Even though we have had a lot of success, I would argue that we are far more successful in understanding failure. We are experts in failure. I’m going to talk about how we see companies fail. I have a top 10 list. [1:00]
Assuming that raising a successful seed round means you reached product market fit. This is extremely common. Founders tend to think that because investors want to invest in their company that their company must be amazing. That their company will go on to be the next big thing. That is rarely the case. The vast majority of the best investors have invested in dozens of companies that you’ve never heard of that have died. [1:30]
Hiring too quickly. Founders think they have to hire 8 to 12 people once they’ve raised an angel round. It is cargo culting what a successful company is supposed to look like. When you have that many employees, the primary job of a CEO switches to management. But for a pre-product/market fit company the primary job of the CEO should be to focus on achieving product/market fit. You can see the disconnect. A lot of the advice we have to give is you need to let some of these people go because you are running low on money. You didn’t find product/market fit. [3:22]
Not understanding your business model. We have a ton of B2B companies. The most common mistake they make is they don’t know if they can afford the process they need to do to acquire customers. Don’t just pursue the strategy that interests you. Pursue the strategy that is commensurate with how much you charge and who your customers are. [5:06]
Not understanding when it is the right time to sell into a tech startup. This depends on what you are selling. If you are selling key components the startup is less likely to rip it out [cancel]. [Using Stripe as an example] If your payment system works you are not going to rip it out. [You might be better off selling to existing businesses] There are some advantages and disadvantages to not selling to startups. Existing businesses have more money. They are less likely to churn. But if you are selling to a larger company you are often selling to an executive. You won’t know what their budget and decision making ability is. [6:02]
Assuming investors will be a large differentiator. The best advice I got as a founder was simple. An “A Investor” give you money, signs your paperwork, and shuts the fuck up. That is an A. There is a lot of room below an A. There is not a lot of room above. Founders often believe their investors will do far more for them then they actually end of doing. [8:40]
Not establishing best practices around hiring. You need to set up an intelligent hiring process that good candidates will enjoy going through. You need to have good, open communication about equity. You need to set clear expectations about what an employee’s role is going to be. And most importantly don’t over believe in your ability to hire great people. Founders always say their team is the best. Clearly not every team is the best. Companies should be trying to minimize their non-essential employees. You should not believe you are great at hiring. If someone is not an essential employee within 3 months that is a sign that you didn’t make a good hiring decision. [10:45]
Not establishing best practices around management. This is extremely common. Early stage management isn’t that complicated. What is missing is consistent 1 on 1s [between managers and employees]. Some type of all hands meeting. Getting employee buy in on strategy and tactics. If you are bringing in amazing, smart people into your company, why wouldn’t you want their opinion on what you are building? [12:42]
Not clearly defining roles between founders. After you raise money and have a few employees suddenly there are some hard decisions to make. Who is going to lead product? Who is going to lead tech? Who is going to lead sales? Who will be responsible for recruiting? It is often the case that teams will not make these decisions. [15:05]
Not having level 3 conversations within the founding team to relieve conflict. There will always be conflict within the founding team. There will always be the need for changes in roles and responsibilities. Great startups have a system to have hard conversations. Bad startups bottle it in. Bad startups get into constant fights. [16:35]
Assuming the series A will be as easy to raise as the angel round. Founders tell me every week that they can raise a series A with a $1 million run rate [There is no guarantee that is true]. I tell founders they should think about this differently. Think about it like a video game. If you have to fight a level 20 boss you have 3 options. [1]You grind up to level 10 and get your ass kicked 20 times in a row. [2]Grind up to level 20 and you have a 50/50 shot of winning. [3]Grind up to level 30 and you kill the boss every time. Which would you rather do? You need to go into a series A conversation with high amounts of leverage so you get the terms you want. Most people aren’t special. They need leverage. [17:54]
Full video here: A Decade of Learnings from Y Combinator by Michael Seibel
Learn from founders who came before you. Every week I read a biography of a founder and tell you what I learned on Founders podcast.
