SPEAKER_01: Hey Dalton, you're a pre-product market fit. Do you have five-year financial projections? That's a great example of that. Financial projections may be a good idea later stage.
SPEAKER_00: Yes. But to even ask me if I had financial projections, I was like, what's a financial projection?
SPEAKER_01: This is Michael Sybo with Dalton Caldwell. And today we're going to talk about why investors, including YC, can't fix their company. For some folks, it's like telling them that Santa Claus isn't real. They're like, hey,
SPEAKER_00: we finally get some time with you. No one wants our product. What should we do? Here's our designs. Can you help me design this so growth takes off? And I have to tell them the unfortunate news, which is I have no idea. And I went through this too when I was a founder
SPEAKER_00: that I really believed that once I raised from the top investors, they would tell me whatever secrets they were holding out on the world.
SPEAKER_01: What's unfortunate is that there are a lot of investors out there who aren't former founders, right, who haven't really lived these mistakes themselves. And so I haven't been humbled by having a crappy startup like we did that failed a lot
SPEAKER_00: like we did. It's easy to sort of like think your hot shit.
SPEAKER_01: It's easy to think that your advice can make companies work. That like you are the magician. And what's interesting is that over the years, a lot of YC founders will kind of start following the advice of these people. And they'll make very, very common errors. And you can almost track it back to like, oh, I kind of understand the type of person who is giving this advice because I see what you're doing now. And like this matches one to one. So one of the most common types of investors is the investor with a finance background, someone who's like never run a company, never operated a company, pure finance.
SPEAKER_00: When all you have is a hammer, everything's a nail. And so if what you know is money, the solutions usually involve money. So raising more money, spending more money, throwing money at the problem, right?
SPEAKER_01: Hey, Dalton, your pre-product market fit, do you have five year financial projections? That's a great example of that. Financial projections may be a good idea later stage.
SPEAKER_00: Yes. But to even ask me if I had financial projections, I was like, what's a financial projection? Like, Michael, how many years in your started do you learn what a balance sheet and shit was?
SPEAKER_01: Long time. Actually, and I resisted it. I resisted it. Our COO Kevin was like, this is important for you to learn. And I'm like, you know what's important for us to learn? How not to lose money every month before we die. And the balance sheet is not really telling us that. It's that we make no money and we spend money. So that's what the problem is. And for these folks, I get it, right? You spend time in spreadsheets, especially if
SPEAKER_00: you're doing stock market investing or private equity investing. It makes sense that your weapon is money and you move money around. That's your leverage point. That's your point of leverage. What's the downside of internalizing that too much, man?
SPEAKER_01: I mean, we see this all the time, which is like scaling negative economics or spending a ton of money on advertising with ever, ever worse payback periods or no payback period ever. It's really like getting people to work on things that are not making a product good. Yeah. I remember Patrick Collison was talking about this when he came to speak at a batch
SPEAKER_00: recently where he's like, listen, let me be blunt. Too many founders treat product as an afterthought. They're basically trying to do financial engineering and the product is like delegated. I think what's also tricky is that like this
SPEAKER_01: strategy isn't always wrong. Like for successful companies, there is usually a point where throwing money at it is a good idea. It's just kind of knowing when to give that advice and when not to. It's when you always give that advice is when things get really tricky. All right. Here's the second type that's common in the investing world. The big company exec. The person who's seen companies at a thousand plus people and have a lot of experience and have done like great work in those companies and now become investors.
SPEAKER_00: Folks with big tech experience are really great at taking a successful product and scaling it further or refining a product. It just is pretty different when you were employee number 100 or 200 at Airbnb or Google or Facebook than employee number five. As we spoke about in a prior video, our friend and colleague Paul Buhight, number 18 at Google, was like the king of dirty hacks. In a lot of ways, when we would interview former Googlers and he was in the room, he didn't love some of the instincts of folks. It was the same company that they worked at. The tactics that they brought to bear when you were employee number 1000 to scale up one of these core products was pretty different than the folks in the first 20 employees. Generally, with these folks, it looks more like scaling a process. It looks more like scaling up hiring. Sometimes taking for granted that getting
SPEAKER_00: any users at all isn't really hard. I talked to folks a lot about this in the batch man.
SPEAKER_00: What failure usually looks like for a lot of our companies is they get zero real customers. It's not that the failure was they couldn't get a series A, it's that they just bombed like complete disaster. If you have too much of this mentality of big company PM, it doesn't even occur to you that you can fail that badly. What do you think?
SPEAKER_01: I think it's tricky because all too often this group of folks are giving founders the
SPEAKER_01: advice of hiring executives before product market fit. It's like you need to build up the company. It's like marketing doesn't work. We need a marketing executive. The engineering team isn't productive enough. We need a VP of engineering. More often than not in this pre-product market fit phase, the mistake is that there's the wrong person in the company, not there aren't enough people. The mistake is like you've got an engineer that no one
SPEAKER_01: wants to work with or no one's measuring any of the marketing results. It's like those are the mistakes, not like you don't have a department for it or an executive to run it. Whereas, we go right back to the first one, when a company is scaling and growing, post-product market fit, hiring more people is essential. Once again, we get this weird
SPEAKER_01: dichotomy where it's like- Think about the zero to one. Think about the first five employees of Facebook and the first
SPEAKER_00: five employees of Instagram when it was a startup before they got acquired. The first five employees of YouTube when it was a startup before it got acquired versus the really awesome people post acquisition who had to step in and scale that thing. Those people are awesome. They're super valuable. And if they weren't around in the zero to one stage, watch out.
SPEAKER_00: It's a very different muscle to build scaling Instagram post acquisition if you were on that
SPEAKER_00: team than getting the first hundred users when you were the founder of Instagram. There's a whole lot more actually supply and demand. There's so many more people that helped scale Instagram than there are people that founded Instagram. There's lots of folks that have lots of experience scaling products and you just don't meet as many that did the zero to one.
SPEAKER_01: The next category is the successful entrepreneur in a non-tech industry. This is really common internationally in new founder ecosystems where the people funding them maybe didn't make their money in tech. What's the common kind of advice given here? Yeah this one's tricky where if
SPEAKER_00: someone made all their money investing in real estate or in strip malls or McDonald's franchises or something like just something that is not remotely a tech startup they will often ask for crazy terms that would make sense if they were investing in like a franchise store. They may ask for more control and they may be really stressed out all the time that you're going to lose their money. A lot of the trickiest investors is a nice way to say it that I've seen the YC founders are like oh why did I take their money. It'll just be someone who's totally well-meaning but they treat this like an investment in a subway franchise and that you're the manager of the subway franchise
SPEAKER_00: and they're gonna call you and yell at you that you're gonna lose their money as opposed to letting you do your tech startup. And that's really just like they really these folks are
SPEAKER_01: like you can't be mad at them they're just taking the principles that they learned to make their money and applying them to a different industry right and it's like totally in some ways these are people you can be mad at the least because it's like at least they were successful themselves and they're like taking things that work for them right like they're not reading this shit on Twitter. But it is tricky because like I think what we've learned is that industries are just different. Like you know maybe there's some common principles but like in general software companies look really different than a lot of other companies out there. So alright here's the next
SPEAKER_01: investor type. The junior investor. The person who just got started looking to make a name for themselves still early in their career. Oftentimes having to really have a win pretty quickly to cement themselves in this career. What's the most common type of advice these people give? Yeah I
SPEAKER_00: think this one is tricky. I think a good mental model is to put yourself in their shoes. I think when you're a new investor or you're newly hired at your job you're not in a position of power inside of the place that you work or you're not in a position power with your investors because they want to raise money from someone else. And so to show weakness or to like screw up their first few investments is very bad for their career. And we know lots of people that basically don't last in the industry because their first investments were bad. Like it's kind of career suicide to become an investor not have any other track record and then make some bad investments. Like you're not gonna make it. Okay and so basically these folks are very optimistic that it's gonna work. That you're gonna make it work. You should totally go raise more money. Yes. Because their their KPIs that if you raise money and they can mark up their investment it makes them look good so they can go tell their colleagues or their their investors hey I invested in this company and it went on to raise more money at a better valuation I invested at. I'm really working. Yeah. Right and so the thing to understand is that's their KPI and so in your interactions with them they will often just really encourage you to fundraise and keep doing that a lot and everything's working great
SPEAKER_01:
SPEAKER_00: and you do have product market fit and you should scale faster. Yeah. Right? And and it's interesting
SPEAKER_01:
SPEAKER_01: because another example of that like they're not trying to hurt your company. No. Like in many ways. They're nice people. Yeah. In many ways they're like some amongst the biggest cheerleaders for your company. It's just that like your company at this stage probably has some really broken shit that has to be dealt with and so unfortunately it's harder for them to kind of go and spend the time in the dirt with you on that stuff because it's gonna kind of break their illusion and hey
SPEAKER_01: you know it is what it is. It's rough like if you were a company where doesn't make sense to raise
SPEAKER_00: for a very long amount of time it may be the right thing that you want to do but may not be great for them if their whole thing is to prove that they're great investors really fast so that they can keep their jobs. So the next category investor we see a lot is the influencer slash famous person. What
SPEAKER_01: do you when I think about this kind of person this is the person that would come to YC demo day and everyone would freak out to get them on their cap table. Yeah. They just get you know infinite access. How do you think that they try to help founders who are struggling? Yeah. I think that
SPEAKER_00: you really understand distribution if you're an influencer because that's your game is building up your distribution network which you can monetize a bunch of different ways right. If you have a million you know Instagram followers or a million TikTok followers you can make money off that and you get it you're savvy. So I think these people are very savvy and realize they can kind of treat startups like other ad deals of being like give me some stuff and I'll promote you. And so a lot of times these folks will like ask for advisor shares or they'll ask those ask for things
SPEAKER_00: and again maybe that's how they got big they're good you know they know they know what they're doing. And it can be so tempting to do it to think that like celebrities tweeting about your thing is gonna fix all your distribution problems and like maybe in some cases they do but most of my experience both personally and with founders in YC is the founders kind of feel like they got a raw deal on these and that the the clicks they get from the from the posts or whatever were not as helpful as they had hoped. That is a nice way to say it. And you know what's weird about this
SPEAKER_01: Dalton is that the the best most reputable influencers and famous people in tech world they don't promise distribution. Like they say I'll try to help but like I think the founders set expectations way too high like it's the founder once again looking for the silver bullet someone else solved the problem for me. And man these silver bullets don't exist. Alright we got two more types here so two more types. Type one is other founders. So this is becoming a lot more common nowadays right like founders investing each other's companies it's you know some people have seen success doing this others not but what's the advice that you know most often you're gonna get from another founder to help you when they're on your cap table? Usually when you
SPEAKER_00: get advice from other founders it's heavily based on their personal experience. The but like the downside of that is if they're really if they really struggled to fundraiser it with fundraising personally all their advice is gonna be them basically telling you don't do what I did or if they struggle with distribution all their advice is gonna be around you know like they're almost like they have a lot of feelings about what happened to them. Again this is we were founders
SPEAKER_00: too dude like a lot of my advice was heavily based on my personal experience and it only it took years of me working at YC to sort of break out of that trap which is to not be so autobiographical and
SPEAKER_00: the things that I'm telling people. You know I think this is something that like people don't
SPEAKER_01: understand enough is like how much we are learning from the founders that we're working with and how much we are condensing their learnings and delivering it to the next generation of YC founders versus how much we're condensing learnings personally that we got in our own companies. I think that's like very counterintuitive to most people. The last one is the extremely young
SPEAKER_01: investor right the just out of college writing a check sometimes the person's in college writing a check and kind of trying to build a career in our world. This person often is different from the junior investor because this person's usually not working at a VC fund or they're a big fun like that. They're usually kind of a scout or some kind of in that kind of role. What's the what's the advice they're often given? Yeah I mean look these people are super sweet and they're super
SPEAKER_00: exciting you know to talk to you. I just think that like the same way that the founder realizes
SPEAKER_00: their job is to play the part of a founder and so they like watch movies about how founders are supposed to act and like read books about it and they sort of are being like am I doing it right? Am I a founder now? Like I think you kind of see this from these investors where they just they read what other investors say and do and they sort of like say and do whatever it is they read and so
SPEAKER_00: like whatever the hot new trend is whatever people are tweeting about whatever like latest essay they've read they just sort of like repeat that and see if and hopefully no one notices that that's what's going on. Which is which is how people learn in school right? So it kind of makes
SPEAKER_01: sense like it's exactly the same. So you know one of the interesting things here to kind of wrap up is that we make mistakes like we screw up. There is a YC partner common bad advice kind of mode and
SPEAKER_01: you know we were talking about this before the show and I think you said it right which is like the kind of lean startup don't hire don't spend too much money like talk to your users put a shitty MVP out in the world path is the path that works for everyone in all cases. I think sometimes
SPEAKER_01: we can fall into that trap but there are many examples that doesn't apply right? Like what are your thoughts on where YC partners ourselves we can get tripped up and give bad advice? Yeah I think that the biggest critique I would have of ourselves is that sometimes it works right
SPEAKER_00: out of the gate and sometimes you can spend two years building a product in a cave and never talk to a single user and it's perfect and you immediately get product market fit. Sometimes that happens. I think that we just we have enough data points that it seems like insane of us to ever recommend that strategy statistically. It's like hey oh you have cancer oh well you know if you you know go on a water fast that might fix it like maybe. I think that it just feels a bit hard for us to recommend making a strategy to not do those things but we have enough data points of YC companies we see companies that can't bootstrap or can't launch an MVP and have to go build something in a vacuum for two or three years yes and sometimes it works. Yes yeah right? The best
SPEAKER_01:
SPEAKER_01: YC partners are very careful with how forcefully we give the YC advice because like the longer you hear the longer you have a kind of running record of the time I told someone to do it like this and the opposite worked. Yep. And so you know honestly to but to me you know what the lesson is
SPEAKER_00: there Michael the founders that made it work believed in themselves and they knew that we couldn't fix it like they actually internalized the whole meta point of this video or at least what I'm trying to get across with it which is like you know they took bits and pieces they took information from the outside world but they took personal accountability that they're the ones who are gonna have to make it work. Yeah. And they weren't counting on blindly following anyone as being the way it ain't. Right? Nope. And especially in including us yeah I think that the big takeaway
SPEAKER_01: here is that as a founder it's your job to figure out how to best use these people who are here to help you all these investors who are here to help you it's your job how to figure out how to best use them they all have your interests in mind but none of us can tell you exactly what to do to win. None of us. And like it's funny because at the YC kickoff the first thing we say is that you know we're experts in failure we know a lot of paths to not take but if you want us to sit next to you at your desk and tell you everything to do to win to become a billion dollar company we can't do it and we actually ask them we're like hey and if you want to leave YC right now well we'll take go give you our shares back like we don't want you to come in here with any false pretenses like this is a hard problem most people don't succeed and like you're gonna be able to deserve 99.9% of the credit if you figure it out because you figured it out all the rest of the people around who helped you they didn't figure it out. Dalton before we close you know we've talked about a number of examples of when investors give advice and it kind of pattern matches to where they come from but might not apply to you at this time what are some of the pieces of advice you've gotten from investors that have really made a huge difference like what what what is what's been some examples of great investor advice because you know I think you and I both have these. I think the best
SPEAKER_00: investor advice I ever got as a founder is that I was swimming in my head with too many ideas at once and I had too much data and that someone from the outside could look at everything maybe like oh this is working they could take they could take all of this like consternation and like complicated stuff and like I can think of a couple times in my life when someone was just like this is working you should do more of this and they were right and it added a ton of value or conversely this is bad you're failing yeah and again I was full of excuse like like my brain was
SPEAKER_00: full of like a thousand different threads going a different direction but to have someone synthesize that into something very simple was super helpful dude I got great advice like that when I was a founder. The number one piece of advice we ever got was from you know someone who had experienced
SPEAKER_01: big companies guy named Gideon Yu and we had just gotten Justin TV profitable and we were very proud
SPEAKER_01: of ourselves and we the first year we really tried to monetize him he had eight million dollars in annual revenue which I think now would qualify as like a deck of corn or something and he came to talk to us and he basically said folks look you should be happy congratulations but your company sucks if you don't change stuff it's all gonna die and all the work you put in so far no one's gonna remember what you did and what was great is like there was no like and so you should
SPEAKER_01: do this it was just more like and that's that's my current status of your company in a nutshell and is exactly what we needed to hear we're just like the best investors point out the problem they don't give you a solution they just point out the problem and they it's true we knew it we knew that was the problem too it's just when someone says it to you you're like oh crap but isn't that okay because again like so many incentives in life are set up to be nice or to tell people that they're
SPEAKER_00: great and they should stay great and everything they're doing is great and they're taking over the world but weirdly again if I think back to my the founder advice I got and same with you it's actually when people were kind of hard on us yeah that was actually was helpful yep right
SPEAKER_01: you know it's crazy one of the reasons why I think Gideon felt so comfortable giving that advice is that he had no interest in investing in us at all yeah literally no interest and you know that's a counterintuitive thing right like wow it's like really you can get a lot more honesty out of somebody when they're not financially incentivized to kind of blow smoke up your ass to you know to say nice things so all right
