Y Combinator Startup Podcast - Why Investors (including YC) Can’t Fix Your Company

Episode Date: October 20, 2022

Dalton Caldwell and Michael Seibel on common pitfalls in the advice from different types of investors and why you, the founder, are ultimately responsible for the success of your company. Apply to Y Combinator: https://www.ycombinator.com/apply/

Hey, Dalton, your pre-product market fit, do you have five-year financial projections? That's a great example of that. Financial projections may be a good idea later stage. But to even ask me if I had financial projections, I was like, what's a financial project? This is Michael Seibel with Dalton Caldwell, and today we're going to talk about why investors, including YC, can't fix their company. For some folks, it's like telling them that Santa Claus isn't real.

You know, they're like, hey, we think. finally get some time with you, you know, no one wants our product. What should we do? Here's our designs. Can you help me design this so growth takes off? And I have to tell them the unfortunate news, which is, I have no idea. And like, I went through this through too when I was a founder that I really believed that once I raised from the top investors, they would tell me whatever secrets they were holding out on, the world. What's unfortunate is that there are, a lot of investors out there who aren't former founders, right? Who haven't really lived these mistakes themselves.

If you haven't been humbled by having a crappy startup like we did that failed a lot like we did, it's easy to sort of like think your hot shit. It's easy to think that your advice can make companies work. That like you are the magician. And what's interesting is that over the years, a lot of YC founders will kind of start following the advice of these people. And they'll make very, very common errors. And you can almost track it back to like, oh, I kind of understand the type of person who is giving you this advice. Because I see what you're doing now and like this matches one to one.

So one of the most common types of investors is the investor with the finance background. someone who's like never run a company, never operate in a company, pure finance. When all you have is a hammer, everything's a nail. And so if what you know is money, the solutions usually involve money. So raising more money, spending more money, throwing money at the problem, right? Hey, Dalton, you're a pre-product market fit. Do you have five-year financial projections? That's a great example of that.

My initial projections may be a good idea later stage. But to even ask me if I had financial projections, I would, was like, what's a financial opportunity? Like, Michael, how many years in your startup do you learn what a balance sheet and shit was? Long time. Actually, and I resisted it. I resisted it. Our CEO Kevin was like, this is important for you to learn. I'm like, you know what's important for us to learn how not to lose money every month before we die? And the balance sheet is not really telling us that. It's that we make no money and we spend money. So that's what the problem is. And for these folks, I get it.

Right. You spend time in spreadsheets, especially if you're doing stock market investing or private equity investing. It makes sense that your weapon is money and you move money around. That's your leverage point. That's your point of leverage. What's the downside of internalizing that too much, man? I mean, we see this all the time, which is like scaling negative economic economics or spending a ton of money in advertising with ever, ever worse payback periods or no payback period ever. it's really like getting people to work on things that are not making a product good. Yeah. I mean, I remember Patrick Collison was talking about this when he came to speaking about recently where he's like, listen, let me be blunt. Too many founders treat product as an afterthought. They're basically trying to do financial engineering and the product is like delegated.

I think what's also tricky is that like this strategy isn't always wrong. Like for successful companies, there is usually a point where throwing money at it is a good idea. It's just kind of knowing when to give that advice and when not to. It's when you always give that advice is when things get really tricky. All right, here's the second type that's common in the investing world. The big company exec, the person who's seen companies at 1,000 plus people and have a lot of experience and have done great work in those companies and now become investors. folks with big tech experience are really great at taking a successful product and scaling it further or refining a product.

Okay. It just is pretty different when you were employee number, you know, 100 or 200 at Airbnb or Google or Facebook than employee number five. And as we spoke about in a prior video, our friend and colleague Paul Buhite, you know, number 18 at Google, was like the king of dirty hacks. And in a lot of ways, you know, when we would interview former Googlers and he was in the room, he would, he wasn't on, he didn't love some of the instincts of folks that it was the same company that they worked at. But the tactics that they brought to bear when you were employee number 1,000 to scale up one of these core products was pretty different than the folks in the first 20 employees. And so generally with these folks, it looks more like scaling up process. It looks more like scaling up hiring.

And kind of sometimes taking for granted that getting any users at all is really hard. Like I talked to folks a lot about this in The Batchman. What failure usually looks like for a lot of our companies is they get zero real customers. Yeah. Zero. It's not that the failure was they couldn't get a Series A. It's that they just like bombed, like complete disaster. And so if you have too much of this mentality of like,

like big company PM, it doesn't even occur to you that you can fail that badly. Yeah. What do you think? I think it's tricky because all too often this group of folks are giving founders the advice of hiring executives before product market fit. It's like you need to build up the company. It's like marketing doesn't work. We need a marketing executive. Like the engineering team isn't productive enough.

We need a VP of engineering. and more often than not in this pre-product market fit phase, the mistake is that there's the wrong person in the company, not there aren't enough people. The mistake is like you've got an engineer that no one wants to work with or no one's measuring any of the marketing results, right? It's like those are the mistakes, not like you don't have a department for it or an executive to run it.

Whereas we go right back to the first one, right? When a company is scaling and growing, post-product market fit, like hiring more people is essential. So like once again, we get this weird dichotomy. Think about the zero to one. Think about the first five employees of Facebook and the first five employees of Instagram when it was a startup before they got acquired. The first five employees of YouTube when it was a startup before it got acquired versus

the really awesome people post acquisition who had to step in and scale that thing. Those people are awesome. Hallelujah. They're super valuable. And if they weren't around, in the zero to one stage, watch out. Get what I'm saying?

Like it's a very different muscle to build scaling Instagram post acquisition if you were on that team than being, getting the first 100 users when you were the founder of Instagram, right? Very. And there's a whole lot more,

actually supply and demand, there's so many more people that helped scale Instagram than there are people that founded Instagram. Yep. Right? There's just lots, so there's lots of,

folks that have lots of experience scaling products. And it's, you just don't meet as many that did the zero one. Yeah. So the next category is the successful entrepreneur in the non, in a non-tech industry. And, and this is really common. This is really common internationally in like new founder ecosystems where like the people funding them maybe didn't make their money in tech. What's the common kind of advice given here? Yeah, this one's tricky. where if someone made all their money investing in real estate or in strip malls or franchise, McDonald's franchises or something, like just something that is not remotely a tech startup, they will often ask for crazy terms that would make sense if they were investing in like a franchise store.

They may ask for more control and they may be really stressed out all the time that you're going to lose their money. And so a lot of the trickiest investors is a nice way to say it that I've seen the YC Found are like, oh, why did I take their money? It'll just be someone who's totally well-meaning, but they treat this like an investment in a subway franchise and that you're the manager of the subway franchise and they're going to call you and yell at you or something that you're going to lose their money

as opposed to letting you do your tech startup. And that's really just like, they really, these folks are like, you can't be mad at them. They're just taking the principles that they learned to make their money and applying them to a different industry, right? And it's like, in some ways, these are people you can be mad at the least because it's like, at least they're, they were successful themselves.

And they're like taking things that work for them, right? Like they're not reading this shit on Twitter. But it is tricky because like, I think what we've learned is that industries are just different. Like, you know, maybe there's some common principles. But like in general, software companies look really different than a lot of other companies out there. So, all right, here's the next investor type. the junior investor, the person who just got started, looking to make a name for themselves, still early in their career, oftentimes having to really have a win pretty quickly to cement

themselves in this career. What's the most common type of advice these people give? Yeah, I think this one is tricky. I think a good mental model is to put yourself in their shoes. I think when you're a new investor or you're newly hired at your job, you're not in a position of power inside of the place that you work or you're not in position power with your investors because they want to raise money from someone else. And so to show weakness or to like screw up their first few investments is very bad for their career. And we know lots of people that basically don't last in the industry because their first investments were bad. Like it's kind of career suicide to become an investor, not have any other track record and then make some bad investments. Like you're not going to

make it. Okay. And so basically, these folks are very optimistic that it's going to work, that you're going to make it work, that you should totally go raise more money. Yes. Because their, their KPI is that if you raise money and they can mark up their investment, it makes them look good so they can go tell their colleagues or their, their investors, hey, I invested in this company, and it went on to raise more money at a better valuation than I invested at. I'm really smart. Yeah. Right. And so the thing to understand is that's their KPI. And so in your interactions with them, they will often just really encourage you

to fundraise and to keep doing that a lot and everything's working great and you do have product market fit and you should scale faster. Yeah. Right? And it's interesting because another example of like

they're not trying to hurt your company. They're good. They're nice people. Yeah. In many ways they're like some amongst the biggest cheerleaders for your company. It's just that like your company at this stage probably has some really broken shit that has to be dealt with. And so unfortunately, it's harder for them to kind of go and spend the time in the dirt with you on that stuff. Because it's going to kind of break their illusion.

And, hey, you know, it is what it is. It's rough. Like if you were a company where it doesn't make sense to raise for a very long amount of time, it may be the right thing that you want to do, but may not be great for them if their whole thing is to, prove that they're great investors really fast so that they can keep their jobs. So the next category investor we see a lot is the influencer slash famous person. What do you, when I think about this kind of person, this is the person that would come to a YC Demoday and everyone would freak out to get them on their cap table.

Yeah, so like they just, yeah, they just get, you know, infinite access. How do you think that they try to help founders? who are struggling. Yeah, well, I think that you really understand distribution if you're an influencer, because that's your game, is building up your distribution network, which you can monetize a bunch of different ways, right? If you have a million, you know, Instagram followers or a million TikTok followers, you can make money off that.

And you get it. You're savvy. And so I think these people are very savvy and realize they can kind of treat startups like other ad deals of being like, give me some stuff and I'll promote you. And so a lot of times these folks will like ask for advisor shares or they'll ask those ask for things. And again, that's how they got big. They're good. You know, they know they know what they're doing.

And it can be so tempting to do it to think that like celebrities tweeting about your thing is going to fix all your distribution problems. And like maybe in some cases they do. But most of my experience, both personally and with founders in YC, is the founders kind of feel like they got. a raw deal on these and that the clicks they get from the from the posts or whatever were not as helpful as they had hoped that is a nice way to say it and you know what's weird about this dalton is that the the best most reputable influencers and famous people in tech world they don't promise distribution like they say i'll try to help but like i think the founders set expectations way too high like it's the founder once again looking for the silver bullet someone else solved the problem

me. And man, silver bullets don't exist. All right, we got two more types here. So two more types. Type one is other founders. So this is becoming a lot more common nowadays, right? Like founders investing each other's companies, it's, you know, some people have seen success doing this, others not. But what's the advice that, you know, most often you're going to get from another founder to help you when they're on your cap table? Usually when you get advice from other founders, it's heavily based on their personal experience. Duh. But like the downside of that is if they're really,

if they really struggled with fundraising personally, all their advice is going to be them basically telling you, don't do what I did. Or if they struggle with distribution, all their advice is going to be around, you know, like they're almost like, they have a lot of feelings about what happened to them.

Again, this is, we were founders too, dude. Like a lot of my advice was heavily based on, my personal experience. And it only, it took years of me working at YC to sort of break out of that trap, which is to not be so autobiographical and the things that I'm telling people. You know what I mean? I think this is something that like people don't understand enough is like how much we are learning from the founders that we're working with and how much we are condensing their

learnings and delivering it to the next generation of YC founders versus how much we're condensing learnings personally that we got in our own companies. I think that's like very counterintuitive to most people. The last one is the extremely young investor, right? The, the, just out of college writing a check, sometimes this person's in college writing a check and kind of trying to build a career in our world. Different from the, this person often is different from the like junior investor because this person's usually not working at a VC fund or they're a big fund like that. They're usually kind of a scout or some kind of in that kind of role. What's the what's the advice they're often giving? Yeah. I mean, look, these people are super sweet

and they're super exciting, you know, to talk to you. I just think that like the same way that the founder realizes their job is to play the part of a founder. And so they like watch movies about how founders are supposed to act and like read books about it and they sort of are being like, am I doing it right? Am I a founder now? I think you kind of see this from these investors where they just, they read what other investors say and do and they sort of like say and do whatever it is they read. And so like whatever the hot new trend is, whatever people are tweeting about, whatever like

latest essay they've read, they just sort of like repeat that and see if and hopefully no one notices that that's what's going on. Which is how people learn in school, right? So it kind of makes sense. Like it's exactly the same. So, you know, one of the interesting things here to kind of wrap up is that we make mistakes. Like we screw up. There is a YC partner common bad advice kind of mode.

And, you know, we were talking about this before the show. And I think you said a right, which is like the kind of lean startup, don't hire, don't spend too much money, like talk to your users, put a shitty MVP out in the world, path is the path that works for everyone in all cases. I think sometimes we can fall into that trap, but there are many examples that doesn't apply, right? Like, what are your thoughts on where YC partners ourselves, we can get trip up and give bad advice? Yeah, I think that the biggest critique I would have of ourselves is that sometimes it works right out of the gate. And sometimes you can spend two years building a product in a cave and never talk to a single

user and it's perfect. And you immediately get product market fit. Sometimes that happens. I think that we just, we have, we have enough data points that it seems like insane of us to recommend that strategy statistically. Like it's like, it's like, hey, oh, you have cancer. Oh, well, you know, if you, you know, go on a water fast, that might fix it. Like, maybe.

I think that it just feels a bit hard for us to recommend making a strategy to not do those things. But we have enough data points of YC companies. We see companies that can't bootstrap or can't launch an MVP and have to go build something in a vacuum for two or three years. Yes. And sometimes it works. Yes. Yeah.

Right? The best YC partners are very careful with how forcefully we give the YC advice. Because like the longer you hear, the longer you have a kind of running record of the time I told someone to do it like this and the opposite worked. Yep. And so, you know, honestly? But to me, you know what the lesson is there, Michael? The founders have made it work believed in themselves and they knew that we couldn't fix it. Like they actually internalized the whole metal.

a point of this video, or at least what I'm trying to get across with it, which is like, you know, they took bits and pieces. They took information from the outside world, but they took personal accountability that they are the ones who are going to have to make it work. And they weren't counting on blindly following anyone as being the way. It ain't. Right? Nope.

And especially in including us. Yeah, I think that the big takeaway here is that as a founder, it's your job to figure out how to best use these people who are here to help you. All these investors who are here to help you, it's your job of how to figure how to best use them. They all have your interests in mind, but none of us can tell you exactly what to do to win. None of us. And like, it's funny because at the YC kickoff, the first thing we say is that, you know, we're experts in failure. We know a lot of paths to not take. But if you want us to sit next to you at your desk and tell you everything to do to win to become a billion dollar company, we can't do it. And we actually ask them. We're like,

hey, and if you want to leave YC right now, we'll give you our shares back. Like, we don't want you to come in here with any false pretenses. Like, this is a hard problem. Most people don't succeed. And like, you're going to be able to deserve 99.9% of the credit if you figure it out because you figured it out. All the rest of the people around who helped you, they didn't figure it out. Dalton, before we close, you know, we've talked about a number of examples of when investors give advice and it kind of pattern matches to where they come from, but might not apply to you at this time. What are some of the pieces of advice that you've gotten from investors that have really made a huge difference? Like what is, what's been to some examples of great investor advice?

Because, you know, I think you and I both have these. I think the best investor advice I ever got as a founder is that I was swimming in my head with too many ideas at once and I had too much data and that someone from the outside could look at everything and be like, oh, this is working. They could take all of this like consternation and like complicated stuff. And like I can think of a couple times in my life when someone was just like, this is working. You should do more of this. And they were right. And it added a ton of value.

Or conversely, this is bad. You're failing. And again, I was full of excuse. Like my brain was full of like a thousand different threads going a different direction. But to have someone synthesize that into something very simple was super helpful, dude. I got great advice like that when I was a founder. Number one piece of advice we ever got was from, you know, someone who had experienced big companies, guy named Gideon, you.

And we had just gotten Justin TV profitable, and we were very proud of ourselves. And the first year, we really tried to monetize, he made $8 million in annual revenue, which I think now would qualify us as like a deck of corn or something. And he came to talk to us, and he basically said, folks, look, you should be happy. Congratulations. But your company sucks. And we don't change stuff. It's all going to die.

and all the work you put in so far, no one's going to remember what you did. And what was great is like there was no like, and so you should do this. It was just more like him. And that's my current status of your company in a nutshell. And it's exactly what we needed to hear. We're just like,

the best investors point out the problem. They don't give you a solution. They just point out the problem. And they, it's true. We knew it. We knew that was the problem too. It's just when someone says it to you.

You're like, oh, crap. But isn't that funny? Because again, like so many insombs, synoms in life are set up to be nice or to tell people that they're great and they should stay great and everything they're doing is great and they're taking over the world. But weirdly, again, if I think back to the founder of advice that I got and same with you, it's actually when people were kind of hard on us. That was actually what was helpful. Yep. Well, you know what was crazy? One of the reasons why I think Gideon felt so comfortable giving that advice is that he had no interest

in investing in us at all. Yeah. He literally had no interest. And, you know, that's a counterintuitive thing, right? Like, wow, it's like really, you can get a lot more honesty out of somebody when they're not financially incentivized to kind of blow smoke up your ass, to, you know, to say nice things. So, all right.