This Week in Startups - YC demo day valuation tensions, how VCs can find gems, Substack's performance & more | E1716

Episode Date: April 7, 2023

Jason breaks down the valuation tension surrounding YC demo days (2:36), how to get better prices on YC-equivalent startups (8:59), Garry Tan's response to complaints (15:18), and more! Then, Jason reacts to a law firm's leaked expectations list that went viral (29:29) before wrapping with some thoughts about Substack (41:59). (0:00) Jason tees up Friday's topics! (2:36) Understanding the valuation tension of YC's demo day; why some investors resent YC (8:59) Jason's three ways to avoid overpaying for YC startups (13:56) Embroker - Use code TWIST to get an extra 10% off insurance at https://Embroker.com/twist (15:18) Garry Tan's response to demo day valuation complaints; Harry Stebbings and Garry Tan's back and forth on valuations/expectations (24:07) Linode - Apply to Linode's Rise program for a $500 credit and up to six figures in discounts at https://linode.com/twist (25:34) How startups that got accepted into YC can cold email top VCs to raise pre-demo day (29:29) Jason reacts to a law firm's leaked expectations list that went viral (36:13) QuickNode - Get one month free by using code TWIST at https://go.quicknode.com/twist (37:25) Reactions to the viral expectations list (41:59) Substack publishes 2021 gross revenue, net loss, and cash on hand and Jason breaks down the company's position Email your pitch deck to [e-mail] if you were rejected by YC and want to meet with the LAUNCH team! Subscribe to our YouTube to watch all full episodes: https://www.youtube.com/channel/UCkkhmBWfS7pILYIk0izkc3A?sub_confirmation=1

Hey, everybody, it's Friday. First up on this show, I'm going to talk about Y Combinator's demo day and why a lot of VCs are hand-wringing and complaining about, oh, my God, the high valuations of why Combinator companies. I will explain why there's resentment from the investment community at Ycombinator companies getting $20 million valuations when non-YC companies with the same amount of traction are commanding five or $10 million valuations. And I'll explain the three ways investors can avoid paying $20 million, but if they want to do the work. Three specific strategies to avoid overpaying when you're investing in startups.

I'll also talk about what Y Combinator companies should do in terms of raising money before Demo Day or listening to the basic rule of waiting till Demo Day. I have an answer that might be very different. I'm going to give you an actual script on how to email VCs that you're not raising money in order to bait them into investing before Demo Day. It's a very critical language I'm going to share

with you. And then I'm going to go through the pros and cons of party rounds. A lot of people have feelings about party rounds. Pro and con. I'm going to go through those. I'm going to talk about why leads are important for startups in these seed rounds. And then I'll quickly break down a law firm named Paul Hastings, non-negotiable expectations for junior employees. It just went viral. I had a lot to say about it. And then we'll talk about substack. Is it a good business to invest in that $600 million valuation or not? Well, we just got, We funder, released, and Axios covered. the amount of money Substack is making. And I'll talk about what Substack's actual evaluation is.

It's going to be an awesome episode. Stick with us. This Week in Startups is brought to you by Embroker's Startup Insurance Program helps startup secure the most important types of insurance at a lower cost and with less hassle. Save up to 20% off of traditional insurance today at Embroker.com slash twist.

While you're there, get an extra 10% off using offer code twist. Linode. Apply to Linode's rise program for founder-led early stage startups and get a $500 credit, up to

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with access to unlimited endpoints across 18 chains and 35 networks. Get one month free by using code twist at go. Dot quicknode.com slash twist. Hey everybody. Welcome back to this week and service. It's Friday.

And I'm still in Tahoe. If you're watching the video, you can see the massive amount of snow behind me on the slopes. And very excited that this extended season because of the atmospheric rivers we had here in California, they had 50 feet of snow in Tahoe, a record, twice as much as been. normally have per year. And that means some spring skiing. So I'm wrapping up the old

spring break with the kids. And I've hit 36 days of skiing. Today will be 37 for those of you counting, trying to hit 40. Okay, lots of news. And the biggest news, you know, twice a year, Y Combinator and Accelerator here in Silicon Valley has a demo date. And two or 300 companies graduate from that awesome program. It's a great program. I've had many companies I've invested in Go to YC. Highly recommend everybody go to YC. But there's handwringing that goes on when demo day happens. So I thought I would recap the controversy and explain a little bit about this tension. There's a lot of tweets going on.

This is very inside baseball, which is why you listen to this week in startups. I'll tell you exactly what's happening on the inside at accelerators that do demo days. So what's a demo day? What's an accelerator? An accelerator, which Paul Graham pioneered really, is a 12, 16 week program. I have one called Launch Accelerator. We've had 28 classes of seven companies each, and we've had great success with it. We've had multiple companies become worth over $100 million, and we've had a company become

worth a billion dollars. And it's a relatively new program. It's only been around for a couple of years. So these accelerators act as a way for entrepreneurs to learn some skills, have accountability for 12 weeks, build a network, get a small amount of money. I think Y Combinator currently does $125K, we do 100. We tend to invest a half million dollars in the companies after they graduate. Ycombinator copied that from us and they do 325, I think, or 375.

And so it's just a great way to start on second base as a founder. And the application process typically results in a small percentage of people getting in. I think in YC's case it's two or three percent of people get in and they get a large number of applications. So what are the controversies here? Well, there are so many people applying because YC is now a worldwide program. We do English language startups because they don't have many multilingual people. and we don't have people on the ground in other regions, so we don't do startups in India or Japan or China.

As an example, there's other accelerators on the ground there. It would be better for a founder to go to those, frankly. But they claim YC, and I don't have any reason to doubt them. 20,000 applications the most ever, 1.4% accepting rate, so it's actually gone down. And 52% accepted with just an idea and no product, 77% accepted without revenue. So they're accepting people early.

And the issue that comes up is valuation. Why Combinator has had an ethos, of being a little adversarial on the margins with the investment community. Why? Well, the investment community resents Y Combinator because they get to invest at a $2 million valuation, right? They put in this money at a $2 million valuation. It's a great deal for YC. In truth, the amount of work it takes to run an accelerator is, I kid you're not, 20 times the amount of work it takes to be a seed investor, an angel investor, or a venture firm. 20x. The cost, the cost, the time, the effort. It is a massive amount of money. So although you're getting that $2 million valuation,

you have to provide a program. You have to be there for 300 founders or whatever it is that tech stars and Y Combinator except maybe 600 per year, I think it is, between each of those programs. Think about how many conversations have to happen. Now, also, Paul Graham had a very bad experience, like many founders did 20, 30 years ago with VCs. The founder-friendly era of venture capital is a recent phenomenon. It's only the last 15 years that founders were able to gain power over venture capitalists and say, you know what, you can't kick me off my board. I want to maintain control of my board. I get to pick my VCs because there's many more VCs and founders have gotten smarter. And also a large number of the folks at Y Combinator have hacked

Angel investors and Venture Capital. Now, I'm an expert on Angel investing. I wrote a bug on it, in fact. And I can tell you that, you know, founders are very clever. So when it comes to fundraising, they, largely on their own, this isn't why Combinator's fault, have figured out hacks. And one of the great hacks is that Y Combinator says, don't raise money before Demo Day. And they kind of get everybody to agree to that. Now, if you're a YC founder, I would totally ignore that rule and I would raise from people while you're in the program. But if you want to take their advice and build up all that energy until demo day. Then on demo day, they do this thing called a handshake protocol. It's kind of, I wouldn't say high pressure, but it's high pressure. Basically, there is this

ethos put out there, this, you know, aura that all the rounds are closing. I can tell you, probably only the top 10, 20%, there's really a sense of urgency. The rest, take a month or two to close. So 90% of the companies take two months to close, but they all put out the front that, hey, it's closing. And they do some unnatural acts in terms of getting people to close. They might do increasingly high valuation. So they say, if you invest this week, it's 15 million, next week it's 16 million, the week after it's 18 million, and then it's 20 million. Really weird stuff like that. And I've heard Sam, who used to, Sam Waltman, who used to run Wycommoner, say he doesn't agree with this stuff and he wasn't in control of it, right?

The founders get to decide what they do. But there's a thing called a party round. And the party round means no investor sets the valuation or terms. You get a bunch of dentists, a bunch of high net worth individuals, perhaps some seed funds. And I'll be honest, a lot of neophytes. when I've gone to Demo Day, it would be like maybe 20% people in the industry and then 80% people who are somewhat new to the industry. And those folks are going to make bets in a pretty frisky way, I would say. It's kind of like new poker players. They can play a lot of hands. They, you know, they're kind of predictable. They may not be as savvy. And so what does savvy founders do? They set their valuations very high. There's a valuation number for this stage

of company. It's $5 to $10 million. YC companies can sometimes ask for $15 or $20 million. And that makes everybody lose their minds. And then they go to Twitter and twice a year, we have this big debate over valuations. Are the valuations too high? I might have a surprising answer for you. Now, while I would pass on those $15 to $20 million valuations, other people might not. Let me explain. There are three ways, three, one, two, three, ways for you to avoid paying $20 million.

Number one, you could very easily meet with three founders. a day over Zoom for three months, and that would be 200 or so companies. You would basically do one-on-one meetings with 200 companies. And you would find all the companies who didn't get into YC who didn't ask for a $15 or $20 million valuation. They would be in the $5 to $10 million. And then you'd sort them. And let's say you wanted to invest in five companies. You would be able to invest in five companies at, I would say, on average, half the valuation of a YC company. Which means you would essentially be like investing in 10 companies. So you can invest in 10 companies for the price of 5YC.

And I can tell you, in that process, you would find companies that are equally good. Because at this stage, not me, one of the greatest angel investors of all time, not Y Combinator, certainly the greatest accelerator of all time, by far. Techstar is right behind them, actually.

I shouldn't say by far. But one of the top two of all time. I'd like to think mine's in the top three, but you get 10 swings at bat instead of five. So why wouldn't everybody do that one simple thing? Because there's a lot of work, and people don't want to work. So if Y Combinator is bringing you pre-vetted companies,

remember, they only accept one and a half percent. That's like going and hiring people from Harvard Business School or Stanford GSP. You've used Stanford or Harvard as a filtering mechanism, so you don't have to. But is the person coming out of Harvard GSP or Stanford, I'm sorry, Stanford's GSP program or Harvard's MBA program? Are they the same price as somebody coming out of Fordham's MBA program or an MBA program from a university in Canada?

Of course not. They're twice the price. So you pay for value. And the value here is that the YC companies have been mentored by very, very successful YC partners, and they've been filtered by very, very successful investors at YC. The second thing you could do is you could start your own dam accelerator. If you're so jealous of YC, then make one. And you know what?

Sequoia has one. Now they started their own program. I have one that I've had for five years. There's plenty of other options out there. You could go make one. But I can tell you that would be even more money and time and effort than just doing the three meetings a day for three months. So that is the second way that you could do this.

The third thing you can do, very simply, is wait. Meet 30 founders you love at YC. Wait 30 days, write all their names down. Email each one of them 30 days and say, hey, I would love to jump on the call with you and see how things are going. Of those 30, I guarantee you 25, 20, you know, depending on you picked them. It may not be random. You may pick the best ones. But I would say between 20 and 25 will still have their rounds open.

I would say maybe 25. So I think five will be closed, like 15, 20 percent will be closed. The other ones will still be open. and if they're not open, they would be open to fundraising, because founders always will take more money. Or you could wait a year and then contact them and say, hey, I would love to get an update in the business. Of those 30, about 20% will have reached the next milestone, product market fit and some revenue. So those six companies you could then meet with, and if they raised that $20 million with no revenue, and then they got to, let's call it, a million dollars in revenue, that would still be 20x times revenue. Their valuation, and the chances are you can't go from a cold start a year or

later have a million. So let's put it at something more modest, like 500. Now you had a company with no revenue, so they had infinite multiple. Now they have a 40x multiple. They're not going to get more than a 40x multiple in the public in the market. So VCs or seed funds who look at them are going to say, you know what, I'll put money in at the last rounds valuation. They're probably not going to get an up round. Whereas people who are normal startups, non-YC startups, that don't do this high pressure tactic, have the demo day thing, do the party round where there's no VC setting the price so you don't know how the price discovery happened. If you're at five or 10 million, you get the product to market, you get to a couple hundred thousand revenue.

Now you're going to get 20 million. So you're, let's call it $7 million valuation. You get 500k revenue. Now you commend the $20 million valuation. So you tripled your valuation. The other folks at YC startups, let's say they started at 20, they have to fill that valuation in. And then you can come along and you can invest in the company.

And over time, private companies will have their valuations and the multiple on revenue, earnings, et cetera. But let's just do it on top line revenue. is we don't expect earnings in private companies. We want them to grow and get more customers and learn. We don't really want them to throw up profits. We want all that money to go back into the company and to go back into growth and to go back into the product and go back into customer discovery.

So all of that will result in the companies as they get to the series A, B, C, and D, especially in a down market like today, starting to sync with the public comps. So if Uber or Airbnb are trading at five times revenue, 10 times revenue, three times revenue, whatever it is, or a SaaS companies at seven times or six times, or it's a dog and it's at three times. That's what founders in private companies will start to get. They'll get a little more credit because they're growing faster. Long way of saying, there are multiple ways, aside from complaining about YC, that you

can deal with this. I just gave you the three. Meet with 200 companies. Play the long game. Start your own accelerator. Hey, everybody. You know, I work all the time with early stage companies at launch. Talking pre-series A, right?

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And of course, Gary Tan, friend of this program, a friend of mine, who's awesome. I've been trying to get him on the program, but I invited him like three times, I think, to come on the program since he's taken over YC, but he's pretty busy. Both saving San Francisco, which I give him a lot of credit for. He's very active in local politics here. trying to make things better. Making videos, which he makes excellent videos. If you don't know Gary Tan's videos, go check them out. And also getting his hands around this program. But he started tweeting about this. He put a tweet out just the other day, I think yesterday. Value investing in

venture is like restricting your searches, your search for the lost keys under only brightly lit street lamps. Evaluate value to buy a public stock at its terminal growth rate. Evaluate potential to buy an early stage startup just getting started. Team ability, product, quality, market size. competition and high valuations exist because large possible markets represent large possible outcomes. Competition doesn't mean a market or idea as bad. It typically means a great market that has lots of people want. I guess lots of what people want. So what are to say there.

But consensus is often wrong and things that are out of favor that turn out to be huge. The best investors tend not to use heat as a single one way or the other. So he's giving you a couple pieces of advice here. And he's obviously talking his own book. So it's a combination of both those things. So in Silicon Valley, we're all talking our own book because hopefully, You're talking your book because you are dedicating your life to a philosophy that you believe in. So he believes what he's saying here, but it's also in Y.C.'s best interest.

Just like I believe what I believe in. And it's also in my LP's best interest. He's saying, like, you shouldn't worry about valuation here. And you should just look at the ability, the product, the quality market size. The most cynical approach to this is, well, you invested at $2 million. And these companies are now asking for a $15, $25 million, valuation. You're 10x up on paper in 12 weeks. that's why this resentment exists, but you shouldn't have resentment if you're an investor. You should be thankful to IC for storing these companies, and then you should deploy strategies

for investing in them when you think the price is appropriate. If the price is too high now, they're going to raise money five times more. So build a relationship with the founder. And then play the long game. If you're going to be an angel investor, you should be thinking about it in a decade, two decade, or three decade, hopefully, arc. And just think about your first decade. You know, I'm going to meet 100 companies a year from Techstar's Launch Accelerator and

Y Combinator. I'm going to follow up with them, et cetera, et cetera. And then you'll build a relationship over time with them. Harry Stebbings then jumped in on this. And he did this tweet. Harry Stebbings is a venture capitalist. Actually told me he was inspired to do his excellent podcast, 20-minute VC by this weekend startup.

So Harry's a good kid. He's an adult now, but I still call him a kid because when I met him, he was very young. He's still in his 20s, I think. But what an inspiration that kid is. If you want to see how to do it, he basically studied everybody in the industry and really then made it his own. So he says founders, this is crucial.

If you raise 2 million on 10 million, even if you do not hit it out of the park, you can raise a next round at a decent valuation markup. If you raise 5 million on 25 million, aka a YC company, that's I'm adding that part, you have to smash it and really smash it to get of 1.5x on that valuation within 18 months. So he's talking his book. Let me translate his book. You only get this here on This Week in Startups, this inside baseball. I know all these people, and I know when they're talking to Brooks. Harry is a seed stage investor. He doesn't want to pay $25 million.

He wants to pay $10. If he puts $2 million in at $10, let's say he puts a million in at $10. He gets $10% of the company. He puts a million in at $20. He gets 5% of the company. So he wants a larger percentage ownership. And I believe he also believes what he's saying, right? So it could be talking his own book.

He wants to get a good price. And this is actually good advice. I said this before. If you raise at $25 and then you get to $500,000,000,000 revenue, you, now you've got a 50x valuation. Now, if you're at 10 million, you get to 500K and you want to raise at 20 million, well, you got a 40x to get to 20 and you've doubled your valuation, whereas the person with 25 million can do a flat round or possibly a down round. Interestingly, Gary Tan, president of YC, decides to reply. So Gary Tan is out there fighting this fight. Hey,

don't worry about valuation, worry about other things. And is he right? Yes and no. He replies, product market fit is more important than your last valuation. That is the high order bit. Last valuation may matter, but it's not the low order bit. So he's using fancy words, high or a bit, lower a bit. It's out YC people and people in Silicon Valley talk. Bottom line, what he's saying here is, most important, less important. That's what high order bit, low order bit.

Very important, not as important. His point, very simply, if you had bet on Airbnb or GitHub or another, you know, Coinbase, whatever great YC company, it wouldn't matter. So you should just study the product market fit. What's wrong about this is the companies don't have product market fit at the stage. Airbnb didn't have product market fit. Coinbase didn't have product market fit when they graduated YC. Product market fit came years later.

So it's easy to look in the review mirror and say, oh, it's Uber. It didn't matter. In my case, I think we invested at $4.5 million evaluation. It wouldn't matter if you invested at $45 or $4.5. It actually would matter. It would matter greatly because the number of shares I would have owned would have been 10% of what they would have been. So this is not true with Gary. TAN is staying. Product market fit is the most important thing in startups, but it does in trump

valuation, because there's another truth. If you were going to invest in one company at 25 million, you would do much better to find those five companies that are raising at five million and get five swings at batten. That's a better betting strategy. You could play five hands to the flop as opposed to one. So if I told you, you've got King Queen suited and it's going to cost you $2,500 to see the flop or it's going to cost you $500 to see the flop. You know, you would rather play King Queen five times for $500. You've got a low price of entry to see the flop. If you connect, amazing, flush, straight, or, you know, big overpairs. So for those of you who are outside of the industry, I think of basically, I should have demystified this. You'll have a lot of

questions. But the party round is one of the major evils here. I just had Satya Patel on yesterday from Homebrew, and he says having a board at the stage stage is amazing. Having somebody priced around, party rounds are death. Party rounds equal death. Why do party rounds equal death? They equal death because nobody actually cares about your business enough to fight for it when things go wrong. And you don't have a lead investor joining your board. YC has made this and the overall culture of Silicon Valley has made it cool not to have a board, not to have a board member, not to have governance, not to have a lead investor. It's just false. You want to have intelligent people. You want to have four board meetings for an hour, a quarter. You want somebody

rooting for you to have a meaningful ownership percentage in your company because they'll fight for it. When somebody owns 5 or 10% of your company and they got skin in the game, they're going to fight for it. If you don't allow anybody to have 500k or million dollars in that seed round and you have only 50K checks, when you have problems, people are like, oh, it's only 50k. I only own 10 basis points in that company. Only own 25 bips in that company. I'll let it die. It's only 50K. But if they had 500k or a million, they'd be like, you know what, we have to fight for this company. Let's come up with some strategies. And they would pick up your call on a Saturday, as opposed to just, eh, you know, I got a Saturday night. I'm going to go work with the company that I own 10%

of. So party rounds, not a great idea. Satya Patel is exactly right. So what can we learn from this? Very simply. 98.5% of you aren't getting into YC. And the last two classes, you know, there's tens of thousands of you who didn't get in. Email me, YC at launch.co. The letter Y, the letter C for Y Combinator at launch.co. Email me your Y Combinator application. I know many people put them in this Friday, the day the show came out,

so it's probably listening to this over the weekend or the next week. Just email me and my team. I'm going to do about 30 meetings next week, so you might get me on the call. We're going to just do 15, 20 minute calls with anybody who emails us their Ycombinator application. We get to know you.

Maybe we put an investment in. Maybe you join founder at university or our accelerator or we invest in your company, or at least we get to know you, put you in our database, follow up with you in three, six months, and maybe we get to talk about your idea and give you some ideas or some feedback on it. And feedback's great at the early stage, especially from a team like ours, which makes, you know, hundreds of investments a year as well. So if you didn't get into YC, send your YC application, send me your rejection letter as well. YC at launch.com.

Send me your rejection letter. I want to see why they said no. and then you and I can talk about that and figure out what's valid about it. Because if they do not accept you, that doesn't mean you're not going to be successful. There's more successful companies that didn't go to YC than did, obviously. So by all means, do not be in any way dissuaded from pursuing your entrepreneurial vision. If you don't get into YC, that's like saying you're going to just not be an artist because you didn't get into Juilliard or something.

Like the acceptance rate is so low now. You should be looking at other programs and other paths for you to get your vision. Sometimes we had an offer here at This Weekend Startups. that's so great from a partner that I don't even need to read the ad. I can just tell you the benefits. Here's the benefit. Linode has a startup program called Rise, RISC, right? And it offers more than just free credits. Startups can get up to $10,000 per month in year one credits followed by 50% and 25% discounts in the next two years. So they're going to take care of you for three full years. There are no caps and you get lifetime discounts based on your usage. Plus you get that amazing award-winning 24-hour-a-day,

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Linode recently announced 12 new global locations that are coming in 2023 with Akamai. Linode, you get access to leading security and CDN solutions. If you're fed up with your hosting solution, you need to check out Linode. So here's an amazing call to action. Visit linode.com slash twist to get $500 in free credits. You can also apply to their startup program, Rise. Rise members receive up to $120,000 in free infrastructure credits during their first year and up to 50% discounts thereafter. If you do get into YC, go and enjoy it and take my seat. a piece of advice, go meet with all the top VCs and send him an email. I'm graduating from, this is how you write, I'll give you the exact, exactly what you're right. Dear Ruloth, like I'd say

it's a Sequoia. Dear Chmoth, dear David Sacks, dear Friedberg, I'm not raising money until we graduate from YC, but I am a huge fan of your podcast, blog posts, Twitter, investments, whatever it is, and then say something very specific. I know that you wrote the deal memo for YouTube. I was really inspired by that. I thought this section was particularly important. And I'm building something that's very similar to what YouTube did and what Zappos did. And I know Sequoia was an investor in both those amazing companies. I'd love to show you what I'm working on. I'm available to come by Sequoia's office seven days a week from 6 a.m. to midnight. I will meet you anywhere anytime for 20 minutes, and that's all I need to show you my vision. Please let me know if you can spare 20 minutes

anytime, any day. You're right it just like I told you. You're going to get that meeting. And you say, I'm not raising money until demo day, and you go meet with them. And then they say, well, you know, if they really do like it and you got the nuts, they're going to say, oh, wow, stone cold nuts. I'm talking about a poker term here, folks. You got a boat. You hit your set on the river. You hit your set of aces on the flop and you board paired on the river and now you got a boat.

You say to them, listen, I got the nuts. And they say, we'd love to put a 500K investment in if you're open to that. And you say, you know what? I would never consider it except for Sequoia, because you're such a great friend. I never consider it except for craft because you're such a great firm. Boom. And then you just go, you move on and you take the money. And then you go into Demo Day with either your round filled or you raise another round.

You raise a second round. You just increase the valuation. You got Sequoia in on this early round for $15 million, $10 million, and then you raise that $20. All right, this is all I can tell you. I hope this is helpful to founders in no way it's meant to be disparaging of Ycombinator. Hope for the people from YC who are listening to this. And Gary, if you listen to this, or if Harry Stabings listen to this, I'm just trying to give everybody their flowers here and explain to the rest of the audience what actually happens in Silicon Valley. So we can all make great investments and work together.

One of the great things about Silicon Valley is the collaboration and that everybody's rooting for everybody. Now, what I've seen over the last 10 years has gotten a little chippy, has a lot of money's been made. And some people made a ton of money. Other people didn't make money. It gets a little chippy, if I'm being honest. just like if you're playing in a poker game and some people lost, some people won. But then hopefully over years of playing poetry together, it all evens out. And everybody gets a chance to win and everybody takes their lumps.

Everybody gets a couple of bad beats. But you ultimately, we should all be supporting each other. And many hands makes for light work. We should all be trying to get three, four, five great seed investors on a YC cap table, on a launch company cap table, on Harry Stebbings, you know, cap table. And let's help these founders win together. Let's all work together. That's what I was originally enamored with at Silicon Valley, that even this kid from Brooklyn,

who was a little bit odd, maybe a little bit abrasive on the margins, maybe too outspoken. I was embraced by some percentage of Silicon Valley. People found it funny or interesting or annoying, but they still accepted me, and they still became LPs in my fund. They still came on the podcast. Paul Graham came on this podcast. He spoke at one of our events. Gary Chan's been on a number of times.

So, anyway, let's all work together. Congratulations to the folks who got into YC. And if you didn't get into YC, send me your rejection letter and let's talk about it. YC at launch.com. Yes, there's no difference between the 1.5% they accept and the next 15%. Probably the next 50% if I'm being honest, nobody's that good of a picker. There's no difference between the 1% that get into Harvard and the top 50% that apply. We all know that, right?

I mean, we all can agree on that. Like the top 50% of people applying to Harvard, they're all excellent. They're all extraordinary. And they all deserve some investment in support. All right. I saw something completely inspiring that people found completely horrific on Twitter. And this is going to be polarizing. A law firm called Paul Hastings, aka pH, I know them.

They generated the 30-second most revenue of all U.S. law firms in 2021 according to the Wikipedia. That's a new website you can check out. But it ranked 18th in revenue per lawyer. So it's fighting above its weight class, probably due to the absurdly high expectations. So they have a document called non-negotiated. negotiable expectation. Number one, Ph. Paul Hastings, is an AM Law 20 law firm.

You're in the big leagues, which is a privilege, act like it. Okay, so they're telling you right now, you're lucky to be here. I like this. Number two, we are in the business of client service. You are the concierge at the four seasons.

A waiter at Alinia. Shout out to our friend, the co-founder of Alinia. Nick Kekonis, my guy. The client always comes first and is always right. If a client wants a mountain, move, we move it. No

questions. As a junior, your clients are the associates and partners on the deal team. All right, here we go. This is setting an expectation. You're a waiter. You're a concierge and you're lucky to be here. Amazing. What great framing. Whoever wrote this?

Chat Chapti could never write this. Although I'm going to train chat. My chat CPT 4 is going to be trained with this. This is the source document. Number three, you are online 247 in bold and underlined. No exceptions, no excuses. I agree with this. I'm going to, I'm sending this to my investment team and telling them you're on 24-7, no exceptions, no excuses. Timelines, quality. Clients expect everything to be

done perfectly and delivered yesterday. Okay, just, we're level setting here. Clients have unrealistic expectations. I like it. Someone is paying 8.50 for one hour of your time. Think about that in everything you do. All communication and work product needs to be prompt professional polish. Number six, take ownership of everything you do. Once you touch a document workstream, you own every mistake in it fair or not, right? Ownership. Ownership, quality of work. This one, number seven, I love. WF.H is a luxury. Work from home is a luxury. This is, this one hit me deeply. I'm right now. I'm scary my teams. Don't take advantage of it. Buy a full home setup. Two monitors, docking station, keyboard, mouse, and a working phone or come to the office.

So they're saying your responsibility to buy this stuff, not ours. Your setup is your responsibility. We have an office, come to the office. If you want to work from home, do it. No poor connections, no excuses, C number three and number five. This is what I tell my people. Have an Ethernet cable, have a setup. I pay for their stuff.

Maybe I'll have to change that. No, I'll still pay for it because we don't have an office. If I did have an office, I would maybe think about this saying, hey, you're responsible for your home setup. We're responsible for your work setup. But I tell my people, have an Ethernet cable, and I've thrown people off a conference call. I kid you not. If they don't show it with a headset, they don't show up with an Ethernet

and a high-speed, perfect connection. People like, I have Wi-Fi. It just doesn't work. Run an Ethernet cable, people. Okay, I love this. Number eight, no questions until you've tried to figure something out for yourself. Of course, this is obvious.

Google unfamiliar concepts, yada, yada, yada. Still can't figure out the answer. Talk to your classmates. They're not, they're saying, don't come to us, go talk to your classmates. Be self-reliant. This is great life advice. Be self-reliant.

Be an adult. Put out quality work. be of service. This is a manifesto. Chef's Kiss. Number nine. I can't even tell you how much of these I love. Number nine, I don't know, is never an acceptable answer. C number six and number eight. Go figure it out. Ten, this is your career.

Y-O-U-R is in caps. Embrace that reality and always put your best foot forward. If not for the firm or your deal team for yourself. At the end of the day, and this is in bold and underlined, And this is critically important. It's your reputation that will carry you. Whether that's here or in-house or elsewhere, make it count. Bravo.

I say bravo to Paul Hastings. And if this is something you find appalling or too intense, well, you go work at the post office. Okay? There's a Starbucks job waiting for you. This is a manifesto for you to become elite. This is the Michael Jordan of legal documents. This is the Kobe Bryant. There's a clip of Kobe Bryant.

I'll have my team put it at the end of this rant, where he talks about working out twice a day versus his strategy of working out four times a day. Instead of starting at 11 a.m., he starts at 4 a.m. And he just talked about how no matter how much work his competitors did in the NBA over the summers, because he consistently got up at 4 a.m. And did that 5 a.m. work out, had breakfast at 8 a.m. then went back to the gym at 10,

and he did the four workouts, and his contemporaries did it too. They could never catch up to him. His fitness, his availability, his technique, his brain, his stamina, everything, was just at another level. And he just said over time, the gap between him and who was behind him got greater.

That gap now is not other players. It's chat GPT4. It is AI. AI is right behind you. If you hear my voice now, and this document scares you, It should scare you much less than the AI that's behind you as a knowledge worker. The AI behind you is going to roll over you unless you become elite.

The world doesn't need average people. AI is going to do average and above average work. You must become elite and you must do it now. That is what is happening in the world as we speak. If your job is to try to be the best basketball player, you can be to do that, you have to practice, you have to train. You want to train as much as you can, as often as you can. So if you get up at 10 in the morning, train at 12, train for two hours, 12 to 2, you have to let your body recover, get back out, you train, start training again at 6. Train from 6 to 8, and now you go home,

you shower, you eat dinner, you go to bed, you wake up and do it again, right? Those are two two sessions. Now imagine you wake up at 3, you train at 4. 4 to 6, come home, breakfast, relax. Now you're back at it again, 9 to 10, now you're back at it again, 2 to 4. Now, you're packed at it again, seven to nine. Look how much more training I have done by simply starting at four. So now you do that as the years go on. The separation that you have with your competitors and your peers just grows larger and larger and larger and larger. By year five or six, it doesn't matter what kind of work they're doing in summer, they're never going to catch up.

So it makes sense to get up and start your day early because you can get more working. You know all the complaints about building apps on the blockchain. It's slow. It's less reliable. There's no support if things go wrong. It's an emerging technology. We all know that. Well, here's the good news.

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dot Q-U-I-C-N-O-D-E dot com slash T-W-I-S-T. And make sure you use that promo code twist so they know we sent you. And some attorney who tweeted this, SMB-U-U-U-U-S-M-B-U-U-Sk, I guess small, medium-sized business attorney, he had this commentary. This big law firm finally said the quiet part out loud. Nothing matters but the firm in generating billables. That's not what I took from it. No.

They literally say, this is how disingenuous this person is. They literally say it's your career that matters, your reputation. They said the opposite. And they never brought in generating billables because that takes care of itself. And then he says, your family, your health, you. No, nothing here says you don't see your family.

Nothing here doesn't say your health. And this is about you. Does it matter? Just bill. 24-7, no excuses. No excuses, yes. 24-7 for your customers, yes. But you're also doing that for your family.

You're also doing that for your family. If you're the breadwinner and you want your kids and family to have a better life, sure, you've got to take them on vacation. You've got to have time with your family. But objectively, this is the roadmap to extreme success. an SMB acquisition attorney had to reply. Never a good idea because I'm going to come back and do it.

And he says, and probably divorced alien relationship with kids and poor physical and mental health. But yes, you're going to get the sale in competition. That's not true. That's not true. You can work 10 hours a day and still have time for your family. You can work a couple hours on the weekend when your family is sleeping or they're working on a task or they're going to their tutor or whatever they're doing. Kids are at soccer or whatever, you know, practice.

You don't have to be at everything. and you could be in great mental and physical health, like Kobe Bryant, like everybody else. And do you have to make sacrifices to be elite? Of course you do. Olympians, NBA players like Kobe, elite CEOs. Did they sacrifice a little bit on the margin? Yes.

Can they still have wonderful relationships? Yes. Those things are completely independent of each other. And in fact, if you bring the same rigor and intentionality in this document and you replace it with your family and your kids, you'll get there. You see me working here. I'm doing a podcast on a Friday. But then I'm going to get those 90 minutes, three hours on the mountain with my kids.

And then I'll work at night. They'll go to bed, and I'll put it on another three hours. And I'll skip Game of Thrones or whatever nonsense that I could have watched. And I'll just get my work done tonight. But I'll get them there 90 minutes, three hours on the mountain. That's what they like to do, an hour and a half. They like to do five to ten runs. I'll get that in.

Anyway, Billy McFarlane, Firefest Felon of note says, Crazy that Twitter thinks this is crazy for a 20-year-old kid trying to build his, her foundation. We've gone soft. I have to say, the hardened criminal mastermind, Billy McFarland, he gets it right here. When you're in your 20s, you can skip Coachella. You know, if you got a client and that's going to advance your career two or three years, you can skip Coachella. It'll be there later.

You don't have to do everything. You should be hustling when you're young and getting, you know, advancing in your career. Anyway, important note, this document is for junior employees who are fresh out of law school. They're probably in their 25, 26, 27, 28. years old range, and they were probably raised on participation trophies. And that's why this is exceptional advice to shake them up and to let them know, you're in the big leagues here, act like it, and build your reputation and service the heck out of these customers of ours. This is great advice. If you want to be a winner, print this Paul Hastings stuff out, edit it, put it into your

AI, drop it into your Cota or Notion, and then make your own manifesto of 10 important things for your company. I'm going to take this and make it a template for my investment team, because I told my investment team, we're an investment company. We're an investment company. If a founder needs our help, I want you on the phone Saturday and Sunday, nights with them, whatever it takes. And you know what? Not everybody's up for that. And those people should not work for me. So if you want to come work for me, this Paul Hastings slide, you might want to read it once or twice, because it is actually in line with how I think about our firm launch and our dedication to our customers. We are the concierge. We are the waiter for our founders.

You can take this non-negotiable expectations list. This is for my investment team. If you're listening, sometimes they listen to the bud. Launch is a top 20 investment firm. We are. We're a top five seed fund. No doubt. We are in the business of client service. You are the conciergeers of the first season. That's correct. The client is always

first and always right. That's true with the founders. The founder comes first and is always right. If the founder wants a mountain moved, we move it. No questions. As a junior, your clients, your founders, are the managing directors and on the deal teams.

Some founder is giving us not $850 an hour. They're giving us 6% of their company to come to our accelerator. They're taking $100,000 of our money to be on their cap table. Okay, let's take it seriously. Everything's got to be perfect. All right, everybody, that's it. Just a quick follow up here to the substack story from a couple of weeks ago. As I had mentioned, when you do equity crowdfunding, you have to disclose how your company's doing, the revenue of the financials.

And so I was like, weird, where are the financials on this? And it turns out you can test the waters. and they did this on a website called WeFunder, and the founder of WeFunder actually reached out to me to correct some things in our episode or just clarify some things from me, and also to say hi. So, hi to the We Founder CEO.

So here's what it says. Per We Founder's website, if you're offering is in the first 120 days of the fiscal year, financials maybe, for the two fiscal years prior to the most recent complete year, yada, yada, yada. This being substack,

was required to dispose financials only from 2020 and 2021, which it did yesterday. They did $12 million, and this is from Axios, which summarized it nicely for us. us, not chat GPT4, 12 million of gross revenue in 2021 on a 22 million net loss with $55 million in cash on hand. So 12 million of gross revenue, they get 10% of that. So that means they

had $1.2 million in revenue and they lost $22 million. And the CEO of Substack, Chris Best says, we're a private company, we're releasing what we're required to release. So, but they'll have to require the rest of them. And we'll see how the company does going forward. But as I said, in our previous episode, it's a challenged business. Substack is a challenge. challenging business, just like Patreon. These businesses are loved by the people who use them. But one of the reasons people who use them love them is because of their low take rate. The percentage that Patreon takes, I think is 10%, and then plus fees, like credit card fees, goes on top of that. Same thing with Substack. The App Store takes 30% for a reason. They want it to be a vibrant

business that, you know, makes a lot of money, has a profit. I don't think Substack can be profitable on the 10% number. If they're losing $20 million a year, like they did in 2021, $22 million loss, that means 10%, if you were to 10x that number to get their 10% take rate, they'd have to make $250 million or something like that to get to this magical break-even point. I don't think they're going to build $250 million in subs stacks. They said they had $2 million paid subs, I believe was the last number I heard. So at $5 a month, $10 million a month, I don't know. It's, or maybe they have a million or $2 million. Maybe they're getting close. That would be, maybe they're halfway there. Maybe they're at 120 million in top line revenues.

They have 12 million in bottom wine. Anyway, it's possible this business gets to break even in the coming years on the cash they have. Actually, I do think that's possible. Will it ever be a company that throws off massive amounts of money? It will not. Now, if they took 30%, nobody would use the product. You would be way too much for somebody making a million dollars a year on subscriptions, two million a day on subscriptions, three million a year in subscriptions to give $300,000, $900,000, and make no sense.

You could hire developers. You could buy software. and you could save all that money. And so that is going to be the challenge of this business, which is why I think they're trying to do other things, podcasts and tweets and other offerings. So they want to build all these subscriptions, and then they're going to keep turning over cards.

Would I want to have been a seed investor, a Series A investor in this company? Very much so. I think it would have been a great investment. Would I invest in this round? No, absolutely not. I think this round is way overpriced by a factor. Now, I wish them the best,

but if people in my syndicate or angel investors are asking me, I would invest at 25% of valuation. I value the business at $150 million, maybe $200 million, something in that range, but not base it at $600 million. That's like peak valuation price. And the reason they're probably doing equity crowdfunding, if you want to take a cynical view,

is because they can't clear market at that valuation with venture capital firms anymore. So they want to raise from their user base and then put that to work to fill in that valuation. And filling in that valuation means, I think, getting to $500 million in subscriptions of which they would get 10%, $50 million and $50 million times.

12 would be 600 million. I think that would make sense. Anyway, I wish them the best. Substack is an awesome product. I have the Jason Calacanis newsletter there. I have an all-in newsletter I started there. I have Founder University there. I have the Twist mailing list there. Why did I move them all there? Because I'm getting free subs because of the network effect and I'm not charging. So it's like getting a free

email provider. So shout out to Substack for giving me a free, essentially free service. And they give me, every day I get a handful of people recommending my mailing list. So it's growing because of the network effect. So I think Substack has executed at a high level. I would not invest at this round. I wish them the best. And here's a question

for you. And I want you to answer me on Twitter. I'm at Jason. I want you to give me your most considered response. Who is the most likely acquirer for substack? And then two, who would be the most unlikely but interesting acquire of substack? Who's the most likely, which would be somebody who's in that business, right? Think that through. Somebody who has subscription, somebody who likes writers and journalism. who could be a really great person to own this business. And then who would be a wild card buyer? Somebody you'd like to see by it. I have mine already.

I will reveal mine on Monday or Tuesday. You tell me over the weekend which ones, who's the likely buyer, who's your wildcard buyer? If you got rejected from YC, my YC rejects, send me your rejection letter, YC at launch.com. Bye-bye.