What is the most important lesson Michael Seibel learned about writing angel checks?

The crucial lesson is to write a 'big enough' check. This means modeling out potential returns from a billion-dollar exit (considering dilutions and taxes) to ensure the financial outcome would be significant enough to matter personally.

How quickly should angel investors be able to make investment decisions?

Investors need a system to move quickly, often making decisions within hours or a couple of days. This involves being ready to hear pitches, sign documents, and wire money promptly, a characteristic of 'A' investors.

What defines an 'A+' investor?

An 'A+' investor is extremely rare and capable of having a truly significant impact on a company's direction, sometimes nudging acquisitions or providing pivotal advice that shapes the company's future, as seen with Socialcam and Twitch.

What are the common reasons Michael Seibel missed investing in successful YC companies?

He attributes missing investments to two main reasons: being on the fence and not moving quickly enough, and also being too busy with his existing YC companies to give sufficient attention to new investment opportunities.

How much equity should founders retain after Series A and B funding rounds?

Seibel models for 20-35% dilution in both Series A and B. He prefers founders to retain a substantial amount of equity (more than 15-20%) after these rounds to maintain motivation for a successful exit.

What are Y Combinator's core strategies for sourcing startups?

YC's primary sourcing strategies are its open application process, which de-emphasizes networking, and maintaining a very high bar for admitting talented individuals. This attracts ambitious people and creates a strong cohort effect.

Key Moments

Michael Seibel - Startup Investor School Day 2

Y Combinator

Science & Technology4 min read29 min video

Mar 7, 2018|19,772 views|246|8

YC Y Combinator Michael Seibel Startup Investor School Ramon Is The Champ!!

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Key Moments

TL;DR

Angel investing lessons: write bigger checks, act fast, don't fear FOMO, and diligence on demo day.

Key Insights

Write sufficiently large checks to make a meaningful return, even after dilution and taxes.

Develop a system to invest quickly, as startup investment opportunities often have short decision windows.

Don't let FOMO (Fear Of Missing Out) pass you by; invest in friends' promising ventures.

Thoroughly research startups before demo day; don't rely solely on the event itself.

Consider investing in promising companies 6-12 months post-demo day for more information and potentially lower valuations.

Be wary of hyped companies on demo day; the crowd's perception of quality can be misleading.

INVESTING PHILOSOPHY AND PERSONAL SCORECARD

Michael Seibel prefaces his advice by framing angel investing as a form of 'giving back,' likening it to charity rather than a primary means of financial gain. He shares his personal investment scorecard, detailing 50 angel investments over 4.5 years, including three non-YC companies and one significant late-stage investment in Reddit. While acknowledging a few major successes like Cruise and companies with high valuations, he humbly assesses his performance, emphasizing that his primary safety net comes from his position at YC, which gives him ownership in all YC companies.

THE IMPORTANCE OF CHECK SIZE

A critical lesson learned by Seibel is the necessity of writing substantial checks. Early in his investing career, he made the mistake of writing $25,000 checks, which, even with a billion-dollar exit, wouldn't yield a significant personal return or impact. He advises investors to model out potential billion-dollar exits, accounting for dilution and taxes, to ensure the potential return is meaningful enough to be worth the investment and to brag about.

THE NEED FOR SPEED AND EFFICIENCY

Startup investing often requires rapid decision-making, with opportunities sometimes lasting only hours or a couple of days. Seibel stresses the importance of establishing a system for swift investment processing, including quick document signing and wiring of funds. He contrasts this with 'A' investors who are decisive and efficient, urging aspiring investors not to be the bottleneck that delays founders by not being prepared to act quickly.

LEVERAGING FOMO AND FRIENDSHIP

Seibel highlights a practical rule: if a friend is starting a company and you'd experience significant FOMO (Fear Of Missing Out) if it became a massive success, you should invest. He admits he wishes he had followed this rule more consistently, as it could have led to greater personal wealth. This rule emphasizes investing in ventures driven by personal connection and the potential for strong regret if missed.

STRATEGIES FOR INVESTING IN YC COMPANIES

For those attending YC Demo Day, Seibel advises being prepared to move quickly, as many professional investors will have already done their homework. He encourages investors to research companies publicly before Demo Day through platforms like the YC blog, Product Hunt, or TechCrunch. This pre-work allows for informed decisions and avoids starting the evaluation process on the day of the event.

POST-DEMO DAY OPPORTUNITIES AND EVALUATION PITFALLS

Seibel points out that many strong companies raise additional funds 6-12 months after Series A, presenting a valuable post-Demo Day investment opportunity. He also cautions against over-hyped companies, noting that the general crowd at Demo Day isn't always as discerning as it appears. He suggests that for investors who haven't done thorough upfront homework, pausing and investing later can be a more pragmatic approach, albeit at potentially higher valuations.

THE HARDEST PART OF ANGEL INVESTING

Becoming a great angel investor is exceptionally hard work. Seibel acknowledges that many individuals dabble in angel investing without committing the necessary effort. To succeed, investors must develop conviction and conduct sufficient due diligence to secure desired deals. This hard work increases the chances of getting into the next big, impactful companies. He also touches on the rarity of 'A+' investors who can profoundly influence a company's trajectory.

CAP TABLES AND FOUNDER EQUITY

Seibel is not concerned by 'party rounds,' which involve many angels. However, he is cautious about cap tables with significantly unequal equity splits or situations where founders have sold large portions of their company early on. He models Series A and B dilutive rounds and prefers founders to retain substantial equity post-financing to remain motivated. He also notes that YC sometimes assists companies in cleaning up their cap tables.

IDENTIFYING TALENT AND PROCESSING DEALS

Regarding startup founder talent, Seibel believes large companies haven't necessarily improved their ability to identify it. He notes that many startup founders are inherently 'unemployable' in traditional corporate settings. For investors, he finds comfort in a baseball analogy: most at-bats result in strikeouts, so applying rigorous analysis while accepting a low hit rate is key. He advises against excessive over-intellectualization of decisions, emphasizing confidence in one's process.

YC SOURCING AND INTERNAL GRADINGS

YC's sourcing power comes from its open application process, challenging the notion that networking is essential for good founders. The second secret is maintaining a high bar for talent, similar to how top universities attract driven students. YC internally gauges its performance by reflecting on past batch experiences, implementing programs like Series A support, and maintaining consistent relationships with alumni through office hours to continuously learn and improve.

Mentioned in This Episode

●Software & Apps

●Companies

●Organizations

●People Referenced

Angel Investing Best Practices

Practical takeaways from this episode

Do This

Write a big enough check so that a potential billion-dollar exit significantly impacts you.

Develop a system to invest quickly, as opportunities may only last hours or days.

Be an 'A' investor: fund quickly, sign paperwork promptly, and stay out of the way.

Follow the FOMO/FRND rule: if a friend starts a company you'd regret missing out on, write a check.

Do your homework before demo day; research companies on blogs, Product Hunt, TechCrunch, or Hacker News.

Maintain relationships with founders after demo day, as opportunities to invest may arise later.

Write larger checks once you have conviction and have done sufficient homework.

Be confident in your process and prepared to write many checks, recognizing a low hit rate is normal.

Focus on the impact you have on founders' lives by helping them take a shot.

Avoid This

Don't write small checks that won't make a meaningful financial difference even in a successful exit.

Don't be an investor who causes founders to wait for signatures or wire transfers.

Don't be surprised by founders moving quickly on demo day; they are often competing with informed investors.

Don't rely solely on hype on demo day; the most hyped companies are often not the best investments.

Don't over-intellectualize decisions to the point of paralysis; be comfortable writing many checks.

Don't be an investor who claims to be 'A-plus' without demonstrating it through actions.

Michael Seibel's Angel Investment Scorecard

Data extracted from this episode

Metric	Value
Total Investments	50
Years Angel Investing	4.5
Invested in Angel Funds	4
Investments in Non-YC Companies	3
Investments in YC Companies	47
Early Stage Investments	46
Late Stage Investments	1 (Reddit)
Companies Deceased	4
Billion Dollar Exits	1 (Cruise)
Exits Post Series A (12-24 months)	1 (Reddit)
Companies Over $50M Valuation	6

Typical Dilution in Startup Funding Rounds

Data extracted from this episode

Round	Dilution Percentage
Series A	20-35%
Series B	20-35%

Common Questions

Michael Seibel views angel investing as a way to 'give back,' similar to charitable donations on the East Coast. He acknowledges that while rare, significant returns are possible, the primary motivation is not financial gain but supporting the startup ecosystem.