Archive for April, 2007

What I Expected From YC and What I Got

Posted on April 15, 2007. Filed under: Uncategorized |

I was re-reading the blog post I wrote the night before I left from San Francisco and it got me thinking about the experience of the past three months. I’ve been asked the question of whether YC was what I expected by numerous people now (mostly current interviewees) so it seems to be something people are interested in knowing about. Here’s a blog post laying out exactly what were my expectations were pre-YC and what I actually got during YC. I want to start by explaining how we got to YC which people also seem to be interested in.

1. How we got to YC

I think a lot of people assume that Kul and I made the decision to move to Silicon Valley from London once we got accepted by Y Combinator. That’s not true. We arrived at that decision independently of Y Combinator. It first started when Kul went out to San Francisco last year with the intentions of just meeting some people to see what people thought about boso. On that trip he met Max Levchin, Evan Williams and Naval Ravikant (Founder Epinions). He had some pretty intense sessions with these guys and when he came back he couldn’t get over just how higher a level the conversations he’d had with these people were compared to our experiences of talking to people about boso in London. That’s when the seed was first planted.

The tipping point came when I read Paul Graham’s blog post about the mistakes that start ups make – near the top of the list was location – and forwarded the link to Kul. His response was pretty brief, “Well why don’t we just move out there then?”. One thing I like to do is look at things from the opposite view point of my co-founder and present the opposing view, that often results in arguments but it also means that we fully utilize the fact there are two brains working on a problem (having a honeymoon type set-up where you both tell each other how great you are is pointless in my opinion). So I tried to make up a list of reasons why we should stay. It was a futile exercise – not a single argument stood up and that’s when it was pretty obvious that we had to move. As much as the thought of leaving everyone I knew behind was incredibly scary it was time to make the move and so we started looking into places to stay/people to hire/office space/etc.

It was after this that we actually applied to Y Combinator. At first we’d thought that YC was only for US companies so we’d always dismissed it. Then I think I read a FAQ on the website that said foreign companies could apply (there hadn’t been any funded at this point though) and we figured we’d at least give it a go. We put together our application pretty quickly and sent it off (it really was completely speculative but as I’ve seen over and over again, it’s often the most speculative actions that yield the most fruitful results) – then we headed out to Boston for our interview.

Our interview was probably a more person focused that product focused interview. At that point we had a launched product, bosowith a few thousand users but we didn’t do any demo. Our interview was centered around our story so far – how we’d got the site launched, what problems we’d faced, where we saw the idea going, which competition we were most worried about. Then we talked about why we wanted to move out to SV from London and how we planned to get around the fact that neither of us were hackers. From other people I’ve spoken to – their ten minutes revolved more around product demo and product talk so I guess if that tells you anything it’s that there’s no formulaic approach to the YC interviews.

After that we got the call frm PG on the same day and a month or so later we headed out to SV to begin the adventure.

2. What I Expected From Y Combinator

So just going over my old blog post again in terms of tangible goals I guess the biggest one was to find a technical co-founder. As I mentioned, with neither Kul or I having a hacker background our biggest weakness has always been plugging that gap in our skillset. We’d gone through an outsourcing attempt where we had some offshore developers working with us. Although that wasn’t a spectacular blowup failure, it became clear very quickly that we weren’t going to build a successful startup by outsourcing. We also tried hiring developers to work with us in-house. The problem with this was that they weren’t co-founder material. They were just average people who happened to have spent time at some point in their lives learning the keystrokes needed to code something. In essence we were hiring people with a 9-5 mentality and it became painfully clear to me that when you’re a startup, you’re not going to take on bigger companies by having a smaller number of 9-5 people. You’re only going to have an advantage if you have a special group of people together who are greater than the sum of their parts (how many 9-5 employees worth of output do you think Steve Woz had in the early days of Apple?).

To sum up the point I’m making is that we had always craved having someone who had all the “ingredients” of a co-founder like we did (e.g. passion for startups, smart, driven, ambitious, etc) and also had the technical skills we lacked. At this point in time, it became clear we weren’t going to find that in London. Quite simply there were not (or we did not find) enough people in London who fitted our criteria who were prepared to join a startup rather than accept a job at a bank/law firm/management consultancy. We knew that YC would increase the frequency with which we met people who would be prepared to join a startup so that was possibly the most important expectation we had.

The next most “tangible” expectation we had was removing a large amount of the headache involved with investment raising. Kul quit his job at Deutsche Bank in February last year and until August the vast majority of his time was spent trying to raise investment. We got there eventually but seeing just how much of a time and resource drain it was made us extra determined to minimise that drain for any future rounds of financing. Going to YC we expected to reduce that drain in two ways:

  1. There is a greater density of investors based out in Silicon Valley who understand the Internet and have already made a lot of money from it. In London we were dealing with investors who just didn’t “get” the potential for making successful web businesses (the state of the London investment scene is a whole debate unto itself, you can read about the issues here and here) and that was a time drain we didn’t need. Just from talking to PG for 10 mins in our interview we saw how much better it was dealing with an investor who understands what we were doing and that made us hungry to be around those types of people.
  2. The YC brand is incredibly powerful and when we learnt about how the investor day process worked we knew just what an amazing opportunity it would be. Having so many investors in the same room was exactly the kind of situation we’d craved for so long and we knew it’d be an incredibly efficient way of raising more money if we needed it.

In terms of expectations that could be loosely termed as “tangible” those two would be it. The other intangible expectations were:

– You often hear the phrase “better to be a big fish in a small pond” thrown around. Kul and I have always had the opposite mentality to that. If there’s one thing above all else that studying at Oxford taught us, it’s the value of being around people you perceive to be as smart/smarter than yourself. At times that can be uncomfortable (I remember going from being the (academically) smartest guy at my school to now being one of many studying law at Oxford and finding that a strange adjustment) but it’s the only way you can really fulfil your potential, or at least that’s true for me. I feel more comfortable feeling like I need to step up a gear if I want to be noticed. Moving out to SV, where just doing a startup is no longer newsworthy (most of the early national PR we got for boso was more down to the fact Kul and I were young and starting a company than the actual idea behind boso) material, made that true and it was a challenge we wanted to face.

– It’s been said many times now but doing a start up is lonely. Even when you have a great co-founder, it’s still lonely. This was especially true for us – all of my peer group started jobs in banks or law firms and it was tough going when they were getting nice pay checks while we’re struggling to get any seed funding. There’s a massive difference between going through a graduate training programme with 100 other people and building a startup with one other person. I love my friends but there was a big part of me that wanted to be around other people who were doing the same thing I was. That type of ecosystem was starting to form in London when we left (we helped start a group called Zenopy) but it wasn’t anything near the scale of SV.

– I generally had always wanted to live and work abroad in some point in my life (the only reason I’d accepted a job with law firm Latham & Watkins was because they’d let me move out and work in Silicon Valley for 6 months during my training). I’ve always wanted to see what it’s like to be exposed to a different culture and all the stuff that comes with working abroad. I never expected it to happen so soon but it did and I definitely felt that on a personal level, I’d learn a lot from living abroad.

3. What I Got from YC

So let’s start off with the tangible goals.

Co-Founder: Within a few weeks of being out in SV we were introduced to the guys behind, YouOS. As fate would have it, one of the founders (Srini) was actually living in the building next to us and we started having informal hacking lessons where he’d teach us how to hack. We got on really well and we agreed to work together more formally for the three months of YC – he’d help us build our product and teach us how to become hackers. Once the three months were up he rejoined the YouOs guys to work on their new product, Project Wedding.

Shortly afterwards, again through YC, we met Patrick Collison – a young whizzkid hacker (he wrote his own programming language when he was 16) who’d applied to YC with an idea relating to the online auction space. We got on fantastically well and we’ve now joined forces with Patrick so we have the co-founder we’ve always wanted. It’s left us incredibly excited about our future and its going to be an awesome ride. We’ve got some more potential additions to the team lined up as well which have got us even more excited and I’ll blog about them in due course.

During the three months my initial expectations were all confirmed, we met an incredible number of talented young people who didn’t need convincing to join a startup but were pro-actively seeking startups out. The biggest sticking point for me has been the sheer rise in my internal meter of assessing the people I want to work with. It’s risen from essentially “anyone who can code” in the early days to people who have worked at companies like Google, IBM, Oracle, Microsoft – the thought of being able to work with people like that had just never been an option before and that’s part SV and part the power of YC.

Investment: This one is easy to sum up, everything we expected came true. It is quite simple, YC will save you an incredible amount of time in the investment raising process. And that’s not just because of the brand name. A lot of you might be thinking about competing incubators but one thing you have to ask yourself is will those guys work as hard for you as YC? One thing people don’t realise is just how hard the YC partners actually work for you – PG is continually pitching YC companies to investors investors and I’ve lost count of how many “I met this great person and told them about you” emails I’ve had from Jessica now. It’s made the investment raising process this time around infinitely better than the last one.

As for the intangible expectations, it’s probably quite obvious from the rest of my blog posts that they’ve all been met. But just saying they’ve “been met” is a massive understatement. Perhaps what I didn’t expect was just how amazing it would feel to actually have all of those expectations met. I’ve never had a problem with self-confidence so saying that YC gives me a new feeling of self-confidence wouldn’t be accurate. I think what has done is given me a new sense of belief and that has come from being around people who have been a success. When you’re having dinner every week with people like Joe Kraus, Evan Williams, Paul Buccheit, PG it suddenly dawns on you that there’s actually a chance you can succeed despite stupid odds. Logically speaking you can argue that I’m looking at it from a skewed data point – for each of these success stories there’s a 100 failures you might say. And you might well be right. The point is that sometimes you just need to forget what logic tells you and just go after something because you want it that bad – YC gives you the belief to do that by placing you in the perfect environment.

When I look back on the past three months, YC has been by far and away the most happy/amazing three months of my life. I can barely recognise myself from when I first started out in January, it feels like there’s been a lifetimes worth of knowledge crammed into my brain and once I’m back out there – I fully expect to have that same feeling another three months down the line. It’s that process of learning from your peers that makes YC special and it’s the way they make that happen that makes YC unique. Just putting a bunch of smart people in a room together isn’t enough (if it were there would be a ton of successful incubators all over the place) there has to be something else going on to make it special. I’ve got a lot of ideas about what that X factor might be but whatever it is, the important point is that YC has it. That’s not to say YC is the only way to start a company (of course it isn’t – there were successful startups before YC and if YC disappeared tomorrow there would still be successful startups somewhere) but it is a great way to do it.

Right that post should definitely be long enough to get out all my pent up blogging cravings for a while.

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How to Kung-Fu battle with investors

Posted on April 5, 2007. Filed under: Uncategorized |

So I have lots of pent up blogging to do, it’s been a while and now I’m back in the UK it’s a good point at which to pause for a little reflection. The first post I want to do is about the process of raising investment. I’ve been through it once when we raised our first round of angel funding back in August and then since YC investor day although we’ve not gone all out on raising another big round (for reasons I’ll explain below) investors have still found us and we’re going through the investor dance once again.

Actually when we practiced our pitch at Obvious HQ before investor day, Jason Goldman referred to the whole process a “weird kung-fu battle” and that analogy has stuck with me. I think it’s a good way to look at it. I don’t pretend to offer anything new here, I’m sure this advice is available around on the net somewhere but here’s a collection of all the lessons I’ve learnt re investment raising since YC which hopefully may be of use to some of you, they’re in no particular order.

1. Believe you’re a hot deal– When you’re a first time founder and you’ve never raised funding before, the whole investment raising process takes on a disproportionate level of importance. I think this often leads to founders creating a mental unbalance between how important they are to potential investors and how important those investors is to them. Always remember investing is a two way process – you need the money but the investors also need good deals. You can’t afford to act desperate or not full of belief, you have to convince investors that you’re the next Google and that starts by believing it yourself. It’s harder to do this if you’re not in the Valley, where there are literally way more investors than there are good deals, but it still needs to be done.

2. Investor and founder intentions are not always aligned – One thing to keep in the back of your mind is that what’s in the best interests of your investors is not necessarily in the best interest of you as a founder. This generally applies more to VC’s than angels but it’s still true to some degree for both. Investors are looking for one thing – a MASSIVE hit in their portfolio – and that is built into their mentality. What might be a good result for you, might not be a good enough result for your investor and that has potential to cause friction further down the road. This basically comes down to managing your investors well and if you’ve retained control of your company then you don’t have to worry about it so much (and it’s not necessarily a bad thing to have that think big mentality pushing you) but what it does mean is that you should always make your own decisions and not blindly follow advice.

3. Know the investor – I’m going to use two speakers from YC dinners to highlight this point. First up is Ron Conway, probably the most prominent/well-known angel investor of all time. When asked what he criteria he looked for when investing he replied “Obviously I want to see an opportunity I’m excited about but generally I don’t invest in ideas. By the time a startup reaches the point of being successful it’s hardly recognizable from the initial idea anyway. I invest in people and teams – I want the founders to be flexible and have the courage to change their business model”. Next up is Greg McAdoo of Sequoia Capital, who said that the first thing he looks for in an investment is the market opportunity. He wants to know how big the market is and see in-depth research of it. So it’s pretty obvious then that in your one-pager to Ron, you want to place a little more emphasis on the team and with Greg you might want some more market data. I know this is pretty obvious advice but when you’re in the midst of the fundraising storm and meeting a load of investors, it’s easy to forget the importance of researching each investor you meet. Do it ruthlessly, know their best investments and which ones blew up in their face. Treat knowledge like ammunition, the more you have the better off you are.

4. Talk is cheap – They say a picture paints a thousand words, if that’s true then a well rehearsed demo of your product must paint a million. I’ve now seen tons of people pitching ideas to investors and I can categorically state that nothing is as powerful as a well rehearsed demo. Being able to sum up your idea in a few sentences is not a competitive advantage/something to feel good about – that’s the minimum standard just to enter the game. Showing a good demo to an investor has a lot of positives 1) It shows you’re not talking bullshit, you can actually build something 2) It saves investors time, you can paint a clearer picture in a 5 minute demo than 5 minutes of talk 3) A demo is visual and sticks in the memory more than talk/one pager. Always have a demo ready – of our current YC batch Weebly and Zenter have awesomely slick demos and it’s not a coincidence that they’re doing very well in the investment raising process.

5. Don’t think in % equity, think in % success – This is something PG has said countless times and is a v important point. Don’t waste time trying to hold onto every last grain of equity, you’re better off deciding how much that particular investor increases your chances of success and use that as a guide as to how much to negotiate with them. There have been enough blogs about this point so I’ll leave it at that.

6. Don’t let your ego dictate your valuation – It’s very easy to take the bigger is better approach when negotiating the valuation at which investors invest in you at. It’s not as simple as that – if you’re a first time founder the one thing you really don’t want to do is lose all your investors money. You want to give them at least some form of return on their investment – even if it’s just 1x or 2x. The likelihood is they’ll put that money straight back into your next venture and so the circle continues – having a set of angels you can always call on is an incredibly powerful asset to have. But let’s say you are a superstar/superhuman negotiator and you manage to raise $5 million and only give away 5% of your company. You might pat yourself on the back and congratulate your success. But what that really means now is that your company is valued at $100 million already – so if you want to give your investors their expected return (about 10x) you need to create a $1 billion company. Even just to give the investors their money back, you need to create a company worth $100 million. Of course you should be aiming high and believing in yourself but you can see why trying to get the highest valuation possible can actually limit your options somewhat.

7. Think of money as a commodity – This is something we only did this time around and it’s incredibly liberating. When you first raise money it’s tempting to grab the money from the first person to make you an offer, after all cash is cash right? Logically though it can never be that simple, if all investment was about was putting money into a business then it’d be totally irrelevant where the money came from. That’s obviously not true though – having $100k put into your company from Ron Conway is worth ALOT more than $100k from Mr X who made all his money from pharmaceuticals (assuming you’re a web startup). When you realise that it’s somewhat liberating, you start to ask the right questions about investors which naturally gives you more power (linking in to point 1) and means you’re less likely to end up with an investor you don’t get along with.

8. VC or not VC – One thing a number of YC speakers have repeated is how the VC’s think behind the scenes and why founders should be careful. To sum it up – VC’s raise their cash from Limited Partners (a VC is really nothing more than a fund manager who takes money from rich people and invests it – they just happen to invest it in startups and not stocks). There are a few implications of this:

  • VC’s get a % of the fund they raise so it’s in their interest to raise as big a fund as possible. They have a lot of money.
  • They need to invest this money but there are only so many investments a VC can physically make in a year (only so many hours in the day and board seats one person can handle
  • So now it’s pretty obvious – if VC’s have a lot of cash but only so much investment capacity, they have an underlying motive to pump a lot of cash into the investments they do make (Limited Partners don’t want to see their money sitting around gathering dust). For a lot of startups this means VC’s offering they way more cash than they actually need.
  • So that’s the first big thing to keep in mind about VC’s, they have incentives to offer you more money than you probably need. That’s not by definition a bad thing but it can be (a lot of people argue that the best innovation happens when a startup has to bootstrap for survival – having $5 million sitting in the bank isn’t bootstrapping but you might counter that eliminating financial concerns lowers stress and helps founders concentrate on the business). Either way, keep it in mind.

    Another thing to remember is that VC can also limit your exit potentials – once a VC invests a successful exit = BIG bucks and quite simply, there are not as many $500 million deals happening each year as there $10 million ones. This comes down to what you want to do, if you’re thinking big then this isn’t an issue but worth keeping in mind (especially if you give away control and wouldn’t be able to sell even if you wanted to). (Just a quick note on this: VC’s are increasingly allowing founders to cash out so if you did get a lowball offer, you might be able to cash out i.e. the VC buys some of your stock which could be a nice compromise if you’re torn).

    So I think that’s about it – as I said this is nothing new but I figure it’s probably useful to have this stuff collected together in one place. Good luck with the fund raising!

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