This post is by Faith Storey from SaaStr
Click here to view on the original site: Original Post
Michael Seibel is CEO and a partner at Y Combinator and co-founder of two startups – Justin.tv and Socialcam. He has been a partner at Y Combinator since 2013, advised hundreds of startups, and has been active in promoting diversity efforts among startup founders. Hear his take on the future of work with a decade in learnings from YCombinator. Want to see more content like this? Join us at SaaStr Annual 2020. Michael Seibel – CEO @ Y Combinator FULL TRANSCRIPT BELOW Okay, great to see everyone. I thought what I would do that could be the most helpful is teach you a little bit about what we’ve learned at YC over the years. To give you a sense of YC, we’ve now funded over 2,000 companies, about 4,000 alumni. Our companies combined are worth about 100 billion dollars. We have about 100 companies that are worth over




Number seven. Not establishing best practices around management. This is something that I see extremely commonly. It turns out that early stage management isn’t that complicated, but if you don’t do it, your team performs poorly. With this, typically what’s missing are consistent one-on-ones between managers and employees, some type of all hands meeting, getting employee buy-in on strategy and tactics. I can’t tell you how many companies run with two co-founders who go into some magical room and come up with some magical idea, and then the rest of the team has to build it, no questions asked. I always say to myself, “If you’re an amazing hirer and you’re bringing the smartest people into your company, why wouldn’t you want their opinion about what you’re building?” Furthermore, someone’s always going to be more motivated to build the product that they had some say in figuring out what it was going to do. So actually having a good process for getting that buy-in is extremely important. And then the last one is not creating an environment around transparency around money in the bank and KPIs. If you’re not transparent with your employees about how successful your company is doing or how much money you have in the bank, one, it’s likely they’re going to try to find another job that’s better. But two, they’re going to suspect the worst. We saw this at Justin.tv, it worked the opposite way. We were always extremely transparent about our cash in hand, our months of runway, our traffic, our revenue. There was a moment where we only had two months of runway left. We were generating about $750,000 a month, we were burning about a million dollars a month. We had half a million in the bank. Instead of employees leaving left and right, we sat everyone down and we basically asked a simple question. “Are we going to cut to a 100 k a month burn, which is going to give us five months of runway? Are we going to break even, or are we going to get profitable?” And everyone said in unison, “We’re going to get this company profitable.” Two months later, we were profitable and we ended the year with eight million in revenue and one million in profit. So when you’re transparent with your employees, they will actually rally to the cause, even when it looks like you’re in your darkest hour. When you’re not transparent with your employees, they’re not going to rally, unfortunately. And they’re probably going to be pretty vindictive. The next one is one that we suffered at Justin.tv. This was not clearly defining roles and responsibilities between the founders. It’s very common that in the early stage, everyone does everything, and you don’t really need strict roles and responsibilities. But after you raise money and you have a couple of employees, suddenly there are some hard decisions to make. Who’s going to lead product? Who’s going to lead tech? Who’s going to lead sales? Who’s going to be responsible for recruiting? It’s often the case that teams will not make these decisions, and then every decision, large or small, will have to go into some kind of founder committee to get results. I think one of the best things that good start-ups do early on is define responsibilities and make it so that only the most important decisions end up being something that’s debated. The other part about this is being willing to see your co-founder try something that doesn’t work, or being willing to see an employee try something that doesn’t work. You have to be okay with that. Your ideas aren’t going to work most of the time either. So really sitting down and having a hard conversation about who does what and who’s responsible for what in the beginning is very valuable. Number nine. Almost done here. Not having level three conversations within the founding team to relieve conflicts. There will always be conflicts within the founding team. There will always be performance issues, there will always be need for change in roles and responsibilities. This will always happen in every start-up. Great start-ups have a system to have hard conversations. Bad start-ups either bottle it in or get into constant fights. And so, having some type of system where the founders are going to meet and work through whatever the bullshit issue is of the day is extremely important. I think the most important thing here is to actually create a space where people feel comfortable providing really on the point feedback without feeling like they’re attacking or feeling attacked. And it takes a lot of effort to create an environment where someone can be extremely honest to someone without it being perceived as attack, but most companies slow down significantly if the founding team doesn’t have these types of conversations. And there will be problems, so this is another strategy to get through them quickly. All right. Number ten. This is the biggest one, and this is something that cripples YC companies specifically a lot. Assuming the Series A will be as easy to raise as the angel round. It’s interesting that a lot of founders look to Series A investors for advice on when they’re ready to raise a series A. It’s tricky, because you’re getting advice from an extremely biased source. The thing that I hear founders tell me time and time again with B to B start-ups is, “I can raise a Series A with a one million dollar run rate.” Time and time again, like, I hear this probably every week. So they think, “I’m going to take all that angel money, shove it into getting a million dollar run rate. I’ll be at six months of runway or less, and Series As will just come knocking on my door.” They say this often parroting Series A investors, who want stages like this and say, “Oh yeah, if you have a million dollar run rate, we’d love to talk.” I think the thing that we’ve realized is that, for most investors who are considering writing a five to ten million dollar check, that is the first moment that they might be interested in talking to you. It’s really interesting. That’s the moment where they want to basically preempt or front run anyone else, but they don’t want to waste their time. So, put another way, that’s the moment where they have maximum leverage in the negotiation, and they have even more leverage if you’ve gotten to that one million dollar run rate with not much runway. You’ve given that Series A investor maximum leverage. That’s not how I like to fight battles. Oftentimes, I tell my founders to think about this slightly differently. I like to tell them, “Hey, you should think about this like a video game. If you have to fight a level 20 boss and you’ve got three options, you’ll grind up to level 10 and get your ass kicked 20 times in a row, you’ll grind up to level 20 and maybe you have a 50/50 shot of winning, or you’ll grind up to level 30 and you kill the boss every time. Which one would you rather do?” Different founders have different preferences. But more often than not, founders rather go into a Series A conversation with high amount of leverage, so that they can get the investor they want at the terms they want in the least amount of time. Usually our guidelines for B to B companies is trying to be in the 150 to 250 k a month range. That, and close to profitable. That put you typically in the maximum leverage category, which significantly increases the chance that going out and raising a Series A will result in a Series A. Most founders don’t quite understand how rare Series As are, and the number of companies that go out and try to raise Series As versus the ones that actually succeed, it’s a very low conversion rate. The other thing that’s tricky here is advice. Your angel investors often don’t give great advice on this subject. They’re often parroting the advice that they’re seeing from investors. So just because your angel investor thinks you can raise a Series A, once again, don’t put on your blinders. You understand how much leverage you have. You can look at your numbers and you’ll know how much leverage you have. The other thing is, don’t be obsessed with what you read on TechCrunch. During my entire 20s, I saw stories on TechCrunch every day about some Joe raising ten million dollars for some company that was clearly going to fail. It had no traction at all. Every day. And I thought to myself, “What the fuck? I can’t raise two million dollars and this guy’s raising ten million dollars.” After we learned fundraising better, after we raised our Series A and Series B, after I became in my 30s, I realized something very different. Suddenly, all of my friends who struggled to raise in their 20s were easily raising in their 30s. And I look at these friends and I’m saying, “You’re better, but you’re not that much better than you were back then. So what’s different?” In reality, two things are different. Investors, I don’t think for good reason, significantly bias for second time founders. Significant bias toward second time founders. And that’s something you have to understand. Second, if you’ve been in the Valley for ten years, a lot of times you’re pitching people you know. This is something that always blew my mind. It’s a lot easier to try to get five to ten million dollars from someone you know than someone you’re meeting for the first time at a VC office. And so, because someone raises doesn’t mean they’re doing well. Because someone raises doesn’t mean their business is going to work. Because your competitor raises, it doesn’t mean that they’re better than you. You don’t know all the circumstances behind that fundraise. And so, because they raise it doesn’t mean you can. I often tell people, “You can try to think that maybe you’re special.” Some people are special. You know, my former co-founder, Justin Kan, he can probably raise with a haiku, he could raise a lot of money. But most people aren’t special. They need leverage. So when you go into a fundraise, the better bet is to have as much leverage as possible. These are the ten things that most YC companies get wrong, especially the B to B ones, post demo day. The last thought I’ll leave you with is that I actually think most of our start-ups have a pretty good hypothesis, a pretty good thesis on why their company can be big. I think that most of them fail not because their hypothesis or thesis was wrong. I think most of them fail because either their timing was slightly off, or because of some of these problems, they didn’t have time to iterate their product so that they can find the real solution to the problem that they’re trying to solve. If you take the case of Justin.tv and Twitch, Twitch sold for a billion dollars. But most people don’t really understand the back story. Twitch started as an online reality TV show, and if you look at the story, it started in 2006, and by 2012 it was worth $24. By 2014 it was worth a billion. So, that entire time, we were trying to figure shit out. The entire time. It took us a long time, six years, to actually figure out what the market wanted, how to solve the problem we were trying to solve. If your plan is you already have solved the problem, or you think you’ve already solved the problem, or you just need six months to figure out the solution, beware, it might take a lot longer. So if you keep a small team, if you iterate quickly, and if you don’t believe the hype and you actually understand whether you have product market fit, you can actually take the time you need to solve the problem. I tell this to YC companies at the end of every batch. It might take you one year to get it, it might take you three years to get it. It’s a lot easier to raise your Series A post product market fit. It’s a lot easier to scale once you know what you’re building. So, stay lean until you have that moment. The last thought I’ll leave you with is a really fun one. I always find funny, founders hate it. We have two kinds of founders calling in the emergency. One, when their company’s dying, that’s extremely typical. The other is when their company’s succeeding. I think the funniest thing that happens in start-ups is success hurts more than failure. Because success comes with all these expectations. So not only is everything breaking and everyone’s complaining, and your customers are yelling at you and your servers are going down, but now, you might have something. So you better … The expectations are now really high. So, just remember that. Remember that unfortunately on this journey, the good times feel bad and the bad times feel bad. It kind of sucks. But hey, this is what you signed up for, and no one forced you to do a start-up. So with that, thank you so much. Good luck. The post A Decade of Learnings from Y Combinator (Video + Transcript) appeared first on SaaStr.