20VC Y Combinator's New President, Geoff Ralston on The Single Most Important Perspective An Investor Can Provide A Founder, The Biggest Lessons From Working Alongside Paul Graham & Why You Will Lose As An Investor If You Profile Invest

Summary Notes


In this episode of "20 Minutes VC," host Harry Stebbings interviews Jeff Ralston, the newly appointed president of Y Combinator, the world's leading startup accelerator. Ralston shares his journey from creating Rocket Mail, which became Yahoo Mail, to becoming a chief product officer at Yahoo, and later founding the educational technology accelerator Imagine K-12. The conversation delves into the importance of a startup team over the market or product, the counterintuitive nature of startup advice, and the significance of product-market fit, defined by growth and retention. Ralston emphasizes the need for founders to have passion and obsession with their ideas, as well as the ability to dream big and pivot when necessary. The episode also touches on the benefits of convertible securities like SAFEs for startup fundraising and the importance of inclusivity and diversity in the tech industry.

Summary Notes

Introduction to Jeff Ralston and Y Combinator

  • Y Combinator has a new president, Jeff Ralston.
  • Y Combinator is a leading accelerator with a portfolio including Stripe, Airbnb, Dropbox, Coinbase, and more.
  • Jeff Ralston's career began with engineering at 411 and the creation of Rocket Mail, which became Yahoo Mail.
  • He held various roles at Yahoo, eventually becoming Chief Product Officer.
  • Post-Yahoo, he was CEO of Lala, which Apple acquired in 2009.
  • Jeff co-founded Imagine K12, an educational technology accelerator, which later merged with Y Combinator in 2016.
  • Gary Tan and Justin Khan contributed questions for the interview.

"Y Combinator has a new president, Mr. Jeff Ralston. And I've wanted to have Jeff on the show for a very long time now." This quote introduces Jeff Ralston as the new president of Y Combinator, setting the stage for the interview and highlighting his significance in the tech industry.

"Jeff then co-founded one of the world's first educational technology accelerators, imagine K twelve, which funded dozens of Ed tech companies, including class dojo, remind and Panorama Education." This quote outlines Jeff Ralston's contributions to the educational technology sector through Imagine K12, emphasizing his role in supporting innovative companies in education.

Harry Stebbings' Podcast and Resources for Startups

  • The 20 Minutes VC podcast discusses scaling businesses and offers insights from founders and investors.
  • There is no definitive playbook for building a great business, but learning from experienced individuals is valuable.
  • Stripe provides resources and guides for technology companies, including scaling engineering organizations.
  • Intercom offers messaging products to help businesses grow across various stages of the customer lifecycle.
  • Notable statistics include 84% of Y Combinator companies using a messaging or live chat tool choose Intercom.

"But there's no playbook for building a great business. But we can certainly learn from people who've done it before." This quote emphasizes the importance of learning from successful entrepreneurs and businesses as there is no one-size-fits-all approach to building a business.

"Stripe gives you the information you need to start, run and scale a technology company." This quote highlights Stripe as a valuable resource for technology companies, providing guides and information to help them grow.

Jeff Ralston's Path to Y Combinator

  • Jeff Ralston was initially inspired by startups while working at Hewlett Packard.
  • He was enthralled by entrepreneurship courses during his MBA in Europe.
  • After returning to the U.S., he quit his job to start internet companies, leading to the creation of Rocket Mail and its acquisition by Yahoo.
  • He met Paul Graham at Yahoo, who later convinced him to become a partner at Y Combinator while founding Imagine K12.
  • Jeff Ralston has been with Y Combinator for about eight years, following the merger of Imagine K12 with Y Combinator.

"So startups were on my mind a little, I guess. Ironically, when I first came out to Silicon Valley in the early eighty s to work for a company that was anything but a startup, Hewlett Packard." This quote reflects Jeff Ralston's early exposure to the startup culture in Silicon Valley and his initial employment at a non-startup company.

"I quit my job and I started several companies in the Internet space." This quote marks a pivotal moment in Jeff Ralston's career where he fully committed to entrepreneurship by leaving his job to start internet companies.

Boom and Bust in the Tech Industry

  • Jeff Ralston experienced the dot-com crash and the 2008 financial crisis.
  • The dot-com crash seemed inevitable and had a purifying effect by eliminating unsustainable businesses while solid companies continued to grow.
  • The 2008 financial crisis felt different and more impactful to Ralston.

"The 2000 Internet crash felt inevitable. It felt normal. It felt almost clarifying and purifying and good, because there was so much garbage going on and it didn't feel like it mattered in the sense that all of the great services that were being built kept on growing and doing great." This quote captures Jeff Ralston's perspective on the dot-com crash as a necessary correction in the market that ultimately benefited the tech industry by weeding out weaker companies.

"In 2008, that was different for me. It didn't feel i..." Although this quote is incomplete, it suggests that Jeff Ralston had a different, more serious perception of the 2008 financial crisis compared to the dot-com crash.### Impact of the 2000 and 2008 Financial Crises

  • The 2000 crash led to the disappearance of many non-substantial entities.
  • The 2008 crisis revealed significant flaws in the financial system's foundation.
  • The speaker expresses a lack of trust in the financial leaders' understanding and management of the system.
  • Concerns persist regarding current financial practices, such as banks taking on bad debt and loosening regulations.

"In 2000 like anything that was secular, that mattered was impacted by the crash. It felt like a bunch of new things that weren't really real went away in 2008." This quote reflects the speaker's view that the 2000 crash affected significant, real aspects of the economy, while the 2008 crash seemed to target less substantial financial constructs.

"It felt like the very platform on which we built our financial lives was crumbling, or at least had huge flaws in it that I didn't understand or actually really believe were there." The speaker was surprised by the fundamental weaknesses revealed in the financial system during the 2008 crisis.

"I have no reason to believe that that's not still true." The speaker maintains skepticism about the reliability and expertise of financial leaders, suggesting ongoing concerns about the stability of the financial system.

Importance of Founders in Startups

  • The speaker emphasizes the critical role of founders in startup success.
  • Disagrees with the notion that market and product are more important than the team.
  • Believes in the potential of a great team to pivot and find success, even with an ambiguous idea.
  • Cites Uber and Airbnb as examples of companies that succeeded due to great teams despite initial skepticism about their markets.

"I will always pick a great team, assume they'll figure it out or they know something I don't know, rather than a slam dunk idea." Jeff Ralston highlights the importance of a capable team over a perfect idea in early-stage investing.

"Look at that idea in the beginning. Who is going to invest in a company that says, well, we're going to have airbeds that will handle overflows from hotels at like conferences and things like that." The quote exemplifies how a seemingly unimpressive idea like Airbnb's original concept can lead to success with the right team.

Evaluating Founder Profiles

  • The speaker avoids relying on stereotypes when assessing founders.
  • Values founders who are technologically adept and capable of building.
  • Looks for founders who are resourceful, determined, and can potentially lead a billion-dollar company.
  • Considers a founder's past achievements and problem-solving ability as indicators of their potential.

"I don't tend to think in terms of profiles. I think you lose as an investor if you fall back on stereotypes." Jeff Ralston explains that successful investment decisions are not based on founder profiles but on their intrinsic qualities and capabilities.

"I want founders who I can look at and imagine in my mind at the helm of a billion dollar company in the future." The speaker seeks founders with the vision and drive to scale their companies significantly.

The Ten-Minute Decision

  • Human instinct and pattern recognition play a significant role in assessing founders.
  • The Y Combinator interview process involves in-person interactions to gauge founders' qualities.
  • While ten minutes is often enough to make a judgment, additional interviews may be conducted for clarity.

"Jeff, human beings are pattern matching machines. It's what we do." Jeff Ralston acknowledges the innate human ability to quickly assess and recognize patterns, which applies to evaluating founders.

"We sometimes interview people twice because we can't quite get it in ten minutes." The quote indicates that while initial instincts are important, the Y Combinator process allows for a more thorough evaluation when needed.

Identifying the Right Idea

  • Founders should be passionate about their idea to sustain effort over many years.
  • The right idea is one that a founder is willing to dedicate themselves to, potentially for a decade or more.
  • Obsession with solving the problem presented by the business is crucial.

"How do you know when you have the right idea? I guess this is sort of the ultimate question." Jeff Ralston addresses the challenge of determining whether a startup idea is the right one for a founder to pursue.

"Have an obsession for solving the problem that your company is going to solve." The speaker suggests that a founder's obsession with their problem is a strong indicator of the idea's suitability.

Balancing Vision and Market Realities

  • Founders must know when to pivot or quit based on the lack of progress or hope.
  • Persistence can lead to success, but there is also a time to recognize when an idea is not working.
  • Advising founders involves helping them understand when to persevere and when to change direction.

"Paul Graham used to say this in a really blunt way, which is, as a founder, you have two choices, quit or get rich." The quote by Jeff Ralston reflects Paul Graham's stark perspective on the outcomes of a founder's journey.

"I think you pivot or change when you're all out of hope and ideas and you don't have the energy to come up with new ones." This quote suggests that a founder's emotional and intellectual exhaustion can be a signal to consider altering their path.## Decision to Quit or Persist

  • Discusses the internal decision-making process when facing business challenges.
  • Highlights Elon Musk's determination with Tesla and SpaceX as an example of persistence.
  • Emphasizes the importance of internal forces over external in deciding whether to quit.

"You might have to quit. And that's a very internal choice. I remember hearing Elon Musk talk about what it was like for him when Tesla was something like $445,000,000 in debt and the first three launches of SpaceX had blown up, and someone asked him, so did you think about quitting? And his reaction was, God, no, never."

This quote emphasizes the internal conviction and determination to persevere through difficult times, using Elon Musk's experience as an example of steadfast commitment to one's business despite external pressures.

The Role of Belief and Passion

  • Belief, passion, obsession, and energy are essential for overcoming challenges.
  • The ability to pivot and find new ways forward is always present.

"If you have the belief, the passion, the obsession, the energy to do what you need to do."

This quote underscores the importance of having a strong belief and passion for what one is doing, suggesting that these qualities are crucial for navigating through tough situations and finding solutions.

Founder-Investor Engagement

  • Discusses the preferred method of engaging with founders as an investor.
  • Emphasizes the importance of asking the right questions to provide perspective.
  • Recognizes that advisors often know less about the business than the founders.
  • Highlights the role of helping founders dream big and maintain vision.

"I think that my superpower is that I help founders by asking the right questions, or asking them to ask the right questions."

This quote reflects the speaker's belief in their ability to guide founders by prompting them to consider the right questions, which can lead to valuable insights and perspectives.

Product-Market Fit

  • Defines product-market fit and how it is perceived in the industry.
  • Describes a simple test for product-market fit based on effortless growth.
  • Mentions Class Dojo as an example of a product that achieved natural growth.
  • Shares Ushwagar's definition of product-market fit as the intersection of retention and growth.

"Are you growing? Are you growing with no effort at all? Does it just grow because the product solves such an obvious key need that it happens with no effort at all?"

This quote provides a straightforward metric for assessing product-market fit, suggesting that true fit is evidenced by organic and effortless growth due to the product's ability to meet a clear and significant need.

Timing of the First Raise

  • Discusses the timing for startups to raise their first round of funding.
  • Emphasizes raising funds when the opportunity presents itself.
  • Advises founders to raise when they can make a persuasive case for being a billion-dollar company.
  • Highlights the importance of reaching milestones that attract venture capital investment.

"The earliest round you should raise when you can make a persuasive case that you're going to be a billion dollar company."

This quote advises founders to time their initial fundraising efforts around their ability to convincingly project the potential of their company to reach a valuation of a billion dollars or more, which is a key criterion for venture capital investment.

Convertibles and Early-Stage Financing

  • Discusses the creation and purpose of convertible instruments in startup financing.
  • Explains the benefits of convertibles for both founders and investors.
  • Describes the transition from convertible notes to SAFEs (Simple Agreement for Future Equity).
  • Critiques the use of debt models for equity investing and the advantages of SAFEs.

"The great thing about convertibles is it said, forget all that. We're just going to do something super simple. It'll be a three page document. You won't really need a lawyer at all because we're going to standardize in the document."

This quote highlights the simplicity and efficiency of convertible instruments in early-stage financing, which streamline the investment process and allow founders to quickly secure funding and return to building their business.## Understanding Convertible Securities: The SAFE Note

  • Convertible securities are financial instruments that investors use to invest in startups.
  • The SAFE (Simple Agreement for Future Equity) is a popular convertible security.
  • Initially, SAFEs were pre-money instruments with a cap, creating complexity.
  • Founders and investors found it hard to understand the resultant equity and cap table implications.
  • Jeff Ralston created Angel Calc to help with the complexity, but it wasn't fully transparent.
  • Y Combinator introduced a post-money SAFE to improve clarity and simplicity while retaining benefits like speed and cost-efficiency.

"A note is, by definition, debt, but it was a pre money instrument. There's a cap on it because it was pre money, it turned out, and because of the way the safety was defined, the amount of equity that you were actually likely to get from buying this promise of future equity was hard to define."

This quote explains the complexity and confusion surrounding the original pre-money SAFE and its implications for equity distribution, prompting the creation of tools and the eventual shift to a post-money SAFE for greater clarity.

The Importance of Team in Startups

  • Jeff Ralston emphasizes the significance of the team over other factors in a startup's success.
  • The understanding of the team's importance evolved over time and is now a primary focus.

"I wish I knew how much I should pay attention to team versus anything else than as I do now."

Jeff reflects on his past experiences and acknowledges that he now realizes the critical role the team plays in a startup's success, a realization that came with time and experience.

Counterintuitive Advice in Startups

  • Startups often require counterintuitive actions for success.
  • A common analogy compares startups to skiing, where leaning forward down the hill is necessary, despite instincts suggesting otherwise.
  • Big deals with large companies can be tempting but often lead to failure due to an impedance mismatch.
  • Having advisors helps navigate these counterintuitive decisions.

"It's just. Maybe it's because so much of what it is to do a startup is hard along so many dimensions that all those things interact in ways that fundamentally challenge our basic intuitions."

Jeff explains that the multifaceted challenges of startups can lead to decisions that go against basic intuition, requiring guidance and a different perspective to succeed.

The Role of Y Combinator and Silicon Valley

  • Y Combinator focuses on changing the world positively through entrepreneurship and innovation.
  • Jeff Ralston values the relationships and connections made with extraordinary people through YC.
  • He expresses pride in companies that overcome challenges and succeed against expectations.
  • The tech industry and Silicon Valley need to become more open, diverse, and inclusive.

"All of us at YC are there because we want to change the world in a positive way, and we think that entrepreneurship, innovation is a great way, a really powerful way to do that."

Jeff emphasizes the mission of Y Combinator to foster positive change globally through supporting innovative entrepreneurs, highlighting the organization's core values and aspirations.

Personal Recommendations and Insights

  • Jeff recommends books for various interests: nonfiction works by Yuval Noah Harari, "Titan" by Ron Chernow, and science fiction like the Altered Carbon series and "We Are Legion (We Are Bob)" by Dennis Taylor.
  • The highlight of his YC journey is the people he's met and the positive impact they aim to have on the world.
  • Jeff acknowledges that he values the element of surprise when startups that initially struggled later achieve great success.

"If you want nonfiction, I'm still saying, if you haven't read sapiens or homo deus by Yuval Harare, read it."

This quote is a personal book recommendation from Jeff, showcasing his interest in nonfiction that explores human history and future, as well as other genres for different tastes.

Future Aspirations and Reflections

  • Jeff looks forward to the future of Y Combinator under his leadership.
  • He reflects on the importance of resources like Stripe for entrepreneurs tackling new challenges.
  • Intercom is highlighted as a tool for scaling businesses through customer acquisition, engagement, and support.

"I cannot wait for the very exciting next chapters with Y combinator, with him taking the presidential seat."

Harry Stebbings expresses enthusiasm for the future of Y Combinator with Jeff Ralston as president, indicating an anticipation for continued growth and impact in the startup ecosystem.

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