A Decade of Learnings from Y Combinator's CEO Michael Seibel

okay great to see everyone I thought what I would do that could be the most helpful is teach you a little bit about what we've learned at YC over the years to give you a sense of why see we've now funded over 2000 companies about 4,000 alumni our companies combined are worth about a hundred billion dollars we have about a hundred companies that are worth over a hundred million dollars and seventeen worth over a billion and our top 100 companies have created over 28,000 jobs most people know the YC accelerator but YC actually has a number of programs now including a MOOC the accelerator a series a program to help companies raise series a and a growth program to help companies expand post product market fit even though we've had a lot of success I would argue that we are far more successful in understanding failure and so sometimes we call ourselves experts in failure and what I'd love to do is talk to you about how we see YC companies fail typically the story starts after demo day so after you've raised somewhere between half a million and three million dollars so like any good list I have a top ten list we'll start with number one assuming that raising a successful seed round means that you've reached product market fit this is extremely common we tend to get a lot of founders in YC who've never experienced the frenzy of a normal demo day and have never seen all of these interesting investors actually wanting to talk to them what ends up happening is they think these investors are so smart and they think these investors because they like and want to invest in their company their company must be amazing and it's going to go on to become the next big thing unfortunately that's rarely the case the vast majority of the best investors have invested in whole dozens of companies you've never heard of who've died and so it turns out that because you raise a check from a famous name or because you're able to raise a lot of money almost has nothing to do with whether or not you have a good product or whether you have something their customers want so in reality we often have to shake founders after demo day and say you know whether you have product market fit or not you know whether you have negative margins or positive margins you know whether you have to lie cheat and steal to get a customer to use your product whether they're coming in every day you know whether your product is actually solving the customers problem you are the biggest expert in your company don't let an investor convince you that you are further along than you are so that's number one number two is hiring too quickly I think that startups have this mentality that after they've raised a million or so dollars they immediately have to get to eight to twelve people it's a cargo cult thing what a successful angel funded company looks like in the valley this always surprises me because around that size the primary job of a CEO has to start switching to management and usually for a pre product market fit company the primary job of the CEO should be to focus on product market fit you can see the disconnect so we really tell companies to not cargo call to what they think is success when success happens it's going to punch you in the face and you're not going to be able to confuse it for anything else if you're not getting punched in this face with traction you're not succeeding and you don't need all those people unfortunately a lot of the advice that we have to give a year-plus after demo day is you need to let some of these people go because you're running low on money and you didn't find product far could fit other mistakes in this area are trying to take on too many problems or products at the same time we often see a companies will try to spin up product to when product one hasn't even hit product market fit yet we also see that if you create the expectation inside of your company that you have product market fit with your employees and you don't grow your employees start asking questions and you really set yourself up to not be able to answer them well so you want employees who are excited to help you find product market fit not employees who think oh this is a rocket ship that's just false started that's the easiest way to get your employees to leave number three is not understanding their business model if we really look at a lot of YC companies nowadays we have a ton of b2b companies and the most common mistake they make is they don't really understand if they can afford the process they need to do to acquire customers often times we see founders who want to be SAS founders but they're running an enterprise company or founders who want to be Enterprise sales people but awkwardly their product only costs a couple thousand dollars a year and so a really big disconnect is not actually pursuing the strategy that like just interests you you have to pursue the strategy that actually is commensurate with how much you're going to charge and who your customers are much of that is decided for you so the next one number four is not understanding when it's the right time to sell into a tech startup so this is one that YC has a lot of experience in one of the superpowers that not many people understand about YC is because we have so many companies who've done YC in effect you get warm leads to anyone who's ever done YC so it's a lot easier for YC companies to sell to one another that's not a surprise you have companies like stripe or Mixpanel or Brax who are able to you know acquire tons of YC companies very early what's interesting though is that this strategy of selling founders early has pluses and minuses oftentimes people will tell you to not sell to startups they'll say things like well your customer doesn't have much money to spend your customers likely to die you're gonna have high churn rates so on and so forth what I would tell you is it depends on what you're selling we've seen a long history of YC companies be very successful in selling to startups initially if they're selling key components that if they work they will not be ripped out if your payment system works you're not going to rip it out also when you sell the startups you're often pitching a founder founders have the ability to control budget and make decisions quickly so their pros and cons are selling the startups but I'd argue that it's been extremely successful within YC and it's a great way to essentially build a brand as being an innovative tech company that you can then use to sell to larger customers later what I will say though is that there are some advantages of disadvantages to not selling into an early-stage startup the advantage is clear they have more money and less likely to churn it's more likely to be a real business the disadvantage that some people don't realize is that if you're selling to a larger company you're often selling into an executive and you don't know what their power what their budget what their decision-making ability is inside of the company also you don't know the products that that executive used previously that there might be inclined to continue using in their new role so this is something you should always consider you know when is it better to enter into a company if you can get in early it often is better and you can often grow with the company but if you're not solving a problem that an early-stage company has you have to go later unfortunately next number five is assuming investors will be a large differentiator the best advice I got for as a start-up founder was very simple in a investor gives you money signs paperwork when you want them to and shuts the up that's an a there's a lot of room below an a there's not a lot of room above founders often believe that their investors are going to do far more for them then actually they end up doing and I've thought about this a lot and I've realized why it's actually really simple there's only one skill that an investor can iterate and improve on in the short term it's hard to know whether you're a good investor for years but it's easy to know whether you're good at this very quickly and that skill is closing so oftentimes as a first time founder you will experience investors who are incredibly good at closing it often involves promising you the world and it's one of their amazing skills unfortunately it's extremely rare that investors will practice the ability for helping because once they're on your crap table it's on to close the next deal their motivation is to get into as many good deals as they can so I often see a disconnect with YC founders who get promised the world on demo day six months later people are applying to email slowly and so I just like to tell these founders if you don't go in with much expectation about what your investors will do you will be disappointed when they don't reply to your emails and this is more common than people talk about I'll also say it on the other side once you are successful to any degree there is a large amount of advice and help that people be willing to give you for free I've experienced this twice in my startups and I see it every day with YC startups so someone doesn't have to be in your cap table to help you and success creates more success all right number six the next big problem we see companies have post demo day is not establishing best practices around hiring so I don't mean about the number of people they hire I mean about setting up an intelligent interview process that good candidates are actually going to enjoy going through having good open communication about equity which is something that I see a lot of founders really flubbing pretty hard not setting clear expectations about what an employee's role and responsibility is going to be not talking them about the mission and culture of the company and then most importantly over believing in their ability to hire great people I've never met a founder who says oh I'm not good at hiring great people I always meet founders to say my team's the best and not every team clearly not every team is the best I often ask founders especially when they're struggling with money do you have any non-essential employees non-essential and by that I mean it's like if this employee left tomorrow you wouldn't be crying in your bed an early stage pre product market fit company should be trying to minimize their non-essential employees and you should not believe you're great at hiring which means unfortunately you're probably enough to do a lot of firing if someone is not an essential employee within three months that's often a great sign that you didn't make a good hiring decision and that's hard to hear because it's a lot easier to give them more time to change responsibilities so on so forth but you're not going to be great at hiring everyone is not great at hiring Google is not great at hiring so understand you're going to make mistakes number seven not establishing best practices around management this is something that I see extremely commonly it turns out that early stage management isn't that complicated but if you don't do it your team performs poorly and so with this typically what's missing are consistent one-on-ones between managers and employees some type of All Hands meeting getting employee buy-in on strategy and tactics I can't tell you how many companies run with two co-founders who go into some magical room and come up with some magical idea and the rest of the team has to build it no questions asked I always say to myself if you're an amazing hirer and you're bringing the smartest people into your company why wouldn't you want their opinion about what you're building furthermore someone's always gonna be more motivated to build the product that they had some say and figuring out what it was going to do so actually having a good process for getting that buy-in is extremely important and then the last one is not creating an environment or on transparency around money in the bank and KPIs if you're not transparent with your employees about how success for your company is doing or how much money you have in the bank one it's likely they're gonna try to find another job that's better but - they're gonna suspect the worst we saw this adjust in TV work the opposite way we were always extremely transparent about our cash in hand our months of runway hour traffic our revenue and there was a moment where we only had two months of runway left we were generating about 750 thousand dollars a month we were burning about a million dollars a month we'd half a million the bank and instead of employees leaving left and right we sat everyone down and we basically asked a simple question are we going to cut to a hundred K a month burn which is gonna give us five months of runway are we gonna break even or we're gonna get profitable and everyone said in unison we're gonna get this company profitable two months later we were profitable and we ended the year with eight million in revenue and 1 million in profit and so when you transparent with your employees they will actually rally to the cause even when it looks like you're in your darkest hour when you're not transparent with her employees they're not gonna rally unfortunately and they're probably gonna be pretty vindictive the next one is one that we suffer to justin.tv this was not clearly defining roles and responsibilities between the founders so it's very common that in the early stage everyone does everything and you don't really need strict roles and responsibilities but after you raise money and you have a couple of employees suddenly there are some hard decisions to make who's gonna lead product who's gonna lead tech who's gonna lead sales who's me responsible for recruiting it's often the case that teams will not make these decisions and then every decisions larger small will have to go into some kind of founder committee to get resolved and I think one of the best things that good startups do early on is to find responsibilities and make it to that only the most important decisions end up being something that's debated the other part about this is being willing to see your co-founder try something that doesn't work our being willing to see an employee try something doesn't work you have to be ok with that your ideas aren't gonna work most of the time either so really sitting down and having a hard conversation about who does what and whose response for what in the beginning is very valuable number 9 almost done here not having level 3 conversations within the founding team to relieve conflicts there will always be conflicts within the founding team there will always be performance issues there will always be need for change in roles and responsibilities this will always happen in every startup great startups have a system to have hard conversations bad startups either bottle it in or get into constant fights and so having some type of system where the founders are going to meet and work through whatever the issue is of the day is extremely important I think the most important thing here is to actually create a space where people feel comfortable providing really on the point feedback without feeling like they're attacking or feeling attacked and it takes a lot of effort to create an environment where someone can be extremely honest to someone without being perceived as attack but most companies slow down significantly if the founding team doesn't have these types of conversations and there will be problems and so this is another strategy to get through them quickly alright number ten this is the biggest one and this is something that cripples YC companies specifically a lot assuming the series a will be as easy to raise as the angel round it's interesting that a lot of founders look to series a investors for advice on when they're ready to raise a Series A it's tricky because you're getting advice from an extremely biased source the thing that I hear founders tell me time and time again with b2b startups is I can raise a Series A with a 1 million dollar run rate time and time again like I hear this probably every week so they think I'm gonna take all that angel money shove it into getting a million dollar run rate albeit six months of runway or less and series A's will just come knocking on my door they say this often parroting series a investors so you on stages like this and say oh yeah if you've a million dollar on rate I would love to talk I think the thing that we've realized is that for most investors who are considering writing a 5 10 million dollar check that is the first moment that they might be interested in talking to you it's really interesting right that's the moment where they want to basically preempt or front-run anyone else but they don't want to waste their time so put another way that's the moment where they have maximum leverage in the negotiation and they have even more leverage if you've gotten to that 1 million dog run rate with not much runway you've grieved you've given that series a investor maximum leverage that's not how I like to fight battles and so oftentimes I tell my founders to think about this slightly differently I like to tell them hey you should think about this like a video game and if you have to fight a level 20 boss and you got 3 options you'll grind up to level 10 and get your ass kicked 20 times in a row you'll grind up to level 20 and maybe have a 50/50 shot of winning your grind up to level 30 and you kill the boss every time which one would you rather do different founders of different preferences but more often than not founders rather go into a series a conversation with high amount of leverage so that they can get the investor they want at the terms they want in the least amount of time usually our guidelines for b2b companies is trying to be in 150 to 250 K a month range that and close to profitable that puts you typically in the maximum leverage category which significantly increases a chance that going on raising a series a will result in a serious a most founders don't quite understand how rare series A's are and the number of companies that go out and try to raise series a is versus the ones that actually succeed it's a very low conversion rate the other thing that's tricky here is advice your angel investors often don't give great advice on this subject they're often parroting the advice that they're seeing from investors so just because your angel investor thinks you can raise a series a once again don't put on your blinders you understand how much leverage you have you can look at your numbers and you'll know how much leverage you have the other thing is don't be assessed which you read on TechCrunch during my entire 20s I saw stories on TechCrunch every day about some Jo raising ten million dollars for some company that was clearly gonna fail it had no traction at all every day and I thought to myself what the like I can't raise two million dollars and this guy's raising ten million dollars after we learned fundraising better after we raised our Series A in series B after ice became in my 30s I realized something very different suddenly all of my friends who struggled to raise in their 20s were easily raising in their 30s and I look at these friends that I'm saying you're better but you're not that much better than you were back then so what's different in reality two things are different investors I don't think for a good reason significantly bias for second time founders significant bias toward second time founders and there's something you have to understand second if you've been in the valley for 10 years a lot of times you're pitching people you know this is something that always blew my mind it's a lot easier to try to get five ten million dollars from someone you know that someone you're meeting for the first time at a VC office and so because someone raises doesn't mean they're doing well because someone raised it doesn't mean the business gonna work because your competitor raises it doesn't mean that they're better than you you don't know all the circumstances behind that fundraise and so because they raise it doesn't mean you can and so I often tell people you can try to think that maybe you're special some people are special you know my former co-founder Justin Kahn he can probably raise with you know a haiku you could raise a lot of money but most people aren't special they need leverage and so when you go into a fund raise the better bad is to have as much leverage as possible these are the ten things that most YC companies get wrong especially the b2b ones post demo day the last thought I'll leave you with is that I actually think most of our startups have a pretty good hypothesis a pretty good thesis on why their company can be big I think that most of them fail not because their hypothesis or thesis was wrong I think most of them fail because either their timing was slightly off or because of some of these problems they didn't have time to iterate their products so that they can find the real solution to the problem that they're trying to solve if you take the case of Justin TV and twitch you know twitch sold for a billion dollars but most people don't really understand the backstory note which started as an online reality TV show and if you look at the story it started in 2006 and by 2012 it was worth $24 by 2014 it was worth a billion so that entire time we were trying to figure out the entire time and took us a long time six years to actually figure out what the market wanted how the POW to solve the problem we're trying to solve if your plan is you're gonna you already have solved the problem or you think you've already solved the problem or you just need six months to figure out the solution B where it might take a lot longer and so if you keep a small team if you iterate quickly and if you don't believe the hype and you actually understand whether your product market fit you can actually take the time you need to solve the problem and I tell this to YC companies at the end of every batch you know it might take you one year to get it it might take you three years to get it it's a lot easier to raise your series a post product market fit it's a lot easier to scale once you know what you're building so stay lean until you have that moment the last thought I'll leave you with is a really fun one I always find funny founders hate it we have two kinds of founders calling in the emergency one when their company is dying that's extremely typical the others when their company is succeeding and like I think the funniest thing that happens in startups is success hurts more than failure because success comes with all these expectations so not only is everything breaking and everyone's complaining and your customers are yelling at you and your servers are going down but now like you might have something so you better like the the expectations are now really high so just remember that like remember that unfortunately on this journey like the good times feel bad and the bad times feel bad it kind of sucks but hey this is what you signed up for and no one force you do a start-up so with that thank you so much good luck you

Channel: SaaStr

Views: 119,605

Rating: 4.9589076 out of 5

Keywords: Michael Seibel, Y Combinator, saastr, saas, saastr annual

Id: 0MGNf1BIuxA

Length: 26min 15sec (1575 seconds)

Published: Wed May 08 2019