Typically the balance of power shifts between investors and entrepreneurs based on how frothy the times are, or how hot a given sector may be. (Oh, hey there, AI)
But not on YC Demo Day. YC has pulled off something that entrepreneurs spent decades dreaming about: it has permanently turned the tables on VCs.
If you are lucky enough to get a ticket to Demo Day, you may have 15 minutes to get a meeting with a company you’ve got your eye on. They’ll probably be raising $2 million on a $20 million valuation. And they’ll have more than $15 million in interest. So you’ll have to talk quickly to convince them why you will add the most value to them.
“Your money is almost irrelevant to them,” says Gabriel Jarrosson of Lobster Capital, who invests exclusively in YC companies. “What do you bring?”
Oh, and you better live up to those promises. Because they have an internal site called Bookface where all investors are ranked with commentary on how they’ve treated past YC entrepreneurs.
If there was ever a 24 hour period in an emerging VC’s life where a crash course is needed, it’s the day before YC Demo Day. So, last Monday night, we hosted one in San Francisco for all of our fund managers, called the “YC Pregame.”
Decile Group Founder and CEO Adeo Ressi hosted a panel of three YC experts. In addition to Lobster Capital’s Jarrosson, there was Jared Heyman of Rebel Fund and Brian Bell of Team Ignite Ventures.
These are three investors who each have literally invested in hundreds of YC companies. Jared and Gabriel only invest in YC. Brian has two funds dedicated to YC and one that invests elsewhere. Each has a slightly different thing they are looking for in the ones they pick. Each has slightly different reasons why they pay the 2x+ valuation mark up to invest in YC companies almost exclusively. And each had different ways of dancing to YC’s tune, while still putting together a winning portfolio.
They generously shared their knowledge with our fund managers, showing why being a part of VC Lab and Decile Group is about more than just setting up your fund. It’s about having a community to turn to, so a new manager doesn’t have to have all the answers–especially when it comes to investing terrain this daunting.
Below are a few of the highlights from the talk.
Brian Bell: “This event is called YC Pregame but it should be called YC Postgame.”
As if everything above wasn’t challenging enough, by the time you get to Demo Day, the truth is most of the deals in the best companies have already been done. Indeed, on Demo Day eve last Monday, our three guests had already done most of the deals they were planning on doing.
Bell asserted that the game was so well played by now that you were too late if you were investing on the day of. But Heyman reassured investors in the room that there were always companies still raising that might be the best ones of the batch.
There are more than one hundred companies in each cohort, and the truth is they are so early that no one really knows who the winners are going to be, he says. Sure, people tend to coalesce around some exciting names. But, as he reminded the crowd, some of the biggest YC hits like Airbnb and Stripe were not obvious, and many of the biggest YC hits have wound up being flops.
Vibe Investing
All three investors said they invest in the founder over the idea. Yes, it’s a cliche in early stage investing generally, but it’s especially important when you only have 15 minutes with someone. Companies and products are going to pivot so much this early, you can’t fall in love with a product.
That said, each of the investors had different ways of making those assessments.
Heyman has an algorithm that he runs the details of the companies– which is mostly about the people involved and the sector since the company itself is so early. But it also benchmarks those qualities against everything he’s seen in all of his time backing YC companies.
It’s not the only thing he uses to make his decision, and the meeting with the founder will be important too, but it even takes into account which YC partner is championing the deal, because some have better track records than others.
Jarrosson goes by early revenue traction. It sounds like that’s not a bet on the founder, but he argues it is, because if you’ve done a million or so of revenue that early, no one does that as a one-off fluke. It’s a testament to the founder’s early hustle and a revenue-centric mindset.
Bell looks at what he calls the four T’s: Team, Timing, Traction, and Transformation. Is this the right team to do this idea? Is this the right moment for it? Are they growing 100% month over month? And is this kind of company likely to transform a market?
Even YC companies can fail
There was a lot of talk at the event about how fishing out of the YC pond is comparatively de-risked because they only take 1% of companies that apply. Bell compared investing out of YC like hiring for Wall Street out of Harvard. 6% of YC companies become unicorns, double the rate of non-YC startups.
But Heyman cautioned investors ready to throw a term sheet at any YC company left at the ball. “6% become unicorns is not 100% become unicorns. You still need to be selective. You just need to do it quickly.”