Jessica Livingston at Startup School 2012

Hi everyone! This is so big league this year, I can't believe it! We have like this team of people in the back helping. There's real chairs, and look how many seats there are! This is so exciting. Um, I'm Jessica Livingston. I'm one of the founders of Y Combinator, and it's been more than 15 years since we started YC. In that time, we funded 467 startups, so I've seen a lot of patterns.

Thank you, I was a little nervous back there, so thanks. Um, there's a talk I always want to give at the beginning of each batch, warning everyone about stuff that I know is probably going to happen to them. I finally wrote down my thoughts and I'm going to share it with you today.

So we all know that lots of smart and talented people start startups. On the left side, there you see huge numbers of startups getting started, and yet, if you look at the other side, a few years later there's actually only a handful of startups that are big successes. What's happening in the middle there that's causing such failure? It's like there's a tunnel full of monsters that kill them along the way, and I just want to thank Minnow Monsters for providing me these fabulous cartoon monsters.

So I'm going to tell you about these monsters today, so you can know how to avoid them.

In general, your best weapon against these monsters is determination. Even though we usually use one word for it, determination is really two separate things: it's resilience and drive. Resilience keeps you from being pushed backwards, and drive makes you go forwards. One reason you need resilience in a startup is that you're going to get rejected a lot. Even the most famous startups had a surprising amount of rejection early on.

Everyone you encounter will have doubts about what you're doing, whether it's investors, potential employees, reporters, your family, or friends. What you don't realize until you start a startup is how much external validation you've gotten for the conservative choices you've made in the past. You go to college and everyone says, “Great!” You graduate and get a job at Google, and everyone says, “Great!” Well, what do you think happens when you quit your job to start a company to rent out airbeds?

This is Airbnb's website when they first launched in 2007. I mean, look up there where they explain what they do. It says, “Two designers create a new way to connect at the IDSA conference.” I've never even heard of that conference! And over on the left, it says, “List your airbed.” It was only for airbeds! I mean, it's unbelievable! This is not the sort of thing that you get a lot of external validation for. Almost everyone is more impressed when you get a job at Google than if you make a website for people to rent out airbeds for conferences.

And yet, this is one of the most successful startups! So even if you're Airbnb, you're going to start out looking like an ugly duckling to most people. Here are the Airbnb founders when they did YC back in early 2009, and at this point they'd already endured tons of rejection. You should check out Brian's talk from the 2010 Startup School; it's a very inspirational story.

Um, but by the time they came to us, they had maxed out their credit cards. They were eating leftover Cap'n Crunch cereal. They were at the end of their rope, and everyone thought their idea was crazy—even I actually did! But they knew they were onto something. During YC, they made some key changes to their site, they talked to users, they set their goals, and they measured everything. And the graphs started to go up!

Remember that new ideas usually seem crazy at first, but if you have a good idea and you execute well, everyone will see it eventually. We funded Eric Migowski about two years ago when he was working on Impulse, the predecessor to the Pebble Watch. Eric was a single founder, and these watches there have something in common that terrifies investors: their hardware. Poor Eric had a really hard time getting funding. No one wanted to fund a hardware company. He met with more than like 30 investors who all said things like, “I love the idea, but I can't fund a hardware company.” Some claimed they just didn't fund hardware companies as a rule. Others said that there were too many capital expenses up front. They all said no when he showed them the concept.

But he'd been building the Pebble based on all this user feedback from Impulse, and he felt strongly that people wanted this product. So I remember he talked to Paul, and they agreed he should just give up investors and put it on Kickstarter. His original goal was to raise $100,000 to make 1,000 watches, and instead of $100,000, Pebble raised $10.2 million in days! The largest amount of money ever raised on Kickstarter!

Even Y Combinator got rejected when we first started! This year is our first batch, sitting at dinner in Cambridge, Massachusetts, back in 2005. Now, there are lots of organizations doing what we do, but trust me—when we first started, people thought we were crazy or just stupid. Even our own lawyers tried to talk us out of it. But eight teams of founders took a chance on Y Combinator and moved to Cambridge and got their $12,000 per team.

And I think they'd tell you they had a really great experience. We too knew we were onto something interesting, so we focused on making something that a few people loved, and we just expanded slowly from there. But it was a slow process. Uh, when we came out to Silicon Valley in the winter of '06, we hardly knew anyone, so we decided we'd focus on meeting new investors to convince them to come to Demo Day. I got an introduction to the number one angel investor in the valley, Ron Conway, and let me show you how he tried to brush us off.

So we get the introduction, and Ron says, “Is this in Boston? I stick to local.” I said, “No, we're in Mountain View, and we'd love to have you come to Demo Day.” And he said, “So is this a chance to invest in your incubator?” And I replied, “No, we're not asking you to invest in us. We're asking you to invest in the individual startups.” And he said, “I'll have to circle back to you. I'm jammed up.” We got the “jammed up” right now from Ron Conway! It was so embarrassing! Oh my gosh! But it all worked out in the end.

Here's Ron a year later speaking to the Winter '07 batch of founders. He did wind up coming to Demo Day, and he was impressed with what he saw. Remember, if you execute well, eventually you'll win people over! And by the way, I should also point out that there's David Rusenko, who's speaking later today, and there's Harjeet Nagar, who's now a partner at YC. It was their batch.

Remember, there were two components to determination: resilience and drive. We've talked about why you need resilience—because everyone will be down on you—but you need drive to overcome the sheer variety of problems you'll face in a startup. Some of them are painfully specific, like a lawsuit or a deal blowing up, and some are demoralizing vague, like no one's visiting your site and you can't figure out why.

There's no playbook you can consult when these problems come up. You have to improvise, and sometimes you have to do things that seem kind of abnormal. This is a picture of Rat Suri; he's the founder of Elart. Elart lets restaurant customers order and pay through a tablet. He was a grad student at MIT when he started the company, and he was so committed that he got a job as a waiter to learn what restaurants were like.

You see that air duct up there over his head? That looks like a halo! This is an example of a good founder. Here are the Cison brothers who founded Stripe. Patrick is speaking right after me today, actually. They do Payment Processing online. When these guys got started, they were a pair of young programmers. They had no idea how to make deals with banks and credit card companies. So I asked Patrick, “How did you even convince these big companies to work with you?” One trick he told me that worked was he started with a phone call, and then people would pay attention to their arguments without being distracted by their youth.

By the time they met in person and the companies could tell how young they are, they were already impressed. We funded the Latron guys back in the summer of '09. That's them, actually, at their YC interview. A year after YC, they were still figuring out their idea. They lived with the Weay guys, and one day the Weay were having a party for their investors. By that point, the Latron guys were working on a product to lock your door with the iPhone.

They were able to impress one of the investors with their prototype, and he asked to have 40 installed at some startup offices he owned. The founders were totally psyched! But the commercial locks they needed to use cost $500 a pop. They didn't have $220,000 to fulfill that order, so they went around to local locksmiths and scrapyards, buying broken locks for $10 a piece. They fixed them themselves and were able to deliver on that order.

Fast forward a few years later, and these guys were ready to launch the newest version of the Lockatron, and they decided to go on Kickstarter. Guess what? A day after Latron submitted their campaign, Kickstarter changed their policy about hardware companies and rejected them! But the Latron guys decided to build their own Kickstarter, and they did it in less than a week! They wondered if anyone would even come, and not only did people come, but they've already sold close to $2 million worth of Lockatrons that way!

So let me give you just one last example—oops, ah, there we go!—of improvising. These are the Justin TV founders when they first got started, and they were having a lot of scaling issues. One weekend, their whole video system went down. Kyle was in charge of it, but no one knew where Kyle was, and Kyle wasn't picking up his cell phone. This was live video, so it was pretty critical that this get fixed immediately. So Michael Seel called Kyle's friends and found out that he was in Lake Tahoe and got the address.

So here's a problem for you: you know the address of where someone is and he's not answering his phone. How do you get a message to him immediately? Michael went on to Yelp and looked for a pizza place near the house and called them up and said, “I want to have a pizza delivered, but never mind about the pizza, just send the delivery guy over and say these four words: ‘The site is down.’” So the pizza place was, like, really confused by this, and they sent the pizza guy without a pizza. Kyle answers the door, and the delivery guy's like, “The site is down.” Kyle's like, “Oh no!” and he fixed the site! It was down for less than 1 hour from start to finish.

All right, so now we're going to move on to another monster: co-founder disputes. I think people underestimate how critical founder relationships are to the success of a startup. Unfortunately, I've seen more founder breakups than I care to even count, and when it happens, it can crush a startup. Be very careful when you decide to start a startup with someone. Do you know them well? Have you worked with them or gone to school with them? Don't just slap yourself together with someone just because they're available and seem good enough. You'll probably regret it.

And if you start seeing red flags, do something about it! Don't think it'll just go away. It's a red flag when you find yourself worrying whether your co-founder is trustworthy or whether he or she works hard enough or is competent. When founders break up for whatever reason, it's a blow to the startup’s productivity and morale. If there's three and one leaves, it's not so bad, but if there's two and one leaves, it's hard, 'cause now you're a single founder.

Now we come to the investor monster. Investors tend to have a herd mentality; they like you if other investors like you. So if no one likes you, until others do, what happens when you talk to the first ones? No one likes you! It's like the Catch-22 of not being able to get a job because you don't have enough experience. You're really starting off in a hole, and you have to work your way out of it. You have to meet with lots of investors and hear things like, “I'd be interested once you get some more traction,” or “Who else is investing?”

If you work hard enough, you may be able to find a few people who are excited enough about you and the idea to fund you, even though you don't have other investors yet. Then, when you have a few investors, you can start to make the herd mentality work for you instead of against you. Fundraising is hard and slow until it's fast and easy, but working to convince those first few investors can be really demoralizing—it's a grind!

Investors also like to drag their feet; left to their own devices, they'll just keep delaying. There's no downside for them to delay, whereas delay will kill you. 'Cause while you're fundraising, your company will grind to a halt! By the way, there are some really good investors who aren't like this; I'm just talking about the median investor. But it blows my mind how many successful startups had a hard time fundraising at first.

If you remember one piece of advice about investors, it's that you've got to create some type of competitive situation. I'll give you what has always stuck in my mind as the most amazing example of this. One of the founders of one of our more successful startups had a longstanding relationship with a VC, so when the founder started the company and did YC, this VC kept in touch for the three months, not really doing anything except kind of keeping a benevolent eye on the founder.

The VC attended Demo Day but didn't invest. After a few months, the startup gets a term sheet from a prestigious VC. For those of you in the audience who don't know, a term sheet is an offer to invest in your company. When the first VC heard about this, he shifted into panic mode. He faxed the founder a term sheet from his firm with the valuation blank and just said, “Fill in whatever valuation you want, and we're in.”

And there are worse things investors can do than just delay. Sometimes they say yes and then change their mind. It's not a deal till the money is in the bank, and we've seen some founders learn that the hard way. I could tell you a lot of horror stories to frighten you, but just remember that fundraising is a distraction.

We warn everyone early on at YC that you need to be very careful about distractions. No one’s stupid enough to play video games all day, but the kind of distractions founders fall for are things that seem like a reasonable way to spend their time. We tell people that during YC, there are three things that they should be focusing on: writing code, talking to users, and exercising.

And maybe that's a little bit extreme, but the point is—early on, nothing else for your startup matters. You need to figure out how to make something people want and do it well. Don't spend all your time networking. Don't hire an army of interns. Just build stuff and talk to users. By the way, fundraising is a distraction, but it's a necessary one, so just try to spend as little time on it as possible.

One thing that isn't necessary and is a bad distraction is talking to corporate development people or Corp Dev. These are people at big companies who buy startups. So you get a call from a Corp Dev person, and they want to learn more about what you're doing and explore possible ways of working together. The founder thinks, “Oh boy, this important company wants to work with me; I should at least take the meeting.”

And I hate to sound harsh, but what these meetings are really for is a way for them to see if they want to do an HR acquisition. An HR acquisition means they're essentially trying to hire you, and they're such a dangerous distraction that I've given them their own little monster. There's nothing wrong with HR acquisitions if that's what you want to do. But most founders don't start startups just to get a job at a big company for what essentially is a nice hiring bonus.

Talking to Corp Dev people early on isn't just a waste of time; it's uniquely demoralizing. I see this cycle happen over and over. The founders go to meet with the Corp Dev people and think the meeting was great. They're so friendly and enthusiastic, and the founders delude themselves into thinking that their startup is going to be the one that gets bought for $10 million after only five months. They start to think, “Okay, yeah, we'd kind of like to get acquired,” and they start to not work on their startup anymore, and they lose momentum.

Then they get the offer and it's essentially what they would have gotten if they'd walked in off the street and gotten a job. But by then, they've gotten so accustomed to the idea of selling that they take it. Going down the Corp Dev road seriously can deflate your ambitions.

Okay, now we come to the fiercest monster of all: the difficulty of making something people want. It's so hard that most startups aren't able to do it. You're trying to figure out something that's never been done before. Not making something people want is the biggest cause of failure we see early on, with the second biggest being founder disputes.

In order to make something people want, being brilliant and determined is not enough. You have to be able to talk to your users and adjust your idea accordingly. And ordinarily, you have to change your idea quite a lot, even if you start out with a reasonably good one. Remember this website, Air Bed and Breakfast? It was a rather narrow idea when they first launched. They started out as a site that let people rent out airbeds to travelers for conferences.

Then they changed to renting out airbeds. Then they changed to renting out a room or a couch, but the host had to be there to make breakfast. Then they finally realized that there was all this pent-up demand to rent out entire places. This evolution shows that you may begin with kind of a general vision of what your startup is doing, but you often have to try several different approaches to get it right.

And sometimes you have to totally change your idea. Order Ahead, which lets you order takeout on your cell phone, was the founder's sixth idea. We funded them for the first thing I think they presented at Demo Day with the third, and it wasn't until Order Ahead that they hit on their big idea! Even if you don't need to change the overall idea much, you still tend to have to do lots of refinement.

And one of the best examples of this is Dropbox. Here's a photo of Drew H during YC in the summer of '07. He and Arash were working on something that was obviously necessary, but the reason it was hard to predict early on whether they'd succeed is there were lots of people doing this. The way to win in this world was to execute well, and it didn't happen overnight. They had to get a thousand and one details right.

There were a lot of unglamorous leaps between that photograph and this one—looks good—between starting the company and being on the cover of Forbes. You're going to have some dramatic ups and downs in a startup. You don't have the damping that you'd have as part of a larger organization; circumstances just kind of fling you about.

The process is often described as a roller coaster because you're up one minute and down the next. Lots of roller coaster stories that I know involve fundraising, and one of the most extreme ones happened to some people we funded in their previous startup. It was based in Houston and they got a term sheet from a top-tier VC in Silicon Valley, and one of the conditions was that they base their company in the valley.

So they said, “Fine.” They sold their houses, moved their families into corporate housing in Houston until they found places in the valley. The documents were already signed, and the money was scheduled to be wired on Friday, and they were going to start working on Monday out of the VC's office. So Friday comes around and, for some reason, the money was not wired.

So they call the VC to ask if they should still come out, and the VC's like, “Absolutely!” So they get into their minivan and they drive from Houston to Silicon Valley, and they stop in Vegas to celebrate. This is the up part of the roller coaster. Um, so on Monday they set up all their stuff in the conference room of the VC fund—all six of their team there—and by that Wednesday, the money was still not wired.

So they had a board meeting planned for that day, and they decided to invite the VC. In this meeting, the CEO talked about how signup numbers had gone down temporarily because they had changed the way they measured them. I think you know how this story is going to turn out. The VC had actually gotten buyer's remorse, and he used this as an excuse to break the deal.

Remember, they had signed all the documents, sold their homes, moved to Silicon Valley, and were just waiting to get the $7 million wired to them. Instead, the VC bails. He kicks them out of their conference room. The founders had to call their wives back in Houston and go back with their tails between their legs, and they had to lay everyone off. Can you imagine? Just a few days before, they were celebrating in Vegas, and now they have nothing!

Incidentally, to get to a story that's extreme, we had to use an example of a startup we didn't fund, 'cause I don't think a VC would probably do this to a startup we funded. Um, now let me just tell you about the other half of the roller coaster. We funded the Codecademy team in the summer of 2011. Their original idea didn't work, and they kept exploring new ones. It wasn't until late July that they started working on their idea for teaching people to code online.

They launched just three days before Demo Day, and in those three days, they got over 200,000 users! I mean, they only launched so they could get up on Demo Day and say that they were a launched company! That's Zach Sims, presenting on Demo Day. They never expected that in just three days, they could go from a startup with an unlaunched idea and get up on stage and announce they had 200,000 users, which is just about the most exciting thing you can say to investors.

The theme here is how extreme things can be. Just remember that no extreme ever lasts. Don't let yourself get immobilized by sadness when things go wrong. Just keep putting one foot in front of the other and know that we get better and better. But don't get complacent when things are going well. In reality, things are never as bad or as good as they seem.

And by the way, what makes this roller coaster even worse is that while you're on it, there's this huge audience watching everything you do. You'll have trolls and reporters say outrageous things about you online, so be ready for that and have a thick skin.

So everyone knows that startups are hard, yet when we watch people do them, they're always surprised. The reason they're surprised is that they don't realize how bad these specific problems can be. I've seen some very smart and talented people get so demoralized that they just gave up. Startups are not for the faint of heart! I realize that this is not new news, but I wanted you to at least understand how they're hard early on, so that when you run into these specific monsters, you'll know what to do.

Thank you!