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Here’s What It Looks Like When A Startup Wins Big at Y Combinator

The first stage of YC success is fundraising. How Mashgin went from a pitch to more than $1 million in seed funding in four business days.

Here’s What It Looks Like When A Startup Wins Big at Y Combinator
[Photo: Ernst Haas, Getty Images]

“The only thing you need to remember about this presentation,” Abhinai Srivastava began during his time on stage at Y Combinator’s Demo Day last month, “is that we recently signed a letter of intent with the potential of $50 million per month.”

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That’s how Srivastava, a 35-year-old veteran of Microsoft and Facebook, started his Demo Day presentation. In case any of the 500 or so investors and journalists at the invitation-only event missed it, he repeated the statement again, speaking haltingly but with a wide smile that projected something approaching confidence. “That’s $50 million,” he said. “U.S. dollars. Per month.” His phone started vibrating in his pocket even before he finished his two-and-a-half minute pitch.

By the time Srivastava walked off the stage, his email inbox was already full of investor queries. He spent the next few hours showing off the self-checkout kiosk that his company Mashgin sells, and that Srivastava believes will revolutionize how we shop and pay for stuff at stores. Instead of scanning bar codes or dealing with a clerk, customers simply put their stuff in a breadbox-sized device for less than half a second and then swipe a credit card. “Everybody was trying to break it,” he says, referring to Demo Day attendees who tried out the mock storefront he set up in a nearby room. They would place items into the box upside down or sideways in an effort to fool the machine. “But it doesn’t break.”

The following week, he and cofounder Mukul Dhankhar (who also happens to be Mashgin’s inventor and the company’s only other full-time employee) closed an investment round, becoming the first startup in Y Combinator’s current batch of 114 companies, which I’ve been following since January as part of a Fast Company series, to announce that they’d done so after Demo Day. Though YC’s partners and alums shy away from publicly discussing the importance of fundraising — partly because the best way to raise a lot of money is to tell investors you don’t need money — this is ultimately the goal of the three-month program: to set up each startup with enough funding to allow it to grow into a significant company.

Srivastava won’t say how much money exactly the company took in, but he says the figure was well over $1 million. And because Srivastava, like most YC CEOs, used a set of entrepreneur-friendly financing documents created by YC’s lawyers, it’s likely that he received the money at terms that just a few years ago would have been considered extremely favorable, despite the fact that Mashgin has yet to ship a commercial product and that it is attempting to offer a completely new piece of hardware to a market that has not historically been the first to embrace new technologies. Srivastava and Dhankhar took their first meeting the Thursday after their Tuesday pitch and closed the round by the following Tuesday. “It was overwhelming,” says Srivastava. “The money is in the bank.”

Mashgin was born in 2012, when Dhankhar, who’d previously worked on Toyota’s humanoid robots, began tinkering with an idea to pair inexpensive digital cameras with sophisticated 3D-imaging algorithms to quickly identify basic household items. “It was a simple webcam hooked up to a computer,” recalls Srivastava, who first met Dhankhar when they were both students at the Indian Institute of Technology in Delhi and who saw an early demo in 2013. “He puts a lemon in front of it, and the screen says ‘lemon’.” He puts his keys up, and it says ‘keys’. He puts a pen, and it says ‘pen’. I looked at it and said, ‘This is the future.’”

Dhankhar turned this bit of science fiction into a working prototype with the help of Highway1, the hardware incubator founded by outsourcing giant PCH International. Srivastava joined the company full time, as CEO, at the end of last year. The two men felt like they were ready to start raising money–and even got a few bites from interested investors–but they felt lost at sea. Srivastava wasn’t sure how much to ask for, what their company was worth, or how to protect the company from possibly onerous terms. “It was one of the toughest things we’d ever done,” Srivastava says. “We really, really needed somebody to advise us.”

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On a whim, he filled out an application to Y Combinator in late December 2014. Even though Mashgin had missed the deadline by two months, YC makes exceptions for companies that look like winners–and under new YC president Sam Altman, there has been a special emphasis on companies that are developing hardware to deal with hard problems. By January, the two men were attending YC’s Tuesday night dinners and had thrown out their old growth plans in favor of more ambitious ones.

Because Mashgin’s product will ultimately be sold to large food-service companies and grocery chains, the company would not be able to mimic the hypergrowth that some YC startups achieved during the program. Instead, Srivastava focused on getting letters of intent from large retailers who agreed to purchase the product if Mashgin could prove to them that it worked. They collected a number of commitments for pilot programs, the largest being the possible $50 million-per-month deal he mentioned on stage. The two men also took a few meetings with investors ahead of time and worked with YC’s partners to polish their pitch. Srivastava tells me that in the past he’d struggled to convey his own excitement about Mashgin’s product to investors, but YC’s partners helped him see that he should be explaining Mashgin to billion-dollar venture-capital funds the same way he’d talk about the company to his friends. “That was one of the biggest learnings,” he says. “Now, when we go to investor meetings, we do not take a pitch deck.”

Part of what allows Srivastava and his peers this informality is that Y Combinator’s Demo Day has turned the uncertain (and fraught) art of fundraising into a highly mechanized process. As I wrote two weeks ago, the name itself is an anachronism: Founders no longer “demo” their products as much as announce themselves to the world and wait for the investment offers to flow in, sometimes in the room itself. “That’s the fascinating thing about YC: You hear a two-minute presentation, you shake hands, and $100,000 moves from one person to the other,” says Kyle Vogt, the cofounder of Justin.TV, which became Twitch, and the driverless car startup Cruise. Vogt says Cruise’s early investors included some who made handshake commitments on Demo Day itself, including avowed germaphobe (and TechCrunch founder) Michael Arrington. “I said, ‘Let’s shake on it,’” Vogt recalls. “He hesitated, but he did it.” The practice has become common enough that, two years ago, YC founder Paul Graham published a formal handshake-deal protocol, a step-by-step approach designed to make it more difficult for investors to renege on a commitment.

Mashgin didn’t do any handshake deals at Demo Day, but Srivastava did take advantage of another YC fundraising innovation: Shortly before Demo Day, attendees receive a link to a web application that includes a list of companies and a Tinder-style matching mechanism. Anyone interested in a given presentation can click a Like button within the app, which sends an email alert to the entrepreneur. Mashgin got 100 such leads on Demo Day, and Srivastava and Dhankar sifted through them to set up 30 meetings over four days. They came prepared with a dollar amount they hoped to raise and a proposed valuation. Instead of dancing around terms, Srivastava focused on describing the company’s ambitions, and presented investors he liked with a take-it-or-leave-it offer. “We picked a number, and stuck with it,” he says.

Despite having more than a million dollars in the bank, Srivastava tells me that he and Dhankhar haven’t had a chance to celebrate–or even to catch up on sleep. The first order of business will be hiring employees to help bring their product to market, and then they’ll have to work to get their would-be customers to actually follow through on those letters of intent.

Y Combinator is over. But the marathon undertaking of building a great company is really just beginning.

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Next Week: YC president Sam Altman reveals his vision for the new Y Combinator. This is part 14 in a series.

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