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Hello and welcome everyone. I'm Patrick O'Shaughnessy. And this is invest like the best this show is an open-ended exploration of markets ideas methods stories and of strategies that will help you better invest both your time and your money you can learn more and stay up-to-date and investor Field Guide.com Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management, all opinions expressed by Patrick and podcast guests are solely their own opinions and do
not reflect the opinion of O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions clients of O'Shaughnessy Asset Management, May maintain positions in the Securities discussed in this podcast. My guest this week is Michael Seibel Michael is a partner at Y combinator and the CEO of their startup accelerator. He was the co-founder and CEO of Justin.tv, which eventually became twitch and Socialcam in this conversation we discuss
All Michael has learned reviewing thousands of applications to YC interviewing countless new entrepreneurs and watching young companies begin to grow and occasionally finding product Market fit listeners will also enjoy when Michael traps me big time in my thinking about Airbnb and his framework for great problems to solve enjoy this great conversation with Michael Seibel Michael. I've been really looking forward to doing this with you. I always try to think of titles for the episodes ahead of them. And when I considered for you is the man who gets to see
the future and that's true because of anyone in the world. Maybe you seem more nascent new companies and Founders being built of just about anybody and so I thought it an interesting place to begin since I know demo day just wrapped up. So I'm sure you've been working your tail off to ask for what sort of of some of the emerging Trends assuming you do believe that you get to see the future in some way that you saw in this most recent batch of young Founders.
I'll zoom out to the past couple years, so generalize
The first Trend that I'm seeing is a social Trend I would say and the way that I would describe it not social like social media the way I would describe it is Founders having more concern about the impact their startup is having on the country or on the world and Founders being braver and taking on kind of core challenges. Whether it's Healthcare we have
Companies trying to attack mass incarceration. I think that there's been a little bit of a feeling like if we want these problems to be fixed in our society. We have to be part of the solution. We can't just lean back and I think that's a qualitatively different than when I started in 2006 2007. Certainly the kind of next big change was not going to be surprise to anyone is B2B SAS with
Fishing is that like B2B SAS has been the trend for what 10 years maybe you'd argue 12 years and I would say that it's not slowing down at all once sub Trend within that that I find interesting is I'm starting to see a lot of companies build verticalized software for small business. If you think of the product like Square they kind of want to revolutionize the POS across all of small business and I think they've gotten a lot of small business basically on board into
modern software and then we've seen a number of YC startups Squire is one of them but there are others who take a chunk of that. I can slice of that small business Squires going after barbershops and hair salons and basically saying I not only want to be your POS, but I want to try to help you do as many things as possible in your stack as possible. I can help you with your payroll. I can help you with your managing of employees and time tracking I can help you collect.
Course money from your customers. I kind of want to be the single piece of software you have to use to run your business and that battle has been interesting because of course square is trying to diversify and offer more services to the same customer, but it's hard to be the single Source piece of software for every type of small business vertical. I would say another massive Trend in YC is just the number of Founders were funding from outside of the US India southeast Asia Europe Middle East.
East Africa, we're now seeing Founders everywhere and we're now basically seeing I think in the first five to ten years of YC. We were still fairly International 10 to 20% but a lot of folks were looking to come here to build their business. I think what we're seeing now is that in a lot of these Emerging Markets Founders are coming here to raise money, but they're building local businesses that's becoming a lot more common as well. So yeah, I'll stick to those.
Re going back to sort of the role of covid and all this. It strikes me into the headline Tech story is the penetration of e-commerce which makes perfect sense, but it seems to me like this is way more pervasive than that and in various ways, whether it's social and people just being fed up with the status quo or companies that just out of necessity have to rebuild the way they do business as you pointed out. It sounds like covid is a huge part of recent Trends. Do you think that that will reverse or is that just here to stay?
I think that's here to stay you brushed against another Trend that I'm certainly seeing where it's basically wholesale businesses are starting to rethink whether or not they can become both whole tail and Retail and if becoming a retail business is as easy as opening up your Shopify store and now I can suddenly diversify and sell to individuals when most by business clients are shut down. I think that's something that a lot of wholesale businesses or
Boring, and I don't think they go back one of the things that I've seen with wholesale businesses is that when they sell their B2B clients they have to give them credit when they sell normal consumers. They get paid up front. I think that's a nice feature. Yes. I think that's almost
addictive one of the things I've been most excited to talk to you about is the literal process of parsing first through applications to YC and then second through companies that actually make it I'm obsessed with
Investors that just have tons of reps in their particular field and I think you're probably like the rep
King daeso grabs.
I'd love to spend some time on both of those stages. So maybe first you could describe what an application to YC looks like and then I want to ask questions about what it's like to review hundreds of these things at a time.
I'll start with some numbers. Let's take the last two batches. We have this crazy nomenclature. So we call it winter 20 and summer 20, which is January through March of 2020 and then
June through August 2020. So combined a little under 30,000 applications to YC between those two batches. We interviewed about 10% I say in person half of those were in person and half of them are doing covid so over video conference and we accepted about let's say 475 ish. So 475 accepted companies out of about 30,000.
Applicants so that's kind of the high
level maybe beginning on so there's actually three levels that are interesting to ask about so first in the 30,000 the applications again having probably been through thousands and thousands of these things personally. What are you looking for in a fairly short application from the founder what signals or patterns have emerged over the years as interesting to you and maybe also the inverse things that are
disqualifying. So I think the first motto of a YC application reader is don't be
Smart, I think there's all of this false conventional wisdom around being able to see the future being able to look at an idea and tell if it's a good idea just just the concept of a quote-unquote good idea. And I think that we're all kind of imbued with this somehow through popular culture and you basically have to unlearn that these Founders are shooting for a point ten years from now and many many things that look like a bad idea.
You now look like a good idea 10 years from now almost the first thing you have to do is kind of let go of your prejudices and opinions about ideas. The other thing which makes it even more important is that a huge percentage of companies change the problem that they're working on or how the product works and so if you can on their idea too much you might be missing out on the pivot. The number one thing that I look for above all else is that the team who's applying has the ability ability to
Build and launch the first version of the product.
And the second and very closely tied to it item is I want evidence of Forward Motion given the amount of time the founders of been working on the company. I want to be impressed with what they've done and I don't care if that amount of time is two weeks. I don't care if it's two years. I just want the sum of what they've accomplished during that period of time to be impressive and I think this is a hard concept for people to understand. I think that everyone is trained on school where these absolutes what was
City score. What was your GPA school doesn't really measure trajectory at all. Whereas like with us. It's really the only thing we care about is trajectory is how much forward motion and momentum and are you creating as opposed to starting position? And so I really want to see evidence that a team is intimidating me with their progress. And then the last thing that I want to see is some evidence of a strong relationship between the co-founders in the early stages of the company are ridiculously stressful.
And companies literally can break from the pressure what holds together a company I think too often when you analyze a company. I think people start thinking about complementary skill sets and that's a very mechanical way of thinking about it. Whereas when I describe a start-up I basically say like you've signed up to get punched in the face every day forever in the early days who's going to be the partner that you're going to cry on their shoulder and they're going to cry on your shoulder when you're both getting punched in the face every day and that
Social component is very hard is very important to survive. So I did like those are the three things the first one kind of translates into some sort of technical ability. The second one is like what kind of progress are you making give it about time you be working and the third is what sort of leadership you have with the co-founder. When you do the actual
interviews themselves now having whittled it down. I think you said the 10% from the thirty thousand applicants. What if any different things are you looking to learn during an in-person or virtual interview that you couldn't
point in a plane application where you're not interacting with the person and I'm also just fascinated by what kind of questions or vectors of questions tend to carry the most free
one of our partners Paul boo height. He was one of the people who have trained me to do interviews. There were kind of two things that always stuck out from his lessons one. Was that a Founder who truly understands what they're working on is able to explain it to a Layman. So the ability of the founder to clearly communicate their ideas in verbal form is
Really important the second one that he always taught me is that the founders should know an almost all cases. They should know more about their customers and their problem than you do. So, you should learn something. You should learn something. You should leave interview knowing something you didn't know before I think those are the two ways the founders can kind of distinguish themselves, positively. I think negatively you get a sense for how a team works together. We're doesn't work together in an interview.
You and you actually get a sense of whether the founders like each other believe it or not when two people have to be in the same space either physical or virtual for 10 minutes communicating. It's hard for them to hide how they feel about each other. I think we're learning what the virtual tells our but I can tell you having many more reps on physical interviews. The physical tells are like hilarious and obvious. If you can avoid it you rather not find a
team that hates each other. Do you have a favorite physical tell for hating each
other? Although I don't want to give up too many Secrets but
I actually think that might be a lesson that applies in other parts of business. It is strikingly obvious. If you're looking for in a typical interview panel, there are three or four of us interviewing two to four Founders and it's only 10 minutes long a lot of the time you're not the one talking so you can be watching and looking and going to be the extra set of eyes, which is really
fun. How much do you think poised matters? Because I have to imagine and I mean poison a different way than the ability to communicate clearly
I imagine it could be quite intimidating to be grilled by a panel of experts that have done this so much. How often do you see people sort of nervous and does that matter to you at all?
I would say nerves only matter if they get in the way of those two things. Otherwise, we don't particularly care. I will say that what's funny and this is actually something that I feel like I don't remind demo day investors enough is that like these are pretty impressive people their companies might not work you have to be
Be impressive to even want to start a technology company and then you have to be pretty pressive to be stack rank in the top 10% of an apple iic applicant pool. This is not just a straight cross section of people on the street. And so generally everyone that comes in the interview has something to be confident and proud of something to draw up some way that they're special or better than most other people and it's funny because I'm constantly reminded of this. I think that when investors look at a batch at the end of
demo day they want to immediately stack rank people and discount the bottom ten percent based on whatever criteria or the bottom 30 percent or whatever and I think what's so interesting is that they don't spend enough time thinking that if our acceptance rates under 2% the quote-unquote US worse person in their stack rank was better than 98% of the people or companies who applied to that batch. Can you really tell that they're not going to end up being the
Good one, can you really perfectly distinguish the top 2% who's good? Who's not I would argue that's very very hard. And that's why I like our model where we don't try to the
final stage of this of course is actually being accepted and then building something in Earnest with that final batch of participants, and I'd love to hear just a bit about how that process has evolved again across 15 years of doing this. What have you found to be the most important maybe improvements. I know you talked about already. We just today the importance of just execution speed. I
Getting stuff done. But what else is useful to sort the best from the worst if you will during the actual period of building together.
Well, you know, what's funny is that once we invest were in a lot of my sorting muscle kind of goes away. This comes back to I don't want to be too smart. There are many examples of companies that did not look very good during the batch that turned out to be very good. I mean how my company during the batch was an online reality TV show 2014, it sold Amazon for billion dollars. You got to be careful about
Being too smart, but how is the batch changed? I mean the wealth of resources that are available to the founders today versus when I did why see I think that's the big difference. It's stupid. What's funny about YC is that it's been imbued with former YC Founders as people who are helping to run it. So we always get to ask ourselves the question like what do we wish we had? I did YC in 2007 and 2012 when 2007
there were barely any YC companies that had raised more than a series a there are barely any YC companies that are making more than a couple thousand dollars a month in Revenue. There was barely any investors came to demo day early days. YC didn't get any respect from investors. It was it wasn't clear that it was a good filter today. There's an Alumni network of 5,000 people everyone from CEOs of public companies to Major Executives at Major technology companies. There are a wealth of deals. I mean,
Please give our founder special deals to get the knees or software's there's millions of dollars of discounts and perks and credits and so on so forth. There's an entire database of everyone who writes checks in the valley with pure reviews from otherwise. He Founders immensely valuable there is and covid accelerated this almost all of the advice. We give two Founders is documented in written. So if you didn't catch something or you remember hearing it, but you want to go back that exist.
There are programs to help you raise money, raise your series a raise subsequent rounds. There's a directory where you can basically sort and find companies that might be great customers companies in the YC Network might be good customers. It's a different world. There's a forum where you can ask questions and poll the audience of alumni and important issues. There's a whole job site where we help you recruit engineers, and we give companies more money now than we used to back in the day the standard deal we get companies around $20,000.
Now it's a hundred twenty five. So yeah, it's crazy. I'm excited for all the stuff. We're going to come up within the next 15
years. I'd love to hear a bit about how you define and think about what technology means assuming that sort of technology companies is the thing that YC focuses on kind of for all the reasons. You just laid out. I think it was Jake reps that compliment that wrote that great post about how every company is basically a software technology company increasingly. We're just encoding everything into software and therefore I'm interested in what is technology or
or even software really mean to you and do you want to intentionally stay on the frontier or sort of ride this trend of everything becoming
software. I almost want to attack it from a different direction. I think that as software is kind of pervaded a lot of forms of life. One of the things that I start hearing is that it's less valuable. There is a trend in the startup world for what people will say is this is just a software enabled startup and that's kind of code for oh this
Or that we use is commoditized and I hate that I aggressively fight against that I don't think that software can be commoditized if I have two companies to fund and they're starting at the same position and they're going after the same market and one believe software is commoditized and the other believes that they can build best-in-class software. I am always funding the second one always always always to me when I
About kind of Founders I'm excited about I think of Founders who are excited to build best-in-class software and to have a software advantage over the competition when it comes to The Cutting Edge. I think The Cutting Edge is a very interesting thing because I think that it is poorly defined in the present and well defined in the past. I think that every year every six months there's a new this is what The Cutting Edge of
Going to be and it's really not my job to believe or not believe just as often as that kind of thesis is correct. It's not correct and it's not really my job to care. It's my job to support Founders who are going to have a vision of how software is going to be used 10 years from now and I never want my vision to Cloud. There's if smart talented people believe this is where software is going. I've got their back.
Right or wrong I never for a second believe that I'm shaping or software is going or I'm deciding or that I have some magical Insight on where software is going know.
How do you think about the world Beyond software? Maybe Hardware technology and a YC will sometimes back companies in that space as well. You mentioned things like healthcare. I'm actually really curious about the mass incarceration example you gave to what extent are non software technology businesses rising or falling in their prevalence in what you do in your
batches.
It's Tricky I do feel like I can split the world up into software and not and it's a little it's a little when you start kind of zooming in there's a gray Zone, but I do think that the kind of Frontier Tech the Tesla inspired startups are far more popular now than of course when I was starting and on one hand, I like that because I feel as though
Though Tesla greats makes great products. I feel like in some ways. It's helping move Society forward those types of companies on the other hand. I think that a lot of times there are investors who are extremely disingenuous about how much more challenging it is to build a not software company and I think they're also disingenuous around what the fundraising environment is for non software companies. I would say Silicon Valley by and large is built to fund a software company.
Is and the further away you get from that software core. The less reliable. It is a funding mechanism and it's not a surprise that most of the kind of larger more Hardware more infrastructure focused companies test them in great examples Space X PP example, we're government funded and I feel people talk about that enough. So if you're trying to be a founder of one of those companies, I would argue that the world isn't as different as it would have been 20 30 40 years ago. It's different sir.
Only have a lot of better software to use to build your company. So it should be cheaper but your funding sources are not as clear-cut. Whereas if you're trying to build a software company. I think the world is massively different for you now versus 40 years ago like in almost every way and I think that there's a community here that's willing to fund you and I think the cost of making software has just dropped incredibly. I think that it's really important to point out that distinction. Whereas I think that maybe there should be an
Get these ratios wrong. Maybe there should be like ten to a hundred X more software companies now than there were in the 90s because of the costs of decreased in my mind on the hardware side. Maybe that's only 2x more because the availability of more private funding it but it's nowhere close to the same scale
software. I'd love to talk a little bit. I've taken to Heart your lesson of don't try to be too smart of talking a bit about the nature of problems being tackled by these young entrepreneurs and I think this discussion will be applicable to any kind of business.
I've heard you say before that variables like frequency and intensity of the problem are important things to consider say a bit about those two variables and any other variables around the type of problem being tackled that you think are important or interesting
frequency intensity intensity and willingness to pay are three things that I tell founders of think about. Here's the thing. The base thing that I want to founder to have is some special or different insight about the problem that they're trying to solve and I want to be clear
Not necessarily a special or different insight about the solution Solutions come and go Solutions change. The Integrated Solutions are something that really get molded by the user but some special or different insight about the problem. I think is really important. What happens in my job a lot. Is that a lot of Founders kind of come to me and they say, I don't know which company to start. I don't know what problem to attack and part of my job is to help them kind of help guide them through a process.
Analyzing the problem. Now, I think that there's kind of a surface approach and a deeper approach. The surface approach is kind of almost academic where I can tell someone hey take your ideas take the problems that you have maybe in your life or that you witness your friends have or you have it work and use these three heuristics frequency intensity and willingness to pay to try to stack rank them. This stack rank isn't as important. What's actually more important is just being able to look at a problem. And uh,
Your stand is it significant at all? And I think more often than not Founders just kind of when they use this tool. They start realizing. Oh like I guess this doesn't matter as much about as important to me and I think it also kind of helps them unlock one of the problems that they're really passionate about if you're really passionate a problem, you're probably more likely to have some insight on how to solve it or some special way of looking at it because you've experienced it really that's what I'm trying to get them to do. And I think what
What's tricky is that there's kind of a prevalence of what we would call scenesters people who are kind of more interested in being the startup scene. Then actually identifying a problem following up with the customer and trying to fix it. And what I'm really trying to do is kind of Reform the seam stirs and say like hey, if you're going to be in this scene, can we at least get you to work on a problem you give a shit about in some way and a problem that if you solve it people are going to care and I think that that's been my attempt to trying to get people to that final end
point.
I love the filters those three filters for thinking about types of problems. I always wonder about the opposite as you were talking. Of course, it's a YC company so I could bring it up Airbnb Pops to mind where I would think both frequency intensity and willingness to pay it would fail. All three of those
tests. You have walked into a trap that I have laid for you.
Excellent.
I think in many marketplaces people have a misunderstanding of who the customer is.
A massive misunderstanding of who the customer is. I think everyone assumes there the customer are you an Airbnb hosts? Nope, I would ask you the question. If you were an Airbnb hosts, how frequently would you want to make sure your home apartment vacation rental was booked always how intense is that need high? And are you willing to pay twelve percent fees for people to book your
place just for the audience to know we arranged this whole sure.
I think that there's this weird thing in these two side of marketplaces. My conical example is always car buying sites. The average person owns a car for seven years yet. They think they're the customer on a car buying side when like once again almost always it's the person selling the car who needs to sell cars every day and I'm saying you're not the Airbnb customer. I'm just saying that if I were trying to figure out
Out who I'm helping more, it's clear. I'm helping to host more. Don't get me wrong people have built businesses in areas that are infrequent. I never try to create rules around what kind of business you should start. Every business is a bit of a miracle is a little different and break some rules that existed before I just try to kind of like do this exercise to give people this kind of sometimes people will choose ideas and we go through this exercise and they come out of it being like Oh, no one cares. It's like, okay. Well if you can't
I defy anyone who cares in this mix. Maybe you should move on
both of those really neat counter examples where you caught me in a bear trap. It's an emphasis on the supply side, which I think is really interesting contrast to some great conversations. I've had with Bill girly and others about owning demand. So is that a common theme where you see a unique problem identification is really to serve the supplier and then maybe a lot of the work is building the demand
typically when we have a two-sided Market Place. It really depends on what stage of investor you are like when you're super early.
Staging trying to get a company from 0 to 1. It's very different than when you're later stage but a typical advice is that you should try to cheat Supply and that's a really fancy way of saying you should try to hand recruit valuable Supply because if you have viable Supply the hand recruit portion is important because viable Supply shouldn't want to sign up. There's no demand. You have to actually one by one solicit and Kajol viable to supply to sign up but there's no way to collect demand without
Something to show them usually the kind of the surgical devices you cheat Supply and in the kind of early days of Airbnb, that's exactly what they did their early viable Supply were vacation rentals in New York City and there were International Travelers with kids who want to stay in an apartment at a hotel there were people who are traditionally in vacation rental business in New York who didn't like the existing tools. That was the actual kindling that got caught Air B&B was a fire that was a number of times before they really got it going and
that was the real kind of Kickstart of it and to be honest it as much as people argue that Airbnb was some unique idea. Look it wasn't VRBO existed Couchsurfing existed. It wasn't unique idea. It was very clearly an iteration Craigslist existed when this was happening. It was very clearly an iteration of what was already happening and their first investor knew that guy named Greg McAdoo. He understood the vacation rental market. I knew this was happening. So I feel like when the Airbnb story is told it's told is like, oh people would never stand each other's houses. That's crazy and it's like
No, that was happening. It's not crazy that was happening before I may be started Airbnb do not kick that start that thing off. They just put better tools and everyone else. They made it easier.
You used the word earlier that I want to go back to I don't think it's a word I've heard often in these conversations, which was Brave or bravery in many ways. The easy thing to do might be go build one of these vertical SAS solutions for a smaller industry or medium-sized industry and kind of run that Playbook my sense. Is that some of the things you mean when you say Brave or Founders putting themselves out there a little bit more in these recent patches.
I'd love to hear some specific examples. If not named by name just by theme and what you find interesting about that
bravery. There are different kinds of Bravery. I actually think that going after a vertical is very brave because investors will tell U square is got its own up your game over but what I'll can on more is the bit about solving problems that can be intimidating to solve.
Where Solutions are not necessarily obvious, we have this company that went through. I see a couple years ago named promise and two Founders who stated goal was to reduce mass incarceration in America at first blush and investors going to think that's a non-profit or that's a social impact. I don't give a shit about that. But this was very much a company and they kind of went through two iterations and it was so much fun watching them do this because the founders are just forces of nature like whatever they're pointed at they're going to get shit done.
So the first thought was that people are getting thrown in jail before they're convicted because government is not good at getting people to come to court. So if you cannot afford bail the easiest way to make sure you come to court is to put you in jail until your court date which seems pretty fucking stupid. But hey, that's the game where their first thought was. We're going to actually work with prison systems. We have counties in the prison systems to make it easier for people to get to court without having to
Bill, so simple things like will put an app on their phone. So whenever there are will send them text messages with their court date make it one click so they can get a Lyft or Uber just the basic things that you can actually not put them in jail so that you don't have them lose their job or lose their car basically have them slide into a much worse life situation for Crime that maybe they didn't even commit or certainly isn't that significant so they started doing that and they were so powerful that they literally
everyone says OG of tech. It's impossible. So the government they sold the government. They got County signed up. They started getting their software deployed and they started realizing that the part of the government they were selling into this prison kind of police system was very much oriented around kind of good and evil right and wrong if you're in our system it must be because you did something bad and the role of our system is to punish you.
So that you won't do something bad again as they started speaking to these people more. They realize that the more efficient they made it for these systems to run the more people. They thought these systems might try to incarcerate or try to pick up on the street and they were like, this is not part of our mission. Now, let's be clear they were getting contracts they were getting paid but because it was a part of the mission they said when take a step back and we're going to look at this different way what they then did was really awesome. They then went back to the root.
Causes and they said a lot of people get mixed up in the criminal justice system based on some type of fine or fee or something that they didn't pay. So there's a bench warrant then at some point to get pulled over and then Bang there in jail, you're working class person you go to jail. You lose your job. You can't pay your rent, right? You really fucked that person's life and their families life. They asked themselves what happens if we can make it easier to pay the government. They did this awesome trick. They basically like look we're not going to start with the deal with the government taste.
We're going to set up a website where you can pay your ticket of your fine. And if you want to pay with a credit card, you can will accept credit cards unlike a lot of jurisdictions. If you want a payment plan, we will give you one on the spot online. You don't have to call anyone or go into some office or sign some forms. And let's be clear. We're not associate with the government. We can't even enforce these payment plans. We're just going to see what happens. They basically both the frontend for this and on the back end. They would just pay your ticket for you and
after a couple months they had no defaults. There were getting no defaults are very few defaults. Everyone was paying everyone was on the payment plan was paying when people missed a payment they like apologize to explain when they make the next one. Everyone was acting in a way that I think oftentimes institutions. Don't treat them. They were acting like responsible adults so they went and they talked to some City and they talked to the treasure Department because the treasury Department is what handles this kind of money collection not the kind of Criminal Justice part of the government.
And the treasury Department's like you've got better collection rates than we do. And the only thing we care about is how much money we get. If doing it your way gets more money. We're down like we don't perceive our role here as punishing people by making it hard for them to pay. We just don't have any good software. And so if you can get us more money, we're happy to try to do it. And so they're in the process now of what I like to kind of call stripe for government every time cause citizen has to interact with government space something. How can that
SB citizen friendly, they're going to build a very successful company, but it's also going to make America better place and I certainly see it in YC applications a lot more now, which is exciting. It's fun.
One of the things I'm seeing a lot more of in the investing World writ large is just more collaborative investment Partnerships meaning like the actual Partners at YC in your case. Obviously, it's been an incredibly interesting and impressive group of people across that business over the years say a bit about how you work with.
That group of Partners to sort of tackle this big problem. You're trying to solve of sorting through these young businesses. How do you interact with other partners? And what have you learned from that
experience somewhat unique about our partnership? I think Benchmark does this as well they did before us is that we have an equal partnership. And then the last thing is that any YC investing partner can get a company to YC. We call it a strong. Yes. Anyone can strong as a company is investing partner YC, there is no consensus required.
And what's funny is that I think a lot of people think that that rule is actually ruled. I was named after a former YC partner guy named Gary tan a lot of people think that rule exists because o the best ideas are controversial and there's going to be debate which I love the reason why that rule existed was because in our kind of why ceiling though, we have votes when we're voting on a company interviews is strong. Yes week. Yes week no strong though. It used to be the case that a company with three week yeses would get
Oh I see and when we started to analyze the companies that were not doing well. There was this massive trend of no one was the strong. Yes. Everyone was like, oh maybe no one could kind of Imagine near this thing working. So we implement this rule that someone's got to care enough to be the big S. And I think it was good for the culture of YC because you know, it prevents arguments in kind of stupid fights, but I think was also good for the investing in YC because if someone can't dream
I'm this thing to be something. They probably won't be
there's a fun idea that I've been thinking a lot about that. I'll share and I'm just curious for your reaction. The idea is that first time Founders tend to focus on product and second time Founders tend to focus on distribution. When you think of
that I do think that's correct. I've observed something in no way conflicts with that but is slightly different. I think that older and more experienced Founders to tend to be more comfortable with execution risk.
Meaning I know there's a need in the market, but I don't know whether I can fill it younger and less experienced Founders tend to be a little bit more interested in product risk. I'm confident I can build it but I'm not sure people want it. I find that very interesting because successful companies have been built in both areas, but I kind of to me it's a bit of and I'm making over broad generalizations when I say that younger more experience and that's a overgeneralization, but I kind of feel like it's a peek into the
Psyche it's kind of like.
Every founder has to fundamentally lie to themselves humans themselves to do a start-up and its really interesting to explore. Are you more able to lie to yourself about people wanting something that might not want or are you more able to lie to yourself about you being able to build something that you have? No qualifications or no clear logical argument why you should be the one that can build it. It's funny right Airbnb is a product risk company stripe is an Executioner's company
the fascinating part about the area that you operate in is
Like you said the low survival rate working with these Founders objectively speaking. Most of whom will not be successful in the way that they all want to be Save bit more about the psychological component of this that you've learned to help coach people building things and taking big personal risk to do. So,
I think that in my style is to be some Founders would describe it as a little brutal. I kind of describe it as a
Is very real and I don't want to lie when we kick off the founders one of the Traditions that Paul Graham the founder of YC started was this phrase there only be and back then the batches were much smaller. They'll only be one or two of you who actually solve the problem. You want to solve really serve your customers and build a successful business. We can't tell who it is, but it only be one or two of you.
And I always love that because it was honest this startup game is very different from most career games. Imagine. If the first day you went to Yale law school the professor told you the only one or two of you are going to become lawyers. You'd be like, wait. Why am I paying all this Me Like Glue? This is not what I signed up for our startup game is a lot more like sports the Duke Coach can probably say only one or two of you are going to ever have a real starting rotation.
Job in the NBA and damn you got to do you're already like pretty good. I think it's just really important to emphasize that point and then the point that comes right after which is that to win you have to reach for Extraordinary and one of the things I really try to motivate folks to do and it's something that Dalton Caldwell one of our partners says a lot is that like you have to be a couple standard deviations away from average in order to have an extraordinary outcome. One of the things I think about a lot is that if you're a smart kid and you put yourself in a community of smart.
It's and your operating average you tend to do well, if you're one of those smart kids and your average, you'll get into a good college. If you're an average smart kid, you'll get into a good professional school. You'll get a good job. You don't have to worry about paying your bills done it or not. So I think a lot of people are kind of programmed to think put myself in a group of people and then acts like them start a YC batch is extremely talented people. But if you are the average player you lose and so a lot of the times we try to really push people to think.
How are you going to be different? How can you not set your internal expectations based on the people around you? Because if you win you're going to be orders of magnitude different your numbers your progress how much the problems that you're solving for your customers. The magnitude of your impact is going to be so much higher than the people around you you have to kind of think that way one of the great things about the Airbnb Founders is that they thought that way they thought very early on we're building a company that will be around for a very long time. Most Founders don't think that way
That wasn't the average of their peers. It was it was exceptional. I think I made many of these mistakes when I think about how do you deal with the founder psychology in the first thing that you prepare them with facts the real reality. This is how hard it's going to be. And then I think the second thing is you acknowledge that you need to develop tools to manage your emotions. We have a number of talks on this, you know, our former batch director at YC aluminum Amy Bueller. She was a trained therapist and she's
Founder coach is kind of create a philosophy for us that's been really helpful and it's kind of had the primary part is like how do you manage your relationship with your co-founder? And so we spend a lot of time kind of trying to explain that to Founders because the co-founder is your primary support system if that it's a lot easier to manage your emotions when you have that rock next to you and the other thing that we kind of emphasizes honestly health and we talked about that a lot. But what I hate is when people talk about one and not the other there's a lot of conversation about like how
Hard should you be working and how hard is it healthy to work? I don't think it's particularly healthy to start a successful company. One of the things that I tell young people considering startups is that I actually think there's probably something a little different or off. You might describe as a wrong with people who are very motivated to start companies. I don't think they're normal. I'll bring it back to what I said before. Would you sign up to get punched in the face every day? Does that sound like a perfectly logical rational thing to do? Most people wouldn't
I think that it's just really important to be honest with people about how hard it's going to be and that it's okay if you don't want to do it and it's okay if you want to give up and it's okay, if you're not successful, you're not a failure because you weren't successful at becoming an astronaut. There's so few people who become astronauts and so try to set things in that context as opposed to normal career contexts.
I'd be curious whether you think it'd be fair to compare the outcome in education, even for one.
Of the obviously High variance they have comes you talked about this versus law school or maybe even business school at Harvard. Do you still think there's a credible case may be to make that you might stand to learn more as a YC batch person. Even if your company is going to fail relative to one of the traditional even high-end Business
Schools. Learn more. Oh fuck. Yeah, that's not even a
question
go on. I think that we can debate on whether you're kind of Life earnings and what job you can acquire we can debate.
That and I don't know that I have an extremely strong answer but like learn more.
Yeah
people learn by doing you don't do at school. It's that simple you can learn on best practices are to fire someone or you can have someone in your company who's not performing and it hasn't been performing for six months and every time you look at them your stomach hurts because you know, you need to fire them but your stomach hurts more because you're too scared to that's when you learn that's learning my
schools not learning. I think that there are certainly certain technical skills that are very viable to acquire in school if you use school for that purpose, otherwise having school is great for building relationships with smart people that you can then work with in the future. But one of the things that we have to tell Founders all the time is that if you're going to succeed at this you're going to learn the whole time things you are not good at now. You're going to have to become good at so this is not a situation where you go to business school and acquire the skills and the company you go use them. That is a complete.
Wrong way of looking at it. No, it's like you are going to start learning skills because there's a gun to your head. And if you don't have the skill someone's going to pull the trigger and then you learn and then you do that enough times you dodged enough bullets. Maybe you make a company.
You have another really interesting framework for thinking about how companies deal with investors. I think from what I've seen you say, there's lots of thinking for how do you interface with investors and you're clever take on this is like the best way to deal with that is by spending that time with customers and
Said could you walk us through just the kind of the customer versus investors Centric nature of Founders
mindset. There is another pop culture misconception out there that the path to creating a company is you think really hard to come up with a clever idea. I would emphasize clever because it's really helpful if people think it's cool idea preferably people who don't even know anything about the problem. Then you pitch investors and your raise money.
Then you build the product and launch the product and then users use it and then you're successful. I think that's kind of wrong almost every front. I think that's kind of what people absorb out of American society. I think that in the age of software for much less money you're able to have much more confirmation from your customers as to whether or not you're solving a problem that they have so that when you go to an investment meeting you
We have leverage in that meeting when you're pitching an idea and you have no background or no experience. You have almost no leverage over an investor. You're basically praying the investor falls in love anyone who goes out and you know, try to find a significant other, you know, that's a low percentage chance of winning the folks who can basically get a product up and running in some way shape or form and get a couple customers the first 10 customers to love the product and pay for the product. They have far more leverage when trying to
Convince an investor that this product might be a thing. They're demonstrating that they can build a product. They're demonstrating that they could sell customers to demonstrate. They can collect money. They're demonstrating that this company will exist. This company is not dependent on the investor to exist.
Yeah. I love that idea of Leverage in all things in the software itself literally is leverage. I think that's Peter thiel's definition of Technology like just do more with less and such an interesting conception. My last batch of questions is really around it.
For Builders everywhere not just start up Builders and understanding. When what your building is when you're really onto something in kind of the Silicon Valley world. This is often called Product Market fit. There's lots of names for it always just like and irak loves basic idea that the dogs are eating the dog food. I think you've seen every possible permutation of things that aren't this things that look like this but aren't things that are this but don't look like it and things that have both and I'd love you just to talk to your experience to help Builders out there know what are some of the signs that your
Onto something. When should you be pouring fuel on the fire?
I hate this question because I have to answer it so much and I am not sufficiently good at answering it. I had to Consumer companies. I'd like to describe.
What it felt like to have product Market fit. So my first company Justin.tv in the spring of 2008. We believe a man in Morocco pointed his webcam at his television and he was watching a local Moroccan soccer game like a Moroccan League soccer game and he wanted his friend somewhere else in the world be able to watch it wasn't a Morocco. She punches webcam at the soccer game. 3000, Morocco.
Ins from around the world saw this link watched this game horrible quality. You can only imagine how about the quality was it was the largest stream we had at the time and it broke our site completely that year our company grew twelve hundred percent and the limiting factor was can we stay up? Can we keep the video system and the web system operating? That's what product Market felt like it was.
Sledgehammer to the freakin jaw we had no time to sit down and is this part of market failures? Like everything's blowing up all the same time lying because no one really builds products to scale. You can't pre-build the park to scale. So once you get all overwhelming amount of usage everything starts breaking my second company Socialcam, we had that moment with more time. I would go into more far more detail on how this wasn't exactly part of Market fit but a kind of replicated product Market fit. We had this moment where we were growing
Ying and when I was going to work in the morning I said to myself. Okay. We're still rocking our own servers. This is 2012 and we were using easy to but for this product wrong with Iraq Iran service and I looking at our growth rates and I was like, okay, it takes two weeks to order servers and install them. We're going to need to make a decision today whether going to orders orders or not because we're growing such that in two weeks. We're gonna need them and by lunchtime it was clear that we were not going.
You to hit the two-week window so that we had to move over to AWS within the next two weeks by dinnertime. It was clear that we had to move over to AWS that night. We didn't go home and 6:00 a.m. The next day. The entire product was me rounds about the entire product rule over WS once again, there wasn't time to like, you know, what?
Sighs Ian consumer example the reality is is that the beautiful thing about a Founders their ability to lie to themselves. And the number one thing to finalize themselves about is whether the product Market fit and the great Founders limit the amount they like themselves. We're about to have the last dinner for YC dinner and and in my kind of final parting advice one of my slides just big text. It says you do not have product Market fit keep on drilling people's heads because what every
Founder kind of dreams of is company building and if you lie to yourself and tell yourself your product Market fit, then you can start company building. It's whatever it founder kind of dreams of they dream of being that Steve Jobs that Bill Gates when you have product Market fit, you should do company money building but most people never get it and most people should never be doing company building most people should never be investing their Nestor dollars in company building. They should just be investigating product that's hard product can punch you in the face every day. And sometimes you want something new you want something different hiring if your products punch you in the face, but you're hiring great people.
'well, you can squint lie to yourself and tell yourself your company's doing well. It's here under my
last question on Founders is all around execution. I'm obsessed with tests for this. I love how I see emphasizes just progress and velocity and momentum as a key attribute of a founding team. Do you think this is something that people can get better at or is it something that is innate and if you do think they can get better. What are the ways that you've seen all the people pass through YC improve their execution
100% You can get better at it. I
That so much of execution is a mental game and expectations Gambit the best analogy that I give is that if you take the fastest person on a high school running team and they train with the college team, they're going to get better. We take the fastest person on the college team and they train with the Olympic team. They're going to get better. They're going to run faster than they thought they could run a mere month before so when you take a Founder in isolation and put them in a batch with a bunch of really smart people who are pushing really hard they're going to accomplish more than they ever thought.
Thought you wanted the secret sauce of I see that's it. It's not the advice or the demo day or Yeti Yeti. It's the batch and one of the things that I say in the very beginning the batch is that the founders make YC not us if you were to take all of the kids who are going to MIT right now move them to the Community College down the block. That's one of the number one engineering schools in the world. Our job is to make sure that the batch is high quality and motivated everyone races to keep up with one.
I could do this with you for a long time. I know we're up against time here. So I have to move it to my traditional clothes and question for everybody which is to ask you for the kindest thing that anyone's ever
done for you.
In 2006 Justin called and Emmett Shear since an email to our friend group saying that they were starting a new company and that they were taking a road trip from Cambridge Massachusetts to San Francisco is they want to start their company in Silicon Valley. I was working on a US Senate campaign where we had just lost our primary by three percentage points and I hadn't taken a vacation in a very long time. They were 22. I was 23 and I emailed them and I
Clem can I join you on your road trip?
And what they didn't tell me is they had packed up Emmet Civic with all their stuff. So to clear out a room in the car for me. They had to basically give away or throw away about a quarter of their stuff and they said yes, and I wouldn't be here right now without that. Yes.
Amazing. What a cool story Michael. I've learned a lot from you today. I'm going to remember a lot of these lessons and apply them. So I really appreciate your time and all the Insight. It's great to meet you. It was really great Being Human
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