To do or not to do Y-Combinator?

My name is Courtney McColgan and I am the founder of RunaHR, a modern cloud-based payroll and HR platform designed for SMBs in Latin America.  We recently graduated from the Y-Combinator Winter 2018 Batch and wanted to share our experience.

A bit of background for context. I grew up in Silicon Valley, studied at Berkeley and Stanford, started two startups and previously worked in venture capital at DFJ and Morgenthaler. In a nut shell, this was not my first rodeo.

Still, there was an allure to the infamous Y-Combinator. Here’s why we joined, what we did to get in and how we maximized our time there.

Why do Y-Combinator?

Y-Combinator takes 7% of your company, that’s more than equity than ANY senior executive you are ever going to bring on board, so you better be darn sure that it’s for you. For us, there were three clear value-adds:

• Eliminate the Latam bias – As a Latin American startup, many investors in Silicon Valley won’t even take your meeting. It doesn’t matter how how amazing the opportunity, the answer is no. As a YC company, we were able to change that conversation. We became a “YC company doing a Latin American play” versus just “a Latin American company.” The difference may sound subtle, but its important. I can say that no investor ever said no to meeting with us.
• Build your network –Across all my alumni communities – Berkeley, Stanford, StartX (a Stanford incubator I was a part of), no one in like the YC community. YC has an amazing network of doers, who actually know how to get something done, quickly and correctly, with their own two hands AND are willing to help you.  How to build out a B2B sales team? How to implement Zendesk in a day? How to obtain a twitter handle that’s occupied?  The YC alumni have been in your shoes. Not only do they know how to do it, but they have pointers on how to do it better than they did. Best network I am a part of hands down.
• Raise $ quickly – I have raised money for 3 companies now, and nothing was as easy as with Runa. Why? Y-Combinator. YC does an amazing job of bringing together a global community of qualified investors that are willing to write checks fast without asking many questions. They have an inherent trust in the YC brand. They know that YC knows how to pick them. So if you do your job and deliver the results during the program, you will raise without a problem. We closed $3.5MM in less than a week.

Is YC is for your company?

YC has a great name, program and community, but it’s not for everyone.  Make sure you really think about these things before deciding to do it.

• Be on the path for high growth – Do you want to build a billion dollar company in 5 years? Yes, of course! Sure, we all can say that, but think about what it actually means – stress beyond belief, many sleepless nights and lots of tough conversations and decision. Is there any other way to build a business? Without a doubt. You can build a billion dollar business in 10-20 years, or a million dollar business in a few years or even just build a great lifestyle business that makes you happy and pays the bills.  There are a million ways to skin a cat, but the YC way is go big or go home. If this does not align with your plans, YC is not the place for you.
• Pay attention to company stage – We had an amazing experience in YC, but I think part of that was due to the stage of our company at the time. We launched 2 days after our batch started and basically grew 150% week-over-week until demo day. Now those are amazing numbers, but part of what made them possible was starting from 0. If we were even 6 months old, 150% WoW growth would not have been possible. Make sure you can show crazy growth during your 8 weeks there, otherwise its going to be hard to get attention from investors.
• The potential for “unicorndom” – Every investor in Silicon Valley wants to invest in the next unicorn. And the statistics say that at least one company in every batch will get there, Does your company have unicorn potential? Is the market big enough? Is the model scaleable? Do the unit economics make sense? These are all important questions to see if unicorndom is a possibility. If it’s not, again, not sure YC is the right place for you. It will be hard to win investor interest from the other 100 companies with unicorn potential in your batch.

How to nail your YC pitch +application?

 Although each company at YC is working on a different problem, there were some  similarities, or more patterns across companies. When I say patterns I mean a theme of  reasoning as to why YC had picked each of us.

• Promising founders. What makes a great founder? Amazing CV, prior experience, and/or immense passion. You don’t necessarily need all three but if you don’t have all 3, you need to be incredibly strong in one. You should also be able to clearly show why YOU for THIS company. For me, I grew Cabify from 4 cities to 130 cities across 12 countries in Latin America. 50% of that business was B2B sales. In our company, the hard part of the equation are the sales, not the software. I had direct extremely relevant experience in that.
• Keep it simple. YC people read thousands of applications. Don’t make it hard for them to understand what you do. Tell them in less than 5 words what you do. For example, Runa manages everything related to HR in a company – onboarding and offboarding of employees, paying of employees, employee profiles, reporting, time tracking, etc, etc. That’s a lot. Did we say all that? No. We just said: Gusto for Latin America. It was simple soundbite digestible in less than a second.
• Think big, plan small. You have to be able to see how your startup today can  be a billion dollar company in 5 years. However, you also need to be able to talk about what you will achieve in the next 8 weeks of Y Combinator. Don’t have one without the other.
• Big market, first market. Many startups die because the market is too small. To be a billion dollar company, you have to have enough growing potential. That’s why market size is important. Its important you can confirm you have a sizeable enough market to build a billion dollar business (and that you can support the math behind that market opportunity calculation). For us it was 17.5MM SMBs x our average customer spend in a year 4,000 USD, which equals a 70 Bn annual market opportunity. Once you’ve got that down, its also important to come back to your reality and talk about what companies you will attack tomorrow. For us, that was the 4.5M SMBs in Mexico, and specifically the 100,000 between size 20-500 employees.
• Economics day 1, year 1 and year 5. We built out a 5 year financial model for our company, before I ever took one investment dollar. Why? It helped me articulate my vision with more credibility. Now I didn’t pull my model out in the 10 minute YC interview, nor did I attach it to my application, but I did use it to talk about how the numbers would work day 1 and over time. People believe you more (and you believe yourself more) if you can talk about things with numbers behind them.
• Why YC? What can YC do for you? You really have to be clear on this. We actually told YC that we didn’t need them. (I wasn’t being arrogant here, we had 3 term sheets to fund our round, and we honestly thought we could build the business without them.) However, what we told them was this: We thought that with YC, we would get there bigger, better and faster. And, strangely enough, that has actually been the case.

How to maximize YC?

We had a good run at YC. We raised 3.5MM USD in less than a week. The round was oversubscribed, and in the end, we were invited to 5 well-known VC offices and received term sheets for Series A from 3 of them (none of which we decided to take by the way). How can you have a good run?

• Grow like a weed. The only thing that matters in YC is growth, and the most important metric to show that growth is revenue. We grew at 150% week-over-week and had $250K in ARR by demo day. For a Saas company doing B2B sales, that was pretty incredible. Now take note, its pretty hard to grow with no money, so once you get into YC, raise a little bit of money to help you fuel rapid growth. (We raise $500K prior to starting YC, and spent almost all before demo day.)
• Lock in value-add investors early. Your valuation will never be cheaper than before you start YC. Our valuation increased 5x from before YC to after YC. As such, prioritize getting value-add investors onboard early. Who are value-add investors? It really depends on who is going to be helpful in building your business? For us, that meant: Salesforce Ventures (the world’s best Saas company), HR experts (CTO of Zenefits, X-Product Lead of Gusto, X-Head of Sales of Gusto) and executives from the Latam unicorns (Rappi, Nubank, Cabify and WeWork Latin America). Not only these people actually help you build the business, but they will also be great “signalers” in the market. They know the most about your business, and they decided to invest. That speaks volume to investors.
• Meet all the YC partners. Every partner at YC has their own experience, their own companies that they have helped along, and their own network. Do your best to get to know everyone of them and leave an impression on them as to why your company will be the best of the batch. Now the best way of conveying that is results, but results are less known if someone else delivers them versus the person that achieved them. Also, it doesn’t hurt on the fundraising side. While no one will ever say it, it just makes sense that every YC person has their own circle of investor friends and I am sure they give a nod on the companies they are excited about. Be one of those companies.

While every founder needs to tell their own story, I know it was helpful for me to see how others did it. Here’s how we did it, sharing with you our YC application, YC Application video and YC Demo Day Pitch. I hope they help you with your application, should Y-Combinator make sense for you.