How AngelList GPs Invest at YC Demo Day

Y Combinator Demo Day offers investors the opportunity to back the next potential Airbnb, Stripe, or Coinbase (all YC alumni). But getting into the best deals is no small feat—especially as more and more startups and investors take part in the bi-annual event.

To succeed, VCs need a strategy. We spoke to some of the top performing Demo Day GPs on AngelList (based on TVPI of their Demo Day funds) about how they approach Demo Day. Here’s what they had to say.

Scout Prior to Demo Day

With so many founders and investors in one (virtual) place, deals tend to move quickly. Many GPs scout the batch prior to Demo Day so they can work with speed and conviction the day of. Holly Liu, a former YC partner, puts out a call to founders on Twitter during the application process to start making inroads with the upcoming batch.

YC founders can raise a round within a week and they may even open fundraising before Demo Day. That’s why I begin preparing before the new batch is even announced. Being able to deploy capital early can be huge because many valuations jump a lot once the company reaches its fundraising goal.

Collaboration is Key

With the rate of dealmaking at Demo Day, there isn’t a lot of time for investors to perform due diligence. That's why investors often work together before Demo Day to identify promising startups and help each other with introductions to founders.

We help other funds find high-quality deals, and they help us. Working with other funds to evaluate startups helps us arrive at an informed decision within a short time period, and relieves some of the fatigue that comes from evaluating lots of deals.

Founders Over Everything

Besides collaborating with other investors to perform due diligence, Demo Day VCs tend to put a lot of weight on the strength of the founding team. This can be especially informative when the company doesn’t have a lot of performance-related data to offer.

The best predictor of success of a YC company isn’t their ability to raise venture capital at Demo Day, but rather the strength of their founding teams. Paul Graham fought hard to get people to pay attention to Airbnb, and Coinbase was very contrarian at Demo Day.

Allocation Depends on Reputation

YC hand-selects the investors who can attend Demo Day based on their investment track record, with special weight to investments in YC companies. Further, YC maintains an investor database where alumni contribute reviews and notes on investors. For this reason, investors who move fast while adding lots of value tend to have a leg up when it comes to earning allocations.

The most valuable investor is the one who asks smart questions, doesn’t waste time, and ignites the seed round by being the first high conviction check—creating signal for other downstream investors.

Play Fantasy Sports

Some GPs hone their instincts by picking companies from previous Demo Days they would have invested in, then checking to see which of the companies went on to raise up rounds. Others create an “anti-portfolio” of the best performing companies from previous Demo Days that they didn’t invest in, and try to decode what made them successful.

Looking at the regrettable misses from previous Demo Days for common factors is a great way to update my mental filter heading into a new Demo Day.

In Summary, Top GPs...

• Make inroads with founders prior to Demo Day.
• Collaborate with other investors to perform diligence faster.
• Scrutinize the strength of the founding team.
• Maintain a positive reputation.
• Hone their instincts by monitoring companies and their markups—even if they don’t invest.
  

As the number of startups and investors participating at Demo Day continues to climb—along with valuations—being able to separate signal from noise will only become more important.

“Y Combinator has changed a lot over the years, but it’s still an incredible source of vetted startups that have proven to become outsized successes, and it can’t be ignored,” said Golda. “It makes sense that you have to work hard to evaluate and invest in top YC companies.”

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Interested in investing in YC startups hand-picked by GPs like Golda, Liu, Roman, Sadhu, and Dickey? Check out AngelList’s Demo Day funds, which provide LPs access to the latest batch of YC companies. Click here to learn more.