Y Combinator Startup Podcast - #144 - Startup School Week 3 Recap - Anu Hariharan and Adora Cheung

Episode Date: September 18, 2019

We've cut down the third week of lectures to be even shorter and combined them into one podcast.First, a lecture from Anu Hariharan. Anu is a partner at YC. Her lecture covers nine common startup business models and the metrics investors want to see for each.Then, a Q&A with Anu and Adora Cheung. Adora is also at partner at YC. During their Q&A they’ll answer questions from Startup School Founders on how investors evaluate startups.Y Combinator invests a small amount of money ($150k) in a large number of startups (recently 200), twice a year.Learn more about YC and apply for funding here: https://www.ycombinator.com/apply/***Topics00:00 - Intro00:39 - Anu Hariharan on Nine Business Models and the Metrics Investors Want1:44 - Enterprise4:09 - SAAS8:55 - Subscription11:33 - Transactional14:44 - Marketplace19:04 - E-commerce21:14 - Advertising23:12 - Hardware23:44 - Common mistakes25:35 - Anu Hariharan and Adora Cheung on How Investors Measure Startups Q&A26:07 - Team, product market fit, and market opportunity27:10 - What if the founder doesn't have experience in the are in which they're building a product?28:19 - How do investors know you're moving fast?29:40 - Local vs remote30:40 - Evaluating solo founders31:45 - Clarity of thought33:35 - International founders35:17 - Solo founders36:21 - Should I fundraise?38:33 - How does an investor evaluate a company with a heavy MVP?39:36 - How do you avoid investors who say "it's too early for us"?40:06 - Is it sensible to engage with investors before product market fit?40:26 - How do you find the perfect investor?41:21 - What are the best approaches for minority female founders to gain visibility within VC?42:36 - How do investors come up with valuations?

Hey, how's it going? This is Craig Cannon, and you're listening to Y Combinators podcast. Today's episode is a recap of the third week of Startup School. I've cut down the third week of lectures to be even shorter and combine them into one podcast. First, we'll have a lecture from Anu Hariharan. Anu is a partner at YC. Her lecture covers nine common startup business models and the metrics investors want to see for each. Then we'll have a Q&A with Anu and Adora Chung. Adora is also a partner at YC. During their Q&A, they'll answer questions from startup school founders on how investors evaluate startups. All right, here we go. Thank you all for having me, and it's so awesome to see so many of you at 9 a.m. in the morning to discuss metrics. So let's hope we keep you engaged till the end of the session. So how do we think about what metrics to track? And our advisors, find out which business model you fit in.

You know, the most common thing people do is which industry vertical are you in? Are you healthcare? Are you biotech or are you enterprise? But that's not really the best way to think of metrics. The best way to think of metrics is how do you plan to charge your users, which is the business model, and which of these business models do you fit in? So roughly there are nine business models. I mean, I would say 99% of you should fit into one of these categories. If you don't, you're probably building something that's incredibly hard,

which is what we call moonshot. So I'll walk you through for the rest of the presentation on each business model and what three or four metrics you need to track. Beyond three to four, honestly at this stage is an overkill. So these are the things that would matter. So what is an enterprise business model? This is a company that sells software or services to a large enterprise. Pretty simple.

Very few startups do that. So I would imagine very few of you are planning to launch something from day one that sells to say Facebook or Google or Apple or any of them. But if you are one of those companies, examples are like Docker, Cloudera, FireE, even in the YC portfolio that are very few that did that from day one. But if you are one of them that sells to large enterprises, you would characterize yourself in this category. and the large enterprises tend to work in terms of contracts.

So your business model will come into three things, which are the three metrics you track, which is bookings. So if you're working with, say, Facebook, they'd say, hey, you're going to help us hire ex-engineers. We'd like to sign a $100,000 contract for next year. So that's why you'd say, what is my booking? What's the total number of unique customers I have? and what's revenue?

The difference between booking and revenue is Facebook might sign a contract ahead of time, would tell you at the start of the year that it's $100,000 for X hires over the year. That doesn't mean you recognize revenue straight away. You recognize revenue only when you've delivered the service. Either you've placed all the hires that you set in your contract, or if it's an annual contract, you just divide it monthly. So the common mistakes we see founders do is confusing business. bookings and revenue. You know, they would have signed contracts, but they haven't delivered

anything. The contract hasn't even kicked in, but they're already reporting it as revenue. That's not true because you haven't delivered service, so therefore it's not revenue. And so you should hold yourself accountable for that, like the company is not generating revenue. The second common mistake, which is probably more relevant at the stage that you're in, is, you know, Facebook might have verbally told you, I will consider a 100K contract. you know, for them 100K is not a big deal. For a lot of you, it's a really big deal. That's neither booking nor revenue because it's a verbal offer.

So the other, even if they sign a letter of intent, it means nothing. So you really have to have the contract written down signed for it to be bookings and for revenue only when you start delivering it. The second business model is SaaS, which is probably where most of you fit in, especially if you're in B2B or, you know, servicing to other companies. you're all probably thinking of SaaS model. It's a very prominent model these days. You know, you see a number, all these are wicy startups, segment, ironclads, sandbird.

They all started with SaaS model right from day one. SaaS is software as a service in terms of business model. It's really subscription business. You charge something monthly for a software that you provide. So what are the four metric, key metrics you would want to track? Well, if it's subscription, by definition, the revenue is recurring, right? means if you hopefully have built something that people really like, they'll continue to use it and they pay you every month. So that's why you track MRR at the highest level. That is,

monthly recurring revenue. How much are you making monthly and what did the customers commit to it? ARR is annual recurring revenue. Because of this phase, you're really growing fast. You may be growing 30% week over week or 40% week over week. So it's helpful to track your annual recurring revenue as literally run rate. So if this month you made 30,000 in MRR and if it's truly recurring, you should expect that your annual recurring is 12 times that. So it's just a good metric to use internally as well because it helps show the pace rather than just looking at absolute. The third thing you should pay attention to is chart. So when you launch, there'll be few users who are early adopters that use it,

but you really should be paying attention to if they stop using it, right? And if you're a subscription business, the chances are you probably make $5,000 to $10,000 a month from two or three customers or maybe even 10. So losing a customer means real impact on your revenue. And so this is why we recommend measuring something called gross MRR churn,

which is say at the start of the month, you expected your monthly recurring revenue to be 10,000, but one customer churned and they were paying 3,000, then that's your gross churn, 3,000 by 10,000. So don't blend it because you're obviously acquiring new users, and if you measure blended, your numbers still look great, right, because you're growing a lot, but you're not paying attention to users that you're losing,

and it's really important to learn from users you're losing, which is why we ask you to measure the churn. Paid cac, this comes in a little later, hopefully, almost all of you are acquiring users organically. I wouldn't recommend doing any paid acquisition at the stage. But if you do start doing some experiments where you say, hey, I'm going to do a little bit of paid marketing or advertising to get a few customers,

then you should measure what was the cost to get that user through paid mechanism. So which is literally saying if I spent $10,000 on Facebook or any other channel that you used, and you got five customers from that channel, how much did you pay for that? Common mistakes. Two really common mistakes,

and this happens again and again, even in spite of highlighting it, which is ARR literally stands for annual recurring. Recurring is the most important word, revenue. If you don't have a recurring business, which is you don't charge subscription, your customers are not committing to 12 months of payment, you don't have a recurring revenue business.

So internally, if you start, calling it ARR, everyone thinks, oh, it's repeat business. It's not. Because you have to go back and acquire them each month or you have to have, you know, you have to work with your customers to make sure they pay every month. So the most common mistake is people, instead of saying annual run rate, which actually is not very useful even to gauge your business, if you use ARR, be absolutely sure you have recurring revenue. the second mistake people make is when they would say oh yeah it's recurring revenue but actually the customer would have committed to only one-time payment or you know you may have done a consulting

project and it's not really clear whether they're going to pay second month or third month but they would still include it as MRR you know it's not make sure you're including only what's truly recurring where the customer has said I'm signed up for a 12 month or a six-month annual plan and this is what I'm being. The third is subscription. This is probably more relevant for consumer businesses. So if you, Dollar Shave Club, Blue Apron, Athletic, there are lots of companies, especially subscription as a service is becoming so popular in consumer right now. It's very similar to SaaS, but it has a slight nuance. So similar to SaaS because you have MRR, which is recurring, right? You may have signed up a Netflix annual subscription. It's recurring. It's monthly recurring.

The two differences is instead of looking at ARR or any of that, we actually say measure your monthly growth and unit churn, not dollar churn. Why is that? Because if you're selling to companies, usually your subscription is more value, right? It's like they're paying $2,000, $5,000. So there if you lose a customer, the impact on revenue is a lot. So you should really look at revenue churn. If you look at Netflix, everybody pays $7 or $10 per month. So it's about volume of customers, which is why we say pay attention to growth,

because you need to make sure that the number of users using Netflix continues to increase. And you measure unit churn. Because if you lost a customer who's paying $10, it's $10. But if you lost 1,000 customers paying $10 each, that's significant. Right? So which is why we say measure growth unit churn, versus if you're a SaaS business selling to companies, measure revenue turn. And paid cac is very similar, like the last time,

which is make sure if you're spending paid marketing, measure the cost associated with acquiring those users. Don't do it on a blended basis. So when you are at the stage, you will tend to grow in spikes. So this month you may grow 80%. Next month you would grow 10%. Next month you may grow another 90%, right? That's natural because you're learning, you're iterating,

and you're trying to figure out, you know, what really resonates with the user. So what's really important is to make sure that since launch, since the month you started acquiring users, you measure compounded monthly growth rate, so which is the current month divided by the first month and, you know, decrease that growth rate proportionately for the number of months since launch. What founders often do as mistake is they would just do the average

So they would do 90% this month plus 10% second month plus 80% third month. What happens with averages? It makes your growth look good because you had some spikes. You want to be true to yourself because these won't be problems when you are two or three people team.

But hopefully you all will scale and will start hitting 10 people team. And then when you set goals, someone will be very happy that it's 50% growth rate but that's because you're measuring growth wrong. The next is transactional businesses. this is probably more new, new in the sense that's happened in the last 8 to 10 years. And again, you see that with Stripe, PayPal, Coinbase, Brex, a lot of FinTech companies,

especially fall in this category. So what is a transactional company, which is if you're in, say, FinTech or payment space, you probably process a lot of payments volume, right? Let's take Stripe, for example. They power the payments for more startups. And so every startup's payment volume goes through Stripe. That's the transactional business. But Stripe collects a fee for the transaction.

So if you're a type of business that processes someone else payments volume, then you should put yourself in the transactional bucket. So the gross transaction volume is the TPV or the total payments volume that flows through the platform. So Stripe had 30 customers at your stage, and all 30 customers were processing, say, 100 million in TPV, but it all went through Stripe, that's TPV. But that's not revenue. Revenue is what goes to your bank account.

So that's your cut, which is why it's called net revenue. So the portion of transaction volume that you make, so Stripe would say, hey, I charge 2.5% for the payment volume that flows through my platform, the 2.5% is the net revenue that they take. if you're in the transactional business, it's very common that you'll have lots of customers, right? So within a year of launch, you could even have 2,000 customers.

Then the important metric to track is user retention because you want to make sure that six months after they're using you or 12 months after they've started using you, hopefully they're still using you. Why? Because you are powering their platform. Unless they've gone out of business, there should be no reason. using your platform. How are they doing business?

Imagine if someone stopped using Strite. Well, are they out of business or who is processing their payments? So that's why it's really important to measure your cohort retention on a monthly basis if you're a transaction business. And paid KAC is very similar to what,

in all cases, it's the same thing, just measure different pay channels. But again, as I said, hopefully none of you are doing paid marketing. So what is the common mistake here? Confusing gross transaction volume to net revenue. As I said, like, if you are processing 100 million in transaction volume, that's not net revenue. That's not the cash that hits your bank. Two and a half percent of the 100 million hits your bank.

That's a much smaller number. So you should really make sure what you call revenue as a transaction volume. And I've often seen founders here sometimes come up with like, oh, but I processed the volume. That's my revenue. No excuses. Net revenue is literally the cash you make in the bank. And then user retention is a cohort metric. It's not one. number. It's not like, oh, I retain 30% of my users. That means nothing to us, right? Even for you, it should not. Because if you're povertying payments, you should say, well, 40% of my customers have used it consistently for the 12 months since they joined us. Well, that's a better metric. Next is Marketplace. Again, this is more similar. It looks like transaction, but it's different.

It's typically used by consumer companies. So Airbnb, eBay, are all good examples of of marketplace. What's a marketplace? You have two sites. So in Airbnb, you have host and guests. Guests go to the platform, select a room, book it, the host is happy. That's a marketplace. So what are the three or four metrics that matter here? GMV, right? So when the guest books the room, you know, the host might say it's $100 per night. And so the $100 per night say they say two nights, it's $200. That $200 is GMV. that Airbnb can record. But that's not net revenue

because Airbnb doesn't make the full $200. Airbnb probably makes 12% of that, right? So 12% of that $200 is what you'd classify as net revenue. Two other metrics, again, similar to the other morals that we talked about you want to track here is compounded monthly growth rate. If you see, this is a more important metric for consumer businesses, right?

Because volume of consumers matter and therefore it's really important to track your monthly growth rate in a compounded way so you can keep yourself honest how you're growing. And similarly, when it comes to consumer businesses, you should pay attention to user retention, not necessarily dollar retention because the volume of users matter. So here you would say what percentage of customers came back to Airbnb or Airbnb retained six months or 12 months from now?

Now, in Airbnb's case, how often do people travel? Does anyone want to take a guess? Was that? Once a year. Very good. So how should they track? When should they be happy? When should they be sad?

Once a year. Yeah. So if you imagine when Airbnb was going through YC and they could see their cohort repetition once a year, how are you going to know you're building a good business? That's wait 12 months. Will you wait 12 months to check whether your customers are coming? back? No. So this is why you have to get creative. And the way to get creative is reflect on your

user behavior. So if you're going to book something, hopefully someone who's traveling is not booking the day before they're traveling. They start doing research six months before. And so Airbnb studied that. And so what they would track is if you as users came back to at least search for a city or a booking six months. So in this stage of your startup, what's most important is to really be truthful and honest about how you want the users to behave and come up with those retention metrics to measure if your business is really healthy. And are you seeing what you want to see from your users? So what's the common mistake here?

This was especially acute for Airbnb because they didn't pay anything for demand site, right? They had a brilliant value proposition. They were really good designers, very good storytellers. demand they didn't pay anything. But they had to pay to acquire a host because guess what? No one was ready to let their homes to strangers. So they had to work hard, which was, you know, they had to put, you know, advertising around events. So they had to spend a few dollars on acquiring host pretty much very early on. So the number one mistake founders tend to do here is, you know, you're acquiring a bunch of users organically and some users through paid and you'll blend everything. You'll say I

acquired 100 users this month, and so my KAC was 12. But what had happened was if you truly measured who you acquired from paid advertising channel, it could be as high as 70. And so you have to ask yourself, is it sustainable? Are you really seeing the ROI in paid channels? So if you are in an unusual situation like Airbnb, where your business frequency is not very high because people use once a year, and you have to pay to acquire host, it's really important to pay attention. to where your money is going and whether you're getting a good auto eye from that.

Ecommerce. Ecommerce is, you know, literally you have certain goods to sell. You're selling them online. People are ordering it. Wavi Parker, Bonobos, Mimi Box, a lot of them, you know, that's what we would characterize as e-commerce,

which is you make the products or source the products, but ultimately it's your brand, and someone's coming to the brand to purchase it. So here, again, it's a consumer business. You track money. monthly revenue. Notice there's no recurring, no subscription. It's just revenue because people might buy a product this month, they may not buy it next month, right? So it's monthly revenue.

Because it's consumer business again, very important to track your compound monthly growth rate. For e-commerce, even from day one, it's important to track your gross margin because you either make the good or you're sourcing it and branding it under your name. So it's important to understand what it takes, what is your cost to get the good so that you're making some profit on a per product basis. And it's more important for e-commerce because it's not a recurring business, right? So you have to make sure that you're able to make money on a per transaction basis. So which is why gross margin is important to track.

PaidCAC very similar to all the other examples. Common mistake, gross profit for e-commerce. is not accounting for all costs. Now, Amazon does a great job of this, and people often say, oh, yeah, they have very thin margins. But actually, it's net margin after all costs. And so if there's high volume, net margin times high volume is a pretty good EBITDA business,

which you can use to funnel for future investments. So the common mistake we see here is in e-commerce, as people would say, oh, say I bought a clip, and we know the cost of the clip is $10. They wouldn't include shipping costs. They wouldn't include customer processing costs. They wouldn't include payment processing costs. All that is important because if you don't include those costs, you're probably pricing it wrong.

And so it's so important that you're pricing it wrong pretty much from first transaction. Advertising. We see far fewer companies in the advertising space these days. But if you happen to be in that space, then, you know, the common company, that are analogs for you are Snapchat, Twitter, Reddit. They all have a huge social network that come to their site for different reasons, but the primary monetization model is advertisers advertise there, and companies make money from advertisers.

So at this stage, because you probably will never be monetizing, if you're in the advertising business, it's all about the users. And so when it comes to users, there are really only three things that matter. daily active, monthly active, percent logged in. So who are the users who use your app daily,

monthly active, who use it monthly, and then percent logged in is actively logged in using a username and password? The common mistake, and I'll give many examples of this, not defining what active means. So there was a company, I think, three or four years ago, that reported a daily active user metric, and I remember

I remember asking them, what is active? And, you know, I had some sense of, like, maybe it was somebody who read, engaged, whatever. And this founder answered, well, those are the emails I sent. That's not active. You know, active, again, it goes back to the Airbnb example. You should define what you want your users to behave like when using your app. So if you're building a news app, does it mean reading counts as active?

Does it mean commenting counts as active? You should define that really well. And so if you don't define that, you could be building something that has no stickiness and probably, you know, you're going to have users that are winding down pretty quickly and it's not worth it, right? So make sure you really define what activist

and hold yourselves to that metric. The other one is hardware. It's, again, very similar to e-commerce because at the end of the day they're selling a device. So if you're Fitbit, GoPro, Xiaomi, you know, we'd say you're in the hardware bucket. As you can see, it's very similar to e-commerce where you look at monthly revenue,

compounded monthly growth rate, you look at gross margin really carefully. Hopefully you're making profit from day one, and then paid gap. Okay, so those are the nine business models. And one last thing I'd leave you with before I open it up to questions is common mistakes. So common mistakes is,

you've heard this and you've probably read this in so many blogs. Charts that look up into the right are brilliant. Well, but cumulative charts are always up into the right. Do not have any cumulative. There is no rational in the world to have a cumulative chart. So I don't know a single company at scale that shows a cumulative chart. So do not take a cumulative chart. Second thing I've seen is not labeling y-axis.

Like, as I said, you're going to scale, even if you hit 5 or 7 users, you know, if you don't know what the y-axis label is, and if the charts look like straight vertical bars, it means nothing. Third is changing y-axis scale. This is something I never understood, but quite a few of them do it, which is, you know, X-axis starts at zero

and Y-axis starts at, say, 50. Those things don't really show how well you're growing. Show your problems. By the way, no YC startup had a chart straight up into the right. No one did. The most successful companies didn't either. So I think the most important thing is to really be honest, measure and fix things, right?

It's okay to go down sometimes. And also, usually we say don't show only percentage charts. It's very important that whatever you're measuring, whether it's gross revenue churn, monthly growth, be clear about the absolute number and the percentage relative to the absolute number. We also have done detailed posts on metrics while I was at A16Z, so I've included two links there

if anyone wants to look at it. But at your stage, only three of the first. or four metrics matter. If anything you took from here, hopefully you fit into one of these nine business models. You can start with two or three of these metrics for each business model, and that itself would be a great head start for all of you. All right. Now for Anu and Adora's Q&A. We're going to do a new thing here, see if it works. Essentially, the topic of this Q&A is how to investors measure startups or something like that. And so what I did was I posted, I don't

know if you saw, but I posted in the form and asked for a bunch of questions. There are hundreds of them. And so I'm going to take the ones that were upvoted a lot and then go from there. So most of this is going to be me asking a new question since Anu has been an investor for a long time. That's not what she told me. She took off of them. I will help answer questions too. But just to get started, so the bigger, you kind of went over this earlier, but the big areas in which an investor evaluates a startup is team. metrics, which you went over just recently in the lecture, unique insight in how big the opportunity is. Are there any other areas in which, big areas in which you evaluate? Yeah, no, I think especially

at the stage you're in, and probably for a while, even your series A, B, it all comes down to only three things. Team, product, market fit, market opportunity. That's it. And so at the stage you are in, it really is probably the heaviest weight is the team. And so when it comes to the team, it's more about why are you working in this idea, right, and what unique insight do you have, your clarity of thought on how you plan to, you know, see this as a big opportunity, and how good are you at convincing that? Like, that's, and if an investor gives you capital, do you know what to do with it, right? So that's, that's pretty much it. So in terms of team, what if I don't have experience in the thing that I'm building? Like, how are investors going to believe that I'm

legitimate person to work on this. Yeah, it actually does not matter, to be honest. I think pretty much if you're a consumer, B2B enterprise, it doesn't, where probably industry or domain experience helps a little bit is really health care and bio. I think in fintech that is slight bias maybe because building a fintech product requires some domain knowledge or at least interest and curiosity because there's a lot of regulatory and compliance, but largely no. So which is why I said your clarity of thought during your pitch to investors is what matters.

How much you have thought about it and how well are you able to articulate all the nitty, gritty details of your business, you know, is what matters. And more importantly than not, you should always assume you are teaching the investor about this space and the company. Don't assume they know it. And so they measure by how well you're teaching them. So that's really the measure. So one of the things that investors say a lot is we want a team that moves fast. So how do they know you're moving fast?

Yeah. Well, this is advice C too. We say that. We have to move really fast. Well, if you have, if you've said that I plan to work on this idea, I've been thinking about it for the last 12 months, and I plan to, you know, hire someone and launch a product in the next 12 months, that's clearly moving slow, right? So it's how they move. how they're measuring whether you move fast is how scrappy you are. Have you launched your MVP? How many iterations are you doing? How are things moving in the pace? Like, and at this point,

it should move really fast on a week-by-week basis. Would you agree? Yes. If you're working on something people want, there's a lot of latent demand, and so you should be able to find users easily. In fact, if you don't know your first, I think we say this a lot, but if you don't know your first 10 users, 10 to 50 users, it's potentially there's no founder market fit there. if you don't know where to even find them. And one of the things, relate to this, one of the things on the YC application, a lot of people apply more than once and get in,

and one of the things we do look at is there's a question, like, something along the lines of what progress have you made since the last application, and we read that actually, like, that's one of the first things I read is, what are the learnings? Even if you don't have that many users yet, it's still what are the learnings you've made?

Okay, local versus remote. Do you discount remote teams, or how do you evaluate? local versus remote, if anything? Well, I think this really varies depending on who you ask, but I think one thing is clear, which is remote is increasingly taking off. And so it would be a remus for anyone to say, oh, we only focus on local and no longer remote, right?

I think tools like Slack, Zoom have really made it incredible for more remote teams to function. I mean, look at GitLab, one of YC's companies, completely remote, Zapier, another amazing company completely remote. So we don't make any differences, but it really comes down to the investors selection. I think even from an investor standpoint, there's no ding on whether it's remote or local. It's more where they're spending their time. But again, here I would emphasize, don't do things to satisfy investor.

Build a company you want. If you build a great company with lots of users, from wherever the investors are, they'll come. All right, so this question is, I have heard constantly that investors are investing in a team, not product, which we have said. How does a solo founder factor into this? Like, the team is one person. So how do you evaluate that one person? More often than not,

it's the CEO that's talking to the investor anyway. We don't recommend that all founders are attending all investor meetings because obviously it's a lot of time, you know, that goes on doing investor meetings versus you have real work to do. So it really comes down to the CEO's clarity of thought, you know, and how well they are able to,

impress upon investor. By the way, this is not just to impress investors. The reason why this clarity of thought, I keep bringing this up, if you don't have that, how are you going to hire your first 10 people? If you can't convince your first 10 people that you're building something big and they should join you in your mission, then it's really hard to convince investors, right? And that's why investors are looking for that storytelling ability. So solo founder doesn't matter. It's the CEO's job, the CEO really needs to be good at it, and they should learn, and they should learn to be good at it. Do you have any advice on how to know the clarity of thought, like the clarity of thought piece? Like, how are you doing well on that? Yeah, so this is probably a really high-bought example,

but I'll say that, which is the Brex founders, Enrique and Pedro. It was the second time they were building a company, so they knew that they needed to do this. I don't know if they did this in their first time, probably not. But when they were going through WISO, they actually literally iterated from a VR startup idea to Brex, right, which is corporate credit cards. And they had built fintech in the past. But both of them knew the stakes were high at least for them, because they were dropping out of Stanford.

They literally came out of Brazil to attend Stanford. They were dropping out of the university. And so they both wanted to make sure that Brex had a big opportunity. And before hiring a single person, they wrote down very clearly what. Brex could be with all the products that they could build in the roadmap, tested it was not a huge survey, but they just wrote it down to really understand, built a financial model. Enrique actually attended the accounting class in Stanford because he had no idea how to build it.

And he built a whole model year by year, tested the assumptions of market demand and what penetration they would need to hit for it to be at least a billion-dollar company. And only after they both got comfortable that there is a path. And this is worth quitting Stanford for it and putting. our entire life probably for the next 10, 15 years on this, they hired the first employee. That is an amazing clarity of thought, right? I'm not saying everybody should be there, but you should at least do the first exercise. If you were to convince someone to join you,

and more often than not at this stage, whoever you want doesn't want to join you, so what is that compelling story? Cool. This one, next one is about international founders. So you've personally invested tons of money in international startups. How did those founders convince you to put that money into their company when you're not from there, like Colombia, UK, all these other places. Yeah, and I think this is where, you know, I know I feel like I'm repeating myself, but it comes to those three things. And it also comes, I think the international ones we did were probably a little later stage

due. So given we didn't have presence in the region and we didn't know what was really market demand, we waited for some more progress, right? So you see that in metrics, you see that in their thinking, you see that in the, you see that in a more flushed-out process. But even there, if it's hard to hire in San Francisco, think about how hard it is to hire there. Like, there are no execs available with scale experience.

So those CEOs actually have to work 10 times harder to have that clarity of thought and to convince someone from the U.S. to move there. Any suggestions of how to convince someone there? Start doing really, really well. And if you do really well, for example, in Latam, Rappi basically convinced a few execs. They actually have done a phenomenal job of attracting execs.

from the U.S. is you have, you know, the execs felt it's the first time in their life. They have an opportunity to make an impact in Latam like the way they never did. And you can do that through a startup. It's really hard to do in any other setting. And so they've been able to convince execs with Latam connection, obviously, but have been living in U.S. and UK for many years to move back and lead teens. For the purpose of applying to YC, we take founders from everywhere. And like a new said, it's more about, more about,

team and idea, then metrics are where you're from and stuff like that. Okay. So is bootstrapping as a solo founder an instant know in your mind? Do you have advice for solo founders? So 10% of our batch from last batch were solo founders. So we definitely accept solo founders at YC. In terms of what you guys do, like is that that doesn't seem like it? No, I don't think that's a great. But I would say this, having obviously observed a lot of YC founders, even the ones at scale, it's such a hard journey and there are so many things that are going to go wrong that having another co-founder

generally I've seen has helped a lot more because there's someone who can give a lot more context than everyone depending on the CEO. But if you don't have that, that's fine. But then by the B, we're looking for some senior execs, at least one or two who are incredible that you can lean on for some portion of your business because if it's still all you,

the main challenge after the BVC is the CEO is not scale. And so if you're a solo founder, it just becomes harder if you don't scale. It's always good. I find that the good solo founders build a community around them of people to help them go through some tough times. Should I fundraise? So maybe this is more fundamental question of how do I, what are the indicators that I should see before I take on investment or even go start fundraise? You know, most companies tend to fundraise.

But the short answer is I actually always refer to PG's post here because I I love that post, which is try to be default alive and try to raise as much money as possible, as little money as possible, sorry, as little money as possible. So you remain focused. I think it is super important and it's lost, you know, on many people. But if you look at the really even successful companies, everyone has done mistakes. But they'll all say the most painful time of their company's life, even in later rounds, was when they, you know, you may have more money in the bank and you end up hiring more

and then you actually delivered a lot less. So it's not that your problems magically go away. Your problems become tenfold because you have people problems. A lot more people problems. So at this stage especially, I'd say raise as little money as possible and focus. Now, there is a question as to whether should you raise or not, right? Very few companies don't raise, but Zapier, for example, never raised after YC Demore. And I think because the business is so good, it's growing really well.

They are EBITDA positive. They have very healthy margins. and, you know, often Wade would tell me this, like, I don't know what to do with my money in the bank. Why will I raise more? It's a great reason not to raise, right? But if you are not in that luxurious situation, then, you know, there is something to be said about

I need capital to grow. Not necessarily for paid marketing. Please don't take this as paid marketing. This is another common mistake. But more like I need to hire more engineers. I need to hire ahead of time to build the things that I need because I know I have a business model at the end of it. So therefore, the way to think of it,

fundraisers, if you think you have a clear path to the next milestone and you may need like, you know, maybe $200, $500 or $1 million, then just raise that minimum amount. But come up with that plan very clearly. What is the money you need to hit that next milestone and just raise that money? Because guess what, your dilution matters? That is a perfect answer. Have a plan, basically. Okay. How does an investor judge a heavy MVP, that is someone with basically a long sales cycle, so a health IT company, it takes four to six months. Like, you need a, maybe you need to raise money before you get your first contract.

How do you show progress? Yeah, this is very true for even enterprise infrastructure, which is why I made the point that you may have only one or two customers at the end of 24 months. That's okay. Most of these companies try to do pilots. So I usually tell, you know, start with a pilot because the company is also probably hesitant to sign a, you know, $500K, $1 million contract with a startup. So start with like a four week, six week pilot, show progress through that.

Investors like to see that. They'll talk to that one or two customers. So if you are in the business of selling large contracts like greater than 500K ACV, you can plan to have only like two to three customers in the first 12 to 24 months because a lot of your time is going to go into making sure that it's really successful with that one or two customers. So it's not necessarily customer growth. it's more that one customer and how you're facing with them. All right.

So the last set of questions is on interacting with investors. All right. So how do you avoid investors when they say it's too early for us? What is the best way to handle this? How do you avoid getting responses like that? It is one of the most common things. I don't think you can avoid it. I think, you know, I would take the no and not read into the no.

and keep moving. Yeah, hear the no and move on. Is it sensible to start engaging with potential investors prior to finding product market fit, or should you just wait until you have real traction? Yeah, at this stage, I would say focus on building the product, focus on getting your first 100 users, and then, you know, meet with angels.

Would you agree? Yes, exactly. How do you find the perfect investors? So this person started with 30,000 on Angel List and removed all the, removed a bunch of, or had a bunch of filters and then has like a thousand left. How do they pick from the 1,000 investors? I wish we had an answer for that. I think it's basically you contact all of them.

I mean, it's like a sale. If you think about a fundraising, it's basically the same thing as a sales game. You have leads, you have conversion, you have to follow up, you have to send personal messages. is I would just use whatever spreadsheets you're using for your sales game for this and just go for that. Yeah. I would say try to avoid the investors that you don't have confidence and not if other founders have referenced that.

But that's the only rule of thumb. But otherwise, you have to do exactly like what I mentioned. Like go through it like a sales pipeline. Ooh, this one's great for you. What are the best approaches for minority female founders to gain visibility with NVCs? I think the industry is changing a lot. So therefore, it should be easier than it was before. I always had problems with the warm intro

because most VCs say you need a warm intro, and I'm like, okay, as a female founder, you probably know less than 1% of the people who know the VCs because they're all males. And it's really hard to get a warm intro, right? I think that it's changing a lot. There are lots of, you know, first of all, most VC firms that are appointing female investors

so it's easier to get. There's groups like all raised that really help female founders to get in front of VCs. But this is a common advice I give irrespective of whether you're from a minority represented group or not. The best referrals is through existing portfolio founders, period. There is no compensation for that. So if you can find an existing portfolio founder of that firm and he or she knows you quite well and is willing to refer you, that's the best referral.

In fact, investors often actively ask their portfolio, actively ask their portfolio, company founders, who should I meet with? And that's like one of their primary channels. Okay, two more questions. One, well, actually just one more question, which was like a common one. How do investors come up with the valuations? Yes. You know, when I first started in VC, actually before YC, I thought there was a lot of science to it, but it's actually art. It's not science. So the truth is, until you're about CDC or so,

there's no science to it. So it literally comes down to what's the stage you're at and what ownership does the VC want. So this is why if you have no traction, someone might say I want 30% of your company, right? It's not very common in the US, but it's very common internationally.

And so you end up raising 1 million at 31 1 divided by 0.3, literally that's your valuation. And so I would say if you're in the U.S. at C, it could vary anywhere from 10 to 15%. Depending on the traction. CD's A is 25% ownership.

So if you're raising 10 million, 10 divided by 0.25 is the valuation. If you're CDs B, it's 10% ownership. So if you're raising 30 million, 30 divided by 0.10 is the valuation. So that's why it's art. There's no science to it. Science really kicks in after the C because you're a growth stage and you have a lot more numbers. Plus, at that point,

the growth investors really evaluating you as to when can you go public and what would be the valuation that you go public. And so the evaluation from the CDC is back calculated based on that. So it sounds like two things, dilution to target and supply and demand. So if you're a hot company, you can say, I'm only going to sell 10%. Correct. So here's my valuation. Or if you're not, then the investors calculate that for you. all right thanks for listening so as always you can find the transcript and the video at blog dot ycombinator com and if you have a second it would be awesome to give us a rating and review wherever you find your podcast see you next time