Y Combinator Startup Podcast - How To Compete With Amazon and Google

Episode Date: January 18, 2023

Step inside the Group Partner Lounge to hear Y Combinator Group Partners Harj Taggar, Michael Seibel and Brad Flora discuss the traps founders often fall into when looking at the competition. They identify the particular types of companies you should watch out for and many more you are wasting your time worrying about.   Apply to Y Combinator: https://www.ycombinator.com/apply/

Like how the hell does anyone compete with like one of the greatest companies of all time on the thing that they're experts at, right? And it turned out that just like picking the right avocado was too big of a challenge for like this trillion dollar company. Hello, this is Michael with Harge and Brad and welcome to the partner lounge. Hey, so as YC partners, we work with hundreds of startups and we find ourselves repeating the same advice that often seems pretty obvious over and over again. And we found ourselves wondering why.

Before COVID, we'd often gather together in the partner lounge at the YC office to try to figure out why this was the case and how we could help startups figure it out faster. And today, we're going to talk about competitors. Harz, you want to set this one up? Yes, you know, one thing I've noticed is that I'll do office hours with a company that's doing great and they'll be, sort of psyched themselves out because they'll just want to talk about how worried they are about a competitor. and it will be, you know, a big company, another startup. And they're just like, it's like they've lost their excitement for their company and replaced it with fear. And we end up talking about this a bunch, right? Like, what's going on?

Like, why is this company that's doing well suddenly feel like they're failing? Well, it's because their competitor raised $5 million, Ard, and we all know, whichever company raises $5 million first wins, right? Isn't that how this works? What do you think, Brad? What lies do you think? Or how do you think folks are psyching themselves out? Well, I think when you start working on something, you think you're the only one that's had this idea.

You quickly learn that's not the case. And then it can be very easy to start thinking that you have to compete with this company and have to beat them in order to succeed with your own company. And so you start thinking of things like, they're going to steal my customers. I have to steal their customers. Their product roadmap, it must be amazing. So I should copy whatever they do without really thinking about it too much. And it's just a very dangerous mindset that can take you away from thinking about your own customers

and having like a first principles approach to building your company. But there's so many lies that founders tell themselves about competition and about what their competitors are up to. When I think about a YC company and competing with folks, oftentimes it goes to my head. And the first thing I tell them is like, the depressing fact that most likely everyone's going to die. It's like you're not accounting for like the most common outcomes. Like you and your competitors, none of you will make something that people want. And then the second thing they don't account for is that there are lots of businesses where there multiple winners. How many banks are there? One bank doesn't look at the other banks and say,

well, I guess that's it. We got a fold-up shop. There's already a bank in existence. And so I often think when I'm encountering this fear thing, I like to kind of run with the fear and be like, let's fear this out to the end point to see what you're really afraid of. And like maybe when we open the closet, the thing in the, you know, the boogeyman isn't actually there. As opposed to like we're sitting on the bed and just obsessing over all these things that could go wrong. Yeah, the boogeyman is not there. In fact, I think oftentimes your competitors are just as messed up as you are. You read about the fundraising and tech crunch or whatever.

And then years later, you talked to someone that worked at that company and they say, oh, man, what a mess. Like everyone was leaving then. the CEO was on a bender and was all sad because we lost all of our big customers. You just don't know. And it's so easy to assume that if you're having a hard time, everybody else must be having a great time when everyone is having a hard time. Yeah, I think that's a really important point.

So, you know, one of the things I remember surprised me the most about when I switched from being a startup founder to a YC partner is that running a startup, you're exposed every day to how screwed your company is. You're just hidden in the face with it every day, right? And so you constantly feel like you're failing. You're not like, you don't know how to build product. You don't know how to manage people. All of this stuff.

And like you see everyone else's exterior and it seems like they're doing great, right? I didn't like, I remember the earliest of YCLA. I always just felt like everyone else was just crushing it. And I'm like, man, we suck. And so it's not even the exterior arch. It's their marketing, right? you're seeing their carefully crafted marketing. But then as a partner, you work with these companies and you start realizing that

all of them are like kind of really badly flawed somehow, right? Like literally in any YC batch, I could take every single company and like pick out some like fatal flaw. And like you know that some of them are going to turn out to be worth like billions of dollars, but you can still do it. But like you don't get that perspective when you're running your own company. But wait a second, Arch. wait a second. So maybe I shouldn't be worried about my competitor, but this is different situation.

We're in a land grab situation. Like I, if I don't get those customers unprofitably as fast as possible, my competitors will and then they'll beat me. We hear this shit all, like, how often do we hear land grab situation at YC? Yeah, it's definitely a bit of a meme. I mean, it's, there's truth to it, actually, right? Like, I don't think it's, it's not unfair to say that you want to get more customers than your competitors. I think it's like what we see is that founders are really quick to assume that their competitors are going to win. And like Brad said, they look at the external signs. It's like, oh, like, you know, they just announced a fundraising round. Oh, they just got like an article in the press. Like, oh, they just like hired someone from Google, blah, like all these reasons.

But what I try to do in the office hours, I'll be like, hey, like, well, like, are your customers talking about them? Are you losing deals? Like, have you looked at the process? do you, like, you know, compare, how do you rank up? And it's funny, like, I don't know about, how do you guys find founders often answer those questions? I mean, usually things are fine, right? The customers are usually not talking about the other companies. It's like a confusion of interfaces.

The founders thinking, oh, my gosh, my competitors in the New York Times. Therefore, my customers are having a worse experience with my product today. It makes no sense whatsoever. And as soon as we ask those questions, hopefully we can get it through to them, that that's not what they should be worried about. You know, it was funny because I was thinking about this in the context of my competitors must know something that I don't,

so I have to like copy their stuff. I remember back in the day early in Twitch, back when we were Justin TV, we were competing against this company named Ustream and another company named LiveStream. And inherently I knew, that we were copying each other's features. Like I knew we were all looking each other's websites,

but there was this one moment where we built a feature that was exclusively for copyright owners taking content off of our site. Like, and it was something you could see on the main site, it wasn't obvious, it had no clear user value at all. And two weeks after we released it, a competitor released the same one. And we were like, oh crap.

Like we're, this is clearly the blind meeting the glide. Like they don't even know. know why we have this. Like, we wish we didn't have this feature, but like, they built it anyway. But then after that, you shut down the next day, right? Because it was a horrible disaster. Right? That was it. That was the end of the company, right? The company only started working when Emmett and Kevin started actually talking to the users and figuring out what they wanted. Instead of, you know, the years where all of us just looked at each other, all the competitors just looked at each other, copying each other's dumb features. I feel like that's what I'm

trying to do in these office hours mostly is like founders come in and super focused on negativity or other competitor and I'm basically just trying to get back to basic what's your growth rate customers churning like what's the pipeline on sales look like and if they can answer all those questions well you're like well then like let's get back to it like keep going Like, why are we stopping? Spend time on the things that you have control over, not the stuff that you don't. But okay, but let's be clear. Sometimes when we talk to founders, there are some reasonable competitive concerns, right?

And I'll start this one out. Brad, this was an idea you had before. When we ask, like, so who's competing with you? And then the answer is like, well, we don't have any competitors. Like, there's no other way to solve this problem other than us. that's a red flag right yes that's when we hear that in a yC interview we buckle up um yeah because it just shows it shows kind of a lack of understanding of the customer and what the customer is doing right now to solve the problem it's it's very unlikely that no one the customer has never

tried another solution to whatever the problem is that they're trying to figure out and you should know what those are yeah and then hars you were talking about about like sometimes your competitor objectively has a better product. Like I've encountered this. Like I remember the day after social cam sold, one of my close friends, you all know who they are, message me and said, okay, I can delete your app now because I've been using something else for this whole time to take video. I was like, oh, I guess we didn't have the best.

Like even my really close friend was only using the product like to, you know, make me feel good because there was a better product out there that he was actually using. What about structural advantages, though? Right. Like, I remember when, you know, my former co-founder is Justin Emmett. They created a calendar company before their kind of success later. And they literally, six months into their company, Google Calendar came out and just absolutely crushed them. So like what happens when someone has like an actual product structural advantage? Yeah, that oftentimes you should worry about that. With my company, Perfect Audience, we started off using the Facebook Exchange API,

and so we had ostensibly eight or nine competitors, and we tried not to worry about them too much. We worried about them too much, and we were all using the same Facebook guy, API, to sell ads. When Facebook announced that they were going to launch custom audiences and sell this themselves directly, Facebook was now a competitor, and they owned the platform, They wrote all the code. They control pricing. So that's a time when you should worry about competition.

And so we sold the company. Yeah, I think a good recent example of this too is probably Microsoft Teams and Slack. And again, I'm talking about this as an observer of it. But Slack's a pretty great product. We all use it every day. And I haven't used Microsoft Teams. But I'll guess that it's not as good of a product as Slack. But good enough that Microsoft could actually.

use that massive sales distribution advantage to kind of beat them in the enterprise, right? What do you guys think about that? If you have a structural advantage but you bring a crap product to the game, you'll lose, right? And like, you know, we saw that, Microsoft's done that too, right? Their music player, remember back in the day, their mobile operating system back in the day? So structural advantage with the crap product doesn't win. A structural advantage with a product that's good enough can win. And man, it really helps when some startup specs the whole product for you. Right? Like Microsoft's move is to not innovate the good enough product. It's to copy it, maybe five to 10 years later. And so that is something to be worried about.

But weirdly, just as often they don't nail it. Like, just as often, they just don't nail it. And like, you see this with Facebook, right? I would say more often, right? Because like, if you think about, like, we're like scratching our heads trying to find examples of times that, like, a fan company launched a product that killed a fast-growing successful startup. So, like, clearly more often than not, like, structural advantage isn't actually that much of an advantage. I mean, Snap lives, right? Yeah.

Just the fact that it lives, right? You know, tis but a scratch, right? Facebook keeps hacking away at it, and it's still alive. It's still a going concern. And I think for a lot of founders where structural advantage is something that comes later, they're just trying to build a great product. The takeaway is that just build a better product. And if you do that, then all of these other advantages are just kind of moot points because it's really rare for the company that has the structural advantage to also put out a great product.

But why would they? It doesn't make any sense. It's not the ideal allocation of resources to make it great when you don't have to. So there's always an open door. The other good recent YC example is Instacart. Like Instacart from like day one, like the number one thing was, well, Amazon's going to do this. Amazon's going to do this. Like how the hell does anyone compete with like one of the greatest companies of all time like on the thing that they're experts at? Right. And it turned out that just like picking the right avocado was too big of a challenge for like this trillion dollar company.

Like man, like can you imagine how many times are people with Instacart must have just been like, had to sit there and listen to some investor, explain to them why, like, Amazon and Jeff Bezos was going to crush the company? Well, think about Kyle and Cruz. When Cruz started, Google was already a decade into building self-driving cars, right? Like, it was so funny because I remember talking to an investor about this, and that was their whole point. They were like, Kyle screwed from day one. And I just was like, look, like, Kyle has built the most. most complicated products inside of our company. Whenever there was ridiculously stupid technical challenge that no one else could do, Kyle volunteered for it. I would never bet against Kyle.

And the crazier, the more I wouldn't bet against him. And, you know, that investor was like, you're right, Michael. And that person made a lot of money. Oftentimes we have to give this somewhat depressing advice to founders, which is basically like, this is a hard problem. but not a complicated product. You need a better product. It's really hard to build a better product, but it turns out you get such an advantage by delivering more value to your end users

than everyone else does. It's the club you can bludgeon everyone else with. So instead of worrying about all these stupid things like land grabs and whatever, all the other crap, it's like, man, just build a better product for your users. And you might get surprised at how well that strategy goes.

Like, stay informed, like know what your competitors are building and, you know, how you stack up against them, but don't, like, let it deflate.