- The speaker welcomes the audience to the second day of Startup Investor School
- They mention some issues from the previous day, such as backed up toilets and lukewarm coffee
- They provide information about how to ask questions during the live stream or in person through Slack
- The speaker announces that there will be wine and beer on Thursday for networking
- Feedback from attendees about wanting more community and networking opportunities is acknowledged
- The speaker emphasizes the importance of not following other investors and making unique investment decisions
- They briefly mention the topics covered in the previous day's session and introduce the topic of making smart investing decisions
- The speaker introduces Dalton Caldwell, who will be discussing founder meetings and the investment process
- Caldwell emphasizes the importance of having a process and face-to-face meetings in making investment decisions
- He explains the different stages of the investment process and the importance of budgeting and decision-making
- Caldwell suggests having a clear budget and a set number of investments to make optimal decisions.

- The pass rate of the process funnel should be considered to avoid wasting time on unnecessary meetings
- It is important to have a clear decision-making process and criteria for investing
- Doing multiple meetings without making a decision is worse for founders than saying no
- Once a decision to invest is made, it is important to commit fully and not back out
- Different investors should have different investment criteria to find unique opportunities
- Criteria to consider include the team, market size, traction, relevant expertise, and investment terms
- Groupthink can lead to non-optimal returns and overfunding of companies
- Personal conviction is important in making investments and avoiding half-hearted commitments
- Asking for an option in a round without believing in the founder's ability to raise funds is not recommended
- Being willing to look stupid and take risks is necessary in investing.

- Conviction is important in investment decision-making, rather than just investing to look good.
- Anti-patterns in decision-making include being slow to respond, deferring decisions, and flip-flopping.
- Meetings should be done in person for better conviction.
- Scheduling meetings in a non-painful way and being on time and picking a convenient location are important for a good reputation as an investor.
- Start meetings with basic questions about the company, team, progress, and funding.
- Trust, gut feeling, and imagining working with the founders are important factors to consider in evaluating a meeting.
- Bad meetings include distractions, making the meeting about the investor, giving unsolicited advice, and overdoing introductions.
- It is important to communicate decisions clearly and directly to founders, even if it is a no. Saying no is a normal part of the job.

- The speaker emphasizes the importance of being able to say no and feel good about it in angel investing.
- They suggest avoiding avoidance and following a handshake protocol when saying yes to an investment.
- They advise against adding unnecessary complications to the investment process, especially for small amounts.
- The speaker provides an example investor meeting where they ask questions to understand the company's business model and goals.
- They highlight the importance of comprehending the company's product and the potential of their idea.
- The speaker discusses the potential of the company's software to enable individuals to start their own local internet service providers.
- They express excitement about the idea and highlight the benefits of not needing to own physical infrastructure.
- The speaker asks about the inspiration behind starting the company and expresses frustration with the current state of internet service.

- The problem with internet access is mainly in rural areas and suburbs with regional monopolies
- Increasing competition is the solution, but starting an internet provider is difficult
- Angel investors interested in ISPs and challenging companies like Comcast would be interested in investing
- Losing faith in a company after investing is a complicated situation, but extreme cases of deception can be addressed
- Saying no to a founder should focus on the lack of conviction in their strategy rather than personal criticism
- Sending decks or data before a meeting may not be helpful for founders, as it often leads to no response
- Milestone-based financings are not recommended for small checks, simple deals with an option to invest more in the future are preferable
- Video calls can be used for deal flow, but flying to meet founders in person can be more effective
- Financial pressure and flatlining performance in an investment after 2-3 years can be challenging to address.

- The speaker discusses what to do when an investment is not performing well but not failing either, suggesting that it is best to ride it out and wait for potential future opportunities.
- They advise against forcing the company to sell and emphasize the importance of understanding that investments often have a 10-year time horizon.
- The speaker also provides advice on discussing competition during founder meetings, suggesting asking neutral questions and gauging the founder's response as a potential red flag.
- They address the issue of information asymmetry and recommend keeping proprietary information to oneself rather than sharing it with founders.
- The speaker answers a question about investing when there is uncertainty about the company's ability to raise funds from other investors, advising honesty and setting clear criteria or milestones for further investment.
- They also discuss the challenge of deciding when to invest in a company that has not yet raised significant funds but may become successful.
- The speaker briefly touches on the importance of compatibility between investors and founders and the need for iterative learning and improvement in the investment process.

- The speaker welcomes the audience to Startup Investor School and addresses some issues from the previous day.
- They provide information on how to ask questions during the live stream or through Slack.
- Networking opportunities and community feedback are acknowledged.
- The importance of making unique investment decisions and not following other investors is emphasized.
- Dalton Caldwell discusses founder meetings and the investment process, emphasizing the need for a clear process and face-to-face meetings.
- The stages of the investment process, budgeting, and decision-making are explained.
- Different investors should have different investment criteria to find unique opportunities.
- Personal conviction and taking risks are important in investment decision-making.
- Anti-patterns in decision-making, meeting etiquette, and communication with founders are discussed.
- The importance of being able to say no and feel good about it is emphasized.
- Unnecessary complications in the investment process are advised against.
- An example investor meeting is provided, highlighting the importance of understanding the company's product and potential.
- The potential of starting a local internet service provider is discussed.
- The challenges and solutions in the internet service provider industry are addressed.
- Dealing with underperforming investments and discussing competition during founder meetings are discussed.
- The speaker provides advice on dealing with uncertainty in a company's ability to raise funds and investing in pre-funding companies.
- Compatibility between investors and founders and the need for iterative learning and improvement are mentioned.

Startup Investor School is a free, 4-day course designed to educate early stage investors interested in investing in startups. We'll cover the fundamentals of investing, from investing instruments to legal and accounting basics to evaluating startups and managing deal flow. Our hope is that more people, from a wide range of backgrounds will consider investing in startups and that those who do will be better at it.

Learn more at https://investor.startupschool.org/

We have a lot to do today, so I'd like to get my part out of the way as quickly as possible.

Good morning again, and welcome to our second day of Startup Investor School.

My role is a little bit more, but not much more, than telling everyone not to park over there, so don't park over there.

Apparently there's a lot of parking behind 335.

There's parking here and there's parking on the street.

Or there's this great services called Uber and Lyft.

So we had our startup growing pains yesterday.

The coffee was lukewarm and the live stream was almost invisible.

Maybe that was actually a feature since I was the first person talking and it got better after that.

I can at least testify to the fact that the coffee is now hot.

So as a reminder, can you just put the, as a reminder, if you have questions out in live stream world, you can tweet them to YCSIS or with hashtag YCSIS.

There's also now a Slack channel for those of you who are here in person.

There's a Slack channel for just communications between you guys and a Slack channel for questions.

You can ask questions and then upvote those questions and we will hopefully get to some of them time willing.

I will also go through all the questions afterwards and try to do a piece answering the questions that I can answer.

So there will be wine and beer on Thursday.

Small amount of time for networking for you guys.

And I don't know how much time, but I guess it depends on how much wine and beer there are for that.

There was some really great feedback, helpful feedback from you guys.

Probably the biggest thing everyone said is, boy, we'd really like to have more community and we'd really like to be able to network.

Mark and a few others sent me more detailed information about how we can do a better job of helping you all network.

So, so far, we have a Slack channel and we'll think about that.

I don't know how much progress, how much change we'll make during this version of Startup Investor School, but we really appreciate that feedback and we obviously take it really seriously.

I will point out, as Sam said yesterday, that 1 of the worst things you can do as an investor is to be sheep.

The best investment decisions you'll make are the ones that other people aren't making.

Like you know when people come by with really stupid ideas like you know having air beds in someone's home after a conference.

No one's going to invest in that 1 except for you, and then you'll make a billion dollars, and then you can laugh.

So we covered a little bit about Sam's introduction and then a lot more about SAFEs and how people do startup investing.

We're gonna cover more today on the how, so I'll get back to that in a sec.

Just a quick word on equities versus safes.

It's a very complex, on the surface it seems like a simple topic as you heard yesterday it's actually rather complex.

Well because it's simple, it's easy, it's fast, and it's cheap.

It's sometimes hard to know what happens with the dilution.

But we'll also put up, we don't have it up yet, but we will put up a spreadsheet for those of you who are more comfortable with old-fashioned tools.

And you'll be able to model cap tables and conversions.

But we actually do have a spreadsheet that helps you figure that out.

So dilution can be a little weird to understand and it is important to understand it both for founders and obviously for investors as well.

Okay so with that we're going to get to the topic today and I am actually really excited myself to to listen today because hopefully I'm going to learn something about how to be a better investor because I have made many mistakes and if you guys want to corner me later I can tell you about a few dozen the mistakes that I have made.

So the topic really today is overall how to make smart investing decisions.

All you have to do is make correct predictions about the future.

Well, the way you start off deciding whether to invest is you find companies you'll meet, you want to, you think you're interested in, and meet with them.

So our very first presenter is my friend and partner Dalton Caldwell, who is the founder of a couple of companies, I-Meme and App.net.

He's been a partner at YC for 4 years now.

My favorite quote from Dalton, because it's 1 of the few I could find, but it's a good 1, is if someone tells a coherent story with the beginning, middle, and end, explaining what their product is, who wants it, what's it does, just that.

So here's Dalton Caldwell to talk about founder meetings

So I'm going to be talking about founder meetings and process so this is the we're gonna break down how you think about making investments and how tactically to do it.

And we have lots of examples of maybe not the best approach, the naive approach.

Even if your process is, I have no process, and I've never done this before, and I don't know what I'm doing, that is, in fact, a process, I would suggest.

So I would encourage you, and what we're going to talk about over the next few slides is to think about how you make a simple, simple, simple process for yourself just to get started with on how you make investment decisions, how you choose who to invest in, how much to invest, all that's good stuff.

It's good to have some sense of what your process funnel is.

And I'll talk about what that means in a second.

And I would argue 1 of the most important parts of a process is the face-to-face meeting.

The face-to-face meeting is pretty much where everyone that's done a lot of investing, that's the meat and potatoes of how you tend to make investment decisions.

You do a bunch of qualification, and then the face-to-face meetings are where you decide whether you're actually going to invest or not.

So we'll talk a bit about face-to-face meetings as well.

Okay, so here's a very basic process funnel.

This is people that you might want to invest in.

It's maybe things that you read in the press.

It's people you see at Demo Day, very straightforward.

These are folks that you have some introduction to and you have some exposure to the company.

For instance, is this even in an industry that I'm interested in?

Is this something that I'm excited about funding?

Does this fit with whatever kinds of companies I said to myself that I wanted to fund?

Then you have some decision-making process, which is, how do I decide whether I'm a yes or a no, which is actually quite tricky.

And then finally, the last bit is actually making the investment and closing the deal.

So again, very straightforward, just like a sales funnel if you've done sales before.

But it's worth thinking about your investment process this way.

Because again, if you're not, if what you're doing is saying, well, I don't know.

I'm going to take some meetings and maybe, and you have a very wishy-washy approach, you're probably not going to make optimal investment decisions.

So here's an example of a process funnel.

The first thing is it's actually good to think about what your budget is.

I don't know if other folks have already talked about this or will talk about this, but if you don't know how much you want to invest and what your budget is, you're probably going to be making suboptimal decisions.

So it's good to think, here's how much I'm willing to invest across a bunch of startups beforehand versus being like, well, you know, I have some money saved away, and I was thinking about maybe doing something else with it.

But I'm going to meet with some startups, and maybe if 3 or 4 of them can convince me it's good, then I'll invest in them.

That's a really tricky thing to do, if that's the way you think about it, because you're going to end up negotiating against yourself.

And there's a good chance you'll end up in this wishy-washy maybe land.

And wishy-washy maybe land is just not a great place to be as an investor.

So say you decide, OK, I have a $500,000 budget per year that I'm going to allocate to this asset class.

And I've talked to my wealth manager or whatever, and everyone's on board with this.

And this makes sense to make this financial decision.

And so the way I'm going to stage out this is do a certain number of investments.

If you're going to do it off YC Demo Day, it's pretty straightforward.

You show up to Demo Day, and you pick the 5 companies you would want to invest in.

But if you don't want to do it through YC Demo Day, you want to allocate it in other ways, put that on a calendar.

And then think about what is the pass rate of your process funnel going to be.

For instance, in this case, that's about picking 5 of your favorite 20.

So you probably don't want to meet with 150 companies if you're only going to be making 5 investments.

Probably not a good use of your time or the company's time.

So you want to do a little bit more on the qualification step.

On the other hand, if you want to make 5 investments and you only meet with 5 companies, probably you're not going to be making optimal investment decisions.

So I would think a little bit, I'd work backwards from what your financial commitment to making investments are to how you decide how many leads to qualify and how many meetings to actually do.

So let's talk about how you actually make a decision once you've gone through this super basic funnel bit.

The most important thing is to have a process in your own mind about how you will make decisions.

You need to negotiate with yourself of what does it mean to make the decision to actually write the check, right?

What is my burden of proof to be convinced by the founder that I want to invest in their company?

There's some criteria that you should decide ahead of time.

And again, it's good to actually think about these things versus ending up in this wishy-washy land where you're doing meetings, you don't even know what you're looking for.

You also want to think about how many meetings or interactions it will take for you to end up with a conclusive yes or no.

Something that we see a lot as an anti-pattern in investor behavior is folks that just do meeting after meeting after meeting after meeting and don't ever make a decision.

And that's actually worse for founders than just saying no, right?

The investor that just wastes a ton of time and feels like they're just on the edge but never say yes, that's very hard for a founder to deal with that.

And so it's actually better off just to figure out what your process is.

That's a much better way to run a process like this.

The other thing that sometimes happen is someone will say yes, but not actually say the amount they're going to commit, or they will say yes and then change their mind.

And if you're new, maybe you're not used to making decisions.

But once you make that decision that you say yes and you commit, you are fully committed.

And trying to back out of the deal after committing is a huge faux pas and will have far-reaching negative reputational effects.

So once you reach this decision, you're in, and that's that.

So let's talk about what the criteria are to make investments.

It's really good if everyone has different investment criteria.

We want everyone to have different investment criteria.

Otherwise, what's the point of having a bunch of investors that just be, there'd just be a computer that does the math, you feed in the 4 inputs and boom, that's a yes or a no and then the money goes in, right?

This is an example of sort of a wisdom of crowds type thing, where a bunch of people with different criteria are much more likely to find really interesting outlier companies and generate great returns versus if everyone has precisely the same criteria.

That's definitely part of our investment criteria.

But you can make your own decision about just how important the team is.

How important is it that there are really strong programmers on the team?

How important is it that they have relevant experience in the industry they're in?

How important is it that you have some touch points that someone else you know knows them and vouches for them?

So there's A number of different ways that you can create in your own personal process different criteria around team.

Market size is pretty important to a lot of folks.

For other folks, market size doesn't matter.

If you did a market size on The original Airbnb thing, it'd be very hard to determine what the market of airbeds were and you would probably say no if you were purely looking at market size.

Similarly something like Uber, the the market size of people calling black cars was very very small at the time and so you could have easily disqualified that just on that criteria alone.

Traction, there's some investors that say, I invest when there's no traction.

There's some investors that invest lots of traction.

So think about where you come in on the traction criteria.

The other thing is that a lot of folks decide no on investments if they don't have the relevant expertise We have a number of bio companies Or hard tech companies at demo day and a lot of folks just hard pass on all of them Because they don't have the relevant expertise and that's actually okay But it's good for you to know, am I willing to invest in something that I have absolutely no background in?

Or am I just going to stay away from that and stick to what I know?

It's good if everyone has different ideas around that, but it's worth thinking about beforehand how much you feeling like an expert in the field matters.

And then finally, the last bit, investment terms.

Some folks say, oh, I only pay very low prices.

Some folks require certain amounts of structure in the deal or certain ownership goals and all the other good stuff.

And that's OK if that's what your actual model is.

But if you have no idea here, it's worth thinking about a little bit how much the actual terms matter.

What often happens, I mean, you've already heard group think, you'll hear a lot of this say this again, is people's actual investment criteria is the thing that everyone else talks about and seems to think is going to work, is the thing they want to invest in.

And I would, again, suggest that this is not the optimal way to make investment decisions.

So the other thing that's not great about groupthink, just to add a little bit more color on that, is it creates non-optimal returns.

Everyone will just try to plow into the same deal and the company will end up being overfunded if it's perceived by everyone, if it fits everyone's criteria.

And it's actually not super great for the company if it gets overfunded.

Investors tend to get a little bit grouchy if they can't get into the deal and they all want to invest in it.

And as Jeff just mentioned, really good investments are often contrarian or unfashionable or somehow are deeply unappealing to everybody else.

Those are the really good ones, is that you see something that other folks don't And the fact that it's deeply unappealing is what creates such a great opportunity for you.

And so again, why am I spending all the time bringing this up?

It's worth thinking about what your process is and knowing what it is versus having your process be, I don't know, I'm going to go ask 10 people what they think is good and whatever they, what's ever on their list of what they wanna invest in is gonna be on my list too.

And I'm gonna do that for everybody and then end up with this like meta group think list.

That's how a lot of people, from what I can tell, do it and I would not recommend that.

Something super important in making investments is having personal conviction.

You have to really believe to make this kind of bet.

You know you're putting the money in and you're probably never getting it back.

There's no undo button on making an investment.

And if you do not have the personal conviction, and even when you say yes, it's sort of half-hearted, you're going to have a very hard time as an investor.

So 1 thing that we hear a lot of, especially for folks that haven't done much of this, is they say, okay I'm in once you go find the rest of the round.

And this is the cheapest of cheap shots that you can possibly do, because what you're actually saying is, I would like an option that's guaranteed in your round, but I do not believe you can actually raise it.

If you prove me wrong and you raise it, and all the other investors invest, then I'm in.

And I can understand why from the perspective of an investor, this feels like a super clever like ninja move.

But holy cow, is this not beloved by founders and not great from a reputational perspective.

These are the folks, these are the fair-weather friends, these are the folks that didn't actually believe in you and all they want is the right to get in if the deal happens to be hot because everyone else invests in it.

And so perhaps you've said things like this, or perhaps this is, you know, things that have happened in the past.

I just, I wouldn't recommend phrasing this way.

I would just say the honest answer if you're in this situation, which is I'm worried about the financing risk, so I'm a no, but let's talk later if more financing momentum happens.

Because then you're being explicit that the answer is actually no, and not like, oh yeah, I'm in, Just go raise 2000000 dollars and I'll be the last check in.

And 1 other thing that's kind of interesting if you think about investor mentality is you have to be willing to look stupid and be wrong on these things.

If the only investments you make are ones that are super defensible and make sense to everyone, and that could never be made fun of because that's just a fantastic business, You're gonna be missing out on a lot of investments.

And by having the personal conviction that you know why you're investing in the company, you should be okay with the fact that people are like, oh, well, what companies have you invested in?

And they're like, wait, you invested in the airbed company?

Like, why did you invest in the airbed company, right?

You have to be willing to take that potential embarrassment that you're like, yeah I did invest in the airbed company, and feel good about it.

And so this is 1 of the reasons why conviction is so important versus just creating a portfolio of things that you think seem like, that will make you look good from a reputational perspective.

So, in terms of some anti-patterns on decision-making that we see a lot, 1 of them is just going really, really slow, disappearing for weeks, not responding to emails, not following up.

Something, another anti-pattern is you're not really sure whether to invest or not, so you ask them to like meet your friend.

And you can keep doing this over and over and over again, like, oh, meet my other friend.

And that's a way to sort of defer making a decision-making process.

The other thing is flip-flopping, where you're saying yes, and then you're like, oh, actually, how about no?

Or how about you need to do this other thing and you're sort of moving the goalposts over and over again?

As I said a second ago, the way you should think about it is if you're not a yes, you're a no.

And you want to stay out of this middle flip-flopping, I'm not really sure land.

And that's where you're going to feel most of the time.

I know that's where I am most of the time when I'm making investment decisions, is you're just kind of in this like, oh yeah, this is maybe good.

And you want any kind of signal you can to get out of that.

And 1 of the pieces of advice we tell founders around fundraising because they get confused so much by people seeming interested in their company and not investing, is we tell the founders if they're not saying yes and giving you money, it's a no.

Because so many founders that we meet with, when we ask them how it's going or how fundraising is going, they say, well, there's a lot of interest.

Well, how many people have written checks?

And that is all the recipe for a failed fundraise, is a lot of people telling you how much they like your business and how exciting it is to talk to you.

If no 1 is writing checks, it means it's not going well.

And so From the flip side, from your side of the table, if you're just meeting with a lot of folks and being very excited and doing a ton of meetings, but never actually saying yes, you are telling them no whether you realize it or not.

And then in terms of the actual meetings, the best way to get this conviction is just to do meetings in person versus reading a deck or asking other people what they think.

Very basic, but just scheduling meetings in a non-painful way will put you ahead of the pack from a lot of other angel investors.

Being on time and picking a convenient location will

put you ahead of the pack from a lot of other angel investors.

picking a convenient location will put you ahead of the pack versus most angel investors.

So I would just suggest part of being founder friendly and getting a good reputation is just being easy to work with and not coming across like someone that's just like thinks they're super awesome and important all the time and wants to just like rub it in the founder's face how important they are.

So this is like very basic stuff, but I can't stress enough that doing these is definitely worth doing if you want to have a good reputation as a good investor or someone people want to work with.

In terms of things to ask in meetings, it's always good to start from the basics.

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Dalton Caldwell - Startup Investor School Day 2