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Speaker 1

00:00

Meeting founders and making decisions is way more of an art than a science. And as Dalton says, unfortunately in this game I think you have to lose some money before you can really become an expert, as much as anyone is an expert at answering the questions you need to answer to make an investment. The next person who's about to come up has more wisdom and knowledge about this than perhaps anybody I know. Before I introduce PB, however, first for the live streamers, I apologize for the problems we're having with the live stream.

Speaker 2

00:47

As I

Speaker 1

00:47

said, this is the first time we've done this here in Mountain View, so we're bound to have kinks. The good news is that everything is going to show up on the site. And once it shows up on the site, it will be more immune from networking issues.

Speaker 1

01:04

They're less likely to be ours and more likely to be yours at that point. All of the slides will appear on the site within 24 hours after the session. So I believe it's true, all of The slides from yesterday are now up with the transcripts from yesterday at investor.startupschool.org. And we'll do our best to make the livestream work as well as possible.

Speaker 1

01:28

So the next investor, the next presenter, excuse me, he's also an investor, obviously, is Paul Buchheit, who has been a partner at YC with me as long as I've been here. He's been at YC as long as anyone here. I think it's probably 7 years he's been hanging around YC for even longer than that. He has also notably the inventor of Gmail, which sucks for me because I was part of the team that invented Yahoo Mail.

Speaker 1

01:56

So we have a lot of good conversations. He's still my friend, I think. He also created a company called Friend Feed, which he sold to Facebook. He knows a lot about a lot.

Speaker 1

02:09

I guess that's the best way to talk about Paul. But 1 of the things he does know a lot about is investing. Here's a quote from Paul that is actually an important 1, and I would think about it a lot as you think about investing. I think the best kind of virality is a product that people like so much that they just want to tell people about it.

Speaker 1

02:34

So here's 1 of the smartest and best investors I know in the world, Paul Bouquet, to talk about that.

Speaker 3

02:54

All right. So, thank you, Jeff. That was probably setting the expectations too high.

Speaker 3

03:05

So, as Jeff mentioned, I've been involved in startups for a while, probably about 20 years now. I've been investing for the past 12 years. I've invested in hundreds of companies. I've seen thousands here at YC.

Speaker 3

03:20

I've interviewed thousands of founders. And so last year I kind of came to the realization that I needed to stop and actually like think about what I had done Because I spent most of those years just making somewhat haphazard decisions. So I spent a bunch of time trying to actually figure out like what are the patterns that gave rise to favorable outcomes for me and what are the patterns that gave rise to unfavorable outcomes with the idea that in the future I can maybe do better. So really this is like something I more did for myself in my own investing process.

Speaker 3

04:00

It may or may not work for anyone else, but it's what I intend to do. And so the structure of this is I'll tell a series of stories. First of favorable outcomes, things that went good for me, and then some unfavorable outcomes, things that did not go good for me. And then finally followed by some conclusions about how I plan to invest going forward.

Speaker 3

04:22

So first, there's this idea I'm not limiting myself to good ideas. And this actually started out as a joke about 20 years ago, but then I kind of realized it was true. A lot of my ideas are not good. But it's also really relevant to startups because oftentimes the bad ideas, I mean the good ideas, look bad.

Speaker 3

04:45

And the reason for this is that if the idea were obviously good, like, the opportunity wouldn't exist. Big companies are not that dumb. They're capable of executing. They have lots of resources.

Speaker 3

04:56

They have market power. Like if they thought there was this, you know, $10 billion business sitting there, They would just go do it themselves. So necessarily, for it to be a good startup, it kind of has to be something that inside of a big company would get shot down for being stupid or unimportant. And actually, the example I like the best is this company, I don't know who recognizes that logo, that's the original Google logo.

Speaker 3

05:25

When Google was a research project at Stanford called Back Rub, it's Larry Page's hand in a flatbed scanner. And so, you know, Google started out as this research project at Stanford. Larry and Sergey were PhD students there. And they actually wanted to continue being PhD students and finish their degree.

Speaker 3

05:45

So they went off and tried to sell Google to 1 of the big Internet companies of the time. So Yahoo, X-Site, InfoSeek. They made their rounds to all these companies. They wanted a million dollars for Google.

Speaker 3

05:58

And Fortunately, everyone said no. No 1 thought it was worth a million dollars. They thought search was unimportant. They thought it was just like a commodity, sort of a flavor of the month thing.

Speaker 3

06:12

They're like, oh, you're hot now, but next month it'll be some other startup, and we'll just hop from 1 to the next. So again, like, if this opportunity were obvious, Google wouldn't exist. So necessarily, it has to look kind of bad. And so I'll start my story at Google.

Speaker 3

06:31

And the reason here is I think I really want to emphasize the absolute importance in this game of being extremely lucky. So the good news is you're all accredited investors, supposedly. That means you're already among the luckiest people on earth. But I also like to think about this a lot because, you know, being a startup employee is actually a lot like being an investor, except you can really only do 1 at a time.

Speaker 3

07:01

And so I've asked myself, how did I end up at Google? What took me there? And the first thing is just that they actually had a product that I used. I was a very early user.

Speaker 3

07:13

And so I just knew about it. They had made something people want, namely me. They made something I want. And the second thing, the second reason is Linux.

Speaker 3

07:23

So I was really, really, really into Linux. A friend in college once put it, shut the fuck up. Not everything is about Linux. So when I went looking for a startup to go work at, really my only criteria was that they'd be doing cool stuff with Linux.

Speaker 3

07:43

And so that was how I ended up at Google, is they were building these clusters of Linux machines and nothing could be more exciting than that. And when I interviewed there, the people were really smart. They asked good questions. I interviewed at another startup where the people asked dumb questions and you could really tell the difference.

Speaker 3

08:02

What I didn't know was that it was a good business. I actually expected that Google would get squashed by AltaVista or something. I didn't go in thinking I was going to make money. I went in thinking I would learn something about startups.

Speaker 3

08:16

And in fact, I did learn some stuff, which was good. So I had a good time there, as Jeff mentioned, launched Gmail. But eventually, it was kind of turning into a big company, and I'm interested in startups. So I kind of got the itch again to get back involved in startups.

Speaker 3

08:33

So I'm looking around. And then in early 2005, I see this thing, the Summer Founders Program. And this is sort of funny, because I don't know, a lot of you probably don't know this. The very first batch of Y Combinator, it was pitched as like a replacement for a summer job.

Speaker 3

08:49

So the idea was college students, instead of going to work at Google as an intern, would just come to YC and start a company. And this actually looked like a really bad idea to most people in 2005. In fact, the original lawyers they tried to work with refused to do the work. They said, this is terrible, we're not gonna do it.

Speaker 3

09:11

Investors all thought it was a joke. They're like, no good company is ever gonna come out of this. So, how did I end up here? How did I end up connected to YC?

Speaker 3

09:26

And the answer is that Paul Graham had written a lot of really good essays. And so I had read a lot of his stuff. He was really smart. I didn't know him.

Speaker 3

09:36

I thought he was really smart. I thought he had really good insights. And I thought this was a really intriguing idea. Not necessarily a good idea, but intriguing, interesting.

Speaker 3

09:46

And for me, I think interesting kind of includes this element of unpredictable. Like if I know what the outcome is, then there's no point in getting involved. It's the things where I don't know the outcome where I can learn. So basically, I just cold emailed PG, and it was like, hey, can I help out?

Speaker 3

10:07

And so I started hanging out here, got to know the first batch that was in this building, which was the Winter 2006 batch. And that was about 12 years ago. I actually since then have invested in every batch. I'm a repeat offender.

Speaker 3

10:27

But my very first angel investment was in a YC company called Wufoo. And here's what the internet thought about it. For those of you who can't read it, which is probably most of them, the person says, is anyone keeping a list of all these new Y Combinator startups? Seems like it might be entertaining a year from now after all the hype has died down to go back and look at it.

Speaker 3

10:48

I mean sure it seems like it's written in Python and it uses XML HTTP requests as being confused with stuff like I have a business plan and my product satisfies a demand that consumers actually have. And I like this because it's both kind of like making fun of YC and Wufoo. And it was very characteristic of the thinking at that time. And in fact, you know, Wufoo never did IPO, but my investment on that returned like 44x when Survey Monkey bought them and the founder Kevin Hale, who's extremely talented, ended up being a partner here at YC some years later and no doubt therefore helped earn me more money by helping our startups.

Speaker 3

11:38

So, you know, there's both an immediate return and then there's like the long-term return. The following year, I invested in this YC company. It's called Justin TV. The idea was that Justin here was going to stick a camera on his head and then live stream it to the internet.

Speaker 3

11:57

That was the idea. And at first, I was like, are you joking? Like, no, we're going to do it. I'm like, awesome.

Speaker 3

12:04

Because again, this is really unpredictable. What's going to happen when you start live streaming your life 24-7? And I guarantee this is not the idea that would come out of Google. You're not going to see Larry Page with a camera strapped to his head 24-7.

Speaker 3

12:21

And nor should it come out of Google. So again, this was just like an unpredictable thing. And in fact, the company struggled for quite a while, which I mentioned, because someone asked earlier, Dalton, what if the company is kind of going sideways? Should I, I mean, I think the implication was, should I kick the founders until they give me my money back?

Speaker 3

12:43

The answer is no. So this company, they actually even tried to do an acquihire several years in, but no 1 would acquihire them because they thought they didn't have any talent. They couldn't do a talent acquisition because the acquirers thought there was no talent. Fortunately, They eventually pivoted to Twitch, which was focusing on just the 1 part of their product.

Speaker 3

13:08

People were streaming all kinds of things on Justin.TV, but Emmett became interested in specifically video game streaming. People were streaming their games, which I never would have thought was a business. That was a total surprise to me. But that turned out to be a great business, which they sold to Amazon, unfortunately, for a billion dollars.

Speaker 3

13:28

It's probably worth way more than that right now. But the other interesting thing I want to point out here is this company had 4 founders. So Emmett, who is the CEO of Twitch, is still the CEO of Twitch at Amazon, where it's estimated to be like a 20 billion dollar business at this point. Justin Khan has started a bunch more startups.

Speaker 3

13:52

He was here as a partner at YC for a couple of years. Now he has a new company called Atrium, which if you invest in any of our companies going forward, you'll probably interact with because they're doing kind of like the default legal legal provider now for YC companies. Michael Seibel started a company called Social Cam which actually was a Justin.TV spin-out, sold that to Autodesk for 60 million and then became a YC partner and actually he's now the CEO of Y Combinator. And finally, Kyle Vogt started a company called Cruise, which you may have heard of, because GM bought them for $1 billion.

Speaker 3

14:31

So that 4 group of people who had so little talent that no 1 would talent acquire them have done some pretty remarkable things. All right. So eventually I wanted to start my own company. I was like, all right, I think I see how this is done.

Speaker 3

14:46

I can do better. So that leads me to FriendFeed. Now, when I decided to start a startup, I actually had a lot of ideas. Probably most of them were genuinely not good.

Speaker 3

15:00

But the 1 idea that was totally correct is that I thought the most important thing was having a really great team. And so that was sort of the original focus is just like figuring out who I can get to join on to this. And fortunately I managed to convince this guy Brett Taylor to co-found FriendFeed with us. And Brett is someone that I knew from Google.

Speaker 3

15:25

I hadn't worked with him, but I kind of knew him. You know, we had chatted. I knew him by reputation. And the story I like to tell about Brett is he was the PM on Maps, or maybe like an APM, not even an engineer.

Speaker 3

15:40

And he was frustrated that the product was so slow and clunky. This was before it was launched. And so finally, 1 weekend, he was just like, you know what? I'm just going to fix it.

Speaker 3

15:54

And so he rewrote the entire JavaScript front end over a weekend, made it a third the size and 10 times as fast as what an entire team of developers had been working on for a long time This is the kind of person you want to invest in right like that is an absolutely great bet Let's see so frankly generated a lot of buzz Unfortunately it didn't generate a lot of growth. In part because we ended up competing with this company Facebook. So they turned out to be a very formidable competitor. I got a chance to meet Zuck.

Speaker 3

16:36

He's really impressive. And eventually, I came to believe that Facebook was unbeatable. Not by us, not by Google, not by anyone. And that it would, therefore, be like a Google-sized success.

Speaker 3

16:52

And therefore, we should sell. So we sold FriendFeed to Facebook for about half a percent of Facebook's equity, which turned out to be a pretty good deal. And so the lesson here I really want to emphasize is find your betters. You want to find people who are smarter in everything, more insightful than you are.

Speaker 3

17:17

And I think Brett and Zuck and the team at Facebook are great examples of this. They were just clearly better at it than I am. So that's 1 of my criteria when I'm meeting a founder. If I'm thinking, oh, I could do this job better than you, like, I shouldn't fund, right?

Speaker 3

17:35

I only want to fund people who are better than I am, right? And so this is why, it's not that I think idea and market don't matter, Like those things are of critical importance. You're not gonna build a big company in a tiny market. But my belief is that if the founders are actually better than me, then they're gonna have better insights.

Speaker 3

17:58

They're gonna know more than me. So I can kind of outsource that part of the thinking to the founder. And then I just have to figure out like, does the founder believe it? And so what you want to do here, I believe, is use your knowledge to probe, to ask intelligent questions, to see if they really do know what they're talking about, right?

Speaker 3

18:19

But not using it to decide, not being like, oh, you know, I'm an expert on air mattresses. I know there's no business here, right? The challenge, of course, is finding these great founders. So I want to go through a couple more examples that I think highlight some traits.

Speaker 3

18:35

The first is Meraki. This is another early investment, 2006, and when I went in to meet them in their little office in Mountain View, they showed me around, they introduced me to the team, they showed me some of the hardware, they were building these little mesh wifi boxes at the time. And I was like, wow, this is really impressive. How much money have you guys raised?

Speaker 3

19:00

And they're like, we haven't raised any. That's why we're talking to you. And I was shocked, because they had hardware there. They had been selling these devices.

Speaker 3

19:08

And they did it all by kind of like scraping together money here and there. They got somehow a deal on this and a deal on that. And someone lent them money. And they were able to string the whole thing together for 0 dollars, which is exactly what I like to see.

Speaker 3

19:22

And so this is another 1 that I like to think about as an example of what you want. And then just kind of for laughs, I'll give you what would be an opposite of Meraki, I would say is Juicero. Like they spent a hundred million dollars on their like juice bag squeezer without ever talking to a customer, without ever trying to sell someone a bag of juice, which by the way is what it is. It's just a bag of juice and it squeezes it out.

Speaker 3

19:53

It's horrible, right? So you want the opposite of Juicero, you want Meraki. And this was, Cisco bought this for 1.2 billion, which was like a 73x return. Once again, they sold too early.

Speaker 3

20:06

That company's worth 10, 20 billion dollars now. Founders always sell too early because you're like, wow, a billion dollars. I make the same mistake. I sell too early.

Speaker 3

20:17

Next up is Cruise. Cruise, I mentioned earlier, 1 of the founders of Justin.TV, Kyle Vogt, started this company. And my favorite Kyle story is actually from the early days of Justin.TV, where they came to me with this problem. I had invested, and then they came to me with this problem where they were burning up all of their money on streaming, because it turned out streaming video was very expensive.

Speaker 3

20:44

They could either use these streaming CDNs that were really expensive, or they could license some kind of software to run their own streaming CDN. But that was also really expensive. So they're like, what should we do? We're going to burn all of your money, which I don't like.

Speaker 3

21:00

So I was like, you know what? This doesn't seem like a hard problem to me. Like, bits go in, bits go out. Like, what's the big deal?

Speaker 3

21:08

You should just write your own streaming media server. And Kyle, you know, took me Seriously. He's like, well, okay, I guess if, you know, PV says it's possible. And actually I told him he should be able to do it in an evening.

Speaker 3

21:22

I was like, you should just build this tonight, launch it tomorrow. Like I don't get wet so hard, just make it work. It turns out it took him maybe like a whole weekend. But he did in fact write their own streaming media server.

Speaker 3

21:36

And this is actually the reason that Justin.tv survived at all, right? Because there was no way the business was viable if they were paying so much for streaming. And so again, it's a founder who's willing to do something that a more reasonable person would say is impossible. Like 99% of engineers, if I told them, oh yeah, you should replicate this other company's product and you should do it tonight.

Speaker 3

22:01

Which would be like you're an idiot. Like you don't know what you're talking about. It would give me a big long list of reasons why it's impossible. But instead he just did it.

Speaker 3

22:11

And so the cruise idea actually seemed 4 years ago kind of in a similar boat. Now, self-driving cars are really, self-driving car startups are really hot. But 4 years ago, it actually seemed like an absurd idea. Like, the technology is so hard.

Speaker 3

22:28

Google has a huge team working on it. Like, there's no way. Like, this is too much for a little startup. There's no way it can work.

Speaker 3

22:37

But of course it had Kyle, so I invested anyway. And as mentioned, GM bought them for like a billion, which was about a 50X return. Not too bad, again, probably sold too early. This company, you may or may not have heard of, they get a lot of press, because it's awesome.

Speaker 3

22:59

They came out of YC 2 years ago, they're building supersonic jets. In 10 years, when you want to go to Tokyo, you're going to get there in like 6 hours. Like, that's pretty exciting. And so this is another great example.

Speaker 3

23:12

The founder, Blake, He's actually a software guy. He doesn't know anything about, he didn't have like an aeronautics background or anything. He just became determined. He's like, you know, it's the future.

Speaker 3

23:25

We should have supersonic travel. And he's like, I'm just gonna do it. And so he took the time to just go teach himself everything and figure out why the Concord was such a huge failure and what was different now. And what was so remarkable, I remember when he was in YC, is that he was able to very clearly explain to me why he was gonna do this thing that seems really impossible.

Speaker 3

23:53

But he could very clearly outline to me essentially like the 3 things that were wrong with the Concord that he was fixing. The 3, The reasons that this was actually a viable business in like work through the economics of it all, and he laid out a very clean picture. And again, this is 1 of the traits of really great founders is they're able to communicate what's a fairly complex idea. I don't know anything about supersonic aircraft.

Speaker 3

24:20

I'm not an expert in supersonic aircraft, right? But he's able to explain this to me in a way that I understand very easily. He's got good insights and just absurd ambition, just like really ambitious. Something that again, people would be like, there's no way a startup is going to build a supersonic airliner.

Speaker 3

24:40

I believe they are. You know, it's not yet proven, but they're making amazing progress. I always love to read their investor updates. He also sends the best investor updates of any company I've ever invested in.

Speaker 3

24:51

And so the other point I want to make here actually is don't be afraid to invest in things that aren't software. If you're working according to this philosophy that you want a really great founder and the founder brings the expertise, then you're able to invest in so much more. And we have so many great companies that are like in bio, I think we're going to have some just giant exits 10 years from now. And I see every time at Demo Day, because I work with a lot of the bio companies because I really like them, I see at least half the investors just cross it off the list on principle because they're like, I don't know anything about supersonic aircraft.

Speaker 3

25:32

So don't do that. All right, now as promised, I will talk about some of the less flattering stories. So in honor of the Dropbox IPO, let's talk about Dropbox. So this email again for those who, who, who can't, read it, is me replying to Drew.

Speaker 3

25:56

This is September 14, 2007. Sorry I wasn't able to make it today. Are you going to be around this weekend? So I had actually gone to Boston to meet the Summer 7 batch, which was only like 19 companies, so it wasn't that hard.

Speaker 3

26:14

Drew seemed really good. He was definitely, you know, seemed like 1 of the strongest founders in the batch. But, you know, I had some questions about competition, like what are you going to do about Google Drive and all that. So I set up a meeting to meet with him when we're back in San Francisco.

Speaker 3

26:32

And then on the day of the meeting, my previous meeting ran long and I canceled on Drew. And I want to make a couple of points here. 1 is that that's really shitty investor behavior because you're wasting the founder's time. Don't do that.

Speaker 3

26:46

And 2, karma kind of got me back. I missed out on what would have been like a thousand extra turn and an exciting IPO because I didn't show up. All right, so I missed Airbnb, I mean, Dropbox, but what about Airbnb? So here's Michael Seibel introducing the, this was June 26, 2008, to this company, Airbed and Breakfast, And then just sort of like humorously, 4 years later or something, 3 years later, I respond, I should have responded.

Speaker 3

27:27

The thing that actually triggered this was that the Airbnb founders were like standing right here telling their story And I was like, oh, this hurts so much. I can't believe I missed this company. In my defense, I had my own startup at the time. And I think if you are a startup founder, you need to give your own company absolute priority over angel investing.

Speaker 3

27:47

The thing that actually makes this more painful is that this was just the first time. This was before they were in YC. Once they were in YC, PG was like, oh, you got to talk to the Airbnbs. They're so good.

Speaker 3

27:59

They're the best company. He was just constantly hyping them. And generally, if PG gives that strong of an endorsement, just like, you just invest. I'm like, cool, I'll invest, I'll watch for them on Angel Day, which is what we used to call Demo Day.

Speaker 3

28:14

And I show up on Angel Day and there's no Airbnb. So I emailed Brian, I'm like, hey, missed you guys today, was hoping to chat and invest. He's like, yeah, sorry, we just signed a term sheet with Sequoia. So again, I had basically in my head decided to invest, But then just kind of was laxadaisical and took some time.

Speaker 3

28:40

Fortunately, I was able to get into a later round, but at a much higher price. But again, the point I want to make here is that if you move slow, you're going to get adverse selection. Like the companies that you can string along for months and, you know, give a hundred different meetings and, like, you need to talk to this person probably aren't going to be the best companies. So be very deliberate in your decision making.

Speaker 3

29:06

Do or do not. Don't just be like, yeah, I'll see what happens. When you identify a company as being really promising, as something you want to invest in, you could spend another week thinking about it, or you could pull the trigger and get Airbnb.

Speaker 2

29:26

All

Speaker 3

29:26

right. What else doesn't work? Really good price. This 1 I've been duped into a bunch where I'm like, oh, it's such a, you know, they're giving me a bargain.

Speaker 3

29:38

Like I'm tempted by a bargain. Like oh, the valuation's so low, it's a steal. Like I'm getting a great deal. I've never gotten any return on something that I invested in because it was a good deal.

Speaker 3

29:51

There really literally is no such thing as value investing in startups. As much as it seems like there should be, every time I've done this, it's been a mistake. Another mistake. Not investing because of price.

Speaker 3

30:07

And clearly there must be some limit at which this isn't true, but I've never encountered it. Anytime I've been like excited about something, but then it's like, ah, the price is so high, you know, I'll invest in something else. I've always regretted it. Like, so now, actually, in my head, I kind of turn around the rule.

Speaker 3

30:28

I'm like, if I'm dissuaded by the price, I should probably invest more. I just need to write a larger check. This 1 is probably kind of obvious. I make this mistake a lot because I work with the founders.

Speaker 3

30:45

I get emotionally attached and I just want to help them out. They seem helpless. If you're investing out of pity, those also have never made any money. These have always turned out bad because again, like the really great founders just are so formidable.

Speaker 3

31:05

Someone like Blake at Boom, it's sort of like a force of nature. He's somehow just going to will this thing into existence. The people who come to me with a sob story, oh, no 1 wants to invest, maybe if you write a check they will. Like, nah, I haven't made anything.

Speaker 3

31:21

So I'm gonna try to keep myself from making this mistake. I'll probably do it a little bit more. Cynical ideas. This 1 is something where I'm actually not really that excited about what they're doing and what it means for the future, but it seems like it could make a lot of money.

Speaker 3

31:40

And so, you know, if they're gonna make a lot of money I'd like some of it. So far, and I'm kind of actually happy about this, I've never made money on these companies. Somehow the cynical ideas, I don't know why, but they haven't worked out for me. Maybe I have the wrong kind of cynicism, But the principle here I would suggest is invest in optimism.

Speaker 3

32:03

Invest in the future you want to see, not the future you fear. And these are basically ideas where I invested in the future I fear. I had this 1 idea at 1 point that I should just invest in anything that would not be out of place in the movie Idiocracy. Fortunately, those investments didn't work.

Speaker 3

32:26

All right, another mistake, really impressive numbers. I think Sam touched on this yesterday. It's really easy to get excited. Good numbers on their own are not a bad thing, obviously.

Speaker 3

32:37

Sometimes really good companies have really good numbers. But the thing that happens is you kind of get blinded by the numbers. You're like, wow, it just keeps going up. Ignore the fact that somehow the founders are kind of or the product doesn't really make sense to me.

Speaker 3

32:56

And again, never made money on these. If I'm just investing because of the numbers, it turns out to be a bad investment. And I think the reason for this, the question to ask is, is this company actually creating value? Like, are they actually making the world a wealthier place, or are they maybe just exploiting some temporary inefficiency in like Facebook.

Speaker 3

33:20

Facebook's gonna change their algorithm and the company's gonna be dead, right? All right. So I've Tried to boil that all down, again, just more for my own use, to a checklist. Because again, my thinking on startups is that it's really like the founders are absolutely critical and everything else kind of derives from that.

Speaker 3

33:46

So if I'm just asking myself, is this person a great founder? Here's some of the traits. Clear, concise communication. And I want to be clear.

Speaker 3

33:57

This doesn't mean slick, salesy kind of communication. I mean people who can demonstrate a real depth of understanding and clarity of thought. And the example, actually probably 1 of the best examples of this is just Paul Graham with Y Combinator. Like the whole reason Y Combinator really exists is because he'd been writing these essays for years that were sort of like, he's kind of like the Pied Piper of nerds.

Speaker 3

34:22

Like everyone would just read these things and get excited. And that was, and to this day, I believe it's like the number 1 or number 2 source of leads to people applying to Y Combinator. We ask a question on the application, how did you hear about Y Combinator? And they say, from Paul Graham's essays.

Speaker 3

34:41

But also, you know, essentially all of the other founders fall into this category, right? Like, Kyle was able to tell me a story about how he's gonna make a self-driving car. Boom, again, he's able to tell me the story about how they're gonna do this impossible thing. And so if people, if I find myself struggling to understand or like doing the work for them, it's always a bad sign.

Speaker 3

35:05

And it's, the trap I sometimes fall into is I'll talk to them for so long, I'll come up with a story that makes sense and then I'll just sell myself on my own story. You know, I'll think maybe I'm just not smart enough, but no. If they're a good founder, they're going to be able to communicate to me. Moves fast.

Speaker 3

35:25

Again, like think of Brett rewriting maps in a weekend, or Kyle making a media server, or the Meraki team building that product with no money. Moving fast is absolutely critical. And again, it's something that I think most people don't do. It's really easy to come up with reasons why this should take longer, or, oh, you know, I really want to get this thing right or that thing right.

Speaker 3

35:54

Like, founders will come up with infinite reasons to move slow. And that's fine. I'm just not going to invest. Accomplishes a lot with a little.

Speaker 3

36:04

And so again, like Meraki is the great example of this. No money in their shipping hardware somehow. Juicero is the anti-story of that. Most startups, unfortunately, accomplish very little with a lot.

Speaker 3

36:19

Implausibly ambitious or frivolous ideas. And the reason that we're kind of at these 2 extremes is that if the idea is in the middle, as I mentioned at the start, probably there's a big company somewhere working on it or a hundred other startups. And so you want to see something that's either it sounds impossible like you know a supersonic jet or just straight-up stupid like putting a camera on Justin's head. Right?

Speaker 3

36:44

Things that seem like toys. Actually Aaron Harris had a good blog post about this I think last week you should look up on the YC blog. Ideas that look like toys are often times really great. And the founders have the conviction to pursue these obviously bad ideas.

Speaker 3

37:03

Is a talent magnet. So the best people want to work with the best people. And somehow the really great founders seem to be able to attract other great people. And actually YC, this is I think really the secret of YC is that it's just a giant talent magnet.

Speaker 3

37:22

Like, we could bring them in and do almost anything. I think it would still sort of work. The key thing is that we're attracting the best people, And the best people want to come be a part of Y Combinator, because this is where all the other best people are. And we see this with a lot of our top startups, like Stripe, really brilliant founders.

Speaker 3

37:42

And then their team is also really impressive. Make something people want. This is key. This is our slogan, make something people want.

Speaker 3

37:55

Google is a great example. I actually was using the product. If they're building a thing that you actually want, that's a good sign. If you can't identify anyone in the world who would possibly want the thing that they're making, anyone who if you offer it to them, they'll be like, no, thank you.

Speaker 3

38:12

That's a bad sign. I was going to say something else about that, but I don't remember. Oh, right. Actually another funny story here is DoorDash, which you may have seen in the news.

Speaker 3

38:28

They just raised another half billion. When they interviewed here, like actually in the room right over there, my like 1 question for them was like, will you deliver to my house? Because at the time when they went through YC, there was no food delivery where I lived and I get hungry. And so they're like, yes, I was like, you're funded.

Speaker 3

38:48

So I mainly funded that company just because I wanted food for myself. But they're doing good. And finally, determined and committed. And In fact, PG says determined is the number 1 most important trait in a startup founder.

Speaker 3

39:06

And the reason for this is because starting a startup is really, really, really hard and unpleasant. And so if you're not super determined, you'll probably give up at some point. You'll be like, why am I putting myself through hell? I should just go get a job at Google and be like a normal person.

Speaker 3

39:26

Unfortunately, I think this can sometimes be a little bit hard to suss out because the founders will of course be like, oh yeah, I'm totally committed. But some of the things you can look for is, are they hedging their bets? Like, do they have kind of this easy plan B? And actually the group of founders where I've seen this happen the most is founders who are on leave from med school.

Speaker 3

39:49

Doctors who realize they didn't really want to be a doctor, so they're like, I'll try out the startup thing. And so they come in here, they'll work for 6 months or whatever, and they'll be like, man, this is hard. I'm scared. I'm gonna go back to medical school, right?

Speaker 3

40:04

Like, They have that easy out. They've already made a huge investment in being a doctor, and they don't want to throw that all away for some pipe dream startup. I think the other thing that I like to look at is have the people made mistakes in their life? I'm very nervous about people who've always gotten perfect grades.

Speaker 3

40:34

They got into all the right things. They did all the right clubs. The people who have the perfect resume. The people who didn't fuck up.

Speaker 3

40:43

Because these are people who've never failed. And startup founder, being a startup founder, you're basically failing day after day. And so what these people do, these are people who are scared of failure. And so they almost inevitably will take just an early exit.

Speaker 3

41:01

And then they can put on their resume, oh, you know, started a YC startup and sold it to some other company, right? It doesn't say that they sold it for like 0 dollars or whatever, but they can add it to their resume and they can go get a safe job at McKinsey or something. All right, so that is it. Thank you.

Speaker 3

41:31

So the question is, with respect to making things people want, how do you evaluate that for like bio companies and things like that? You know, actually I find Most of the time with those companies, it's pretty obvious. Like, you're making a cure for cancer. I want a cure for cancer, right?

Speaker 3

41:53

The risk on those companies is most often not market risk. It's not the risk that no 1 wants a cure for cancer. The risk is that they don't actually have a cure for cancer, right? So with those companies, more often, it's 1 of these things where the demand is kind of obvious.

Speaker 3

42:11

It's just a question of whether you can actually create the product. I have a question.

Speaker 1

42:17

Just wondering. I know Justin. I know Michael.

Speaker 1

42:21

I know Emmett. I know Kyle. What is it about those guys that made you invest? Because I mean, you didn't really say it, but you heard this incredibly stupid idea.

Speaker 1

42:32

And yet you invested in this no-talented group of 4 people. Why?

Speaker 2

42:37

I mean,

Speaker 3

42:38

I think they did have talent. I think they told a very simple story. Actually, this is a good question.