Dodge: Hello.
Hello, everyone. Thank you for coming, last session of the day
of a two-day conference. Hope you had a great time, and thanks for
hanging in there with us. We saved the best for last. This is going to be the best
session of the conference. We have some superstar--
Kraus: No pressure. Dodge: We have superstar
panelists here who have started companies,
started multiple companies, and invest and get more
companies going, VCs here. So, we've got
some great panelists. A few things to start. There are two microphones
out here, and we want you
to ask questions throughout. So, I'm going to start
with a few questions. I'll be looking at the mics to see if you're up there
to ask questions, and we want to do that
throughout the session. Okay? So, don't make me ask
all the questions. All right? Let me ask a couple of questions
right now. How many of you are not
from Silicon Valley? Oh, awesome. How many of you are not
from the United States? Awesome, that's great.
Okay, great. First, let me introduce
our panelists. Paul Buchheit,
the inventor of Gmail, left Google
and started FriendFeed. FriendFeed was acquired
by Facebook. He stayed at Facebook
for a while, then left, and now he's a venture
capitalist at Y Combinator, one of the premier startup
incubators in Silicon Valley. Joe Kraus, founder of Excite,
one of the very first search engine portals
on the web, very successful, merged with @Home,
so it became Excite@Home. Later, the founder of JotSpot,
a really cool startup that was acquired by Google, stayed with Google
for several years, and now is a venture capitalist
at Google Ventures. And to my right here,
Seth Priebatsch. He's the founder
of Scavenger. He'll tell you a little bit more
about that, but it's a really cool game
that you can play, based on location, and go around and find things
like a scavenger hunt. It's a really cool game. And Scavenger is a portfolio
company of Google Ventures. So, he's in the family. So, this session is about
how to take an idea from a nights and weekends
kind of project that you're hacking on
to a funded startup, and how do you get there? All three of these guys
have done it several times, so I think that's
the first question. Tell us how you did that. How did you go from idea stage
to hacking something, to finding another cofounder, to getting some
angel investment, to getting venture capital?
Let's start with Seth. Priebatsch:
Cool. Just want to make sure
I'm doing this right. Can everyone hear me okay?
Cool. So, I started Scavenger when
I was a freshman at Princeton, and started working on it there,
doing math and computer science. And, basically,
the lineage of the idea was about taking
game mechanics, moving them
into the real world, trying to play a game
literally everywhere. And taking it from that
to actually being something that looked a bit more
like a company was sort of
a messy process. I brought it to one of
my computer science professors, this guy Adam Finkelstein,
and said, "Hey, I have this cool idea. There's a Princeton business
plan competition coming up. Will you help me put
together just enough to make it look like
the product sort of works?" And we did that. We hacked together
a few scripts in Python, and it was literally running
on a server underneath my bed in my dorm room, which,
if we had ever vacuumed, the circuit would've blown, and the whole thing
would've gone down. But I ended up winning
the business plan competition, and that was sort of
a key turning point for us, and then sort of made
the leap of faith and decided to drop
out of school, because that's what
all the cool kids were doing at that point, and I figured
I should follow along. And I think that's probably
the best short answer I have to it, that I found
a couple of friends at college. I found one professor, got into a business plan
competition, which gave us some credibility,
and then sort of took a leap of faith to jump into
one of the incubator programs. We went with Dream Adventures and sort of
started it from there. Dodge:
Great. Joe? Kraus: Yeah, for me, I'll talk
about my first company, which was Excite,
back a while ago now, 1993. I started it
right out of college. We did the route where
we borrowed money from our, each of--
we had six cofounders. We borrowed money
from our parents. We borrowed $15,000 total, and basically
set up shop in our garage. And the kind of two things
that I would basically say-- one is that persistence
played a huge role for us in moving from nights and
weekends to a funded company, and that we just never gave up
trying to get money. And the second
is that opportunity creates opportunities in ways
that are hard to predict. Our funding cycle
literally went like this. I got a book, when I graduated,
from my then college girlfriend, which was by a guy
named Bob Cringley. He still writes
an online column. And it was called,
"Accidental Empires," and it was about a gossip
history of Silicon Valley. In the book, it said,
"Tips for Entrepreneurs: Call me,
I'm a cheap date." I call him,
we go out to lunch. He's interested in
what we're doing. He says,
"I want to join the company." I said, "Great." I didn't know anything
at this point. I'm, you know, brand new,
and I thought, "Oh, this author
wants to join our company. We've made it." He eventually doesn't join,
but he introduces us to his parent company,
which was IDG, a big publishing company
at the time. They give us our first $100,000
contract back in 1994 to put all their archives
online. One of the people I met there
said, "If you do a good job, we'll introduce you
to our board." And so we did a good job, and they introduced us
to their board, and one of their board members
happened to be a venture capitalist
named Steve Coit, out in Boston
at Charles River Ventures. Steve said,
"I'm kind of interested in what you guys are doing, but
I need a West Coast partner." So, he introduced us
to a guy named Jeff Yang, who was then at IVP,
now at Red Point. Jeff said, "Yeah, I don't really
know what to do with you," but he introduced us
to Vinod Khosla. Vinod, we met with Vinod,
and his first question-- unlike everybody else's,
which was, "How are you
going to make money?"-- his first question was,
"Does your technology scale?" We said, "We don't know. We can't afford a hard drive
big enough to test." He buys us, right then,
five minutes later, a $10,000 hard drive,
which, by the way, in 1994, was 10 gigs.
[laughter] And, basically,
that led to us getting a $3 million financing
from Kleiner Perkins, in that case,
without a business plan. And the reason I tell that story
is you could not predict from a book that I received
from my college girlfriend to a $3 million financing
from Kleiner Perkins, how that chain of events
would've happened. But one thing
led to another. Opportunities created
opportunities in ways I couldn't predict, and the second is
we were persistent. To me, it's the number one
characteristic of amazing entrepreneurs
is they persist. So, that'd be my nights
and weekends of transition. Buchheit: All right,
so, that's a great answer. But my story
is a little different. That makes noise.
All right. So, I was very interested in
startups when I moved out here, but I didn't know
anything about them or anything like that. So, I did the only thing
I could. And, again,
the idea being you don't really know
where the path leads. I decided I would
simply join a startup and then, hopefully,
learn in that way. And so, luckily, the startup
I joined was Google. [laughter] So, that's just
a simple matter of-- Kraus:
Good choosing. Buchheit: Yeah,
joining Google in 1999. Kraus: Nice dart.
Buchheit: Yeah, and, you know, I was there for a long time,
obviously, and a lot longer
than I expected. I never thought Google
would really last. It seemed like a-- Kraus: Flash in the pan.
Buchheit: Yeah. I mean,
with AltaVista there, it's hard to see how Google
could really make it. Dodge: I was at AltaVista
at that same time. Buchheit:
Yeah. Dodge: And look
where I ended up. Buchheit:
AltaVista was huge. Kraus: I've got you all
beat there. I had the opportunity
to buy Google, and I failed to do so.
So, how about that? [laughter] How's that
for egg in the face? [laughter/applause] Buchheit:
Anyway, so, I mean, that was obviously
a great experience for me, and it achieved my goal
of learning something about startups and also just meeting
a lot of great people. So, sometime after
I left FriendFeed, I was getting together
with friends from Google, first Sanjeev Singh, who is
the second person from Gmail, and we started talking
about startup ideas and also other people
who we might be interested in, you know, having come onboard
with the startup, as well. And so we kept an eye on who else might be coming
out of Google, because there were lots
of good people at Google, and ultimately ended up talking
with Bret Taylor and Jim Norris, who were also interested
in doing a startup, and the four of us together
finally formed FriendFeed sometime later. And so, you know, at that point,
I think our story differs quite a bit from most startups
because of our history, which is a little bit unusual. Bret had started, more or less
started Google Maps, and Sanjeev and I
had done Gmail. So, we had an advantage
over most startups, in terms of being able
to raise money and such. We actually tried
to avoid raising money. But still, just that idea
of never knowing where the road leads, and you always just
kind of have to go forward. And certainly the deal with
selling the company to Facebook was sort of a surprise, because they were
always trying to buy us, and we always said no, never. And then one day we sold,
kind of by surprise. And, again, where I am now,
in terms of Y Combinator, just kind of happened
spontaneously out of that same process
of just meeting people, talking to people. In the case of YC,
I've actually been involved since about 2006, initially just investing
in the companies. In every batch, I would invest
in more and more companies. And at some point,
I was already invested in so many of the companies,
it just made sense for me to join full-time, and that's
how I got to where I am now. Dodge: So, Paul, you had
four founders in FriendFeed. Buchheit:
Right. Dodge: Joe, you had
six cofounders in Excite. Seth, you did it by yourself.
Why don't you have a cofounder? Priebatsch:
No one liked me. It was--
[laughter] No, well, maybe, but I'm not
sure that was totally relevant. For me, Scavenger is,
by far, the most successful and most interesting startup
that I've done, but I'd done
two previous ones. Giftopedia, I founded
when I was much, much younger, and it failed gloriously. The thing just totally blew up,
but I'd sort of been used to doing things by myself
on that, and I think a lot of the stories
you hear are about founders looking for founding partners. And that's one
very successful model, and there's obviously
a huge amount of data, a huge amount of stories, too,
to showcase the success on that. For myself, personally,
I sort of wanted to get it to a stage where I knew at least
what I was doing, where I had some level
of proof of concept and then went the route of looking for really
solid advisers and looking to build out
a team very quickly. So, by the time I started
building out a team, we had-- I knew what the product
was going to be. I knew at least sort of
what it looked like. It's obviously evolved
a tremendous amount and continues to evolve,
but for me, the founding portion was something that I'm much more
comfortable doing myself and then realizing
what I'm very weak at-- sales was a big thing
I was weak at. Marketing was a big thing
I was weak at, and finding the right people
to help me do that, but at a slightly later stage than looking for
a founding partner. Kraus: Actually, for anybody
who is out there starting companies, I talked to somebody
about this last night. The data actually suggests
and supports the notion that there is a positive
increase in successful outcome as you add numbers
of cofounders up till about four. There's just no data
past four. So, you are more likely
to succeed as you add cofounders
to your business. Nobody knows exactly why, but there is
that positive correlation. Buchheit: We've certainly
noticed this at Y Combinator, because we have,
at this point, I don't know,
300 or 400 startups, and two or three cofounders
seems to be the sweet spot. One is just very difficult,
a lot of times, because ultimately
startups end up having really difficult times,
and it's easier if you're not all alone
when things are awful. And we're not really sure
why going up four or five, six is bad,
but...our sort of theory is that it's just
sort of an indication that there's almost like a
little bit of fear in the group. I mean, obviously,
now I'm talking about both of our companies,
which worked out okay, but we've seen that sometimes,
when there's that many people, it kind of indicates
that none of them is quite as committed. They don't have what it takes
to make it with two or three, and so they kind of get
more and more people, almost out of fear. Dodge: Paul,
I believe Y Combinator doesn't accept companies
of one founder. Buchheit:
Oh, no, we absolutely do. Dodge: Do you?
Buchheit: Yeah, in fact, probably one of the most
successful Y Combinator companies
of all time, which is Dropbox,
was originally a single founder, and then he found
a cofounder. So, he was accepted
as a single founder, and then he found
a cofounder later on. But we have several single
founders in every group. Dodge:
Joe, as a venture capitalist, when you look at investments,
do you like it when there are cofounders
or several cofounders, or how do you look at that? Kraus: Well, obviously,
it depends on the stage, but if we're talking about
something early stage, seed or A round, the things
that we definitely look for and that we have in a pretty
broad analysis of a lot, a lot, a lot of companies
and data have found is, one, is yes,
there's a positive correlation between number of cofounders. Second is have you worked
together in the past is really important as a kind of predictive
indicator of likely success. And that's just primarily,
like, have you gone to battle
together before? Do you like each other
at the end of it? Can you communicate honestly
with one another? Can you resolve disagreements without just striking
the middle ground and having the easy answer? But, oftentimes, somebody
winning an argument is actually more important than trying to kind of
thread the middle. So, having worked together
and then, lastly, the thing that is positively
correlated to success is, you know, this is obvious,
but, like, do you actually know
the domain you're pursuing? You know, startup founders
who do their second startup are actually no more likely to
succeed in their second startup if they're in
a brand-new domain. So, like, for me, I was-- I did a consumer
internet startup in Excite, when I went and did JotSpot, which was really focused on
small to mid-size business. By the numbers, I was at
no greater an advantage having done a startup before, mainly because the market
strategy is so much different. The way you sell,
the way you market, how you understand your
customers is so much different. But bottom line,
in early stage companies, the stuff that we like to see,
obviously, if you've done it before,
that's great. Multiple cofounders is good. Having worked together
in the past, and hopefully in a domain, that you're operating
in a domain you understand and have some deep
expertise in. Those are all kind of
obvious things, but some of the stuff
that we certainly look for. Dodge: I look at cofounders
as validation, right? If there are several
cofounders, that means that
more than one crazy person agreed that this is
a great thing to do. Kraus: Yeah, you cast a good
reality distortion field over a large number of people.
That can be helpful. Dodge: Right, 'cause
there's lots of crazy people, myself included,
who have ideas every day, but I think the validation
of an idea is when you can convince
someone else to drop what they're doing
and join you in your idea. If you can get two or three
people to do that, then that's pretty
good validation that you might be
onto something. And if you can't convince
two or three people to drop what they're doing
and join you, you should think really hard
about what you're doing. Now, Seth and others
are exceptions to that, but as an investor, that's--
I weight that pretty heavily. So, we have questions here.
So, let's start over here. man:
Quick question. So, any ballpark information as
far as does adding cofounders increase your chances
by 10%, 500%? Also, you said
there's no data past four. Is there any drop off,
sort of leveling off? So, adding one cofounder
quintuples your chances, but adding the fourth one
is only a 10% increase. Kraus: Yeah, I don't know
the data explicitly. This is actually public research
that's been done, academic research
that's been done on this particular point. I don't know the name
of the paper, but-- and I don't know how to get you
the name of the paper. Maybe out of the Google
Ventures Twitter account we can Tweet
that particular paper that details
the answers to that. And the reason
there's nothing above four is there's just
not many companies that start with
five cofounders, or six, or whatever. man: Hi, today
what do you think is more important,
traction or product? Kraus: Oh, in my opinion?
man: Mm-hm. Kraus:
Traction, for sure. I mean, look, there's always
the internal debate in a company--
what matters more? Does the team matter most,
does the product matter most, does the market matter most? And, oftentimes, I think
most people understand that it's an interplay
of the three and that oftentimes
it's heavily dependent upon what stage you're actually
making that evaluation. So, a company that's doing
200 million in revenue, and, you know, $50 million
of free cash flow, well, their market
matters a lot, because it's an ongoing concern,
and you want to know how much expansion there's going
to be into the company-- I'm sorry--how much expansion
of the revenue, of the marketing of the company
there can be. Way down back
to the early stage, what's really interesting
is anybody here read a book called
"The Checklist Manifesto"? No? I don't recommend it,
actually. [laughter] But I can summarize it
in a word, in like a few sentences, which is people who are really
expert at something are great at telling
other people how to do it and really bad at following
their own advice. So, the classic example here
is medical doctors who are-- let's say,
you're a pulmonologist. I can tell Don here,
"Here's how I screen for whether somebody
has lung cancer." And we watch what that doctor
actually does-- Nothing related to what
they actually told Don to do. And that's why pilots
have checklists, right? So, there's just no notion
of expertise bias. Well, the thing here is
that if you actually ask and survey wide swaths
of venture capitalists, especially in the early stages, "What's the most important thing
in the very early stages?" they'll all say team. When you watch
what they spend their time doing due diligence on, they do diligence
on the product and the market. And so there's a mismatch
between what people say is important
and what they actually do. So, the question,
as an investor, is how do you create
a system or a bias towards doing what you know
to be important? And so, sorry,
longwinded answer, but in my opinion,
in the early stage, for me, at least,
is all team. man:
Thank you. man: So, this is mostly,
I think, an ethical question. How do you know
when your product is too big
for your current company? You talk about Gmail
specifically. That was something. How did you know
that was right for Google, versus striking it out
on your own, whereas with FriendFeed, that was something, you know,
that social networking has always been kind of
something Google might do. How did you have the clarity
to know that that was right to do on your own? Buchheit: I think
doing Gmail as a startup would've been
a lot harder. The resources required,
I mean, just in terms of all the hardware,
everything else, not too much in just
the brand value of Google. Are you going to trust
your email to some company you've never heard of?
I think that's less likely. By the time we launched Gmail,
Google was pretty well known and pretty well respected,
and people trusted it. People trusted
switching over. If it was FriendFeed mail,
you might be, like, "Well, I'll give it
a few years," right? So, and obviously
there's counter examples. Hotmail was a startup,
but at the time, they didn't really have
any competition. So, I think it would've been
a lot harder to do that, as a startup,
because it benefited a lot from Google's brand
and technology, and everything else. Other startups,
I think having an attachment to a big company like Google
could even be a hindrance. You know, maybe--I don't know,
I'm not going to go into the Google
social experimentation, but certainly
you can see where people might actually be
more comfortable thinking this is like a new product, and the ability
to move very quickly and take unusual directions
and not be hindered by a lot of
the big company apparatus, and Facebook might be
a good example of that. You know,
it's written in PHP, which would never
have been allowed at Google. But, you know,
it's very successful. But I think if it were subjected
to a big company process, they wouldn't have been able
to make the big bets, take the big gambles, you know,
anger millions of people and whatever else it took
for them to become number one. man: Thanks.
Dodge: Over here. man: Hi. Can you give your views
on working with archangels versus working with
early stage VCs? Buchheit: Archangel,
like super angels? Is that the--
you know, I don't know. I think the lines
have gotten pretty blurred. I don't know that there's
any simple answer. It really depends on how much
money you're needing to raise. You know, if you're going to do
a large series A or something like that, you're probably going to end up
at a standard VC. Also, in terms of how much
you're going to have to give up. If you do a series A,
typically, you're going to give a board seat
or maybe two board seats. You're going to give away
20% to 30% of your company. But if you're doing a seed round
with regular angels or super angels, you might be
giving away much less. You might only sell off
5% or 10% of your company. But, typically, you're getting
a lot less money. It probably won't last you
until profitability or even maybe more than
6 to 12 months. Kraus: I personally view it as
who do you fundamentally believe can help you
build your business? Like, it comes down
to your choice of who you want to help fund you,
should, in my opinion, not be based at all on firm,
on position, on whether they fit,
you know, super angel, angel, early stage VC. It's fundamentally about
do you have a good relationship with that person? And I always use
the Caller ID test, which is if
that person calls you and you look at the Caller ID, are you excited
to pick up the phone, or are you like,
"Oh, crap"? And the investments that I've
always kicked myself for failed the Caller ID test,
but where I get greedy. I'm like, "Oh, it's going to be
an awesome business." And then invariably, you know,
stuff changes, but I'm still
getting the calls. And, you know, so it really
is fundamentally, can people-- do you believe that you've got
the people that can help you, give you advice,
and kind of steer you right, more than, you know,
one bucket or another? Dodge: So, Seth, you raised
angel capital money and venture capital money, so you've gone through
both processes. What kind of decision
did you go through in choosing your investors, or did you just take any money
that would come, or how did you go through that?
Priebatsch: Sure. So, from our perspective, we went through an incubator
at Dream Adventures, which was based
in Philadelphia. It's now based in Philadelphia
and New York. And they're sort of,
they're structured like a VC, but they're really an angel.
You know, it's a tiny round. They give you 35K. They take 6%,
sort of the standard model. You sleep on the floor,
eat Ramen noodles, build things as fast
as you possibly can. And then we basically
had a choice to sort of what to figure out
after that. I decided I wasn't going back
to school at that point. And we looked at the angel
versus VC sort of dichotomy, and our initial reaction
was to go with an angel round. We were looking to raise
about $3/4 million, and we figured that's probably
more of an angel size thing than a VC thing,
but we went out, and we talked to a bunch of VCs,
and what we found was-- you know, we went
sort of the unusual route. I think, at this point, a lot of people are going
the super angel route. We ended up going
with Highland Capital, which is a large VC. They've got $2 or $3 billion
under management, and they agreed to do
a tiny round. You know, they're not
used to writing checks for that small
amount of money. They've actually gotten
into it a little bit more now, but we figured if a company
or venture firm that's used to investing
in businesses that are much, much bigger was willing to spend
their time with us, even if they weren't putting
that much money to work, that that was probably
a very good bet for us. And so we ended up
going with them, and they've since participated
in our two follow-on rounds and have been hugely helpful, and we've now raised
about $20 million from Google Ventures
and also Balderton Capital. And from our perspective,
again, Scavenger is the only serious company
that I've really done, but my recommendation would be
if you can get a large VC to put a small amount of money
in you, the real value you're getting
is the time, and so you can get
a lot of leverage for that, if they'll do terms
that are reasonably equivalent to what an angel might do.
Dodge: Over here. man: Hello.
A question across the board. I was curious if you could
speak a bit about what has kept you motivated
over the years, both before and after
your success, other than massive amounts
of money. [laughter] Kraus: You know, when I did
my second startup, almost every employee
that I was trying to hire asked me this question,
and the truth doesn't sound-- it is the truth. It's just not satisfying
for most people, but it is what it is, which is I love
the personal relationships that you form
in a startup, when you get a group of people
trying to do the impossible. It is the closest-- I'm now married
with three kids, and like I just,
I don't get to spend a lot of time with people
that aren't in my family. And the kind of closest
to that collegiate experience, where you're spending
a ton of time with people, there's kind of this--
it's this crucible moment... that's what I get
out of startups. And so all of my closest
relationships really come from the companies
that I've done, because you go through
these experiences where, like, literally,
you don't have-- we had this at Excite. You literally don't have
the next payroll in the bank, and you're trying to figure out
what to do. You go through these ups,
the celebratory experiences where something great
happened and where something bad,
horrible happens. And so for me, at least,
it's the relationships that you form when you try
to do these things. Dodge:
How about you, Paul? Buchheit:
Yeah, that's right. I mean, I think that's actually
one of the things that, in my mind, is the big
differentiator from startups versus some other environments
is the extent to which you're really close
to the team, and you're kind of choosing
the people you're around, especially if you've started
the company. You literally choose the people
you're working with. But also, there's just
the creative aspect of launching new things
all the time, and I don't know. That's just fun for some people,
and it's certainly something that I think enjoyed
most just at FriendFeed is that every day I'd go in,
I'd write something new, and I'd launch it. And just being able to get
things out there that quickly, to have an idea and move from
idea to implementation, to having it out to the world
and people telling me that they hate it,
or they love it, or whatever, in such a short period
is kind of intoxicating. It's just a lot more fun
than most of the things that people--it's more fun
than, I don't know, whatever it is people
pay to have fun. Like, it's more fun
than most vacations. You know,
to actually build things and launch them, and,
you know, that's a big part. Obviously, there's the flipside
that then like at 4:00 AM, you get called, because
like a server is broken, and you've got to wake up
and fix up. I didn't really care
for that part so much. So, there's a balance.
But even in what I'm doing now, I get to be involved in
the creative side of things, because people come to me
with problems, or we're looking at a product, and you can kind of
explore solutions. And then the next time I talk
to the people a week later, they've tried it out
and told me that it didn't work, or it did work,
or whatever, but it gets
that same creative cycle of exploring the world
and trying out new ideas. Priebatsch: So, I've got
a totally unconventional and probably not likely to be
popular response to this one, but, you know,
Scavenger is a company all about game mechanics, and we've still got
a lot of work to do, but we've certainly done well.
We're two years in, and we raised our last round
north of 100 million, so we're doing well. But we very, and I very,
explicitly try and manage my own motivation
using mechanics, and the way I do it is lack of
alternatives, realistically. You take out everything else
that could possibly make you excited
or successful or happy, and you replace that with what
you're doing at your company. And if you've got--
Kraus: I love you. [laughter] Priebatsch: No, no, you're not
going to like this one, and it's not popular, and
it's probably not recommended, if you want to be happy.
[laughter] But it's recommended if you
want to build your company to be as big as you can
possibly make it. I built my whole
incentive structure so that I don't
draw a salary. I don't have a super-active
social life. I left Princeton. I decided I was going to do
Scavenger, and that was it. And it's sort of the thing, if you really want
your troops to fight hard, you burn the ships,
and you've got nowhere to go. And if you build yourself
to have only that, that that is the thing
you are doing, then you're absolutely
motivated to do it, because there's nothing else. And it sounds a little stark,
and it sounds sort of a little cruel
and almost masochistic, but it's really not. It's a very almost
Zen-like state, where you wake up
in the morning, and you know that there's absolutely
nothing else in your life that you have to do
except build a company. And I'm in a weird state, right?
I sleep at the office. I don't have an apartment. I outsource laundry
to my parents. Like, it's a wonderful,
blessed, bizarre life. But if you can do that,
if you can convince the office to bring in breakfast,
and lunch, and dinner, so you don't have to worry
about making food, and you can remove
all alternatives and everything else
you have to focus on, then you will keep yourself
motivated on what you're building. It's not going to be
a super popular one. It's not going to get
in a book anywhere, but it definitely works. man: Great, thank you for
taking the time to talk with us. Dodge: Motivation
is incredibly important in starting a company. It is everything:
motivation and competition. If you remember, you know,
when you were kids, and you played sports,
team sports, and the adrenaline rush
that you get from a band of brothers
out there trying to defeat the enemy,
and just practicing so hard and getting so committed
to doing something, and then the thrill of victory
when you actually win. Well, when you're adults, you don't have an opportunity
to do that. The sports are gone. And, for me, startups
are like adult sports. You build a team.
You go against the competition. You wake up every morning,
and you can't wait to get there and to beat the competition, and there's nothing else
like it. Once it's in your blood,
you can't get away from it. Question over here. man:
When you find a company that you're
looking to invest in, how do you come up
with a number of what you think
that company is worth? Do you listen to the seller,
or do you come in with a number? And is it ten times sales,
one time sales, valued on EBITDA? Kraus: It's obviously
heavily dependent upon stage. So, again, if you're investing
in a late stage company with serious
public comparables, it's a much easier
valuation exercise. You might value it on a multiple
of free cash flow. You might value it on
a multiple of EBITDA. You would value it
relative to those things, relative to its growth rate. But most investing by VCs
is not that style of investing. Most investment by VCs
is investing at a much earlier stage with
much less perfect information. Actually, I think the, um... it is,
in my opinion, at least, more art than science,
the valuation game, and it is subject hugely
to human dynamics. So, like,
I'm a big poker player. I love playing poker,
and it's clear that, obviously, competitive dynamics
increase your valuation pretty dramatically. Sadly, I think most
venture investors are subject to a huge set
of herd behavior, and what I would call FOMO,
fear of missing out. So, I think, if you want to play
the game against the investor, you've got to realize
that investors have a, for some reason, a much greater fear
of missing out on a great deal than a worry about
striking out on a deal that they see
in front of them. And that's very
anti Warren Buffet. Warren Buffet's view is there's
no called strikes in investing, only hit pitches that you think
you can knock out of the park. But it's very hard in that kind
of a competitive environment for most investors
to stay true to that. So, and then the last thing
I would say is that oftentimes investors,
through-- I don't know who's read,
"Predictably Irrational," but the notion of
an anchor price, oftentimes, oddly,
conversations around valuations revolve around
what the entrepreneur said that they wanted
instead of an independent like, "What do we think it's worth?" And it takes discipline
inside the investing rooms to actually create some-- to create a valuation
from scratch, without being anchored
by what the entrepreneur said. So, kind of flip that around. I would, if I were you,
I'd mention a price. The-- Priebatsch: Definitely.
[laughter] Kraus: The second thing is
just recognize the psychology and how competition
plays into it. Now, you've got to be careful
on the game in a sense that what
you don't over-optimize. If you find somebody
you really want to work with, then it's really
not worth jerking around, because a 10% premium
relative to the chance of losing the person
that you think can make the difference
isn't worth it to the long-run
of the business. So, hopefully,
some of that was helpful. man: So, my friend
always asks me to, like, come up
with a business plan, and he'll give it to
some of his investor friends and see
if anything would happen. But say you don't know
how to make a business plan and also that your idea
is kind of out there, and you don't really--
there's no really statistics or numbers
to back your idea up. How would you go about
getting your idea funded without a business plan,
if it's possible? Buchheit: So, no company
that YC funds ever has a business plan. We basically--again,
the team is a big part of it, and then, you know,
just look at the idea. And, specifically, does the team
understand the idea? But at an early stage
for kind of high-tech startups, there usually aren't really any
numbers that you can look at. You can't say this is going
to be our revenue in year five. When people do that,
it's all fiction. And some people do that because they think
it's an obligation, but when you look at it,
there's-- no one could've ever predicted
like what Google's revenue was going to be at,
like, whatever year, right? So, that kind of--any time
spent on that sort of thing, you know, that makes sense
for a sandwich shop or something like that, where the business
is kind of predictable. If you're starting
some Facebook or something, you're not--there's no way
you can predict any of those numbers. And so we ultimately just invest
in people at an early stage, which isn't to say
that the idea doesn't matter. Because if someone
comes to you with an idea that seems
really, really bad, that kind of reflects
on the person. Or it might just be
a really brilliant idea, which is always the intriguing
thing with bad ideas is that they're either bad
or brilliant, and that's where you
want to talk to the team and find out
have they thought through any kind of the obvious flaws? If you ask them,
well, what about-- If your plan is to like
give away free gold bars, you say, like,
"Where do you get the money to get the free gold bars?" They think,
"Oh, I didn't get that." You know, that would be
a bad sign. [laughter] But, you know, maybe they have
a machine that makes gold. And you're like,
"Okay, this we can work with." So, it really,
at the early stage, you don't worry
about business plans. Just build a product. That's really
the most compelling thing is if you can
actually demonstrate that you have something
that is useful and that people like. So, don't spend any time
on that. Just build something.
Get users. Get traction,
if that's possible, and that will make you
stand out. Priebatsch:
To jump in on that, we wrote a business plan for
the business plan competition and never used it again. Highland never asked for it. Google Ventures
never asked for it. Balderton
never asked for it. I still have it,
and it's really good-looking and sounds super professional.
It's totally wrong. [laughter] But, you know, I would say
you should never write a business plan except for
a business plan competition, because winning those
is useful, but they're the only ones
who really care. Dodge:
Good, over here. man: Hi, I'm interested in the
field of intellectual property. What's your view of funding? I mean, the part of intellectual
property patents, trademarks,
all this stuff. Should I walk into it? Do you consider it as a plus,
considering funding? Kraus: You know, there's
differing views on this. My own personal view is no.
Here's why. I think that it's really
only valuable to any company that would acquire you,
because small companies have no ability
to prosecute their patents. Most of the time, you're walking
in with patent applications, and you've got multi years
before it grants. You don't even know
if the company is going to survive
to that stage. And then, lastly, most patents
aren't actually foundational or fundamental in some way.
They're incremental, and so they're usually used
for defense more than offense. Somebody sues you.
You basically countersue. You've got kind of
competing claims. You do a free
cross license. They're rarely used
to effectively-- they're rarely used to affect
the outcomes of competitors or other companies
as a startup. Now, Google, Facebook,
Microsoft, somebody big buys you, and you have something
foundational, that will improve
your valuation, but I think the chances,
for the most part, are slim
relative to the ability of actually making
a business of substance. So, it's not a high focus. There's certain areas
where it is more of a focus, but in kind of traditional, certainly in kind of consumer
internet businesses, no. Dodge:
Over here. man: My question is,
especially for Paul and Joe, I'm the founder of a small
enterprise software company. We have a lot of traction
in a small niche, and we are going after
a very large market that's growing really fast. When you look at a company
like that, what are some things
that turn you on, and what are some things
that turn you off? Buchheit: Well, at the stage
that I invest is usually like
the very early stage, and so, again,
it comes down to the team. And if the team
believes in the idea and the team seems good,
we just go with it. Because the assumption is
you know better than we do. That said, enterprise sales
is notoriously difficult, but I think the question
you're asking might be a little later stage
and more to Joe's. Kraus: It's tough,
at that level of pitch, it's hard to give you
kind of specific advice, but my sense is where
I would quickly dive in, in that conversation, is just,
one, I'd want to understand the dynamics of the market
you're selling into today. How are you selling
into it? Is it direct sales?
Is it indirect? Is it over the phone?
Is it field sales? How do you compensate
those people? What's the title of the people
that you're selling to? And then I would want
to understand, is that pattern
relevant to the pattern into this larger market,
or is it a new pattern? And I would want to
also understand, is this going to require
a heavy lift with regard to
upgrading the team? So, suddenly, the people
that were really good at this niche market,
are they the right people, or are we going to have to hire
a bunch of new people to attack
this bigger market? So, that would be
the line of questioning that I would start
going down at the level of detail
that you've given me. man: Hi, I have
a two-part question. It seems like the team
is very important, and it also seems like a lot
of these cool app engine, where the hardware has become
less important, and it seems like startups
are actually getting cheaper to start, at this point,
easier to take a risk. So, I'd like your views
on outsourcing, basically, you know, now that we don't have
to pay the money on hardware, I'd rather invest
in local talent and keep the team together. And I'm just wondering
how you guys feel about the cost of startups
and how outsourcing affects that or shouldn't affect it. Buchheit:
Outsourcing of what? man: Coding,
in particular. Buchheit: Well, I mean,
if you're a technology company, you outsource the coding,
you're basically outsourcing the thing that you do
to a large extent. Kraus: Gold bar machine.
Buchheit: Yeah. man: But you see a lot where
the CTO will be someone local, and then they'll outsource
their dirty work, and I don't agree with that.
I'm just wondering. Buchheit: No, I mean,
it's not like an ethical thing. It's just that
sometimes that works, but I haven't really seen
a lot of examples of that. I've seen a lot of people try,
and it can sometimes work if you're really on the ball,
but the fact is that it's very hard to get
really top quality developers, even when you're carefully
screening them. You go through a long
interview process. You're managing them
locally. When you're just picking up
people off of a website, I think the quality
that you're going to get just isn't as high. Now, if the actual technology
that you're building is something very basic, and
that's not at all fundamental, you just need to customize
your WordPress template or something, yeah,
I think that can work fine. But if you're
building something where technology is
a core part of the business, I think that you're going
to run into a lot of trouble. Kraus:
As a general rule, I don't like it at all
at early stage. There are always
exceptions to the rule. In particular,
if this entrepreneur has a long-standing
previous working relationship with this group
that happens to be offshore and they've developed
multiple products together, really, the thing you're
dealing with in early stages is you want a mind meld
between the team, and you want
very high bandwidth, low latency communications
between the team. That is just hard to achieve
telephonically or over VC or any of these things where you've just got
time and distance that no matter how good
the technology may be today, it is really, really hard to get that kind of
communication going. So, again, the only exception
I will see is somebody's worked
with this team for ten years and they've developed
multiple products together. Then I'd consider it;
otherwise, I'd just-- I wouldn't do it at all. Buchheit: Yeah, to add
to that point, actually, of the team being together...
you know, at Google, if something
became really important, we would actually put
all the people in the same room, because actually having people
be in separate rooms, it turned out to be a huge
disadvantage in communication, and that's because they're
like 20 feet apart. Right, if you put them on
the opposite side of the planet, it's a whole other game,
right? There's latency
with time zone. It just mucks up
the whole communication. man:
I agree. Thanks. man: This is a little
orthogonal perhaps, but I'd be very interested
to hear from each of you that aside from
your own companies, who do you think
are the really hot startups to be working for today? [laughter] Dodge: You're talking
to people who start companies. They don't work
for other people. [laughter] They aren't
going to do that. man: I guess I'm saying the ones
that look like they have, you know, big potential
or really solid or... lotta buzz. Priebatsch:
So, to throw in the plug, if you weren't going to apply
to Scavenger, jobs at Scavenger.com,
then I think the companies that are real interesting
are probably the ones you hear about a lot,
but companies like Square that are doing things
in mobile payments. We're a location-based
company. I think that mobile payments
are going to be one of the things
that tie social to making it actually work
in offline commerce, and so any company
in that space-- and Square is sort of
a leader there-- I think would be fascinating. I don't know if you guys
have any others. Kraus: You know,
it's funny. So, thank you, Seth,
for giving me like 30 seconds to think.
[laughter] Because, again, as a VC, you're spending
most of your time selecting what you hope
are the best companies and then trying to assist them
to make them successful. So, mentioning something
outside the portfolio actually takes a lot of
like synapses firing. But there's a company downstairs
that I admire from afar. They've raised their money.
It's a mobile gaming company. I do some gaming investing.
And it's called Pocket Gems, and I just think
they're on fire. I think they're great, and
that category monetizes well. So, that's a company
that I happen to like. I don't know whether anybody
has ever heard of them, but they're
quite successful. Dodge: So, I think anything
to do with mobile, location, social, or games,
those four things-- Kraus:
I get that pitch a lot. Dodge: If you can think
of something-- Kraus:
That's the first slide: mobile, social,
gaming, location. Dodge: Yeah, so if you can
come up with an idea that integrates mobile, social,
and games, go for it. Seth:
And colors. Dodge: Colors,
yeah, that, too. Okay,
another question? man: Unless the last panelist
had any ideas. Buchheit: Yeah, I mean,
I could name off the obvious companies,
depending on what stage. You've got Facebook,
and Twitter, and Foursquare. All these are all obviously
hot companies. But if you want earlier
stage things, you know, I actually don't spend
that much time thinking about the early stage
companies that aren't YC. I mentioned Dropbox earlier. I think they're
going to be huge, as well as quite a few
of our other companies, but I don't have
any great examples that come to mind for you,
unfortunately. man: Okay, I have someone
who views himself as a young entrepreneur and has many, many ideas
every week at least. What are some tips
that you guys have for, like, self-regulating your ideas
and junking the ones that-- because often
I'll be very idealistic and optimistic about things, just because I'm in the moment
of thinking about the idea. So, what are some tips
about weeding out just completely
obviously bad ones? Dodge: I can answer this one,
at least first, because people come to me
all the time and ask me
exactly that question. And I tell them
it's sort of like if it's the only thing
you can think of, if you wake up
every morning, and that's all
you can think about, then that's the one
to go with. If you have ten ideas, and you think they're
all kind of pretty good, but not sure,
or I'm not going to leave my existing job to go do this,
forget it. Don't do it. It's got to be an idea that you
just cannot stop thinking about, and you have to do it. When you have that feeling,
that's the one. Kraus: I would actually
argue with this. I don't mean
to sound rude. The profile of the personality
you're talking about that you have is not complete
as a successful entrepreneur. It's not the idea factory. It's pairing yourself
with somebody that's really good at focusing,
and getting a cofounder is incredibly important
for your personality type. Most of the people that I know
that are idea factories are not the guys
that are great at starting and executing on companies, because they can't stay focused
on making an idea happen. And, again, persistence
is one of those key things that makes entrepreneurs
successful. Because, look, startups
go through deserts, big deserts, where nothing feels
repeatable and easy, and like maybe you're getting
a little bit of sales, but it doesn't feel like you've
figured out the real formula. Well, an idea person,
like yourself, immediately jumps to what
other ideas might we do? And sometimes that's good,
but most of the time, it's actually bad. Most of the time,
persistence does carry the day with a combination of exploring,
and it's that balance that is really important
and the art of it. And so, I would say to you
get a cofounder that's different than you that can help kind of shape
and pare down those ideas and kind of camp down
the factory. man: Yeah, yeah,
thank you very much. That's excellent. man: Just wondering, how do
you guys see about health, just your own health
in terms of doing startups? Do you sacrifice
your health to like-- Kraus: Yeah!
No, this is a huge deal. I mean, I don't mean to
jump into it already, but I'll tell
a personal story, and I tell this
only because it, um... I regret it. I was a competitive skier
in college. I had a huge ski accident,
fell 300 feet down a chute through rocks
and was lucky to be alive. And I blew up my knee and I had reconstructive
knee surgery, and I had the surgery
a week before we started pitching JotSpot
on our VC roadshow. Essentially, we were
going to the roadshow. And instead of delaying it,
I did all the pitches, and we got the company going,
and we kind of went, and I put all of my health stuff
on hold. It took me seven years,
as a result, to recover from this fully. And so I've made a commitment,
like, never again am I doing that,
and it's really tough, because, for me, what motivates
me is my commitment to my team, when I'm doing these startups. And so I did the thing
I shouldn't have done. I kind of sacrificed
my own health in that particular case,
because I felt so obligated to show up for the team,
and that was just a bad choice. Buchheit:
Yeah, I agree. I think it's a very
short-term optimization to sacrifice your health,
because you have to recognize all of your abilities,
your mental capacity, your emotional capacity
to handle things is going to come
from your health. So, if you're extremely
unhealthy, I don't think you're
going to be able to persevere, which as Joe pointed out, it's like kind of
the key thing you need to do. Are you going to be able to
make it through that desert, if you're half dead? And it's bad for the team too,
I think, because then you're setting a bad example
for everyone else, where you're kind of
implicitly telling them that they should be also
sacrificing their health, right? So, one of the few
pieces of advice we give the YC companies
for the summer is basically-- not few pieces of advice-- few activities
they're allowed to do. It's like you can spend
all your time working. I forget
what the other thing is. And then go outside,
get exercise, basically. It's crucial, I think. If you're indoors
the whole time, you're just going to go insane
and feel terrible. Priebatsch:
Yeah, I buy into the physical activity thing
a ton. I would recommend,
if you're doing a startup, put yourself
on a running regimen, or swimming, or biking,
or whatever, partially to stay healthy,
but partially because physical activity
is an awesome time to be thinking about things
or not thinking about anything and letting your mind reset, but also expanding
that to your team. At Scavenger,
we have team hikes. We're doing a 200-mile
running race next weekend with six of us, where we're all
hopping in a van, and you sort of relay
from a mountain to the beach, 200 miles in 24 hours. And if you can keep the entire
team active and healthy-- it's no surprise
there's a lot of data out there to show that people
who are active and healthy are happier
and more productive. And you want people
to be healthy, you want them to be
focused and dedicated, but definitely healthy,
and physical activity is a great way
to help make that happen. man: Well, two good friends
of mine in college, we created a product line
for Next Gen Disc Golfing accessories,
and we actually won first place in the business
concept contest. So, my question is
who should we talk to to get funding? Like, what are
good companies to-- [laughter]
Like you. Like, who are good people
to talk to? I mean, we're trying
to get funding to take it to the next step,
manufacturing, prototyping, shipping,
all that. Kraus: One of the things
you'll find, at least at the firm level,
is firms like to invest-- it's the old adage, like,
invest in what you know. And so if you look through
all these funds, all the angels, most of them
have big portfolio pages. I would spend some time
looking through and seeing if you see anything that at
least is approximately similar. Like, for example,
Google Ventures has nothing in something that involves
retail sales or something that involves,
broadly speaking, something nontechnical. We're probably not a good fit
in that particular case, because you're going to be
swimming heavily uphill, and VCs, like it or not,
are pattern matchers, based upon the limited
amount of time they have, and, like, is this a pattern
that feels familiar and where I can apply learnings
from one experience to another to help accelerate
the progress of the company? And so, for me, if I were you,
I would basically spend time looking through
the portfolio pages of a lot of different funders,
and narrow it down to approaching those
that basically have something that's analogous
in some way. Buchheit: The other thing
you might try is just building the business
on your own. I mean, I don't know too much
about the disc golf space, but I can imagine it would be
a lot easier to raise funding, if you already had
an established online business where you've demonstrated
just running it out of your apartment
or something, that you have a market. man: Yeah, we've made
a prototype of the backpack. We've taken that
to market and stuff, and we've estimated
about 50 grand to complete the first thousand backpacks
after shipment. I mean, we can't
really do that on our own. Kraus: This is actually,
this is-- Buchheit: Well, 50 grand,
you might be able to do it with friends and whatnot,
right? man: Ah, not in college.
[laughter] Kraus: Actually,
I would think there's a broader point in here,
which I feel like is-- oftentimes, we get pitches
for businesses that are interesting
lifestyle businesses, where I think it would make
a great lifestyle business but probably isn't
a venture-backed business, where a venture-backed business,
again, you're going to want to see
a return on your money and a high likelihood that
there's a multitude of buyers in almost every stage
of the company. man:
We know there is. Kraus: But the thing is,
you know, the question is-- you also always have to believe
that the business has a chance of being huge,
and so a lot of times, we run into companies
that would be-- are great businesses
if the person's motivation wasn't getting on the front page
of "Tech Crunch," and instead,
the motivation was I want to draw as large
a salary as I possibly can and just have a business
that throws off a ton of cash, but I don't need to be
on the cover of "Tech Crunch." I just want to have
a great business. And so it's, oftentimes,
there's some counseling around. Like, look,
I like your business, just not the right one
to invest in, but make it a great
lifestyle business, and I think you'll be generating
a bunch of cash. Dodge: Okay, so we have
five minutes left. So, we're going into
lightning round now. That means the questions
are like 15 seconds, and the answers
are like 45 seconds. Kraus: How about
only one person answers? Dodge: Yeah, only one person
answers 45 seconds. Go.
man: Okay, so, Seth, you took money
from Highland Ventures, and you kind of closed
with saying if you can take money
from a big venture fund, a couple of billion dollar fund, you're taking 250 or 500K from
a couple of billion dollar fund, that's a good way to go. But there's a whole
other side to this, where if you're putting
yourself in a position where if Highland
isn't interested or potentially
one partner at that firm isn't interested
in doing a follow-on round, then it can kind of
kill your company. And so, like, Paul, you guys,
as I understand, have a policy where you don't
do follow-on rounds like that. If you guys don't mind
just talking about that other side
of that kind of investment. Buchheit: That's certainly
part of the reason we do that is because there is this issue, if you do get one round
from a VC and then they don't join
in the second round, that sends a pretty negative
signal to other VCs, because, like, the people
who know you best don't want to invest. And so Y Combinator is we give
a small amount of money, but the real value
is actually the advice, and connections, and network,
and everything else. And so, yeah,
as part of that, we don't have any
follow-on funding activity, so that there is no
conflict of interest there. There's no negative signal
that like, oh, we didn't choose
to join in on that round, and we're able to help connect
people with the best VCs. Dodge:
Yeah, over here. man: This might help
the disc golf gentleman. But when do you know
to look for investors, and when do you know to throw
your idea on Kickstarter, and what are some pros
and cons of each? Priebatsch: So, I'll jump in
on this one. Start looking for an investor as soon as one of them
will give you money. That would be
my general advice. There's a continuing
trend to bootstrap and to try and not take money, and I'm totally
in the opposite camp. If you can get money
at good terms, it's going to make your life
easier. The help they're
going to give you is going to be great. The credibility
is awesome. And if you can bootstrap,
then take the money and just don't spend it
on the things you would've been
able to bootstrap. Spend it on
something else. So, as soon as humanly possible,
and start trying right away. man: Hi, when you're working
nights and weekends, and you're putting
some more to work, at what point do you worry
about not infringing some obscure IP
and things like that? Buchheit: Never.
Don't waste your time. You are infringing on IP.
There's no question. [laughter] man:
So, let me reiterate, because the gentleman
in front of me asked the question
about bootstrapping, but that was my question,
so I'm going to ask it again. Do we always
have to raise money? Because lately there is a trend
about bootstrapping. Is it for real,
or it was just a factor of the tough economic times? Kraus: I think
bootstrapping is for real. As an entrepreneur, look, I think that kind of
macro trend is out there. You have large cap tech
companies like Google, like Microsoft,
like Facebook, like Yahoo, who've accumulated a massive--
Apple--have accumulated a mass amount of cash
on their balance sheets. So, small acquisitions
are things which those companies are likely to continue doing
over the next two, three years. So, bootstrapping, really,
the benefit of bootstrapping is it allows for relatively
small acquisitions where you own the majority
of the company to be really beneficial for you
and cheap for the company. So they preserve a wide range
of early exit options. Taking money definitely narrows
the range of exit options, just because there's
a higher hurdle now that you have
to be bought at. So, I'm still a big fan
of bootstrapping, as an investor,
because it lowers the risk of the investor investing, because you usually have
more data to invest on. Dodge: Okay,
last question over here. man: I'm currently looking
for one or more cofounders. Right now,
it's just myself. And to be brutally honest
about my skills, I think I excel most
at more of a product design, product manager type of role. I do have
a technical background, and I can do
the technical stuff, but I just feel
I excel more at designing the product
and the features. Do you recommend I look more
for a business background, a person with
a business background or a technical background? Buchheit: I think--
I mean, it's tricky to find anyone, right? But I think improving
your own technical skills is the thing to do right away,
and then probably-- I mean, it depends on what
you're building, obviously, like, it depends
on the market. It depends.
What are the needs that are going to make
your business successful, right? But if there is a big
technology component, I think it's pretty important that your cofounder
also be technical. man:
Thank you. Dodge: Okay,
we are out of time. Thank you so much
for staying with us and thank our panel.
[applause]
