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Lecture 20 - How to Start a Startup

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Yeah? All right. god eftermiddag och välkomna till den sista klassen i hur man startar en startup So this is a little bit different than every other class. Every other class has been things that you should be thinking about in general at the beginning of a Startup. And today, we're going to talk about things that you don't have to think about for a while. In fact, you shouldn't. But since, I'm not going to get to talk to most of you, again before you get to sort of post-product market fit stage. I wanted to just give you the list of things that you need to think about as your Startup scales, and the list of the things that usually. Founder failed to make the transition on. So these are the topics we're going to talk about but again all of these things are things that are not writing code or talking to users. Which means, with a few exceptions that I'll try to note, you can ignore them until after you have product market fit. Most of these things, for most companies, become important between months 12 and 24. But it's really more about stage than anything else. These are things that usually hit around 25 people and definitely post product-market fit. So just write these down somewhere and look back at them when you get there. So the first area we're going to talk about is Management. At the beginning of a company there is no management, and this actually works really well. Before 20 or 25 employees most companies are structured with everyone reporting to the founder, it's totally flat. And that's really good, and that's what you want, and at that stage that is the optimal way, for product, that's the optimal structure for productivity. But the thing that tricks people is that when, when lack of structure fails, it fails all at once. And so what works totally fine at 20 employees, is from zero to 20 employees? Is disastrous at 30. And so you want to be aware that this transition will happen. And you don't actually need to make the structure complicated. In fact, you shouldn't. All you need is for every employee to know, who their manager is? And every, and there should be exactly one. And, and every manager should know, who their direct reports are? You want to ideally cluster people in teams that make sense of course. But the most important thing is that there's just clear reporting structure. And that everyone knows, what it is. And if you want to make changes to it people sort of understand how to make changes or to hire someone. Clarity and simplicity are the most important things here. But failing to do it is really bad. So, because it works in the early days to have no structure at all, and, because it sort of feels cool to have no structure. Many companies are like, we're going to try this crazy new management theory and have no structure. What you want to do is innovate on your product and your your business model? Management structure is not, where I would recommend trying to innovate. So, don't make the mistake of having- >> >> Nothing but don't make the other mistake of having something super complicated. A lot of people fall into this trap, where they think it's like you know, people feel cool if they're someones manager. And if they're just an employee they don't feel cool. So people come up with these convoluted circular matrices management structures, where you report to this person for this thing, and this person for that thing, and this person for that thing. But you know, actually this person reports to you for this thing. That's a mistake too. So don't, don't try to innovate here. This is the first instance of an important shift, in companies, or in, in, in the founders job. Before product market fit your only job that matters is to build a great product, right, you're number one job is to build a great product. As the company grows and at about this, you know, 25 or so employee size, your main job shifts from building a great product. To building a great company, and it stays there for the rest of your time. And this is probably the biggest shift in being a founder that ever happens. There are four failure cases we see all the time, as founders become managers. So I want to talk about the four most common ones. The first one is being afraid to hire senior people. In the early days of a Startup, hiring senior people is usually a mistake. You just want people that get stuff done. and, and the willingness to work hard and aptitude matters more than experience. As the company starts to scale, and about this time when you have to put in place a basic management structure. It is actually valuable to have senior people on the team. You know, executives that have built companies before. And almost all founders after the first time they hire a really great executive and that executive takes over big pieces of the business and just makes them happen the founder says, wow, I wish I had done that earlier. But everybody makes this mistake and waits to long to do this, so don't, don't be afraid to hire senior executives. The second mistake is hero mode. So, I will use the example of say someone that runs the customer service team. Someone runs the customer service team, they want to lead by example, this starts from a good place, it's, it's the extreme of leading by example. It's saying, you know what, I want my team to work really hard. Rather than tell them to work hard I'm going to set an example and I'm going to work 18 hours a day. And I'm going to show people how to get a lot of tickets done. But then the company starts growing. Also they have the normal discomfort of assigning a lot of work to other people. So the company starts growing and the ticket volume, keeps going up, and now they have to do like 19 hours a day, and then 20 hours a day, and it's just obviously, not working. But they won't stop and hire people, because they're like, if I stop, even for one day, we're going to get behind on tickets. The only way to get out of hero mode in this case is to say, you know, what? we're going to get behind on tickets for two or three weeks, because I'm going to go off. And I'm going to hire three more support team members and I've calculated based off our growth rate that this is going to last this long. And next time, I'm not going to make the same mistake. I'll get ahead of it and hire again. But you actually have to make a tradeoff. You actually, have to say, you know, what? I need to hire more people and we're going to get behind on other stuff. That is the right answer. The wrong answer is to stay in hero mode until you burnout, which is what most people do. Third mistake bad delegation. Most founders have not managed people before and they certainly haven't managed managers. And so the way that the bad way you delegate is you say hey, employee, we need to do this big thing. You go off and research it. Come back to me with all the data and the trade-offs, I'll make a decision and tell it to you, and then you'll go off and implement it. That's how most founders delegate, and that does not make people feel good and it certainly doesn't scale. A subtle difference but really important is to say, hey, you're really smart, that's why I hired you. You go off, here are the things to think about, here's what I think, but you make this decision. I totally trust you, and let me know what you decide. That's the delegation that actually works. because, I think, because Steve Jobs was able to get away with the former and make every decision himself, and people just put up with it. And every founder thinks they're the next Steve Jobs. A lot of people try this. But I, for 99.9% of people. The second method here works a lot better. And then the fourth area is just a personal organization one. When you are working on product, you don't actually need to be that organized in terms of how you run a company, and how you talk to people about what they're working on. But if you fail to get your own personal organization system right. where you can keep track in some way of what you need to do, and what everybody else is doing, and what you need to follow up with them on. That will come back to bite you, so developing this early as the company begins to scale is really important. Two other things that we hear again and again from our founders, they wished they had done earlier. And that is simply writing down, how you do things? And why you do things? These two things, the how and the why, are really important. I mean early there is you just tell everyone, employee, when you're, like, sitting around, having lunch or dinner, you know? This is how we think about building products, this is how we push production, you know, this is how we handle customer support, whatever. As you get bigger, you can't keep doing that. And if you don't do it, someone else is just going to say it. But if you write it down, and put it up on a Wiki or whatever, that every employee reads. You as the founder get to basically, write the law. And, and if you write this down it will become law in the company. And if you make everyone read this as the company hires 100 and then 1,000 employees people will read this and say, all right, that's how we do things. If you don't do it it will be like random oral tradition of whatever the hiring manager or their best friend that they make at their first week in the company tells them. So writing down how you do things? And the why? The why is the culture of values, Brian Chesky talked about this really well. Every founder I know wishes that they'd written down both of these, the how and the why, earlier. To just establish it as the company grows, and then this becomes what happens. I think it's one of the highest leverage things that you can do that, that people don't. All right. Next area, HR. HR is another thing that most people correctly ignore in the first phase of a Startup because again, it's not writing code. It's not talking to users. But it's a huge mistake to continue to ignore it. And the reason that I think most founders ignore it, is they have in their mind this idea of, like TV sitcom HR, you know, awfulness. But it doesn't have to slow you down. Actually, it speeds you up. Most founders will say, out of one side of their mouth, people are our most important asset. And, the other side, we don't want any HR. So, what they mean is, we don't want HR. We don't want, like, the bad kind of TV HR. What good HR means is, a few things. A clearer structure, which Charlie talked about. You know, a path for people about, how they can evolve their careers? Most important, one of the most important things is Performance Feedback. again, this happens organically early on, people know how they're doing. As the company gets to 25, 30, 45 people, that gets lost and it doesn't have to be complex. It can be super simple but there should be a way that it happens and it shoulder be frequent. You know, people need to hear pretty quickly, how they're doing? And it should tie you know, if they're doing badly to a way you get them out of the company or if they, they doing well it should there should be a clear path to how this ties to compensation. And that's the next thing. In the early days of a Startup. People's compensation is whatever they negotiate with the founder, and it's all over the place. As you grow. It feels hopelessly corporate, but it really is worth putting in place these compensation bands. So a midlevel engineer is in this range. A senior engineer's in this range. Here's how you move from this to this. And it keeps things really fair. Someday everyone will find that everyone else is comp. If it's all over the place it will be a complete meltdown disaster. If you put these bands in place early. It will at least be fair. It will also save you a lot of crazy negotiation. One thing that I think is really important when it comes to HR is equity. Most people get this right now for the early employees, they give them a lot of equity. But I think you should continue to give a lot of equity all the way through. And, this is one place that your investors will always give you bad advice. I think, not YC, but all other investors give bad advice here, most do. You should be giving out a lot of equity to your employees. now, this dilutes everyone, right, this dilutes you as the founder and the investors equally. For some reason, founders usually understand this is good, investors are very shortsighted and don't want to dilute themselves. So they'll like fight you over every equity grant. But we've seen a lot of data at YC now, and the most successful companies, and the ones where the investors do the best, end up giving a lot of stock out to employees, year after year after year. So I tell founders like, you should think about, you know, for the next ten years, you're going to be giving out 3 to 5% of the company every year, because you just get bigger and bigger. So the individual grants get smaller, but in aggregate, it's a lot of stock. And I think this is really important to do, if you value your people, you should be doing this. specifically, you need to do this with refresher grants and you should get a, a plan in place for this early. You know, I think, you never want an employee in a place where they vested three out of their four years of stock and they start thinking about leaving. So you should always stay in front of people's vesting schedules. And you know, how they plan early where you have refresher grants in place. There are a lot of new structures that people have been using here. I personally like six year, big grants, but six years investing. because I think these companies just take a while to build. There's Pyramid Vesting where you back weight someone's grant, so in year four they get a lot more of the vesting than year one. There's a concept, different names for it, but something like continuous forward vesting, where people's grants are automatically reupped every year, at the same number of shares. Whatever you decide, get an option management system in place at about this point. The normal way people do this is just someone keeps an Excel spreadsheet. I have seen mistakes that have cost employees or companies tens of millions of dollars because they didn't get this right. So there's really good option management systems or software and you should get those in place around this point. The other sort of HR stuff to touch on, there are a bunch of rules that change around 50 employees. Common examples are that you have to start sexual harassment training and diversity training there's a bunch of others as well. But just put a little pin in your mind that when you cross 50 employees there's a new set of HR rules that you have to comply with. Monitor your team for burnout. Again, it's up to product market fit it's just to Sprint, now it becomes a marathon. At this point, you actually don't want people to work a hundred hours a week forever. You want them to go on vacation. You want them to have new challenges and do new things. And if you let the whole company get burned out all at once, that, that is often a company-ending thing. This is also a good time to put in place a, a hiring process. Another thing that most founders regret is they don't hire as soon as everything is working, I think you should hire a full-time recruiter. If you do this too early, that's bad because you'll hire too fast, and that usually implodes. But, most founders get behind the ball on this. The other, there are a lot of other, sort of just hiring process tips. For example, I think most companies, even until they get up to say 3 or 400 employees should announce every offer on some internal mailing list or something before they make it, because like half the time you do that, someone in the company will know something good or bad about that employee. And the companies that I know that have instituted this have been really happy. Also a good time to have a program in place to ramp up employees, so when someone starts, you know, what does their first week look like? How do they get, how do they get spun up? How do they learn everything they need to learn? Are they going to have a buddy that's going to think through them? That's going to help them think through kind of everything about the company. Here's one that you actually do need to think about before the 12 to 24 month mark, which is diversity on the team ,. The most common place this comes up honestly is people that hire, you know, all guys on their engineering team for the first 15 or 20 people. And in that point you get a culture in place that sort of takes on a life of it's own, and most founders that I've spoken to that have made this mistake regret it and they wished they had hired some diversity of perspective on the team early on. Engineering teams are not the only place where it comes up, but that's where you see it the most often, and if you get this right early you'll be able to grow the team much more quickly over, over the long-term. The other thing to think about is what happens to your early employees. So, a common situation that happens is, the company evolves fast the early employees you know, the company, so like you hire an engineer who is a really great engineer, but then as the engineering team grows you need a VP of Engineering. The early engineer wants to be the VP of Engineering, you can't do that, and but you don't the early employee to leave, they're an important, important part of the culture, they know a lot, people love them, and so I think you want to be very proactive about this. You know, you want to like think about what's the path for my first 10 or 15 employees going to be as the company grows, and then just talk to them about it very directly, be up front, you know,. I want, like sit them down and say, I want to talk about, sort of where you want to see your career go inside of this company. All right, so company productivity, this is something you don't need to think about in the early days because small teams are just sort of naturally productive most of the time. But as you grow, it the productivity I think goes down with the square of the number of employees if you don't make an effort because it sort of one of these like connections between nodes, every pair of people adds communication overhead. And so if you don't start thinking about the systems that you're going to put in place, when the company is 25 to 50 people, to stay productive as you grow things will grind to a halt faster than you can imagine. The single word that matters most, I think, to keep the company productive as it grows is alignment ,. The reason companies become unproductive is people are either not on the same page and you know, don't know what the same priorities are, or they're actively working against each other which is obviously worse. But if you can keep the entire company aligned in the same direction, you'll have one well over half of the battle, and, and the way to start with this is just a very clear roadmap and goals. Everyone in the company should know what the roadmap for the next three or six months, or a year, depending on where the company is in its life cycle, looks like. You know, a classic test that I love to give is if I walk into a company getting, beginning to struggle with these scaling issues, I'll ask the founders, like, if I walked around and polled ten random employees and asked them what the top three goals for the company are, right now, would they all say the same thing? And a 100% of the time, the founder says, yes, of course they would, and I'd go do it, and 100% of the time, no two employees even say the same three, top three goals, in order. And founders can never believe it, because they're like well I announced that in all hands like three months ago what our goals were going to be, and how can they not remember? But it's really important to keep reiterating the, the message about the roadmap and the goals, and almost no founder does this enough. And if you do it, you know the company will say, you know, all right, these are our goals, we understand them, we're going to get them done, I know self-organize around that. But if people don't know what the roadmap of their goals are it won't happen. We already talked about figuring out your values early, but I want to reiterate that because that also really help the company make the right decisions. If everyone knows what the framework to decide is. They'll make hopeful the same decisions if they're smart people. You want to continue to be run by great products and not process for its own sake, this is a fine, fine line. Because you do need to put some process in place, but you never want to put process in place that rewards the process. The focus has to always be on great product. One easy way to do this that a lot of companies try is they just say, we're going to ship something every day, and if you do that you know, there's at least a continued focus on delivery. And then transparency and rhythm in how you communicate are really important, most founders wait way too long on these, but having a management meeting every week, of just the people that report directly to the founder or the CEO, critical ,. All hands meetings not quite sure how often is optimal for those, at least once a month where you go through the results and the real map with the entire company really important. And then, you know, doing a plan every quarter of what we're going to get down over the next three months and how that fits into our goals for the year, also becomes really important. I put offsites up there, because I don't think people do these nearly enough. A surprising number of the successful companies we've been involved with do a lot of offsites. Where they'll take their best people for a weekend to a cabin in the woods or somewhere and just talk about. What do we want to be when we grow up? What are our most important things to be doing? What are we not doing that we should be doing? But get people out of the office and out of the day-to-day, everyone I know that does those thinks they're well worth the time. So the goal in all of this productivity planning is that you're trying to build a company that creates a lot of value over a long period of time, and the long period of time is what's important here. You can avoid all of this and just like with the authority of the founder make sure the company ships a great next version. But that won't work for version ten, it won't work for version 11. I, I really believe that this single hardest thing in business is building a company that does repeatable innovation and just has this ongoing culture of excellence as it grows. If you look at the examples of this most companies fail here. Most companies do one great thing where the founder just pushes to get it done and then don't innovate that well on follow on products. And it really takes founders that think about how I'm going to do this second thing. This really hard thing. To get something like an Apple that can churn out great products for 30 or 40 years, or longer. All right, these are super tactical mechanics. This is, this is definitely to just put on a list and remember these things for later. All right in the early days, people basically ignore all accounting and they have, like, maybe if they're lucky, a shoebox full of receipts. They certainly don't have anything that looks like a financial report. This is a good time to get it in place. You know, when things are working, say, month 18 or whatever. You can do this with an outsourced person. Just say, you know what? We want, like to get our books in order. We want to start getting audits every year. We want to start a relationship with an accounting firm. Easy to do. Definitely worth it. This is also a good time to collect your legal documents. Because it's easy to fix things now. So, if you actually assign someone to go through and collect every agreement the company has ever signed. Then when your landlord tries to **** you out of your lease and no-one can find the lease which happens like, half the time somehow someone will be able to find it. Also, you're almost certainly missing something. Some employee didn't sign their PIIA or whatever and you'll find it now. It's easy to fix now. It gets really hard to fix, like, in the middle of your next round of financing. So, again, this is time to bring, like, a little bit of the order to, to chaos. FF stock is a special class of stock for founders that the founders can sell in a later round, without messing up the common-stock valuation. It used to be that most people set this up right when they started the company. Founders fund sort of popularizes. Which is why it's called FF stock. But it became a really bad signal, right? Founders that were obsessed with their own personal liquidity when the company had nothing turned out to like fail most of the time. And so investors learn that if founders pushed on this in the seed round it was a very, very bad sign. Most founders don't actually want to sell stock until the company is worth, like a billion dollars or something like that. So, I think you can actually safely set this up after things start working, in the next financial round, and then you can sell it two, three, four years down the road. But it's a good thing to remember by about the time you get to the B round. IP, trademarks and patents. actually, just IP and trademarks. So, you have 12 months, after you announce something, if you want to patent it. And, if you miss that window, it's very hard to do. so, 11 months after you launch, or first publicly talk about what you're doing. Is a good time to file provisional patents. We recommend people just file provisional patents. All that does is just hold your place in line at the patent office and it gives you another year to decide if you want to patent something or not. It only costs about $1000. It takes way less effort than a full patent. And most of the time you'll know whether or not you need full patent a year later. But if you just do this one step, you'll at least have the option. It's also a good time to file trademarks for the U.S. and major international markets. again, if you don't do this at this stage, most people end up regretting it. And while you're at it, a good time to grab all the domains. FP&A, good time also I think to think about someone to start doing FP&A. I think most companies don't end up realizing where the knobs on their financial model are until far too late. And I think it turns out that if you have someone build a really great model of the business. And by really great, apparently Roelof Botha, who was the PayPal CFO and built their FP&A model. The top, the, like, the top sheet of his spreadsheet was 1,500 lines, just as a level of the detail people build these to. But you can really optimize the business and understand it at a level that I think most people totally miss. Most people don't hire someone like this until they're many hundreds of employees. I think it's worth hiring earlier. Another thing that I think is worth hiring earlier that almost no one does is a full time fundraiser. Let's say you hire someone like really, really great and their full time job is to raise money for the company. You hire them after your b round. And you say, you know what, by the time we raise our c round we want the evaluation to be double what it would have been otherwise. You almost certainly get better results than if you hire an investive banker or someone else if it's just someone internal to the company and you end up paying way less money, and take like literally half the dilution. So, I think this is one of these like, slightly none obvious optimizations that people just failed to make. Tax structuring, so, this is another thing. most, once things are working. It would be worth you spending a little bit of time thinking about how you set up the tax structure for the company. I confess, I don't know a lot about the details here because I just find it personally really boring. But like somehow if you assign all the IP to like some corporation in Ireland that licenses it back to the U.S. corporation, you end up paying like no tax, no corporate tax. But I know you can only do that like relatively early on. And this ends up being a huge issue for companies that don't do it that compete with companies that do do it. You know once they're big, public companies. So that's worth doing. A lot of people throughout the class have talked about your own psychology as a founder. Here's what they haven't said. It gets worse, not better. As the company grows, you continue to oscillate. The highs are better but the lows keep getting worse. And, you, you really want to think about this early on and just be aware this is going to happen. And try to try to manage your own psychology through the expanding swings that it's going to go through. Another thing that happens as you begin to be successful. As you go from being someone that most people rooted for, kind of the underdog, to someone that a lot of people start hating on. And you know, you see this first in internet commenters who will be, like, I can't believe this **** company raised money. It **** sucks, like, awful. And it only bothers you a little bit, but then, like, journalists that you kind of care about start writing this, and it just goes on and on. This also will go on and on as you get more and more successful, and you just have to make peace with this early. But if you don't, it will bother you all the way through. This is also a good time to start thinking about how long of a journey this is going to be. Very few founders think long term. Most founders think kind of a year in advance. And they think that you know what in three years I'm going to sell my company and either I'm going to become a VC or sit on the beach or something. Because so few people make an actual long term commitment to what they're building, the ones that do have a huge advantage. They're, they're in a very rarefied class, and so this is a good time to like sit around with your cofounders and decide, you know what, we're going to work on this for a very long time. And we're going to build a strategy that assumes that we're going to be doing this for the next ten years. Just thinking that way alone, I think is probably, a very high leverage thing you can do for success. Take vacation. Another common thing that we see is founders will run their business for three or four years, without ever taking, you know, more than a day of vacation. And that works for like a year, or two years, or something like that. It really leads to nasty burnout if you don't do it. Losing focus is another way that founders get off track. I actually think this is a symptom of burnout. When you get really burned out on running the business, you want to do easier things, or sort of more gratifying things. You want to go to conferences, and have people tell you how great you are. You know, you want to do all these things that are not actually building the business. And the most common post-YC failure case for the companies we fund is that they're incredibly focused, during YC, on their company, and then after, they start doing a lot of other things. You know, they, they advise companies. They go to conferences, whatever. Focus is what made you successful in the first place. There are a lot of reasons people lose focus, but fight against that really, really hard. This is a special case of focus. As you start to do well. You will start to get a bunch of potential acquires sniffing around. And it's very gratifying. And you're like wow, I can be so rich and that'd be so cool. And negotiations feel really fun. This is one the biggest killers of, of companies is that they entertain acquisition conversations. You, you distract yourself. You get demoralized if it doesn't happen. If an offer does come in and it's really low, you've already like mentally thought that you're done, and so you take the offer. As a general rule, don't start any acquisition conversation unless you're willing to sell for a pretty low number. Don't ever just check it hoping that you're going to have the one miracle high offer. If that's going to happen you'll know. Because they'll just make you a big offer before you can meet them. But this, this is a big company killer. And then just as a reminder to everybody the thing that kills startups at some level is the founders giving up. So sometimes you should quit. But, if you mismanage your own psychology and you quit when, when you shouldn't, that, that is what kills companies. I mean that is, that is the sort of final closet death in most of these start ups. And so if you can manage your own psychology in a way that you don't quit. Dont go to place a where you need to quit, or give up on the startup. You'll be in a far, far better place. So, marketing and PR is something that we tell companies to ignore for a long time. Everyone thinks in the early days that the press is going to be what saves them. We tell them all the time it doesn't work that way. It's definitely true. You know, press is not what's going to save your startup. But as you start to be successful, this is something that the founders themselves need to spend time on. So, once your product is working, switch from not caring about this, to caring about it a little bit. And, the two most important things for the founder to do, the founders to do. Figure out the key messaging yourselves. Never outsource this to your head of marketing or PR firm. You, founders have to figure out what the message of the compay is going to be. And once you set that, it kind of sticks. It's very hard to change this once the press decides how they're going to talk about you. The other thing is getting to know key journalists yourself. PR firms will always try to prevent you from doing this, because they need to have a reason to exist. And so they're like, well, we're going to handle the relationship with the journalist. We'll just bring you in for interviews. No journalist wants to talk to a PR flack, ever. They're so much more happy to just hear from a founder. I think the biggest PR hack you can do, is to not hire a PR firm. Just pick three or four journalists that you develop really close relationships with, that like you, that understand you, that you get. And then you contact them yourself. They will cover every story you ever give them, and they'll actually pay attention, get to know you and care about the company. This is so much better than the normal strategy of having a PR firm blast 200 contacts that never read their e-mails, with every piece of news. so, this is something that I think is important to start doing. This is also the time in a company when business development starts to matter. And so, in the early days you can basically ignore anything that would be like doing deals, except maybe fund raising and sales. You know, this is the time when they're important. And everything, or many things that you do, like even fundraising, falls under the, the category of doing deals. So there are, here's my one-minute crash course on this. There are five points that I think are important to understand here. We've talked about this a lot. Nothing will serve, nothing will matter if you don't build a great product. So assume that you've done this before you go try and get anyone to do anything with you. Developing a personal connection with anyone you're trying to do any sort of big deal with, is really important. For whatever reason, most founders fail to do this, or many founders fail to do this. But no one wants to feel like they're this transactional thing, that you're using them to get distribution for your product, or to raise money, or whatever. And, so figuring out some way to actually care about this person and care about what you're doing with them. And not view them, you have to in your own mind not just view them as a one off transaction. You have to actually care about them and what they're going to get out of this. Competitive dynamics, so this is like basic principle of negotiation. Most funders learn this the first time in fundraising but it actually matters for everything. The way you get deals done, and the way you get good terms, is to have a competitive situation. You know, if you don't do this deal with party A, you're going to do it with party B. It's not always an option, but it usually is, and this is, like, the single thing that makes deals happen and makes deals move. Tyler talked about persistence the last lecture so I won't hit on that again too much, other than to say, you have to go beyond your comfort point here, most of the time as a founder. And then, the fifth point is you have to ask for what you want. This is another thing, I still have trouble with this, and certainly most of the founders we do. Have, you know, if you want something to deal, just ask for it. Most of the time, you know, you won't get laughed out of the room and you might get it. But you have to be like, at some point you actually have to say, you know this is what I'd like you to do. Even if it feels aggressive or an overreach, or whatever. So I'm going to close, this part of the talk with an image. One of the Airbnb founders drew this on like a business card or something for another founder that was starting a company. And then I saw it once and took a picture of it. Because I thought it was such a good summary. And what he had tried to draw here was the Ycombinator process as he remembered it. And I love it because it's like so simple, and it looks so do-able when it's written on a business card. But you're trying to find product market fit. You know, you're trying to build a product, and you're trying to close the gap between those two gears. The only way to do that is to go off and meet the people. You cannot do this without getting really, really close to your users. And then he drew this graph that, sort of on a whiteboard at YC and got in kind of, like, one of the YC he writes a passage, but that's the graph of how adoption goes for a new company. So you launch in the press, you get a huge spike. It falls off to nothing. At some point, at least one point, things look like they're going to completely die and kind of dip below the x-axis. They recover a little bit. You have this long, long, long trough of sorrow before things work. In Airbnb's case, it was 1,000 days before the graph started ticking upward. You have these wiggles of false hope, and then finally, finally, finally, things start to grow. Three years later. So starting a startup ends up being this very long process. It is, you know, it can be really rewarding. It's definitely long, but it is do-able. And that's what I love about that drawing. So, with that, I think I have about ten minutes left. I can answer questions on this, or anything else in the course that we've covered. If anyone has some. Yes. >> You have that diversity being important, but an earlier speaker said diversity wasn't important and you should just hire people that are very much like you, and then you can cross. >> So, here is the the question is, how do you you square the device of diversity being important with earlier speakers saying you want people that are very similar. the, the difference what you want is you want diversity of backgrounds, but you don't want diversity of vision. Like where companies get in trouble is when they have people think very differently about what the company should be doing, or don't work well together. You don't want that. You do want to hire people that you know, and that you trust and that you can work with. But if everyone on the team comes from exactly the same background you end, you do end up developing somewhat of a mono-culture which often causes problems down the road. Not always. Some companies have been successful with that. So what, what we tell people is, hire people that you know and that you've worked with before. But try to hi, try to hire people that are complementary and align towards the same goal, not people that are exactly the same. because you just get a, a better skill set. Yeah. >> What are some examples of ways to make a transition back to a more personal level, especially when you're really. >> >> How to keep track, productivity systems. So, the one I use, which actually I think works really well, is I keep one piece of paper with my goals for sort of a three to 12 month time frame. And I look at that every day. And then separately I keep one, one page for every day of my short term goals for that day. And so if I need to do something in like a week, I just flip forward seven pages and write it down, and then I also keep a list of every person and what they're working on, and what I need to tell them, and what I need to talk to them about, what we talked about last time. So every time I sit down with someone, I kind of have the full statement, a list of things for that person that works really well. Yes. >> So we talked about that startup growing. But most startups fail. >> Yeah. >> Any advice for kind of fail gracefully. >> Yeah. >> >> How to fail gracefully. So, most startups fail,and Silicon Valley almost goes too far in how much it loves failure. Failure still sucks. You should still try not to fail. And this whole, like, thing, of like, failure's great, I, I don't agree with. But it will happen to most people most of the time, and it's a very forgiving environment. As long as you are upfront about it, and ethical, and don't let anyone get into a bad situation. So, if you're failing, first of all, you should tell your investors. And, second of all, you should not totally run out of money. What you don't want is a blow-up with a bunch of, you know, debts that the company owe, and everyone, you know, showing up to work, one day, and the door being locked. You'll know when you're failing, you'll know when the company is, things just aren't going to work, and you should just tell your investors. Like, hey, sorry, this isn't going to work. No one will be surprised. Like, I expect to lose my, or I'm willing to lose my money on every investment I ever make. I know that happens most of the time, and the winners pay for it, you know, still with a factor of 100, so it's okay. No one, people will be very understanding and supportive. But you want to tell people early. You don't want to surprise them. And you want, you don't want to like let your employees gets shocked when they learn they don't have a job. you know, you, you, you want to shut the company down in a graceful way. Help them find jobs. Make sure you give them two or four weeks of severance payment, so that they're not suffering a cash flow problem. All that stuff is pretty important. Yes. >> How many immigrant founders have you seen in Y Combinator? >> How many immigrant founders have we seen in Y Combinator? In the last batch, I think it probably went up for this next batch, in the last batch 41% of the founders we funded were born outside the US. From 30 different countries. So it's. Yeah a pretty big percentage. >> What do you think are other good places to start a start up? >> Apart from the Valley where do I think are other good places to start a start up? Well I still think the Valley is the best by a very significant margin. But I think it's finally, maybe beginning to weaken a little bit. Because the costs have just gotten so out of control. To be clear, if I was going to start a company I still wouldn't think about. I would still pick Silicon Valley. And I think if you look at the data of companies over the last few years, Valley still wins by a lot. But Seattle, LA, lots of places outside the U.S., I think all of these make sense. >> Like what places outside? I hesitate to make recommendations there because I haven't spent enough time in this cities to really have an intuitive feel. but, like, I mean, you, you know as well as I do the common ones people talk about, startup hubs, and I just, I can't make a personal recommendation there. >> Hire a professional CEO or like a senior. >> When should the founders think about hiring a professional CEO? Never. you, if you look at the most successful. Companies in tech, they are run by their founders for a very long time, sometimes forever. And sometimes they even hire a professional CEO and then realize that that is not going to like build a great company. And so, like Larry Page came back to CEO again. I think, if you don't want to be the long-term CEO of a company, you probably shouldn't start one. I'm not totally sure about that. I think there are exceptions. But generally, that, the transition I talked about today, if you go from building a great product to building a great company. Being a founder, you know, for nine of the ten years is going to be about building that great company. And if you're, if you're not excited about doing that I think you should think hard about, about it. Yes? >> What are some of the most common and most alarming warning signs you should be looking for. When you're trying to make this shift from building great products to building great companies. What are the, the most common mistakes to make when you're shifting towards building your own company? I think I went through most of them here. I tried to put everything in here that I see people mess up most of the time. Yes? >> Is there a way to get involved in the Y com, community before getting accepted? Is there a way to get involved with YC before getting funded? No, and intentionally not. Actually I'll say the one thing you can do is if you work at a YC company. And then later apply I think that probably like, well not probably. That definitely if you get a good recommendation from those founders will help with YC. So you know, working at a YC company helps. But there's not much you can do to help and that's intentional. Like there is no pre start up in a way that there's pre-med. You should just focus on whatever you're doing. And when you start a start up, there's things like YC and others that are structured to help you. Most of the founders we fund, we don't know at all before we do it. You know, you don't, you really don't need to get to know us or get involved. We're, we're all good that way. Yes? >> There's a statistic of saying, now harder to get into Y company then getting, getting into Harvard. So I'm curious, the criteria that are used, think of start-up, does it change over time, or? >> The question is what, what criteria do we use to pick start-ups and has it gotten harder? Has it changed? You know, we, the two things that we need to see are, are good founders and a good idea. And without both of those, we, we won't fund a company. But that hasn't changed. That has, that has always been the case. The applicant pool to YC has grown quite a bit. But most of, or a lot of the growth is, you know, people that shouldn't be starting start-ups anyway. Probably, that are just doing it because it's sort of the cool thing now. So you know, if you're really passionate about an idea. And the idea is good. And you're you know, smart and get things done that you're executing. I still think you have a, a very reasonable shot at YC, even though the headline number is bigger. Yes. >> The certain, certain market that you're really excited about but don't necessarily know a lot about yet. Is there a certain or ways to ,. >> Sure. If there's a market that you're excited about but don't know a lot about yet, what should you do? Two schools of thought on this. One is to just jump right in. Learn it as you go. That's worked a lot of times. The other is to go work at a company in the space or do something in, in the market for, you know, a year or two years. I lean slightly towards the second. But as long as you're willing to really learn and really study and really get uncomfortably close to your users, either case will work. And I don't think it's that much of a disadvantage. I, I think, all things being equal, I would go spend a couple years learning about it in detail, but I don't think you have to. Yes? >> I have question related to YC to. >> Sure. >> Yeah so, I think that YC does fantastic job in promoting partnership, instead of combating. In fact, as an institutional investor I actually I messed with a suite up at YC. In past periods, the hardware has things like you know, you guys has 180 companies every year jumping into the market. And it looks like it's hard to follow each of the YC companies any more. Do you think that this will create some you know, if some people will walk away from YC. Because they cannot follow such a companies. The company has to be very polished and the founder has to be thinking over and over about ideas. Easy to access the capital- >> All right, so I think the question is do I think investors are going to fund less YC companies as we grow? no. Definitely not. Like certainly the trend in this is the other way. We have more and more investors saying that, you know, half their portfolio's now YC companies. And they're looking forward to the day where it's three-quarters. No I don't think that's a problem at all. I think that is like so not on my top 100 problem list. The opposite of that maybe. All right, one more question. Yes. >> When should a group of founders raise a seed fund or the first fund? >> When should a group of founders raise some seed money? This is a great question. I think that, I think that in general. It's nice to wait until you have the idea figured out and initial signs of promise before you raise money. Raising money puts some pressure on the company. Some time pressure. And once you've raised money you can't be in this exploratory phase indefinitely. you, and you end up having to rush. And so, like, if you haven't raised money, and your idea's not working, you can, you know, like flail around and pivot until you really hit on the thing that's working. But if you raise money and your idea doesn't work, you're in this like oh **** moment, and you have to pivot. And you pivot to whatever the first vaguely plausible idea is. And that's bad. So I think. If you can wait to raise any outside capital more than say, like $100 or $200,000 if you're necessary, but ideally not even that. Until things are working or, or at least pointing in the direction of working you're way better off. All right, thank you all very much, this was fun.

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Posted by: pulak on Dec 5, 2014

Lecture 20 - How to Start a Startup

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