97. How To Start A Startup: How Angel Investors Judge Startup Founders

09 important takeaways from this interview:

00:02:22 When raising money for your startup, it’s better to raise money through someone who made money themselves through a startup because then they’ll be able to give you advice. This is how Y Combinator began.

At Y Combinator we don’t invest a lot – just enough to cover their expenses up to demo day when they can hopefully gain more investment to continue.

When applying to join a group like Y Combinator, it better not be just for investment and connections because 1) Investors live and die pretty quickly, and 2) Connections are important but aren’t #1.

Y Combinator’s goal isn’t just to launch new startups, it’s actually to acquire the priceless data about what makes a startup work. That was Y Combinator’s original goal. We launched Y Combinator with the goal of teaching ourselves how to be angel investors. We usually aim to invest in between 2.5-3% of all the startups who apply for Y Combinator.

[EDITOR’S NOTE: For more information on pitching to investors, watch the lecture How Can I Introduce My Pitch So Investors Want To Invest In My Startup?]

00:03:43 It’s easier to launch a startup today than before because there is a lot more knowledge out there and it’s a lot easier to raise money partly because more people want to invest in startups, partly because the procedures and protocols between investors and investors to talk to one another is smoother, more established and more streamlined,  and partly because it’s easier to launch a startup today.

00:05:00 The founder is more important than the idea. When people come to me with an idea I always begin by asking about the co-founders. I care MUCH less about the actual idea than I do the idea’s foundings – what kind of people they are. A bad idea might be a bad reflection on the entrepreneur.

There are some people who just get what they want in the world, and if you’re going to try and start a startup you have to be one of those people.

The five things I look for in a founding team (refering to this Forbes article) are:

  1. Determination – the hardest thing about Y Combinator’s 10 minute long interviews is spotting determination – people often fool us. If they didn’t fool us, every startup we invest in would succeed. You can usually tell how smart somebody is within 10 minutes. Some entrepreneurs will absorb the new ideas and opportunities, while others will downright reject them.
  2. Flexibility – The ability and willingness of an entrepreneur to accept other alternatives to their product or business model
  3. Imagination – Similar to flexibility, the creativity of how they respond to our ideas and their ability to not only grasp what we’re saying but also take it further is important.
  4. Naughtiness – Angel investors don’t look for ‘obedient employees’ who blindly do what they’re told. Sometimes at the very beginning stuff needs to be held together by duct tape and oftentimes startups must be slightly dubious to get things done. You can usually spot if there is a glean in the entrepreneur’s eye.
  5. Friendship – Investors look for co-founders who already have friendship as a foundation.

Intelligence is not on this top 5 list partly because intelligence tends to be taken for granted. If you’re a computer programmer you must have an at least above average intelligence. There are plenty of smart people who get nowhere.

[EDITOR’S NOTE: For more information about choosing who you work with watch the lecture How To Start A Startup: The Importance Of Choosing Your Team & Execution.]

00:09:38 I (Paul Graham) met Sam Altman, president of Y Combinator, when he was a 19 years old kid going on 40. When I talked to him he pushed back. So I couldn’t treat him like a 19 year old. As a sophomore in university, I initially sent him a rejection email telling him to slow down and take your time, and Sam responded and said “I’m coming anyway.”

00:12:19 Make something that people want. The biggest mistake startups make is being disengaged from their users. Go talk to your users and find out what they want because the amount of value you create is directly coorelated to how you improve your user’s lives. Ideally you want to build a product that improves a lot of people’s lives.

[EDITOR’S NOTE: For more information on understanding your users, watch the lecture How To Start A Startup: Growing From Zero To Many Users and read my interview with Peter Spear On Conducting Consumer Research & Brand Listening.]

00:14:38 Many of our successful investments were entrepreneurs building something that they themselves wanted. Build something for which you yourself are the user, then of course you’ll understand them.

00:16:20 Launch your startup ideas while you’re young and too stupid to realize how hard it really is and all you want to do is work as hard as you can.

00:19:36 We don’t intentionally plan to grow Y Combinator, it’s just that the number of great startup ideas keeps growing year after year. It’s like a plant that just naturally grows. As long as the total number of applications keeps growing year after year, then we will have to keep growing to accomodate them.

00:25:52 Even if we reject them, we track every startup who applies for us. One of the advantages of having so many competitors is that if we miss somebody our competitor will snatch them up, so when one of our competitors has a successful startup, we go back and look at that startup’s application to Y Combinator to figure out why we didn’t accept them.

Always be asking yourself “Why am I screwing up and how do I get better?”

[EDITOR’S NOTE: For 15 more important takeaways from Paul Graham, watch his lecture How To Start A Startup: A Checklist Of Counter-Intuitive Rules, or watch the entire series of lectures hosted by Stanford University.]

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