Later-stage Advice

Good afternoon. Welcome to the last class of How to Start a Start Up. This is a little bit different than other classes, which have been about things that you should think about at the beginning of a startup. Today we’re going to talk about things that you don’t have to think about for a while. Since I’m going to not going to get to talk to most of you again before you get to post-product market fit stage, I want to give you the list of things that you need to think about as your startup scales. The list of the things that founders usually fail to make the transition on.

These are the topics we’re going to talk about. Again, these 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. For most companies, these things become important between months 12 and 24. Write these down somewhere and look back them when you get there.

The first area we’re going to talk about is management. In the beginning of a company, there is no management. This actually works really well. Before 20 and 25 employees, most companies are structured with everyone reporting to founder. It’s totally flat. That’s really good. That’s what you want because at that stage, it’s the optimal structure for productivity.

What tricks people is when lack of structure fails, it fails all at once. What works totally fine at 20 employees is disastrous at 30. You want to be aware that this transition will happen. 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 for everyone to have exactly one manager. Every manager should know their direct reports.

You ideally want to cluster people in teams that make sense but the most important thing is that there is a clear reporting structure and that everyone knows what it is. Clarity and simplicity are the most important things here. Failing to do this correctly is really bad. Because it works in the early days to have no structure at all, it feels cool to have no structure. Many companies are like, “We’re going to try this crazy new management theory and have no structure.” You want to innovate on your product and your business model.

Management structure is not where I would recommend trying to innovate. 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. They think people feel cool if they’re someone’s manager and if they’re just an employee, they don’t feel cool. So people come up with 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, while this person reports to you for this thing. That’s a mistake.

This is the first instance of an important shift in the founder’s job. Before product market fit, your number job is to build a great product. As the company grows past 25 employees, your main job shifts from building a great product to building a great company and it stays there for the rest of your time. This is probably the biggest shift in being a founder.

There are four failure cases we see all the time as founders become managers. So I am going 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 mistake. You just want people that get stuff done, and the willingness to work hard and aptitude matters more than experience. As the company starts to scale, and at about this time when you have to put in place the basic management structure – it is actually valuable to have senior people on the team. Executives that have built companies before. 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 be afraid to hire senior executives.

The second mistake is “Hero Mode”. I will use the example of saying someone that runs the customer service team. Someone who runs the customer service team — they want to lead by example. This starts from a good place. 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. I’m going to work 18 hours a day. I’m going to show people how to get a lot of tickets done.” But then company starts growing. 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. Now they’re have to do like 19 hours a day, and then 20 hours a day. 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 ’cause I am going to go off and I am going to hire three more support team members. I’ve calculated based off our growth rate that this is going to last this long. 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 trade off. You actually have to say, “You know what? I need to hire more people and we’re going get behind on other stuff.” That is the right answer. The wrong answer is to stay in hero mode until you burn out. Which is what most people do.

Third mistake: “Bad Delegation”. Most founders have not managed people before and certainly have not managed managers. 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 tradeoffs. I’ll make a decision and tell it to you and then you go off and implement.” That’s how most founders delegate. 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 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 how delegation actually works. Steve Jobs was able to get away with the former, and make every decision himself and people just put up with it. Every founder thinks they’re the next Steve Jobs. A lot of people try this. For 99.9 percent of people, this second method here works a lot better.

Then the fourth area — it’s 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 the 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 and what everybody else is doing and what you need to follow up with them on – that will come back to bite you. 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 wish that they had done early: simply writing down how you do things and why you things. These two things – the how and the why – are really important. In the early days, you just tell everyone. “Employee, when you’re sitting around having lunch or dinner, you know this is how we think about building product. This is how we push to production. You know, this is how we handle customer supper.”

Whatever. As you get bigger you can’t keep doing that. 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 if you write this down it will become law in the company. And if you make everyone read this – as the company hires a hundred and then a thousand employees – people will read this and say, “Alright. That’s how we do things.”

If you don’t do it, it will all be random oral transition of whatever the hiring manager or their best friend that they make it their first week in at the company tells them. So writing down how you do things and the why — the why is the cultural values. Brian Chest talked about this really well. Every founder I know wishes they 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. It’s one of the highest leverage things you can do that people don’t.

Next area – “HR”. HR is another thing that most people correctly ignore in the first phase of start up because, again, it’s not writing code. It’s not talking to users. But it’s a huge mistake they continue to ignore it. The reason 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 that we don’t HR – we don’t want the bad kind TV HR. What good HR means is a few things. A clear structure. Which we already 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 should be frequent. People need hear pretty quickly how they’re doing. It should tell if they are doing badly to where you get them out of the company. Or if they’re doing well it should. There should be a clear path to how this ties to compensation. That’s the next thing.

In the early days of a startup, people 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 mid-level engineer is in this range. A senior engineer is this range. Here’s how you move from this to this. It keeps things really fair. Someday everyone will find out everyone else’s comp. If it’s all over the place, it will be complete meltdown disaster. If you put these bands in place early you will at least be fail. 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 a lot of equity. But you should continue to give a lot of equity all the way through. And this is one place that you 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 founder usually understand this as good. Investors are very short-sighted 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 given a lot of stock out to employees. Year after year… After year.

So I tell founders, “You should think about for the next ten years you’re going to be given out 3- 5 percent of the company every year ’cause you just get bigger and bigger. So the individual grants gets smaller but in actuality it’s a lot of stock. 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 plan in place for this early. You never want an employee in a place where they vested 3 out of their four years in stock and they start thinking about leaving. So you should ALWAYS stay in front of peoples 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 of vesting. ‘Cause I think these companies take a while to build. There’s pyramid vesting where you back weight someone’s grant. 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 re-upped. Every year. At the same number of share. 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.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 pen in your mind that when you cross 50 employees there’s a new set of HR rules that you have to comply with.

“Monitoring your team for burnout.” Again, it’s up to product market fit. It’s just a sprint. Now it becomes marathon. At this point you actually don’t want people to work a 100 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 is often a company ending thing.

This is also a good time to put in place a “hiring process”. Another thing that most founders regret is they don’t hire – as soon as everything is working, you should hire a “full time recruiter”. If you do this early – that’s bad ’cause you’ll hire too fast. That usually implodes. But most founders get behind the ball on this. There are a lot of sort of hiring process tips.

For example, I think most companies – even til they get up to say 3 or 4 hundred 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. 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 their first week looks like. How did 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 help them think through everything about the company.

Here’s one that you 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 at that point you get a culture in place that sort of takes on a life of its own. Most founders that I’ve spoken to that have made this mistake regret it. They wish they had hired some diversity of perspective on the team earlier 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 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 past the early employees. You know the company – you hire a engineer who’s 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, but you don’t want the early employee to leave. They are an important part of the culture. They know a lot. People love them. So I think you want you be very proactive about this. You want to 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. Sit them down and say, “I want to see where you want to see your career go inside of this company.”

Alright, so – “Company Productivity”. This is something that you don’t need to think in the early days because small teams are just naturally productive most of the time. But as you grow, it – the productivity – goes down with the square of the number of employees if you don’t make an effort. Because it’s sort of one these connections between nodes. Every pair of people add communication overhead. If you don’t start thinking about the systems that you’re going to put in place when the company is 25-50 people to stay productive as you grow – things will grind into a halt faster than you can imagine.

The second word that matters most 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 actively working against each other. Which is obviously worse. But if you can keep the entire aligned in the same direction, you have won well over half of the battle. The way to start with this is just a very clear road map and goals. Everyone in the company should know what the road map for the next three or six months or a year – depending on where the company is in its life cycle.

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 pulled 10 random employees and asked them what the top three goals for the company are right now – would they all say the same thing?” And 100 percent of the time the founder says, “Yes. Of course they would.”

Then I’ll go do it and 100 percent of the time, no two employees even say the same three top three goals in order. The founders can never believe it. Because they’re like, “Well I announced it in all hands like three months what are goals were going to be. And how can they not remember?” But it’s really important to keep reiterating the message about the road map and the goals. Almost no founder does this enough. And if you do it, you know the company will say, “You know, alright. These are our goals. We understand them and we’re going to get them. “ Self-organize around that. But if people don’t know what the road map of the goals are, it won’t happen.

We already talked about figuring out your values early but I want to reiterate that. ‘Cause that’ll also really help company make the right decision. If everyone knows what the framework to decide it – they’ll make hopefully 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 gonna ship something every day.”

And if you do that – you know there’s at least a continue 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 and the CEO – critical. All hands meeting – not quite sure how often is optimal for those. At least once a month. Where you go through the results and the road map of the entire company. Really important. Then doing a plan every quarter of what we’re going to get done over the next three months and how that fits into our goals for the year – also becomes really important.

I put “Offsite” up there, because people don’t do those nearly enough. A surprising number of the successful companies we’ve been involved with do a lot of off-sites. Where they take their best people for a weekend to a cabin in the woods or somewhere and just talk about what we want to be when we grow up. What are 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 today. Everyone I know that does 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 with the authority of the founder – make sure the company ships a great next version. But that won’t work for version 10. It won’t work for version 11. The 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. It really takes founders that think about how I am going to do this second thing – this really hard thing to get something like an apple that can turn out great products for30 or 40 years. Or longer.

Alright – these are super tactical “Mechanics”. This is definitely just to put on a list and remember these things for later. Alright – in the early days. People basically ignore all accounting and maybe if they’re lucky have a shoebox full of receipts. They certainly don’t have anything that looks like a financial report. This is 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 outsource person. Just say, “You know what? We 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. If you actually assign someone to go through and collect every agreement that the company has ever signed, then when your landlord tries to screw 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 employees didn’t sign their PIAA or whatever and you’ll find it now – it’s easy to fix now. It’s 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 of the order to chaos.

“FF Stock” is a special class of stock for founders that 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 that were obsessed with their own personal equity when the company had nothing – turned out to fail most of the time. So investors learned 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. You can actually safely set this up after things start working in the next financing round and then you can sell it two, three, four years down the road. But it’s a good thing to remember by around the time you get to the B round.

“IP, Trademarks and Patents”. Actually just IP and trademarks. So, you have twelve months after you announce something if you want to patent it. And if you miss that window, it’s very hard to do. So eleven months after launch or first publically 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 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 dollars. It takes way less effort than a full patent. And most of the time you’ll know whether or not you’ll need a fully 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 US 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 grab all the domains.

FP&A — good time, also to think about someone to start doing FP&A. Most companies don’t end realizing where they knobs on their financial model are until far too late. It turns out that if you have someone build a really great model of the business – and by really great, apparently Roelf Botha – who was the PayPal CFO and built their FP&A model – the top, like the top sheet of his spreadsheet was 15 hundred lines just a level of the detail people build these to. But you can really optimize the business and understand it at a level that most people totally miss. Most people don’t hire someone like this until their many hundreds of employees. 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 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 valuation be double what it would have been otherwise.” You almost certainly get better results than if you hire an investment banker or someone else if it’s just someone internal with the company. And you end up paying way less money and take literally half the dilution. This is one these slightly non-obvious optimization that people just fail to make.

“Tax structuring”. This is another thing. 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 ’cause I just find it personally really boring. But like if you assign the IP to some corporation in Ireland that licensing it back to the US Corporation. You end up paying no tax. No corporate tax. But I know that you can only do that relatively early on. And this ends up being a huge issue for companies that don’t do it that compete with companies that do it you know once they’re big public companies. So that’s worth doing.

A lot of people through 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 osculate. The highs are better but the lows keep getting worse. And you really want to think about this early on and just be aware that this is going to happen. And try to, try to manage your own psychology through the expanding swing that it’s going 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 hating on. You see this first in internet commenters who will be like, “I can’t believe this shitty company raised money. It fucking sucks. It’s like awful. And it only bothers you a little bit. But then journalists that you kind of care about it start writing this and it just goes on and on. This also will go on and on as you get more and more successful. 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 thing 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, “You know what? In three years I am going to sell my company and either I am 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 in a a very rare flight class. So this is a good time to sit around with your co-founders and decide, “You know what – we’re going to work on this for a very long time and we’re gonna build a strategy that assumes that we’re going to be doing this for the next ten years.” Just thinking that way alone, it’s 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 more of a day of vacation. And that works for a year or two years or something like that. It really leads to a nasty burn out.

Losing focus is another way that founders get off track. This is a symptom of burnout. When you get really burned out on running 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 what to do all these things that are not actually building a business. And the most common post YC failure case for the companies we fund is that they are incredible focused during YC on their company – and then after, they start doing a lot of other things. 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. You’re like, “Wow! I can be so rich.” And I’ll be so cool. And MNA negotiations feel really fun. This is one of the biggest killers of companies. Is that they entertain acquisition conversations. You distract yourself. You get demoralized if it doesn’t happen. If an offer does come in – it’s really low. You’ve already 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 is big company killer.

And then – just a reminder to everybody – that things 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 you shouldn’t, that is what kills companies. That is the final cause of death for most of these startups. And so if you can manage your own Psychology in a way that you don’t quit – don’t get to a place where you need to quit or give up on the startup. You’ll be in a far far better place.

So “Marketing & 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. Press is not what’s going to save your start up. 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. The two most important things for the founder to do – the founders to do – figure out the key messaging yourselves. Never outsource to your head of marketing or PR firm. You founders have to figure out what the message of the company is going to bet. And once you’ve set that it kind of sticks. 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 to exist… And so they’re like, “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 flag ever. They’re so much happier to hear from to just hear from the founder. 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 – which you get. Then you contact them yourself; they will cover every story you ever give them. And they’ll actually pay attention and 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 emails with every piece of news. 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 fundraising and sales. This is a time when they’re important. And everything or many things that you do like even fundraising. It falls under the category of doing deals.

So there are – here’s my one minute crash course on this. There are five points that are important to understand here. We’ve talked about this a lot. Nothing will matter if you don’t “Build a great product”. So assume that you’ve done this before you go try to 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 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. 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 brave to in your own mind not just view them as this one off transaction. You have to actually care about them and what they’re going to get out of this.

“Competitive dynamics” – this is a basic principal of negotiation. Most founders learn this the first time in fundraising. But it actually matters for everything. The way you get deals done and the ways you get good terms is to have a competitive situation. 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 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 go beyond your comfort point here most of the time as a founder.

And then the fifth point is that “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. If you want something in a deal – just ask for it. Most of the time, you won’t get laughed out of the room and might get it. But you have to be – at some point, you actually have to say, “You know this is what I’d like to do.” Even if it feels aggressive or an over-reach or whatever.

So I am 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 starting a company and then I saw it once and took a picture of it. ‘Cause I thought it was such a good summary. And what he had tried to draw here was the YCombinator process as he remembers it. I love it ’cause it’s like so simple and it looks so doable when it’s written on a business card. But you’re trying to find product market fit. 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 can’t do this without getting really, really close to your users. And then he drew this graph that sort of on a white board that at YC and gotten kind of sort one of the YC rites of passage. But that’s the graph of how adoption goes for a new company.

So you launch on 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 access. They recover a little bit, you have this long, long troth of sorrow before things work. In Arabian B’s case, it was a thousand days before the graph started taking upward. You have these wiggles of false hope. And then finally, finally, finally, finally things start to grow. Three years later. So starting a startup ends being this very long process. It is – it can be very rewarding. It’s definitely long but it is doable. That’s what I love about that drawing.

So with that. I have about ten minutes left. I can questions on this or anything else in the course that we’ve covered. If anyone has some.

Yes.

Audience member #1: You hold that diversity is important, but an earlier speaker said that diversity wasn’t important and that you should just hire people that are very much like you and trust you…

Sam: So the question is how you square the device of diversity being important with earlier speakers saying that you want people that are very similar.

The difference is that what you want is diversity of backgrounds. But you don’t want diversity of vision. Like where companies get in trouble is when they have people that think very differently about what the company should be doing or don’t work well together. You don’t want that. You do want 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 do end up developing somewhat of a monoculture. Which often causes problems down the road. Not always. Some companies have been successful with that.

So what we tell people is hire people that you know and that you’ve worked with before. But try to hire people that complementary and aligned towards the same goal. Not people that are exactly the same. ‘Cause you just get a better skill set.

Audience member #2: So what are some examples of ways to make up productivity on a personal level? How do you do that on a personal level and also on an advance level?

Sam: How to keep track productivity systems. So, the one I use which I actually thinks works really well is I keep one piece of paper with my goals for sort of three to twelve month time frame. And I look at that every day. And then separately I keep 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 I write 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 the full state and a list of things for that person that works really well.

Audience member #3: So we talked a lot about the startups growing but most startups fail. Any advice for how to fail gracefully?

Sam: Yeah. Yeah. Great question. We should have covered that.

How to fail gracefully. So, most startups fail and Silicon Valley almost goes too far on how it loves failure. Failure still sucks. You should still try not to fail. And this whole like thing of like “Ahh failure is great!” 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 up front about it and ethical and don’t let anyone get into 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 blow up which a bunch of depths that the company owe and everyone showing up to work one day and the door being locked.

You’ll know when you’re failing and you’ll know the company – things just aren’t going to work. And you should just tell you 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 I make. I know that happens most of the time and the winners pay for it you know still with a factor of a hundred. And so it’s ok, 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 get shocked when they know they don’t have job. You want shut the company down in a graceful way. Help them find jobs. Make sure you give the two or four weeks of severance payment so they’re not suffering a cash flow problem. All that stuff is pretty important.

Audience member #4: How many immigrant founders have you seen in YCombinator?

Sam: How many immigrant founders have we seen in YCombinator? In the last batch – I think it probably went up for this next batch. In our last batch 41 percent of the founders we founded we’re born outside the US. From thirty different countries. So it’s a pretty big percentage.

Audience member #4: I was just thinking – what do you think are the good places to start start ups?

Sam: Apart from the Valley where do I think are other good places to start a startup. 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 out of control. To be clear – if I was going to start a company I still wouldn’t think about it. I still will pick Silicon Valley. And think if you look at the data of companies of over the last few years that is to wins by a lot. But Seattle, LA – Lots of places outside the US – I think all of these makes sense.

Audience member #4: Like places outside the US?

Sam: I hesitate to make recommendations because I haven’t spent enough time in the cities to really have an intuitive feel. But like – you know as well as I do the common ones people talk about start up hubs. I just can’t make a personal recommendation there.

Audience member #5: So when should the founders start to thinking about hire a professional CEO – a senior guy?

Sam: 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. Sometimes they even hire professional CEO and realize that is not going to like build a great company and so Larry Page came to be 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 am not totally sure about that. I think there are exceptions. But generally that the transition that I talked about today if you go from build ing a great product to building a great company being a founder for nine of the ten years is going to be about building that great company and if you’re not excited about doing that – I think you should think hard about it.

Audience member #6: What are some of the most common and alarming warning signs you should be looking for when you’re trying to make the shift from building great product to building a great company?

Sam: What are the most common mistakes to make when you’re shifting to building a great company? I think I went through most of them here. I tried to put everything here that I see people mess up most of the time. Yes.

Audience member #7: Is there a way to get involved in the Yom community before getting accepted?

Sam: Is there a way to get involved with YC before getting funded? No and intestinally not. I say the one thing you can do is if you work at a YC company and then later apply – I think 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 intention. Like there is no pre start up in a way that there is premed. You should just focus on whatever doing and then when you start a start up – there are `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 really don’t need to get to knopw us or get involved. We’re all good that way.

Audience member #8: The statistic you saying now harder to get into YCombinator than getting into Harvard. So I am curious the criteria’s that you use to pick up startups. Does it change over time?

Sam: The question is what criteria to pick startups and has it gotten harder? Has it changed? The two things that we need to see are good founders and a good idea. And without both of those we won’t fund the company. But that hasn’t changed. That is always been the case. The applicant pool to YC has grown quite a bit. But most of – a lot of the growth is people who shouldn’t be starting start up anyone that are just do9ing it ’cause it is sort of the cool thing now. So you know if you’re really passionate about an idea and the idea is good and you are smart and you get things done and your we executing – I still think you have a very reasonable shot at YC even though the headline number is bigger.

Audience member #9: There’s a certain market that you’re really excited about that don’t necessarily know all about yet – is there a certain track you recommend or ways to?

Sam: Sure – if there’s a market that you’re excited about but don’t 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 go work at another company in the space or do something in the market for a year or two years. I lean slightly towards the second but as long as you are willing to really learn and really study and to get uncomfortably close to your users – either case would work. And I don’t even thinks that it’s that much of a disadvantage. I think all things being equal go spend a couple of years learning about it in detail but I don’t think you have to.

Audience member #10: I have a question related to YC – So I think YC did a fantastic job in promoting partnership in Silicon Valley. In fact, I plan to invest in some in the next three years. You guys pump 180 companies per year coming to the market it looks like its hard to follow each of the YC company any more. Do you think that this will create some – some people will walk away from YC because they cannot follow large batch of companies and the company had to be very polished and the firm had to be think of the world about ideas?

Sam: Alright 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 half their portfolio is not YC companies and they look forward to the day where it’s three quarters. No I don’t think that’s a problem at all. I think that so not on my top hundred problem list. The opposite of that maybe.

Alright. One more question.

Audience member #11: When should a group of founders raise a seed round or Series A?

Sam: In general it’s nice to wait until you have the idea figured out and initial signs of promise before you raise money. Razing money puts some pressure on the company. Sometime pressure. And once you’ve raised money you can’t be in this exploratory phase in definitely. You end up having to rush and so like if you haven’t raised money and your idea is not working you can fall around and pivot until you really hit on the thing that’s working. But if you’ve raised money and your `idea doesn’t work – You’re in this oh shit moment. And you have to pivot and you pivot to whatever vaguely plausible idea is. And that’s bad. So I think if you can wait to raise any outside capital more than say like a hundred or 200 thousand dollars even necessary – but ideally not even that. Until things are working or at least pointed in the direction of working you’re way better off.

Alright thank you all very much! This was fun!

Legal and Accounting Basics for Startups

Sam Altman: Kirsty and Carolynn are going to talk about Finance and Legal Mechanics for Startups. This is certainly not the most exciting of the classes, but if you get this right, this is probably the class that helps you avoid the most pain.

Thank you very much for coming.

Carolynn: As Sam said, this lecture is about the Mechanics of the Startup. Kirsty and I are going to be talking about the basic legal and accounting issues that your startup may face in the very beginning.

I was watching Paul Graham’s video and at one point he says, “Founders don’t need to know the mechanics of starting a startup.” And I thought, “Oh no! That’s exactly what Sam titled this lecture.”

What PG actually says is that founder doesn’t need to know the mechanics in detail. It’s very dangerous for founders to get bogged down in the details. That’s exactly right. Kirsty and I can’t give you the details in forty-five minutes anyway.

Our goal here today is to make sure that you do know better than to form your startup as a Florida, LLC.

Kirsty: As Sam mentioned, we were also worried that this was going to be pretty boring for you to listen to an Accountant and a Lawyer talk. You’ve had some really amazing founders talking about really interesting things. But as Sam said, if you know the basics, you can get yourself set up in the right way, avoid pain, stop worrying about it, and then concentrate on what you actually want to do, which is make your company a success.

We refer to this term “startup” all the time. In the back of your head, you probably know a “startup” has to be a separate legal entity. We’re going to talk a bit more about how you actually set that up and what that means.

You also probably know that a startup will have assets, IP, inventions, other things, and that the company needs to protect those. So we’ll talk a bit more about that and about raising money, hiring employees, and entering into contracts.

There are a few other things that you need to talk about when setting up your company which ferrets out a few issues amongst founders. Who’s going to be in charge? How much equity is everybody going to own?

Carolynn: The first thing we’re going to talk about is formation. Your startup is going to be a separate legal entity. You probably already know this but the primary purpose for forming a separate legal entity is to protect yourselves from personal liability. If your company ever gets sued, it’s not your money in your bank account that the person can take. It’s the corporation’s.

Then the question is: where do you form one? Theoretically, you have fifty choices, but the easiest place is Delaware. I’m sure you’re all familiar with that as well. Delaware is in the business of forming corporations. The law there is very clear and very settled. It’s the standard. The other thing is that investors are very comfortable with Delaware. They already invest in companies that are Delaware corporations. Most of their investments are probably Delaware corporations. So if you are also a Delaware corporation then everything becomes much simpler. There’s less diligence for the investor to do. You don’t have to have a conversation about whether or not to reincorporate your Washington into Delaware.

We had a company at YC about two years ago that was originally formed as an LLC in, I’ll say Connecticut. The founders had lawyer friends there who said that this was the right way to do it. When they came to YC we said, you need to convert to Delaware. The Lawyers in Connecticut did the conversion paperwork and unfortunately, they didn’t do it right. They made a very simple mistake, but it was a very crucial mistake. The company was recently raising money, a lot of money, and this mistake was uncovered. The company thought it was a Delaware corporation for a couple of years but in fact, it was still a Connecticut LLC. I’ll just say this: four different law firms were needed to figure that one out. Two in Delaware and one in Connecticut. One here in Silicon Valley. The bill right now is at five hundred thousand dollars for a conversion mistake.

What’s the take away here? Pretty simple. Keep it really simple and familiar for yourself. The reason we incorporate all companies the same way at Y Combinator is that it’s easy. Don`t get fancy. Save yourself time and money.

Kirsty: Once you decide that you’re going to be a Delaware corporation, how do you actually set that up? It requires a few different steps. The first one is really easy. You literally just fax two pieces of paper into Delaware saying we’re going to set up a corporation. All that does though is create a shell of a company. It doesn’t actually do anything within the company. After that, you then need to complete a set of documents that approve the by-laws of the company. It creates a board of directors. It creates officers of the company. Delaware requires that someone has the title of CEO, President, and Secretary.

At this point, you also need to complete documents that assign any inventions or any code that you as an individual create so that the company actually owns that. Remember, at this point, it’s a really good thing to think about, “Am I doing this as an individual, or am I doing this on behalf of the company, which is a separate entity.” You have to maintain that split in your mind.

There are services that can help you get incorporated. You can use a law firm, but there are also other online services that help. The one that we often use with YC companies is called Clerky. They are set up so that all that standard basic documents are used and they get you set up in a very vanilla way so that you can move on and keep focusing on what you need to do.

A note on paperwork. You’re creating documents. These are really important documents that are going to be setting what the company does and what the company is. It’s really important that you actually keep these signed documents in a safe place. It sounds so basic but we get so many founders saying, “Oh, these are just some documents.” They have no idea what they are or where there are. So really, really make sure that you keep them in a safe place. Let’s be honest, filing documents is not the glamorous part of running a startup. The times where this is crucial are going to be high-stress times in the startup’s life. It’s likely when the company is raising a big Series A or if the company is being acquired. The company will have to go through due diligence and there will be lawyers asking for all this stuff. If you don’t have it and you don’t know where it is, you’re making a stressful situation even more stressful.

The key thing here is to keep those documents in a safe place. Keep them organized. It will make your life so much easier.

Carolynn: Now we’re going to talk about equity. We’re going to touch on a couple of different things in this section. The first thing that we’re going to talk about is equity allocation. If your company stock is high, how to divide the pie. You have to talk about this with your co-founders. Why is this important? If you’re a solo-founder this isn’t important. If you are a team of two or more, then this issue is absolutely critical.

The first thing that you need to know is that execution has greater value than the idea. What do I mean by that? A lot of Founder Teams give way too much credit and therefore a lot of the company’s equity to the person who came up with the idea for the company. Ideas are obviously very important but they have zero value. Who’s ever heard of a billion-dollar payment for just an idea? Value is created when the whole Founder team works together to execute on an idea. You need to resist the urge to give a disproportionate amount of stock to the Founder who is credited with coming up with the idea for the company.

The next thing you want to think about is if the stock should be allocated equally among the founders. From our perspective, the simple answer is probably yes. Stock allocation doesn’t have to be exactly equal, but if it’s very disproportionate, that’s a huge red flag for us. We wonder what conversation is not happening among the Founder team when the ownership isn’t equal. For example, is one Founder secretly thinking that this whole startup thing is temporary? Has one Founder overinflated the work that he or she has already done on the company? Or overinflated his or her education or prior experience? Do the founders really trust each other? Have they been honest with each other about their exceptions for the startup and for the future? When ownership is disproportionate, we worry that the founders are not in sync with one another.

Thirdly, it’s really important to look forward to the startup. Said another way, all the founders have to be in it one hundred percent. Are they all in it for the long haul? If the expectation at your startup is that each Founder is in it one hundred percent, for the long haul, then everything that happened before the formation of the company shouldn’t matter. It doesn’t matter who thought of the idea, who did the coding, who built the prototype, or which one has an MBA. It will feel better for the whole team if the allocation is equal because the whole team is necessary for execution. The take away on this point: in the top YC companies, which we call those with the highest valuations, there are zero instances where the founders have a significantly disproportionate equity split.

Kirsty: You’ve had the conversation about to split the equity but then what? We talk to many founders who are actually surprised that they have to do something in order to own this stock. They think that talking about it is actually enough. This is another situation where you have to think about you as an individual versus you as a representative of the company. And if you equate this to a large company, if you worked at Google and were told that, as part of your compensation package, you would be receiving shares, you would expect to sign something to get those shares. If you didn’t, you would be thinking, “What’s going on here?” It’s the same thing with a small company.

In this case, the document that you’re signing is a stock purchase engagement. You as an individual buy the shares from the company. In any situation, if you’re buying something there’s a two-way transaction. In this case, you’re getting shares in return for either a cash payment or for contributing IP or inventions or code to the company so that the company actually owns everything that you’ve done in the past. We also refer to that stock as being restricted because it vests over time. We’re going to cover that next, in more detail. As a result of the stock being restricted and vesting, there’s one very crucial piece of paper that we talk about until we’re blue in the face to everybody because there’s actually no way to go back and fix this. This is one of the things that has blown up deals in the past. We’ve seen companies who haven’t filed what’s called an 83(b) Election, and deals have blown up. I’m not going to go into detail about the 83(b) election, but it affects your individual taxes and it affects the company’s taxes. It can have a big impact. The main things here sign the paperwork, sign the Stock Purchase Agreements, sign the 83(b) Election, and make sure that you actually have proof that you sent that in. If you don’t have the proof it just goes into a black hole at the IRS. Investors and acquirers will walk away from a deal if you can’t prove that.

Carolynn: The next thing we are going to talk about is vesting. I imagine that many of you are familiar with vesting, but just in case, vesting means that you get full ownership of your stock over a specific period of time. We’re talking about the stock that Kirsty just said. You bought the stock of your company and you own it and you get to vote, but if you leave before this vesting period is over, then the company can get those unvested shares back. When you hear restricted stock, it means that the stock is subject to vesting. The IRS speak for this is, “Shares that are subject to forfeiture.”

What should a typical vesting period be? In Silicon Valley, the so-called standard vesting period is four years with a one year cliff. This means that after one year, the Founder vests in or fully owns twenty-five percent of the shares. Then the remaining shares vest monthly over the next three years. Here’s an example. Founder buys stock on Christmas day, let’s say, and then quits the company on the following Thanksgiving. So before the year has passed. In that case the Founder leaves with zero shares, because the cliff period hasn’t been met. If the Founder quits the day after the next Christmas, so a year and day later, he or she is vesting in twenty-five percent of the shares. In that case the one year cliff has been met.

What happens to the shares when a Founder stops working at the company? The company can repurchase those shares. In the example I just gave where the Founder quit a year and a day after purchasing the shares, seventy-five percent of the shares are still invested and the company will repurchase that full seventy-five percent of the shares from the Founder. How? They just write the Founder a check. That’s how the Founder brought it. It’s the same price per share that the Founder paid, so it’s simply giving the Founder his or her money back.

So why have vesting? Why would founders do this to themselves?They’re doing this to their own shares. The number one reason why vesting is important has to do with founders leaving the company. If you didn’t have vesting and a founder leaves, a huge chunk of the equity ownership leaves with or her. Obviously that is not fair to the founders left behind. We’re actually going to talk about this a little bit more when we get to the the “Founder Employment” slide. I will go into that in more detail.

The other reason to have vesting is the concept of skin in the game, the idea that founders need to be incentivized to keep working on their startup. If the Founder can walk away with his or her full ownership at any point and time, then why would you stay and grind away? Startups are hard.

Do solo founders need vesting? They do and the reason is because the skin of the game concept applies to solo founders as well. Investors want to see all founders, even solo founders, incentivized to stay with at the company for a long time. The other reason that solo founders should put vesting on their shares is to set an example for employees. You can imagine it would be inappropriate for a Founder to tell an employee that he or she has to have four year vesting on his or her shares but the founder doesn’t think he or she needs any on their own shares. It’s a culture point. A founder who has to vest on his or her shares then sets the tone for the company by saying, “We’re all in it for the long hall. We are all vesting on our shares. We’re doing this together.”

Vesting aligns incentives among the founders if they all have to stick it out and grow the company before they get any of that company. Investors don’t want to put money in a company where the founders can quit whenever they feel like it and still have a big equity ownership stake in that company.

Kirsty: Moving on. We’ve now got a beautifully formed corporation in Delaware. Everyone has their stock. It’s all in the plain vanilla standard paperwork. Then what? The next stage of a company’s life is to raise money. We know that you already heard a lot from a lot of investors and from founders in this set of classes. They’ve been talking about the tactics of how to raise money but what about the paperwork? What about when somebody actually agrees to invest?

In terms of logistics, in very simple terms there are two ways to raise money. Either the price is set for the money that comes in or the price isn’t set. By price we mean the valuation of the company. Rounds can actually be called anything. People can name them whatever they want, but generally, when you hear the term seed round, it means that the price has not been set. Anything that’s a Series A or Series B is something where the price has been set.

Not setting the price is the most straight forward, fast route to getting money. The way that this is done is through convertible notes or safes. Again, this is a two-way transaction. It’s a piece of paper that says, for example, that an investor is paying one hundred thousand dollars now and in return has the right to receive stock at a future date when the price is set by investors in a priced round. It’s important to note that at the time that paperwork is set, that investor is not a shareholder and therefore doesn’t have any voting rights in the company. They will have other rights which Carolynn is going to talk about separately.

Of course, investors want something in return for putting in money at the earliest, riskiest stage of the company’s life. This is where the concept of a valuation cap comes in, which I’m sure many of you heard mentioned before. The documents for an unpriced round set a cap for the conversion into shares that’s not the current valuation of the company. It’s an upper bound on the valuation used in the future to calculate how many shares that investor is going to get. For example, take an investor that invests one hundred thousand dollars on a safe with a five million dollar cap. If a year later the company raises a priced round with a valuation of twenty million dollars, then the early investor would have a much lower price per share. About a quarter. Therefore their hundred thousand dollars would buy them approximately four times more shares than an investor that was coming and putting in a hundred thousand in that Series A priced round. That’s where they get their reward for being in early.

Again, this is a situation where you need to make sure you have the signed documents. Services like Clerky can help with that. They have very standard documents that most of our YC companies use to raise money.

A couple of other things to think about when you are raising money, um. Hopefully, you got a really hot company that, that’s doing great and it’s really easy to raise money. But you should be aware that all these people throwing money at you does have some downsides. Um, so the first thing is to understand your future dilution. So, if you raise, let’s say two million dollars on safes with a valuation cap of six million dollars, then when those safes convert into equity, those early investors are going own about twenty-five percent of the company. And that’s going to be an addition to the investors that are coming in at that priced round who may want to own twenty percent of the company. So you’re already at that point given away forty-five percent of the company. So is this really what you want? And you know the answer might be yes. Um, remember that some money on a low valuation cap is infinitely better than no money at all. And if those terms that you can get then, then take that money. Um, but it’s just something to be aware of and to follow through the whole process so that you can see where this is going to lead you down the road.

The other thing to keep in mind is that investors should be sophisticated. They have enough money to be able to invest. They understand that investing in startups is a risky business. We see so many companies say, “Oh yeah. My uncle put money in or my neighbor put money in.” They’ve put in five or ten thousand dollars each. Often those are the investors that cause the most problems going forward because they don’t understand how this is a long term gain. They get to the point where they’re sitting thinking, “Hmm. I could actually do with that money back because I need a new kitchen.” Or, “This startup investing is not actually as exciting as all the TV shows and movies made it out to be.” That causes problems for the company. They’re asking for their money back. Be aware that you should be raising money from people who are sophisticated and know what they’re doing. The term that you’ll hear that refers to these people are that they are accredited investors.

The main point here is keep it simple. Raise your money using standard documents. Make sure that you have people who understand what they are getting into and understand what you’re getting into in terms of future dilution.

Carolynn: Ok. You’re raising money. You understand what you’re selling. You figured out the price. You got down the logistics that Kirsty just described. What you may find is that you don’t understand some of the terms and terminology that your investors are using. This is ok, but you do have a burden to go and figure it out. Don’t assume that just because you have agreed on the valuation of the price, that all the other stuff doesn’t matter. It does matter. You need to know how these terms are going to impact your company in the long run. At Y Combinator, Kirsty and I hear founders say all the time “I didn’t know what that was. I didn’t know what I was signing. I didn’t know I agreed to that!” The burden is on you to figure this stuff out.

We’re going to go over four common investor requests. The first one is a board seat. Some investors will ask for seat on your company’s board of directors. The investor usually wants to be a director either because he or she wants to keep tabs on their money or because he or she really thinks they can help you run your business. You have to be careful about adding an investor to your board. In most cases you want to say no. Otherwise make sure it’s a person who is really going to add value. Having money is very valuable but someone who helps with strategy and direction is priceless. So choose wisely.

The other things is advisers. They are so many people who want to give advice to startups. Few people actually give good advice. Once an investor has given your company money, that person should be a de facto adviser but without any official title and more importantly without the company having to give anything extra in return for the advice.

At Y Combinator, we’ve noticed that whenever a startup manages to garner a celebrity investor, the celebrity almost always asks to be an adviser. We have a company that provides on-demand bodyguard services. An NBA basketball player invested and asked to be an adviser and then asked to be given shares of common stock in exchange for adviser services. The service that this person had in mind was to introduce this company to other professional basketball players who might want to use an on-demand bodyguard. This celebrity just made a big investment, shouldn’t he want to help the company succeed? Why does he need something extra? All investors who can help should do so. Asking for additional shares is just an investor looking for a freebie.

Next we’re going to talk about pro-rata rights. Very simply, pro-rata rights are the right to maintain your percentage ownership in a company by buying more shares in the company in the future. Pro-rata rights are a way to avoid dilution. Dilution in this context means owning less and less of the company each time the company sells more stock to other investors.

This is a really basic example, but say an early investor buys shares of preferred stock and ends up owning three percent of the company once the financing has closed. The company raises another round of financing. The company will go to this investor who negotiated pro-rata rights and say, “Hey. We’re raising more money. You’re welcome to buy this many shares in the new round to keep your ownership at approximately three percent.”

Pro-rata rights are a very common request from investors. They are not necessarily a bad thing, but as a founder you absolutely need to know how pro-rata rights work. Especially because the corollary to an investor having pro-rata rights to avoid dilution is that founders typically suffer greater dilution.

The final thing is information rights. Investors almost always want contractual information rights to get certain information about your company. Giving periodic information and status updates is not a bad thing. At YC we encourage companies to give monthly updates to their investors because it’s a great opportunity to ask for help with introductions or help with hiring. That kind of thing. You have to be really careful about overreach. Any investor saying they want a monthly budget or weekly update, that’s not ok.

The takeaway here is that just because the type of financing and the valuation has been negotiated doesn’t mean that everything else is unimportant. You need to know everything about your financing.

Kirsty: Moving on to after you’ve raised money. The company bank account probably has more zeros in it then you’ve ever seen in your life. Then what? This is where you actually start incurring business expenses. Business expenses are the cost of carrying out your business. Paying employees, paying rent for an office, hosting costs, the cost of acquiring customers, that kind of thing. Business expenses are important because they get deducted on the company’s tax return to offset any revenues that are made to lower the taxes that the company pays. On the flip side, if the company incurs a a non-business expense that is not deductible on the tax return, that can increase the profits of the company that have to pay tax on them.

Again, this is a separation issue. The company will have its own bank account, out of which the company’s expenses should be paid. Um, again think about this from a, from a large company, if you were working at Google, you would not use a Google credit card to buy a tooth brush and tooth paste.

Remember that the investors gave you this money. They trusted you with a huge amount of money. They want you to use that money to make the company a success. It’s not your money for you to spend how you please. Believe me, we’ve had some horror stories of founders who’ve take that approach. We had one founder who took investor money and went to Vegas. By his Facebook photos, boy did he have a good time. Needless to say he’s no longer with the company. This is stealing from investors.

The concept of business expenses can get a little bit blurry, especially in the early days when you’re working in your apartment twenty four hours a day. The way to think about it is, “If an investor asked me what I’d spent their money on and I had to give them a line by line break down, would I be embarrassed about any of those lines?” If you would, it’s probably not a business expense.

The other thing to bear in mind is that you’re busy running your company at ninety miles an hour, so you don’t have to necessarily think about the book keeping and accounting at that point. However, it’s crucial to keep the receipts so when you do engage a book keeper or a CPA to prepare your tax returns, they can figure out what are business expenses and what aren’t business expenses. They’re going need your help as a founder to do this. The way make your involvement as small as possible is to keep those documents in a safe place, so you can easily refer to them.

If you remember nothing else, do not go to Vegas on investors’ money. Spend that money wisely.

Carolynn: In this section we’re going to hit a couple topics in this section. The first one is “Founder Employment.” Why are we talking about founder employment? As we said already, the company is separate legal entity. It exists completely separately from you as founders. As prestigious as we think the title founder is, you’re really just a company employee and founders have to be paid. Working for free is against the law and founders should not let their company take on this liability. You wouldn’t work for free anywhere else, so why is your startup an exception? Companies have to pay payroll taxes. We had a YC company that completely blocked their payroll taxes for three years. It was huge expensive disaster and in extreme cases, people can actually go to jail for that. Fortunately not in this case, but it’s bad. The moral of this story is set up a payroll service. This is something that is worth spending your money on. Don’t go overboard on lavish salaries. Minimum wage. This is still a startup and you have to run lean.

Now I am going to mention founder break ups. First, what is a founder break up? In this context, I’m talking about one founder on the team being asked to leave the company. founders are employees, so that means your co-founders are firing you. Why are we talking about break ups in founder compensation? At YC we have seen a ton of founder break ups and we know that the break ups get extra ugly when the founders haven’t paid themselves. Why? Unpaid wages become leverage for the fired founder to get something that he or she wants from the company. Typically that is vesting acceleration. The fired founder says, “Hey. My lawyer says you broke the law by not paying me. If you pay me and you give me some shares that I am actually not really entitled to, I’ll sign a release and make all this ugliness go away.” If you’re the remaining co-founders, you’re probably like, “Sounds like a good deal.” Now you have a disgruntled person who owns a piece of your company and, even worse, the remaining workers are working for that ex-founder. They are building all the value in the company and the ex-founder who got fired is sitting there with all their shares going, “That’s right. Make it valuable.”

The take away here is avoid problems by paying yourself. Paying your payroll taxes and thinking of your co-founders wages like a marital pre-nup.

Kirsty: As the founders, you are going to need to hire employees. Much has been said in previous classes about how to find those people, about what makes a good fit, and about how to make them really productive employees. When you actually find somebody, how do you hire them? What’s involved? Employment is governed by a huge raft of laws. Therefore, it’s important to get this right. It’s again the nitty gritty stuff that, as long as you know the basics, you can probably keep yourself out of most situations. As soon as things get complicated, you need to get yourself involved with a specialist.

the first thing you need to do is figure out if the person is an employee or a contractor. There are subtle differences to this classification. this is important to get right because the IRS takes a big interest in this. If they think you got it wrong they will come after you with fines.

Both an employee and a contractor will require documents that assign any IP that they create to the company. That’s obviously really important. The form of the document is very different for each type of person and the method of payments are very different. Generally a contractor will be able to set their own work hours and location and they will be given a project where there is an end result. How they actually get to that will not be set. They’ll be using their own equipment and they won’t really have any say in the day to day running of the company or the strategy going forward. A contractor will sign a consulting agreement. When the company pays them, the company doesn’t hold any taxes on their behalf. That responsibility is on the individual. At the end of the year, the company will provide what’s called a form 1099 to the individual and to the IRS, which they use to prepare their personal tax returns.

The opposite side of this is an employee. An employee will also sign some form of IP assignment agreement, but when the company pays them, the company will withhold taxes from their salary. The company is responsible for paying those taxes to the relevant state or federal authorities. At the end of the year the employee receives a W2 form, which will then be used to prepare their personal tax returns.

The founders need to be paid. So do employees. It isn’t enough to just say, “Well, I am paying them in stock. That can be their compensation.” They need to be paid at least minimum wage. In San Francisco, which has a slightly higher minimum wage than California as a whole, that works out to about two thousand dollars a month. It’s not a huge amount but it can add up.

There’s are other things that you need to make sure you have if you have employees. The first thing is that you’re required to have workers compensation insurance, especially if you’re in New York. The New York authorities that look after this will send really threatening letters saying, “You owe fifty thousand dollars in fines because your one employee that’s being paid minimum wage has not paid the twenty dollars a month of workers compensation fees.” It is really important that you set that up. The other thing that is important is that you need to see proof that the employee is authorized to work in the US.

Founders are not payroll experts and nobody expects you to be one. This is all about the basics. You absolutely must use a payroll service provider who will look after this for you. Services like Zen Payroll are focused on startups. They help you get this set up in the easiest way possible so you can go back and concentrate on what you do best. In the example that Carolyn gave just a few minutes ago, if that company had actually set themselves up with a payroll service provider, all of that heartache would have gone away because it would have been looked after for them. They were trying to save money by not doing it and look where it got them.

That’s the key thing. Use a payroll service provider and make sure that you understand the basics of employment.

Carolynn: Somebody at YC once said, “You’re not a real founder until you’ve had to fire somebody.” Why is that? Because firing people is really hard. It’s hard for a lot of reasons, including that founders tend to hire their friends. They tend to hire former co-workers or they get close to their employees because working at a startup is really intense. But in every company there’s going to be an employee that doesn’t work out and firing this employee makes a founder a real professional because he or she has to do what is right for the company instead of what is easy. Best practices for how to fire someone: number one, fire quickly. Don’t let a bad employee linger. It’s so easy to put off a difficult conversation but there is only downside to procrastination. If a toxic employee stays around too long, good employees may quit. If the employee is actually screwing up the job, you may lose business or users.

Number two , communicate effectively. Don’t rationalize. Don’t make excuses. Don’t equivocate about why you are firing the employee. Make clear direct statements. Don’t apologize. “We’re letting you go,” not, “I’m so sorry your sales didn’t take off this quarter, blah, blah, blah.” Fire the employee face to face and ideally with a third party present.

Number three, pay all wages and accrued vacation immediately. This is a legal requirement that we don’t debate or negotiate.

Number four, cut off access to digital systems. Once an employee is out the door, cut off physical and digital access. Control information in the cloud. Change passwords. We had a situation at YC where one founder had access to the company’s GitHub account and held the password hostage when his co-founders try to fire him.

Number five, if the terminated employee has any invested shares, the company should repurchase them right away. The takeaway here is that, surprising as this may sound, one of the hallmarks of a really effective founder is how well he or she handles employee terminations.

Kirsty: The basic tenant to all of this is keep it simple. Do all the standard stuff and keep it organized. Make sure you know what you’re doing. Equity ownership is really important, so make sure you are thinking about the future rather than the three months of the history of the company. Stock doesn’t buy itself, so make sure you do the paperwork.

Make sure you actually know about the financing documents that you’re signing. It’s not enough to just say, “I’ll take your hundred K.” You and the employees need to be paid. Everybody needs to assign IP to the company. If the company does not own that IP, there is no value in the company. If an employee must be fired, do it quickly and professionally.

We didn’t mention knowing your key metrics. At any time you should know the cash position, you should know your burn rate, you should know when that cash is going to run out so you can talk to your investors. A lot of running a startup is following the rules and taking it seriously. It’s not all the glamorous bits that we see in movies and TV shows. You do have to take that seriously.

Audience Member #1: How would you advise searching for an accountant and when in the process do you need one?

Kirsty: There are two different things. There is a book keeper and there is a CPA, an accountant. Generally book keepers will categorize all your expenses and CPAs will prepare your tax returns. In the very early days it’s probably fine for the founders to just be able to see the bank statements and see those expenses coming out. Tax returns have to be prepared annually, so at some point in that first year of the company’s life, some service is going to need to be engaged to do that. It’s not worth the founders time to do it. There are services available like inDinero which try to make things as effortless as possible from the founders’s point of view. You do need to get a CPA at some point because you need to file your annual tax returns for the company.

Audience Member #1: How do you find one?

Kirsty: Finding one is tough. The best is through recommendations. With any kind of specialist, a CPA or an accountant or a lawyer, it’s always best to use people who are used to dealing with startups. Not your aunt who lives in Minnesota and doesn’t actually know how startups work.

Audience Member #2: All things considered, what should be my budget for incorporating, for the lawyer, for getting the deal to buy for my effort seed rounds? And then for hiring the first employees. How much money should I set aside for that?

Carolynn: In terms of incorporation, don’t spend a dime on that. You can do that online. Well, actually it does cost a little bit.

Carolynn: Incorporating online using a service like Clerky is inexpensive. In the hundreds, not in the thousands. You don’t need a lawyer for that part. When you actually need to hire a lawyer depends on what business you are starting and how complicated it is. Do you have a lot of privacy policies, is HIPPA involved? You mentioned raising your seed round, how much money are you raising? Who are the investors? What kind of terms are in the term sheet? Sometimes that dictates whether or not you need to get legal counsel.

Kirsty: Services like Clerky can help if you are using very standard documents for the fundraising. There are very basic fundraising documents you can use that cost less than a hundred dollars, which can save you some legal fees.

Audience Member #3: Do you have any advice or comments on the complexity that comes with working with cryptocurrencies or cryptoequities?

Kirsty: Oh wow. That’s a tough question to end with. Yes, there are some issues. Often banks struggle to deal with companies that are working with cryptocurrencies because they haven’t quite figured out how to deal with that sort of thing yet. Generally a lot of it is very product specific.

Sam: Thank you very much!

Carolynn: You’re welcome.

How to Run a User Interview

Sam Altman: Good afternoon. Today’s guest speaker is Emmett Shear. Emmett is the CEO of Twitch, which was acquired by Amazon, where he now works. Emmett is going to talk about how to do great user interviews; this is the talking to users part of “How to Start a Start Up.” It should be really useful. Thank you very much for coming!

Emmett Shear: Thanks Sam. I started my first startup with Justin Kan right out of college. We started a company called Kiko Calendar. It didn’t go so well. Well, it went alright. We built it, we sold it on eBay. That’s not necessarily the end you want for your start up.

It was a good time. We learned a lot. We learned a lot about programming. We didn’t know anything about calendars. Neither one of us were users of calendars. Nor did we, during the period of time we did the thing, go talk to anyone who actually did use a calendar. That was not optimal. We got the build stuff part of the startup down. We did not get to the talk to users part.

The second startup we started, we used a very common trick that lets you get away with not talking to users, which was that we were our own consumer. We had this idea for a television show, Justin.tv, a reality show of Justin Kan’s life. We built technology and a website around the reality show we wanted to run. We were the users for that product. One way to cheat and get away with not talking to many other users is to build something that literally is just for you. Then you don’t need to talk to anyone else because you know what you want and what you need. But that is limiting way to start a startup. Most startups are not built for the person who is using them. When you do that, every now and then you get really lucky and you are a representative of some huge class of people who all want the exact same thing you do. But very often, it just turns into a side project that doesn’t go anywhere.

We kept working on Justin.tv for awhile and we actually achieved a good deal of success because it turned out that there were people out there who wanted to do the same thing we did, which was broadcast our lives on the internet. The issue with Justin.tv that kept us from achieving greatness is we hadn’t figured out how to build towards anything beyond that initial TV show. We built a great product. If you wanted to run a live 24/7 Reality television show about your life, we had the website for you. We had exactly what you needed but if we wanted to go do more than that. We wanted to open it up to a broader spectrum of people and use cases, but we didn’t have the insight to figure that out because we weren’t that user.

So we decided to pivot Justin.tv. We decided we needed to go in a new direction. We thought we built a lot of valuable technology but we hadn’t identified a use case that would let it get really big. There were two directions that seemed promising. One was mobile and one was gaming. I lead the gaming initiative inside of the company. What we did with gaming that was very, very different from what we’d ever done before was we actually went and talked to users. Because while I loved watching gaming videos, I was very aware that neither I nor anyone else in the company knew anything about broadcasting video games. I was amped about the content. I thought that there was market there. That was the insight that wasn’t common at the time, which was how much fun it was to watch video games.

Quick show of hands, how many people know about watching video games on the internet here? If you don’t know about watching video games internet you should go read about it, because it’s important context for the stuff I am going to talk about. The main point is I thought it was awesome, but I didn’t know anything about the important side of it, which is actually acquiring the content of the startup broadcasting. We ran a very large number of user interviews. We talked to a lot of people and that data formed the core of all the decision making for the next three years of product features on Twitch. We continued to talk to users and in fact built an entire part of the company whose job it is to talk to our users. That is a whole division we didn’t even have at Justin.tv. We had no one at the company whose job it was to talk to our most important users.

I want to give you guys a little bit of insight into what it meant to talk to users. We determined that the broadcasters were the most important people because when we went and looked into the market, we looked into what determined why people watched a certain stream or went to a certain website. They would just follow the content. You had a piece of content you loved and the broadcaster would come with you. That’s actually the one really important point about user interviews, which is that who you talk to is as important as what questions you ask and what you pull away from it. Because if you go and talk to a set of users, if we had gone and talked to viewers only, we would have gotten completely different feedback than if we were talking to the broadcasters. Talking to the broadcasters gave us insight into how to build something for them. That turned out to be strategically correct. I wish I could tell you the recipe for figuring who the target user is for your product, and who your target user should be, but there isn’t a recipe. It comes down to thinking really hard and using your judgment to figure out who you are really building this for.

I want to do something interactive now. I’m going to get a bunch of ideas from you guys and I’m going to pick one of them. I want everyone to sit down and do step one of this process right now. Which people, where would you go to find the people you needed to talk to in order to learn about what you should build. The idea we are going to use is a lecture focused note taking app. The idea is: the state of the art for note taking is not good enough yet and I want to make a note taking app that improves that experience. It will make taking notes in class better. Maybe it has collaboration features or maybe it helps you focus better somehow. It has multimedia enhancements. All sorts of possible features. That’s the idea. So take 120 seconds right now and think about not what you would ask or what the right features for this app is, but who would you talk to? Who is going to give you that feedback that is going to tell you whether this is good or not. It’s good to think in your head but actually write it down and come up with the five people you would talk to. The five types of people you talk to, and who you think the most important one was. There’s nothing like actually running through something and trying to do it. Actually get it into your head that it’s right way to do it. I’m gratified to hear the clicking of keyboards now. If you are following along at home actually do it. Think about who would you talk to because that’s the first question for almost any startup. You need the answer to the question: who is my user and where am I going to find them?

Alright, that’s shorter than you normally would think about this problem. It’s actually a really tricky problem, figuring out where to source people is pretty hard. We’re going to move along in this highly abbreviated version of learning how to build a product and running a user interview.

Can I get one volunteer from the audience to come up and tell us who you would talk to. And we’ll talk about it.

Audience Member 1: I would definitely talk to college students first, because we sit in a lot of lectures. Specifically, I want to talk to college students studying different subjects to see if they are an English major, if that makes a difference versus studying Math or Computer Science in terms of how you want to take notes in different lectures.

Emmett Shear: You’re going to talk to a bunch of college students. Would you pick any particular subset of college students? We don’t want to talk to all college students.

Audience Member 1: I want to only talk to college students and break down the divisions by people who study different areas. It would make sense for people who have different study techniques, because some people take a lot of notes. Some people don’t take that many notes but still jot stuff down.

Emmett Shear: That’s a really good start. Those are obviously the users you want to go talk to, especially if you are targeting college students as the consumer. If you are talking to college students as the consumer, you are going to get a lot out of students about what their current note taking habits are and what they would be excited about.

One of the problems with selling things to college students is that college students actually don’t spend very much money. It’s really hard to get you guys to open your wallets, especially if you want them to pay for a school related thing. People don’t even want to buy text books. You probably all use checks or debit or borrow from your friends. So one of the things that I think you would be missing if you go after just the students, is who the most important person to this this app is. If you actually had a note taking app for colleges, the people most likely to actually buy a note taking app would be college IT.

Presumably for the most part you want to sell software to students, and the people who have to be brought into that is usually the school administrators. That might be one approach. I feel like you will presumably go talk to college students and find out they don’t actually buy any note software now at all. It’s possible they do, in which case I’m completely wrong. This is why you have to go and talk to the users.

But you then have to try other groups. So I would talk to college IT administrators as well.That’s another area that’s really promising. You might talk to parents. Who spends money on their kids’ education? Who is willing to pull their wallet out? The parents of kids who are freshmen going to college for the first time. You need this app to make your kid productive so that they don’t fail out of college. There are actually a lot of groups that aren’t necessarily obvious users but who are potentially critical to your app’s success. When you are at the very beginning of a startup, when you have this idea that you think is awesome, you want to have the broadest group you possibly can. You don’t just want to talk to one type of person. You want to get familiar with the various kind of people who could be contributing.

Let’s have someone come up and we’re going to pretend we are running a user interview. We are going to talk to a college student and try to find out what we should build, what we should get into this note taking app. Another volunteer please, for running an interview. Hello.

Audience Member 2: Hi, I’m Stephanie.

Emmett Shear: Hi Stephanie.

Audience Member 2: Nice to meet you.

Emmett Shear: Welcome. Thank you for agreeing to do this user interview with us. I want to hear from you about your note taking habits. How do you take notes today?

Audience Member 2: Sure, I take notes in a variety of ways. Because of speed and efficiency, and because I can come back to it later, it’s easy for me to take notes on my laptop. A lot of those would be primarily text based, but in certain classes, for example if I am taking a History class, most of it would be in text. But if I am taking a Physics class, there are going to be more complex diagrams and different angles I have to draw.

Emmett Shear: What software do you use for this stuff today?

Audience Member 2: I just do pen and paper for that.

Emmett Shear: You do pen and paper. So you do a combination. You take notes with pen and paper. You take notes with the computer sometimes.

Audience Member 2: Yup.

Emmett Shear: When you take all these notes, at the end, do you actually review them? Be honest! Do you actually go back and look at this notes?

Audience Member 2: The pen and paper not so much. But yes to the software based. It’s easier to access and it’s easier for me to share and collaborate and maybe even merge notes with classmates and friends.

Emmett Shear: What did you use to take notes today on your computer?

Audience Member 2: Google Docs and Evernote.

Emmett Shear: Why two things at the same time?

Audience Member 2: Evernote is easy if I am trying to just collect for myself. You can share, but Google Docs is easier to share. If a friend has already created a folder in Google Docs, I just have to add to that folder. If it’s for my personal use I tend to go more toward Evernote.

Emmett Shear: It sounds like you have a lot of note taking collaborations.

Audience Member 2: Yeah, I wish it was integrated.

Emmett Shear: Tell me more about that. Do you wind up taking most of the notes, most of the value out of notes that other people take? Or is it mostly your own notes you review at the end of the semester? How does that work?

Audience Member 2: It’s mostly mine because I am pretty picky about the way I like things organized. Design wise or formatting, even color, I am really particular with. The font that we use really effects the way I study. So I tend to personalize notes, even after I merge them.

Emmett Shear: So you’re pulling notes from other people but then you merge them into what works for you. Awesome! If you have Evernote notes and you have Google Docs notes, and you have pen and paper notes, once the semester is over, do you ever go back to any of that stuff or is it per quarter? Once the quarter is over, do you ever go back to any of that stuff?

Audience Member 2: For classes not so much, but if it’s notes that I have taken for talks, like these for example, or if it’s interview prep, I tend to go back because I like to keep these things fresh in my mind. They help me prep for future things.

Emmett Shear: That’s interesting. Tell me more about that. You take notes not just in class.

Audience Member 2: I take notes to summarize main points. For example, inspirational quotes from talks like these. If I am going to an event where I am going to meet someone, notes help me remember what was at the talk.

Emmett Shear: Awesome. Normally I would actually dig into a lot more detail. There are a huge amount of open questions that are still in my mind after hearing that. Which people do you collaborate with? How long are your notes?. How much time do you spend note taking? I would dig into her current behavior but in the interest of time and not making everyone hear about the intricacies of one person’s note taking habits forever, we’re going to move on. Thank you very much Stephanie.

Audience Member 2: Thank you.

Emmett Shear: I appreciate that. You notice we are not talking about the actual content of the app at all. I’m not really interested in features. I don’t want to know about a specific feature set in Google Docs or Evernote. I might dig a little more into which features actually get used. If she’s actively collaborating, how does that work? I heard some interesting things, ” We use a folder.” That’s interesting to me.

The main thing you’re trying to do when running this first set of interviews is not necessarily ask questions about optimizing user flow. Or questions about the specifics of any of that stuff. That can be distracting because users think they know what they want. You get the horseless carriage effect where you’re asked for a faster horse instead of asked to design the actual solution to the problem.

So you want to stay as far away from features as possible because the things they tell you feel overwhelmingly real. When you have a real user asking you for a feature, it’s very hard to say no to them because here’s a real person who really has this problem. They’re saying, “Build me this feature.” But as you start to talk to lots of people and really get a sense for what their problems are, you figure out if this is actually a promising area or not.

Based on what I heard there, starting from that user interview, I’m not necessarily positive there is a problem. At least there might not be a big enough problem that it’s worth building a whole new product for. I didn’t hear a lot of things that were big blockers, where there is something really wrong with the way it was working. Unless I have some big idea, I would take that as a negative sign. That doesn’t necessarily mean you can’t move forward and keep talking to more people. Just because you don’t get anything out of talking to the first person doesn’t mean there are not going to be more people who actually have a problem. Once you’ve talked to about six to eight people, you are usually about done. It’s unlikely you’re going to discover a bunch of new information. Which is why it is important to talk to different extremes of people. Go find people who are different, because if you talk to six Stanford College students you are going to get a very different response than if you talk to six high school students or six parents.

Based on that though, you can come up with a set of ideas.You have this information about how someone takes notes. You had some ideas as to how you could build something cool. If you are going to build just one feature on top of Google Docs, what would that feature be? For a new product like this, it might be a good way to start thinking about where to go. They are extensively using this thing right now, how can we make that experience just one quantum better? Something that would be really exciting to this person, something that would be one step ahead. Take two minutes and think about what that feature might be. Try to come up with what you might do based on what you heard from Stephanie that could convince her to switch away from her current collaborative, multi-person, all working together work flow on Google Docs to your new thing that has the features of Google Docs plus this one special thing that is going to make it more useful and convince them to stop using the thing they are already using.

Awesome, alright. I am going to invite our third guest up.

Audience Member 3: The reason she uses Evernote is because of sticky note type notes. More thoughts and like details. I feel that Google Docs has documents and not smaller notes. I feel like a feature that would be super would be a mobile version of drive that isn’t clunky and doesn’t make you use documents could be useful.

Emmett Shear: Awesome. That’s a good insight. That’s exactly one of the things you get out of that user interview. Now you have this idea. You’ve gotten this user’s feedback. What if we had a Google Docs that had the collaborative aspects and the group aspects but where you could pull in more little one off notes. A product designed more around note taking. The question is now, once you have this idea, is this enough? Is this something people would actually switch to? There are two ways to validate that. One, if you are quick at programming you can literally just go build it, throw it out into the world, and see what happens. When that works, it’s an excellent way to approach the problem. But a lot of the time that one little thing that’s a bit better might take you three months to actually build. So you want to go out and validate that idea further before you start building it.

You might take that idea and draw diagrams of what it would look like. Draw the work flow and put that in front of people. The one thing you really don’t want to do is ask them about a great idea for a feature. Ask them, “Are you excited about it?” Because the feedback you get from users if you tell them about a feature and ask them, “Is this feature good?” is often, “Oh yeah that’s great.” When you actually build it, you find out that while they thought it was a clever idea, no one actually cares to switch and get it. So the one question you can’t ask is, “Is this feature actually good or not?”

Sam Altman: What is the minimum that you can do to actually build on that question? Between asking and actually building the full thing?

Emmett Shear: What’s the minimum you can actually get away with to validate your product, given you can’t actually just go and ask them, “Is this good or not?” It’s highly dependent on the particular feature. Usually the best thing you can do is just hack something together. If your idea is to build something on top of Google Docs, don’t go rebuild Google Documents but for note taking. Find a way to write a browser extension that stuffs that little bit of incremental feature in and see if it’s actually useful for people. Find a way to cheat is what it comes down to, because if you can’t actually put it in front of people it’s really, really hard to find that out.

For bigger things, where you are actually trying to get people to spend money, it gets a lot easier. If you are selling, it’s great. Sales is the cure-all for this problem. Get people to give you their credit card and I guarantee you they are actually interested in the feature. It’s one of the most validating things that you can do for a product. Go out there and actually get customers to commit to pay you up front. The problem when you are working on a student note taking app, is that’s going to be relatively hard. Unless your idea is that you’re actually going to sell it, the trial version is probably free. You’re not necessarily going to learn that much by trying to charge people money. But if you go out there and can get people to say “Hey, I am going to give you money,” the money test is amazing. It clarifies whether or not they’re really excited about your product. If you’re not five dollars excited about it, you’re probably not very excited about it.

The last thing I want to do is work through what happened at Twitch. I brought some slides that I’d like to put up. They are representative excerpts of Twitch feedback. I had a twenty-six page document of all the feedback and realized that reading that was going to be a little bit tedious. Lots of people said this to us when we asked them questions. I’ve pre-condensed the feedback for you.

To launch Twitch, we talked to a bunch of existing Justin.tv broadcasters and asked them about their experience broadcasting, what they liked about broadcasting, why they broadcasted, what they broadcasted. What else was going on in their life? When you talk to detailed users of your product, they come back to you with very detailed things about features because they get mired in the features. You have to sort of read between the lines. They ask us for things like, “I want a way to clear the ban list in my chatroom.” That was actually a very common request because there was a very particular issue with how our chatroom is worked. People would ask for the ability to edit titles of highlights after creating them. This stuff was really consistent.

As we talked to broadcasters, we probably talked to twelve to fourteen broadcasters of the Justin.tv gaming platform, we got all this feedback. “Your competitors have all these cool features like polls and scrolling text. I can personalize chat there.” Then we have some positive feedback. “You guys don’t have ads. You’re able to ban trolls.” A bunch of stuff about chat, around interactivity with their viewers. That was all really interesting. This is what the Justin.tv broadcasters wanted us to build. This is where they felt pain using the product. If you thought that what we did was go and address these problems, you would be wrong. People who are using your service already are willing to put up with all these issues, which kind of means that these are probably not the biggest problems. If you are willing to ignore the fact that you can edit the ban list and that titles are editable, that there is no way to get trolls out of your channel and you’re using the service anyways, maybe those aren’t huge problems. That brings up a really important point, which is you have to compare groups of people. And compare the level in which they argue.

Here we have competitor broadcaster feedback, which is really interesting. This is stuff we heard a lot from people who were using other broadcast platforms. They wanted to be able to switch multiple people onto their channel at the same time. They complained about us not having a revshare program. They talked a lot about how they were trying to make a living and they really wanted to make money pursuing this this gaming broadcasting thing. They talked about video stability. Our service wasn’t good in Europe. Globally, video stability was this huge, huge issue. If you compare and contrast, it was really different. What people who didn’t use our service cared about was completely different than the people who were using our service. We focused on this stuff because this was the stuff that was so bad that people weren’t even willing to use our service. Most of it we hadn’t actuallythought about it because our user base happened to be well educated and knew about all their options. Reaching out to them meant that they probably already tried all four services and actually had an opinion. It’s great when you can get users who are that informed and understand the space that well.

The other important thing we did was talk to non-broadcasters. We talked to all the people who weren’t using us or our competitors. In many ways, those were the most important people. Talking to your competitors is a a short term win, unless your software is like Google, which is a search engine which everyone uses, then there may be no non-users to convert. In the case of gaming broadcasting, almost everyone is a non-user. The majority of people you are competing with are non-users. They are people who have never used your service before and what they say is actually the most important. What they say is the thing that blocks you from expanding the size of the market with your features.

If all you do is look at your competitors and talk to people who use your competitors’ products, you can never expand. You’re not learning things that help you expand the size of the market. You want to talk to people who aren’t even trying to use these things yet. Who’ve thought about it maybe, but who aren’t into it. What did they say? My computer isn’t fast enough. I am focused on training twelve hours day for the next tournament. I like making the perfect video and I like editing it. I upload a couple of things to YouTube. I don’t do live streaming. I have no desire to go into that space. In Korea this is a big problem. Once our strategy gets broadcast in major tournaments, we have to start over. We have to come up with an entirely new strategy. The last thing we ever want to do is broadcast our practice sessions, are you crazy? That’s going to hurt us in the next big tournament.

This became big outreach program for us, trying to figure out how to get people over this. We brought people computers. We worked closely with gaming broadcast software companies to help the people who made the broadcasting software. We started building broadcasting into games and into platforms. We built broadcasting into the Xbox. We brought broadcasting into PlayStation 4 because we needed to overcome this issue. Broadcasting wasn’t possible. These were the three big groups we looked at for broadcasting. You combine that feedback and what it tells you is not features to build, because the features they asked for, polls, the ability to have a child account, we haven’t built most of that stuff. What was important were the issues, the goals they were trying to accomplish.

People wanted money. People wanted stability and quality. People wanted universal access for viewers all around the world. That became our focus. We dumped almost all of our resources into things no one ever mentioned in an interview. Those were the things that actually addressed the problem. The way that you can tell that it worked is as we would build these things, we would go back to exact same people we interviewed and we would say, “You told us you really cared a lot about making money. We built you this subscription program that will let you make money.”

It’s astonishing because most people had actually never had that experience. They had never talked to someone and said, “It would be really great if your product had feature X” and then a month later your product actually has feature X, or at the very least a feature that addresses the problem that they brought up. The people we converted first to our product were the people that we talked to about user research. They were the ones who were the most impressed. Which is fun. It really worked, because we picked people who were representative. We picked big broadcasters. Small ones. Medium ones. We made sure were addressing their concerns. That was completely different from how we approached the problem at Justin.tv.

With Justin.tv when we tried to do this, we’d go through huge amounts of data. We spent tons of time looking through Google Analytics, Mixpanel, and in-house analytics tools. Figuring out how people were trying to use the service, where our traffic came from, completion rates on flows. You can learn things from that. I’m not telling you not to look at your data. But it doesn’t tell you what the problems are you need to address. We would invent these ideas at Justin.tv without talking to someone and then nine times out of ten, that idea would turn out to be bad. That’s actually one of the disappointing things about doing user interviews and getting user feedback, which is why I think so many people don’t do it. You’re going to get negative news about your favorite feature most of the time. You’re going to have this great idea and you’re going to talk to users and it’s going to turn out that nobody actually wants it. They are actually concerned about a completely different set of things and they don’t care about what you thought was important at all. That’s a little bit sad, but think about how sad you’d be in four months when you launch that feature and it turns out no one actually wants to use it.

That’s the lecture section. I want to take some questions from the audience.

Audience Member 4 : What do you see startups get most wrong about interviews? Most startups don’t do them at all, but the ones that do, what are their most common mistakes?

Emmett Shear: The most common mistake is showing people your product. Don’t show them your product. It’s like telling them about a feature. You want to learn what’s already in their heads. You want avoid putting things there. The other thing is asking about your pet feature direction. If you think you want to add subscriptions to your product, going and asking people, “Would you pay for a subscription? Would you use this feature?”

Another big mistake people make is talking to who is available rather than talking to who they need to talk to. There are certain users are really easy to get at because they are members of your forum already. You have some product forum, you talk to the users on that forum because they’re easy to access. We spent weeks digging for identifying information and figuring out who these people were so we could talk to them. This was a site that did not support messaging, so there was no obvious way to interact with them. We spent a bunch of time trying to network and find those users. Because if you just talk to who’s easy to talk to, you’re not getting the best data. The fortunate side there is almost everyone is flattered to be asked what they think, so they will actually talk to you and tell you things.

Audience Member 5: How hard was it to get buy in from the rest of your company? You can say, “I’m in charge so you’re doing what I say” but that’s probably not the best way of doing it.

Emmett Shear: That’s a good question. If you just go to them and say, “I talked to the users. I figured it out. We have to build this,” it’s really hard because people don’t trust you. There’s something magic about showing them the interview though. I recommend recording interviews. It also stops you from taking notes in the middle, which is a little bit disruptive. It makes it hard for you to actually engage in the conversation. You can then play that recording for people. They don’t have to be there for the entirety of all the interviews, but when you want to make a point about what what you should be building and why, you can play the interview back for the rest of the company. It’s like magic, the influence it has on people’s thoughts, on what is the right thing to build.

Audience Member 6: Since you mentioned recording, did you try to insist on doing Skype interviews rather than over email?

Emmett Shear: You definitely want to Skype. You don’t want to do interviews over email if you can avoid it, because interviews over email are non-interactive. The most interesting learnings come from the, “Interesting. Tell me more.” The instant you hit this vein, they will say something that you didn’t expect. And then you should drop into detective mode. Detective mode is, “Huh, that’s interesting. Can you tell me more about that?” People don’t like silence, so they’ll keep talking to feel the void. The best part about doing an interview over Skype or doing it in person is that you have that interactive feedback. You can actually pull a lot more out of people. Email interviews are basically useless. In person or over Skype interviews are also easy to record. Make sure you ask them if it’s ok to record. It’s not polite to record people without their consent, but if they are willing to give you a user interview, they’ll probably willing for you to record it as well.

Audience Member 6: What about the international market? You mentioned that you have a lot of users in Korea.

Emmett Shear: That’s really hard. To this day Twitch works way better in English speaking countries than it does in non-English speaking countries. A big part of that is we are much better at talking to people in English speaking countries and learning what their needs are. We are not as good at that in other Countries. We’ve tried to address that by hiring people who speak Korean and having them translate. We’ve tried to address it by finding representative people who speak both English and Korean and reaching out to them. But the problem is you’re not actually getting a representative sample, no matter how hard you try. The very fact that they are a fluent English speaker means they are not representative of all the people who don’t speak fluent English. It’s a hard problem. It’s why companies find it easier to build markets in their home country. It’s really hard to talk to users abroad.

Audience Member 7: What channels do you use to reach out to them? And do you ever compensate them?

Emmett Shear: The channels we used to reach out to them were onsite messaging systems. Most websites have some way to contact the user. If they are a visible user of another website, you use that site’s messaging system and say, “Hey. I was watching your stream…” Or, “I’d love to ask you some questions about your usage. Would you mind hopping on a Skype call?” We also find out where those people were. We’d run into them at events because a lot of these people go to the same events. We wouldn’t run the user interview at the event, but we’d get to know them. We would exchange business cards and we would get in touch with them. We tend not to compensate people. If people don’t care enough about the problem to like someone who is trying to solve it, you’re probably barking up the wrong tree. We never had any trouble getting people to talk to us without paying them.

Audience Member 7: What about onsite user feedback tools?

Emmett Shear: This is a whole second set of user feedback that’s really important. You’re talking about when you have a new product and you want to see if it’s actually going to work or not. You put it in front of people and see how they use it or not. That is super, super important. It can tell you where you went wrong building something before you launch it, which is great. It doesn’t tell you what to build. It helps you iron out the kinks and edges of the thing you did build. Generally speaking, that wasn’t the user feedback we were getting. I mean that stuff’s good, it’s much more similar though to the data driving approach. You’re finding out why people are dropping off of this flow. You’re not finding out the problem you should really be solving. What do they care about as a human? This early stage user interview is crucial for startups. That’s where you want to focus. We didn’t bring anyone in onsite, it was almost all over phone or Skype.

Audience Member 8: In finding groups of people that can give different kinds of feedback, is there a group that you should focus on first?

Emmett Shear: Given that we had very limited resources, we focused on the people using competing products. We knew that they were already interested in the behavior that we needed and they were willing to do it at all. Therefore all we had to do was convince them to switch, which is much easier to do than to create a new behavior. We did that because we had to get some quick wins. My gaming project inside of Justin.tv would have been killed if wasn’t showing twenty-five percent month over month growth every single month. That meant focusing on the short-term, on getting the people in right now. That turned out to be good in general.

Audience Member 9: In the beginning the video gaming industry was decentralized. There wasn’t a lot of cohesion, but now it’s very different. You said you originally spoke to broadcasters and streamers themselves. How has that changed? For example, ? has banned users or professional players from streaming their own stuff. Did you try to gain leverage with that?

Emmett Shear: Yeah, so the question is about the game publishers. Game publishers are important people in the space. Any big company for that matter isn’t going to give you the time of day as a small startup. Which is both good and bad. It means you don’t need to talk to them because they’re not interested in you. But it means you actually just can’t talk to them. We tried but no one wanted to talk to us. They did once we started getting some traction and becoming a bit of a player in the space.

I don’t really want to talk that bad about them because they were nice enough about it. When you are a tiny little startup, there are lots of tiny little startups, and they don’t have the time to talk to all of you. As we’ve gotten bigger, game publishers have become increasingly important for us. If I was to talk about who Twitch does user interviews with now, who we pull information form now, it would include game publishers. Definitely! They’ve become much more active in the space. They weren’t particularly active three or four years ago. The really important user interviews in general are from the pool of people you care about, and that is going to shift over time. The people who get you started for the first six months are not who will be using it three years later. It’s very important you keep doing this stuff. One of the things that is really easy to do is to do a little bit of it in the beginning and achieve some success and then stop talking to new people. That’s a good way to make the next set of features you build be not as good as the first ones.

Audience Member 10: How do you give good user feedback if you’re a user?

Emmett Shear: How do you give good user feedback? I want a user to tell me what they are really thinking. What their problems really are. To just sort of ramble. I want someone to just tell me about stuff in their life. The more you learn about them as a person and the context of what they are doing, the easier it is to understand why they want the things they want. That’s really the critical question. What I am looking for in someone when I am doing a user interview is someone who is going to be willing to talk a lot and be willing to give me a full picture. On flip side, if you want to help people out with good user interview feedback, ramble.Just talk about everything.

Alright great. Well thank you very much!

Sam Altman: Thank you very much!

How to Operate

I’m going to talk about how to operate. I have watched some of the prior classes and I am going to assume you have hired a bunch of relentlessly resourceful people, you have built a product that at least some people love, hopefully, raised some capital, and now you are trying to build a company. You have been forging a product and now you are forging a company. And I would actually argue, forging a company is a lot harder than forging a product. Basic reason is people are irrational. We all know this. Either your parents, your significant other, your brother or sister, your teacher, somebody in your life is irrational. Building a company is basically like taking all the irrational people you know putting them in one building, and then living with them twelve hours a day at least. It’s very challenging. Now there are some techniques for coping with that some people get good at it, some people don’t. But that’s really what operating is all about.

So basically what you are doing when building a company is building an engine. At first, you have a drawing on a whiteboard and you are architecting it, and it looks especially clean, beautiful, and pretty. But when you actually start translating it to practice it actually starts looking more like this and you’re holding it together with duct tape. It takes a lot of effort from people to hold it together, that’s why people work 80-100 hours a week. It’s that heroic effort to keep this thing together because you don’t actually, yet, have polished metal in place. Eventually, you want to construct a very high-performance machine. A machine that almost nobody really has to worry about every hour, every minute. And as we used to joke about at eBay, that if the Martians took over eBay it would take 6 months for the world to notice. That’s eventually what you want to get to.

As Warren Buffett says, build a company that idiots could run because eventually, they will. So this is what you want. Basically a performance machine that idiots can run. Now as a leader, what is your real job, what’s your role? Strictly speaking, there is only one book ever written that actually explains how to do this. It’s rather old, written in 1982 by Andy Grove, it’s quite famous and successful. And his definition of what your job is to maximize the output of the organization. Your organization that you are responsible for, so the CEO’s (responsible for) everything and VP would be a part of the organization, and the organizations around you. So if you are a VPE, you are actually responsible for the performance of the product team and the marketing team because you have influence there. So this is how you measure people, and you want to focus on the output and not the input. The old adage about measuring motion and confusing progress. You are measuring only progress. And this is going to sound like a fancy and glamorous thing to do. Maybe people get excited about managing a whole large organization and being “responsible” for the output. But in practice, what you are going to hopefully learn today is that it’s more about things like ordering smoothies, teaching your receptionist how to answer your phone properly, and serving as a $10 an hour TaskRabbit for your employees. So let’s talk about that.

So at first, when you start a company everything is going to feel like a mess. And it really should. If you have too much process, too much predictability, you are probably not innovating fast enough and creatively enough. So it should feel like every day there is a new problem and what you are doing is fundamentally triaging. So some things will look like a problem, and they are actually colds, they are just going to go away. So somebody is annoyed about this or that, that is a cold, you shouldn’t stress about it and you certainly should not allocate all your time to it. And some things are going to present themselves as colds, but just like in the emergency room if they are not diagnosed properly they can actually become fatal. What I am going to try to do is give you frameworks for thinking about when things are colds and when things are potentially fatal.

So one of the most important things I learned at Square is the concept of editing. And this is the best metaphor I have ever seen in 14 years of running stuff, of how to think about your job. It’s a natural metaphor, so it’s easy to take with you every day and it’s easy to transmit to each of your employees so they can figure out if they are editing or writing. It’s a natural construct, you generally know when somebody asks you to do something, am I writing or am I editing? So an editor is the best metaphor for your job. And we are going to talk about the specific things you are doing in editing.

The first thing an editor does and you have all probably had this experience in school, is you submit a paper, to a TA, a draft to your friend, and the first thing that editor does is they take out a red pen, or nowadays you go online, and they start striking things. Basically eliminating things, the biggest task of an editor is to simplify, simplify, simplify and that usually means omitting things. So that’s your job too, is to clarify and simplify for everybody on your team. The more you simplify, the better people will perform. People can not understand and keep track of a long complicated set of initiatives. So you have to distill it down to one, two, or three things and use a framework they can repeat, they can repeat without thinking about, they can repeat to their friends, they can repeat at night.

Don’t accept the excuse of complexity. A lot of people will tell you, this is too challenging, this is too complicated, yeah well I know other people simplify but that’s not for me, this is a complicated business. They’re wrong. You can change the world in 140 characters. You can build the most important companies in history with a very simple to describe the concept. You can market products in less than 50 characters. There is no reason why you can’t build your company the same way. So force yourself to simply every initiative, every product, every marketing, everything you do. Basically take out that red and start eliminating stuff.

Second thing editors do, is they ask you clarifying questions. When you present a paper to someone, what do they usually do? They find some ambiguity somewhere and ask, do you really mean this? Did you really mean that? Give me an example of this? That’s what your job is. So you are in a meeting, people are going to look to you. And the real thing you do, is you ask a lot of questions. And they can be simple basic questions like should we try this seven days a week? Or six days? They can be fundamental questions like where’s our competitive advantage here? We try to do this as investors too. Some investors will ask you a billion questions about a billion things and they will have you do diligence forever. We try to narrow down to, what are the one two three four things that matter most to this company? And only focus on those things. So it allows us to be more decisive and we can make decisions rapidly. It allows us not to distract you from your day job which is actually building a company. And yet still I think we get to the highest fidelity question because we don’t have all these extra extraneous details and data. Now it’s hard, it’s something you have to practice. But when you get good at it, every step you eliminate, Andy Grove estimated you can improve performance by 30-50%.

Now the next thing you do is you allocate resources. So the editor construct, this is what editors do all the time. They take editors from the Mideast, covering the Mideast and they move them to Silicon Valley because Silicon Valley is more interesting. Or they move them to the sports section because they want to compete on the basis of sports journals and other publications. So that can be top-down, where I take a whole bunch of resources and people and say, we are now going over here. We are going to compete on this basis. Then next month, next quarter, next year well that Middle East coverage is getting boring, we don’t want to do that anymore. Let’s go chase after something else. Or it can be bottom-up, just like journalists mostly come up with their own stories.

The people who work with you, generally, should be coming up with their own initiatives. So a reporter, generally, who covers Google will come up with the interesting stories that they are hearing in ether and propose one or two to their editor for approval. But it’s not the editor saying, go cover Google and this is the angle I want. Once in awhile, they do that, but its not the meat and potatoes of what a journalist does every day. Your goal over time is to use less red ink every day. So one way of measuring how well you are doing at communicating or talking to your colleagues about what’s important and what’s not, about why some things are important and why some things are not. It’s how much red ink you are pulling out in a day, it’s okay if you are having a bad day and the red ink is all over the place. But it’s not okay if the red ink next month is more than it was last month, and next quarter more than this, so measure yourself by how much red ink you’re creating.

The other thing that is very important that actually isn’t as intuitive to a lot of people, is the job of an editor is to ensure a consistent voice. So if any of you read The Economist, you can tell that there is one consistent voice. You can pick up any article, any post in The Economist and it feels like it was written by the same person. Ideally, your company should feel, on your website, on PR releases, on your packaging if it’s a physical product, anywhere on your recruiting pages it should feel like it was written by one person. That’s extremely difficult to do. And at first, you are going to be tempted to do that yourself, which is okay for a founder to do that him or herself initially. Over time you do not want to be doing all of the consistent voice editings by yourself. You want to train people so they can recognize differences in voice.

See this website page, it looks very different than this recruiting page. You start asking questions, why is that? Is the reporting messed up? Is one of the leaders over here not really understanding the voice of the company? You have to fix that over time, but you want to start with the objective that everything should feel the same. It’s quite difficult to practice, almost every company has one piece of the organization that isn’t on the same voice. At Apple, which is notorious, even under Steve’s regime, which is notorious for getting this right, if you asked someone who worked at Apple, asked them about the internal tools about recruiting, do they really feel like Apple products? All of them will tell you no. So you are never 100%. But you definitely want to get as close to that as you can.

Next complicated topic is delegating. So just like the other metaphor on editing is writers do most of the work in the world, editors are not writing most of the content in any publication. So that is true of your company, you shouldn’t be doing most of the work. And the way you get out of most of the work, is you delegate. Now the problem with delegating is that you are actually responsible for everything. The CEO, founder, there is no excuse. There is no, there is that department over there, this person over there screwed up. You are always responsible for every single thing, especially when things go wrong. So how do you both delegate but not abdicate? It’s a pretty tricky challenge, both are sins. You over delegate and you abdicate, or you micromanage, those are both sins. So I’m going to give you a couple of techniques for solving this.

First, and this actually came from High Output Management and Andy Grove, is called task-relevant maturity. It’s a fancy phrase for, has this person ever done this before? It’s really simple, how mature is this person in doing something? And the more they have done the exact same task before, the more rope you are going to give them. And the more they are trying something new, the more you are going to instruct them and constantly monitor. This is a basic concept but it’s worth keeping in the back of your brain. The interesting implication and this is pretty radical, is that any executive, any CEO, should not have one management style. Your management style should be dictated by your employee. So with one particular person, you may be very much a micromanager because they are quite low on this scale. And with another person,, you may be delegating a lot because they are quite mature on this scale.

So it’s actually a good thing if you do reference checks on somebody and half the people you call say they are a micromanager and the other half say they actually give me a lot of responsibility. That’s a feature not a bug. I didn’t understand that at first at all. I used to be befuddled when people would do reference checks on me and come back with this complicated mosaic. Then I finally figured out that maybe I was doing my job correctly. So then I taught others that this is the way to do it.

A more nuanced answer that I came up with, is how to make decisions. Delegating vs doing it yourself. You don’t want to do it yourself too often. So I basically borrowed from Peter, this is my first two by two matrix ever in my life, but he taught me something at least. You basically sort your own level of conviction about a decision on a grate, extremely high or extremely low. There are times when you know something is a mistake and there are times when you wouldn’t really do it that way but you have no idea whether it’s the right or wrong answer. And then there is a consequence dimension. There are things that if you make the wrong decision are very catastrophic to your company and you will fail. There are things that are pretty low impact. At the end of the day, they aren’t really going to make a big difference, at least initially.

So what I basically believe is where there is a low consequence and you have very low confidence in your own opinion, you should absolutely delegate. And delegate completely, let people make mistakes and learn. On the other side, obviously, where the consequences are dramatic and you have extremely high conviction that you are right, you actually can’t let your junior colleague make a mistake. You’re ultimately responsible for that mistake and it’s really important. You just can’t allow that to happen. Now the best way to do that is to actually explain your thinking why. It’s easy to shortcut when you get busy explaining ways in the world but it’s very important to try.

When I was at LinkedIn, I had a colleague that was quite, quite talented but occasionally would get annoyed if I did not agree with his opinion on something. So I would spend a lot of time trying to persuade him why I was making a decision a certain way. And his wild card, his card he would call out if I didn’t quite persuade him was, okay you’re the boss. And that to me was like I was burning a lot of social capital. Every time he said that I knew I was creating a really thin line and ultimately that was going to backfire if I did that too often. You want to track the times that you are doing that.

An example of this is at Square, one of my favorite people in the world and my second hire, first marketing hire, had this program he wanted to run called Inner Square which allowed Square merchants to give out, imagine a food truck outside put out ten Squares on the counter and people could just grab them. And Kyle had this great idea that this would be an awesome marketing program. Squares would spread Squares to other people and to some extent it was on brand. So it didn’t have catastrophic consequences. Each of these ten Squares didn’t cost that much money, so financially we could afford to do it. But at that time, my ten years of experience said it was not going to work on a meaningful enough scale for our metrics and I preferred not to do it. Kyle was so excited about this that I decided to just let him do it. He learned that when you measure this thing, it’s not massive. It doesn’t create massive value for the company. It did require a fair amount of operational complexity to ship all these Squares to people and figure out how to get them, etc, etc. But it allowed him to be excited about his job and to learn how to filter future ideas. So it was totally worth letting him make the “Mistake.”

The next and most important thing you do is edit the team. So these are the people you work with. Nobody is going to have a perfect team and you certainly aren’t going to start that way. So what I am going to try to do is maximize the probability of success in editing the team. So I like this idea of barrels and ammunition. Most companies, when they get into hiring mode, as Sam pointed out you should defer that a bit, but when you do just hire a lot of people, you expect that when you add more people your horsepower or your velocity of shipping things is going to increase. Turns out it doesn’t work that way. When you hire more engineers you don’t get that much more done. You actually sometimes get less done. You hire more designers, you definitely don’t get more done, you get less done in a day.

The reason why is because most great people actually are ammunition. But what you need in your company are barrels. And you can only shoot through the unique barrels that you have. That’s how the velocity of your company improves is having barrels. Then you stock them with ammunition, then you can do a lot. You go from one barrel company, which is mostly how you start, to a two-barrel company and you get twice as many things done in a day, per week, per quarter. If you go to three barrels, great. If you go to four barrels, awesome. Barrels are very difficult to find. But when you have them, give them lots of equity. Promote them, take them to dinner every week, because they are virtually irreplaceable because they are also very culturally specific. So a barrel at one company may not be a barrel at another company.

One of the ways, the definition of a barrel is, they can take an idea from conception and take it all the way to shipping and bring people with them. And that’s a very cultural skill set. Two questions are probably occurring to you. How can you tell who is a barrel and who is not? One is you start with a very small set of responsibilities, it can be very trivial. It can be something like, I want to reward the engineers in my office at nine o’clock every night with a nice cold, fresh smoothie. This is actually a real example. I was frustrated, our engineers were working really hard, and maybe 20%, 30% would stay late in the evening and we had already served them dinner but I wanted to give them something cool to reward them. You can think about alcohol but that’s a little complicated. So smoothies were probably a little bit better than pizza, which drains you of energy. But nobody could get smoothies to show up in my office at nine o’clock sharp, that was cold, that tasted good, and that was delivered in the right place that the engineers would find them.

You would think this is simple but in fact, it took two months to get this done. So we had an intern start, and I think on his second day I was explaining this problem, and he said, well I will do it. And I was looking at him like there was no way. I have seen my office manager fail, my assistant fails, who was actually pretty good. This just isn’t going to happen. And low and behold they show up. On-time, cold, delivered at the right place, and my first instinct was great. Nothing about the smoothies, but now I can actually give him something more important that is more complicated to do.

And that’s actually what you want to do with every since employee, every single day is expand the scope of responsibilities until it breaks. And it will break, everybody, I couldn’t run the world, everybody has some level of complexity that they can handle. And what you want to do is keep expanding it until you see where it breaks and that’s the role they should stay in. That level of sophistication. But some people will surprise you. There will be some people that you do not expect. With different backgrounds, without a lot of experience that can just handle enormously complicated tasks. So keep testing that and pushing the envelope. The other signal to look for is once you’ve hired someone, with an open office, just watch who goes up to other people’s desks. Particularly, people, they don’t report to. If someone keeps going to some individual employees desk and they don’t report them, it’s a sign that they believe that person can help them. So if you see that consistently, those are your barrels. Just promote them, give them as much opportunity as you can.

The other question everybody asks about people is when do you hire somebody above somebody. And when do you mentor somebody, and when do you replace somebody? And the way to think about this is that every company has its own growth rate, and every individual has its own growth rate. So some companies that are very successful, let’s say LinkedIn. LinkedIn was always a very linear company, it never went like this. So, for example, I joined LinkedIn 18 months after we launched and we only had 1.5 million users. Which for a social product is a very small number. And when I joined I was the twenty-seventh employee, and when I left two and a half years later they only had fifty-seven employees. In contrast, when I joined Square as the twentieth employee, two and a half years later we had two hundred fifty-three employees.

So each company has it’s own velocity on this curve. So if the company is going like this, you can only keep people on the roles if their own learning curve is going like this. On the other hand, if your learning curve is like this, anyone learning faster than that, you can give them the same roles as they do. So always track the individual slope of employee and the company growth rate. Now that you have your barrels figured out, and you can identify people who can take ideas that you have in the back of your head, scope it out, run with it, ship it, and it’s perfect. Where do you aim these barrels?

So I am going to argue that you need to spend a lot of time focusing on people. This is something I learned from Peter Thiel actually. He used to insist at PayPal that every single person could only do exactly one thing. And we all rebelled, every single person in the company rebelled to this idea. Because it’s so unnatural, it’s so different than other companies where people wanted to do multiple things, especially as you get more senior, you definitely want to do more things and you feel insulted to be asked to do just one thing.

Peter would enforce this pretty strictly. He would say, I will not talk to you about anything else besides than this one thing I assigned you. I don’t want to hear about how great you are doing over here, just shut up, and Peter would run away. And then focus until you conquer this one problem. And the insight behind this is that most people will solve problems that they understand how to solve. Roughly speaking, they will solve B+ problems instead of A+ problems. A+ problems are high impact problems for your company but they are difficult. You don’t wake up in the morning with a solution, so you tend to procrastinate them. So imagine you wake up in the morning and create a list of things to do today, there’s usually the A+ one on the top of the list, but you never get around to it. And so you solve the second and third. Then you have a company of over a hundred people so it cascades. You have a company that is always solving B+ things which does mean you grow, which does mean you add value, but you never really create that breakthrough idea. No one is spending 100% of their time banging their head against the wall every day until they solve it. So I highly recommend some version of that. You can be less stringent, you can give people three things to work on, but I would still track the concept of what would happen if you only gave everybody one thing to prioritize.

You don’t want to be making all these decisions yourself. You have to create tools that enable people to make decisions at the same level you would make them yourself. So how do you create scale and leverage? The first thing I would recommend is to build a dashboard. This is an old Square dashboard, it looks pretty presentable even today. The construct of the dashboard should be drafted by the founder. You need to simplify the value proposition in the company’s metrics for success on a whiteboard. You can have other people build the dashboard, I don’t care about that. But you need to draw it out. Like what does business success look to us and key inputs to those and then have someone create something that is very intuitive for every single person in the company, including customer support to use. And then, the key metric of whether you succeed is what fraction of your employees use that dashboard every day? If it’s actually useful, it should be close to 100%. It’s not going to be probably 100% but you want to measure that. Just like you have quality scores for your other KPI’s with users, your dashboard needs to be as intuitive as your product is for users.

Another concept is transparency. Transparency people talk a lot about, it’s a goal everybody ascribes to but when push comes to shove, very few people actually adhere to it. So let me walk through a little bit of transparency and different stages of transparency. Metrics are the first step. So everyone in your company should have access to what’s going on. Other things I like to do, is to take your board decks. As you get more formal, the board decks will get more complicated. And actually review every single slide with every single employee after the board meeting. You can strip out the compensation information if you really want to. But every other slide you should go through with every single employee and explain it. If you can remember some of the feedback you got from your board that is really cool to pass on.

Another thing we did at Square is when we scaled, not everybody is going to get invited to every meeting, but they are going to want to go to every meeting. The way you scale that is you create notes for every meeting and you send them to the entire company. So we created notes at least for every single meeting that involved more than two people, somebody would write notes and send it to the entire company. So everyone felt that as the company added employees, they continued to track what was interesting, what was going on. And they never felt excluded, hopefully. Another thing is, even details around conference rooms. Every conference room at Square has glass walls. Because as soon as you have regular walls, people wonder what’s going on. It’s amazing, if they can see who exactly is in the meeting and who is meeting with who when, they don’t start to worry nearly as much as about what’s going on behind those closed doors.

Stripe, you may have seen a blog post about, I think Patrick wrote it, about email transparency, about actually allowing everyone to have access to email. That’s pretty far out there but it has certain merits to it. I would call all the tactics you hear and read about as minimal viable transparency. I actually think you could push the envelope a lot more. Steve Jobs actually tried this at Next, he actually tried transparent compensation. I actually think that even though Next didn’t do extremely well, the real reason wasn’t around experimenting with compensation in transparency. There is a lot of merit to that. The critique of compensation transparency is, well we want people to be teammates and work together and collaborate. And if you look in the sports world where people are teammates and collaborate, all of their compensation is actually public. In fact, any one of us can look up one of their compensations in the sports world to get it exactly accurate. And somehow it seems to work. So I am not completely bought into that you need to keep compensation non-transparent.

And finally, metrics. So you want to measure things. You want to measure outputs, not inputs. And again, you should dictate this yourself. You should draft the dashboard yourself to tie this all together. One important concept is pairing indicators. Which is, if you measure one thing and only one thing, the company tends not to optimize to that. And often at the expense of something that is important. Cost is example of payments and financial services is risk. It’s really easy to give the risk team the objective and say, we want to lower our fraud rate. It sounds great. Until they start treating every user in this audience as a suspect because they want to lower the fraud rate. So they require each of you to call them up on the phone and give them more supplemental information and fax in things. Then you have the lowest fraud rate in the world, you also have the lowest level of customer satisfaction score.

What you want to measure at the same rate as your fraud rate, is your false positive rate. That forces the team to actually innovate. Similarly, you can give recruiters metrics around hiring. And guess what? You will have a lot of people come in for interviews. But if you are not tracking the quality of interviewers, you may be very unhappy about the quality of people you are hiring and giving interviews to. So you always want to create the opposite and measure both. And the people responsible for that team need to be measured on both.

Finally around metrics. One insight I have had over my career is what you, you kind of want to look for the anomalies. You don’t actually want to look for the expected behavior. So a famous example was at PayPal. None of the top ten markets that the company was planning on going after included eBay. One day, someone noticed that 54 of the sellers actually handwritten into their eBay listings, please pay me with Paypal and brought this to the attention of the executive team at the time. The first reaction from the executive team was, what the hell is going on? Let’s get them out of the system, that is not the focus. Fortunately, David Sacks came back the next day and said, I think we found our market. Let’s actually build tools for these power sellers instead of forcing them to write into their listing, pay me with PayPal. Why don’t we just have an HTML button that they can just insert? And that actually worked. Then he thought, why should we have them insert it each time? Why don’t we just automatically insert it for them? They can just insert it once, then every listing they have forever will have it automagically appear there. So that became the success for PayPal. Similarly I was at LinkedIn and I saw this stat that made no sense to me. The UI of the site was a little different then. 25% of all clicks, maybe 35% of all clicks from the homepage were people going to their own profile. And that didn’t make any sense whatsoever. It was in the settings, you had to go to the margin and find a link. It was 25-35% of every click at scale, so this is just invalid stuff. And it made no sense whatsoever. I had never seen UI perform that way.

I went around for weeks trying to figure this out, then someone smart, actually it was Max Levchin, said something to me and I was like, he was like, it’s vanity. I was like, ah ha! People are looking at themselves in the mirror. Thats a very good answer, because they weren’t editing their profile. Nobody has something to edit everyday in their profile. But they were just looking at themselves in the mirror every day because it made them feel good. Then you could test that with, if I had more content would I look at myself in the mirror more often? It turns out, you did. If you had more endorsements would you look at yourself more in the mirror? You did. So we figured out what was underneath the utilitarian product, the product the team thought they were building was actually more emotional vanity. It didn’t actually translate to the best feature like the Paypal example. We couldn’t exactly put a button up that said, be more vain today on the homepage. That probably would not work perfectly. So it really never really took off like the Paypal example did. But it really clarified what users of the product really wanted. And we wouldn’t have found that if we hadn’t looked through anomalous data.

The final topic I want to talk about is details. And in my assigned reading there is a great book by Bill Walsh, called The Score Takes Care of Itself. And the basic point of the book is that if you get all the details right, you don’t worry about how to build a billion dollar business, you don’t worry about how to have a billion dollars in revenue, you don’t worry about having a billion users. Thats a byproduct of what you do everyday to get the details excellent. So the topics that he talks about in the book that really resonated with me was, he took over the 49ers in 1979. They were the worse team in football, I believe they were 2 in 14 which is really bad if you don’t know football. In the next ten years he transformed the team into NFL’s best, won three super bowls. And what’s the first thing he did to go from the worse team to one of the best in many ways? He actually taught the receptionist to answer the phone properly. He wrote a three page memo on how to answer the phone.

And that may sound absurd but what his point was organization as a whole does everything exactly the right way. Then receivers will start running their routes at 7 yards not 8 yards. And that actually will matter. And if every person on the team executes to the same level of performance, you will have a team that is performing at the highest possible level. And at the highest performance level, the team will play at their best. So how to relate this to a company may include a lot of details that do not matter, not seem that they matter superficially. Most people would agree that details matter when faced with the user. But what the real debate it is on things that don’t face the use. Steve Jobs famously in the Mac, insisted upon an immaculate circuit board, you can read about this in various books. The Mac, for those of you who don’t remember the Mac. Maybe most of you here, but may have seen it. It couldn’t be opened. So the circuit board couldn’t be seen by any person in the world. There was no way to open the Mac except by the people that worked at Apple.

Steve insisted that it be absolutely perfect and beautiful. That is the sort of detail obsession that building this sort of company requires. Examples that may be a bit more practical for you instead of circuit boards may be, what sort of foods do you serve people? It actually matters more than you might guess. When people don’t like the food you serve them, what do they do? They go gossip, they go complain to their friends, they walk over to someones desk. Then all of a sudden that lunch that they are complaining about is what they are spending most of their time gossiping and complaining instead of brainstorming. You don’t have this serendipities idea matching another serendipities idea that creates a spark instead they are all wallowing and whittling around. The best thing you can do is give people the food they want or the food thats good for them that makes them more productive. So it may seem like this glorious job you thought you had is more like running around being a TaskRabbit for people. But it is to take things off their plate that is a distraction so they can be high performance machines. And if you take enough things away from people to distract them and give them the tools to be successful, all of a sudden your organization produces a lot more.

Similarly, often one that people get wrong is office space. So one natural thing is when you need an office to have an office manager of your team go out and find offices. And they will go out and come back with photos and ideas. You need to do that yourself. The office environment that people work in everyday dictates the culture that you are going to be in. And the final thing, then I am going to take some questions, is around effort.

Ultimately I don’t believe you can create a company without a lot of effort and that you need to lead by example. So Bill Walsh, in the first chapter of his book, he asks this question, how do you know you are doing the job? And this is the quote that he gave everyone when asked that question. So if this is how you feel everyday then you’re probably on the right track. If it doesn’t sound appetizing then you shouldn’t start a business truthfully. And with that I am done with the prepared part and I will see if anyone has any questions that I can try to be helpful with.

Q: So you talked about making compensation transparent. How would you do that, especially when people equate themselves to the value of how much their salary is?

A: I would do it probably in bands. You can do it, just everybody in the company gets paid the same. Or you could have all discipline, all engineers– Or you could do it by experience. How Steve did it at Next was there was a high band and a low band. You either had a lot of experience or a low experience and that was it. So low band, now would be about $85,000 flat. Everyone flatly gets paid $85,000, if you are a supervisor with experience everybody gets paid $130,000 and that’s just it. Sort of the Next translated for inflation.

Q: So the question is, besides food, what sort of details do others care about?

A: The laptops they use. This is just a default everybody has. Five years ago it was a benefit to get people high powered machines as opposed to optimizing our cost by having Dell Machines and ugly monitors, just as an example. If you think about all these people who are relentlessly resourceful and equally talented in a mass competitive ecosystem competing for talent, you learn to give people the best possible tools to do the best possible job. So rigorously asking, how do I make people more successful, what things do they not need to be working on, or distracting. And what things can I give them to make them more valuable per day? Then just break that down per day and solve that stuff yourself.

Q: When you are in a startup environment, resources are scarce. How do you optimize for those things?

A: That’s a good question. First of all I think you must have your own office. I don’t believe ever in shared office spaces. Peter talks a little about this, that every good startup is a cult. And it’s really hard to create a cult if you are sharing space with people. Because a cult means you think you are better than every other startup, you have a special way of doing things that’s better than anyone else in the world. And if you are sharing physical space with others it’s very hard to internalize that. So I would start there. But it is a prioritization question. Everywhere is scarce, so it’s just a question of the magnitude of zeros you are paying attention to. Probably not $10 expenditure, but $100, $1000, $10,000, then $1 million starts being a rounding error.

So I would figure out is what is the most important, a quality office that creates a good vibe that allows you to recruit people. Because recruits are very savvy about this. They walk into your office and they can tell a lot about the culture instantly. I can walk into a company office and I can tell whether or not I am going to invest as soon as I walk in. Seriously, I just absolutely rule things out that I don’t want to invest in as soon as I walk in. And there’s times I walk in an office, like wow this is really impressive. You can tell how people work together, how hard they are working, how distracted they are. Roelof Botha at Sequoia made a point to me about YouTube. So when I invested in YouTube in the very very beginning, it wasn’t obviously going to be successful. Then Roelof led this series A Investment for this client on YouTube and we were at a board meeting together and he said, I really think Youtube is going to work. I said, Why? And he said, every time I go to one of my portfolios companies half the office is watching Youtube during their lunch. I was like, really good sign. And so you pick up on these little things and you can predict a lot.

A: What do you think is the best way of getting street credit as a new manager?

Q: Oh boy. Almost all good managers in Silicon Valley are promoted because of their individual performance. In cultures that are bureaucratic the percentage is even higher. So we tried in PayPal to only promote people who were kicking ass at their discipline. Peter didn’t believe in general managers. In fact I remember going for a job around campus with him my first week of PayPal. He was asking me how things were going, other kinds of CEO questions. Then we got in this debate about whether the company needed any more managers. He was like, nope. No managers. We are only going to promote people, so the VP in engineering is going to be the single best engineer. The VP of design is going to be the single best designer. The VP of product, is going to be the single best product person. And they are going to learn to manage later. The advantage of that is you don’t demoralize people. Because everyone knows their boss is actually better at their job than they are. And they can learn stuff. And you can learn a little bit of the management techniques later, as opposed to promoting people who are just good people managers that don’t have the discipline and skill.

That demoralizes people, so I think just being excellent at something and then being excellent at getting a bunch of people to do something is the next task. But people, some things you just have to learn by doing. Some people can’t learn to play the guitar by reading a book. You have to actually try to manage a bit and you won’t do well at first. I have another set of tactics and classes on what you actually do when you transition from an individual to a manager. It’s hard. One of the first things people don’t get right right away is their timing allocation. Actually, what I would recommend is doing what I call a calendar audit. And track what you spend your time on in a month. How much is editing, how much is writing, etc. And optimize it over time. You can get a mentor. Find someone who’s been a manager before that will work with you. Not your boss, because your boss has a set of complicated objectives including how much are we shipping. A mentor can just focus on you and making you more successful.

Q: What are some things you can do to ensure a consistent voice in the company?

A: So I would look at every piece of copy in every department. Another part that is hardly ever, look at your recruiting website. It almost never has the same quality as your conversion funnel. I would look at customer support. Another classic area that is never up to the same quality. Treat customer support as a product so you actually have an engineering team and a design team that over time focuses on making that world class. Usually we have other executives at a scaled company. Most executives were trained differently at other companies and bring that with them. You have to crosstrain that. So if you hired a VP of engineering of Google its very different than a Design Leader from Apple. They don’t actually learn anything the same way. So you are going to have to stitch that together somehow. Either one or the other is going to have to learn the other style. Or you are going to have to create your own style and really teach that to your executives. So it shows up all the time. All you have to do is pick up the company’s products and look for things that have a different voice and you can see it, visual voice, word choice, all over the map.

Sam Altman: Can you talk a little about the tactics of how you manage people? How often do you meet with them?

A: So the canonical advice sounds obvious but was radical back in 1982 when Andy wrote his book, is to have a one on one roughly every two weeks. Some people say every week, but I wouldn’t go longer than two weeks. Every week can be ideal in many companies. The reason why there is another adage, you should only have five to seven direct reports. That actually derives on the concept of having a one on one every week. The director reports is so you can fit enough one on ones in your calendar a week and get other things done. I think one on ones once a week is ideal. I think the agenda should be crafted by the employee that reports the manager, not the manager. The one on one is mostly to benefit the employee. They should walk in with, these are the three things I want to talk about. Even bullet points in advance by email so you have time to chew on it, and you’re not on the fly winging your answers. But that’s probably the best structure. But if someone is really good and been doing this a long time and has internal credibility you might push out the one every week to once every two weeks. Maybe every month. I don’t know that I would go beyond once a month ever.

Q: When is it acceptable to compromise and hire someone that is ammunition instead of someone who is barrel?

A: Truthfully you are going to hire more ammunition, naturally, than barrels. So there is a ratio between the two. The question is the ratio. At some point the ratio is going to get out of whack, you will have only one barrel in the company and fifty engineers. You might as well have ten engineers because you are not going to get any work done. You are just wasting resources. You are going to frustrate engineers because everyone is going to need your approval. Your signoff. Your editing. It’s just going to stack and get frustrating to people. I think roughly one, to ten, to twenty is the right range. You don’t need more engineers until you have more barrels. Designers are a little different. But you are always going to be hiring more ammunition than barrels. A good barrel will have a feel for that. One way to correct for this is, there is this natural tendency to create headcount on your team. Like an empire-building tendency. Like I manage twenty people and Sam only manages ten and you manage three. So I’m more important than Sam. And Sam is more important than you. Put an X here, over Y which equals the output, and specify how many things they have done successfully and then divide by the number of people on their team. And tell them this is going to be the grade for their performance review. Shockingly the Y doesn’t start increasing on that team. It’s amazing how this works and be explicit about it.

Q: How often, as a venture capitalist, do you meet and interact with your companies?

A: When we invest, we do some seed companies where we invest less money, but when we invest in a Series A or B round, we join the board and roughly I meet with the founder or CEO every two weeks. That’s the default. Obviously there are inflection moments when things go right or wrong and then it’s on an ad hoc basis. Actually right now I do a lot by text message. I even have one CEO who Snapchats me all the time. Which I would actually rather he not, but the world has changed a lot. But I try in-person meetings every two weeks.

Q: In-audible

A: No. Being a venture capitalist to me is like being more of a psychologist. So if you come to my office we have two chairs with a table in the middle. And we sit down and it’s like, Tell me your problems. My response is usually, have you thought about this? Have you talked to this person? Have you tried this? Etc. It’s just asking a lot of questions and going back like that. But that’s 90% of what I do.

Q: In-audible

A: Well it depends on where your prioritizations are. Sam talked a little about this in his lecture. So a company will move to recruit first, second, or third. Somewhere in that spectrum. If it’s your number one priority then 25% is probably a good allocation. Actually I like the calendar audit more for CEOs even more so than new managers. So when I work with CEOs that aren’t thriving in that role for the first time, I actually force them to show my their calendar. Now I am going to ruin this trick. But I ask them to write them out on paper and specify whatever they are. Then I ask them to pull out their calendar and see if it matches. And it never matches. Never. Recruiting is the one that is usually the most often awry. Half the CEOs will say recruiting is their number one priority. It’s almost never the biggest block of time on anyone’s calendar. So that is what you are trying to do is match resources to priorities in the calendar audit. And there is no software that does this really well for you. It would be great, right now we pull up someone’s Google calendar and hand count up the hours. Which is insane. But that is the best way, just ask about their priorities. Priorities are raising money, you don’t want to allocate most of your time recruiting. One more question.

Q: On the surface some of this advice is contradictory. How do you harmonize those roles?

A: It’s a good question. How do you harmonize when details really matter, but you’ve got that one thing to do, you want to only allocate time to that one, two, or three things. How do you put those things together? There is some tension even in a healthy organization. There is some tension of why are we focused on writing the script as opposed to something the user may see.

The underlying philosophy of getting the details right is pretty important to install in the very very beginning of a company. Because people will start acting that way and making decisions that way themselves. So you won’t have to literally do that. If you have to actually do that then that shows the foundation isn’t that solid. When you first start the company it’s about getting the details right. Everyone is precise, everyone on every task is always thinking that way. And then that scales, the people you bring in will think that way, the people that think that way will tend to get hired and those who can’t won’t get hired. Each team and each leader will tend to enforce that themselves. So the CEO is almost never doing it. So it’s partially how do you start. And the key to culture is it’s a framework for making decisions. And if it’s baked into your culture, people learn how to make decisions across that culture without you ever saying anything. You never have to really do anything except watch and promote and move people around.

Cool. Well, I guess that’s it.

Thank you.

Building for the Enterprise

Can we keep playing, yeah.

[Eye of the Tiger starts]

Can we turn it up a little bit so it has more pump up? Okay, there we go. Okay. Guys, we have to find the beat then clap to the beat. Okay, please stop the music. Please put on the presentation. Thank you. That will be about the most pumped up thing that happens in enterprise software. The rest is downhill from here. Thank you for that well rehearsed intro.

I’m Aaron Levie, CEO and co-founder of Box. Welcome to this edition on how to build an enterprise software company. This is my understanding, this is the course you are taking? Is that correct? No.

So this is my job today. I am going to try and convince you that everyone else that speaks during this whole class is wrong and that you actually want to build an enterprise software company. Hopefully we will be able to work through this and you’ll have a good sense of why it’s super cool to be in enterprise. And why the perceptions of going into the consumer space, why it’s so much fun are wrong, and why you want to go into enterprise software. Who wants to build an enterprise software company? Good, alright. Thank you very much. Hopefully we will do a vote at the end and hopefully that will not have shrunk. That’s really the only goal I have today.

So we are going to talk about three things today. The first is the quick background of Box. Because when we first started out, we did not know we wanted to do enterprise software. So I want to go a little bit into why we went after enterprise and what we do today. Then we are going to talk the major factors that changed in enterprise software that make it possible to do a startup today. And finally we are going to look at patterns that are ways to recognize and go build a startup by yourself. Hopefully, that will be some practical, useful advice. Just as a forewarning, my voice, I’ve been speaking a lot the past few days. So hopefully I will be able to get to that third part of advice and make it.

Building for the enterprise, these are high level stats of Box. We have about two hundred forty thousand businesses that use Box, there are over twenty-seven million users that have brought Box into their organization, and ninety-nine percent of Fortune 500s. Actually that one percent is really Microsoft and they don’t seem to want to buy from us. We have to work on that a little bit. A lot of users to bring Box into workplace environments, these are some of the organizations that are using the product. We have a very wide range of industries from manufacturing consumer products to companies like General Electric. Stanford Health Care actually uses the product for collaboration inside the medical department search. Between health care, media, manufacturing, these are some of the range of industries we serve.

So the question is, how did we get here? Because we didn’t start the company to be an enterprise software company even though that is how things ended up happening. We launched the company in 2005, we got the idea back in college which was 2004. Was anybody using the internet back in 2004? Okay great. I didn’t know if millennials used the internet or not, so great. Sorry, okay no more age jokes. Okay here is the point. So back in 2004, you might remember there wasn’t a lot to do back then. It was boring right? This was before Facebook, this is certainly before Snapchat, so before much to do. You couldn’t send people fifteen second messages or photos that disappeared because you didn’t even have phones. So on the internet, in 2004, there wasn’t a lot going on. This is sort of what the internet looked like, a barren deserted landscape. Just to clarify, the happy camel is Google, the sad camel is Yahoo! This is the internet in 2004. Yahoo! has done a lot better since then, but back in the mid 2004, they were trying to find their way. And Google was taking over the world. But this was the extent of the entire world.

So what we noticed in 2004, in college, was for some reason it was really hard to share files. And as simple of an idea as that is now, and you go back ten years. It was either really expensive or really hard to move data around through corporate companies. I had an internship at the time, most of my job using data was to copy printed out papers and put them in cabinets. That’s what you do as an intern if you are not a computer science guy. So I was really really good at copying paper, unfortunately not a skill really used today. But it was really hard to share files. In classroom environments, you were working in large groups, it was also hard to share files. I went to USC, and USC gave you fifty megabytes of storage space. Fifty megabytes, you can basically store one file. Then it would auto delete every six months. So whoever was running IT at the time, they certainly weren’t running hard drives. And so it was really, really hard to store and share files. Well, why don’t we make it easy to store and share files from anywhere?

So we got the idea for, at the time, Box.net. And what we noticed was, there were a lot of factors that changed in the software world. The first was the cost of storage was dropping dramatically. So in our business, basically every year or two you could double the amount of storage and data goes into a hard drive. So what was uneconomical now because feasible. The cost of computing, the cost of storage has dropped. We had more powerful browsers, and networks. Firefox was just emerging. People were using the much faster internet for homes and the classroom. Then people had more locations that they wanted to store and share information with. So we had these three factors that were sort of emerging. So pull these factors back when I give some tactical advice. The first point to remember, always look for the changing technology factors. Every market that has a significant change in underlying were enabling factors was in an environment that was about to change in a very significant way. We were very fortunate in the need for data in the Cloud, was growing in importance. The cost and feasibility. was also not improving rapidly. We decided to put together this really quick version of Box and launched it as Box.net. The idea was, let’s make it really easy to share files. It turned out the idea clicked. We got angel funding from this guy named Mark Cuban. This was before Shark Tank but it was very similar. So we got this funding and thought this was going to be super exciting.

We are going to drop out of college, we are going to move to the Bay area, and it’s going to be awesome. And when you drop out of college, anybody drop out of college yet? Okay, good. Stay in school! When you drop out of college, everyone pictures it like it’s going to be incredible. Bill Gates dropped out of college, it will be like Bill Gates. Or Michael Dell dropped out of college, it will be super exciting like Michael Dell. Steve Jobs dropped out of college, so this is what people imagine, but nobody ever remembers that this guy dropped out of college also.

So it’s not really a guarantee that it’s going to be successful. It’s funny, I don’t even know if this guy dropped out of college. It just seems like he had to. And I apologize if anyone is related to him, it’s just a funny picture on the internet. So basically we decided we would drop out of college, we moved up to first Berkeley, then Palo Alto. We decided we were going to open up the product for free. We got hundreds of thousands of people to sign up for the product every single month. If you go to Box.net you get one free gigabyte of file storage space. Which once again was big back in 2006. But we were getting so many users, we were trying to figure out what to do.

What we ran into was a common problem that, really, any startup runs into. Really pronounced by our business model which was, for consumers we built a very robust, very reliable enterprise. We really brought a really insignificant product. So for consumers, what we were running into was we had all these features you could pay for but a lot of consumers didn’t need all those features. And for enterprises, we really didn’t have enough securities and we didn’t have enough capabilities around how enterprises want to use their data. So we had more than what a consumer needed and not enough that an enterprise needed. So we found ourselves at the juncture. We found ourselves basically in this period where its very difficult to figure out what we wanted to do with the business. So we had to make this choice. We were at this path, where we had to choose which path to go down.

This is back in early, mid 2006 up to late 2006. I was 23 at the time, my cofounder was 22. Our founding team was even younger, we had all dropped out of college. So in 2006, 2007, we imagined these two paths and the worlds were very very different. When you do a consumer startup it’s basically lots of fun. You have parties all the time, it’s just super exciting. Then in the enterprise you are battling these large, it’s a rather thankless model because people just generally hate enterprise software. So that was sort of how we imagined the two paths, was we had to choose one of these two worlds. So we looked at that and thought. Okay consumer looks really fun, enterprise looks really hard and there is a lot of competition. At the same time, in this consumer space you are always fighting this issue of how do you monetize? How do you actually get people to pay for product? In the consumer space there are really only two business models that you can do.

You can either have people pay for your application or you could provide advertising on the application. To give you a little bit of perspective, these are today’s numbers. In the consumer world there are about thirty-five billion spent on mobile apps every year. Pretty big number right? Thirty-five billion dollars. That’s a lot of money being spent on mobile apps today. For advertising, the global digital advertising is $135 billion dollars. So most consumer businesses are going after, if you are not doing e-commerce, are going after about $170 billion dollars of either purchasing power on applications or global advertising around these types of services. So big number, a lot of opportunity there.

However, in the enterprise there are $3.7 trillion on enterprise IT every single year. These are the servers, the infrastructure, the software, the networking, the services. All of that stack of technology equates to a few trillion spent every year. What we realized was there was a rather wide delta between these two markets. We are going to be fighting to get consumers to pay a few dollars a month. And Google, Microsoft, and Apple will try to make this product free over time. And there were rumors that google drive was coming out. And all these products that were going to happen, are coming out. But in enterprise, its not about them trying to save money on IT.They are either trying to increase productivity, they are trying to increase business. So the value equation is very different. So the consumer, we have limited amount of money that we wish to conserve for as few things as possible that we are going to spend. On the enterprise it’s a little bit of a shift, actually what can I get out of technology? How much value is that for me? So that was a really important data point.

However, the problem was that enterprise software was very unsexy right? Very competitive, very hard to build a business. It wasn’t something you shot out of bed in the morning saying, I’m super excited to build an enterprise software company. And the reason for that was actually very straight forward at the time. The way that you built software was very slow. It was very slow because you couldn’t break anything for customers, the sales process was very slow because customers take a long time to purchase technology. So I think everyone is used to this philosophy that when you are trying to sell enterprise software, it could take up to years for them to actually just buy the software. Then it could take even more years for them to implement the technology in the first place. So a lot of companies are around for years without their technology even used in the first place.

That felt like a huge problem, and not something that we wanted to be a part of. The technology itself is complex, I don’t know how many people have had to use enterprise software but it’s generally really complicated. You try to figure out, why in God’s creation did a designer try to put forty-seven buttons on one page. You just can’t even understand it and the reason is something we will get into in a second. But basically there is just no love or care for the design or user service. The software is just complex. And finally, if that wasn’t bad enough, you have to figure out how you are going to sell this software. For anyone who loves the power of the internet, this notion of having a sales intermediary to get to your customer, seemed really unappealing. You have to hire a bunch of people, who are going to be in every country, they are going to be the only interface you have to your customer. You hire this guy named Chuck, and Chuck is going to roll in with a brief case and he is going to try to sell lots of enterprise software to the customer. Just so we are clear, this is what Chuck looks like. And that was the sale process that you, in the enterprise at least, that we imagined in our head. Chuck looks like a happy guy, but he is still an intermediary to getting your software. Well why cant use the power of to internet and get our technology out here that way?

Why should we have to go through this sales intermediary as we scale up the business? I will get into it in a minute why we were wrong about the sales business. But this was sort of the fear that we had. And if that wasn’t hard enough, we had investors saying, in 2007, basically there is no way you are going to make it in enterprise. You again, are basically a founding team of 20 year olds. You don’t have anyone on your team that has been in an enterprise. Microsoft, Oracle, IBM, these companies are going to stomp on you. This is going to be very very hard to succeed. And to be fair they were right on several areas. We were a very inexperienced team. We were still very early in our careers. Our co-founder, for instance, looked like he was 13 years old. Just to be clear on what he looked like. So it sort of made sense right? This is him as our CFO, I think this is him at 29. But it looked like we were going to run off with the money and go to Disneyland. I appreciate why they didn’t think we could pull it off. I can’t imagine giving him money.

So, we decided that we still have to go do it. We have to give this our best shot. We are going to take the scale, the consumer experience, the DNA of our company and we are going to see if we can bring this into the enterprise. We were really fortunate. We had an investor, early in his career, make a belief on us because there was something changing with the enterprise that we would be able to take advantage of. We decided, if we are going to do the enterprise, if we were going to go after the enterprise, we were going to have to play with a very different set of rules. So what about the complexity of software can change in this era? What about the sales process is very slow can change in this new era? How do we move and go directly to the user the customer, instead of having this really indirect process at getting our technology out there? How do we build a design for the user instead of just for the RFP process that a customer is going to go through? So we looked at all of the factors that are true with the enterprise and we are going to do, not in all cases, the opposite. We are going to find what has changed in the technology world that we can build a newer, and better software company. That was the decision we embarked on, the path we embarked on 8 years ago. And that is why we have been focused on enterprise.

Today, again we have about two hundred and forty thousand businesses using the product. And the reason is we architected the business model, we architected the software, we architected the solution to work in one specific version of the world, and it turned out that one solution was the one that happened. And I will go a little bit into what has changed in the world that we sort of built our company around. And what I would highly recommend to you, if you are building an enterprise software company to orient to your technology. So that was sort of why we made the decision, how we started to take on the problem.

So everything about enterprise, and by definition the software that the enterprise uses, has changed just in the past 5 years. If there ever was a magical time to build an enterprise software company, now is that time in terms of how much has changed in what is going on with organizations. Lets go over a couple of these things. The first is that most application companies are moving to the cloud. And the biggest thing is, if you are going to start a business management company, or a business intelligence company, even a contact management company years ago you had to have you idea implemented in every single customer location. No matter how many customers you sold to, no matter what region you were in, every customer had to put that in their datacenter. That was the flaw with on premise computing. You were doing all this work, you were creating so much redundancy, it was the slowing down the whole process of delivering and building software for the enterprise. All of a sudden the cloud came around, things like Sales Source. com, things like Amazon Web Services, basically said. Why is it that every customer that wants to implement a couple servers, have to implement servers, put them in their data server, but security or networking around them, six months later they go live and a developer can use them in the organization, same thing with an application? They said, why does that make any sense today? We could just put together tens of thousands of servers, put them on demand, and you can use whatever you want, when you want and we can do that. That obviously is the definition of Cloud Computing. What’s happening is CIO’s and large enterprises are taking advantage of this. So it seems obvious to everyone in this room because you would never build your company by buying your own servers. You would start is on google, yahoo, or ashore rather. But to an enterprise there are decades of infrastructure that now has to move to that cloud. So thats a massive shift that is actually happening.

We are moving to a world of cheaper, on demand computing from a world of expensive computing. The benefit of starting a startup is the customers don’t have the same friction,, they are going to go and adopt new technology. As soon as the computing becomes cheaper, its easier to adopt new solutions. Which means, their barrier for showing you in–the barrier is a lot lower which is great for startups. We are going from a world of customized platforms to standardize softwares. It use to be that you had to build all the customizations, all the customer experiences on top of the software itself and now customers are realizing that they won’t open platforms and they can customize a layer on top of the product. It use to be that when you started an enterprise software, you could only sell to the top five or ten thousand companies in the world. Because only those companies had the wear with all, the talent, the infostructure, and the budget to employ you technology into the enterprise .Today, literally a two person company can sign up for box, as well as we work with General Electric who has over 300 thousand employees. So the fact that you can now serve a small business anywhere in the world, as well as some of the largest on the planet means there are much larger markets you can go after. Which makes it an even better economical proposition to go after the enterprise. The platforms themselves are becoming more global. Our customers were internationally a couple weeks after starting the company. If you would have done enterprise the traditional way that would have take years to actually be able to go internally.

And finally, the most profound shift of all, mobile devices. iPhones, iPads, Androids, Tablets, IT of these models have become a lot more user led. It’s fundamentally important. In an IT world, incumbents generally win because they have the existing relationship with the IT organization, with the CIO, with the spending power of that company. In a user lead model, users are bringing in their own technology. They’re bring it in in the sales team, they are bringing it in in the marketing team, they are brining it in in finance and you can build software around that user. Which means they can bring the enterprise in and you can sell to the enterprise when they want to have better control, better security, better scalability.

So you still have the same model as a business software company but the way to get into the company now is through the end user. So those are quantitative factory changes. Just a couple quantitative changes, there is over nearly 2 billion smart phones on the planet. That changes every single IT model planet. Because it use to be 10 years ago, if you were managing technology for the company, you just had to manage the computers network that was inside your building. But now with billions of smart phones you have to manage ways of computing anywhere at any time on any network. And that becomes big in software companies, because no incumbent has built a technology stack that powers this line of work and how enterprises are using their data. So that creates a massive start up opportunity.

There are nearly 3 billion people online. That means that every single enterprise is changing how they are going to give their own products to their customers. Which means that every industry changes. There are only two times, two moments of opportunity where a technology revolution will happen in an enterprise. The first is where raw materials change. So cost of computing goes down and they centralize and let people use it on demand. The second thing that can change, is the very people that these enterprises have to go after need new experiences at that enterprises product. Let me give you an example. If you go off campus you probably use something like Uber or Lyft. If you are in the shipping business, if you are in the transportation business, Uber represents a massive change to your industry. So you can’t let Uber exist without understanding, what are the implications of Uber? What are the implications of Instacart? What are the implications of Lyft to my business model?

So in a world where enterprises are dealing with that kind of change, you are going to need new technology to help them create their business models, how they adapt to this disruption. This is why it’s such an amazing time to even start vertical software companies for industries. Right now every single industry is going through a business model and technology orientated disruption. Means they are going to need technology from start ups to help them work through this. I will give you a couple of examples: so in the retail industry there’s this vision of omni channel or multichannel commerce. You are going to shop online, you are going to shop on your phone, you are going to shop in a store, and you want things to be delivered to you as well. So most of the incumbent technology does not power multichannel commerce. No one is prepared, what does it mean when consumers want to go buy goods anytime from anywhere with better information, better intelligence. So every retailer in the world is going to need a new technology stack to power their retail experiences.

In the healthcare space, every single health care institution is trying to find ways of building more personalized experiences, more predictive experiences, they want to have medicine be adapted to the individual. As the business model of healthcare changes to being about the surgery, charging for the check up, and instead, really where the customer pays for the wellness and staying healthy. Then all of a sudden every healthcare institution needs technology to deliver health care experiences. They are going to want to deliver telemedicine. They are going to want to deliver health care in more regional locations instead of just in the monolithic hospital environment. There are going to be new use cases coming around. How are our healthcare providers get connected to one another so one doctor can make better decisions? All of these things are going to require new enterprise software to power these businesses and industries.

In the media space, as an example, you have a world where the industry is going from really linear programming, whether that’s television or that’s music or that’s movies, it’s a linear supply chain oriented business model, when a film gets made, it goes to the theater for 3 months, then afterwards it goes to iTunes or other platforms, to a world where people want experiences on demand. So that’s going to change how distribution works on a scale of 3 billion people on the internet, and again no media network has a platform that is actually going to power how content, data, and information moves to this system at scale. I was just in LA yesterday, meeting with a media company that has basically done predictive analytics to find their potential moviegoers in the middle of 3 billion users. They want to be hyper targeted on how to get to the specific 3 billion fans that are into a certain film types. And so all of a sudden you have a movie company who needs big data and they need business intelligence and marketing in order to go and market and distribute.

This is where two industries come together, where all new software is going to be necessary. So every industry is going through some form of this change. You can take any industry you want and zoom into it and say, what are the underlying technology factors that are going to change the business model for the next couple of years? And then there is going to need to be software to power those types of experiences. Think of the future of water, who is going to power that? That’s going to need software, I’m sure.

So basically every company in the world, the great thing about being at Stanford is we study the technology. And we think of the technology industry as an industry. But in reality what is happening, is every industry is going to have a technology component of what they do. Enterprises are not going to be able to survive in the future if they do not get good at technology. If they don’t have competency at leveraging data and using these new tools. But they are going to do that by working with what we call the technology industry.

Instead of everyone else building out in these expertise for themselves. So there’s going to be a lot of partnership over the next five to ten years where companies are going to need technology to work smarter, to work faster, they are going to need to do this more securely. And this is not only going to change how individuals work in these environments but ultimately change the business models of these companies. So that was chapter two of this.

Now I’ll give you some practical advice to help you get started. To be fair, most of this advice is looking through the lens of retrospect which means this is not how this is going to happen, but I can look back through time and say that these are the things that led this to be true. It’s hard to be deterministic about building a company. You may not have all these things figured out, but this will give you a sense of pattern to recognize as you are building or thinking about building an enterprise software company.

So the first one is spot technology disruptions. This is going to be true whether you are building consumer or enterprise. The rest are more enterprise, but this is just fundamental if you are going to build a tech company. You have to look for new enabling technologies, or major trends, like fundamental trends, that create a wide gap between how things are done and how they can be done. Looking back in time to our business, the gap was basically storage was getting cheaper, internet was getting faster, browsers where getting better yet we are still sharing files with this very complicated, very cumbersome means. Anytime, between the delta of what is possible, and how things work today is at its widest. That is an opportunity to build new technology to go solve a problem. As you are looking at the enterprise, the question is, what about the cost of computing dropping so rapidly changes what enterprises can do with their data?

What does it do to change from a business standpoint? What was impossible, because of either economic feasibility or technical feasibility that 10-15 years ago is now possible. A fun thing to do every now and then, if you find a newspaper article from the 1990’s or 1980’s, business articles about technology, all we are really doing is repeating all the technologies we tried 10, 20, 30 years ago. It was too expensive, too unusable, and we didn’t have the enabling technologies to make it possible. You can see this concept emerge, something that was impossible 5, 10 years ago is now very practical. I will give you an example. There is a company called PlanGrid, does anyone know what PlanGrid does? Okay, cool. Are you in the construction industry? You are? Oh my god! What does that even mean?

Q: PlanGrid? Or construction?

Aaron Levie: Construction.

Q: I work at a job site, we build buildings.

Aaron Levie: Holy crap, that’s great. Basically PlanGrid is a mobile application that lets you manage construction projects, lets you access your blueprints, lets you manage all the data around a construction process. And what this company realized is, 4 billion dollars, I think, are spent every year printing out blueprints. And they have all the prints and updates to them anytime there a change, then they have to ripple and cascade through a very wide network of contractors and construction workers every time. Even if it’s one slight, minute change, suddenly they realized, with the iPad, we have the perfect form factor to load up blueprints and content. This is something that can ripple through the construction industry, which isn’t really known for high technology, except on the design side. How can they build technology that makes data collaboration problem really seamless and easy to do in an industry that hasn’t really changed in a while? It was a perfect discovery of a change in a market and figuring out how those two things converge. Then this team built a great startup for it that is doing incredibly well and taking over the construction industry as proven by this individual. Thank you.

The next thing is, in enterprise, you want to start intentionally small. What I mean by that is you want to find, this is more true with all companies in an enterprise in a user light paradigm, you want to find the wedge that is sort of natural that you can create a product that will slip in the gaps of other existing products. But something that you think over time expands to be a more important product of the enterprise structure. What you want to start to do is say, we will take this sliver of a problem, we are going to make the user experience on the incredible. We are either going to change the business model, we are going to create new technology to make this previously problem really really simple. It might feel small at first, maybe you are going after small businesses and then you are going to go up market. Maybe you are starting with a sliver of the use case and expand out, but you intentionally start small. Because you will not be able to compete with an incumbent because the incumbent is always going to go for the full solution. So you have to find, what are the gaps in the full solution, that are significant enough that the customer is going to want to solve the problem with a discreet technology. But over time you are going to be able to expand. Again to either larger customers or to more use cases over time.

Great example is ZenPayroll. ZenPayroll was started by Stanford graduates couple of years ago. Basically, they discovered that the payroll is some small business is complicated and incredibly annoying process. That is because we use the same vendors that we have for decades to do that and they were digitally ordinated. You didn’t get your payments as a receipt over email. Very complicated. You didn’t get to see graphs of your salaries. There was really no good data around this. And they said we are going to take off the slice that is most painful to start out at, around hiring people and paying people. Just that payroll management process. We are going to plug into a lot of existing structure. But we are going to make it dead simple to go do this. And now they are able to move up market over time as well as deliver new services over time. And what happens is the incumbent in this market, eventually looks at something like Zen Payroll and says, well thats small. Its only for small businesses’. How can it be very powerful? But thats just the start. As they get that wedge, as they fit into the market, they are going to be able to expand again over time. Build out more services and more capabilities. But they found just the right, exact opening to build a new company and have the emerge.

Then next you really want to find asymmetries. You want to do things that incumbents can’t or won’t do because either the economics don’t make sense for them, the economics are so unusual, or because technically they can’t. I will give you two examples. So, if you are going to build software today for the enterprise that goes after an incumbent category, that has more of a suite? oriented approach. Then what you are going to want to do is build technology that is platform agnostic. What suite players will do is want everything to be integrated with itself, and theres more value with the vertical integration. But you want to go after a different access. Which you want your technology to work across all the platforms. That way you can work with so many different kinds of customers. You can be an ally to so many kinds of platforms, which a traditional incumbent is not able to do. That is technically infeasible because its architecture or its a fundamental component business model to not do that. The other thing is, trying to do things that is economic feasible. You can look at the cost structure of an incumbent company and discover where they are not going to be able to drop their prices. Because that business model is fundamental to the company. Or where can you find ways of monetizing the customer that are unusual or unique that no one has discovered before, thus making impractical for anyone else to do.

There is a company called Zenefits where they have an HR management software company that helps you as a small startup manage all your benefits, all your HR information. And instead of charging the startup that may not value the software stage they are at, they realize they can get commission from the insurance companies that pays for the ability to use their software. The customer itself is not paying for Zenefits. Zenefits platform is being paid for by the insurance company and they have thus created a business model that no other software company has been able to think of or attack. And they are equally going and disrupting a category that has not seen a lot of innovation previously which is the health and benefits space in small businesses.

The next is you want to find the mostly crazy, but still reasonable outliers within the customer ecosystem. So you need to find the customers that are at the edge of the business, their business model, their industry and find the unique characteristics of those customers. Leverage them as your early adopters. Paul Graham has a great article where he talks about living in the future and building what is missing when you are living in the future. Thats an easy way to spot trends and patterns about disruption that is playing out. The same is true in the workplace. If you find customers that are working in the future, you will be able to work with them to find what is missing in the future. And how do we build technology that supports all these new use cases that are going to emerge? There is a company called Skycatch that does enterprise drones. At first it seems kind of weird, but in construction space, farming they are using drones now for data capture and modeling different environments. So this company is able to find all the companies that are on the bleeding edge of their industry. What is unique, or new about how those businesses operate. And they worked with a lot of those early adopters to establish their platform. Which really is first enterprise drone company. So the idea is, go look at your market. Find the customers on the bleeding edge of their market who use technology to get a head. And that use technology for performance advantages, and go work with them to see how your product can evolve.

Listen to your customers but don’t always build exactly what they are telling you. This is a really key distinction around building enterprise software. Your customers are going to have a large number of requests. Your job is to instill those lists down into the ultimate product. This does not mean that you are not going to build exactly what they tell you to build. It is your job to listen to their problems, and translate those into what is going to build the best and simplest solution for them. It’s really your job, and Palantir does a really good example of very very complex issues and then scaling them down into simple solutions for complex problems that the customer would not have known how to ask for.

You want to modularize not customize. So build a platform as opposed to building all the custom technology and customer vertical experiences into the software itself. Make sure you really think about openness and APIs as a way of building experiences. Don’t build that directly into the product. Focus on the user always. The magical thing about building an enterprise software company right now is you can keep consumer information at the center of the product. That will always mean that adoption is easier, that your product has a much better chance of going viral. It becomes easier to sell in the organization. Always make sure you bring consumer DNA into the product. Your product should sell itself. But that does not mean you don’t need sales people. So this is a really important distinction. Leverage everything about the internet, leverage everything about users to get to your customers. But you still will likely need sales as a way to help your customers navigate your product, help your customers navigate the competitive landscape and ecosystem. So you are going to want very domain specific sales associates that are going to be helpful for your customer in deploying enabled in these positions. But don’t make that be a substitute, don’t make that be a handicap for not building a great product. So you fundamentally build a product inside that. A company called Mixpanel comes in through the developer and eventually sells to that organization with a more inside sales process. Also read these three books: Crossing the Chasm, the Innovators Dilemma, and Behind the Cloud. These three combined, if you binge and read them all, you will come out ahead.

So in closing, today, right now is an amazing time to start a software company. I wish you the best of luck. If it doesn’t work, we are hiring. The only other thing is, please do not compete with me because I have a lot of competition already. Ideally either come work with us or build your own company.

So thank you very much!

Before the Startup

One of the advantages of having kids is that when you have to give advice to people you can ask yourself, “what would I tell my own kids?”, and actually you’ll find this really focuses you. So even though my kids are little, my two year old today, when asked what he’ll be after two, said “a bat.” The correct answer was three, but “a bat” is so much more interesting. So even though my kids are little, I already know what I would tell them about startups, if they were in college, so that is what I’m going to tell you. You’re literally going to get what I would tell my own kids, since most of you are young enough to be my own kids.

Startups are very counterintuitive and I’m not sure exactly why. It could be simply because knowledge about them has not permeated our culture yet, but whatever the reason, this is an area where you cannot trust your intuition all the time. It’s like skiing in that way – any of you guys learn to ski as adults? When you first try skiing and you want to slow down, your first impulse is to lean back, just like in everything else. But lean back on the skis and you fly down the hill out of control. So, as I learned, part of learning to ski is learning to suppress that impulse. Eventually you get new habits, but in the beginning there is this list of things you’re trying to remember as you start down the hill: alternate feet, make s-turns, do not drag the inside foot, all this stuff.

Startups are as unnatural as skiing and there is a similar list of stuff you have to remember for startups. What I’m going to give you today is the beginning of the list, the list of the counterintuitive stuff you have to remember to prevent your existing instincts from leading you astray.

The first thing on it is the fact I just mentioned: startups are so weird that if you follow your instincts they will lead you astray. If you remember nothing more than that, when you’re about to make a mistake, you can pause before making it. When I was running Y Combinator we used to joke that our function was to tell founders things they would ignore, and it’s really true. Batch after batch the YC partners warned founders about mistakes they were about to make and the founders ignored them, and they came back a year later and said, “I wish we’d listened.” But that dude is in their cap table and there is nothing they can do.

Q: Why do founders persistently ignore the partner’s advice?

A: That’s the thing about counterintuitive ideas, they contradict your intuitions, they seem wrong, so of course your first impulse is to ignore them and, in fact, that’s not just the curse of Y Combinator, but to some extent our raison d’être. You don’t need people to give you advice that does not surprise you. If founders’ existing intuition gave them the right answers, they would not need us. That’s why there are a lot of ski instructors, and not many running instructors; you don’t see those words together, “running instructor,” as much as you see “ski instructor.” It’s because skiing is counterintuitive, sort of what YC is—business ski instructors—except you are going up slopes instead of down them, well ideally.

You can, however, trust your instincts about people. Your life so far hasn’t been much like starting a startup, but all the interactions you’ve had with people are just like the interactions you have with people in the business world. In fact, one of the big mistakes that founders make is to not trust their intuition about people enough. They meet someone, who seems impressive, but about whom they feel some misgivings and then later when things blow up, they say, “You know I knew there was something wrong about that guy, but I ignored it because he seemed so impressive.”

There is this specific sub-case in business, especially if you come from an engineering background, as I believe you all do. You think business is supposed to be this slightly distasteful thing. So when you meet people who seem smart, but somehow distasteful, you think, “Okay this must be normal for business,” but it’s not. Just pick people the way you would pick people if you were picking friends. This is one of those rare cases where it works to be self indulgent. Work with people you would generally like and respect and that you have known long enough to be sure about because there are a lot of people who are really good at seeming likable for a while. Just wait till your interests are opposed and then you’ll see.

The second counterintuitive point, this might come as a little bit of a disappointment, but what you need to succeed in a startup is not expertise in startups. That makes this class different from most other classes you take. You take a French class, at the end of it you’ve learned how to speech French. You do the work, you may not sound exactly like a French person, but pretty close, right? This class can teach you about startups, but that is not what you need to know. What you need to know to succeed in a startup is not expertise in startups, what you need is expertise in your own users.

Mark Zuckerberg did not succeed at Facebook because he was an expert in startups, he succeeded despite being a complete noob at startups; I mean Facebook was first incorporated as a Florida LLC. Even you guys know better than that. He succeeded despite being a complete noob at startups because he understood his users very well. Most of you don’t know the mechanics of raising an angel round, right? If you feel bad about that, don’t, because I can tell you Mark Zuckerberg probably doesn’t know the mechanics of raising an angel round either; if he was even paying attention when Ron Conway wrote him the big check, he probably has forgotten about it by now.

In fact, I worry it’s not merely unnecessary for people to learn in detail about the mechanics of starting a startup, but possibly somewhat dangerous because another characteristic mistake of young founders starting startups is to go through the motions of starting a startup. They come up with some plausible sounding idea, they raise funding to get a nice valuation, then the next step is they rent a nice office in SoMa and hire a bunch of their friends, until they gradually realize how completely fucked they are because while imitating all the outward forms of starting a startup, they have neglected the one thing that is actually essential, which is to make something people want. By the way that’s the only use of that swear word, except for the initial one, that was involuntary and I did check with Sam if it would be okay; he said he had done it several times, I mean use the word.

We saw this happen so often, people going through the motion of starting a startup, that we made up a name for it: “Playing House.” Eventually I realized why it was happening, the reason young founders go though the motions of starting a startup is because that is what they have been trained to do, their whole life, up to this point. Think about what it takes to get into college: extracurricular activities? Check. Even in college classes most of the work you do is as artificial as running laps, and I’m not attacking the educational system for being this way, inevitably the work that you do to learn something is going to have some amount of fakeness to it. And if you measure people’s performance they will inevitably exploit the difference to the degree that what you’re measuring is largely an artifact of the fakeness.

I confess that I did this myself in college; in fact, here is a useful tip on getting good grades. I found that in a lot of classes there might only be twenty or thirty ideas that had the right shape to make good exam questions. So the way I studied for exams in these classes was not to master the material in the class, but to try and figure out what the exam questions would be and work out the answers in advance. For me the test was not like, what my answers would be on my exam, for me the test was which of my exam questions would show up on the exam. So I would get my grade instantly, I would walk into the exam and look at the questions and see how many I got right, essentially. It works in a lot of classes, especially CS classes. I remember automata theory, there are only a few things that make sense to ask about automata theory.

So it’s not surprising that after being effectively trained for their whole lives to play such games, young founders’ first impulse on starting a startup is to find out what the tricks are for this new game. What are the extracurricular activities of startups, what are things I have to do? They always want to know, since apparently the measure of success for a startup is fundraising, another noob mistake. They always want to know, what are the tricks for convincing investors? And we have to tell them the best way to convince investors is to start a startup that is actually doing well, meaning growing fast, and then simply tell investors so.

Then they ask okay, so what are the tricks for growing fast, and this is exacerbated by the existence of this term, “Growth Hacks.” Whenever you hear somebody talk about Growth Hacks, just mentally translate it in your mind to “bullshit,” because what we tell them is the way to make your startup grow is to make something that users really love, and then tell them about it. So that’s what you have to do: that’s Growth Hacks right there.

So many of the conversations the YC partners have with the founders begin with the founders saying a sentence that begins with, “How do I,” and the partners answering with a sentence that begins with, “Just.” Why do they make things so complicated? The reason, I realized, after years of being puzzled by this, is they’re looking for the trick, they’ve been trained to look for the trick.

So, this is the third counterintuitive thing to remember about startups: starting a startup is where gaming the system stops working. Gaming the system may continue to work, if you go to work for a big company, depending on how broken the company is, you may be able to succeed by sucking up to the right person; Giving the impression of productivity by sending emails late at night, or if you’re smart enough changing the clock on your computer, cause who’s going to check the headers, right? I like an audience I can tell jokes to and they laugh. Over in the business school: “headers?” Okay, God this thing is being recorded, I just realized that.

Alright for now on we are sticking strictly to the script. But, in startups, that does not work. There is no boss to trick, how can you trick people, when there is nobody to trick? There are only users and all users care about is whether your software does what they want, right? They’re like sharks, sharks are too stupid to fool, you can’t wave a red flag and fool it, it’s like meat or no meat. You have to have what people want and you only prosper to the extent that you do. The dangerous thing is, especially for you guys, the dangerous thing is that faking does work to some extent with investors.

If you’re really good at knowing what you’re talking about, you can fool investors, for one, maybe two rounds of funding, but it’s not in your interest to do. I mean, you’re all doing this for equity, you’re puling a confidence trick on yourself. Wasting your own time, because the startup is doomed and all you’re doing is wasting your time writing it down. So, stop looking for the trick. There are tricks in startups, as there are in any domain, but they are an order of magnitude less important than solving the real problem. Someone who knows zero about fundraising, but has made something users really love, will have an easier time raising money than someone who knows every trick in the book, but has a flat usage graph.

Though, in a sense, it’s bad news that gaming the system stops working now, in the sense that you’re deprived of your most powerful weapons and, after all, you spent twenty years mastering them. I find it very exciting that there even exist parts of the world where gaming the system is not how you win. I would have been really excited in college if I explicitly realized that there are parts of the world where gaming the system matters less than others, and some where it hardly matters at all. But there are, and this is one of the most important thing to think about when planning your future. How do you win at each type of work, and what do you want to win by doing it?

That brings us to our fourth counterintuitive point, startups are all consuming. If you start a startup, it will take over your life to a degree that you cannot imagine and if it succeeds it will take over your life for a long time; for several years, at the very least, maybe a decade, maybe the rest of your working life. So there is a real opportunity cost here. It may seem to you that Larry Page has an enviable life, but there are parts of it that are defiantly unenviable. The way the world looks to him is that he started running as fast as he could, at age twenty-five, and he has not stopped to catch his breath since. Every day shit happens within the Google empire that only the emperor can deal with and he, as the emperor, has to deal with it. If he goes on vacation for even a week, a whole backlog of shit accumulates, and he has to bear this, uncomplaining, because: number one, as the company’s daddy, he cannot show fear or weakness; and number two, if you’re a billionaire, you get zero, actually less than zero sympathy, if you complain about having a difficult life.

Which has this strange side effect that the difficulty of being a successful startup founder is concealed from almost everyone who has done it. People who win the one-hundred meter in the Olympics, you walk up to them and they’re out of breath. Larry Page is doing that too, but you never get to see it.

Y Combinator has now funded several companies that could be called big successes and in every single case the founder says the same thing, “It never gets any easier.” The nature of the problems change, so you’re maybe worrying about more glamorous problems like construction delays in your new London offices rather than the broken air conditioner in your studio apartment, but the total volume of worry never decreases. If anything, it increases.

Starting a successful startup is similar to having kids; it’s like a button you press and it changes your life irrevocably. While it’s honestly the best thing—having kids—if you take away one thing from this lecture, remember this: There are a lot of things that are easier to do before you have kids than after, many of which will make you a better parent when you do have kids. In rich countries, most people delay pushing the button for a while and I’m sure you are all intimately familiar with that procedure.

Yet when it comes to starting startups a lot of people seem to think they are supposed to start them in college. Are you crazy? What are the universities thinking – they go out of their way to ensure that their students are well supplied with contraceptives, and yet they are starting up entrepreneurship programs and startup incubators left and right.

To be fair, the universities have their hand forced here. A lot of incoming students are interested in start-ups. Universities are at least de-facto supposed to prepare you for your career, and so if you’re interested in startups, it seems like universities are supposed to teach you about startups and if they don’t maybe they lose applicants to universities that do claim to do that. So can universities teach you about startups? Well, if not, what are we doing here? Yes and no, as I’ve explained to you about start-ups. Essentially, if you want to learn French, universities can teach you linguistics. That is what this is. This is linguistics: we’re teaching you how to learn languages and what you need to know is how a particular language.

What you need to know are the needs of your own users. You can’t learn those until you actually start the company, which means that starting a startup is something you can intrinsically only learn by doing it. You can’t do that in college for the reason I just explained. Startups take over your entire life. If you start a startup in college, if you start a startup as a student, you can’t start a startup as a student because if you start a startup you’re not a student anymore. You may be nominally a student but you won’t even be that for very much longer. Given this dichotomy: which of the two paths should you take?

Be a real student and not start a startup or start a real startup and not be a student. Well, I can answer that one for you. I’m talking to my own kids here. Do not start a startup in college. I hope I’m not disappointing anyone seriously. Starting a startup could be a good component of a good life for a lot of ambitious people. This is just a part of a much bigger problem that you are trying to solve. How to have a good life, right. Those that are starting a startup could be a good thing to do at some point. Twenty is not the optimal time to do it.

There are things that you can do in your early twenties that you cannot do as well before or after. Like plunge deeply into projects on a whim that seem like they will have no pay off. Travel super cheaply with no sense of a deadline. In fact they are really isomorphic shapes in different domains.

For unambitious people your thing can be the dreaded failure to launch. For the ambitious ones it’s a really valuable sort of exploration and if you start a startup at twenty and you are sufficiently successful you will never get to do it.

Mark Zuckerberg will never get to bum around a foreign country. If he goes to a foreign county, it’s either as a de-facto state visit or like he’s hiding out incognito at George V in Paris. He’s never going to just like backpack around Thailand if that’s still what people do. Do people still backpack around Thailand? That’s the first real enthusiasm I’ve ever seen from this class. Should have given this talk in Thailand. He can do things you can’t do, like charter jets to fly him to foreign countries. Really big jets. But success has taken a lot of the serendipity out of his life. Facebook is running him as much as he’s running Facebook.

While it can be really cool to be in the grip of some project you consider your life’s work, there are advantages to serendipity. Among other things, it gives you more options to choose your life’s work from. There’s not even a trade off here. You’re not sacrificing anything if you forgo starting a start up at twenty because you will be more likely to succeed if you wait. In the astronomically unlikely case that you are twenty and you have some side project that takes off like Facebook did, then you face a choice to either be running with it or not and maybe it’s reasonable to run with it. Usually the way that start ups take off is for the founders to make them take off. It’s gratuitously stupid to do that at twenty.

Should you do it at any age? Starting a startup may sound kind of hard, if I haven’t made that clear let me try again. Starting a startup is really hard. If it’s too hard, what if you are not up to this challenge?

The answer is the fifth counter intuitive point. You can’t tell. Your life so far has given you some idea of what your prospects might be if you wanted to become a mathematician or a professional football player. Boy, it’s not every audience you can say that to. Unless you have had a very strange life indeed you have not done much that’s like starting a startup. Meaning starting a startup will change you a lot if it works out. So what you’re trying to estimate is not just what you are, but what you could become. And who can do that? Well, not me. for the last nine years it was my job to try to guess (I wrote “predict” in here and it came out as “guess”—that’s a very informative Freudian slip). Seriously it’s easy to tell how smart people are in ten minutes. Hit a few tennis balls over the net, and do they hit them back at you or into the net? The hard part and the most important part was predicting how tough and ambitious they would become.

There may be no one at this point who has more experience than me in doing this. I can tell you how much an expert can know about that. The answer is not much. I learned from experience to keep completely open mind about which start ups in each batch would turn out to be the stars. The founders sometimes thought they knew. Some arrived feeling confident that they would ace Y Combinator just as they had aced every one of the few easy artificial tests they had faced in life so far. Others arrived wondering what mistake had caused them to be admitted and hoping that no one discover it.

There is little to no correlation between these attitudes and how things turn out. I’ve read the same is true in the military. The swaggering recruits are no more than likely to turn out to be really tough than the quiet ones and probably for the same reason. The tests are so different from tests in people’s previous lives. If you are absolutely terrified of starting a startup you probably shouldn’t do it. Unless you are one of those people who gets off on doing things you’re afraid of. Otherwise if you are merely unsure of whether you are going to be able to do it, the only way to find out is to try, just not now.

So if you want to start a startup one day, what do you do now in college? There are only two things you need initially, an idea and cofounders. The MO for getting both of those is the same which leads to our sixth and last counterintuitive point.

The way to get start up ideas is not to try to think of startup ideas. I have written a whole essay on this and I am not going to repeat the whole thing here. But the short version is that if you make a conscious effort to try to think of startup ideas, you will think of ideas that are not only bad but bad and plausible sounding. Meaning you and everybody else will be fooled by them. You’ll waste a lot of time before realizing they’re no good. The way to come up with good startup ideas is to take a step back. Instead of trying to make a conscious effort to think of startup ideas, turn your brain into the type that has startup ideas unconsciously. In fact, so unconsciously that you don’t even realize at first that they’re startup ideas. This is not only possible: Yahoo, Google, Facebook, Apple all got started this way. None of these companies were supposed to be companies at first, they were all just side projects. The very best ideas almost always have to start as side projects because they’re always such outliers that your conscious mind would reject them as ideas for companies.

How do you turn your mind into the kind that has startup ideas unconsciously? One, learn about a lot of things that matter. Two, work on problems that interest you. Three, with people you like and or respect. That’s the third part incidentally, is how you get cofounders at the same time as the idea. The first time I wrote that paragraph, instead of learn a lot about things that matter, I wrote become good at some technology. But that prescription is too narrow.

What was special about Brain Chesky and Joe Gebbia from Airbnb was not that they were experts in technology. They went to art school, they were experts in design. Perhaps more importantly they were really good at organizing people in getting projects done. So you don’t have to work on technology per se, so long as you work on things that stretch you.

What kinds of things are those? Now that is very hard to answer in the general case. History is full of examples of young people who were working on problems that no one else at the time thought were important. In particular that their parents didn’t think were important. On the other hand, history is even fuller of examples of parents that thought their kids were wasting their time and who were right.

How do you know if you’re working on real stuff? I mean when Twitch TV switched from being Justin.tv to Twitch TV and they were going to broadcast people playing video games, I was like, “What?” But it turned out to be a good business. I know how I know real problems are interesting, and I am self-indulgent: I always like working on anything interesting things even if no one cares about them. I find it very hard to make myself work on boring things even if they’re supposed to be important. My life is full of case after case where I worked on things just because I was interested and they turned out to be useful later in some worldly way.

Y Combinator itself is something I only did because it seemed interesting. I seem to have some internal compass that helps me out. This is for you not me and I don’t know what you have in your heads. Maybe if I think more about it I can come up some heuristics for recognizing genuinely interesting ideas. For now all I can give you is the hopelessly question begging advice. Incidentally this is the actual meaning of the phrase begging the question. The hopelessly question begging advice that if you’re interested in generally interesting problems, gratifying your interest energetically is the best way to prepare yourself for a startup and probably best way to live.

Although I can’t explain in the general case what counts as an interesting problem I can tell you about a large subset of them. If you think of technology as something that’s spreading like a sort of fractal stain, every point on the edge represents an interesting problem. Steam engine not so much maybe you never know. One guaranteed way to turn your mind into the type to start up ideas for them unconsciously. Is to get yourself to the leading edge of some technology. To, as Paul Buchheit put it, “Live in the future.” And when you get there, ideas that seem uncannily prescient to other people will seem obvious to you. You may not realize they’re start up ideas, but you will know they are something that ought to exist.

For example back at Harvard in the mid 90s. A fellow grad student of my friends Robert and Trevor wrote his own voice over IP software. It wasn’t meant to be a startup, he never tried to turn it into one. He just wanted to talk to his girlfriend in Taiwan without paying for long distance calls. Since he was an expert on networks, it seemed obvious to him that thing to do was to turn the sound into packets and ship them over the internet for free. Why didn’t everybody do this? They were not good at writing this type of software. He never did anything with this. He never tried to turn this into a startup. That is how the best startups tend to happen.

Strangely enough the optimal thing to do in college if you want to be a successful startup founder is not some sort of new vocational version of college focused on entrepreneurship. It’s the classic version of college is education its own sake. If you want to start your own startup what you should do in college is learn powerful things and if you have genuine intellectual curiosity that’s what you’ll naturally tend to do if you just follow your own inclinations. The component of entrepreneurship, can never quite say that word with a straight face, that really matters is domain expertise. Larry Page is Larry Page because he was an expert on search and the way he became an expert on search was because he was genuinely interested and not because of some ulterior motive. At its best starting a startup is merely a ulterior motive for curiosity and you’ll do it best if you introduce the ulterior motive at the end of the process. So here is ultimate advice for young would be startup founders reduced to two words: just learn.

Alright how much time do we have left? Eighteen minutes for questions good god. Do you guys have the questions?

Q: Sure we will start with two questions. How can a nontechnical founder most efficiently contribute to a startup?

A: If the startup is, if the startup is working in some domain, if it’s not a pure technology startup but is working in some very specific domain, like if it is Uber and the non technical founder was an expert in the limo business then actually then the non technical founder would be doing most of the work. Recruiting drivers and doing whatever else Uber has to do and the technical founder would be just writing the iPhone app which probably less, well iPhone and android app, which is less than half of it. If it’s purely a technical start up the non technical founder does sales and brings coffee and cheeseburgers to the programmer.

Q: Do you see any value in business school for people who want to pursue entrepreneurship?

A: Basically no, it sounds undiplomatic, but business school was designed to teach people management. Management is a problem that you only have in a startup if you are sufficiently successful. So really what you need to know early on to make a start up successful is developing products. You would be better off going to design school if you would want to go to some sort of school. Although frankly the way to learn how to do it is just to do it. One of the things I got wrong early on is that I advised people who were interested in starting a startup to go work for some other company for a few years before starting their own. Honestly the best way to learn on how to start a startup is just to just try to start it.

You may not be successful but you will learn faster if you just do it. Business schools are trying really hard to do this. They were designed to train the officer core of large companies, which is what business seemed to be back when it was a choice to be either the officer core of large companies or Joe’s Shoe Store. Then there was this new thing, Apple, that started as small as Joe’s Shoe Store and turns into this giant mega company but they were not designed for that world they are good at what they’re good at. They should just do that and screw this whole entrepreneurship thing.

Q: Management is a problem only if you are successful. What about those first two or three people?

A: Ideally you are successful before you even hire two or three people. Ideally you don’t even have two or three people for quite awhile. When you do the first hires in a startup they are almost like founders. They should be motivated by the same things, they can’t be people you have to manage. This is not like the office, these have to be your peers, you shouldn’t have to manage them much.

Q: So is it just a big no no, someone has to be managed no way they should be on the founding team.

A: In the case were you are doing something were you need some super advanced technical thing and there is some boffin that knows this thing and no one else in this world including on how to wipe his mouth. It may be to your advantage to hire said boffin and wipe his mouth for him. As a general rule you want people who are self motivated early on they should just be like founders.

Q: Do you think we are currently in a bubble?

A: I’ll give you two answers to this question. One, ask me questions that are useful to this audience because these people are here to learn how to start startups, and I have more data in my head than anybody else and you’re asking me questions a reporter does because they cannot think of anything interesting to ask. I will answer your question. There is a difference between prices merely being high and a bubble. A bubble is a very specific form of prices being high where people knowingly pay high prices for something in the hope that they will be able to unload it later on some greater fool. That’s what happened in the late 90’s, when VC’s knowingly invested in bullshit startups thinking that they would be able to take those things public and unload them on other retail investors before everything blew up

I was there for that at the epicenter of it all. That is not what is happening today. Prices are high, valuations are high, but valuations being high does not mean a bubble. Every commodity has prices that go up and down in some sort of sine wave. Definitely prices are high. We tell people if you raise money, don’t think the next time you raise money it’s going to be so easy, who knows maybe between now and then the Chinese economy will have exploded then there’s a giant disaster recession. Assume the worst. But bubble? No.

Q: I am seeing a trend among young people and successful entrepreneurs where they don’t want to start one great company but twenty. You are starting to see a rise in these labs attempts were they are going to try to launch a whole bunch of stuff, I don’t have any stellar examples yet.

A: Do you mean like IDEO?

Q: No, like Idealab, Garrett Camp’s new one…

A: Oh yeah. There’s this new thing were people start labs that are supposed to spin off startups. It might work, that’s how Twitter started. In fact, I meant Idealab, not IDEO, that was another Freudian slip. Twitter was not Twitter at first. Twitter was a side project at a company called Odeo that was supposed to be in the podcasting business, and you like podcasting business, do those words even grammatically go together? The answer turned out to be no as Evan discovered. As a side project they spun off Twitter and boy was that a dog wagging tail, people are starting these things that are supposed to spin off startups, will it work? Quite possibly if the right people do it. You can’t do it though, because you have to do it with your own money.

Q: What advice do you have for female co-founders as they are pursuing funding?

A: It probably is true that women have a harder time raising money. I have noticed this empirically and Jessica is just about to publish a bunch of interviews on female founders and a lot of them said that they thought they had a harder time raising money, too. Remember I said the way to raise money? Make your start up actually do well and that’s just especially true in any case if you miss the ideal target from the VC’s point of view in any respect. The way to solve that problem is make the startup do really well. In fact, there was a point a year or two ago when I tweeted this growth graph of this company and I didn’t say who they were. I knew it would get people to start asking and it was actually a female founded startup that was having trouble raising money, but their growth graph was stupendous. So I tweeted it, knowing all these VC’s would start asking me, “Who is that?” Growth graphs have no gender, so if they see the growth graph first, let them fall in love with that. Do well, which is generally good advice for all startups.

Q: What would you learn in college right now?

A: Literary theory, no just kidding. Honestly, I think I might try and study physics that’s the thing I feel I missed. For some reason, when I was a kid computers were the thing, maybe they still are. I got very excited learning to write code and you can write real programs in your bedroom. You can’t build real accelerators, well maybe you can. Maybe physics, I noticed I sort of look longingly at physics so maybe. I don’t know if that’s going to be helpful starting a startup and I just told you to follow your own curiosity so who cares if it’s helpful, it’ll turn out to be helpful.

Q: What are your reoccurring systems in your work and personal life that make you efficient?

A: Having kids is a good way to be efficient. Because you have no time left so if you want to get anything done, the amount of done you do per time is high. Actually many parents, start up founders who have kids have made that point explicitly. They cause you to focus because you have no choice.

I wouldn’t actually recommend having kids just to make you more focused. You know, I don’t think I am very efficient, I have two ways of getting work done. One is during Y Combinator, the way I worked on Y Combinator is I was forced to. I had to set the application deadline, and then people would apply, and then there were all these applications that I had to respond to by a certain time. So I had to read them and I knew if I read them badly, we would get bad startups so I tried really hard to read them well. So I set up this situation that forced me to work. The other kind of work I do is writing essays. And I do that voluntarily, I am walking down the street and the essay starts writing itself in my head. I either force myself to work on less exciting things; I can’t help working on exciting things. I don’t have any useful techniques for making myself efficient. If you work on things you like, you don’t have to force yourself to be efficient.

Q: When is a good time to turn a side project into a startup?

A: You will know, right. So the question is when you turn a side project into a startup, you will know that it is becoming a real startup when it takes over a alarming large percentage of your life, right. My god I’ve just spent all day working on this thing that’s supposed to be a side project, I am going to fail all of my classes what am I going to do, right. Then maybe it’s turning into a startup.

Q: I know you talked a lot, earlier, about you’ll know when your start up is doing extremely well, but I feel like in a lot of cases it’s a gray line, where you have some users but not explosive growth that is up and to the right, what would you do or what would you recommend in those situations? Considering allocating time and resources, how do you balance?

A: When a start up is growing but not much. Didn’t you tell them they were supposed to read Do Things that Don’t Scale? You sir have not done the readings, you are busted. Because there are four, I wrote a whole essay answered that question and that is to do things that don’t scale. Just go read that, because I can’t remember everything I said. It’s about exactly that problem.

Q: What kind of startup should not go through incubation, in your opinion?

A: Definitely any that will fail. Or if you’ll succeed but you’re an intolerable person. That also Sam would probably sooner do without. Short of that, I cannot think of any, because a large percentage, founders are often surprised by how large a percentage of the problems that start ups have are the same regardless of what type of thing they’re working on. And those tend to be kind of problems that YC helps the most not the ones that are domain specific. Can you think of the class of startups? That YC wouldn’t work for? We had fission and fusion startups in the last batch.

Q: You mentioned that it’s good advice to learn a lot about something that matters, what are some good strategies to figure out what matters?

A: If you think of technology as something that’s spreading as a sort of fractal stain. Anything on the edge represents an interesting idea, sounds familiar. Like I said that was the problem, you have correctly identified the thing I didn’t really answer the question were I gave this question begging answer. I said I’m interested in interesting things and you said you were interested in interesting things, work on them and things will work out.

How do you tell what is a real problem? I don’t know, that’s like important enough to write a whole essay about. I don’t know the answer and I probably should write something about that, but I don’t know. I figured out a technique for detecting whether you have a taste for generally interesting problems. Which is whether you find working on boring things intolerable and there are known boring things. Like literary theory and working in middle management in some large company. So if you can tolerate those things, then you must have stupendous self-discipline or you don’t have a taste for genially interesting problems and vice versa.

Q: Do you like Snapchat?

A: Snapchat? What do I know about Snapchat? We didn’t fund them. I want another question.

Q: If you hire people you like, you might get a monoculture and how do you deal with the blind spots that arise?

A: Starting a startup is where many things will be going wrong. You can’t expect it to be perfect. The advantage is of hiring people you know and like are far greater than the small disadvantage of having some monoculture. You look at it empirically, at all the most successful startups, someone just hires all their pals out of college.

Alright you guys thank you.

Team and Execution

Before I jump into today’s lecture, I wanted to answer a few questions people had emailed me about the last lecture that we didn’t have time for. So, if you have a question about what we covered last time, I am welcome to answer it now, starting with you.

Q: How do I identify if a market has a fast growth rate now and also for the next ten years?

A: The good news about this is this is one of the big advantages students have. You should just trust your instincts on this. Older people have to basically guess about the technologies young people are using. But you can just watch what you’re doing and what your friends are doing and you will almost certainly have better instincts than anybody older than you. And so the answer to this is just trust your instincts, think about what you’re doing more, think about what you’re using, what you’re seeing people your age using, that will almost certainly be the future.

Okay, one more question on the last lecture before we start.

Q: How do you deal with burnout while still being productive and remaining productive.

A: The answer to this is just that it sucks and you keep going. Unlike a student where you can throw up your hands and say you know I’m really burnt out and I’m just going to get bad grades this quarter, one of the hard parts about running a startup is that it’s real life and you just have to get through it. The canonical advice is to go on a vacation and that never works for founders. It’s sort of all consuming in this way that is very difficult to understand.

So what you do is you just keep going. You rely on people, it’s really important, founder depression is a serious thing and you need to have a support network. But the way through burn out is just to address the challenges, to address the things that are going wrong and you’ll eventually feel better.

Last lecture, we covered the idea and the product and I want to emphasize that if you don’t get those right, none of the rest of this is going to save you. Today, we’re going to talk about how to hire and how to execute. Hopefully you don’t execute the people you hire. Sometimes.

First, I want to talk about cofounders. Cofounder relationships are among the most important in the entire company. Everyone says you have to watch out for tension brewing among cofounders and you have to address is immediately. That’s all true and certainly in YC’s case, the number one cause of early death for startups is cofounder blowups. But for some reason, a lot of people treat choosing their cofounder with even less importance than hiring. Don’t do this! This is one of the most important decisions you make in the life of your startup and you need to treat it as such.

And for some reason, students are really bad at this. They just pick someone. They’re like, I want to start a business and you want to start a business, let’s start a startup together. There are these cofounder dating things where you’re like, Hey I’m looking for a cofounder, we don’t really know each other, let’s start a company. And this is like, crazy. You would never hire someone like this and yet people are willing to choose their business partners this way. It’s really really bad. And choosing a random random cofounder, or choosing someone you don’t have a long history with, choosing someone you’re not friends with, so when things are really going wrong, you have this sort of past history to bind you together, usually ends up in disaster.

We had one YC batch in which nine out of about seventy-five companies added on a new cofounder between when we interviewed the companies and when they started, and all nine of those teams fell apart within the next year. The track record for companies where the cofounders don’t know each other is really bad.

A good way to meet a cofounder is to meet in college. If you’re not in college and you don’t know a cofounder, the next best thing I think is to go work at an interesting company. If you work at Facebook or Google or something like that, it’s almost as cofounder rich as Stanford. It’s better to have no cofounder than to have a bad cofounder, but it’s still bad to be a solo founder. I was just looking at the stats here before we started. For the top, and I may have missed one because I was counting quickly, but I think, for the top twenty most valuable YC companies, almost all of them have at least two founders. And we probably funded a rate of like one out of ten solo teams.

So, best of all, cofounder you know, not as good as that, but still okay, solo founder. Random founder you meet, and yet students do this for some reason, really really bad.

So as you’re thinking about cofounders and people that could be good, there’s a question of what you’re looking for right? At YC we have this public phrase, and it’s relentlessly resourceful, and everyone’s heard of it. And you definitely need relentlessly resourceful cofounders, but there’s a more colorful example that we share at the YC kickoff. Paul Graham started using this and I’ve kept it going.

So, you’re looking for cofounders that need to be unflappable, tough, they know what to do in every situation. They act quickly, they’re decisive, they’re creative, they’re ready for anything, and it turns out that there’s a model for this in pop culture. And it sounds very dumb, but it’s at least very memorable and we’ve told every class of YC this for a long time and I think it helps them.

And that model is James Bond. And again, this sounds crazy, but it will at least stick in your memory and you need someone that behaves like James Bond more than you need someone that is an expert in some particular domain.

As I mentioned earlier, you really want to know your cofounders for awhile, ideally years. This is especially true for early hires as well, but incidentally, more people get this right for early hires than they do for cofounders. So, take advantage of school. In addition to relentlessly resourceful, you want a tough and a calm cofounder. There are obvious things like smart, but everyone knows you want a smart cofounder, they don’t prioritize things like tough and calm enough, especially if you feel like you yourself aren’t, you need a cofounder who is. If you aren’t technical, and even if most of the people in this room feel like they are, you want a technical cofounder. There’s this weird thing going on in startups right now where it’s become popular to say, You know what, we don’t need a technical cofounders, we’re gonna hire people, we’re just gonna be great managers.

That doesn’t work too well in our experience. Software people should really be starting software companies. Media people should be starting media companies. In the YC experience, two or three cofounders seems to be about perfect. One, obviously not great, five, really bad. Four works sometimes, but two or three I think is the target.

The second part of how to hire: try not to. One of the weird things you’ll notice as you start a company, is that everyone will ask you how many employees you have. And this is the metric people use to judge how real your startup is and how cool you are. And if you say you have a high number of employees, they’re really impressed. And if you say you have a low number of employees, then you sound like this little joke. But actually it sucks to have a lot of employees, and you should be proud of how few employees you have. Lots of employees ends up with things like a high burn rate, meaning you’re losing a lot of money every month, complexity, slow decision making, the list goes on and it’s nothing good.

So you want to be proud of how much you can get done with a small numbers of employees. Many of the best YC companies have had a phenomenally small number of employees for their first year, sometimes none besides the founders. They really try to stay small as long as they possibly can. At the beginning, you should only hire when you desperately need to. Later, you should learn to hire fast and scale up the company, but in the early days the goal should be not to hire. And one of the reasons this is so bad, is that the cost of getting an early hire wrong is really high. In fact, a lot of the companies that I’ve been very involved with, that have had a very bad early hire in the first three or so employees never recover, it just kills the company.

Airbnb spent five months interviewing their first employee. And in their first year, they only hired two. Before they hired a single person, they wrote down a list of the culture values that they wanted any Airbnb employee to have. One of those what that you had to bleed Airbnb, and if you didn’t agree to that they just wouldn’t hire you. As an example of how intense Brian Chesky is, he’s the Airbnb CEO, he used to ask people if they would take the job if they got a medical diagnosis that they have one year left to life. Later he decided that that was a little bit too crazy and I think he relaxed it to ten years, but last I heard, he still asks that question.

These hires really matter, these people are what go on to define your company, and so you need people that believe in it almost as much as you do. And it sounds like a crazy thing to ask, but he’s gotten this culture of extremely dedicated people that come together when the company faces a crisis. And when the company faced a big crisis early on, everyone lived in the office, and they shipped product every day until the crisis was over. One of the remarkable observations about Airbnb is that if you talk to any of the first forty or so employees, they all feel like they were a part of the founding of the company.

But by having an extremely high bar, by hiring slowly ensures that everyone believes in the mission, you can get that. So let’s say, you listened to the warning about not hiring unless you absolutely have too. When you’re in this hiring mode, it should be your number one priority to get the best people. Just like when you’re in product mode that should be your number one priority. And when you’re in fundraising mode, fundraising is your number one priority.

On thing that founders always underestimate is how hard it is to recruit. You think you have this great idea and everyone’s going to join. But that’s not how it works. To get the very best people, they have a lot of great options and so it can easily take a year to recruit someone. It’s this long process and so you have to convince them that your mission is the most important of anything that they’re looking at. This is another case of why it’s really important to get the product right before looking at anything else. The best people know that they should join a rocketship.

By the way, that’s my number one piece of advice if you’re going to join a startup, is pick a rocketship. Pick a company that’s already working and that not everyone yet realizes that, but you know because you’re paying attention, that it’s going to be huge. And again, you can usually identify these. But good people know this, and so good people will wait, to see that you’re on this trajectory before they join.

One question that people asked online this morning was how much time you should be spending on hiring. The answer is zero or twenty-five percent. You’re either not hiring at all or it’s probably your single biggest block of time. In practice, all these books on management say you should spend fifty percent of your time hiring, but the people that give that advice, it’s rare for them to even spend ten percent themselves. Twenty-five percent is still a huge amount of time, but that’s really how much you should be doing once you’re in hiring mode.

If you compromise and hire someone mediocre you will always regret it. We like to warn founders of this but no one really feels it until they make the mistake the first time, but it can poison the culture. Mediocre people at huge companies will cause some problems, but it won’t kill the company. A single mediocre hire within the first five will often in fact kill a startup.

A friend of mine has a sign up in the conference room that he uses for interviews and he positions the sign that the candidate is looking at it during the interview and it says that mediocre engineers do not build great companies. Yeah that’s true, it’s really true. You can get away with it in a big company because people just sort of fall through the cracks but every person at a startup sets the tone. So if you compromise in the first five, ten hires it might kill the company. And you can think about that for everyone you hire: will I bet the future of this company on this single hire? And that’s a tough bar. At some point in the company, when you’re bigger, you will compromise on a hire. There will be some pressing deadline or something like that you will still regret. But this is the difference between theory and practice we’re going to have later speakers talk about what to do when this happens. But in the early days you just can’t screw it up.

Sources of candidates. This is another thing that students get wrong a lot. The best source for hiring by far is people that you already know and people that other employees in the company already know. Most great companies in text have been built by personal referrals for the first hundred employees and often many more. Most founders feel awkward but calling anyone good that they’ve ever met and asking their employees to do the same. But she’ll notice if you go to work at Facebook or Google one of the things they do in your first few weeks is an HR person sits you down and beat out of you every smart person you’ve ever met to be able to recruit them.

These personal referrals really are the trick to hiring. Another tip is to look outside the valley. It is brutally competitive to hire engineers here but you probably know people elsewhere in the world that would like to work with you.

Another question that founders ask us a lot about his experience and how much that matters. The short version here is that experience matters for some roles and not for others. When you’re hiring someone that is going to run a large part of your organization experience probably matters a lot. For most of the early hires that you make at a startup, experience probably doesn’t matter that much and you should go for aptitude and belief in what you’re doing. Most of the best hires that I’ve made in my entire life have never done that thing before. So it’s really worth thinking, is this a role where I care about experience or not. And you’ll often find to don’t, especially in the early days.

There are three things I look for in a hire. Are they smart? Do they get things done? Do I want to spend a lot of time around them? And if I get an answer, if I can say yes to all three of these, I never regret it, it’s almost always worked out. You can learn a lot about all three of these things in an interview but the very best way is working together, so ideally someone you’ve worked together with in the past and in that case you probably don’t even need an interview. If you haven’t, then I think it’s way better to work with someone on a project for a day or two before hiring them. You’ll both learn a lot they will too and most first-time founders are very bad interviewers but very good at evaluating someone after they’ve worked together.

So one of the pieces of advice that we give at YC is try to work on a project together instead of an interview. If you are going to interview, which you probably will, you should ask specifically about projects that someone worked on in the past. You’ll learn a lot more than you will with brainteasers. For some reason, young technical cofounders love to ask brainteasers rather than just ask what someone has done. Really dig in to projects people have worked on. And call references. That is another thing that first time founders like to skip. You want to call some people that these people have worked with in the past. And when you do, you don’t just want to ask, How was so-and-so, you really want to dig in. Is this person in the top five percent of people you’ve ever worked with? What specifically did they do? Would you hire them again? Why aren’t you trying to hire them again? You really have to press on these reference calls.

Another thing that I have noticed from talking to YC companies is that good communication skills tend to correlate with hires that work out. I used to not pay attention to this. We’re going to talk more about why communication is so important in an early startup. If someone is difficult to talk to, if someone cannot communicate clearly, it’s a real problem in terms of their likelihood to work out. Also. for early employees you want someone that has somewhat of a risk-taking attitude. You generally get this, otherwise they wouldn’t be interested in a startup, but now that startups are sort of more in fashion, you want people that actually sort of like a little bit of risk. If someone is choosing between joining McKinsey or your startup it’s very unlikely they’re going to work out at the startup.

You also want people who are maniacally determined and that is slightly different than having a risk tolerant attitude. So you really should be looking for both. By the way, people are welcome to interrupt me with questions as stuff comes up.

There is a famous test from Paul Graham called the animal test. The idea here is that you should be able to describe any employee as an animal at what they do. I don’t think that translates out of English very well but you need unstoppable people. You want people that are just going to get it done. Founders who usually end up being very happy with their early hires usually end up describing these people as the very best in the world at what they do.

Mark Zuckerberg once said that he tries to hire people that A. he’d be comfortable hanging with socially and B. he’d be comfortable reporting to if the roles were reversed. This strikes me as a very good framework. You don’t have to be friends with everybody, but you should at least enjoy working with them. And if you don’t have that, you should at least deeply respect them. But again, if you don’t want to spend a lot of time around people you should trust your instincts about that.

While I’m on this topic of hiring, I want to talk about employee equity. Founders screw this up all the time. I think as a rough estimate, you should aim to give about ten percent of the company to the first ten employees.

They have to earn it over four years anyway, and if they’re successful, they’re going to contribute way more than that. They’re going to increase the value of the company way more than that, and if they don’t then they won’t be around anyway.

For whatever reason founders are usually very stingy with equity to employees and very generous with equity for investors. I think this is totally backwards. I think this is one of the things founders screw up the most often. Employees will only add more value over time. Investors will usually write the check and then, despite a lot of promises, don’t usually do that much. Sometimes they do, but your employees are really the ones that build the company over years and years.

So I believe in fighting with investors to reduce the amount of equity they get and then being as generous as you possibly can with employees. The YC companies that have done this well, the YC companies that have been super generous with their equity to early employees, in general, are the most successful ones that we’ve funded.

One thing that founders forget is that after they hire employees, they have to retain them. I’m not going to go into full detail here because we’re going to have a lecture on this later, but I do want to talk about it a little bit because founders get this wrong so often. You have to make sure your employees are happy and feel valued. This is one of the reasons that equity grants are so important. People in the excitement of joining a startup don’t think about it much, but as they come in day after day, year after year, if they feel they have been treated unfairly that will really start to grate on them and resentment will build.

But more than that, learning just a little bit of management skills, which first-time CEOs are usually terrible at, goes a long way. One of the speakers at YC this summer, who is now extremely successful, struggled early on and had his team turn over a few times. Someone asked him what his biggest struggle was and he said, turns out you shouldn’t tell your employees they’re fucking up every day unless you want them all to leave because they will.

But as a founder, this is a very natural instinct. You think you can do everything the best and it’s easy to tell people when they’re not doing it well. So learning just a little bit here will prevent this massive team churn. It also doesn’t come naturally to most founders to really praise their team. It took me a little while to learn this too. You have to let your team take credit for all the good stuff that happens, and you take responsibility for the bad stuff.

You have to not micromanage. You have to continually give people small areas of responsibility. These are not the things that founders think about. I think the best thing you can do as a first-time founder is to be aware that you will be a very bad manager and try to overcompensate for that. Dan Pink talks about these three things that motivate people to do great work: autonomy, mastery, and purpose. I never thought about that when I was running my company but I’ve thought about since and I think that’s actually right. I think it’s worth trying to think about that. It also took me a while to learn to do things like one on one and to give clear feedback.

All of these things are things first time CEO don’t normally do, and maybe I can save you from not doing that.

The last part on the team section is about firing people when it’s not working. No matter what I say here is not going to prevent anyone from doing it wrong and the reason that I say that is that firing people is one of the worst parts of running a company. Actually in my own experience, I’d say it is the very worst part. Every first time founder waits too long, everyone hopes that an employee will turn around. But the right answer is to fire fast when it’s not working. It’s better for the company, it’s also better for the employee. But it’s so painful and so awful, that everyone gets it wrong the first few times.

In addition to firing people who are doing bad at their job, you also wanna fire people who are a) creating office politics, and b) who are persistently negative. The rest of the company is always aware of employees doing things like this, and it’s just this huge drag – it’s completely toxic to the company. Again, this is an example of something that might work OK in a big company, although I’m still skeptical, but will kill a startup. So that you need to watch out for people that are ifs.

So, the question is, how do you balance firing people fast and making early employees feel secure? The answer is that when an employee’s not working, it’s not like they screw up once or twice. Anyone will screw up once or twice, or more times than that, and you know you should be like very loving, not take it out on them, like, be a team, work together.

If someone is getting every decision wrong, that’s when you need to act, and at that point it’ll be painfully aware to everyone. It’s not a case of a few screw-ups, it’s a case where every time someone does something, you would have done the opposite yourself. You don’t get to make their decisions but you do get to choose the decision-makers. And, if someone’s doing everything wrong, just like a consistent thing over like a period of many weeks or a month, you’ll be aware of it.

This is one of those cases where in theory, it sounds complicated to be sure what you’re talking about, and in practice there’s almost never any doubt. It’s the difference between someone making one or two mistakes and just constantly screwing everything up, or causing problems, or making everyone unhappy, is painfully obvious the first time you see it.

When should co-founders decide on the equity split?

For some reason, I’ve never really been sure why this is, a lot of founders, a lot of co-founders like to leave this off for a very long time. You know, they’ll even sign the incorporation documents in some crazy way so that they can wait to have this discussion.

This is not a discussion that gets easier with time, you wanna set this ideally very soon after you start working together. And it should be near-equal. If you’re not willing to give someone – your co-founder – you know, like an equal share of the equity, I think that should make you think hard about whether or not you want them as a co-founder. But in any case, you should try to have the ink dry on this before the company gets too far along. Like, certainly in the first number of weeks.

So the question is – I said that inexperience is OK – how do you know if someone’s gonna scale past, not scale up to a role, as things go on and later become crippling. People that are really smart and that can learn new things can almost always find a role in the company as time goes on. You may have to move them into something else, something other than where they started. You know, it may be that you hire someone to lead the engineering team that over time can’t scale as you get up to 50 people, and you give them a different role. Really good people that can almost find some great place in the company, I have not seen that be a problem too often.

So the question is what happens when your relationship with your cofounder falls apart. We’re gonna have a session on mechanics later on in the course, but here is the most important thing that founders screw up. Which is, every cofounder, you yourself of course, has to have vesting. Basically what you’re doing with cofounder vesting is you’re pre-negotiating what happens if one of you leaves. And so the normal stance on this in Silicon Valley is that it takes four years, let’s say you split the equity fifty-fifty, is that it takes four years to earn all of that. And the clock doesn’t start until one year in. So if you leave after one year, you keep twenty-five percent of the equity, and if you leave after two years, fifty, and on and on like that.

If you don’t do that and if you have a huge fallout and one founder leaves early on with half the company, you have this deadweight on your equity table, and it’s very hard to get investors to fund you or to do anything else. So number one piece of advice to prevent that is to have vesting on the equity. We pretty much won’t fund a company now where the founders don’t have vested equity because it’s just that bad. The other thing that comes up in the relationship between the cofounders, which happens to some degree in every company, is talk about it early, don’t let it sit there and fester.

If you have to choose between hiring a sub-optimal employee and losing your customers to a competitor, what do you do? If it’s going to be one of the first five employees at a company I would lose those customers. The damage that it does to the company- it’s better to lose some customers than to kill the company. Later on, I might have a slightly different opinion, but it’s really hard to say in the general case.

I am going to get to that later. The question is: what about cofounders that aren’t working in the same location? The answer is, don’t do it. I am skeptical of remote teams in general but in the early days of a startup, when communication and speed outweigh everything else, for some reason video conferencing calls just don’t work that well. The data on this is look at say the 30 successful software companies of all time and try to point to a single example where the cofounders were in different locations. It’s really really tough.

Alright, so now we’re going to talk about execution. Execution for most founders is not the most fun part of running the company, but it is the most critical. Many cofounders think they’re just signing up to this beautiful idea and then they’re going to go be on magazine covers and go to parties. But really what it’s about more than anything else, what being a cofounder really means, is signing up for this years long grind on execution and you can’t outsource this.

The way to have a company that executes well is you have to execute well yourself. Every thing at a startup gets modeled after the founders. Whatever the founders do becomes the culture. So if you want a culture where people work hard, pay attention to detail, manage the customers, are frugal, you have to do it yourself. There is no other way. You cannot hire a COO to do that while you go off to conferences. The company just needs to see you as this maniacal execution machine. As I said in the first lecture, there’s at least a hundred times more people with great ideas than people who are willing to put in the effort to execute them well. Ideas by themselves are not worth anything, only executing well is what adds and creates value.

A big part of execution is just putting in the effort, but there is a lot you can learn about how to be good at it. And so we’re going to have three classes that just talk about this.

The CEO, people ask me all the time about the jobs of the CEO. There are probably more than five, here are five that come up a lot in the early days. The first four everyone thinks of as CEO jobs: set the vision, raise money, evangelize the mission to people you’re trying to recruit, executives, partners, press, everybody, hire and manage the team. But the fifth one is setting the execution bar and this is not the one that most founders get excited about or envision themselves doing but I think it is actually one of the critical CEO roles and no one but the CEO can do this.

Execution gets divided into two key questions. One, can you figure out what to do and two, can you get it done. So I want to talk about two parts of getting it done, assuming that you’ve already figured out what to do. And those are focus and intensity. So focus is critical. One of my favorite questions to ask founders about what they’re spending their time and their money on. This reveals almost everything about what founders think is important.

One of the hardest parts about being a founder is that there are a hundred important things competing for your attention every day. And you have to identify the right two or three, work on those, and then ignore, delegate, or defer the rest. And a lot of these things that founders think are important, interviewing a lot at different law firms, going to conferences, recruiting advisers, whatever, they just don’t matter. What really does matter varies with time, but it’s an important piece of advice. You need to figure out what the one or two most important things are, and then just do those.

And you can only have two or three things every day, because everything else will just come at you. There will be fires every day and if you don’t get good at setting what those two or three things are, you’ll never be good at getting stuff done. This is really hard for founders. Founders get excited about starting new things.

Unfortunately the trick to great execution is to say no a lot. You’re saying no ninety-seven times out of a hundred, and most founders find they have to make a very conscious effort to do this. Most startups are nowhere near focused enough. They work really hard-maybe-but they don’t work really hard at the right things, so they’ll still fail. One of the great and terrible things about starting a start up is that you get no credit for trying. You only get points when you make something the market wants. So if you work really hard on the wrong things, no one will care.

So then there’s this question of how do you figure out what to focus on each day. Each day it’s really important to have goals. Most good founders I know have a set of small overarching goals for the company that everybody in the company knows. You know it could be something like ship a product by this date, get this certain growth rate, get this engagement rate, hire for these key roles, those are some of them but everyone in the company can tell you each week what are our key goals. And then everybody executes based off of that.

The founders really set the focus. Whatever the founders care about, whatever the founders focus on, that’s going to set the goals for the whole company. The best founders repeat these goals over and over, far more often than they think they should need to. They put them up on the walls they talk about them in one on ones and at all-hands meetings each week. And it keeps the company focus. One of the keys to focus, and why I said cofounders that aren’t friends really struggle, is that you can’t be focused without good communication. Even if you have only four or five people at a company, a small communication breakdown is enough for people to be working on slightly different things. And then you lose focus and the company just scrambles.

I’m going to talk about this a little bit later, but growth and momentum are something you can never lose focus on. Growth and momentum are what a startup lives on and you always have to focus on maintaining these. You should always know how you’re doing against your metrics, you should have a weekly review meeting every week, and you should be extremely suspicious if you’re ever talking about, we’re not focused on growth right now, we’re not growing that well right now but we’re doing this other thing, we don’t have a timeline for when we are going to ship this because we’re focused on this other thing, we’re doing a re-brand, whatever, almost always a disaster.

So you want to have the right metrics and you want to be focused on growing those metrics and having momentum. Don’t let the company get distracted or excited about other things. A common mistake is that companies get excited by their own PR. It’s really easy to get PR with no results and it actually feels like you’re really cool. But in a year you’ll have nothing, and at that point you won’t be cool anymore, and you’ll just be talking about these articles from a year ago that, Oh you know these Stanford students start a new start up, it’s going to be the next big thing and now you have nothing and that sucks.

As I mentioned already, be in the same space. I think this is pretty much a nonstarter. Remote confounding teams is just really really hard. It slows down the cycle time more than anybody ever thinks it’s going to.

The other piece besides focus for execution is intensity. Startups only work at a fairly intense level. A friend of mine says the secret to start up success is extreme focus and extreme dedication. You can have a startup and one other thing, you can have a family, but you probably can’t have many other things. Startups are not the best choice for work life balance and that’s sort of just the sad reality. There’s a lot of great things about a startup, but this is not one of them. Startups are all-consuming in a way that is generally difficult to explain. You basically need to be willing to outwork your competitors.

The good news here is that a small amount of extra work on the right thing makes a huge difference. One example that I like to give is thinking about the viral coefficient for a consumer web product. How many new users each existing user brings in. If it’s .99 the company will eventually flatline and die. And if it’s 1.01 you’ll be in this happy place of exponential growth forever.

So this is one concrete example of where a tiny extra bit of work is the difference between success and failure. When we talk to successful founders they tell stories like this all the time. Just outworking their competitors by a little bit was what made them successful.

So you have to be really intense. This only comes from the CEO, this only comes from the founders. One of the biggest advantages that start ups have is execution speed and you have to have this relentless operating rhythm. Facebook has this famous poster that says move fast and break things. But at the same time they manage to be obsessed with quality. And this is why it’s hard. It’s easy to move fast or be obsessed with quality, but the trick is to do both at a startup. You need to have a culture where the company has really high standards for everything everyone does, but you still move quickly.

Apple, Google, and Facebook have each done this extremely well. It’s not about the product, it’s about everything they do. They move fast and they break things, they’re frugal in the right places, but they care about quality everywhere. You don’t buy people shitty computers if you don’t want them to write shitty code. You have to set a quality bar that runs through the entire company. Related to this is that you have to be decisive. Indecisiveness is a startup killer. Mediocre founders spend a lot of time talking about grand plans, but they never make a decision. They’re talking about you know I could do this thing, or I could do that other thing, and they’re going back and forth and they never act. And what you actually need is this bias towards action.

The best founders work on things that seem small but they move really quickly. But they get things done really quickly. Every time you talk to the best founders they’ve gotten new things done. In fact, this is the one thing that we learned best predicts a success of founders in YC. If every time we talk to a team they’ve gotten new things done, that’s the best predictor we have that a company will be successful. Part of this is that you can do huge things in incremental pieces. If you keep knocking down small chunks one at a time, in a year you look back and you’ve done this amazing thing. On the other hand, if you disappear for a year and you expect to come back with something amazing all at once, it usually never happens.

So you have to pick these right size projects. Even if you’re building this crazy synthetic biology company and you say well I have to go away for a year, there’s no way to do this incrementally, you can still usually break it into smaller projects.

So speed is this huge premium. The best founders usually respond to e-mail the most quickly, make decisions most quickly, they’re generally quick in all of these ways. And they had this do what ever it takes attitude.

They also show up a lot.

They come to meetings, they come in, they meet us in person. One piece of advice that I have that’s always worked for me: they get on planes in marginal situations. I’ll tell a quick story here.

When I was running my own company, we found out we were about to lose a deal. It was sort of this critical deal from the first big customer in the space. And it was going to go to this company that had been around for year before we were. And they had this like all locked up. And we called and said “we have this better product you have to meet with us” and they said “well we’re signing this deal tomorrow. sorry.” We drove to the airport, we got on a plane, we were at their office at 6am the next morning. We just sat there, they told us to go away, we just kept sitting there. Finally once of the junior guys decided to meet with us, after that, finally one of the senior guys decided to meet with us. They ended up ripping up the contract with the other company, and we closed the deal with them about a week later. And I’m sure, that had we not gotten on a plane, had we not shown up in person, that would not have worked out.

And so, you just sort of show and and do these things, when people say get on plane in marginal situations, they actually mean it, but they don’t mean it literally. But I actually think it’s good, literal advice.

So I mentioned this momentum and growth earlier. Once more: the momentum and growth are the lifeblood of startups. This is probably in the top three secrets of executing well. You want a company to be winning all the time. If you ever take your foot off the gas pedal, things will spiral out of control, snowball downwards. A winning team feels good and keeps winning. A team that hasn’t won in a while gets demotivated and keeps losing. So always keep momentum, it’s this prime directive for managing a startup. If I can only tell founders one thing about how to run a company, it would be this.

For most software startups, this translates to keep growing. For hardware startups it translates to: don’t let your ship dates slip. This is what we tell people during YC, and they usually listen and everything is good. What happens at the end of YC is that they get distracted on other things, and then growth slows down. And somehow, after that happens, people start getting unhappy and quitting and everything falls apart. It’s hard to figure out a growth engine because most companies grow in new ways, but there’s this thing: if you build a good product it will grow. So getting this product right at the beginning is the best way not to lose momentum later.

If you do lose momentum, most founders try to get it back in the wrong way. They give these long speeches about vision for the company and try to rally the troops with speeches. But employees in a company where momentum has sagged, don’t want to hear that. You have to save the vision speeches for when the company is winning. When you’re not winning, you just have to get momentum back in small wins. A board member of mine used to say that sales fix everything in a startup. And that is really true. So you figure out where you can get these small wins and you get that done. And then you’ll be amazed at how all the other problems in a startup disappear.

Another thing that you’ll notice if you have momentum sag, is that everyone starts disagreeing about what to do. Fights come out when a company loses momentum. And so a framework for that that I think works is that when there’s disagreement among the team about what to do, then you ask your users and you do whatever your users tell you. And you have to remind people: “hey, stuff’s not working right now we don’t actually hate each other, we just need to get back on track and everything will work.” If you just call it out, if you just acknowledge that, you’ll find that things get way better.

To use a Facebook example again, when Facebook’s growth slowed in 2008, mark instituted a “growth group.” They worked on very small things to make Facebook grow faster. All of these by themselves seemed really small, but they got the curve of Facebook back up. It quickly became the most prestigious group there. Mark has said that it’s been one of Facebook’s best innovations. According to friends of mine that worked at Facebook at the time, it really turned around the dynamic of the company. And it went from this thing where everyone was feeling bad, and momentum was gone, back to a place that was winning.

So a good way to keep momentum is to establish an operating rhythm at the company early. Where you ship product and launch new features on a regular basis. Where you’re reviewing metrics every week with the entire company. This is actually one of the best things your board can do for you. Boards add value to business strategy only rarely. But very frequently you can use them as a forcing function to get the company to care about metrics and milestones.

One thing that often disrupts momentum and really shouldn’t is competitors. Competitors making noise in the press I think probably crushes a company’s momentum more often than any other external factor.

So here’s a good rule of thumb: don’t worry about a competitor at all, until they’re actually beating you with a real, shipped product. Press releases are easier to write than code, and that is still easier than making a great product. So remind your company of this, and this is sort of a founder’s role, is not to let the company get down because of the competitors in the press.

This great quote from Henry Ford that I love: “The competitor to be feared is one who never bothers about you at all, but goes on making his own business better all the time.”

These are almost never the companies that put out a lot of press releases. And they bum people out.

How to Start a Startup

Welcome to CS183B. I am Sam Altman, I’m the President of Y Combinator. Nine years ago, I was a Stanford student, and then I dropped out to start a company and then I’ve been an investor for the last few. So YC, we’ve been teaching people how to start startups for nine years. Most of it’s pretty specific to the startups but thirty percent of it is pretty generally applicable. And so we think we can teach that thirty percent in this class. And even though that’s only thirty percent of the way there, hopefully, it will still be really helpful.

We’ve taught a lot of this class at YC and it’s all been off the record. And this is the first time a lot of what we teach is going to be on the record. We’ve invited some of our guest speakers to come and give the same talks they give at YC. We’ve now funded 725 companies and so we’re pretty sure a lot of this advice we give is pretty good. We can’t fund every startup yet, but we can hopefully make this advice very generally available.

I’m only teaching three. Counting YC itself, every guest speaker has been involved in the creation of a billion-plus dollar company. So the advice shouldn’t be that theoretical, it’s all been people who have done it.

All of the advice in this class is geared towards people starting a business where the goal is hyper-growth and eventually building a very large company. Much of it doesn’t apply in other cases and I want to warn people upfront, that if you try to do these things in a lot of big companies or non-startups, it won’t work. It should still be interesting, I really think that startups are the way of the future and it’s worth trying to understand them, but startups are very different than normal companies. So over the course of today and Thursday, I’m going to try to give an overview of the four areas you need to excel at in order to maximize your success as a startup. And then throughout the course, the guest speakers are going to drill into all of these in more detail.

Ideas, Products, Teams and Execution Part I

So the four areas: You need a great idea, a great product, a great team, and great execution. These overlap somewhat, but I’m going to have to talk about them somewhat individually to make it make sense.

You may still fail. The outcome is something like idea x product x execution x team x luck, where luck is a random number between zero and ten thousand. Literally that much. But if you do really well in the four areas you can control, you have a good chance at least some amount of success.

One of the exciting things about startups is that they are a surprisingly even playing field. Young and inexperienced, you can do this. Old and experienced, you can do this, too. And one of the things that I particularly like about startups is that some of the things that are bad in other work situations, like being poor and unknown, are actually huge assets when it comes to starting a startup.

Before we jump in on the how I want to talk about why you should start a startup. I’m somewhat hesitant to be doing this class at all because you should never start a startup just for the sake of doing so. There are much easier ways to become rich and everyone who starts a startup always says, always, that they couldn’t have imagined how hard and painful it was going to be. You should only start a startup if you feel compelled by a particular problem and that you think starting a company is the best way to solve it.

The specific passion should come first, and the startup second. In fact, all of the classes we have at YC follow this. So for the second half of today’s lecture, Dustin Moskovitz is going to take over and talk about why to start a startup. We were so surprised at the amount of attention this class got, that we wanted to make sure we spent a lot of time on the why.

The first of the four areas: a great idea. It’s become popular in recent years to say that the idea doesn’t matter. In fact, it’s uncool to spend a lot of time thinking about the idea for a startup. You’re just supposed to start, throw stuff at the wall, see what sticks, and not even spend any time thinking about if it will be valuable if it works.

And pivots are supposed to be great, the more pivots the better. So this isn’t totally wrong, things do evolve in ways you can’t totally predict. And there’s a limit to how much you can figure out without actually getting a product in the hands of the users. And great execution is at least ten times as important and a hundred times harder than a great idea.

But the pendulum has swung way out of whack. A bad idea is still bad and the pivot-happy world we’re in today feels suboptimal. Great execution towards a terrible idea will get you nowhere. There are exceptions, of course, but most great companies start with a great idea, not a pivot.

If you look at successful pivots, they almost always are a pivot into something the founders themselves wanted, not a random made-up idea. Airbnb happened because Brian Chesky couldn’t pay his rent, but he had some extra space. In general though if you look at the track record of pivots, they don’t become big companies. I myself used to believe ideas didn’t matter that much, but I’m very sure that’s wrong now.

The definition of the idea, as we talk about it, is very broad. It includes the size and the growth of the market, the growth strategy for the company, the defensibility strategy, and so on. When you’re evaluating an idea, you need to think through all these things, not just the product. If it works out, you’re going to be working on this for ten years so it’s worth some real upfront time to think through the upfront value and the defensibility of the business. Even though plans themselves are worthless, the exercise of planning is really valuable and totally missing in most startups today.

Long-term thinking is so rare anywhere, but especially in startups. There is a huge advantage if you do it. Remember that the idea will expand and become more ambitious as you go. You certainly don’t need to have everything figured out in your path to world domination, but you really want a nice kernel to start with. You want something that can develop in interesting ways.

As you’re thinking through ideas, another thing we see that, founders get wrong all the time is that someday you need to build a business that is difficult to replicate. This is an important part of a good idea.

I want to make this point again because it is so important: the idea should come first and the startup should come second. Wait to start a startup until you come up with an idea you feel compelled to explore. This is also the way to choose between ideas. If you have several ideas, work on the one that you think about most often when you’re not trying to think about work. What we hear again and again from founders is that they wish they had waited until they came up with an idea they really loved.

Another way of looking at this is that the best companies are almost always mission-oriented. It’s difficult to get the amount of focus that large companies need unless the company feels like it has an important mission. And it’s usually really hard to get that without a great founding idea. A related advantage of mission-oriented ideas is that you yourself will be dedicated to them. It takes years and years, usually a decade, to build a great startup. If you don’t love and believe in what you’re building, you’re likely to give up at some point along the way. There’s no way I know of to get through the pain of a startup without the belief that the mission really matters. A lot of founders, especially students, believe that their startups will only take two to three years and then after that they’ll work on what they’re really passionate about. That almost never works. Good startups usually take ten years.

a third advantage of mission-oriented companies is that people outside the company are more willing to help you. You’ll get more support on a hard, important project, than a derivative one. When it comes to starting a startup, it’s easier to found a hard startup than an easy startup. This is one of those counter-intuitive things that take people a long time to understand. It’s difficult to overstate how important being mission-driven is, so I want to state it one last time: derivative companies, companies that copy an existing idea with very few new insights, don’t excite people and they don’t compel the teams to work hard enough to be successful.

Paul Graham is going to talk about how to get startup ideas next week. It’s something that a lot of founders struggle with, but it’s something I believe you can get better at with practice and it’s definitely worth trying to get better at.

The hardest part about coming up with great ideas is that the best ideas often look terrible at the beginning. The thirteenth search engine, and without all the features of a web portal? Most people thought that was pointless. The search was done, and anyway, it didn’t matter that much. Portals were where the value was at. The tenth social network, and limited only to college students with no money? Also terrible. MySpace has won and who wants college students as customers? Or a way to stay on strangers’ couches. That just sounds terrible all around.

These all sounded really bad but they turned out to be good. If they sounded really good, there would be too many people working on them. As Peter Thiel is going to discuss in the fifth class, you want an idea that turns into a monopoly. But you can’t get a monopoly right away. You have to find a small market in which you can get a monopoly and then quickly expand. This is why some great startup ideas look really bad at the beginning. It’s good if you can say something like, “Today, only this small subset of users are going to use my product, but I’m going to get all of them, and in the future, almost everyone is going to use my product.”

Here is the theme that is going to come up a lot: you need conviction in your own beliefs and a willingness to ignore others’ naysaying. The hard part is that this is a very fine line. There’s right on one side of it, and crazy on the other. But keep in mind that if you do come up with a great idea, most people are going to think it’s bad. You should be happy about that, it means they won’t compete with you.

This also another reason why it’s not really dangerous to tell people your idea. The truly good ideas don’t sound like they’re worth stealing. You want an idea where you can say, “I know it sounds like a bad idea, but here’s specifically why it’s actually a great one.” You want to sound crazy, but you want to actually be right. And you want an idea that not many other people are working on. And it’s okay if it doesn’t sound big at first.

A common mistake among founders, especially first-time founders, is that they think the first version of their product – the first version of their idea – needs to sound really big. But it doesn’t. It needs to take over a small specific market and expand from there. That’s how most great companies get started. Unpopular but right is what you’re going for. You want something that sounds like a bad idea, but is a good idea.

You also really want to take the time to think about how the market is going to evolve. You need a market that’s going to be big in 10 years. Most investors are obsessed with the market size today, and they don’t think at all about how the market is going to evolve.

In fact, I think this is one of the biggest systemic mistakes that investors make. They think about the growth of the start-up itself, they don’t think about the growth of the market. I care much more about the growth rate of the market than its current size, and I also care if there’s any reason it’s going to top out. You should think about this. I prefer to invest in a company that’s going after a small, but rapidly growing market, than a big, but slow-growing market.

One of the big advantages of these sorts of markets – these smaller, rapidly growing markets – is that customers are usually pretty desperate for a solution, and they’ll put up with an imperfect, but rapidly improving the product. A big advantage of being a student – one of the two biggest advantages – is that you probably have better intuition about which markets are likely to start growing rapidly than older people do. Another thing that students usually don’t understand, or it takes a while, [is that] you can not create a market that does not want to exist. You can basically change everything in a start-up but the market, so you should actually do some thinking to be sure – or be as sure as you can bet – that the market you’re going after is going to grow and be there.

There are a lot of different ways to talk about the right kind of market. For example, surfing someone else’s wave, stepping into an up elevator, or being part of a movement, but all of this is just a way of saying that you want a market that’s going to grow really quickly. It may seem small today, it may be small today, but you know – and other people don’t – that it’s going to grow really fast.

So think about where this is happening in the world. You need this sort of tailwind to make a startup successful.

The exciting thing is the there are probably more of these tailwinds now then ever before. As Marc Andreessen says, the software is eating the world. It’s just everywhere, there are so many great ideas out there. You just have to pick one, and find one that you really care about.

Another version of this, that gets down to the same idea, is Sequoia’s famous question: Why now? Why is this the perfect time for this particular idea, and to start this particular company. Why couldn’t it be done two years ago, and why will two years in the future be too late? For the most successful startups we’ve been involved with, they’ve all had a great idea and a great answer to this question. And if you don’t you should be at least somewhat suspicious about it.

In general, its best if you’re building something that you yourself need. You’ll understand it much better than if you have to understand it by talking to a customer to build the very first version. If you don’t need it yourself, and you’re building something someone else needs, realize that you’re at a big disadvantage, and get very very close to your customers. Try to work in their office, if you can, and if not, talk to them multiple times a day.

Another somewhat counterintuitive thing about good startup ideas is that they’re almost always very easy to explain and very easy to understand. If it takes more then a sentence to explain what you’re doing, that’s almost always a sign that its too complicated. It should be a clearly articulated vision with a small number of words. And the best ideas are usually very different from existing companies, [either] in one important way, like Google being a search engine that worked just really well, and none of the other stuff of the portals, or totally new, like SpaceX. Any company that’s a clone of something else, that already exists, with some small or made up differentiator—like X, beautiful design, or Y for people that like red wine instead—that usually fails.

So as I mentioned, one of the great things about being a student is that you’ve got a very good perspective on new technology. And learning to have good ideas takes a while, so start working on that right now. That’s one thing we hear from people all the time, that they wish they had done more of as a student.

The other is meeting potential cofounders. You have no idea how good of an environment you’re in right now, for meeting people you can start a company with down the road. And the one thing that we always tell college students is that more important then any particular startup is getting to know potential cofounders.

So I want to finish this section of my talk with a quote from 50 Cent. This is from when he was asked about Vitamin Water. I won’t read it, it’s up there, but it’s about the importance of thinking about what customers want, and thinking about the demands of the market. Most people don’t do this—most students especially don’t do this. If you can just do this one thing, if you can just learn to think about the market first, you’ll have a big leg up on most people starting startups. And this is probably the thing we see wrong with Y Combinator apps most frequently, is that people have not thought about the market first, and what people want first.

So for the next section, I’m going to talk about building a great product. And here, again, I’m going to use a very broad definition of product. It includes customer support, the copy you write explaining the product, anything involved in your customer’s interaction in what you built for them.

To build a really great company, you first have to turn a great idea into a great product. This is really hard, but its crucially important, and fortunately its pretty fun. Although great products are always new to the world, and its hard to give you advice about what to build, there are enough commonalities that we can give you a lot of advice about how to build it.

One of the most important tasks for a founder is to make sure that the company builds a great product. Until you build a great product, nothing else matters. When really successful startup founders tell the story of their early days its almost always sitting in front of the computer working on their product, or talking to their customers. That’s pretty much all the time. They do very little else, and you should be very skeptical if your time allocation is much different. Most other problems that founders are trying to solve, raising money, getting more press, hiring, business development, et cetera, these are significantly easier when you have a great product. Its really important to take care of that first. Step one is to build something that users love. At YC, we tell founders to work on their product, talk to users, exercise, eat and sleep, and very little else. All the other stuff I just mentioned—PR, conferences, recruiting advisers, doing partnerships—you should ignore all of that, and just build a product and get it as good as possible by talking to your users.

Your job is to build something that users love. Very few companies that go on to be super successful get there without first doing this. A lot of good-on-paper startups fail because they merely make something that people like. Making something that people want, but only a medium amount, is a great way to fail, and not understand why you’re failing. So these are the two jobs

Something that we say at YC a lot is that its better to build something that a small number of users love, then a large number of users like. Of course, it would be best to build something that a small number of users love, but opportunities to do that for v1 are rare, and they’re usually not available to startups. So in practice you end up choosing the gray or the orange. You make something that a lot of users like a little bit, or something that a small number of users love a lot. This is a very important piece of advice. Build something that a small number of users love. It is much easier to expand from something that small number of people love, to something that a lot of people love, then from something that a lot of people like to a lot of people love. If you get right, you can get a lot of other things wrong. If you don’t get this right, you can get everything else right, and you’ll probably still fail. So when you start on the startup, this is the only thing you need to care about until its working.

[Audience member]: Can you go over that slide again?

So you have a choice in a startup. The best thing of all worlds is to build a product that a lot of people really love. In practice, you can’t usually do that, because if there’s an opportunity like that, Google or Facebook will do it. So there’s like a limit to the area under the curve, of what you can build. So you can build something that a large number of users like a little bit, or a small number of users love a lot. So like the total amount of love is the same, its just a question of how its distributed. [audience laughter] And there’s like this law of conservation of how much happiness you can put in the world, with the first product of a startup.

And so startups always struggle, with which of those two they should go. And they seem equal, right? Because the area under the curve is the same. But we’ve seen this time and again, that they’re not. And that it’s so much easier to expand, once you’ve got something that some people love, you can expand that into something that a lot of other people love. But if you start with ambivalence, or weak enthusiasm, and try to expand that, you’ll never get up to a lot of people loving it. So the advice is: find a small group of users, and make them love what you’re doing

One way that you know when this is working, is that you’ll get growth by word of mouth. If you get something people love, people will tell their friends about it. This works for consumer product and enterprise products as well. When people really love something, they’ll tell their friends about it, and you’ll see organic growth.

If you find yourself talking about how it’s okay that you’re not growing—because there’s a big partnership that’s going to come save you or something like that—its almost always a sign of real trouble. Sales and marketing are really important, and we’re going to have two classes on them later. A great product is the secret to long term growth hacking. You should get that right before anything else. It doesn’t get easier to put off making a great product. If you try to build a growth machine before you have a product that some people really love, you’re almost certainly going to waste your time. Breakout companies almost always have a product that’s so good, it grows by word of mouth. Over the long run, great product win. Don’t worry about your competitors raising a lot of money, or what they might do in the future. They probably aren’t very good anyway. Very few startups die from competition. Most die because they themselves fail to make something users love, they spend their time on other things. So worry about this above all else.

Another piece of advice to make something that users love: start with something simple. Its much much easier to make a great product if you have something simple. Even if your eventual plans are super complex, and hopefully they are, you can almost always start with a smaller subset of the problem then you think is the smallest, and its hard to build a great product, so you want to start with as little surface area as possible. Think about the really successful companies, and what they started with, think about products you really love. They’re generally incredibly simple to use, and especially to get started using. The first version of Facebook was almost comically simple. The first version of Google was just a webpage with a textbox and two buttons; but it returned the best results, and that’s why users loved it. The iPhone is far simpler to use then any smartphone that ever came before it, and it was the first one users really loved.

Another reason that simple’s good is because it forces you to do one thing extremely well and you have to do that to make something that people love.

The word fanatical comes up again and again when you listen to successful founders talk about how they think about their product. Founders talk about being fanatical in how they care about the quality of the small details. Fanatical in getting the copy that they use to explain the product just right. and fanatical in the way that they think about customer support. In fact, one thing that correlates with success among the YC companies is the founders that hook up Pagerduty to their ticketing system, so that even if the user emails in the middle of the night when the founder’s asleep, they still get a response within an hour. Companies actually do this in the early days. Their founders feel physical pain when the product sucks and they want to wake up and fix it. They don’t ship crap, and if they do, they fix it very very quickly. And it definitely takes some level of fanaticism to build great products.

You need some users to help with the feedback cycle, but the way you should get those users is manually—you should go recruit them by hand. Don’t do things like buy Google ads in the early days, to get initial users. You don’t need very many, you just need ones that will give you feedback everyday, and eventually love your product. So instead of trying to get them on Google Adwords, just the few people, in the world, that would be good users. Recruit them by hand.

Ben Silbermann, when everyone thought Pinterest was a joke, recruited the initial Pinterest users by chatting up strangers in coffee shops. He really did, he just walked around Palo Alto and said “Will you please use my product?” He also used to run around the Apple store in Palo Alto, and he would like set all the browsers to the Pinterest homepage real quick, before they caught him and kicked him out, (laughter) and so that when people walked in they were like “Oh, what’s this?”. This is an important example of doing things that don’t scale. If you haven’t read Paul Graham’s essay on that topic, you definitely should.

So get users manually and remember that the goal is to get a small group of them to love you. Understand that group extremely well, get extremely close to them. Listen to them and you’ll almost always find out that they’re very willing to give you feedback. Even if you’re building the product for yourself, listen to outside users, and they’ll tell you how to make a product they’ll pay for. Do whatever you need to make them love you, and make them know what you’re doing. Because they’ll also be the advocates that help you get your next users.

You want to build an engine in the company that transforms feedback from users into product decisions. Then get it back in from of the users and repeat. Ask them what the like and don’t like, and watch them use it. Ask them what they’d pay for. Ask them if they’d be really bummed if your company went away. Ask them what would make them recommend the product to their friends, and ask them if they’d recommended it to any yet.

You should make this feedback loop as tight as possible. If your product gets 10 percent better every week, that compounds really quickly. One of the advantages of software startups is just how short you can make the feedback loop. It can be measured in hours, and the best companies usually have the tightest feedback loop. You should try to keep this going for all of your company’s life, but its really important in the early days.

The good news is that all this is doable. Its hard, it takes a lot of effort, but there’s no magic. The plan is at least is straightforward, and you will eventually get to a great product.

Great founders don’t put anyone between themselves and their users. The founders of these companies do things like sales and customer support themselves in the early days. Its critical to get this loop embedded in the culture. In fact, a specific problem we always see with Stanford startups, for some reason, is that the students try to hire sales and customer support people right away, and you’ve got to do this yourself, its the only way.

You really need to use metrics to keep yourself honest on this. It really is true that the company will build whatever the CEO decides to measure. If you’re building an Internet service, ignore things like total registrations—don’t talk about them, don’t let anyone in the company talk about them—and look at growth and active users, activity levels, cohort retention, revenue, net promoter scores, these things that matter. And then be brutally honest if they’re not going in the right direction. Startups live on growth, its the indicator of a great product.

So this about wraps up the overview on building a great product. I want to emphasize again, that if you don’t get this right, nothing else we talk about in the class will matter. You can basically ignore everything else in the class until this is working well. On the positive side, this is one of the most fun parts of building a startup.

So I’m going to pause here, we’ll pick back up with the rest of this on Thursday, and now Dustin is going to talk about why you should start a startup. Thank you for coming, Dustin.

Why To Start A Startup

But yeah, Sam asked me to talk about why you should start a startup. There’s a bunch of common reasons that people have, that I hear all the time for why you might start a startup. Its important to know what reason is yours, because some of them only make sense in certain contexts, some of them will actually, like, lead you astray. You may have been mislead by the way that Hollywood or the press likes to romanticize entrepreneurship, so I want to try to illuminate some of those potential fallacies, so you guys can make the decision in a clear way. And then I’ll talk about the reason I like best for actually starting a startup, its very related to a lot of what Sam just talked about. But surprisingly, I don’t think its the most common reason. Usually people have one of these other reasons, or, you know, they just want to start a company for the sake of starting a company.

So the 4 common reasons, just to enumerate them, are it’s glamorous, you’ll get to be the boss, you’ll have flexibility, especially over your schedule, and you’ll have the chance to have bigger impact and make more money then you might by joining a later stage company.

So you guys are probably pretty familiar this concept, when I wrote the Medium post, which a lot of you guys read a year ago, I felt like the story in the press was a little more unbalanced, entrepreneurship got romanticized quite a bit. The movie The Social Network came out, it had a lot of like bad aspects of what it like to be an entrepreneur, but mainly it painted this picture of like, there’s a lot of partying and you just kind of move from like one brilliant insight to another brilliant insight, and really made it seem like this really cool thing to do.

And I think the reality is just not quite so glamorous, there’s an ugly side to being an entrepreneur, and more importantly, what you’re actually spending your time on is just a lot of hard work. Sam mentioned this, but your basically just sitting at your desk, heads down, focused, answering customer support emails, doing sales, figuring out hard engineering problems. So its really important that you go in with eyes wide open. And then its also quite stressful. This has been a popular topic in the press lately: The Economist actually ran a story just last week called “Entreupeneurs anonymous”, and shows a founder like hiding under his desk, talking about founder depression. So this is a very real thing. Let’s be real, if you start a company its going to be extremely hard.

Why is it so stressful? So a couple reasons. One is you’ve got a lot of responsibility. People in any career have a fear of failure, its kind of just like a dominant part of the part of the psychology. But when you’re an entrepreneur, you have fear of failure on behalf of yourself and all of the people who decided to follow you. So that’s really stressful. In some cases people are depending on you for their livelihood, even when that’s not true, they’ve decided to devote the best years of their life to following you. So you’re responsible for the opportunity cost of their time. You’re always on call, if something comes up—maybe not always at 3 in the morning, but for some startups that’s true—but if something important comes up, you’re going to deal with it. That’s kinda the end of the story, doesn’t matter if you’re on vacation, doesn’t matter if its the weekend, you’ve got to always be on the ball and be in a place mentally where you’re prepared to deal with those things. A sort of special example of this kind of stress is fundraising.

So a scene from The Social Network. This is us partying and working at the same time—somebody’s spraying champagne everywhere—The Social Network spends a lot of time painting these scenes. Mark’s not in the scene, the other thing they spend all their time on is painting him out to be a huge jerk.

This is an actual scene from Palo Alto, he spent a lot of time at this desk, head down and focused. Mark was still kinda a jerk sometimes, but in this more like fun lovable way, and not in a sociopathic, scorned lover way. So this is just him signaling his intention to just be focused and keep working, not be social.

So then there’s the scene demonstrating the insight moment, it’s kind of like out of A Beautiful Mind, they literally stole that scene. So they like to paint that scene and jump to these moments from other moments, with partying in between. But really we were just at that table the whole time. So if you compare this photo, Mark is in the exact same position but he’s wearing different clothes, so this is definitely a different day. That’s what it’s actually like in person. I just covered this bullet; this is the Economist article I was talking about a second ago.

So another form of stress is unwanted media attention. So part of it being glamorous is you get some positive media attention sometimes, it’s nice to be on the cover of Time and to be the Person of the Year. It’s maybe a little less nice to be on the cover of People with one of your wedding photos. It depends on who you are, I really hate it, but when Valleywag analyzes your lecture and tears you apart, you don’t want that, you definitely don’t want that. Nobody wants that.

One thing I almost never hear people talk about is you’re much more committed. So if you’re at a startup and it’s very stressful and things are not going well, you’re unhappy, you can just leave. For a founder, you can leave, but it’s very uncool and pretty much a black eye for the rest of your career. And so you really are committed for ten years if it’s going well and probably more like five years if it’s not going well. So three years to figure out it’s not going well and then if you find a nice landing for your company, another two years at the acquiring company. If you leave before that, again it’s not only going to harm yourself financially but it’s going to harm all your employees. So if you’re lucky and you have a bad startup idea, you fail quickly, but most of the time it’s not like that.

I should say, I’ve had a lot of this stress in my own life, especially in the early years of Facebook, I got really unhealthy, I wasn’t exercising, I had a lot of anxiety actually threw out my back, like almost every six months, when I was twenty-one or twenty-two, which is pretty crazy. So if you do start a company, be aware that you’re going to deal with this. You’re going to have to actually manage this, it’s one of your core responsibilities. Ben Horowitz likes to say the number one role of a CEO is managing your own psychology, it’s absolutely true, make sure you do it.

Another reason, especially if you’re had another job at another company, you start to develop this narrative, like the people running this company are idiots, they’re making all these decisions and spending all their time in these stupid ways, I’m gonna start a company and I’m going to do it better. I’m going to set all the rules.

Sounds good, makes a lot of sense. If you’ve read my media post, you’ll know what’s coming, I’ll give you guys a second to read this quote:

People have this vision of being the CEO of a company they started and being on top of the pyramid. Some people are motivated by that, but that’s not at all what it’s like.

What it’s really like: everyone else is your boss – all of your employees, customers, partners, users, media are your boss. I’ve never had more bosses and needed to account for more people today.

The life of most CEOs is reporting to everyone else, at least that’s what it feels like to me and most CEOs I know. If you want to exercise power and authority over people, join the military or go into politics. Don’t be an entrepreneur.

-Phil Libin

This really resonates with me. One thing to point out is that the reality of these decision is nuanced. The people you thought were idiots probably weren’t idiots, they just had a really difficult decision in front of them and people pulling them in multiple directions. So the most common thing I have to spend my time on and my energy on as a CEO is dealing with the problems that other people are bringing to me, the other priorities that people create, and it’s usually in the form of a conflict. People want to go in different directions or customers want different things. And I might have my own opinions on that, but the game I’m playing is who do I disappoint the least and just trying to navigate all these difficult situations.

And even on a day to day basis, I might come in on Monday and have all these grand plans for how I’m going to improve the company. But if an important employee is threatening to quit, that’s my number one priority. That’s what I’m spending my time on.

A subset of You’re the Boss is you have flexibility, you have control over your own schedule. This is a really attractive idea. So here’s the reality:

If you’re going to be an entrepreneur, you will actually get some flex time to be honest. You’ll be able to work any 24 hours a day you want!
-Phil Libin

This truly resonates with me as well. Some of the reasons for this again, you’re always on call. So maybe you don’t intend to work all parts of the day, but you don’t control which ones.

You’re a role model of the company, and this is super important. So if you’re an employee at a company, you might have some good weeks and you might have some bad weeks, some weeks when you’re low energy and you might want to take a couple days off. That’s really bad if you’re an entrepreneur. Your team will really signal off of what you’re bringing to the table. So if you take your foot off the gas, so will they.

You’re always working anyways. If you’re really passionate about an idea, it’s going to pull you towards it. If you’re working with great investors, you’re working with great partners, they’re going to be working really hard, they’re going to want you to be working really hard.

Some companies like to tell the story about you can have your cake and eat it too, you can have like 4 days work weeks maybe, if you’re Tim Ferris maybe you can have a 12 hours work week. It’s a really attractive idea and it does work in a particular instance which is if you wanna actually have a small business to go after in each market then you are a small business entrepreneur, that makes little sense but as soon as you get past like 2 or 3 people you really need to step it up and be full-time committed.

You’ll make more money and have more impact

This is the big one, the one I hear the most especially like candidates applying to Asana, they tell me “You know I’d really like to work for much smaller companies or start my own because then I have a much bigger slice of the pie or have much more impact on how that company does and I’ll have more equity so I’ll make more money as well”. So let’s examine when this might be true.

I’ll explain these tables. They’re a little complex but let’s focus on the left first. These are just explaining Dropbox and Facebook, these are their current valuations and this is how much money you might make as employee number 100 coming into these companies especially if you’re like an experienced, relatively experienced engineer, you have like 5 years of industry experience, you’re pretty likely to have an offer that’s around 10 base points. If you joined Dropbox couple years ago the upside you’ve already locked in is about $10M and there’s plenty more growth from there. If you joined Facebook a couple years into its existence you’ve already made around $200M, this is a huge number and even if you joined Facebook as employee number 1000, so you joined like 2009, you still make $20M, that’s a giant number and that’s how you should be benchmarking when you’re thinking about what you might make as an entrepreneur.

Moving over to the table on the right, these are two theoretical companies you might start. “Uber for Pet Sitting”, pretty good idea if you’re really well suited to this you might have a really good shot at building a $100M company and your share of that company is likely to be around 10%; that certainly fluctuates a lot, some founders have more than this, some founders have a lot less, but after multiple rounds of dilution, multiple rounds of option pool creation you’re pretty likely to end up about here. If you have more than this I’d recommend Sam’s post on equity split between founders and employees, you should be probably giving out more.

So basically if you’re extremely confident in building a $100M, which is a big ask, it should go without saying that you should have a lot more confidence on Facebook in 2009 or Dropbox in 2014 that you might for a startup that doesn’t even exist yet, then this is worth doing. If you have a $100M idea and you’re pretty confident you can execute it I’d consider that.

If you think you’re the right entrepreneur to build “Uber for Space Travel”, that’s a really huge idea, $2B idea, you’re actually gonna have a pretty good return for that, you should definitely do that, this is also the value only after 4 years and this idea probably has legs, definitely go after that, if you’re thinking of building that you probably shouldn’t even be in this class right now, just go build that company.

So why is this financial reward and impact? I really think that financial reward is very strongly correlated with the impact we have on the world, if you don’t believe that let’s talk through some specific examples and not think about the equity at all.

So why might joining a late stage company actually might have a lot of impact, you get this force multiplier: they have an existing mass of user base, if it’s Facebook it’s a billion users, if it’s Google it’s a billion users, they have existing infrastructures you get to build on, that’s also increasingly true for a new startup like AWS and all these awesome independent service providers, but you usually get some micro-proprietary technology and they maintain it for you, it’s a pretty great place to start. And you get to work with a team, it’ll help you leverage your ideas into something great.

So couple specific examples, Bret Taylor came into Google as around employee number 1500 and he invented Google Maps, that’s a product you guys probably use everyday, I used it to get here and it’s used by hundreds of millions of people around the world. He didn’t need to start a company to do that, he happened to get a big financial reward, but the point is yet again massive impact.

My cofounder Justin Rosenstein joined Google a little later after Brett, he was a PM there and just as a side project he ended up prototyping a chat which used to be a stand-alone app, integrated in Gmail like you see in the upper right there and before he did that like you couldn’t even think you could chat over Ajax or chat in the browser at all and he just kinda demonstrated it and showed it to his team and made it happen. This is probably a product most of you use almost everyday.

Perhaps even more impressively, shortly after that Justin left and became employee around 250 at Facebook and he led a hackaton project along with people like Andrew Bosworth and Leah Pearlman to create the Like button, this is one of the most popular elements anywhere on the web, totally changed how people use it and then again didn’t need to start a company to do it and almost certainly would have failed if he had tried because he really needed the distribution of Facebook to make it work.

So important to keep in mind the context for what kind of company you’re trying to start and like where you will actually be able to make it happen.

So what’s the best reason?

Sam already talked about this a little bit, but basically you can’t not do it. You’re super passionate about this idea, you’re the right person to do it, you’ve gotta make it happen. So how does this break down?

This is a wordplay, you can’t not do it in two ways. One is you’re so passionate about it that you have to do it and you’re going to do it anyways. This is really important because you’ll need that passion to get through all of those hard parts of being an entrepreneur that we talked about earlier. You’ll also need it to effectively recruit, candidates can smell when you don’t have passion and there are enough entrepreneurs out there that do have passion so they may as well work for one of those! So this is table stakes for being an entrepreneur. Your subconscious can also tell when you don’t have passion and that can be a huge problem.

The other way to interpret this is the world needs you to do it. This is validation that the idea is important, that it’s going to make the world better, so the world needs it. If it’s not something the world needs, go do something the world needs. Your time is really valuable, there are plenty of good ideas out there, maybe it’s not your own, maybe it’s at an existing company, but you may as well work on something that’s going to be good.

The second way to interpret this is that the world needs you to do it. You’re actually well suited for this problem in some way. If this isn’t true, it may be a sign that your time is better spent somewhere else. But best case scenario if this isn’t true, you outcompete the team for which it is true and it’s a suboptimal outcome for the world and that doesn’t feel very good.

So drawing this back to my own experience at Asana, Justin and I were reluctant entrepreneurs before we founded Asana, we were working at Facebook and we were working on a great problem. We would basically work all day long on our normal projects and then at night we would keep working on this internal task manager that was used internally at the company and it was just because we were so passionate about the idea, it was so clearly valuable that we couldn’t do anything else.

And at some point we had to have the hard conversation of okay what does it mean if we don’t actually start this company. We could see the impact it was having at Facebook, we were convinced it was valuable to the world. We were also convinced no one else was going to build it, the problem had been around a long time and we just kept seeing incremental solutions to it and so we believed if we didn’t come out with the solution we thought was best, there would be a lot of value left on the table. We couldn’t stop working on it and literally the idea was beating itself out of our chests and forcing itself out into the world. And I think that’s really the feeling you should be looking for when you start a company, that’s how you know you have the right idea.

I’ll go ahead and stop there. I’ll put some recommended books up here.

Thank you.