Xobni Man Walking Some thoughts from an entrepreneur

I encourage most startups or would-be startups to apply to Y Combinator, our first investors. Most people are really excited about the possibility of getting YC funding.

Of the people who are lukewarm, the number one objection I hear is that the valuations are too low. The number two objection people give is that “We’re too late stage for them.”

Baloney.

When someone says that the valuations are low, they’re comparing YC to a traditional investment. The rule of thumb usually doesn’t apply because the stage is super early (more on this later) and YC isn’t investing very much. But even from a higher level, valuations are a tactical matter; you should be thinking about grand strategy when making this decision. If Y Combinator funding increases your expected outcome by 2x, you should be willing to give up 50%, right?

I have a lot of empirical evidence about the entrepreneur’s upside so far. On average, Y Combinator will increase your expected outcome by at least 5x. They usually take 2-10% of your stock in exchange. That’s a great deal! (I think it’s really 20x or higher, but I’m being on the safe side.)

How do they increase your outcome so significantly? It’s not about the money at all; it’s about the advice and connections. These things seem fluffy before you’ve experienced their significance. I applied to Y Combinator mostly to be around Paul, not to get introductions to important people. I didn’t have any use for important people. Boy, have things changed. I can also say very empirically that the network really matters. More details and proof on that in a few months.

YC doesn’t just casually introduce you to investors, reporters, and potential employees. They really work their tails off to make it happen. Your job is to only give equity to people who are going to contribute to the company. You don’t want to give shares to investors who are just going to give you money and not help you out. You want to give shares to investors who will give you their cell phone number, who will write emails to recruits encouraging them to join, and so on.

I mentioned that YC also gives you great advice. There was a YC dinner last summer when we went to Paul and said Paul, we’re ready to launch. He said, very simply, No you aren’t. I went home demoralized. As Steve Jobs said, It was awful tasting medicine, but I guess the patient needed it. We weren’t ready to launch.

I could go on and on about this, but I’ve got to get to work on the second objection: We’re too late stage for YC.

This objection might be true for some. YC doesn’t invest in $20M series B rounds. Usually, though, I hear this retort from people who have been working on the product without funding for one or two years. They’ve built a lot of technology, and are afraid that their valuations won’t reflect that.

I can see why people might think this way. For years YC’s web site said that they take 5-7% of the company. Only recently did it change; now it says 2-10%. (You can use the Internet archive to see old versions of their site.)

What’s going on here? YC is seeing more teams that have already made something, and they’re accommodating those situations. Their #1 goal is to work with great people and companies, not to own the largest possible percentage. So, no, you probably aren’t too late stage for them.

The founders of Weebly were working on their site for a year before taking YC money. They were on TechCrunch the day of their YC interview. They still took the money, and I am sure they haven’t regretted it.

I always buy a pumpkin around Halloween to keep, uncarved, until it dies. They’re festive and can really brighten up a room.

This year’s pumpkin lasted for about four months.

Rest In Peace, 2006-2007 Pumpkin. (Maybe next year I’ll name it something more creative than by year!)

I love Visual Studio 2005. Microsoft repeatedly hits home runs it comes to IDEs. But it isn’t perfect; it has two thorns that prick me every day.

First, Visual Studio doesn’t have multimon support. I have three monitors, and only get to write code on one of them. You can open the same solution on multiple VS instances, but that doesn’t work because editing a file in one instance will confuse the other instance.

In contrast, Eclipse really nailed multi monitor support. You can have the same project open in multiple windows, and you can instantly see any edits in all the windows.

It’s funny that this bug impacts our hardware purchase decisions. Because VS 8 lacks multimon support, we prefer one huge monitor to multiple average ones. I’m running 1600×1200 vertical now, which means I can see 80 vertical lines of code at a time. I’m looking forward to getting even more in the near future.

Second, Visual Studio doesn’t have Edit And Continue support for anonymous functions. The code below executes as you would expect.

Except that I’m from Texas. We don’t say “hello” in Texas; we say “howdy!” I didn’t see my mistake until I ran the code in debug mode, so I hit Pause and change “Hello” to “Howdy.” I hit Continue, but…

I think that anonymous functions should be rarely used, but this bug really hampers my willingness to use them when they would otherwise make sense.

I am proud that C# has anonymous functions, though. Many languages don’t.

Sam Altman from loopt was the speaker at the Y Combinator dinner last night. (Sam is a close friend and one of the best entrepreneurs I know.) During Q & A, Paul Graham asked: “What do you wish you’d known when you were at these guys’ early stage?”

I asked myself the same question. What do I wish I could tell my past self?

I think we’ve done a great job so far. That being said, if I had known these things when we began, Xobni might be worth twice its current value.

Equity

First, offer significant equity to rock stars you find early in the company. When we met Gabor Cselle in August, we were in love. We asked our friends how much we equity we should offer, and the feedback was all over the board. We took the wrong advice and offered him too little.

We recently corrected that mistake, and Gabor is now joining the company about seven months later. I’m really happy about this, but we left a lot of value on the table by not getting him earlier.

Conflicts of Interest

Matt and I passed up three introductions to a firm because of their investment in another email company.

The truth is that there are going to be other companies in your space, but if they’re not competing directly then it might be foolish to turn down a meeting with their investors. As John Doerr said, “No conflict, no interest.”

We eventually realized we were wrong. We took the fourth introduction, and haven’t regretted it.

So don’t be so paranoid about conflicts of interest as long as you’re not a direct competitor.

Idea Due Diligence

We knew we wanted to leverage hidden email data. The most obvious thing to do with hidden data is to display it with graphs and tables, so we spent the first six months working on that product.

It turned out that Xobni Analytics didn’t generate enough recurring value for individuals. Whoops.

We didn’t know how to judge an idea, so we started with the most natural idea. Instead, we should have forced ourselves to answer “Why do people want this?”

This goof only slowed us down by about 30% because we used bottom up programming. Most of those six months were spent building out the baseline platform that we’ll need for any product in our space.

Saving Grace?

The common theme of these mistakes is that we eventually woke up and recovered. I’d love to say this implies that we’re brilliant at spotting our mistakes. Instead I’m compelled to ask myself: what big mistakes are we making now that we don’t know about?

My name is Adam Smith, and I am the author of this blog. (As a side note, I don’t see why I should be the only author of this blog. Perhaps I should host guest authors at times.)

Xobni Man Walking is about my experiences as an entrepreneur and software developer. Xobni is a year-old startup focused on organizing your personal information, centered around email. We have a company blog.

Xobni only had two people until recently, so it made sense to put all of our thoughts on the company blog. As Xobni grows, so does the difference between ‘I’ and ‘we.’ Enter individual blogs.

This particular blog is going to discuss growing a company and growing a software product. Growing a company is really something you do so you can grow a product, but it’s such a daunting task that I think it deserves its own bullet in the agenda.

Of course, growing a product could also be seen as something you do in order to grow a company. (This is where a picture of a ying-yang would go.)