Sam Altman - Startup Investor School Day 1 | Summary and Q&A

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March 5, 2018
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Y Combinator
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Sam Altman - Startup Investor School Day 1

TL;DR

This video explores the motivations behind investing in startups, the importance of finding exceptional founders, and the key factors to consider when investing in a startup.

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Questions & Answers

Q: Why is investing in startups energizing?

Investing in startups is energizing because it involves working with people full of new ideas, unlimited energy, and the beauty of inexperience. Being surrounded by this environment is incredibly inspiring and motivating.

Q: What is the advantage of investing in startups in terms of time?

The advantage of investing in startups is the leverage on time. By working on multiple projects and supporting founders in their endeavors, investors can maximize their impact and outcomes.

Q: How can investing in startups be a humbling experience?

Investing in startups requires accepting the fact that one will be wrong a lot of the time and that failures are part of the learning process. It teaches humility and the ability to adjust expectations and strategies.

Q: What is the key factor to consider when investing in startups?

The key factor to consider when investing in startups is the founder. Exceptional founders have traits such as obsession, focus, resilience, and a sense of purpose.

Q: How can investors provide value to founders?

Investors can provide value to founders by helping them with hiring, future fundraising, and providing tactical advice. Being available and responsive to the needs of founders is crucial in building a strong relationship and partnership.

Q: Should investors focus on the current revenue or the growth rate of a startup?

Investors should focus on the growth rate of a startup rather than its current revenue. The future potential and scalability of a startup are more important than its current market size.

Q: What is an example of a good idea that seemed bad initially?

Reddit is an example of a good idea that seemed bad initially. People were skeptical about the concept of a platform for sharing links and thought it would not be successful. However, it turned out to be a highly valuable and successful platform.

Q: How should investors evaluate their time and resources allocated to different founders?

Investors should only fund founders with whom they are excited to work and spend a lot of time helping. It is crucial to have a strong connection with the founder and a willingness to invest time and resources to support their journey.

Q: Why is investing in startups energizing?

Investing in startups is energizing because it involves working with people full of new ideas, unlimited energy, and the beauty of inexperience. Being surrounded by this environment is incredibly inspiring and motivating.

Summary

In this video, Sam Altman, the president of Y Combinator, discusses why, how, and what to consider when investing in startups. He shares insights from successful investors and highlights the importance of understanding the power law and investing in companies with the potential to be worth billions. Altman also emphasizes the significance of finding and investing in founders with certain traits, such as obsession, focus, passion, intelligence, communication skills, and a fast rate of improvement. He advises investors to focus on the long-term potential of a company rather than its current revenue or market size. Altman also provides tips on finding and evaluating the next big market, recognizing good ideas that may seem initially bad, and adding value to founders by helping with hiring, future fundraising, and offering tactical advice. He concludes by discussing the importance of integrity and the impact of security tokens and ICOs on financings.

Questions & Answers

Q: Why is investing in startups energizing?

Investing in startups is energizing because working with founders who are not burned out on the world, full of energy, and have new ideas is incredibly inspiring. Being around people who are doing things for the first time and are willing to take risks is invigorating.

Q: What is the motivation behind investing for the best investors?

The motivations of the best investors include wanting to help shape the future, having the leverage to work on multiple things, the occasional high returns, the satisfaction of making a difference in a founder's career, the opportunity to be around talented people, an endless optimism about the future, and the humbling experience of being wrong and learning from it.

Q: What is the number one mistake in startup investing?

The number one mistake is caring too much about what other investors think. Many investors outsource their decision-making to what other people think about an investment opportunity, leading to a herd mentality and potentially missing out on great investments.

Q: How does the power law factor into startup investing?

The power law suggests that the single best investment in a portfolio will have a greater return than all the other investments combined. This means that investors should prioritize finding companies with the potential to be massive successes rather than trying to diversify and hit singles.

Q: How can investors find startups that have the potential to be massive successes?

Startups with the potential for massive success often exist outside of established networks and are started by people who may not be well-known. One way to find these companies is through referrals from other founders. Angel investors can also offer their help for free to founders, building relationships and increasing the likelihood of future referrals.

Q: How has the dynamics of startup investing changed in recent years?

There are now more investors looking to invest in startups than there are good startups, giving founders greater choice in selecting investors. Founders now have more leverage and rely on word-of-mouth referrals and references from other founders to make investment decisions.

Q: How does reputation impact investing in startups?

Reputation is crucial in startup investing. Investors who are well-liked and respected by founders are more likely to be successful in securing deals. Founders often base their decision on which investors to work with on the recommendations of other founders. Treating founders well, being responsive, and building a reputation for being good to work with is essential.

Q: How can investors get better terms in an investment deal?

While many investors focus on getting better terms or a good bargain in an investment deal, Sam Altman suggests that the best investments often feel expensive. Investors should be willing to overpay if they believe in the potential of a company. Trying to get better terms can sometimes detract from the potential success of the investment.

Q: What is the most important factor to consider when deciding what to invest in?

The most important factor is determining how big a company can be if it works. Investors should consider whether they can envision the founder, idea, and market supporting a massive company. Instead of initially focusing on why it could fail, the first question should be how big it can be if it succeeds.

Q: How should investors evaluate and judge founders?

Evaluating founders involves looking for certain traits such as obsession, focus, intelligence, communication skills, and a fast rate of improvement. Assessing a founder's ability to recruit talented people and their commitment to the mission of their startup is also important. While experience and domain knowledge are valuable, they can be learned, and the potential for growth is a key factor to consider.

Q: How should investors evaluate market potential?

Investors should focus on the potential growth of a market rather than its current size. A small market that is rapidly growing can offer more opportunities for success than a large market that is already saturated. The presence of competitors can also indicate the potential of a market. Investors should be wary of trends and assess whether they are real trends or fake trends by considering the engagement and enthusiasm of users.

Q: What should investors look for in a startup's product?

The best companies have great products that resonate with users, leading to organic word-of-mouth recommendations. Investors should look for products that people find so good that they spontaneously tell others about them. The product's quality and level of user engagement are more important than short-term growth or revenue metrics.

Q: What are some common mistakes that investors make in startup investing?

One common mistake is investing in bad ideas that look like good ideas. Investors often chase what worked in the past rather than identifying new and potentially disruptive ideas. Ignoring the power law and focusing on the failure rate rather than looking for massive successes is another mistake. Additionally, relying too much on the opinions of other investors can lead to poor investment decisions.

Q: What role does integrity play in evaluating founders?

Integrity is crucial in evaluating founders. Investors should pay attention to the decisions founders have made and their behavior during the early stages of the business. If founders display unethical behavior or lack integrity, it can be an indication that they may make similar decisions in the future.

Q: How do security tokens and ICOs impact startup financing?

Security tokens and ICOs have the potential to change financings but not in the way most people believe. While there may be improvements in how investments are tracked, there will likely still be regulations in place to ensure investor protection. The notion of raising money from the crowd may not be as successful as some believe.

Takeaways

Investing in startups is energizing due to the unlimited energy and new ideas of founders. Key motivations for investing in startups include shaping the future, leverage on time, working with talented people, endless optimism, and the opportunity to learn and improve. The power law suggests that the single best investment will be worth more than all other investments combined, and investors should prioritize finding companies with the potential to be massive successes. Identifying founders with traits such as obsession, focus, intelligence, communication skills, and a fast rate of improvement is crucial. Market potential should focus on long-term growth rather than current size, while the quality of a startup's product and its user engagement are important factors to consider. Investors should avoid investing in bad ideas that appear good and not rely too much on the opinions of other investors. Integrity is essential in evaluating founders, and investors should be cautious about security tokens and ICOs, as regulations are likely to remain in place.

Summary & Key Takeaways

  • Investing in startups is energizing and provides opportunities to work with people full of new ideas and unlimited energy.

  • The leverage on time and the ability to work on multiple things is a key advantage of investing in startups.

  • Investing in startups is a humbling experience that requires the ability to learn quickly and adapt to constant changes.

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