Michael Seibel - Startup Investor School Day 2

So, just a couple of notes. If you've noticed, a lot — maybe all — of the presenters thus far are YC people. That's not going to end right now. However, the rest of the course is mostly, almost exclusively, perspectives on investing from outside of YC. So, don't worry, we're not completely staring at our own navel here.

However, I will also argue vociferously that the lessons that you've heard from YC partners thus far, excuse me, mm-hmm, are in fact quite general and relevant to investing in startups inside or outside of YC. You still should invest in a lot of YC companies; there's good reasons to do that. However, I also know there's a lot of questions about ICOs, and SAPs, and crypto. If you can contain yourselves, please try to hold those questions till day four, because we're going to be — we're going to have a presentation by Andy Bromberg, who's the CEO of CoinList, and the right person to whom to pose those questions.

Our next presenter is going to briefly talk about whatever he wants to. He's one of that no-talent group of four people from Justin.tv, who it turned out did okay founding his own company, Socialcam, selling it for a couple bucks, and is now the CEO of Y Combinator and doing great, amazing things here. Michael is an extraordinary person to have in front of us; I'm really lucky. He is the person who said, "You need to find problems so dire that users are willing to try half-baked, one-imperfect solutions." He knows a lot about those exact things.

Please welcome Michael Seibel!

All right, it's been a long day, so I'm going to be pretty fast. First, how many of you in the room are doing angel investing to make money? Raise your hand. Okay, raise it high against the sun; it's not a bad thing to make money. Great! So, I'm going to tell you about my experience raising — I'm sorry, doing angel investing, but I'll tell you straight away that I'm not doing it to make money. In effect, I feel like where I came from on the East Coast, when people want to give back, they give money to charity and they go to galas, which I never understood.

Strangely, here in the Valley, when people want to give back, they write angel investing checks, and so that's really why I write checks. I kind of think of it as charity. Someone described it to me as taking money, flushing it down the toilet, and then very rarely walking up on the street to a million dollars just laying there and being like "holy..." So that's kind of how I see it. So, take all of this advice with that in mind.

I wanted to give you a very realistic vision of my scorecard. I've been angel investing for 4.5 years. I've made 50 total investments: I invested in four angel funds, 47 companies. Only three of them were not YC companies; 46 of them were early stage, one was late stage. It's a little company called Reddit; I hope it's going to continue to do well. Of those 50 investments, four are dead, one is a billion-dollar exit, Cruise, 12-hour post series A, and six have over a $50 million valuation.

So, I don't really actually consider myself that good of an angel investor. I'm fairly certain that there are really big companies that have gone through YC since I've been here that I have not invested in. Thankfully, because I work at YC, I own a percent of every one of them; that's how I sleep at night.

So, what are my lessons? The first lesson I actually learned about angel investing is you have to write a big enough check. It's funny because the second I started writing angel investment checks, Sam told me this lesson, and then I ignored him for two and a half years. What you really need to think about when writing an angel investment check is: what are the realistic chances that I'm going to get a return, and how much would I make at a billion-dollar exit? I talked to a lot of people who invest in check sizes that if the company were to become a billion-dollar company, they wouldn't make enough money to really impact themselves at all.

So then I kind of asked the question, "Why are you doing it then?" I've kind of made the mistakes of writing $25,000 checks, and I don't do that anymore. So really, the way I think about this is: model out a billion-dollar exit with dilutions, with taxes, and make sure you're making enough money so that when you brag about investing in that company to your friends, you're not whispering in the back of your head, "Oh, but I only made like $20,000 or $50,000."

The next thing that I learned is you have to create a flow, a system to invest quickly. Oftentimes, you have hours or, you know, a day or two to make a decision. So you need to be set up to be able to hear a pitch, sign a Clerke document, and wire money. Investors who don't know how to set that up, just talk to your banker, whoever else handles your money, and figure that out.

One of the things we tell YC companies all the time is that a grade A investor gives you money quickly, signs the paperwork quickly, and shuts the hell up. That's a grade A investor. There are very, very few A+ investors in the world, and there are very, very many less than A investors. So don't be one of those people who founders are waiting for signatures from. "Ooh, you signed the paperwork but I can't send the wire because the money is over here and it's got to come over here."

That, like, if you're in this game, be able to write checks quickly. The last rule that I've learned, just in my co-founder taught me, and he calls it the FOMO/FRND rule. If one of your friends is starting a company and you would have FOMO if it would become a billion-dollar company, just shut up and write him a check. I wish I followed that rule more often; basically, I would have been much more wealthy.

When it comes to investing in YC — and this is kind of where I will end here and open up for questions — the first thing that I think about is if you're there on demo day and you have done no prior research, you need to be prepared to move extra quickly because you're going to be in a room of people, some of whom have done their homework, and this isn't the first time they've seen the name of this company on the screen. So don't be surprised when you see a founder moving quickly because there are a lot of people in that room whose primary job is to make money and they've done their work.

The second thing that I would think about is you can do your homework too. These companies are launching; often, many of them are launching publicly before demo day. You can read about them on the blog, you can read about them on Product Hunt, on TechCrunch, on Hacker News. There's really no reason why you shouldn't already be interested in a large number of YC companies before demo day. You can reach out to them; they might not want to meet straightaway; they might want to wait till after demo day, but certainly, you don't have to start your work starting on demo day.

The last thing I'll say about demo day is that I think not enough investors spend time thinking about what happens after demo day. Oftentimes, even very good companies will raise a little bit of money before Series A, six to twelve months after demo day. So even if you didn't get a chance to get into a company on demo day or didn't know they were good, make sure you're maintaining a relationship with that founder. If you can be helpful, be helpful, and oftentimes, there's actually an opportunity to invest later that I think people don't realize.

I would argue that for some people who are not going to put in the work upfront, it might be better to take a pause and think about investing six to twelve months after. You're definitely going to pay higher valuations; you're going to have more information. And then one thing that PB said that I can't say enough: the most hyped investments on demo day are often not the best ones. Very, very often, I think what's interesting is that the crowd on demo day is just not as smart as it appears.

I've been the beneficiary of investors who are very good at working the room and pumping up the investments they've already made. It's great when you're a founder because you get to raise at a, you know, twenty million dollar cap, which is nice. But needless to say, in my batch in Winter '12, my company was by no means the best investment. Justin was in my batch as well; he raised that uncapped, super hyped — also wasn't the best investment. If you were investing in my batch, you probably would want to invest in a company called Augusto; they're pretty good.

So, with that being said, I just wanted to give you guys kind of some honest truths from my experience. Happy to answer some questions, and I know you guys have a busy day. Thank you.

[Applause]

Okay, so go ahead.

So I think that when you're trying to figure out how big of a check to write, what's interesting is that this scales fairly well. So if you have less money, when the billion-dollar company hits, you have to make less of a return for it to have a significant impact. When you have more money, you need to make more of a return to have a significant impact. That really scales your check size.

So probably the number one thing I learned and the number one thing I changed was going from $25K checks to $50K checks to $200K checks. If Sam were here, he probably would tell me I should be writing $250K checks. I do also think there's something to an investment having a little bite — like just a little bite, just a little "mmm" — to make you think a little bit more sharply about whether this is a good thing you should be doing.

I think to make big returns, you have to write bigger checks. However, to the point, there's a lot to be learned, and you shouldn't write bigger checks until you have conviction. Once you are able to get conviction, and if you go through your angel career thinking "Oh my god, am I going to put money into Justin.tv? It's such a stupid idea, and the founders don't have that much talent," then don't write a big check.

But if you can look at this guy and actually notice about Michael that he's actually incredibly articulate, and if you see Justin, and you say, "Well, like, he's the kind of guy," and if you meet Justin, you'll say he's the kind of guy — if you punched him in the face and knocked him down, he's probably going to get up and punch you back. You might think, "Whoa, these guys, it's a stupid idea maybe, but what do I know? They might just make it."

Once you get that conviction, then you should write bigger checks. Before then, I wouldn't.

I would learn more questions. What makes an A+ investor? Well, I'll give you an example: the Socialcam acquisition almost didn't happen, and an A+ investor nudged it in the right direction; that's like pretty big impact. I would say that it's extremely rare that an investor can have truly big impact. Another investor of ours, Pabu Hight, he basically threw a piece of advice; it's the reason why we built a video system, which is the reason why Justin.tv could exist, which is the reason why Twitch could exist.

So, like, that was a biggie. I would say there are kind of very specific moments where like a really impactful investor can actually change the direction of the company, but that's very rare. Most of the time, I tell YC startups to go after A investors. Many investors claim to be A+ investors; it's often not true.

So it's a great question: what are the statistics on YC companies and how well they do? So actually, Arin works on this a lot more, so he'd be a better person to answer this question, and he's coming in on day four. Oh yes, you should ask Erin that question.

What I will say is that we tell the batch that the vast majority of YC companies will fail, and that's been a message in the kickoff meeting since PG was giving it, and so that's for sure true. You know, from my kind of memory of the numbers, Series As tend to happen between 12 and 24 months post-demo day, and between twenty and thirty percent of companies will raise follow-on funding post-demo day.

Hey Michael, um, you mentioned that you missed a lot of the big companies in YC. What happened? If you could concisely say what went wrong in your evaluation, and is there any lessons that can be taken from that?

So when I missed companies, let's say probably two things, and he covered one of them. One was I was just on the fence and didn't move quickly. I think the second one is actually strangely unique to YC. I was busy; like, I had a bunch of companies to help, and so my first kind of thought when I go into demo day is not which company should I invest in; it's how are my companies doing and how do I make sure they do really well?

So I think that, yeah, it's different when you work here a little bit.

So I'll just elaborate for one second because I've missed a lot of really great investments; more than I have, and I've missed more than Michael has. Yeah, it's true. I think there is something that people forget about this, which is: to be a great investor is incredibly hard work. Most of you probably don't want to work that hard; you're kind of dabbling, right?

So you've got to again walk this line. I'll tell you contradictory things: like if you're angel investing, the last thing you want to do is kill yourself angel investing, but if you really want to be successful, you better get your sense of conviction and then do enough homework so that you can chase after and work hard to get in the deals you want. If you don't do that, your chances of getting that next big deal go down a lot.

A couple more questions?

Yeah, so to party rounds scare me? No, not at all. The thing that scares me about cap tables is massively unequal equity splits or cap tables where the founders have already sold a large portion of their company very early, but party rounds don't scare me at all. I think people talk about them as if they're really scary.

Like yes, you have to get more people to sign more paperwork, but as long as you're getting good A investors who sign paperwork quickly, I haven't had a problem. I think Socialcam had 30-plus angels. So in terms of how much equity the founders should have, I think the way that I think about this is I model out a Series A that's going to be between twenty and thirty-five percent dilution, in a Series B that's going to be between twenty and thirty-five percent dilution.

And I'd like it where the founders are going to be after that, you know? If you're looking at a founding team that's at only fifteen or twenty percent equity after those two rounds, they probably still have a large amount of work to do to produce a great exit and not very much equity as motivation. So those, I tend to be a little bit more careful about.

Interestingly, at YC oftentimes some of the work that we have to do when we ingest companies has helped them clean up their cap tables and help convince their previous investors that the way the company is set up right now is actually harmful.

So that's actually work we do quite a bit.

Identifying what kind of talent you mean from the perspective of acquiring them? So the question is, are large companies today somehow better at identifying talent, I guess, to hire or to acquire than they were in the past?

Yeah, I honestly have no perspective on that. I actually think the number of things that have to go right for an acquisition to happen can introduce many problems, even with very, very smart people. So, it seems unlikely to me that anything qualitatively has changed in terms of how big companies evaluate startup founders and their talent.

One thing to remember and keep in mind is that often startup founders are unemployable. Not always, but often, the best ones.

Advice on processing getting to yes? So what I will say is that it's a lot easier for us to get to yes than it should be for you to get to yes. It's easier for YC to fund the incremental company.

On the angel investing side, one thing I think about is kind of how I think a little bit about baseball: like when you go up to the plate, you know most likely you're going to strike out; like, you're not gonna get on base.

And so I think that for me, that's kind of a calming feeling. It's like I can apply as much intellectual rigor as humanly possible, and I'm still gonna have a very, very low hit rate. So sometimes I think that people over-intellectualize these decisions. I was talking to one investor who said that in order to get a 2 million dollar check, they had to produce a hundred-page document on how this company was going to go. And now it's like, wow, that's impressive; it was a pre-launch company, right? That's probably a lot of waste of time.

I think that you have to be confident enough in your process that you're comfortable writing a lot of checks. But I do think that there's diminishing returns with analysis.

It's funny; it's the Jeff mentioned it: this is a hard game to be very good at; and that's why, for me, what's comforting is that no matter what, I'm making an impact in that founder's life. Even if they don't go on to do a billion-dollar company, I'm helping them take a shot, and someone helped me take a shot.

So even if it all goes to, at least I'm kind of continuing that cycle and making a Valley a place where people have those opportunities. That should be, in my opinion, like a very big motivation for an angel.

Okay, last question, Mark. So how does YC source? I would say there's two secret powers to YC sourcing.

One is we have an open application process. I think investors believe that having the skill to network to an investor is an important characteristic of a good founder, and I think kind of YC's core position from the beginning is that it's not.

So especially in the days now where you can write software with relatively little money that has a relatively large impact, I think the value of networking and being able to raise large amounts of money is less and less. So I would say that's one kind of big secret.

The other peak secret — PB mentioned when I go and talk at MIT; my brother's there now — I basically say like what makes this school? The buildings and the professors and the administration are the students. You put the same students in a, you know, C-level engineering school, that's the best engineering school in the country; all you have to do is move the students.

So in an interesting way, I think PG kept a very high bar very early, when he didn't have to, and that created this trend where people understood that if I'm gonna be at YC, I'm gonna be around extremely talented people, and as long as we don't screw that up, I think that's just perpetuating over and over and over again.

So I'm sorry, and your second question was — oh, how do we kind of grade ourselves internally at YC? Because it takes so long to get feedback.

It's actually interesting. One thing that we do that I witnessed when I first joined was we ask ourselves how did we feel? I joined after Summer 2012, which was the batch that killed YC. It looked like a bomb had gone off; like literally, partners had like this PTSD-like look on their face, and clearly something wasn't great about how that batch experience went. Not, I think, for the companies; there were great companies, but clearly something had to change for the organization to be able to accept that number of companies again.

I think that's a very important thing that we look at. More recently, we've implemented a Series A program that helps companies raise Series A's, and that's basically allowed us to pay a lot more careful attention to what's the path from demo day to the next step.

And then, I would say the last thing that is kind of glaringly obvious over time is we do a lot of office hours with alumni. So we don't really get caught; like once you are the group partner for a company like YC, in many ways, to that company, it's you.

So they will keep on coming back, and so you kind of still have to deal with the new class, but you're always writing the story along with the previous classes. In that way, it's actually interesting to learn about what their experience is, how we could help them better.

There's a lot of other things, but I think those are the big boys. And of course, we track stats and so on and so forth, but yeah, I think those are the big ones I've seen make a difference.

Hey Michael, thanks very much!

Thank you. Okay now we are well and truly halfway in. We will start again tomorrow at 10:00 a.m. promptly, and for those of you who are left already, you're about to miss my last pearl of wisdom, which is that Michael mentioned what makes an A+ investor.

One thing that for founders, it's easy to tell when an investor is not an A+ investor is if they claim to be an A+ investor. It's not always — it is good to have a great track record. If you've invested in lots and lots and lots of big companies, it's probably a good sign.

But just because you've made a lot of money investing, do not forget there's a significant component of luck involved. It's great if you all are the lucky ones that pick the one or two or three companies in this batch, I see, for example, that become multi-billion dollar companies, but just because you do that doesn't mean you're an A+ investor.

Thanks, and we'll hopefully see you all tomorrow!