by Y Combinator10/9/2019
We’ve cut down the sixth week of lectures to be even shorter and combined them into one podcast.
First a lecture from Tim Brady. Tim’s a partner at YC. His lecture covers the importance of building a good culture early and shares six things that you can do now to help create a solid foundation for your startup.
00:00 – Intro
00:38 – Tim Brady on Building Culture
1:13 – Culture is behavior and the right behaviors support a good business
4:38 – Six things new startups can do now
5:00 – 1. Be proud of the problem you are solving
7:31 – 2. Create a long term vision that others will follow
9:36 – 3. List your values then model the behavior
12:34 – 4. Align your culture with your customer
14:49 – 5. Discuss the importance of diversity to your company
16:43 – 6. Put a hiring process into practice. Plan to evolve it.
18:24 – Dalton Caldwell on Pivoting
18:53 – The term “pivot”
20:20 – Why pivot?
21:33 – Good reasons to pivot
22:35 – Good reasons not to pivot
23:13 – Why people take too long to pivot
26:01 – Anecdotes
27:22 – Product market fit
28:34 – How to find a better idea
30:40 – It’s ok to not work on an idea that requires venture capital
31:34 – Venture vs. non-venture scale ideas
32:52 – When is the best time to pivot
33:48 – More pivoting thoughts
35:07 – Idea quality scores
37:11 – Brex
39:51 – Retool
41:37 – Magic
43:22 – Segment
45:16 – Dalton’s summary
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 a recap of the sixth week of Startup School. I’ve cut down the sixth week of lectures to be even shorter and combined them into one podcast. First, we’ll have a lecture from Tim Brady. Tim’s a partner at YC, his lecture covers the importance of building a good culture early on and shares six things that you can do now to help create a solid foundation for your startup. Then, we’ll have a lecture from Dalton Caldwell. Dalton is a partner at YC, and he’s also the director of admissions. His lecture covers pivoting and his advice on how founders should think about it. All right, here we go.
Tim Brady [00:38] – Morning, my name’s Tim Brady, I am a partner here at YC, group partner, which means that I work with the companies during the batch closely. I have started three things prior, one of which was Yahoo back in 1994, so a lot of what I’m going to talk about today stems from that experience. As Kevin said, I want to talk about building culture, how to think about it at this stage of your company and why it’s important. Now, culture can be pretty broadly defined, so let me be super clear on what I’m talking about. Really, to me, culture is just behavior. In company culture, kind of is that implicit set of behaviors inside of your company. These should inform your employees on how to behave, I guess when done right they should inform the employees inside of your company how to behave when it hasn’t been explicitly laid out for them. The good news, if you do it right, if you get the right culture, the right behaviors will support a good business, and hopefully a great business. Over the course of your company, over the history of your company, it will support that in a lot of kind of intangible ways that are hard even to describe. That’s why it’s important. That’s how you should think about it at this stage. Don’t overcomplicate it, right? That’s really it. You’re probably asking yourselves, at this stage of the company, you have so many things on your plate, you’re so busy, it almost seems like a luxury to be thinking about culture, right? You’re not wrong to be asking that question,
Tim Brady [02:31] – and the reason is that when your company gets going, like these are three phases that you’ll be going through as you build your company. All of you really are at this top stage that I call the idea stage, right, talking to customers, iterating the product, experimenting, iterating the product. Hopefully you’ll raise some money at some point to allow you to continue to do that, and at some point in the future you’re going to reach product-market fit. All right, if you think back on the product-market fit talk that Michael gave a couple weeks ago, and when you do that, hopefully you’ll raise a whole lot more money and begin scaling the company. Now, scaling the company almost always requires hiring a lot of people, right? The people that you have inside of the company prior to hiring a lot of people are really your cultural DNA. Those are the people that are going to be involved in hiring and training that next wave of people. It’s super important that you get it right, you get, that’s why I subtitled this kind of the first 20 employees, that you get, and there’s no magic to the number 20, it’s really that set of employees that are in place when you begin scaling the company. Because, again, those folks are going to be highly involved in hiring, in training this next wave. So if you get it right, if those first set of employees are this, embody kind of the culture and the values that you want inside your company, you have a much higher likelihood of building a strong and coherent culture. The reverse is also true, right?
Tim Brady [04:16] – If you make mistakes, if you get the wrong types of people inside of the company early on, they’re going to be involved in hiring and training, and those mistakes are going to get propagated. It’ll be much harder later on to build, to kind of correct course and try to build a coherent company, right? That’s why it’s important to be thinking about now. I know you have a lot on your plate in starting this company, but what you need to do doesn’t take a whole lot of time. For the most part it’s just some conversations with your cofounder. I came up with a list of six things that you can do now to help you or to help the likelihood of you building a strong and coherent culture. First one, be proud of the problem you’re solving. Kind of seems silly to say, but you need to, right? If you don’t have the problem yourself, you need to identify with the people that do have the problem, and you need to be really proud of the fact that you’re solving it for them, right? Because building, as I’m sure you’re going to, if you’ve heard already and you’ll continue to hear, building a company’s hard. It’s a long process, and there will be some really difficult times. If you’re not proud of what you’re doing, it’s really hard to maintain the level of energy and enthusiasm you need to sustain the company. Right? Sometimes where we see founders go wrong is they choose an idea with their ego. They choose an idea because it sounds good to tell their friends at a party, right? And when times get tough, it’s really hard to maintain that level of energy.
Tim Brady [06:04] – And the reason energy and enthusiasm is important, not just for sustaining the company, but everyone around you will see how you feel about the company. To a large degree that will set the tone for your culture. A couple of batches back we had a YC alum come and tell his story. He went through the YC program a few years back. He applied with four other guys with the idea of helping retailers liquidate their excess inventory. That was the idea they started with. And they did all the right things, talked to customers, iterated, experimented, and he raised some money, and he got to search for product-market fit. He continued to search for product-market fit. Ultimately, they ended up, had a good business for a little while, but they ultimately ended up in the business of makeup for teenage girls. Right, they didn’t identify with the problem. When times got tough, they just didn’t want to be there. Right, they didn’t identify with their customers. He told the story of where the employees around him actually came up to him and said, “Hey, it doesn’t look like you’re enjoying what you’re doing.” Ultimately they ended up shutting down the company. Next, when you do find the right problem to solve, one that you’re proud of, create a long-term vision that others will follow. It’s much easier to create a great culture if people who identify with the problem you’re solving know you’re solving it. They’ll raise their hand and say, “Hey, I want to be part of what you’re doing,” right? You can call it a North Star for the company.
Tim Brady [07:59] – Say it in a way that will inspire people. It should give purpose to the work you’re doing. It shouldn’t describe the work, but it should talk about the purpose of that work. Let me give you a couple of examples to illustrate what I mean. Tesla, to accelerate the world’s transition to sustainable energy. Pretty inspiring, right? No mention of an electric vehicle. If you said, “Oh, we’re building the world’s best electrical vehicle,” that’s good, you’ll inspire a handful of engineers who implicitly understand kind of the technical challenges that come with that, but if you’re going to build a big company you need to attract kind of a broad array of people. This does that. Another example, Microsoft’s original, a computer on every desk in every home. It’s kind of laughable now, but in the early ’80s, like this was crazy talk, right? Computers were only fro businesses and hobbyists. But this vision, laid out by Bill Gates and Paul Allen, attracted the right type of people to their company, right, the hobbyists that had the capability to help them build the type of company they needed to build saw this and were excited about it. It attracted and allowed them to kind of build the type of culture that they needed at Microsoft. Last one, one you’re all familiar with, organize the world’s information and make it universally accessible and useful. Again, no mention of the product, doesn’t say we’re building a kick ass search engine. All right, so once you’re able to come up with kind of an inspiring vision
Tim Brady [09:40] – to attract the right people to your company, the next thing you should do is have a conversation with your cofounder about the types of values and behaviors you want to cultivate inside of your company. Right, ultimately the purpose of this at this stage in your company is to use as a filter for the hiring process, right? It should be a short list, and at this stage it’s fine that it’s informal. If you’re lucky enough to move on and grow like ultimately maybe this list becomes a more polished corporate values list. This is probably the seed of that, but at this stage it doesn’t need to be polished, right, you don’t need to publish a blog post on it. It’s just a short list, less than five things. And this will help you during the hiring process to make sure that you’re letting the right type of people inside the company, right? This is in addition to that skill list that you’ll need, job description, the skills that person needs, this is above and beyond that. So let me take you through a couple of examples, and I apologize, these are actually more corporate value list. They’re a little more polished. Yours won’t need to be this polished. All right, Spotify, innovative, collaborative, sincere, passionate, and playful. Right, you can see pretty clearly how you can use that set of lists, that this list to begin screening potential employees. Atlassian, right, this is a little different the way they make the list, and like it doesn’t have to be just adjectives like the Spotify one was. Open company, no bullshit.
Tim Brady [11:26] – Build with heart and balance, don’t fuck with the customer. Play as a team, and be the change you seek. Right, they said it a little different. You can see how this came from a conversation between cofounders, right? I don’t want to work in an environment that’s highly political, no bullshit, right? That translate into kind of a hiring filter. If someone seems political in any way, let’s not let them in the company, him or her in the company. So come up with this list, right, again, a short list, what type of company do you want to build? What type of behaviors will support the business you’re building? And then create that list. But don’t let it just be a piece of paper, right, don’t put it in a drawer and wait for the marketing department to polish it a few years later. You have to model that behavior. For better or for worse, the early employees will look to you for the cultural cues, right? You can’t say do as I say, not as I do, you have to walk the walk. They will take their cues from you. Four, when thinking about this list, to the extent you can, make sure it’s externally focused. It’s much better to build a culture that’s focused on the customer than it is on how you treat one another inside the company. Look, your short list can have both, but the more important ones are like having it externally focused. Over the long haul, that will serve you much, much better. And let me give you an example of what I mean by this. So move fast and break things, you’ve heard this, right? Facebook. This is what I consider an internally-focused thing.
Tim Brady [13:16] – If you’re a project manager or an engineer at Facebook trying to decide what to do next, this doesn’t offer you a whole lot of guidance, right? Think back to kind of the definition I gave of company culture. It informs employees how to behave when it hasn’t been explicitly laid out. If you’re deciding what next product to build, this doesn’t help at all, just tells you to move fast, right? Shouldn’t be a surprise when you look at this that some of the privacy violations that they’ve been charged with have occurred at Facebook, right? I don’t think for a second anyone at Facebook set out to violate anyone’s privacy, but their culture certainly didn’t help them, didn’t give them the guide rails on where to stop, right? Contrast that with kind of Google’s early motto, don’t be evil. Not particularly prescriptive, necessarily, but it’s outwardly focused, right? It lets the employees and the world know like, hey, we’re a force for good. And when you think about kind of that policy that Google has with its engineers, they’re allowed to work 20% of their time on theses independent projects. It’s pretty impressive that you haven’t heard of any of those go astray, right, pretty amazing given the data they’re sitting on. Again, outwardly focused, right, it gives some guide rails to the employees on how to behave. Next, have a conversation about diversity. I’m not just talking about ethnic and gender diversity here, I’m talking about a diversity of opinions. Can you create a culture where people with diametrically opposed opinions, strongly held, can coexist?
Tim Brady [15:10] – Can you foster conversations that are loud but then people walk away and are okay? How important is that to your business? There’s plenty of research out there that suggests that companies that are able to foster this kind of environment, have a diverse environment that isn’t always agreeable, tend to be more creative, they tend to be better problem solvers. And the reason I put this up there is it’s really hard, because most of the advice, when you get going, when you’re hiring the first set of employees, is to, hey check, tap your Rolodex, talk to friends, talk to former colleagues, right, those people you know whether or not they’re good engineers, you know whether or not they embody the values that you’re trying to put into your company, they’re known quantities. And at that stage, it’s a good thing, but they’re also probably a lot like you, right? And you can find pretty quickly that you’ve built a pretty homogeneous environment in trying to hire too quickly. So have this conversation, how important is it to you, to your company, to have diversity? Because if you think you’re going to wake up at 100 employees and then start a diversity program, you’re fooling yourself. It’s way too hard. It’s too late by then. So have that conversation, it’s tough, I don’t have the right answers on what that looks like, but have it, it’s important. Once you’ve done all that, had those conversations, put a hiring plan in place, right, don’t just let it happen. From the very first employee, make sure you’re following a process. There’s ton of stuff online about hiring process
Tim Brady [16:58] – and it’s beyond the scope of this talk, but consider all those conversations you’ve had with your cofounder, the type of values you’re trying to instill in the company and the type of diversity you want. And make sure that’s part of the process from day one, right? And make sure you assess whether it’s working, especially the early employees. After you hire your first couple of people, make sure you get back together with your cofounder a month or two after and discuss whether it did what it should’ve. Like did it filter the right way? Do you have the right type of people in your company at this point? And if it didn’t work well, improve it, plan on evolving it. You want it tested by the time you get to the point where you have to scale fast, right? You want a process that you know works by then. So that’s it, right, again, not too early, you have a ton on your plate, and, again, what I’ve given you hopefully are just a few simple things that aren’t too time consuming, just conversations you can have, kind of thought experiments with your cofounder that can help kind of build a solid foundation for building a culture later on. Thanks everyone.
Craig Cannon [18:21] – All right, now for Dalton’s lecture.
Dalton Caldwell [18:24] – How’s everybody doing? I’m Dalton. I’m a partner at Y Combinator. In addition, I’m the head of admissions, which is our selection process for the companies that get into YC. I’m here to talk about pivoting. Yeah, let’s talk all about pivoting, cool, all right. Here is some stuff we’re going to cover, what the heck is a pivot, why you should pivot, when you should pivot, and evaluating ideas to pivot to. So we’re going to try to cover all the bases here, all right? Let’s talk about the term pivot. This is one of those terms that if I’m in a cafe and I hear someone talking about pivoting, I roll my eyes because it’s one of those words that I associate with annoying startup people. And so let’s just explain what we mean here, it just means changing your idea, that’s all it means. Technically, if we want to be really technical, I would call a true pivot where it’s like a real company and you have lots of users and you’ve raised money and you’re like, we’re going to shut this thing down and do something different. The most famous example is Slack. They raised money and had like 100 employees for this video game called Glitch. I was a beta user, and then they one day just shut it down and like did something crazy. I would call that a pivot. I think that’s a valid use of it. Probably what most of the folks here are doing, I interchangeably call it pivoting, but you should just call it changing your idea. It should feel really lightweight. When you’re at the earliest stages of your company, especially pre-launch or very near after launch,
Dalton Caldwell [19:53] – changing your ideas constantly is kind of the norm, and I wouldn’t think that this is some huge thing. It should feel lightweight. Frankly, if you’re not in a state where you’re rapidly changing ideas or assumptions over and over and over again in quick succession, you are likely doing it wrong. You are likely moving too slow. And so this is just like part of it, change your idea constantly, trying to find exactly the right version of your idea is something you should be doing in the beginning. Let’s talk about why you should pivot. The main reason I would argue is opportunity cost. The definition of opportunity cost is that the loss of potential gain from other alternatives where one alternative is chosen. In other words, you can only really work on one thing at a time. Sometimes people try to violate that rule, but that’s a whole different topic. By working on something that’s not working, and you have evidence that it’s not working, you are taking opportunity cost to not be doing something else. It’s as simple as that, right? I don’t know, I tried to write some pseudocode here for you about, it’s kind of a joke, but like how well things are working divided by the number of months of concerted full-time effort, if that number is less than excitement to work on something else plus confidence you can find something better, you should pivot. And so the key thing to, if you like look at this equation like what am I really trying to say? It’s that if you worked on something for months
Dalton Caldwell [21:09] – and months and months and months and it’s not happening, like that’s a pretty good signal, right? Like that’s what drives this equation that I put here the most is the number of months you worked on something and it’s not working. And so if you’re throwing good money after bad, good time after bad, and it’s not happening for you, that is a pretty darn good signal. But if it’s really, really, really early and you’ve only been working on something a couple of weeks, eh, it’s less obvious. Let’s give you some good reasons to pivot. I hate working on it. All right. It’s not growing. It’s just not working. I keep doing the thing, and nothing is happening. I’m not a good fit to be working on this idea. The more you learn about this, the more you realize that you are just not the right person for the idea. Another one is, I’m relying on an external factor outside of my control to make my startup take off. A couple of examples of that are like relying on mainstream virtual reality headset adoption. That’s a good one. You know, like any day now the new Facebook thing’s going to take off and that’s when VR app’s going to take off. Or like relying on like mainstream crypto adoption, things like that. Those are like totally out of your control and if you’re just sitting here hoping someone else does something good and then your startup will work, man, you should definitely pivot. Another one is just where you’re out of ideas on how to make the thing work. You’ve thrown everything against the wall to make your current idea work
Dalton Caldwell [22:28] – and you’re actually kind of out of ideas, that’s usually a sign you should pivot. Good reasons to not pivot. You’re trying to run away from doing hard work. Sometimes you see people where they build a product and right when it gets to sales time they pivot. And they do that over and over again. Eh, that’s probably not a good reason to pivot. It’s just someone trying to dodge the sales part. So watch out for that. Also, another reason not to pivot is if you’re the type of person that changes their idea over and over and over again, like chronically, and you’re detecting yourself doing that, it’s good to actually follow something through all the way. You just want to watch out for that happening. Also, a good reason not to pivot is that you just hear there’s some hot new thing, and you want to pivot because you read a TechCrunch article because someone raised money for a hot new thing. That’s not a great reason to pivot. Let me give you some reasons on why people take too long to pivot. And the reason I mention this is I would argue on average most people take too long to pivot, right? I think that’s usually, like if I had to put people in buckets, more people take too long than the reverse, and so why do they take too long? Loss aversion, when you feel like you’ve invested in something, you have a really hard time letting go to it, and that’s loss aversion, you can research this. Have a little bit of traction, like you have a few users or like one customer, and you’re like, maybe it’ll work. That will make you not pivot, and that’s rough.
Dalton Caldwell [23:48] – Another thing is like people are very polite in the world, and they have a hard time telling you the truth, that they don’t like the thing that you’re working on. And so a lot of founders get confused about politeness and getting that confused with traction. And so you’re never going to really, I mean, I shouldn’t say never, most likely you’re not going to have people being like, your idea’s horrible, give up, now, I will never be a customer. They’re not going to tell you that to your face. They’re going to be like, oh, this is great, maybe if you add a few more features and come back, we’ll take a look at it, right? Oh, that’s dangerous. Because you can end up doing that iteratively over and over and over again for like years and never actually get customers. Watch out for politeness and getting politeness confused with traction. Another one is fear of innate weakness or defeat, if you pivot, you’re giving up in some way. Another one is putting blame on why things aren’t working on customers or investors. This is where you’re like, “I’m not wrong, the world is wrong. Like, no one gets this, this is way ahead of its time.” Things like that are not a great sign, and usually people realize that maybe it is kind of on them versus on the external world, but it takes a long time to get there. And then finally there’s a lot of inspirational stuff out there that’s just like, if you just believe hard enough and keep going, you’ll eventually be recognized and everything will be great. And so there’s a lot of those inspirational messages
Dalton Caldwell [25:07] – out there, and that can kind of be counterproductive. But basically this is why I talk about the little bit of traction thing, I call it the uncanny valley of product-market fit. And you know what’s weird, I noticed as a YC partner, someone that gets into YC with a idea that’s just a total fail like immediately is actually at a huge advantage than someone that has like a little bit of traction. Isn’t that weird? Like a total fail, the founders can declare bankruptcy on the idea immediately and just work on other stuff with no regrets and no like second guessing, “Oh, should I pivot?” They’re like, “Wow, that was really bad.” And having that freedom to immediately throw off the old idea and work on a new one is actually a weird advantage. Isn’t that counterintuitive? And so you just want to really watch out for a little bit of traction, ’cause I’ve seen that be a trap that have capture a lot of really talented people for long periods of time. And then let’s just talk about the anecdotes. So anecdotes about stories of people that just kept doing what they were doing and it didn’t work, and then five years later it was great. I think those are cool, and they’re inspirational, and I like them, but, they’re all true, they’re anecdotes, but it’s kind of like anecdotes about people that played the lottery every day for like five years, and then they won the lottery, and now they’re like really happy and that’s super cool, but that is not actionable for you, right? There’s nothing you can do with this anecdote
Dalton Caldwell [26:34] – about someone that just kept believing strong enough. Like I would much rather give people advice to play the statistics of this and to take accountability for like their own actions in the world than just like hope and dream that you might be one of the anecdotes too. And so if you decide to pivot or don’t decide to pivot, just remember you decide, it’s your life, and if it works out good or bad, that’s on you. Often I get founders that want to push this decision on me as a YC partner or other authority figures about, is this idea working or not, when should I know when to give up? And ultimately all we can do is give you guidance, but this is exactly in the class of problems that is on the founder and never something you should look to an authority figure to tell you how to decide. Product-market fit, I’m sure, we’re talking about this a lot. It’s been discussed a lot in Startup School and it’s because it is so important. Most people will never get it, probably most people watching this don’t have it, even if they think they do. And you know you have it when growth is not your biggest problem, it’s other stuff. And one good reason to pivot is you just get more shots on goal to try to get this elusive thing, right? Like if you made something and you launched it and it’s like, meh, not really working, a dang good reason to pivot is you get another roll of the dice. You get another shot. I’ve just seen people that use these opportunities really well. It’s much easier to be lucky when you get like half a dozen shots on goal than one, right?
Dalton Caldwell [28:03] – And so if we’re just playing the statistics of, how do I get product-market fit, taking several high quality shots, notice I say high quality, you can’t just constantly pivot through stuff and never launch it, but if you do a full awesome product iteration of making something and completing it, shipping it, giving it to people, following all the advice you’re looking here, and you can give yourself multiple of those shots, I would argue you are creating luck for yourself, and the odds that you actually hit something that works are much higher than someone that only ever takes one shot. Okay, let’s talk about how to find a better idea. Here’s the advice that I give people during the batch when they are looking for an idea to pivot to. Find something that you’re more excited about and that makes you more optimistic about the world and just generally more excited to wake up in the morning and work on the thing and not less excited. There’s a corollary here, and this, I think, is counterintuitive, often choosing what is perceived as a harder idea is more, is good. And so I see a lot of people where they’re like working on some ad network, ad tech thing to like affiliate something ad targeting, I don’t know, those like never work, and it’s because they’re not inspirational and no one cares. And so when you see people go from that into something that’s really, really exciting, right, like, “Oh, I want to help small business owners do X,” or I had a company in this last batch and they started with this ad tech thing that they were all very bored with
Dalton Caldwell [29:33] – and they pivoted to Robinhood for India. And the moment they pivoted to that, the founders, they were like, they lit up, and every conversation I had with them they were like so excited about their idea, and it was contagious talking to them. And it was almost like a different, like the amount of change, and it was the same founders, but what changed is they found an idea that was real, that they were excited about and not just some like boring ad tech crap, no one cares about that stuff. Okay, so if you’re doing something that seems like a good startup idea because you read in TechCrunch people raised money for it, but it’s not inspiring to you, and you’re like, man, this is pretty lame, you probably want to find something that’s more exciting to you. Another thing to do on finding a better idea is make an honest assessment of what you’re good and bad at. This is hard, but you want to be really self aware of what you’re good and bad at and play to those strengths. And another thing here for finding a good idea is, especially if it’s a pivot, find something that you can very quickly build and validate and not something that takes like a year or two of R&D, right? Like if you pivot from one thing that’s impossible to ship into another thing that’s impossible to ship, not good. Ideally you find something that’s way easier to ship like really fast, highly recommended. Quick note here, caveat, it’s totally okay to work an idea where you’re not going to raise venture capital, all good. Most businesses in the world don’t require venture capital,
Dalton Caldwell [30:49] – and so if what you’re doing is consuming lots of content on how to start a company like this and it’s all kind of like venture capital focused stuff, and you’re not going to do something that raises venture capital, you can kind of get blown off course, idea-wise, and so just be self aware about this, and realize that if you do want to raise venture capital, the idea does matter a lot. And there’s a constant recurring theme I see is people that are trying to raise money for something that is definitely not venture capital fundable, and they get really frustrated. Everyone gets frustrated with that. It just, it doesn’t make sense for all businesses, and so just be self aware of this when you’re choosing an idea of like, is this something that at least hypothetically is VC fundable? Just to give you some rule of thumb, well, what does that mean? I don’t think there’s a guidebook for what venture scale means, but here’s some rules of thumb. Can I imagine this business generating hundreds of millions or billions in net revenue per year? That sounds venture capital fundable. Can I imagine the revenue growth to get to those numbers to happen in like less than 10 years or five years, like can this happen really fast? Can I imagine this thing that I’m doing as a publicly traded company some day? Can I picture it, can I visualize it? Kevin’s first lecture talks about this, but these are all things like, if you just can’t see any of these, that’s not a great sign. And other key properties, it’s usually technology is a key component, and usually the founders
Dalton Caldwell [32:15] – build the technology, at least in the early days, for something to be VC fundable. You want to see really high margins. Not for everything, but, again, just a rule of thumb. Software margins, 80% gross margins, 70% gross margins, really high margins is something you would want to see. And then just, it’s funny, like I think a lot of people learn about fundraising from Shark Tank, and I don’t think a lot of that stuff is venture fundable, just in case you were wondering. It’s fundable for people that want to put product stuff together, but I don’t know if, I think you’d have a hard time raising money from venture capitalists for the majority of that stuff. But, hey, like I said earlier, it’s your call, it’s your dream, so figure it out. When’s the best time to pivot? As soon as these things happen, you’ve launched and trying to get users for weeks or months and you feel hopeless, it feels hopeless, you should probably pivot. When the idea is impossible to get started with. Like, “Cool, once we raise $100 million, then we will build the prototype.” You should definitely pivot if you’re one of those people, because unless you have $100 million, you are in a chicken and egg unsolvable issue. And here’s another one, you know in your heart it’s not going to work. A lot of founders know secretly that their thing isn’t working, but they want to keep up this front to everyone in the world that it is working, and they think they can fool people into funding them or working with them. If you can’t convince yourself and you know this isn’t really working,
Dalton Caldwell [33:35] – man, is that a good time to pivot, right? Like you know more than anyone else about your business, you got to listen to yourself. And it’s sometimes not stuff you want to hear from yourself. Okay, let’s talk about other pivoting stuff. If you pivot over and over and over again, it causes whiplash. Whiplash is very bad, because it causes founders to give up and not want to work on this anymore, and that actually kills the company. Weirdly, it’s more deadly to your company to get whiplash and get sad than to work on a bad idea. ‘Cause if you’re having fun working on a bad idea, you won’t give up, and then conceivably you can maybe make it work. If you get really sad and hate your life while you’re working on your startup, you will definitely not succeed, and it’s because you will give up. And so this is weird, like it’s kind of better to work on an idea that’s not the best one if you’re really having fun. And then you just want to be in a happy medium, some founders pivot way too much, and they’ll probably watch this lecture and then like pivot once a day for six weeks. Don’t do that. And some people just work on the same idea for five years, and it’s not working, and they just are really obstinate about it. Just find the happy medium, like everything else in life. Another thing is it’s really hard to have employees and be pivoting, so don’t do it. It just makes it slower, and it makes them really sad. And so trying to scale up like a team and taking all the advice here about how to scale a team while you don’t even know what your idea is or you think
Dalton Caldwell [34:53] – you’re going to change your idea, definitely not best practices. It only slows you down. I would only add people to the team after you know your idea is working and you have confidence. Otherwise it’s just all downside. Okay, let’s go to a different thing here. I made this up for this lecture, and I came up with a subjective notion of a quality score, just to give you a few criteria to evaluate an idea, okay? And so what I did is there’s four key things that I think you could use to evaluate the quality of an idea, and you could give them a one to 10 and you average those together to get an overall quality score, okay? So let me just go into detail on these. How big of an idea it seems to be. And, again, this is the stuff I talked about earlier, is this an obvious publicly traded company, like Tesla? Hey, it’s a new car company, there’s lots of publicly traded car companies. That seems pretty big. A new bank. There’s lots of banks that are publicly traded. That seems pretty big. The opposite end of the spectrum is like a Subway, I’m going to buy a Subway franchise. That’s the other end of the spectrum. Or like, oh, I’m going to import some stuff and sell it on eBay. Little less obvious how that’s big. The second, founder/market fit is really, really key. Again, a 10 out of 10 would be, hey, I was on the self-driving car team when I was an undergrad and then I worked on self-driving cars my whole career, and so now I’m going to do a self-driving car startup. Yeah, that’s a 10 out of 10. A zero out of 10 is like, I’m going to do some kind
Dalton Caldwell [36:22] – of advanced AI startup, and I don’t know how to program. That’s a zero out of 10 right there, don’t recommend that. How easy is it to get started on the idea is actually I think undersold. I don’t know if people realize, this is actually really key, is ideas that are easy to start are highly recommended, and there’s so many really good ideas out there that never work because the founders can’t figure out how to get started. And then someone in the future does the same idea and has a much better way to get started, and then they win. Then people get bitter because they’re like, I had that idea. I would argue getting, finding an idea that’s easy to get started with is just as important as the idea itself. And finally, early market feedback from customers, this just means, do people just want it immediately and it sells straightforward, or is it just impossible? Let me give you some examples of companies that I worked with and advised with at YC that you may or may not have heard of. Brex is one, they were in YC winter ’17, and I funded them to do a different idea and talked to them a lot during their pivot. And they pivoted during the batch, and they got product-market fit pretty quickly. And they have now raised hundreds of millions and are worth billions, in two years. So it’s like one of those rare outlier stories, I’m not saying this is common, but holy cow, I got a front row seat to watching kind of the most epic pivot of all time, I think, maybe there’s other ones, but I was like, wow, that really worked. So let’s talk about the before and after.
Dalton Caldwell [37:42] – Here was what they started with, they had this idea for a new VR hardware headset that you would use to do work, or something. And so here’s the scores I just put in. I put these in now, I didn’t do these at the time. But how big does it seem? Yeah, it seems like medium big, like VR headsets, there’s no publicly traded ones, but that seems like the future, right? Founder/market fit, I gave a one out of 10. These guys knew nothing about hardware or optics or any of the things associated, they were just fintech software folks, so they had literally no idea what they were doing. And they were very up front about that. How easy it was to get started, that’s only a two. And the reason is they had to hire hardware people to build a prototype, not a good sign. They needed millions of dollars to build a prototype, not a good sign. And it would take like years and years and years of manufacturing. This was pretty bad. And then finally, early market feedback, they went and talked to people, and they were like, do you want to use this? And no one wanted to use it. So this was bad, okay? So, overall score, 2 1/2 out of 10. Okay, post-pivot, credit card for startups. That seemed pretty big. There’s tons of publicly traded comps of like fintech companies. Even in startup land there’s Square, there’s Stripe, I mean there’s lots of examples of that, so I would give that a 10 out of 10, I did at the time. Founder/market fit, 10 out of 10. The reason is they had started a fintech company earlier in Brazil, and it was successful, and they sold it for like 20 or $30 million,
Dalton Caldwell [39:07] – so they knew exactly what they were doing and they could write all the code themselves. They could ship it themselves, and they had all these existing relationships. Man, is that such a better fit. How easy it was to get started, I’m only giving this a three out of 10, ’cause they actually, it’s hard to launch a new credit card product. This is one where if you don’t have founder/market fit, I would not necessarily try this at home. There was something about the founder/market fit that made it easy. And then finally the early market feedback, I’m giving eight out of 10, and it’s because in the batch they were like, “Hey, do you have a credit card? Do you want to be a customer?” And people were like, “Yes.” And that was the whole sales process. Like I witnessed it multiple times. So if that’s your sales process, good. It’s like a three sentence sales process, and people say yes. That is good. Let’s talk about Retool. They were winter at ’17, and they’re a really good SaaS company, and honestly, everyone should check it out and maybe use it. It’s a tool to build internal tools, it’s awesome. I’m encouraging all the YC startups to use this to build internal management pages. It’s actually like a really great product, so that’s what Retool is, you should look at it. Pre-pivot was Venmo for the UK. How big it seems, seems pretty big, like Venmo’s big. Founder/market fit, three out of 10, they didn’t really know anything about fintech, but they managed to get a launch so there was something there. How easy it was to get started, I’m giving that a seven out of 10,
Dalton Caldwell [40:26] – it’s because they already launched. They had already had a bunch of users then, so that was pretty impressive. And early market feedback though was only three out of 10, and the reason is no one wanted to pay, and they were losing money on every transaction. There’s all these reasons this wasn’t really working. And so they decided to pivot, even though this is an example of the insidious sort of traction, right, they had enough traction that it was like hard to decide to give up on this, because they had users, and it was like kind of working. So that was a tricky one. Anyway, Retool post-pivot is the no-code internal tools builder. I think it seems like a 10 out of 10 because 80% of all software built is for internal consumption, not external consumption, like at big companies. And so that seems like a big market to me. Founder/market fit, 10 out of 10. One of the founders had made something like this at his college internship, and so he had a very good idea of what the product should be and had relevant to it. It was easy to get started, they built it in two weeks and got their first customers. Great. And early market feedback, only gave it a five out of 10. People were interested in it, but they weren’t sure they wanted to trust somebody’s startup to this thing. So this one did not fly off the proverbial shelves. They managed to get some users, but it was not immediate obvious product-market fit. They had to build it out a bit. So that was a great pivot. Next, we got Magic, they were in winter of ’15, they pivoted during the batch.
Dalton Caldwell [41:41] – And what’s great about them is they built a profitable and sustainable company. Yay, I wish we all could do that, right? How did they do it? They started off with this idea for a blood pressure coach, where there was an app, and you enter your blood pressure, and it would tell you how to lower your blood pressure. Didn’t seem like a huge idea, two out of 10. Founder/market fit, they didn’t know anything about health whatsoever or much along those lines, so that’s probably just a two out of 10. How easy it was to get started, eight out of 10, because they built the app really quickly, and they got users really quickly, and they followed all the advice, good for them. And then the early market feedback was like not good. Everyone was really polite, and no one used the dang thing. Like their usage was just horrible. This one was, again, it was kind of obvious they should pivot, they realized it on their own pretty quickly. And then the built a bunch of prototypes, they actually built the Magic prototype in a weekend. No joke, this is actually true, not an exaggeration. And they put it on Hacker News, and it went to number one and got like 2,000 upvotes, and it blew up overnight. I don’t know if anyone remembers this thing, but it went like crazy viral. And they got all this press, like it was the most, it was an example of the shots on goal thing I was talking about earlier where they didn’t know, they had like five ideas, and there’s no way I would’ve known or they would’ve known that this would be
Dalton Caldwell [42:53] – the thing that would capture the world’s imagination, but it did. And so not obvious founder/market fit on this one either, but it was very easy to get started. It got really good early market feedback, and it seems pretty big. That was great. It also inadvertently inspired tons and tons of clones. I would argue that anyone that’s doing chatbot stuff, it sort of like a direct descendant about when this thing blew up, and everyone was like, “Oh, chatbots are the future,” was sort of like second order effects from this going so crazy viral and inspiring so many people. Segment, they were in YC summer ’11. They pivoted a bunch of times, including years after the batch. It took them a really long time to get it going. They didn’t even pivot during the batch, and now they’re worth billions, and it’s a really good company. It’s a top data infrastructure company. Pre-pivot they had this thing that was a classroom feedback tool where like you would give it to students in a classroom and they could say if they were lost or not, I think was what the feature was. So if you were confused, you would like push a button and it would tell the professor. Okay, didn’t seem huge, in my opinion. Founder/market fit, well, they were students and they were young, so I would give that like a five out of 10. They weren’t experts on education, but they understood the audience. It was easy to get started. They built it really fast. And the early market feedback was actually decent, where professors liked it and they got a bunch of schools to adopt this thing.
Dalton Caldwell [45:25] – And so changing your idea is part of a startup, the sooner the better, because the opportunity costs and the shots on goal type of stuff. And when you’re considering changing your idea, especially early stages, it shouldn’t feel like a big deal. You should probably do it all the time. Following best practices is recommended. Hopefully I gave you some good pointers on what those best practices are, but if you’re really scientific about this, you can dramatically increase the odds that your startup will work. Great, that’s it for me, thanks.
Craig Cannon [45:57] – All right, thanks for listening. As always, you can find the transcript and the 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