About investors

From the translator: The founder of imgix , the former Youtube developer Chris Zacharias, talks about taking YCombinator courses and the experience of getting investments. Recently, I also published a translation of the second article from the author's blog - Something about the weight of the page .

When I attended the YCombinator courses in the summer of 2011, it seemed to me that I was the only person in the group who knew nothing about investing. I clearly remember how Jessica Livingston reported about $ 150 thousand, which we can get from SV Angel and Start Fund. When she spoke about the conditions of investment, the audience was filled with applause. I was sitting and nervously googling, trying to understand what had just been said and whether I should be here at all.



Being in such a selected group of founders of companies that are at different stages of their business development, you very quickly get the information you need. This is the most valuable in the three-month training YCombinator. One of the things that you learn at an early stage is that investors often have a herd mentality. Later, through observation, I discovered that this is also characteristic of the founders of companies.



I remember how my colleagues looked at me in surprise when I suggested that I could refuse the Start Fund money. I talked to people from the SV Angel team and knew them well, but I never heard of Start Fund. Taking money from someone I do not know seemed insane to me, but I gradually became more and more aware that there was something wrong in this way of thinking. Having studied all the papers with my lawyer and talked with Felix from the Start Fund, I finally became convinced of the advisability of making Start Fund investments.



When the time came for the demo day, the focus quickly shifted from product development to fundraising. Being at that time the only founder of my company, or - as I liked to say - “not yet found co-founders,” I knew that I could not raise funds under the same conditions as my colleagues from companies with many founders. In fact, I did not even try to do it. After the demo day was over for me, I ran away from negotiations with investors, went to Wisman Park in Mountain View, and fell asleep there on the lawn for two hours. It seemed to me the best pastime after all this madness of the last three months.

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My colleagues returned with stories about the terms of transactions with convertible bonds in the amount of 8, 10, 12 million dollars and more. I was happy for them, but I could not understand the real long-term benefits of optimizing the conditions of transactions. As before, I assumed that this was only evidence of my lack of experience. When I openly asked if such large sums were something good, they began to look at me again with surprise. I asked this question only in the hope of gaining a better understanding, and not with the aim of criticizing anyone.



It was only when I began to communicate with my friends Kristina and Dvipal, who previously earned money on YouTube, and then became investors of start-up companies, did I discover an opportunity that the rest did not seem to see. Kristina and Dvipal told me that they did not invest in any of the companies in my group on the YCombinator courses, despite the fact that many of them liked them. Their price was too high! These were the two most professional entrepreneurs I had known, with extensive experience in this field, a network of partners around the world and a number of successful Internet transactions, and they could not choose a company from the YCombinator group that could cooperate on reasonable conditions. I realized that other investors are in a similar situation - people who can significantly help a startup.



When I found a co-founder for my company, and it was time to raise funds, I decided to build it on the assumption that the market overestimates YCombinator and underestimates professional investors. In order to test this hypothesis, we decided to attract a small amount - $ 500 thousand - with a market interest rate on capital about two times lower than that of the YCombinator companies. If things go badly, the company will still have enough funds for the second attempt, this time on market terms, which will help cover the losses by averaging.



The results were astounding. Three days later we had a verbal agreement on half the amount needed for a startup, and the rest of the funds were found during 45-minute talks in a cafe in Lower Manhattan, where I stopped on my return from my trip to Europe. While I expected to spend many weeks or even months searching for money, I was able to complete this process much faster, and I was able to return to my main job.



Our list of investors turned out to be better than we expected. Among them were experts in infrastructure, engineering, products, interaction with users, mobile technologies, content policy, business and entrepreneurship. All of our investors were either creators or among the first employees of such well-known Internet companies like Etherpad, Rentjuice, Vimeo and YouTube. The experience of our investors is huge in all respects. They are always available and ready to help. We are very lucky.



This experience has taught us that providing good conditions to good investors will bring huge benefits to your company. Think about it. If capitalization, or valuation of a company, is too high, what incentive an investor will have to work for you in the short term, if a company needs to grow several times to get real income from its investment, is the probability of which is very low? This is if you can even find investors. Good investors will disagree.



If you offer adequate conditions to good investors, they will immediately become part of your team. Our investors helped us make deals that allowed us to use most of our infrastructure for free or much cheaper than what is available on the open market. They have done for us what other companies can only dream of. Due to the fact that our investors worked for us, we managed to snatch a big deal right from under the nose of our competitor. Our investors introduced us to the best lawyers, accountants, sales managers, etc. I can go on indefinitely.



Over the past few months, our company has experienced very rapid growth. To attribute this to our success alone in the engineering part would be wrong. Our investors played an important role in our growth and helped us grow in ways that I could not even imagine. Even as we move on to the next stage in the development of the company, I count on their support in determining our future direction.



Although it may look like a song of praise to our investors, this is not what I wanted to convey. I wanted to show how the wise use of investments has benefited us and can bring it to you. Attracting more experienced investors is costly on your part, but then it pays off many times over. My enthusiasm is based on the fact that I unexpectedly found myself in a position where I can see how valuable and effective the alignment of the interests of all the parties involved can be.