Invest Like the Best Michael Seibel

Lessons from Thousands of Startups | Michael Seibel on Invest Like the Best with Patrick O’Shaughnessy

Check out the Invest Like the Best Podcast Page & Episode Notes

Key Takeaways

  • Founders are more concerned about making a positive impact today than in the past
  • What Michael Seibel looks for in YC applicants
    • The team’s ability to build and launch the first version of the product
    • Evidence of forward-motion
    • Evidence of a strong relationship between co-founders
  • “The beautiful thing about founders is their ability to lie to themselves, and the number one thing they lie about is whether they have product-market fit. The great founders, limit the amount they lie” – Michael Seibel
  • YC’s secret sauce is the batch, not the advice
    • When you put a startup founder in a batch of people pushing really hard, he’s going to accomplish more than he ever thought
  • In startups, it’s far more important to focus on customers’ interactions that investors’ relations.
    • Proof that you are solving a real customer’s problem gives you enormous leverage with investors

Intro

  • Michael Seibel (@mwseibel) is a Partner at Y Combinator and the CEO of YC’s startup accelerator. He was the co-founder and CEO Justin.tv (which eventually became Twitch) and Socialcam.
  • Host: Patrick O’Shaughnessy (@patrick_oshag)
  • In this chat, Michael discusses what he learned working at YC, what makes successful YC applications, and the latest startup trends

Top Trends in the Startup World

  • Social Entrepreneurship
    • Founders are more concerned about having a positive impact on the today than in the past
  • B2B SaaS has been growing for the past 10 years and it’s not slowing down
    • Lately, B2B SaaS startups focus more on helping small businesses in a specific vertical
    • Example of Squire, looking to be the single piece of software that hair salons need
  • YC is funding more startups outside the US
    • In the past, YC invested in international founders (10-15%) to start companies in the US
    • Now many more founders are building businesses in emerging markets

Reviewing Thousands of YC applications

  • The motto of a YC application reader is “don’t be too smart”
    • Everyone tends to think they’re able to judge if an idea is good or not
      • But it’s impossible to accurately predict what will be a good idea a decade from now
    • “The first thing you have to do is let go of your prejudices and opinions about ideas” – Michael Seibel
      • Many YC companies change the problem they’re working on, so by focusing on the idea too much “you might be missing out on the pivot”
  • What Michael looks for in applications (in order of importance)
    • The team’s ability to build and launch the first version of the product
    • Evidence of forward-motion
      • Michael wants to be impressed by what the team achieved since they started
    • Evidence of a strong relationship between cofounders
      • It’s crucial that the relationship won’t break with the stress involved with starting a company
      • “When I describe a startup I say: you signed up to get punched in the face every day, forever.” – Michael Seibel

Insights Into YC’s Interview Process

  • What they look for:
    • The ability of founders to communicate their idea clearly
      • “A founder who truly understands what they’re working on is able to explain it to a layman” – Michael Seibel
    • Founders should know more about their customers and product than the interviewer
    • Interviews provide a great way to further assess if founders have a good relationship
  • After interviews each Partner can vote: Strong Yes, Weak Yes, Strong No, Weak No
    • In the past, startups admitted to YC with 3 “Weak Yes”, tended to perform badly
    • Now, as long as there is one Strong Yes, the company will be accepted
      • If someone can’t dream a startup to be something massive, it probably won’t be

How YC Changed

  • In the past, investors discounted YC startups. Barely any investors showed up at Demo Day
  • Y Combinator today offers many more resources to founders
    • YC companies receive $125k (as opposed to $20k when YC started)
    • Alumni network of 5,000 people (among which are CEOs and major technology companies executives)
    • YC startups have access to millions of dollars of discounts and credits
    • Database of investors in the Valley reviewed by other YC founders
    • All YC advice is documented and available
    • Directory of YC companies that could be great customers
    • Resources for hiring and raising money
  • Y Combinator is run by former YC startup founders who continuously ask themselves “what do we wish we had?”

Defining a Good Startup Problem

  • Frequency, intensity, and willingness to pay are the factors to consider
    • Founders should have a special insight into the problem they are trying to solve
    • If you’re passionate about a problem, you are more likely to have an insight
  • Thinking about Airbnb’s early days
    • It may seem that Airbnb guests didn’t have a frequent, intense problem they were willing to pay for
    • Michael suggests to reverse the point of view and look at Airbnb hosts
      • Hosts INTENSELY want their house to ALWAYS be booked and are WILLING TO PAY 12% fees for people to book their place

How Startups Resemble Sports and YC’s Secret Sauce

  • The Startup game resembles sports more than any other career would
    • To win you have to reach for the extraordinary
      • In a regular career, being an average smart kid among smart kids you’ll tend to do well
      • In the Startup Game, if you are the average player, even among the hyper-talented people at YC, you’ll lose
      • Only a few of the highly selected founders who get to YC will be successful
  • In startups like in sports, execution is a mental and expectations game
    • The fastest person on a high school running team will get better by practicing with a college team
      • They’ll run faster than they thought they could run
    • When you put a startup founder in a YC batch of people pushing really hard, he’s going to accomplish more than he ever thought
      • YC’s secret sauce is the batch, not the advice

Product-Market Fit

  • Michael describes his experience realizing he had found product-market fit
    • The year Justin.TV grew 1200%, limited only by the team’s ability to keep the site up with increasing demand, Michael knew he had product-market fit.
      • “It was a sledge-hammer to the freaking jaw” – Michael Seibel
  • “The beautiful thing about founders is their ability to lie to themselves, and the number one thing they lie about is whether they have product-market fit. The great founders, limit the amount the lie to themselves” – Michael Seibel

Dealing With the Psychological Aspects of Startups

  • Prepare founders with facts of how hard it’s going to be
    • It’s ok if you don’t want to do it or fail
      • “You’re not a failure because you weren’t successful at becoming an astronaut. There are so few people who become astronauts” – Michael Seibel
  • Acknowledge that you need to develop tools to manage emotions
    • YC particularly emphasizes the need to learn to manage the relationship with co-founders

Advice for Marketplace Startups

  • You should try to “cheat supply”
    • When there’s no demand, supply won’t sign up, so you have to recruit supply one by one
    • There’s no way to collect demand if you don’t have supply
    • That’s what Airbnb did, hand-recruiting Vacation Rentals in NYC

Promise, the Startup Aiming to Reduce Mass Incarceration

  • Promise‘s founders found that people went to jail before being convicted because governments are not good at ensuring that people show up to court
    • Promise worked with prisons to make it easier for people to go to court through an app with location tracking, reminders, one-click Uber
    • That helped avoid people going to jail, losing their jobs, and destroying their life
  • As the founders found that their efficient system was being used to get more people in the criminal system, they looked for a better solution
    • They saw that many people would go to jail for missing payments on fines
      • Promise set up a website to make it easier for people to pay fines, even introducing payment plans
      • After a couple of months, they had better collection rates than the government
      • Treasury departments were happy to adopt Promise’s system, as it would lead to higher collection
        • Michael calls Promise “Stripe for Government”

Other Trends in Startups

  • Hardware, Tesla-inspired startups are more popular than before but Silicon Valley is still mostly focused on software companies
    • The further away you are from software, the more difficult to raise capital
  • With COVID, wholesale businesses are realizing that they can sell directly to customers with a simple Shopify store
    • Selling to consumers offers many benefits and Michael doesn’t see this trend stopping, even after COVID

Additional Notes

  • YC received a little under 30,000 applications in the past two batches
    • Only 10% are interviewed
    • 475 companies were accepted
  • Investors at Demo Day tend to discount the bottom portion of startups, forgetting that everyone who attended YC is already in the top 2% and has strong potential
  • Michael has no doubts that people learn a lot more by attending YC and failing than by attending a top University
    • “People learn by doing. You don’t do at school, it’s that simple” – Michael Seibel
  • In startups, it’s far more important to focus on customers’ interactions that investors’ relations
    • Proof that you are solving a real customer’s problem gives you enormous leverage with investors
  • Michael tells about the kindest thing somebody did for him
    • Justin Kan and Emmett Shear informed Michael they were about to take a road trip to San Francisco to start a new company
    • They had already packed the car, but when Michael asked if he could join, they said yes and gave away their stuff to make space in the car for him
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Notes By Giorgio Parlato

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