- The speaker, Fred Wilson, is a well-known investor and founder of two VC firms.
- He emphasizes the importance of investors having their own opinions and convictions.
- Wilson believes that entrepreneurs should appreciate investors who challenge their ideas rather than those who say nothing.
- He discusses how investors often have preconceived notions and ideas about what they are looking for in a startup.
- Wilson shares an example of how an entrepreneur's idea aligned with his own and led to a successful investment.
- He values clear and concise communication from founders and believes it is an important skill for success.
- Wilson mentions the temptation to use buzzwords or compare a startup to a well-known company, but warns against trivializing the idea.
- He reflects on his firm's strength in evaluating teams and their potential once they have created a product.

- The company mentioned in the video was one of the first to teach coding through in-browser coding
- The speaker discusses the metrics they look at when deciding to invest in a company, but there is no specific formula or algorithm
- They mention a previous investment in a company called Turntable that didn't work out due to high churn 
- The speaker emphasizes the importance of building a business and investing in product and team growth
- The increasing size of seed rounds is attributed to high demand from investors and entrepreneurs equating capital with success, but the speaker advises against raising too much money
- The speaker mentions that their firm has adapted to the changing market by investing in areas outside of Silicon Valley and New York.

- Investors are becoming more selective and want to see more traction and high-quality teams before investing
- Seed and Series A investments may have been mispriced in the past and are now being priced correctly
- The success rates of startups are increasing, leading to higher pricing for investments
- Investing is still largely local, but platforms like AngelList have the potential to change that
- Startups should be located in regions with startup and investor density, but there are many geographies that could be suitable
- Israel has a thriving startup scene, particularly in Tel Aviv, with a strong culture of entrepreneurship
- New York is seeing a rise in enterprise SaaS companies and has a growing talent pool and capital availability.

- Fred Wilson, a prominent investor, emphasizes the importance of investors having their own opinions and convictions.
- He believes that entrepreneurs should appreciate investors who challenge their ideas.
- Wilson discusses the preconceived notions and ideas that investors often have when looking for startups.
- He values clear and concise communication from founders and warns against using buzzwords or trivializing ideas.
- Wilson reflects on his firm's strength in evaluating teams and their potential once they have created a product.
- He mentions the increasing size of seed rounds and advises against raising too much money.
- Wilson discusses how investors are becoming more selective and want to see more traction and high-quality teams before investing.
- He mentions that investing is still largely local, but platforms like AngelList have the potential to change that.
- Wilson highlights the thriving startup scene in Israel, particularly in Tel Aviv, and the rise of enterprise SaaS companies in New York.

Fred Wilson is interviewed by Aaron Harris at Startup School NY 2014

And before I was a partner at YC, I founded a company called Tutorspree that went through Y Combinator in the winter of 2011.

And today, it's my honor to introduce someone who doesn't really need very much of an introduction.

Fred Wilson has been investing in technology for close to 30 years.

And in that time, he's founded 2 separate VC firms.

The first 1, Flatiron Partners, was founded in 1996.

And the second, Union Square Ventures, was founded in 2004.

Without a doubt, Fred is 1 of the best-known investors on the East Coast.

And he's 1 of the premier consumer technology investors in the world.

He's also created, through his blog, AVC, a lively community which is home to wide-ranging discussions about finance, technology, government, and his taste in music.

You all join me in welcoming Fred Wilson.

She has opinions and she's not afraid to share them.

I think investors need conviction and she's got conviction.

Well, it would seem like if you were waffling on each of your investment decisions, you'd never really reach anything good.

There's a lot of people in the venture business who hedge and follow and try to figure out what the hot thing is and don't have their own opinions.

By the way, I probably don't agree with half of what Shanna said, but, and, like, we argue about these things, but I appreciate that.

Like, she's probably right a bunch of places where I'm wrong.

might be right in a few places where she's wrong, but that's okay.

That's why I think investors need to have that.

And entrepreneurs sometimes get annoyed because they walk into a meeting and they're meeting with you and they're like, this guy is just not buying this at all, you know.

But it's better than, I think, pitching to someone who's just like, You know, like saying nothing.

I guess if all the investors agreed with each other, prices would rise infinitely and no deals would actually get done at the end of the day.

But you know, sitting in the room with an investor, with someone who comes to you with a pitch, what's going to make you decide that you believe in what they're doing versus saying, you know what, this isn't really going to work?

So that sort of goes back to what I was saying about Chana.

We have certain opinions about what's interesting to us.

So we come into the meeting with a preconceived notion about what we're looking for, what's exciting to us, what's not exciting to us.

So part of it is just that that entrepreneur is connecting to some preconceived notion that we already have.

I mean, I remember back when Brad and I were raising the first USV fund in 2003, he said to me, why isn't there a Google for jobs?

Instead of having to go to Hot Jobs or Craigslist or Monster, why can't you just go to someplace and search and just have every job posting on the entire internet filtered for you.

And I was like, gee, that would be a good idea.

And then 1 day, I was reading my friend John Battelle's blog, and he mentioned this company he had launched called Indeed.

That's the thing you've been looking for.

They're like, no, we don't want to talk to VCs.

Eventually, at 5 times the valuation that We originally thought we were going to pay.

That's an example of a specific idea that you have in mind, a specific company that you want to see formed.

Is that typical of how you make investments, or is it more thematic?

Entrepreneurs are the ones who generally come up with the great ideas.

So it's generally more sort of thematic that we just have certain ideas about what's coming and given that that's coming, this should happen, and boy, so we should look for that thing.

And sometimes these ideas are sort of half-baked and not fully formed.

And then an entrepreneur comes in and you're like, yeah, yeah, yeah, that's what I was thinking about.

But they've kind of, like, crystallized it way more because they've obviously thought way more about it.

Like, when you're building a company, you're doing 1 thing.

Like, you become obsessed about that 1 thing, and you get really deep into it, and you generally understand that opportunity better than an investor will.

So this is actually something pretty interesting that you're touching on, which is something we talk about a lot when we look at applications, which is the ability of the founder to communicate his ideas or her ideas clearly and well is so critical, because there are a lot of people who probably have thought about these things very deeply.

you think it is that drives certain people to be able to communicate that?

Or what do you react to in terms of that communication and that clarity that stands out?

I think this is true of a lot of investors.

I like it when somebody can explain something very crisply and very simply.

And they get you to the sort of nugget of what they're doing right away.

I mean, not by rushing into it, but by just kind of simplifying it and making it easy to understand.

And I think that some people are born with that gift.

I have worked on that myself over the years.

And I have found that I've gotten better and better and better at that.

And I do that a lot of times for our portfolio companies when it's the next round or maybe the entrepreneurs decide they want to sell and so we get involved in helping them do that.

And I have found that I've gotten good at positioning the opportunity quickly in a way that's, you know, very, hopefully, attractive to the person on the other end of the phone or whatever.

But that's a really important skill is to be able to explain what you're doing, And I think without buzzwords, you know, because it's so easy to fall back on buzzwords or three-letter acronyms like CRM or something like that and people's eyes tend to glaze over.

I think it's Another temptation people have sometimes is to say, I'm the X for X.

You know, I'm, you know, Etsy for electronics or I'm Uber for helicopters or whatever.

And, you know, that's a really, in some ways, a really great technique.

But it also sometimes trivializes what you're doing.

But I think being able to communicate crisply and clearly is really important.

It's interesting that you mentioned the this for that thing.

When we applied to Y Combinator with TutorSpree, we pitched ourselves as the Airbnb for tutors.

part of the reason we did that was it allowed us to pack a lot of information into a very short sentence.

It was not the right way to look at the business.

What did PG say when you came in and said we're Airbnb for tutors?

I think that he was looking at us as a founding team and then thinking about what could happen next with the company.

And Airbnb, this is 4 years ago, was certainly growing quickly.

I mean, we've got to bring it up every time we talk

I think what you just said about, you said something about the team was good and the potential of what they could do with the idea, right?

I think that's what seed investors are good at.

Seed investors are really good at sort of connecting to the potential of the team and the potential of the big idea and not getting caught up in much more than that.

We sometimes invest in seed rounds, but usually those are seed rounds for companies that have already shipped a product.

I think we, and this is a criticism or maybe just an observation of USV, we are actually not very good at the thing you just said that seed investors do.

I think we're very good at evaluating a team once they've created a product.

I saw I see Zach Sims just walked in back there and when Zach and Ryan shipped Codecademy, you know, we were able to say, oh fuck that's amazing, like we need to invest in this, right?

We knew how great they were, because we were hanging around Columbia University trying to find interesting teams coming out of there.

But so It was the potential of the team on top of something that they had already shipped into the market.

And I think that great seed investors don't need to see the product.

They somehow can recognize the potential in the people that they're going to create that product.

Now, Codecademy is a pretty interesting example of that, because when they launched, they had only been working on it for a few weeks, but it launched to, I mean, it was an unbelievable launch.

So when you compare that against other, you know.

Well, Shanna was saying, you know, do something different.

I think they were the first people to do in-browser, you know, like writing code in-browser as a way to teach coding.

idea of how do you teach someone to code.

And so that, that I think was part of why they kind of just took off, because it was inviting to people.

So when you're looking at that sort of takeoff moment, what metrics are you looking at?

Is there a specific set of things you're analyzing?

Or is it just a general momentum somewhere?

People always say to me, how many monthly active users do I need before you're going to invest in my company?

It's more sort of based on the market, the product, what you would expect for a product like that.

Certain things that are, you know, super viral, you'd want to see much larger numbers, things that are more utilities, smaller numbers, but, you know, the right kinds of engagement might be more important, niche services that have sort of high-value niches.

Maybe it's even smaller numbers, but just, so it's, we don't have a formula, we don't have like an algorithm or anything like that.

We've toyed around with, and my partner Albert is enamored of this idea, money ball for VC, of, you know, could we create an algorithm and just essentially, like, crawl the Internet and, like, run algorithms and that'll just tell us what companies to invest in.

I think It's a little bit more art than science.

What's most likely to trick you on that decision?

Turntable was a monster right out of the gate.

And so their problem was that they had a churn problem, but their acquisition was so high in the early days that you couldn't really see the churn unless you really knew how to look for it.

But over time, the churn revealed itself.

And then it just could never get beyond that.

And I think that the churn was related to the fact that a lot of people listen to music in a very passive sort of way.

Like they, you know, take a software engineer, they go into work, they, you know, put on their music, they put on their headphones and they're grinding away.

And they don't actually want to be, like, in a room engaging with people around the music, right?

So it was too intense and people just had, they're like, I got to get off of this.

I got to go back to Pandora or whatever else I'm listening to.

So that was what I think caused the churn.

Would you make the same kind of bet again?

I mean, there was a huge amount of momentum behind that.

Well, you know, but also, so let's unpack that a little bit more.

I'd known Billy for 6 years and I'd known Seth for close to, well, 15 to 20 years.

So it was a team that I knew really well.

And I had been looking to invest in 1 of Billy's projects for a long time because I always had recognized his talent.

So it was kind of, it was like the perfect storm of I like the people, there's a product-centric entrepreneur here who I've always respected and wanted to work with, and now they've nailed it, they've hit it.

So maybe the fact that the people side of the equation was so strong for me meant that I was willing to kind of maybe not be as diligent in the analysis of the phenomena.

When you've made that decision, when you've made the decision to invest in a company and it's certainly coming to the A, B round, what are you expecting people to go and do once they have your money in their bank?

Well, at its core, I think doing a startup is building a business.

So I think that what I would want them to do is get on with the building of the business.

And I wrote a blog post today about the metaphor of going up the flight of stairs and step 1 is building the product and getting the product market fit.

And that's generally what I think of seed money for.

And then getting a Series A done so that you can go beyond the founding team, which might be 2 or 3 or 4 people, and go out and build sort of a 10 or 12 or 14-person team to really, you know, get, you know, all of the aspects of the business going, really create sustainable growth and really continue to invest in product.

And then once you've, you know, proven you can do that, series B would be around building full-blown business, scaling the team, taking the market, becoming the dominant product in the market, and then series C, get to profitability, and then after that, take the company public, sell it, do a secondary.

And so each of those steps along the way is ultimately in furtherance of building a company, building a real business.

And so I see it sort of as a, as a, just a march through those, those paths.

And I want to see people commit to making the investments in the business that are required to make all those things happen.

So it's, it's usually about, you know, continue to invest in product and build out a team, get to a business model, execute that business model, get revenues, get customers, continue to build a team.

And if the entrepreneur either gets unfocused and starts lighting up a whole bunch of side projects or is reluctant to build a team or there's just some, you know, kind of classic red flags you get sometimes when you start to see that they're, for whatever reason, not really kind of committed to that sort of grinding away on the business that I think is, you just got to do.

You've been watching companies raise money and spend money for 30 years now.

There's been a lot of talk about how starting a startup is easier than ever.

Alexis mentioned all you need to do now is open your laptop.

With AWS, costs have gone down remarkably.

But the seed rounds are getting larger and larger.

I think it's just a function that there's a lot of demand from investors, everything from angel investors, seed investors, VCs, and lots of other types to put money into startups.

And so I think entrepreneurs are in a market, in a seller's market where they can raise a lot of capital.

And a lot of entrepreneurs are choosing to do that because they equate capital with runway and runway with increasing the probability of success.

But I think that's a little bit of a trap because I think that with a limited amount of money, too little money will kill you and too much money will kill you.

With a limited amount of money, too little money will kill

With a limited amount of money, if it's sufficient, it focuses you and constrains all of the possible things you might do and makes you and your cofounders, you know, make the hard decisions about, do we do this or do we do this?

It forces you into this kind of process about optimizing the most important things and doing the things that are going to get you to where you want to go.

So I think that the market is at a stage right now where you could go out and do a $2.5 million seed.

I'm generally, I would generally advise founders not to do that.

Given the low interest rate environment and the fact that it doesn't seem to be ending anytime soon where growth and inflation are, you can reasonably assume that that kind of capital interaction is going to go on for quite some time.

So as an investor looking a little bit later, are you at all worried that the traditional size of the rounds and the prices that you pay for rounds are just going to get to a place where it doesn't make sense for you anymore?

Well, I mean, if you look at, you know, we've been, USV is 10 years old this year.

And if you look at the prices we were paying for seeds and series A's in 2004, 2005, 2006, that was here, and then in 2007, 2008, 2009, that was here, And then in 2010, 2011, 2012, it was here.

And, you know, we have reacted to that by, I think, making some changes.

We've become more willing to invest in places like Iowa and Pittsburgh and Philadelphia and Berlin and, you know, other parts of Europe.

And so that's going to where the supply-demand equation is not quite as in favor of entrepreneurs as it is in Silicon Valley and New York and increasingly other parts of the United States.

Okay, if we're going to have to pay those prices, then damn well be, you know, a risk reward equation that we're happy with.

So maybe we want to see a little bit more traction, or want to, you know, really back a super high quality team.

I guess it could get to the point where we think we're not gonna make money, but we don't see any evidence.

Maybe, Maybe Seed and Series A have been mispriced for 25 years.

And maybe the market's finally starting to price them correctly.

When you think about a Seed investment as basically a very long, long option.

You know, where it's either worth a hundred, a thousand X, or it's worth nothing.

You could argue it's worth a lot more than people have paid for it in the past.

That might be because the success rates of startups is going up, and therefore, when an investor is pricing an investment, unfortunately, the entrepreneur is paying for the fact that a number of the investor's investments are not going to work out.

So, I mean, we understand that a third of the things we invest in are not going to work at all.

A third of the things we invest in are going to kind of work, but not particularly well.

And it's the final third that actually produce all the returns.

And so the entrepreneur who is taking money from us who's in that group that's producing all the returns is actually paying a little bit for the failure rates because we're thinking about it, what's the blended return on our portfolio?

Well, if failure rates go down because of things like YC that increase the probability of success, and I absolutely believe that YC does that, then maybe that's part of why pricing has gone up.

Given that the world is so connected now, and we have the Internet,

you, Internet, and people out on the Internet are watching us now.

Investors are finding deals all over the place.

You're finding, you mentioned Philadelphia, Berlin, all over the place.

So given that, it would seem that there would be parity in prices wherever you are.

It shouldn't matter that your location is Silicon Valley or New York or Berlin.

AngelList maybe has the potential to change that.

I mean, if we really end up with a NASDAQ-like market for seed and Series A and Series B investments, then that would happen.

But still a lot of investing, particularly seed investing, is local.

And people want to be able to meet the entrepreneur and hear the pitch and possibly, you know, join a board or at least be on an advisory board or spend some time on a regular basis with the entrepreneur.

And so that means that entrepreneurs who are in places where there is a lot of capital, like Silicon Valley and New York to a slightly lesser extent, but there's a lot of capital here, are in a better situation than entrepreneurs who are in parts of the world where there isn't much of that money.

So, and I think also investors may have a higher comfort factor with startups that are in regions that have a lot of startup density.

I'm not entirely sure why that would be the case, but I think that probably is true.

I think there's something of an environmental aspect to that, when you're around other people who are doing startups and are talking about technology, I think it's beneficial.

know that when I left finance to work in startups, at which point, by the way, I applied for the USV Analyst Program and was summarily rejected.

You know, but this is part of why YC thinks that we'll find great startups wherever they are.

We want them to come to Silicon Valley, sort of see how things are done there, and then go back.

Wherever is best for your business, that's kind of where you should be.

I know some entrepreneurs want to build their companies in a place where they want to raise their families or whatever.

That could be Silicon Valley, that could be New York, that could be Boston, it could be Boulder.

So I do agree that you should do a startup in the place that's best for you, but I also think maybe you should do it in, there's probably at least a dozen geographies around the world that have enough startup density and enough investor density that, you know, would be a decent place to build a company.

Don't go to some out-of-the-way place that it will be hard to recruit management.

I mean, you know, it's really, really hard to recruit people to, you know, if you were doing a startup in Bozeman, Montana, like, I think you'd, I mean, I don't mean to pick on Bozeman.

But, you know, I just think you'd have a hard time recruiting, you know, really high-quality talent there.

Either you're going to find it locally or you're kind of stuck.

I was just in Israel a couple weeks ago in Tel Aviv.

And I was struck by how vibrant the scene was there.

I knew that there was great technology there.

But it seems like some of what's going on in San Francisco and in New York is starting to seep out to the

Well, I mean, Israel has been a startup hub for a long time.

They had a little bit of a period where they, it reminds me a little bit of what happened in Boston, although I think that Israel has bounced back stronger in some ways than Boston, but what happened was there was this transition from sort of more infrastructure and enterprise stuff to more consumer stuff, really around the time we started USV was when it kind of really started to happen.

And entrepreneurs and VCs in both Israel and Boston, I think, struggled to make that transition as quickly as entrepreneurs in Silicon Valley.

And New York, it was easy for, New York was easy to make that transition because it always had a bent that way to begin with.

But Silicon Valley, I was always impressed by how quickly they made that transition.

And I think that Israel went through a little bit of a period where they struggled.

And because they've been doing startups in Israel, particularly in Tel Aviv, for 20 or 30 years now, at least, they have a lot of repeat entrepreneurs and a lot of talent and a lot of knowledge about how to do these kinds of things.

See all Y Combinator transcripts on Youtube

Fred Wilson Interview at Startup School NY 2014