- The Q&A session is about how investors measure startups.
- The main areas investors evaluate are the team, metrics, unique insight, and market opportunity.
- Industry experience is not necessary, but clarity of thought and ability to articulate the business is important.
- Investors value teams that move fast and show progress.
- Remote teams are increasingly accepted by investors.
- Solo founders can still be successful if they have clarity of thought and storytelling ability.
- International founders need to show progress and have a compelling story to convince investors.
- Bootstrapping as a solo founder is not an instant no, as YC accepts solo founders.
- The startup journey is difficult and unpredictable.

- Having a co-founder or senior executives can provide valuable support and context for a founder during the challenging journey of building a startup.
- It is advisable to raise as little money as possible and remain focused, as having too much funding can lead to problems and dilution.
- Launching a company and showing traction before seeking investment is recommended, as it increases credibility and valuation.
- Revenue and user traction are the best indicators of progress and potential for investment.
- Non-binding indications of interest or support from investors do not hold much weight without actual traction or revenue.
- For startups with long sales cycles, starting with pilot programs and showing progress with a few initial customers is sufficient.
- Rejection from investors is common and should be accepted without reading too much into it.
- Engaging with potential investors should be done after achieving product-market fit and gaining some traction.
- Finding the right investors can be approached like a sales game, contacting all potential investors and using personal messages.
- Female founders, especially minority female founders, can gain visibility within VCs through networks like All Raise and referrals from existing portfolio founders.
- Valuations in the investment process are more of an art than a science.

- VC funding is more of an art than a science, with valuation and ownership determined by the stage of the company
- In the US, seed funding typically ranges from 10-15% ownership, Series A is 25%, and Series B is 10%
- Science comes into play after the C stage, with growth investors evaluating the company's potential for going public
- Factors that influence valuation include dilution to target and supply and demand
- Investors are still interested in moonshot bargains, particularly in the education sector
- When seeking investors, focus on what the money will help the company achieve and demonstrate confidence in its growth potential
- Considerations for early-stage companies include whether to join an accelerator or raise money from angels, with the primary factor being the need for funding
- YC is a popular choice for its community and the opportunity to raise a significant amount of money through demo day
- Switching business models may be necessary for building a billion-dollar company, with advertising often being a defining factor.

- The importance of articulating a clear plan for monetization and growth in order to build a successful company
- The question of whether to give up equity in exchange for funding to reach the next stage of growth
- Advice to raise only the necessary amount of funding and avoid excessive dilution in the early rounds
- Suggestion to focus on generating more sales and revenue before seeking additional funding
- Fundraising should be done strategically and not become a perpetual distraction from company growth
- The importance of tracking cohorts as a metric to measure growth with target customers
- Revenue is the most important metric for the health of a company, with other metrics being important for investor knowledge and evaluation
- Founders should be knowledgeable about their numbers and metrics to demonstrate mastery and dedication to their company's growth
- The ultimate indicators of a company's success are the amount of money coming in and customer satisfaction with the product.

Investors evaluate startups based on team, metrics, unique insight, and market opportunity. Industry experience is not necessary, but clarity of thought and ability to articulate the business is important. Investors value teams that move fast and show progress. Remote teams are increasingly accepted. Solo founders can be successful with clarity of thought and storytelling ability. International founders need progress and a compelling story. Bootstrapping as a solo founder is not an instant no. Having a co-founder or senior executives can provide valuable support. Raising as little money as possible and remaining focused is advisable. Launching a company and showing traction before seeking investment is recommended. Revenue and user traction are the best indicators of progress. Non-binding indications of interest do not hold much weight. Starting with pilot programs is sufficient for startups with long sales cycles. Rejection from investors is common. Engaging with potential investors should be done after achieving product-market fit. Finding the right investors can be approached like a sales game. Female founders can gain visibility through networks and referrals. Valuations in the investment process are more of an art. Factors that influence valuation include dilution and supply and demand. Investors are interested in moonshot bargains. Considerations for early-stage companies include joining an accelerator or raising money from angels. YC is popular for its community and funding opportunity. Switching business models may be necessary. Articulating a clear plan for monetization and growth is important. The question of giving up equity for funding arises. Raising only the necessary amount of funding is advised. Focus on generating more sales and revenue before seeking additional funding. Fundraising should be done strategically. Tracking cohorts is important for measuring growth. Revenue is the most important metric. Founders should be knowledgeable about their numbers and metrics. The ultimate indicators of success are money coming in and customer satisfaction.

YC Partners Anu Hariharan and Adora Cheung answer questions from Startup School founders on how investors measure startups.

Find more Startup School and YC content at https://www.startupschool.org/library.

We're gonna do a new thing here, see if it works.

Essentially, the topic of this Q&A is how do investors measure startups, or something like that.

And so what I did was I posted, I don't know if you saw, but I posted in the forum and asked for a bunch of questions.

And so I'm gonna take the ones that were upvoted a lot and then go from there.

So most of this is gonna be me asking Anu questions since Anu has been an investor for a

But just to get started, so the big area, you kind of went over this earlier, but the big areas in which an investor evaluates a startup is team, metrics, which you went over just recently in the lecture, unique insight in how big the opportunity is.

Are there any other areas in which, big areas in which you evaluate?

Yeah, no, I think especially at the stage you're in and probably for a while, even your series A, B, it all comes down to only 3 things, team, product, market fit, market opportunity, that's it.

And so at the stage you are in, it really is probably the heaviest weight is the team.

And so when it comes to the team, it's more about why are you working in this idea, right?

And what unique insight do you have, your clarity of thought on how you plan to see this as a big opportunity, and how good are you at convincing that?

And if an investor gives you capital, do you know what to do with it?

So in terms of team, what if I don't have experience in the thing that I'm building?

Like how are investors going to believe that I'm a legitimate person to work on this?

Yeah, it actually does not matter, to be honest.

I think pretty much if you're a consumer, B2B, enterprise, it doesn't.

Where probably industry or domain experience helps a little bit is really health care and bio.

I think in fintech, there is slight bias, maybe, because building a FinTech product requires some domain knowledge or at least interest and curiosity, because there's a lot of regulatory and compliance, but largely no.

So which is why I said, your clarity of thought during your pitch to investors is what matters.

How much you have thought about it and how well are you able to articulate all the nitty gritty details of your business is what matters.

And more importantly than not, you should always assume you are teaching the investor about this space and the company.

And so they measure by how well you're teaching them.

So 1 of the things that investors say a lot is, we want a team that moves fast.

Well, if you've said that I plan to work on this idea, I've been thinking about it for the last 12 months, and I plan to hire someone and launch product in the next 12 months, that's clearly moving slow, right?

So it's how they're measuring whether you move fast is how scrappy you are, have you launched your MVP, how many iterations are you doing, how are things moving in the pace?

Like, and at this point, it should move really fast on a week by week basis.

Yes, if you're working on something people want, there's a lot of latent demand, and so you should be able to find users easily.

lot, but if you don't know your first 10 users, 10 to 50 users, potentially there's no founder market fit there if you don't know where to even find them.

And 1 of the things related to this, 1 of the things on the YC application, a lot of people apply more than once and get in, and 1 of the things we do look at is there's a question, something along the lines of, what progress have you made since the last application?

of the first things I read, is what are the learnings?

Even if you don't have that many users yet, it's still what are the learnings you've made.

Do you discount remote teams or how do you evaluate local versus remote, if anything?

Well, I think this really varies depending on who you ask.

But I think 1 thing is clear, which is remote is increasingly taking off.

And so it would be a remiss for anyone to say, oh, we only focus on local and no longer remote, right?

I think tools like Slack, Zoom have really made it incredible for more remote teams to function.

I mean, look at GitLab, 1 of YC's companies, completely remote.

Zapier, another amazing company, completely remote.

But it really comes down to the investor's selection.

I think Even from an investor standpoint, there's no ding on whether it's remote or local.

It's more that they're spending their time But again here I'd emphasize don't do things to satisfy investor build the company you want if you build a great company with lots of users From wherever the investors are they'll come

So this question is I have heard constantly that investors are investing in team, not product, which we have said.

Like what is, like the team is 1 person, so how do you evaluate that 1 person?

More often than not, it's the CEO that's talking to the investor anyway.

We don't recommend that all founders that are attending all investor meetings because obviously it's a lot of time that goes on doing investor meetings versus you have real work to do.

So it really comes down to the CEO's clarity of thought, you know, and how well they are able to impress upon investor.

By the way, this is not just to impress investors.

The reason why this clarity of thought, I keep bringing this up, If you don't have that, how are you gonna hire your first 10 people?

If you can't convince your first 10 people that you're building something big and they should join you in your mission, then it's really hard to convince investors, right?

And that's why investors are looking for that storytelling ability.

Do you have any advice on how to know the clarity of thought?

Like the clarity of thought piece, like how are you doing well on that?

Yeah, so this is probably a really high bar example, but I'll say that, which is the Brex founders, Enrique and Pedro.

It was the second time they were building a company, so they knew that they needed to do this.

I don't know if they did this in their first time, probably not, but when they were going through YC, they actually literally iterated from a VR startup idea to Brex, right, which is corporate credit cards.

But both of them knew the stakes were high, at least for them, because they were dropping out of Stanford.

They literally came out of Brazil to attend Stanford.

They were dropping out of the university.

And so they both wanted to make sure that Brex had a big opportunity.

And before hiring a single person, they wrote down very clearly what Brex could be with all the products that they could build in the roadmap, tested it for not like it was not a huge survey but they just wrote it down to really understand, built a financial model and Enrique actually attended the accounting class in Stanford because he had no idea how to build it.

And he built a whole model year by year, tested the assumptions of market demand and what penetration they would need to hit for it to be at least a billion dollar company.

And only after they both got comfortable that there is a path, and this is worth quitting Stanford for and putting our entire life probably for the next 10-15 years on this, they hired the first employee.

That is an amazing clarity of thought, right?

I'm not saying everybody should be there But you should at least do the first exercise.

If you were to convince someone to join you, and more often than not at this stage, whoever you want doesn't want to join you.

This 1 next 1 is about international founders.

So you've personally invested tons of money in international startups.

How did those founders convince you to put that money into their company when you're not from there?

Like Columbia, UK, all these other places.

Yeah, and I think this is where, I know I feel like I'm repeating myself, but it comes to those 3 things.

And it also comes, I think the international ones we did were probably a little later stage too.

So given we didn't have presence in the region and we didn't know what was really market demand, we waited for some more progress, right?

So you see that in metrics, you see that in their thinking, you see that in a more fleshed out process.

But even there, if it's hard to hire in San Francisco, think about how hard it is to hire there.

Like there are no execs available with scale experience.

So those CEOs actually have to work 10 times harder to have that clarity of thought and to convince someone from the US to move there.

Any suggestions of how to convince someone to move there?

And if you do really well, for example, in LATAM, Rappi basically convinced a few execs.

They actually have done a phenomenal job of attracting execs from the US.

The execs felt it's the first time in their life they have an opportunity to make an impact in LATAM like the way they never did.

It's really hard to do in any other setting.

And so they've been able to convince execs with LATAM connection obviously, but have been living in US and UK for many years to move back and lead teams.

For the purpose of applying to YC, we take founders from everywhere.

And like Anu said, it's more about team and idea than metrics or where you're from and stuff like that.

Okay, so is bootstrapping as a solo founder an instant no in your mind?

So 10% of our batch from last batch were solo founders.

So we definitely accept solo founders at YC.

In terms of what you guys do, is that, that doesn't seem like it.

I don't think that's a great, but I would say this, having obviously observed a lot of YC founders, even the ones at scale, it's such a hard journey, and there are so many things that are going to go wrong.

That having another co-founder generally I've seen has helped a lot more, because there's someone who can give a lot more context than everyone depending on the CEO.

But if you don't have that, that's fine, but then by the B, we're looking for some senior execs, at least 1 or 2 who are incredible that you can lean on for some portion of your business.

Because if it's still all you, the main challenge after the BBC is the CEO's not scaling.

And so if you're a solo founder, it just becomes harder if you don't scale.

It's always good, I find that the good solo founders build a community around them of people to help them go through some tough times.

So maybe this is more fundamental question of how do I, what are the indicators that I should see before I take on investment or even go start fundraise?

You know most companies tend to fundraise so but The short answer is I actually always refer to PG's post here because I love that post, which is try to be default alive and try to raise as much money as possible, as little money as possible, sorry, as little money as possible, so you remain focused.

I think it is super important, and it's lost on many people.

But if you look at the really even successful companies, everyone has done mistakes, but they'll all say the most painful time of their company's life, even in later rounds, was when they, you know, you may have more money in the bank and you end up hiring more and then you actually deliver a lot less.

So it's not that your problems magically go away, your problems become tenfold because you have people problems, a lot more people problems.

So at this stage especially I'd say raise as little money as possible and focus.

Now there is a question as to whether should you raise or not, right?

Very few companies don't raise, but Zapier for example never raised after YC Demore.

And I think because the business is so good, it's growing really well, they are a bit positive, they have very healthy margins, and you know often Wade would tell me this like, I don't know what to do with my money in the bank, why will I raise more?

But if you are not in that luxurious situation, then, you know, there is something to be said about I need capital to grow.

Please don't take this as paid marketing.

But more like I need to hire more engineers.

I need to hire ahead of time to build the things that I need, because I know I have a business model at the end of it.

So therefore, the way to think of fundraisers, if you think you have a clear path to the next milestone, and you may need like, you know, maybe 200, 500, or $1 million, then just raise that minimum amount, but come up with that plan very clearly.

What is the money you need to hit that next milestone and just raise that money because guess what, your dilution matters.

Okay, so the next set of questions, There are a lot of questions on basically how do I fundraise without users or revenue?

Which is like a thinly veiled way of saying how do I trick investors, I think, into funding me when I don't know if I'm building something I want.

How are pre-launch startups measured, specifically those that are low commission but require high user volume?

Again, this comes down to the founder, but I honestly would say if you really think that it's a big company to be built, like why haven't you launched and why haven't you shown some traction before you go race?

Because you can easily, especially today, you can raise a few hundred thousand dollars, even from friends and family and launch a company.

Don't go out pitching to investors on some grand idea that you don't have a plan.

It is possible these days but I don't recommend it.

I think if you have founder credibility which is you're a second time founder or a third time founder it is easier to do those things without launching but remember the if the less traction you have and the less data you show, the smaller your cap, the smaller your valuation, the larger your dilution.

So make sure that you really know that you want to build a company that is worth it and you believe that and so raise accordingly because money will be there if you execute right and if you yourself see that you you have enough user traction and there is something to be built so I would say try to test it out there are many ways to test it out these days in low-cost effective ways so do that first before you launch.

What is the best way to show some traction when looking for investment without launching?

So, like email lists, all these users lists, wait lists, stuff like that.

They are, you know, this is the wisest advice we give in the batch, which is if you don't have money in the bank You haven't raised so you don't have if you have users on email list you don't have users

right there are some like obviously we keep telling you guys Users and revenue or the if that's your primary metric revenue being like 99% of you should just use revenue, that way you get cash in the bank and that's your best type of investment.

There are leading indicators to getting into revenue, but at the end of the day, that's really the only way.

All right, how do investors view non-binding indications of interest slash support in evaluating traction of the B2B company?

So I'm guessing like non-binding LOIs or letters of support for grant applications and stuff like that, do those even matter?

Not much, If you have traction and you have certain LOI spending then fine.

Then they would call those LOIs and ask what's the probability of converting.

But at the stage you're in if you go in saying I have 2 LOIs it means it doesn't mean much.

Yeah and then how does an investor judge a heavy MVP?

That is someone with basically a long sales cycle, so a health IT company, it takes 4 to 6 months.

Like you need, maybe you need to raise money before you get your first contract.

Yeah, this is very true for even enterprise infrastructure, which is why I made the point that you may have only 1 or 2 customers at the end of 24 months.

Most of these companies try to do pilots.

So I usually tell, start with a pilot, because the company is also probably hesitant to sign a $500K, $1 million contract with a startup.

So start with a four-week, six-week pilot.

So if you are in the business of selling large contracts, like greater than $500K ACV, you can plan to have only like 2 to 3 customers in the first 12 to 24 months because a lot of your time is gonna go into making sure that it's really successful with that 1 or 2 customers.

So it's not necessarily customer growth, it's more that 1 customer and how you're facing with them.

All right, so the last set of questions is on interacting with investors.

right, so how do you avoid investors when they say it's too early for us?

How do you avoid getting responses like that?

I think, you know, I would take the no and not read into the no and keep moving.

Is it sensible to start engaging with potential investors prior to finding product market fit or should you just wait until you have real traction?

Yeah, at this stage, I would say focus on building the product.

So this person started with 30,000 on AngelList and removed all the, removed a bunch of, or had a bunch of filters and then has like 1,000 left.

How do they pick from the 1,000 investors?

I wish we had an answer for that, or like a.

I think it's basically you contact all of them.

If you think about a fundraising, it's basically the same thing as a sales game.

You have leads, you have conversion, you have to follow up, you have to send personal messages.

I would just use whatever spreadsheets you're using for your sales game for this and just go for that.

Yeah, I would say try to avoid the investors that you don't have confidence in or if other founders have referenced that.

But if that's that's the only rule of thumb.

But otherwise you have to do exactly like what Aurora mentioned like go through it like a sales pipeline, yeah.

What are the best approaches for minority female founders to gain visibility within VCs?

I think the industry is changing a lot, so therefore it should be easier than it was before.

I always had problems with the warm intro because most VCs say you need a warm intro.

And I'm like, OK, as a female founder, you probably know less than 1% of the people who know the VCs, because they're all males.

And it's really hard to get a warm intro, right?

There are lots of, you know, first of all, most VC firms are appointing female investors, so it's easier to get.

There's groups like All Raise that really help female founders to get in front of VCs.

But this is a common advice I give, irrespective of whether you're from a minority represented group or not.

The best referrals is through existing portfolio founders, period.

So if you can find an existing portfolio founder of that firm and he or she knows you quite well and is willing to refer you, that's the best referral.

In fact, investors often ask their portfolio, actively ask their portfolio company founders, who should I meet with?

And that's like 1 of their primary channels.

1, well actually just 1 more question, which was like a common 1.

How do investors come up with the valuations?

Yes, you know when I first started in VC, actually before YC, I thought there was a lot of science to it, but it's actually art, it's not science.

So the truth is, until you're about CDC or so, there is no science to it.

So it literally comes down to what's the stage you're at and what ownership does the VC want.

So this is why if you have no traction someone might say I want 30% of your company right.

It's not very common in the US but it's very common internationally And so you end up raising 1 million at 31 divided by 0.3, literally that's your valuation.

And so I would say if you're in the US, at seed it could vary anywhere from 10 to 15 percent, depending on the traction.

CDs A is 25 percent ownership, so if you're raising 10 million, 10 divided by 0.25 is the valuation.

If you're Series B, it's 10% ownership, so if you're raising 30 million, 30 divided by 0.10 is the valuation.

Science really kicks in after the C because your growth stage and you have a lot more numbers plus at that point the growth investors really evaluating you as to what when can you go public and what would be the valuation that you go public and so the evaluation from the CDC is back calculated based on that.

So it sounds like 2 things, dilution to target and supply and demand.

So if you're a hot company, you can say I'm only gonna sell 10%.

Or if you're not, then the investors calculate that for you.

I haven't seen very many brand exits and some of the big numbers that we've seen over the next few years.

from investors for moonshot bargains, especially around education?

Look at Lambda School, another YC portfolio company of ours.

So I think it's important that, I think historically investors probably struggled with education startups because they found it tough to scale.

Right, and if you don't scale, there is a cap at which it stops or it plateaus.

And I think with new tools like Slack and Zoom, especially Lambda School has been able to scale really well.

And also the newer ed tech startups are more outcome focused, so I do expect a lot more startups in ed tech.

So for finding investors, like how much actually should you have for going to, let's say you're out of state, you're not in your software for a reason, but you don't have revenue, or should you pay for the investment?

Yeah, so the question is how much revenue or usage should I have before I go reach out to investors?

So, I'm not sure that that's a good, I think it's basically.

of running the company is not to go get an investor.

So just the whole premise of the question is the problem that I have.

It's like, what do I have to do to get this guy to like me?

And the whole thing is like, you're going to an investor because you're like, man, I figured something out and I need some money to make this grow a lot faster.

I'm a little impatient or I'm like, God, I figured out a bunch of stuff and if I just had this stuff, I would be able to make this a whole lot bigger, a whole lot faster, and I'm willing to give up equity to do it.

So sometimes you can be like, hey look, I know more money would help me grow faster but I'm not willing to give up the equity.

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Anu Hariharan and Adora Cheung - How Investors Measure Startups Q&A