Transcription
Hi everyone, I'm Brad Flora, general partner here at Y Combinator. Before joining YC, I spent years angel investing and managing seed funds focused on YC demo day startups. And I'm Gary Tan, president and CEO of YC. And before this, I was both a partner at YC and then I went on to create initialized capital and went on the Midas list at number six.
Today, we're sharing the clearest strategy we know for investing at Demo Day based on real-world results and 18 years of YC data and frankly our own very direct experience. If you're here, it's because you know or you're starting to realize that early stage investing is not about spray and prey. It's about consistently finding and backing the few companies that really matter. And YC Demo Day is the single best place in the world to do that. Because by the time you meet a founder on demo day, they've already made it through the most selective investment process in tech and spent months accelerating their business through the YC batch experience.
So what are we going to cover today? First, why should you invest in demo day? Second, what's the best investing strategy? And third, how do investors actually execute this strategy? Let's get started.
To win at startup investing, you have to actually invest in outlier companies. The fact is 6.5% of YC demo day companies become unicorns, which means they reach a billion dollars in market valuation. Outside of YC, this number is only 2.5% according to Angelist. Demo day investing triples the odds of investing in an outlier. If you're investing at a $20 million post money valuation, that's a 50x return before dilution. Roughly 25% of YC's unicorns go on to become decacorns worth $10 billion or more. And I can tell you from experience, decacorns produce generational wealth for angels and legendary returns for fund managers. They make careers and they make funds. And that was true for me.
Let's make this real for a minute. GitLab, Scale AI, Coinbase, Door Dash at demo day. Not yet household names, just small teams pitching ambitious ideas at demo day. And many of them did not raise at crazy prices. In fact, these rounds weren't reserved for insiders. Every one of the companies we just mentioned took checks from angels and small funds at demo day. And this leaves the door open for you. Investors who showed up, met them, trusted their own judgment, and made a bet got a massive outcome in return.
The fact is being a regular YC demo day investor pays dividends. Of people who funded at least three companies from 2018 to 2020, the median TVPI, meaning the multiple on their investment was 5x. The top quartile was 8x, the top decile was 15x. And amazingly, the bottom quartile of the people who did that got a 3.3x. And if you know venture capital for the asset class, 3.3x at YC demo day is better than the top quartile of the asset class overall. YC is full of outliers, and that's what this looks like.
So how do you consistently put yourself in a position to catch these winners? Looking at years of demo day investing activity, several thousand investments made by thousands of investors, we've seen the top performers coalesce around a strategy we call the golden strategy for demo day investing. The golden strategy boils down to three ideas.
First, consistent deployment. You show up and invest every batch for at least two years. No batch skipping, no trying to time the market. You're there every batch. So in a world where YC is running four batches a year, the optimal strategy for hitting unicorns is to invest across eight batches. Why is that? Well, because great founders don't wait for perfect conditions. They just build. Because markets and ideas don't emerge on some timetable. When an idea's time comes, you've got to be there ready to invest.
The second part of the golden strategy is broad allocation within batches. You spread your bets across the strong founders that you meet and find. You're not here to pick a winner. You're here to build a net that catches the great companies. A portfolio of startups that you think could get huge from the batch that you're investing in. To give you a couple examples from the numbers, the top angels that invest at Demo Day are writing 15 to 25 checks per batch. And the top seed funds who are writing larger checks are still writing 8 to 15 checks per batch. So why should you invest broadly? Well, even the best investors miss individual winners. The key is to not miss the batch. Startups take a long time, and it's hard to know how things will play out. Bad ones will scrub out quickly, though. So, if you can identify those and put money with the ones that will go the distance, you create the surface area for luck and greatness to find your companies and your portfolio.
Finally, the last piece of the golden strategy is aggressive execution. You want to reach out early, meet early, and close early with the companies you're excited about. The most successful demo day investors move fast. They don't haggle over valuation, and they don't have a Byzantine diligence process that they put the companies through. They're very efficient with their time and very efficient and respectful of founder time. Remember, by the time a company gets to demo day, much of the filtering has already been done. They've got their first customers, their product is launched, they're on their path. You want exposure to the best companies and the best way to do that is to move quickly and make quick decisions.
Now you've got the plan for investing at demo day. Let's talk a bit about the tactics. How do the top demo day investors actually operate once they've figured out the big picture plan?
So the first thing that they do is they make a list. The top investors make a CRM for every batch that they work on and as startups launch, they add them to the CRM. So, for some examples of what your CRM might contain, the obvious stuff: the startup's name, status of your contact with them, what category of business they're building, maybe a score of how excited you are about the team, the URL of their website, description of what they do. This is not rocket science. It's the simple building blocks of what constitutes the company. And the good news is it's actually easy to find YC companies launching. The YC batch pushes companies to launch and YC announces them on X, on LinkedIn, and on the YC website. The top investors monitor these sources. They're on X all the time. They're on LinkedIn and a lot of them are even using AI scrapers to ping the YC website every day and look for companies that are launching so that they can update their CRM and stay on top of what's coming out. Yeah, I'm pretty sure you could find a Zapier trigger that drops right into your own custom Gumloop workflow.
While you're adding these companies and sizing them up, focus on the founders, not just the initial idea. Because frankly, the idea almost never stays the same. Founders pivot. Execution stays. If you find the right people, you win. Let's zoom in on Whatnot for an example of betting on founders over idea. In the winter 2020 batch, they pitched themselves at Demo Day as an auction app for verified Funko Pop toys. This was super niche. It maybe seemed a little bit weird at the time, and they struggled to raise even a million dollars at Demo Day. They pulled in just about $400,000 at an $8 million valuation cap. But post Demo Day, they made a huge change to the business. They pivoted hard into live stream shopping for all sorts of collectibles. And today, just four years later, they're valued at $5 billion. This was a company that couldn't raise a million dollars at their demo day. And so, it's important to recognize that the best opportunities may not look obvious just looking at the idea. Great founders evolve fast. And so, you should really index on the teams that you're excited about.
When you find a launch that you think is interesting, as you're updating your CRM and scraping the YC website and checking LinkedIn and Twitter, reach out to them. When YC startups launch, they get lots of inbound investor meeting requests. You want to be in that first wave of requests that they get. Once they get back to work and stop triaging the inbound, it's not a given that they're going to get back to you as quickly as if you got in the first tranche of emails that they that they receive. YC tells founders to put off taking meetings until the start of investing season. That's usually the Monday of the week before demo day. So, if you really want to talk to a company, be ready to talk to them the week or so before their demo day event.
So, what do these emails actually look like? Well, the best thing to do is to just keep them short and direct. Say how you can help and what you like about that company. Another tactic that the top investors do is they make sure to meet more companies than they plan to invest in. If they plan to write 10 checks, they don't just talk to 10 companies. You probably want to meet between two and five times as many companies as you plan to invest in. If your model has you writing 15 checks, you need to talk to at least 30 or so. This would give you a conversion rate between 20 to 50% on all the meetings that you take and it would make you a high conversion rate investor and a high priority meeting for the founders who want to spend time with the people that are serious about writing checks and not wasting time.
The last thing is it's important to close quickly. The top angels and seed funds generally make same-day decisions or within 24 hours of meeting a startup. Some even try to decide at the meeting itself when they first meet them and and talk to them about the business. This requires them to have done homework on the founding team ahead of time and spend at least 5 to 10 minutes loading the company into their memory before they meet. The top angels invest in about 40 to 50% of the startups they meet and the top seed funds invest in about 20 to 30% of the companies that they meet.
So, what are you supposed to talk about in the meeting? Remember, your goal is not necessarily to determine if this particular company you're meeting is a winner. It's so early that it might be too hard to actually determine that. It is much easier for you to determine if the startup is sufficiently good or not a loser. Are the founders really smart? That is great. You clearly want to put money behind people who are some of the smartest people you've ever met. Can they clearly communicate the problem they're solving and their solution? Have they done impressive things previously? Do they seem serious and tough? Do they seem like they're making progress and learning as they go? These are some of the things that I would look out for.
Once you decide you want to invest in a company, the steps are pretty straightforward. You want to communicate your decision in writing. For example, "I'm in for $25K at the $20 million cap you told me about in the meeting." The founder will then confirm the exact terms over email. We call this a handshake agreement. And the founder will then send you a SAFE using the YC SAFE tool. You e-sign it, they e-sign it, and you wire funds within 48 hours. Remember, fast execution gets you into great deals. And so, if you follow these steps, now you're in.
Like we said at the start, startup investing is a game of finding the outliers. And YC Demo Day puts you in the best pool in the world to find them four times a year. If you invest consistently over years, allocate broadly, and move decisively, you stack the odds massively in your favor. A big cohort of YC-focused startup investors have already figured this out and they consistently produce 10x or more returns that put them alongside top VC funds. So this is our pitch to you. Do the three things we mentioned and set aside exactly 8 days a year. Two full days of half-hour meetings with YC companies four times a year for the four batches, usually a week and a half before our actual demo day. And if you do that and follow our instructions, you have a chance to get exactly that type of return, to be alongside any of the top VC funds in the world. Now you know the playbook and we can't wait to see what you build with it. Thanks for joining us and we'll see you at demo day.