20VC How Investors Can Get Into The Best Y Combinator Startups & How YC Startups Should Choose The Right Investors with Jared Friedman, Partner @ YC

Summary Notes


In this episode of "20 minutes vc," host Harry Stebbings interviews Jared Friedman, a partner at Y Combinator (YC), to discuss the intricacies of Demo Day and the strategies for both startups and investors to thrive. Friedman, a co-founder and former CTO of Scribd, shares insights on YC's unique approach to investing, emphasizing hands-on engagement with startups rather than traditional investment models. He clarifies misconceptions about fundraising at Demo Day, noting that the majority of companies are still seeking investments at that stage. Additionally, Friedman outlines the competitive nature of invitations to Demo Day, based on past investor behavior and contributions to the YC ecosystem. He also introduces Investor Day, an innovation to facilitate efficient investor-founder meetings, and touches upon his personal transition from an operator to an investor role.

Summary Notes

Introduction to the 20 Minute VC Podcast

  • Harry Stebbings hosts the 20 Minute VC podcast from San Francisco.
  • He promotes his Snapchat account, H Debbings with two b's.
  • The episode features Jared Friedman, a partner at Y Combinator (YC).

You are listening to the 20 minutes vc with me, your host Harry Stebings presenting today from sunny San Francisco, and you can see more from me on Snapchat at H Debbings with two b's.

This quote introduces the podcast and the host, Harry Stebbings, while also providing his Snapchat handle for listeners to follow for more content.

Y Combinator and Jared Friedman's Background

  • Y Combinator is a highly successful accelerator with notable portfolio companies.
  • Jared Friedman was the co-founder and CTO of Scribd before joining YC.
  • He is also an angel investor with investments in companies like Instacart and Cruise Automation.
  • Special thanks are given to Eric Tornberg for introducing Jared to the show.

Now Jared is a partner at Y Combinator, the world's most successful accelerator with portfolio companies including the likes of Airbnb, Dropbox, Stripe, Zenfits, Twitch.

This quote provides context on Jared Friedman's current role and the success of Y Combinator, highlighting its impressive portfolio of companies.

Foundersuite and Greenhouse Software Promotions

  • Foundersuite is a CRM for raising startup capital with a large investor database.
  • Greenhouse Software helps companies hire great people with its applicant tracking system.
  • Special promotional offers are provided for podcast listeners.

Foundersuite makes the leading CRM for raising startup capital. Since March of 2016, Foundersuite customers have raised over $130,000,000 in seed and venture capital.

This quote explains the purpose and success of Foundersuite, emphasizing its relevance to startups looking to raise capital.

Jared's Journey to Y Combinator

  • Jared started his career when YC was not well-known.
  • He joined YC's third batch in 2006 as a college undergrad.
  • His company, Scribd, grew to be successful with over 100 employees.

I did Y combinator as a founder in the third batch of Y Combinator right after it had been founded, all the way back in 2006.

Jared describes his early involvement with Y Combinator and his experience as a founder, which laid the groundwork for his later role as a partner at YC.

Mindset Shift from Founder to YC Partner

  • Jared discusses the transition from being a founder of Scribd to becoming a partner at YC.
  • He explains that YC is not a typical investment firm and is unique in its operations.

So the thing is that Ycominator is not a typical investment firm, and we don't really think of ourselves as investors.

In this quote, Jared emphasizes the distinctive nature of Y Combinator and how it differs from traditional investment firms, impacting his mindset shift.

Y Combinator's Demo Days

  • The podcast aims to focus on YC's demo days and the process for new investors to attend.
  • YC operates on a batch schedule with two batches of startups per year.
  • The culmination of each batch is a demo day where startups present their progress.

We run two batches of startups a year, and the end, the culmination of the batch, is what we call a demo day, when all of the startu

This partial quote introduces the concept of Y Combinator's demo days and their significance as the finale of each startup batch cycle.

Investment Opportunities at Y Combinator's Demo Day

  • Demo Day is the prime event for investing in Y Combinator startups.
  • A large number of investors can invest in top YC companies during this event.
  • It takes place at the Computer History Museum in Mountain View, Silicon Valley, and lasts three days.
  • Investors are advised to block off a full week to accommodate post-Demo Day investment activities.
  • Investing at Demo Day is considered a gamble with a positive expectation due to historical data showing profitability even with random investments in YC companies.

"After Demo Day, the best ones generally go on to become very successful, and it's only the top tier institutional OBCs that have access in them. But at Demo Day, there's this window of opportunity where a large number of investors have a good shot of investing in the top YC companies."

This quote emphasizes the exclusivity and potential success of YC companies post-Demo Day, highlighting the unique opportunity for a broader range of investors to participate during the event.

Misconceptions about Demo Day Fundraising

  • There's a persistent rumor that it's too late to invest in companies at Demo Day.
  • Only a small percentage of companies finish fundraising before Demo Day.
  • The majority of companies are still open to investment during Demo Day.
  • Companies with term sheets may still be seeking better offers.
  • Y Combinator advises startups not to raise money before Demo Day.

"Today, 100 companies will present at Demo Day, and probably only two or three of them will be done fundraising before. So 98% of them are still fundraising at Demo Day and are open to investment from any qualified investors."

This quote clarifies that the vast majority of companies presenting at Demo Day are still in the fundraising process, debunking the rumor that it's too late for investors to get involved.

Investor Selection and Behavior at Demo Day

  • Y Combinator is selective about which investors are invited to Demo Day.
  • There are limited physical seats available, and demand far exceeds supply.
  • Investors who have historically performed well and behaved responsibly are more likely to be invited back.
  • Responsible behavior includes being honest, upfront, and responsive to founders, regardless of investment decisions.

"The actual invitations to the in-person demo day are quite competitive. We only have about 500 physical seats in the auditorium and we have demand for ten times that many."

This quote highlights the competitive nature of invitations to Demo Day due to limited seating and high demand, indicating the exclusivity of the event for investors.

Advice for Investors and Founders at Demo Day

  • Investors must act quickly to secure deals at Demo Day.
  • Traditional due diligence processes may be too slow for the pace of Demo Day.
  • VC firms are encouraged to adapt their investment decision processes for the event.
  • Founders have a variety of investors to choose from and should select wisely.

"The first thing is you have to move fast. There are many investors who are used to taking their time with due diligence, which might be fine in other circumstances, but it simply doesn't work at Demo Day because there's so much activity happening."

This quote advises investors on the need for speed in decision-making during Demo Day, due to the high level of activity and competition for investment opportunities.

VC Investment Decision Speed

  • VC firms in Silicon Valley have adapted their processes to make faster investment decisions.
  • A special partners meeting is created just for Demo Day to review deals quickly.
  • Having all decision-makers in one meeting accelerates the process and avoids follow-up meetings.

"Therefore, many of the best VCs in Silicon Valley have created a special partners meeting to review investment deals just for Demo Day...just have all three decision makers in the room so you can make a decision after the first meeting."

This quote highlights the strategic change implemented by VCs to streamline decision-making by having all necessary partners present in initial meetings, thereby expediting the investment process.

Jared Friedman's View on the VC Ecosystem

  • Jared considered joining VC firms after leaving Scribd but preferred a hands-on approach with early-stage companies.
  • Working with Y Combinator allowed him to be both hands-on with founders and an investor.

"But to me, I really loved working in a very hands-on way with early stage companies...And YC was that unique organization that enabled me to continue to work in a very hands-on way with new founders and still to be an investor."

Jared expresses his passion for direct involvement with early-stage companies, which influenced his decision to join Y Combinator over entering the VC ecosystem.

Perspectives on Other Accelerators

  • Jared respects many people running other accelerators, especially those encouraging entrepreneurship in developing countries.
  • He recommends founders to participate in the programs they find most beneficial if Y Combinator is not an option.

"I particularly enjoy traveling around the world and meeting the accelerators who are working in developing countries to encourage entrepreneurship...And I think they're all doing great work and I would encourage people, if they don't get into Y Combinator, to do whatever programs they feel will be most helpful for them."

Jared acknowledges the positive impact of various accelerators worldwide and advises founders to seek out the best fit for their needs, even if it's not Y Combinator.

Scalability of Demo Days

  • The amount of funding available scales with audience size, but investor patience for presentations is limited.
  • Almost all companies presenting at Demo Day successfully raise follow-on funding.
  • Y Combinator innovated with Investor Day to address the bottleneck of too many presentations.

"So the actual funding is more scalable than investors patience...And so in terms of the actual funding results, they're very positive. Almost all the companies who present at Demo day do raise follow-on funding, but we are running into the limit of how many presentations people are willing to sit through."

This quote discusses the challenge of scaling Demo Day presentations due to the finite patience of investors, despite the scalability of funding, and highlights the overall positive funding outcomes for presenting companies.

Introduction of Investor Day

  • Investor Day was created to facilitate efficient meetings between companies and investors.
  • It reduces logistical challenges by having all meetings in one location.
  • The scheduling system is based on mutual preferences of investors and companies, using an algorithm similar to medical residency match programs.

"So we created this new event called Investor Day, where we do 20 minutes meeting slots...we took a page out of a similar system which is used for matching medical residents with residency programs in the US."

The introduction of Investor Day is explained as a solution to streamline the post-Demo Day meeting process, inspired by the medical residency matching system, to optimize meetings based on mutual interest.

Top Investor Choices

  • Brand name investors are often at the top of the choices for companies.
  • The ranking and matching system reflects the preferences of both investors and companies.

"It's largely who you would think. Brand name investors that we've all heard of."

This quote indicates that well-known, reputable investors typically rank highly in the preferences of companies seeking investment during Y Combinator's Investor Day.

Venture Capital Investment Strategy

  • Companies should not overly favor large firms with high brand recognition.
  • A diverse mix of traditional venture firms, seed firms, and angel investors is recommended for startups.
  • Large firms often have lower acceptance rates, which can leave companies without investment if they focus solely on them.

"We do tell companies not to favor firms too much and to make sure that they select a lot of angel investors in their top choices."

This quote emphasizes the advice given to companies to diversify their investor outreach beyond just large, well-known venture capital firms.

"And because the largest firms have the greatest brand recognition, there's a tendency for companies to want to meet with brand names."

This quote highlights the common inclination for startups to seek out big-name firms due to their reputation, which may not always be the best strategy.

"And we found that that is actually suboptimal for them because those firms have a low acceptance rate."

The quote explains that focusing on large firms can be disadvantageous due to their lower likelihood of accepting investment proposals.

Personal Preferences and Insights

  • Jared Friedman's favorite book is "Sapiens," which offers a new perspective on human civilization and evolution.
  • Reading "Hacker News" is a preferred way for Jared to stay informed about startup-related topics.
  • Jared's recent angel investment in Starcity was motivated by the potential to address San Francisco's housing crisis and the opportunity for significant financial returns.

"Favorite book recently is a book called Sapiens, which is the history of human civilization and evolution."

Jared shares his favorite book and implies that it has significantly influenced his worldview.

"Honestly, I spend most of my time reading hacker news, which, in my opinion, does a pretty good job of bringing the best startup related posts to the top."

Jared reveals his primary source for staying updated on startup news, suggesting its effectiveness in curating high-quality content.

"My most recent angel investment is in a YC company called Starcity, which is doing low cost housing in San Francisco."

This quote provides insight into Jared's investment choices, highlighting his interest in both profitability and social impact.

Y Combinator (YC) Experiences

  • The YC fellowship revealed a global desire for Y Combinator-style accelerators in other countries.
  • Being a YC partner allows Jared to engage with numerous innovative ideas, though it limits the time spent on each.
  • Y Combinator's seasonality was an unexpected aspect of working there, with periods of high activity followed by downtime.
  • The selection process for YC's next batch of startups is completed well in advance, allowing for preparation before the batch starts.

"Biggest learnings from the YC fellowship is that there is overwhelming desire around the world for people to do Y combinator in their own country."

This quote reflects the international demand for startup accelerators similar to Y Combinator.

"Biggest pro is being able to work on a huge number of incredibly cool ideas and to go to sort of jump from idea to idea."

Jared discusses the advantages of his role at YC, which includes exposure to a wide array of innovative concepts.

"One of the biggest surprises is what it's like to work at a company that is seasonal."

The quote conveys Jared's realization of the unique work rhythm at Y Combinator due to its batch-based operation.

Industry Tools and Resources

  • Foundersuite is a CRM for raising startup capital, with a large database of investors.
  • Greenhouse offers an applicant tracking system to help companies make better hiring decisions.
  • These tools are used by startups in major accelerators and can contribute to their success.

"Foundersuite customers have raised over $130,000,000 in seed and venture capital."

This quote highlights the success and utility of Foundersuite for startups seeking funding.

"Greenhouse currently works with over 1500 of the world's most innovative companies, such as Airbnb, Slack, Snap Inc. And Lyft."

The quote showcases Greenhouse's credibility and its adoption by leading companies in various industries.

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