Hot Seat

Chapter 26. Contrarian Segmentation

Chris Zacharias, founder of imgix.com, was confused by his Y Combinator colleagues. It was the summer of 2011. YC was the hottest ticket in the Valley, and graduates were able to command a premium on their valuation with investors. It turned out that premium was bigger than anyone expected, as Jessica Livingston, YC cofounder, announced over a casual dinner that each startup was going to receive $150K guaranteed investment from SV Angel and Start Fund. This was an uncapped note, a tremendously generous offer with very few strings attached.

No one had ever heard of terms like this for seed companies, and certainly not for so many of them all at once. Chris was somewhat overwhelmed. He discussed turning down the money on the principle that he didn’t know the investors and didn’t see how selling pieces of his company to total strangers was a good idea. He changed his mind after talking to his attorney and getting to know the investors better, and agreed to the funding.

But the whole process was beyond anything he’d imagined. After the legendary demo day, where a string of startups fire minutes-long pitches to an auditorium of waiting investors, Chris quietly retired to Whisman Park. There he found a green, open field and curled up for a nap.

Many of Chris’s peers were getting astronomical terms on the balance of their financings: convertible debt with caps of $8M, $10M, $12M, and more. He felt that it was hard to see the wisdom of this: with such ...