20 VC 075 Y COMBINATOR WEEK Kirsty Nathoo, CFO @ Y Combinator

In this episode of "20 Minutes VC," host Harry Stebbings discusses the influential role of Y Combinator (YC) with its CFO, Kirsty Nathoo. Kirsty details her journey from PwC in Cambridge to becoming the financial backbone of YC, the world's most successful accelerator, known for backing companies like Dropbox and Airbnb. She also highlights the importance of team dynamics over ideas in startup success and addresses common fundraising mistakes, such as overvaluing capital raised. Furthermore, Kirsty touches on the evolution of YC, its expansion plans, and how it continues to support startups through mentorship and financial guidance, emphasizing the necessity of proper fund allocation and the potential of biotech investments to change the world.

• Y Combinator is the world's most famous accelerator, home to companies like Dropbox, Reddit, Airbnb, Stripe, and Zenfits.
• Kirsty Nathoo is the CFO at Y Combinator and is considered the financial brains behind the operation.
• She manages Y Combinator's internal finances and assists startups with financial matters like outside financings, tax issues, and incorporation.
• Kirsty's importance is highlighted by YC partner Hajj Tagar, who stated that without her, YC would cease to operate.

"CFO at YC, Kirstie holds the keys to the kingdom, literally. Not only does she control and manage Y Combinator's internal finances, from paying bills to helping organise demo days to actually making sure Y Combinator's money is wired to startups from the proper accounts, but she helps YC startups coordinate outside financings, tax issues, incorporation and other fiscal matters."

The quote highlights Kirsty Nathoo's extensive responsibilities as CFO, which include both managing Y Combinator's finances and supporting the financial needs of its startups.

• Kirsty's move from PwC in Cambridge to CFO at YC was not initially to join a famous accelerator but to take up a role at a lesser-known one.
• She had experience with VC-backed technology companies and startups in the southeast of England.
• Her involvement with YC began through her husband, a YC founder funded in 2008.
• The move to San Francisco was challenging due to the economic collapse at the time.
• Kirsty was hired by the original YC founders who needed help as the organization was growing and becoming more complex.

"I had the necessary skills, and I was ready to jump on an aeroplane and move over there to start."

This quote explains that Kirsty's skill set matched the needs of Y Combinator at a time of growth and complexity, prompting her to relocate to San Francisco to join the team.

• Upon joining YC, Kirsty was responsible for finance and various other tasks like event management and operations.
• She was given immediate control over all the bank accounts and access to everything, which fostered a strong sense of trust.
• As YC grew, Kirsty was able to focus solely on finance by delegating other responsibilities to new teams.

"It was incredible how much trust was placed in me straight away. I had control over all the bank accounts. I had access to absolutely everything."

The quote emphasizes the immediate and complete trust Y Combinator placed in Kirsty upon her arrival, giving her full access to the financial aspects of the organization.

• Kirsty witnessed Y Combinator's growth from 26 companies in her first batch (winter 2010) to 114 companies in a later batch.
• The growth of YC and startups, in general, has been unexpected, and it's debated whether YC is the cause or effect of this trend.
• Startups have become more acceptable, and YC's expansion is partly due to having more partners and bandwidth to support more companies.
• YC started as a small family business and has evolved into a larger operation with a broader impact.

"Well, the first batch that I was involved in was winter 2010, and that had, I think, 26 companies in it. So now our last batch we had 114 companies. So it's grown beyond recognition."

This quote provides a perspective on the scale of growth at Y Combinator from Kirsty Nathoo's early days to the present, illustrating the accelerator's significant expansion.

• Y Combinator (YC) started with a different mindset, focused on helping startups.
• The organization's aim shifted to helping the world by supporting startups to achieve remarkable feats.
• Under Sam's presidency, YC accelerated growth and diversified its intake of startups.
• YC now includes hardware and biotech startups and runs the YC Fellows program for early-stage startups.

"So then as we started to grow and take more partners in the mindset and the aim of the organization became very different. And now our aim is to basically help the world by helping startups to do amazing things."

This quote emphasizes the evolution of Y Combinator's mission from its initial focus to its current broader goal of global impact through startup support.

• Kirsty Nathoo, as CFO, recognizes patterns in what investors and VCs expect from startups.
• Investors prioritize team dynamics, determination, and resilience in startups.
• Early-stage company evaluation focuses on the team more than the idea or market, as ideas and markets can change, but team dynamics are more stable.

"Are the team very close knit? Do they know each other well? Are they determined? We don't want them to give up."

This quote underlines the importance of team cohesion and determination as critical factors for investment consideration, highlighting that a strong team is crucial for overcoming challenges.

• YC's interview process varies significantly with each candidate, focusing on the startup's specific context.
• Interviews aim to understand the startup's potential for growth, customer acquisition, and market demand.
• A successful indicator in an interview is learning something new from the founders.

"The kind of questions you're going to ask a company who is working on trying to discover a cure for cancer is very different to the kind of questions that you're going to ask a company who is doing the latest social network."

This quote illustrates the tailored approach to YC's interview process, which adapts to the unique aspects of each startup's industry and objectives.

• Startups often struggle with knowing when to stop fundraising.
• Founders mistakenly equate fundraising with success, leading to overemphasis on raising funds instead of product development.
• A successful raise is context-dependent, and founders should focus on using the funds to build and grow their product.

"But what the founders do and hear, or don't hear maybe, is they see fundraising as a sign of success."

This quote captures the common misconception among founders that raising more money is a measure of success, rather than the actual progress and growth of their product.

• Founders should have multiple plans (A, B, C) for different fundraising outcomes.
• The right amount to raise depends on the startup's current needs and growth trajectory.
• Fundraising is not a competition; efficient use of funds is more important than the amount raised.

"We always say to our founders, have sort of a plan a, a plan b, and a plan c, and if you raise a small amount of money, this is what you'll do with it."

This quote advises founders to be strategic in planning for various fundraising scenarios and to focus on the efficient allocation of resources to achieve growth milestones.

• Companies that reach profitability are in a strong position, attracting investor interest.
• Founders often compare themselves with other companies, feeling like failures if they haven't raised as much money.
• The amount of additional funding needed to reach profitability varies greatly among companies.

"But the founders definitely compare themselves to each other and see it as they're failing if they haven't raised much money."

This quote highlights the psychological pressure founders feel to raise funds and the tendency to compare themselves to their peers, viewing their fundraising efforts as a measure of success.

• YC provides a "seal of approval" for companies, which is not necessarily a ticket to easier fundraising.
• YC helps companies with their business questions and problems, offering continuous support.
• Investors conduct their own due diligence despite the YC badge.
• YC educates founders on the impact of valuations on their capitalization table.
• Founders sometimes competitively seek higher valuations, influenced by others' fundraising caps.

"I think what YC does give these companies is it gives them a seal of approval."

This quote explains that YC's endorsement serves as a form of validation for companies, which can be beneficial in the fundraising process.

"We're trying really hard to make the founders see that actually the cap is not something that drives the dilution as much as the amount they actually raise."

Kirsty Nathoo emphasizes YC's effort to educate founders on financial aspects of fundraising, specifically how valuations and capital raised affect company ownership.

• YC takes the responsible use of investor money very seriously.
• Founders are expected to use funds to grow their business, not for inappropriate expenses.
• YC has encountered and addressed instances of misuse of funds.
• There are clear business expenses and grey areas, such as living in an apartment that also serves as an office.
• Founders are encouraged to pay themselves at least a minimum wage to avoid legal issues and use personal funds for non-business expenses.

"We drill into the founders many times that this is not their money."

Kirsty Nathoo underscores the importance of founders recognizing that investor funds must be dedicated to business growth, not personal use.

"Everybody must be paid a minimum wage."

This quote stresses YC's advice to founders to pay themselves and their employees at least the minimum wage to avoid potential legal disputes and ensure personal expenses are covered separately from business funds.

• Setting up payroll and filing tax returns are critical external reporting requirements for a new company.
• Founders must be aware of internal financial metrics: cash on hand, runway, growth rate, and burn rate.
• Founders should have tools to report and know these internal metrics daily.
• Internal reporting varies based on the company and is essential for financial health.

"The two main things are setting up payroll and making sure that you get tax returns filed."

This quote emphasizes the importance of payroll setup and tax compliance as foundational financial tasks for a startup.

"The founders should be able to tell off the top of their head at any one time how much money they have in the bank, what their Runway is, what their growth rate is, what their burn is."

This quote underscores the necessity for founders to be constantly aware of their company's key financial indicators to manage their business effectively.

• YC is continually exploring new programs and growth opportunities, such as the YC fellows program.
• YC's scalability and potential expansion into markets like China and India are under consideration.
• The focus remains on excelling at what YC does best: selecting and nurturing top companies.

"No comment. Unfortunately, there's a lot of new things going on."

Kirsty Nathoo chooses not to disclose information about future funding rounds, hinting at ongoing developments within YC.

"We think about China and we think about India a lot."

This quote indicates YC's interest in international markets, highlighting the organization's strategic considerations for expansion.

• Founders should listen to advisors but ultimately make their own decisions.
• Selecting VCs for demo days involves considering past investments in YC companies and giving new investors a chance.
• The biggest challenge for YC is ensuring that top companies continue to see value in joining the program.

"To listen to advisors, but then to make your own decisions."

This quote conveys the balance founders must strike between considering expert advice and trusting their own judgment.

"We have various different ways. One, the most important thing is whether they've invested in YC companies previously."

Kirsty Nathoo explains the criteria for inviting VCs to demo days, with a preference for those with a history of investing in YC startups.

• YC is particularly excited about investments in biotech companies with the potential to change the world.
• Criticisms of YC focusing on less impactful industries are countered by highlighting life-changing biotech innovations.

"It's absolutely fascinating, some of the biotech companies that we're doing."

This quote reflects YC's enthusiasm for groundbreaking biotech startups that have the potential for significant societal impact.

• The most impressive interviews are from founders who can articulate a clear vision quickly and convincingly.
• Kirsty Nathoo is reluctant to single out any one interview as the most impressive, likening it to choosing a favorite child among many.

"The best interviews that stand out for us are the ones where the founders have such a clear vision that they can articulate the answers so quickly and easily."

This quote highlights the importance YC places on a founder's ability to clearly and effectively communicate their vision during interviews.