0:00This is the issue with junior investors.
0:01Yes, is it if their career is riding on you, they are not going to be a source of strength. They are going to be freaking out Yeah, [laughter] constantly.
0:08They're more worried than you are because it's their job.
0:12Yeah, they could get fired way before you would get fired.
0:18This is Dalton plus Michael and today we're going to talk about do investors help?
0:25Um, Dalton doesn't know this but I'm going to take the position that they don't help.
0:29[laughter] So so Dalton is forced And and the irony is not lost on us, friends.
0:36[laughter] No, we are investors. So it's SO MAYBE FOR MORE TIME THAN WE WERE FOUNDERS.
0:41[laughter] Does Michael help?
0:43Hell no. Okay, Michael, I think great video. I'm taking that position.
0:47[laughter] Let's say on average. I'm an exception.
0:52Other investors are bad except for me.
0:53Oh, I've never heard that before, Michael.
0:55[laughter] I've heard that one.
0:56I'm a retired investor so I can say it. Um, but in all honesty, um, I think you and I have experienced as founders and also advising founders that there may be some misconceptions about how investors can help you and how they can't. So let's talk about it honestly. And hey, like as a plug for the investors, maybe we should start with how they do help.
1:17Yeah, let's start with positives. And again, I guess to set this up, I remember very well being a first-time founder and having no context on this.
1:26And I don't know, just like we had to figure out by intuition. Like we knew I knew what an investor was and I understood the benefits of someone that gives you money. Yep. Seems good for your business, right? Like Yep, yep, yep. But the realities of what it means for someone to help you was very abstract.
1:46And all you get really exposed to is what other founders say or what you read online, right, man?
1:50Well, that this I think is the interesting point where it's like the amount of what I call pop knowledge or just like false information about this, you know, I remember thinking well, Sequoia's the best VC, so every Sequoia company's going to win. And like that's how that kind of works. It's like being drafted on the Bulls in '96. Like you're just going to Well, that's a great example cuz what percentage of draft picks work out?
2:16ABOUT [laughter] EXACTLY.
2:19EVEN IF YOU'RE the Even if you're the best team, do all their draft picks hit?
2:22No, no. This is why I think the analogy is interesting cuz like they will pull you along. Like they're Jordan. So, they will like they will pull you into success, I think was my extremely false understanding. But, I think that was almost like in the air. The other analogy that I put up is like the Oracle. It's like whenever Neo needed help Oh god, I'm talking about Matrix now, which means half people are going Yeah, kids don't know what the Matrix is. I'm sorry.
2:46Kids watch the Matrix. But, um whenever Neo needed help, like this like almost religious figure was there to like guide him on the path. And I'm like that hasn't been my experience exactly with investors. So, if we can kind of like break down the they're going to do it for you or they're going to always have the right thing to say at the right time. But, start with what they actually do.
3:09Yeah, let's talk about positives. Yeah, I like starting with positives. So, I think the number one thing um that investors help with in my experience is inspiration of making you feel like you can do it and making you believe in yourself more. And I did have good investors like that.
3:28Good investors do that.
3:29Yeah, like where you just feel fired up.
3:34And that that's actually like Yes.
3:36of all the things that how a person A can help person B Yes.
3:40making someone feel really fired up and like they belong there and that they have a right to try really hard and giving them permission to change the world.
3:49I think it's actually awesome.
3:50Like a coach before a big game.
3:53I love that you started there because like you started with like what the best investors are doing when they're at their best.
4:00I'm going to start with what even the worst investors Okay. All right.
4:04Even the worst investors give you money.
4:06Okay. All right, [laughter] Michael.
4:08That's it. That's a classic Dalton Michael dichotomy there. Yes, they do give you money. Reliably.
4:14Not [laughter] always, though.
4:15Sometimes they sign the paperwork and they don't wire the money. But we can't call them investors. So let's say the minimum bar for investor is they gave you money.
4:23And I might argue Money's good.
4:25Let's like in term if we're helping people set expectations, can we say that's a win?
4:33[laughter] Just as a quick aside, um in some of our fundraising advice for YC companies, Yes.
4:39um one of the shocking things we would say, where again, I I think founders would think we were lying to them, but what what we would say is like, look, an investor with a really fast process that wires the money on good terms, and then responds to an email if you ask them a question, and otherwise you never hear from them again, that's like like a 90% That's like a fantastic That's a good score.
5:03That's top 10% investor. And they're like, wait. What are you guys saying?
5:05You mean You mean I've talked to these other investors and they say they want to get on quarterly calls and like weekly meetings and they're going to do all this strategic stuff. Are you're saying that that's not good? And we're like, that is exactly what we're saying.
5:17[laughter] We are saying that is like textbook Yes.
5:21not helpful you run your company for you is worse.
5:24Yeah. [laughter] And again, I think that's shocking that like someone that wires the money and is pleasant to deal with and responds to emails, congratulations. That's a top investor.
5:32Well, it's clear. I think that's anti the marketing. Cuz I think a lot of investors when they're marketing early stage founders, they're like, we know this is hard and that's why we're here to help. Versus I think a more accurate message is that the coach for your team is not going to lift the weights for you, is not going to make you wake up early and take the runs.
5:51When you are the star athlete, you deserve 99% of the credit cuz you did 99% of the work. Exactly.
5:59Can you imagine if you got like an auto loan, and that some of the people offering auto loans were like, we're going to show up, we're going to help you drive. We're [laughter] going to Once a week, we're going to give you driving tips. I'm going to go get in there with you."
6:10Exactly. Every time you drive, call me first.
6:13[laughter] That's the worst auto loan I've ever heard. Like, I just I need a loan to buy a car. Like, get out of my life.
6:20Exactly. Exactly. [laughter] So, I love that. We turned a We turned a positive into a negative.
6:25[laughter] Sorry, but let's get Let's talk about positives.
6:27positives positives Yes. So, um I think another one that investor can do um aspirationally is be honest with you while not demotivating you.
6:42Right? Cuz I think that balance is so helpful. I think that being able to make sure you're excited by your startup or like show their excitement about your startup and your potential is incredible, but also their ability to be honest with you. Because I think that as a founder, what's tricky is how many people are worried about hurting your feelings.
7:05And how many people, you know, your employees, your co-founders, maybe your customers, like they don't want to say the uncomfortable thing. And I think a great investor can actually say the uncomfortable thing. I remember somebody said to us in passing in the early days of Justin.tv, "Consumer hardware companies just aren't going to work." And this is back when we were hand building cameras. And we were we showing investors this like workbench that Kyle had where he's like hand soldering cameras. And we were thinking
7:35this is something to be proud of. And this person in passing was like, "That's That's not This whole thing is an anti good thing."
7:42[laughter] And like, thank god they said that. Like, you know, it was like I think there's a way they could have said it that would have been really demotivating, but they actually kind of said it in a just like straight talk guys, like this isn't the exciting part. Um we're excited by the software.
7:58And man, that was That was really really huge. So, being able to get that from an investor, amazing. Where else could you go? I think um a lot of good investors are plugged in to how other good companies operate.
8:13Sure. And so they can kind of level set what best practices are. And so that this is something that we were able to do, which is like, "Hey, um don't do that thing. Like, this this idea you have is probably not best practices. We've seen this before."
8:30I'm laughing because the use of the word good is so key, right? Like, a good an investor that has seen good companies Yes.
8:40can give you perspective on that.
8:42That's right. Otherwise, they're just making stuff up.
8:44Well, I think an unsaid s- thing is that like a lot of investors don't see good companies. Um especially around the world.
8:52That's actually a great question to ask an investor is what are the best companies they have personally funded. And to like ask those founders if they know who the investor is. Yeah. That's really easy to diligence.
9:02Um You can actually start by just asking AI that.
9:05tricky when you talk to someone that's ac- Yeah, never interacted with a good company before.
9:10But when you're talking to people who have interacted with good good companies, I completely agree. That's like a huge value add. Even if they even if you can't take the tactics that that good company did directly, I think like learning those stories and maybe them introducing you to those founders Very helpful. And maybe this leads into the next one, which is introductions. I remember um when Pedro from Brex came in to speak to YC and he had this great story, which was, "I wanted to learn the best
9:39practices of great CEOs. And so being able to get introductions to those great CEOs so that I can actually learn from them directly was a huge unlock.
9:49Was a huge unlock. And so I think that this is another area where good investors and also, to be clear, I'd argue maybe the quality of the introductions improve as your company gets better. But introductions can be valuable, especially when that person introducing you can give you some ground truth, some actual like first like their own experience versus a summary of other people's stuff.
10:14Yeah, I guess one funny anecdote for for the audience here is like we originally met because an investor introduced us. They're like, "Oh, you should talk to Dalton."
10:21Well, and it was funny is I think the first time I wanted to talk to you about like spin-offs.
10:26And it was like instead of talking to an investor about spin-offs, let's talk to someone who had just Yeah.
10:31done a spin-off, and you gave me like really good advice.
10:34[laughter] And so that's literally how we first met. That's how I met a lot of people is like some investor introduced us. So.
10:39So what's next on the ticker board for I think a good investor can be a source of not just inspiration, but calmness and confidence where they don't care too much. But they you can just like count on them. Like again, it's like pretty chaotic being a founder, and having someone in your life that's really stable Yes.
10:58and really confident, and like is always just a source of strength.
11:04Here's something counterintuitive.
11:07The more an investor needs your company to win, especially early, Amen.
11:14the more you're going to encounter a lot of their like their angst Yeah.
11:19will be transmitted to you.
11:20This is the issue with junior investors.
11:22Is it if their career is riding on you, Ooh.
11:24they are not going to be a source of strength. They are going to be freaking out Yeah.
11:29constantly. They're more worried than you are.
11:31Because that's their job.
11:32[laughter] Yeah. They could get fired way before you would get fired.
11:36Um but on the other hand, when you work with folks who um have experience and aren't they know startups come with ups and downs. They're not worried about their career.
11:46It's so nice when you talk to someone who's not worried about their career. All right, let's flip to the side that I love.
11:53Okay. So let's start with what they can't do. And again, this is something we we we've given this advice a lot, never in a on YouTube, but Yes.
11:59the shocking thing Shocking. Shock us.
12:01is raising money from an investor uh does not mean they they help you be successful. Like it taking money does not imbue you with product market fit. No. Like, it's not The dollars don't have product market fit on them and it rubs off on you and oh, we have product market fit because we raised money.
12:22Again, this is always something funny about funny people for YC is I think some folks getting into YC is their dream and they're like, "Well, once I get into YC, then like we made it." Like, and it was like we'd have to tell people bad news. You didn't make it.
12:35[laughter] You still have to like do the thing now. We can't just tell you how to make something people want, unfortunately. We can give you tactics, but you're kind of on your own here.
12:43You know, it's funny cuz um a famous VC, Doug Leone from Sequoia, I was randomly listening to a podcast where he literally just said like finding part of market fit is a dark art. That's not something we can help with. And I remember I was like, I need to to like clip this, put it into Bookface and the user manual and just be like, if let's call, you know, easily one of the top VCs from easily one of the top funds is telling you the truth, like is like
13:13a moment of vulnerability telling you the truth they can't help you with this, maybe don't trust anyone else who says they can. Like, and and I I really appreciate you just put it out there cuz it's like it is your responsibility.
13:27Product market fit is your responsibility. Either explicitly say or imply they can help you get product market fit, they are liars.
13:34Like, they they're selling you. They're totally lying. [laughter] Yes. Well, by the way, I think this extends to the next thing, which is an investor's not going to know your customers better than you.
13:45Or if they do, you're going to tricky. [laughter] It's such a bad sign. Well, unless they and I'll caveat this, right? If you're just starting and this is like the first check, right? And maybe you're pre-launch, then maybe your investors will a little bit. Some of them might.
14:02But I would say that like that runs out really fast. Cuz the amount of time you spend with customers versus the time they spend with customers, no dice. And I think a lot of the best investors are more compelled by your pitch if it's painfully obvious that you know more about your customers than they do pre-launch. I remember that was always exciting at a YC interview was that if I'm learning about a problem that a customer has that I didn't understand or I didn't know about, I'm like
14:30there's new there's new information and trend, [laughter] you know, versus if I'm sitting here and you're saying all of the interesting things about customers and I'm like I've heard all of those a hundred times, it's like is there new information?
14:41So to me that's like a an unfortunate big one. The idea that your investor knows about the problem, knows about the customers, can guide you to the you, it means you're making something people want. Again, this is the the error. Again, this would happen all the time at YC where we would fund something and it would be like, "Yeah, I don't think this idea is going to work, but we're going to fund them anyway." And then unfortunately the founders' interpretation was like they funded me for this idea, this idea is totally going to work. It'd be like, "No."
15:10I we used to say I shouldn't say we. I don't know that you endorse this. I used to say look, there's a battlefield out there and we know there's like a lot of landmines and there's a lot of ambushes and there are a lot of guns and there's a lot of death and we're going to send you out there if you seem really reasonably capable and we're going to discover the landscape of what works and what doesn't based on who lives and who dies and [laughter] like Yeah, I don't know if I endorse that Michael, but But that's a very Michael
15:40But I think that's [laughter] how we learned like what the market liked, what it didn't, what the problems were or what they weren't. It it wasn't the knowledge we were bringing in, it was the startups going out there and exploring and figuring it out. And it was all those hypotheses being tested.
15:54Yeah. Maybe my my version of that is just we believe in you, founder. And we believe that you can do something interesting and you have my unequivocal support. I'm going to stop there. Like you know what I'm saying? Like it doesn't mean we believe the idea like there's all these other things.
16:09nicer way of saying [laughter] it.
16:11But it doesn't have to say it for like, "Hey, you're the person.
16:14Go do it. knock out.
16:16Um but man, we we have no idea how that's going to go. No. We no, no. [laughter] And we know it's dead wrong.
16:21Don't don't expect me to actually tell you what to do. Again, sometimes it's like the the investor that told you about making hardware. There might be cases like recently where there's a founder, basically they were doing some stuff with ad networks and I had dealt a lot with ad networks as a founder. And I was like, here is like my top 10 tips of dealing with this. And I think I saved them like 6 months of time. And it wasn't rocket science. It was just stuff that I learned as a founder that I was sharing with them. That was pretty helpful, but that was tactics. Yes. That
16:49was not let me tell you how to run your business for you.
16:52Well, and this is not unorthodox, especially for me. But let's let's go back to the good things for 1 second. I agree with you. There were a number of times where an investor would give me a couple tactics, right? PB did this for us twice. Um, Paul Bucheit. The first time he really encouraged us to build our own video system. And he And he But he did it in this kind of like backhanded complimentary way where he said that PB said to Kyle, like, "How hard is it to build a video server? It's just bits in, bits out." And Kyle was like, "Well, if
17:21PB doesn't think it's hard, I don't know anything about this."
17:24[laughter] I can do it. I don't want to look like an idiot. And then the second time, um, in my next company, PB gave us like an insight on I mean, it was this really in the in the weeds thing. But he was basically just like, "Look, like you should assume most IP addresses unique and you could use that information to figure out whether you're going viral or not." And it was just like that that helped us figure out whether we were going viral, helped us then go viral, and so and so forth.
17:50Extremely interesting, great tactical pieces of advice. What's tricky is I had a lot of investors over the course of a large number of years and I don't have hundreds of those stories.
18:01And so like that was that was I don't want to say it was luck, but like don't expect it. It's great when it happens, but don't expect every board meeting you get this tactical genius move that's going to make your company work. Like that was not the case. All right, back to the negatives.
18:17Again, I don't want to talk about or expectation set. Expectations setting.
18:21I think the biggest fake idea is around king making.
18:26And let me explain what I mean by king making. I think there is a belief that if you raise money that you become invulnerable and impervious to competitors or the outside world beating you.
18:41And this is an interesting thing where I think founders want to believe it. I know I did. I would love When I was a founder, I really wanted to believe if I raised a certain amount of money, no one could ever beat me.
18:52But it's not sound great. Again, it's it's an appealing idea. And investors are aligned where they want to believe that, too.
18:59[laughter] They want you to believe that.
19:01no one It's like the emperor wearing no clothes. No one's going to be like, "Hey guys, like king making's a fake idea."
19:08Well, the only one arguing against that is the world, right? It's the only one that's like here's [laughter] the facts on the ground.
19:13But like it neither party wants to admit that that's a fake idea.
19:17It's inconvenient to both parties.
19:20Um And sadly, it's a fake idea.
19:22Well, I remember a great story on this one. I remember talking to Brian from Airbnb when um they were just having some drama with the city of New York. And I remember him saying, you know, "I don't think there's another company that has a better set of investors, a better set of funds, better set of people on their board than we do.
19:45But like this is still a problem punching me in the face. This is on me. I got to solve this." And I think that um it's tricky cuz like the biggest problems you face you're on the front lines. You got to solve them. No no one's going to solve them for you. Especially not your investors.
20:02And again, let's be let's be objective.
20:04Let's like let's use some case studies.
20:06If king making was a real thing why is Entropic still alive?
20:13Well, can I go more basic? If king making was a thing, why can the power law exist? Why don't all of Sequoia's investments work?
20:21Why don't all of A16Z's investments Why doesn't every company that raised a unicorn valuation succeed?
20:27You know, like why is Bending Spoons buying all these companies? Like how is that possible?
20:31Well, and by the way, this brings up this like really important point, which is that if you consume all of the fundraising news, but you never actually explore what happens, Yes.
20:41you have a false impression about the number of winners there are.
20:45How many king-making rounds happened in 2021 and 2022 in crypto and fintech and what have you?
20:51Lots. Lots. There were some successes, but it's very hard to argue that it wasn't that the businesses themselves succeeded on the merits of the business and their quality of PMF and not well, we raised a big round, therefore we won. No.
21:04No. Well, and it's interesting cuz like, you know, the story of DoorDash versus Uber, right? Like Uber had more resources, spending more money. They had in so many investors that DoorDash really couldn't raise money cuz all of the investors are already invested in Uber. Why didn't DoorDash back then Now, Uber was obviously the king.
21:23by a wide margin. [laughter] By like a ridiculous margin.
21:26And and what happened?
21:28And so, again, maybe some percentage of people watching this are like, "Rar, rar, rar." You know, basically rejecting They're like, "Yeah, yeah, yeah, no." And I get it because it does feel like with AI right now that so much money is being raised and there really are these hot companies that are raising tremendous amounts of money and that they're of course going to win.
21:47I just would tell you to look to history. And even if you're the biggest believer in AI, which God knows I am and we are, Yeah, yeah, yeah.
21:55that doesn't mean that everyone that raised a lot of money is going to succeed. It just can't. That is not how reality works. There's still going to be a power law. There's still going to be a distribution of outcomes, no matter what stage you get at.
22:06Well, and what's so funny is that, you know, I I grew up in the '90s. And from that perspective, there were two companies that seemed like everything, right? There was the especially to like a a teenager, was Microsoft and there was AOL.
22:23Yeah, AOL was the big dog.
22:26It like It was the internet. Like I don't really know how to explain this. Like the first time I ever used a web browser, it was like AOL's web browser. But like there wasn't really a concept of what the internet was not defined by AOL.
22:41Does anyone use that anymore?
22:42No. And so if you go back in time, you will find all of these dinosaurs. Like you will you all the dinosaurs are the bones are like laying on the surface. You just have to go look for them. And you'll realize that there's some dinosaurs walking right now who are not going to survive. And that's what gives startups opportunity.
23:04And so the way I would think about it, viewer, is your business needs capital to execute on your goals.
23:14And Elon needed capital Yes.
23:16to go to space and build car. Like So yeah, fundraising is cool, but it is a means to an end in your pursuit of making customers happy Yes.
23:26and of delivering more value than you're capturing and all that good stuff. And it's not it's almost like you're getting the cause and effect wrong.
23:35Which is if you raise all the money, then you win. That that that is not the right order of operations.
23:41When you win, you raise all the money.
23:43And then that keeps happening, right?
23:45I think that my hope is that we set these expectations for you right because I think if you go into this game with those expectations you don't put investors on a pedestal. And then counterintuitively when you do that, they want to work with you more. They want to invest in you more. Like when you don't feel like you need them to win that's actually like a positive signal. So, with that good luck.
