Hey, how's it going? This is Craig Cannon, and you're listening to Why Combinators podcast. Today's episode is with Jeff Ralston, Jeff's a partner YC, and before that, he co-founded Imagine K12. So, I met up with Jeff to talk about startup investor school.
Startup investor school is a free four day course designed to educate early stage investors interested in investing in startups. And if you're interested, you can sign up at investor.startupschool.org. All right, here we go. So why don't we just start with the basic facts?
So what is investor school? Yeah, so investor school is a four day class that we're teaching for the very first time here in Mountain View, across the street. And the original Y Combinator building 320. And it's a school that's going to teach the basics of startup investing.
So we hope people come in person. We think there's a lot of demands. So we think we're going to a lot of folks who want to come, but also doing a live stream where we're going to make it a MOOC, a massively open online course, just like we've done in the past with startup schools. So we're really excited about the potential to give back a whole bunch of the knowledge that we've gained at YC over the years and how to be a really effective angel investor to the community at large.
So we create more better, happier, and happier. And what gave you the impression that folks needed a school? Well, it gives us the impression that folks needed a school is we've seen lots of, say, not so effective behavior and approaches to angel investing. And we're not being conceited in thinking that we've seen it in ourselves.
Most of us have at one time or another in the partnership of YC been angel investors. And so we know all the missteps. We've done them ourselves. I personally have made so many mistakes angel investing that I feel if nothing else qualified to tell you a whole bunch of things you shouldn't do.
So we're trying to help people avoid a lot of the pitfalls. And we're also, there's ways to be a better investor. There's ways to be a worse investor. And we think we can help teach people those.
And so again, make them better at their job, even if it's not a job, better at the discipline of angel investing. And that makes it better for the companies in whom they're investing. And is there a particular type of person you're looking for to participate in an investor school? Do they need to have been an engineer and had an exit?
Or they just have some cash that they want to invest? Who are you looking for? Well, the one qualification is that you're an accredited investor. The SEC has set of rules as to what comprises accreditation in terms of income and wealth.
As long as you're accredited, we want everybody. In fact, we actually think this is an opportunity to add greater diversity to the ranks of investors. So yeah, anyone who's accredited, which is a little bit the equivalent of what you said is you have some spare cash to invest that you can afford to lose. And you have to be honest about this.
This is a very high risk investing paradigm. So if you're going to invest in startup companies, you have to be prepared for extraordinary upside but also perhaps more likely downside. And are you giving anyone a certain criteria of what they should think about? It's like, this is an approximate amount of money that if you're going to get started angel investing in the valley, you should be ready to start putting down, putting to work.
Is there a number that you have in mind? I think we'll give some guidelines as to how to think about creating your portfolio, think about doing asset allocation across that particular portfolio. But how much you invest is a very personal thing. It's sort of how much you will care about losing, how much upside you want to have, what percentage of a company it's important for you to own.
And if you think about it that way. So I think the amount that people invest is incredibly variable. There are some minimums. Most people aren't investing $5,000 when they do angel investing.
That does happen but it's unusual. It tends to be a minimum in the tens of thousands of dollars, up to a maximum of hundreds of thousands of dollars usually. Okay. So maybe we ought to walk through the curriculum in broad strokes.
So where, day one, what are you guys going to start with? Well, day one, we're going to start with what you might expect. The basics. Sort of how you should start, why you should start angel investing.
Why do it? What's it about? Talk a little bit about the history of investing and where angel investing came from. There didn't used to be such an angel.
There was people pretty much finance companies on their own. That's what Silicon Valley got started. HP was founded in the garage with $538 of capital. That day packer and a bill Hewlett scrounged together to build an audio oscillator.
And much of Silicon Valley came from graduates of Hewlett Packard School of Building Products. It was only later that venture capital started and you had a whole bunch of people coming out to San Hill Road and figuring out that they could make lots of money. I mean, there's an early venture firm invested $70,000 in digital equipment corporation. That was one of the earliest angel investments.
And they made $35 million and not even investment VC investments. They made $35 million. Big time. Which is pretty cool.
70? Yeah. Well, that's the kind of return that people look at and say, I want a piece of that action. So a lot of companies set up in San Hill Road and you had sort of the classic early VCs from, you know, Trade for Starting Sutter Hill and Kleine Perkins and Sequoia all began back in those early days.
And so there was sort of an intermediate path to raising capital between putting together your own money, putting money on credit cards, maybe getting friends and family to put a little money in and then IPO. There was a big gap between adventure came and filled in some of that. But eventually what happened was it was harder to get started at the small well in friends and family who were kind of the original angels, expanded to be people who really just gave smaller checks, which was really the amount needed right in the very beginning to get a company ready and able to accept venture investing. So I'm going to tell a little bit about that.
And then we're going to talk, I'm going to have a couple of partners from YC go over some of the mechanics of startup investing that are a little frankly mysterious. How is it that these weird convertible notes work used to be when back in the early days of venture investing, you just bought a share of the company equity in the corporation. Now we have these different instruments that are much cheaper and faster and simpler to use but also a little mysterious. So I want to demystify that, explain how it works.
We built up a bunch of standards as to how an angel investor or any sort of investor will interact with founders. There's something we call the handshake protocol, which is how you go about sort of cementing a deal verbally before you do it on documents. We want to cover things like that. So the beginning of the course is sort of getting the vocabulary down.
The vocabulary, getting the dotting the eyes and crossing the tees of how you actually act as an angel investor, how you should think about when you're investing, how much you're going to own a company, how dilution works, how cap tables work, all those basics that kind of you know, you sort of run into it. No one tells you what's this document they're getting. I mean, but what about even before that? What about evaluating a company if you're a non-technical person who wants to invest in software?
Yeah, we're going to get into that. Right in the very beginning question is, so you want to invest in a company? How do you learn about the company? Well, there's actually a simple answer to that.
You meet with the founders and talk to them. So we're going to quite extensively go into when you go into a meeting with founders, how should you conduct that meeting? How should you think about the founder? If I'm meeting with you and we're talking about your company, how do I make judgments about whether this is a company I want to invest in?
How should I think about that? Okay. So you want to kind of help people through that exact answer, that exact question. So yeah, let's get specific on some of these.
Like you're meeting with a founder for the first time. What's a red flag when you're like, say there are two or three co-founders, you're talking about a product and it's just, I don't know, what's something that you might spot that you're like, I don't know if I want to put money into this startup? Well, for me, the very first thing comes with sort of how I read the founder's belief in what they're doing. If you have this passion, people usually talk about passion.
I remember listening to Mike Moore talk about this once and he talked about it being at a different level, like almost an obsession with what you're building and why you're building it. You have to care so deeply that everything that's going to happen to you as a startup founder will be something that you will think nothing of overcoming. Because that's the short thing. People that if you don't have the resilience you need, the toughness you need, the determination you need, the belief you need, none of the other things matter.
Nothing else. How big the opportunity is, how much of competition there is or isn't, how much money you raise, how smart you are, none of that matters because it will happen. So that's where I start. And if I can't get past that, if I don't get that sense.
Are you kind of laying a little trap here and there to see if they'll bite on something like I don't know if they're quite confident enough or is it just this vibe someone has? What are you actually looking for? Like saying traps and a little underhand. I personally, everyone gets different styles.
I'm very direct. And so what I like to do is I like to push. So there's, and it's easy to do after a while because every single idea has a million things that could possibly go wrong with it and half of those will. So you talk about those and you see how they react to it.
How they, as you push on them and you say, well, how could this possibly work? You want to provide ride sharing services to seniors. You know they don't really use their phones. How are you going to do that, Craig?
And you start to push on those ideas. And so I think that a certain amount of this you can't teach. It's experience. As partners in YC, we've all talked to hundreds, not thousands of companies.
But we can, I think, illuminate the process and get people started on the right foot. And that's, I think, the way we should think about this. It's a short course. It's four days, two classes per day, eight sessions total over that four day period.
It's not a six month graduate school investing. I don't even know what you would cover in that. But it's enough, I think, to put you on the right road to becoming a fantastic angel investor. And that's our goal.
Create more fantastic angel investors. Fantastic means, I don't know if they make the right choices for themselves. They help companies more. They have a better relationship with companies.
They make their decisions in a more effective, timely fashion. Yeah. It's not just spray and pray. Like show up to demo day, spend $200,000 and then hopefully something.
I mean, that can be okay. That's an terrible thing for companies generally to get that kind of cash. But I think it's much more useful for companies to get thoughtful investors who invest for the right reason and who are not painful later, who understand the quid pro quo that's going on when you invest and when you get a piece of a company and how you should be interacting with that CEO and founding team henceforth. So from a personal perspective, do you only invest in companies where you feel like you can add more value than your money?
Or are you okay just putting money into something you think is attractive, but you don't really know about the space? A lot of people say that. They'll only invest in companies. There are all types of companies.
A lot of people say that and then they put money all over the place. That's true. Well, there's what you say and what you do. There's probably as many different styles of angel investing as you know.
Me personally, I think I invest when I get excited about a company. And it may be a little egotistical, but I kind of believe that I can always help a company because I've seen so many companies. No, I've been doing this for coming up on seven years now and I've been angel investing 13 years now. This being why I see an angel investing for longer than that.
So as those insurance commercials go, I've seen a thing or two. So I kind of believe that, but I think that's separate from it. If you're talking to me and I say, oh my gosh, this guy's amazing or this girl's amazing. This is an idea and I'm going to invest.
And do I believe I'll be able to help you? There's another perspective that's important to have as an angel investor. Angel investors can in limited cases have substantive impact on the companies in which they invest. Mostly their impact is marginal, minimum.
You might meet with a company once a year, twice a year, maybe. And you might give them some really good advice. They're building the company. Sometimes I think angels or I've heard angels take way too much credit.
Again, sometimes angels are very helpful. And I like to think that I've been quite helpful to the companies that I've worked with, but they're building the company. And so if there's a pile of credit for success, 99.9% goes to them and their team. And sometimes the bigger investors who spend a lot more time with them than angel investors who go on the board and meet with them every quarter or more frequently and help them recruit.
And most angels don't spend that much time doing that. Okay. At times they do and some do more than others. But for the most part, I'm honest with myself and know that like words I can be pretty helpful.
The main reason to invest, and it's good to be helpful and it's good to be that kind of investor. But the main reason is because you believe that's why I invest. And so going back to the vetting process, I heard an Evolve Robicon in a startup investing talk from AngelConf like years ago on the Venture Hacks blog. I think he said something like, it wouldn't be strange if you met with 100 companies before you made your first angel investment.
Do you have a rule of thumb around that? No. No, so it could be the first one. Okay.
I'll have a different rule of thumb. And also it wouldn't be strange. And I would argue from personal experience is that you auto-weight just because it's hard to calibrate in the beginning. But at this point, I'll meet lots of companies.
I know when, and I do think my calibrations don't. I know when I'm interested in some combination of the founder, the idea, the opportunity, the execution they've had up to then, all those things. But it is true in the very beginning before you made your first angel investment calibrate. So do spend.
I don't know if it's 100 or 10 or 15. You should. This being said. There are one of the reasons people angel investors surely because they want to be Professor Horowitz at Stanford who invested in Google and became a billionaire doing that.
It's nice to be a billionaire college professor. And those companies don't come along very often. And so if for whatever reason you believe the first company you talked to just might be the next Google or the next Airbnb, it will be painful to let that go. So if you got that belief.
I do think that the probability is low that you ever see one of those. If you see if you saw one of the very first one, it'd be a strike of lightning. But. But it goes back to what you said already.
You have to be able to throw the money away. So if the first company you see, not throw it away, but you know what I mean? You have to be prepared to zero out that investment. In fact, my default position when I invest in a startup is that that investment is not worth zero.
It's not like if I put, pick a number, $25,000 in a company. And then I track that is value is zero until I have more information than it's not. Exactly. You have to have it.
So whether it's the first investment or the 20th investment, you're still going to feel that pressure when you're about to write a check and you're like, oh, no, no, this is it. But eventually you're going to have to pull the trigger. So what other things, how else do you help someone mentally prepare to become an angel investor? What like mental models you offer?
What do you recommend? What are the things we're going to do in this course, which I'm pretty excited about is we're going to get for pretty well known, pretty successful angel investors to come in and kind of tell their stories a little bit to give what I call angelic advice about how they dealt with that. I do think the bottom line is you got to do it. You have to meet with a bunch of founders.
You have to think about their companies. Usually it's a good idea to invest in some space that you have some familiarity with. So you can actually hopefully make a more educated judgment. And then go for it.
Yeah, go for it or not. And you'll get better at it. So what else is on the curriculum? What else do we have to look forward to?
Well, okay. So I've taught that much because again, it's a pretty short curriculum. We're going to talk a little bit about how to be a good investor. We talked.
We talked earlier. It's actually shockingly easy to be a terrible investor. And so we want to talk about what it means to be a good investor and how you should think about that and how you should interact with companies and what companies need and want from you as an angel investor. And that goes from first meeting to whatever rhythm you have meeting with the company once you're actually an investor, if at all.
Some investors just want to invest and write me a check when it's all over. But most want to sort of get updates and talk to the CEO as part of the fun of it, by the way, and watching progress. I just got to go and talk to a YC company that's doing great. I mentioned them, but when I also made an angel investor and then, you know, if I'm two people now, they're 50 people and there I've got a big valuation and they have all sorts of problems and they're doing incredibly well and it's exciting.
It's just a really fun thing. But I want to talk about that. But maybe the last thing I'll say about the curriculum for the course that I'm excited about is I want to talk a little bit about investing in the 21st century because it has changed. I was talking about HP back in 1937, 1937, excuse me.
That's when HP was 137. But venture capital really started in 57 and 60. And then sort of angels came in in the subsequent decades. Things changed a lot once the 2000s, the 21st century came.
Probably the first big change was YC was accelerators. We're thinking how people did early stage investing. Well, it's changing again. You mentioned another advocate.
He launched this thing called AngelList and there's something called Kickstarter. So AngelList brings people and companies together in a really unique online way to invest in a different paradigm than before. As Y Combinator was a different paradigm investing in bulk. We invest in a whole bunch of startups all at once.
But there's new stuff happening. You know about this. There's ICOs. There's initial coin offerings.
Companies are changing the way they think about the availability of capital. The SEC is looking hard in this right now. It's complicated. So I want to talk a little bit about how the space is changing and evolving.
Another thing I didn't mention was that I talked about this history in a very chronological way. One of the things that happened after YC began this accelerated craze is it became a lot more angels out there. The angels started to professionalize. Some of the angels who were most experienced angels became what we call the time super angels or micro VCs and they started creating funds.
So then you had a little bit of fragmentation of VC where there was a bunch of early stage and then series A and then growth after that. And then you had a whole bunch of evolution of that where VC started doing both early stage and growth sometimes in the same fund strangely which I don't necessarily think is a great idea. So there was this, I don't know if fragmentation is the right term I used to before but there's no diversification of styles of professional investors. Professional investors meaning someone who has limited partners who have more investing other people's money besides their own.
And so that's changed a lot in the 21st century. But certainly the new ways to raise money, the crypto oriented techniques are pretty radical in that so early there's an equal amount of money and ICOs being raised by startups as a veteran money. That's crazy so fast. I don't really believe it's sustainable and there's a lot of crap.
Certainly a lot of fraud out there too. So buyer beware. But the world is shifting and changing radically rapidly. So we want to talk a little bit about that so people are kind of up to speed with some of what's happening.
The course where we're covering a lot of the fundamentals. Some insider looks at how you become an angel investor and how you think about deal flow and portfolios and making your decisions. And then maybe a little bit of a look towards the future. Okay, awesome.
So we would be remiss if we didn't talk about your personal angel investing experience to share some advice with people just to give them a taste before they sign up for investor school. So before you said the good and bad habits of being an angel investor, let's talk about those specifically. What does it mean to be a good angel investor? So this qualitative thing is good.
Like good can mean a few things. You mean that you're actually good to your companies and can actually mean you get a good return. So let me try to answer kind of both of them. I think to be a good angel investor, first is you have to follow your passion, invest in what you care about, but don't be emotional.
You'll make a lot of bad decisions if you're emotional. So it is a cold hard cash investing decision and you should think about it that way. You should learn how to say no and learn how to say no explicitly and kindly and with as many real reasons as you can. I'll get back to that in a sec.
That's part of being a good investor too, two companies. If you meet with me and I say, I'm thinking about it, Craig, you seem to have a pretty good idea. I'll get back to you and I never get back to you. Sometimes investors do that because it's just hard to say do no.
And so you have to learn how to do that. Say no. Sometimes, as I said, you should be as honest as you can, especially if it can be helpful. Sometimes you can't.
Sometimes it's because I didn't believe in you. I didn't think you were smart enough. I didn't think you were strong enough. I didn't think all these things that I'm not really going to say in an email to you.
So you have to come up with some way to gracefully say I'm not interested. But remember what we talked about. And if I said you have to meet with 100 companies, at least 10 or 20 or 30, certainly you want deal flow. And that's another thing about being a good angel investor.
You need deal flow. Find a way to get deal flow. We'll talk about that. If you don't have deal flow, you'll talk to me.
I'll invest. Please take my money. Right. So in a micro level, you wouldn't necessarily be wrong either.
If your deal flow is only 10 companies a year, you may still pick the best one, but it may still fail. You might just need a few more. Which is the wrong. Which is, no, which is being wrong in the macro sense.
You're like, you're being locally right, but that doesn't do you any good. So that's why you do need more to see. But again, I do think these things stand alone. You have to look at whether you believe the opportunity is there and that you have a founder in front of you who has some probability of winning in the fight for that opportunity.
So be rigorous and organized and dedicated. Even if you're dabbling, and I think most angel investors dabble. They're not professional. Yeah.
This course, by the way, is not meant to teach people to be professionals. But I don't expect a real venture capitalist will come and take the course. I expect angels who are investing their own money and who are doing this because they enjoy working with founders, because they have causes that they care about, because they want to see innovation in the world, because they want to see change. Those are all really good reasons.
And those are good reasons to invest. But you have to temper that because I wouldn't recommend just investing in change with no hope for return. Right. You can, if you're really willing to throw away whatever amount of money you're investing, and I would never gain say that if you're doing this because there's some possibility of making a difference, creating change even if you're not that concerned about the return, that's fine.
But most angels want some kind of return. I would also say most angel investors should ignore the little stuff, because when you're angel investing, if you're going for a 7.6% return to try to beat the stock market, you're in the wrong game. Right. It's a game of big wins.
So don't sweat the little stuff. Don't run your founders through the ringer as they're shutting down and try to extract some bit of blood from a stone where there is any. It doesn't matter. It doesn't matter.
If you act like a jerk to a founder, that might be even if that gets you an extra 50% of your return, your investment back somehow, that might actually cost you way more in the long term because the way you get deal flow is because some founders says to another founder, you should take Jeff Ralston's money because he's a good person to have on your cap table. Right. So my advice is be a good person to have on someone's cap table. Be that person.
Say, Ron Conway, you want his money. He will help you. He's not a jerk. He will be on your side.
Yeah. It's so relationship based. Something I didn't fully realize until I moved out here was how important optionality is when people are investing. It's not uncommon for someone to say no at one point and then say yes later down, even if they have to pay premium for that.
And I think that's a difficult thing because on the relationships. I've done that lots of times. I mean, you know, one thing we tell founders here and it's the reverse is true for investors. There's no no forever.
It's not now. Exactly. Not now. I'm not ready.
You're not ready. Whatever. But the thing that messes with your head is when someone says not now in other in other areas of life, you're just like, oh, they're politely telling me to go away and never. But here, not now often means not now.
Like call me an 18 months when you're raising money again. Yeah. And so, yeah. In fact, as most angel investors don't get a bite at the later rounds, they might get a bite later on during this round and you think about it.
But don't. I mean, there's one other thing I will say not to do as an investor, which is don't try to be the last money in because you don't have any confidence in yourself. So some of the worst investor behaviors to say, I like you. I like your company.
You're raising a million dollars. I'll put $100,000 in as soon as you raise $900,000 because you're useless. The fact of the matter is once you craig have raised $900,000, you don't need me. And I have demonstrated right then and there that you don't need me.
Yeah. Right? You'll fill it in with someone else. And someone who's more useful, who has more courage behind their conviction.
Totally. Be the kind of investor who has enough courage to say, you've raised zero. I'll be the first money in. I like you that much.
And on the strategic side for you personally, what have been some of the best moves that you were, you were unsure about in the beginning, but then later on, you're like, oh, maybe I kind of called it there. That worked out pretty well. Well, the best example of that is one of my earliest angel investments. And I did it for the wrong and the right reasons.
The wrong reason was the woman who was running this company was at a old friend. Someone I'd worked with for years, years before. And that's a terrible reason to invest in someone except that she's awesome. And I'd done both ways.
Sometimes you're like, she's even pretty good and you invest in something because they're a friend and it's not a good choice. This one, in this case, it was the right reason. But the space was really tough. It was in wireless networking.
And there was so much competition. They were a small wireless networking company. They had some kind of cool technology. But she wasn't even a founder.
She became the CEO. She'd been a founder before. I knew she's like, now it's good. But I didn't know the founders very well.
And it was this hardware thing and some software. And oh my gosh. And so I only invested a little bit. And that was so far the only company that has IPOed.
So there you go. And I made a really good return on investment. So that one worked out really nicely. And it took.
And it was one of those things where I was like, oh, it's never going to happen. It's never going to happen. I kind of lost track until I woke up one day and I had IPOed. But I got to notice that I had public company stock.
And I was sort of totally shocked. Was there a learning on the positive side where you're like, oh, this is a pattern that I might be able to match again? But the contrary, it was because I knew a good person. And I invested in that person.
Aside from all the other warning centers at this space, are you kidding me? I found out I don't know that well. But this great person, really smart, really capable. It's done this before.
It's running the company. Yeah, I invested that all day long. So I did want to ask you, you've had success with startup investing, angel investing, where you didn't necessarily know if it was going to pan out. Obviously, you never know.
What are mistakes you've made? Oh, I actually think the appropriate question is which mistakes haven't I made. Because I made them all. I've invested in family.
Don't do that. I invested without thinking it through very much. Don't do that. I invested in spaces where I really had no freaking clue at all about it.
And I just did it because and don't do that. I invested in spaces because someone I thought was smart invested there. And sometimes that's a good thing to do, but I didn't put enough thought into it. I've been fooled by founders.
I thought they were better than they were. I've invested in founders in a space that demanded great technical know-how that didn't have great technical know-how. I've invested in founders where I didn't believe in them and then decided not to invest and then was persuaded by short term results that I was wrong, but I wasn't. Do you often invest internationally?
Almost never. Almost never. I have invested in national YC companies sometimes. So, I shouldn't say almost never.
When I was investing pre-YC or outside of YC, I haven't. It's too complicated. You can't get my head around it. Talk about investing in ecosystems you don't understand.
And I mostly try to invest in places where I have an understanding or a belief system. I don't have to be deep into it. I will invest in CRISPR companies because I'm not a biologist, but I think CRISPR is a nerve-shatteringly important technology. I wrote up about that just because it's so cool.
I wouldn't do an expert. And synthetic biology in general, I believed for half a decade now is going to be incredibly important before I even knew anything about CRISPR, but just the idea that you could start to think about programming the tree of life. In fact, a conviction that I had way back then that we're going to figure out how to do it. It just kind of happened really quickly where the ability to do gene editing at a very detailed level came about thanks to bacteria.
Very much bacteria. It's so cool. It's amazing. But I'm sure you're going to have international angel investors come in.
Definitely. They're really good. They're from all over the place. I don't think it's different though.
Let me caveat that. Sure, it's different. I think the set of things we're going to talk about are generic. And we'll be true for them as well.
It's a good point you make. Probably assuming this course goes well and we teach it again in the future, we'll think about how we need to add more about how you should think about investing. He's a US investor in international companies or is an international investor in international companies in your own country or say investing in US companies. There's certainly a lot of international investors who come and invest in West Companies on demo day.
But that's the beauty of it. This is our experiment. It's a learning experience for us as well as for the students. Hopefully assuming it goes well, we'll improve it and do it again next year.
That's great. Where should someone go if they want to buy? They should go. Well, the application is going to open on Thursday.
I hope I get this right. They should go to investor.startupschool.org. Okay. And we'll also post it on the blog too.
All right. Thanks Jeff. Thanks a lot. Nice talking to you.
You too. All right. Thanks for listening. So as always, you can check out the transcript in the video at blog.ycombatator.com.
And if you have some time, please leave us a rating and review wherever you find your podcast. See you next time.