by Y Combinator4/17/2019
Anu Hariharan is a Partner at YC.
00:00 – Max’s intro
00:34 – Leaving Square and coming up with the idea for Faire
7:05 – Changes to SMBs in the past five years
9:05 – What is Faire?
11:25 – Max’s vision for Faire
14:40 – Finding product/market fit
17:40 – Switching to try before you buy
20:50 – What separates the great companies
22:00 – Scaling as a CEO
26:00 – Calming down
29:10 – Faire’s first hires
33:10 – Faire’s first executive hire
37:55 – Fundraising and fundraising advice
43:00 – Ryan McCarthy asks – Why did Max study history at Yale?
44:00 – Why does Max think Square Cash became a successful app?
Craig Cannon [00:00] – Hey, how’s it going? This is Craig Cannon, and you’re listening to Y Combinator’s podcast. Today’s episode is with Max Rhodes and Anu Hariharan. Anu is a partner at YC. Max is the Co-Founder and CEO of Faire. Faire helps retailers find and buy unique wholesale merchandise for their stores. They were in the Winter 2017 batch of YC. You can try Faire at faire.com. Max is on Twitter @maxrhodesokan and Anu is @anuhariharan. All right, here we go.
Anu Hariharan [00:32] – Hi everyone, this is Anu, partner at YC. Today we have Max Rhodes, Founder and CEO of Faire. Faire went through YC’s Winter ’17 batch and YC Continuity also led Faire’s Seris C round. Very excited to have you here, Max.
Max Rhodes [00:49] – Excited to be here.
Anu Hariharan [00:50] – We have a lot of questions from our Twitter audience but I think we’re going to touch on three topics, broad topics, today. One is the early days of Faire, and two, we’ll talk about scaling, and third, we’ll talk about fundraising and how you chose partners. I’d like to start with the first one, which is the early days of Faire. It’s not often we see companies trying to disrupt retail and local retail, especially given the strength of Amazon. So can you talk a little bit about, how did you come up with the idea of Faire, and what were some of the early days like which gave you conviction that there was something here to build?
Max Rhodes [01:30] – I went against the advice of almost everybody I knew and left Square about three years ago, specifically to start a company. I explored a bunch of different ideas.
Anu Hariharan [01:42] – And did everyone tell you not to leave Square?
Max Rhodes [01:45] – Everyone told me not to leave without a burning need to start a company. Like, don’t start a company just to start a company. I actually think in retrospect, they were probably right and I think we got kind of lucky. I just plowed ahead and we explored three or four different ideas in the process, and it was actually around the third idea that we were exploring. We were trying to sell dental drills from Brazil.
Anu Hariharan [02:14] – Dental, how did that happen? From Square to dental drills from Brazil.
Max Rhodes [02:19] – One of my co-founders had a connection in Brazil to this dental drill manufacturer and it was like diamond coated and it supposedly didn’t cause pain, and it was quiet. This was actually the moment where I realized this is why people tell you not to just go leave to start a company, because you can end up trapped with an idea that you’re not really that excited about but you feel this pressure to do it because it’s what you set out to do. We actually started to try to raise money with it and it got bogged down in the legal questions of can we actually extract the IP from Brazil? I remember being on the phone with Marcello, my now CTO, after one of these hour long discussions where we were racking up crazy legal bills, and just saying, like “What are we doing? Why are we trying to sell dental drills? This is not what we should be doing.” We know how to build software, that’s what we did at Square. We built Square Capital, we built Cash App, this is what we know how to do. We made the very difficult decision for our third idea to just scrap it and start from scratch again, and decided to work on what ultimately became Faire. The reason why we picked this idea was, I had this experience of introducing this product called the BLUNT umbrella to the US Market, it’s a signed umbrella from New Zealand, and I knew first hand how painful the wholesale market was. How hard it was to get products into stores. The whole time that I was doing BLUNT, because I did it while I was on the side at Square,
Max Rhodes [04:09] – I kept going to these trade shows and kept thinking like, there really should be a better way to do this. I wasn’t sure if local retail had a future. You mentioned the whole Amazon thing and to be honest, that was kind of where my hangup was. I just decided, I know this problem exists. Maybe it’s a small market, but let’s just start somewhere. I started to dig into the data and lo and behold, local retail actually is making this comeback. It’s starting to get a little bit more attention now, but at the time it was just stitching together census data. Local book stores have been coming back since 2011 since Borders went bankrupt, pharmacies are coming back, grocery stores are coming back. You’re seeing this renaissance of shop local in communities all across the United States. We started to build confidence that like, okay maybe there is something here, maybe there is a wave that we can ride here, if we can figure out how to crack the actual problem itself which is the wholesale problem. I started doing customer interviews and it was in the customer interviews that we uncovered, a pretty interesting insight, which is if you ask a local retailer, if you ask a small shop owner, what’s your favorite part of your job? They’ll say, finding new products. That’s what gets them out of bed in the morning, connecting with makers, bringing new products into their stores, and that’s what excites their customers, too. It’s that moment of, somebody walks in and sees something,
Max Rhodes [05:49] – “Oh, this is so cool, where did you get it?” That delight that they see in their customers, that’s what it’s all about for them. And then, if you ask them, well, how many of the products that you carry are new? And most of the time, it’ll be somewhere between 20 and 30% and that was where I started to dig in of well, why? The answer always was because it’s scary to bring on new products. If you’re a local retailer and you’re buying new products that you’ve never carried before, you don’t know if it’s going to sell. You don’t have a relationship with the vendor, so they’re not going to give you terms. You’re going to be shelling out your cash which is a very precious resource for a small business and if it doesn’t sell, you’re stuck and so you’re one bad buying season away from going out of business and so they have a portfolio approach where they mostly stick with what they know is going to work and then occasionally spice it up with a few new things–
Anu Hariharan [06:50] – Even though the new products actually generate a lot of sales.
Max Rhodes [06:53] – Yeah, exactly, when they get it right.
Anu Hariharan [06:55] – When they get it right.
Max Rhodes [06:55] – When they get it right.
Anu Hariharan [06:56] – And it’s important to get that right.
Max Rhodes [06:57] – And even though that’s the fun par of the job. It’s very important to get it right. I realized why nobody had ever figured out how to move this market online, it’s because they’re going to trade shows to solve inventory risk, to like get over that fear so that they can touch and feel the products and really feel good that this is something that’s going to do well in my store. That ultimately led to us thinking, well, how can we fix this? How can we help them fix their inventory risk? And that’s where we really drew upon the Square experience where we started thinking, what has changed?
Craig Cannon [07:38] – One of the big things that has changed is that all of this data about SMBs, about their inventory, about their social media presence, about who their customers are, on both sides of the market both makers and retailers, that’s now available online.
Max Rhodes [07:55] – Really for the first time ever. It’s changed–
Anu Hariharan [07:58] – Wasn’t it available like–
Max Rhodes [07:59] – It’s changed over the course of the last five years.
Anu Hariharan [08:00] – It’s only in the five years? What prompted it to happen only in the five years?
Max Rhodes [08:04] – SMB started adopting social media. So they started really relying on Instagram. Facebook, and then they started adopting cloud-based point of sale systems. Square, Shopify. Before Square, most point of sale systems were on-premise systems, and so the data lived on a server inside the store, if they even used a point of sale system. A lot of times it was just like paper and pen with a cash register. It was this confluence of social media, eCommerce presence as well was a new thing, with Shopify. It was this big wave and we a little bit made the bet based on our experience from Square that we could take on the inventory risk for these stores and eventually build machine learning algorithms that would predict what would sell where, and actually get better at managing inventory risk for the store looking across thousands of stores than what you could do if you’re an individual store owner.
Anu Hariharan [09:10] – It’s actually fascinating because at YC we often say, especially that early in the batch, it’s about finding a market fit. It’s about solving your own problem which you had from your experience having launched BLUNT umbrellas and the unique experiences you all shared from Square to really understand the SMB market. Now, some of the things you describe as part of the unique insight, which was like people like to touch and feel, people want to manage inventory risk, still exist even if you move online. Can you explain, what is Faire? What does it do, and how does it help solve some of those?
Max Rhodes [09:42] – Good question. If you don’t have that context, it’s important. Faire, it’s a wholesale marketplace. We connect small retailers, one to 10 location stores, the kind of stores that you’d find on Main Street all across the United States that are coming back. And then we have makers, craft brands, smaller manufacturers on the other side. Kind of the maker revolution types of folks. We connect them together with this wholesale marketplace. Rather then going to trade shows, or hiring sales reps and doing this all face to face or over, you know with pen and paper, they move their whole business online and it works just, it’s like a wholesale version of Amazon. The key insight or the key differentiator for us is actually something that’s been used in consumer eCommerce for decades to move consumers online. It’s free returns. We’re just replicating that playbook that’s been used before but in the–
Anu Hariharan [10:47] – So that’s how they do the touch and feel. Because you give them free returns.
Max Rhodes [10:51] – Exactly.
Anu Hariharan [10:52] – And is it an auto-set duration?
Max Rhodes [10:52] – Yeah, exactly. And I think free returns matters more in our business, even than it does in the consumer business because of that inventory risk that I was referring to earlier. It’s also harder to manage. Free returns really would not have been possible even five years ago, I think. But with all of this data, we’re able to predict what sells where, and that’s how we’re actually able to–
Anu Hariharan [11:18] – So the better matching will help you also solve that issue.
Max Rhodes [11:22] – Yeah, exactly.
Anu Hariharan [11:22] – But then you offer returns so that they still have the touch and feel.
Max Rhodes [11:25] – That’s right, that’s right. It’s a value proposition that both draws the retailers in and then it also actually makes the system smarter and it then turns into another value proposition which is, we are seeing what’s selling, what’s being returned, and we can then use that data to help retailers make smarter buying decisions. If you come in and you place an order and you return part of it, we then know the types of products that don’t do well for you and we’ll recommend you other products that are more likely to do well.
Anu Hariharan [11:58] – What is your vision for Faire? What do you think happens to local retail five years from now, or 10 years from now given what you are trying to do?
Max Rhodes [12:07] – Local retail has some big advantages over particularly big box retail, but even over Amazon. The reason for that is, these retailers have spent the past 50 years figuring out how to compete with larger competitors that have larger assortments, lower prices. The ones that survived were the ones who evolved and figured out how to offer more curated assortments, better experiences. A lot of the things that people are now talking about is the future of offline shopping. That’s what local retail’s been doing for the past 20 years, and that’s why they’re doing well. At the same time, they’ve evolved, the industry around them has not. The technology industry’s basically ignored this whole space, sort of assuming Amazon’s coming, it’s going to go away, like I did two years ago when I was kind of hesitant to move into it. What I believe what we’re going to do is we’re going to accelerate the shop local movement by basically eliminating a lot of the advantages that big box competitors have traditionally had over retailers. If you’re a big box retailer, one of the ways that you made life hard for small retailers is you had more data so you had your assortments much more optimized, there was less cost in your supply chain, so you could offer lower prices. You were able to get capital so you had larger assortments. These were things that smaller retailers never had. You also actually had free returns. Big box retailers had free returns for decades.
Anu Hariharan [13:41] – Correct.
Max Rhodes [13:41] – It’s called buy backs.
Anu Hariharan [13:43] – Yes.
Max Rhodes [13:44] – We’re leveling the playing field for these small retailers and so you have the tandem advantage of this seismic shift in consumer sentiment towards shopping local and then the leveling the playing field with technology and I think the future of retail is going to be local.
Anu Hariharan [14:04] – Local.
Max Rhodes [14:05] – If you look back over thousands of years, trade and retail was about community. Trade is what brought us together in the first place. It was, you know I would trade some pots to somebody who was maybe a great blacksmith. That was the economy, it was local, it was about community. Over the course of the past hundred years we lost that a little bit and people are craving a return to that and I think we can help use technology to support that revival of community and that revival of local shops.
Anu Hariharan [14:44] – The shop local movement is real and also like access to unique supply is real and you were also saying a lot of makers, individual makers, trying to establish themselves in that regard. That movement is definitely happening. Now let’s think about your want for Faire. Quite a few founders have a really good vision and a clarity of thought, but when it comes to execution, you still have to go through the ups and downs of the motions. Talk about the first year at Faire. You know, right from when you went through YC demore and post demore. When did you really start thinking you have some early signs of product market fit? You clearly had found a market fit. But when did you really actually see that?
Max Rhodes [15:29] – I would say it came in waves. There were definitely early signals. You know customers, they would lean forward in customer interviews, and then I remember our first order, I brought a printed sheet of paper with just the names of the products and the prices and I said, “If I let you buy this on consignment where there’s no inventory risk, do you want it? ” And the retailer said “Yes, I want all of it.”
Anu Hariharan [15:56] – So that’s how you made your first sale?
Max Rhodes [15:58] – Yeah, that was our first sale.
Anu Hariharan [15:59] – Not on a website.
Max Rhodes [15:59] – No.
Anu Hariharan [16:00] – Not on this vision that you have laid out for Faire. Okay, so you took a printout. And what store was this?
Max Rhodes [16:06] – Wink SF. In Noe Valley. That was the way we got most of our our first probably 10 customers came that way. We started to try to scale the business, we definitely started to have doubts because it just was feeling too hard. I could just through sheer force of will sit somebody down and get them to buy the products, but once we tried to move it to tele-sales.
Anu Hariharan [16:35] – I could have predicted that.
Max Rhodes [16:37] – It was, yeah it became more difficult.
Anu Hariharan [16:39] – Yeah, it’s hard.
Max Rhodes [16:41] – And once we hired a couple more sales people every time we added a little bit more friction to the process, the excitement and the conversion rate and everything just started to deteriorate.
Anu Hariharan [16:59] – Did it start to slow down? Did it manifest into slower growth or was it that you couldn’t accelerate?
Max Rhodes [17:04] – A little bit but it wasn’t accelerating. And it just, we could feel it. It didn’t quite feel like this is it.
Anu Hariharan [17:15] – You didn’t have the inflection point where you hit escape velocity.
Max Rhodes [17:16] – Exactly, exactly. We played around with a bunch of different value props. We did away with the net 60 payment terms or the net 90 payment terms, we started trying discounts. I remember at one point we were at a trade show and I literally was trying to give the products away and it turns out trade shows are a terrible venue for us because the customers tend to be a little more old school and they just didn’t want it. They didn’t want to buy online and–
Anu Hariharan [17:42] – Well, they’re trying to see all the products that are available, right.
Max Rhodes [17:44] – Exactly, they’re there to touch and to feel, they’re not there to order on a computer. We went to the New York Now trade show which was actually where I originally got the idea of launching BLUNT umbrellas. It was there that we were trying all these dumb value propositions, just throwing stuff against the wall, trying to sell a dollar for 90 cents and I called Daniele, one of my company-founders, and I said, “It’s not working, I think we should go back to the try before you buy inventory risk thing,” because all these other things aren’t working. And he said, “Yes let’s do it, I think you’re right.”
Anu Hariharan [18:24] – And so that gave you more conviction to go.
Max Rhodes [18:26] – We were on the same page. He also felt like something was off. And we went in that morning to the trade show booth and 9:00 a.m. retailers started showing up and I started pitching try before you buy and they started seeing the products that we had.
Anu Hariharan [18:44] – Literally in one day you just switched.
Max Rhodes [18:45] – In one day. We sort of wandered in the wilderness for a few months trying different value propositions and honestly not maintaining our conviction while Olivia was building up the assortment. And it turned out the reason that we were struggling was we just didn’t have enough supply, we didn’t have the right supply. The value proposition was amazing but without the supply, it didn’t matter. And when you combined the two together on that morning, it was magic.
Anu Hariharan [19:16] – And how much did the growth change after that?
Max Rhodes [19:18] – Oh it was, overnight.
Anu Hariharan [19:21] – Overnight.
Max Rhodes [19:22] – Yeah, and you could, again you could see it in their faces, people were spending hours shopping on the site and buying and placing big orders and I called Daniele, I said, “This is it,” like we did it. And we were invite only at that point, we’d been all hand to hand combat sales and we decided this is it, let’s open it up, let’s launch. And so, it took us about two weeks to rebuild the website and pull it out of invite only. We turned it on.
Anu Hariharan [19:49] – Well, thank god we have a site from print outs.
Max Rhodes [19:50] – Yeah, yeah exactly. Advanced a little bit from there, and I was funny enough on my honeymoon the week that we launched.
Anu Hariharan [20:02] – It always happens that way.
Max Rhodes [20:03] – It always happens, yeah. You’re always on your honeymoon when you–
Anu Hariharan [20:06] – Yes, some honeymoon.
Max Rhodes [20:09] – I remember sort of sneakily checking the metrics from the Galapagos and it was just green. Just all green every day, 10%, 15%, 20%, 30% and we went from doing $100,000 in sales in August to a million in October.
Anu Hariharan [20:34] – Oh wow.
Max Rhodes [20:35] – Just in the span of three months. Not even three, two.
Anu Hariharan [20:38] – That’s really good. And you know I think many companies in YC we’ve seen who have actually found really strong product market fit, like go through one of those defining moments and if I remember for Instacart, it was actually switching from search for a tomato to search by a store.
Max Rhodes [20:53] – Wow, I didn’t know that.
Anu Hariharan [20:54] – It was literally, because people buy groceries by looking at a store, right? If you’re buying shampoo you know whether you want Pantene or something else but your groceries you know whether you go to Trader Joes or Whole Foods or Safeway and so switching to by store search dramatically changed the buying game.
Max Rhodes [21:13] – Yeah, it’s little things. And I remember asking Mike Moritz at a Sequoia event who obviously, amazing investor and has seen a lot, I think was on the board of Instacart.
Anu Hariharan [21:28] – Yes, he’s still on the board.
Max Rhodes [21:30] – And I asked him what like sets apart the great companies from those that don’t do as well and he thought about it for a minute and then he said, “Constant application of force.” They have a vision and they just keep pushing against it. I think that’s a great way to describe it.
Anu Hariharan [21:51] – I think that’s spot on because I think one of the founders last week had told us this, which is from the outside it feels like we were genius in figuring out all the strategy but only the inside we know we tried a hundred things and the one thing that worked we didn’t know was going to work.
Max Rhodes [22:08] – Yeah, that’s right, that’s right.
Anu Hariharan [22:08] – That’s a great way to move from the early days story to scaling people management because clearly now you have very strong product market fit and you are, how many people do you have right now?
Max Rhodes [22:21] – A little over a hundred.
Anu Hariharan [22:22] – A little over a hundred, okay. The second phase of company building is really about scaling people management, right? Especially scaling yourself as a CEO. What has been your biggest learnings so far as you’ve scaled as a CEO? One or two things that you’d love to share with the other founders.
Max Rhodes [22:42] – It’s been an interesting experience for me because I came from a product management background. I had just a tiny bit of people management experience at the tail end of my time at–
Anu Hariharan [22:56] – How many people did you manage at Square?
Max Rhodes [22:59] – My last team I think I had seven or eight. But that was for maybe six months. Prior to that, it was just all product teams. And when you’re a product manager, you’re not managing people, you’re managing through influence and you’re managing through just convincing people desperately to try to do what you want them to do. It took me some time to figure out what was different about people management. One of the things that I really struggled with was I didn’t know what kind of relationship I was supposed to have with the people who worked for me.
Anu Hariharan [23:45] – Can you elaborate on that?
Max Rhodes [23:46] – As a product manager, it’s all about building really strong relationships and building trust and building credibility to get people to listen to you. And as a founder CEO especially, people will listen to you no matter what. Up to a certain point obviously but you have a lot of authority. Sometimes to fault.
Anu Hariharan [24:13] – Yeah, and they’re worried about bringing it up with you.
Max Rhodes [24:15] – Yeah, yeah. And I didn’t know how to negotiate that and it felt uncomfortable at times. And I think the thing that I really struggled with was is it okay to build relationships with the people that work for you?
Anu Hariharan [24:34] – You mean relationships outside of work, like friendly relationships?
Max Rhodes [24:36] – I put up this wall. I had a couple early experiences where we had to let a few people go and that was really really hard and I think that led me to feel uncomfortable building a relationship because if I have a relationship, then I’m not going to feel comfortable giving direct feedback or potentially having to make a really hard decision if I have to. I ended up hiring an executive coach, Shefali, at the recommendation of one of our board members, Kirsten Green who walked into our office at our first board meeting and pulled me aside afterwards and she said, “I think you need a leadership coach because I think everyone’s terrified of you.”
Anu Hariharan [25:21] – I love Kirsten.
Max Rhodes [25:22] – She’s amazing.
Anu Hariharan [25:23] – Yeah, she’s amazing.
Max Rhodes [25:25] – I hired a leadership coach and I worked with her and I read a book called Radical Candor and I think that was really transformational for me, because Radical Candor basically the whole premise is you have to build relationships with the people that work for you. Because you need that trust, because without that trust they’re not going to feel comfortable speaking up, they’re not going to feel comfortable being held accountable for results. The word for it is obnoxiously aggressive. When you give feedback and you don’t have a relationship you’re being obnoxiously aggressive and really it puts a person in a defensive place. If you give feedback when you have that relationship, there’s trust, they know that you have their best interests at heart, they’re going to take it well and they’re going to implement it.
Anu Hariharan [26:16] – Feedback is a gift.
Max Rhodes [26:16] – Feedback is a gift.
Anu Hariharan [26:18] – If it’s delivered well, it’s taken well.
Max Rhodes [26:20] – The stronger that your relationship is with the person, the easier it is to give that feedback. That made a big difference for me. I calmed down a lot.
Anu Hariharan [26:34] – Talk about that. When you say calm down a lot. I often think like it’s really hard to be a founder. I think we talked about this briefly before the start. There’s one part of the day, something goes well and there’s another part of the day something doesn’t go well. So like, what’s the secret behind calming down? Like how do you calm down?
Max Rhodes [26:53] – There are some tactical things that I do. I meditate. Every morning at 8:00 a.m. I lead a meditation for 10 minutes using Headspace with anywhere from five to 15, 20 people at the company. That I found helps a lot because it just makes you more aware of your own state of mind. Part of it is just developing that awareness, being mindful of your own state of mind because I was so stressed out that first year and a half. That was also part of what created that wall is like I didn’t even feel like we could talk about anything other than work, because if we weren’t thinking about work, then we might fail.
Anu Hariharan [27:42] – I remember when we did the Series C round and I think you had taken a two week vacation someone on your team messaged us saying I think we had to exchange docs and someone said, “Max is finally taking some time off.”
Max Rhodes [27:57] – It was my honeymoon, which was five days. And I was checking metrics more than I should have, and that was basically it for that first year and a half. There was just that feeling that I had so many, I’m sure every founder is familiar with that, like existential dread that you carry around and that is a weight that weighs on the whole company and it weight especially on the people that report to you. It hinders performance. People can’t do their best work when they’re under that much stress. And then… Honestly, part of it was we kind of got through the woods.
Anu Hariharan [28:43] – You found stronger product market fit–
Max Rhodes [28:45] – We figured out the business model, and it became less about survival and it became more about how big can we make this, which is a lot more fun and a lot less stressful. Part of it was circumstantial. Part of it was just sort of coming to terms with if it fails, so what? Letting go of that fear of if it fails, so what? I’ll pick myself back up and I’ll try it again ’cause I can’t imagine doing anything else. I really, really love this job and so, if I have to do it again, I’ll do it again. That also, I think, was helpful.
Anu Hariharan [29:30] – Jack and his advice to Sara and the note that he published on Twitter did say it’s okay to fail publicly.
Max Rhodes [29:37] – Yeah, fail publicly, yeah.
Anu Hariharan [29:38] – Let’s talk about people becuase that’s clearly the next element of scaling, right? One you figure out strong product market fit you have a very good business model and a vision that if the company’s able to realize its full potential, can be a huge opportunity enabling more local retail. It comes down to the team at the end of the day, right? And you are scaling from 20 to 70 to now about 100 and probably in a year another 100. Who were your first 10 hires?
Max Rhodes [30:09] – Our first hire, her name is Katy. She’s our founding designer. She was there from the very beginning. I knew that design was going to be really important for us. I knew our customers were designers. I knew from Square that design is so important in small business because small business owners act just like consumers. They make decisions emotionally. If it’s not easy, they’re done. I knew that we needed to build a great experience. I knew it needed to be beautiful. I knew we wanted to create a strong brand because I’d seen that work at Square.
Anu Hariharan [30:47] – Yeah, I know you guys have a very high bar for design because your office looks so beautiful. It looks like a local retail store.
Max Rhodes [30:53] – That’s Katy. Yeah, that’s Katy.
Anu Hariharan [30:54] – So one of your first key hires were design.
Max Rhodes [30:57] – Yeah, design was probably the really really important hire.
Anu Hariharan [31:01] – And outside of engineering, who were any of the other key hires you made in you first year?
Max Rhodes [31:06] – Another really important hire was this woman Olivia. She came from being in company management consulting firm and she sat me down in the first interview and she said this is how your business works. And she was right. It was like spot on. She understood it all the, and it’s a complex, it’s a hard–
Anu Hariharan [31:28] – It’s a complex…
Max Rhodes [31:29] – It’s a complex business to really get all of it.
Anu Hariharan [31:32] – And she managed the assortment?
Max Rhodes [31:34] – So she started out managing the assortment. And she did a phenomenal job with that. We were missing that. Without her figuring that out, I don’t know what happens because we just did not know what our retailers wanted because that wasn’t, we knew small business, I knew the problem from the wholesaler perspective, but I didn’t shop enough in local stores. That was like one of the key missing ingredients.
Anu Hariharan [32:00] – That is an important point, right? Because all three co-founders, I don’t know how much experience you had shopping local retail, and you needed someone early on.
Max Rhodes [32:07] – We really needed somebody who had that and she brought that. Once we started to scale and we were live, she took over Facebook advertising. She’d never done Facebook advertising before. We tried to use a contractor and it was a mess and it wasn’t working and she just took it over and like a week later, we were doubling our growth rates through Facebook advertising. At that moment, I was still product manager and CEO and it wasn’t working and Daniele and Marcelo were telling me you are doing a terrible job as the product manager, we need to hire a product manager. I didn’t want to hire an experienced product manager because I think in early stage startups it’s really hard to find a strong outside PM and so I decided let’s give Olivia a shot. And she became our first PM.
Anu Hariharan [33:00] – Oh, fantastic! When you get the right hire, they actually scale really well.
Max Rhodes [33:05] – Yeah. And, honestly, she’s now better than I ever was which is a really, really cool thing.
Anu Hariharan [33:10] – That’s awesome. Let’s talk about, so that’s the first 10 hires, which is really important to the early years of the company and every company has this unique story. Clearly in your case, it was both the design, as well as the assortment plus your PM which Olivia brought which was key, right? Actually like some fintech startups, when I asked them, I think both in Stribe and Brex case, the CFO and the GC were probably first 10 hires. Depending on the company and the space you’re in it’s important that they are part of the first 10 hires. But let’s switch gears a little bit to execs. Because that’s the second hardest thing that a company really struggles with. Who is the first outside executive that you hired? Talk a little bit about the interview process and how long it took you to get that.
Max Rhodes [33:57] – I read somewhere that the way you define an executive is somebody who consistently wows you with insights and results and doesn’t need to be managed.
Anu Hariharan [34:08] – Yes, that’s exactly right.
Max Rhodes [34:10] – Which I think is a pretty good–
Anu Hariharan [34:11] – I actually say if you have a working executive team, the CEO can go on vacation for a month and not much will happen, not much negative impact.
Max Rhodes [34:20] – I think that’s right. And maybe when you come back actually, it’s like crazy–
Anu Hariharan [34:25] – It’s better.
Max Rhodes [34:27] – The first person we hired outside who came in and was just immediately that was this woman Shan who we actually tried to hire in January of 2017 and she turned us down. She and I were in the same class at Bain. She ran customer support at Tapingo and content at Tapingo. We interviewed her, I knew her well and we put her through a pretty rigorous interview process where she came in and met with four or five people on the team. We had her spent a day on site doing a bunch of exercises with us and sort of digging into the work. Because I knew her as a friend and then we did pretty through reference checks. I talked to four or five people that worked with her at Tapingo and all of them said she is a… They said she’s just a force of positivity and enthusiasm. She’s phenomenal with process and she knows how to run a customer support team. We missed her the first time around, she turned us down. I kept checking in, texting, or meeting with her. I met with friends of friends to try to like get her to–
Anu Hariharan [35:44] – That’s some little stalking.
Max Rhodes [35:46] – Yeah, yeah, it was a little creepy but–
Anu Hariharan [35:48] – That’s not, but I’ve heard a lot of CEOs do that, so–
Max Rhodes [35:52] – Yeah. I do think somebody said that the best CEOs never lose candidates.
Anu Hariharan [35:56] – Yeah. Well, they lose, but you know, like you, they keep trying.
Max Rhodes [36:01] – That’s the mentality that you just don’t lose a candidate. That stuck with me and that was the approach that I took. I knew Shan was the person for this role. Customer service was going to be so important for us, especially as we started to scale, I knew we needed her. We needed somebody who was warmer and could really be a positive force of energy–
Anu Hariharan [36:22] – And more calm.
Max Rhodes [36:22] – And more calm. Shan’s not exactly calm, but–
Anu Hariharan [36:27] – Okay, got it.
Max Rhodes [36:28] – But she’s warm and you meet her and she just fills the room up with warmth. And somebody who could scale customer support. And she came in and we were in a tough spot by the time she joined on customer support site. Turnaround times were out of control. We were hearing all over the place from everyone that people were complaining about our NPS score was going down. Within like a month, we had 12 customer supporters and they were all amazing. We went from three to 12.
Anu Hariharan [36:59] – In a month.
Max Rhodes [36:59] – In a month. Maybe two months.
Anu Hariharan [37:02] – And how did the NPS change?
Max Rhodes [37:04] – And immediately MPS stabilized. Customer satisfaction score shot up and while she was scaling up, we unlocked this growth channel that where we went from doing she joined in June and we were doing like 1.5 million or maybe 2 million and–
Anu Hariharan [37:25] – In sales a month.
Max Rhodes [37:26] – In sales a month, and three months later, we were doing seven. Normally through those periods of growth, like I saw this happen to Coinbase, this happened a little bit at Square where just customer support always falls apart.
Anu Hariharan [37:42] – Yeah, it’s usually the bottleneck.
Max Rhodes [37:44] – For us, it actually got better. Our metrics improved through that period. And then after that, she took on a warehouse where we deal with returns. I can keep throwing more and more at her. She’s about to go on maternity leave for four months, which will be an interesting experience.
Anu Hariharan [38:06] – As long as the processes are in place, you scale really fast.
Max Rhodes [38:09] – I actually think it’s going to be fine because she’s hired well underneath her which is another definition, another thing that executives, and I haven’t had to worry about customer support, or anything that she’s focused on at all since she joined.
Anu Hariharan [38:22] – Great. We talked about early days, scaling people. I want to switch topics a little bit to fundraising. In the evolution of a company in different points in time, company does need capital to scale for growth. How did you think about fundraising and what did you look for a partner each time you approached fundraising?
Max Rhodes [38:43] – Well, from the very beginning, we knew that this was going to be a business where capital was going to be a weapon because of the payment terms and the consignment model. We started thinking about fundraising pretty early. We raised before we even had a product. We raised a little bit of capital with the idea that the business model was going to require that. And then, we raised again after YC and–
Anu Hariharan [39:11] – You raised your Series A pretty quickly, right?
Max Rhodes [39:13] – We did our pre-seed, whatever we want to call it these days, it was like 500K.
Anu Hariharan [39:19] – Yeah, I don’t know what it is anymore.
Max Rhodes [39:23] – Right before we started working on it full-time in December of 2016. Then we raised our seed in March of 2017 right after YC and we raised from Sequoia, Khosla, and a little bit from Kirsten at Forerunner. And then, six months later right after that inflection point where we went from 100 to a million, we raised our A from Khosla and Kirsten stepped up and co-led. I find fundraising to be a pretty big distraction. I like making the process quick and short and just getting back to work. If we can create a really quick competitive process, I’ll trade, maybe a little bit of upside on the margin to be able to run the process quick and find a partner that we build a relationship with that we feel really good about. That’s what we did with the B. We knew capital, especially heading into the holidays, was going to be important. We didn’t want to get stuck at a place where we were throttling growth. It felt like and it continues to be the case that the opportunity in front of us was even bigger than we realized, and so we really wanted to build up a war chest and take advantage of the opportunity ahead of us. We ended up raising in the span of about three months about $100 million.
Anu Hariharan [40:53] – But what advice would you give a founder, if they came to you and said clearly you’ve had great success with fundraising. What would be like the one or two like tactical or pieces of feedback or advice you’d give a founder?
Max Rhodes [41:05] – Momentum is really important. Take advantage of momentum in the business and raise when you’ve got a lot of momentum.
Anu Hariharan [41:14] – I also think one other thing you guys had was actually the clarity of thought and vision on how to build a big business and what it is many years out, not just this year versus next year, which I think a lot of founders actually don’t spend that much time. You can get caught up even in growth rounds about metrics which is very important, but that’s about performance to date and the question about potential really relies on how articulate you are with the vision.
Max Rhodes [41:40] – Having a big vision and that’s something that I learned from Jack at Square. Jack was always thinking just huge about what’s going to be, even though he was just a little card reader, he was talking about how we were going to chance the world. That’s something that we’ve tried to do which I think, and that’s what gets me out of bed in the morning, but I think it also helps with fundraising because that’s what gets investors excited. The other thing I will say is not all money is created equal. We’ve been really careful about bringing on partners that there’s trust where I feel like they can really help us in some meaningful way where I like spending time around them. You’re going to end up spending quite a bit of time around your investors, so you want to feel good about that. And in the end, I do think that the brand name matters. That was something Tony from DoorDash told me early on was it sounds kind of like… It sounds kind of, I don’t know, like an annoying thing to optimize for, but it really does make a big difference.
Anu Hariharan [42:51] – Why do you think it matters? Where does it matter?
Max Rhodes [42:53] – Sequoia and big brand name investors. It matters with recruiting. It’s probably the biggest thing.
Anu Hariharan [42:58] – Yeah, that’s true. That’s very true.
Max Rhodes [43:00] – Where people are looking for signals and then it matters for follow-on rounds. You can create this halo around your company, this excitement, this hype around your company that I think can be really powerful. It can sort of build on itself and become a self-fulfilling prophecy.
Anu Hariharan [43:15] – Yeah, especially given Silicon Valley is so competitive. You look for talent, right? You can’t just hire engineers that you want.
Max Rhodes [43:21] – Yeah, don’t underestimate the importance of–
Anu Hariharan [43:23] – Yeah, true.
Max Rhodes [43:25] – And raising a lot of capital from the right investors can really help with that.
Anu Hariharan [43:32] – Got it, great. We’ll do a very small rapid fire run from some of the Twitter questions that we’ve had from our followers. One Twitter follower, Ryan McCarthy wants to know, “Why did you study history at Yale?”
Max Rhodes [43:47] – I do believe that history repeats itself. If you can develop pattern recognition around the way things have unfolded in the past, you can actually predict the future, to a certain extent.
Anu Hariharan [44:00] – It’s actually even more true in investing. Knowing history is super important.
Max Rhodes [44:04] – Yeah, I bet that’s right. Having a firm grasp of the past, I think gives you more of an ability to understand the present and to lead a great life. If you know where things are headed, especially if you want to be an entrepreneur, I think it can actually be really powerful.
Anu Hariharan [44:26] – Well, Faire is bringing local commerce back, so– The second question is, “Why do you think Square Cash went on to become a successful app?”
Max Rhodes [44:37] – First of all, really focusing on the experience and nailing the experience. The day before we were supposed to launch, Jack made us delay launch by two days in order to change the color of the app because he thought the color was too drab and people were freaking out about it. Who knows if that ended up actually being the thing that led to Cash’s successes, but it was that sort of obsession about the details of the experience, particularly on the consumer side, really being in the details and recognizing that all you have is the experience at the end of the day. Yhat is all that customers know you for. In opposition to that is we recognized that the product isn’t just the product. The product is the network. Particularly after we moved to the native experience and got rid of the email client, which had a bunch of friction in it, we launched a really aggressive referral program where we were losing a lot of money. And honestly, a lot of us, including me, sort of wondering like does this really make sense for Square as we’re about to go public to be losing all this money? And Brian Grassadonia and Jack, to his credit, just constant application for us, just like kept going and said we’re never going to have a shot if we don’t have people using this thing. Once we got it off the ground and really invested, that’s when the power of network effect started to kick in and once we were off the ground and made that bet, we were able to do all sorts of things with monetization. It was having that clarity of vision
Max Rhodes [46:40] – and focusing on the experience and recognizing that you need a big network and the product isn’t just the software, it’s also–
Anu Hariharan [46:47] – The network.
Max Rhodes [46:48] – For us, the product, with Faire, the product is the products. It’s the assortment.
Anu Hariharan [46:53] – Correct. It was not that obvious with Square Cash for the network angle because Venmo has a strong network. What do you think made Square Cash still pull that off?
Max Rhodes [47:03] – Different network. We tapped into just a different network. It felt like Venmo was everywhere because all of our friends used Venmo. That freaked people out. Venmo was only tapping into like the 1% of the population that went to Ivy League schools, and were fresh out of college because it started at Penn. It just dominated and spread really rapidly in that kind of millennial yuppy scene. And then, Cash is everywhere else, and is now, I think, on pace to be bigger than Venmo because that market’s actually bigger.
Anu Hariharan [47:41] – Great. Awesome, well thank you so much, Max. Thank you for your time.
Max Rhodes [47:45] – Thank you.
Craig Cannon [47:46] – All right, thanks for listening. As always, you can find the transcript and video at blog.ycombinator.com. If you have a second, it would be awesome to give us a rating and review wherever you find your podcasts. See you next time.
Y Combinator created a new model for funding early stage startups. Twice a year we invest a small amount of money ($150k) in a large number of startups (recently 200). The startups move to Silicon