Y Combinator Startup Podcast - How Do Billion Dollar Startups Start? | Office Hours

Episode Date: November 17, 2024

The biggest companies in the world all had to start somewhere. In this episode of Office Hours, the Group Partners explore the humble origins of several top YC companies to try and identify common traits of the most successful founders. They’ll explore what it takes to keep your company alive in the early days, where to focus your energy and how to find product market fit that leads you to mega success.

Every founder looks at Airbnb and just imagines Airbnb in the early days must have been something special. And actually, they kind of all look the same. For founders just starting out, they think that the trajectory and the growth graph of all the successful startups looked like this. You know, just like constantly up into the right. And they don't see the early days. It might be hard to imagine. But the founders of companies like Airbnb, Stripe and Dropbox at one point or another looked indivision. distinguishable from other startups getting started in their time.

We like to put companies on a pedestal as if they were great from day zero, but it isn't actually like that. It's actually the tens of thousands of decisions along the way that made them great. Every company, no matter how successful it becomes, has to start somewhere. And that is what you'll hear about today. Jared, I would love to hear about solugin. I really like those guys. I've talked to me a few times, but I was not in the interview.

So what was that interview like? Sollugent produces industrial chemicals, primarily hydrogen peroxide. For a long time, it was like just hydrogen peroxide, and now they make other stuff. So like hydrogen peroxide, the same stuff that you buy in, like, a drugstore that you put on like a cut or something, that's what they make. And they had invented a new process for making hydrogen peroxide that uses a new organic catalyst. and you don't need like massive heat and massive temperature and it won't blow up on you. And because they had this process that scaled down, they were able to start making really small quantities. Talk about humble beginnings.

I remember the Sali Jin interview because it was a really fun one. This was back when interviews were still in person. And if you remember, back in the old in person days of interviews, when people had like harder products, they would actually bring them to interviews. Yeah. It was great if it was food. Yeah, because we got food. They bring it hydrogen peroxide. They literally brought in hydrogen peroxide.

So they showed up to this interview and we're like sitting in this room and the hydrogen peroxide guys walk in and they literally have a beaker of hydrogen peroxide, which I think at the time was like most of the hydrogen peroxide they've ever produced. And during the batch, basically their goal was to figure out how to sell like bottles of hydrogen peroxide because they wanted to generate revenue and to prove that this was a real business. So rather than trying to raise $100 million to build like a giant facility, they literally set up shop in their garage and they would just start making bottles of hydrogen peroxide and selling them to anybody who would buy a bottle of hydrogen peroxide.

Today, they actually have this huge plant in Houston that ships out like tanker truck fulls of hydrogen peroxide like every day. In the interview, what did they say that convinced you? Well, the cool thing was one, these guys clearly had like great backgrounds to be doing this. they were definitely experts at this. But unlike some of the academic science folks that we interviewed from high to time, these guys were doers. They weren't waiting for anyone's permission to go do the thing.

They had like made the hydrogen peroxide and brought it in and they were like trying to find somebody to sell it to. They clearly had like a bias for action. It's the duer mentality that applies to any kind of startup idea and interviews. And also the willingness to admit that you may not have all the answers. you may not be able to think all the steps ahead of how you build a big company, but you're down for the ride. Like you're ready to do it and you're signed up for the journey.

And you'll figure it out later. You have to be comfortable with this idea that you know you're going to do a thing and you're going to work really hard at it. And you don't really have all the details worked out, but that's okay. One of the best lessons I've learned in my career is to not worry too much about what it's like at the top of the mountain. The most important thing is to decide that you're going to make it there and to take that first step on the journey.

And sometimes that first step means building a demo before you even have any customers. One company I wanted to talk about is Captivate IQ. They did Y-C in winter 18, and they built software that helps sales team figure out the compensation. So if you have lots and lots of salespeople, it turns out is quite a complex math that goes beyond my Excel skills to figure that out.

And they had built some demo software. One of the founders built a demo, but they know customers and really nothing else. Totally. And that's how every company starts right. And every founder looks at Airbnb and just imagines Airbnb in the early days must have been something special. And actually, they kind of all look the same. And then they convinced us that there are only two major players in the space in the US. And they're both big and they're both pretty bad. Wow. So they convinced us that like, if we just become better than these two players, we can win the space.

Yeah, I think that's another mistake founders make where they sort of say, there's no competition. It's like blue ocean or whatever. And the reality is that's an indication no one wants the thing. Whereas if you've got these huge incumbents that making tons and tons of money and haven't innovated in decades, actually that's perfect. Because it's like a demonstration that people actually pay for this software. Yeah. And this is one of those companies where everything they kind of said at the interview

turned out to be true. Wow. And so the normal state of a company when it applies to YC, I think back to my application, I was working with two friends in a bedroom in London. We'd cobbled together this janky prototype. Like, we bullied some friends into using it. We had no revenue. In fact, we were losing money on every single transaction.

And that's pretty normal, right? Even earlier, I think YCs today is going back to sort of the origins of YC of funding people earlier and earlier. So a lot of people I interviewed this batch, I'm sure it's the same with you, haven't even quit their jobs yet. And they've got an idea. And perhaps that idea is something they'd worked on their previous job, a tool they'd built or a problem they'd identified.

And they've recruited a couple of co-founders to come along to the interview. But really, there's not much there yet. you're really looking more at the quality of the founder than the progress of the business. That's a big point for all startups. Don't be afraid to pivot. Many of the most successful companies initially pitched ideas during their interview that didn't work out. That isn't necessarily a sign of failure. What's most important is that you have the drive to keep trying until you do finally land on the right idea. So what type of people have the perseverance, to keep grinding until they've made something people want.

Next up, Diana and Michael will talk about one common trait of the best early stage founders. To be best in the world, there's this aspect of the best people at the top of their careers. They're actually very not well-rounded. They're very quirky people for a good reason. Yes. And that's what makes them outlier.

Like by definition, if you're average, then it's like, okay, you're not going to build a great company. going to build a great company. Because building a successful large company, by definition, you're going to be out of multiple standard deviations out of the norm. Yes. You have to go all in. And I think that a lot of young people have never been, it's never been communicated to them that the strategy that got them to this school, that got them the meta job, that got them the Ivy League degree is not going to be the strategy that actually gets them to be successful as a startup founder. And I'd argue not all careers are this way.

I'm sure there are other careers where that kind of hedging strategy is still a great strategy. But in our game, so few people win. Like the problem is like so few people turn any amount of their like paper stock value into real cash that like you have to be lucky and really good. Some of this may seem like it's outside of your control, but that's not necessarily the case. You can create your own luck by staying determined and shutting out all other distractions in your life. As you'll hear from Harge and Pete, you just have to keep at it. Here's like another interesting case is Amplitude, which is now like a public company offering an analytics product. And we interviewed the founder of Spencer and Curtis in 2011 now, so it's been kind of like a while.

And they applied to IC with this idea that was a mobile app. a mobile app on your Android phone that was voice to text. So basically the idea was, hey, if I want to text while I'm driving, I'll talk into the phone and it will like send my texts for me. And we didn't think the idea had any legs at the time because we were like, well, like, Google's just going to do this. They're really good at this. And like we had Paul Buhit, the founder of Gmail, early Google employee in the interview

just like hammering on Spencer saying like Google, this Google is so great at this. Like there's no like how are you guys going to going to win. And Spencer was just so, like, so intense in, like, his comebacks and just, like, determined to, like, work on this idea. We were like, we don't agree with, like, this idea, but this is the kind of, like, intense person you want. Like, they're almost irrationally intense in how attached they are to the thing that they're working on. You want to fund people like that. And it took amplitude, I think, a year and a half after YC to find the idea. But once they did, obviously, like, really took off. Yes.

And so there's almost like a sort of like an obstinence about like the best founders where they're just whatever they're working on. They don't do it at like 60 or 70 or even 80%. They're always just like a hundred percent like committed and have high conviction in what they're doing. Yes. And then they just need to get in the right direction and they're like basically unstoppable. Yes. Yeah. It's a good reminder that some of these founders came into YC with like actually objectively bad ideas.

Right. Like there were the Brex founders who I think we're working on like a VR startup at the time. time. Yeah. The Segment founders, I think when they did YC, they're working on like an ed tech. Segment's a really another great example. Like segment ultimately was bought by Twilio for like $3 billion. And they also went to like developer tools and API services.

They applied to YC with this idea. It was to let professors who were giving a lecture, like poll less students. And like no one wanted this, like you had zero traction. And we like, again, we pushed to them like, you guys are really smart, you're great engineers. Why don't you work on something that's like technically hard versus this like very obviously student idea. And they were just obstinate.

Like, but they weren't like obstinate without direction. They were like, what we are really passionate about is fixing education. And we think this is a really good place to start. And like, we're inspired to work on this mission of fixing education. And so we were like, okay, like, again, they have this intensity and they have this like thing that they're really committed to. And eventually, again, they figured it out with the segment idea, but it took them a while. This is what happens when you have that like obstinence.

Like, if you're in the wrong direction, you can, like, get dug into it for a while. Even longer. Yeah, even longer, right? Like, but that's just like, maybe that's like the yin and yang of it. Like, because if you're only ever doing things like 60% of the time, like, you then just risk, like, always kind of being in a 60% state. You may be seeing a pattern here. The key attributes that come up time and again are grit and determination.

If you give 100%, then you increase your chances of being in the right place. at the right time for things to take off, even if it's not your first, second, or even third idea. Next up, we've got Brad and Nicola talking about how many of the top founders were clear and concise with their pitches from day one. One company that comes to mind that I had the good fortune to interview that has gone on to be pretty successful is a company called Jeeves. They are a digital bank for startups based outside the U.S. And when we interviewed them, It was two founders with pretty much the exact idea that they have now, which is pretty impressive.

But it was really an idea and a lot of homework, but not much actual action just yet. So how did they convince you? I mean, were you impressed by them? How did that go? Yeah. So I went back, reread the application the other day. And one thing that jumped out to me from the application itself was that it was very clearly written.

the language was very plain and simple in the application, and it was also pretty succinct. So we have a question in the application about how much progress have you made so far. And I think they literally just had two sentences. We've completed a deal with our first bank partner and are ready to start onboarding initial customers. That was it. Now, in my mind reading that, that's the answer. Okay, great, that's what they've done so far. And it's very easy, though, for founders that are applying to YC to just do like paragraph after

first I did this, then I did this, then I did this, right, right, get into pitch mode. And so looking back at that, I immediately, you know, that jumped out to me. That would jump out to me today. Someone just very confidently and succinctly saying, this is the most noteworthy part of what I've done. Makes sense. But that's the application. How about the interview itself?

It's interesting because they came in and they, you know, they were well-spoken. we got what they were working on. It all came across very clearly, but they were also pretty upfront about things that they did know and didn't know. And they, you know, they didn't try to like razzle-dazzle us with like fake traction or anything like that. It was pretty clear that they didn't know yet what the actual usage was going to look like or what the demand was going to look like. They had a few early customers.

They were excited about that they'd signed up maybe since applying, but before the interview. but there were many question marks. But I would say, and this is one of the qualities that I think is kind of common among the companies that go on to become big, they didn't hide that stuff in the interview. They were pretty upfront about it. And that put the ball in our court after the interview to say, okay, there's a lot of question marks here. Do we want to go forward and fund it? And it wasn't the most obvious idea to fund it based on the interview. It wasn't like a slam dunk.

Oh, my gosh, this is incredible. founders. Yeah, but we were pretty impressed with the founders and that they had the confidence to talk about the business and what they're working on in that way. And we thought it would be a pretty good experience. And one of the cool points about that that I think a founder listening to this can take away is that all of those things are in your control. You can write succinctly if you choose to. You can say a little bit less than just the highlights about your business if you choose to. You can be very forthright and very confident about what you have done and haven't done if you choose to. It feels like the best founders when they come to interview, they don't pitch us.

Right. They engage in the conversations, answer our questions, like as clearly as they can. Yep. And don't try to hide anything. That's right. I think that's kind of like the thing here. Yes. There's a classic PGSA about how to convince investors where I'll paraphrase this roughly. The most convincing way to talk to investors is just to plainly tell them what you're working on and help let them like build the model and understand it themselves. That's what we want as interviewers. Like, we want to engage and get to know the founders, understand who they are, what they think, how they think.

That's right. And that's the only way to do that is to have a conversation and not be the target of a pitch, whereas they repeat stuff, have stuff. That don't always make sense. Yes. And with the Jeeves founders, we definitely sensed, all right, we had a real conversation with them.

There's only 10 minutes long, but it felt real, it felt genuine, felt like an actual, like, working conversation. And we think this could be a big thing if it's successful. There's a lot of question marks, but let's do it. A lot of times, we as group partners aren't totally sure about an idea at the interview stage. It's really about identifying these key traits, the same ones we've seen time and again in the most successful founders.

Next up, Serbian Aaron will talk to you about why you should avoid trying to follow in the exact footsteps of successful founders that came before you. A lot of our early stage founders, they look at these hyper-successful founders in their current state where they are now, after they've had this success. What do you think their risk is of doing that? Well, I think that for founders just starting out, they think that the trajectory and the growth graph of all the successful startups looked like this. You know, just like constantly up into the right.

And they don't see the early days when they applied with a different idea. They had no product. they tried something and nobody wanted it. And so what you end up seeing the stories that you read in the press and in the media has this like PR gloss over it. Where they're only showing the positives, only showing the good stuff and not showing a lot of the negatives and all of the like super difficult times that they had to go through in order to get to that point to be able to tell their story. I like to talk a lot about like when founders are going through a tough time, imagining the story that they want to tell in 10 years. and how boring it would be if everything was just up into the right and successful the whole time. Yeah, you wouldn't learn anything.

Yeah, there was no challenge, right? And so when you think of those challenges, like, it just makes the story that much more interesting and memorable. I totally agree. One thing that this reminds me of is one of our more successful healthcare companies, recent successes, is called Nourish. And they just close a really meaningful series A from a brand name investor and it's all over the news. but they spent the whole batch pivoting and even after. You know, they pivoted five times before they found the right idea, and now they're taken off, and the team was always promising.

The team was always great. But yeah, it wasn't always roses. Truly legendary startups aren't just born that way. They are forged through difficult decisions, uncertainty, mistakes, and pain. I'm proud to say, the group partners at YC, or some of the most experienced people in the world at helping founders get to product market fit. We can do it not just because we've been there. We can also do it because we've directly worked with more zero-to-one startups than anyone on the planet.

Thanks for watching and we'll see you on the next episode of Office Hours.