Half a Decade After Demo Day

Later today, Y Combinator will host its demo day for the summer 2014 batch. I know exactly what those founders are feeling, because I was in the exact same position five years ago, when my co-founder and I were part of YC’s 2009 class. 

I remember nervousness and excitement, tempered by the difficulty of delivering a three minute pitch that does justice to many months filled with days where we didn’t stop working until we were literally too exhausted to go on.  Most distinctly, I remember a sense that the fate of WePay hung in the balance. Succeed or fail, it all came down to those three minutes, or so I thought.

I was wrong. What I didn’t realize at the time was that demo day, while incredibly important, wasn’t the end-all be-all of WePay.  I mean, rationally I knew this. But there’s a difference between knowing something and feeling it.  Life after demo day felt as distant as the “real world” felt when I was in college.

The day came and we pitched.  To be honest, I was nervous and it wasn’t my finest work. We really didn’t get a ton of interest, overshadowed by friends’ companies like Bump, Mixpanel and Dailybooth.  In fact, I think only a few meetings came directly out of demo day, and none of them resulted in investment.

But you know what? Life went on. We ended up raising a great seed round, then a Series A, then took the company through a pivot and into a Series B and a Series C.  Demo day was a great launchpad, but as time went on it quickly became one moment in a long list of challenges met and milestones achieved.

With that in mind, I’ll offer a few thoughts to this batch of YC companies:

Rounds live and die by momentum.  

The problem with fundraising is that it's feast or famine: when things are great, they’re really great, but when they suck, they really suck. Realize that this is normal. 

I met with 47 investors before we closed our first round.  This was partially because it was 2009 and nobody wanted to back a financial services company during the “worst recession since the Great Depression”, but mostly it was because that’s just how the game is played. 

One person or pitch can change the entire process instantly. In our case, that person was Eric Dunn, former CTO and CFO and now SVP of Strategic Payments at Intuit.  Eric was willing to suspend the commonly held, pre-Square and pre-Stripe belief that payments were too hard for anyone besides PayPal. Eric introduced us to David Hornik at August Capital, and with them leading the round, we went from broke to oversubscribed in three days.  

I was shocked at how dramatic the shift was.  Investors who wouldn’t call me back showed up at my house, demanding a $500,000 allocation.  It was incredibly vindicating when we closed, raising $1.7 million from Eric, August, Max Levchin, SV Angel and others - and turned down an additional $2 million.

Great fundraisers can navigate the ebbs and flows like a skilled driver utilizing the clutch of a manual transmission on a steep hill. Remember that the dynamic of a round can change very quickly with interest from the right people, but also know that there are times to back off to avoid stalling. [1]

Think beyond your seed round.  

The relationships you are building with investors now will follow you for the rest of your company’s lifecycle, and probably your career.  Invest in them and treat them with care.  

Over-inflating valuation makes the next round much harder.  It can be tempting to minimize dilution in the short-term with a high price, but it can destroy you if growth slows even slightly, or if you require any course correction before the next round like we did. We were fortunate that we raised at a valuation that allowed us to raise another round at a healthy step-up, despite going through a pivot in between. 

Fundraising is incredibly hard, but it’s easy compared to what comes next. 

I remember freaking out in the car with my cofounder after we closed our first round. I was so excited because it felt like the hard part was over. 

But that feeling didn’t last — in fact, there was a very distinct “oh shit” moment that followed, and that I’ve had with every round since. The cause: a sudden mentality shift from selling people on our vision to actually executing on it. 

Coming out of demo day, we were a group payments company — we made it easy for groups to collect money for shared expenses.  As we dug deeper into group payments, we started to come to terms with two fundamental truths: our users were reluctant to pay fees for this type of service, and our users didn’t send money all that often (a few times a year, on average). We saw decent growth, but it didn’t matter: there was a limit to how successful we could be with a customer base that didn’t use us frequently and who didn’t want to pay when they did. [2]

No amount of fundraising prepares you for a realization like that.  But if you’re like most startups, you’ll have to tweak your business model several times before you get it right. It’s normal. So don’t be too discouraged when you find that life after demo day gets harder, not easier. 

Don’t get too high on your own supply.  

Be honest with yourself about the complexities and difficulties of your business. Better to acknowledge difficulties so you can mitigate them than ignore them until it’s too late.

Our willingness to question our vision saved WePay from stubbornly spending its capital down a dead end. As our doubts around group payments continued to grow, we started experimenting with an API that allowed developers to build on top of our payment system.  

We were quite good at building easy payment signup flows for individuals while still mitigating fraud (most payment companies primarily serve businesses).  And so we found great product/market fit with crowdfunding companies like GoFundMe and Fundly, since they too served individuals instead of businesses, and they too wanted to prevent fraud.  Veda, the fraud engine we’d initially built to handle group payments, worked far better for this use case than PayPal’s risk technology did — enabling easier signup, faster payouts and less frozen accounts, while still protecting us and the partner from fraud. [3] [4]

We saw so much traction from our API that we eventually decided to discontinue our other products to focus exclusively on it, and we haven’t looked back.

The caliber and commitment of your team makes a huge difference when things are going sideways. 

Very early stage startups should focus on product, almost exclusively. But a great company is more than just a great product. A great company is the team of people that makes the product vision a reality, especially in the face of inevitable adversity. 

This is most apparent when things are going wrong. A great team bands together when fundraising is tougher than expected, it adapts to changing market conditions and it isn’t afraid to explore new ideas. Building that team is the single most important thing a founder can do post-demo day.

Hiring might seem like a distant concern — you might wish you had the luxury of bringing on more people. That's normal - pre-demo day, the "team” is usually composed of the founders and maybe one or two early employees. Make sure that post-demo day, you’re building a team that can help you weather the storms to come.

Five years later, I’m excited about the market we’re in, the traction we’re seeing, and the team we’ve built.  But that didn’t happen overnight, and we are far from done — it will take many more years of hard work to become the company we ultimately want to be.

So that’s my advice to the founders pitching today. Remember that the things that seem like mountains in the moment will be remembered as molehills in the future.  See demo day for what it is — an incredibly important milestone in your journey. But don't lose sight of the fact that the journey is only beginning.

[1] Paul Graham uses this analogy in his Hackers & Painters essay here: http://www.paulgraham.com/hp.html  I’ve also heard him apply it to fundraising.

[2] Which isn’t to say that person to person payments are a dead end, either. Our friends at Venmo proved that the need for better person to person payments was very real and very compelling, and built an awesome product to serve that use case.  Facing the economic realities of group payments on a standalone basis, they became part of Braintree in 2012 and PayPal in 2013, and have continued to grow a great product.

[3] http://www.nytimes.com/2012/08/02/technology/paypal-antifraud-measures-are-extreme-some-users-say.html?pagewanted=all&_r=0

[4] http://techcrunch.com/2013/05/09/wepay-debuts-veda-an-intelligent-risk-engine-that-leverages-social-media-data-to-prevent-merchant-fraud/

Thanks to Richard Aberman, Slava Akhmechet, Paul Graham, Semil Shah, Katey Sullivan, April Rassa & Jon Xavier for both encouraging me to write and reading my drafts.