#147 - Startup School Week 6 Recap - Tim Brady on Culture and Dalton Caldwell on Pivoting

Episode Summary

Tim Brady's Lecture on Culture: - Company culture is the implicit set of behaviors that inform employees on how to act. Getting the culture right early on makes it easier to scale later. - Be proud of the problem you are solving. This gives purpose and energy to the work. - Create an inspiring long-term vision to attract the right people to your company. Don't just describe the work, talk about its purpose. - Have a conversation with your co-founder about the values and behaviors you want to cultivate. Use this as a hiring filter. - Focus the culture outwardly on customers, not just inwardly on how you treat each other. - Discuss diversity early on. Homogeneous environments are hard to change later. - Put a hiring process in place from day one and iterate on it. You want it tested before you scale up. Dalton Caldwell's Lecture on Pivoting: - Pivoting just means changing your idea, which should feel lightweight early on. Constantly iterate. - The main reason to pivot is opportunity cost - putting more time into an idea not working rather than trying something new. - Good reasons to pivot include lack of excitement, no growth, relying on external factors, and running out of ideas. - Don't pivot to avoid hard work or just because something new seems hot. See it through fully first. - To find a better idea, get excited about solving a problem and believe you can. Make your strengths align with the idea. - Launch quickly and talk to customers to get evidence for whether to pivot. Multiple quality attempts increase your odds.

Episode Show Notes

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.

Then a lecture from Dalton Caldwell. Dalton is a partner at YC and he’s also the head of admissions. His lecture covers pivoting and his advice on how founders should think about it.

Y Combinator invests a small amount of money ($150k) in a large number of startups (recently 200), twice a year.

Learn more about YC and apply for funding here: https://www.ycombinator.com/apply/

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Topics

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

Episode Transcript

SPEAKER_01: 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. Good morning. My name is Tim Brady. I am a partner here at YC, SPEAKER_00: a group partner, which means 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. So 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. And company culture is that implicit set of behaviors inside of your company. They 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. And 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. And over the course of your company, over the history of your company, it will support that in a lot of intangible ways that are hard even to describe. But that's why it's important. That's how you should think about it at this stage. Don't overcomplicate it. That's really it. So 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. And that's kind of the, you're not wrong to be asking that question. 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. 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. If you think back on the product market fit talk that Michael gave a couple of 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? And 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. So it's super important that you get it right. You get that's why it's subtitled as 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 and 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? 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. And it'll be much harder later on to build to kind of correct course and try to build a coherent company. Right? So 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 co-founder. And so 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 is hard. It's a long process, and there will be some really difficult times. And 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, you know, it's really hard to maintain that level of energy. 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. Right? And 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. And he continued to search for product market fit. Ultimately, they ended up had a good business for a little while, but they also ultimately ended up in the business of makeup for teenage girls. Right? They didn't identify with the problem. And when times got tough, they just didn't want to be there. Right? They didn't identify with their customers. And he told the story of where the employees around him actually came up to him and said, hey, like, it doesn't look like you're enjoying what you're doing. And 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? We call it kind of a, you can call it a north star for the company. And 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. And 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. You know, 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 for businesses and hobbyists. But this vision, you know, laid out by Bill Gates and Paul Gallant 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 to attract the right people to your company, the next thing you should do is have a conversation with your co-founder 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. 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. You know, job description, the skills that person needs. This is, you know, above and beyond that. So, let me take you through a couple of examples. And I apologize. These are actually more corporate value lists. They're a little more polished. Yours won't need to be this polished. 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. Like, it doesn't have to be just adjectives like the Spotify one was. Open company, no bullshit. 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 co-founders. Right? Like, I don't want to work in an environment that's highly political. No bullshit. Right? That translates into, you know, kind of a hiring filter. Like, 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, you know, do as I say, not as I do. Right? 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 creating 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. 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. Right? 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. It 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 these 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. And I'm not just talking about ethnic and gender diversity here. I'm talking about a diversity of opinions. Can you give me a conversation about can you create a culture where people with diametrically opposed opinions, strongly held, can coexist? 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 type 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, 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. 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. So 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 a ton of stuff online about hiring process, and it's beyond the scope of this talk. But consider all those conversations you've had with your co-founder, 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. Right? After you hire your first couple of people, make sure you get back together with your co-founder a month or two after, and discuss whether it did what it should have. 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. Right? 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, you know, 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 co-founder that can help kind of build a solid foundation for building a culture later on. Thanks, everyone. SPEAKER_01: All right. Now for Dalton's lecture. SPEAKER_02: How's everybody doing? I'm Dalton. I'm a partner at Y Accommodator. 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's 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. And 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. So 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 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. Changing your ideas constantly is kind of the norm and I wouldn't think that this is some huge thing. It should feel lightweight. And 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. So the main reason I would argue is opportunity cost. And the definition of opportunity cost is that the loss of potential gain from other alternatives where one alternative is chosen. So 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. And so by working on something that's not working and you have evidence that it's not working, you are taking opportunity cost and not be doing something else. It's as simple as that, right? I don't know, I tried to write some pseudo code here for you about, it's a kind of a joke, but 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 look at this equation, like what am I really trying to say? It's that if you've worked on something for months and months and months and months and it's not happening, 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 in a couple of weeks, 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. Like 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. So 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 is going to take off and that's when my 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're just, you've thrown everything against the wall to make your current idea work 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. 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 and over again, like chronically, and you're detecting yourself doing that, it's good to actually follow something through all the way. So 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. 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 of 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. 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 gonna really, I mean, maybe I shouldn't say never. Most likely you're not gonna have people being like, your idea is horrible. Give up. Now I will never be a customer. They're not gonna tell you that to your face. They're gonna be like, oh, this is great. Maybe if you add a few more features and come back, you know, 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. So watch out for politeness and getting politeness confused with traction. Another one is fear of immediate 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. So this is where you're like, I'm not wrong. The world is wrong. You know, like no one gets this. This is like 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 know, you'll eventually be recognized and everything will be great. And so there's a lot of those inspirational messages out there and that can kind of be counterproductive. I don't know if it's super legible, but basically this is where 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 an idea that's just a total fail like immediately SPEAKER_02: is actually the 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? You know, 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 because I've seen that be a trap that have captured a lot of really talented people for long periods of time. And then let's just talk about the anecdotes. So anecdotes about, you know, stories of people that just kept doing what they were doing and it didn't work and then five years later, you know, it was great. I think those are cool and they're inspirational and I like them and they're all true, you know, they're anecdotes, but it's kind of like anecdotes about people that, you know, played the lottery every day for like five years and then they won the lottery and now they're like really happy and, you know, that's super cool, but that is not actionable for you, right? There's nothing you can do with this anecdote about someone that like 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. And so 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, you know, 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, man, not really working. A dang good reason to pivot is you get another roll of the dice. You get another shot. And so 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? And so just if we're just playing the statistics of how do I get product market fit, taking several high quality shots, and once 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, completing it, shipping it, giving it to people, following all the device 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 more, just generally more excited to wake up in the morning and work on the thing and not less excited. And 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 working on some ad network, ad tech thing to affiliate something, ad targeting, I don't know. Those 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, 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 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, 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 write in TechCrunch, people raise 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? Often, 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. And so all of your, 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 like 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 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? All right, 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 is a publicly traded company someday? 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 is usually technology is a key component, and usually the founders 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, you know, 80% gross margins, 70% gross margins, really high margins as some of 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, you know, I think you'd have a hard time raising money from venture capital 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 SPEAKER_02: 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 a 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 when you're hurt, 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, man, is that a good time to pivot, right? Like you know more than anyone else about your business, so 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, because 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. 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 opposite 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 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, you know, four key things that I think you could use to evaluate the quality of an idea, and you could give them a one to ten, and you average those together to give 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, I don't know, 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 of the spectrum is like, I don't know, a subway. I'm going to buy a subway franchise, you know. You know, that's the other spectrum. More like, oh, I'm going to import some stuff and sell it on eBay, you know, probably a little less obvious how it's big. The second one, founder market fit, is really, really key, so again, a ten out of ten 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 gonna do a self-driving car startup. Yeah, that's a ten out of ten. A zero out of ten is like, I'm going to do some kind of advanced AI startup, and I don't know how to program. That's a zero out of ten 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, and then people get bitter because they're like, I had that idea. So I would argue getting, find 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 in a sales straightforward, or is it just impossible? So let me give you some examples of companies that I worked with and advised at YC that you may or may not have heard of. Brex is one. They're in YC1 or 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. 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, and 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 upfront 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. So this was pretty bad. And then finally, early market feedback. They went and talked to people, and they're like, do you want to use this? And no one wanted to use it. So this was bad. Okay, so overall score, two and a half out of 10. Okay, post pivot. Credit card for startups. That seemed pretty big. SPEAKER_02: There's tons of publicly traded comps of like fintech companies. Again, even in startup land, there's Square, there's Stripe. I mean, there's lots of examples of that, so I give that a 10 out of 10. I did at the time. Founder market 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. So they knew exactly what they were doing, and they could write all the code themselves, and 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, because 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 a whole sales process. I witnessed it multiple times. So if that's your sales process, good. It's like a three-cent sales process, and people say yes. That is good. Let's talk about Retool. They're a winner 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 a really great product. So that's what Retool is. You should look at it. PrePivot was Venmo for the UK. How big it seems? Seems pretty big. Like, Venmo's big. The founder market fit, three out of 10. They didn't really know anything about fintech, but they managed to get a launch. There was something there. How easy it was to get started? I'm giving that a seven out of 10. It's because they already launched. They'd already had a bunch of users then. So that was pretty impressive. And the 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. So 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. They had enough traction that it was hard to decide to give up on this because they had users and it was kind of working. So that was a tricky one. Anyway, Retool PostPivot 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 seemed like a big market to me. Found a 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 giving a five out of 10. People were interested in it, but they weren't sure they wanted to trust some new 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. 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. Final 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 was it 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. So this one was, again, was kind of obvious they should pivot. They realized it on their own pretty quickly. And then they 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. It was an example of a shots on goal thing I was talking about earlier where they had like five ideas and there's no way I would have known or they would have known that this would be 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. So that was great. It also inadvertently inspired tons and tons of clones. So I would argue that anyone that's doing chatbot stuff, it's 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're 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. So 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. Found a 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. So their sales were successful. But ultimately this was not, it took them on the order of years to discard this one. And yeah, it's good that they pivoted because now they're doing Segment, again, which everyone should use. It's a data collection tool. That one did not seem obviously big. Anyone here use Segment? It's this JavaScript thing you put on your page and it connects to other tools. It was less obvious how that would be a publicly traded company at the time. But the found a market fit was great because they built so much analytics stuff. They were world experts on analytics already when they built it. It was easy to get started because they literally built this thing and open sourced it and gave it away for free and people begged for them to support it. The market begged for this product to exist. They didn't think this was the company. They just had this thing on GitHub and so many people were obsessed with this thing that they built. They're like, well, I guess the market's telling us we should make this the company. And they did it. So that I would say is easy to get started and really good market feedback. With the market's begging for something and that you don't even think it's good and they have to convince you it's good, that's a pretty good sign. And so that was a good pivot. Okay. In summary, I tried to give you those examples just to give you real, real, real life examples of stuff that I personally worked on just to show the before and after and how these decisions are really made. And so changing your idea is part of a startup. The sooner the better because of the opportunity cost and the shots on goal type of stuff. And when you're considering changing your idea, especially the early stages, it shouldn't feel like a big deal. You should probably do it all the time. And 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. SPEAKER_01: All right. Thanks for listening. So as always, you can find the transcript and the video at blog.ycombinator.com. And if you have a second, it would be awesome to give us a rating and review wherever you find your podcast. See you next time.