Everything I Learned at The Stanford StartX Accelerator

One of the best kept secrets in Silicon Valley is the Stanford Stardex Accelerator. The numbers are insane. While 90% of startups fail, 92% of startups that go through the Stanford StartX accelerator are either running or acquired 10 years later. And what's crazier is StartX companies are 2.6 times more likely to achieve $100 million valuation than other top accelerators. My startup, Prodigy, was one of those success stories. We went through StartX in 2015 and sold the company for nine figures in 2021. And the lessons I learned inside the accelerator can be applied to any business. So in this video, I'm going to break down everything I learned from the formula to building billion-dollar companies, how to raise venture capital, what to focus on as an early stage founder, and a bunch of other stuff that's going to help if you are in business or want to be a founder. Probably the most important thing I learned inside the Atelier was a three-part formula for building a business. And it works whether you're building a million-dollar business or a billion-dollar business. And you need all three. The first two are critical, but they don't actually work unless you have the third piece. So let me break down the formula. The first thing you need is a new or growing problem. This is the famous why now question from VCs. See, if you're solving some old boring existing problem, chances are the business's needs are probably already fulfilled. It's not something that you can really build a massive business around. And ultimately, all great businesses are built around finding a new or growing pain that they can provide a solution to. On top of that, you need a really big market. The simple formula is number of customers times the price point that you can charge those customers greater than $2 billion. $1 billion if you're not really looking to raise venture capital, or you just want to build a pretty sizable business, but $2 billion is really ideal. That's going to allow you to raise venture capital. And sure, you're not going to get to $2 billion most of the time, but it allows you to just take a small piece of the pie and still build a really big business. But it's the third piece that probably matters the most. And rather than telling you, I'm going to quote ultra controversial billionaire Peter Thiel, competition is for losers now what peter thiel is really saying is not that you have to go out and kill all of your competitors you need to build a moat around the solution to this large market with a growing problem and this is critical if you go out and you find an amazing problem you build an amazing solution you get all these happy customers you raise all this money lots of press people will see that and if you don't have a moat that keeps them out of your business they'll just come in take all your goods kill your business. And this happens to so many founders that are onto something and they just don't hold onto the market. So how do you build a moat around your business? Or to put it in TL vocabulary, how do you eliminate competition? Well, there's three ways. First is what's called a data moat. Data moat means that as you get more data, your product becomes better. This is something like maybe OpenAI today. As they gather more and more data, more people are using OpenAI, the product is getting better. And hopefully if it plays out well, open ai or your business in this example stay ahead of the curve the second way to build a moat is through network effects now this is a bit of a two-edged sword because early on building a company that relies on network effects is really hard when there's less users the product is inherently less valuable therefore product kind of sucks early on so you have to do a lot of growth hacks to get there but if you're building a business that gets better as more people use it then one, switching costs are really high. People don't want to jump to the new platform because it's just not enough people on there. You see a lot of failed social networks because of this. But also, they just get used to it. It's so good. Everyone's on there. And why would you go somewhere else? Like, it's just the place to be. It's called a network effect. And what it really is doing is it's raising the barrier to entry. Anyone who wants to compete with you just has to get so many users that it's not really viable. And then the third way to do it is called economies of scale. Economies of scale are simple. as you sell more products you can sell them for cheaper because your costs go down hopefully your efficiency goes up and so over time as you're selling more and more you're getting what's known as economies of scale you have lower cost lower cost means the competition cannot match your price thus you win all right let's get into the juicy stuff let's talk about raising millions of dollars from investors one of the weird things about startex is that there's not really a specific classroom style structure where you go into let's say a talk on sales and then a talk on marketing and then a talk on fundraising this doesn't really happen the accelerator what actually happens is there are these sort of pay it forward secret kind of meetings behind closed doors where a really successful founder will kind of get together a bunch of people and share some secrets that have worked for them in these very like tight-lipped closed doors And probably the most secretive thing at Stardex is how to raise venture capital. And the reason for this is they have a very specific way of raising venture capital that is, I would say, non-traditional. And we use these tactics to raise $21 million. But I don't really want to gatekeep, so I'm just going to teach you what they taught me and share what I learned. So the first thing you learn is that you're not pitching a single investor. You often think that when you go in, you pitch, you know, Sequoia Capital, and if Sequoia Capital passes, well, you go talk to Andreessen and Benchmark and blah, blah, blah. That's not actually how venture capital works. You're not pitching an investor. You're pitching an ecosystem. It's kind of like high school drama on steroids. I was actually on the phone with a portfolio company that we invested in, and I was explaining this to him. I was like, imagine you go into a bar, and there's a bunch of hot chicks that you want to talk to. Maybe you want to pick one up. So you go and you say hi to the first one. She blows you out, says, get out of my face. I'm not interested. You suck. You go to the second one, blows you out. Third one, blows you out. By the 17th girl you talk to in that bar, you're done. No one is going to give you a chance because they've all watched you get blown out over and over and over again. Hopefully that metaphor is not too personal or real for some of you, but that's kind of what raising venture capital is like. You think you're pitching one investor, but you're not. You're pitching into an ecosystem. And in this ecosystem, all the associates, principals, they're all in these little group threads and they're saying, oh, did you meet Micaiah today? We heard he's working on Prodigy. What did you think? Oh, we think it sucks. We're passing. And all of a sudden, what happens is you start getting black marks. And when you get these black marks, what actually is happening is that you are losing momentum and credibility. in the ecosystem. And so a lot of the Stanford StartX philosophy is around how do you avoid black marks in the ecosystem? How do you not get rejected 17 times in front of everybody so that no one wants to touch your deal? There's a few ways to do that. First is to not actually go out and actively pitch. You want to start by having some casual chats and you want to do this in a very specific order. I'll get to that in a second, but let me talk about the chats. In the chats, you're going to do this in messages and you're saying, hey, listen, we're thinking about fundraising. know we might do it in a month or two we're not sure yet um but i'd love to tell you what we're working on just to get your take get your feedback and you know hear what you think about our company and you're going to have these chats a few times and what you're looking for is an investor that says hey listen between you and me i don't think you should go fundraise like why don't we just do an early round right now i think we get together our guys cut you a check, and you can just run this thing. You're looking for people that are trying to preempt your round. And that's so important because if you're getting those signs, it's a good sign that you're actually ready to go raise. On the other hand, if everyone's like, yeah, you know, this business does sound really hard, but I wish you the best of luck. I hope it goes well for you. Like, let's stay in touch for future rounds. Like that kind of BS that a lot of VCs do. That's a sign that you are not ready to raise or... your business needs some work and the way you do that i see there's a very specific order and you want to go to what i would call tier three vcs tier three vcs are they're not bad cash is cash but they're not the sequoias and andres and horowitz of the world let's say And you want to start with them. Have some casual conversations with them. Then if that's going well, start your tier twos. And then finally, when you talk to your tier ones, you should be buttoned up. You've had like 20, 30 meetings with these lower tier VCs that when you go into those meetings, you are so sharp, so crisp. You know your numbers, you know your objection handling, and you can actually get business done. Now, on top of that, there are three specific things you need to do to actually have a chance of getting money from these investors. First is the introduction. In our experience, and I've seen this across my company, now the companies that I'm investing in as a VC, and also dozens of my friends' companies, the introduction is actually one of the biggest factors in the meeting. If you have a super strong intro from an amazing founder who's made VCs a bunch of money, not only will they take the meeting, but they are way more likely to invest. And on the other hand, if you have a intro that's kind of like, hey, I met Micaiah at this coffee thing for startups. He's working on this new AI thing. He asked me if I could intro you. So connect to you guys on a thread. Hope it helps. That sucks. I've had those intros. They never turn into checks and you just waste your time. So you need to hustle for really strong intros. And that does mean pitching people that don't know your business on why they should like your business so that they'll give a strong intro to someone that they know. Hopefully that makes sense. And the second thing you want to do is you want to batch these pitches. After you've had your casual chats, you want to try to have 10 to 20 meetings per week and this is so critical because what you want to do is you're forcing everyone to make decisions around the same timeline if people are lagging you remind them to catch up if people are moving a little fast maybe you kind of slow play it and pump the brakes a bit but you're trying to get everyone to decide within like the same week if they're investing or not so that one the black marks don't spread too much for people passing And two, the people that do invest are all bidding at the same time. And this is how valuations get much, much higher very quickly and you get much more money. And I saw this firsthand in our own round. We started raising a $8 million valuation. And the very first check in the round was $200,000 at an $8 million valuation. And then we got more interest. And so we bumped the valuation to an $11 million valuation. We raised some money on that. And then ultimately we raised at an $18 million valuation and had offers at a $36 million valuation for our seed round. And that was back before AI, back when seed rounds were not supposed to be raised at $36 million valuations. But it was because we had so much FOMO. And the only way we achieved that was by getting everyone to decide on the same timeline. Now, on top of that, the final piece of advice is do not let investors sit in the maybe column. one of the startup founders gave me some of the best advice which is in the public markets you can buy what's called an option and an option is basically you are paying real money to have the option or right to buy that stock in the future you literally pay the money today so that you can buy it at this price in the future however in the private market an investor can get an option in your startup by just saying hey this is really interesting let's stay in touch or you know we're still analyzing the market or hey our team's still working on this but like we're super interested we're sticking into this really hard they will sit on the maybe column all day so what you need to do is you force them you say from today what is your decision process like how many internal meetings do you need how many days do you need how many weeks to get to a yes or no can you hold them to that Do not let investors sit in the maybe column. As a beginner founder, I know what it's like. You're going to be so worried. Oh my gosh, if I push them, if I force them to make a decision, they might have been a yes, but they're going to be a no. That's not true. What actually can happen, and I genuinely believe this, it's ridiculous to say, they might have been a no if you let them sit around, but by forcing them to make a decision a little faster. they might actually be a little fearful. They might have a bit of FOMO and they will be a yes. So do not let your investors sit on an ABs. By the way, I don't have a script here. I'm reading from a few slides. So I was supposed to say this earlier in the video, but I forgot. If these videos are helpful, could you subscribe to the channel? Our last video gained 20,000 subs for the channel, which is insane. That lets me know that these videos are helpful. And if I see this one working as well, I'll make more videos like this. So hit the subscribe button and let's get back to the value. So lesson four. what to focus on early in your startup. In a startup, there are always a hundred things to focus on and what you focus on really matters. It's these small little micro decisions of where you spend your time, where you spend your limited resources that actually decide if your startup will be successful or not. And I learned this actually from a VC who I have had the great pleasure of being rejected in every single fundraise I've ever done. He rejected me in the early, early Just An Idea angel raise. He rejected me at the seed raise. He rejected me at the Series A. And then I think by the time we were like raising larger rounds, their fund was too small. But that's not to say that I don't like him. Actually, I really like this VC. He's very smart. And he was just looking for something different than us. But his name is Leo Polovitz. And he wrote this article called Startups Are Risk Bundles. And I think it is the best framework for figuring out. how to get maximum ROI for your limited resources at a startup. In the article, he gives an example that I'm just going to walk you through here because I think it really helps emphasize what you as a founder should be focusing on. So the example is a company just raised a series seed round and they're thinking about we want to raise our next series A at $50 million valuation. And they have two scenarios. Scenario A, focus on product. And these are technical founders in the example, both of them technical founders. And so Leo assigns them a 95% chance of building a successful product. They're engineers, they can probably build it. But he gives them a 25% chance of selling that product at mass. And so if you do the expected value calculation, 50 million times 95% chance of building the product times a 25% chance of selling the product gets you a $12.5 million valuation. Kind of crappy. On the other hand, they can focus on sales. So they have the same 95% chance of building the product, but now they've sold it. So it's 100% chance of selling it. They've shown they can do it. Now that $50 million valuation target times a 95% chance of building the product times a 100% chance of selling it gives them an expected value of $47.5 million. And this example really helps frame how you should focus as a startup. You should look at your startup as what Leo calls a risk bundle. What are the things that we think are most likely to go well? And what are the biggest risks that could kill this business? And focus on killing those at every stage of the business so that you constantly build this momentum and build a resilient company that can handle the ups and downs of startup life. All right, the next lesson is how to build like a Silicon Valley startup. And this is probably one of the things that I see people outside of the Valley just get completely wrong time and time again. They build companies, but they have no idea. the actual pace of a silicon valley startup and the example i'm going to share comes from mike cassidy he gave a talk that i just is ingrained in my brain it was called speed is a competitive advantage and he gives the example of a typical company schedule and it's something like explore ideas three months raise money three months higher core team three months build v1 product 12 months marketing launch three months and so your launch time adds up to 24 months and they said here's a real startup pace explore ideas two weeks raise money two weeks hire team and open office two weeks build mvp two months launch time three months and if this sounds insane understand that this is actually the real pace that silicon valley moves at and once you just accept that you will be amazed at how much faster you just build because you start cutting corners on things that just don't matter and focus on what really matters which is finding a problem finding a solution and shipping something that people love You just do those things relentlessly fast. And that's how startups actually work. Now, let's talk about how to build resilience as a founder. Everyone knows that resilience, the ability to endure hard times is necessary to succeed as a founder. But how do you actually do it? Well, StartX has a really interesting way that I've never seen anyone talk about of how they actually teach you about this. So what happens is in StartX, you meet all these different founders and sometimes they're working in the co-working space. Sometimes you're just like catching lunch with them or like seeing them at an event. And some of them are really crushing it. Like they are up into the right millions of dollars of revenue added every month, blah, blah, blah, blah. They're crushing it. But most of being crushed, if I'm being honest, like you just feel bad for them. Like, man, just pack it up and go home. This startup thing is clearly not working for you. Your team is losing faith. You've lost faith. Your customers are canceling. Like, why are you still here? And then honestly, you just kind of forget about them. You're like, yeah, they're dead. I write them off. And then one day, maybe it's six months later, maybe it's years later, you see the headlines. So-and-so company, that one that you gave up on, acquired for $3.2 billion. And you're like, what? Like, I watched that company die, and now they're acquired for $3.2 billion. And this would be crazy enough if it happened once, but this happens over and over and over again. And you just see it so many times at Starbucks that you realize you can never write anyone off, including yourself. you start to believe that you can actually become successful. And so I understand that me telling you this is actually not building the belief in you. What I would do if I was in your shoes is I would try to build a network of founders that you're catching up with every now and then, whether it's online, digital, in person, and just really watch how they build, watch the ups and downs because by seeing your peer group go through those ups and downs and make it through, you will not give up on yourself because you build the internal self-belief that if they can do it, you can too. That's not something I can teach you in a video, but I can guarantee you it will make a massive difference in your life if you can surround yourself with people like this. And the final thing I learned at StartX was how to build a personal board of advisors. One of the first things you do in the accelerator is you build an advisor network. You go out, you find advisors, you pitch them on your startup, try to get them to help you along the way. There's a bit of criteria that I think really matters here. First is you want to find CEOs that are three to five years ahead of where you want to be. If they're 20 years ahead, it's not really relevant to you. They're focusing on how do they deal with their public investors or their hedge funds that are shorting them or whatever. It's not relevant. You want CEOs that are three to five years ahead, ideally in the same industry or category of product. So what you don't generally want to look for is, let's say you're building a B2B SaaS. You don't want some amazing founder who built a clothing brand. Yes, they might be amazing. They might know so much about operations and everything else, but they're missing some of the core lessons and context to help you. So ideally, same industry or category or product. And then the third thing, maybe the most important, they have to be willing to commit to meeting at least once per month. I had one mentor that... I actually got through Stardux and I really liked the guy. Like he was so nice, so helpful, but I only met with him twice. Once when I pitched him on helping me in my company and then once at this event that he was at, like he was speaking on stage and he's like, I got a little bit of time at midnight. And so I met him, I think it was closer to 1 a.m. in this like hotel lobby in San Francisco. And to be fair, he gave me like two hours of his time at 1 a.m. And I was incredibly grateful. super nice of him to do but i kind of needed help more often and so you want to find people that actually are available that are willing to meet and can kind of prioritize this because not everybody wants to prioritize being a mentor but it's important for you to find people that can and the way that you also entice them to meet with you and so on is you want to give them a portion of your company and it's typically a quarter percent to 0.5 percent of your company and that's an equity and i've seen it go lower but that's a good range for like real solid people but really important that equity needs to vest and specifically you want to make it vest over two years with what's known as a six month cliff which if you don't know startup speak just means that for the first six months if it's not working out they suck you say listen let's part ways and there's no equity exchange they only start getting bits of equity every month after the first six months that's really important and three mentors is best I like three because what you'll find is that you'll go to one and they just give you like their view and their opinion. They tell you to go this direction. You go to a second one and they might tell you to go to a completely different direction. By the time you meet with three about like some big problem that you're facing, what you'll find is that none of them may have the perfect solution, but they've given you enough data to allow you to make the final call. And as a CEO, that is ultimately your job. You make the decisions. It's the buck stops with you. And by having three, it really helps kind of round out your data collection process so you can make good decisions. And that is everything I learned at Stanford StartX. Hope it helps.

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If you're new here my name's Michia (Muh-ky-uh). I'm a serial entrepreneur and investor. Since selling my last startup for 9 figures, I'm investing my own money into the next wave of founders at my VC firm, L7V. 

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