Always Be Closing: Y Combinator and The Art of the Pitch

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NSFW: Alec Baldwin in Glengarry Glen Ross. This film has a 96% rating on Rotten Tomatoes.

The above video was first sent to me by a star EMC sales rep in 2000.

EMC was then the 800-pound gorilla of data storage, and I was fresh out of college at my first job. Sitting shoulder-to-shoulder with my field engineer, Bryan, TrueSAN Networks owned my ass. For $40,000 base, I would be paid to perform. Bryan and I were crammed into a four foot-wide fire exit doorway, we often slept under our desks, and we had to prepare for formidable competition. Namely, EMC and NetApp.

It was an exciting time to be David fighting Goliath.

EMC was famous for producing armies of A-grade salesmen. They’d hire former football players, train them to a berserker-like level of confidence, then unleash them with field-proven scripts. At the ends of quarters, wolf packs of EMC salespeople would descend upon borderline prospects, sometimes staging office sit-ins in their Men in Black attire, calmly notifying the exec in charge of buying decisions, “We’re not leaving until we get a PO [purchase order].” They were the Yankees, Dark Side, and X-Men, all wrapped into one.

They had sales rallies in rented out football stadiums, and their tribe devotion was otherworldly. I saw an “EMCDNA” license plate on a tricked out BMW on highway 101 once. I smiled and kept listening to Secrets of Power Negotiating by Roger Dawson. “One day,” I thought as I puttered along in my minivan, a hand-me-down from my mom, “I’ll beat those guys…”

I had been hired as an outside sales rep. My job was to get CEOs or CTOs on the phone, often from Fortune 500 companies, convince them to have an in-person meeting, and then sell them multi-million dollar SAN (Storage Area Network) installs. It was thankless work, “dialing for dollars”: cold calling prospects and getting rejected all day long. But it taught me a lot about the arts of persuasion, and the value of being the odd one out. I took a different approach than the EMC boys, hanging with the systems engineers and learning all the tech (RAID, parity, etc.) better than my rival salesmen (they were all men at the time). My final quarter at TrueSAN, I booked more revenue than the entire LA office of EMC combined.

Part of it was trial-and-error. Calling between 7-8am, then again from 6-7pm, for instance, allowed me to bypass gatekeepers and get to C-level executives. As another example: Telling CTOs what our technology was terrible at, right off the bat, created a trust that the “I know why this is perfect for you” approaches couldn’t. The other major lesson was persistence — recognizing that failure was more than 80% of the game. Getting rejected wasn’t fun, but this early baptism by fire inoculated me against the fear of rejection.

Now, when I guest lecture at Princeton University to students in ELE 491, High-Tech Entrepreneurship which I tend to do twice a year, I start by asking a question:

“How many of you want to be salespeople?” No hands go up.
“Fine. How many of you want to be master dealmakers?” Nearly every hand goes up.

That’s when I point out that they are one and the same. Whether you want to sell an idea, a start-up, or yourself as an employee, you better learn to negotiate and craft deals. Not only that, but you better get used to pain. It will become your constant companion, a trusted friend. A signal that you’re getting stronger.

The following post is about an amazing start-up accelerator called Y Combinator, and the art of the pitch. This how-to article is intended to 1) provide key takeaways for selling anything, and 2) snap anyone out of the delusion that start-ups are easy. Y Combinator grad Chad Etzel has a great piece that makes the point: Startups are hard.

So what is Y Combinator? From Wikipedia:

Y Combinator is an American seed accelerator, started in March 2005. Y Combinator provides seed money, advice, and connections at two 3-month programs per year. In exchange, they take an average of about 6% of the company’s equity.

Compared to other startup funds, Y Combinator itself provides very little money ($14,000 for startups with 1 founder, $17,000 for startups with 2 founders, and $20,000 for those with 3 or more), though Yuri Milner and SV Angel offer every Y Combinator company a $150,000 convertible note investment. This reflects co-founder Paul Graham’s theory that between free software, dynamic languages, the web, and Moore’s Law, the cost of founding an information technology startup has greatly decreased. Wired has called Y Combinator a “boot camp for startups” and “the most prestigious program for budding digital entrepreneurs”.

The average valuation of the top 21 Y Combinator-backed companies, according to co-founder Paul Graham, is $224 million.

Y Combinator is harder to get into than Harvard, but the rewards can be sweet. The most notable graduates include Airbnb and DropBox, both valued at well over a billion dollars each, and Heroku, which sold to Salesforce.com for a reported $212 million in cash. Y Combinator has funded more than 450 start-ups to date. I’ve invested in and advised a few Y Combinator (YC) companies, including Posterous (acquired by Twitter), RescueTime, and Yardsale.

“Demo Day” is the culmination of each 3-month cram school, where YC companies give (most recently) 2.5-minute long pitches to a roomful of investors, ranging from Sequoia partners and Marc Andreessen to Ashton Kutcher. Even attending a few demo days, as I have, teaches you a lot. As I watched the number of start-ups using AWS (Amazon Web Services) grow from a few to nearly all, I made my first major public market investment: Amazon. I sold it 6-8 months later for a nice 30% return. Thanks YC!

The below learning lessons are exclusive excerpts from a book titled The Launch Pad: Inside Y Combinator, Silicon Valley’s Most Exclusive School for Startups, written by Randall Stross. Randy also wrote the book that partially brought me to Silicon Valley, eBoys, about Benchmark Capital.

I chose these particular excerpts to highlight the importance of dealmaking, and the reality of start-ups: nothing good comes easy, even when it looks easy.

The headings in orange are mine.

Getting Funded Isn’t Winning; It’s a Means

At the very end of the summer, after Demo Day, when there is a last dinner gathering of the batch, Paul Graham will say something in passing that will give every one of the sixty-three companies pause. He says that at the beginning of the summer the Start Fund’s backers, Yuri Milner and Ron Conway, had made $150,000 investments in startups that in almost every case were undeserving.

Graham delivers this news without a critical tone. He is being matter-of-fact, simply clearing up a mystery for the founders who do not understand at summer’s end why other investors are balking at matching the same founder-friendly terms as they had received from the Start Fund.

“Let me explain,” Graham says that evening. “It’s beee-caussse”—he elongates the word to prepare his audience for the punch line— “Yuri and Ron’s approach to investing in all of you, I’m sorry to say— sixty-two of you they invested in by accident. Statistically, there’s an Airbnb or a Dropbox in here somewhere. And they don’t know, especially at the very beginning of the batch, they don’t know which one it is. So they’ve got to offer you all terms that sixty-two out of sixty-three of you don’t deserve, to make sure that they get the Dropbox, whoever it is.”

The Start Fund’s investors knew that they had to offer terms that were literally irresistible. “If they had made their terms just a little bit harsh, in any way,” Graham says, “there’s a disproportionate chance that the first startup that would turn them down would be the best one. So they have to offer these ridiculously good terms for you.”

Learning to Pitch–Assume You’ll Start With “No”

If YC companies thought of themselves as an extended family, then Dropbox and Airbnb are, to the summer batch, the pair of wealthy great uncles, distant relations who might be approached for assistance but only once in a great while, delicately, and only after elaborate planning. Were either Dropbox or Airbnb willing to become a customer of a just born startup, it would be a boon of immeasurable value. But it is also difficult to even imagine the circumstances in which that would happen. Companies with wide name recognition would want to partner only with companies that had a proven record of reliable service and had earned the trust of other— sizable— business customers. Having a shared lineal connection to YC would not be a sufficient basis for the far larger company to rely on a not yet hatched startup.

When Michael Litt looks at Airbnb’s Web site, which makes use of videos, he sees a natural home for Vidyard’s services. Airbnb’s AirTV section has videos of the more unusual lodging listings or colorful Airbnb hosts— its nickname is “the ‘Cribs’ of Airbnb.” Vidyard’s software is not finished, but Litt goes after Airbnb, sending an e-mail to the cofounders, Brian Chesky and Joe Gebbia. It is the very first week of the summer session. Always Be Closing.

The subject heading of Litt’s first e-mail message is “AirTV— Current YC company looking for some quick insight!” He opens, “Hey Guys, Sorry to bother. We’re building a platform for video serving (encoding, analytics, customization included) and would love some insight into what you guys are doing with AirTV.” He says Vidyard could add analytic reports to the videos that they are already serving or “we can serve and take the entire piece off of your shoulders.” He closes with a mention that both Vidyard and Airbnb have shared parentage. “Thanks and let me know— we’re very glad to be YC!”

His message is forwarded to Venetia Pristavec, the manager in charge of Airbnb’s videos. Airbnb presently is using the video service of Vid Network, a startup that does the video hosting and analytics that Vidyard plans to offer. But Pristavec says that Airbnb is looking for a new video provider. Unfortunately for Vidyard, Airbnb has narrowed the field of replacement candidates to a pair of big names in video hosting, Ooyala and Brightcove. Clearly, Airbnb has decided to move away from relying on a startup and instead shift to a much larger company as its video supplier.

Litt is not daunted. He asks Pristavec if she has time for a chat. “It just so happens we’re in a bid for another initiative with Ooyala and Brightcove,” he says, suggesting implicitly that Vidyard is able to hold its own while battling with the big boys. He asks Pristavec only for information, for her “perspective” on the reasons for switching from Airbnb’s current video host. “I promise I won’t try to sell to you. I’m not a salesman— we’re just looking for feedback from potential users,” he says.

Meanwhile, Paul Graham dashes off a note to Pristavec and to Airbnb’s cofounders, testifying to the Vidyard team’s work ethic and asking that they be given an opportunity to make their pitch before a final decision is reached. Litt follows with an impassioned follow-up e-mail addressed directly to Gebbia. “This is an awesome opportunity that we are willing to work our asses off for,” he writes. “It goes without saying that your brand would hold some amazing clout for us and the timing is perfect
for both parties.”

Litt dispatches more e-mails but it is all for naught. Airbnb does not budge from its original plan and Vidyard does not get the chance to make its pitch to land the contract. Litt does not pause. “Sorry to be a pain,” he writes Airbnb again, confessing that “we’re really putting on the hustle.” He proposes that Vidyard produce some videos for Airbnb. This offer will not lead to a commission either. But to Litt, there is never a definitive no, there is only to-be-continued.

Begging Forgiveness Instead of Permission; Getting the Meeting

[Tim: Bolding is mine.]

Noah Ready-Campbell and Calvin Young, two software engineers who met at Google, arrive at YC with an idea that is so much bigger than a summer-sized project that it makes the ideas the other startups in the batch are working on seem like weekend projects. Their startup, Minno, is going to attempt to succeed where many other startups have failed: micropayments, the very small amounts of money that could potentially be charged for reading, watching, or listening to digital media. Other than building the software to handle the payments— the easy part— they must persuade Web site owners to ask their visitors to pay.

This has been a holy grail for publishers for as long as the Web has existed. In the 1990s, many startups tried, and failed, to get micropayments accepted: FirstVirtual, Cybercoin, Millicent, Digicash, Internet Dollar, Pay-2See, MicroMint, Cybercent. Clay Shirky wrote an epitaph in 2000, “The Case Against Micropayments,” arguing that users hated them because they imposed a “mental transaction cost” as the user was forced to contemplate a transaction that would always be “too small to be worth the hassle.”

Ready-Campbell and Young think the landscape has changed since then, that today users have become accustomed to paying small amounts of money for apps in the app stores and for virtual goods within games.

As an experiment, Noah Campbell-Ready and Calvin Young tried out their software on the New York Times Web site— without the Times’ authorization. Users were permitted to hop over the Times’ paywall by paying five cents to Minno in Minno’s credits (users received two dollars in free credits when they registered at Minno). “NYT for a Nickel” did not last long; in just over an hour, they received a phone call from the Times instructing them to take the site down. It had served its intended purpose, drawing a bit of attention to Minno’s revival of the micropayments idea.

Investors are keenly interested in Minno. When the two founders arrive at YC, they have more than $700,000 in their pockets, raised from GRP Partners in Los Angeles and from angels. This is an amount that far exceeds what other members of the summer batch have raised at the start. It is so large that it dwarfs even the Start Fund’s and SV Angel’s $150,000.

Ready-Campbell and Young do not need the capital that YC offers, so why have they come? Their idea needs major Web publishers to adopt their payments system. Their $700,000 cannot purchase a meeting at Conde Nast. But with the YC affiliation, the Conde Nast meeting is set up quickly even before YC has its first dinner. This is accomplished with the help of Reddit, a member of the first YC batch in 2005 and part of the Conde Nast empire since being acquired in 2006. The meeting does not lead to a partnership, however.

Minno was the name the founders started with because the domain name Minnow.com could not be purchased for a reasonable price. But the two have decided to discard it, replacing it with BuySimple just as the summer session begins. They have also hired their first employee, Jeff Yolen, whose responsibility will be business development. In plain English, that means “gets a foot into the door of prospective content partners.”

Yolen arranges a meeting in the first week of YC with mSpot, a company that has acted as wholesale supplier of radio programming to the major wireless carriers. It lately has added movies, too. It has also begun to build its own brand, renting movies at mSpot’s own Web site that can be streamed either to phones or to a Web browser on a PC, competing with Amazon. Having built its core business as a supplier to persnickety carriers, it has to be larger than its unknown brand name might suggest.

MSpot seems to have a lot of executives. Yolen is old friends with one of them, Eric Thomas, who is an mSpot product manager. Yolen brings Ready-Campbell over to mSpot’s modest offices in Palo Alto to meet with Thomas and two other managers, Brook Eaton and William Gaudreau.

“Jeff gave me the demo,” Thomas tells Ready-Campbell, to get the meeting under way. “So I generally get what the product does. These guys”— he nods at Eaton and Gaudreau— “know at a very high level what it is but they haven’t seen any of the details.”

Ready-Campbell begins his pitch. “We want to make payments simpler for people to buy digital products on the Web. We think there’s sort of been a big cultural shift in how people approach digital products. They do it a lot now. They do it in-app on the iPhone. They do it in social games on Facebook. And we want to build a payment system that lets any publisher directly monetize their audience.” His delivery is smooth, as if he has done it a hundred times before, though he hasn’t.

“We’re in private beta now,” he continues. “We just announced a partnership with Soundbug. They’re a big indie music site, doing thirteen million uniques a month. And we’re talking to a lot of others.” He uses his laptop, which is connected to a projector, to show how the BuySimple payment service works for the first-time user. The screen shows a BuySimple button that sits next to a song title. “You just click here. You don’t have to create a new account or anything. You just connect your Facebook account. Now, if I were logged into Facebook on this computer, I wouldn’t even have to type— I would just see an ‘Allow’ dialog. Users don’t have to verify their e-mail address or choose a new password or manage all of the issues of having a new account. Gets them on board really quickly. We pull in all the information about them from Facebook. We get their profile data and their social graph and things like that. That helps us manage our fraud a lot better. Assuming we think they’re a real human, we give them two dollars just to start off with.”

“What’s the account behind it? How do they get money into their account?” asks Gaudreau.

“After you spend the two dollars or three dollars or whatever it is that you get when you first sign up, we prompt you for a credit card.”

Gaudreau reviews: “So the concept is, the initial pay is hassle-free and then you go, OK, now come in and set up your account.”

He moves on to another topic. “So I’m going to ask the question I’m sure you get every single time you talk to people: how are you different from PayPal, or better than PayPal?”

“Conversion rates is what it comes down to. The standard PayPal implementation involves opening up a new window, it involves entering all of your billing information, and then you have to come back to the original merchant site. There’s three or four different steps. We think if you can remove three of those steps and make it one step, then it’s a much better user experience and it becomes much more profitable for our partners.”

MSpot’s manager in charge of movie rentals, Brook Eaton, asks how much BuySimple would charge mSpot for handling the transaction. No charges at all, Ready-Campbell says. In the future, BuySimple would ask for a revenue share, perhaps taking 5 to 10 percent.

That won’t be acceptable. “It needs to be better and save money,” says Eaton. Right now, mSpot pays PayPal 5 percent, so BuySimple will have to come in with a much lower number to draw his interest. “For us, conversion rate doesn’t even matter,” he says. “’Cause at the end of the day, we need to make sure we run a profitable business.”

As the mSpot executives look at one another, signaling the end of the meeting, Yolen looks at Eaton across the table and says with a straight face, “I know you’re not interested in price.” He’s joking— price is the principal thing that Eaton is interested in. The two banter lightheartedly for a couple of minutes. When Yolen makes a tongue-in- cheek offer to lower BuySimple’s price so low that BuySimple’s would pay mSpot, Eaton turns serious: “I don’t want you to pay me. I wouldn’t want to do this if I didn’t think you could be in business a long time.”

“And get more users,” adds Thomas. “This becomes a lot cooler when you have an account and use it for other things.”

“Exactly,” says Ready-Campbell.

As good-byes are exchanged, Yolen extracts a promise of hearing the following week whether mSpot is interested.

It will be a no, however. There will be many nos, and no yeses, from companies that matter. Salespeople need to be preternaturally optimistic, but they also need to pay attention to the no that signals that oblivion is ahead. BuySimple must contemplate the possibility that micropayments remain as premature in 2011 as in 2000.

During their first office hours with Paul Graham in mid-May, before the first YC dinner, Ready-Campbell and Young had been told that they seemed to be doing everything right. And Graham had remarked on the similarity not just in their clothes— both had on gray T?shirts and jeans— but also in identical physical mannerisms, holding their arms the same way, something he had seen before among cofounders and had observed was a good sign, indicating greater likelihood of success. But he had also said that BuySimple’s prospects were even more “binary” than most startups. Either it would succeed in a big way, or it would fall hard to earth.

Build It And They Will Come? Not Quite.

[Tim: Whether it's SEO, viral loop, or a direct sales force, don't kid yourself: someone or something has to sell your start-up service or product. There must be a mechanism for cutting through the noise. Rare is the unicorn that hits 1,000,000 users without thinking about how to methodically spread the word.]

The real purpose of Prototype Day is to give all of the founders the opportunity to see what their peers are doing. “There’s nobody here except you guys,” Graham says. “Don’t worry about looking good. Just explain what you’re doing. And maybe some people will say, ‘Oh, yeah, I had this friend who worked on that. This is what he did.’ ”

Two days before, at the dinner, Drew Houston, the founder of Dropbox—summer of 2007— had been the guest speaker. Afterward, he told Graham there was something else he had intended to say about successful startups but hadn’t gotten to: “They don’t fuck around, right? The startups that succeed, they don’t go to meet-ups, they don’t run around talking to boards of advisers, they just write code and talk to customers, right?” This is Graham’s oft-repeated mantra, too. Write code and talk to customers.

Graham says the founders may not realize that he and the YC partners update their own rankings of the batch’s startups as the session proceeds. It is a training exercise for the partners’ own benefit, he explains. They want to improve their ability to identify the characteristics of applicants most closely associated with later success.

“I noticed,” Graham says, “looking down the rankings— at least my rankings— that all the ones at the top were, like, real animals at doing sales.” He does not mean to say that strength in sales was all that was needed. “You have to be good at hacking and be aggressive in sales. Everybody we fund is good at hacking. We can tell that!” What the YC partners might have missed is that willingness to attack sales. “When I say sales, I don’t just mean people calling you up. I mean going out and talking to customers to figure out what they want. So why don’t you try this: erring on the side of sales. Just spend all your time doing sales and treating hacking as this side project, right?” The outrageousness of his suggestion makes Graham more animated. “That—” He pauses for emphasis. “That will tend to produce really good results.”

Graham has an example in mind. He looks out, searching. “Vidyard— where’s Vidyard? Vidyard tried to sell its services to Airbnb, and Airbnb said no, they had already signed this contract to write code or something like that. Vidyard said, ‘OK, we’ll nag Airbnb anyway ’cause I know something is going to happen some way.’ ” His exhortations reach their climax: “Be more like Vidyard. Be sales animals. And if you’re not sales animals, force yourselves to do it, even though it will be uncomfortable.”

Relationships are Hard. “It’s like we’re married, but we’re not fucking.”

When Y Combinator began, Paul Graham set down a formal rule: no funding of startups with only one founder. He later relented a bit, allowing occasional exceptions in cases where the founder seemed extraordinary. It was a good thing he did relent— one if those exceptions was Drew Houston, the sole founder of YC’s largest success: Dropbox. But Houston did not remain the sole founder— Justin. tv’s Kyle Vogt introduced him to Arash Ferdowsi, who became a cofounder. If anyone doubted the need for at least two founders, Graham would list the technology giants whose public identity is bound to a single founder— Microsoft (Gates), Apple (Jobs), Oracle (Ellison)— and then point out that each one initially had two founders, not one. All startups are the same, he maintains. You need two people to spread the load.

Graham could enumerate other reasons for not wanting to fund single founders. The very fact that a founder did not have cofounders was evidence, in his view, that the founder’s friends had withheld placing their confidence in the founder. “That’s pretty alarming,” Graham said in 2006, “because his friends are the ones that know him best.” Even if friends had underestimated the founder’s ability to make a success out of a startup, and even if the founder could handle all of the startup’s tasks alone, the founder still needed others, Graham said, “colleagues to brainstorm with, to talk you out of stupid decisions, and to cheer you up when things go wrong.” More than one founder was essential, but not many more. Harj Taggar, addressing aspiring founders in London in 2011, said that YC’s experiences showed that four founders was too many— decision making was too cumbersome. “You don’t want your startup to be like the UN, some sort of democratic process to get the smallest thing done.”

A startup could change its idea easily, but not its cofounders. It was critically important that the two or three founders knew and liked each other well before starting out. Graham said, “Startups do to the relationship between the founders what a dog does to a sock; if it can be pulled apart, it will be.”

In 2009, Graham conducted a survey of the founders in YC’s previous batches and was struck by the way that those in the successful startups talked about the intensity of the founders’ relationship. He quoted one respondent: One thing that surprised me is how the relationship of startup founders goes from a friendship to a marriage. My relationship with my cofounder went from just being friends to seeing each other all the time, fretting over the finances and cleaning up shit. And the startup was our baby. I summed it up once like this: “It’s like we’re married, but we’re not fucking.”

Sometimes It’s Not What You Say, It’s How You Say It

Graham breaks in. “It’s not so much what you say, it’s more like how you carry yourself. And there’s not much I can advise you to do. I wish— I wish—” He stops, then starts again. “Do you remember all the guys at the fund-raising panel?” He’s referring to an evening program back in June in which partners and YC alums had offered advice about fund-raising. Ryan Abbott had been there. Graham continues, “You probably remember Joseph Walla from HelloFax. He seemed like kind of a badass, right? All those guys up there seemed pretty badass. He seems badass now. But, man, during YC, he would have been below the median for badassness.”

Iorns laughs, imagining what Graham and the partners had done to him. “He’s been beaten into shape!” She laughs again.

“Remember the first day I said you have to undergo this sort of transition that produces James Bond? Remember that? He has undergone that transition! If you took the original Joseph Walla and, like, put him in the transition that makes people seem more confident, more resourceful, and tough–right?–that’s what you get out.”

Tan agrees. “The difference is all tone. Old Joseph Walla would be, like”—Tan changes his voice to sound indecisive—“ ‘Well, maybe, we think that there’s something here.’ Versus, by the end of it, he’s, ‘There is something here.’ ”

“It’s all confidence,” says Buchheit.

“Just take out all the weasel words,” says Tan, and laughs. This is not so easily done in this case, however, since the chief executive of this startup is a research scientist. What Tan calls weasel words—we-can’t-be-certains, the we-do-not-knows and the like—are the qualifiers used by scientists to make what they say precisely accurate.

Buchheit continues in this vein. “You can’t be, ‘Well, if this goes right, if that goes right.’ ”

“We don’t tell people stuff like this much,” says Graham. “’Cause I’m not sure there’s much you can do. Some people will become Joseph Walla.”

“That’s all I told Walla, though,” recalls Tan. “I was like, ‘Take out all the weasel words.’ I tried to coach him that way.”

“Really?” asks Graham. HelloFax had been in the winter 2011 batch.

“Yeah, when we were doing the Demo Day stuff.”

Graham says he is not talking about what is said in a presentation, but about a change in the very way Walla carries himself all the time. “I’ve seen it time after time.” He offers another example of transformation: “Justin Kan seems so terrifyingly fearsome now. And I remember he seemed…”

“I think it’s coachable, though,” says Tan.

Graham continues his story about Kan. “During the first YC batch, he seemed so clueless. He seemed like he just rolled out of bed.” Kan must have undergone the transformation when on his own; Graham makes no claim of having played a part in the process and he declines to agree that fearsomeness is a characteristic that coaching can instill. He has just told the Science Exchange founders that this is a topic that he rarely brings up because he does not think it is something that the YC partners, or anyone else, can produce in others.

As a scientist, Elizabeth Iorns was trained to be careful in what she says and does. Her graduate education probably did not include a unit on how to project a Braveheart persona that will lead soldiers into battle. Ryan Abbott speaks up.

“The knowledge of the market—Elizabeth is very confident. Any question that anybody has, she’s going to have the reason—”

“I don’t think there’s much you can do,” says Graham, “this quickly, to change how much you seem like Joseph Walla. Really, the reason we got onto this subject is because you were asking what your valuation would be, and it’s going to come down to their personal reactions to you. Which are going to be impossible to predict. Be fatalistic. Since it’s due to this unpredictable thing, it’s going to vary a lot between VCs. Realize that some VCs you’re going to talk to are going to like you and some VCs aren’t, and whatever reasons they give you are going to be bullshit. They’re going to say, ‘It’s because people can circumvent you,’ or they don’t understand the market, or one of their standard ‘It’s not you, it’s me’ lines. Don’t try and fight them. If they say, ‘You’re circumventable,’ don’t say, ‘Oh, no! But we’re not!’ Because what they really mean is, ‘We don’t like the way you look.’ ”
Knox says, “You said it, but Ben Horowitz, I think, also said it: ‘Listen to the answer, don’t listen to the reason.’ So, no is no. Got it.”

“So who knows?” Graham sums up. “Whether any will be interested, what the valuation will be—it’s totally unpredictable. That’s true in general, but most of all with you guys.”

The session ends without a cheery note to neutralize the depressive speculation about investors turning Science Exchange away.

You don’t receive accolades at YC for doing what you said you were going to do when you applied. In Science Exchange’s case, it said it would launch a marketplace and it has done so. And it has managed to secure the customers who are the most difficult to find, the first ones who are willing to pay.
Science Exchange may not be able to present a face of martial fearsomeness to investors on Demo Day. But it remains to be seen whether all investors will slight Science Exchange for failing to appear like all the rest. Just as the startups in the batch have individuality, so too, the startups will discover, do investors, who do not always act as a herd.

Learn From Your Mistakes, But Most Important: Learn From Others’ Mistakes

“Watch what works!” Paul Graham instructs the founders. It’s Rehearsal Day, a week before the Demo Day presentations. This begins seven days of nonstop rehearsing and critiquing by YC partners. This first day is directed by Professor Graham. “You’re going to get sixty-three data points about what slides you can read, what slides you can’t, what things people say you can understand, who talks too fast. I was going to say who talks too slow, but it’s impossible to talk too slow. You’ll see—everyone’s going to talk too fast.”

Each startup will have two and a half minutes to present its pitch, just as it will on the actual Demo Day. Jessica Livingston will call out “time” when the limit is reached. On Demo Day, she says, “I’m going to have a hook.” The order of presentations is randomly assigned, and each presenter is followed by a critique delivered by Graham, standing at the side or in the rear of the hall. Presentation, critique. Presentation, critique. His criticism is sharp, employing the directness that professors use with grad students. The founders assigned to the first slot come up. One steps onto the small semicircular dais and one sits down to operate the laptop that controls the slides. When the speaker steps down, Graham begins.

“All right, so you guys went first, so you guys made all the mistakes. You’re like the front of the car, catching all the bugs. You’ve got to look at the audience and not at the screen when you talk. If you look at the audience, you force them to pay attention.”

Graham has introduced the theme that will run throughout his critiques: presenters will have to work hard to hold the attention of the audience. On Demo Day, the sheer mass of presentations will make it difficult for an audience member to remain tuned in continuously. “Use the Black-Berry test,” Graham advises. “Is my presentation the one where they’re going to check their BlackBerry?”

The first presentation lasted only a minute and a half, a full minute short of its allotted time. “You should get to two minutes and thirty by saying the same words that much slower,” Graham says.
The next presenter, like the first one, is a nonnative English speaker. Graham repeats a point made earlier. “If you’ve got a strong accent, you’ve got to speak slowly. I lost entire sentences of what you were saying. And I know you and have some practice with your accent. Most of the audience will be seeing you for the first time. If I’m losing entire sentences of what you are saying, that means you might as well have just not said them—you might as well have just stood there and moved your mouth, right?” When Graham says something more cutting than he perhaps intended, he softens its impact by immediately looking down at his notes and uttering a placatory “umm.”

The next presentation is given by a founder from the UK, who begins in an affectless monotone and, worst of all, is speaking very rapidly, too.

“Wait,” Graham interrupts after just a few seconds. “What did you just say? What was the beginning of that sentence? ‘You’re probably wondering’?”

The speaker repeats it: “You’reprobablywondering.”

“You’ve got ‘you’re probably wondering’ down to one syllable. Seriously.” Graham repeats the phrase, speaking slowly, making every syllable distinct. “You’re. Prob. Ab. Ly. Won. Der. Ing.” The advice he has for this founder is offered to everyone: “Here’s the trick for deciding how fast to talk. If it doesn’t feel wrong, you’re talking too fast.”

Another speaker, this one U.S. born, comes up and apparently believes his presentation is easy to understand. It is not. He goes too fast. Graham instructs, “Say fewer words, slower.” This will not be the last time today that he says this. In the teaching business, repetition and patience are necessary.
As Graham moves on to other points, he shows irritation at the way this speaker has boasted of the programming prowess of one of his hacker cofounders. The speaker has singled him out for learning to program when he was thirteen. Graham is not impressed. “Every hacker started programming at thirteen. It’s actually rather late.”

Every presenter, Graham says, must make very clear, at the beginning, what idea the startup is pursuing. “A lot of people will be sitting in the audience and will assume that the presentations are not of equal quality, that there are going to be some dogs in this batch. And they want to know what they’re about to see a presentation for to decide”—Graham raises his voice a half octave higher—“if they should even pay attention.”

Buzzwords and trite marketing phrases should be removed. To Graham, the generic phrase “We’re going to disrupt this market” is the prose equivalent of stock photographs. “No one should use any slide that would fit in another startup’s presentation,” he says.

Tikhon Bernstam steps onto the dais and begins. “Hi, we’re Parse. And we’re building Heroku for mobile apps.” A YC alum from a 2006 batch, he has already taken the Graham seminar in pitching investors and he does not speak too fast. In fact, he speaks extremely slowly, in an affect-less voice. Before he goes any further, Graham interrupts. “All right.” The audience’s laughter drowns out whatever Graham attempts to say—they can tell that Bernstam is going to be the first speaker to be criticized for speaking too slowly.

Bernstam is unaware of how he sounds. “What’s that?” he asks Graham.

“Are you kidding? That was actually too slow.” More laughter in the hall. Bernstam begins again, speaking marginally faster but not by much. Graham allows him to finish.

“When I said you should speak slowly, I should have added: also, not in the intonation of a bedtime story or a hypnotist.” Graham allows himself to tease the advanced grad students, the resident alumni, a bit more roughly than he would first-years. He resumes, “I expected you to say at some point, ‘And then the lion said to the bear—’ ” This gets an appreciative laugh from the group. He raises his voice for emphasis. “You’ll put them to sleep! Seriously. When you speak slowly, also speak emphatically!” Speaking emphatically comes naturally to Graham.

Neither the founders nor Graham’s YC partners have his ability to pithily summarize a startup’s idea. After another presentation, he says, “This is another one where I feel people won’t even get the revolutionary nature of what you’re doing. It’s almost like your presentation conceals what you’re doing.” He exclaims in a high-pitched voice: “It’s in there somewhere!” He then renders the idea crisply.

Michael Dwan of Snapjoy, the photo storage site, presents, offering the tagline “Organizing the world’s memories.” When Graham begins his critique, he asks for a less abstract tagline. “Seriously,” he says. “People will see that and they’ll think, ‘All right, whatever. I’ll just check my e-mail.’ They’re not going to do the extra work to figure out, ‘What does he mean by organizing the world’s memories? Oh, I understand! He means collect their photographs and then expand into other file formats.’ What you should say is, ‘We’re going to host everybody’s photos.’ ”

He is not done with Dwan. “You’ve missed the biggest thing you then have to have in a presentation like that, which is, why you? Everybody knows it’s going to be a good thing to host everybody’s photos. Everybody’s got photos. You’ll have millions of users. They’ll pay to have their photos hosted. That’s huge. But that’s a giant prize. Why are you going to win it? Why isn’t there something else that’s already the right answer?”

Graham does not abandon Dwan to despair, however. As Graham says in the YC User’s Manual, “We have a lot of practice cooking up takeover-the-world plans.” He draws on the example of YC’s all-time most successful company: Dropbox. He tells Dwan, “You’ve got to say, this is one of those things, like Dropbox or search engines, where there are a ton of people already doing it. You say, ‘How are we going to win? There’s already so many things hosting photos. Well, the sign that there’s room to win is the fact that there’s so many! That means nobody’s got it right.’ ”

Graham continues. “Then you have to make the claim about why you’ve gotten it right. You’ve got to get into that. It’s really good if you can say, ‘All right, I know what you’re thinking—why us? We’re so arrogant. We’re like these smarty-pants programmers, we think we can write something, host people’s photos online and display them with some nice Java-Script, and we’re somehow going to get all the users and not Apple?’ ” He chuckles. “Explain why you.”

Up next come Matt Holden and Sean Lynch, who, when the group had last seen them at Prototype Day two months earlier, were working on Splitterbug, the expense-sharing app for smartphones. It had not seemed like an idea that could grow into a sizable business, and this thought had concerned the two founders, too. They had decided to throw Splitterbug out and start anew. Holden introduces TapEngage, an ad network for serving interactive ads on iPads and other tablets. A former program manager at Google, he speaks conversationally.

“That was a good presentation!” Graham exclaims afterward. “That’s what a good presentation tone feels like.” He faces the founders in the hall. “Did you see how it was sort of conversational and moved along? He didn’t go into super-much detail but he explained what they’re doing. That’s all the investors need: ‘I understand what they’re doing. It seems like it could be a big deal.’ ”

Jason Shen of Ridejoy follows. His startup’s tagline is “We’re the Airbnb for rides.” He has some impressive numbers to share. “Each year, Americans spend nearly a trillion dollars on transportation—just consumer spending alone. And last year, we drove over three trillion miles. We think this is a really exciting opportunity and we can’t wait to show you more.”

When writing on his personal blog, “The Art of Ass-Kicking,” Shen projects fearlessness. But today, standing before the assembled group, he seems ill at ease and relies too heavily on reading his prepared text word for word. The only time he speaks in a natural voice is when he talks about the shortcomings of Craigslist as a ridesharing service. Graham notices this. In his critique, he says, “You became strangely animated when you talked about how Craigslist sucked.” The audience laughs. Graham wants everyone to draw a lesson from this. “You should choose the part of your presentation where you want to be most animated. You don’t want to be animated the whole way through—you’ll seem like a used-car salesman. And you don’t want to be like you’re telling a bedtime story the whole way through, either. You want to be animated at some point, and you want to choose the point when it’s animated.” If Shen gets animated when he talks about Craigslist, “the audience will assume you have done that and they’ll be confused because—” He pretends to be an investor in the audience on Demo Day who thinks to himself, “They’re talking about how bad Craigslist is and this is clearly the most important thing about their startup. I don’t understand.”

Graham will not let the “trillion dollars” spent on transportation go unremarked upon. “Don’t include macroeconomic stats like that. That just washes over people,” he says. Any mention of “trillion” will bring to mind politics, not business. “Don’t even put that in. If you’re going to make some kind of estimate, do it from the bottom up. This is like saying, ‘We’re a software company. Software is a subset of business. Business last year generated—’ ” The audience laughs again.

Dropbox comes up several times in Graham’s critiques. He has used Dropbox as a source of inspiration for Snapjoy as it tries to make its way amid many photo-sharing competitors. He brings Dropbox up again after Kicksend’s Pradeep Elankumaran has spoken. Kicksend’s users can easily send large files to someone else, a service that does not, on its face, compete directly with Dropbox, and Elankumaran never mentions Dropbox. But he has said that “file sharing is broken.” That, Graham says, “is not going to be very convincing if the Valley is buzzing about how Dropbox just raised money at a valuation of $4 or $5 billion. You’ve got to be clearer about why people can’t just use Dropbox. You can’t just sort of hand-wave and say, ‘Oh, it’s got complex permissioning.’ Obviously, a lot of people can use it. So you’ve got to say why you’re better. Everybody is going to say, ‘These guys are competing with Dropbox. Dropbox is kicking ass! That means it’s going to kick these guys’ ass.’ That’s what these guys are going to be thinking by default. So you’ve got to make most of your presentation addressing that.”

Even if each presentation fits tidily within two and a half minutes, the procession of disparate ideas, without thematic grouping, will be stupefying. Today, after a numbing twenty-one presentations, a break is called. Two-thirds of the batch still wait for their turns.

###

For more in-depth stories and lessons from Y Combinator, see this page for The Launchpad. For other articles on selling and marketing on this blog, visit this page.

What’s the best sales lesson you ever learned, or the best sales story you ever heard? Perhaps the best question or phrase you ever learned? Please share in the comments.

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76 comments on “Always Be Closing: Y Combinator and The Art of the Pitch

  1. HI Tim,

    thanks a lot for sharing the tips on the fundraising game. We just moved to Mexico and want to build our dream company here. Like that we can combine our mini retirements with work.

    At least thats the plan ;)

    Thanks a lot for the inspiration,
    Julie

  2. Comment regarding the movie clip…Holy crap! I detest sales ppl like that and the second they approach me like that is the second I turn around and leave. Really? You think you’re gonna bull doze me into buying? I’m an online shopper for that very reason!!!

    As for the article…way too long. I won;t read anything beyond a couple of paragraphs. I have far too much to do

  3. What a rich post! So many useful nuggets for anyone doing business development and/or sales support (not just for startups).

  4. My comment is for old Hennessey way down there! Yes it takes a good salesman to know his product PERFECTLY, then of course that salesman could teach others! However those kind of products are sold at VERY LOW LEVEL call centers pal! To me
    (and I’m MORE THAN SURE THE OTHERS) ABC is much bigger than that, what your talking about is not even close to the GURU’S definition of always be closing (ABC)! STOP TEACHING those minimum wage newbies about your lame product MAN, UNLESS YOUR MAKING AT LEAST $25.00 an hour to stand there and correct there every mistake!!! My sincere advise to you is to quit your job TOMORROW (unless your making $25.00 an hour if not your not one of the big boys at your shit call service) stay home and do some research on much much bigger products and call all your contacts to see if they can get you a sales position YOU DESERVE! I see mostly white males on this site and Im VERY happy to see that! GUYS WHY DON’T WE STICK TOGETHER LIKE EVERY OTHER RACE DOES???? The American Dream still belongs to US, but A WHOLE LOT MORE OF US NEED TO STEP UP AND MAN UP, STICK TOGETHER AND GET IT!!!!!