Mar 6, 2018 · 46m · y-combinator
Sam Altman - Startup Investor School Day 1 · Y Combinator
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In this opening lecture for Y Combinator's Startup Investor School, Sam Altman delivers a comprehensive masterclass on early-stage angel investing, covering investor mindsets, power law dynamics, founder evaluation, deal sourcing, and idea selection. He outlines actionable strategies for identifying outlier startups and avoiding common pitfalls in venture investing.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. How this is scored →
The partners as informed peer 0.2 Guest teaching 0.0 Guest disagreement 1.7 The partners pushing back 0.0
speaking balance: gold is the partners, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 23:40 Rejecting conventional market-size dogma
Altman bluntly dismisses the common investor fixation on current market size as ridiculous and counterproductive to finding breakout companies.
Hardest push from the partners ▶ 39:50 Audience question on ICOs and non-consensus ideasAn audience member asks whether ICOs and security tokens have fundamentally upended venture funding, prompting Altman to clarify the limitations of crowd raises.
Biggest teaching moment ▶ 4:05 The power-law math lessonAltman teaches the audience why failure rates are irrelevant in angel investing compared to capturing a single massive power-law winner.
The partners hold their own ▶ 35:19 Moderator setting up stream Q&AJeff intervenes smoothly to manage the live stream audience, coordinate the hashtag, and structure the timing of the Q&A session.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | The partners as informed peer | Guest teaching | Guest disagreement | The partners pushing back | Why |
|---|---|---|---|---|---|---|
| Why Invest in Startups: Motivations and Mindset | 0 | 0 | 1 | 0 | Monologue lecture where Sam Altman discusses the motivations behind startup investing, emphasizing energy, shaping the future, and power-law returns. No host interaction takes place. | |
| How to Invest: Overcoming Investor Groupthink | 0 | 0 | 2 | 0 | Altman warns against investor herd mentality and explains how power-law dynamics dictate returns in early-stage investing. Monologue segment with no host participation. | |
| Sourcing High-Quality Dealflow and Maintaining an Open Network | 0 | 0 | 2 | 0 | Altman advocates for maintaining an open network and taking cold pitches, contrasting YC's approach with traditional investors who brag about exclusivity. Solo presentation. | |
| Winning Deals and Building Investor Reputation | 0 | 0 | 2 | 0 | Altman emphasizes investor reputation during company wind-downs, criticizing investors who fight over remnants of failing startups. Monologue format. | |
| Valuation Pitfalls and the Fallacy of Value Investing | 0 | 0 | 2 | 0 | Altman discusses why value investing fails in angel rounds and how high-performing companies often look expensive. Solo lecture segment. | |
| The Advantage of Starting Ambitious, Hard Companies | 0 | 0 | 1 | 0 | Altman lays out the paradox that starting hard, ambitious companies is easier than trivial ones because they attract superior talent. Monologue segment. | |
| Founder Evaluation: Communication, Execution Speed, and Growth Rate | 0 | 0 | 1 | 0 | Altman details critical founder traits including communication, execution velocity, and personal growth trajectory. Monologue presentation. | |
| Avoiding Mediocre Founders, Scenesters, and Integrity Red Flags | 0 | 0 | 3 | 0 | Altman warns against mercenary founders, scenesters, and low integrity individuals, as well as the fallacy of screening solely for market size today. Monologue segment. | |
| Good Ideas That Look Like Bad Ideas and Spontaneous Word-of-Mouth | 0 | 0 | 2 | 0 | Altman outlines how to differentiate real technological waves from fake trends using organic word-of-mouth adoption (e.g., iPhone vs. VR). Solo presentation. | |
| Exponential Growth Modeling, Accumulating Advantage, and Edge | 0 | 0 | 1 | 0 | Altman discusses exponential modeling, compound moats, and having an information edge over the market. Solo presentation concluding the lecture. | |
| Q&A: Value Addition, Founder Flaws, Integrity, and Pro-Rata Rights | 1 | 0 | 1 | 0 | Jeff introduces audience Q&A, and Altman systematically answers questions regarding investor value-add, acceptable founder flaws, assessing integrity, and exercising pro-rata rights. | |
| Q&A: Security Tokens, Unconventional Wins, and Time Allocation | 1 | 0 | 2 | 0 | Altman answers audience questions on security tokens, early doubts about Reddit and Dropbox, estimating expanding markets like Uber, and managing non-technical founders. |
Statements from this episode (35)
Altman: Startup investing resembles addictive slot machines with rare 1000x returns
“Most of the time you lose one extra money, but occasionally you do get to make a hundred or a thousand X, and that for the same reason slot machines are so satisfying, is incredibly addictive.”
Altman writes confidence intervals on Post-its behind every stock certificate
“I write on the back of every stock certificate on a post-it note my confidence interval and what I thought was going to happen with the company.”
Altman: Startup investing can be improved rapidly through deliberate practice
“If you treat this as something that you're gonna try to get better at, and sort of deliberately practice you can learn a lot, and you can get better at this really quickly.”
Altman: Most investors first ask YC founders who else is investing
“The first question that most people ask YC startups is who else is investing year round?”
Altman: 80% of investors outsource 80% of decisions to other investors
“I would say 80% of investors outsource 80% of their decision making to what other people think about an investment opportunity, but the problem is everyone does that, and so there's this weird schooling effect where a company gets hot for no discernible reason…”
Altman: In angel investing, a single winner outperforms all other investments combined
“The power law means that your single best investment will be worth more to you in return than all of the rest of your investments put together. Your second best will be better than three through infinity put together.”
Altman: The biggest startups sound like bad ideas but are actually good
“The companies that could be giant are at this intersection of sounds like a bad idea is a good idea. And because That's a very narrow intersection. And because they sound like a bad idea, the best investments are the ones that are easiest to talk yourself out …”
Altman: YC's top single company accounts for nearly one-third of portfolio value
“YC has funded, I think around 1600 companies, maybe 1700. Our top five companies represent about two thirds of the value that we've created. And our top one company represents about one third. So this is like a, or nearly one third.”
Altman: Generation-defining companies are often started by out-of-network founders
“Many of these companies that are sort of a generation defining companies are started by people who are out of network, who are not well known, who are not sort of the people that, you know, can start a company and get a bunch of press right away.”
Altman: Top angel investors start out by helping founders for free
“I think what I have seen the most successful angel investors do is just start helping founders for free. Realizing they may not get to invest in those companies, but that they'll get the referrals down the road.”
Altman: Open network access is among the top secrets of YC's success
“This idea that we're available and we're open I think this was in the two or three most important secrets of YC. This was something that we did that was really different. Other people hadn't done it before.”
Altman: Investor leverage over founders is gone and won't return soon
“The network has gotten big enough that the asymmetry that used to exist Where investors had a lot of leverage is gone, and I don't think it will come back anytime soon.”
Altman: Founder goodwill matters far more than salvaging dying companies
“It is way more important to your future success as an investor that founders like you and say, that investor did the right thing by me, than it is that you squeeze out, you know, a few drops of juice from a failing company.”
Altman: Best investments either lacked other investors or felt incredibly expensive
“The very best investments I've made have either been a ridiculous deal because no one else wanted to invest, or a deal that felt incredibly expensive. The more I was willing to sort of overpay in my mind to invest in a company, often the better it did.”
Altman: Value Investing Fails for Angel Investors Most of the Time
“I think value investing is not a winning strategy when it comes to being an angel investor most of the time.”
Sam Altman: Only criterion for investing is potential to reach $10 billion
“I will consider anything that I believe could be a ten billion dollar company. And that is such a tight criteria. I have no other rules. So I am willing to look at any stage. I'm willing to look at any sector. I am willing to look at any business model.”
Altman: It is easier today to start a hard company than an easy company
“Speaking of the really big companies, I think, I don't know if this was always true, I suspect it may have been, but I think today, it is easier to start a hard company than an easy company.”
Altman: Ability to recruit potential founders is a vital, overlooked filter
“Is this a company that I believe will be able to recruit hundreds of really talented people who could otherwise start their own companies? Is a super important filter that I don't think people think about enough.”
Altman: Buchheit's Four Founder Traits Are Obsession, Focus, Frugality, Love
“Paul Buhite, one of our partners, made a list of the four traits that he thought founders that go on to create giant companies have, and they are obsession, focus, frugality, and love.”
Altman: YC funded 20 idea-less founder teams and all failed
“We tried an experiment once at YC where we funded 20 teams of strong founders that didn't have ideas, ah, but were otherwise really good. And what we learned, they all failed”
Altman: Great communication skills are typical among super successful startup founders
“If you don't have really strong communication skills, or if you don't develop them quickly, you're at a big disadvantage. Think about, there are obviously famous exceptions to this, but if you think about it on the whole, the founders of the really super succe…”
Altman: Seed investors must evaluate founder growth rate, not current polish
“If you look at a founder who comes to meet you for a seed round and compare that founder to Brian Chesky, you'll be disappointed a hundred percent of the time. That is the wrong comparison. You will never write a check. However just like startups, you look at …”
Altman: Every expected YC success that failed lacked a mission-driven founder
“If we look at our own success and failures in our portfolio of YC, ah, every time we thought a company was going to go really well and didn't the company, the founder, did not have this deep sense of mission.”
Altman: Never made substantial money backing mediocre founders with good businesses
“I've, I have never once made a lot of money backing a founder that I thought was only okay, but a business that was otherwise good.”
Altman: Founders focused on startup scene and parties are a red flag
“There are increasing number of people who just, like, want to be around startups and go to startup parties and talk about being a founder. Treat that as a red flag.”
Altman: Real tech trends feature intense daily usage and organic advocacy
“A real trend is one where although not that many people are participating yet, the people who are use the platform a lot every day and tell their friends spontaneously how great it is.”
Altman in 2018: Virtual reality isn't a trend because headsets sit unused
“If you contrast that to virtual reality, everyone talks about it as the next trend. It may be in the future. But today, if you talk to people who have VR headsets they don't use them every hour. They don't use them every day. Most of them don't use them every …”
Altman: Ninety percent of angel capital goes into bad ideas disguised as good
“Unfortunately, what most people end up chasing are bad ideas that look like good ideas. I would say this is where, like, 90% of all angel capital in the startup ecosystem goes.”
Altman: Top power-law startups require spontaneous word-of-mouth recommendations
“If I think about all of the most successful internet and mobile startups I heard about those because, this is like true for enterprise and consumer apps, I heard about those because they were so good that, ah, one of my friends spontaneously told me about it. …”
Altman: Humans lack evolutionary intuition for exponential startup growth
“Human intuitions about exponential growth are terrible. We clearly had no evolutionary need for this. We can, like, visualize linear growth very well. We can, like, you know, visualize the trajectory of an arrow very well. We, very few people that I have met, …”
Altman: Most startup value comes from earnings in years 10 through 12
“Almost all of the value in a startup is the, you know, revenue, the earnings it's gonna generate in years, 1011, and 12 from now.”
Altman: Founders often voluntarily reveal unethical behavior in brief interviews
“Even in our 10 minute interview, if you give like a founder a chance to sort of tell you about the unethical things they do, they will often do it. And Yeah, surprisingly often.”
Altman: Studies show investors should always exercise pro-rata in top-VC uprounds
“Several venture firms have done very sophisticated studies of this, and they've all come to the following conclusion, which is if the company is raising an upround led by a good VC, say a top quartile VC, you should always exercise prorata. And if you do that …”
Altman: Crowdfunded token raises will prove why securities laws exist
“I think this idea that, like, everyone is going to just raise money from the crowd, like, I think we'll find out that we have securities laws for a reason, and that we want some level of that”
Altman: YC strongly prefers multi-founder teams with a technical founder
“Where I've seen that go wrong the most often is then the ability to attract, evaluate, and retain technical talent. And so, we have a strong, strong preference. For founding teams that have at least one technical founder. We also have a strong preference for t…”