YC demo day valuation tensions, how VCs can find gems, Substack's performance & more | E1716

TL;DR

Understand the controversy surrounding high valuations of Y Combinator (YC) companies, strategies for smart startup investing, and expectations for employees in a prominent law firm.

Transcript

hey everybody it's Friday first up on this show I'm going to talk about why common air is demo day and why a lot of VCS are hand ringing and complaining about oh my God the high valuations of why common air companies I will explain why there's resentment from the investment community at why common air companies getting 20 million valuations when no... Read More

Key Insights

• 🥺 YC companies often receive higher valuations due to their association with the prestigious accelerator program, leading to resentment from investors outside the YC community.
• 👶 Investors have strategies to avoid overpaying for startups, such as meeting with non-YC companies or starting their own accelerator program.
• 🛝 Leads play a crucial role in setting valuations and guiding startups in seed rounds.
• 🤳 Paul Hastings highlights the importance of professionalism, client service, self-reliance, and reputation for junior employees.
• 😘 Substack's valuation and financial performance raise questions about the long-term viability of the platform, especially given its low take rate.
• 🉐 YC rejects can still achieve success in their entrepreneurial ventures and should not be deterred by not gaining acceptance into the program.

Questions & Answers

Q: Why is there resentment from the investment community regarding high valuations of YC companies?

YC companies receive high valuations due to their association with the prestigious accelerator program, resulting in investors paying more for equity compared to non-YC startups with similar traction.

Q: How can investors avoid overpaying for startups?

Investors can meet with non-YC companies with lower valuations or start their own accelerator program to find startups at more reasonable valuations.

Q: What are the pros and cons of party rounds?

Pros of party rounds include greater flexibility and diverse investors, while cons include potential valuation inflation and difficulties in setting a clear price for shares.

Q: Why are leads important for startups in seed rounds?

Leads play a crucial role in setting valuations and providing guidance to startups, ensuring fair deals and maximizing potential returns.

Q: What were the non-negotiable expectations outlined by Paul Hastings for junior employees?

The expectations include prioritizing client service, being available 24/7, self-reliance, and taking ownership of work to maintain a strong reputation.

Q: How did Substack perform financially in 2021?

Substack reported $12 million in gross revenue in 2021, with a net loss of $22 million and $55 million in cash on hand.

Summary

In this video, the host discusses why there is resentment from the investment community towards companies in Y Combinator and offers strategies for investors to avoid overpaying. They also provide advice for Y Combinator companies on raising money before demo day and discuss the pros and cons of party rounds. The host also breaks down a controversial document from law firm Paul Hastings about their expectations for employees.

Questions & Answers

Q: Why is there resentment from the investment community towards companies in Y Combinator?

The investment community resents Y Combinator because they can invest at a lower valuation of $2 million, while non-YC companies with the same traction command valuations of $5-10 million. YC companies get the advantage of being pre-vetted and mentored by successful investors.

Q: How can investors avoid overpaying when investing in startups?

There are three strategies to avoid overpaying. First, investors can meet with non-YC companies that have lower valuations but still have potential. By investing in these companies, they can get the same quality at a lower price. Second, investors can start their own accelerator program, although it comes with more time and effort. Lastly, investors can wait to invest in YC companies after they have reached the product-market fit and have some initial revenue.

Q: What advice does the host offer for Y Combinator companies on raising money before demo day?

The host suggests that YC companies should ignore the advice of not raising money before demo day. Instead, they should reach out to VCs and invite them to invest before demo day using a specific email script. This allows the companies to secure investments early, leveraging the interest and energy around demo day.

Q: What are the pros and cons of party rounds?

Party rounds, where no investor sets the valuation or terms, have both pros and cons. The pros include a more frisky and diverse group of investors, with a higher chance of finding new and enthusiastic backers. The cons include the lack of a lead investor to fight for the company's interests and the uncertainty in price discovery during the round.

Q: Why are leads important for startups in seed rounds?

Leads, or lead investors, are important for startups in seed rounds because they provide guidance, support, and expert knowledge. They can fight for the company's interests and help navigate the fundraising process. Having a lead investor also gives credibility and confidence to other investors.

Q: What are the non-negotiable expectations for junior employees at Paul Hastings?

The non-negotiable expectations for junior employees at Paul Hastings include acting like they are in the big leagues, prioritizing client service, being available 24/7, delivering work promptly and professionally, taking ownership of their work, being self-reliant and resourceful, and understanding that their reputation carries weight in their career.

Q: What does the host advise for Y Combinator applicants who didn't get accepted?

The host advises Y Combinator applicants who didn't get accepted to email their YC application and rejection letter to engage with other investors and seek feedback. Not getting into YC doesn't mean the end of their entrepreneurial journey, as there are other programs and paths to explore.

Q: How can investors support Y Combinator companies and work together?

Investors can support Y Combinator companies by building relationships with founders, investing in their companies at reasonable valuations, and collaborating with other seed stage investors. The goal is to help these companies succeed collectively and create a supportive ecosystem in Silicon Valley.

Q: Why does the host believe that the resentment in Silicon Valley can be overcome?

The host believes that despite some resentments and competition in Silicon Valley, collaboration and support should be the focus. Over time, through meaningful collaborations and shared success, the resentments can be overcome, and the ecosystem can benefit from collective growth and achievements.

Q: How does the host suggest founders approach investors in order to secure investments before demo day?

The host suggests that founders should approach investors before demo day by sending a personalized email expressing their interest to meet and discuss their vision. Founders should be specific about why they admire the investor's work and expertise, and offer to meet at the investor's convenience. They should also mention that they are not actively fundraising until demo day to create a sense of exclusivity and urgency.

Summary & Key Takeaways

• Y Combinator (YC) accelerator program has a high acceptance rate, resulting in resentment from the investment community due to high valuations of YC companies compared to non-YC startups with similar traction.

• Investors can avoid overpaying for startups by meeting with non-YC companies with lower valuations or starting their own accelerator program.

• Party rounds, where no investor sets the valuation, have pros and cons and can result in higher valuations for YC startups.

• Leads are important for startups in seed rounds as they play a key role in setting valuations and providing guidance.

• Paul Hastings, a law firm, shared a document outlining non-negotiable expectations for junior employees, emphasizing client service, self-reliance, and professionalism.

• Substack, a newsletter platform, has raised concerns with its $600 million valuation and financial performance.