Y Combinator Startup Podcast - #103 - Michael Seibel

Episode Date: November 28, 2018

Michael Seibel is a partner and the CEO of YC. He cofounded Justin.tv, which was in the winter 2007 batch and Socialcam, which was in the winter 2012 batch.In this episode Michael comments on five of his essays. The essays are: Why Should I Start a Startup?, One Order of Operations for Starting a Startup, The Real Product Market Fit, Users You Don’t Want, and Why Does Your Company Deserve More Money?Michael’s on Twitter @mwseibel.The YC podcast is hosted by Craig Cannon.***Topics0:00 - Intro0:42 - Why Should I Start a Startup?2:00 - Three types of people: people highly motivated when working for themselves, people that could succeed starting a startup or within a big company, and people that could succeed within a big company.6:00 - How do you decide what type of person you are?7:30 - Identify bias in advice givers10:30 - Peer advice becomes less valuable during college14:40 - One Order of Operations for Starting a Startup15:40 - People aren’t taught how to find ideas17:20 - Find a particular problem that you’re passionate about20:55 - Find some friends and brainstorm a solution23:20 - Build an MVP25:55 - Two failed orders of operations for starting a startup29:57 - The Real Product Market Fit 30:57 - Why do many founders think they have product market fit when they don’t?35:42 - Building a successful company is not a single variable problem37:27 - Socialcam didn’t hit product market fit38:37 - Justin.tv had $1M in profit before reaching product market fit42:27 - Some companies take a long time42:55 - Users You Don’t Want44:25 - The spectrum of how users are using your product45:55 - Users that take a lot of customer support time48:50 - Don’t let the hijack users control the product roadmap49:31 - Why Does Your Company Deserve More Money?50:31 - A team, a product, and an office are all just a means to an end51:31 - If you don’t really deserve money, what is an alternate path to create leverage?53:16 - Breaking even at Justin.tv was a moment of infinite clarity55:31 - Series A program and leverage

Hey, how's it going? This is Craig Cannon, and you're listening to Y Combinators podcast. Today's episode is with Michael Seibel. Michael's a partner and the CEO of YC. He co-founded Justin TV, which was in the Winter 2007 batch, and Social Cam, which was in the Winter 2012 batch. In this episode, Michael and I go over five of his essays. They're linked up in the show notes, and they are, Why Should I Start a Startup, One Order of Operations for Starting a Startup, the real product market fit, users you don't want, and why does your company deserve more money? If you have comments, you can reach out to Michael on Twitter at M.W. Sybil. All right, here we go.

All right, Michael Seibel. So today we're going to do something different and talk about a few of the essays you've worked on in the past. I think these are maybe the past two years. Yes. So the first one is, why should I start a startup? You start this essay by saying, a lot of people ask themselves this question. They often mull over one or more of the following facts.

One, the vast majority of startups are not successful. Two, for talented technical people, it's relatively easy to get a job and make a large salary. And three, large companies offer opportunities to work on very difficult problems that only often occur at scale. My answer to why you should start a startup is simple. There's a certain type of person who only works at their peak capacity when there is no predictable path to to follow. The odds of success are low and they have to talk to and they have to take personal responsibility for failure the opposite of most jobs at a large company. Yes. Okay. Why did you write this essay? So I think that there are two reasons. One, I talk to a lot of smart technical

people who I think sometimes feel like they should start a startup but they're conflicted because they either don't know if they have a good idea, don't have an idea, don't have a team. And I think they're really trying to figure out, like, what should I do with my life? You know, like, what should my real career path be? And when I first started giving people advice, I think that I really assume that because you could start a startup, you should start a startup. You know, if you have the money to afford, if you have the time, if you have the ability, you should be doing it. I quickly realized working at YC, that's a bad idea. And I think what I quickly realized is that there's probably like three sets of people.

Okay. There's probably this set of people who the only thing they can really do is work in a radically entrepreneurial job. Yeah. Like literally, like they will not enjoy their life inside of a big company, inside a big bureaucracy. Like, and I think like back in the day, like those are the kinds of people who start small businesses. Uh-huh.

And so there's that type of people. and they're relatively few and far between. Like I wouldn't be surprised if that's only like 1% of the population. Yeah. The second group people are the people who are on the fence. They want to be really challenged by work, but they can easily apply themselves in either a entrepreneurial world or in a big company world. And I think those people are the ones where they have some choices to make.

Yeah. Yeah. I think a lot of people confuse themselves for this group. When in reality, this group is also probably pretty small. And then there's the last group. Pretty small. How small? Like, I bet I bet one percent.

Like, I bet there's only really, like, yeah, so far. Yeah. Like, I think it's a really small group who can actually be equally capable in either, in either role. As a founder or as a really effective person inside of a big company. Uh-huh. And I think you do see this. Like, I think you do see, like, founders who get acquired. who are actually if really functional inside of big companies and vice versa, right?

Exactly well and start companies and they do well. But few and far far between. I think the last group and by far the biggest group are the people who are going to operate best within a large company. And like the mindset of this type of person is type of person, at least from what I've seen, is like they want a system to optimize. Like they want an existing system, an existing path, an existing set of rules that they can operate and play by. And like what's interesting is that like almost everything up to this point in your life kind of has that. Right. Like kindergarten through 12 has this. Even college has this. And they kind of want to continue that. Someone else defines what's an A and what's an F and then I optimize, right? And I don't think that there's any like moral judgment to be passed.

Like I think that like if most people didn't feel that way, the world wouldn't work. So it's like a good thing. But there's a small group of people who feel like I want to make the rules. Yeah. I don't want to follow them. Yeah. And so I think that like when someone's thinking about whether they should start a startup, they should really be intellectually honest with themselves about which of these groups they're in. And anyone who's trying to kind of guilt trip them into one group or another, right? Like it goes both ways.

Like I in the past would guilt to be able to be a founder. A lot of people, parents will guilt treat them into being a big company or being a doctor or yada, yada, yada. I just think like this is one of these things where you have to actually have some personal, you have to go deep and really understand. Yeah. Did you ever read the book, The E-myth? No, I haven't. Have you heard of this book? No, no, no.

So I read it in college, so it's been a while. But basically the concept was a lot of people who are, you could say craftsmen. So in our context, like a developer, often think that they want to become entrepreneurs so they could do just their craft in just the way they want to, but they don't realize that as soon as they enter the entrepreneurial realm, most of their jobs no longer that. And so I think this is a common thing. And it's why these indie hackers are so, like, people love them so much. It's an interesting point.

Because like artists and craftsman doesn't equal founder, isn't it? And even more so what's so sad is that as a founder, almost by definition, the thing that you're good at is the thing that you stop doing. Oh, yeah. And like, you have to keep on doing things that you suck at. Yeah. And be totally okay with it. Yeah, no, it's rare that the founder who's really good at something can like delegate

so well that the thing they love is still the thing. they do. Yeah. Yeah. Yeah. Really, really, really hard. So, okay, you get to this at the end. What are the questions, you know, that we've had some time since you wrote this one.

Yep. So what are the questions that you ask yourself when you have to decide if you're in that, you know, 2% of people? I can answer this for myself better. The questions that I asked myself was, where am I at my best? Mm-hmm. And where do I feel like I'm organically? applying effort. Like, I'm 100% self-motivated. And like, I think anyone who is 22 to 25 has enough

life experience to know. And certainly anyone who's 30 or 30 plus definitely has enough life experience to know, you know, in what types of situations, am I just naturally, extremely motivated? The other kind of question I'd ask, which is an extension of this is like, if I think about the moments where I outperformed. So not only was I really extremely motivated, but actually like delivered the best results. I did the best. Where does that happen? And like when I think about those moments for myself, like they never really happened in the truly structured things.

Like in the K to 12 setting, I did final that stuff. Of course, right. I did all the classes and got all the grades. But it wasn't when I was like really like kicking in high gear. So I think if you're like super honest, like when do you really kick it into high gear? That's when like you can start asking this question of yourself like, okay, who should I be? And what career track should I take? I think that like one tricky bit here is you have to be really careful about taking advice from biased people.

So I eat everyone. Yeah, right? Like when I was giving founders this advice originally, I was so biased. I'm at YC. I want you to be a founder. Like, you should be a founder, right? I was giving you advice.

I was, you know, previously giving advice. I was very self-serving. I think that like, um, a lot of young people are looking for advice givers and are not doing good job of identifying bias. And so I see a lot of people who are generally believing the information that they get from either their peers or from companies that they work at. And like, they don't realize those people are biased. A perfect example.

My brother's at MIT right now. The most prestigious jobs are jobs of Facebook and Google. And that prestige has actually very little to do with any facts. Like it actually reminds me of like when I was in high school and like the crew that I was in, the like job everyone wanted to do was be a lawyer. And because we were all like government kids. They everyone would be a lawyer. But then if you ask people like, do you actually want to do the work of a lawyer? every day.

They'll be like, no, of course not, right? Yeah, no, no. And just make a bunch of money in a lawyer. Yeah. And, like, I want to, like, you know, change the laws and I want to, like, debate the constitution and write all these things. It's like, yeah, but do you actually want to do the lawyer? You're like describing model UN, right?

Yeah, exactly. That was a model you in the T, right? Yeah. And so I think, like, similarly, when I talk to my brother and I, like, go to MIT, I meet all these people who have this, created this imaginary world where when they get to go to Google, they're going to be on the machine learning team. and they're going to have high impact from day one. And like, needless to say, Google loves to pitch this story, right?

And like, people love to eat it. But the reality is when you're on the other side, that's often very rarely the case. Yeah. And so what I would encourage people to do, having been an offender myself, is to just really look for the bias in the person who's presenting you with options and advice. Like, understand where their biases are. and understand that like Google is operating a machine, and the machine is multiple purposes. One purpose is to get the smartest people to work on the hardest tasks.

But the other purpose is to get people who are smart and talented so that they're not working for Google's competitors. And then the last purpose is to get people who are smart and talented so they're not creating companies that will compete with Google. Yeah. And everyone understands the first one and they don't think about two and three. No, not at all. And also when I find college kids, and I'm totally offender of this as well, they seek

people for advice until the person gives them an advice that corroborates with what they want to hear. And so you just look around and you're like, sometimes it feels like you got, you got to do some living. Like you can only listen to advice or so long. Well, and I think the pure advice thing is actually really tricky. It's really hard to go from, like I'd argue that like, at a lot of. in school, especially like K to 12, a lot of peer advice is very helpful.

Like I learned how to apply to a good school from my peers. Like my parents hadn't done it in years, right? I learned which classes to take, which teachers were good. Like my peers were this like great intelligence source for so long. And then it turns out that like with career advice, they almost are horrible. And I think it's so hard to go from a situation where someone goes from a good source of information to a bad source information so fast. But like that's what happens in college. Like your peers are no longer.

Because like I think what the reality is is that like in many ways there's a simple track and a simple set of rails all the way up through college. And then college it goes from like one track to a thousand tracks. Yeah. And like your peers don't even know anything about any of the 1,000 tracks. So suddenly they're like not the experts anymore. Suddenly the kid who's like one year ahead of you really just doesn't actually know anything more than you do. No. But like your whole old system is still there.

Your old system of like relying on that is still there. And it's what's funny is the big companies know this. Like that's the cool thing. Oh yeah. They are actually relying on you having poor sources of information. Like I everything that a big company does to attract a college kid is 100,000. percent orchestrated. Yeah.

I mean, there's an information gap there. Yes. Yeah. And that's how the business works. Which, I mean, it's fine.

Again, you can go and have fun of these jobs. You can go and feel purposeful. What I'd argue, like, for most people, that is the job they should take. Yeah.

But like, man, if you're one of those different people, don't believe the height. I mean, this is kind of harsh and, yeah, I don't know if it's 100% accurate, but my impression is that the

world just kind of tends toward wanting you to be average. You ask someone for advice. They're like, these are the known outcomes based on all the inputs you just gave me. You should go work at this company. And I wouldn't say average. I would say like wants to put you in a box. Sure. It could be a very productive box, right?

It could be like ridiculously productive box, but like a well laid out, well understood box. Like they're going to plug you in somewhere and move on. Yeah. And that doesn't work for some people. Yeah. Yeah. Or more importantly, like, for some people, that's not how you get their best. For some people, it's almost a guarantee you won't get their best in that environment. And so, yeah, so what's so weird is, like, we're not talking about, like, do you see a good business opportunity?

Or do you see, do you have, like, this, like, burning problem? Like, those things are important. But, man, if you are not irrationally motivated to do startups and be entrepreneurial, like, it's going to be frustrating. and you're not going to understand the risk reward. Because from a pure money-making perspective, it's probably better to take the job at Google. It's definitely safer. Definitely safer.

But from a like, will I enjoy my life perspective? Like that's the one where like for some people, absolutely not. Right. But on the other hand, I just say, try it out, see how you feel. Like you can do plenty of projects in college. You can see how works. Yeah, yeah. Cool.

One order of operations for starting a startup. More often than not, when I talk to a talented technical person who's thinking about becoming a founder, they're number one blockers that they don't have an idea. At some point during their formative years, they learned that every great startup started with a great idea, and if the idea isn't amazing,

usually as judged by peers, parents, or other people with little startup experience, the startup will fail. All right, why'd you write this one? I think I wrote that. I think I did right now. I think I read that before. I wrote this because this is the number one excuse

I hear from people who, want to start a startup. And it's so interesting to me. I think that like there are all of these old entrepreneurial rules and business best practices that that I think that people just want to apply hand and glove to a new industry. And I think tech startups might be a little different. And so interestingly enough, like I don't. even think people are really taught how to find ideas. So like I feel as though people are sitting

there saying, I don't have an idea. And they don't even really understand a process, but I wish to get one. They think they think that it's supposed to like happen organically. Like it's like almost like out of the cartoons or like a light bulb goes off the top of your head. And like that's not really how it works. And so what I wanted to do with this essay was give people a framework that they could try to use to come up with an idea. So instead of this being a passive process, it can be active process. I think one of the the things that like might be hard for people to see is like now being in this world for so long I have a lot of friends who wanted to do a startup and didn't know what they wanted to do and then came up with an idea and we're very successful. And so like I've seen this happen with a lot of people.

And so that's kind of where I've come up with this thought. So you break it out into one, two, three, four, several steps. So this is, I'm going to outline it and then we can explain. So the order of operations. Here's where I'd start. Is there any particular problem that you're passionate about? The next step. Once you decide on a problem, find some friends and brainstorm potential solutions to the problem. The next step. At this point, the most important thing is to make that spark turned into a fire is to work together and build and launch an MVP. Yes. And that's basically it. Yeah. Yeah. It's not that complex. It's hard, but it's not that complex. No, it's not. So let's start at the beginning.

A particular passion. I'm probably passionate about. So I think oftentimes I'll give you the conversation that I had with a founder. I was at a conference over the weekend called AfroTech and there are a bunch of young people who wanted to start companies there. And this woman walked up to me and she said, I have an idea. I'm doing a startup that helps other startups. And I call this like a meta startup. And this is startups that I kind of don't like because it's like in some ways,

I think it's like a cop out. It's like, hey, I want to help give other startups advice and guidance, but I haven't really done a startup myself. Right. I don't know. It's just it's it's not great. And so I dug in. I was like, okay, so what's a problem that you have?

And it was interesting. So the woman was the mother. And she said, one of the problems I have is that I, there are a lot of places, when I go somewhere new, there are a lot of places where I don't know if I can use my stroller with my baby because it's like hard to get around or if I'm walking on the street, does it have, you know, the proper sidewalks and so and so forth. So I'd love like some type of product that would like tell me what path I should take that's like stroller friendly. And I said to, okay, that's, we're getting somewhere, right? Now we're not in like this meta idea. Now we're actually solving a problem directly.

Great. But I asked her, hey, can you judge this by two things first? One, how frequent is this problem? And she said, well, actually, when I'm in an area that I know, then I know where to walk. I know how to do it? It's not a frequent. And how intense is this problem? It's like, well, you know, if I had to go over a curb or something, you know, it's like it's pain, but it's not like, you know, intense.

So then I was like, okay. Okay. What if you could start a problem that was addressing one of the top three problems in your life? What would it be? You know what she said? She said affordable child care. I was like, you know what? A lot of people have that problem. That's a big problem. And like I felt my like douchebag investor like light go off. It's like, yes, you should do that. Like that is a problem. Like even if you have solved that problem, you're going to be wildly successful. Like there are gajillions people who have that problem. It's ridiculously intense. It's really. And it was like interesting because in such a weird way, I feel like she had somehow condensed all of the startup advice that she'd been given and everything she read to go to this like wrong place when I just asked her, what's the problem in your life? And she almost immediately got to like a place that could create real value. Now like how should she solve that problem? Okay. Yes.

That's another question. But damn, like it's a personal problem she has. and she sure as hell knows that if she makes a product, is it helping her? Yeah. And at least if it's helping her, she knows it's like halfway decent. So like that I got to a really exciting place by just digging into like, what sucks for you? I think everyone can do that exercise. And I think that like that exercise can be informed by your work life or your personal life.

So many startups I see or created because they were doing something at work and they were like, this sucks. Why do I have to keep on doing this? I'm going to make this thing and then sell it to my job so that no one. has to do this ever again. Right. So it can apply either way. Right.

And this is a very easy way to get people to pay you. Whereas doing things like strapping a web camp to your head, not as obvious, not as obvious of a problem. Pretty, pretty non-obvious. So you go there. So once you find a problem, find some friends and brainstorm potential solutions to the problem. So here's the trick. You don't need to skip to a solution too early. And your thought process should be whatever solution I come up with is probably going to be wrong.

So what my solution really is is a first hypothesis. And basically it's like imagine I'm trying to, I don't know, like redo some famous science experiment. Like I'm trying to figure out the speed of gravity or something, right? I first have to start with a hypothesis, then test and then repeat, repeat, repeat, and play to my answer. Okay. So I don't need to know the answer up front. that's not the goal. If you have a big enough problem, like trust that like if you come up with anything resembling an answer in a reasonable period of time, years, you have a big business.

So instead of thinking, okay, let me come with my idea how to solve it, I think the more important thing is to start talking other people about it. Because I think that the number one thing you have to do to create a company or one of the top three is to have some co-founders. and it's really helpful to figure out who are the types of people who you can talk to about something and you riff well. You iterate each other's ideas. There's some type of people you brainstorm with and like they say, like I say Craig, wouldn't it be cool if the sky is red? And Craig says no.

And that's the end of the brainstorm. And it's like, well, we might not have a best founder relationship. Right. As opposed to like, well, wouldn't it be cool if the sky was red? And Craig says, you know, we can't make the sky right. But what happens if we, like, tint all the windows in the house red? So you can make it look like the sky's red. Right.

It's like, oh, right? Right. You know, like, we're moving, right? So you want to start having those conversations to people that you like. People, if you're not technical, people who are technical, people who you just respect their intelligence. And ideally together, you start coming up with an idea. And what's cool about that is that if you cope that idea together, everyone you've been talking to, feel some ownership of the idea.

Yeah. And that helps kind of light that flame. Yeah. Yeah. It's dangerous to be married to a solution. Yeah. Yes. That was a real problem.

All right. So at this point, the most important thing is to turn that spark into a fire and work together to build an MVP. Boom. So biggest mistake that people make at this point is to think that the things they need to do is like now I feel like some like weird phantom MBA starts whispering in their ear And it's like, you need to incorporate. You need to raise money.

You need to do it, da, da, da, da. And it's like, kick that person out. That person, like, that's not, it's not what you to do. Can you just build a simple V1 of the product? Can you both the simplest v1? Even if it's just an Excel spreadsheet, something powered by the Excel spreadsheet. Give it a try. Like, the way to get that team even more excited is to try something.

Yeah. And, like, oftentimes I see people kind of get lost in that legal or that fundraising world and never even got to give their thing a try. You don't need, you don't need like bank accounts to give something a try. You don't need an incorporation to give something a try for the most part. There's some ideas you do, but like for the most part, you don't. And a way that you can really get that team solidified is just to get some kind of MVP and get like one customer, two customers. This is one, the final test on like, hey, can we work together well? Right. And two, man, it amps up the excitement a lot. And so that when you have to go through some of the bullshit of

incorporation and stuff or fundraising, right, the excitement level is high. Yeah. Also, third, it gives you leverage. Like, if you actually have something with a couple of customers, then, like, investors are far more interested to like to talk to you and if you just have an idea. Especially people who are on the fence about working with you. Yes. Yeah. I mean, these are all of these things that you're saying, these are all excuses you create because it's easier than working on the actual problem. Well, yes, for some people. But I, I mean, all, all, yes, for some people, but I also think it's, for some people, it's what they think is the right path. It's like, it's like, I actually think that some people, some people are being, I don't want to say lazy,

but some people are being, I don't know, um, not some people are, are kind of being disingenuous in this process. But I think other people actually think, oh, no, the right thing to do is actually to come up with an idea, fundraise, outsourced an MVP, and then hire a team. Like, I think that like some people think that's the right thing you do. And it's like, yeah, the harder. That's a harder path. Okay. You don't have to do that. Well, my failure mode is different then. All right. So then you wrap this essay up with a couple things. The two failed orders of operations. Well, these are two of many, I suppose. Yes. So one, come up with an idea and then pitch to investors. Two, I have an idea, but can't write code. And none of my co-founders can either. Yeah. So, um,

We're in a time where there are a lot of startups. And there's unfortunately people that you're pitching, if they're good, they're getting pitched by a lot of people. So you need to bring some real fire to that meeting. And a good deck is no longer good enough. I would argue that back in the day, like in the 90s, it was so expensive to get software made and hosted and online and get users that, like, A good deck, or actually back then it was like a 100 page business plan, like that's all you could get.

That's all you could do without money. We're not there now. And so you're not bringing the fire if you just bring in an idea. Now, some people can raise on just an idea, right? And if you're one of those lucky people, it's great. But like, I don't know, like, I'd rather be good than lucky. In terms of, you know, no technical co-founders, like this is a constant issue. And I'm surprised by this.

Like I talked to a friend the other day who is thinking about starting something and doesn't have a technical co-founder yet. And even she was a little concerned about getting one, even though she has kind of been in the tech startup world. And, you know, I had to encourage her. I had to tell her, no, you can. Like, you can do this. Like it's not, it's not, it's not going to be that hard is that like it's probably going to be easier than outsourcing it. The one failure mode that I see a lot is that I see people who can raise a little bit of money, go down the outsourcing route and believe that they are progressing. They believe that the thing is moving forward.

And what they don't realize is that for the most part, they're going to need to iterate anything that's created by those outsourcers over and over and over and over again. and it gets pretty expensive, pretty fast. And so the fair amount that I see so constantly is outsourcing, iterating with that outsourcer, you run out of money. You haven't figured things out yet. And so you have to go to an investor and say, well, I don't have anything. I need more money.

And like that's death. And like what's so sad about that death is that like you've been kind of walking that path the whole time, but often you don't realize it to the very end. and after you spent money. And like sometimes it's people's own money. Like they do their savings. They hand their savings to these people. And like I don't think the outsourcing folks are bad or morally wrong.

I just think that like people should take the hustle that they have and apply it to the number one problem, which is like it just turns out that getting a technical co-founder tends to be cheaper than paying an outsourcing. Yeah. Yeah. I mean, I guess, you know, to push back, if you. if you had someone outsourced something and then that got you a couple customers, then you found a co-founder. That's a great outcome. Well, it's interesting because I think that a lot of people go into the outsourcing route with that intention. But the thing that they don't realize is that like they didn't feel comfortable going and find a technical co-founder now.

They don't have any traction and they don't have a product, right? Most likely the outcome is the outsourcing will give them a shitty product. It's shitty V1. Totally. They won't have any users then. And now they'll go after tech and co-founder with a shitty product and no users and less money. And they want to give the co-founder 10%.

Yeah. They're not actually in a better position. Yeah. So it's like, yes. I think that they're like one. And I mentioned the essay. There are counter examples. Like there are people who do go from a contractor to big company.

But it's just I would argue it's a harder path. And it's a. path that's much more likely to lose you a lot of money. Your own money. Your own money. The real product market fit. Yes. This was a good one.

Not that the other ones aren't great. You're great. I'm trying my best. All right. I often talk to founders who believe they've found product market fit when they haven't. This is a huge problem because they start hiring people, increasing burn, and optimizing their product before they've actually discovered what needs to be built. I'm ready to. this post to help you understand when you've really found product market fit. To start,

read Mark Andresens on product market fit for startups. It has been the single most influential posts for me as an entrepreneur and it was the first time I ever read the term. Here's how he defines the term. The customers are buying the product as fast as you can make it or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You're hiring sales and customer support staff as fast as you can. So why do most people think they're there when they're not? One, it's intellectually convenient to. I think that a lot of founders are really excited at the prospect of company building.

And they think that company building is what creates success. And by company building, I mean like hiring employees and having great culture and, you know, getting an office and having management and so and so forth. And they are not real with themselves that like the real challenges to solve the problem. Yeah. And the company building happens for the most part after you figure out how to solve the problem, not before. I hear this term product market fit so often. And I have to tell you like 98% of the time it's using correctly. And like what's so frustrating is that like people almost act like it's an undefined or like flexibly defined term.

And it's like totally not. It's like saying that like, oh yeah, like green, blue, yellow, we could call off those orange. Like, it's okay. Like, we'll just call them orange. It's different for every company. Yeah. Yeah, exactly. It's like it's your interpretation of it.

It's like, no, it's not. It's like, it's not the case. Like there's a defined term. Just like make up another term if you want to mean something else. Yeah. So I think the most common way it's mistaken is like it's weird because it sounds so close, but it's not. It's, I built the thing that customers want.

Right. And like what's hilarious is like, product market fit is what happens after you build the things the customers want. It turns out the only way you know you've built something the customers want is because they're using it in an explosive and destructive way. And like people want to separate these two concepts. It's like so amazing. It's like so like you can see intellectually why.

It's just so much easier to be able to look at your thing and say, this is what customers want. Right. And not have to really have any customers. Oh yeah. Totally. It's easier to say that. And so, man, people really just. want to separate those two things out. And it's like, if you are not getting explosive usage,

you do not have what customers want. Or there aren't that many customers, in which case, you don't have a big business. No. And so I think the awful reality is like the vast majority of founders, the vast majority of YC founders even, never find product market fit ever. I argue that, like, more acquisitions than you might know are of, companies that did not find product market fit. Once you find product market fit, I almost say it's like it's your company to fuck up. Like it's almost like this is going to work unless you screw it up. Whereas like pre product market fit, there's all this stuff you need to do to even see if

there can be something there. And you really don't know. Post product market fit, it's like if you execute, you get there. Pre-product market fit, you can actually great and never have anything. And moreover, you can still have customers. You can still have growth if you're pre-product. Yes, yes, yes. It's not like when I go from zero customers to one customer, I've not hit product

market. Like I think that Mark does a good job of defining it because it's experiential. Right. I think if you tried to define it any other way, people would find loopholes. I mean, they clearly have already found loopholes. But it's like, is the growth killing you? Like, if I would extract what the meaning of this sentence, like, is the growth almost killing you.

Yeah. And is it profitable? Like people always want to forget the second one, right? Like money is piling up in the check account. That's by definition profit. Yeah. Like literally, there are so many companies who are like, the growth is killing us. Right.

And I'm like, oh, oh, let's show me, explain. And they're scaling negative margins. Exactly. They're saying, hey, Craig, how about you pay 75 cents and I give you a dollar worth of value? That's amazing. Yeah. Craig make that trade 17 times an hour.

Yeah. No, I love that the PV quote where it's like they figure it out before you. Well, because you're just burning VC money or your own money. Yes. The customer is a nose for those types of deal. Because if you have the problem, like you really understand the value of the solution. So what's funny to me is that, you know, oftentimes founders will want to try. try to reduce this. Like,

the, I get this question so often. It's like, should I optimize for growth? Should I optimize for retention? Or should I optimize for profitability? And my answer is always the same. Yes.

Like, what makes you think that building a successful company is a single variable problem? Like, how could that be the case? It's clearly not the case. Especially,

Especially in the venture paradigm. Yes. Yes. For a tech startup, yes. It's clearly not the case. Like there's clearly multiple variables here. And, you know, one of the things we try to talk to people, we often, if you're charging your customer, we try to talk to you about revenue.

Yeah. And the reason why is that like in many cases, like revenue that you keep is as close as we can get to a single metric. But like, even that is not perfect. Like you really want to know, like, what? What percentage of your revenue are you losing every month? You really want to know, like, how much does it cost you to get that revenue? Like, you really want to know, like, how satisfied are your customers?

Like, like, you need to know those other stats to really know. And so, yeah, product market fit. Like, I wish more comfortable. It's like, like, I talk about pre-product market fit as just being in the suck. It's just like, you're just in the river of crap and you're not enjoying your life. Yeah. Like, and unfortunately, I think that you, you, you, every startup, I almost imagine, this isn't the case, but I almost imagine that there's like a predetermined amount of time you have to live there until you figure out how to get out.

And like a lot of founders just want to cheat. And like a lot of founders just like I want to get out by cheating. Like I just want to pretend like I'm not in here and like build a nice house or I just want to like do something that's really unprofitable. And so I can't pretend to be out of product market fit. It does not work. You have to be comfortable. You have to be so passionate about the people you're working with and or the problem that you're solving that you are comfortable failing at it for a while. Did you guys hit it at social cam?

Absolutely not. So here's a perfect example. Social cam over the course of four months, got 16 million downloads, got one eighth of every single person on Facebook to watch at least one video on our platform over the course of three to four months. wouldn't that be like almost the definition of product market? We certainly were dying in the traffic. We shut off like half the world to not couldn't use the product because we were like, we can't do it. Absolutely not.

For our product, one, we had no monetization. We probably could have figured out monetization. At that point, no monetization. Two more importantly, we had horrible retention. Absolutely horrible retention. Like if you came and. Download the app, the chances that you were using that app 10 days later was basically zero. If you watched a video, the chances that you'd watch it, five more videos that week, very low.

And like, it was interesting because it was like we had an exit. Yeah. We had tons of growth. We for a while were top five in the app store, yet not product market fit. Yeah. I'd even argue, I mean, if you look back at Justin TV, right? Justin TV by let's say 2010.

So we started in 2006. By 2010, I'm sure I have those dates right. I think that's correct. Yeah. We made $8 million in revenue, one million in profit with approximately 30 million

monthly viewers on the product. And we were not at product market fit. Right. Yeah. And so it's like, yeah, this, it is like, it is hard. And the reason why for the Justin TV case was that we didn't have a repeatable engine to create growth. Like that 300 million month the Uniques, we couldn't make that number go up. And then the second thing was that, unfortunately, we had tons of copyright and content on the site.

Yeah. And so it wasn't, we weren't able to reliably monetize that over time. Right. And so it's like, it's funny because I can't imagine how many pitches that I gave trying to present that as a good business when like in my heart I knew it wasn't a good business. You know what I mean? And like it wasn't until we actually found Twitch and found gamers. Did we actually find something that had this like repeatable machine that both spit out more users and more money and retention? And, like, what was so interesting is that, like, we'd solve all the technology problems at Justin TV.

Well, clearly the market does not care what you have behind the hood. No. No, no, no. Like, we had all the live video streaming and we all chat. We had everything. Like, that was, I mean, let's be clear. Necessary, but not sufficient. Like, we never could have done it without that stuff, but it was not sufficient at all.

And, like, man, what did that take? That took, it took six years. for us to have a hint that that's what the customer base was. Right, because in like the suck period with Twitch as game streaming, how long did that go for before? Not very long. Not very long. You know why? It was interesting. It didn't go for very long because everything else was already the table was set. You're kind of in place for the market. We had people. We had all the technology we needed. We had money because we were running profitably. So like it was all like, like all of the, the table was set and then bam, the food arrived.

Like everyone was seated, every the table was set, ban the food arrived, and the meal happened. But like, we were waiting at the table for like six years. Yeah, dude. Yeah, that's so good. We built the table. We had the door open. We sent invites out.

No one cared. Because even, but like if you started Twitch in 2006, probably wouldn't work. You know, no. I don't think it would have worked in 2006. I think looking back, um, uh, silly little things matter. one of them was webcams. Yeah. Like webcams went from being something you had to buy extra to something that were built into every laptop.

And it was like little things like that can change things. I think that though, had we been talking to our users more, we could have gotten there sooner. Like I think we could have gotten there by like 2008, 2009. But, you know, we didn't die. That was, you know, didn't die, I have another shot. That's a big takeaway. Yeah. Yeah.

Which is kind of a separate thing, probably separate essay. But like learning when you should have quit, maybe. Like some people do hold on to things. Some people hold on to things. It's funny. Like I see it too ways. Some people hold on to things. On the flip side, though, man, there are still some companies who, like some companies take a long time.

Yeah. You know, like, there are some peers of ours who, like, now are. really doing well, but just took even longer than we did. And so, man, there is a lot. Like, if you're willing to put in the time and grind it out, like, every year you don't not die, like, your chances of being successful go up. Yeah. And then some companies sell too early and they could have been so cool. And then they die within big companies. Yeah. That happens to. People are trying to get paid. That happens to. Users you don't want. This one was contentious. Yeah. This was fun. Yeah.

Let's bring it back. All right. When you're just getting started, many startups will take every user they can get. They have a strong idea of a problem, and they want to attract as many users with that problem as possible. Unfortunately, when you open up the barn doors, you get all sorts of people with all sorts of problems. Some of them will try to hijack your product to solve a problem you didn't intend to solve. By and large, these hijackers are users you do not want. When has this happened to you?

I mean, Justin TV was by definition hijacked. Yeah. Like we built a product to allow people to live stream their lives. And within a year, it was being used to stream copper and content around the world. Like absolutely the definition of a hijacked product. And what's interesting is that I'm a little afraid of my phrasing here. I wish I didn't say that these hijack users, are not users you want.

Because it turns out that like, sometimes they are. Yeah. It turns out that like, you know, the reason why we even had an inkling to do Twitch was because some percentage of the hijacked users were video gamers. And like, it turns out that that could have been

a much bigger community if we, if we helped it and then eventually became one. So this kind of like users using your product for a whole variety of things, I like to think about it more like on a spectrum. Like there's the user. who's using your product as intended. Great.

It makes you feel good. Maybe there's a business there. Maybe there is. Right? There's the user who's using your product in interesting ways with potential. Yeah. Right? Study those users.

Those users are very important. Video gamers are Justin TV. There are users who are using your product with ways that it's extremely clear to you that there isn't long-term value, even if there is short-term value, right? I'd argue that those were the corporate and streamers on Justin TV. There were short-term value because we could monetize with ads and so on sort, but long-term, we weren't really creating value.

And then they're, like, hijack users. I'd argue, like, those are users who are using your product and they're creating no value and they're probably actively, like, decreasing your value.

They're harming your network, right? And, like, for us, you know, that would be people like, you know, some people streamed like pretty horrible things on Justin TV, right? And, like,

that was, that was not. good. And so what's interesting is that now when I talk to startups at YC, they don't know how to recognize these hijack users and just kick them out. And like they kind of like no one, no one talks about these people. They always talk about like everyone before them, right? Which like those are users that have some value. And they're talking about the high eject users. And it's like, if you can identify the hijack users, you need to kick them out. Like they're actually going to hurt you more than they're going to help you. And so I think this is important. And I think that like, it's not that the

high-act users have like bad intentions even. They can. Some do. But some, it's just they want to use your product to do what they want to do. And that is literally going to hurt your business. There are some things that like if people do on your platform, it hurts your business. How would you, how would you classify someone who just takes up all the customer support time? it depends on how much revenue they're generating. Yeah. Right. Like,

I'd argue that if they are generating enough revenue to justify that support time, great. Yeah. If you have a free product. Not so much. That's so much, probably, right? Especially if you're not learning.

If they're taking up a bunch of your support time, but you're learning and, like, you're actually improving your product because of it. Great. But, like, for example, like,

let's say, I'll create like a hypothetical example of my head, right? Imagine that in the beginning of Airbnb, someone wanted to use Airbnb to host like drug parties, right? Like illegal drug parties, like crack parties. And they thought of these Airbnbs as like mobile crack dens, right? Well, let's think about this for a second. Like so on one hand, right, well, they are paying.

Yeah. They're paying for the big apartments. They're paying for the nice places. Yeah. Right. Yeah. They got money. Right.

Interesting. On the other hand, they're probably destroying those apartments. Doing something highly legal. Yeah. Getting the police called on them. Like, done, da,

da, right? And it's like, these are hijack users. Like, these are not the types of people you want. And, like,

you can be a hijack user and there's still some positive. Yeah. But it says, like, if there's, like, if there's, like, way too much negative,

it's not worth the positive, you know? And that's actually, where I see a lot. I actually see it a lot where it's like the hijack user's paying. So you feel bad because when the hijacked users is not paying, usually you feel less bad kicking them out. Yeah, yeah. When they're paying, you're like, well, but they're paying.

Right. And it's like, no, no. You still kick them out. Yeah, especially in the context of like you have these metrics you want to hit and you're like, even during LACC. Yeah, right. Oh my God. Like this is real, this is stuff. It's like, shut it down.

Yeah. Yeah. And you end it in a nice clean way. by saying, by focusing on solving one problem really well, you're betting on making a small amount of people very happy. If you let any user that walks in the door, the product roadmap, you're going to end up doing shitty job at half solving a lot of problems. Yeah.

I mean, to be clear with this ending, my whole goal is that, like I said, there's like this spectrum of potentially useful users. Yeah. My whole goal is like, don't let the hijack users steer your product roadmap. Totally. Like the, it's really totally. okay if you want to explore some of those use cases that are not the use case that you thought

that are still use cases that like could be good for you then it's totally okay to explore to experiment so and so forth but it's like don't let your app like don't let the crack den guys on Airbnb control the product roadmap for Airbnb right and suggest the features that they want like right right right not where you want to go I mean this is sort of the mentality it's like at the end of the day you have to have some opinion about your product yeah you can't just be like I don't know like the market's going to take it wherever the customer's take it wherever. Yes. It's really hard to build product without some opinion. Yeah. Why does your company deserve more money? Yes. Dun-done. The hardest conversation I have to have with the founder is when they've spent

their one to two million dollar angel round, but haven't found product market fit. Unfortunately, I have to ask them a very unforgiving question. Why does your company deserve more money? Yeah. This is so hard. This is really hard for YC companies. Yeah. Like in one way we try to make YC companies feel very special. And certainly, investing community often makes YC companies feel really special. But, man, isn't it weird that someone who's given $2 million to do something and doesn't succeed thinks, you know what, I need another $2 million? Like, you know, it's like, part of me just wants to like bring people back to the real world. You know, it's like, you know, maybe you do, right? Maybe the next $2 million is going to get, make it work, right? Maybe. I'm not willing to say it won't, but I think

we should just like, it's certainly a lot easier to raise that money if you've done something for the first $2 million, you know? And I think sometimes founders, once again, sometimes founders kind of cargo cults, like they think, oh, well, we have this team. We built a team, right? We have this product, right? You got a cool office. Yeah, we have a cool office. Like, look at what we've done, right? And it's like, nobody's grading you on those things. Like, those are means to an end, not an end. Like, you can't be like, oh, I'm an NFL coach. And look, we have a team. We have this amazing stadium, right?

You should renew me, right? And it's like, well, the record of the team is like zero wins. Like, like, you can't get another contract if you have no wins, you know? Moreover, if you, I mean, you might have all the MVPs, but if they can't play together, you know. Then no wins, right? And so I think that, like, people like to confuse means for ends because like, yeah, means are a lot easier to get. I can go out and get an office. I can go on higher, right?

Solving people's problems, that's hard. Yeah. So a lot of the time I have to have these conversations with founders where I'm just like, look like, what is an alternative path? Like if you don't really deserve money right now, what is an alternative path? And like the sad but true fact is cutting burn and trying to get to break even is more often than not the right thing to do if you haven't hit product market fit for that first one to two million dollars. more often that's what's going to create that leverage. You get to break even and that gives you time to figure things out. You're like, like we said before, like not every product market,

it doesn't mean you're not growing. It doesn't mean you're not generating revenue, right? It just means that you're not taken off. Yeah. And oftentimes that just means you need more time. But like asking investors for that time is oftentimes way less fruitful than just cutting burn and giving yourself that time. with the revenue that you're generating.

Exactly. And like, man, I learned this the hard way of Justin TV. Like, I, sometimes I just think at Justin TV, I just had myself completely fooled. Like, literally, I just, like, I was out there pitching a site that, like, half of the usage was spreading copper and content. It was a public site. Like, like, any investor could just, before the meeting, go to our website and, like, in three clicks, see content me of the rights to. And then I would go in and try to pitch them on how that was going to be a billion-dollar business, right? Like, I don't even know how I did it looking back, right?

You seem to have made every mistake. Many, many mistakes. Many of the mistakes. I like to write about things that I have personal mistake experience. But, like, I will tell you that when we broke even at Justin TV, that was the moment of, like, infinite clarity. And what was weird is that, like, looking back, one of the things I see in other founders and I recognize it myself is that when you're operating on the investor's dime, oftentimes you're trying to optimize what the investor wants to hear.

And oftentimes you're trying to structure your pitch and your strategy to what's going to get us more money. Because it turns out the investor is really your customer because they're the only one giving you the money you need to survive. And your users become secondary. When you hit break even, there's this magical moment where you realize, wait a second, like I can just generate money from my user. users. I don't need these investors anymore. And like, strangely, like, weirdly, the only

group of users who, the only group of people who are harder to understand than users are investors. Like, for many people, some people can just spin investors, you know, some people have a way with investors. But many people, investors are this like really confusing group. And it's like, well, I'd rather fight the user fight than the investor fight. And like, that was the case. for us. And it was so interesting, man, we never had a better strategy. We never had a better plan. We never had better execution than two moments. One, when we were running out of money. And two, when we were hit break-even. It was just, wow. The clarity was amazing. And just like, man, and the fear went away. Yeah. It's like, this isn't going to die tomorrow. You know, like, well, you have confidence. And then all

all of a sudden, when you look at the other side of the table, now you have a product that the investor wants. Isn't that funny? Isn't that funny? When you don't need investment, guess who comes around? Oh, you need some more running? Yeah, no problem. I'll cover you guys.

Classic. Classic. Yeah. And I think, like, basically the way you wrap up is like, this is about leverage. So what you say is don't limp into a series A fundraise. You need to be able to show that you have taken the early investment money and used it sensibly to create a product that people love. You need to have sustained growth to raise a series A.

Understand that and you'll be better off than most startups. It's kind of simple, right? Yeah, I know, I know. It's interesting. We have a series A program at YC and we help YC companies since to be like 12 to 24 months after YC, prep for and raise series A. And at the kickoff meeting,

it's very similar to the kickoff meeting at YC. Everyone goes around in a circle says what they do. But the difference is that everyone says their revenue too. And it was so much fun to be at the kickoff meeting for the series A because you know, you'd hear some ideas like, oh, I'm doing yada, yada, yada. And like, you know, YC, we hear ideas all the time, you know? And it's like, yeah, okay, it's another idea. Seems cool.

Yeah. And then the founder's like, yeah, we're doing $5 million revenue. And you're like, oh, that's different. And then the next person's like, yeah, we're doing $3.5 million of revenue. And the next person's like, oh, we're doing $4 million. And it's like so funny how an idea sounds better when like there's a revenue number after. And and and so what's so funny is that like I think what WIC is good at is that like if you can create the business leverage, right? If you can make your business work, we can help you present that in the leverage maximizing way.

And we can help you do a process that maximizes the leverage that you've created. But you have to create the core leverage. Like, you got to do the work, right? Like, you got to do the work. Like, you got to figure out the product that gets that usage. And then we can help you package it and sell it most effectively. And so it's fun to see when that works. You can't predict it.

Yeah. Like, if you asked me years before who was going to be that series A program, I would not have known. But, man, those founders are far more formidable. Like, when they have something, they're like, they're killers. Quiet strength. when you got shit. Yeah, you don't need a flun it. No, you don't, you don't need a, it's funny because like sometimes I see people with like

snazzy pitches and like snazzy, like things that like remind me of stuff you would hear on like a TV infirmational. And it's like you don't need that much work when you have a good company. Like usually like you can just like graphs. Like you just show graphs. It's a few numbers. Yeah. And it's like, oh wow, that's really working.

Yeah. It is. Awesome. All right. Thanks, man. All right. Thanks for listening. So as always, you can find the transcript and the video at blog.combinator.com. And if you have a second, it would be awesome to give us a rating and review wherever you find your podcast. See you next time.