20VC Garry Tan on The Biggest Takeaways From Advising 700 Companies @ Y Combinator & Why Now Is The Golden Age For The Early Stage

Summary Notes


Harry Stebbings interviews Gary Tan, co-founder of Initialized Capital and former partner at Y Combinator, on the 20 Minutes VC podcast. Gary shares his journey from a Bay Area kid to a prominent figure in Silicon Valley, detailing his early career, co-founding Postorous, and helping build Palantir Technologies. He emphasizes the importance of mission-driven startups and the value of mentorship and community, as experienced through Y Combinator's supportive ecosystem. Gary also discusses Initialized's investment philosophy, focusing on early-stage companies and avoiding the "spray and pray" approach, aiming for meaningful engagement and support for startups. Additionally, he touches on the current investment climate, the trend of delayed IPOs, and the potential impact of the Long-Term Stock Exchange.

Summary Notes

Introduction to Gary Tan and Initialized Capital

  • Gary Tan is the co-founder of Initialized Capital, a prominent seed fund in Silicon Valley.
  • Before Initialized, Gary was a partner at Y Combinator, working with over 700 companies.
  • He has a portfolio that includes Tilt, Eero, Flexport, Lendup, and more.
  • Gary co-founded Postorous, which was acquired by Twitter, and was part of the founding engineering team at Palantir Technologies.
  • He is highly regarded for his contributions to the founder ecosystem.

Now as for Gary, prior to founding initialized, Gary was a partner at Y Combinator, where he invested in and directly worked with over 700 companies in five years from the earliest possible stage. Often just an idea.

This quote highlights Gary Tan's extensive experience in early-stage startup investing through his time at Y Combinator, where he worked with a vast number of companies right from their inception.

Gary Tan's Background and Entry into Startups

  • Gary's entry into the tech industry was somewhat accidental, starting with making web pages in the late '90s.
  • He studied computer science at Stanford, which coincided with the rise of influential software companies.
  • Gary was invited by Peter Thiel to join Palantir Technologies as one of the first engineers but initially declined the offer to stay at Microsoft.
  • He later joined Palantir as employee number ten and was involved in building the Palantir finance product and designing the company logo.
  • Gary's experience at Palantir led him to co-found a company in the blogging space, which was eventually acquired by Twitter.

I was just a Bay Area kid growing up sort of in the shadow of Silicon Valley and I got my first job opening up the yellow pages to the Internet section of the phone book and just started calling to get my first job.

Gary describes his humble beginnings in the tech industry, which started with a proactive approach to finding his first job.

So he was certainly not the billionaire demigod that he is today yet, but everyone knew who he was and knew he was a truly great entrepreneur. So to me it feels very much that opportunity came out to seek me and sometimes as a 23 year old coming around of college who didn't really understand startups at the time, you make the wrong choice, as I did.

Gary reflects on his decision to decline an early opportunity to join Palantir, emphasizing the unpredictability of startup success and the importance of seizing opportunities.

Transition to Early Stage Investing

  • Gary's transition to early stage investing was influenced by his exposure to Y Combinator (YC) as a founder.
  • He observed the value of real talk and trust among batchmates at YC, which contrasted with the superficial interactions at typical networking events.
  • His experience at YC highlighted the importance of genuine support and advice, which is often missing in the broader startup community.

Yeah. So I ended up joining as employee number ten instead about a year later. So they were unsuccessful with me to get me to quit my entry level job at Microsoft, but they were able to get a number of our mutual close friends.

Gary eventually joined Palantir, recognizing the mistake of initially turning down the opportunity and illustrating the importance of being open to revisiting decisions.

And what we got at YC was basically real talk. You and your batchmates were able to actually share what was really going on that day, mainly because you could trust them.

This quote explains the value of Y Combinator's community, where founders can have honest conversations and receive genuine support, which is crucial for early-stage startups.

Y Combinator's Impact on Startups

  • Y Combinator (YC) provides a supportive ecosystem for startups, offering guidance on various challenges.
  • Gary Tan highlights the initial skepticism surrounding YC, which has now evolved into widespread recognition of its value.
  • The concept that "it takes a village to create a great startup" is central to YC's philosophy.
  • Tan credits YC's influence on his success and the success of many other founders.

"And that helped us a ton. Roundabout way of saying basically in 2011, YC was so powerful and valuable for us that when I heard that they were looking for a designer, I just raised my hand and I said, I'd love to help out."

This quote illustrates how valuable YC was to Gary Tan and his decision to contribute to the program, signifying the transformative role YC plays in the startup community.

Transition to Investment

  • Gary Tan transitioned from being an angel investor to a more institutional seed investor with Initialized Capital.
  • He discusses raising a new fund and the excitement around new technological platforms such as AI, VR, and AR.

"So I feel like I lucked into that and along the way became angel investor and then a more institutional seed."

The quote reflects Tan's career progression into institutional investment and his role in supporting startups through Initialized Capital.

Lessons from Past Tech Shifts

  • Gary Tan reflects on the 2004 tech landscape, comparing it to 2016, and shares a personal anecdote about missing an opportunity with Palantir.
  • He emphasizes the importance of focusing on prevailing software platforms rather than chasing new, unproven technologies.
  • Tan sees software's potential to revolutionize late adopter industries, citing examples like Flexport and Bannerman.

"Around that time, I personally went out and sought out a position with mobile devices... But the ironic thing is, in 2004, Facebook was new Facebook. That was the time to continue to invest in the web."

Tan's quote underscores the potential misstep of shifting focus away from dominant platforms too early, using the rise of Facebook as an example of the web's enduring relevance.

The Potential of AR and VR

  • While acknowledging the potential of AR and VR, Tan cautions against investing too heavily in these untested platforms.
  • He uses the example of J2ME and Windows Mobile to illustrate the risk of early leads not translating to success on new platforms.

"And in fact, there are quite a lot of companies that got left behind because they didn't switch to the iPhone platform when it arrived finally in 2009."

This quote highlights the danger of not adapting to new, successful platforms, as evidenced by companies that failed to pivot to the iPhone.

Capital in the Startup Ecosystem

  • Gary Tan disagrees with the notion that there is too much capital chasing too few deals, particularly regarding teams and ideas.
  • He believes that there are many talented individuals capable of creating incredible software and that early-stage investors play a crucial role in guiding these teams.
  • Y Combinator's success stories, like Dropbox and Airbnb, are attributed to the nurturing environment it provides.

"Too much money chasing too few teams and too few ideas. So I disagree on the teams part."

Tan's quote directly challenges the common belief that there is an oversupply of capital in relation to available investment opportunities, especially when it comes to talented teams.

Mega Fundraises and Fund Economics

  • Discussing the trend of mega fundraises by large venture capital firms, Tan points to the delay in IPOs and the influence of buyout and PE funds.
  • He mentions the Long Term Stock Exchange by Eric Ries as a response to this trend.
  • The contraction of public markets and expansion of private markets are seen as significant shifts in the investment landscape.
  • Tan views this as an opportunity for microVCs, accelerators, and YC, as more money at later stages increases the demand for early-stage development.

"The classic series A funds are shifting later... the golden age for the microVC, the golden age for accelerators and for YC, because there's more money at the later stage."

This quote describes the shift in investment stages and the resulting opportunities for early-stage investors and accelerators, emphasizing the changing dynamics of the venture capital industry.

Experience with YC and Takeaways

  • Founders often manage people, ship products, or start companies for the first time at YC.
  • It can take years for companies to achieve product-market fit.
  • With the right mentorship, capital, and support, inexperienced founders can become excellent CEOs and build powerful businesses.
  • The transformation from inexperienced individuals to capable CEOs is a significant takeaway.

"I think the most surprising thing is how long? Well, when you're talking about working with founders who are new, know not only is it often the first time that they start companies, but it's actually the first time they've managed people, sometimes the first time they've ever shipped a product."

This quote emphasizes the inexperience of many founders in YC and the journey they undergo in developing their businesses, which can be longer and more challenging than anticipated.

Commonalities in Successful Teams

  • Successful founders are often driven by a mission originating from personal experience.
  • They aim to address societal needs rather than pursuing money, power, or fame.
  • Personal motivation tied to a mission is a common trait among successful YC founders.

"Usually it's something that comes out of their own personal experience."

Gary Tan highlights that founders who are motivated by personal experiences tend to be more successful, as their commitment is rooted in a deeper purpose.

Investment Strategy and Portfolio Optimization

  • Initialized Capital aims to balance the number of companies they invest in to ensure meaningful engagement without spreading resources too thin.
  • Investing in too many companies can prevent meaningful contribution, while too few investments might miss out on transformative businesses.
  • The goal is to hit major successes like Dropbox or Airbnb through a selective but sufficiently broad investment approach.

"I think that for us, the right trade off is we think that we can work with about 20 companies per year and really spend quite a lot of time with them biweekly to monthly meetings all the way through until they're series a."

Gary Tan outlines Initialized Capital's strategy of working closely with a manageable number of companies to increase their chances of success, avoiding the "spray and pray" model.

Ownership and Collaborative Investing

  • Initialized Capital targets 5-10% ownership in the initial seed round.
  • Collaborating with other investors is preferred, allowing for a diversified investment approach and support for the companies.
  • Sufficient ownership is maintained to remain invested in the company's success and provide ongoing assistance in later rounds.

"5% ownership at the initial check size means that we're usually among the biggest checks in that seed round, if not the biggest, between five."

This quote explains Initialized Capital's investment approach, which involves taking significant but not overly dominant stakes in startups to foster collaboration and maintain influence.

Thematic Investing and Pattern Recognition

  • At the seed stage, it's challenging to rely on patterns due to the early nature of companies.
  • Success in seed investing comes from backing founders first, rather than chasing hot trends.
  • Trends emerge when talented individuals apply themselves to markets with real needs.
  • Personal anecdotes and experiences can inform investment decisions and founder evaluations.

"The hot trends basically happen when smart people apply themselves to an idea or a market that really, really needs what they're building."

Gary Tan argues that chasing current trends is not as effective as investing in founders who are addressing genuine market needs based on their insights and experiences.

Evaluating Seed Companies

  • At the early stage, evaluating a seed company involves assessing the team, market potential, trustworthiness, and supportive investors.
  • These base level questions are crucial for making informed investment decisions in emerging sectors such as cryptocurrency and drones.

"You have to just evaluate a priori, like who's the team? What's the market? Do you trust them? Right? And who's investing in it, and are they going to help?"

This quote emphasizes the importance of pre-assessment in determining the potential success of a seed-stage company, focusing on the team's quality, market opportunity, trust in the founders, and the caliber of investors involved.

Initialized Capital's Vision and Focus

  • Initialized Capital is committed to supporting startups from the zero to 20 employee stage, helping them navigate early challenges.
  • The firm aims to avoid the pitfalls of scaling too quickly and losing the ability to effectively support early-stage founders.
  • Initialized Capital's mission is to create job opportunities and innovative products by helping founders succeed.

"We really should focus on the zero to 20 employee sort of stage."

This quote outlines Initialized Capital's strategic focus on early-stage startups and their dedication to assisting founders during the critical initial growth phase.

Mentorship and Influence

  • Gary Tan cites Paul Graham as his biggest mentor, attributing Y Combinator's success to Graham's straightforward, no-nonsense approach.
  • The mantra "make something people want" from YC is a guiding principle for Tan, influencing his advice to founders and his investment strategy.

"Everything that made YC great really came from Paul and Jessica... Like no BS, no marketing speak. Let's be very straightforward and let's be mission oriented."

The quote reflects on the impact of Paul Graham's mentorship on Gary Tan, highlighting the importance of a clear, honest, and mission-driven approach in the startup ecosystem.

Reading and Learning

  • Gary Tan's favorite book is "Chaos Monkeys," which he appreciates for exposing the lesser-discussed aspects of the tech industry.
  • Jason Lemkin's blog is highly regarded by Tan for its insights into enterprise sales processes, which he finds particularly valuable.

"I think that he just captured the underbelly, the thing that people never talk about."

This quote explains why "Chaos Monkeys" is Gary Tan's favorite book, as it reveals the hidden realities of the tech industry that are often overlooked but critical to understand.

Investment Philosophy

  • Initialized Capital's recent investment in the Long-Term Stock Exchange (LTSE) was driven by Eric Ries's vision to address the systemic issues of information rights and liquidity in Silicon Valley.
  • The investment reflects a belief in tackling large-scale problems with binary outcomes and supporting founders with the capacity to bridge multiple sectors effectively.

"Either Eric is going to go and create something that kills the Nasdaq or the New York Stock Exchange and deeply disrupts it or not."

This quote captures the high-stakes nature of Initialized Capital's investment in LTSE, indicating a binary outcome of profound industry disruption or failure, and the confidence in Eric Ries as a founder.

Acknowledgments and Resources

  • Harry Stebbings expresses gratitude to Judith at Weathergage Capital for introducing him to Gary Tan, enabling the interview.
  • Stebbings promotes Xero, an online accounting software for small businesses, and Pearl Rear Vision, a wireless backup camera system for cars.
  • The resources mentioned, such as blogs, books, and software, are part of the tools and influences that shape the perspectives and operations of early-stage investors.

"A huge hand to him for giving up the time today to be on the show. Also, a massive thanks to Judith at Weathergage Capital for the intro to Gary today, without which we would not have been able to conduct the interview."

This quote shows appreciation for the time and connections that made the interview possible, emphasizing the collaborative nature of the venture capital ecosystem.

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