- The speaker, Sam Altman, discusses why, how, and what to do to invest in startups.
- He emphasizes the energizing aspect of investing in startups, working with people full of new ideas and unlimited energy.
- The opportunity to shape the future and work on multiple projects is highlighted as a motivating factor for investors.
- Altman mentions the humbling nature of investing and the importance of being open to learning and improving.
- The speaker advises against being swayed by what other investors think and emphasizes the power law, where a single successful investment can outweigh all others.
- He encourages investors to focus on the potential magnitude of a company's success rather than its failure rate.
- Altman suggests finding promising startups through word of mouth and building an open network.
- He recommends being open to random emails or introductions, as they can lead to valuable opportunities.
- The speaker notes that there are now more investors than good startups, giving founders more control in the investment process.

- Founders now have more power and choice when it comes to investors
- Reputation is crucial for investors, as founders consider the opinions of other founders when choosing investors
- Being helpful, responsive, and available also contribute to a positive reputation
- The best investments often come from deals that feel expensive or where there is no competition
- Startups that aim to solve hard problems are more likely to succeed than those focusing on easy problems
- The traits of successful founders include obsession, focus, frugality, and love
- Intelligence, creativity, and communication skills are important for founders
- Execution speed and the rate of improvement are strong predictors of success.

- The growth rate of a founder is just as important as the growth rate of a startup.
- Pay attention to founders who are improving quickly over a short period of time.
- Be wary of founders who are motivated by getting rich quickly or using startups as a resume item.
- The size of the market today is not as important as the size of the market in 10 years.
- Look for small markets that are growing rapidly rather than large markets with big competitors.
- Avoid following trends and instead focus on identifying real trends where people are actively using a platform.
- Good ideas that look like bad ideas are more valuable than bad ideas that look like good ideas.
- Avoid chasing what worked in the past and be skeptical of investing in companies with many competitors or founders who downplay long-term commoditization.

- Founders who try to convince investors of their long-term competitive advantage should be viewed skeptically
- Having a great product is crucial for success, but the focus in Silicon Valley has shifted too much towards growth hacking and marketing
- Startups that rely on word-of-mouth recommendations from trusted sources have the potential to become successful
- Human intuition about exponential growth is often unreliable, so it is better to model and analyze growth potential
- A successful startup should become more powerful, have increasing pricing power, and have an easier time acquiring users as it grows
- The value of a startup lies in its future revenue and earnings, so it is important to assess its potential in the long term
- Early stage investors can add value by helping with hiring, future fundraising, and providing tactical advice
- Flaws in founders can be acceptable if they are improving quickly and are changeable
- Assessing a founder's integrity can be done by listening to their decisions and observing their behavior
- Exercising pro rata rights in future funding rounds is recommended, especially if the company is raising an up round led by a top VC.

- Pro rata rights are often included in investments to maintain ownership level in future rounds.
- Security tokens and ICOs may change financings, but not in the way most people think.
- There are important ICOs happening, but there are also many scams and incompetence.
- The success of ideas can be underestimated, like with Reddit and Dropbox.
- It is important to consider shifts in consumer behavior when evaluating market potential.
- Solo, non-technical founders can succeed, but having at least one technical founder is preferred.
- Self-awareness, willingness to take feedback, and drive to improve are important qualities in founders.
- Allocating time and resources to founders is based on personal interest and willingness to help them.

The speaker, Sam Altman, discusses investing in startups and highlights the energizing aspect of working with people full of new ideas and unlimited energy. He advises against being swayed by other investors and emphasizes the power law, where a single successful investment can outweigh all others. Altman suggests finding promising startups through word of mouth and building an open network. He notes that founders now have more power and choice when it comes to investors. The traits of successful founders include obsession, focus, frugality, and love. The growth rate of a founder is just as important as the growth rate of a startup. It is important to assess a startup's potential in the long term and consider shifts in consumer behavior. Having at least one technical founder is preferred, and self-awareness and willingness to take feedback are important qualities in founders.

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/

I'm going to turn it over to our first speaker, Sam Altman, the president of Y Combinator, who actually had the original idea for this course, so I'm pretty grateful for that.

And he's also the man who has said, You want to sound crazy, but you want to actually be right.

This is, it's cool to see so many people in the room.

So I wanna talk about why, how, and what to do to invest in startups.

I'm only gonna talk a little bit about why, especially given how many of you already invest in startups, but I did do something to get ready for this class which was I asked some of the best investors I know why they invest in startups.

And I contract, oh, Stephen, I think it's automatically advancing.

So, And then I compared that with reasons I've heard from other people who I don't think are as good.

And I think it is worth thinking about why the people who have sort of done the best in the field, what their motivations are to invest.

This was 1 I heard from a few people, these exact 3 words from a few different people.

The thing that I like the most about investing in startups is that it's energizing.

I feel like I am constantly working with people that are not burned out on the world at all.

They have unlimited energy, they have new ideas, and they have the sort of the beauty of inexperience, and they don't know.

People that are doing things for the first time are willing to do things that anyone who has got a few more battle scars won't try, And that is incredibly energizing to be around.

Help shaping the future was something that the very best investors said again and again.

And as part of that, the leverage on time, the ability to work on multiple things, came up again and again and again.

Most of the time you lose 1 extra money, but occasionally you do get to make 100 or 1,000x.

And that, for the same reason slot machines are so satisfying, is incredibly addictive.

It's also satisfying because every once in a while, a founder of a great company who is now super famous will tell you, hey, that thing you did for me 8 or 10 years ago was this make or break difference to my entire career.

You get to be around some of the most talented people in the world.

There is this sense of just endless optimism around the future that is really important to my own personal happiness to be around And I haven't found that in too many other places in the world besides startup founders.

I write on the back of every stock certificate on a post-it note my confidence interval and what I thought was going to happen with the company.

And that framework, that mental adjustment, you're usually going to be wrong.

That has been helpful to me in everything else I've done in life.

And If you treat this as something that you're gonna try to get better at and sort of deliberately practice, you can learn a lot and you can get better at this really quickly.

All right, so now I wanna move into the 2 main sections, The how and the what.

The number 1 mistake that I used to make when I started investing was actually not a misunderstanding of the power law.

The number 1 mistake was that I cared too much about what other investors thought and The sooner you can free yourself of this, the better.

I think this is a very common mistake that people make when they start investing.

You get very swayed by what previously successful investors think.

The first question that most people ask when I see startups is, who else is investing in year round?

People totally outsource, I would say 80% of investors outsource 80% of their decision making to what other people think about an investment opportunity.

And so there's this weird schooling effect where a company gets hot for no discernible reason or if it's a trend or whatever and then everybody wants to invest in 1 company.

And it's just because a few people decided they liked it.

So the number 1 mistake I made was to be too swayed by what other investors thought good and bad about a company.

After I corrected for that, the second biggest mistake I made was not understanding the power law.

The power law means that your single best investment will be worth more to you in return than all of the rest of your investments put together.

Your second best will be better than 3 through infinity put together.

And this is like a deeply true thing that most investors find and this is so counterintuitive that it means almost everyone invests the wrong way.

So the question that you should be thinking about, the question that most people think about when they start angel investing is can I hit a bunch of singles?

And in most other kinds of investing, that's the right way to do it.

You know, if you're going to invest in stocks or bonds or whatever, That's how you do it.

You just compound singles for a long time.

But angel investing is a business of home runs and you want to look for things that can be potential home runs.

And we're gonna talk about that again and again through this but this is, I think, the most important thing to learn and the thing that most investors get wrong.

So it's all about the magnitude of your biggest success.

Most investors talk about their failure rate.

Still, you know, when we have people that are trying to build angel firms come talk, the question, the first question they ask is, what is your failure rate?

Totally the wrong way to think about angel investing.

You can have 95% of your investments fail if 1 of them returns a billion dollars and you'll be totally happy.

And so this is what you want to think about.

The first question that I try to ask myself when I meet a startup is not why is it going to fail.

The first question is how big could this be if it works?

Can I imagine this founder, this idea, this market supporting a massive, massive company?

And then I think about all the things that could go wrong.

But I found that if I thought about what could go wrong first, I filtered out the companies that could be giant.

The companies that could be giant are at this intersection of sounds like a bad idea is a good idea.

And because that's a very narrow intersection, and because they sound like a bad idea, The best investments are the ones that are easiest to talk yourself out of if you start off thinking about why they could go wrong.

So then there's a question about how do you find these companies, how do you find the companies that can be the handful of companies that get started every decade that are responsible for almost all of the returns.

Just to put some numbers on the power law, YC has funded I think around 1,600 companies, maybe 1,700.

Our top 5 companies represent about 2 thirds of the value that we've created.

And our top 1 company represents about one-third.

So this is like this very extreme, very counterintuitive thing.

All right, how do you find these companies?

Another thing that I think is surprising is many of these companies that are sort of a generation defining companies are started by people who are out of network, who are not well known, who are not sort of the people that can start a company and get a bunch of press right away.

And the best way to do that is from other founders.

This is part of what we try to do at YC, is we try to get our founders to like us so much that they refer all of their friends to us.

Because they say, these, you know, YC creates so much more value than it takes, you gotta go work with them.

And we, this idea of like word of mouth as the way to find companies to invest in has been great.

If you're just starting out, I think what I have seen the most successful angel investors do is just start helping founders for free, realizing they may not get to invest in those companies, but that they'll get the referrals down the road.

And so much of this is about people connecting you to other people that you don't know.

We talk about this at YC, this value of an open network.

A lot of angel investors like to brag about how difficult it is to get a meeting with them, how you have to have a connection, otherwise they'll never take you seriously, And it's got to be from someone they worked with a bunch, and you've got to be well-known and experienced.

Anyone in the world can go to our website, click Apply.

We try to respond to emails to people that email us.

We take people seriously that have no personal brand, no reputation, no network.

We ask people that are in our network to connect us to the most promising people they know that we don't already know.

But this idea that we're available and we're open, I think this was in the 2 or 3 most important secrets of YC.

This was something that we did that was really different.

In fact, people bragged about the opposite.

And we went totally the other direction, and I strongly recommend this.

Be open to that random email that comes in.

Be open to the introduction of someone that on paper doesn't seem like that there's someone you want to meet.

That other time makes it totally worth it.

So 1 big shift that's happened in the last 10 years, I'd say, or maybe 15 even, is there are now way more people that want to invest in good startups than there are good startups.

And so, Founders have really become in the driver's seat.

Founders of good companies have a lot of choice when it comes to investors, and founders talk a lot now.

The network has gotten big enough that the asymmetry that used to exist, where investors had a lot of leverage, is gone, and I don't think it will come back anytime soon.

It is way more important to your future success as an investor that founders like you and say that investor did the right thing by me than it is that you squeeze out a few drops of juice from a failing company.

The number of investors that I have seen do incredible long-term damage to their reputation by fighting over the carcass of a company that was never, because of the power law, going to matter to them anyway, but try to get out $10,000 or whatever from a dying company.

If you're playing a long game, that's not worth it.

Reputation, especially reputation when a company is going badly, is super, super important.

And I think that is the secret at this point in sort of 2018 Silicon Valley to winning deals.

The thing that we tell founders to do and the thing that founders do anyway when they're trying to choose between a number of investors that all want to invest in their company is they do reference checks on you, just like you do on them.

And more and more, the thing that I have seen founders use as the criteria to make the decision about which investors to work with is what the other founders that investor is funded have to say.

And so I think this will continue to be important.

There are other things you can do, I think.

Helping before you close the deal is good.

Deciding quickly, being clear about your reasoning, being responsive, being available.

All the things you want from a founder, those all help too.

But this reputation of being good to work with, that goes a long way and people remember that for a long time.

The other question I get all the time is how do I get a good bargain?

How do I get better terms than everybody else?

We recently had a company, they had let's say 10 investors that were gonna join their seed round.

Every 1 of the 10 had asked for advisor shares.

Every 1 of the 10 had said, well unlike all those other investors, I really do work super hard.

I'm the only investor in a round that usually gets advisor shares, so you need to give them to participate.

And everybody asks for this, all 10, same thing.

And I think a lot of people are just looking for a good deal because valuations feel high.

They have felt high to me for 8, 7 years now.

I went back and looked at my best investments.

The very best investments I've made have either been a ridiculous deal because no 1 else wanted to invest, or a deal that felt incredibly expensive.

The more I was willing to sort of overpay, in my mind, to invest in a company, often the better it did.

And especially when I felt like I was getting screwed.

If it was like a huge up round 3 months after some other round, it was painful.

I think because the companies that work sometimes work so fast, and you're anchored to like what a fair deal is, you gotta watch out for this.

But My experience investing in startups is my best investments with 1 or 2 exceptions have been the deals that felt the most expensive to me.

And the 1 or 2 exceptions were companies where I understood something that no 1 else did and thus there was no competition whatsoever.

Other than that, the companies where I like tried to value invest have not been as good.

I think value investing is not a winning strategy when it comes to being an angel investor most of the time.

Alright, I will try to go kind of fast through this to leave time for questions.

So there's a big question of what to invest in and here is the framework I use.

I will consider anything that I believe could be a $10 billion company and that is such a tight criteria I have no other rules.

So I am willing to look at any stage, I'm willing to look at any sector, I'm willing to look at any business model.

There are other investors who have this like oh I only do this 1 thing at this 1 stage and maybe they make that work.

The good, the great companies, the companies that are in that number 1 spot on the power law are so rare that I suggest you only select for things that can be there, and other than that, be really open-minded.

Speaking of the really big companies, I think, I don't know if this was always true, I suspect it may have been, but I think today, it is easier to start a hard company than an easy company.

And this sounds super counterintuitive, but if you're going to build a really big company, you got to convince people to come work with you, to pay attention to you, to write press articles about you, to care about you, to advise you.

And if you are starting the 22,000th photo sharing application, it's really hard.

If you are starting a nuclear fusion company, a lot of people want to help with that.

And I think especially for the companies that end up breaking out, This is really important.

You know, this thing that is so interesting, people proactively want to help you for free, want to come be part of your team, whatever.

So like, is this a company that I believe will be able to recruit hundreds of really talented people who could otherwise start their own companies is a super important filter that I don't think people think about enough.

1 thing that we've learned at YC is to mostly pick the founders.

It is difficult to hear an idea at the very early stage and say, yeah, this idea has what it takes to be a $10 billion company.

You can say an idea doesn't have it, which we'll talk about.

But it's difficult to say this is for sure the big idea.

However, I think you can, with practice, identify founders, and I'm going to talk about how, that have a chance at creating 1 of these companies.

Paul Buhite, 1 of our partners, made a list of the 4 traits that he thought founders that go on to create giant companies have, and they are obsession, focus, frugality, and love.

He said this sort of in passing in a meeting like 2 or 3 years ago.

There's other obvious things that everyone screens for, but Pay attention to these.

Speaking of the obvious things that everyone screens for, intelligence is really important.

You can give a founder an idea and they can start a company.

The problem is they need to come up with new ideas for a company.

You have to come up with crazy new ideas, big changes all the time.

We tried an experiment once at YC where we funded 20 teams of strong founders that didn't have ideas, but were otherwise really good.

And what we learned is that the good founders are the people that have ideas all the time.

So there's an intelligence component to this.

There is an ability to think independent thoughts component to this.

But whatever you want to call this, this idea of this particular kind of intelligence that leads to seeing problems in different ways and thinking of ideas that don't yet exist but should, you've got to have that in a founder.

Communication skills, I think, are 1 of the most important founder qualifications that people don't think about enough.

So, so much of your job as a founder is about communication.

You are, every time you hire someone, every time you go raise money, every time you try to sell the product, every time you try and set a direction for the company, you do it.

Like a huge amount of a founder's job is being an evangelist for the company.

And if you don't have really strong communication skills or if you don't develop them quickly you're at a big disadvantage.

Think about there are obviously famous exceptions to this but if you think about it on the whole the founders of the really super successful companies tend to be great communicators.

There's a lot of ways to measure this, but, and we talk about this a lot, the need to sort of relentlessly execute as a founder.

This is incredibly correlated with success.

So 1 way we test this during YC is between office hours, which we have every week or 10 days, how much progress do the founders make?

How quickly do they take a new idea and try it and say, hey, I came back and I tried that.

This didn't work, but this other thing did.

Just this relentless cadence of execution is incredibly predictive of success.

And we had a joke once where there were all these founders who are incredible on paper, they never execute quickly, they always have great reasons for why they didn't.

But they still never go on to be successful.

And then there are these people who just like get an amazing amount of stuff done.

Their iteration speed, the speed with which they can generate a hypothesis, test it and implement it is unbelievable.

That's really correlated with huge success.

So, if you look at a founder who comes to meet you for a seed round and compare that founder to Brian Chesky, you'll be disappointed 100% of the time.

That is the wrong comparison, you will never write a check.

However, just like startups, you look at the growth rate, you should look at the growth rate of the founder as well.

So 1 thing that we can often tell over the 10 weeks of YC is how fast a founder is improving.

It's different than how fast the business is improving.

And you know, like humans always underestimate exponential growth.

And so if you notice a founder who is improving incredibly quickly over the couple of months you get to know that founder, pay a lot of attention.

Again, you won't get Brian Chesky in a first meeting, But you can find people who are on a trajectory to develop into a Brian Chesky.

This is 1 of those things where I have seen it, you know, maybe like 10 times in my career so far where I just knew that this founder was going to like develop into an incredible leader And it's basically been every time I felt it, it's been right.

I really do trust this rate of improvement metric.

I think 1 thing you have to be increasingly aware of are the wrong motivations.

So starting a startup is a very long-term commitment.

You know, if it's gonna work, it takes more than a decade.

It's really hard, there are a lot of days where you just wanna give up.

And there are a lot of people now who start a startup because they think it is a way to get rich quickly.

So as startups have become the new default career trajectory for ambitious people, there are a lot of people who are doing a startup as a resume item or as a way to get rich quickly.

The amount of pain that you have to suffer for a startup, you realize at some point, you know what?

I can do pretty well in any series of other jobs with much less risk and much less negative effect on my life.

So you really do want to stay focused on the mission driven founders.

Again if we look at our own success and failures in our portfolio of YC, every time we thought a company was going to go really well and didn't.

The company, the founder did not have this deep sense of mission.

So, it's something we really look for as a primary motivation.

Then, another way I used to get tricked a lot is, there were founders that I didn't think were that good, but they had stumbled on a nice business, or they had this metric that was growing pretty well, or all of my other investor friends were investing, and so I got scared and did it anyway.

But I think this focus on truly exceptional founders, like people that I'm like, wow, I wanna go work for him or her, is really important.

I have never once made a lot of money backing a founder that I thought was only okay, but a business that was otherwise good.

I talked a little bit about this, but we have a word at YC called scenesters.

This is different than people who just want to make a lot of money.

There are increasing number of people who just like want to be around startups and go to startup parties and talk about being a founder.

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Sam Altman - Startup Investor School Day 1