Paul Buchheit - Startup Investor School Day 2

Investing Philosophy and Core Principles

• Startups must appear "bad" or "stupid" to outsiders; obvious opportunities are already captured by large, well-resourced companies.
• Google originated as a rejected research project called "BackRub" that was initially dismissed by major internet firms like Yahoo as a commodity.
• Successful investment requires a high tolerance for luck, particularly for founders who have not experienced failure in their previous lives.
• Investors should prioritize funding founders who are smarter than themselves, allowing the investor to "outsource" the thinking to the founder's superior insight.
• Paul Buchheit advises against using personal expertise to make final investment decisions, reserving it only to probe the founder's depth of knowledge.

Case Studies: Favorable Outcomes and Patterns

• Wufoo: Invested despite the idea looking flawed; returned 44x when acquired by SurveyMonkey, with founder Kevin Hale later becoming a YC partner.
• Justin TV / Twitch: Invested in the unpredictable concept of a founder live-streaming his life 24/7; pivoted to video game streaming (Twitch) and was acquired by Amazon for $1 billion.
• Justin TV Alumni: The four founders of Justin TV (Emmet, Justin, Michael Seibel, Kyle Vogt) collectively founded or acquired $20B+ in value via Twitch, Atrium, SocialCam, and Cruise.
• FriendFeed: Sold to Facebook for a stake worth approximately 0.5% of Facebook's equity, emphasizing the strategy of "finding your betters" like Brett Taylor and Mark Zuckerberg.
• Meraki: An early 2006 investment where the team shipped hardware with zero external funding; acquired by Cisco for $1.2 billion (73x return).
• Cruise: Invested in Kyle Vogt's autonomous vehicle company despite it seeming absurd four years prior; GM acquired it for $1 billion (approx. 50x return).
• Boom Supersonic: Funded founder Blake because he could clearly explain the economics of fixing Concorde's failures despite lacking an aeronautics background.
• DoorDash: Funded largely because the founder confirmed he would deliver food to the investor's specific location, validating "make something people want."

Case Studies: Unfavorable Outcomes and Mistakes

• Dropbox: Missed investing because a meeting was cancelled due to the investor's own lateness; later cited as a "thousand-turn" loss.
• Airbnb: Failed to invest initially due to indecision and delay; entered a later round at a much higher price after Sequoia led the seed round.
• Juicero: Cited as the antithesis of Meraki; spent $100 million without talking to customers or validating demand, ultimately failing.
• Value Investing Error: Investing solely because a valuation seemed low or a "bargain" never resulted in returns; "value investing" does not exist in startups.
• Pity Investing: Investing to help struggling founders emotionally attached to them has consistently resulted in losses.
• Cynical Investing: Investing in ideas that seem profitable despite lacking optimism for the future ("future you fear") has never worked.
• Over-reliance on Metrics: Investing based solely on impressive early numbers often blinds investors to poor founders or products that lack real value creation.

Investment Checklist and Founder Traits

• Pure, Concise Communication: Founders must clearly articulate complex ideas; inability to do so within 10 minutes is an immediate disqualification.
• Speed: Successful founders "move fast" (e.g., Brett Taylor rewriting Maps code in a weekend); the "slope" of progress is more important than current size.
• Resourcefulness: Founders should accomplish more with less (e.g., Meraki's bootstrapping), whereas Juicero represents the failure of "accomplishing little with a lot."
• Impossibly Ambitious Ideas: Great founders pursue ideas that seem "impossible" or "frivolous," which acts as a talent magnet for other high-performers.
• Determination: The most critical trait; founders must lack a "Plan B" (e.g., quitting med school) to avoid taking an early exit when facing difficulty.
• History of Failure: Founders who have never failed are often too afraid of it to persist; investors prefer those with a track record of resilience.
• Market Validation: Products must be something the investor personally wants; if the investor cannot identify a user, the product likely lacks demand.

Forward-Looking Statements and Specific Advice

• Bio-Tech: While market demand is obvious (e.g., cures for cancer), the primary risk is technical feasibility rather than market risk.
• Hard Tech: Investors should embrace deep tech and non-software sectors (bio, hardware) if the founder possesses superior expertise and clear communication.
• ICO/Crypto: Buchheit predicts the vast majority of Initial Coin Offerings (ICOs) are scams; the "too much money" phenomenon insulates founders from reality, mirroring the Juicero failure.
• Dilution of Past Success: Investors must not over-learn from past mistakes; seed-stage investing is heavily influenced by luck, and avoiding "unpleasant" deals prevents missing outsized returns.
• Adverse Selection: Slow decision-making leads to investing in lower-quality companies; deliberate, rapid action is required to secure top-tier deals like Airbnb.
• Testing Conviction: To test a founder's determination, investors should probe for "Plan Bs" or challenge them with unreasonable tasks (e.g., rewriting a server in an evening) to see if they execute.