Archive for the ‘Funding’ Category

Lessons Learned from our YC Interview (with Tips!)

November 7, 2007

I’m back from Cambridge with some unfortunate news: Y Combinator decided not to fund us. Dan and I are disappointed but we’re glad that we got the opportunity to pitch our idea. Thank you Paul, Jessica, Trevor, and Robert (whom I’ll collectively refer to as ‘YC’ for brevity’s sake) for meeting with us and for giving us feedback on Seekler. We really appreciate it.
Obviously, we’re disappointed with their decision but we’re optimistic – clearly they thought Seekler was interesting enough to warrant flying us out and they said that we should continue working in this space. They also gave us some great feedback that will help us improve.
The whole process was great, but I want to mention one thing I found particularly awesome – the way in which YC gives you their decision. Given that they are very busy calling all the teams in one night, I expected the decision to be a quick ‘yes’ or ‘no’. Instead, Paul called me up and we talked for over five minutes about Seekler. He gave me specific reasons why they chose not to invest, listened to my ideas for the future, and gave me great feedback. I know that his time is valuable (especially on decision night) and I really appreciate the way he gave everyone (even those who didn’t get investments) great advice and ideas to improve.
So we left the weekend with a good idea of why YC chose not to invest in us. Their main reason was that Seekler doesn’t have a huge innovation that would let us really compete with existing review sites like Yelp. The frustrating thing is that I feel like this criticism is based on a misconception of what Seekler is all about. I feel like they rejected a concept that was close to Seekler, but not quite Seekler.
A few keys points I want to make absolutely clear before continuing:
1. I’m not a mind reader – I can’t say for certain if the YC folks truly understand Seekler or not. Maybe they understand perfectly and were just not interested.
2. Even if they don’t understand, it’s impossible to say whether they would have been any more interested in Seekler if they had understood better.
3. Any misconceptions YC might have about Seekler are entirely our fault and not in any ways YC’s. What we said ultimately doesn’t matter – what’s important is what they heard. And we were responsible for making sure they heard what we wanted.
I don’t want to go into the reasons I disagree with their reasons – that’s not really the point of this post. The only reason I mention it is that it illustrates the lessons we learned while interviewing with YC. Hopefully these lessons will be useful to future YC interviewees – but they should apply to anyone pitching to an investor.
Let me really quickly give you a picture of what the interview itself is like. First, it’s really short – only ten minutes. If you have a demo (which we did), you’ll be asked to show it, but YC will almost immediately start making requests and asking questions, effectively taking control of the demo. From there it’s just non-stop, rapid-fire set of questions for ten minutes. It’s intense, but actually pretty fun.
In retrospect, the interview format makes a lot of sense – they have a short amount of time to assess you and your idea, so they need to get the answers they need as fast as they can. But I wasn’t really expecting it and it can throw you off-guard if you don’t see it coming.
That said, here are some specific tips for getting the most out of your ten minutes. The key is to take responsibility for communicating your vision.
Tip 1. If you have demo, walk in with it loaded and your laptop open.
This should be pretty obvious, but don’t trust your laptop to wake up quickly. My MacBook Pro is usually pretty good about coming out of sleep, but of course during the the interview it took about 20 seconds to become responsive. When you only have 10 minutes, every second counts.
Tip 2. Show them the coolest thing right off the bat.
We had a scripted five-minute demo all planned out. We only showed about 10% of it. Don’t assume that you’ll get past step two of your demo – jump right into the part you want them to focus on, because that’s all you’ll get to show once they start asking questions.
Tip 3. If you have user-generated content, carefully prune it for the demo
For our demo, we had prepared data on comic books, because it’s a great example of a niche that is not currently well-served and that Seekler would be prefect for. However, we’ve had alpha users for some time on Seekler and we’ve let them create any types of content that they want. So, when we fired up the Seekler home page, the first thing YC saw was lists on restaurants. They asked to see that, and we obliged. Unfortunately, our data on restaurants sucks. And frankly, restaurants is a pretty bad niche for Seekler – simply because there are other sites that do it so much better than we will.
But first impressions are hard to change – we got several minutes of questions about how we are going to beat Yelp and Zagat. Ultimately, it seems their concept was largely defined by this first impression. We definitely should have only displayed niches that fit really well with our vision for Seekler.
Pruning your data can seem counter-intuitive. Many sites are quite general and it may seem like you don’t want to limit your vision to just one area. We thought it would be good to show the breadth of content on Seekler. But some content is just plain better for your app than other content. Think about it – if you were pitching YouTube, you wouldn’t your investors to come to the front page and just see music videos. This will give them the impression that you’re trying to compete with MTV (plus it raises questions about copyright infringement). You’d be better off showing off the highest-quality user created videos you can find. Always show the data that best fits with your app first.
4. Watch the clock and deliver your vision
YC will hammer you non-stop with technical and business questions. You need to answer these, but you also need to watch the clock and make time to really explain your vision. We spent several minutes answering questions about the mathematical feasibility of our project. We know the math works but we found ourselves eating up a lot of our ten minutes trying to convince them. While we addressed their specific concerns on the math, I think the main focus of the site got lost in the chaos. You’re ultimately responsible for making sure they really get it – and that may mean that you have to gloss over specific questions a bit to make time for explaining your overall strategy and business plan.
Overall, the weekend was a hugely positive experience. We made some mistakes in our interview, but now we know more about pitching to investors. Regardless of the potential misunderstandings about Seekler, YC gave us some great advice which will undoubtedly make Seekler better going forward. We got to meet some incredibly smart people who have inspired us to quit our jobs and start Seekler. And they said we could continue to send them updates, so hopefully we can benefit from their experience even though we won’t be going to the Valley.
Congratulations and the best of luck to all the teams that got funding!

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Closing the deal: Lessons from selling a website

August 28, 2007

We closed our first round of funding without giving up any equity as we mentioned in our last post, “why sell a profitable website?” After the sale, our company is financially set for at least awhile, so what did we learn? We learned why everyone says getting funding and closing the deal is so hard. In the end, we think it was worth all the trouble but that doesn’t change the difficulties of closing a deal.
“In the startup world, closing is not what deals do. What deals do is fall through. If you’re starting a startup you would do well to remember that.”
Paul Graham
Selling an asset turns out to be very much like the way Paul Graham describes getting VC or angel investments. It takes a lot of time and work. In the end, we were in and out of talks to sell our site for over three months before we had a check in hand. The deal almost fell through multiple times, in which case not only do we not get the investment, we lose all the time we spent pursuing this deal. That is a scary thought when you’re a bootstrapping startup.
The point Paul Graham makes is that the negotiation never stops until the closing. This hit close to some of our struggles with completing this deal. After a verbal agreement was made, we wanted nothing more than getting back to full time work on our new product Seekler. In fact for awhile we stopped taking on new advertising contracts (not wanting them to complicate the terms of the sale agreement) which turned out to be a mistake, wasting time and losing out on additional revenue. Unfortunately, as some delays to closing came up we realized we needed to make some final improvements on the old website to close the deal. In the last few weeks we put more time and focus back into the old site – increasing traffic, fixing bugs, pursuing additional revenue streams (renewing contracts we had been delaying), and improving the site’s visibility on search engines. After this push to really hit the value of the deal home, we found the legal documents getting pushed around quickly to finish everything up. We learned not to delay any contracts, revenue, or slow down the development until you have a fully signed legally binding deal in hand.
With ink on a few pieces of paper, Pretheory has at least jumped from small losses to a funded start up. We are risking a small but steady income for the chance at solving a far larger and more interesting problem at Seekler – collecting and sorting the world’s opinions on everything.

Why sell a profitable website

August 27, 2007

It isn’t time to start celebrating (Pretheory doesn’t have assured success yet) but we have closed our first round of funding. The best part of us closing this deal is that we got to keep all our equity and secure funding that should ensure a beta release. After our beta release, it is likely we might have to start seeking funding again if we see the chance for rapid growth. That said, it is nice to know that our company will have enough money to at least bring the initial version of our vision to the market.
How does a startup acquiring funding without giving up equity? We didn’t take loans, beg family, or empty our retirement accounts (although up to this point, we have been self funded from our savings). Instead, we sold a small website that we have been slowly making money from for awhile. We found a company that was interested in growing and expanding in that market. So we sold the asset for the revenue it would make over a couple years to get access to that money now.
Since we started, Pretheory has run a older website because it made us a profit. When we began negotiations for selling the site, many people questioned our motivation to sell a small and profitable website that takes relatively little time to manage. In a future post we will explain about negotiating and closing the deal. Here we will focus on why we sold our site in the first place.
The site didn’t take much time to manage, but did require more task switching. If your trying to keep an entire program in your head, it becomes much harder when you have to switch to another task for 30 minutes a day. Task switching can hurt your productivity even more when the time of the switch isn’t always in your control. Sometimes meetings about the site, traffic spikes, or interviews would occur in the middle of the day. Many problems that arise on a site need to be dealt with quickly. Being able to properly focus on a problem is a major gain for a small team that already has to work on many different tasks infrastructure, marketing, application code, and others.
Selling the site also makes sense for us financially right now. The site does make money, but not enough to maintain a company. If we want to succeed as a company we need to focus on something with a larger potential profit. If we could make a decent amount of money from this site, but it would take years to amass a significant sum. There are many advantages to selling the site to get access to the majority of that amount now. We have costs related to developing and releasing our new product Seekler, and getting the funding to get it to market the way we would like as soon as we can could be a huge advantage. The financial growth of the old site was rather limited, even if we worked to expand the site’s offerings, while our new product has a far larger market potential.
While it might seem scary to give up our only current source of income, you can’t create the future when you’re holding on to the past.

No dice

April 11, 2007

Unfortunately, our proposal was rejected by TechStars and Y Combinator. We wish those who were selected all the best. And thank YC and TS for considering our app. Now, we’ve got a lot of work to do…

Applications suck

March 28, 2007

Sorry for the lack of posts, but we’ve been spending a lot of time writing our applications for Y Combinator and Tech Stars. Paul Graham is right – writing is harder than programming. Or at least less fun and more exhausting.
We’re very glad to be done so we can focus on programming again. We obviously really hope to get into a program, but, even if we don’t, writing the application was definitely valuable. We ended up talking a lot about the details of our idea, and I feel like we both have a much better picture of our goals as well as the problems we face.
A word to the wise: look for word-count limits before you write essays. We had copy/pasted the YC application questions into Google docs initially, to make it easy to collaboratively edit the answers. After we had written the app and were ready to paste it back into the web form, we noticed the instructions requesting all answers to be under 120 words. Whoops.
It definitely took us some extra time, but I’m making myself feel a little better by convincing myself we got better answer this way. It’s kind of like sketching something that’s going to be cropped – you’ll get a better drawing if you can continue drawing off the borders and then crop afterward instead of stopping your pencil right at the border. Plus, if we get an interview, we can talk about interesting stuff that didn’t make the final cut for the application.

Y or Y not?

March 14, 2007

Ever since my co-founder and I went to startup school last year, we’ve been talking about how cool it would be to get accepted into the Y Combinator program. For those of you who don’t know, YC is a company that funds very early stage software startups. I stress the “very” in “very early” – YC prefers that the companies they fund aren’t even legally formed yet. YC picks a handful of these companies, give them each roughly $15,000-$20,000 (depending on the number of founders), and has all the founders to move out to either Cambridge, MA or the Bay Area. For the next three months, YC mentors the startups, has speakers come in weekly to give talks, and helps them make connections to investors. In exchange, each company gives up roughly 6% of their stock. That’s a very summarized version of what goes on, but trust me, it’s very cool.
Sounds like a perfect fit for us, right? Well, sort of. It turns out that our timing isn’t the greatest. YC takes applications twice a year – once in the summer and once in the winter (founders to go Cambridge in the summer and the Bay Area in the winter). Last winter, we were not ready to start the company, for a bunch of reasons I won’t get into. But now, we’ve been working on the company for several months and have enough money to fund ourselves for awhile. We already have started to develop connections and could pretty much form the company next week if we wanted. So while I think YC is a great opportunity for a lot of companies, we’re really not sure if it’s the best option for us.
Before I get into the details: this post isn’t supposed to be pro-YC or anti-YC. Your decision should be context-sensitive. But I’ll outline some of the stuff we considered. And remember that not all pros/cons are worth the same. I’m not sure I can attach a number to each one, but some of them are weighing much more heavily on our mind than others. The weights you apply will also differ depending on your situation.

YC
Decision Factors (partially specific to us)
Pros Cons Questions
– Work environment
– YC Advice
– Networking
– Free press
– Money is nice
– Giving away equity
– Money isn’t crucial
– Lose valuable time
– Poorer social scene
– Girlfriends?
– Travelling?
Big question: How
much will YC help us, and is it worth it?

Let’s start with the positives.
I mentioned that all the founders move out to the same city. While they are there, they get tons of mentoring from YC as well as weekly speakers who are generally rock stars of the startup/software world. Since all the founders are in the same city, they try to get a lot of interaction and knowledge sharing between the founders.
There’s a couple of great thing here. First of all, being in Cambridge with other founders sounds like the best work environment I can imagine. I know that personally, I do my best work when surrounded with smart people who are working hard. Ideas flow easily, and my friendly competitiveness comes out. Being around smart people just makes me smarter and it’s a lot of fun, too.
Plus, the advice from the YC guys would be invaluable. My co-founder and I are not businessmen. We’re programmers. So, although we have been, and will continue to, learn as much about the business side as we can, it would be great to have advice from people who have started companies. We could save a lot of time not making dumb mistakes if other people are there to point those mistakes out.
Then there is the networking. We’ve already spent a lot of time looking at banks and lawyers, and we’ll need to spend even more looking at graphic designers, marketing people, accountants, and investors. YC can help with a lot of that, because they already have those connections and know good people. Its a few less things to worry about (so we can focus on actually, you know, writing code).
Besides the networking to the business community, we’d also get to know the other founders, who are sure to be a great group of smarter-than-hell people. Not only is there knowledge sharing while at YC, there is the possibility of knowing someone that you can hire (or might hire you) in the future.
Finally, since YC is so well known in the startup community, we’d get a ton of exposure just by being accepted. It would be amazing to get a ton of potential users (turning them into actual returning users obviously depends on how good our code is) without spending a dime on marketing.
But it’s not all positive.
For starters, we’d be giving away 6% of our company, which is 6% that we can’t give to any other investors. If we’re intent on keeping some percentage of our company, giving away 6% at this stage just makes that harder.
And there’s the $15,000. To start with, that money isn’t worth nearly as much in Cambridge as it would be in Denver. Plus, we’re likely going to have to spend at least $1500-2000 just to move out there from Denver (and another $1500-$2000 if we want to move back).
For some companies, the money that YC gives is the majority (or even all) of their money (at least at the time they get accepted). This makes YC more attractive, because without YC, the company wouldn’t be able to exist. The YC money makes a huge difference, because it gives them time to build a prototypes and gets them to the next round of funding.
But for us, this wouldn’t be true. We’ve been working the past year to put away a lot of money to fund our startup. I’ve already quit my job and my co-founder is putting in his notice today (congrats, man!). The YC money, while nice, doesn’t really allow us to do anything we can’t do with our own savings. We’ve already started. We could build a prototype on the money we have. And we’re still going to need another round of funding in the next 6 months to a year, regardless.
We also need to think about time. I’m not so worried about wasting time on the application – the application has great questions which we need to be answering now, regardless of whether or not we’re applying to YC. But, the move to Cambridge will be a disruption – probably 2-3 weeks worth, for both of us. That’s quite a bit of time that could be used to write code.
Socially, it’s going to be hard to leave Denver. It’s pretty hard to meet friends when you’re working you ass off at a company that only has two people (you’re certainly not going to meet anyone new at the office). But since we already have a group of amazing friends here in Denver, it’s not a big worry.
In Cambridge, it’s a different story. Yeah, we know a few people, but with our insane work hours and limited social sphere, I’m guessing we’re going to be pretty hard pressed to find friends in the few hours that we take off.
When I was going off to college, I was trying to decide whether to stay in a party dorm or a quiet dorm. Someone gave me following advice: “You can always leave to study.” And they were right – it was easy to leave the dorm to get work done. And when I needed a break, it was really easy to find someone who was up for some fun. The opposite situation doesn’t work so well. I expect to be working insane hours for the startup, but I don’t want to spend my free time looking for friends. I want to be spend them actually having fun.
Finally, there are some things that are neither pros nor cons, but just questions. My co-founder has a serious girlfriend. How is the move going to affect them? I have a good friend getting married in August and a family trip around the same time. Will I need to skip those?
That’s my best attempt at capturing all the jumbled stuff we wrote on our whiteboard about this. A lot of it is just gut feeling stuff, but, being nerds, we did try to formulate some of the biggest questions mathematically.
First, the way we look at the YC deal is this: we give away 6% of the company to get $15000 + x, where x is the sum of
a) The amount of money we’d spend on a marketing campaign to draw an equivalent number of users to our site
b) The money we’d waste on dumb business mistakes that the YC guys could have pointed out
c) The additional time we’d spend finding employees, investors, advisors, board members, lawyers, accountants, etc., over and above what we would have spent if we had access to the YC network (to make the units work, we have to convert time to money using some estimate of our hourly rate)
The question is: what is the value of x? I really have no idea, since I’m so new to this whole startup thing. But in theory, the YC guys, or the companies who have been funded by YC, should have some idea about this, at least enough to give a ballpark answer. It’s something we’d like to ask if we get past the first round.
Secondly, how much will getting YC funding increase our chances of success? We’re going to make this startup thing work with or without YC, but I’m all for making it a bit easier.
Unfortunately, this one is also hard to answer. There’s probably some data (I have yet to really search for it) about the number of startups that fail or succeed. Unfortunately, there probably isn’t very good data about the number of YC companies that fail or succeed, simply because they haven’t funded companies long enough to really get an accurate idea. Yes, Reddit got acquired, and there have some other successes, but as for the rest of the companies, it’s not clear whether they are going to make it or not. We may not know for another few years still.
Really, looking at it now, the first question is just a way one way to approach answering the second question.
Of course, even if we decide that YC would be great for us, there’s still the little problem of actually, you know, being accepted. But we want to feel strongly about doing it if we’re going to submit our application. I think a pretty good metric is whether or not we’d spend a few hundred dollars to fly out for the weekend to meet with the YC guys (they have the finalists out for a weekend before deciding, but only reimburse 500 per group, which would not cover us both going. This is almost certainly by design – its enough money that pretty much any team can make it, but it’s not all expenses paid, so as to weed out those who aren’t really serious).
The application is due April 2nd. Like I said earlier, I think filling out the application is useful just to make us answer some hard questions about our business. We’ll be thinking hard about whether or not we want to submit it, and if we do, what to do between now and the YC decision in order to make sure we don’t lose momentum either way.
At this point, we’re leaning strongly towards going for YC, but we want to make sure we’re really thought it out. I’m sure that there are hundreds of other teams applying for YC funding. At least some of those must be in somewhat similar situations. How did you decide? Any angles we haven’t considered?