Startup Investor School Day 2 Live Stream

Hey good morning! Thank you. We have a lot to do today, so I'd like to get my part out of the way as quickly as possible. Good morning again and welcome to our second day of Startup Investor School. My role is a little bit more, but not much more, than telling everyone not to park over there. So, don't park over there. There's other parking. Apparently, there's a lot of parking behind 335, there's parking here, and there's parking on the street, or you know, there's this great service called Uber and Lyft that work really well too.

So, we had our startup growing pains yesterday. A few things went a little bit wrong. The toilets backed up of course, the coffee was lukewarm, and the live stream was almost invisible. Maybe that was actually a feature since I was the first person talking and it got better after that. I think we've corrected all those. I can at least testify to the fact that the coffee is now hot, hopefully the toilets are working, but I think we've got that figured out.

As a reminder, if you have questions out in the livestream world, you can tweet them to #YCSIS or with the hashtag #YCSIS. There's also now a Slack channel for those of you who are here in person. I think you've all been invited. You can ask questions. There's a Slack channel for just communications between you guys and a Slack channel for questions. You can ask questions and then upvote those questions, and we will hopefully get to some of them, time permitting. I will also go through all the questions afterwards and try to do a piece answering the questions that I can answer.

So, there will be wine and beer on Thursday. That's my big announcement, yes! Wine and beer! Small amount of time for networking for you guys, and I don't know how much time, but I guess it depends on how much wine and beer there are.

There was some really great feedback, helpful feedback from you guys. Probably the biggest thing everyone said is, “We'd really like to have more community in,” and “We'd really like to be able to network.” Mark and a few others sent me more detailed information about how we can do a better job of helping you all network.

We get that, so so far we have a Slack channel and we'll think about that. I don't know how much progress or how much change we'll make during this version of Startup Investor School, but we really appreciate that feedback and we obviously take it really seriously.

I will point out, as Sam said yesterday, that one of the worst things you can do as an investor is to be a sheep. Don't follow other investors. The best investment decisions you'll make are the ones that other people aren't making. Like, you know, when people come by with really stupid ideas like, you know, having air beds in someone's home after a conference. Stupid idea, right? No one's going to invest in that one except for you, and then you'll make a billion dollars and you can laugh.

So, we covered a little bit about Sam's introduction and then a lot more about SAFEs and how people do startup investing. We're gonna cover more today on the "how," so I'll get back to that in a sec.

Just a quick word on equities versus SAFEs. It's very complex. On the surface, it seems like a simple topic, as you heard yesterday. It's not actually rather complex. Why would you do a SAFE? Well, because it's simple, it's easy, it's fast, and it's cheap. It's better for founders, but there's a little hair we admit that it's sometimes hard to know what happens with the dilution.

There are tools. AngelCalc is linked on the site, but we will also put up a spreadsheet for those of you who are more comfortable with old-fashioned tools, and you'll be able to model cap tables and conversions. It's a weird conversion, it's circular, and so yeah, you know, it's kind of bizarre. But we actually do have a spreadsheet that helps you figure that out.

So, dilution can be a little weird to understand, and it is important to understand it all for founders and obviously for investors as well.

Okay, so with that, we're going to get to the top today, and I am actually really excited myself to listen today because hopefully I'm going to learn something about how to be a better investor. Because I have made many mistakes, and you guys want to corner me later, I can tell you about a few dozen mistakes that I have made.

So, the topic really today is overall how to make smart investing decisions. How do you do that? Well, it's simple! All you have to do is make correct predictions about the future. Easy, right? Well, the way you start off deciding whether to invest is you find companies you want, you meet, you think you're interested in, and meet with them.

So, our very first presenter is my friend and partner Dalton Caldwell, who is the founder of a couple of companies, Imeem and App.net. He's been a founder at YC and a partner at YC for four years now. He knows a lot about many things. My favorite quote from Dalton, because it's one of the few I could find, but it's a good one, is, “If someone tells a coherent story with a beginning, middle, and end explaining what their product is, who wants it, and what it does.”

So here’s Dalton Caldwell to talk about founder meetings. Thank you!

“Hi! How's it going? So I’m going to be talking about founder meetings and process. So this is the we’re going to break down how you think about making investments and how tactically to do it. And we have lots of examples of, you know, maybe not the best approach, the naive approach. We’ll talk about those.

So, let’s get into it. Let’s talk about the first principles. Everyone needs a process. Even if your process is, “I have no process, I’ve never done this before, and I don’t know what I’m doing,” that is in fact a process, I would suggest. So I would encourage you, and what we’re going to talk about over the next few slides, is to think about how you make a simple, simple process for yourself, just to get started with, on how you make investment decisions, right? How you choose who to invest in, how much to invest, all this good stuff.

It's good to have the process, it’s good to have some sense of what your process funnel is. And I’ll talk about what that means in a second. And I would argue, one of the most important parts of a process is the face-to-face meeting. The face-to-face meeting is pretty much where everyone that's done a lot of investing—that’s the meat and potatoes of how you tend to make investment decisions. You do a bunch of qualification, and then the face-to-face meetings are where you decide whether you’re actually going to invest or not. So, we’ll talk a bit about face-to-face meetings as well.

Okay, so here’s a very basic process funnel. It’s just like a sales funnel, right? You’re gonna have some leads—these are people that you might want to invest in. It’s maybe things that you read in the press, it’s people you see at demo day, you know, very straightforward.

You have intros—these are folks that you actually have some introduction to and you have some exposure to the company. You do some qualification, you know, for instance, "Is this even in an industry that I’m interested in, or is this something that I’m excited about funding? Does this fit with whatever kinds of companies I said to myself that I wanted to fund?”

So that’s some very basic qualification. Then you have some decision-making process, which is, “How do I decide whether I'm a yes or a no?” Which is actually quite tricky. And then finally, the last bit is actually making the investment and closing the deal, right? So again, very straightforward, just like a sales funnel if you've done sales before. But it’s worth thinking about your investment process this way because if you’re not—if what you’re doing is saying, “Well, I don’t know, I’m gonna take some meetings and maybe…” and you have a very wishy-washy approach, you’re probably not going to make optimal investment decisions.

So here’s an example of a process funnel. The first thing is actually good to think about what your budget is. I don’t know if other folks have already talked about this or will talk about this, but if you don’t know how much you want to invest and what your budget is, you’re probably gonna be making suboptimal decisions.

So it’s good to think, “Here’s how much I’m willing to invest across a bunch of startups beforehand,” versus being like, “Well, you know, I have some money saved away and I was thinking about maybe doing something else with it, but I’m going to meet with some startups and maybe if three or four of them can convince me it’s good, then I’ll invest in them.”

That’s a really tricky thing to do if that’s the way you think about it because you’re gonna end up negotiating against yourself. And there’s a good chance you’ll end up in this wishy-washy maybe-land, and wishy-washy maybe-land is just not a great place to be as an investor.

So, say you decide, “Okay, I have a 500k budget per year that I’m going to allocate to this asset class, and I’ve talked to my wealth manager or whatever, and everyone’s on board with this. I’ve talked to my significant other, and this makes sense to make this financial decision.”

And so the way I’m going to stage out this is do a certain number of investments. You know, if you’re gonna do it off YC, you can—it's pretty straightforward. You show up to demo day and you pick the five companies you would want to invest in. But if you don’t want to do it through YC demo day and you want to allocate it in other ways, like put that on a calendar and then think about what is your pass rate of your process funnel going to be?

For instance, in this case, that’s about picking five out of your favorite twenty, right? So, you probably don’t want to meet with one hundred fifty companies if you're only going to be making five investments. Probably not a good use of your time or the company’s time, so you want to do a little bit more on the qualification step.

On the other hand, if you want to make five investments and you only meet with five companies, probably, you’re not gonna be making optimal investment decisions. So I would think a little bit, I’d work backwards from what your financial commitment to making investments are to how you decide how many leads to qualify and how many meetings to actually do.

Still with me? Alright, so let’s talk about how you actually make a decision once you’ve gone through this super basic funnel bit. The most important thing is to have a process in your own mind about how you will make decisions. You need to negotiate with yourself: “What does it mean to make the decision to actually write the check?”

“What is my burden of proof to be convinced by the founder that I want to invest in their company?” There are some criteria that you should decide ahead of time, and again it’s good to actually think about these things versus ending up in this wishy-washy land where you’re doing meetings and you don’t even know what you’re looking for. You’re not even sure.

You also want to think about how many meetings or interactions it will take for you to end up with a yes or no. Something that we see a lot as an anti-pattern in investor behavior is folks that just do meeting after meeting after meeting and don’t ever make a decision. And that’s actually worse for founders than just saying no, right? The investor that just wastes a ton of time and feels like they’re just on the edge but never say yes—that’s very hard for a founder to deal with that.

And so it’s actually better off just to figure out what your process is, and if you’re maybe—that’s probably no, tell them no, and move along. That’s a much better way to run a process like this. The other thing that sometimes happens is someone will say yes but not actually say they’re going to commit, or they will say yes and then change their mind, and please do not do that. This is very important stuff.

And you know, if you’re new, maybe you’re not used to making decisions, but once you make that decision that you say yes and you commit, you are fully committed, and trying to back out of the deal after committing is a huge faux pas and will have far-reaching negative reputational effects. So once you reach this decision, you’re in and that’s that.

So, let’s talk about what the criteria are to make investments. It’s really good if everyone has different investment criteria—that’s really excellent. We want everyone to have different investment criteria. Otherwise, what’s the point of having a bunch of investors? That just be a computer that does the math—you feed in the four inputs, and boom, that’s a yes or no, and then the money goes in.

This is an example of sort of a wisdom of crowds type thing, where a bunch of people with different criteria are much more likely to find really interesting outlier companies and generate great returns versus if everyone has precisely the same criteria. So, what are some examples of criteria? The most straightforward one is the team.

The team is pretty important too—definitely part of our investment criteria—but you can make your own decision about just how important the team is and what does that mean? How important is it that there are really strong programmers on the team? How important is it that they have relevant experience in the industry they’re in? How important is it that you have some touch points, that someone else you know knows them and about fruit pouches for them?

So it’s a number of different ways that you can create in your own personal process different criteria around team. Market size is pretty important to a lot of folks. For other folks, market size doesn’t matter—who cares? Because they’ll figure it out later, right? If you did a market size on the original Airbnb thing, it’d be very hard to determine what the market of air beds were, and you would probably say no if you’re purely looking at market size.

Similarly, something like Uber. The market size of people calling black cabs was very, very small at the time, and so you could have easily, you know, just qualified that just on that criteria alone. Traction—there are some investors that say, “I invest when there’s no traction.” There are some investors that invest lots of traction, so think about where you come in on the traction criteria.

The other thing is that a lot of folks decide no on investments if they don’t have the relevant expertise. We have a number of bio companies or hard-tech companies at demo day and a lot of folks just hard pass on all of them because they don’t have the relevant expertise. And that’s actually okay, but it’s good for you to know, “Am I willing to invest in something that I have absolutely no background in, or am I just gonna stay away from that and stick to what I know?”

It’s good if everyone has different ideas around that, but it’s worth thinking about beforehand how much you feeling like an expert in the field matters. And then finally, the last bit of investment terms—some folks say, “Oh, I only pay very low prices.” Some folks require certain amounts of structure in the deal, or certain ownership goals, and all the other good stuff, and that’s okay if that’s what your actual model is, but if you have no idea here, it’s worth thinking about a little bit how much the actual terms matter.

What often happens, I mean, you already heard groupthink, you’ll hear a lot of sales again, is that people’s actual investment criteria is the thing that everyone else talks about and seems to think is gonna work is the thing they want to invest in. And I would again suggest that this is not the optimal way to make investment decisions.

We see a lot. So the other thing that’s not great about groupthink—just add a little bit more color on that—is it creates non-optimal returns. Everyone will just try to plow into the same deal, and the company will end up being over-funded. If it’s perceived by everyone, if it’s everyone’s criteria, and it’s actually not super great for the company if it gets over-funded.

Investors tend to get a little grouchy if they can’t get into the deal, and they all want to invest in it. And as Jeff just mentioned, really good investments are often contrarian or unfashionable or somehow are deeply unappealing to everybody else, right? Those are the really good ones—you see something that other folks don’t, and that the fact that it’s deeply unappealing is what creates such a great opportunity for you.

And so again, why am I spending all the time bringing this up? It’s worth thinking about what your process is and knowing what it is versus having your process be, “I don’t know, I’m gonna go ask 10 people what they think is good, and whatever is on their list of what they want to invest in is gonna be on my list too.” And I’m gonna do that for everybody and then end up with this meta groupthink list—that’s how a lot of people, from what I can tell, do it and I would not recommend that.

Something super important in making investments is having personal conviction. You have to really believe to make this kind of bet; you know you’re putting the money in, and you’re probably never getting it back. There is no undo button on making an investment. And if you do not have the personal conviction, and even when you say yes, it’s sort of half-hearted, you’re going to have a very hard time as an investor.

So one thing that we hear a lot of, especially for folks that haven’t done much of this, is they say, “Okay, I’m in; once you go find the rest of the round.” And this is the cheapest of cheap shots that you can possibly do because what you’re actually saying is, “I would like an option that’s guaranteed in your round, but I do not believe you can actually raise it. If you prove me wrong and you raise it and all the other investors invest, then I’m in.”

And I can understand why, from the perspective of an investor, this feels like a super clever, like, ninja move, but holy cow is this not beloved by founders and not great from a reputational perspective, right? These are the folks—these are the fair-weather friends; these are the folks that didn’t actually believe in you, and all they want is the right to get in if the deal happens to be hot because everyone else invests in it.

Right? And so, perhaps you’ve said things like this or perhaps this is, you know, things that have happened in the past. I just—I wouldn’t recommend phrasing this way. I would just say the honest answer if you’re in this situation—which is, “I’m worried about the financing risk, so I’m a no, but let’s talk later if we—if more financing momentum happens.” Because then you’re being explicit that the answer is actually no and not like, “Oh, yeah, I’m in! Just go raise two million dollars and I’ll be the last check-in!”

Right? That is not a great move.

And one other thing that’s kind of interesting if you think about investor mentality is you have to be willing to look stupid and be wrong on these things. If the only investments you make are ones that are super defensible and make sense to everyone and that could never be made fun of because that’s just a fantastic business, you’re gonna be missing out on a lot of investments.

And by having the personal conviction that you know why you’re investing in the company, you should be okay with the fact that people are like, “Oh, well, what company did you invest in?” And they’re like, “Wait, you invested in the airbed company? Why didn’t they tell you? Like, why did you invest in the airbed company?” Right? You have to be willing to take that potential embarrassment that you’re like, “Yeah, I did invest in the airbed company,” and feel good about it.

And so this is one of the reasons why conviction is so important versus just creating a portfolio of things that you think seem like they will make you look good from a reputational perspective.

So in terms of some anti-patterns on decision-making that we see a lot, one of them is just going really, really slow—disappearing for weeks, not responding to emails, not following up—not great. So, I mean another anti-pattern is you’re not really sure whether to invest or not, so you ask them to meet your friend, like, “Hey, meet my friend,” and you keep doing this over and over again—like “Oh, meet my other friend.” And that’s a way to sort of defer making a decision—that’s not great.

The other thing is flip-flopping where you’re saying yes, and you’re like, “Oh, actually, how about no?” Or like, “How about you need this other thing?” And you’re sort of moving the goalposts over and over again. As I said a second ago, the way you should think about it is if you’re not a yes, you are a no. And you want to stay out of this middle flip-flopping I’m-not-really-sure land, and that’s where you’re gonna feel most of the time. I know that’s where I am most of the time when I make any investment decisions is you’re just kind of in this like, “Oh yeah, this is maybe good,” and you want any kind of signal you can to get out of that.

And one of the pieces of advice we tell founders when fundraising because they get confused so much by people seeming interested in their company and not investing, we tell the founders, “If they’re not saying yes and giving you money, it’s a no.”

Because so many founders that we meet with when we ask them, you know, how it’s going or how fundraising is going, they say, “Well, there’s a lot of interest.” Okay, well, how many people have written checks? “Well, they’re very excited; they seem to really like the business.” And that is all the recipe for a failed fundraise—there’s a lot of people telling you how much they like your business and how like exciting it is to talk to you. If no one is writing checks, it means it’s not going well.

And so, from the flip side, from your side of the table, if you’re just meeting with a lot of folks and very excited and doing a ton of meetings but never actually saying yes, you are telling them no whether you realize it or not, right?

And then in terms of the actual meetings, the best way to get the conviction is just to do meetings in person versus reading a deck or asking other people what they think.

So let’s talk about meetings—it’s very basic. But just scheduling meetings in a non-painful way will put you ahead of the pack from a lot of other angel investors. Being on time and picking a convenient location will put you ahead of the pack versus most angel investors. I don’t know why this is so. I would just suggest part of being founder-friendly and getting a good reputation is just being easy to work with and not coming across like someone that just thinks they’re super awesome and important all the time and wants to just like rub it in the founders’ face how important they are.

Right? So this is like very basic stuff, but I can’t stress enough that doing these is definitely worth doing if you want to have a good reputation as a good investor or someone people want to work with.

In terms of things to ask in meetings, it’s always good to start from the basics. To this day, this is how we do YC interviews and we make all of our investment decisions. We ask—we always start with the basics: “What does your company do? Who’s on the team? What progress have you made? How much have you raised? What terms?”

You can get really complicated and complex on what you think you should ask, and maybe that’s okay at the end of the meeting, but I would suggest always start in these meetings with first principles questions and making sure you understand the basics because it’s not—maybe you already saw their deck or maybe you already read about the company. It’s not necessarily about learning what you didn’t already know; it’s about hearing the founder tell their own story in their own words.

And that’s such a good reason to start from these first principles is you sort of want to forget everything you know and just hear the founders tell their own story, right? And so this is how I’d always suggest starting a meeting—is super basic questions, and then only at the end do we get into advanced, complex mode on the business.

If you want to do follow-up meetings, say you’re not a yes or no after the first meeting, and you want more information, dig deep on the things that would give you either the conviction to say yes or no. Don’t waste time rehashing irrelevant stuff.

And one thing to look for in your own gut is if you feel more or less convinced the more you talk to the founder. Because it could be you hear about an idea, you see their demo day pitch, and it seems great, and you’re a yes, and the more you talk to them, the more you’re getting lukewarm—that is not a good sign. That feels like a no, right? But if it seems kind of like mediocre and the more you talk to them, the more excited you get—that feels like it’s heading towards a yes, right?

And so that’s one good thing to look for is your gut reaction. And if you can’t get conviction, that’s a no. In terms of how do you evaluate was that a good meeting or not: Are you excited or energized, and amped up about the business and just feeling awesome after you talk to the founders?

Or are you feeling kind of like weirded out about it? A really important question to ask is, “Do you trust the founders?” Trust is super important, and even if they’re saying everything that’s right, but you come away with a feeling of not sure if they’re telling you the truth—that is definitely a red flag and a good sign that maybe you should disqualify them from your personal criteria, right?

Because it’s possible for someone to say all the right things, but your gut reaction is perhaps it’s not all true. Would you want to work with their company hypothetically? Would you want them to be your boss? Can you imagine them running a really large company someday and having lots of people reporting to them? That’s a good criteria to think about. And if things go not great, which they often do, are you willing to go through the hard times with these particular folks you’re talking to? That’s a good thought experiment as well.

And so these are all the sorts of thought experiments that I would do after a meeting to decide if you’re getting more or less conviction. In terms of bad meetings, one thing to think about is pretend that the investor meeting is your job interview where they’re interviewing you for a job and not the other way around.

There’s often a lot of power dynamic things of making it feel like the founder is like an employee, I guess, and they are not an employee, right? You really want to feel like you’re interviewing for the job of investor in their startup and not that they’re interviewing for the job of potential underling that wants your money.

And again, just bad meetings have a lot in common. A very common thing we hear a ton from founders is that investors just look at their phone the entire meeting or otherwise act super distracted—not recommended. Very basic, but holy cow, is that common? That happens in a double-digit percentage of meetings, so just basic things—would not recommend.

And then the other thing is sometimes investors try to make themselves the center of attention, where they’ll tell stories about how great they are and all the people they know and all these other good stuff. Just remember the point of the meeting is for you to listen to the founder to decide whether or not to invest. You can build a rapport with them, but to the extent you make the meeting about yourself, I would just argue that’s both counterproductive and probably not a great way to get a positive reputation among founders talking to each other.

Another thing just to mention here is sometimes folks, especially if they’re new investors, want to differentiate by doing a lot of value-added services. And so they’ll use these meetings to just give a ton of product advice and tell the founder how they’re doing everything wrong and how they need to redesign the website and they need to change the name, and they think their marketing strategy through and all this other stuff. And the founder kind of has to take it because they’re meeting with them and they want to raise money, but man, if you just blow them up with tons of advice on how to run their company for them, that is not received well, is what I would say.

Also, if you provide a ton of advice on how their fundraising process is done and they should do it differently—like, “Oh, you’re raising on the wrong price, and you should be doing this,” and “You should never raise on a SAFE.” Like, whatever it is, that is not helpful. If you write them a check, then your advice is a lot more valued. But if you’re just meeting with someone and it’s a no and all you’re doing is telling them how everything they’re doing is wrong, that is not value-add, right?

Another thing that sometimes people do when they’re trying to be value-added is just do a ton of introductions. Like, you do one meeting, you don’t invest in the company, and you introduce them to like 20 people to seem really value-add. That is not value-add; that is wasting their time.

So the point here is you can easily do too much and that’s actually worse than just being straightforward, right? And sometimes people are trying to differentiate themselves and create a name for themselves, but this stuff can really backfire on you if you’re too heavy-handed with decision communication.

How do you say no? What often happens with investors, much like dating, is they ghost the other party. They just never follow up. You do a meeting with an investor and, you know, maybe the founder follows up with the investor, “Hey, how’s it going? What are the next steps?” Never a response? Again, that is not great. I understand that it happens a lot, but I would not recommend it.

I would suggest you directly tell the founders that you will not be investing if possible. If it’s appropriate, give them some reasons. It’s nice to know the reasons, but you don’t necessarily have to. And the fact is, in this business, you’re going to be saying no most of the time, right? That it just is what it is. That’s how the funnel works, and so you need to be prepared to know how to say no, to feel good about saying no, and get practiced at it and make it part of the job.

If there’s something about saying no that makes you very uncomfortable and unwilling to do angel investing, I would suggest just breaking out of that habit. Avoidance alone is not great.

How to say yes? Say the moment you have conviction and you want to invest. Communicate that to them—tell them how excited you are to work with them. We have the handshake protocol, which is covered on how to actually do this over email so there’s no misunderstanding. So follow that and then get them the money.

Sometimes things fall through where the investor says yes and then they ghost them for a while and the money actually never gets closed and the investor gets locked out of the round and there’s a whole mess afterwards, right? So if you say yes and you follow the handshake protocol, just invest, declare victory, and move on.

Sometimes people say yes but then they introduce a bunch of weird stuff alongside of it, so it’s not actually yes. So, you know, maybe if you’re writing a huge check, you can consider doing a term sheet or price Toronto or things like that, but if it’s a very small amount and you’re just part of a large syndicate, don’t make it hard; it’s only going to follow up the process and often the founders will just push back on all this stuff.

So sometimes people do, especially when new angel investors, they try to ask for a bunch of extra stuff—not great.

Okay, so that’s it for this bit. I think we’re gonna do an example meeting now. I have a company from the current batch who I already invested in, so I guess that’s a little bit biased. But we’re going to do just an example investor meeting where I’m gonna ask some questions. Once we’re done with this bit, then we’ll do some Q&A.

Alright, so let’s do it. Okay, so we’ll do the intro in the meeting.

“Okay, how’s it going? So first of all, just introduce yourself and tell us a little bit about what your company does.”

“Okay, hey! I’m Ben, I’m the founder of Nectar, and what Nectar does is we help people start Internet service providers.”

“Okay, so let’s be super specific. So you make software?”

“Yep. And it lets people start Internet service providers.”

“Exactly! And this is a little bit of context. I don’t have it— you simultaneously run your own Internet service provider and you have the ability for anyone to create their own using your software, right?”

“Exactly! So why we started doing this is the problem of what we see is that people usually hate their internet providers, right? The lowest product score. And the reason why is usually people live under regional monopolies, right? Their internet is either coming from a national telecom or a small town has basically Comcast as the only option. And the reason for that is two things: it used to be very expensive to start an internet provider, and then the second part is it’s actually really hard. The amount of knowledge that you need to start an internet provider is really high, and I went through this myself as I was trying to start my own, which is when I realized, hey, the cost has come down dramatically— you can use wireless gears that can deliver gigabits of service. So, you know, with like ten, twenty thousand dollars, you can start your own internet provider. And what you need is the knowledge, which is what we provide, and that’s the part that can be skilled.”

“So, meta point, part of the reason I picked this company is this is actually kind of a complicated pitch, okay? This is kind of a complicated business, and it’s inherently complicated. And so there’s a way that I could immediately get distracted and start talking about, I don’t know, hey, maybe you should rename the company. Like I don’t even know. But there’s a million ways that I can end up down in the weeds before really even understanding what they actually do.”

“And so what I’m going to do here is actually dig deeper and make sure that I completely comprehend what the company does. And hopefully folks do here. I think probably people pulled out, oh it’s some kind of ISP thing. And you know probably little bits and pieces. But I would guess based on what we’ve heard thus far, the mechanics of what they actually do is not completely landed for everybody. Is that true?”

“Anyway, yeah.”

“Okay, so let’s dig deeper. What exactly have you—what do you have today? What is the current state of the company?”

“Yeah, so we have our own internet provider that came out of beta January 22nd.”

“Okay, so you have your own ISP, right, that you guys started using with your software?”

“Right, exactly.”

“How many customers do you have live with that ISP?”

“We have 47.”

“Okay, and where’s that located?”

“That is in the southern parts of San Francisco and Bayview Hunters Point.”

“Okay, so again, meta to zoom out, here’s what we’ve learned. They’re making some kind of ISP company, they have a first location in San Francisco, they have 50 customers for it, and it’s live now. Okay? What do we learn? Okay, this is a real thing; they’re live, they have customers. Are you guys some kind of experts? How do you know how to start an ISP?”

“Like, we just did ourselves. We figured out all the bits and pieces with help from basically the community around because there are actually a lot of experts — darn retired— they’re like the original dot-com people are volunteers.”

“Okay, cool. So we kind of get that. So then what’s the big idea? Why is this gonna be a good company?”

“Like, yeah, so what I have found is there are actual products that are out there that’s basically an internet provider in a box, right? So it comes with the hardware and software, but what it doesn’t do is actually tell you how to use it, how to be successful with it, and how to actually start a thriving internet provider, which is every part that we will be helping out people who use our service.”

“Okay, cool. So, so to zoom out a little bit, and again, because I’m familiar with the company, what you’re saying is the big idea is that what made all these other startup ISPs not work is that you needed tons and tons of money to put, like, fiber on the ground. And so you’re saying by making the software to help people start ISPs locally, they’ll put all the money up themselves and you could scale very quickly without having to raise hundreds of millions or billions of dollars to put in fiber, right?”

“That’s correct.”

“Okay, right. Okay, and then what evidence do you have that that will actually work, that you can get people to use your software to start their own high speed and put up their own money?”

“Yeah, so evidence I have is, you know, we have two people who’ve signed on as franchise, and, you know, they are—and they have buildings in at least five cities that will be using us as a network operating center and will be, you know, powering their software, their landing page, their billing, and customer management.”

“Follow that? Okay, cool! So again to zoom out, the version of this meeting that is a not-great meeting is where I immediately get distracted or I immediately start asking questions and I never even understand what they really do. Because again, like I said earlier, this is a little bit complicated—there are several moving parts here.

But I think my version of this that I can get the most excited about is I do think more ISPs are good. I know you agree. And an innovation of having customers putting in their own capital to create their own local ISPs, it could be really big.

So one metaphor that I’ve talked about with the company in the past is, in the same way that Uber doesn’t actually own any cars and Airbnb doesn’t own any physical property, you’re gonna be in high-speed that doesn’t actually own any routers or fiber, right?”

“Right, we just own the rights to operate. They’re their exclusive right to operate their hardware.”

“That sounds pretty good, right? So anyway, so this is sort of the line of thinking that got me convinced that this is actually really interesting. I can come up with a million reasons why this might not work, but this does feel like, in my opinion, a fresh take on it.

And then I think last bit before we move out, what’s your guys? Why did you start the company? Like what was your inspiration here? Why are you working on this?”

“Yeah, so I mean my inspiration was kind of the frustration with most people with their internet is, it’s 2017. Why does you know Internet in 2020—sorry, sorry, why is Internet know a problem?”

“Right? And then you dig deeper and you realize it’s not really a problem for large apartment buildings; it’s only a problem for, you know, rural areas or suburban areas where there’s regional monopolies. So how to combat this is to basically increase the competition in these areas, and there isn’t one—there isn’t competition because it’s actually really hard to start an Internet provider.”

“Okay, cool. So again, zooming out one more time for every, by the audience, this is not a company for everyone, but if you’re excited about ISPs and excited about taking on Comcast or you think the idea is, you know, you’d like to start your own ISP, this is—that’s the sort of angel investor that’s gonna be like, ‘Wow, this is exactly what I’m looking for,’ right? And so it’s okay if we think about our criteria. Every company is not gonna seem appealing to everybody, but you want to ask the right questions to know if there’s some bit of this to get really excited about.

And so, yeah, I was convinced after talking to them, and you know, sounds fun. So that’s it for this bit. Let’s say thanks! Thanks, Ben! Alright, so time for Q&A. Before I do that, I’m going to announce four cars that are in the parking lot. Yes, this is my job! There is a red Prius, license plate 5SJD123, a green Lexus, that says hand symbol, you know, and a black Nissan 77XFY896. That sounds like too many letters and numbers! And a black Tesla—of course, one Tesla, 7BCT-888. If those are your cars, please everyone close your eyes. Please go move them right away! Thank you. Now let’s do some QA.

And I will also, for streamers, be taking questions from YC SIS and from the Slack channel.

Alright, great, first? Yeah, go for it.”

“Yeah, I think the questions lease option was what do you do when you agree to invest and then you lose faith in the company?

So there’s some subtlety here—one, if you agree to invest, hopefully your investment closed immediately versus the commitment hanging out forever because that can be complicated. And then in terms of the actual things that happen, if the way that you lose faith in the company is what you find out is they’re horrible at fundraising and they’re just gonna like go out of business but they were like nice about it, then you lost your money—congratulations, welcome to angel investing! You can’t get your money back just because someone didn’t raise some other people.

But if someone does something very, very, very bad, lies—there’s reason to see that you were materially deceived about the situation, then I think you want to figure it out on a case-by-case basis. I mean that’s—that’s what we do like at YC. We have a founder code of ethics, and we do enforce that at times, and it’s for extreme cases of true deception.

On the other hand, if someone that we invested in just doesn’t have a good company—well, that’s—that’s the brakes. And so to the extent that you ever experience someone that goes way beyond the line of what is a true breach of trust or conduct, I think you want to, yeah, on a case-by-case basis, talk with the founders, talk with lawyers, and figure that out. And hopefully that will be rare.

Hopefully that’s pretty rare.

Okay. [Music] Yep, that’s a great question.

Okay, so the question was how do you say no to someone if the actual answer is not nice? I don’t know, like, if you just don’t have faith in the people doing it.

So this is tricky. I think you definitely want to say no. And I think you want to say something like, “I was not convinced that this is going to work given the current strategy.” You shouldn’t say, “I think you’re a bad founder.” Well, don’t say that.

But I think there’s ways that you can convey that you just were not convinced in an honest way because basically if the team cannot convince you—I mean, how do you say this, Jeff? I think this is—that’s actually a great and one of the hardest questions we struggle with at YC all the time because sometimes we interview people and we think it’s a great idea, but we just don’t believe in the founders. And that’s the last thing you want to tell someone, one, because you might be wrong and, you know, you shouldn’t stab someone in the heart.

Two, because that’s not a good interaction, right? And let’s just keep in mind, though, there are always a million reasons not to invest in a company. Most companies will fail, and it’s a lack of your own imagination if you can’t come up with a reason why you’re not believing in their version of the future. And that’s what you should communicate to them.

I think the bottom line is every interaction with the founder should be as helpful to the founder as it possibly can be. And if you can’t be helpful, then just don’t say it. But if you can find some way to help them even if the real reason is not that so much that, but it’s still valid, I would use that. There’s always something.”

“Yeah, in the back.”

“So the question was what are the expectations for asking the founder for a deck or other data before the meeting? I think it depends on a case-by-case basis, but let me tell you, if it’s like a regular YC company at demo day, for the context we’re talking about, I usually tell founders not to do that because it’s a very quick meeting.

Maybe the founders could send a one-page or a quick overview, but you generally want to have the quick meeting. I think it’s not, it doesn’t do the companies—I’m saying this from the founders’ perspective. It doesn’t help my company to send decks to like 100 people and then have them just never reply. Is that usually what happens?

So to the extent that the investor is interested enough to ask for that info, I would be like, “Well, just get on a call with them or try to meet them first and then present the information.” When you send people a ton of information without meeting them, it feels very low ROI from a founder perspective, but it’s fine to ask for stuff, and they could just say, “Hey, we don’t really have that,” which a lot of them probably don’t.”

“Yeah, back corner.”

“Yep, so the question was milestone-based financings. So here’s what I would say for what it’s worth. If it was a company that I was advising and an investor suggested that, I would say, ‘Don’t do that deal.’ But if there’s a specific reason in the company that that makes sense, if this if these are the best terms that are available to the company or perhaps it really makes sense, I think also if those were lots of money, maybe that wouldn’t make more sense. But if it’s a relatively small check, and I would consider 50k a relatively long check and someone tried to put milestone-based payments, that would not be my—I would not tell the company that would be my first choice.

And I would say maybe they could just—maybe just get them to invest 25k now at the current terms, and then you’ll circle back with them later versus actually doing a deal that contains milestone payments. Does that make sense? I’d rather do this simple deal now, and then there’s an option to invest more in the future than to do a more complex deal today.”

“Can I add something to that?”

“Sure, yeah.”

“Milestone—the abstract milestone-based investments sound great, but what you’re really doing is asking for results in exchange for an option to invest in the future. And I will always tell founders, take—if you like the investor, take the upfront money, but do not give them that option.

All you can say is like, ‘Okay, that’s a great idea, but if we raise more money in the future, we’ll talk to you and make no commitment that you have to talk.’ They can commit to giving you money all they want, but you do not have to commit to taking the money. So actually it’s kind of a lose for the investor because they’re, you know, you’re guaranteed you get that 25, and if things go fantastically and you’ll want to get more money into bad, you might not get it in.”

“Cool?”

“Yep!”

“Yeah, so the question is if you are not there in person, how does that affect your overall deal flow? I think that maybe video can be okay. It depends on the check sizes. If you’re writing relatively small checks and it’s not a big deal to you, you certainly can use video calls to get some sense of it.

But if this is really your bread and butter, I would suggest flying around to folks on a regular basis for, maybe, you know, a large part of your deal flow. Again, it depends on your focus, and then it does make sense if you’re a locally present somewhere, you’re probably gonna be very helpful to those folks anyway as well.

So you probably wanna do a little bit of both. We do have a lot of investors that fly around the world and basically just show up at Demo Day and write checks and then disappear, and you know, there’s a place for that, right? Everyone doesn’t have to do it the same way.”

“Yeah, there’s a place for that.”

“Yep!

So the question is what do you do when you have an investment that you made and, two or three years in it’s not dying, but it’s flatlining? My understanding is we see a lot of this is, uh, you just kind of gotta ride it out with them.

Usually, these companies can turn into something big, maybe someday they buy the shares back. There are all these options, but there’s really not much you could do. I would not recommend forcing them to sell or something like that. If you have a company that takes as a ten-year time horizon, that’s kind of what you’re signing up to when you make the investment.

Even the companies that go really well—we’re talking about ten-year time horizon. PB is about to talk, and like, you know, a lot of the investments that he made in 2008, 2007 are still hanging out there and he’s getting no liquidity from it. So do you know that you don’t have a ton of options? But I’ve seen founders, depending on the case-by-case, find a way to take care of their investors.

“Hey Dalton, let me give you a couple of online questions. One is how do you approach discussions discussing competition during founder meetings? And sort of a related one was how would you handle information asymmetry… and the example is if you have information that founders didn’t share with you or didn’t share that with you?”

“Okay. Okay, so the first question was competition. It’s definitely good to ask about competition in a meeting but there’s certainly a way to talk about it that is perceived as rude by founders. And so a good thing to think about is if they’re in a competitive space, ask them, ‘Well, how are you going to win versus other folks? Who are the other parties that are in the market, and what are they doing well and what are they not doing well?’

And try to aim for a very even-keeled conversation. Usually, if the founder is super defensive and flips out about it, that is a good red flag for you, right? That is a very good red flag if the person has a very hard time speaking on an even tone about competition or is unwilling to admit the competition exists.

So to the degree to which you can just ask very neutral questions about it and see where they take it, that’s how I would get the most out of the competition question. And the second question was this asymmetry one. What was—can you—what were they saying? I was reading it but it was just a little bit incoherent, so…”

“Okay, I think the question is if you know stuff somehow from your network that the founder doesn’t know, how should you deal with that? Can we give an example? Do you have an example? You seem to know examples!”

“Yeah, I mean, and I guess the real question is if it’s not clear to you whether you’re allowed to say—like let’s say you know another company is about to launch. Yeah, it’s going to be competitive that’s working in the same space. How should you deal with that?”

“Yeah, generally speaking, I see folks do this sometimes where they have proprietary information because they work at a big company or something, and they know things are about to get really good or really bad on a startup, and the founders don’t know.

I would generally keep that to myself because you can’t—I can think of a million ways that can go wrong. But if that helps you inform your decision, then that’s really good. That’s an example of a differentiated decision-making process versus other folks. But to the extent that you—I think I would always advise to keep that to yourself.

There’s so many ways that can go wrong even if you do invest or don’t invest.”

“Okay, cool.”

“Yes, yep.”

“So the question is what do you do when you have an investment and you just don’t believe in the founders anymore? If it’s okay to talk about or…”

“Right, so this is a situation everyone finds themselves in, basically.

I think in that case, and I suspect this would be unusual in the case of YC companies, but if you don’t believe in the founders, don’t keep investing with them, and I think it’s best for everyone to cut ties. And that might sound a little bit harsh, but I do think that once you’ve realized you can’t trust or entertain the founders, then it’s best for you not to be working with them anymore.

And sometimes if you see a red flag where you’re feeling frustrated, maybe you’ll be able to keep up communication and keep conversations clear. Eventually the relationship will deteriorate, but I think it’s important to give founders a chance. Try to root for them, but if you stop rooting for them, just cut ties.”

“Okay, cool!”

“Then how do you deal with the loss of your investment? Do you cut your losses or wait for the startup to die?

That’s, you know, something worth thinking about that way. If you think it’s just going sideways, cut your loss.

And then let that money be floating around forever for you—theoretically—invest in the next one of either it’s a good investment or a bad investment.”

“Okay, cool. Got it. Thanks.”

“You mentioned speed and evaluations, but in the context of early-stage investing, do you take suggestions from other investors or do you mostly listen to the founder and fall back on your gut?”

“Yeah, that’s a great question.

You know, too many times I’ve seen people fall back on what somebody else told them when they should have just trusted their gut. Trust yourself; trust your instincts.”

“Alright, guys, thank you!”

“Thank you! That’s it for this portion, and we will see you guys tomorrow.”