Michael Seibel - Startup Investor School Day 2

Presenter Context & Agenda Management

• The session shifts from YC-specific perspectives to external investment views, though YC lessons remain broadly applicable.
• Questions regarding ICOs, SAFs, and crypto are deferred to Day 4, featuring Andy Bromberg (CEO of CoinList).
• Michael Seibel is introduced as the outgoing CEO of Y Combinator, former co-founder of Justin.tv (acquired) and Social Cam (sold for "a couple bucks"), and author of the principle that startups must solve "problems so dire that users are willing to try half-baked V1 imperfect solutions."

Michael Seibel's Personal Investment Thesis & Performance

• Seibel frames angel investing primarily as charitable giving ("flushing money down the toilet") rather than a primary wealth-generation vehicle.
• Investment Statistics (4.5 years):
  • Total investments: 50.
  • Fund allocation: 4 angel funds + direct deals.
  • Company origins: 47 YC companies (1 non-YC), 46 early-stage, 1 late-stage (Reddit).
  • Outcomes: 4 dead, 1 billion-dollar exit (Cruise), 12 post-Series A, 6 with valuations >$50 million.
• Seibel attributes his inability to capture all YC outliers to his dual role as a YC partner, owning a 1% stake in the entire YC ecosystem.

Strategic Lessons on Capital Allocation

• Check Size:
  • Seibel advises writing checks large enough to generate meaningful returns on a billion-dollar exit after dilution and taxes (e.g., avoiding $25,000 checks that yield negligible bragging rights).
  • He adjusted his strategy from $25k checks to $50k–$200k checks once conviction was established.
  • Investment size should scale with the investor's total capital to ensure impact.
• Operational Speed:
  • "Grade A" investors write checks quickly, sign paperwork (e.g., via Clerky) immediately, and "shut the hell up."
  • Investors who delay fundraising via logistical hurdles (e.g., wire transfer issues) are considered "not A" investors.
• The FOMO/Friend Rule:
  • If a founder's potential success would cause a friend significant FOMO, the investor should "shut up and write the check."

YC Demo Day & Post-Demo Strategies

• Preparation: Investors must conduct research prior to Demo Day (via YC blog, Product Hunt, TechCrunch) as many founders are already known to prepared investors.
• The "Hype" Trap: The most hyped companies on Demo Day are often not the best investments; crowd sentiment can be manipulated by founders or existing investors pumping their portfolios.
• Timing:
  • Many viable companies raise 6–12 months post-Demo Day for Series A.
  • Investors who miss Demo Day can still invest later, though valuations will be higher and information asymmetry lower.
  • Seibel suggests some investors may prefer a 6–12 month pause to gather more data before committing.

Evaluation Criteria & Risk Management

• Cap Tables:
  • Party rounds are not inherently risky; the primary concern is massively unequal equity splits or founders holding too little equity (<15–20%) after Series A and B dilution.
  • YC often intervenes to "clean up" harmful cap tables during intake.
• Acquisition Dynamics:
  • Large companies do not necessarily possess superior talent acquisition skills; the number of variables required for a successful acquisition creates inherent complexity.
  • Top founders are often "unemployable" in traditional roles.
• Evaluation Rigor:
  • Intellectual over-analysis (e.g., 100-page due diligence docs for pre-launch companies) yields diminishing returns.
  • Investors should accept a low hit rate (high strikeout ratio) and focus on the conviction required to chase specific deals.

YC Sourcing & Internal Metrics

• Sourcing Philosophy:
  • YC utilizes an open application process to avoid prioritizing networking skills over ability, recognizing that high-impact software can be built with minimal capital.
  • The "YC brand" acts as a self-reinforcing filter; high initial standards created by Paul Graham attract top talent, perpetuating the quality of the cohort.
• Internal Grading:
  • YC gauges success through qualitative partner feelings (e.g., the "bomb had gone off" sentiment after the Summer 2012 batch) and quantitative Series A placement rates.
  • Alumni office hours provide continuous feedback loops to improve the support ecosystem.

Q&A Specifics

• A+ Investor Definition:
  • True "A+" investors are rare and defined by specific, high-impact interventions (e.g., Paul Buhite advising on the video system that birthed Twitch).
  • Most investors should aim to be "Grade A" (speed and silence) rather than claiming A+ status.
• Luck vs. Skill:
  • Investing success involves a significant component of luck; a strong track record does not guarantee an "A+" status.
• Founder Challenges:
  • Seibel notes that working at YC during Demo Day can lead to missed personal investments due to prioritizing the success of current portfolio companies over new deal flow.

Logistics

• The course resumes tomorrow at 10:00 AM.
• Future sessions will cover external investor perspectives and crypto/ICOs.