Startup School Week 3 Recap: Anu Hariharan and Adora Cheung

by Y Combinator9/18/2019

We’ve cut down the third week of lectures to be even shorter and combined them into one podcast.

First, a lecture from Anu Hariharan. Anu is a partner at YC. Her lecture covers nine common startup business models and the metrics investors want to see for each.

Then, a Q&A with Anu and Adora Cheung. Adora is also at partner at YC. During their Q&A they’ll answer questions from Startup School Founders on how investors evaluate startups.


00:00 – Intro

00:39 – Anu Hariharan on Nine Business Models and the Metrics Investors Want

1:44 – Enterprise

4:09 – SAAS

8:55 – Subscription

11:33 – Transactional

14:44 – Marketplace

19:04 – E-commerce

21:14 – Advertising

23:12 – Hardware

23:44 – Common mistakes

25:35 – Anu Hariharan and Adora Cheung on How Investors Measure Startups Q&A

26:07 – Team, product market fit, and market opportunity

27:10 – What if the founder doesn’t have experience in the are in which they’re building a product?

28:19 – How do investors know you’re moving fast?

29:40 – Local vs remote

30:40 – Evaluating solo founders

31:45 – Clarity of thought

33:35 – International founders

35:17 – Solo founders

36:21 – Should I fundraise?

38:33 – How does an investor evaluate a company with a heavy MVP?

39:36 – How do you avoid investors who say “it’s too early for us”?

40:06 – Is it sensible to engage with investors before product market fit?

40:26 – How do you find the perfect investor?

41:21 – What are the best approaches for minority female founders to gain visibility within VC?

42:36 – How do investors come up with valuations?


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Craig Cannon [00:00] – Hey how’s it going? This is Craig Cannon and you’re listening to Y Combinator’s podcast. Today’s episode is a recap of the third week of start-up school. I’ve cut down the third week of lectures to be even shorter and combine them into one podcast. First we’ll have a lecture from Anu Hariharan. Anu is a partner at YC, her lecture, covers nine common startup business models and the metrics investors want to see for each. Then we’ll have a Q&A with Anu and Adora Cheung. Adora is also a partner YC. During their QA they’ll answer questions from Startup School founders, on how investors evaluate startups. All right here we go.

Anu Hariharan [00:39] – Thank you all for having me, and it’s so awesome to see so many of you at 9 a.m. in the morning to discuss metrics, so let’s hope we keep you engaged till the end of the session. How do we think about what metrics to track? Our advice is to find out which business model you fit in. Tthe most common thing people do is which industry vertical are you in. Are you health care? Are you biotech or are you enterprise? That’s not really the best way to think of metrics. The best way to think of metrics is how do you plan to charge your users, which is the business model, and which of these business models do you fit in. Roughly there are nine business models, I mean, I would say 99% of you should fit in, to one of these categories, if you don’t, you’re probably building something that’s incredibly hard, which is what we call a moonshot. I will walk you through for the rest of the presentation on each business model and what three or four metrics you need to track, beyond three to four, honestly at this stage is an overkill, so these are the things that would matter. What is an enterprise business model? This is a company that sells software or services to a large enterprise pretty simple. Very few startups do that, so I would imagine very few of you are planning to launch something from day one that sells to say Facebook or Google or Apple or any of them. If you are one of those companies, examples are like Docker, Cloudera, FireEye, even in the YC portfolio there are very few that did that from day one,

Anu Hariharan [02:15] – but if you’re one of them that sells to large enterprises you would characterize yourself in this category. And the large enterprises tend to work in terms of contracts, so your business model will come in to three things which are the three metrics you track, which is bookings. So if you’re working with say Facebook, they’d say “Hey, you’re going to help us hire X Engineers. We’d like to sign a hundred thousand dollar contract for next year.” So that’s why you’d say, what is my booking, what’s the total number of unique customers I have, and what’s revenue? The difference between booking and revenue is Facebook might sign a contract ahead of time would tell you at the start of the year that it’s a hundred thousand for X hires over the year, that doesn’t mean you recognize revenue straightaway, you recognize revenue, only when you have delivered the service, either you’ve placed all the hires that you’ve said in your contract or if it’s an annual contract, you just divide it monthly, so the common mistakes, we see founders do is confusing bookings and revenue. They would have signed contracts but they haven’t delivered anything this contract hasn’t even kicked in, but they’re already reporting it as revenue. That’s not true because you haven’t delivered service, so therefore it’s not revenue and so you should hold yourself accountable for that like the company is not generating revenue. The second common mistake which is probably more relevant at the stage that you’re in

Anu Hariharan [03:43] – is you know Facebook might have verbally told you, I will consider a 100k contract, for them 100k it’s not a big deal, for a lot of you it’s a really big deal that’s neither booking nor revenue because it’s a verbal offer. The other, even if they sign a letter of intent it means nothing. You really have to have the contract written down, signed for it to be bookings and for revenue only when you start delivering it. The second business model is SaaS, which is probably where most of you fit in especially if you’re in B2B or you know servicing to other companies, you’re all probably thinking of SaaS model it’s a very prominent model these days. You see a number, all these are YC startup, Segment, Ironclad, SendBird, they all started with SaaS model right from day one. SaaS is software-as-a-service in terms of business model, it’s really subscription business, you charge something monthly for a software that you provide. What are the four metric, key metrics you would want to track? If it’s subscription by definition that revenue is recurring right, which means if you hopefully have built something that people really like, they’ll continue to use it and they pay you every month. That’s why you track MRR at the highest level, that is Monthly Recurring Revenue, how much are you making monthly and what did the customers commit to it? ARR is Annual Recurring Revenue because of this phase you’re really growing fast you may be growing 30% week over week or 40% week over week,

Anu Hariharan [05:17] – so it’s helpful to track your Annual Recurring Revenue as literally run rate, so if this month you made 30,000 in MRR and if it’s truly recurring, you should expect that your annual recurring is 12 times that, so it’s just a good metric to use internally as well because it helps show the pace rather than just looking at absolute. The third thing you should pay attention to is churn. When you launch there will be few users who are early adopters that use it but you really should be paying attention to if they stop using it right, and if you’re a subscription business, the chances are you probably make $5,000 to $10,000 a month from two or three customers or maybe even 10, so losing a customer means real impact on your revenue. This is why we recommend measuring something called Gross MRR Churn which is how say at the start of the month, you expected your monthly recurring revenue to be 10,000, but one customer churned and they were paying 3,000 then that’s your gross churn, 3,000 by 10,000. Don’t blend it because you’re obviously acquiring new users and if you measure blended, your numbers still look great right because you’re growing a lot, but you’re not paying attention to users that you’re losing and it’s really important to learn from users you’re losing which is why we ask you to measure the churn. Paid CAC this comes in a little later, hopefully almost all of you are acquiring users organically, I wouldn’t re-commend doing any paid acquisition at this stage, but if you do start doing some experiments where you say, “Hey I’m going to

Anu Hariharan [06:55] – do a little bit of paid marketing or advertising to get a few customers,” then you should measure what was the cost to get that user through paid mechanism. Which is literally saying if I spent $10,000 on Facebook or any other channel that you used and you got five customers from that channel, how much did you pay for that? Common mistakes, two really common mistakes and this happens again and again even spite of like highlighting it, which is ARR literally stands for Annual Recurring, recurring is the most important word, Revenue. If you don’t have a recurring business which is you don’t charge subscription, your customers are not committing to 12 months of payment, you don’t have a recurring revenue business. Internally if you start calling it ARR, everyone thinks oh it’s, you know it’s repeat business, it’s not because you have to go back and acquire them each month or you have to have, you know you have to work with your customers to make sure they pay every month, so the most common mistake is, people instead of saying Annual Run Rate, which actually is not very useful even to gauge your business, if you use ARR be absolutely sure you have recurring revenue. The second mistake people make is when they would say, “Oh yeah it’s recurring revenue.” But actually the customer would have committed to only one-time payment or you know, you may have done a consulting project and it’s not really clear whether they’re going to pay second month or third month but they would still include it as a MRR, you know it’s not, make sure you’re including

Anu Hariharan [08:33] – only what’s truly recurring where the customer has said, I’m signed up for a 12 month or a six month annual plan and this is what I’m paying. The third is subscription, this is probably more relevant for consumer businesses. If you are Dollar Shave Club, Blue Apron, AppLetic, there are lots of companies especially subscription as a service is becoming so popular in consumer right now, it’s very similar to SaaS, but it has a slight nuance. Similar to SaaS because you have MRR which is recurring right, you may have signed up a Netflix annual subscription, it’s recurring, it’s monthly recurring. The two differences is instead of looking at ARR or any of that, we actually say measure your monthly growth and unit churn, not dollar churn, why is that? Because if you’re selling to companies usually your subscription has more value right, it’s like they’re paying 2000, $5000, so there if you lose a customer, the impact on revenue is a lot, so you should really look at revenue churn. If you look at Netflix, everybody pays seven or $10 per month. It’s about volume of customers which is why we say pay attention to growth because you need to make sure that the number of users using Netflix continues to increase and you measure unit churn, not necessary because if you lost a customer who’s paying $10 that’s $10, but if you lost thousand customers paying $10 each, that’s significant right. Which is why we say measure gross unit churn whereas if you’re a SaaS business selling to companies measure revenue churn.

Anu Hariharan [10:12] – Paid CAC is very similar like the last time which is make sure if you’re spending paid marketing, measure the cost associated with acquiring those users don’t do it on a blended basis. When you are at this stage, you will tend to grow in spikes, so this month you may grow 80%, next month you would grow 10%, next month you may grow another 90% right, that’s natural because you’re learning, you’re iterating and you’re trying to figure out, you know what really resonates with the user. What’s really important is to make sure that since launch since the month you started acquiring users, you measure compounded monthly growth rate, so which is let the current month divided by the first month and you know decrease that growth rate proportionately for the number of months since launch. What founders often do as mistake is they would just do the average, so they would do 90% this month plus 10% second month, plus 80% third month what happens with averages, it makes your growth look good because you had some spikes. You want to be true to yourself because these won’t be problems when you are two or three people team, you know but hopefully you all will scale and will start hitting 10 people team, and then when you set goals, someone will be very happy that it’s 50% growth rate, but that’s because you’re measuring growth wrong. The next is transactional businesses, this is probably more new, new in the sense that’s happened in the last eight to 10 years. Again, you see that with Stripe, PayPal, Coinbase,

Anu Hariharan [11:44] – Brex, a lot of FinTech companies especially, fall in this category. What is the transactional company, which is if you’re in the say FinTech or payment space, you probably process a lot of payments volume, right let’s take Stripe for example. They cover the payments for more startups, and so every startups payment volume goes to Stripe, that’s the transactional business but stripe collects a fee for the transaction, so if you’re a type of business, that processes someone elses payments volume then you should put yourself in the transactional bucket. The gross transaction volume is the TPV or the total payments volume that flows through the platform, so a stripe had 30 customers at your stage and all 30 customers were processing say 100 million in TPV but it all went through Stripe, that’s TPV but that’s not revenue, revenue is what goes to your bank account. That’s your cut which is why it’s called net revenue. The portion of transaction volume that you make. Stripe would say, “Hey I charge “two and a half percent for the payment volume that flows through my platform, the two and a half percent is the net revenue that they take.” If you’re in the transactional business, it’s very common that you’ll have lots of customers, right so within a year of launch, you could even have thousand two thousand customers, then the important metric to track is user retention. Because you want to make sure that six months after they’re using you or 12 months after they’ve started using you, hopefully they’re still using you,

Anu Hariharan [13:19] – why, because you are powering their platform. Unless they’ve gone out of business, there should be no reason they’re not using your platform, how are they doing business, like imagine if someone stopped using Stripe, well are they out of business, or who is processing their payments? That’s why it’s really important to measure your cohort retention on a monthly basis, if you’re a transaction business and paid CAC is very similar to what you know in all cases it’s the same thing, just measure different paid channels, but again as I said hopefully none of you are doing paid marketing. What is the common mistake here, confusing gross transaction volume to net revenue, as I said like if you are processing 100 million in transaction volume, that’s not net revenue, that’s not the cash that hits your bank, two and a half percent of the 100 million hits your bank that’s a much smaller number, so you should really make sure what you call revenue is this transaction volume. I’ve often seen founders here sometime come up with like, “Oh but I process the volume that’s my revenue”, no excuses, net revenue is literally the cash you make in the bank. Then user retention is a cohort metric, it’s not one number, it’s not like, “Oh I retain 30% of my users,” that means nothing to us, right even for you it should not, because if you’re powering payments, you should say well 40% of my customers, have used it consistently, for the 12 months since they joined us, well that’s a better metric, next is marketplace,

Anu Hariharan [14:46] – again this is more simple it looks like transaction, but it’s different it’s typically used by consumer companies so Airbnb, eBay, are all good examples of marketplace. What’s a marketplace? You have two sides. In Airbnb you have hosts and guests, guests go to the platform, select a room book it, the host is happy that’s a marketplace, so what are the three or four metrics that matter here, GMV, right. When the guest books the platinum room, you know the host might say it’s $100 per night, and so the $100 per night say they say, two nights it’s $200, that $200 is GMV, that Airbnb can record, but that’s not net revenue, because Airbnb doesn’t make the full $200, Airbnb probably makes 12% of that right, so 12% of that $200, is what you’d classify as net revenue two other metrics, again similar to the other models that we talked about, you want to track here is Compounded Monthly Growth Rate. If you see this is a more important metric for consumer businesses right because volume of consumers matter and therefore it’s really important to track your monthly growth rate in a compounded way so you can keep yourself honest how you’re growing. Similarly when it comes to consumer businesses, you should pay an attention to user retention, not necessarily dollar retention, because the volume of users matter. Here you would say, what percentage of customers came back to Airbnb or Airbnb retained six months or 12 months from now. Now in Airbnb’s case, how often do people travel, does anyone want to take a guess? Was that, once a year very good.

Anu Hariharan [16:37] – How should they track, when should they be happy when should they be sad, once a year. If you imagine when Airbnb was going through YC and they could see their cohort repetition once a year, how are you going to know you’re building a good business, they had to wait 12 months, will you wait 12 months to check whether your customers are coming back? No so this is where you have to get creative, and the way to get creative is, reflect on your user behavior, so if you’re going to book something, hopefully someone who’s traveling is not booking the day before they’re traveling, they start doing research six months before. Airbnb studied that. What they would track is if you as users came back to at least search for a city or a booking six months. In this stage of your startup, what’s most important is to really be truthful and honest about how you want the users to behave and come up with those retention metrics to measure if your business is really healthy, and are you seeing what you want to see from your users. What’s the common mistake here this was especially acute for Airbnb because they didn’t pay anything for demand-side, right, they had a brilliant value proposition, they were really good designers, very good storytellers, demand they didn’t pay anything, but they had to pay to acquire hosts because guess what no one was ready to let their homes to strangers, so they had to work hard which was you know they had to put you know advertising around events, so they had to spend a few dollars on acquiring hosts pretty much very early on.

Anu Hariharan [18:17] – The number one mistake founders tend to do here is you know you’re acquiring a bunch of users organically and some users through paid, and you’ll blend everything, you’ll say I acquired hundred users this month, and so my CAC was 12 but what had happened was if you truly measured who you acquired from paid advertising channel, it could be as high as 70, and so you have to ask yourself is it sustainable, is that is are you really seeing the ROI in paid channels, so if you are in an unusual situation like Airbnb, where your business frequency is not very high because people use once a year, and you have to pay to acquire host, it’s really important to pay attention to where your money is going and whether you’re getting a good ROI from that. E-commerce, e-commerce is you know literally you have certain goods to sell, you’re selling them online, people are ordering it, Warby Parker, Bonobos, Memebox, a lot of them that’s what we would characterize as e-commerce which is you make the products or source the products but ultimately it’s your brand and someone’s coming to the brand to purchase it. Here again it’s a consumer business, you track monthly revenue. Notice there’s no recurring, no subscription, it’s just revenue because people might buy your product this month, they may not buy it next month, right so it’s monthly revenue, because it’s consumer business again, very important to track your compounded monthly growth rate for e-commerce even from day one, it’s important to track your gross margin.

Anu Hariharan [19:50] – Because you either make the good or you’re sourcing it and branding it under your name, so it’s important to understand, what it takes, what is your cost to get the good, so that you’re making some profit on a per product basis, and it’s more important for e-commerce because you it’s not a recurring business right so you have to make sure that you’re able to make money on a per transaction basis, so which is why gross margin is important to track, Paid CAC very similar to all the other examples. Common mistake gross profit for e-commerce is not accounting for all costs, now Amazon does a great job of this and people often say, “Oh yeah they have very thin margins”, but actually it’s net margin after all costs and so if there’s high-volume net margin times high-volume is a pretty good EBITDA business, which you can use to funnel for future investments so the common mistake we see here is in e-commerce is people would say, “Oh say I bought you know a clip”, and we know the cost of the clip is $10, they wouldn’t include shipping cost, they wouldn’t include customer processing costs, they wouldn’t include payment processing costs, all that is important, because if you don’t include those cost you’re probably pricing it wrong, and so it’s so important that you’re pricing it wrong, pretty much from first transaction. Advertising, we see far fewer companies in the advertising space these days but if you happen to be in that space, then you know the common companies that are analogues for you are Snapchat, Twitter, Reddit,

Anu Hariharan [21:28] – they all have you know a huge social network that come to their site for different reasons, but the primary monetization model is advertisers advertise there, and companies make money from advertisers. At this stage because you probably will never be monetizing, if you’re in the advertising business, it’s all about the users, and so when it comes to users, there are really only three things that matter, daily active, monthly active, percent logged in. Who are the users who use your app, daily, monthly active, who use it monthly and then percent logged in is actively logged in using a username and password. The common mistake and I’ll give many examples of this not defining what active means. There was a company I think three or four years ago that reported a daily active user metric, and I remember asking them, “What is active?” I had some sense of like maybe it was somebody who read, engaged, whatever and the founder answered, “Well those are the emails I sent”, that’s not active. You know active, again it goes back to the Airbnb example. You should define what you want your users to behave like when using your app. If you’re building a news app, does it mean reading counts as active? Does it mean commenting counts as active? You should define that really well. If you don’t define that, you could be building something that has no stickiness and probably, you know, you’re going to have users that are winding down really quickly, and it’s not worth it, right? Make sure you really define what active is, and hold yourselves to that metric.

Anu Hariharan [23:13] – The other one is hardware, it’s again very similar to e-commerce because at the end of the day they’re selling a device. If you’re Fitbit, GoPro, Xiaomi, we’d say you’re in the hardware bucket. As you can see, it’s very similar to e-commerce where you look at monthly revenue, compounded monthly growth rate, you look at gross margin really carefully, hopefully you’re making profit from day one, and then paid CAC. Okay so those are the nine business models And one last thing I’d leave you with before I open it up to questions is common mistakes. Common mistakes is, you’ve heard this and you’ve probably read this in so many blogs, charts that look up into the right are brilliant, well but cumulative charts are always up and to the right. Do not have any cumulative chart, there is no rationale in the world to have a cumulative chart so I don’t know a single company at scale that shows a cumulative chart, so do not take a cumulative chart. Second thing I’ve seen is not labeling y-axis. As I said you’re going to scale, even if you hit five or seven users, you know, if you’re, if you don’t know what the y-axis label is and if the charts look like straight vertical bars it means nothing. Third is changing y-axis scale, this is something I never understood but quite a few of them do it which is you know x-axis starts at zero and Y axis starts at say, 50. Those things don’t really show how well you’re growing, show your problems, by the way, no YC startup had a chart straight up into the right. No one did.

Anu Hariharan [24:43] – Even the most successful companies didn’t either, so I think the most important thing is to really be honest, measure and fix things right? It’s okay to go down sometimes. Also usually we say don’t show only percentage charts, it’s very important that whatever you’re measuring whether it’s gross revenue churn, monthly growth, be clear about the absolute number, and the percentage relative to the absolute number. We also have done detailed post on metrics, while I was at a16Z so I’ve included two links there if anyone wants to look at it but at your stage only three or four metrics matter. If anything you took from here hopefully you fit into one of these nine business models. You can start with two or three of these metrics for each business model and that itself would be a great head start for all of you.

Craig Cannon [25:32] – Alright, now for Anu and Aurora’s Q&A.

Adora Cheung [25:34] – We’re going to do a new thing here, see if it works. Essentially the topic of this Q&A is, “How do investors measure startups?”, or something like that. And so what I did was I posted, I don’t know if you saw, but I posted in the forum and asked for a bunch of questions, there are hundreds of them, and so I’m going to take the ones that were upvoted a lot and then go from there. Most of this is going to be me asking Anu questions since Anu has been an investor for a long time

Anu Hariharan [26:01] – That’s not what she told me.

Adora Cheung [26:03] – I will help answer questions, too but just get started so, the bigger, you kind of went over this earlier, but the big areas in which an investor evaluates a start-up is team metrics which you went over just recently in the lecture, unique insight, and how big the opportunity is, are there any other areas in which, big areas in which you evaluate?

Anu Hariharan [26:28] – Especially, at the stage you’re in and probably for a while even your series A,B it all comes down to only three things, team product,-market fit, market opportunity, that’s it. At the stage you’re in it really is probably the heaviest weight is the team. And so when it comes to the team it’s more about why are you working in this idea, right and what unique insight do you have? Your clarity of thought on how you plan to you know see this as a big opportunity, and how good are you at convincing that? And if an if an investor gives you capital, do you know what to do with it? Right, so that’s pretty much it.

Adora Cheung [27:08] – In terms of team, what if I don’t have experience in the thing that I’m building? Like how are investors going to believe that I’m a legitimate person to work on this?

Anu Hariharan [27:18] – It actually does not matter to be honest I think pretty much if you’re a consumer, B2B enterprise, it doesn’t, where probably industry or domain experience helps a little bit is really health care, and bio. I think in FinTech there is slight bias, maybe, because building a FinTech product requires some domain knowledge or at least interest and curiosity because there’s a lot of regulatory and compliance but largely no. Which is why I said your clarity of thought during your pitch to investors is what matters. How much you have thought about it and how well are you able to articulate all the nitty-gritty details of your business is, what matters. And more importantly than not, you should always assume you are teaching the investor about this space and the company. Don’t assume they know it and so they measure by how well you are teaching them. So that’s really the measure.

Adora Cheung [28:16] – One of the things that investors say a lot is, “We want a team that moves fast”. How do they know you’re moving fast?

Anu Hariharan [28:24] – Yeah. Well this is at YC too, we say that, we have to work really fast. Well if you’ve said that I plan to work on this idea, I’ve been thinking about it for the last 12 months, and I plan to, you know, hire someone and launch product in the next 12 months, that’s clearly moving slow right? How they’re measuring whether you move fast is how scrappy you are? Have you launched your MVP, how many iterations are you doing, how are things moving in the pace, like and at this point it should move really fast, on a week-by-week basis. Would you agree?

Adora Cheung [29:00] – Yes, if you’re working on something people want, there’s a lot of latent demand and so you should be able to find users easily. In fact, if you don’t know your first, I think that we say this a lot, but if you don’t know your first 10 users, 10 to 50 users, potentially there’s no founder-market fit there, if you don’t know where to even find them. One of the things relates to this. One of the things on the YC application, a lot of people apply more than once to get in, and one of the things we do look at is there’s a questions like something along the lines of “What progress have you made since the last application?” and we read that actually like well that’s one of the first things I read is what are the learnings. Even if you don’t have that many users yet, it’s still what are the learnings you’ve made. Okay, local versus remote. Do you discount remote teams, or how do you evaluate local versus remote, if anything?

Anu Hariharan [29:46] – Well, I think this really varies depending on who you ask, but I think one thing is clear. Which is remote is increasingly taking off. It would be a remiss for anyone to say, “Oh we only focus on local and no longer remote, right?” Tools like Slack, Zoom, have really made it incredible for more remote teams to function I mean look at GitLab, one of YC’s companies, completely remote, Zapier, another amazing company, completely remote. We don’t make any differences, but it really comes down to the investors selection. Even from an investor standpoint there’s no ding on whether it’s remote or local, it’s more that they’re spending their time. But again, here I re-emphasize, don’t do things to satisfy investors. Build the company you want, if you build a great company with lots of users, from wherever the investors are, they’ll come.

Adora Cheung [30:37] – Alright so this question is, I have heard constantly that investors are investing in team, not product, which we have said, how does a solo founder factor into this, like what is, like the team is one person, so how do you evaluate that one person?

Anu Hariharan [30:51] – More often than not it’s the CEO that’s talking to the investor anyway, we don’t re-commend that all founders are attending all investor meetings, because obviously it’s a lot of time that comes on doing investor meetings because you have real work to do, so it really comes down to the CEO’s clarity of thought and how well they are able to impress upon the investor. By the way this is not just to impress investors, the reason why this clarity of thought, I keep bringing this up, if you don’t have that, how are you going to hire your first ten people? If you can’t convince your first ten people that you’re building something big and they should join you in your mission, then it’s really hard to convince investors. That’s why investors are looking for that storytelling ability. Solo founder doesn’t matter, it’s the CEO’s job. The CEO really needs to be good at it, and they should learn, they should learn to be good at it.

Adora Cheung [31:44] – Do you have any advice, on how to know the clarity, like the clarity of thought piece, like how are you doing well on that?

Anu Hariharan [31:50] – This is probably a really high-bar example but I’ll say that, which is the Brex founders, Henrique and Pedro. It was the second time they were building a company so they knew that they needed to do this. I don’t know if they did this in their first time, probably not, but when they were going through YC they actually literally iterated from a VR startup idea to Brex, right? Which is corporate credit cards and they had built FinTech in the past. But both of them knew the stakes were high at least for them, because they were dropping out of Stanford. They literally came out of Brazil to attend Stanford, they were dropping out of the University, and so they both wanted to make sure that Brex had a big opportunity. Before hiring a single person, they wrote down very clearly what Brex could be with all the products that they could build in the roadmap, tested it but not like, it was not a huge survey, but they just wrote it down to really understand, built a financial model, Henrique actually attended the accounting class in Stanford, because he had no idea how to build it, and he built a whole model year-by-year, tested the assumptions of market demand and what penetration they would need to hit for it to be at least a billion-dollar company, and only after they both got comfortable that there is a path, and this is worth quitting Stanford for and putting our entire life, probably for the next 10-15 years on this, they hired the first employee. That is an amazing clarity of thought. I’m not saying everybody should be there

Anu Hariharan [33:20] – but you should at least do the first exercise, if you were to convince someone to join, and you know more often than not at this stage whoever you want doesn’t want to join you, so what is that compelling story?

Adora Cheung [33:33] – Cool. This next one’s about international founders. You’ve personally invested tons of money in international startups. How did those founders convince you to put that money into their company when you’re not, you’re not from there? Like Colombia, UK, all these other places.

Anu Hariharan [33:47] – I feel like I’m repeating myself but it comes to those three things. It also comes, I think the international ones we did were probably a little later stage too, so given we didn’t have presence in the region and we didn’t know what was really market demand, we waited for some more progress, right? You see that in metrics, you see that in their thinking, you see that in a more fleshed-out process, but even there if it’s hard to hire in San Francisco, think about how hard it is to hire there. There are no execs available with scale experience. Those CEOs actually have to work ten times harder to have that clarity of thought and to convince someone from the US to move there.

Adora Cheung [34:29] – Any suggestions on how to convince someone to move there?

Anu Hariharan [34:31] – Start doing really really well and if you do really well for example in LatAm, Rappi basically convinced a few execs they actually have done a phenomenal job of attracting execs from the US. The execs felt they have it’s the first time in their life they have an opportunity to make an impact in LatAm like the way they never did. You can do that through a startup, it’s really hard to do in any other setting. They’ve been able to convince execs with LatAm connection obviously but having been living in US and UK for many years to move back and lead teams.

Adora Cheung [35:05] – For the purpose of applying to YC, we take founders from everywhere and like Anu said, it’s more about more about team and idea than metrics or where you’re from and stuff like that. Okay, so is bootstrapping as a solo founder an instant no in your mind? Do you have advice for solo founders? 10% of our batch, from last batch, were solo founders. We definitely accept solo founders at YC, in terms of what you guys do, like is that, that doesn’t seem like a–

Anu Hariharan [35:33] – No, I don’t think that’s great, but I would say this having, you know, obviously observed a lot of YC founders even the ones at scale. It’s such a hard journey, and there are so many things that are going to go wrong, that having another co-founder generally I have seen has helped a lot more because there’s someone who can give a lot more context than everyone depending on the CEO. If you don’t have that that’s fine but then by the B, we’re looking for some senior execs at least one or two who are incredible that you can lean on, for some portion of your business, because if it’s still all you the main challenge after the BBC is the CEO is not scaling, and so if you’re a solo founder it just becomes harder if you don’t scale.

Adora Cheung [36:13] – It’s always good, I find that the good solo founders build a community around them of people to help them go through some tough times. Should I fundraise? Maybe this is more fundamental question of how do I, what are the indicators that I should see before I take on investment, or even go start fundraise?

Anu Hariharan [36:32] – You know most companies tend to fundraise, so but the short answer is, I actually always refer, to PG’s post here because I love that post, which is try to be default alive, and try to raise as little money as possible so you remain focused. I think it is super-important, and it’s lost on many people. But if you look at the really even successful companies, everyone has done mistakes. But they’ll all say the most painful time of their company’s life, even in later rounds, was when they, you know, you may have more money in the bank and you end up hiring more, and then you actually delivered a lot less. It’s not that your problems magically go away, your problems become tenfold because you have people problems. A lot more people problems. At this stage especially, I’d say that you raise as little money as possible and focus. Now there is a question as to whether should you raise or not, right? Very few companies don’t raise but Zapier, for example, never raised after YC Demo Day, and I think because the business is so good, it’s growing really well, they are a bit positive they have very healthy margins and you know often Wade would tell me this, “I don’t know what to do with my money in the bank, why will I raise more?” It’s a great reason not to raise, right? but if you are not in that luxurious situation, then you know there is something to be said about I need capital to grow, not necessarily for paid marketing,

Anu Hariharan [37:55] – please don’t take this as paid marketing, this is another common mistake but more like I need to hire more engineers, I need to hire ahead of time to build the things that I need because I know I have a business model at the end of it. Therefore the way to think of a fundraise is, if you think you have a clear path to the next milestone and you may need like you know maybe 200, 500 or 1 million dollars then just raise that minimum amount but come up with that plan very clearly. What is the money you need, to hit that next milestone, and just raise that money, because guess what, your dilution matters.

Adora Cheung [38:29] – That is a perfect answer. Have a plan, basically. Okay, how does an investor judge a heavy MVP, that is someone with basically a long sales cycle, so a health IT company it takes four to six months maybe you need to raise money before you get your first contract, how do you show progress?

Anu Hariharan [38:47] – This is very true for even enterprise infrastructure which is why I made the point that, you may have only one or two customers at the end of 24 months that’s okay. Most of these companies try to do pilots, so I usually tell, start with a pilot because the company’s also probably hesitant to sign a 500k, $1 million contract with a startup. so start with like a four-week six-week pilot, show progress through that investors like to see, that, they’ll talk to that one or two customers. If you are in the business of selling large contracts, like greater than 500k ACV, you can plan to have only like two to three customers in the first 12 to 24 months because a lot of your time is going to go into making sure that it’s really successful with that one or two customers. It’s not necessarily customer growth, it’s more that one customer and how you’re facing with them.

Adora Cheung [39:37] – Alright, so the last set of questions is on interacting with investors. Alright so, how do you avoid investors when they say “It’s too early for us,” what is the best way to handle this? How do you avoid getting responses like that? It is one of the most common things that they’ll reject you.

Anu Hariharan [39:54] – I don’t think you can avoid it. I think, you know, I would take the no, and not read into the no, and keep moving

Adora Cheung [40:04] – Yeah, hear the no and move on. Yeah. Is it sensible to start engaging with potential investors prior to finding product market fit, or should you just wait until you have real traction?

Anu Hariharan [40:18] – Yeah at this stage, I would say focus on building the product, focus on getting your first hundred users, and then you know, meet with angels, would you agree?

Adora Cheung [40:26] – Yeah, yes, exactly. How do you find the perfect investors? This person started with 30,000 on AngelList and removed all the, removed all the, removed a bunch of or had a bunch of filters, and then has like a thousand left, how do they pick from the thousand investors?

Anu Hariharan [40:43] – I wish we had an answer for that, or like a–

Adora Cheung [40:47] – Basically you contact all of them. I mean it’s like a sale, if you think about a fund-raising it’s basically the same thing as a sales game. You have leads, you have conversion, you have to follow up, you have to send personal messages, I would just use whatever spreadsheets you’re using for your sales game for this and just go for that.

Anu Hariharan [41:05] – Yeah I would say try to avoid the investors that you don’t have confidence in or if no other founders have referenced. That, but if, that’s the only rule of thumb, but otherwise you have to do exactly like what Adora mentioned, go through it like a sales pipeline.

Adora Cheung [41:19] – Yeah. Ooh, this one’s great for you. What are the best approaches for minority female founders to gain visibility with VCs?

Anu Hariharan [41:27] – The industry is changing a lot, so therefore it should be easier than it was before, I always had problems with the warm intro because most VCs say you need a warm intro and I’m like okay as a female founder, you probably know less than 1% of the people who know the VCs because they’re all males and it’s really hard to get a warm intro, right? I think that it’s changing a lot, there are lots of you know first of all most VC firms that are pointing female investors so it’s easier to get there’s groups like All Raise that really help female founders to get in front of VCs, but this is a common advice I give irrespective of whether you’re from a minority represented group or not, the best referrals is through existing portfolio founders period. There is no compensation for that. If you can find an existing portfolio founder of that firm, and they, he or she is, knows you quite well, and is willing to refer you, that’s the best referral.

Adora Cheung [42:25] – In fact, investors often ask their portfolio, actively ask their portfolio company founders, “Who should I meet with?” And that’s one of their primary channels. Okay two more questions, one, well actually just one more question, which was like a common one. How do investors come up with the valuations?

Anu Hariharan [42:43] – Yes. When I first started in VC actually before YC, I thought there was a lot of science to it but it’s actually art, it’s not science.

Adora Cheung [42:56] – The truth is, until you’re about Series C or so, there is no science to it, so it literally comes down to, what’s the stage you’re at, and what ownership does the VC want? This is why, if you have no traction, someone might say I want 30% of your company, right? It’s not very common in the US, but it’s very common internationally. You end up raising 1 million and 30 you know .1 divided by .3, literally that’s your valuation. I would say if you’re in the U.S, at seed it could vary anywhere from 10 to 15% depending on the traction series A is 25% ownership, so if you’re raising 10 million, 10 divided by 0.25 is the valuation, if your series B, it’s 10% ownership so if you’re raising 30 million, 30 divided by 0.10 is the valuation, so that’s why it’s art there’s no science to it, science really kicks in after the C, because you’re growth stage and you have a lot more numbers plus at that point the growth investor is really evaluating you as to what when can you go public and what would be the valuation that you go public? The valuation from the Series C is back-calculated based on that.

Anu Hariharan [44:08] – It sounds like two things, dilution-to-target and supply-and-demand. So if you’re a hot company you can say, “I’m only going to sell 10%”

Adora Cheung [44:15] – Correct.

Craig Cannon [44:16] – “And so here’s my valuation”, or if you’re not then

Anu Hariharan [44:17] – Exactly.

Adora Cheung [44:19] – The investors, calculate that for you.

Craig Cannon [44:24] – All right, thanks for listening. As always, you can find the transcript and the video at If you have a second it would be awesome to give us a rating and review wherever you find your podcasts. See you next time.


  • Y Combinator

    Y Combinator created a new model for funding early stage startups. Twice a year we invest a small amount of money ($150k) in a large number of startups (recently 200). The startups move to Silicon