Y Combinator Startup Podcast - The Truth About Y Combinator

Episode Date: November 29, 2022

With the YC S22 batch coming to a close, Dalton Caldwell and Michael Seibel reflect on the recent batch and their experience fundraising. The two group partners also clear up some misconceptions about Y Combinator based on feedback from founders.Apply to Y Combinator: https://yc.link/DandM-apply Work at a Startup: https://yc.link/DandM-jobs

I love the like, well, I watch all your videos, so we kind of get YC. It's like, guys, these videos aren't YC. Like, oh, it's so funny. So this is Michael Seibo with Dalton Caldwell. And today, we just finished up a YC batch and we're getting a ton of feedback. We thought it'd be great to talk to you all about that. Let's be critical for a second. I would argue this is something that YC does poorly, that they, that they've very.

very clearly pointed out, they were like, when we applied to YC, we really didn't know what we were applying for. One founder said to me, we just thought it was a three-month program. We had no idea that you follow on invest in companies later, that you have programs for helping me raise a series A or for helping me as I'm scaling. We had no idea. Another founder said to me, we didn't even understand how YC was organized. We thought it was just going to be some big online lecture. Like we didn't know we would be assigned a group partner. We didn't know we'd be put into groups in sections. We get to meet with small groups of companies that are like in our area. And they didn't know any of this stuff. And, you know, that's kind of a knock on us. I think sometimes we

assume people know. But a lot of these founders were like, well, I applied to YC because I talked to alums and they really liked it. And then when I got here, I was like, oh, shit. Like, this is way more stuff than I thought. You know, one founder was like, dude, we didn't even know that you helped us hire. And then today there was a meeting about the like YC hiring platform. And we were like, oh, we didn't know. We spent seven, seven percent. We had no idea what we were getting for.

I don't know. Why do you think we suck at that though, Dalton? Like, it's pretty obvious we're bad at it. There's just a lot of moving parts. and so people know about the batch because they hurt, you know, oh, it's a three-month program. Oh, you move to the Bay Area and you spend time.

And even then there's confusion. It's like, yeah, no, like, you get to know us in person. Sometimes they're like surprised that it's really you and me that you mean. They think we're like paid actors or something. How many acceptable calls do you do where they're like, so am I going to get to work with like you? Yeah, I'm calling you. You haven't met anyone else. Who else would it be?

We're the hired. We're the YouTubers. We're just the front guys. The real, the real. It's like, no, it's really us.

And so I think they know about the program. I think they may have heard something about Demo Day, but it's always way more impressive than they expect. And then they have no idea that we keep talking to the companies for a while. And there's all this other crazy stuff we do to give people an edge. A lot of which we kind of don't slash can't talk about. And so I think that's part of the reason. we don't market it as well, is a bunch of the stuff we do is meant to be secret?

I don't know how you market that. And there's just a lot of data that we keep secret unless you're in YC, and that is like going to stay that way. A lot of secret data. You know the other thing that makes it hard, I've started to realize this, it's too easy to think of YC as a university. And when I think back, you know, I'm sure Yale has changed a couple ways in the last 20 years since I went,

but it's not changed that much, right? I'm sure Stanford's changed some ways since you went, but it's not changed that much. And I think that when we think about a university, we're preconditioned to think it's probably 99% the same year over year. Yeah. And I think what people don't think about YC is a product, right? If you were to look at Instagram day one and look at Instagram, Instagram now, it's completely different. And you would expect that. You would expect the product to change all the time. And I think people's misconception is YC as a university or a school. Yeah. Yeah. I think you nailed it. We talk to people about this. I think we have some lessons we're going to teach you or something. And or like, I love, I love the like, well, I watch all your videos. So we kind of get YC. It's like, guys, these videos aren't YC. Like, oh, it's so, anyway. So it's not like a school where we're like, here.

our syllabus we're going to read you here's our lecture here's lecture for how to get users that ain't it it's more like you're you're in the club and you get access to the resources and if you are ambitious and you are smart the sky is the limit if you actually work with people that um know what they're doing there's doors that opens and the bigger your ambition is the more doors it can open. You know, and this is why it's a little dangerous. This is a dangerous thing I'll say. You know, we've been accused of being a mafia and we're not a mafia, right? We don't break anyone's legs or anything like that. But it's not completely false, right? Like, if you're like made in the mafia, you do get privileges that normal people don't. Right? And, and, and,

And like, when you get to go through IC, you get access, like you said, to resources that other people don't, right? And so there's a little slightly different way. It's a little bit like the mafia. People don't shit on you as hard. You know, like when you're the mafia, like, someone's not going to rob you. Right? Like, when you're YC, VCs don't rip you off. Like, and so I'm not saying it's a mafia, right?

I'm saying it's not a mafia. We just have these very clear similarities to what I've seen on Mafia TV. Oh, God. Anyways, so this part of the feedback that we got from founders, it had two elements. One was we didn't really understand the benefits that YC had when we were applying. It also had this aspect of there were some really serious misconceptions that we had about YC. that didn't get cleared up until we got in. You know, one, was this misconception around, like,

are we actually going to get to work with you personally? Like, is there actual structure of this thing where we feel like we're getting really personalized support? But what are some of the other misconceptions that you saw that were, you know, obviously, I mean, I would argue like obviously designed to try to convince people to not do YC? Like these were like designed attacks on YC. what else you've seen out there?

Trying to encourage founders to think that investors are what makes your company great and that you could get product ideas and product market fit based on who you let on your cap table. So you'd be like, if I get this investor, they'll do this for me and this investor does this for me. And so, well, YC will do this for me. And it's like, guys, like, the way you build a company is not, you're not baking a cake where you sprinkle in three different investors and then a cake pot. pops out. Like that's like the stupidest thing I've ever heard. This is a really common misconception out there, which is like, I hate to bring you to you. You're doing all the work. All the work.

We're not. The reason to do YC is not that we're going to do the work for you. It's a great environment to do this with other peers and founders and get access to these resources while you're the one baking the cake. And the amount of resources you get in this network way trumps the resources you get from some random small check, like similar side check, right? So I think that's one. I think another big misconception was just folks, a lot of folks that apparently have the strongest opinions of telling people but YC never actually were in a batch. I don't know where that comes from.

So just be just like, be curious. Because, you know, it's, you don't try, like I have this founder of my group this badge. And he was like, well, yeah, everyone that was in YC was like, you should. definitely do YC and the people not in YC were like, oh, it's not worth it. And he's like, in retrospect, he's like, now that I think about it. Everyone who never used my product had opinions about it and everyone who did use my products had different opinions and I weighed them equally. Yeah. You know, the last one for me is this crazy misconception about how far along you have to be. And like, what pains me about this misconception is that it can be

destroyed through basic research. It's like, look at the companies who've done YC have been successful and look at how far along they were when they applied. Yet over and over again, people will tell founders like, oh, unless you have this much revenue or unless you're live, unless you've been doing something for this period of time, or like YC is for scaling, but it's not. for starting. That's like garbage. Like literally 40% of the last batch came in with just an idea. Most of them were working when they applied. We're at work, working jobs when they applied. It's true. And again, let me just say the brutal truth. This is the brutal truth. Some company that their idea to start was to first raise a pre-seed round and sell 30% to some

random investor have some co-founder who lasted a year and then they had to fire them and now they have a bunch of equity who's gone through three pivots and burned half a million dollars and applies to YC. Michael, would you rather fund that or the brand new company that started a month ago, they just quit their jobs. The crap table is completely clean and the founders were just like totally jazzed and ready to start a company. Like who do you think is more likely to succeed? Yeah, you know, you know. I think if you look at the last batch, it's very clear where our preferences lie. Yeah.

And so again, people that their idea that you've, you know, go to YC once you're ready to scale or once you've done all the stuff and after, you know, exactly wrong. Dude, how many companies we funded the past few batches that they have to change their idea, which is fine, it's good to change your idea. We like it. But they've already raised and they already have all this hair on the company and they think they're really far along. how much harder is it to change your idea once you have a bunch of hair on the company because you thought you were ready to scale? So hard. So hard. I think that like, you know, it's so funny, but in my mind it's so clear. You do IC because you want an amazing peer group. You do IC because you want to not be screwed over by investors. You do YC because you want honest feedback and you want to take responsibility for the win or loss of your company.

And you do YC because so many other great companies did YC and extracted value out of it that you should be confident that if you're a great founder you can extract value out of it as well. It's that simple. And like so many people that convince founders that YC is bad, they can't. explain why taking their money or doing their program or doing their thing is better. All they can do is like, Neg, why see. And like if you ever see someone making an argument that's 100% ripping something else down

and zero percent explaining why their thing is good, if all of your talking points is the alternative is bad. Like, uh, you know, like maybe, all you're selling is fear because that's all you have to sell. And like maybe that's your business model is selling fear. Not the kind of investor I want on my cap table. And then what's the reality? Like inside of YC, if you're a YC company, if you're in the batch. Yeah. If you're getting the advice from us to

prepare for demo day, how to go, Michael? Like what did we notice? You know, first valuations. I think everyone was nervous that valuations the summer would come way down. Wasn't it like hashtag VC summer vacation or some shit like that was going on where no one was around? Prices are almost exactly the same as they were during the last batch when it was like VC heaven on earth and money was flowing like like crazy. We saw 15 to 25. Some companies raised at 30. Almost no change from the last batch. didn't see any change on speed. You know, we saw investors going from meeting to commitment

within one to two meetings. Didn't see any difference on terms. Like, you know, investors weren't demanding board seats or weird craziness. I don't know. What did you see? All similar stuff.

And again, I think this is like an evergreen lesson for everybody. YC alums or people, not NYC is, it's too easy to take an anecdote that you heard from people or stuff people are saying in the group chat and think it applies to you. Like one of the classic mistakes we see from later stage YC companies is they base how easy or hard they think their fundaries will be based on tech crunch articles they read of other people raising. They're like, hey, so-and-so just raised.

So I'm going to be able to raise the same valuation. And think about how much time you and I have to talk people off the ledge on how like some, random company in Europe raising for like some AI whatever doesn't magically mean their fundraising to be easy, right? It's like bad data, like garbage in, garbage out. Okay. So again, the advice for folks is your mileage may vary. I'm sure there are people out there having a harder time fundraise. I apologize to you, right? I'm not saying my experiences, the experiences YC companies have the same as yours. But this is sort of the meta point I'm making, which is too many folks think fundraising is a market like the stock market and that there's like graphs and church you can have

and it all operates like an efficient market instead of what it actually is which is like 10 different things right michael like the yc funding ecosystem is like its own little universe it's its own thing right it operates separately than this other stuff a lot of what people don't understand is the power of running an auction right like they just like it's so rare that you really get to run an auction. You know, most founders, early stage founders, are not running an auction. They're begging for money. Like, let's be frank. We, Dalton, you and I were there, right? Like, we were, we were begging for money. Like, when you're in an auction, you get to do things like name your own price. Like, why C companies say to investors, we're raising this much money

at this price. Are you in or are you not in? Right. Like, that's, that's, that's a foreign language to people who've like most people who've raised around. Oh, we need to lead to prices. Completely different for YC companies. I think the other thing that happens when you're running an auction that people to understand is you get inbound offers. Like a typical company in this batch got between 10 and I've seen 60 or 70 investors cold emailing them wanting to learn about investing in their company. I got founders messaging me on Slack. Michael, what's going on? And I'm like, oh, yeah, no, this is just how this is what, nobody told you this is what happened at YC. They're like, no.

And I'm like, oh, yeah, this is, yeah, investors cold email you. You don't cold email investors. And they're like, mind blown, mind blown. So I think that's what's so funny is that we talk to so many founders who had such a different experience fundraising, often from the same funds before doing YC than after doing YC. And let's dig into that. Like, I think you have like this great analogy around this kind of early stage investing environment. Like try to kind of frame what's going on here. Yeah.

My first company was in the music industry for better or worse. And so I learned a lot about in the eight years I worked on it, I learned a lot about how the music industry works and how Hollywood works in general. And I started to see a lot of parallels between those industries and Silicon Valley. Again, kind of depressingly, if I'm honest with you. And it's the following. A lot of the folks who are most approachable when you're a first-timer or when you're just moving to the area or you're trying to break into the industry, the friendly people that want to talk to you are often the most exploitative. And they're the people whose business model is to just like squeeze you and like pull you up the funnel to

someone else and that the folks that you feel like they're doing you a favor while doing yeah right they're like they're gatekeepers but they're really friendly and you don't know you're like oh you're a talent scout oh you you like you like you like the way my demo you came to my show like whatever it is like there's folks who really aggressively um sell themselves to newcomers and part of the pitch is oh I'm really important I know all these important people I can open doors for you um you know here's some other people that I know, I can introduce you to them. Like, there's all these, like, kind of promises. And sadly, the story with a lot of folks, you know, in the entertainment business is

you learn the hard way that those, you want to not talk to those people. Or you want to understand there's, you want to make it to the, to the big leagues and get, again, if we're talking about agents or something, to the extent you can get a really good, well-known agent that's like a large agency, like CAA or something. something. All right, well, then you made it. Like, it's like a key step to go from like, anyway, we, I don't want to get too deep in the Hollywood stuff, but there's commonalities across these industries. And the thing I noticed in Silicon Valley in my startup experience was a lot of the characters that came out of the woodwork and that they were the most successful

to me is a first-time founder. In retrospect, we're not great. No. Like, hey, give me advisor shares to introduce you to someone. Hey, pay to pitch. We have a pitch competition coming. Hey, you know, like all these angles that weren't great. And what's weird is a lot of the people, you know, were like medium famous and had like some social media clout. Like you, like they did enough to seem successful or drive fancy cars or seem rich that you would think they did actually know people. I mean, you had this too with like fake advisors, right?

Yes. Yes. God. I had a fake advisor who literally took two. percent of our company to help us fail at raising around that was rescued by our existing inside investors. Two percent. And exactly the same thing, right? Like, oh, really nice. Oh, I'm helping you out. Oh, it didn't work out. But like, you sign this thing. Or what about my consideration? I actually didn't even sign anything. It didn't matter. And so I think this is like what's interesting is when talking to YC founders, they have so many of these horror stories of these kinds of experiences fundraising before YC. And then they're shocked when like an investor's like, sure, I'll sign a safe.

No, I don't need prerata rights. I don't need a board seat. I don't need a board observer seat. No, I'm fine. You know, like, and the founders are like, what do you mean? And it's like, and I think that it'd be helpful for us to talk about some of those specific horror stories that they tell us about, right? company in my group that raised money, they were desperate. They raised a good chunk of money from an investor who put in hundreds of thousands of

dollars and bought over a third of the company straight away. And what they didn't tell that founder is that every subsequent investor would say to themselves, huh, this investor put in a relatively small amount of capital bought so much of the company that the founders are going to get so diluted, that dot, da, da, da, they're not going to end up owning anything. And it's going to shut off later stage rounds completely. And, you know, these founders, of course, a couple hundred thousand that wasn't enough. They raised more. They raised more. They came in YC with almost 50 percent dilation. And it's like from an investor who knows better, but who saw that they could get leverage over a founder and so they took it.

This leverage point is fascinating because so much of when you talk to founders that go out to do a lot of fundraising, there's a lot of talking points that get beat into your head. And it's easy to believe them. Like, oh, I have to own 20%. Oh, I have to have a board seat. Oh, if you raise it too high of evaluation, it's bad. Oh, like, and when you think about it, those. Those are actually very, you know, clever talking points from the investor perspective.

And again, so many of the memes out there about fundraising that are being pushed by folks where it's convenient. Do you see how it's actually convenient to be like, prices are down and founders should give up more rights than they used to give during the economy? What are some other horror stories, man? What else you got from this match? Yeah. I mean, I had one where the investors.

the founder was like, hey, when we previously went out, we wanted to raise a million dollars, and the investor wanted us to do it as a priced round and to pay for $50,000 of their legal fees. And I'm like, companies raise on safes and pay nothing. There's no lawyers. On this situation, you hand 50K. And the even more criminal thing is great. You want to do a priced round. Awesome. There's standard paperwork for that. It shouldn't cost $50,000 to a priced round. Like, you're just ripping off founders. Pure and simple, ripping off founders. There are other situations

where someone is basically like, oh, I'm committing to be in your round, but I need to be the last money in. Tell me when you've read. Yeah. Once you find another million, I'm in. But like, you have to, and you have to leave room for me. I'm like, what? Are you just making rules up? This isn't how it works, right? But founders don't know. We got another one where it'll be like someone saying, all right, I'm committing 500,000 of your $2 million round. You just have to go and get the rest.

I'm going to lead. You just have to go raise the another $1.5 million. Like these were like all horror stories over and over from founders in this batch talking us about fundraising before doing YC. And it's like, I know why they were shell-shot. I know why they were shocked when they did fundraising during YC. They didn't hear any of this shit. And what's tough made is when you think about it to just go back to the

music industry metaphor, the entertainment industry metaphor, for a lot of folks, they would have been better off or people would say, I would have been better off just like waiting longer to get a better agent. Or like not having like a bad agent, just having no agent. Or instead of having a bad manager who, like, like stole the masters from me, maybe having. And so this is what's weird is a lot of the content marketing we get from the venture capital industry is to convince people they need it and want it immediately. It's like the message that you're brainwashed with as a founder is like you can't

even start without raising a pre-seed round. And we're in the business of pre-seed round, blah, blah, blah, blah, blah, right? And again, I hope people never hear that from YC or they don't get that from us. We say the opposite. If you watch our other videos, we're like, yeah, like, you don't actually need to go raise this money to, like, start a company and to, like, get customers. Like, this is deeply part of the YC mantra, which is if your idea for how you start a startup is to first create a pitch deck and go pitch VCs, you're setting yourself up to get screwed. you're setting yourself up to get taken advantage of by people who are going to have 20 different ways to rip you off versus if you do something cool and you're going to have a lot more leverage right anyways um this was an amazing batch and i don't want yc to take too much credit here the founders at the work like we said the founders at the word and you know to one of the points you made earlier being able to see

everyone in person this batch was also just like amazing you know it was one of the things that reminded me about why this is such a fun job is being able to see everyone and interact with them throughout the batch so this is a good one right yeah we made it yeah we made it we survived money we survived 19 kind of nuts kind of nuts all right man see you later Sounds good. Talks later.