Dalton Caldwell - Startup Investor School Day 2

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 3:35. There's parking here, and there's parking on the street. Or, you know, there's this great service called Uber and Lyft; they work really well too.

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 livestream 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 issues. I can at least testify to the fact that the coffee is now hot. Hopefully, the toilets are working, but I think we've figured that out.

So, as a reminder, if you have questions out in livestream world, you can tweet them to #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.

There will be wine and beer on Thursday; that's my big announcement! Yes, wine and beer—a small amount of time for networking for you guys. 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 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 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 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 then 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 going to 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 a very complex topic.

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 dilution.

There are tools; AngelCalc is linked on the site, but we'll also put up—I don't have it up yet—but we will 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, 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 both 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.

If 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'll meet; you want to 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 including Iamonn 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 the beginning, middle, and end explaining what their product is, who wants it, and what it does, just that." So here’s Dalton Caldwell to talk about founder meetings.

Dalton: "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 gonna 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, and 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 gonna talk about over the next few slides is to think about how you make a simple, 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.

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 what you're actually going to invest in 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 have to actually have some introduction to, and you have some exposure to the company. You do some qualification. 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 '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 again, if you're not—if what you're doing is saying, 'Well, I don't know, I'm gonna take some meetings, and you know, maybe'—and you have a very wishy-washy approach, you're probably not gonna 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 gonna 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.'

So, the way I'm going to stage out this is to do a certain number of investments. You know, if you're gonna do it off YC donut, you can—it’s pretty straightforward; you show up to demo day, and you pick the five companies you 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, put that on a calendar and then think about what your pass rate of your process funnel is 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 and 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 going to be making optimal investment decisions.

So I would think a little; 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, right?

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—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 conclusive '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 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 says 'yes,' that's very hard for a founder to deal with that.

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. 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.

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?

It’d just be there—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, right? 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; I see that’s definitely part of our investment criteria, but you can make your own decision about just how important the team is. 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 touchpoints that someone else you know knows them and can vouch for them? So, there'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 would be very hard to determine what the market of air beds was, and you would probably say 'no' if you were purely looking at market size.

Similarly, something like Uber—the market size of people calling black cars was very, very small at the time, and so you could have easily just qualified that just on that criteria alone.

Traction—there are some investors that say, "I invest well; 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. 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 feel like an expert in the field matters. 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, 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 the SaaS’s, again, is that people's actual investment criteria is the thing that everyone else talks about and seems to think is going to work; it's the thing they want to invest in.

I would again suggest that this is not the optimal way to make investment decisions. We see a lot of—the other thing that's not great about groupthink—just to 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 overfunded if it's perceived by everyone, if it fits everyone's criteria.

It's actually not super great for the company if it gets overfunded. Investors tend to get a little bit grouchy if they can't get into the deal, and they all want to invest in it.

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—it's that 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.

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 ten people what they think is good, and whatever's 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 like meta groupthink list.

That's what a lot of people, from what I can tell, do, 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!" 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."

I can understand why from the perspective of an investor this feels like a super clever, ninja move, but holy cow is this not beloved by founders and not great from a reputational perspective. 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?

So perhaps you've said things like this, or perhaps this is a—you know, things that have happened in the past. I just—I wouldn't recommend phrasing it 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 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 get everyone up; just go raise two million dollars, and I'll be the last check in." Right? That is not a great move.

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've 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.

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.

Another anti-pattern is you're not really sure whether to invest or not, so you ask them to meet your friend, like, "Hey, I meet my friend," and you can keep doing this over and 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 then you're like, "Oh, actually, how about 'no'?" or, "Like, how about you needing 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 investment decisions—is you're just kind of in this, "Oh yeah, this is maybe good," and you want any kind of signal you can to get out of that. One of the pieces of advice we tell founders on 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’s it going?" or "How's fundraising 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.

It’s a lot of people telling you how much they like your business and how exciting it is to talk to you. If no one is writing checks, it means it's not going well.

So from the flip side, from your side of the table, if you're just meeting with a lot of folks who seem 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 this 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—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, but I would just suggest that 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 rub it in the founders' faces 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 always start with the basics. What does your company do? Who's on the team? What progress have you made? You know, how much have you raised?

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 starting 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: you sort of want to forget everything you know and just hear the founder tell their own story, right?

And so this is how I'd always suggest starting a meeting—with super basic questions. And then only at the end do we get into advanced complex mode on the business. If you want to do a follow-up meeting, say you're not 'yes' or 'no' after the first meeting, and you want more information, dig deep on the things that would give you either conviction to say 'yes' or 'no.'

Don't waste time rehashing irrelevant stuff. 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 airing 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 you know, 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 our 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 criterion 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.

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 for 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 a basic thing would not recommend.

And then the other thing is sometimes investors try to make themselves the center of the attention or they'll tell stories about how great they are and all the people they know and all those 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 could build a rapport with them, but just as extended, don’t 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, they 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 like they need to change the name, and they need to rethink their marketing strategy, 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," or 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.

Another thing that sometimes people do when they're trying to be value-add is just do a ton of introductions. Like, you do one meeting, you don't invest, and you introduce them to like twenty 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? Sometimes people are trying to differentiate themselves and create a name for themselves, but this kind of 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 never hear—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?” and there’s 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.

The fact is, in this business, you're going to be saying 'no' most of the time, right? That just is what it is; that's how the funnel works. 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 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 conversion, 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 slow up the process, and often the founders will just push back on all of this stuff.

So sometimes people do, especially when they're 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 going to 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.

Ben: "Okay, give me a sec. Hello! Yep! Hey, I'm Ben, I'm the founder of Nikto, and Nikto does ISP in a box. So we basically help people create into service providers like Comcast, right?"

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 context that I have; 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 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 that 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 a 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 $10,000—$20,000, you can start your own internet provider. And so what you need is the knowledge, which is what we provide, and that's the part that can be scaled.

So I'm at a point—part of the reason I picked this company is this is actually kind of a complicated niche, okay? It’s 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 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.

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 a 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?

Ben: "Anyway, yeah!"

Okay, so let's dig deeper. What exactly do you have today? What is the current state for the company?

Ben: "Yeah, so we have our own internet provider that came out of beta January 22nd, and we’ve been onboarding customers on that."

Okay, so you have your own ISP, right, that you guys yourself started using your own software?

Ben: "Right, exactly."

Okay, how many customers do you have live with that ISP?

Ben: "We have 47."

Okay, and where's that located?

Ben: "That is in southern parts of San Francisco and Bayview-Hunters Point, Excelsior."

Okay, so again, to zoom out, here's what we 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? Like, how do you know how to start an ISP?

Ben: "We just did it ourselves. We figured out all the bits and pieces with help from basically the community around, because there are actually a lot of experts that are now retired. They’re like the original dot.com people who are volunteers, I guess."

Okay, so we're gonna—okay, so we kind of get that. So then what's the big idea? Like, why is this gonna be a good company?

Ben: "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 to zoom out a little bit—and again, because I'm familiar with the company, what you're saying is that it's really hard to start a new ISP, right? You guys are gonna be able to build— you have these ISPs in a box so that anyone anywhere could start their own local ISP, right?

Yep!

Okay, so now here's the important part: why does that matter, and why is this a good idea? So here's my context; a bunch of people have tried to start ISPs—there's Google Fiber, Adler’s web pass, there’s a bunch of money that's been put into this; this seems like a graveyard of bad startups—what the heck is special or different about what you're doing?

Ben: "Oh yeah! So it's actually really cool because I'm just reaching out to the YC Alumni community. A lot of people have been trying to start an ISP, and we’re actually helping them out. What they have done is they’ve taken out loans or put up their own buildings in their own communities where they gather their own customers and put in their own capex, and all we do is become their network operating center to help them set up."

Okay, cool! So again, when I pull out of here, what I would be taking my notes on—what I would continue to be pushing on is 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 so that you could scale very quickly without having to raise hundreds of millions or billions of dollars to put in fiber, right?

Ben: "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 their software and start their own ISP and put up their own money?

Ben: "Yeah, so the evidence I have is, you know, we have two people sign on as franchises, 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 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. You know, you agree!

An innovation of having customers put in their own capital to create their own local ISPs 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 ISP that doesn't actually own any routers or fiber, right?

Ben: "Right! We just own the rights to operate there—their exclusive right to operate their hardware."

Okay, 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 the 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?

Ben: "Yeah, I mean my inspiration was kind of the frustration with most people with their internet. It's 2017; why does, you know, internet in 2020—oh, I started last year; sorry, sorry—why is internet’s such a problem, right? And then you dig deeper and you realize it's not really a problem for large apartments and buildings. It's only a problem for, you know, rural areas or suburbs—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—favoring 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 the sort of angel investor that's gonna be like, "Wow, this is exactly what I'm looking for!"

Right? 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, man! Thanks!

This is now—ahem—let's do some Q&A, and I will also, for streamers, be taking questions from #YCsis and from the Slack Channel.

Alright, great! First—yeah, before Matt—yeah, I think the question's the assumption 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 from other people.

But if someone does something very, very, very bad—lies—there's reason to see that you were materially or deceived about the situation. Then I think you want to figure it out on a case-by-case basis.

I mean, that’s what we do 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 invest in just doesn’t have a good company, well—that’s the brakes!

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.

Yeah, okay!

Yeah, yep, that's a great question!

Okay, so the question was how do you say no to someone if the actual answer is not, you know, 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're not—you shouldn't say, "I think you’re a bad founder," well, not say that, but I think there's ways that you can convey that you just were not convinced in an honest way, because that’s basically if the team cannot convince you.

I mean, how do you say this, Jeff? I think this is actually a great and one of the hardest questions we actually 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.

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 founders 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’s still valid—I would use that. There’s always something!

Yeah, in the back!

Yep, 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 founder can send a one-pager 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 a company to send decks to like a hundred 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's 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. 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 these are the best terms that are available to the company—or perhaps it really makes sense, I think also if it 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 small check, and someone tried to put milestone-based payments, that would not be my— I would not tell the company that; that would be my first choice.

I would say maybe they could 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 a 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, Dalton?

Yeah, milestone—the abstract milestone-based investments sound great, but what you're really doing is asking for results and said 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. And so actually it’s kind of a lose for the investor because they’re, you know, you’re guaranteed you get that $25K and if things go fantastically and you’ll want to get more money in—too bad, you might not get it!

Cool! Yep!

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 locally present somewhere, you're probably going to be very helpful to those folks anyway as well. So you probably want to 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, yes!

Yep, so the question is: what do you do when you have an investment that you made and two or three rows in, it's not dying, but it's flatlining?

My understanding we see a lot of this is—you just kind of got to 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 a ten-year time horizon, that’s kind of what you're signing up for when you make the investment! Even the companies that go really well—we were talking about a ten-year time horizon!

P.B. is about to talk, and, like, you know, a lot of the investments he made in 2008-2007 are still hanging out there; he’s getting no liquidity from it.

So, you know, you don't have a ton of options, but I've seen founders, depending on the 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 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 say, or someone in the network and founders 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-keel 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 either exists, then 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?

Do you have an example?

You seem to know an example!

Yeah, I mean, I guess—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 that is gonna 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 and 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—I can think of a million ways that can go wrong, even if you do invest or don’t invest.

Yeah! Okay, cool!

Yes, yep!

Yeah, what do you do if you're an investor in the position where it's unclear or basically you don't have a strong signal they're gonna raise from a bunch of other people?

So ideally what you do is you're honest with them, and you tell them that’s what you're worried about. And that’s not, “Hey, I’m in once you get other people.”

It's you, which you would say, “I am not comfortable investing right now because the amount of capital you need—my check alone will not get you there.”

So let's brainstorm on how to either convince me to write the check now; because again, an example of YC—we write everyone checks without anyone else being in, right?

So either here’s my criteria for you to convince me that I’m willing to take that risk to be the only check in, or here are when we—here’s the milestones that I would want to see to have a further conversation and being clear that that’s basically a ‘no’ until they do other stuff!

Yeah, that's also a great question.

And, you know, Dalton mentioned that, you know, what we tell founders if an investor says, "I’m gonna invest, I love you, as soon as you get $900K of the $1 million that you're trying to raise," I'm in.

And there’s a quandary for investors because if you have a company and you give them $25,000, they could spend that in a month and then die, and it would be much better for you if they had a half a million dollars.

And then you gave them your $25,000, but here's the problem: by the time they get to a half million dollars, they might not take your $25,000.

So you have a trade-off: you have to decide how convinced you are in the company and these founders that they will be successful fundraisers.

That might be your only chance to get in, and it might be the $10 billion company that you just missed because you said, "I wasn't sure they were gonna raise more than $25,000."

It’s a hard, hard place to put yourself in; that’s why this job’s hard, by the way!

But to the close, you said ‘yes,’ and did they not close it?

Okay, and did you do the handshake protocol?

Okay, okay!

So the question is what do you do if the founder is a little bit asks for a lot, I guess, and the other thing is why would someone be pushy to get the check wired?

We definitely encourage founders to get the money wired from the investor. There's so many sad stories that we know where someone commits to invest and then disappears or like never actually wires the money.

So we do encourage people to say once the person is committed, get the money! It’s very, very straightforward.

So perhaps it's a completely reasonable thing to say. On the other hand, you do need to the extent you can front-load in your interactions with the founder to make sure you will get along with them and that their personality type fits with your personality type.

That's a good thing to figure out before you make the investment. And so it could be there's some—there's some personality types that just aren't a good fit for you that are just higher maintenance.

Okay, one more question please, and then we're gonna take a quick break and we’ll do—

You the question is how do we iterate on our process and learn from ourselves?

We actually have a fairly complex process inside of YC. We keep track of everything we fund; we keep track of things we don’t fund; we track their progress. We keep track of who does really well and who doesn’t do really well, and we take ample notes on everything.

So we do a lot of reviewing our process, and we try to get every batch to the extent that we can—I can’t say, “Oh, it’s just, you know, we throw AI at it, and the AI tells us what to invest!”

It's not that; it's really just literally looking through the decisions and looking at our notes to understand, “Well, why did we say ‘yes,’ or why did we say ‘no’ to that?”

And trying to pull out of that wisdom that we apply to future things.

And so this is the thing: never one says the team comes first; everyone says that. What does that mean?

Well, that’s something that we learn every batch through trial and error! Sometimes we invest in really goofy ideas with really great founders, and we make a lot of money!

And sometimes we invest in really amazing seeming startup ideas with tons of traction, and maybe the founders are trickier to work with, or they just aren't good at communicating their idea, and we lose our money!

And so every batch there are these same lessons that we learn over and over and over again.

And I think that's how you build confidence in yourself as an investor! You get enough times to iterate, and you actually, you know, have to lose money; you have to have some winners or losers to feel the pain!

So we’re gonna take a quick ten-minute break. Grab what you need, but thank you very much, Dalton, for a great session!

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