The Truth About Y Combinator

I love, I love the like, well, I've watched all your videos, so we kind of get YC. It's like, guys, these videos aren't YC. Like, yes. [Music] So, this is Michael Cybo with Dalton Caldwell, and today we just finished up, um, a YC batch, and we're getting a ton of feedback. We thought it'd be great to talk to you all about that.

Let's be critical for a second. I would argue this is something that YC does poorly, that they very clearly pointed out. They were like, when we applied to YC, we really didn't know what we were applying for. One founder said to me, we just thought it was a three-month program. We had no idea that you follow on investing companies later, that you have programs for helping me raise a series A or for helping me as I'm scaling. We had no idea.

Another founder said to me, we didn't even understand how YC was organized. We thought it was just going to be some big online lecture. Like, we didn't know we would be assigned a group partner. We didn't know we'd be put into groups and sections. We get to meet with small groups of companies that are like in our area, and like they didn't know any of this stuff. And you know, that's kind of a knock on us. I think sometimes we assume people know, but a lot of these founders were like, well, I applied to YC because I talked to alums, they really liked it, and then when I got here, I was like, oh, like this is way more stuff than I am.

Yeah, uh, you know, one founder was like, dude, we didn't even know that you helped us hire. And then today there was a meeting about the YC hiring platform, and we were like, oh, we didn't know. We spent seven percent; we had no idea what we were getting it for. I don't know, why do you think we suck at that though, Dalton? Like, it's pretty obvious we're bad at it.

There's just a lot of moving parts, and so people know about the batch because they heard, you know, oh, it's a three-month program, oh, you moved to the Bay Area and you spend time. And even then there's confusion. It's like, yeah, I know, like you get to know us in person. Sometimes we're like surprised that it's really you and me that you meet. They think we're like paid actors or something. How many acceptables do you do where they're like, so am I gonna get to work with like you? Yeah, I'm calling you the universe. What's the front, guys?

The real, the real. So, I know it's really us. And so, I think they know about the program. I think they may have heard something about demo day, but it's always way more impressive than they expect. And then they have no idea that we keep talking to the companies for a while, and there's all this other crazy stuff we do to give people an edge. A lot of which we kind of don't slash can't talk about. And so, I think that's part of the reason we don't market it as well is a bunch of the stuff we do is meant to be secret. I don't know how you market that.

And there's just a lot of data that we keep secret unless you're NYC, and that is like gonna stay that way, a lot of secret data. You know, the other thing that's, that makes it hard, I've started to realize this, it's too easy to think of YC as a university. And when I think back, you know, I'm sure Yale has changed a couple ways in the last 20 years since I went, but it's not changed that much, right? I'm sure Stanford's changed some ways since you went, but it's not changed that much. And I think that when we think about a university, we're preconditioned to think it's probably 99% the same year over year.

Yeah, and I think what people don't think about why C is as a product, right? If you were to look at Instagram day one and look at Instagram now, it's completely different. And you would expect that. You would expect the product to change all the time. And I think people's misconception is why I see as a university or a school. Yeah, it's not. YC is a product. I think you nailed it. We talked to people about this. I think they think we have some lessons we're going to teach you or something or like, I love, I love the like, well, I've watched all your videos, so we kind of get YC.

It's like, guys, these videos aren't YC. Like, yes, anyway. So, it's not like a school where we’re like, here's our syllabus, we're going to read you, here's our lecture, here's lecture four, how to read these books. That ain't it. It's more like you're in the club, and you get access to the resources, and if you are ambitious and you are smart, the sky is the limit if you actually work with people that know what they're doing.

There are doors if that opens, and the bigger your ambition is, the more doors are gonna open. You know, this is why it's a little dangerous. This is a dangerous thing I'll say, you know, we've been accused of being a mafia, and we're not a mafia, right? We don't break anyone's legs or anything like that. But it's not completely false, right? Like, if you're like made in the mafia, you do get privileges that normal people don't, right? And like when you get to go through YC, you get access, like you said, to resources that other people don't, right?

And so there's a little slightly different way. It's a little bit like the mafia. People don't honk on you as hard. You know, like when you're in the mafia, like someone's not gonna rob you, right? Like when you're YC, VCs don't rip you off. Like, and so I'm not saying it's a mafia, right? I'm saying it's not enough, we just have these very clear similarities to what I've seen on Mafia TV.

Oh God, anyways. So, um, this kind of, this part of the feedback that we got from founders, it had two elements. One was, we didn't really understand the benefits that YC had when we were applying. Um, it also had this aspect of there were some really serious misconceptions that we had about YC that didn't get cleared up until we got in.

You know, one was this misconception around like, are we actually going to get to work with you personally? Like, is there actual structure of this thing where we feel like we're getting really personalized support? But what are some of the other misconceptions that you saw that were, you know, obviously I mean, I would argue like, obviously designed to try to convince people to not do YC. Like these were like designed attacks on YC. What else are you seeing out there trying to encourage founders to think that investors are what makes your company great and that you could get product ideas and product market fit based on who you let on your cap table.

So, you're like, if I get this investor, they'll judiciary and this investor does this for me, and so, well, YC will do this for me. And it's like, guys, like the way you build a company is not you're not baking a cake where you sprinkle in three different investors and then a cake pops out. Like that's like the stupidest thing I've ever heard. This is a really common misconception out there, which is like, I hate to bring it to you, you're doing all the work, all the work. We're not the reason. The reason to do YC is not that we're going to do the work for you.

It's that it's a great environment to do this with other peers and founders, and get access to these resources while you're the one baking the cake. And the amount of resources you get in this network way trumps the resources you get from some random small check. Like, yeah, similar size check, right? Like, so I think that's one. I think another big misconception was just folks, a lot of folks that apparently have the strongest opinions of telling people about YC never actually were in a batch. I don't know where that comes from.

So, just be curious. Because you know, you don't like I, I just found her in my group this batch, and he was like, well, yeah, everyone that was NYC was like, you should definitely do YC, and the people not NYC were like, oh, it's not worth it. And he's like, in retrospect, he's like, now that I think about it, never, you'd product had opinions about it, and everyone who did use my product had different opinions, and I weighed them equally.

Yeah, you know, the last one for me is this crazy misconception about how far along you have to be. And like what pains me about this misconception is that it can be destroyed through basic research. It's like, look at the companies who've done YC, you've been successful and look at how far along they were when they applied. Yet, over and over again, people will tell founders like, oh, unless you have this much revenue, or unless you're live, unless you've been doing something for this period of time, or like YC’s for scaling, but it's not for starting. It's like garbage. Like literally 40% of the last batch came in with just an idea. Most of them were working when they applied, we're at work working jobs when they applied.

It's true. And again, let me just say the brutal truth. This is the brutal truth. Some company that their idea to start was to first raise a pre-seed round and sell 30 to some random investor, have some co-founder who lasted a year, and then they had to fire them, and now they have a bunch of equity who's gone through three pivots and burned half a million dollars and applies to YC. Michael, would you rather fund that or the brand new company that started a month ago? They just quit their jobs, the craft table is completely clean, and the founders were just like totally jazzed and ready to start a company.

Like who do you think is more likely to succeed? Uh, yeah, you know, I think if you look at the last batch, it's very clear what our preferences lie. Yeah, people that their idea that you've, you know go to, I go to YC once you're ready to scale or once you've done all the stuff and after that, you know exactly wrong, dude, how many companies we funded the past few batches that they have to change their idea, which is fine, it's good to change. Writing, we like it, but they've already raised and they already have all this hair on the company, and they think they're really far along.

How much harder is it to change your idea once you have a bunch of hair on the company because you thought you were ready to scale? So hard, so hard. I, I think that like, you know, it's so funny, but in my mind, it's so clear. You do YC because you want an amazing peer group. You do YC because you want to not be screwed over by investors. You do YC because you want honest feedback, and you want to take responsibility for the win or loss of your company.

And you do, I see because so many other great companies did YC and extracted value out of it that you should be confident that if you're a great founder, you can extract value out of it as well. It's that simple. And like so many people that convince founders the YC's bad, they can't explain why taking their money or doing their program or doing their thing is better. All they can do is like neg YC, and like if you ever see someone making an argument that's 100% ripping something else down and 0% explaining why their thing is good, if all of your talking points is the alternative is bad. [Laughter]

Uh, you know, all you're selling is, is all you have to sell. And like maybe that's your business model is selling fear. Um, not the kind of investor I'd want on my cap table. And then what's a reality like inside of YC if you're a YC company if a batch if you're getting the advice from us to prepare for demo day? How'd it go, Michael? Like, like what did we notice?

You know, first evaluations I think everyone was nervous that valuations this summer would come way down. Wasn't it like hashtag VC summer vacation or some like that was going on where no one was around? Prices are almost exactly the same as they were during the last batch when it was like VC heaven on Earth and money was flowing like crazy. We saw 15 to 25, some companies raised at 30. Almost no change from the last batch. Didn't see any change on speed, you know, we saw investors going from meeting to commitment within one to two meetings.

Didn't see any difference on terms, like, you know, investors weren't demanding board seats or weird craziness. Uh, I don't know, what do you see? All similar stuff, and I think this is like an evergreen lesson for everybody, YC alums or people not in NYC is it's too easy to take an anecdote that you heard from people or stuff people are saying in the group chat and think it applies to you.

Like one of the classic mistakes we see from later stage YC companies is they base how easy or hard they think their fundraise will be based on TechCrunch articles they read of other people raising. They're like, hey, so-and-so just raised, so I'm gonna be able to raise the same valuation. And think about how much time you and I have to talk people off the ledge on how like some random company in Europe raising for like some AI whatever doesn't magically mean their fundraising is gonna be easy, right? Like you're, it's like bad data, like garbage in, garbage out.

Okay, so again the advice for folks is your mileage may vary. I'm sure there are people out there having a harder time fundraise; I apologize to you, right? I'm not saying my experiences, the experiences YC companies have the same as yours, but this is sort of the meta point I'm making which is too many folks think fundraising is a market like the stock market, and if there's like graphs and charts you can have and it all operates like an efficient market instead of what it actually is, which is like 10 different things, right? Michael, like the YC funding ecosystem is like its own little universe, own thing, right? It operates separately than this other stuff.

A lot of what people don't understand is the power of running an auction, right? Like, they just, like it's so rare that you really get to run an auction. You know, most founders, early stage founders are not running an auction. They're begging for money. Like, let's be frank. We, Dalton, you and I were there, right? Like we were, we were begging for money.

Like when you're in an auction, you get to do things like name your own price. Like YC companies say to investors, we're raising this much money at this price. Are you in? Are you not in? Right? Like that's, that's a foreign language to people who've like most people have raised around. Oh, we need to lead to price. It's completely different for YC companies. I think the other thing that happens when you're running an auction that people understand is you get inbound offers.

Like a typical company in this batch got between 10 and I've seen 60 or 70 investors cold emailing them wanting to learn about investing in their company. I got founders messaging me on Slack, Michael, what's going on? And I'm like, oh yeah, no, this is just how this is what nobody told you this is what happened at YC. They're like, no. And I'm like, oh yeah, this is, yeah, investors cold email you. You don't cold email investors, and they're like, mind blown, mind blown.

So, I think that's what's so funny is that we talked to so many founders who had such a different experience fundraising, often from the same funds before doing YC than after doing YC. And let's dig into that. Like, I think you have like this great analogy around this kind of early stage investing environment. Like, try to kind of frame what's going on here.

Yeah, my first company was in the music industry for better or worse. And so I learned a lot about, in the eight years I worked on it, I learned a lot about how the music industry works and how Hollywood works in general. And I started to see a lot of parallels between those industries and Silicon Valley, again, kind of depressingly if I'm honest with you. And it's the following: a lot of the folks who are most approachable when you're a first-timer or when you're just moving to the area or you're trying to break into the industry, the friendly people that want to talk to you are often the most exploitative.

And they're the people whose business model is just just like squeeze you and like pull you up the funnel to someone else. And the folks that you feel like they're doing you a favor while doing, yeah, right? They're like, they're gatekeepers, but they're really friendly. And you don't know you're like, oh, you're a talent scout. Oh, you like, you know, you like the way my demo, you came to my show, like whatever it is.

Like there's folks who really aggressively sell themselves to newcomers, and part of the pitch is, oh, I'm really important. I know all these important people. I can open doors for you. Um, you know, here's some other people that I know I can introduce you to them. Like, there's all these like kind of promises and sadly, the story with a lot of folks you know in the entertainment business is you learn the hard way that those, you, you want to not talk to those people or you want to understand.

There's, you want to make it to the big leagues and get, again, if we're talking about agents or something, to the extent you can get a really good, well-known agent that's like a large agency, like CAA or something, all right, well, then you made it. Like, it's like a key step to go from like, anyway, we, I don't want to get too deep in the Hollywood stuff, but there's commonalities across these industries.

And the thing I noticed in Silicon Valley in my startup experience was a lot of the characters that came out of the woodwork and that they were most successful to me as a first-time founder in retrospect were not great. No, like, hey, give me advisor shares to introduce you to someone. Hey, pay to pitch. We have a pitch competition, come in. Hey, you know, like all these angles that weren't great.

And what's weird is a lot of the people you know were like medium famous and had like some social media clout. Like, you like they did enough to seem successful or drove fancy cars or seem rich that you would think they did actually know people. I mean, you had this too with like fake advisors, right? Like, yes, yes, God, I had a fake advisor who literally took 2% of our company to help us fail at raising around that was rescued by our existing inside investors.

Two percent, and exactly the same thing, right? Like, oh really nice, so I'm helping you out. Oh, it didn't work out, but like you sign this thing, or what about my consideration? I shouldn't even sign anything; it didn't matter. And so, I think this is like what's interesting is when talking to YC founders, they have so many of these horror stories of these kinds of experiences fundraising before YC.

And then they're shocked when like an investor is like, sure, I'll sign a safe, don't need pro-rata rights, I don't need a board seat, I don't need a board observer seat, no, I'm fine. You know, like and the founders are like, what do you mean? And it's like, and I think that it'd be helpful for us to talk about some of those specific horror stories that they tell us about, right?

Um, company in my group that raised money, um, they were desperate. They raised a good chunk of money from an investor who, um, you know, put in hundreds of thousands of dollars and bought over a third of the company straight away. And what they didn't tell that founder is that every subsequent investor would say to themselves, huh, this investor put in a relatively small amount of capital, bought so much of the company that the founders are going to get so diluted they're not going to end up owning anything, and it's going to shut off later stage rounds completely.

And you know, these founders, of course, had a couple hundred thousand, that wasn't enough. They raised more than raised more; they came in YC with almost 50% dilution, and it's like from an investor who knows better but who saw that they could get leverage over a founder, and so they took it. This leverage point is fascinating because so much of when you talk to founders that go out to do a lot of fundraising, there's a lot of talking points that get beat into your head, and it's easy to believe them.

Uh, like, oh I have to own 20, oh I have to have a board seat, oh if you raise it too high of a valuation it's bad. Oh, like when you think about it, those are actually very clever talking points from the investor perspective, and again, so many memes out there about fundraising that are being pushed by folks where it's convenient. Do you see how it's actually convenient to be like prices are down and founders should give up more rights than they used to give during the economy?

What are some other horror stories, man? What else you got from this badge? Yeah, I mean I had one where the investor, the founder was like, hey, when we previously went out we wanted to raise a million dollars and the investor wanted us to do it as a priced round and to pay for fifty thousand dollars of their legal fees. And I'm like companies raise on safes and pay nothing. There are no lawyers in this situation. You hand 50k!

And the even more criminal thing is, great, you want to do a price ground? Awesome; there’s standard paperwork for that. It shouldn't cost fifty thousand dollars to a priced round. Like you’re just ripping off founders, pure and simple, ripping off founders. There are other situations where someone is basically like, oh, I'm committing to being your round, but I need to be the last money in. Tell me when you've read.

Yeah, once you find another million, I'm in, but like you have to, and you have to leave room for me. I'm like, what are you just making rules up? This doesn't, this isn't how it works, right? But founders don't know. We got another one where it'll be like someone saying, all right, um, I'm committing 500,000 of your two million dollar round. You just have to go and get the rest. I'm gonna lead; you just have to go raise that another 1.5 million.

Like these four, these are like all horror stories over and over from founders in this batch talking to us about fundraising before doing YC, and it's like, I know why they were shell-shocked. I know why they were shocked when they did one fundraising during YC. They didn't hear any of this. And what's tough to say is when you think about it to just go back to the music industry metaphor, the entertainment industry metaphor, for a lot of folks, they were, they would have been better off or people would say, I would have been better off just like waiting longer to get better, a better agent, or like not having like a bad agent, just having no agent or so having a bad manager who like stole the masters for me.

Maybe having. And so this is what's weird is a lot of the content marketing we get from The Venture Capital industry is to convince people they need it and want it immediately. It's like the message that you're brainwashed with is a founder is like you can't even start without raising a pre-seed round, and we're in the business of pre-seed round, blah, blah, blah, blah.

Right? And again, like I hope people never hear that from YC or they don't get that from us. We say the opposite. If you watch our other videos, we're like, yeah, like you don't actually need to start with this money to like start a company and to like get customers. Like this is deeply part of the YC mantra, which is if your idea for how you start a startup is to first create a pitch deck and go pitch VCs, you're setting yourself up to get screwed. You’re setting yourself up to get taken advantage of who people, uh, by people who are going to have 20 different ways to rip you off versus if you do something cool, um, you're gonna have a lot more leverage.

Right? Anyways, um, this was an amazing batch, and I don't want YC to take too much credit here. The founders did the work. Like we said, the founders did the work. And you know, to one of the points you made earlier being able to see everyone in person this batch was also just like amazing. You know, it was one of the things that reminded me about why this is such a fun job is being able to see everyone and interact with them throughout the batch.

So, this is a good one, right? This is good. We made it. Yeah, we made it like we survived. We survived at 19. Kind of nuts. It's kind of nuts. All right, man. See you later. Sounds good, talk to you later. [Music] laughs