Michael Seibel - Startup Investor School Day 2

so just a couple of notes if you've noticed a lot maybe all of the presenters thus far are YC people that's not going to end right now however the the rest of the course is is mostly almost exclusively perspectives on investing from outside of YC so don't worry we're not completely staring at our own navel here however I will also argue vociferously that the lessons that you've heard from YC partners thus far excuse me mm-hmm are in fact quite general and relevant to investing in startups inside or outside of YC you still should invest in a lot of YC companies there's good reasons to do that however also I know there's a lot of questions about icos and saps and and crypto if you can contain yourselves please try to hold those questions till day four because we're going to be we're going to have a presentation by Andy Bromberg who's the CEO of coin list and the right person to whom to pose those questions our next presenter is going to briefly talk about whatever he wants to he's one of that no-talent group of four people from justin.tv who it turned out did okay founding his own company Socialcam selling it for a couple bucks and is now the CEO of Y Combinator and doing great amazing things here Michael is is an extraordinary person to have in front of us I'm really lucky he is the person who said you need to find problems so dire that users are willing to try half-baked the one imperfect solutions he knows a lot about those exact things please welcome Michael Seibel all right it's been a long day so I'm gonna be pretty fast first how many of you in the room are doing angel investing to make money raise your hand okay raising high against Sun it's not a bad thing to make money great so I'm gonna tell you about my experience raising I'm sorry doing angel investing but I'll tell you straight away that I'm not doing it to make money in effect I feel like where I came from on the East Coast when people want to give back they give money to charity and they go to galas which I never understood and strangely here in the valley when people want to give back they write angel investing checks and so that's really why I write checks I kind of think of it as charity someone described it to me is taking money flushing it down the toilet and then very rarely walking up on the street to a million dollars just laying there and being like holy and so that's kind of how I see it so take all of this advice with that in mind so I wanted to give you a very realistic vision of my scorecard I've been angel investing for 4.5 years I've made 50 total investments invested in four angel funds forty-seven companies only three of them were not YC companies 46 of them were early stage one was late stage it's a little company called reddit I hope it's going to continue to do well of those 50 investments for our dead one is a billion dollar exit cruise 12 hour post series a and six have over a 50 million dollar valuation so I don't really actually consider myself that good of an angel investor I'm fairly certain that there are really big companies that have gone through YC since I've been here that I have not invested in thankfully because I work at YC I own a percent of everyone of them that's how I sleep at night so what are my lessons the first lesson I actually learned about angel investing is you have to write a big enough check and it's funny because the second I started writing angel investment checks Sam told me this lesson and then I ignored them for two and a half years what you really need to think about when writing angel investment check is what are the realistic chances that I'm going to get a return and how much would I make at a billion dollar exit I talked to a lot of people who invest a check sighs that if the company were to become a billion dollar company they wouldn't make enough money to really impact themselves at all so then I kind of asked the question why are you doing it then and so I've kind of made the mistakes of writing twenty five thousand dollar checks and I don't do that anymore so really the way I think about this is like model out a billion dollar exit with dilutions with taxes and make sure you're making enough money so that when you brag about investing in that company to your friends you're not whispering in the back of my head oh but I only made like twenty fifty thousand dollars the next thing that I learned is you have to create a flow a system to invest quickly like oftentimes you have hours or you know a day or two to make a decision so you need to be set up to be able to hear a pitch sign a Clerke document and wire money and like investors who like don't know how to set that up just talk to your banker whoever else handles your money figure that out one of the things we tell YC companies all the time is that an a investor grade a investor gives you money quickly signs the paperwork quickly shuts the hell up that's an a investor there are very very few A+ investors in the world there are very very many less than a investors so don't be one of those people whoo founders are waiting for signatures whoo you signed the paperwork but I can't send the wire because the money is over here and it's got to come over here that like if you're in this game be able to write checks quickly the last rule that I've learned just in my co-founder taught me and and he calls it the FOMO slash frnd rule if one of your friends is starting a company and you would have FOMO if it would become a billion dollar company just shut up and write him a check I wish I followed that rule more often like basically I would have been much more wealthy um so when it comes to investing in YC and and this is kind of where I will end here and open up for questions the first thing that I think about is if you're there on demo day and you have done no prior research you need to be prepared to move extra quickly because you're gonna be in a room of people some of whom have done their homework and this isn't the first time they've seen the name of this company on the screen so don't be surprised when you see a founder moving quickly because there are a lot of people in that room whose primary job is to make money and they've done their work the second thing that I would think about is you can do your homework too these companies are launching often many of them are launching publicly before demo day you can read about them on the blog you can read about the one product hunt on TechCrunch on Hacker News there's really no reason why you shouldn't already be interested in a large number of YC companies before demo day you can reach out to them they might not want to meet straightaway they might want to wait till after demo day but certainly you don't have to see your work starting on demo day the last thing I'll say about demo day is that I think not enough investors spend time thinking about what happens after demo day often times even very good companies will raise a little bit of money before Series A six to twelve months after demo day so even if you didn't get a chance to get into a company on demo day or II didn't know they were good make sure you're maintaining a relationship with that founder if you can be helpful be helpful and oftentimes there's actually an opportunity to invest later that I think people don't realize and I would argue that for some people who are not gonna put in the work upfront it might be better to to take a pause and to the thing about investing six to twelve months after you're definitely gonna pay how higher valuations you're gonna have more information and then one thing that PB said that I can't say enough the most hyped invests in on demo day is often not the best one very very often I think what's interesting is that the crowd on demo day is just not as smart as it appears and I've been the beneficiary of investors who are very good at working the room and pumping up the investments they've already made and it's great when you're a founder because you get to raise at a you know twenty million dollar cap which is nice but needless to say in my batch in winter twelve I my company was by no means the best investment Justin was in my batch as well he raised that uncapped super hyped also wasn't the best investment if you were investing in my batch you probably want to invest in the company called augusto they're pretty good so with that being said I just wanted to give you guys kind of some honest truths from my experience happy to answer some questions and I know you guys have a busy day thank you [Applause] okay so go ahead so I think that when you're trying to figure out how big of a cheque to write what's interesting is that this scales fairly well so if the amount of if you have less money when the billion-dollar company hits you have to make less of a turn return for it to have a significant impact when you have more money you need to make more of a return have sniffing impact that really scales your check size so probably the number one thing I learned and the number one thing I changed was going from 25k checks to 50k checks 200k checks if Sam was here he probably would tell me I should be writing 250k checks I do also think there's something to an investment having a little bite like it like just a little bite just a little like mmm to make you think a little bit more sharp sharply about whether this is a good thing you should be doing I think you should to make big returns you have to write bigger tracks however to the point there's a lot to be learned and you shouldn't write bigger checks once you have conviction once you are able to get conviction and if you go through your angel career thinking oh my god am I gonna put money into justin.tv it's such a stupid idea and the founders don't have that much talent then then don't write a big check but if you can look at this guy and actually notice about Michael that he's actually incredibly articulate and if you see Justin and you say well like he's the kind of guy and his if you meet Justin you'll say he's the kind of guy if you punched in the face and knock him down he's probably gonna get up and punch you back and you might think whoa these guys it's a stupid idea maybe but what do I know they might just make it and once you once you get that conviction then you should write bigger texts and before then I wouldn't I would learn more questions what makes an a-plus investor well I'll give you an example the Socialcam acquisition almost didn't happen and an a-plus investor nudged it in the right direction that's like pretty big impact so I would say that it's extremely rare that an investor can have truly big impact another investor of ours pabu height he basically threw a piece of advice is the reason why we built a video system which is the reason why justin.tv could exist which is reason why twitch could exist so like that that was a biggie I would say they're kind of like very specific moments where like a really impactful investor can actually change the direction of the company but that's very rare so most of the time I tell YC startups to go after a investors many investors claim to be a-plus and wrestlers it's often not true so it's a great question what are the statistics on YC companies and how well they do so actually Arin works on this a lot more so he be better person asks answer this question and he's coming in on day four oh yes you should ask Erin that question what I will say is that we tell the batch that the vast majority of YC companies will fail and that's been a message in the kickoff meeting since PG was giving it and so that's for sure true and you know from my from my kind of memory of the numbers series A's tend to happen between 12 and 24 months post demo day and between twenty and thirty percent of companies will raise follow-on funding post demo day hey Michael um you mentioned that you missed a lot of the big companies in YC what happened if you if you could concisely say what went wrong in your evaluation and is there any lessons that can be taken from that so when I missed companies let's say probably two things and and he be covered one of them one was I was just on the fence and didn't move quickly and I think the second one is actually strangely unique to YC I was busy like I had a bunch of companies to help and so my first kind of thought when I go into demo day is not which company should I invest in its how are my companies doing and how do I make sure they do really well so I think that yeah that's it's it's different when you work here a little bit so um so I'll just elaborate for one second because I've missed a lot of really great investments for than I have and I've missed more than Michael has yeah it's true and and I think there is something that people forget about this which is to be a great investor is incredibly hard-working so and most of you probably don't to work that hard you're kind of dabbling right so you've got a again walk this line I'll tell you contradictory things like if your angel investing the last thing you want to do is kill yourself angel investing but if you really want to be successful you better get your sense of conviction and then do enough homework so that you can chase after work hard to get in the deals you want and if you don't do that your chances of getting that next big deal go down a lot a couple more questions yeah so to party around scare me no not at all the thing that scares me about cap tables is massively unequal equity splits or cap tables where the founders have already sold a large portion of their company very early but party rounds don't scare me at all I think I think people talk about them as if they're really scary and like yes you have to get more people to sign more paperwork but as long as you're getting good a investors who sign paperwork quickly I haven't had a problem I think Socialcam had 30 plus angels so in terms of how much equity the founders should have I think the way that I think about this is I model out a Series A that's gonna be between twenty and thirty five percent dilution in a series B that's gonna be between twenty and thirty five percent dilution and I'd like it where the founders gonna be after that you know and if you're looking at a founding team that's at only fifteen or twenty percent equity after those two rounds they probably still have a large amount of work to do to produce a great exit and not very much equity as motivation and so those I tend to be a little bit more careful about interestingly at YC oftentimes some of the work that we have to do when we ingest companies has helped them clean up their cap tables and help convince their previous investors that the way the company is set up right now is actually harmful so that that's actually work we do quite a bit identifying what kind of talent you mean from the perspective of acquiring them so the question is are large companies today somehow better at identifying talent I guess to hire or to Akwa higher than they were in the past yeah I honestly I have no perspective on that I actually think the number of things that have to go right for an acquisition to happen can introduce many problems even with very very smart people so seems unlikely to me that anything qualitatively has changed in terms of how big companies evaluate startup founders and their talent one thing to remember and keep in mind is that often startup founders are unemployable not always but often the best ones so advice on processing getting to yes so what I will say is that it's a lot easier for us to get to yes than it should be for you to get to yes it's easier for YC to fund the incremental company from my on the angel investing side one thing I think about is is kind of how I think a little bit about baseball like when you go up to the plate you know most likely you're gonna strike out like you're not gonna get on base and so I think that for me that's kind of a calming feeling it's like I can apply as much intellectual rigor as humanly possible and I'm still gonna have a very very low hit rate so sometimes I think that people over intellectualize these decisions I was talking to one investor who said that in order to get a 2 main dollar check they had to produce a hundred page document on how this company was going to go and now it's like wow that's impressive it was a pre-launch company right that's probably a lot of waste of time I think that you have to be confident enough in your process that you're comfortable writing a lot of checks and then but I do think that there's diminishing returns with analysis it's funny it's the Jeff mentioned it this is a hard game to be very good at and that's why I like for me what's comforting is that no matter what I'm making an impact in that founders life even if they don't go on to do a billion dollar company I'm helping them take a shot and someone helped me take a shot and so even if it all goes to at least I'm kind of continuing that cycle and making a valley a place where people have those opportunities that should be in my opinion like a very big motivation for an angel ok last question mark so how does YC source I would say there's two secret powers to YC sourcing one is we have an open application process I think investors believe that having the skill to network to an investor is an important characteristic of a good founder and I think kind of why C's core position from the beginning is that it's not and so especially in the days now where you can write software with relatively little money that has a relatively large impact I think the value of networking and being able to raise large amounts of money is less and less so I would say that's one kind of big secret the other peak secret PB mentioned when I go and talk at MIT my brother's there now I basically say like what makes this school the buildings and the professors and the administration are the students you put the same students in a you know C level engineering school that's the best engineering school in the country all you have to do is move the students so in an interesting way I think PG kept a very high bar very early when he didn't have to and that created this trend where people understood that if I'm gonna be at YC I'm gonna be around extremely talented people and as long as we don't screw that up I think that's just perpetuating over and over and over again so I'm sorry and your second question was oh how do we you just repeat the question like yeah how do we kind of grade ourselves internally at YC because it takes so long to get feedback it's actually interesting um one thing that we do that I witnessed when I first joined was we asked ourselves how did we feel I joined after summer 2012 which was the batch that killed YC and it looked like a bomb had gone off like literally partners had like this like PTSD bike look on their face and clearly something wasn't great about how that batch experience went not I think for the companies there were great companies but clearly something had to change what the organization to be able to to accept that number of calm again I think that's a very important thing that we look at more recently we've implemented a series a program that helps companies raise series A's and that's basically allowed us to pay a lot more careful to tension to what's the path from demo day to the next step and then I would say the last thing that is kind of glaringly obvious over time is we do a lot of office hours with alumni and so we don't really get caught like once you are the group partner for a company like YC in many ways to that company is you and so they will keep on coming back and so you kind of still have to deal with the new class but you're always writing the story along with the previous classes and in that way it's actually it's interesting to learn about what their experience is how we could help them better there's a lot of other things but I think those are the those are the big boys and of course we track stats and so on and so forth but yeah I think those are the the big ones I've seen make a difference hey Michael thanks very much thank you okay now we are well and truly half way in we will start again tomorrow at 10:00 a.m. promptly and for those of you are left already you're about to miss my last pearl of wisdom which is that Michael mentioned what makes an a-plus investor and one thing that for founder's it's easy to tell when an investor is not an a-plus investors if they claim to be an a-plus investor and it's not always it is good to have a great track record if you've invested in lots and lots and lots of big companies it's probably a good sign but just because you've made a lot of money investing do not forget there's a significant component of luck involved and it's great if you all are the lucky ones that pick the one or two or three companies in this batch I see for example that become multi-billion dollar companies but just because you do that doesn't mean you're an a-plus investor thanks and we'll hopefully see you all tomorrow you

Channel: Y Combinator

Views: 14,204

Rating: 4.7906976 out of 5

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

Id: ugmjf0fJY84

Length: 28min 28sec (1708 seconds)

Published: Tue Mar 06 2018