Notes
[1] There’s no reason to believe this number is a constant. In fact it’s our explicit goal at Y Combinator to increase it, by encouraging people to start startups who otherwise wouldn’t have. [2] Or more precisely, investors decide whether you’re a loser or possibly a winner. If you seem like a winner, they may then, depending on how much you’re raising, have several more meetings with you to test whether that initial impression holds up. But if you seem like a loser they’re done, at least for the next year or so. And when they decide you’re a loser they usually decide in way less than the 50 minutes they may have allotted for the first meeting. Which explains the astonished stories one always hears about VC inattentiveness. How could these people make investment decisions well when they’re checking their messages during startups’ presentations? The solution to that mystery is that they’ve already made the decision. [3] The two are not mutually exclusive. There are people who are both genuinely formidable, and also really good at acting that way. [4]
How can people who will go on to create giant companies not seem formidable
early on? I think the main reason is that their experience so far has trained
them to keep their wings folded, as it were. Family, school, and jobs encourage
cooperation, not conquest. And it’s just as well they do, because even being
Genghis Khan is probably 99% cooperation. But the result is that most people
emerge from the tube of their upbringing in their early twenties compressed
into the shape of the tube. Some find they have wings and start to spread them.
But this takes a few years. In the beginning even they don’t know yet what they’re
capable of. [5] In fact, change what you’re doing. You’re investing your own time in your startup. If you’re not convinced that what you’re working on is a sufficiently good bet, why are you even working on that? [6] When investors ask you a question you don’t know the answer to, the best response is neither to bluff nor give up, but instead to explain how you’d figure out the answer. If you can work out a preliminary answer on the spot, so much the better, but explain that’s what you’re doing. [7]
At YC we try to ensure startups are ready to raise money on Demo Day by
encouraging them to ignore investors and instead focus on their companies till
about a week before. That way most reach the stage where they’re sufficiently
convincing well before Demo Day. But not all do, so we also give any startup
that wants to the option of deferring to a later Demo Day. [8] Founders are often surprised by how much harder it is to raise the next round. There is a qualitative difference in investors’ attitudes. It’s like the difference between being judged as a kid and as an adult. The next time you raise money, it’s not enough to be promising. You have to be delivering results. So although it works well to show growth graphs at either stage, investors treat them differently. At three months, a growth graph is mostly evidence that the founders are effective. At two years, it has to be evidence of a promising market and a company tuned to exploit it. [9] By this I mean that if the present day equivalent of the 3 month old Microsoft presented at a Demo Day, there would be investors who turned them down. Microsoft itself didn’t raise outside money, and indeed the venture business barely existed when they got started in 1975. [10] The best investors rarely care who else is investing, but mediocre investors almost all do. So you can use this question as a test of investor quality. [11] To use this technique, you’ll have to find out why investors who rejected you did so, or at least what they claim was the reason. That may require asking, because investors don’t always volunteer a lot of detail. Make it clear when you ask that you’re not trying to dispute their decision—just that if there is some weakness in your plans, you need to know about it. You won’t always get a real reason out of them, but you should at least try. [12] Dropbox wasn’t rejected by all the East Coast VCs. There was one firm that wanted to invest but tried to lowball them. [13] Alfred Lin points out that it’s doubly important for the explanation of a startup to be clear and concise, because it has to convince at one remove: it has to work not just on the partner you talk to, but when that partner re-tells it to colleagues. We consciously optimize for this
at YC. When we work with founders create a Demo Day pitch, the last step is to
imagine how an investor would sell it to colleagues. |
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