Y Combinator Startup Podcast - #28 - Prerequisites for Starting a Company - Phil Libin

Episode Date: August 23, 2017

Phil Libin is the cofounder and CEO of All Turtles. Prior to that he was the CEO of Evernote. This is his 2013 Startup School talk.Watch the video here.Read the transcript here.

Hey, this is Craig Cannon, and you're listening to Y Combinators podcast. Today's episode is with Phil Libbon, and it's from our 2013 startup school. At the time, Phil was the CEO of Evernote, so he shared some advice about running Evernote, but more importantly, advice from starting startups in the past. So if you want to check out this video or all the other videos from past startup schools, they're all on our YouTube channel, and we'll be posting the transcript at blog.Ycombinator.com. All right, here we go. I'm super precise to talk to you.

You know, Paul asked me to come in and talk a little bit about what we went through at Evernote, especially in the early years and the mistakes we made and the lessons we learned, and I'm happy to do that. You know, Evernote didn't come out of nothing. It was our third startup, and we learned a lot kind of all the way through the process. The first real startup that I was involved with, I started with a few college roommates of mine, my best friends in Boston. We called it Engine 5.

And that was, I think, kind of the first and probably the most important lesson to me right there was that I had great co-founders. The most important thing, and this is very much the same team of people that was with me at the first startup, and then the second startup, and then many of them are even at Evernote. And so I think the most important thing to do it as young and age as possible is to just cultivate this group of really, really brilliant, high energy, you know, willing to work for free, best friends for life. And it's super important to do that. And you kind of have to pay attention. Like, I got lucky.

I got lucky that the people that I happened to meet in college in the computer science department of Boston University are people that have to. stuck with me for at least so far the rest of our lives, and I fully expect much longer. In fact, I would go so far as to say that you shouldn't even make friends with people that you don't see starting your company with. Like, it kind of sounds dickish, I guess, but, like, you, to be honest with you, like, why bother? Like, you only have, you only have so many best friends that you're going to have, and if you can't imagine counting on them in a pinch as a co-founder, use those resources wisely. And so I just lucked into it.

I happened to get these great people. And I've been able to get really great people in every other company. So basically we started our first company, Engine 5. The core group of those people went out to found the second company, Core Street. The core group of those people went on to found Evernote. Evernote, I really hope, is my life's work. I don't intend to really work in anything else. But if I ever do, I already know that the 50 or so people that ever know that are going to hopefully be with me for whatever the next thing is.

And so developing this crew is super huge. And I can kind of tell for most of you, you look like you're right at about that age and an area of life where you're making these connections, you're making these friendships, and it's going to go by really fast. So to make the most of it. So Engine 5 was a – we were consultants. We started this company. There was originally going to be five of us, but then two people chickened out, but we already had the domain name. And it was just all three of us were computer programmers, we're old developers, and we literally didn't know that there was such a thing as investors. This was a new concept to us. We didn't know that there were people who would give you money so that you can build something.

We just assumed that the way you build a business is, you know, you just start working and you get paid and you make more money that you spend and so on. And luckily, this was right at the lead up to the original dot-com bubble. in the very late 90s, and so if you could program, people would just throw money at you. And we didn't have much motivation in starting this company other than we just wanted to work together. We wanted to see what it would be like to have a company to be our own boss to call the rules.

And so we did a lot of programming, consulting, mostly around e-commerce stuff. And what we learned, and this is probably the second most important lesson, is being your own boss and having your own company and making the rules kind of sucked. if what you're doing ultimately is, you know, as being a consultant, it's just like you're just getting paid by somebody else to, you know, write some code. Because you're not actually building any value, any long-term value.

You can be getting paid. You can be making a decent amount of money while you're working. But all of this idea that you're actually calling the shots and your control is a complete illusion if what you're really doing is working for, you know, building something for some other company. So it's amazingly hard work. and the rewards are very immediate, but they're not lasting. You don't build anything up.

And so after working, you know, harder than we've ever worked for about two and a half years, you know, 16-hour days on average, I remember, you know, I would come into the office at like 2 a.m. And there would be people, you know, leaning out of the windows smoking because we didn't have time to even go outside. And back then people used to smoke, you know, ask your parents. And we finally did sell that, we sold that company to a big company called Vignette in Austin, Texas, about two and a half years later, and we were super happy to sell it, because we didn't love this work. We were just working for somebody else. We were just building stores and e-commerce things, and so we sold it. And it was pretty cool. We didn't know how to sell a company, so we came down to Austin, and it was totally, the acquirers did everything that you would expect. Like, they totally, like, slid the paper across the table with, like, I'm going to write down a figure and slid it across the table. And I'm totally serious. It was exactly like that. any of you have seen the Always Sunday in Philadelphia episode. It was just that.

So we sold that company, and a couple years later, we left Vignette, and we decided, okay, what do we learn? You know, time to do something new, time to start a company, because obviously we weren't going to go and get real jobs at this point. But what lesson did we learn? And we said, well, our lesson is we don't want to be consultants. We don't just want to develop stuff for somebody else. We want to build a product.

And so we started our second company, which is an MIT spin-off. off at the time called Core Street, where we got together with this brilliant MIT cryptographer to build a cryptography and security stuff for banks and for governments, you know, products. And that was better in the sense that we were building a product, we were building something reusable, we were building something that we can add value to. But what we got wrong was it turned out that it wasn't a product that any of us were madly in love with. Because it turns out nobody is madly in love with, you know, government security and cryptography stuff. Like, people don't wake up in the morning being like, oh, yeah, I'm so excited.

The new government standard for contactless smart cards is out today. Well, like one guy does that. That guy was me, so it was like doubly sad. And at some point, basically, we decided after about seven years of this. And, you know, we had a good experience. We set out to change the world a little bit, to redefine security. I think we did that in a small way. But what we started realizing was like, man, we just, like,

I'd sooner chew my own arm off than sit through one more, you know, Department of Defense procurement process hearing. And so we exited that company. We brought on, you know, adult leadership, and then we were able to sell that second company as well. And then got together in 2007 and said, okay, Now we're all in our mid-30s, and we've had two companies and we've had some exits. We've made a little bit of money.

What do we want to do now? What lesson did we learn? And we said, okay, well, the first lesson we were right, let's not be consultants, let's build a product. But the second lesson, it shouldn't just be any product. It shouldn't be a product about, we shouldn't sit around thinking, you know, what does the market want? What does the market fit? How do we build something that we can sell? What will people buy?

We got really tired of that. I got tired of board members and investors constantly telling me, which would happen all the time, they would constantly tell me, you know, remember, Phil, you're not the target audience. You know, your customers are the target audience. And, you know, remember, the best product doesn't always win. All those things are true, and especially true if you're building stuff for, you know, systems, for banks and for governments. But they were just boring. And we said, okay, the third time around, let's do this again, but let's only build something for us.

let's build something that we love. Let's build something that we love so that we are the target audience. And let's do it in a way that we're not going to try to sell a company. Because we've sold two. And, you know, selling a company is, it's a mixed feeling. I mean, it's nice, especially the first time you do it, if you have a decent exit and you make some money. But you are, you know, you've put your entire life into this for years and then, you know, and then it's not yours anymore.

So it's, at best, a bittersweet feeling. And we said, the third time around, let's do it differently. Let's have two guiding principles. Let's only build things for us that we're in love with that we want to use. And let's build a company that we want to keep. Let's explicitly say there is no exit strategy. Let's make something that is sufficiently epic to be our life's work. And if you have something that's your life's work, you don't need an exit strategy.

There's no exit strategy for your life's work. You should have a liquidity strategy, especially if you're going to raise money. You don't need an exit strategy. something sufficiently epic. Let's make something that we can devote our lives to, that we can devote our lives to building, and let's build it for us. And that was the motivation for Evernote. So we sat around thinking, okay, well, what should we build? Well, let's start with stuff that we like. You know, what do we like? And we said, I said, you know, I play a lot of video games. I love video games. Let's, you know, maybe we should start a video game company.

And we thought, okay, but we already have really great experiences with video games. You Even back then, there was already like a giant stack of games that I wanted to play that I couldn't play through. I thought, like, the world isn't, like, the world isn't going to be significantly better if we add another one, because there's already people doing a great job, keeping us entertained with video games. So then we thought, okay, well, what else do we like? And one of my co-founder said, well, you know, I kind of like the new social networking, social media stuff. And we thought, yeah, that is kind of cool. You know, Twitter was just kind of getting started. There was a few other things, but we thought, you know what? There's already so many companies doing it. already a great experience. And, you know, I mean, MySpace has already done everything you'd ever do with a social network. Like, why would we want to start something, you know, to compete with MySpace? Already providing a great service. There could be nothing better. And so we decided not to do that.

By the way, I suck as an angel investor. Just so you guys know. But then we thought, okay, well, we have pretty good experiences with entertainment. We have pretty good experiences with communication and with social networking. But when we're using productivity stuff, when we're using stuff to try to make us smarter to try to actually accomplish something, it's for the most part just a really crappy experience. Every time we use productivity software, it feels either old or kind of cultish. It doesn't actually get the job done. It doesn't feel very elegant. And we thought, okay, that's cool. Like we're all nerds. We all want to build a second brain. We all want to be smarter. It isn't a good experience right now. It really feels like things like

smartphones and app stores you're about to take off and get started, let's build something that is going to be the modern definition of what it means to be effective and productive as a knowledge worker. And we set out to do that. So we made a plan. We were going to call the company ribbon, like you tie ribbon around your finger to remember. And then in my due diligence and my research about it, we were in Boston. We ran into this other group of people here in actually very close here in Cupertino, sorry, in Sunnyvale, that was called Evernote. That was started by this guy named Stefan Pachikov, and he had a team of people. Stepan is sort of this genius, kind of mad, scientist, inventor, entrepreneur, kind of Russian-American guy.

He had a team of people that actually worked, that went all the way back to the Apple Newton days. The Apple Newton was kind of the way ahead of its time, you know, first, in a portable device with handwriting recognition and everything. And they were working on this idea of a second memory to everyone, you know, building a second brain. We were saying the same things. So Stepan and I got together and we decided, hey, instead of competing, let's actually just merge the companies. Let's merge the teams and make something Evernote. And so we merged the two teams in 07 and we kind of recreated the company, relaunched it as a new company called Evernote. We recapitalized it, which means it's a technical financial term. It means that it used to have a capital N, Evernote, and we made it a lowercase end.

We also changed the investment structure, but that was less important to me. And we launched a new product in 2008. And there was an important lesson there too, which is this was a mistake that I think we made. It was a very unconventional start. This wasn't the typical Silicon Valley startup start where you go to Y Combinator and you have a couple of co-founders and you get an A round and you start something. We didn't do that. It was a weird, complicated structure with kind of two teams coming together and one of them already had some investments and it all had to get redone. and this was a big mistake.

I mean, it was great that we combine the teams and that we merged and the personalities were great and we were able to build something really fantastic. But we were way too clever with the structure. And I'll never repeat that mistake. It does not pay to be clever, to be innovative, on kind of the structure, on the legal entity and how you divvy up your stock and any of that kind of stuff

because it basically made us unfundable for a couple of years because until we were significant enough that it was actually worth, you know, a BC's time actually understanding why we were different and figuring out how to unwinded and how to fix it until we were significant enough to get over that barrier, like no one would even, no one would even take a look at us. And it took us, you know, the fact that we were clever in the early days and tried to kind of preserve this unconventional structure probably cost us 18 months of not being able to raise money. So I definitely don't advise that. I don't advise doing anything particularly clever or different about how you do the basis.

and the dynamics. So just pay attention to what people here will tell you and at YC and other resources and just do exactly that. Be innovative about one thing only, which is your idea. Like, that's the only thing you can afford as startup founders to really be innovative about is the main thing that you're doing, everything else you want to do as by the book as possible, at least in the early days, to minimize your chances of failing for a stupid reason. And we almost did. Evernaud almost failed for the stupid reason that we were too clever with our legal forms early on. So, you know, we cleaned up everything, and, you know, we had self-funded it. I put some money in, step on put money in.

We had some friends and family investors. But we were just about ready to raise a big round, and it took a long time, but we finally got a $10 million term sheet, not from a Silicon Valley investor, from a European investor. The Silicon Valley guy still didn't want to talk to us. And we had about three weeks of cash in the bank left. It was a very long due diligence because we had to fix all the structure stuff. But the deal was supposed to close finally, and it was supposed to close in 2008 in the fall. And the day, the closing day was actually the day that Lehman Brothers collapsed. And the investor called me on the day of closing and said,

hey, we just lost 60% of our fund value in one day. We're not going to do the investment. And we had three weeks of cash left. at that point. We hadn't been able to talk to too many other investors for about the previous three months, because we were kind of locked up in due diligence, you know, with exclusivity. And, you know, so we panicked. At that point, I already had 20-something people in the company. So I spent a week just frantically calling everyone, calling everyone I knew, everyone I didn't know, just trying to get, you know, trying to get meetings, trying to get investment, nothing, absolutely

nothing. It was arguably the worst time to be doing it in the history of the universe. It was like late October 2008. I wasn't particularly good at it. We had a spectacularly bad VC pitch. The VC pitch wants something like this. I'll give you the quick version. I would say, hi. I'm Phil Libbyn.

You've never heard of me. We're going to do this. We're going to make this thing called Evernote. It's going to let you, you know, write stuff down. Remember things? using computers and we're going to give it away for free please give me $10 million.

And it worked in Europe. It did. It worked in Europe. And then usually that would be enough to get us thrown out in Silicon Valley. But sometimes just sort of politeness they would like ask a follow-up question. And the most common question would be like, so who's your competition?

And oh, man, I would nail this one. This one would be great. I would say, oh, our competition, well, pretty much every single computer or phone or PDA or any other device that's ever come out in the last 50 years already has a pretty good free note-taking solution on it. And that didn't help us either. Anyway, I digress. So we're out of cash.

I spent a week trying to get cash, nothing. Now we have two weeks of cash left in the bank. It was 3 a.m. And I totally remember this day. It was sitting there at 3 a.m. And I decided, finally, this is it. I'm going to shut down the company tomorrow morning. You're going to go to sleep.

I'm going to stand up from my desk. I'm going to go to sleep. I'm going to force himself to sleep. I'm going to come into the office tomorrow. I'm going to lay everyone off and shut down the company. Because we only had two weeks of cash left, and you can't really take it to zero. Then you get into legal trouble.

So you had to make sure you pay the last bills and all that kind of stuff. And I decided this was going to happen. And I remember sitting there at 3 a.m. When I finally decided to do this. and I kind of had this epiphany. I kind of thought, oh, this is what it must feel like to be an adult. For the first time in my life, I felt like I was an adult. This is what it feels like to be an adult, make an adult decision.

This sucks. Whatever happens afterwards, I'm going to optimize my life for being as childish as possible from here on out. But I decided that this is what was going to happen. And at about 3 a.m., right before I went to sleep, I got an email. And so I said, all right, I'll read one more email.

And this email was from some random guy in Sweden. And he said, Dear Phil, I'm a random guy in Sweden. And I'm just writing to let you know that I love Evernote. I've been using it for about two months. It's only been out for about two months at that point. I've been using it for about two months.

And I love it. It's changed my life. It's made me happier. It's more organized. It's really great. And I remember thinking, oh, that's nice. That makes me feel better.

You know, they say, like, if you can make a difference to one random guy in Sweden, you know, you've kind of achieved something. But then he went on to saying his email. So I'm just writing to see if you guys need any investment. And I wrote back, and I wrote, why, yes. We would like some investment. And then I stayed up. I didn't go to sleep. And 20 minutes later, I was in a Skype call with him.

And, of course, you know, we told him the whole situation. And two weeks after that, he wired us half a million dollars. And it was exactly enough. That half a million dollars was exactly enough that we cut back. I had stopped drawing a salary a while ago, and some of the management staff wasn't drawing a salary. We really tighten their belt. But that half a million dollars was enough. It got us.

It lasted about six months, and then the worst of the crisis was over. But more importantly, we had already cleaned up all of our structure. And the most important thing is we finally had traction. We finally had enough data. where I could do a VC presentation that wasn't awful, where I can actually say, this is the model. These are the cohort charts.

These are the unit economics. Here's how the business is actually working. Here's how we are making money today, and here's why it's going to scale. And that's what made all the difference. And then we were able to get financing. Still not from Silicon Valley people. The first investors were actually Russians and Canadians and Japanese.

We got one of our first investors. Professional investors was Docomo Capital. you know, the giant telecom in Japan. The reason we got that was pretty good. You know, they reached out somehow on Twitter because, you know, they liked Evernote. By the way, every single investor in Evernote from the early days down to the people that we were bringing in, you know, now, last year,

every single investor is a fan of the product. We don't even talk to people anymore who don't love Evernote. But even early on, when no one knew what it was, the investors were all giant fans of the product. So we build it for us, but it turns out we also build it for, our investors and for our employees and for the media and for every other constituency that was important to us. So Docomo came in. We were still struggling at that point. We still didn't have

too much for investment, but a couple of executives flew in from Japan. And they had a meeting with myself and our CTO, Dave Engberg, one of my co-founders. And in our office in Sunnyvale, and they come in to the room and we bow and say hello. And then in back of me, I hear Dave you know, talking to them, and I hear Dave say, thank you very much to them, in Korean. And I hear this, and my thought is like, well, why is Dave speaking to these people in Korean? And I kind of look at him, and he immediately realized what he had done, because he was just in Korea, and he was just, you know, his brain just got frazzleslesles. So he immediately realized what he had just done that he just spoke, you know, he just said,

thank you. He meant to say hello in Japanese, but he instead said, thank you in Korean. And he's like, he's totally pale. like he's just ashen, like he's so embarrassed. And I look at the docomo guys, and the docomo guys are completely, completely embarrassed. And the thing with Japanese people is they're so, like, for the most part, they're so emphatic,

they have so much empathy. Like, they feel your embarrassment worse than you do. And, like, they're mortified about how bad we feel. And so the only way out of the situation was for them to just give us several million dollars just to, like, just to prove that, you know, there was no hard feelings. So we got lucky in that as well.

But then, you know, then things did get a lot better. And then we did have traction. And then Morgan Thaler came in as the first Silicon Valley firm. And then Sequoia went in big, you know, several times. And it got, you know, it got a lot harder. It got a lot harder once we were a real company. and I didn't appreciate that at the time that actually the most bond I ever had,

the most carefree that I ever was, the least stress that I ever had, was back when it looked like we might go out of business any day. It was back when the only priority was to raise money because things were really simple. Things were really simple, and there was one fitness function. You know, as an engineer, I just appreciated this. It said the only job is to raise money

to make sure that we can meet payroll and have enough, you know, have enough cash. And so you know when you're successful, right, when the check, when you call the bank and you see that there's a few more million dollars in it, you're like, yes. And you're totally ready to fail at that point. You know, you expect to fail. You're ready to do it. You've made peace with it. You know what's going to happen. And in fact, it's kind of liberating. And the day after we raised, I think, our B round, which was the first time where we had, you know, a couple of years of cash in the bank. And we really felt like we weren't, we were out of immediate existential danger.

You know, that day, we celebrated, we had a big party. It felt great. And, like, the next morning is when it got hard. The next morning is when I said, okay, like, now there's an actual company. Now there's people depending on us. Now there's millions of users. Now there's expectations. Now is when we actually have to. Now is when we actually have to do something. And so, you know, I can stand here and say, you know, traditionally, you know, it gets better. It does very much. But it also gets harder. It doesn't necessarily get easier. And so you shouldn't be in this business. You shouldn't be thinking about founding a company if what you're trying to optimize for is easy. It's never gotten easier for me. It gets harder and harder all the time. But it also becomes more and more important and more rewarding.

And in some sense, more and more fun. You know, somebody asked me, a reporter asked me the other day if I was still having fun day to day. And I had to be honest, I have to say, you know what? I'm not. It's not fun day to day. It's a huge amount of fun month to month, but it's not fun day to day.

You know, when I look back, like, what do we achieve in the past 30 days? It's awesome. It's really fun. It's really gratifying. But day in and day out, when you're, like, doing the job, difficult is kind of the main thing. Difficult, but since I still have this amazing team of people, this team of people who are much smarter than I am, who are much more capable than I am, many of which have been with me now for 20 years, but, you know, many have only been there for a couple of months. it's vastly satisfying. And the only reason this works,

the only reason that I can see myself doing this, even though it's super difficult and super stressful, I can see myself doing this from the rest of my life. And it stays rewarding is because we found something sufficiently epic to do. We didn't try to think about what piece of crap can we sell someone to make some money and flip the company. We thought about what can we do that we will continue to stay in love with.

And this is the main way that starting a business right now is different from starting a business even five years ago. If you were starting a business even five years ago, it would have been stupid advice to say build it for yourself. If you're starting it now, it's stupid advice to do anything else. Because if you build something for yourself, if you build something that you love that you think is sufficiently epic, if you make something that you love,

there's probably another billion people in the world that love it as well. and unless you're like a really weird, unless you're just like a, unless you're like a spectacular weirdo. But even if you are, even if you're like, even if you're several, you know, standard deviations away from the center of the bell curve on weirdness, there's probably still 10 million people that love something just as weird as you. And because the tech world, because of the way that the tech world has assembled itself, because of app stores and smartphones and social media, the tech world is more of a meritocratry. that it's ever been. And so if you build something you love, those 10 million or billion other people will also love it, they'll know about it the next day, they'll be able to find it, they'll be able to use it, they'll be able to pay you. And if you're making it for yourself, if you're making something great, you're at a huge advantage over somebody who's making

something for somebody else, because you can at least tell when it's great. You know, you're making it for yourself, you can be an honest critic and an honest judge of your own products. And if you're not doing that, it's just much harder. So make something sufficiently epic. Make something that you will be able to be a fair judge of when it's achieved greatness, or at least when it's close to it. I don't think we've achieved greatness at Evernaut, but I think we get closer to it every day.

And don't bother making friends with people who you can't start a company with. Thank you. All right, thanks for listening. So as always, we're posting the video and transcript at blog.w.commodator.com. And please remember to rate and subscribe to the show. All right. See you next week.