September 9, 2020

Lessons from Thousands of Startups | Michael Seibel on Invest Like the Best with Patrick O’Shaughnessy

Check out the Invest Like the Best Podcast Page & Episode Notes

Key Takeaways

• Founders are more concerned about making a positive impact today than in the past
• What Michael Seibel looks for in YC applicants
  • The team’s ability to build and launch the first version of the product
  • Evidence of forward-motion
  • Evidence of a strong relationship between co-founders
• “The beautiful thing about founders is their ability to lie to themselves, and the number one thing they lie about is whether they have product-market fit. The great founders, limit the amount they lie” – Michael Seibel
• YC’s secret sauce is the batch, not the advice
  • When you put a startup founder in a batch of people pushing really hard, he’s going to accomplish more than he ever thought
• In startups, it’s far more important to focus on customers’ interactions that investors’ relations.
  • Proof that you are solving a real customer’s problem gives you enormous leverage with investors

Intro

• Michael Seibel (@mwseibel) is a Partner at Y Combinator and the CEO of YC’s startup accelerator. He was the co-founder and CEO Justin.tv (which eventually became Twitch) and Socialcam.
  • Check out Michael’s website
• Host: Patrick O’Shaughnessy (@patrick_oshag)
• In this chat, Michael discusses what he learned working at YC, what makes successful YC applications, and the latest startup trends

Top Trends in the Startup World

• Social Entrepreneurship
  • Founders are more concerned about having a positive impact on the today than in the past
• B2B SaaS has been growing for the past 10 years and it’s not slowing down
  • Lately, B2B SaaS startups focus more on helping small businesses in a specific vertical
  • Example of Squire, looking to be the single piece of software that hair salons need
• YC is funding more startups outside the US
  • In the past, YC invested in international founders (10-15%) to start companies in the US
  • Now many more founders are building businesses in emerging markets

Reviewing Thousands of YC applications

• The motto of a YC application reader is “don’t be too smart”
  • Everyone tends to think they’re able to judge if an idea is good or not
    • But it’s impossible to accurately predict what will be a good idea a decade from now
  • “The first thing you have to do is let go of your prejudices and opinions about ideas” – Michael Seibel
    • Many YC companies change the problem they’re working on, so by focusing on the idea too much “you might be missing out on the pivot”
• What Michael looks for in applications (in order of importance)
  • The team’s ability to build and launch the first version of the product
  • Evidence of forward-motion
    • Michael wants to be impressed by what the team achieved since they started
  • Evidence of a strong relationship between cofounders
    • It’s crucial that the relationship won’t break with the stress involved with starting a company
    • “When I describe a startup I say: you signed up to get punched in the face every day, forever.” – Michael Seibel

Insights Into YC’s Interview Process

• What they look for:
  • The ability of founders to communicate their idea clearly
    • “A founder who truly understands what they’re working on is able to explain it to a layman” – Michael Seibel
  • Founders should know more about their customers and product than the interviewer
  • Interviews provide a great way to further assess if founders have a good relationship
• After interviews each Partner can vote: Strong Yes, Weak Yes, Strong No, Weak No
  • In the past, startups admitted to YC with 3 “Weak Yes”, tended to perform badly
  • Now, as long as there is one Strong Yes, the company will be accepted
    • If someone can’t dream a startup to be something massive, it probably won’t be

How YC Changed

• In the past, investors discounted YC startups. Barely any investors showed up at Demo Day
• Y Combinator today offers many more resources to founders
  • YC companies receive $125k (as opposed to $20k when YC started)
  • Alumni network of 5,000 people (among which are CEOs and major technology companies executives)
  • YC startups have access to millions of dollars of discounts and credits
  • Database of investors in the Valley reviewed by other YC founders
  • All YC advice is documented and available
  • Directory of YC companies that could be great customers
  • Resources for hiring and raising money
• Y Combinator is run by former YC startup founders who continuously ask themselves “what do we wish we had?”

Defining a Good Startup Problem

• Frequency, intensity, and willingness to pay are the factors to consider
  • Founders should have a special insight into the problem they are trying to solve
  • If you’re passionate about a problem, you are more likely to have an insight
• Thinking about Airbnb’s early days
  • It may seem that Airbnb guests didn’t have a frequent, intense problem they were willing to pay for
  • Michael suggests to reverse the point of view and look at Airbnb hosts
    • Hosts INTENSELY want their house to ALWAYS be booked and are WILLING TO PAY 12% fees for people to book their place

How Startups Resemble Sports and YC’s Secret Sauce

• The Startup game resembles sports more than any other career would
  • To win you have to reach for the extraordinary
    • In a regular career, being an average smart kid among smart kids you’ll tend to do well
    • In the Startup Game, if you are the average player, even among the hyper-talented people at YC, you’ll lose
    • Only a few of the highly selected founders who get to YC will be successful
• In startups like in sports, execution is a mental and expectations game
  • The fastest person on a high school running team will get better by practicing with a college team
    • They’ll run faster than they thought they could run
  • When you put a startup founder in a YC batch of people pushing really hard, he’s going to accomplish more than he ever thought
    • YC’s secret sauce is the batch, not the advice

Product-Market Fit

• Michael describes his experience realizing he had found product-market fit
  • The year Justin.TV grew 1200%, limited only by the team’s ability to keep the site up with increasing demand, Michael knew he had product-market fit.
    • “It was a sledge-hammer to the freaking jaw” – Michael Seibel
• “The beautiful thing about founders is their ability to lie to themselves, and the number one thing they lie about is whether they have product-market fit. The great founders, limit the amount the lie to themselves” – Michael Seibel

Dealing With the Psychological Aspects of Startups

• Prepare founders with facts of how hard it’s going to be
  • It’s ok if you don’t want to do it or fail
    • “You’re not a failure because you weren’t successful at becoming an astronaut. There are so few people who become astronauts” – Michael Seibel
• Acknowledge that you need to develop tools to manage emotions
  • YC particularly emphasizes the need to learn to manage the relationship with co-founders

Advice for Marketplace Startups

• You should try to “cheat supply”
  • When there’s no demand, supply won’t sign up, so you have to recruit supply one by one
  • There’s no way to collect demand if you don’t have supply
  • That’s what Airbnb did, hand-recruiting Vacation Rentals in NYC

Promise, the Startup Aiming to Reduce Mass Incarceration

• Promise‘s founders found that people went to jail before being convicted because governments are not good at ensuring that people show up to court
  • Promise worked with prisons to make it easier for people to go to court through an app with location tracking, reminders, one-click Uber
  • That helped avoid people going to jail, losing their jobs, and destroying their life
• As the founders found that their efficient system was being used to get more people in the criminal system, they looked for a better solution
  • They saw that many people would go to jail for missing payments on fines
    • Promise set up a website to make it easier for people to pay fines, even introducing payment plans
    • After a couple of months, they had better collection rates than the government
    • Treasury departments were happy to adopt Promise’s system, as it would lead to higher collection
      • Michael calls Promise “Stripe for Government”

Other Trends in Startups

• Hardware, Tesla-inspired startups are more popular than before but Silicon Valley is still mostly focused on software companies
  • The further away you are from software, the more difficult to raise capital
• With COVID, wholesale businesses are realizing that they can sell directly to customers with a simple Shopify store
  • Selling to consumers offers many benefits and Michael doesn’t see this trend stopping, even after COVID

Additional Notes

• YC received a little under 30,000 applications in the past two batches
  • Only 10% are interviewed
  • 475 companies were accepted
• Investors at Demo Day tend to discount the bottom portion of startups, forgetting that everyone who attended YC is already in the top 2% and has strong potential
• Michael has no doubts that people learn a lot more by attending YC and failing than by attending a top University
  • “People learn by doing. You don’t do at school, it’s that simple” – Michael Seibel
• In startups, it’s far more important to focus on customers’ interactions that investors’ relations
  • Proof that you are solving a real customer’s problem gives you enormous leverage with investors
• Michael tells about the kindest thing somebody did for him
  • Justin Kan and Emmett Shear informed Michael they were about to take a road trip to San Francisco to start a new company
  • They had already packed the car, but when Michael asked if he could join, they said yes and gave away their stuff to make space in the car for him

Invest Like the Best : business, entrepreneurship, startups
Notes By Giorgio Parlato