“At Y Combinator, we see a lot of companies who raise money on demo day as you can imagine, but still the vast majority of them die and about 70% of them do not go on to find any form of product market fit. Here are the most common trends”
I found an online talk by Michael Seibel here (https://www.youtube.com/watch?v=Dgmmje5WHWA) that described literally every issue I have encountered since starting. It is the most relevant and useful advice I have seen in a long time. I wrote them down and organized the content into something people can skim and google easily.
What is product market fit?
I don’t think the definition has changed since i read it in a Marc Andreessen blog post more than 10 years ago.
From Marc Andreessen – https://pmarchive.com/guide_to_startups_part4.html
Product/market fit means being in a good market with a product that can satisfy that market.
You can always feel when product/market fit isn’t happening. The customers aren’t quite getting value out of the product, word of mouth isn’t spreading, usage isn’t growing that fast, press reviews are kind of “blah”, the sales cycle takes too long, and lots of deals never close.
And you can always feel product/market fit when it’s happening. The customers are buying the product just as fast as you can make it—or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can. Reporters are calling because they’ve heard about your hot new thing and they want to talk to you about it. You start getting entrepreneur of the year awards from Harvard Business School. Investment bankers are staking out your house. You could eat free for a year at Buck’s.
Do you believe raising more money translates into more success?
Here’s something counterintuitive. I actually think all things being equal, raising more money than you need translates into less success not more.
I see too many founders not understanding that the more money they raise in the seed, the higher the expectation is of the Series A investor.
I’ve had some conversations that go like this, “Well we raised a four million dollar seed round and we’ve just hit one million dollars ARR. It’s time to raise our Series A.”
Well I told the founder, “Okay, understand there’s another company pitching for their Series A that had reached a one million dollar ARR and they only raised a million or a million and a half in their seed round.”
As an investor, am I going to measure you similarly or am i going to say “Huh. How much more is this company that raised three to four million dollars accomplished than the one that raised one and a half. So that’s the first issue with raising more than you need.
The second issue is that we have funded some of the most talented and smartest people at YC that I’ve ever had a chance to work with. I’ve yet to consistently meet founders who can prevent themselves from spending more money when they have more money in the bank.
I’ve yet to consistently meet founders who will double down on the metrics that matter when they have a lot of money in the bank. It’s a very very hard thing to do.
What are the top one or two things that make startups really great?
From my experience, first and foremost excellent technical talent.
I don’t necessarily mean amazing resumes like having managed a thousand people or built amazing things. When I think about amazing technical talent. I actually think two things.
One is the ability to build software
Two is a lack of intimidation
I think that one of the things that I’ve been amazing recipient of as kind of a business founder is that in both of my companies, my technical co-founders were not intimidated by building things they’d never built before.
I’ve never heard anyone say, “I don’t know how to build this” or “I don’t think we can build this.”
Never heard it.
Folks who have never built anything before have built massively scalable websites. Built massively scalable video systems. Built video filters.
Almost everything they were building they had never built before. But they weren’t intimidated.
The combination of ability and a lack of intimidation I think is very big.
It’s probably the number one thing that makes a startup and increases the chance of startup success.
Number two is setting goals.
It is really scary to set goals. It sets you up for failing.
Founders who are able to get over that fear and set aggressive goals and just embrace the challenge always do better.
Oftentimes weekly and monthly goals. Oftentimes numeric.
When starting out, how do you deal with customers who want customizations?
This is why I think operating an area where you have insight is extremely important.
If you have insight, you’ll be able to understand if these customizations are features that new customers will want or just customizations that only this one customer will want.
Then you have to basically ask yourself the question.
How much is the contract worth?
Every company has to make that decision for themselves. What i will say though is that you should be deathly afraid of becoming a consulting company.
Most big companies will try to force startups to become consulting companies by customizing to a degree that is useless.
If you are attacking a top three problem for a company, a strong problem they have to aggressively deal with. If you’re actually attacking a problem that people have, they are usually willing to work with you and use a product that isn’t fully built and isn’t fully customized.
Before we hit product market fit, how far in advance should we be getting the pieces in place for growth?
I think that these two ideas kind of live at the same time in direct conflict with each other.
The first idea is that you can disrupt a big company by being more nimble.
By planning less. By moving faster.
The second part is, “I’m running a startup and i want to hire more people and I want to do more things at the same time.”
It seems to me like that second bid is exactly what big companies do and exactly what opens up the opportunity for you to disrupt them.
The company is not focused and hiring much people.
So I would argue that in the early days what we tell YC companies is get 10 customers who love your product and do it in a non-scalable way.
And then get 100 customers that love your product.
Word of mouth is a very powerful, very powerful thing.
I would argue that oftentimes getting sales channels and marketing channels working is a secondary project. It is something that’s far more important to do after you have paying, retaining customers who love you.
It is very hard for a startup to do multiple things at the same time.
I always choose paying retaining customers who love you over marketing stuff. Always choose that in my opinion.
How do early stage startups set really good clear goals?
This is actually very simple. They actually write the number they want to achieve every week down on a spreadsheet.
They create a graph and they look at it every day
The airbnb founders did this amazingly well when they came into YC. It was in January 2009.
The economic crash was fully realized and Paul Graham told the whole batch we don’t know if any investors are going to come to demo day so you all need to try to become profitable.
The airbnb folks internalized this and they basically said they would need to be generating Four thousand dollars a month to be profitable.
They called it ramen profitable, because it would cover rent and eating ramen.
They basically said if we want to hit that number by demo day, here’s every number we have to hit every week between now and demo day.
They printed that graph out and put it all over their apartment.
They put it in their kitchen. They put it in the fridge. They put it on the bathroom mirror. They put it everywhere.
Every week, they tracked to see whether they were going to their numbers or not.
Before demo day they were ramen profitable.
It turns out that you won’t know how you’ll accomplish a hard goal before you set it.
But once you set it, that’s when you start getting creative. That’s when you start figuring your shit out.
Step one is an aggressive goal. Step one is not plan.
Step two come up with idea on how to hit it.
That’s the best flow.