Art Over Science in Decision-Making:

The speaker emphasizes that meeting founders and making investment decisions is more an art than a science. This perspective suggests that intuitive judgments and relationship-building are key factors in the decision-making process.

Learning by Losing:

The speaker believes that to become an expert in the investing arena, one has to lose some money first. This underlines the notion that experience, including failures, contributes to expertise in investment decision-making.

Technical Issues Addressed:

The speaker apologizes for the live streaming issues they’ve been having. They assure the audience that all slides and transcripts will be available on their website, thus hinting at the organization’s commitment to transparency and problem-solving.

About Paul Buchheit:

The speaker introduces Paul Buchheit as a long-time partner at Y Combinator (YC) with a wealth of knowledge and wisdom in the tech and investing sectors. Paul is noted as the inventor of Gmail and the creator of a company called Friend Feed, which he sold to Facebook.

Paul’s Investment Philosophy:

A quote from Paul Buchheit is shared, emphasizing the importance of product virality through customer satisfaction. Paul believes that the best virality comes from a product that people are so satisfied with that they naturally want to share it with others.

Setting Expectations:

Finally, there is a comment about possibly setting the expectations too high for Paul Buchheit’s talk. This may reflect the speaker’s admiration for Paul but also sets the stage for an engaging and insightful discussion.

Background and Introspection:

Paul Buchheit has been involved in startups for around 20 years and has been an investor for the past 12. He came to a point where he felt the need to stop and reflect on his career. By looking at the patterns that led to favorable and unfavorable outcomes, he aimed to improve his future investing strategy.

The Value of “Bad Ideas”:

Paul discussed the paradox that many successful startups initially seem like “bad ideas.” He argued that if an idea were obviously good, big companies would have already pursued it. Therefore, opportunities that seem unimportant or stupid can often be the best areas for startups to explore.

Case Study: Google:

Using Google as an example, Paul emphasized that it was initially seen as an unimportant project. Even Larry Page and Sergey Brin were initially unable to sell the idea for $1 million to big companies at the time. The opportunity for startups lies in these ideas that aren’t obviously brilliant but have untapped potential.

Importance of Luck:

Paul attributes a significant portion of his success to luck. He mentions that being an early user of Google led him to work there and that his fascination with Linux was a driving factor. He argued that startup employees and investors share similarities, particularly the factor of luck.

Y Combinator’s Underestimated Value:

He discussed how he got involved in Y Combinator (YC), a startup accelerator. Originally, YC was perceived as a bad idea and was even ridiculed. However, it turned out to be a lucrative endeavor. Paul Buchheit attributed his interest in YC to Paul Graham’s insightful essays, which led him to offer his help.

Investment Returns:

Paul mentioned his first angel investment in a YC company called Wufoo. Despite being ridiculed at the time, the investment yielded a 44x return when the company was acquired by SurveyMonkey. He emphasized that the long-term return also came in the form of valuable relationships and contributions to other startups.

Conclusion:

Paul Buchheit shares that he’s learned much from his journey so far and has drawn valuable lessons for future investments. His approach is guided by recognizing patterns, valuing seemingly “bad ideas,” acknowledging the role of luck, and keeping an open mind towards unconventional opportunities.

Origin of Justin.TV:

The speaker, Paul Buchheit, discusses the inception of Justin.TV, a concept that started with Justin Kan streaming his life 24/7 via a camera attached to his head. The idea was deemed unconventional and risky at the time, contrasting sharply with something a tech giant like Google would attempt.

Initial Struggles:

The company faced several challenges in its early days, including failed acquihire attempts. Investors wondered whether they should lose faith in the struggling startup, to which Buchheit advised against it.

The Pivot to Twitch:

The company eventually discovered a niche—video game streaming—that eventually became its primary focus. This marked their successful pivot to Twitch, which was later sold to Amazon for a billion dollars. This move surprised Buchheit, who never expected game streaming to be a lucrative business.

The Talent Behind the Venture:

Buchheit emphasizes the surprising trajectory of the founding team, which was once considered to lack talent. Emmett Shear, the CEO of Twitch, continues to lead the now-estimated $20 billion business under Amazon. Justin Kan has moved on to launch several startups and was also a partner at Y Combinator. Michael Seibel sold his spin-out company, Social Cam, for $60 million and is now the CEO of Y Combinator. Kyle Vogt sold his company, Cruise, to GM for a billion dollars.

Entrepreneurial Insight:

The case of Justin.TV and its founders illustrates the unpredictable nature of startups and the potential for unrecognized talent to make significant impacts in the tech industry. Despite early struggles and skepticism, the team not only succeeded but pivoted into a billion-dollar business, underlining the importance of flexibility and perseverance.

Starting FriendFeed:

Paul Buchheit discusses his motivation to start his own company, FriendFeed, after feeling confident he understood the startup ecosystem. He mentions the importance of having a great team as the cornerstone for success, highlighting that he managed to convince Brett Taylor to co-found the company with him.

Brett Taylor’s Skills:

Buchheit shares an anecdote about Brett Taylor, whom he knew from Google. Taylor, frustrated with the performance of Google Maps before its launch, rewrote the entire JavaScript front end in a weekend, making it faster and more efficient. This led Buchheit to recognize that Taylor was an excellent asset for FriendFeed and a person worth investing in.

Challenges with Growth:

While FriendFeed generated buzz, it failed to grow substantially. One reason was the competition with Facebook, which Buchheit acknowledges as a formidable opponent. After meeting Mark Zuckerberg and observing Facebook’s trajectory, he concluded that Facebook would be a Google-sized success and unbeatable in the long run.

Selling to Facebook:

Eventually, FriendFeed was sold to Facebook for approximately 0.5% of Facebook’s equity, which Buchheit describes as a good deal. The key lesson he emphasizes is the importance of finding team members and competitors who are better than you are at what they do.

Investment Criteria:

Buchheit explains his criteria for funding startups: he only wants to invest in founders who are better than he is at their respective tasks. While he acknowledges the importance of ideas and market size, he argues that if the founders are better, they will inherently have better insights, which can guide the venture to success.

Role of an Investor:

The role of the investor, in Buchheit’s view, is to use their knowledge to ask intelligent questions to evaluate the founders’ understanding of their business. The aim is not to use one’s expertise to decide whether a business will work but to validate whether the founders know what they’re talking about.

In sum, Buchheit shares valuable insights into the importance of team dynamics, the challenges of competing with tech giants, and criteria for investment decisions.

Resourcefulness and Bootstrapping:

Paul Buchheit shares the example of Meraki, a company that built mesh Wi-Fi boxes without external funding. By skillfully utilizing available resources and deals, Meraki demonstrated the value of resourcefulness and bootstrapping. Their minimalistic approach contrasted sharply with Juicero, which spent $100 million without market validation.

The Importance of Timing in Exits:

Both Meraki and Cruise offered good returns upon their sales to Cisco and GM, respectively. However, Buchheit mentions that in hindsight, both companies probably sold too early, missing out on even greater valuations.

Solution-Oriented Mindset:

Kyle Vogt, a founder of Cruise, previously faced a significant challenge at Justin.TV with expensive streaming services. Instead of giving up, Kyle took Buchheit’s advice to write their own streaming server, making the business viable. This epitomizes a founder who tackles seemingly impossible problems.

Willingness to Pivot and Adapt:

Kyle Vogt started in the streaming business and later moved to self-driving cars. Buchheit’s trust in Kyle was not misplaced, as Cruise was later bought by GM for about a billion dollars, showing the value of a founder’s ability to adapt and pivot.

Unlikely Expertise:

Blake, the founder of a supersonic jet company, originally had a software background. Despite lacking aeronautical expertise, Blake taught himself the necessary skills and learned from past failures like the Concorde. His ability to articulate complex ideas clearly, even to those without subject matter expertise, marked him as an exceptional founder.

Effective Communication:

Paul emphasizes that a common trait among great founders is their ability to communicate complex ideas clearly. Blake could break down the issues with the Concorde and explain his fixes, showcasing his deep understanding and making a strong case for his business.

Importance of Founder Expertise:

Paul Buchheit emphasizes the value of investing in founders who bring in unique expertise, irrespective of the domain. Whether it is a startup aiming to build supersonic airliners or a biotech firm, a capable founder makes the investment worthwhile.

Investor Behavior and Missed Opportunities:

Paul shares personal stories about missed investment opportunities in Dropbox and Airbnb due to poor investor behavior or lack of prompt action. He advises investors to be respectful of founders’ time and make decisions swiftly to avoid missing out on valuable opportunities.

Investment Criteria and Mistakes:

He argues against the practice of investing solely based on numbers, or because something appears to be a “good deal.” Such investments have never resulted in profitable outcomes for him. The concept of “value investing” doesn’t necessarily apply in the startup landscape.

Investing Philosophy:

Paul suggests “investing in optimism” and advises against investments driven by fear or cynicism. He also shares that investments made out of pity or emotional attachment have not been profitable.

Market and Algorithm Sensitivity:

Paul warns against investing in startups that are not creating value but are merely exploiting temporary market inefficiencies. Such companies are susceptible to algorithm changes in platforms like Facebook and may not have a sustainable business model.

Paul’s overarching message is to be deliberate and strategic while making investment decisions in startups. He champions the idea of investing in strong, knowledgeable founders who are driven by more than just good numbers.

Importance of the Founder:

Paul Buchheit emphasizes the critical role of founders in the success of a startup. He believes that all other factors for a startup’s success derive from the quality of its founders.

Clear Communication:

Buchheit notes that effective founders demonstrate clear and concise communication, emphasizing that this doesn’t mean slick or salesy communication. The founder should be able to convey complex ideas clearly, demonstrating a deep understanding of their subject matter. As an example, he cites Paul Graham’s essays as a key factor in Y Combinator’s popularity.

Ability to Inspire:

Good founders should be able to tell a compelling story about their vision. This capacity not only convinces investors but also helps in recruiting talent and customer acquisition. When Buchheit struggles to understand a founder’s vision or finds himself doing the work for them, he takes it as a red flag.

Speed of Execution:

A crucial trait for successful founders is their ability to move quickly. He mentions instances of founders rewriting maps in a weekend or building products without much funding. Buchheit is wary of founders who find reasons to move slowly, as he sees speed as a vital component for success.

Resourcefulness:

The ability to accomplish much with limited resources is another important trait. Founders should be able to make the most out of what they have, using examples like the Meraki team building a product with minimal funding to emphasize his point.

In summary, according to Paul Buchheit, the essential traits for a successful founder include clear and effective communication, the ability to inspire and tell a compelling story, rapid execution, and resourcefulness.

Entrepreneurial Extremes:

Paul Buchheit emphasizes that successful startup ideas often lie at two extremes: either implausibly ambitious or seemingly frivolous. Startups that find a middle ground risk being overshadowed by larger companies or numerous other startups working on similar concepts.

Value of ‘Toy’ Ideas:

Ideas that may initially seem trivial or like ‘toys’ can often turn into significant businesses. Buchheit stresses that founders with the conviction to pursue these ‘obviously bad ideas’ may have a unique insight into market needs.

Talent Magnetism:

Great founders have the ability to attract top-tier talent. The pull of working with the best attracts the best, as seen in Y Combinator’s own ecosystem and successful startups like Stripe.

Creating Desirable Products:

The core tenet, ‘Make something people want,’ is underscored by Buchheit. He states that startups building products that fulfill genuine needs have a better chance of success. He humorously recounts how his personal need for food delivery led him to invest in DoorDash.

Determination and Commitment:

Being highly determined is crucial for startup founders, as startups are challenging and can be mentally taxing. Founders must be willing to persist despite the difficulties, and those with an easy ‘Plan B’ may lack this essential drive.

Caution Against Perfect Resumes:

Buchheit expresses concern about founders who have never faced failure, mentioning that a perfect resume can sometimes indicate a fear of failure. He believes that startup founders will face setbacks and must be capable of navigating them.

In summary, Paul Buchheit provides additional nuanced traits that successful startup founders should possess, such as pursuing extreme or unconventional ideas, attracting top talent, building genuinely desired products, and displaying unrelenting determination and a willingness to face failure.

Evaluating Bio Companies:

Paul Buchheit explains that the market risk for bio companies, such as those creating a cure for cancer, is generally not a concern. The demand for such products is obvious. The real risk lies in whether or not the company can actually deliver on its promise to create an effective product.

Investment Criteria:

When questioned about what made him invest in a seemingly no-talented group with a ‘stupid’ idea, Buchheit clarifies that he looked for a simple, compelling story and the team’s ability to execute it quickly. Speed of execution is critical for the success of startups.

Quick Iteration is Key:

Buchheit emphasizes that the success of a startup can almost be predicted by how quickly it can test, learn, and iterate. Companies that take too long to release or update their products generally fail.

Due Diligence in Fast-Paced Environment:

Unlike in private equity where there’s time for extensive diligence, venture capitalists have to move fast. One method to assess a startup’s speed is to ask about their recent accomplishments and future schedule. Buchheit suggests looking for companies showing an upward ‘slope’—meaning rapid progress—even if they’re starting small.

The Importance of Prompt Action:

He points out that pushing founders to move faster after funding can be a good litmus test for their responsiveness and capability. He values founders who can take on seemingly unreasonable challenges and execute them quickly, illustrating this with a story about Kyle, an engineer who took on a large task on a tight deadline.

The overarching theme is that speed, execution, and the ability to meet market demand are critical factors in the success of startups and worthwhile investments.

10-Minute Interview Policy:

Paul Buchheit discusses Y Combinator’s approach of funding companies based on a 10-minute interview. He emphasizes the surprising amount of information that can be gathered in such a short span. The key for him is clear and concise communication; if a company can’t articulate what they do in 10 minutes, they are unlikely to receive funding.

Importance of Communication:

For Buchheit, the ability of a startup to communicate its value and mission clearly in a short amount of time is crucial. He estimates that about a third of the companies that come in for interviews at Y Combinator fail to make their mission clear, resulting in a straightforward “no” for funding.

Risks and Mistakes in Investment:

He acknowledges that most investments will not work out and cautions against overthinking or creating complex theories for investment decisions. Such approaches, he finds, often lead to investors talking themselves out of good opportunities.

Unpredictability and Conclusions:

Buchheit notes that failures do occur for fundamental reasons but are often unpredictable. Drawing rigid conclusions from past outcomes can lead to missed opportunities in the future. For example, if he had overthought the investment in Justin.TV, he could have convinced himself it was a bad idea, possibly missing out on a good opportunity.

The Trap of Overanalysis:

Paul stresses that while it’s easy to analyze a situation in hindsight and come up with reasons why it didn’t work, such an approach can lead to investment paralysis. He cautions against allowing negative experiences to influence future investment decisions too heavily, as it might lead to missing out on valuable opportunities.

The overarching theme is that effective communication, a balanced approach to risk, and open-mindedness to unpredictability are crucial elements in startup investment.

Avoiding Overlearning from Mistakes:

Paul Buchheit cautions against overlearning from past mistakes in the investment realm. He emphasizes that losing money is painful but investors must accept that seed-stage investing involves a great deal of luck. Avoiding new opportunities due to past failures may be a counterproductive strategy.

Luck and Uncertainty in Seed-Stage Investing:

Buchheit reiterates that seed-stage investing inherently involves a lot of uncertainty and luck. He suggests that while investors may want to avoid losses, understanding the unpredictable nature of this stage of investment is crucial.

Crypto as an Emerging Field:

He finds the cryptocurrency sector intriguing and compares his enthusiasm for Linux, which led him to Google, to the current enthusiasm for crypto. He thinks that paying attention to what excites young, tech-savvy people could lead to successful investments, like Coinbase and Bitcoin.

Skepticism on ICOs:

Buchheit expresses a highly skeptical view of Initial Coin Offerings (ICOs). He states that most ICOs are scams or are overvalued, raising substantially more money than they could through traditional venture capital. He doesn’t believe most of these ICOs will succeed.

Dangers of Overfunding:

He warns that too much funding can be a liability for startups. Using Juicero as an example, he explains that a surplus of money may lead to inefficient operations and disconnect from market realities. Companies with excessive funding may insulate themselves from customer feedback and real-world constraints, which can ultimately be detrimental.

The overarching message is that while seed-stage investment is risky and involves luck, excessive caution or overfunding can be pitfalls. A balanced approach and understanding of emerging fields like crypto are crucial for success.

Overcoming Fear of Deep Technology:

Paul Buchheit discusses that the fear of investing in deep technology companies is not a significant issue for him personally because he tends to invest in projects that excite him. He acknowledges his own limitations in technical expertise and stresses the importance of investing in people who are more knowledgeable than he is.

Criteria for Exciting Investments:

Buchheit shares that he finds it easier to get excited about groundbreaking technologies, like supersonic jets, over more mundane sectors like enterprise software. His approach is driven by enthusiasm rather than an exhaustive understanding of the technology itself.

Investing in People:

According to Buchheit, the key to comfortable investing in high-tech sectors is believing in the expertise of the company’s founder. He argues that a strong founder can act as a proxy for his own decision-making, allowing him to outsource his thinking to someone better equipped to understand the company’s complexities.

Assessing Founder Determination:

In terms of assessing a founder’s determination, Buchheit looks for signs that the entrepreneur has no “Plan B.” He is wary of founders who have not yet fully committed to their venture and are setting conditions on their involvement, such as a particular salary or raising a certain amount of capital.

Past Failure as a Measure of Determination:

The conversation also touches on how the history of overcoming failure can be an important measure of a founder’s resilience and determination. Founders who have never faced failure may be more risk-averse and likely to take a safer exit strategy when challenges arise.

Case Study: Airbnb:

The discussion includes a case study about Airbnb, where despite initial setbacks and skepticism from investors, including Paul Graham of Y Combinator, the founders remained unwaveringly committed to their idea. Their determination played a key role in their eventual success.

Overall, Buchheit emphasizes the importance of founder expertise and determination when considering investments, especially in complex technology sectors.

Humility in Knowledge:

Paul Buchheit discusses the paradox of expertise, mentioning that he consciously avoids overestimating his own knowledge in areas he’s familiar with. He finds it easy to slip into the trap of thinking he knows more than he actually does, which can cloud judgment when evaluating startups.

Learning and Unlearning:

Both speakers touch on the complexity of leveraging past experience in the investment world. While it’s essential to learn from past mistakes, it’s equally critical to be willing to unlearn preconceptions. This creates a balance between applying expertise and remaining open to new opportunities.

High Bar for Familiar Sectors:

When it comes to sectors he is familiar with, like email, Buchheit sets a high bar for startups. He uses his knowledge to probe founders on how they would deal with potential challenges, like feature incorporation by major players like Google. He cites the example of Front, an email startup, as a successful case where the founder could convincingly argue the company’s unique value proposition beyond existing services.

The Contradiction in Advice:

The conversation ends with an acknowledgment of the contradictory nature of investment advice. On one hand, investors should learn from their past, but on the other hand, they should also be willing to ignore it to seize new opportunities. This reflects the complexity and nuanced skills required to be a successful investor.

Overall, the dialogue emphasizes the need for a balanced approach in investment, combining both humility and rigorous scrutiny, particularly when dealing with sectors one is familiar with.