Silicon Valley's top startup factory has a clever way to make sure investors follow through on 'handshake' deals

In Silicon Valley, a handshake deal can make or break a startup. Things move too fast, so investments and companies can fall apart if the funding doesn’t come through.

It’s especially hard when investors are listening to pitches from as many as 100 startups over two days and making decisions on the spot. That’s why many Silicon Valley investment deals start out as handshakes.

Handshakes should mean a done deal, but that doesn’t always happen, so startup accelerator Y Combinator instituted a formal “Handshake Protocol” in 2013.

A handshake deal only happens if:

  1. The investor says “I’m in for [offer].”
  2. The startup says “OK, you’re in for [offer].”
  3. The startup sends the investor an email or text message saying “This is to confirm you’re in for [offer].”
  4. The investor replies yes.

That crucial step three is where handshake deals can fall apart.

So, why not turn to tech to solve the problem?

For this summer’s Demo Day, a pitching exhibition for its startups, Y Combinator created a new “Handshake” button for investors in the audience, Y Combinator President Sam Altman said during the opening remarks.

Since investors (and press) are barraged with more than 50 pitches in three hours each day, Y Combinator has created a dashboard where investors can “like” or “handshake” a startup they are interested in. (Investors have had the option of “Liking” to express interest and get in touch with a startup for a while.)

When an investor clicks on the handshake button, they can specify if they have already settled on the terms with the startup and it autogenerates an email saying what they’re in for. The startup gets the notification and can accept their virtual handshake.

Of course, most of these handshakes occur in person first, because startups have to negotiate the terms in the first place. The virtual handshake is a way to keep investors and startups responsible.

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