As a venture capitalist, I often say when speaking with founding teams, everything is a signal. Everything is a signal, because as a potential investor in a team and the earliest stage of an idea, business and company, you are dealing with the most intangible, the most uncertain of situations. With as much imprecise, uncertain information as you are sifting through all day as a venture investor, I find that I tend to pick up on little signals.
Several months ago for example, I was taking a pitch from 3 co-founders. The ideas was pretty interesting. Not in my sweet spot as an investment, but a credible, if early, idea. Something about the founding team struck me as a little off, however. About halfway through the pitch, I stopped them. ”Tell me about the three of you came together as a team,” I said, “I’m hearing an interesting idea, but to be honest, guys, I can’t get a read on the chemistry between the three of you as a team. If I had to guess, I’d say you three met for the first time this past weekend and thought it’d be fun to start a company together.” They got a sheepish look on their faces and said that in fact, they’d met for the first time at a bar 10 days prior and had cooked up their plan. Not a bad thing at all, in my mind, they just needed more time together as a team to figure out what kind of organization and company they wanted to build. This example is one of many I could point to where small signals make an impact.
With that as a framework, what was signaled at this week’s Y Combinator Demo Day as to the state of Silicon Valley and tech startups in general? Y Combinator, of course, is the well-known startup incubator co-founded by Paul Graham. It is a terrific organization, the gold standard of startup incubators. This batch of startups had over 70 companies, and hundreds of investors of all stripes filled the main auditorium of the Computer History Museum in Mountain View, California. With this many companies presenting, and with this many investors, there were signals galore, from which to try to point to what’s going on in the world of start-ups in Silicon Valley.
Here are the key observations I saw coming out of the Demo Day.
Revenue is happening faster. It is well known and oft discussed that the costs of starting a company has been dropping all the time. Open sourced software stacks and development tools, and low cost cloud resources from Amazon Web Services, all conspire with Moore’s Law to drive lower and lower startup costs for software companies. These trends enable teams to do more with less, and this trend will only continue.
The newer phenomenon, however, is the capability to build and drive revenue faster than ever before. More YC companies this batch than I’d ever seen before were ramping revenue, and in some cases ramping it quickly. This is a great trend for all involved. The signal here is that startups have an opportunity to drive revenue sooner and faster than I think ever before, and I expect this to continue.
Software continues to chomp. VC Mega Firm Andreesen Horowitz has as their mantra software is eating the world, and this Demo Day showcased this trend in an interesting way. Here’s what I mean. Several years ago, critics would complain that YC companies were so single minded in their efforts to deliver a basic quantum of value by Demo Day that they were really building only features and dressing them up as companies. Some would say also that the earlier YC efforts were far too consumer focused or limited.
I think those critiques were overblown then, and they’re totally obsolete now. This year’s YC batch showcased companies with solutions aiming to disrupt a vast array of markets. Several of these markets are ripe for disruption: trucking and logistics (Keychain Logistics), non-profit fund-raising (Amicus), rental price prediction (Rent.IO), interior design (Tastemaker). All of these markets suffer from fragmentation, a low tech, antiquated value chains, and so on. It’s awesome to see these YC companies driving to disrupt these markets. I’m thrilled for them. And the signal here is that if you’re thinking about starting a company, consider a sleepy old industry and what and whether you might be able to build something that dramatically upends the value chain as it is currently established.
Companies are combining bricks and clicks. One change in this batch of YC companies, in my view was that more are stepping beyond pure software, to include real-world elements. For example, Viacycle is a new bike sharing platform. It combines technology with real-world equipment to enable users to rent and share bicycles. Tastemaker is a software oriented approach to requesting a bid for design, but there are real-world steps in its process, including professionals who measure your room, and getting a hard copy of your design brief delivered. The signal here: as software continues to disrupt more and more of daily life, we’re going to continue to see software extend beyond purely virtual and online, into real-world everyday implementations.
Venture is continuing to shift. The trends in startups I mentioned above, will have I think a few impacts on investors. First, focus will matter. Startups that are getting more focused on disrupting specific verticals or value chains will, I think, over time start seeking money that’s smarter and more aligned with what they’re doing. Second, investors will have to realize and adjust to the reality that more companies they seek to fund early will likely have revenue coming in through the door. This will, in some cases, drive valuations. In other cases, it will drive a healthy conversation around how to think about growing the business. All in all these are all great things.
To close, I tell people that YC Demo Day is like Christmas morning for me. Its a day I look forward to always. It is a delight and a privilege to watch these many founders showcasing their hard work over the last several months, and its a great experience to remind me why we’re all so fortunate to do this job here in Silicon Valley.