Dalton & Michael: The truth about Y Combinator

So this is Michael Seibel with Dalton Caldwell. Well. And today, we just finished up, a YC batch and we're getting a ton of feedback. We thought it'd be great to talk to you all about that. Let's be critical for a second. I would argue this is something that YC does poorly that they that they very clearly pointed out.

They were like, when we applied to YC, we really didn't know what we were applying for. One founder said to me, we just thought it was a three month program. We had no idea that you follow on investing companies later, that you have programs for helping me raise a series a or for helping me as I'm scaling. We had no idea. Another founder said to me, we didn't even understand how YC was organized.

We thought it was just gonna be some big online lecture. Like, we didn't know we would be assigned a group partner. We didn't know we'd be put into groups and sections. We get to meet with small groups of companies that are, like, in our area and and like, they didn't know any of this stuff. And, you know, that's kind of a knock on us.

I think sometimes we have to assume people know, but a lot of these founders were like, well, I applied to YC because I talked to alums. They really liked it. And then when I got here, I was like, oh, shit. Like, this is way more stuff than I ever thought. You know? One founder was like, dude, we didn't even know that you helped us hire.

And then today, there was a meeting about the, like, YC hiring platform, and we were like, oh, we didn't know we we didn't we spent 77%. We had no idea what we were getting for. I don't know. Why do you think we suck at that though, Dalton? Like, it's pretty obvious we're bad at it. There's just a lot of moving parts.

And so people know about the batch because they they hurt. Know, oh, it's a three month program. Oh, you moved to the Bay Area and you spent time. And even then, there's confusion. It's like, yeah. No. Like, you get to know us in person. Sometimes we're, like, surprised that it's really you and me that you meet.

They think we're, like, paid actors or something. Many acceptance calls do you do where they're like,.

so am I gonna get to work with, like, you? I was like, yeah. I'm calling you.

You hadn't met anyone else. Who else would it be? Yeah. We're the we're the we're the hybrid we're the YouTubers. We're just the front guys. The real the real it's like, no. It's really us. And and and so I think they know about the program.

I think they may have heard something about Demo Day, but it's always way more impressive than they expect. Then they have no idea that we keep talking to the companies for a while, and there's all this other crazy stuff we do to give people an edge. A lot of which we kind of don't slash can't talk about.

I think that's part of the reason we don't market it as well, is a bunch of the stuff we do is meant to be secret. I don't know how you market that. And there's just a lot of data that we keep secret unless you're NYC, and that is, like, gonna stay that way.

Lot of secret data. You know the other thing that's that that makes it hard? I I've started to realize this. It's too easy to think of YC as a university. And when I think back, you know, I'm sure Yale has changed a couple ways in the last twenty years since I went, but it's not changed that much. Right? I'm sure Stanford's changed some ways since you went, but it's not changed that much.

And I think that when we think about a U university, we're preconditioned to think it's probably 99% the same year over year. Yeah. And I think what people don't think about YC is a is a product. Right? If you were to look at Instagram day one and look at Instagram now, it's completely different. And you would expect that. You would expect the product to change all the time.

And I think people's misconception is YC is a university or a school. Yeah. It's not YC is a product. I think you nailed it. We we talked to people about this. I think they think.

we have some lessons we're gonna teach you or something. They're like, I love I love the, like, well, I watch all your videos, so we kinda get YC. It's like, guys, these videos aren't YC. Like Yes. Oh, that's so funny. Anyway, so it's not like a school where we're like, here's our syllabus. We're gonna read you here's our lecture. Here's lecture four.

To read these books. Ain't it. It's more like you're you're in the club, and you get access to the resources. And if you are ambitious and you are smart, the sky is the limit. If you actually work with people that know what they're doing, there's doors that that opens. And the bigger your ambition is, the more doors are gonna open. You know what? This is why it's a little dangerous.

This is a dangerous thing I'll say. You know,.

we've been accused of being a mafia and We're not a mafia. Right? We don't break anyone's legs or anything like that. But it's not completely false. Right? Like like, if you're, like, made in the mafia, you do get privileges that normal people don't. Right? And and, like, when you get to go through YC, you get access, like you said, to resources that other people don't.

Right? And so there and and there's a little slightly different way. It's a little bit like the mafia. People don't shit on you as hard. You know? Like, when you're in the mafia, like, someone's not gonna rob you. Right? Like, when you're YC, VCs don't rip you off.

Like, and so I'm not saying it's a mafia. Right? I'm saying it's not a mafia. We just have these very clear similarities to what I've seen on mafia TV. Oh god. Anyways, so this kind of this part of the feedback that we got from founders, it had it had two elements. One was we didn't really understand the benefits that YC had when we were applying.

It also had this aspect of there were some really serious misconceptions that we had about YC that didn't get cleared up until we got in. You know, one was this misconception around, like, are we actually gonna get to work with you personally? Like, is there actual structure of this thing where we feel like we're getting really personalized support?

But but what what are some of the other misconceptions that you saw that were you know, obviously I mean, I I would argue, like, obviously designed to try to convince people to not do YC. Like, these these were, like, designed attacks on YC. What else are you seeing out there?

Trying to trying to encourage founders to think that investors are what makes your company great and that you could get product ideas and product market fit based on who you let on your cap table. So you're like, if I get this investor, they'll do this for me, and this investor does this for me. And so, well, YC will do this for me.

And it's like, guys, like, the way you build a company is not you're not baking a cake where you where you sprinkle in three different investors and then a cake pops out. Like, that's, like, the stupidest thing I've ever heard. This is a really common misconception out there, which is, like, I hate to break it to you. You're doing all the work. All the work. We're not.

Reason the reason to do y c is not that we're gonna do the work for you. It's that it's a great environment to do this with other peers and founders that get access to these resources while you're the one baking the cake. And the amount of resources you get in this network way trumps the resources you get from some random small check, similar sized check. Right? Like I think that's one.

I think another big misconception was just folks a lot of folks that apparently have the strongest opinions of telling people about YC never actually were in a batch. I don't know where that comes from. So just be just, like, be curious because, you know, it's you know what trying to like, I I I have this founder in my group this batch, and he was like, well, yeah.

Everyone that was in YC was like, you should definitely do YC. And the people not in YC were like, oh, it's not worth it. And he was like, in retrospect He's like, now that I think about it.

who never used my product had opinions about it, and everyone who did use my products had different opinions, and I weighed them equally. Yeah. You know, the last one for me is this crazy misconception about how far along you have to be. And and, like, what pains me about this misconception is that it can be destroyed through basic research.

It's like, look at the companies who've done YC who've been successful, and look at how far along they were when they applied. Yet over and over again, people will tell founders, like, oh, unless you have this much revenue or unless you're live, unless you've been doing something for this period of time or, like, y c is for scaling, but it's not for starting. That's, like, garbage.

Like, literally 40% of the last batch came in with just an idea. Yes. Most of them were working when they applied, were at work working jobs when they applied. It's true. And, again, let me just say the brutal truth. This is the brutal truth.

Some company that their idea to start was to first raise a pre seed round and sell 30% to some random investor, have some cofounder who lasted a year, and then they had to fire them, and now they have a bunch of equity, who's gone through three pivots and burned half a million dollars and applies to YC. Michael, would you rather fund that?

Or the brand new company that started a month ago, they just quit their jobs, The crap table is completely clean, and the and the founders were just, like, totally jazzed and ready to start a company. Like, who do you think is more likely to succeed? Yeah. You know? You know? I think if you look at the last batch, it's very clear where our preferences lie. Yeah. Very Very clear.

People that their idea that you've you know, go to I go to YC once you're ready to scale or once you've done all this stuff and after the you know? Exactly wrong? Dude, how many companies we funded the past few batches that they have to change their idea, which is fine. It's good to change their idea. We like it.

But they've already raised and they already have all this hair on the company, and they think they're really far along. How much harder is it to change your idea once you have a bunch of hair on the company because you thought you were ready to scale?

So hard. So hard. I I think that, like you know, it's so funny, but in my mind, it's so clear. You do YC because you want an amazing peer group. You do YC because you want to not be screwed over by investors. You do YC because you want honest feedback, and you want to take responsibility for the win or loss of your company.

And you do y c because so many other great companies did y c and extracted value out of it that you should be confident that if you're a great founder, you can extract value out of it as well. It's that simple. And and, like, so many people that convince founders that y c is bad, they can't explain why taking their money or doing their program or doing their thing is better.

All they can do is, like, neg y c. And, like, if you ever see someone making an argument that's 100% ripping something else down and 0% explaining why their thing is good, if all of your talking points is the alternative is bad. Like, you know, like, maybe all you're selling is fear because that's all you have to sell. And, like, maybe that's your business model is selling fear.

Not the kind of investor I want on my cap table. And then what's the reality? Like, inside of y c, if you're a y c company, if you're in the batch. Yeah. If you're getting the advice from us to prepare for demo day,.

how'd it go, Michael? Like like, what did we notice? You know, first, valuations. I think everyone was nervous that valuations this summer would come way down. Wasn't it like hashtag VC summer vacation or some shit like that was going on where no one was around?

Prices are almost exactly the same as they were during the last batch when it was like VC heaven on earth and money was flowing like like crazy. We saw 15 to 25, some companies raise at 30. Almost no change from the last batch. Didn't see any change on speed. You know? We saw investors going from meeting to commitment within one to two meetings. Didn't see any difference on terms.

Like, you know, investors weren't demanding board seats or weird craziness. I don't know. What did what did you see?

All similar stuff. And and, again, I think this is, an evergreen lesson for everybody. YC alums or people not in YC is it's too easy to take an anecdote that you heard from people or stuff people are saying in a group chat and think it applies to you.

Like, one of the classic mistakes we see from later stage YC companies is they base how easy or hard they think their fundraise will be based on TechCrunch articles they read of other people raising. They're like, hey. So and so just raised, so I'm gonna be able to raise at the same valuation.

And think about how much time you and I have to talk people off the ledge on how, like, some random company in Europe raising for, like, some AI whatever doesn't magically mean their fundraising be easy. Right? Like, you're it's like bad data. Like, garbage in, garbage out. Okay? So, again, the advice for folks is your mileage may vary.

I'm sure there are people out there having a harder time fundraise. I apologize to you. Right? I'm not saying my experiences or the experiences YC companies have are the same as yours, but this is sort of the meta point I'm making, which is too many folks think fundraising is a market like the stock market.

And that there's, like, graphs and charts you can have, and it all operates like an efficient market instead of what it actually is, which is, 10 different things. Right, Michael? Like, the YC funding ecosystem is, like, its own little universe.

It's its own thing. Right? It operates separately than this other stuff. A lot of what people don't understand is the power of running an auction. Right? Like, they just like, it's so rare that you really get to run an auction. You know, most founders, early stage founders are not running an auction. They're begging for money.

Like, let's be frank. We Dalton, you and I were there. Right? Like, we were we were begging for money. Like, when you're in an auction, you get to do things like name your own price. Like, y c companies say to investors, we're raising this much money at this price. Are you in or are you not in? Right?

Like, that's that's that's a foreign language to people who've, most people have raised around. Oh, we need to lead to prices. Completely different for y c companies. I think the other thing that happens when you're running an auction that people don't understand is you get inbound offers.

Like, a typical company in this batch got between 10, and I've seen 60 or 70 investors cold emailing them wanting to learn about investing in their company. I got founders messaging me on Slack. Michael, what's going on? And I'm like, oh, yeah. No. This is just how this is what nobody told you this is what happened at YC. They're like, no. And I'm like, oh, yeah.

This is yeah. Investors cold email you. You don't cold email investors. And they're like, mind blown. Mind blown. So I think that's what's so funny is that we talked to so many founders who had such a different experience fundraising, often from the same funds before doing YC than after doing YC. And and and let's dig into that.

Like, I think you have, like, this great analogy around this kind of early stage investing environment. Like, try to kind of frame what's going on here, folks. My first company.

was in the music industry for better or worse. And so I I I learned a lot about in the eight years I worked on it, I learned a lot about how the music industry works and how Hollywood works in general. And I started to see a lot of parallels between those industries and Silicon Valley. Again, kinda depressingly, if I'm honest with you. And it's the following.

A lot of the folks who are most approachable when you're a first timer or when you're just moving to the area or you're trying to break into the industry, the friendly people that wanna talk to you are often the most exploitative, and they're the people whose business model is to just, like, squeeze you and, like, pull you up the funnel to someone else.

And that And the folks that you feel like they're doing you a favor while doing it. Yeah. Right? They're, like, they're gatekeepers, but they're really friendly. And you don't know. You're, oh, you're a talent scout? Oh, you you like, you know, you like the way my demo you came to my show? Like, whatever it is, like, there's folks who really aggressively sell themselves to newcomers.

And part of the pitch is, oh, I'm really important. I know all these important people. I can open doors for you. You know, here's some other people that I know. I can introduce you to them. Like, there's all these, like Yeah. Kind of promises.

And sadly, the story with a lot of folks, you know, in the entertainment business is you learn the hard way that those you you wanna not talk to those people, or you wanna understand there's you wanna make it to the to the big leagues get again, if we're talking about agents or something, the extent you can get a really good well known agent that's like a large agency, like CAA or something.

Alright. Well, then you you made it. Like, it's like a key step to go from, like anyway, we I don't wanna get too deep in the Hollywood stuff, but there's commonalities across these industries.

And the thing I noticed in Silicon Valley in my startup experience was a lot of the characters that came out of the woodwork and that they were most successful to me as a first time founder, in retrospect Good. Were not great. No. Like No. Hey. Give me adviser shares to introduce you to someone. Hey. Pay to pitch.

We have a pitch competition coming. Hey. You know, like, all these angles that weren't great. And what's weird is a lot of the people, you know, were, like, medium famous and had, like, some social media clout. Like, like, they did enough to seem successful or drive fancy cars or seem rich that you would think they did actually know people. I mean, you had this too with, like, fake advisers. Right?

Like Yes. Yes. God.

I had a fake adviser who literally took 2% of our company to help us fail at raising a round that was rescued by our existing inside investors. Two percent. And exactly the same thing. Right? Like, oh, really nice. So I'm helping you out. Oh, it didn't work out, but, like, you signed this thing or the what about my consideration? I actually didn't even sign anything.

It didn't matter. And so I think this is, like what's interesting is when talking to YC founders, they have so many of these horror stories of these kinds of experiences fundraising before y c. And then they're shocked when, like, an investor is like, sure. I'll sign a safe. No. I don't need pro rata rights. I don't need a board seat. I don't need a board observer seat.

No. I'm fine. You know? Like, and the founders are like, what do you mean? And then it's like and and I think that it'd be helpful for us to talk about some of those specific horror stories that they tell us about. Right? Company in in my group that raised money. They were desperate.

They raised a good chunk of money from an investor who, you know, put in hundreds of thousands of dollars and bought over a third of the company straight away.

And what they didn't tell that founder is that every subsequent investor would say to themselves, This investor put in a relatively small amount of capital, bought so much of the company that the founders are gonna get so diluted that that that that that they're not gonna end up owning anything, and it's gonna shut off later stage rounds completely.

And, you know, these founders, of course, that a couple hundred thousand, it wasn't enough. They raised more. They raised more. They came in YC with almost 50% dilution. And it's like from an investor who knows better, but who saw that they could get leverage over a founder, and so they took it. This leverage point is fascinating because so much of.

when you talk to founders that go out to do a lot of fundraising, there's a lot of talking points that get beat into your head, and it's easy to believe them. Like, oh, I have to own 20%. Oh, I have to have a board seat. Oh, if you raise it too high of a valuation, it's bad. Oh, like and when you think about it, those are actually very, you know, clever talking points from the investor perspective.

And, again, so many the amines out there about fundraising that are be are being pushed by folks where it's convenient. Do you see how it's actually convenient to be like, prices are down and founders should give up more rights than they used to give during the economy? What what are some other horror stories, man? What else you got from this batch?

Yeah. I mean, I had one where the investor the founder was like, hey. When we previously went out, we wanted to raise a million dollars, and the investor wanted us to do it as a priced round and to pay for $50,000 of their legal fees. And I'm like, companies raise on safes and pay nothing. There are no lawyers. On this situation, you hand 50 k. And and the even more criminal thing is, great.

You wanna do a price round. Awesome. There's standard paperwork for that. It shouldn't cost $50,000 to do a price round. Like, you're just ripping off founders. Pure and simple, ripping off founders. There are other situations where someone is basically like, oh, I'm committing to be in your round, but I need to be the last money in. Tell me when you've raised this money.

Find another million, I'm in. But, like, you have to and you have to leave room for me? I'm like, wait. Wait. You just making rules up? They none of this doesn't this isn't how it works. Right? But founders don't know.

We we got another one where it'll be like someone saying, alright. I'm committing 500,000 of your $2,000,000 round. You just have to go and get the rest. I'm gonna lead. You just have to go raise another 1,500,000. 0. Like, these who are these are, like, all horror stories over and over from founders in this batch talking to us about fundraising before doing YC.

And it's like, I I know why they were shell shocked. I know why they were shocked when they did want fundraising during YC. They didn't hear any of this shit.

And what's tough, man, is when you think about it, to just go back to the to the music industry metaphor, the entertainment industry metaphor. For a lot of folks, they were they would have been better off or people would say, was I would have been better off just, like, waiting longer to get better a better agent or, like, be not having, like, a bad agent, just having no agent?

Or instead having a bad manager who, like, stole the masters from me, maybe having No bad manager? And so this is what's weird is a lot of the content marketing we get from the venture capital industry is to convince people they need it and want it immediately. It's like the message that you're brainwashed with as a as a founder is, like, you can't even start without raising a pre seed round.

And we're in the business of pre seed round, blah blah blah blah blah. Right? And, again, I I hope people never hear that from YC or they don't get that from us. We say the opposite. If you watch our other videos, we're like, yeah. Like, you don't actually need to go away with this money to, like, start a company and to, like, get customers.

Like, this is deeply part of the YC mantra, which is if your idea for how you start a startup is to first create a pitch deck and go pitch VCs, you're setting yourself up to get screwed. You're setting yourself up to get taken advantage of who peep by people who are gonna have 20 different ways to rip you off versus if you do something cool, you're gonna have a lot more leverage. Right?

Anyways, this was an amazing batch, and I don't want YC to take too much credit here. The founders at the work, like we said. The founders at the work. And, you know, to one of the points you made earlier, being able to see everyone in person this batch was also just, like, amazing. You know?

It it was one of the things that reminded me about why this is such a fun job is being able to see everyone and interact with them throughout the batch. So this is a good one. Right? This is good. We made it. Yeah. We made it. We made it.

We 20? We survived 19? Kinda nuts. Kinda nuts. Alright, man. See you later.

Sounds good. Talk to you later.