Y Combinator's Essential Startup Advice - Michael Seibel

[Music] well we're grateful to have you back this is like you're starting to hit like an all-time status here of like know your rap you're getting in the double digits so we've created lots to cover let's let's just start with people know Y Combinator obviously for the accelerator yes but it's so much more than that talk to us a little bit about what else is involved in YC what else what other programs are you doing so one of the cool things about YC is that this generation of leadership for the most part are all alum and so it's been a lot of fun to build the things that we wish we had when we went through I see the first new program is called startup school which is a massive online course that I think last year about 28,000 people participated in and now represents about a third of the companies in the current batch so wildly successful on the accelerator everyone knows Bookface is something that not many people know about it's our internal social network for all of our founders it's how we keep everyone together it's how people get to interact with alumni who they've never met in person get deals and has an investor database so it's got all kinds of secrets on the best investors yeah but surprise none of that stuff is real I don't know that any of that's ever come out I mean it's been pretty tight you know people I mean some of it people at YC kind of are good at keeping things private which is good and so there are a lot of resources that are kind of shared within the community that makes community you have and sorry you're trying to make me passive as I remember there are like ratings on people there exist that exists yes yeah that seems really useful actually it's very useful a lot of people come to demo day and for a lot of founders their fundraising people they've never met and they don't know anything about and it's one of the most viable things to be able to see reviews from other founders and hey this investor moves fast makes decisions quickly great great great hey this investor moves slow too much due diligence I would pass yeah so okay so we've got star school which one thing I love about stars sometimes don't meet somebody at some random place around the world going oh yeah like I would I like I went through ycs program I'm like oh cool like which batch like what was the start of school yeah it's like you know okay so it's really like open the doors to a lot more people to kind of like the pre free it's like the basically the pre accelerator well the way I would say it is that I think a lot of people because YC is kind of begun become more popular a lot of people are a little intimidated to apply and they're worried that they won't get in and I think what the MOOC do does what startup school does is kind of introduces you to everything that YC does and gives you advice on how to apply and just makes you feel more comfortable that like you can make it and a lot of new participants did so that was really fun and then for folks who didn't quite hit that line we actually gave grants to about a hundred MOOC companies as well so yeah that was that was a lot of fun that was really good program okay so the MOOC MOOC the accelerator book face book face yep the next program after that is called a series a program so anywhere between 6 and 24 months after demo day for companies that are doing well and are ready to raise the next round we actually rebadged them into a smaller batch see about 12 to 15 companies and we teach them how to raise a Series A and traditionally a Series A is where investors have a ton of leverage because most founders have never raised Series A before and so we teach them about how to run a professional process and we effectively try to get them to veteran status like our goal is to make it so that you're running a process that's as good as someone who's raised 1 or 2 or 3 Series A's would run and you have another batch of people that you can basically compare notes with get support from so and so forth just like the early stage okay and that's more equity that's the same program that's same more equity no yeah no more 7% $150,000 you get everything I see how it work pays for everything pays for everything have you I mean have you felt pressure as the markets have shifted and is really really in the which is great for us as entrepreneurs it's really shifted for towards entrepreneurs yes and you all have made some some some shifts over time and I've done I think it started at like fifteen or twenty thousand dollars in equity yep and forth yet for the same inequity have you felt pressure to adjust the model or to you know to raise it or to change it so within the last 12 months we actually increased from 120 to 150 and a lot of that reason was because of how expensive housing is in the Bay Area so we figured we would just make it clear to founders hey look 30 K should easily class out of two weeks yes should easily cover housing for four to six months so you can spend 120 on your business but no I mean I think the market has been you know good for YC founders valuations are great on demo day typically YC pays for itself literally on demo day and is there is there some like range of that that you see in terms of either a bump or an average that you see people see companies coming out of YC can expect to raise it between a six and twelve million dollar cap if you're in kind of the top third and investors are swarming that 12 can turn into 15 18 20 and 25 or higher and then some number of companies will raise a Series A right out of demo day every batch yeah I had a friend that I went to college with who raised that even I think it was closer to 40 out of demo day maybe that's not don't recommend but that that does have happens it does happen so okay so then we've got the you've got the series a program and then what happens after what's the next thing the next program is the growth program so the growth program is for post product market fit companies and it's really designed for CEOs who are now responsible for building and scaling the organization as opposed to figuring out what product the market wants and so when founders come to us and they say how do I hire a VP of Sales how do I have a fitting SEC team how do I manage a company of 5,200 people that's growing quickly how do i scale hiring scaley HR how do I create values and mission that can defined all of my employees together all of those things are hard to learn and most of us just made mistakes doing them so we re batch companies in the 5200 employee range going quickly and we basically bring in other YC alum who are further along to share all of their experience around this company building advice and that's kind of the the continuum from before you even do I see all the way through your fast-growing company post product market fit we want to help you at every step what so that's how many people work at Y Combinator about 5050 okay and what are the main differences between you as CEO and and PG with Paul Graham when he was CEO so I think one of the things that PG did amazingly well is establish that kind of core culture and advice that YC gives founders in the early stage and that exact playbook is what we teach today it's what we learned from PG it's what we tried to do in our startups sometimes failed book tried and what we teach today the second thing that PG and Jessica really invented was the batch model it's a lot easier for founders when they're with founders who are like them and so we've actually tried to replicate both of those cores and everything else that we do you're always with a batch of other people that you can get support from and you're we're always giving you the kind of core basic YC advice I think during my time what I've been trying to figure out how to do is how do you organize YC to accommodate more founders you know one of our core thoughts is if deserving people are applying to IC we want YC to be able to scale to accommodate them the last batch we got almost 12,000 applicants and we had to figure out how to scale YC to accommodate it so we went from about 140 companies in the batch previous to about 205 in this batch yeah so that takes a little work I wonder is is wearing cargo shorts is that a requirement that he is laid out that he can do anything you want with YC but you have to continue wearing it's actually like I sure awkwardly embarrassing that we both like Sam does okay so not a requirement not a requirement okay maybe maybe we should consider that so I think one thing that I found interesting over the years with with Y Combinator is that it feels like it feels to me like a lot and this may be my own bias of my own sample size around me but I feel like a lot more people are getting interviewed and and statistically I mean a lot of percentage-wise a lot of people more people are getting in because you're growing the program but I I even I spoke with the founder yesterday at the show that said that he had been interviewed in the same batch like he was interviewed three times in just by different partisans I you know I think one group interviewed him than another than another and I just wonder I feel like I'm hearing about a lot of interviews I'm not necessarily all those people aren't getting in but I wonder do you see interview snout differently than used to like it are they used as a way to to coach people more and to say like look we don't even know that you're gonna be ready when we interview you this time but we see the potential we want to encourage you to really come back next time no not really so we do two types of interviews in the application phase we do video interviews those are online interviews between the founding team and one YC partner and then in the interview stage we do interviews and re interviews I would argue that the whole purpose of interviews is to get a YC partner - yes and so partner or partner one partner is one partner and so for companies where we're unsure whether or not they should be invited to interviews or not the easiest way to kind of clarify that is to invite them to a good interview and then for companies that do a single interview during the interview stage and we're unsure whether or not they should be in YC we think to ourselves let's read interview them with another group maybe they can find someone in that group they're strong yes so a lot of the process is designed to make sure that as many partners as possible get an opportunity to say yes to the company we are far more focused on saying yes then trying to predict who's going to be the absolute best company that's very very hard I think one of the things too about Y Combinator that I as a founder who who applied to Y Combinator one point really appreciated and also you know was angry about for like two days but what I didn't get in but was it's the fact that you you all actually give a real reason yeah and it feels like it's thoughtful and I mean it you're doing it at scale you need 12,000 companies or whatever you're trying to give you know you can't you know when somebody comes in for an interview you have real reasons for why they did or didn't get accepted and I think it's a very thoughtful thing to do and it I'm sure you get pushback on it from them initially but virtually no investors do that even I don't know why no one's copy that you've been doing that for maybe since the beginning yeah and I don't know why investors aren't doing that it seems like such an easy thing to do to be thoughtful you know to like these are the reasons why we said no we you know we will you always say we were wrong lots of times so we may be wrong here but I wonder like is that I mean how do you how do you all execute that how do you think about saying you know saying no we know when you say yes but how do you think about saying no well talking about some of the things that come from Fiji and Jessica and kind of the original YC I think they built YC in reaction to how dysfunctional fundraising is typically and it's dysfunctional in two ways it's not transparent you don't know how many meeting it's gonna take to get to a yes or no even a no which is you know what you would want and then also the reasons are never made clear and we actually advise YC companies on this we say you know for the vast majority of investors believe the no don't believe the why and I think the thing I've learned is for the majority of investors it doesn't really benefit them to give the and they're a little afraid that if they give real feedback the founders gonna think they're an I think YC operates differently are you if you if you give real fine it's great I mean I know as a founder I appreciated real feedback and I read you ever go back to an investor who told you know who gave you I mean most most don't so I mean you've raised money in a bunch of different companies yeah did you put them on a black list did you let me know that said no to UT did you go back to them or no okay let's say it this way I remember I remember every single person who said no to me yeah every single VC yes and you know that won't go away and like we they would have made money like right like it's like I like man I feel like maybe I was doing them a favor and so you definitely remember that but do any of them like come back and actually like try to clear the air cuz I feel like some of them that I thought they like kind of avoid like these are people that I would have even some of them have been my friends and sometimes like they kind of avoid me when I see them and then they'll like wait where's that person who's gonna walk bump right into do you have that or do you have people that like hey man I'm sorry I just blew it I had a bad day there was there was one investor who literally had offices right below our office who didn't which company this is for a twitch who didn't invest were they friendly with you yeah they're fine yeah but they mentioned it in passing but no it's it doesn't come up at all ever yeah no and it's funny because it was the same way with Airbnb before everybody did YC I introduced them to all of our angel investors were one of their first advisors yeah and and they all said no one of them actually PB famously sky named Paul boo Hyde who works at YC I sent the intro and he didn't reply for two and a half years and he replied to the intro when Airbnb was on stage at YC as a guest speaker saying I guess I missed that one well okay I tried my best [Laughter] what shifts are you seeing the trend over the last twenty or thirty years is that entrepreneurship is is actually in decline it's hard to we don't sort of naturally think that because it's front and center of mainstream news every day and even in Hollywood in other places but sort of the tech industry in startups is hot hot as it's ever been but you know are we you know are you you have the most applications you've ever had so and some would say that maybe it's not it's not declining for you but how do we like how do you see the tech industry not right now with the investors and startups and you know the people building those I think that there are maybe two trends I'm not excited about and one trend I am so the trend that I am excited about is that we see more and more founders who explicitly are creating companies to make a world a better place and I feel like in the early days of YC so much wasn't built yet on the internet it was much more about just kind of solving the basic problems and it was more about just kind of having fun really to be honest and I think now a lot more founders come into I see with the social mission so that's very positive I think the two negatives are unfortunately a lot of the large tech companies have extremely smart founders and they basically understand that new people like them are going to be disrupting them and they're proactively working to make sure that they can't be disrupted and that's actually reducing innovation many of the most important distribution paths right now are now being controlled by the large tech companies in a way that it's never been controlled before so messaging is controlled by Facebook advertising is controlled by Facebook and Google and prices are priced accordingly and email is controlled by Google and like those are three of the best ways to get the word out about it so that's really challenging and then I think the the unfortunate kind of final negative is that I still don't think the investing community has woken up to the core thesis of YC the core thesis that the abilities had Network to an investor is no longer the most important thing that should be considered when we're trying to figure out whether to fund a company and I think that you know investors are still not open to this new reality that the best builders might not be the best networkers and that's unfortunate cuz I mean ycs been around for a while and that's been our core thesis and I think we've proven it but the rest of the community needs to catch up in 2010 and I could just remember so many people talking about building accelerators I mean it felt like it was like if we go through these cycles and it's like okay what are you building I'm building a so driving you know happened you can pick people up it's like kind of like lyft uber yeah yeah but it's for like you know it's for hipsters and then it's like hey what are you building it's like oh like I'm building this like this this coupon thing it's like it's kind of like Groupon it's like yeah but like it's got a really big focus on shoes and then like and and so we went through these phases and at one point it was this phase of accelerators but has it surprised you that YC is basically like it's basically zero-sum game in acceleration I mean there was thousands thousands and thousands and there are not anymore and there's really you know there's there's basically you guys who have you know taking up an unbelievable size of that market as that surprised you or do you expect that or it has not surprised me for a couple reasons one accelerators are not good businesses PG and Jessica had to invest a disproportionate amount of time and money for a very long time before they saw any return and I think that people don't realize that I think the second thing is that it's a hell of a lot easier to start a startup accelerator if you've been somewhat successful doing startups on your own and it's it's not only is it about business but I wouldn't recommend it as anyone's first business and then I think the last thing is that it seems funny service noting too that people are giving startups advice that literally have never built a startup if I don't understand everyone became a start-up advisor at some point now everyone's an investor but I don't you know these are makes it a little easier for us yeah yeah and then I think the the last thing is that I think that the focus has been on YC maybe for the last three to five years and unfortunately a lot of accelerators have tried to copy YC during that phase when they really should have been looking at what YC look like in 2005 very small very technically focused extremely low budget and you know like most things if you try to start them at scale they're not gonna work as well or at all it's a good insane I'd love to kind of finish here talking about why it's hard for some companies to raise and I wonder if we could just start by just talk us through the economics of an investor if I'm an investor how do I think about investment in terms of me me myself making money so it often asked this question to founders I often say how much money do you think of VC makes if you sell your company for a billion dollars and what's clear is that if you sell your company for a billion dollars you're gonna make a lot of money unless you've made some horrible mistakes along the way you're gonna do just fine and the math for the VC is actually interesting so this is back in the envelope it's not perfect but to give you a basic idea imagine that VC firms own 20% of your company imagine there are five partners so you sell for a billion that's 200 million that comes to the to the firm that split up 80/20 between the VC firm partners and their investors right so right off the bat right like right off the bat that 200 turns into 40 now that 40 is split up amongst the five partners right then you pay taxes so when you look at a billion-dollar company it's very realistic that the VC partner that invested in it might only make under ten million dollars and I think this is something that founders don't realize when they're thinking about how they pitched their business and the thing about how big their business could be the economic reality is that most investors really really care about the potential to invest in 10 to 100 billion dollar companies for the simple reason that the math works better for them personally and like you can't expect someone to not operate by personal incentive so oftentimes a lot of what we have to do with founders is talk about like what could their business be if it was huge like what's the maximum impact they would want to have and talk about it you know when you're pitching a series a investor talked about it that way even though you're still executing on it in a very micro scale and like this is something that like veterans like people have done multiple businesses understand better and that's often why they can raise money faster but it's a training thing you can train anyone to think this way and is that primarily the thing that separates people that can raise versus the ones that can or I think it's probably three things I think folks you can raise typically are showing that they are currently executing on their business they're not waiting for investment in order to execute on their business I think the second thing is that the folks who can raise typically you're better about how they run their process they run it slightly tighter more in parallel and then I think this is a third one by being able to tell the story that convince the investor that this could be a very very big business I would say that a lot of what we do for demo day prep is help our companies kind of fit that mold I would argue that you know sometimes the valley represents itself as being able to help anyone accomplish their dreams in reality the valleys an economic engine and the people operate according to economic incentives and you get to accomplish your dreams if you can align them with those economic incentives and like I would argue that maybe that sucks but that's the reality and so how do you make what you want to happen in the world happen while fitting into those kind of those guidelines will give you access to a lot of money if you don't need a lot of money then great don't sign up but if you do need a lot of money to make this thing in the world that you want to happen happen these are the kind of things you to think about yeah the other thing too is if you're Pitt when you pitch your company or your idea your product and if when you pitch your your potential customers the same way you're pitching investors which I have absolutely done and over the course of many different companies but you're completely missing it right because it's a totally different audience with totally different motivations as you say yes they're trying to figure out how do I maximize my time to get the money that I need to get out of this so that I can keep my job yep you know in seven years and not be you know quietly sunset it off to a new really cool project it's not really that cool and so it's you've got to tailor the message and the things that you're saying specifically to those people and the motivations that they have we often tell founders at YC your investor pitch and your customer picture two very different things never combine them and we help them with their industrial pitch but you as a founder should know your customers way better than anyone else including any of them you know I said YC so you know your customer pitch the thing that's on the front page of your website the thing that you say to customers is often very different because investors are rarely actual customers or users of your product Michael from Y Combinator thank you so much you

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Id: A35jCapHmug

Length: 25min 57sec (1557 seconds)

Published: Tue Mar 05 2019