Michael Seibel - Startup Investor School Day 2

TL;DR

To succeed as an angel investor, prioritize writing larger checks that can lead to meaningful returns. Create a system to make quick investment decisions and be prepared to act fast on promising opportunities, especially during Demo Day. Additionally, follow the FOMO/frnd rule by supporting friends' startups that could become billion-dollar companies.

Transcript

so just a couple of notes if you've noticed a lot maybe all of the presenters thus far are YC people that's not going to end right now however the the rest of the course is is mostly almost exclusively perspectives on investing from outside of YC so don't worry we're not completely staring at our own navel here however I will also argue vociferousl... Read More

Key Insights

• 👀 It's important to note that the course will cover perspectives on investing from outside of YC, not just from YC people. Lessons from YC partners are general and relevant to investing in startups. Invest in a lot of YC companies for good reasons, but questions about ICOs, SaaS, and crypto should be held until day four when the CEO of Coinlist will present on those topics.
• 😎 Michael Seibel, the CEO of Y Combinator, has been angel investing for 4.5 years. He doesn't do it to make money, but rather sees it as a form of charity, with the possibility of stumbling upon a million-dollar opportunity. He has made 50 total investments, invested in four angel funds, and most of his investments have been in YC companies.
• 🔑 One key lesson Michael has learned from angel investing is the importance of writing a big enough check. He initially ignored this advice from Sam Altman, but now he models out the potential returns from a billion-dollar exit and ensures he is making enough money to have a significant impact.
• 💸 Creating a flow and system to invest quickly is crucial. Investors need to be able to make decisions, sign documents, and transfer money within a short timeframe. Being a fast and efficient investor is highly valued.
• 🤝 The FOMO/FRND rule advises that investors should write a check to friends who are starting a company if they would experience FOMO (fear of missing out) if it becomes a billion-dollar company. This is a lesson Michael wishes he had followed more often.
• 💡 When investing in YC companies on Demo Day, investors should be prepared to move quickly, as many others have already done their homework and may be ready to invest. It's also beneficial to do prior research on the companies and establish relationships with founders before Demo Day.
• 💼 Investors should not forget to consider what happens after Demo Day. Many companies will raise some funds before their Series A, which presents an opportunity for investors to connect with founders and potentially invest later on at higher valuations with more information.
• 📈 The most hyped investment on Demo Day isn't always the best one. Many investors try to work the room and inflate the perceived value of their investments. It's important for investors to do their own research and not be swayed solely by hype.
• 👍 YC's open application process and the high bar set for founders have been key to sourcing top talent. The focus on talent and the ability to access a pipeline of talented founders have been instrumental in YC's success. Internal evaluation at YC includes gauging partner satisfaction, focusing on company growth post-demo day, and conducting office hours with alumni.

Questions & Answers

Q: What are the key lessons of angel investing that Michael Seibel shares?

Michael Seibel shares three key lessons from his angel investing experience. First, he emphasizes the importance of writing big enough checks and modeling out potential returns for a billion-dollar exit. Second, he highlights the need to create a flow or system to invest quickly, as timing is often crucial in making investment decisions. Finally, he advises investors to support friends' companies that have the potential to become successful, as experiencing FOMO (fear of missing out) on their success is a strong indicator of their potential.

Summary

In this video, Michael Seibel, CEO of Y Combinator, shares his experience and insights on angel investing. He discusses the importance of writing big enough checks, creating a system to invest quickly, and investing in friends' startups when there is FOMO (fear of missing out). He also offers advice on investing in YC companies and emphasizes the need to do prior research, maintain relationships with founders after demo day, and not be swayed by the hype. Seibel concludes by highlighting the low success rate of angel investing and the importance of helping founders take a shot at building a successful startup.

Questions & Answers

Q: According to Seibel, why does he write angel investment checks?

Seibel writes angel investment checks as a means of giving back and compares it to charity. He sees it as taking money, flushing it down the toilet, and occasionally stumbling upon a million dollars on the street.

Q: How long has Seibel been angel investing, and what is his investment track record?

Seibel has been angel investing for 4.5 years and has made 50 total investments, with most of them being in YC companies. He has experienced a mix of successful and unsuccessful investments, with one billion-dollar exit, several valuations over $50 million, and a few failures.

Q: According to Seibel, what is the first lesson he learned about angel investing?

The first lesson Seibel learned is the importance of writing a big enough check. Initially, he made the mistake of writing smaller checks without considering the realistic chances of getting a return. He advises investors to model out a billion-dollar exit with dilution and taxes to ensure they make enough money to have a significant impact.

Q: What system does Seibel recommend for investing quickly?

Seibel emphasizes the need to have a flow or system in place to invest quickly. He suggests setting up a process with bankers or other money handlers to hear a pitch, sign documents, and wire money within hours or days. This allows investors to act swiftly and not keep founders waiting for signatures or funds.

Q: How does Seibel evaluate the impact of investors in an angel investment?

Seibel mentions that impactful investors can make a difference in certain situations, citing examples of investors who nudged acquisitions in the right direction or provided critical advice. However, he also believes that truly impactful investors are rare, and most angel investors should aim to be supportive, quick to sign documents, and not hold up the process.

Q: What advice does Seibel give for investing in YC companies on demo day?

Seibel suggests that investors attending demo day should be prepared to move quickly, as some investors in the room have already done their homework and are ready to invest. He also encourages investors to do their own research before demo day, as many YC companies launch publicly and can be found on blogs, product hunt, TechCrunch, and Hacker News. Finally, he advises maintaining relationships with founders even if they were not invested in during demo day, as opportunities to invest may arise later.

Q: How does Seibel recommend evaluating equity splits for founders?

Seibel believes that founders should have a significant amount of equity left after series A and series B rounds, even accounting for dilution. He models out these rounds to ensure that founders still have enough equity as a motivator, especially if they had already sold a large portion of their company early on. He also cautions against unequal equity splits or cap tables with founders who have already sold a significant amount of their equity.

Q: Are party rounds (multiple investors in a funding round) a concern for Seibel?

Seibel does not find party rounds scary but expresses concern about unequal equity splits and founders who have already sold a large portion of their company too early. He advises angel investors to ensure they are getting good investors who can sign paperwork quickly and not cause delays.

Q: How have large companies' abilities to identify talent changed over time?

Seibel believes that large companies' abilities to identify talent have not qualitatively changed over time. He mentions that startup founders are often unemployable, and their talent may not be recognized or valued by large companies. He does not see any significant changes in how big companies evaluate startup founders and their talent.

Q: How does YC source companies, and how does it evaluate its own performance?

YC has an open application process that allows for sourcing companies, teaching aspiring founders that networking is not the most critical characteristic for success. They also maintain a high bar for talent and surround founders with other talented individuals. YC evaluates its own performance by assessing feedback, tracking statistics, implementing programs to help companies raise follow-on funding, and maintaining relationships with alumni through office hours.

Takeaways

In angel investing, it is essential to write checks big enough to make a significant impact. Creating a system to invest quickly and being able to make timely decisions is crucial. Investing in friends' startups when there is FOMO can lead to great opportunities. When investing in YC companies, conducting prior research, networking, and maintaining relationships with founders are essential. Recognizing that the most hyped investments may not be the best ones is crucial. Angel investing has a low success rate, but it provides the opportunity to help founders take a shot at building successful startups.

Summary & Key Takeaways

• Michael Seibel shares his 4.5 years of angel investing experience, where he made 50 investments, mostly in YC companies, with three of them resulting in billion-dollar exits and six having over a $50 million valuation.

• He emphasizes the importance of writing big enough checks and modeling out potential returns, as well as creating a flow or system to invest quickly.

• Seibel also highlights the FOMO/frnd rule, advising investors to support friends' companies that have the potential for significant success.