Key Moments
Startup Investor School Day 2 Live Stream
Y CombinatorKey Moments
Startup investors often choose to invest in companies that appear less promising on the surface, as obviously good ideas are rarely left for startups to pursue. The key is finding founders with immense determination and unique insights who can articulate a compelling vision, even for seemingly unappealing ventures.
Key Insights
The most successful startup ideas often appear "bad" or "stupid" to established companies and the general market, demonstrated by Google initially being rejected by Yahoo and others for $1 million.
Founders' determination is the single most important trait. "People who have never failed" are more likely to take an early exit due to fear of failure, while those who have overcome adversity are more resilient. (e.g., Paul Graham trying to talk Airbnb out of their idea and them persisting).
Moving fast is critical; founders who accomplish a lot with little and iterate quickly are more likely to succeed. Examples include Meraki building hardware with $0 and Justin.tv hacking together streaming solutions.
Investors should invest in the future they want to see, not the future they fear. Investments in "cynical ideas" or based solely on impressive numbers have historically underperformed for Paul Graham.
The "wisdom of crowds" and groupthink can lead to non-optimal outcomes. Investors should have their own well-defined criteria, rather than simply following what others are doing, as truly great investments are often contrarian.
A significant part of startup investing is luck." Investors, even smart ones, can miss out on massive opportunities (e.g., Paul Graham missing Dropbox and Airbnb) due to moving too slowly or not prioritizing effectively.
Embracing the "bad" idea and contrarian thinking
The core principle discussed is that truly groundbreaking startup opportunities often appear unappealing or even "stupid" to established players and the wider market. Big companies, with their resources and market power, would pursue any obviously good idea. Therefore, for a startup to have a significant opportunity, it must be something that a large company would dismiss. This was exemplified by Google, which was initially offered for sale for $1 million but rejected by major companies like Yahoo. The lesson for investors is that truly great investments are often contrarian and may seem unappealing to everyone else. This contrarian approach is crucial for generating outlier returns, as it allows investors to find opportunities that others overlook precisely because they are unfashionable or deeply unappealing.
Assessing founder determination and resilience
A recurring theme is the paramount importance of founder determination. This trait is considered more critical than the idea itself, as startups face immense hardship. Individuals who have a "Plan B" or who have never experienced failure are viewed with caution. They may be afraid of failure and thus more likely to accept an early, less lucrative exit. In contrast, founders who have faced adversity, such as those who persisted when Paul Graham tried to dissuade them from pursuing Airbnb, demonstrate the resilience needed to navigate the startup landscape. Investors should look for signs of this determination, such as founders having already quit their jobs or having a history of overcoming setbacks. "People who have never failed" may lack the grit to push through tough times, making them a riskier bet in the long run.
The critical role of clear communication and understanding the basics
During founder meetings, the ability of the founder to communicate a clear, concise, and coherent story is vital. This doesn't mean slick salesmanship, but rather a deep understanding and clarity of thought. Investors should be able to grasp what the company does, who wants it, and what value it provides. If an investor finds themselves struggling to understand or having to do the work of constructing the narrative for the founder, it's often a red flag. First principles questions about the company's product, team, and progress should always be the starting point. This initial clarity is crucial for building conviction, and if a founder cannot articulate their vision effectively within a short timeframe (like a 10-minute YC interview), it's a straightforward reason to say no.
Operationalizing the investment process: Funnels and decision-making
Establishing a clear investment process, analogous to a sales funnel, is essential for making optimal decisions. This process typically involves lead generation, introductions, qualification, decision-making, and closing. Investors are encouraged to define their budget and investment criteria beforehand to avoid 'wishy-washy' decision-making. A critical anti-pattern is endless meetings without decisions, which is detrimental to founders. Investors should be decisive, saying "no" quickly if they are not a "yes," to avoid wasting everyone's time. This also includes avoiding 'fair-weather friend' behavior, where an investor commits conditionally, leading to reputational damage.
The importance of moving fast and avoiding "deal drag"
Speed is paramount in startup investing. Investors who move slowly risk adverse selection, losing out on promising companies like Airbnb, which quickly secured funding from other firms. Founders have limited time and resources, and investors cannot afford to string them along with excessive meetings or delayed decisions. "A" investors are characterized by their ability to make decisions quickly, sign documents promptly, and wire funds efficiently. Conversely, investors who cause delays or add unnecessary complexity, especially for small checks, are detrimental to the founder experience and their reputation will suffer. The mantra for investors should mimic the advice given to founders: if you're not a "yes," you're a "no."
Invest in optimism and the future you want to see
Paul Graham shared a personal principle: "invest in optimism." This means investing in the future you desire, not the one you fear, and avoiding "cynical ideas" that might seem profitable but lack inspiring vision. His own investments in companies based on "cynical ideas" or solely on impressive numbers have historically underperformed. The core of a great startup, and thus a great investment, is making something people want. This isn't about exploiting temporary market inefficiencies but about creating genuine value. While numbers are important, they should not blind investors to potential flaws in the founder or the product's long-term viability. A company should be creating genuine value, not just exploiting loopholes.
The necessity of larger checks and the "founder-friendly" approach
For angel investors aiming for meaningful returns, writing larger checks is crucial. A $25,000 investment in a billion-dollar company might yield a return that doesn't significantly impact the investor's personal wealth. Investors are advised to model out potential outcomes, including dilution and taxes, to ensure their checks are substantial enough to matter. However, this increases the stakes and the need for conviction. It's not about writing big checks indiscriminately, but about writing larger checks once conviction in the founders and the idea is established. While the goal is financial return, maintaining a founder-friendly reputation by being easy to work with, being on time, and communicating clearly is also vital for long-term success.
Learning from mistakes and the role of luck
Startup investing inherently involves a significant degree of luck. Even with rigorous analysis, a high hit rate for successful investments is unlikely. Investors are cautioned against over-learning from past mistakes, as this can lead them to avoid good deals out of fear or past negative experiences. While it hurts to lose money, it's a necessary part of the learning process. Investors are encouraged to continue iterating on their process, learning from both wins and losses. Ultimately, the ability to build conviction and gain access to promising deals requires hard work, but the goal is not necessarily to be a "genius" investor but to continue participating in the cycle of innovation and opportunity.
Mentioned in This Episode
●Products
●Software & Apps
●Companies
●Organizations
●Concepts
●People Referenced
Common Questions
Start by defining your annual budget for this asset class. Then, work backward to determine how many companies you should qualify and meet. For example, if you aim to make five investments, you might qualify 20 promising leads to achieve that.
Topics
Mentioned in this video
The organization hosting the Startup Investor School, frequently mentioned as a reference for investment practices, interviews, and company sourcing.
A company founded by Paul Buchheit, later sold to Facebook, highlighting the importance of a great team.
One of the companies founded by Dalton Caldwell.
Cited as an 'anti-Meraki' example of a startup that spent $100 million on a 'juice bag squeezer' without customer validation, ultimately a failure.
One of the big internet companies that Larry Page and Sergey Brin tried to sell Google to in its early days, but they said no.
A YC company building supersonic jets, founded by Blake Scholl, highlighted for its absurd ambition and clear founder vision.
One of the big internet companies that Larry Page and Sergey Brin tried to sell Google to in its early days, but they said no.
Acquired Meraki for $1.2 billion.
A company Paul Buchheit missed out on investing in early due to cancelling a meeting, calling it a 'thousand X return' opportunity.
Mentioned as a successful crypto company that someone would have invested in by paying attention to what 'nerdy 21-year-olds' were excited about.
An email startup with a 'great founder' (Mathilde Collin) that successfully raised a large round from Sequoia, demonstrating that good email startups can exist with a clear story.
A 'late-stage' company that Michael Seibel invested in, hoping it will continue to do well.
Used as an example of a company whose market size was initially hard to determine, making it a contrarian investment. Later, Paul Buchheit recounted missing out on early investment in Airbnb due to slow decision-making.
Mentioned as a transportation service available similar to Uber.
Paul Buchheit's former employer, where he launched Gmail. Used as an example of a highly successful startup that initially looked like a 'bad idea' (BackRub research project).
A new company started by Justin Kan, serving as a default legal provider for YC companies.
One of the big internet companies that Larry Page and Sergey Brin tried to sell Google to in its early days, but they said no.
Paul Buchheit's very first angel investment at YC that returned 44X when acquired by SurveyMonkey.
Company whose CEO, Andy Bromberg, will be speaking on day four about ICOs and crypto.
Acquired Twitch for a billion dollars.
Mentioned as a top startup with brilliant founders and impressive team, exemplifying YC's talent magnet.
An early YC investment (2006) that built mesh Wi-Fi boxes with no external funding initially, later acquired by Cisco for $1.2 billion, returning 73X.
Food delivery service Paul Buchheit funded primarily because he wanted their service delivered to his house, illustrating the 'make something people want' principle.
Mentioned as a typical example of a regional monopoly ISP that Nectar aims to disrupt by enabling local competition.
Acquired FriendFeed; mentioned as a formidable competitor in the social space. Also mentioned as a platform susceptible to temporary inefficiencies that can be exploited by startups.
Consulting firm mentioned as an example of a 'safe job' that founders who are scared of failure might pursue after an early, less successful startup exit.
A YC-funded startup that makes software allowing individuals to create their own Internet Service Providers (ISPs), described as 'ISP in a box'.
Mentioned as an example of a company that created a large market from a formerly small one, and also as a metaphor for Nectar's business model where Uber doesn't own cars, Nectar doesn't own hardware.
AngelCalc, a tool for modeling cap tables and conversions, is linked on the site.
The successful pivot from Justin.tv, focusing on video game streaming, later sold to Amazon for a billion dollars and is now estimated to be a $20 billion business.
Acquired Socialcam for $60 million.
One of the companies founded by Dalton Caldwell.
An early YC investment that started with the 'stupid idea' of livestreaming Justin's life 24/7, eventually pivoted to Twitch and was sold to Amazon for a billion dollars.
Mentioned as an example of a large company that attempted to enter the ISP market but faced challenges, leading to a 'graveyard of bad startups'.
A self-driving car company founded by Kyle Vogt, acquired by GM for a billion dollars, generating a 50X return for Paul Buchheit.
Mentioned as a 'pretty good' company from Michael Seibel's YC batch (Winter 2012) that would have been a better investment than his own or Justin.tv.
Friend and partner at YC for four years, founder of imeem and app.net, and the first presenter discussing founder meetings.
Co-founder of Y Combinator, known for his essays that attracted early interest to YC, and for emphasizing 'determination' as the most important founder trait.
Founder of Dropbox, whose meeting Paul Buchheit cancelled, leading to missing an early investment opportunity.
Co-founder of Justin.tv, who live-streamed his life, later started more startups, and was a YC partner.
One of the four co-founders of Justin.tv, started Socialcam, sold it to Autodesk, became a YC partner, and is now the CEO of Y Combinator.
Co-founder of FriendFeed with Paul Buchheit, described as an 'absolutely great bet' for his talent and ability to quickly re-architect Google Maps.
Founder of email startup Front, praised by Paul Buchheit for her clarity and ability to explain why her product wasn't just a Gmail feature.
Mentioned as a YC partner who works a lot on company statistics and has written a blog post about 'ideas that look like toys'. He is scheduled to speak on Day 4.
One of the four co-founders of Justin.tv, started Cruise Automation, which was acquired by GM for a billion dollars. Known for his willingness to 'do something impossible'.
Partner at YC for seven years, inventor of Gmail, founder of FriendFeed, and a seasoned investor sharing his wisdom and investment philosophy.
Founder of Wufoo and later a partner at YC, described as extremely talented.
Co-founder of Airbnb, who Paul Buchheit emailed about missing their demo day pitch.
One of the four co-founders of Justin.tv and current CEO of Twitch at Amazon.
Mentioned as having given an introduction yesterday and offering advice on not being a 'sheep' as an investor.
CEO of Facebook, who Paul Buchheit found 'really impressive' during discussions for FriendFeed's acquisition.
Co-founder of Google, mentioned alongside Larry Page as a PhD student who developed Google (BackRub).
CEO of CoinList, who will present on day four to address questions about ICOs and crypto.
Co-founder of Google, mentioned as a PhD student at Stanford who tried to sell Google (BackRub) for a million dollars before it became a huge success.
Founder of Boom Technology, a software guy who taught himself aeronautics to build supersonic jets, lauded for his clarity and ambition.
Email service invented by Paul Buchheit; mentioned in the context of his career accomplishments.
Acquired Wufoo, resulting in a 44X return for Paul Buchheit.
A spin-out from Justin.tv started by Michael Seibel, sold to Autodesk for $60 million.
Mapping product at Google, whose JavaScript front-end Bret Taylor famously rewrote over a weekend.
A communication platform used for questions and communications among attendees of the Startup Investor School.
Operating system that Paul Buchheit was very enthusiastic about, leading him to work at Google due to their use of Linux clusters.
Mentioned as a competitor to Dropbox that Paul Buchheit had questions about in early founder meetings.
Email service mentioned as a competitor to Gmail, on whose team Jeff (the host) worked.
A search engine Paul Buchheit expected to 'squash' Google in its early days, illustrating his initial skepticism about Google's business potential.
Mentioned as an example of a top engineering school where top talent is concentrated, analogous to Y Combinator's role in attracting founders.
Venture capital firm that signed a term sheet with Airbnb early on and recently invested a large round in Front.
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