This episode covers Startup Investor School. Startup Investor School is a free, 4-day course designed to educate early stage investors interested in investing in startups. You can sign up at investor.startupschool.org.

Geoff Ralston is a Partner at YC and before that he cofounded Imagine K12.



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Transcript

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 with Geoff Ralston. Geoff’s a partner at YC and before that, he co-founded Imagine K12. I met up with Geoff to talk about Startup Investor School. Startup Investor School is a free four-day course designed to educate early stage investors interested in investing in startups. If you’re interested, you can sign up at investor.startupschool.org. Alright, here we go. Why don’t we just start with the basic facts. What is Investor School?

Geoff Ralston [00:34] – Investor School is a four-day class that we’re teaching for the very first time, here in Mountain View, across the street in the original Y Combinator building 320. It’s a school that’s going to teach the basics of startup investing. We hope people come in person. We think there’s a lot of demand, so we think we’re going to have a lot of folks who want to come but also doing a live stream. We’re going to make it a MOOC, a Massively Open Online Course, just like we’ve done in the past with Startup Schools. We’re really excited about the potential to give back a whole bunch of the knowledge that we’ve gained at YC over the years and how to be a really effective angel investor. To the community at large, so we create more better, happier, angel investors.

Craig Cannon [01:28] – And what gave you the impression that folks needed a school?

Geoff Ralston [01:32] – Well, what gives us the impression that folks needed a school is we’ve seen lots of, shall we say, not so effective behavior and approaches to angel investing. We’re not being conceited or anything like that, we’ve seen it in ourselves.

Craig Cannon [01:50] – For sure.

Geoff Ralston [01:51] – Most of us have, at one time or another, in the partnership at YC have been angel investors, and so, we know all the missteps. We’ve done them ourselves. I, personally, have made so many mistakes angel investing that I feel, if nothing else, qualified to tell you a whole bunch of things you shouldn’t do. We’ll trying to help people avoid a lot of the pitfalls. We’re also… there’s ways to be a better investor. There’s ways to be a worst investor and we think we can help teach people those and so, again, make them better at their job. Even if it it’s not a job, better at the discipline of angel investing and that makes it better for the companies in whom they’re investing.

Craig Cannon [02:34] – Is there a particular type of person you’re looking for to participate in investor school? Do they need to have been an engineer and had an exit or they just have some cash that they want to invest? Who are you looking for?

Geoff Ralston [02:47] – Well, the one qualification is that you’re in accredited investor.

Craig Cannon [02:51] – Okay.

Geoff Ralston [02:52] – And the SCC has a set of rules as to what apprises accreditations in terms of income and wealth. As long as you’re accredited, we want everybody. In fact, we actually think this is an opportunity to add greater diversity to the ranks of investors. Anyone who’s accredited, which is a little bit the equivalent of what you said is you have some spare cash to invest. That you could afford to lose. And you have to be honest about this. This is a very high risk investing paradigm. If you’re going to invest in startup companies, you have to be prepared for an extraordinary upside but also a, perhaps, more likely downside.

Craig Cannon [03:40] – Are you giving anyone certain criteria of what they should think about, as this is an approximate amount of money that, if you’re going to get started in angel investing in the Valley, you should be ready to start putting down, putting to work? Is there a number that you have in mind?

Geoff Ralston [03:55] – We’ll give some guidelines as to how to think about creating your portfolio.

Craig Cannon [04:03] – Okay.

Geoff Ralston [04:04] – Think about doing asset allocation across that particular portfolio.

Craig Cannon [04:05] – Yeah.

Geoff Ralston [04:08] – But how much you invest is a very personal thing. It’s sort of, how much you will care about losing. How much upside you want to have.

Craig Cannon [04:17] – Okay.

Geoff Ralston [04:18] – What percentage of a company it’s important for you to own if you think about it that way. The amount people invest is incredibly variable.

Craig Cannon [04:28] – Okay.

Geoff Ralston [04:28] – There’s some minimums.

Craig Cannon [04:29] – Yep.

Geoff Ralston [04:30] – Most people aren’t investing $5,000 when they do angel investing, that does happen but it’s unusual.

Craig Cannon [04:35] – Yeah.

Geoff Ralston [04:35] – It sort of tends to be a minimum in the tens of thousands of dollars. Up to a maximum of hundreds of thousands of dollars usually.

Craig Cannon [04:43] – Okay, so maybe we ought to walk through the curriculum in broad strokes. Where, day one, what are you guys going to start with?

Geoff Ralston [04:51] – Well day one, we’re going to start with, as you might expect.

Craig Cannon [04:53] – Okay.

Geoff Ralston [04:53] – The basics.

Craig Cannon [04:54] – Yeah.

Geoff Ralston [04:55] – How you should start, why you should start angel investing.

Craig Cannon [04:59] – Yeah.

Geoff Ralston [05:00] – Why do it, what’s it about? I’m going to talk a little bit about the history of investing and where angel investing came from. There didn’t used to be such a thing as an angel. People pretty much financed companies on their own. That’s how Silicon Valley got started, HP was founded in a garage, was $538 of capital that Dave Packard and Bill Hewlett scrounged together to build an audio oscillator. And much of Silicon Valley came from graduates of the Hewlett Packard school of building products. It was only later that venture capital started and you had a whole bunch of people coming out to Sandhill Road and figuring out that they could make lots of money. There’s an early venture firm, invested $70,000 in Digital Equipment Corporation. It was one of the earliest angel investments and they made 35 million dollars. Not angel investments, VC investments and they made 35 million dollars.

Craig Cannon [06:02] – Yeah, big time.

Geoff Ralston [06:04] – Which is pretty cool!

Craig Cannon [06:04] – Off 70, yeah.

Geoff Ralston [06:06] – That’s the kind of return people look and say, I want a piece of that action. A lot of companies setup on Sandhill Road and you had some of the classic, early VCs from very first starting Sutter Hill and Kleiner Perkins and Sequoia all began back in those early days. There was an intermediate path to raising capital between putting together your own money, putting money on credit cards, maybe getting friends and family to put a little money in and then IPO.

Craig Cannon [06:38] – Yeah.

Geoff Ralston [06:39] – There was a big gap in between and venture came and filled in some of that. But eventually what happened was, it was harder to get started at the small well and friends and family who were kind of the original angels expanded to be people who really just gave smaller checks.

Craig Cannon [06:56] – Yep.

Geoff Ralston [06:56] – Which was really the amount needed right in the very beginning to get a company ready and able to accept venture investing. I’m going to tell a little bit about that and then we’re going to talk, I’m going to have a couple of partners from YC go over some of the mechanics of startup investing that are a little, frankly, mysterious. How is it that these weird convertible notes work? Used to be when, back in the early days of venture investing you just bought a share of the company. Equity in the corporation. Now, we have these different instruments that are much cheaper and faster and simpler to use but also a little mysterious, so we’re going to demystify that, explain how it works. We’ve built up a bunch of standards.

Craig Cannon [07:44] – Yep.

Geoff Ralston [07:45] – As to how an angel investor or any sort of investor will interact with founders.

Craig Cannon [07:49] – Yeah.

Geoff Ralston [07:51] – There’s something we call the handshake protocol. Which is how you go about cementing a deal verbally before you do it on documents. We want to cover things like that. The beginning of the course is, sort of, getting the–

Craig Cannon [08:02] – Vocabulary down.

Geoff Ralston [08:03] – The vocabulary, dotting the I’s and crossing the T’s of how you actually act as an angel investor. How you should think about when you’re investing, how much you’re going to own of the company. How dilution works, how cap tables work, all those basics that, kind of you run into and no one tells you what’s this document they’re giving me.

Craig Cannon [08:22] – What about even before that? What about evaluating a company if you’re a non-technical person who wants to invest in software?

Geoff Ralston [08:29] – Yeah, we’re going to get into that right in the very beginning. Question is, so you want to invest in a company, how do you learn about the company?

Craig Cannon [08:37] – Yeah.

Geoff Ralston [08:37] – There’s actually a simple answer to that. You meet with the founders and talk to them. We’re going to, quite extensively, go into, when you go into a meeting with founders, how should you conduct that meeting?

Craig Cannon [08:47] – Yeah.

Geoff Ralston [08:47] – How should you think about the founder? If I’m meeting with you and we’re talking about your company, how do I make judgments about whether this is a company I want to invest in, how should I think about that?

Craig Cannon [08:57] – Okay.

Geoff Ralston [08:57] – We want to kind of help people through that exact, answer exact question that you have.

Craig Cannon [09:01] – Let’s get specific on some of these. You’re meeting with a founder for the first time, what’s a red flag? Say there are two or three co-founders, you’re talking to them about a product. What’s something that you might spot that you’re like, “I don’t know if I want to put money into this startup?”

Geoff Ralston [09:20] – Well, for me–

Craig Cannon [09:20] – Yeah.

Geoff Ralston [09:22] – The very first thing comes with how I read the founder’s belief in what they’re doing.

Craig Cannon [09:30] – Okay.

Geoff Ralston [09:33] – If you have this passion, people usually talk about passion. I remember listening to Mike Moritz talk about this once and he talked about it being at a different level, like almost an obsession with what you’re building and why you’re building it. You have to care so deeply that everything that’s going to happen to you as a startup founder will be something that you will think nothing of overcoming. Because that’s the sure thing, you know that if you don’t have the resilience you need, the toughness you need, the determination you need, the belief you need, none of the other things matter. Nothing else. How big the opportunity is, how much of competition there is or isn’t, how much money you raise, how smart you are, none of that matters because it won’t happen. That’s where I start and if I can’t get past that, none of the other stuff even matters. If I don’t get that sense–

Craig Cannon [10:32] – Are you kind of laying a little trap here and there to see if they’ll bite on something, like, “Oh, I don’t know if they’re quite confident enough?” Or is it just this like vibe someone has, what do you actually looking for?

Geoff Ralston [10:44] – Well, you make it sound sneaky, saying traps and– Almost underhanded, and I personally–

Craig Cannon [10:49] – Devil’s advocate type–

Geoff Ralston [10:51] – Well, yeah, everyone has a different styles.

Craig Cannon [10:53] – Yeah.

Geoff Ralston [10:53] – I’m very direct. And so, what I like to do is, I like to push.

Craig Cannon [10:56] – Okay.

Geoff Ralston [10:57] – It’s easy to do after a while because every single idea has a million things that could possibly go wrong with it and half of those will. You talk about those and you see how they react to it.

Craig Cannon [11:13] – Okay.

Geoff Ralston [11:13] – As you push on them, and you say, well, how could this possibly work? You want to provide ride-sharing services to seniors. You know they don’t really use their phones, how are you going to do that, Craig? How are you going to, and you start to push on those ideas. I think that, a certain amount of this, you can’t teach.

Craig Cannon [11:36] – Yep.

Geoff Ralston [11:36] – It’s experience. As partners in YC, we’ve all talked to hundreds, if not thousands of companies, right?

Craig Cannon [11:43] – Yeah.

Geoff Ralston [11:45] – But we can, I think, illuminate the process and get people started on the right foot and that’s, I think, the way we should think about this. It’s a short course.

Craig Cannon [11:52] – Yeah.

Geoff Ralston [11:53] – It’s four days, two classes per day, eight sessions, total, over that four day period. It’s not a six month graduate school of investing. I don’t even know what you would cover in that. It’s enough to put you on the right road to becoming a fantastic angel investor, and that’s our goal. To create more fantastic angel investor and fantastic means, not only do they make the right choices for themselves, they help companies more. They have the better relationship with companies. They make their decisions in a more effective, timely fashion.

Craig Cannon [12:31] – Yeah, it’s not just spray and pray. Show up to demo day, spend $200,000 and then, hopefully, something…

Geoff Ralston [12:37] – That can be okay. It’s not a terrible thing for companies to get that kind of cash.

Craig Cannon [12:40] – Yeah.

Geoff Ralston [12:42] – But I think it’s much more useful for companies to get thoughtful investors.

Craig Cannon [12:48] – Right.

Geoff Ralston [12:49] – Who invest for the right reason and who are not painful later. Who understand the quid pro quo that’s going on when you invest and when you get a piece of a company and how you should be interacting with that CEO and founding team henceforth.

Craig Cannon [13:08] – From a personal perspective, do you only invest in companies where you feel you can add more value than your money or are you okay just putting money into something you think is attractive but you don’t know about space?

Geoff Ralston [13:21] – A lot of people say that they’ll only invest in companies, there are all types of–

Craig Cannon [13:26] – A lot of people say that and then they put money all over the place.

Geoff Ralston [13:27] – That’s true. Well, that’s what you say and what you do. But, there’s all different… There’s probably as many different styles of angel investing as there are angels. Me, personally, I invest when I get excited about a company.

Craig Cannon [13:49] – Okay.

Geoff Ralston [13:49] – And… It may be a little egotistical, but I kind of believe that I can always help a company because I’ve seen so many, now, I’ve been doing this for…

Craig Cannon [14:01] – Yeah.

Geoff Ralston [14:01] – Coming up on seven years now and I’ve been angel investing 13 years now. This being YC and angel investing for longer than that. As those insurance commercials go, I’ve seen a thing or two. Right?

Craig Cannon [14:15] – Yep, yep.

Geoff Ralston [14:16] – I kind of believe that but I think that’s separate from if, like, if you’re talking to me and I say, “Oh my gosh, this guy’s amazing!” or “This girl’s amazing!” This is an idea, and I’m going to invest.

Craig Cannon [14:28] – Yeah.

Geoff Ralston [14:31] – Do I believe I’ll be able to help you? Yeah, but you know, there’s another perspective that’s important to have as an angel investor. Angel investors can, in limited cases, have substantive impact on the companies in which they invest

Craig Cannon [14:45] – Yep.

Geoff Ralston [14:45] – Mostly their impact is marginal.

Craig Cannon [14:45] – Yep.

Geoff Ralston [14:48] – Minimum. You might meet with a company once a year, twice a year, maybe. And you might give them some really good advice. They’re building the company and sometimes angels or I’ve heard angels take way too much credit. Again, sometimes angels are very helpful and I’d like to think that I’ve been quite helpful to the companies I’ve worked with but they’re building the company and so, if there’s a pile of credit for success, 99.9% goes to them and their team. And sometimes to bigger investors who spend a lot more time with then angel investors, who go on the board and meet with them every quarter or more frequently or help them recruit and most angels don’t spend that much time doing that. At times, they do and some do more than others but, for the most part, I’m honest with myself and know where I can be pretty helpful. The main reason to invest, and it’s good to be helpful and it’s good to be the kind of investor but the main reason is because you believe.

Craig Cannon [15:53] – Yeah.

Geoff Ralston [15:53] – And that’s why I invest.

Craig Cannon [15:54] – Going back to the vetting process, I heard Naval, Naval Ravikant in a startup investing talk from angel conflict years ago on the Venture Hacks blog, I think he said something like, it wouldn’t be strange if you met with 100 companies before you made your first angel investment. Do you have a rule of thumb around that?

Geoff Ralston [16:15] – No.

Craig Cannon [16:16] – So it could be the first one?

Geoff Ralston [16:17] – Yep.

Craig Cannon [16:17] – Okay.

Geoff Ralston [16:18] – I have a different rule of thumb. Naval says it wouldn’t be strange but what I would argue, from personal experience, is that you ought to wait just because it’s hard to calibrate.

Craig Cannon [16:29] – Yeah.

Geoff Ralston [16:32] – In the beginning. But, at this point, I have no, I’ll meet lots of companies and I know when, and I do think my calibration’s done. I know when I’m interested.

Craig Cannon [16:42] – Okay.

Geoff Ralston [16:45] – In some combination of the founder, the idea, the opportunity, the execution they’ve had up till then.

Craig Cannon [16:50] – Yeah.

Geoff Ralston [16:51] – All those things, but… But it is true, in the very beginning, before you’ve made your first angel investment, calibrate. Do spend, I don’t know if it’s a hundred or 10 or 15, you should. This being said. This being said. There are… One of the reasons people angel invest is, surely, because they want to be Professor Horowitz at Stanford, who invested in Google and became a billionaire doing that. It’s nice to be a billionaire college professor. And those companies don’t come along very often. And so, if for whatever reason, you believe the first company you talk to just might be the next Google, or the next Airbnb.

Craig Cannon [17:44] – Right.

Geoff Ralston [17:47] – It would be painful to let that go.

Craig Cannon [17:50] – Yeah.

Geoff Ralston [17:50] – So, if you got that belief. Now, I do think that the probability is low that you’ll ever see one of those. If you saw one the very first one, it’d be a strike of lightning. But…

Craig Cannon [18:05] – But it goes back to what you said already, you have to be able to throw the money away, right? If the first company you see, not throw it away, but like– You know what I mean, right?

Geoff Ralston [18:16] – You have to be prepared– To zero out that investment. In fact, you know, my default position, when I invest in a startup, is that that investment is now worth zero. It’s not, if I put, pick a number, $25,000–

Craig Cannon [18:30] – Exactly.

Geoff Ralston [18:30] – In a company… And then I track that.

Craig Cannon [18:32] – Yeah.

Geoff Ralston [18:34] – Its value is zero until I have more information that it’s not.

Craig Cannon [18:37] – Exactly.

Geoff Ralston [18:38] – Yeah, you have to have–

Craig Cannon [18:40] – Whether it’s the first investment or the 20th investment, you’re still going to feel that pressure when you’re about to write a check. “Oh, I don’t know if this is it,” but, eventually, you’re going to have to pull the trigger. What other things, how else do you help someone mentally prepare to become an angel investor? What mental models do you offer, what do you recommend they read?

Geoff Ralston [19:00] – One of the things we’re going to do in this course, which I’m pretty excited about is, we’re going to get four pretty well known, pretty successful angel investors.

Craig Cannon [19:09] – Okay.

Geoff Ralston [19:10] – To come in and kind of tell their stories a little bit, to give, what I call, angelic advice. About how they dealt with that. I do think the bottom line is, you got to do it, eventually.

Craig Cannon [19:21] – Yeah.

Geoff Ralston [19:23] – And you have to meet with a bunch of founders. You have to think about their companies. Usually it’s a good idea to invest in some space that you have some familiarity with so you can actually, hopefully, make a more educated judgment. And then–

Craig Cannon [19:44] – Go for it.

Geoff Ralston [19:45] – Yeah, go for it or not and you’ll get better at it.

Craig Cannon [19:48] – What else is on the curriculum? What else do we have to look forward to?

Geoff Ralston [19:53] – Well, okay, I’ve taught, not much. Because, again, it’s a pretty short curriculum. But we’re going to talk a little bit about how to be a good investor. I brought that up earlier. It’s actually shockingly easy to be a terrible investor. We want to talk about what it means to be a good investor and how you should think about that and how you should interact with companies and what companies need and want from you as an angel investor. And that goes from first meeting to whatever rhythm you have meeting with a company once you’re actually an investor, if at all. Some investors just want to invest and write me a check when it’s all over. But most want to get updates.

Craig Cannon [20:48] – Definitely.

Geoff Ralston [20:49] – And talk to the CEO, that’s part of the fun of it, by the way, and watching the progress. I just got to go and talk to a YC company that’s doing great, I won’t mention them, but while I also made an angel investment in it and… Went from two people, now they’re 50 people and there I’ve got a big valuation and they have all sorts of problems and they’re doing incredibly well and it’s exciting and that’s a really fun thing. I want to talk about that but, maybe the last thing I’ll say about the curriculum for the course that I’m excited about is we’re going to talk a little bit about investing in the 21st century because it has changed. I was talking about HP back in 1957. 1937, excuse me, that’s when HP was founded, ’37. But venture capital really started in ’57 and ’60 and then, sort of, angels came in the subsequent decades.

Craig Cannon [21:42] – Yeah.

Geoff Ralston [21:43] – Things changed a lot once the 2000’s, the 21st century came. Probably the first big change was Y Combinator, was accelerators. Rethinking how people did early stage investing. Well, it’s changing again. You mentioned Naval Ravikant, he launched this thing called AngelList. And there’s something called Kickstarter. AngelList brings people and companies together in a really unique online way to invest in a different paradigm than before, as Y Combinator was a different paradigm of investing. It’s investing in bulk. We invest in a whole bunch of startups all at once. But there’s new stuff happening, you know about this. There’s ICOs, there’s Initial Coin Offerings. Companies are changing the way they think about the availability of capital. The SEC is looking– Horrendous right now, it’s complicated. We’re going to talk a little bit about how the space is changing and evolving. Another think I didn’t mention was that, I sort of talked about this history in, sort of, a not very chronological way. And so, I’ll continue that. One of the things that happened, sort of, after YC began this accelerator craze is, there became a lot more angels out there.

Geoff Ralston [23:03] – And the angels started to professionalize and some of the angels who were most experience angels became, what we called at that time, Super Angels. Or micro VCs. And they started creating funds. Then you had a little bit of fragmentation of the VC where there was a bunch of early stage and then series A and then growth after than and then you had a whole bunch of evolution of that where VCs started doing both early stage and growth, sometimes in the same funds, strangely, which I don’t necessarily think is a great idea. I don’t know if fragmentation is the right term, I used it before, but this new diversification–

Craig Cannon [23:47] – Sure, yeah.

Geoff Ralston [23:48] – Of styles of professional investors. Professional investors meaning someone who has limited partners. Who are investing other people’s money besides their own. That’s changed a lot in the 21st century, but certainly, the new ways to raise money, the crypto oriented techniques are pretty radical. Radical in that, so early, there’s an equal amount of money in ICOs being raised by startups as venture money; that’s crazy! So fast.

Craig Cannon [24:22] – For sure.

Geoff Ralston [24:24] – Don’t really believe it’s sustainable and there’s a lot of crap–

Craig Cannon [24:26] – Of course, yep.

Geoff Ralston [24:29] – Certainly a lot of fraud out there too. So, buyer beware. But the world is shifting and changing–

Craig Cannon [24:38] – Absolutely.

Geoff Ralston [24:39] – Radically, rapidly, so we want to talk a little bit about that so people are up to speed with some of what’s happening. That’s kind of the gamut of the course where we’re covering a lot of the fundamentals. Some insider looks at how you become an angel investor and how you think about deal flow and portfolios and making your decisions. And then, maybe a little bit of a look towards the future and where we’re going.

Craig Cannon [25:04] – Okay, awesome. We would be remiss if we didn’t talk about your personal angel investing experience. Share some advice with people, just give them a taste before they sign up for Investor School. Before you said the good and bad habits of being an angel investor, let’s talk about those, specifically. What does it mean to be a good angel investor?

Geoff Ralston [25:25] – This qualitative thing is good, good can mean a few things. It can mean that you’re actually good to your companies. It can actually mean you get a good return.

Craig Cannon [25:32] – Okay. Yeah, they like you.

Geoff Ralston [25:34] – Let me try to answer both of them. To be a good angel investor, first, is you have to follow your passion, invest in what you care about. But don’t be emotional. You’ll make a lot of bad decisions if you’re emotional. It is a cold, hard cash investing decision and you should think about that way.

Craig Cannon [26:01] – Yeah.

Geoff Ralston [26:02] – You should learn how to say no and learn how to say no explicitly and kindly and with as many real reasons as you can. I’ll get back to that in a sec but that’s part of being a good investor too, to companies. If you meet with me and I say, “I’m thinking about it, Craig, you seem to have a pretty good idea, I’ll get back to you,” and I never get back to you, sometimes investors do that because it’s just hard to say, “Dude, no.”

Craig Cannon [26:27] – Yeah.

Geoff Ralston [26:29] – And so, you have to learn how to do that, say no. Sometimes, as I said, you should be as honest as you can, especially if it can be helpful; sometimes you can’t. Sometimes it’s because I didn’t believe in you. I didn’t think you were smart enough. I didn’t think you were strong enough. I didn’t think, all these things that I’m not really going to say in an email to you. You have to come up with some way to gracefully say, I’m not interested. But remember what we talked about, Naval said you have to meet with a hundred companies, at least 10 or 20 or 30 and certainly, you want deal flow and that’s another thing about being a good angel investor. You need deal flow, find a way to get deal flow, we’ll talk about that. If you don’t have deal flow, you’ll take the first thing you get, “You’ll talk to me, I’ll invest, please, take my money.”

Craig Cannon [27:14] – On a micro level, you wouldn’t necessarily be wrong either if your deal flow is only 10 companies a year, you may still pick the best one but it may still fail. You might just need to see–

Geoff Ralston [27:23] – Which is being wrong.

Craig Cannon [27:24] – No, I’m saying, which is being wrong in the macro sense–

Geoff Ralston [27:27] – But you’re being locally right but that doesn’t do you any good.

Craig Cannon [27:29] – Exactly.

Geoff Ralston [27:30] – That’s why you do need more to see but, again, I do think these things stand alone. You have to look at whether you believe the opportunity is there and you have a founder in front of you who has some probability of winning in the fight for that opportunity. Be rigorous and organized and dedicated. Even if you’re dabbling and, I think, most angel investors dabble, they’re not professional.

Craig Cannon [28:00] – Yeah.

Geoff Ralston [28:01] – This course, by the way, is not meant to teach people to be professionals. I don’t expect real venture capitalists will come and take the course, I expect angels who are investing their own money and who are doing this because they enjoy working with founders. Because they have causes that they care about. Because they want to see innovation in the world. Because they want to see change. Those are all really good reasons. And those are good reasons to invest. But you have to temper that because I wouldn’t recommend just investing in change with no hope for return.

Craig Cannon [28:35] – Right.

Geoff Ralston [28:36] – You can, if you’re really willing to throw away whatever amount of money you’re investing and I would never again say that. If you’re doing this because of some possibility of making a difference, creating change even if you’re not that concerned about the return, that’s fine. But most angels want some kind of return. I would also say that, you know, most angel investors should ignore the little stuff. Because when you’re angel investing, if you’re going for a 7.6% return to try to beat the stock market, you’re in the wrong game. It’s a game of big wins. Don’t sweat the little stuff. Don’t, you know… Don’t run your founders through the ringer as they’re shutting down and trying to extract some bit of blood from a stone where there isn’t any. It doesn’t matter.

Geoff Ralston [29:36] – It doesn’t matter. In fact, if you think about it, if you act like a jerk to a founder, that might be, even if that gets you an extra 50% of your investment back somehow, that might actually cost you way more in the long term because the way you get deal flow is because some founder says to another founder, you should take Geoff Ralston’s money because he’s a good person to have on your cap table.

Craig Cannon [29:57] – Right.

Geoff Ralston [29:59] – My advice is, be a good person to have on someone’s cap table. Be that person. Say, Ron Conway, you want his money. He will help you, he’s not a jerk, he will be on your side.

Craig Cannon [30:11] – It’s so relationship-based, something I didn’t fully realize until I moved out here was how important optionality is when people are investing. It’s not uncommon for someone to say no at one point and then say yes later down, even if they have to pay premium for that. And I think that’s a difficult thing because on the relationship side–

Geoff Ralston [30:30] – I’ve done that lots of times. One thing we tell founders here, that the reverse is true for investors.

Craig Cannon [30:37] – Yep.

Geoff Ralston [30:38] – There’s no, no forever, it’s not now.

Craig Cannon [30:41] – Exactly.

Geoff Ralston [30:41] – Not now, I’m not ready, you’re not ready, whatever.

Craig Cannon [30:44] – But the thing that messes with your head is when someone says not now in other areas of life, you’re just like, “Oh, they’re politely telling me to go away, and never.” But here, not now often means not now. Like, call me in 18 months when you’re raising money again.

Geoff Ralston [31:00] – Yeah. But there is, the fact is, most angel investors don’t get a bite at the later rounds. They might get a bite later on during this round and you think about it, but don’t. One other thing I will say not to do as an investor which is… Don’t try to be the last money in because you don’t have any confidence in yourself. Some of the worst investor behavior is to say, “Craig, I like you, I like your company. You’re raising a million dollars, I’ll put $100,000 in as soon as you as raise $900,000” because you’re useless. The fact of the matter is, once you, Craig, have raised $900,000, you don’t need me. And I have demonstrated right then and there that you don’t need me.

Craig Cannon [31:53] – Yep.

Geoff Ralston [31:53] – Right. You’ll fill it in with someone else and fill it in with someone who’s more useful, who has more courage behind their conviction.

Craig Cannon [32:01] – Totally.

Geoff Ralston [32:02] – Be the kind of investor who has enough courage to say, you’ve raised zero, I’ll be the first money in, I like you that much.

Craig Cannon [32:11] – And on the strategic side for you, personally, what have been some of the best moves you were unsure about in the beginning, but then later on, you were like, oh, maybe I kind of called it there, that worked out pretty well?

Geoff Ralston [32:24] – Well, the best example of that is one of my earliest angel investments. And I did it for the wrong and the right reasons. The wrong reason was, the woman who was running this company… Was an old friend, someone I’d worked with for years, years before and that’s a terrible reason to invest in someone. Except that she’s awesome. And I’ve done both ways, like sometimes you feel pretty good and you invest in them because they’re a friend and it’s not a good choice. This one, in this case, it was the right reason. But… The space was really tough, it was in wireless networking and, geez, there was so much competition, they were a small wireless networking company and they had some kind of cool technology but she wasn’t even a founder, she became the CEO. She’d been a founder before, she’s like now it’s good but I didn’t know the founders very well and it was this hardware thing and some software and, oh my gosh. I only invested a little bit and that was, so far, the only company that has IPO’d.

Craig Cannon [33:36] – There you go.

Geoff Ralston [33:37] – I made a good return on my investment, so that one worked out.

Craig Cannon [33:39] – Okay.

Geoff Ralston [33:40] – Really nicely, and it took, and it was one of those things where I was like, ah, it’s never going to happen, it’s never going to, like, and I sort of lost track until I woke up one day and they IPO’d and I got to notice that I had public company stock and I was, sort of, shocked.

Craig Cannon [33:56] – Was there a learning on the positive side where you’re like, “Oh, this is a pattern that I might be able to match again,” or did you just get lucky–

Geoff Ralston [34:03] – No, quite the contrary, like, it was because I knew a good person and I invested in that person. Aside from all the other warning signs, this space, are you kidding me.

Craig Cannon [34:12] – It’s the founder.

Geoff Ralston [34:13] – Founders I don’t know that well but this great person who’s really smart, really capable, has done this before is running the company, yeah, I’ll invest in that all day long.

Craig Cannon [34:21] – Okay. I did want to ask you, you’ve had success with startup investing, angel investing where you didn’t necessarily know if it was going to pan out. Obviously, you never know. What are mistakes you’ve made?

Geoff Ralston [34:34] – Oh, I actually think the appropriate question is which mistakes haven’t I made, because I’ve made them all. I’ve invested in family, don’t do that. I invested without thinking it through that much. Don’t do that. I invested in spaced where I really had no freaking clue at all about it. And I just did it because, and don’t do that. I invested in spaces because someone I thought was smart invested there and sometimes that’s a good thing to do but I didn’t put enough thought into it. I’d been fooled by founders. I thought they were better than they were. I’ve invested in founders in a technical, in a space that demanded great technical know-how that didn’t have great technical know-how. I’ve invested in founders where I didn’t believe in them and then decided not to invest and then was persuaded by short term results that I was wrong, but I wasn’t.

Craig Cannon [35:36] – Do you often invest internationally?

Geoff Ralston [35:44] – Almost never. I have invested in international YC companies sometimes. I shouldn’t say almost never. When I was investing pre-YC or outside of YC, I haven’t. It’s too complicated.

Geoff Ralston [36:00] – I can’t get my head around, talk about investing in ecosystems you don’t understand. I mostly try to invest in places where I have an understanding or a belief system. I don’t have to be deep into it, I will invest in CRISPR companies. Because I’m not a biologist, but I think CRISPR is an earth-shatteringly important technology.

Craig Cannon [36:25] – Absolutely.

Geoff Ralston [36:26] – I wrote a post about that just because it’s so cool. I wouldn’t claim to be an expert and synthetic biology, in general, I had believed for half a decade now, is going to be incredibly important before I even know anything about CRISPR but just the idea that you could start to think about– Programming the tree of life. In fact, a conviction that I had way back then that we’re going to figure out how to do it, it just kind of happened really quickly where the ability to do gene editing at a very detailed level came about, thanks to bacteria. Very much bacteria.

Craig Cannon [37:02] – It’s so cool.

Geoff Ralston [37:02] – It’s amazing, yeah.

Craig Cannon [37:05] – I’m sure you’re going to have international angel investors coming, right?

Geoff Ralston [37:10] – Oh, definitely.

Craig Cannon [37:11] – From all over the place, right?

Geoff Ralston [37:12] – I don’t think it’s different though.

Craig Cannon [37:14] – Right.

Geoff Ralston [37:16] – Let me caveat that. Sure, it’s different. But the set of things we’re going to talk about are generic and will be true for them as well. It’s a good point you make, assuming this course goes well and we teach it again in the future, we’ll think about whether we need to add more about how you should think about investing as a U.S. investor in international companies or as an international company, as an international investor in international companies in your own country or say, investing in U.S. companies. There’s certainly a lot of international investors who come in and invest in western companies. On demo day.

Geoff Ralston [37:59] – But that’s the beauty of it. This is our experiment, it’s a learning experience for us as well as for the students and hopefully, assuming it goes well, we’ll improve it and do it again next year.

Craig Cannon [38:11] – That’s great. Where should someone go if they want to apply?

Geoff Ralston [38:13] – The application is going to open on Thursday and, I hope I get this right, they should go to investor.startupschool.org.

Craig Cannon [38:24] – Okay, and we’ll also post it on the blog too. Alright, thanks Geoff.

Geoff Ralston [38:28] – Thanks a lot, Craig, nice talking to you.

Craig Cannon [38:29] – You too.

Geoff Ralston [38:31] – Alright, thanks for listening. As always, you can check the transcript and the video at blog.ycombinator.com. And if you have some time, please leave us a rating and review wherever you find your podcasts. See you next time.