Essential Startup Advice During a Pandemic

[Music] Hello everyone, my name is Alex. I'm here from TechCrunch to talk a little bit about the startup world, the pandemic, what has changed, and what is the same. I'm very lucky to have Jeff Ralston from Y Combinator here with me today. Jeff, uh, before we get into all the work stuff, you doing good? Family safe? Everything okay?

Thanks for asking, Alex. Yeah, everyone is really doing great. I feel very fortunate, in fact, because life is pretty good right now, and it's a really tough world out there, but yeah, everything's good. I hope the same is for you and your family.

Yeah, no, we're doing good. I feel like you and I are living kind of the software company life during the pandemic; we're doing fine. Well, there's a lot of struggling out there in the broader market. Uh, but let's talk about the pandemic and what's changed. You know, if we go back to the March-April time frame, startups were culling staff, pulling back on spend, thinking a lot about, you know, extending runway, trying to figure out ways to make sure they had plenty of cash. And then if I go over the summer, much more aggressive investing, startups raising extension rounds to go out there and really leverage on growth.

Where are we today in terms of the risk-on, risk-off sentiment inside the startup world? You know, I have to admit I've been surprised at how seamlessly the venture world transitioned to investing over Zoom. I think that's sort of a, um, the biggest wake-up that I've had during this whole pandemic is that it turns out that they haven't slowed down much. I think there was a little slowdown, right, in March-April-May time frame when we didn't really know what was going on, and then sort of seamlessly they just got back to business, and so did startups.

So, I would say that the overall perspective is super positive. Lots of folks are starting companies, as many as ever. We're getting applications at rates that are somewhere above what we got last year, and the quality of the founders is terrific. The summer batch, we can talk more about that, which was entirely virtual, went great. The fundraising of that batch afterwards went great; it's still going great. So, I'd say overall, the signs are mostly or even all positive.

Yeah, it feels very risk-on right now. I mean, that's what I keep hearing from people at the kind of early, middle, and later stages of the VC community. It's amazing how fast things flipped over the summer into this more bullish perspective. But you know, when you're talking to, let's just say, companies from the summer batch of YC that are now, you know, graduated, in the market, operating kind of under their own steam, do you guys say that they should have, you know, more cash than you might have a year ago? Is there any, uh, push to be a bit more conservative on the financial side, the investing side for these companies?

Yeah, I think, you know, look, the advice we give startups now is not radically different than we give all the time. You know, Paul Graham wrote this essay a long time ago about being default alive, and it's always good to be default alive, to try to find a place where you can survive without raising more money. I would say it's more intense now, so think just a little bit harder about getting to product-market fit and making sure you have product-market fit and being honest with yourself about it. And, you know, conserve cash.

We always say hire slowly and fire quickly—well, hire even more slowly than you might otherwise and be more careful. Growth is obviously key to startup success, but you need to think about how you're growing and when you're going and whether you're doing it in an intelligent way more now than ever before, just because the economy is so uncertain. Um, that, you know, before the election that was even more true, but now what is 2021 going to look like? I think it's an open question that is very difficult for anyone to answer. So, creating a startup in that environment, I think you have to be just a little bit more wary of the potential pitfalls out there.

Does that wariness encourage startups to get a little bit more serious earlier about revenue growth? I know that YC plays at the very early stage. A lot of companies that demo day are still developing their product, aren't even out there yet, which is totally fine. But it seems that if the market was a bit more uncertain and investment was a little bit less, uh, you know, obvious or like determined to happen, are you telling companies to get, you know, a bit sooner on the revenue pedal?

Yeah, you know, I don't really know how to parse that. Some companies, it makes sense to go after revenue. That's what default alive means, by the way, is get revenue, get enough income so in the worst-case scenario you can survive on your revenue. And it's always a smart thing to do. If you're going to measure how your startup is doing, revenue is always the best metric. Now, it's not the only metric, and it depends on the startup you have and what you're trying to build and what you believe the appetite of venture capital is to fund growth without revenue.

So, I don't, you know, I don't know really how to parse that. Some companies should go to revenue as early as possible, and some shouldn't. Whether that pandemic changes that or not, look, it's better to be default alive during a pandemic and during uncertainty. So yeah, if you can get there, you should.

Yeah, no, I was talking to a group of investors, um, the other day about this, and they were talking about how, you know, AR thresholds, revenue thresholds that used to be in play for the Series A, for example, have really changed around. And so I was kind of curious if that had impacted things at the earlier seed stages, but it sounds like it depends on the sector, the customer focus, and kind of other things. So, it's not a question you can answer, uh, in aggregate, Jeff, is that fair?

Yeah, you know, obviously I will not pretend to be a Series A expert, but I do think that there's a whole different set of criteria that Series A funds need to put in place that is just different when you're just trying to figure out how to actually build that thing that people want and get it into their hands and figure out if you have a path to growth and to revenue.

Yeah, so let's talk about the pace of innovation inside of startups. I've been going to YC demo days forever since they were down in the South Bay since they were NSF. I went to the last couple in a remote setting, so I've been through thousands of YC companies. And to be clear, I've always really enjoyed it. It's a fun day, a lot of enthusiasm, excitement, and people just really getting hyped about building stuff.

But one thing that I noticed in the most recent batch, this summer cohort, was that, um, a lot of companies were applying ideas to different geographies. And my favorite example of this was Bakayi, which was applying kind of the Shopify model to India on top of the WhatsApp platform. Brilliant company, great founding team, growing like all heck, fantastic. But are we seeing the same pace as we used to of kind of like net new startup ideas, or are we more focused now on spreading out things we found out that work to new geographies where they haven't currently, you know, made it there yet?

Well, gosh, I guess your question is what's the definition of a new startup idea? Because, uh, you know, I think that's sort of an argument over what real innovation versus incremental innovation is, and again, that's a difficult thing for me to parse. Let me say this, though: the amount of creativity and innovation we see in the application set that comes in hasn't changed.

Now, um, yeah, it is for sure there's some trends about people thinking about the future of work and applying SaaS models to things that perhaps in one geography haven't really been built yet. For sure, that is the case. It's kind of smart to look at what works in an economy like the United States and say, hey, we can build that in India. But that doesn't mean that you don't see local innovation for local markets. You know, a company of ours—this isn't that new company, but just as an example—called Meesho in India, you know, they figured out a way to create a B2B marketplace for all these local sellers, mostly women in local villages, and get them the goods they need. That wouldn't really work in the United States; it's just a completely local phenomenon, and it's growing extraordinarily well.

So, it sounds like the answer then is a mixture of both. We are seeing kind of net new local things and also some appliance models. No, I ask because I agree with you that it's not a bad thing to take a model that works and apply it somewhere else, but I feel like the era in which we got the sharing economy we had the explosion in mobile—those big platform-style trends seem to have kind of been figured out, and so I'm trying to figure out what the next wave of change will be, you know, what the next platform play.

Sure, sorry to interrupt. I was going to say that, you know, people are creating new platforms and building on top of platforms. Like, suddenly—it maybe suddenly is the wrong term—but Shopify looks like an extraordinary platform on which to build all sorts of businesses, and there's a number of YC companies that are doing precisely that.

Um, I do think there's something that happens in new markets where you kind of leap frog, where platforms don't exist, and you see a lot of fintech, for example, innovation happening in countries like India or Indonesia, uh, in various places around the world, South America as well. But, um, I don't know that, you know, as I think about whether there's this maturation happening in the set of platforms and that new platforms won't be built, I always think that's kind of a dangerous thing to hypothesize because things are still moving so fast.

Oh, to be clear, I think there will always be a next platform. I'm very bullish long-term about VR and so forth. I don't want to say that we're done; we're definitely not. But, um, just like yourself and—and they are an interesting topic as you bring them up because we still see lots and lots of innovative ideas there, and we still have to ask ourselves when is that going to happen?

But yeah, you know, take cryptocurrency, take the blockchain—still, you know, one of those platforms. We have an extraordinary company, Coinbase, which is built around the cryptocurrency, but still, that platform hasn't really come into its fullness for sure.

No, no, lots of work to be done there, and Brian Armstrong's done a great job building, I think, an 8 billion dollar company over at Coinbase. Um, when you're thinking about the future, what areas of the startup world do you think are the most exciting? Are you particularly into, I don't know, BDC, fintech, or what's a place where you see a lot of innovation around the world that makes you very excited about what's going to come next?

I think that, um, one of the interesting things about the pandemic is that it sort of accelerated how people are thinking about the future of X. When I think about the future of work, the future of school, the future of medicine, you know, you have remote school—everyone's in a remote school—what does that mean? You have, uh, you have so much innovation around telehealth and, uh, around how we deliver medical services to folks. Even the fact of the pandemic, um, caused a ton of innovation in how we actually think about treating and testing for illnesses.

All those domains seem to just be turbocharged right now. People are thinking about different ways in which we can imagine the future faster than we would have otherwise. Today, um, I'm also super interested in the idea of embedding cognition in all sorts of different areas. People call, you know, people might say that's the AI. I just think about making software smarter throughout a lot of different domains, maybe every different domain. I think that's really exciting and going to change the way we interact with pretty much every service, every business that we do.

No, I'm excited to hear that because I could really use it. I feel like what's amazing is that even in these, um, you know, modern computing systems that we live inside, everything is incredibly siloed, incredibly, um, stupid compared to, you know, they can't—apps can't talk; my browser can't talk to anything else. It feels very, very 1994 in the modern era. You think we would have gone farther with that technology, um, by now, Jeff?

Yeah, sometimes it's still extraordinarily frustrating because when you do interact with something that knows you and reacts to you and really, possibly, then you go into a doctor's office and they give you seven sheets of paper to fill out. It's sort of—it's stunning. So, I do think there's a lot of innovation, a lot of progress to be made in all of those arenas, and I think one of the points you're making is that getting different areas, different domains, to talk to one another more effectively, that's going to be really interesting when we have more integration in our lives.

And it's going to take some time to do that. Super hard, super complicated. We can't even get different medical records systems to talk to one another yet, so in one domain—but eventually, I think we'll get there.

Yeah, my spouse is a physician, so I'm incredibly aware of how bad the medical record world is. Um, I want to talk about the end of the pandemic. One thing that we've all seen in the last month or so has been, you know, good news about vaccines. There seems to be some optimism that, uh, maybe by the end of next year, we could be almost back to normal. And I'm curious, you know, what does that leave open for startups? Should they begin planning more bullish investment scenarios for their budgets? Should they be thinking more about hiring plans? Like, what does the tail end of this aberration of an era mean for the companies that are growing the fastest?

Well, I think for early-stage startups they should kind of ignore that and pay attention to what's right in front of them: get product-market fit, grow when they do, and make sure the runway is as long as possible. I think, you know, um, it is awesome that the two vaccine candidates, um, Moderna and Pfizer, seem to be over 90 percent effective. I think we have to be a little conservative in how much that is going to affect businesses and the economy—how many people are going to take the vaccine, how it’s going to be distributed—all those things should give us a lot of pause.

I'm pretty optimistic that the world will be in a very different place by the end of 2021, um, but I don't think that that optimism would cause me to talk to a startup any differently and say, look, by the end of 2021 you should—I think that's a little—that's getting the cart before the horse for most of those folks.

So, just it's fun to talk to you about this because you're being very clear. And so, for the early-stage startups, the macro climate seems to be relatively unimpactful, and you're saying, look, just niche down, laser focus on product-market fit, make sure you have plenty of cash in the bank, get those early customers, iterate, and then once you've figured out, kind of go to market, grow like all hell. Is that fair?

Yeah, um, you know, I might add find the right people for your startup because that's going to be more substantive than anything else and maybe be a little bit even slower at that than you would otherwise. But yeah, you know, focus on your startup core—all that, you know— we call—we're calling this talk essential startup advice in the time of pandemic, but really, I would say read essential startup advice and pay attention to that.

And, you know, maybe double down on some of the things that make most sense during a pandemic, like conserving cash and being perhaps a little bit more conservative on things like I've repeated a number of times, like how you hire and how you build your company. Um, but what you do want to do is—this is always true for a startup, but you want to get to the other end, right? Whether it's the end of 2021 or Q1 or 2022, come out the other side.

And the startups that do make it through and survive and then can raise a Series A and Series B are super well positioned, I think, to take advantage of, um, of what—let's be honest—what the pandemic has done has caused an earlier shift to digital, to online, that would have happened otherwise. And some of the companies that have been able to take advantage of that are flying high right now.

Again, I feel it's almost crass to point out that people are being advantaged during this horrible pandemic that has caused so much suffering, but it's just a fact that certain companies have and will do very well by taking advantage of the shift online. And the shift is secular; it'll go back, of course—it's not going to remain, you know, completely remote all the time for sure—but this, I am persuaded, is a change that is fundamental and long-lasting, and overall this particular part of the change is positive, I think.

Yeah, so we only have a couple minutes left, but I want to get into just a topic that's been stuck in my head. So, like I said, I've been to a bunch of, you know, YC demo days throughout time, and now that they're remote, you guys have been able to widen your net. Startups seem to be placed in different parts of the world, and they don't have to be kind of in Mountain View or in San Francisco and so forth. You know, is that going to stay in the YC model? Because I'm hearing from startups that are really excited they can take part in the last batch, in the next batch of YC without having to move, you know, across the world or the country.

So, you know, has it opened up your net, and will we see some of this last in 2022 when COVID is behind us?

For sure we will. We won't—I don't know exactly what YC looks like post-pandemic, but it'll look different. It is unquestionably true that aspects of running a remote batch are actually better than in person. That, you know, it would have been hard to try as an experiment in the past. We might have eventually gotten there, but we were forced into it, right?

It is certainly true that it's way easier to interview and then fund companies that are very far away—in Brazil, or in India, or in Southeast Asia—than it would have been otherwise, and it's way easier for those folks to build their business, their local business, especially while they're on site there and yet still participate fully in YC. I think we'll see some sort of hybrid in the future for sure where we'll bring people together. It is—human contact won't go away, thank God, right? We—it matters; it really matters. It matters to create ties between people and to create—super important, not, you know, just for business but emotionally, it really matters, and we'll try to recapture as much of that as we can.

But it's certainly true that remote YC has gone terrifically well, and especially for the folks who aren't in San Francisco or the Bay Area or even in the United States, but far field and how it, you know, we've been able to make YC incredibly practical, convenient, and positive for the success of their businesses.

Well, Jeff, we are out of time, but I do appreciate you walking me through this. Um, I hope the next time we talk it won't be during COVID, and we can talk about something else because I think it's all been done for the last nine months. But thank you for your time. Good luck with YC's next batch and back to Lisbon.