Y Combinator Do’s and Don’ts: In Conversation with Dalton Caldwell and Michael Seibel (Y Combinator) | Disrupt SF (Day 3)
7:51PM Sep 10, 2018
technical co founder
So he's really exciting actually to have Dalton Caldwell and Michael Siebel from Y Combinator discuss how yc has managed to get to this point about 10 or 11 years after they started in 2007 together with my colleague who is also editor at large Josh Constine from TechCrunch. Round of applause, everybody.
So normally at disrupt for the last few years, we've just been talking about the boom times everything seemed to be going pretty well for technology. Yeah, we got a little hiccup in valuations a little correction here and there. But overall, things are going pretty well. This year was different the world all that has turned against the tech giants like Facebook and Google. And that's actually good news for Y Combinator, the startup accelerator has graduated over 1600 companies hoping to disrupt these giants, including many founded by the departed execs from those giants. So I'd like to start by just getting a little bit of a lay of the land, what's going on with big tech, and how is that influencing the flow of startup creation.
So I think there's two things we want in big tech.
The first is their branding is getting is such that their employees are starting to say, is it really worth the money and perhaps I should strike out on my own and really change how people are perceiving tech. I think the second thing is that unfortunately, they're starting to control the methods for distribution.
Email, messaging, social networking, those used to be open platforms that people could build on top of their now little more limited, and I think that's going to massively impact how innovation happens in the next 10 years.
and if you think about it, in terms of human potential, everyone knows people that work at these big tech companies and are working, I don't know, five or six hours a day
when they're capable of so much more. And so if you think about the sheer amount of talent that's warehouse it and these big companies that are just working on a title area of the site to optimize ad click through is by 3% versus what these people are capable of doing if they start their own companies,
I hope people go start more companies versus optimizing any 3% more ad clicks on a small part
of the site. You see these like product masters becoming pixel pushers. Yeah, it will, we're just optimizing that tiny little bit of the flow. And I think when they look out at that massive company that has 50,000 employees, 100,000 employees, it's hard for them to tell what their real impact is. And I think what you guys are really focused on is how can the fewest amount of people make the biggest impact. And so you've had, you know, now 1600 startups come through your your program, but you also just admitted 15,000 companies to your startup school accidentally. So tell us the story. How did you screw up so badly as to let in more startups to your program than all of the companies who ever graduated from the main yc.
So technically, this isn't the worst to screw up when it comes to meeting. Okay, wait, stop,
and just tell us the worst screw apparently,
I think the UC system might have screwed up to the tune of 30,000. Oh, yeah. When so we're like, still doing really well.
I think first we we actually did that back in college, we wrote like a humor newspaper. And we put out a paper that said this one morning that a whole bunch of people I've been accidentally admitted and twisted their names. And these we had somebody who actually, like, packed up their bags.
Have you guys seen anybody who, you know, when they heard that they were accidentally admitted to this program that they like, lost their minds, we thought that they were like, we're suddenly the next Mark Zuckerberg,
you know what it's been, it's been great. Everyone was, needless to say, a little disappointed at first. But when we accepted every
One, the like, outpouring of love was huge. And we always wanted startup school to be massive. And so this kind of fun mistake caused us to make startup school about five times bigger than we thought it was going to be, which has been great.
And the quick context here is the whole idea of startup school is that anyone could do it. It's a it's a massive online course. It's different than the core Y Combinator program. And we created it because we wanted everyone to have access to the online lectures and have access to all the best practices there.
The only part of it where we messed up was there were some parts of it where you got to do a little bit more. And so then we just opened it up to everybody. But again, the whole point of us doing that was to make it so that anyone in the world can participate. So we're not too bummed about the whole thing, right?
And now, I mean, they're almost 30,000 people that's participating in this startups around the world. So I can't complain about that at all. So some people think that offering startup education to everyone could actually be doing
dangerous because you might be giving people false hope they might, you know, mortgage their house and need to spend their life savings trying to fund themselves, or the very least, they might just like, leave a really steady job. And that can be tough for their family. You can also say that these founders build character, even if they do fail. So why are you trying to democratize startup education, and why does the net potential negative impact outweigh the negative impact pale in comparison to the real positive outcomes you guys are producing,
I think it's still pretty special to be a startup founder. It's not the everyday person that says, I want to quit my job, go out on my own, and try to make something that no one's ever thought of before. So I don't think anyone who has that crazy thought shouldn't be supported. And when I came out here, 10 years ago, I mean, Justin TV started, twitch started as a show a TV show about Justin. And if people had said to us, oh, screw you get out of here, we never would have built which. So in my mind, if you decided to be crazy enough to be a founder, you deserve the support.
And so sometimes it's not necessarily about judging them by the company that they come in with. A lot of times, it ends up being something really different courts. And so how do you how do you assess that, and somebody that it's not just about, oh, they have a great idea. And they're going to be great at this, but that they're going to be truly great at entrepreneurship, what kind of signals do you look for in them.
So I do a lot of startup recruiting. And I talked to a lot of college students and otherwise. And one of the benefits of startup school that we tell people is, aspiring entrepreneurs think that the way you start a company is to first raise money for it. And this is not correct, the way you start a company is to come up with an idea, and then maybe try to get users and figure out if you're making something that people want. And so the way you evaluate if something is good or not, is evidence that someone has actually begun to build a startup versus immediately trying to raise money for just an idea. And this is one of the reasons we put this front and center in the course is that, again, like a lot of people because of the tech press. So fundraising focused the I would argue that the naive assumption about the way you start a startup as you first create a pitch deck, and then you go network of investors. And then like the other part about building a product, what have you is later. And so that's certainly something we look for in founders is folks that don't put the cart before the horse. But I do think that's something the teacher does that make sense. Like, that's, we really try to hit that hard in the course.
I think that isn't apart the media's fault that we focus so much on the funding rounds, because I think a lot of times reporters are low to make their own bets and say, Hey, nobody else has validated this startup. But I think it has a real potential. And I hope that as an industry, the media can start to say, hey, these investors aren't that much smarter than us No offense, hey, I think ever it's all kind of just an art less than a science and so to try to say that only these people can be the kingmaker in these others can't I think you end up leaving out a lot of the the potential companies. And what I'd like to see you guys doing now is moving more internationally in China, look for those companies. And so maybe you can tell me, how do you think the the future of the, you know, the next round of unicorns? Are we going to see a lot more of those internationally? And why? And are those companies going to move to Silicon Valley or stay at home. So about a third
of the batch right now is international. And we've started to see international companies really succeed, they tend to have two flavors. One is company that want us wants to sell the tech companies. So they'll get started somewhere else, they'll move to the bay and they'll stay the other local consumer companies are local b2b companies that have come to the Bay, get learning, raise money and go back home and execute. And we're starting to see those companies do really well. I think both Robbie who's doing delivery and in South America and paste stack is doing payments in Nigeria are two of the many examples of companies that came to yc went home and are building amazing companies,
what do you think it takes to actually get more Silicon Valley venture capitalists funding companies from those kind of places, because I've especially heard of there being a terrible like Series B gap where once you get to needing a little bit more like growth capital, that fun kind of vault, the floor falls through underneath you. And these companies say like, oh, if I don't already have all these us connections, I can't find that kind of capital at home,
I think a couple things going to happen. One, I think yc is doing great work in this space, because we can fund them. And also when yc puts its brand on a company, I think investors get a little bit more comfortable with something that's less normal to them. The second thing, though, is I think companies going to start borrowing a little bit from China, I think you'll see a lot more companies invest in these foreign markets, they know their space better than a lot of investors. And if they're, if there's another company in the market, they can't really touch, they might as well invest in it. Speaking of that, what do you think
about the influence of international capital, like these things like SoftBank, the Saudi money flowing into startups, is that make it easier for these companies to exist? Or are we going to see that kind of dilution, there's, there's this talk of when the like, after the the bubble burst, and there was that downturn, you had this moment when there were fewer companies getting funded. And that led to this concentration of talent and things like PayPal, and that's what you have like the PayPal mafia, all of these incredible people ended up at a few startups rather than them being distributed across the massive field with just like one smart person in each room. Tell me about that. Do you think that that's actually an influencer of the creation of high quality startups? Or can that app like in one great person make a startup around
them, I don't think it's the capital that's causing that dilution. I think it's the big companies that are taking talented people and putting them on the sidelines. I think that if you're a big company, now, you feel as though you need to sell a dream, get the person in, lock them down with stock options, and put them in the corner somewhere. And I think that most of the founders or potential founders right now are locked away in that in those companies.
It's either we're seeing a very different trend there, because these big companies know that the little companies are coming to disrupt them. And I feel like, you know, this latest wave has done everything they can to prevent that, whether that's acquiring companies really early cloning companies, but also, just like you said, hoarding talent. And I think we're seeing something really different happening with stock options. And these grants, they're like, are you guys hearing of people being like, Oh, I would love to start a start up, but they just gave me more like stock options that are gonna vest for another four
years, the best, the best trick I've heard so far is you come into the company and getting paid 120, within six months, you're given a half a million dollar stock option package that vests over four years. And so you think to yourself as an employee, especially a young employee, it's like, I now have half a million dollars, that's now my savings account, you get a new one of those every six to 12 months. So you're spending goes up, you get that house, you get that car, you're waiting and waiting and waiting for that stock to vest. And then there goes your 20s your best chance of starting a company early, you wake up one day, you're out of the game. And it's interesting because the these companies are smart, they were started here, they know the story of how their disruptors get started. And they've just started figuring out like, screw acquiring them. Let's just grab the founders before they even start the companies.
Yeah, because if you start to, if you have that mortgage, you've got those car payments waiting on you. You're not going to take that risky bet of like, Oh, go start this startup. Who knows? If it's gonna work out? You're gonna say no, it's like, kind of like those finance guys who get trapped in the higher and higher income brackets. And they say, Oh, now I have this massive mansion in the Hamptons. How am I going to go to like a go do pro bono work? Right? Yep. I I think along that I want to know a little bit about what is helping companies get into Y Combinator. I think a lot of people out here are wondering whether they're trying to actually apply to yc, whether they're just trying to pitch to investors were, even if they're just trying to pitch a project inside of their own company, they want to know what are the the like signals that their bosses those investors are going to be looking for, to say, this person is actually going to go through with it
will let me give you the two biggest misconceptions. And then Dalton can give you the things that are actually good. I think the two biggest misconceptions is our one most of investing, you have to network, most of investing, you have to know someone, the vast majority of yc companies have never met a yc partner. And a huge number of them have never met a yc alum, and therefore, thousand alone. So you don't have to know anyone in yc to get into yc. And the other big assumption is that you have to be further along post launch growing 60% of the companies in the last batch got into yc pre launch. And so I think those are the two biggest misconceptions that keep people from applying which we try to kill every day. In terms of what's good. I mean, this is Yeah, I mean, in
terms of what's good, the most important thing is to have the technical talent on the team to build the thing you want to build. And that doesn't necessarily mean programmers. If you're building a software product, that means programmers. But if you're building a biotech company, you need someone that could do the biotech. If you're building a robotics company, you need a roboticist. So you just see a very high percentage of aspiring founders that lack the technical talent on the team. They think they can outsource it or otherwise figure it out later. And they want to raise funding for it. And we just strongly encourage having the talent that you need to make the thing on the team. And also having evidence that you can actually ship something is really good.
Yeah, I feel like we've seen this era where, whether it's through SAS services, Amazon Web Services, suddenly, there's all these little like tools, you can plug into your startup things you don't have to do. And I think that's there. And there's also these these like outsourcing firms, games like gig stir, or even top towel. And these other companies that say, oh, will come in will do the engineering for you. And I've heard some horror stories I just talked to this company from from Florida, they basically spent their entire seed round with one of these outsourcing companies. And then when they got them product back, it was a Genki piece of shit. It wouldn't work at all. And so I was wondering, you know, how you when you look at those companies, and they say, Oh, we don't have that technical talent? Are you just like, no? Or is there are there resources you can point them to, to actually help them find that, like, if you're, if you're one of these people out there saying, we got a great product idea. We've got some good designers, marketers sales people, but we lack that real technical talent, how do they go and find that without being like, at those terrible startup mixers, or like, find your technical co founder thing, which is sort of like this terrible version of the bachelor, where it's like everybody trying to get the rows from the one CTO,
that sounds very familiar. Yeah, we know exactly what that is. Um, I would say, there are three hacks, I think the first hack is start with the team, don't start with the idea if you can be if you have friends who are software developers, talk to them come up with an idea together, so they have ownership of front, I think the second hack is go to your personal network. I think too often people think that they need someone way more experienced, and they actually need and they really should be targeting someone who's a friend, someone who, when the times are rough, they're actually going to want to be sitting next to them versus some stranger who has like, theoretically, more skills. And then the last thing is, it takes 10 years to build a big company, if you don't have a technical co founder, oftentimes, it's better to go work at a start up for a couple years, and build a network and make some friends. If I could tell you, you know, something that you could do in two years, that would significantly increase the chances of your startup being more successful, this would be it. I think, one
of those misconceptions is that people think they have to hire their CTO forever, yes, they don't really understand that. A lot of times, as your company grows, you're going to have new people who are going to need to take over those roles. and old people who were the greatest CTO for a series A or seed stage company can't be the series The the one that's building on a 200 person engineering team, and how do you prepare companies to make those hard decisions?
Well, you know, I think that like, the first thing is, the vast majority of companies don't have to make those decisions. The vast majority of companies like will start test, the hypothesis won't work. So when I talked to founders were, that's their number one concern, I tell you, like, focus on the problem right in front of you, are you making something that even 10 people love? Let's start with that, then I'll start with 100. By the time we get to 10,000 people, and you might need to change your team will deal with that when it comes. Yeah, I feel like
I hear a lot of companies where the first thing they do is, I design a logo, then we're gonna go, ma'am, you got to pick up pick the name, because it's definitely important to have a name that you if you spell it, you can pronounce it. And if you hear it, you can spell it. I've heard those are the best rubric for creating a startup name. But then you gotta you gotta code the, the mockups and make your seed duck first got to make the seed decks. So the last thing you want to actually get out of the building and talk to real people and see if they want the startup. And it's terrifying when I get a business card from someone who seems like they've never actually asked anybody if they want this company, or if they've gotten those sugar coated responses from family like,
yeah, that's a cool idea. Wow, that's, that's interesting. Interesting
means that you're going to fail for sure.
But there are new factors coming in that are preventing companies from having the same success, especially in the seed stage, especially around the consumer faith stuff. Maybe you could talk to us a little bit about what are the things like the Facebook cloning machine mean for consumer startups? And how are you seeing them, maybe take a different tack or seeing different ideas that are way out of the box instead of something that Oh, that would be an easy thing for Facebook to copy.
What's interesting thought, I think that what we are seeing, because the big companies have locked down a lot of distribution is founders of being more resourceful, and actually tackling different non traditional areas. We funded a company named promise that's actually trying to
change incarceration of people. And the number one thing they point out as the vast majority people in jail are in jail pre trial because they can't afford bail. And I think what's I mean, maybe the unintended positive consequence of all of these channels being locked down, or founders are finding new areas and new places where they can compete. I think we both strongly believe that tech is not an industry it's a float across every industry. And so I think that's what's most fun. Now, you see with yc companies is you know, they're not limited to social networks. They're not limited to like photo sharing apps. They're now starting to say we can solve any problem we could do this better than anyone out there Yeah,
I like some of the newest batch things like Papa which is like Airbnb for grandkids. Yeah, basically like help senior citizens get in touch with college students and gets actually have human interaction with people a lot younger than or CV therapeutics, which is working on CBD. And you know, the the new cannabis industry where there aren't any real giants yet to go out and copy you like, surely Marlboro is coming eventually. But I think for now, there's a real opportunity to be in these spaces where there is no true incumbent who can come out there and copy you guys. So just to recap, a few of the awesome insights we got from you guys in the real question for these big tech executives, is, is it worth the money to sell your 20s to be pushing pixels and changing something tiny when you could go and have a real impact of the startup. But the problem is, they are controlling methods of distribution. So there's a reason why people are staying there, it's a lot easier and a lot less risky. But you're also going to make less impact. And you guys are trying to democratize the startup education, entrepreneurship education, because even though maybe not everybody is ready to start a startup. The ones who are willing to make the jump are going to build character, even if they fail, and at least they're gonna have something good on their resume afterwards. But what they have to do is go out validate their assumptions. First, don't raise money, don't pick a name, don't start coding your app, until you know, you really want to build something. And now yc is validating new whole areas, whether those are international markets like Nigeria, or whole new areas, you know, like cannabis and some of these interesting new marketplace plays. And while the big companies are hoarding talent and using stock grants to keep you spending too much to ever go take a risky choice swing at a startup, you know, there's more and more of these really crazy companies out there, there's still opportunity for people to come out and get something new. And as long as you have the evidence that you can ship ship a product you can you've recruited real technical talents, you don't just start with a with raising but instead you have a real idea. You go to your personal network, you find the people that you need, I think you can actually still beat those big incumbents not by beating them at their own game by making a whole new game to play. Thank you guys for coming and talking with us. And thank you all for watching. Thanks.