusted
01:37:14relationship let's see you finish
01:37:24negotiation you're all done everyone's
01:37:27agreed everyone's happy
01:37:29what happens next as soon as you agree
01:37:35to terms say to the founder great can
01:37:40you send me Docs
01:37:41if the founder is slow in sending you
01:37:44Docs follow up and say hey can you send
01:37:47me those Docs this is when it's okay to
01:37:49be pushy you are a shareholder now where
01:37:51you should be get the docs signed and as
01:37:54soon as you sign them send the wire
01:37:56don't even get up from your computer use
01:37:58hello sign or Clerke or whatever you're
01:38:00using sign and immediately open your
01:38:03goldman sachs wealth management account
01:38:06i'll call your guy that smith barney
01:38:09that stole thing no okay and get them to
01:38:14wire the money to the account as soon as
01:38:16possible and as soon as you do call all
01:38:20your friends who also are trying to
01:38:22figure out where to put money and get
01:38:24them in on the deal bring a coalition
01:38:27bring a syndicate with you bring really
01:38:29helpful investors as the founder needs
01:38:32to say hey Aaron thanks for letting me
01:38:35put twenty five thousand dollars in I
01:38:36know you guys are trying to raise a half
01:38:38million more I have five people who I
01:38:40worked with or who I know who are
01:38:43awesome for your business for this
01:38:44reason this reason in this reason they
01:38:45typically invest $25,000 of fifty
01:38:47thousand dollars a piece can I get them
01:38:49in as the founder says yes immediately
01:38:52send the emails make the phone calls and
01:38:53bring those people in everyone remembers
01:38:56that and this is the reverse of saying
01:38:58hey let me invest and I'll figure out
01:39:02money late like I promise I'll find you
01:39:04some other people
01:39:05but I'm not gonna invest until they come
01:39:07in you invest first you lead and then
01:39:09bring the other people in that's a great
01:39:11way to set off your relationship on a
01:39:13good foot on a good foot and then get
01:39:17the hell out of the way there's this
01:39:19thing that investors want to do during a
01:39:21fundraising process where they've
01:39:23invested they now feel as if they are
01:39:24the CEO this is particularly difficult
01:39:26for people who have been CEOs or run
01:39:29groups and they say oh great I've
01:39:30invested hey I did a a teardown of your
01:39:33product it's broken here and here and
01:39:35here also the way that you wrote this
01:39:37thing on your website is bad I think the
01:39:39periods in the wrong place and they just
01:39:41start sending emails and these emails
01:39:44are incredibly frustrating because the
01:39:45founder is trying to close it around and
01:39:47get back to work and now you're
01:39:47distracting them with all these things
01:39:49My partner Dalton refers to this kind of
01:39:52investor as a human DNS attack well they
01:39:55just like overload you with all these
01:39:58requests and they just you just you
01:40:01can't do anything anymore because your
01:40:02email is just filled with all these
01:40:03requests and all these things and all
01:40:05these orders and so don't do that right
01:40:07sit back and wait for the founder to
01:40:09reach out to you and get to the point
01:40:11where you can start helping because then
01:40:14oh actually sorry two quick stories
01:40:17because I think this is pretty awesome
01:40:18I'm the best transition from kind of
01:40:24wants to invest to shareholder that I
01:40:26have seen there's an investor that comes
01:40:27to demo day who meets with founders does
01:40:31a handshake on the floor leaves like
01:40:34within five minutes of demo day ending
01:40:36and then literally sends wires from his
01:40:39jet as he flies home that night and for
01:40:42a while we thought we thought this like
01:40:44wasn't really happening we didn't
01:40:46understand that this founder was legit
01:40:47this investor was legit and then a
01:40:50couple of our companies so this is gonna
01:40:52sound weird but we sent this guy as safe
01:40:55and he said he was flying out but then
01:40:58we got the wire and we tried to respond
01:41:00and his assistant said sorry he's
01:41:01already he's in flight he can't respond
01:41:03whoa this is pretty cool this guy's
01:41:06really moving fast he's following all
01:41:07the advice about closing quickly that's
01:41:09great the opposite is an investor I know
01:41:12of who committed to investing in a
01:41:14company worked really really hard oh I'm
01:41:16gonna be so great and it was a big check
01:41:18I think was
01:41:19a million dollar check or something like
01:41:20that I'm gonna be so good for you and
01:41:22for everything okay cool awesome and
01:41:24then you know he signed the docs and
01:41:27then the founder said hey where's the
01:41:29wire nothing founder said hey where's
01:41:32the wire nothing hey where's the wire a
01:41:33week later the investor got back said oh
01:41:37I'm so sorry about that wire my fund
01:41:40hasn't closed yet yeah so can you hold
01:41:44that open for me and the founder said no
01:41:46that's ridiculous
01:41:48I need the wire you agreed I'm gonna
01:41:50kick you out so the investor tried this
01:41:52said okay hey I'm sending you a check in
01:41:54the mail can you do me a favor can you
01:41:58put it in your drawer just hold it there
01:42:01for I just in a couple weeks and then
01:42:05you can cash it Wow this is terrible for
01:42:10so many reasons one never commit to
01:42:12invest money you don't have to this
01:42:15person convinced the founder that they
01:42:18had the money to invest
01:42:19the founders stopped talking to some of
01:42:21the other investors that were interested
01:42:22so didn't get the money from the
01:42:23investors that were interested is now
01:42:25waiting on money that doesn't exist and
01:42:27care really necessarily go back to those
01:42:29original angels that were interested
01:42:31because they're in this weird legal
01:42:32limbo where they signed the thing and
01:42:34now they don't have the money
01:42:35that's a blacklist of all offense right
01:42:39if you start making promises that you
01:42:41literally can't cash that's a really
01:42:43good way to destroy your reputation
01:42:49there's the final part being good to
01:42:51companies on an ongoing basis now a
01:42:53bunch of the other speakers over the
01:42:55course of the week touched on this about
01:42:56the kinds of advice that you can offer
01:42:59how you offer that advice the cadence
01:43:02with which you do it and I kind of want
01:43:05to keep this high level in terms of
01:43:07thinking about your relationship with a
01:43:10company as a relationship and as an
01:43:12ongoing relationship that builds and
01:43:14deepens over time and this isn't
01:43:17actually going to be true of every
01:43:18single one of your investments that's a
01:43:20fact if you are lucky enough to make
01:43:24more than one investment chances are one
01:43:28of those or many of those you'll never
01:43:30hear from very much again
01:43:32hopefully they'll send you investor
01:43:33updates and there'll be things with
01:43:35which you can help but some of these
01:43:37founders just won't need you or maybe
01:43:40won't believe that they need you and
01:43:42it's not your place to force your way in
01:43:44founders will ask for help good founders
01:43:47will ask for help when they need it the
01:43:49founders who disappear on you it's not
01:43:52worth your time to chase them because
01:43:54honestly they're probably not gonna do
01:43:57very much we've noticed that founders
01:43:59who send monthly updates every single
01:44:02month tend to outperform founders who
01:44:05disappear for six and twelve months at a
01:44:07time and it's this thing about
01:44:09understanding transparency and
01:44:11understanding how to keep a relationship
01:44:12going right because this is a two-way
01:44:14street
01:44:14and the founders who will understand
01:44:17that tend to create better outcomes
01:44:20those are the people I like to work with
01:44:24there are things you will learn as an
01:44:26investor that will be secret investor
01:44:29updates qualify as this and you need to
01:44:32help a founder realize the difference
01:44:35between private information and
01:44:39proprietary information or confidential
01:44:41information and proprietary information
01:44:42confidential information is revenue
01:44:45numbers headcount burn balance those
01:44:50things are not to be published freely
01:44:53but honestly don't make the difference
01:44:56between the life or death of the company
01:44:57you have no right to share them without
01:44:58explicit permission but it's okay for a
01:45:02founder to share it for you and it's
01:45:03okay for you to ask for that information
01:45:04it's not okay for you to ask to look at
01:45:08source code on your own computer at home
01:45:12potentially with a competitor over your
01:45:14shoulder that's not okay and so you
01:45:17shouldn't ask for it and if a founder
01:45:18tells you they don't want to give you
01:45:19that kind of information respect it
01:45:23part of that is knowing where you are
01:45:25actually helpful I have felt this a lot
01:45:29where I want to help companies in areas
01:45:33I don't understand
01:45:34and it's this overriding urge when
01:45:37someone asks you a question to answer it
01:45:40to the best of your ability and it's
01:45:43very easy as
01:45:45the person with money and experience
01:45:48maybe to treat that as license to advise
01:45:53on any question that gets asked of you
01:45:56resist that urge when you do not know
01:45:59the answer to a question do not answer
01:46:01it say hey I would love to help you on
01:46:02this but I can't I really can I know
01:46:06some people who might be able to help
01:46:07would it be okay if I ask them the
01:46:10question that's a way to help your
01:46:14founders and when you do know the
01:46:16answers help offer that help offer the
01:46:19advice offer to show up at the office
01:46:21and walk them through how to do
01:46:22something offer to get on the phone if
01:46:25you're not willing to get on the phone
01:46:26with a company that you've invested in
01:46:28you probably made a bad investment we've
01:46:30done a bad job choosing so think about
01:46:32that and look at the ratio of companies
01:46:35you've invested in that you'd be willing
01:46:37to take a phone call from versus the
01:46:39ones that you're not it's a good
01:46:41indication of whether or not you're
01:46:42tracking above all things and this is a
01:46:48an important thing for me and I think
01:46:50it's important in the ecosystem overall
01:46:52is you need to be honest a lot of
01:46:55founders will ask hard questions and
01:46:58your instinct will be to shade the truth
01:47:00or to say hey it's not going that bad or
01:47:02you know don't worry you shouldn't have
01:47:04hit metrics this month anyway because
01:47:05you had a cold or no there's a totally
01:47:09fine way to fire someone founders
01:47:15sometimes need to hear hard truths and
01:47:17sometimes you need to hear hard truths
01:47:18and if you're not honest with them they
01:47:20won't be honest with you they won't tell
01:47:22you when they don't think you're doing a
01:47:23good job if they don't think you're
01:47:24doing the same for them and as you are
01:47:27honest with people honest and fair
01:47:30people will respond to that and you'll
01:47:33get better information this is something
01:47:35I always really appreciated from PG
01:47:37where any conversation I have with him
01:47:39he is completely honest with me about
01:47:43where I stand what I'm doing right and
01:47:45what i'm doing wrong and because I know
01:47:46that he is doing it in our shared
01:47:48interest it never feels like an attack
01:47:50and there's again this thing you want to
01:47:54do where you're so smart you have money
01:47:56I'm gonna like attack you for this thing
01:47:58you're doing
01:47:59wrong and I'm gonna drive at home just
01:48:00cuz just prove how wrong you are and how
01:48:02right I am that doesn't help people
01:48:04react super badly to that just be honest
01:48:07and direct and kind and finally respect
01:48:13the limits of your influence and your
01:48:16rights in any given situation don't go
01:48:20to the place where you start trying to
01:48:23make the decisions for the CEO when
01:48:25you're a small shareholder don't try to
01:48:27influence the board don't go calling the
01:48:29board behind the invest the founders
01:48:31back because you think they did
01:48:33something wrong it's probably not your
01:48:35place except in really extreme
01:48:37circumstances or the founder is
01:48:38committing fraud and won't admit it
01:48:41right but proceed cautiously in any of
01:48:44those situations there is one right I do
01:48:47want to mention that is often a point of
01:48:48contention between early stage investors
01:48:52and later stage investors and founders I
01:48:54see this a lot because I run our series
01:48:57a program where I take all of our
01:48:59companies that have received capital and
01:49:00when we're ready for their series days
01:49:02we train them up and would try to help
01:49:05them raise the best possible series I
01:49:06and the point of contention ends up
01:49:08being around pro-rata rights if you're
01:49:11not familiar with what they are welcome
01:49:13up there one of the most valuable rights
01:49:14that an early stage investor can
01:49:17negotiate for and then an early stage
01:49:18investor can get and what they basically
01:49:21allow you to do is continue to invest in
01:49:23a company in future rounds such that
01:49:25you're not diluted should you have the
01:49:27capital to do that now this thing
01:49:29happens where in later rounds founders
01:49:31will go out and raise money and their
01:49:34later stage investor will say well you
01:49:37want to raise ten million dollars we
01:49:38want all ten million of that round so
01:49:40screw your early investors it's not
01:49:45great and the founder gets put in a
01:49:48really rough position especially if they
01:49:50didn't account for this ahead of time
01:49:51where they don't know what to do and
01:49:54it's very easy in this situation if a
01:49:57founder emails you and says hey I need
01:49:59you to cut back your pro rata rights
01:50:01because we have Sequoia on the other
01:50:03side or Excel or whoever right that's a
01:50:07lot of pressure and usually it's
01:50:10actually coming from somewhere in the
01:50:12middle
01:50:12a partner at Sequoia didn't say cut
01:50:14everyone back it usually got lost in
01:50:16translation through a lawyer or
01:50:18something and the founder interpreted as
01:50:21a directive and they come to you
01:50:24understand that they're not trying to
01:50:26kill you they're probably not
01:50:28consciously trying to hurt you and be
01:50:31reasonable with them but I think it's
01:50:33okay here to be firm and say look we
01:50:36negotiated for this you agreed to this
01:50:38I need my Ferrara here's what it is and
01:50:40if it's a situation where it's really
01:50:42too much where they can't give you your
01:50:43pro rata be understanding right and
01:50:46figure out a way forward that's good for
01:50:48both sides and remember that every once
01:50:50in a while you have to subordinate your
01:50:52financial best interest and again a
01:50:54specific deal for the greater good of
01:50:56your long-term career as an investor
01:50:59couple of things that good is not good
01:51:07does not mean smart in any way it's not
01:51:10the smartest investors that make the
01:51:12most returns and it's not the smartest
01:51:13investors that are helpful you know dumb
01:51:16money in smart money are kind of both
01:51:19money to founders they make the Machine
01:51:22go and what I found is that investors
01:51:27who know which camp they fall into can
01:51:28both be good so-called dumb money you
01:51:31don't know much about startups you don't
01:51:33know much about investing but you try to
01:51:36be helpful
01:51:36you give capital when it's needed you're
01:51:39honest you move quickly that's a good
01:51:41investor in my book and I would be happy
01:51:44to recommend that investor to any
01:51:46startup that asked smart money investors
01:51:48who have built that kind of business
01:51:49know how it works also really good or
01:51:53can be really good and both of those
01:51:55investors can be bad by violating some
01:51:56of the rules we've talked about good
01:51:58doesn't equal big checks some of my best
01:52:00investors as a founder were some of my
01:52:03smallest checks they were the people
01:52:04willing to get on the phone and some of
01:52:06my biggest investors like Sequoia
01:52:07we're also some of my best investors it
01:52:09all depends on the relationship that you
01:52:11build and how you go about it
01:52:13and good doesn't even mean famous you
01:52:19have probably never heard of some of the
01:52:21best angels in YC companies you've heard
01:52:24of some of them
01:52:25hi Ron he's great but there are also a
01:52:29lot of really really great investors
01:52:31you've never heard of who founders know
01:52:34about who we know about so don't read
01:52:37the paper and say oh this angel was just
01:52:39involved in that deal that must be a
01:52:40great deal he must be awesome she must
01:52:42be awesome she must be the best remember
01:52:45that it's not about fame it's about
01:52:46helping companies and getting into good
01:52:49deals and if you do that if you are in
01:52:52fact good hopefully good actually yields
01:52:56returns that's our hope that's what we
01:52:59like you all to be able to do and we'd
01:53:01like to be able to help you do that
01:53:03Thanks okay q-and-a any questions
01:54:17so what can you expect as well as an
01:54:23investor what can you expect in terms of
01:54:25governance from a seed stage company and
01:54:27what should you expect in terms of
01:54:28investor updates so on the governance
01:54:30side most seed companies do not have
01:54:32external board members it's usually one
01:54:34or two of the founding team are kind of
01:54:37a board and they approve things like
01:54:39options grants but there's no one
01:54:40outside and that's just sort of the
01:54:43nature of how the system works I think
01:54:46that's generally good because I think
01:54:47that boards at that early stage are more
01:54:49hindrance than help and I think that
01:54:53starts to change when a company has
01:54:55raised summer between four somewhere
01:54:59above four million dollars of raise
01:55:01that's when I actually advise companies
01:55:02to form a board whether or not an
01:55:04investor has a specific right to do so
01:55:06and will do in some of these cases as
01:55:08we'll kind of form an informal board
01:55:10with them and I'll sort of sit down with
01:55:11them once a quarter to make sure things
01:55:12are on track if there are things that
01:55:15you think are being done that are
01:55:16explicitly bad from a governance
01:55:19perspective bring it up and discuss it
01:55:22when it comes to investor updates I
01:55:26actually wrote an essay about this
01:55:27called investor updates that outlines
01:55:30how to write a good one it should take
01:55:33about 15 minutes if the company knows
01:55:36what it's doing it's a little different
01:55:38if it's a pre product versus post
01:55:39product but this thing the the basics of
01:55:41it it should have revenue it should have
01:55:44growth then should have burned should
01:55:45have cash balance should have what they
01:55:47need
01:55:48what's going well and what they're
01:55:49struggling with 15 minutes a month maybe
01:55:5220 or 30 and every month a seed stage
01:55:57company because if they're not sending
01:55:59at that often it problem means they're
01:56:00not making that much progress there's a
01:56:03tendency worth some companies will say
01:56:06oh well I'm too busy I'm gonna do this
01:56:08every six months what I tell them is the
01:56:11reason that's bad is their investors
01:56:13will forget about them and it is not bad
01:56:16investor behavior to prod your founders
01:56:19into good founder behavior it's not a
01:56:21good idea to exhibit bad investor
01:56:23behavior because you're good fun your
01:56:25founder has bad founder behavior but you
01:56:28are well within your rights to request
01:56:31your rights there was a question back
01:56:33here
01:56:58so the question is about reputation and
01:57:02how the reputation system such as it is
01:57:05sometimes breaks down the question are
01:57:08knows of investors who have actually
01:57:11treated companies bad but seem to have a
01:57:12good public reputation how does that
01:57:15happen and what happens I think no
01:57:17reputational system is perfect certain
01:57:21very people with very bad reputations
01:57:24get I don't know elected to high office
01:57:29never happened never I think that's true
01:57:33all through history honestly I think
01:57:37that this space is fairly small and it
01:57:42might take a little while but that word
01:57:44usually gets around but there's always
01:57:46gonna be a few bad apples that I think
01:57:48will probably continue to squeeze into
01:57:50deals here and there the thing that you
01:57:51don't know and this is really tricky you
01:57:54have no idea from the outside what kind
01:57:58of allocation that person actually got
01:58:00so I've seen people put on their Twitter
01:58:04BIOS and in AngelList and on LinkedIn
01:58:07that their investors in some wildly
01:58:10successful company and I know that they
01:58:13bought a couple thousand dollars of
01:58:14secondary at a massive round and they
01:58:16hold themselves up as being brilliant
01:58:19angel investors who caught it early so
01:58:22[Music]
01:58:23you know so um I actually think I know
01:58:28what happens there and it sort of sucks
01:58:31but there is a power asymmetry and it is
01:58:37difficult for a founder to want to take
01:58:41on an investor who's more powerful than
01:58:43them even if they're being an
01:58:45and it sucks one of the advantages of
01:58:49being a YC company by the way is that we
01:58:53stomp on people who do that that that we
01:58:56you know we're we're lucky enough to be
01:58:58in a position where if you screw with
01:59:00one of our companies they will tell us
01:59:01and I don't care even if you're on
01:59:03Conway although he never does that he
01:59:06never does right the most powerful angel
01:59:09there isn't he never does so you
01:59:12that sort of reputation does spread
01:59:16throughout and I would also argue that
01:59:18secondarily that it'll never last
01:59:20because eventually people who are
01:59:22treating companies bad like politicians
01:59:26who do bad things it leaks out that's
01:59:30because the information asymmetry that
01:59:33used to exist doesn't really exist
01:59:35anymore and word will get out
02:00:09so sorry you're you're a little quiet
02:00:12there but you're asking about losing
02:00:14pro-rata rights okay so what happens
02:00:17when when your pro-rata rights are taken
02:00:20away from you so Jeff and I have
02:00:22actually both written about this because
02:00:25we both think it's it's a pretty bad
02:00:27thing when when companies go back and
02:00:30reduce or remove pro-rata rights from
02:00:33investors who have bet on them early I
02:00:37don't have a good answer honestly I
02:00:40think it's kind of crappy I think you
02:00:44should fight it to the degree that you
02:00:45can but no your strength in any of those
02:00:48situations and know how like how to
02:00:54fight and how far to fight on it and at
02:00:57the end of the day you might get screwed
02:01:00here and there and hopefully that is not
02:01:03the end of the story right so I think
02:01:06the message throughout this course and
02:01:10especially Erin's presentation is don't
02:01:12be penny wise and pound foolish if
02:01:14you've invested in a fantastic startup
02:01:16that you really want parotid and don't
02:01:18get it you're gonna make most of your
02:01:20money on the original investment and so
02:01:24like you should not ruin your reputation
02:01:27or in any way ruin the chance of that
02:01:31company getting a deal if that's what
02:01:33you're being told however it sucks if
02:01:37you have contractual pro-rata the YC
02:01:40safe gives you contractual pro rata in
02:01:42all rounds except the round that it
02:01:44converts in and if the founder who you
02:01:47believed in before anyone else takes
02:01:51that away from you well that merits a
02:01:56conversation at the very least and by
02:02:01the way most of the time when this
02:02:03happens it is not the founder doesn't
02:02:05even know and if the founder did know
02:02:07they would put their foot down because
02:02:09it's up to them I'll talk a little bit
02:02:10about this at the very end but I do
02:02:12think that this the process of taking
02:02:16away pro rata z' that are contractually
02:02:18agreed is is is not a good one
02:02:21and why it happens it's complicated it
02:02:23can be a pain in the butt for to have to
02:02:26like go around and figure out what your
02:02:27pride is with everyone is but if you've
02:02:29contractually agreed to it well that's a
02:02:31promise right and sorry one last thing
02:02:33for what it's worth there's there is
02:02:34something we do for all of our companies
02:02:35now as part of our series a process we
02:02:38proactively model out for them what
02:02:41Piratas look like and evolution looks
02:02:42like in different scenarios such that
02:02:44they can plan for it ahead of time
02:02:45because I think the thing that we saw
02:02:47happen was basically people just didn't
02:02:49plan and they agreed to things they
02:02:51didn't realize the implications that's
02:02:53usually why I found her has gone back
02:02:55and tried to change it and if they have
02:02:56the information ahead of time there
02:02:59usually they will usually protect their
02:03:01angels not all cases but most often yeah
02:03:41so the question is is it reasonable to
02:03:45ask for things like Parata and a side
02:03:48letter especially if they're not using
02:03:50the standard safer even if they are
02:03:51using the standard safe which does not
02:03:53give you pro rata and then converting
02:03:54around what's reasonable to ask for
02:03:56where should you draw the line so this
02:03:59goes back to the point that I was making
02:04:00around during negotiation know what the
02:04:03terms are
02:04:04no what's standard and know what your
02:04:05leverage is I am of the negotiating
02:04:09school that it never hurts to ask for
02:04:11things that you think you deserve and
02:04:13you think you want if those things are
02:04:16standard right or if those things are
02:04:18within the realm of expectation and then
02:04:22know how much leverage you have to push
02:04:24on it I think pro rata is a pretty
02:04:26standard thing I think it's normal to
02:04:29ask for it something that I always want
02:04:30if I make an angel investment because I
02:04:32believe they're valuable and I think
02:04:34it's the right thing to do that isn't
02:04:37true of
02:04:382.x participating preferred now what I
02:04:41have seen is some angels will push their
02:04:44leverage as far as possible because they
02:04:46know a company is def or desperate and
02:04:48they'll get things and okay they won
02:04:50that skirmish but they will lose the
02:04:52overall war yes
02:05:25so the question revolves around the sort
02:05:29of two sides to the reputation markets
02:05:32one side is with founders and one side
02:05:35is with your fellow investors and how to
02:05:37think about times when perhaps those two
02:05:41things might come into conflict so I I
02:05:48actually don't think there are that many
02:05:50situations where those two things are in
02:05:53conflict I think one situation in which
02:05:55it could be in conflict as this thing
02:05:56you're mentioning where an investor asks
02:05:59you for a recommendation to an investor
02:06:02and you don't feel so comfortable with
02:06:03it so in a situation where you're not an
02:06:06investor in the company you're just
02:06:08talking to them you say you know I
02:06:10really only feel comfortable
02:06:11recommending companies that I invested
02:06:12in that's the way you get through that
02:06:15one and if there's a situation where a
02:06:18founder asks you for a recommendation to
02:06:20a company you don't feel comfortable
02:06:21with it this is the thing where I talked
02:06:24about being honest
02:06:25tell the founder hey while I would love
02:06:28to be able to recommend you I don't
02:06:29think this is the right fit for this in
02:06:31this reason and if they're super super
02:06:34super persistent say no please just do
02:06:37do it do it do it do it do it you know
02:06:40there's introductions and there's
02:06:41introductions and there's
02:06:42recommendations and you know make sure
02:06:45they know the kind of recommendation
02:06:47they're getting and the kind of
02:06:48introduction and be honest with them
02:06:50about it okay we're gonna take one more
02:06:53question because unfortunately Ron has
02:06:55limited time so this will be the last
02:06:56one
02:07:42okay the last question is kind of a
02:07:44tough one it's about how founders
02:07:47communicate what their cap table looks
02:07:50like as they come and talk to investors
02:07:53and solicit investment do I have that
02:07:54right so I think it's normal for an
02:07:58investor to ask for a cap table and I
02:07:59think it's fine for founders to show
02:08:01them the cap table
02:08:04that's pretty pertinent information
02:08:07because it yeah so asking more than just
02:08:22what the cap table is but what sort of
02:08:23agreements you have you know again this
02:08:27this question sort of revolves around
02:08:28how much due diligence should early
02:08:32stage investors do and I know I do think
02:08:36it's fair to ask about those things I
02:08:39would argue however that it will almost
02:08:41never have an impact on whether you
02:08:43invest or not the cap table might if you
02:08:45see wildly strange equity splits that's
02:08:50not a good sign for companies in fact we
02:08:51asked about it at YC we don't tend to
02:08:54ask so much about founder agreements cuz
02:08:56imagine like would you not invest in
02:08:58Dropbox or Airbnb because of some
02:09:00founder agreement that you found
02:09:01suboptimal but you might do as an
02:09:04investor once you're an investor is give
02:09:06advice as to what sort of founder
02:09:08agreements might make sense in the
02:09:10future in general your due diligence as
02:09:14an early stage investor is pretty
02:09:16limited and in fact it's easy to tell a
02:09:18bad early stage investor because they
02:09:21ask for too much say you know what are
02:09:22your pro forma income statements over
02:09:24the next three years really like this is
02:09:27this is a company that is trying to
02:09:30figure out how they're gonna get revenue
02:09:32you're asking for the wrong information
02:09:34that will not help you make a decision
02:09:36so um Thank You Aaron
02:09:41[Applause]
02:09:51okay alright so that was a I think a
02:10:01fantastic survey a summary of how to
02:10:07think about what it means to be a good
02:10:09investor Paul Graham actually wrote an
02:10:12entire essay about what it means to be a
02:10:14good investor with Ron Conway as as the
02:10:18subject of the essay so the guinea pig
02:10:20yeah he was the the guinea pig and so
02:10:25this is a I think for me the perfect way
02:10:27to to put a wrap on this course I'm
02:10:33gonna have a brief conversation with Ron
02:10:34we'll take a few questions unfortunately
02:10:35he does have a hard stop so he can't
02:10:37hang around and that's that's actually
02:10:40too bad for you because I've learned
02:10:41most of what I've learned about angel
02:10:43investing from watching Ron and from I'm
02:10:45from talking to Ron he's an incredible
02:10:47resource but the there's a lot of
02:10:50resources out there that that that that
02:10:53Ron points to for how you learn about
02:10:55doing these things in fact there's a
02:10:57reading list that will be on the website
02:10:59that that SV angel and Ron recommend for
02:11:03how you learn about being an investor
02:11:05teach yourself so Ron by the way since
02:11:16I've had a quote from everybody I have a
02:11:18quote from Ron - Ron said referring to
02:11:26entrepreneurs you can't learn to be
02:11:31ambitious and driven and I think that's
02:11:36like something I keep in mind every time
02:11:37I talk to entrepreneurs I think
02:11:39entrepreneurs can become more formidable
02:11:42but if you say maybe they'll figure it
02:11:44out and they'll be there'll be they'll
02:11:46eventually work hard and be driven
02:11:48that's probably not the investment you
02:11:49want to make run has been angel
02:11:51investing certainly since before some of
02:11:54you were born
02:11:55and before I even thought about what an
02:11:59investment might look like can you
02:12:00describe a little bit how you got into
02:12:02that sure I'm honored to be here
02:12:06I'm a born in San Francisco raised my
02:12:10kids in Atherton then moved back to San
02:12:13Francisco but my first job was at
02:12:16national semiconductor and a few folks
02:12:21from there went off and I went with them
02:12:24and I was a founder at Altos computer
02:12:27and this was a micro computer in the
02:12:30late 70s that was disrupting the mini
02:12:34computer industry all innovation is
02:12:37around disruption you're disrupting
02:12:40somebody and at Altos our lead board
02:12:45member and investor was Don Valentine
02:12:48who was the founder of Sequoia Capital
02:12:51and he and I took a liking to each other
02:12:54and after we sold out those two Acer Don
02:12:58suggested that I go observe board
02:13:00meetings with him and start mentoring
02:13:02founders and consider angel investing I
02:13:05loved the leverage of giving founders
02:13:10advice and quite frankly not having to
02:13:13do the work I did the work at Altos and
02:13:15found out I didn't like managing people
02:13:18that I was a much better mentor and so
02:13:21in 1994 I decided to start investing
02:13:24full-time and the best investment
02:13:27decision I ever made was to invest just
02:13:30an Internet software which in 1994 that
02:13:34was two years before Netscape was even
02:13:36founded and you see how huge the
02:13:40internet software industry is today what
02:13:43what insight led you to that I mean
02:13:46there was you know everyone was in
02:13:48investing at the time in semiconductors
02:13:50and and hardware enterprise often price
02:13:53software what what strange
02:13:56epiphany did you have that made you go
02:13:58that sector I teamed up with Ben Rosen
02:14:01who is then the chairman of Compaq and
02:14:04all we did is think about what what is
02:14:08the mostess
02:14:09of Industry on the horizon that will
02:14:12grow by thousands of percent a year
02:14:16whatever industry that is that's the
02:14:18industry what we want to be part of so
02:14:21it was driven by growth and growth is
02:14:24the lifeblood of innovation a lot of
02:14:29folks here have asked questions about
02:14:30like so how do you start how do you get
02:14:32deal flow how did you guys how did you
02:14:34in the beginning get deal flow well it
02:14:37was easy because back then there was
02:14:41only about one Internet company being
02:14:44founded per month so we would literally
02:14:47just look for any internet company and
02:14:50for two years we talked to every single
02:14:53Internet company how many other angels
02:14:56were there at the time
02:15:00I guess 50 but but I asked Jeeves and
02:15:06PayPal were two of our our first
02:15:10companies that we invested in that that
02:15:13we got excited about and that that kind
02:15:15of started started the trend and an
02:15:18anti-spam company called bright mail
02:15:21remember well what what was it about Ask
02:15:25Jeeves and PayPal that convinced you to
02:15:29write a check all the four four SV angel
02:15:33it's always been the character of the
02:15:36founder we invest in the founder first
02:15:39the idea second so at each of these
02:15:42companies we were impressed with the
02:15:47founder today it's intuitive within five
02:15:49minutes I can decide if I if I like a
02:15:52founder or not back then it took you
02:15:55know a one or two hour meeting to figure
02:15:56out hey do we like the character of this
02:16:00founder the integrity of this founder
02:16:02but it's the person first the idea
02:16:05second so I sort of had a question you
02:16:11know you put a lot of thought into into
02:16:14what you like in founders and I know I
02:16:16know you guys have a whole whole whole
02:16:18thing on that back then
02:16:21you have to meet for an hour or two when
02:16:25you actually sat down in weather with
02:16:28Ben or all by yourself and decided to
02:16:30invest what broke the tie what actually
02:16:34mattered the most to you what probably
02:16:38mattered the most was the determination
02:16:40of the founder because these founders
02:16:44don't know it in the beginning but
02:16:46starting a company is the hardest thing
02:16:50you'll ever do and that's why we have
02:16:52such admiration for founders and are
02:16:55advocates for founders and if if a
02:16:59founder is determined we know that he or
02:17:01she will see it through that that they
02:17:04will try every every trick in the books
02:17:07to go build a big company to recruit the
02:17:10best team and that takes a lot of
02:17:14fortitude so a lot of it is is the
02:17:16passion the you know the leadership
02:17:21qualities that we think that that
02:17:23they're possessing at this early stage
02:17:25but it's really the determination and
02:17:28goal driven I think a Mark Zuckerberg
02:17:31and then you met suck like Waverly we
02:17:34met suck when he was 19 years old the
02:17:36summer he came out here that he was
02:17:39supposed to go back to Harvard and never
02:17:41went back but he was very very driven
02:17:46and he was driven by metrics and user
02:17:48experience that's all he cared about he
02:17:52didn't care about getting his name in
02:17:54the paper or or anything else that's the
02:17:58type of founder that that it immediately
02:18:01hey this this person's gonna build a
02:18:04successful company by the way since we
02:18:07do have limited time if anyone has
02:18:09questions as we go along feel free to
02:18:11just raise your hand and we'll we'll try
02:18:13to fit it in if you look back at the
02:18:17dist hundreds and hundreds of
02:18:20investments hundreds and hundreds of
02:18:21decisions some of works some haven't as
02:18:24you look back without naming names what
02:18:29have you gotten wrong like what when
02:18:31when have you looked at founder and said
02:18:32I've got this is
02:18:34this is a founder in the SV angel mold
02:18:38and and been wrong about it and why yeah
02:18:42one thing that that I want to bring up
02:18:45is keep in mind
02:18:47forty to sixty percent of every company
02:18:50you invest in is going to completely go
02:18:52out of business so failure is part of
02:18:55the angel business model forty percent
02:18:58actually are pretty damn good that's our
02:19:00failure rate if you get that we've been
02:19:01doing it for twenty five years in the
02:19:05beginning your failure rate will
02:19:06probably be probably be over fifty
02:19:08percent that's part of the business
02:19:09model don't be upset about that you know
02:19:12lots of Angels after their first company
02:19:14goes out of business they drop out and
02:19:15I'm like what are you talking about
02:19:17failure failure as part of the
02:19:19experience you have to often than not
02:19:22just so we're clear you will write a
02:19:24check and never see that money again
02:19:27it's gone forever
02:19:28yeah and that's why that's why the
02:19:30winners have to win big they have to pay
02:19:32for the losers that's that's how it
02:19:34works in angel investing and now I
02:19:36forgot what you asked so yeah so the the
02:19:38thing is that there's a lot of
02:19:40investments you make where you say that
02:19:42you know I took my shot but sometimes
02:19:44you can look back and say I should have
02:19:47known what what what when you look back
02:19:49at at at at some of the ways maybe you
02:19:52you're your criteria were wrong or you
02:19:56misread the criteria or they something
02:19:58happened well what goes wrong out of 750
02:20:01investments we have three founders
02:20:03literally that they were crooked they
02:20:05belong in jail so it's bad to invest in
02:20:08crooks so that's it and but that's
02:20:09pretty low that's a low that's a low
02:20:11pretty low number but but pay shame on
02:20:13us a lot of times it's that the co
02:20:16founders don't get along we didn't
02:20:18predict that and co founders not getting
02:20:21along happens a lot and it's something
02:20:24that you really have to grapple with
02:20:26because usually one of them has to go
02:20:29and that is very very hard to predict
02:20:33but we do look for that now that oh
02:20:35these founders don't get along you know
02:20:38we don't want to be the divorce lawyer
02:20:39again how can you tell
02:20:42we're in the company we are the divorce
02:20:43lawyer we have to get involved that's
02:20:46fun right
02:20:47well hey you got you got to do it it's
02:20:49part of it's part of the experience how
02:20:52do you how do you judge whether founders
02:20:54are gonna get along or not you just
02:20:56watch how they interact when they're
02:20:58making their first presentation you
02:21:00watch very very closely does each one
02:21:04have their own turf and what they like
02:21:08or does the engineer hey that engineer
02:21:12he's gonna feel like he's a marketing
02:21:14guy someday well guess what that's gonna
02:21:16be a problem someday for that company it
02:21:18does sort of get to the point that it's
02:21:20sort of booths angel investors to see
02:21:22the whole team for sure you should at
02:21:26founding it's easy there's only two or
02:21:29three of them you you should meet
02:21:30everybody on the team when I went to
02:21:33Google eyes I saw Larry and Sergey going
02:21:36in that that's how our meeting was
02:21:38there's only five people there but going
02:21:40out the door the operations guy was cell
02:21:43our common gar soul our common gars the
02:21:45guy who who figured out the business
02:21:48model he figured out the entire AdWords
02:21:52model and at the time he was you know an
02:21:57Operations guy and and I stopped at the
02:22:00door while I sat down with him and he
02:22:03was so young-looking I sat him down I
02:22:06said do your parents know that you're
02:22:08here and and he said no and I said so
02:22:13where are you at school I'm pre-med at
02:22:15Stanford and I said boy are they going
02:22:17to be pissed
02:22:19he never finished he never got his
02:22:21degree he's very happily retired right
02:22:25now but yes definitely get to know
02:22:28everybody in the building get to know
02:22:30the assistants get to know the culture
02:22:33if you can get a feel for the culture of
02:22:34a company you'll feel much better about
02:22:37the investment question over here
02:22:44okay this this is a good I'll repeat the
02:22:47question
02:22:48post investment what's the biggest value
02:22:50you add for your portfolio companies in
02:22:53addition to general mentoring initially
02:22:56it's introducing them to other members
02:22:59of the team once the company starts to
02:23:03take off they've got to hire engineers
02:23:06marketeers salespeople and helping them
02:23:09build out that management team is the
02:23:11biggest thing you can do if they need
02:23:13partnerships to build traffic if they
02:23:16need distribution then you know we
02:23:19introduce them to our contacts at Apple
02:23:21Twitter Facebook Google the beauty of it
02:23:24is a lot of these companies we helped
02:23:26get off the ground so when we introduce
02:23:29somebody to Google a lot of times we're
02:23:31introducing to somebody we placed at
02:23:33Google but but these founders need help
02:23:36building the team and getting
02:23:38distribution for whatever the product is
02:23:40in addition to all the day to day
02:23:43mentoring that we give them and most of
02:23:48the time lately it's getting them to get
02:23:51off their asses and make decisions and
02:23:53execute there's a wave of
02:23:57procrastination going on in start-up
02:24:00land right now
02:24:01that's making me crazy it's it's my pet
02:24:04peeve so if you see a founder
02:24:06procrastinating you can help them by
02:24:08saying hey you can't build a big company
02:24:11by procrastinating you got to make
02:24:13decisions even if it means making a
02:24:15mistake and move the ship forward I'm
02:24:18spending a lot of time giving that
02:24:20lecture today and some of them are
02:24:22companies with a billion dollars in
02:24:23sales thank you but they could be 10
02:24:26billion if they made decisions quicker
02:24:28getting this right is really important I
02:24:30remember I was actually doing this kind
02:24:34of talk with Ron once and someone asked
02:24:35a question and you know Rhonda mirrored
02:24:38a little bit so I it was sort of saying
02:24:39what would we do in this situation I
02:24:40sort of explained well you know if you
02:24:42run it you know I did a little office
02:24:44hour thing I was if you're running the
02:24:45company do this and Ron sort of looked
02:24:48at it and then and after I finished my
02:24:50little spiel he said well as an investor
02:24:54I try to let my founders run the company
02:24:59I'm just saying
02:25:01run run it fast or make decisions right
02:25:03like so it's a much you have to be
02:25:06careful of the kind of advice you give
02:25:08because it is not your company to run
02:25:10and if you think you're gonna have to
02:25:12run the company it's probably not going
02:25:14to do that well because you're probably
02:25:16not gonna spend that much time with it
02:25:17how did you get involved with YC funny
02:25:22enough Chris Sacca introduced me to Y
02:25:24Combinator and it took some convincing
02:25:27because I said oh another accelerator
02:25:31but the first time I ever came to YC
02:25:33which is now well over ten years ago I I
02:25:36looked at Paul and Jessica it's all
02:25:38about the people everything in life is
02:25:41about the people Paul and Jessica were
02:25:44picking well they were screening
02:25:46founders well and then the advice that
02:25:50they were giving them was so impeccable
02:25:52you knew that group of founders was
02:25:54going to be successful and that's why
02:25:57why see today is head and shoulders
02:25:59about ahead of any accelerator the
02:26:03second-best accelerator is like ten
02:26:06floors down thank you and it's because
02:26:08the because of the screening process and
02:26:10the advice and mentoring that they give
02:26:13founders did not pay him to say that but
02:26:18it's it's true so there's a bunch of
02:26:26investors here who some of them have
02:26:28investors who want to invest if you're
02:26:31going to give advice one or two bits of
02:26:34advice to a new investor say for example
02:26:37a child of yours was gonna get into
02:26:39investing just say what what's the and
02:26:43you had just a little bit of time here
02:26:45what's the one or two things you would
02:26:46you would say I I'm in favor of the
02:26:49portfolio approach so I pick a sector
02:26:53that you like hopefully it's the sector
02:26:55where you have domain expertise and in
02:26:58that way you can add value to the
02:27:01companies you invest in because you know
02:27:03the space well and I would invest a
02:27:05little money like 25k each in
02:27:10five or 10 companies so that you have a
02:27:12portfolio many many investors angel
02:27:17investors that I know they invest in
02:27:19three companies a year one of them goes
02:27:21out of business oh my god one-third of
02:27:23the portfolio went out of business this
02:27:25is this is the so I don't want to
02:27:27do it it's because well you know three
02:27:32investments isn't enough there's this is
02:27:36very risky business you should spread it
02:27:39across ten companies 25k each hopefully
02:27:44one of them hits and then you're playing
02:27:45with the house money for the rest of
02:27:47your career which is basically what I've
02:27:50been doing with the house money that's
02:27:53the goal
02:27:53start small yeah and and get to the
02:27:55point where you're playing with the
02:27:56house money how long did it take you Ron
02:28:07to to figure out you were good at it and
02:28:09did you use any metrics to measure
02:28:11yourself I did not use any metrics we
02:28:15just invested away but within within two
02:28:20years Ask Jeeves went public and Ask
02:28:22Jeeves it was a big big win so I that
02:28:25was a metric I said yeah yeah the metric
02:28:28is wins there's no doubt about it and
02:28:33you know once you get a win and you're
02:28:35playing with the house money then you
02:28:37can focus more on adding value to
02:28:40founders being an advocate for the
02:28:42founder and not worrying about hits
02:28:44anymore the the lucky thing about SV
02:28:48angel every fund we've ever started
02:28:49early on we've been able to identify a
02:28:52hit and in our own mind the investors
02:28:55don't realize it but in our own mind
02:28:57we know hey this funds gonna be okay
02:29:00it's gonna be a moneymaker and let's
02:29:02just go about our business and add value
02:29:04and help founders if you keep helping
02:29:06founders and building your relationship
02:29:10network so you can solve more problems
02:29:12for them you'll you'll be successful you
02:29:17you may have just answered this but I
02:29:19want to return just briefly to what we
02:29:22started with so
02:29:24Paul wrote it's a theme we've come back
02:29:28to several times here but Paul Paul
02:29:30wrote the Ronco principle using you as
02:29:33an example but to point out that that
02:29:35actually being good wasn't a personality
02:29:39aberration it was a strategy what does
02:29:43being good mean to you well I think
02:29:47giving back to the community and being
02:29:49civically engaged is part of being a
02:29:52member of a community and today more
02:29:56than ever we should all be civically
02:29:58engaged while we're angel investing you
02:30:01can do two things at once
02:30:03and you can courage founders to be
02:30:05civically engaged locally and now
02:30:09especially nationally and right now I'm
02:30:13drawing a ton of energy from these
02:30:16students in parkland Florida where we
02:30:19have a bunch of 17 year olds who might
02:30:21change the country
02:30:23thank you don't clap from thank you for
02:30:27clapping but I know you're clapping for
02:30:29these students these students could
02:30:31change the country they're gonna have a
02:30:33ripple effect I hope they solve the gun
02:30:35mu the gun safety movement and then they
02:30:38go solve a whole bunch of other issues
02:30:39because they're all going to go register
02:30:42to vote and it's it's amazing and
02:30:47energizing and we should follow their
02:30:50example I hope I hope everyone here is
02:30:52going to march on March 24th I'm flying
02:30:55to DC and I'm gonna march in the main
02:30:57march but there's 500 other marches and
02:31:01I love it that all every student in
02:31:03America is talking to their parents and
02:31:05their grandparents about it and this is
02:31:09a real movement that could make change
02:31:11and slap some sense into Trump and his
02:31:15pals that is a tall order so every I'm
02:31:22sorry I don't have time for any more
02:31:23questions because Ron has to run but one
02:31:26one last point everyone here is getting
02:31:30a virtual invite to winter 2018 demo
02:31:34days
02:31:35it's still hard to say double days
02:31:37instead of demo day and ten of them will
02:31:42actually get an in-person invite you
02:31:44have any parting advice for people who
02:31:45are going to demo day take lots of notes
02:31:50because it moves really really fast but
02:31:54that's what I do I I sit up in front I
02:31:57pay attention I try not and get it
02:31:59described it's weren't going to be there
02:32:00just who have like all these companies
02:32:02to listen to and every way and you
02:32:04couldn't listen to it remotely take lots
02:32:07of notes and and and be decisive but but
02:32:11I would try and pick a sector that
02:32:13you're gonna be an expert at hopefully
02:32:15it's related to something you already
02:32:17know about and go invest in that sector
02:32:20rather than investing hodge-podge
02:32:23which is going to force you to try and
02:32:25become an expert if you're going to help
02:32:27these founders in in too many industries
02:32:31and one fascinating one right now is the
02:32:34old blockchain crypto space if you're
02:32:38really ambitious focus on that as a
02:32:41sector because I think that is web 300 I
02:32:44think it's the next wave of the Internet
02:32:47and it's pretty fascinating but but it's
02:32:51a hard one to get your arms around
02:32:52because it's working process you really
02:32:55have to study study the space thank you
02:32:59so much for coming in with us Ron it's a
02:33:00pleasure
02:33:01so ron has to run if you guys will just
02:33:05bear with me for I have a couple of
02:33:07closing words and then then we can start
02:33:09on the wine and beer so just give me one
02:33:12sec I'll walk around on I'll be right
02:33:13back
02:33:16[Applause]
02:33:35you
02:34:33so the only thing between you and wine
02:34:41and beer is me so I will be very very
02:34:47quick awesome okay that is nearly it I
02:35:00just wanted to do a brief recap of what
02:35:05we covered here the we started with I
02:35:11don't know if I can't remember it's been
02:35:14so long yeah we started off with sort of
02:35:16why do this I think Sam give an awesome
02:35:19talking about about why and and and what
02:35:25your motivations might be for investing
02:35:27and how you ought to think about what
02:35:28you investing what you invest in and
02:35:30then we then we went and talked to quite
02:35:32a bit about the mechanics of investing
02:35:35you heard a lot about the safe you guys
02:35:37raise your hand if you guys think you
02:35:39know how is safe works raise your hand
02:35:45if you've actually modeled it so all of
02:35:49you who didn't model it but think you
02:35:51know how it works you're wrong you don't
02:35:54and and you know that's actually not
02:35:59wasn't our intention the reason we we
02:36:03invented the safe was because we wanted
02:36:06it to be quick and easy and cheap and
02:36:08simple and it turns out every time you
02:36:12do anything there are unintended
02:36:13consequences so we've tried to remedy
02:36:16that by creating tools for people to
02:36:18actually understand them so as you go on
02:36:20invest in safes please we haven't yet
02:36:23but we're going to put up a spreadsheet
02:36:25you can use to model it you can use
02:36:27angel calc which is actually quite easy
02:36:29to model it understand what you're doing
02:36:31and how it works and how that conversion
02:36:33works you can actually see the formula
02:36:35do the math figure it out we're we're we
02:36:40will probably tweak the safe perhaps too
02:36:43to remedy some of the confusion were
02:36:46almost a hundred percent sure when we do
02:36:49that the unintended consequences will
02:36:51make things even worse
02:36:52so we're hesitating but we'll probably
02:36:55do do something so we talked about how
02:37:02we talked about how to get deal flow we
02:37:04talked about how to go about starting we
02:37:07heard a bunch from a variety of angels
02:37:10who became super angels who became pros
02:37:12some of them are still angels some of
02:37:13them are are still on their own
02:37:15investing their own money we talked
02:37:17about how to make how to meet with
02:37:19companies how to make your key
02:37:21investment decisions and we talked about
02:37:28how to do this in a serious way this
02:37:32actually means a lot to me because I did
02:37:35this for years without being very
02:37:36serious or rigorous at it and I don't
02:37:40really want to talk a lot about how much
02:37:43money that cost me it cost me a lot
02:37:47talked about deal flow and we talked a
02:37:53little bit about what today looks like
02:37:57and a tiny bit about what the future is
02:37:59going to look like I personally believe
02:38:01that angel investing the way we've
02:38:03talked about it here will persist for a
02:38:05long time
02:38:06equity may evaporate and go away in the
02:38:09future but it will not be the near near
02:38:13future I don't believe I think I SEALs
02:38:16will be part of our world and we'll have
02:38:18to factor that into our decision-making
02:38:19processes processes but so will so will
02:38:22angel investing I just want to repeat
02:38:32one of the key things that that to keep
02:38:40in mind here when we talk about being
02:38:42good don't I'll say it again be
02:38:44Pennywise and pound-foolish be a good
02:38:48investor and that sort of leads to sort
02:38:50of a final a final plea before we before
02:38:55we
02:38:57do our networking and drinking and
02:38:58eating thing which is let's all work
02:39:07together to make the ecosystem better to
02:39:09to add and keep consistency honesty
02:39:12integrity and transparency in the system
02:39:16we can all do our part for these things
02:39:18and we all win when it's this way you
02:39:20know one of the there's a lot of
02:39:23reputational downsides to being a
02:39:27venture capitalist of any kind and and I
02:39:29believe that came because in the past it
02:39:32actually might have helped Vesey's to
02:39:34act badly it doesn't work that way
02:39:36anymore you've heard a lot about that
02:39:38and especially early stage there's no
02:39:40win for you and there's no win for the
02:39:42companies and there's no win for the
02:39:43entire ecosystem Aaron mentioned that
02:39:48that we've both written about this I
02:39:49wrote a post called transparency and
02:39:51startup investing and I actually think
02:39:56part of this was due to convertible sort
02:40:00of becoming the modus operandi of how
02:40:02people mostly raise early stage capital
02:40:06but we don't have to give up on
02:40:10transparency if you're pro rata is
02:40:12getting taken away you should be told
02:40:14and you so you can have that
02:40:15conversation if you're getting converted
02:40:17you should be told what your conversion
02:40:19price is and indeed how it was
02:40:21calculated and you should check it and
02:40:24you should be given the information you
02:40:25need to check it i've actually suggested
02:40:28a form the numbers aren't don't matter a
02:40:31form this is on the post that you can
02:40:35send when you get a conversion notice
02:40:38saying please sign these documents in
02:40:41two hours and you get four hundred pages
02:40:43of documents send them this form back
02:40:45and say sure just fill all this out for
02:40:47me and i'll sign and that's a legitimate
02:40:51quality request high integrity request i
02:40:59mentioned we're going to be asking for
02:41:01feedback on this course i'm sure there's
02:41:02many things that we could have done much
02:41:04better and hopefully you guys will tell
02:41:06us what those are or just suggest to us
02:41:09when we do this again
02:41:11how we can make it better and more
02:41:12useful to you or to others lastly I want
02:41:18to first thank all of the speakers who
02:41:19came and spoke to you even though it was
02:41:23some work putting this stuff together
02:41:24they did all the hard work the speakers
02:41:26from within YC and without I thought
02:41:28they were great and I also want to thank
02:41:31the team that put this together
02:41:34Steve Pham here Ramon acquittal on
02:41:41camera and our video guy Craig who can
02:41:49wave obviously it's it's actually more
02:41:55work than I thought it was going to be
02:41:56to put the course together and they were
02:41:58all fantastic so with that we are done
02:42:01good luck and good investing and thank
02:42:03you so much for joining us
02:42:05oh and demo day invites all that stuff
02:42:10will be taken care of next week thank
02:42:12you
02:42:22you
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