YC SUS: Eric Migicovsky & Dalton Caldwell discuss pivoting & pitching

Nope, not live. Almost live. Now we're live. Okay! My name is Eric Makovski. I'm the startup school course facilitator. Welcome to another live Q&A. We're joined today by Dalton.

"How's it going?"

I'm Dalton Caldwell. I'm a partner at Y Combinator. In addition to my partner duties, I run the admissions. I'm in charge of figuring out who gets into YC. So today, we're gonna talk a little bit about what—answer some questions that you asked about Dalton's video lecture on pivoting and the YC admissions process. Let's dive in.

First question from Danielle at Squid Bio: "At what point does pivoting turn into actually shutting down the company you're working on and starting a new one?"

"Usually, founders are too willing to start a new co and just think about in terms of amount of work you have to do. It's much easier to just change your idea with the same Delaware C-corporation like that, or for you—strike that—Stripe Atlas, and there's no need to redo it. I think the major reason I've seen someone creates a new company from scratch is there's like legal liability with the old company or some lingering issues.

Yeah, there's like a really, really good reason why. But for the most part, you know, it makes sense to keep the same cap table, to keep the same investors, and it's like a waste of time. This is an example of like work that is not productive work. Yeah, these were a bunch of entities and like talking to lawyers, and this is a great example of things you could spend time on that are not work. And you can also—like you don't have to change the corporate name right away. Remember that they don’t like—yeah, Jawbone was called Aleph for like ten years before they renamed it to Jawbone. Like this is totally common.

So I think in your case, Danielle, you were saying that you have some grant money and you're already incorporated. I would recommend just like sticking with that. Like there's no harm. Plus, like the main goal is to find—is to get product market fit. Like yes, spend time on that part and not on the corporate shell game. Looking at this is something you could spend a lot of time on and then it has basically zero value to whether or not your startup works."

Yeah, next up, Peter from Whiplash Gaming. Whiplash Gaming is an interactive watch party platform for esports. "Dalton, you mentioned in your video that founders might pivot to avoid hard work, like sales. How would you make the judgment call between the product not being good enough and justifying a pivot and the sales efforts not being good enough justifying a different strategy, different channel?"

"So it's totally the case that there are good startup ideas that aren't right for the founders. This is the founder-market fit thing. And so, you know, it doesn't really matter if the reason is the founders are bad at sales and will never get better or it's a bad idea. Those are kind of the same thing. And so, you know, you want to watch out for three levels of hypotheticals.

Like sometimes when founders end up in a hypothetical land about why the thing isn't working, again, this is an example if somebody can spend a lot of time on, have a lot of conversations about. Within the co-founders, you know, ask a lot of advice and it's not working. And so spending too much time diagnosing it, I would argue, is not great. And I hear where you're coming from, but sometimes there are really great startup ideas that require lots of sales expertise and if that's not what you want to do, it's not gonna work even if it's secretly a good idea.

Also, like at the early stage, sales is effectively talking; it's like identical to talking to your customers and responding to their kind of like their direction. So if you can't get past that first stage, that's probably more of an indication that maybe the idea is not one that's picking up steam with customers."

"Have you seen any cases where like very clearly the founder-market fit is unaligned and there's a structural problem to getting to that next stage? Like say you've got a couple customers, some early users? I just see a lot of times with those founders whose primary modality is writing code and maybe they can talk to other programmers, but they end up with an idea that involves like selling to insurance companies or something and they really struggle, which is like why so many great [founders are] like solving a problem that they themselves have because by definition, they are the customer; they're like really close to them and they also know how to sell them."

Next question from Matthias at Estill: "Hey Dalton, it's okay. We're now pivoting after realizing our solution didn't solve the problem we were addressing yet. We're still trying to solve the problem as we believe it's a big one. Their problem that they're solving is 40% of returns on clothes are because they have the wrong fit, so we're now launching it as a discovery tool that shows clothes on your body for new and used clothes.

On one hand, we're concerned that we should only focus on newer used clothes, but we also feel that a discovery tool should have both as 50% of shoppers shop for either one. Do you think that we should stop, start with just one, or offer the full range as an MVP?"

"Yeah, so if I were doing office hours with a company and they asked me that question, my answer would be, I don't know! What are your numbers? What are your sales? And the reason is, you can end up weaving this really complicated web of conceptualism about we think this, we think that. And it's, if the current product, you know, has zero users, zero revenue, zero traction, I'd be like, well, just go get anyone to pay you a dollar, like in order to make one purchase.

Yeah, and either time—and it's so tricky when I talk to people, and they have these really complicated, like intellectual arguments and they're like, whoa, we don't really have any customers per se, Eric. You know, it's like, whoa, how did you end up with this super elaborate theory of the market and you've gotten no customers?

And so maybe that's not the case, you know, the numbers aren't in here on this question, but I usually encourage folks to try to make metrics-based decisions about if they're like should I do A or B. You look at your numbers, and it's much easier to not get caught in conceptual land when you're doing that.

And what's also true is that like, you know, we see companies across a wide variety of domains, products, technologies, interestingly that these—this kind of advice actually works at like a meta-level above the particular thing that you're working on. Like you really can't go wrong with finding a few people who want to buy the first version of whatever you're making and incrementally add on.

And for that, the best time, you know, in a pivot is you just fail to get one customer. Yeah, one live customer really using your product, like that's the bar. If you're below the bar, so it's not even a real thing, and if you're above the bar, then you can have a sophisticated conversation.

So in this case, like I wouldn't be too worried about like whether your product offers everything at the start. I would worry more about can you describe what you're doing in such a way that it gets a couple of people excited right at the beginning and they really use it? Not just excited, they're like, yeah, oh, it's about when I'm going to retailers—let me put it live! Like, let's do it. And you can say, wow, we've done a hundred returns. Yeah, okay, that's—we can work!

And even if it's just used, or even if it's just new, like either one as long as you have some degree of traction; like then you can iterate and work with that."

Next up, Julia at Marble. Marble is a collaborative learning solution for teams, automates learning, turning assets like links to courses, videos, and articles into a learning plan. "Cool—I think I get it. Question is, how do we know if we need to pivot the design functionality of the product or continue searching for the right user?"

"Okay, well, I would first say, is anyone actually using it? Does the product exist? Did you build it? So many times I talk to people, there's like a continuum. There's people on this end of the spectrum which they pivot constantly but they never actually make anything; they just talk.

Been with a mono—and we talked about what the night pivot is and we talked about it, yeah. And then there's gathered in the spectrum where you write code and you build a product and you know, it's been live for like a year and it's not working. And so it's a wide continuum.

So one actionable thing that I offer to founders here is to set up experiments that they could run in usually about a week or so, and you can run experiments on the product side by either adjusting or changing the actual landing page or the things that your product does, but you can also run experiments on who you're trying to attract as users.

So for example, you could like lock your product in and say like—because every good experiment has like a control—you don't change both things. As you’re returning, you don’t change the product and the user base. So maybe like say, okay, our product is doing good, we have like five or ten users—you know, it's going okay—but we really want to explore to see if teachers are the right people or whether it's parents or whether it's whatever.

And you can set up an experiment, so over the course of a week, you say, I’m gonna try to get twenty customers in this new customer segment, and then at the end of the week if you hit that, it’s a pretty good sign that you're onto something. And if you like totally fail and you get like zero or two people? Well, maybe that's not the right group.

The tougher part is when you hit in the middle. That's always a bit more difficult. And let me push—there's actually a subtlety in the question. The question in one part says, well, when you pitched the idea to people, they are very excited. However, when they test it, they're not finding the use case in themselves.

So there's a whole variety of ideas that are very exciting and that I would call them mirages or something. And so let me give you an example, Eric. I have a startup that makes delicious food. It is the most delicious food you ever had. You love it, you're excited about this delicious food, right? Why wouldn't I?

That does not mean this is a good startup. "Watching Eric, would you like free money?" And so you know, "Oh Eric, don't you wish you didn't have to work as hard and you got more work done?" These are like leading questions. Yeah, pretty much everyone you ask the coin will say yes.

And so if you phrase this particular idea as like we're a learning solution for teams, would you like your teams to learn more or better or faster? Yeah, that's not actually validating that that excitement is not actually a startup idea in my opinion. And you have to turn it into an actual product.

Yeah, and usually, usually it's like it's a problem that they're having in the course of trying to have better learning. So Eric, do you want your team to work, to learn better? Let me tell you about what I have. I have a learning tool. It costs $20 per user per month. It's a Slack plugin.

And what it does is it sends them daily reminders about whether you know, with daily lessons, would you pay for that? I'd consider it like a—that’s a pitch! Like that, you have the second part you really need in there, which is to offer a concrete product and solution and ask for money. The second part is what you need; the first part is not. It's so vague as to not even really be a startup idea!

And you can run that in one of your experiments. So you already have these people who are kind of casually interested or excited. You can try to put people on point and say like, okay, we talked to 20 people, how many of those 20 people are actually willing to pay us just for our MVP?

Yeah, you get an answer pretty—you're seeing a lot of this right now. With remote work, everyone's paid into remote work stuff. I get why. But just saying we're doing remote work, that's not a startup idea! Like everyone saying that—you have to turn that into, here's the thing that we make and how it works. And you know, until you nail down the specifics, you just saying we're doing a remote work startup is like—not it. It is not reality! It's just people will tell you they're interested; they'll be like, oh, that's very interesting! I'm very excited about remote work! That does not mean you have validation on your startup idea, you know?"

Yeah, cool! Next question from Joey from Company Nurture: "Pivoting mobile apps is a lot easier and less painful than, say, building rocket ships to Mars. What are sort of the best tips for hard tech companies to avoid wasting kind of time and money to avoid like a pivot later down the road?"

"Yeah, so we've funded a lot of hard tech companies. You have; we have too. I think you want to think about this in terms of risk, and the biggest risk for a software company is they don't make something that people want, and that is the most—you know, when we see our causes of death, that's pretty much it. They spend too much money and they don't get the product.

Yeah, it just never—it just doesn't happen for them. Okay, what's harder about hard tech is you have this other kind of risk, which is financing risk, and that is to even show up, we need this amount of capital. And whether or not the product is good, whether or not people want it, like there's all these things that apply to software that you have this additional financing risk thing.

And so if you don't have a plan around financing risk, and I would love to hear your thoughts; you're an expert on this. Like that's gonna—you need a plan from the get-go! And even having tons of consumer demand, even having prices, even having any Kickstarters—yeah, expert here—even having like lots of people can be mining Kickstarter, if you have financing risk, it's gonna be tricky.

So to kind of dive in on this financing for a hard tech company, it's not just about paying for the engineers and the people who are working at the company. It's also creating a business model in which customers can actually buy the thing that you're building.

So we have a bunch of companies that are using robotics to solve labor-saving activities in the workplace. Like this is a really hot subject, and we've invested in a ton of great companies. But one of the things that we always talk to, or talk about with our kind of hard tech, let's say robotics, companies is figuring out—once you've designed this product—we have, for example, a company that picks—a company that makes a robot that picks tomatoes from greenhouses. So it drives along the greenhouse and picks tomatoes.

They had to work really hard to build an arm that would like find the tomatoes. They had to build a vision system that would process it and figure out which tomatoes are ripe. And then they had to improve it to make it faster than an actual human so that it actually made sense to use as a product.

One of the things that they did really well is they were super lean! Like they managed to do all of this unlike a couple hundred thousand dollars, which most people when they think of hard tech, they think like millions of dollars. Yeah, R&D—you don't—we don't wear socks; we need a lot to do all that. You can actually like hack together a pretty good, even like hard tech company!

And then what they did is they talked to customers, and in this case, this is greenhouses, and they figured out what was the buying timeframe, how did they allocate money, how did the greenhouses run their budget, how do they do their profit and loss? So they actually built a model that was almost better than the greenhouses' actual financial model to understand like who is paying what and where were the actual ROI opportunities.

And then what they did is they said, we're gonna build this robot; it costs like X amount of money to build, and then we're gonna charge our customers in such a way that it fits into their budget—into their line item. So if you're a hard tech company, thinking about how are you gonna finance this from like customers, you have to consider like how do they earn money? How can they pay you? And then potentially even find people who will like finance it or give you loans because the customers aren't used to paying like that much money at the front?

I think that's great! And like final thoughts—you know, everyone looks at Tesla, and that's the shining light of people that tried really ambitious things. But I don’t know if everyone knows the story, but there was a time when they had a big financing risk. Okay? And basically, Elon, the Calabrese himself—well, no, all the money!

Yeah. There was a time when like he took his entire net worth, which was sizable at the time, and put it into the company because they would have died otherwise. And so it would be very hard to bootstrap. Like what's tricky about certain startup ideas, there's no amount of the idea being good can help you from financing risks.

You need to figure out the hole; the hole is hard. And so yeah, the reason we get to enjoy the fruits of Tesla these days is there was all these times they almost died maybe like half a dozen. But they didn't, you needed like an act of God to keep the thing financed.

Yeah, anyway, just touching again on the question that you asked—how do you avoid a pivot later? The main way you can do this is by validating that customers actually want to buy, which I'm making like very specifically!

Yeah, the Semester Roadster—okay! So this, you know, people bought the Tesla Roadster immediately at a high price point! Remember his secret plan? You can—you can Google this! The idea was to make it—to start with a very high margin, high-end thing that he could just sell to basically his friends, validate the market, validate the people that they could actually build it and then—and then they wanted—and then we give money for it!

It wasn't a hypothetical car! And now, you know, they scale the thing up. If he started with the Model 3, I don't... It's like another way to think about is that you can have this large vision of where you want to go but try to figure out if there's like even an MVP of like a hard tech product that you can deliver.

Elliott from Unify asks: "What is a good way to pitch a market opportunity? You win— a standard total addressable market slide would show like all users who take pictures. I think the question is kind of getting at like how do you—how do you like provide subsets of product of markets that like you could like reasonably say everyone could be interested in?"

"I don't think you have to—like, well, I guess it comes up if an investor says, oh, well, what's your TAM? But when you're at a really early stage, it sort of doesn't matter. I remember one time an investor gave a talk that I attended and they were talking about Uber's TAM, and when Uber was very small, it was only these cars like limos, basically, like private car black cars that you would—and they did a TAM, bottoms-up TAM of the number of black cars in San Francisco and how much Uber could charge.

I think the TAM was something silly like ten million dollars. And it just shows how this particular exercise—Airbnb, yeah, the TAM would be like, how many—what's the TAM of like people who want to sleep on other people's floors when they go to conference in small cities?

Yeah, and so we have all of these—I think we were saying, don't raise the investor. The investor is asking that—asking kind of like a question! Yeah, and what they're really saying is I don’t think this is interesting to me! Like this is a nice way to say it is oh, I'm worried about the TAM. It's just a nice way of saying I don’t want to invest.

Yeah, and the best way to combat that is to have the overall company seem exciting in numerous different ways than thinking you can debate them with a really good TAM.

Okay, or here's a potential like path that you could take people down. I always love it when founders are actually—it’s counterintuitive, but when they're actually like very specific about the market that they’re trying to go after because then I can visualize their product being used by that market and then like saying they can easily knock this out of the park. Like if you go after that and no one else is going after that then you get into this conversation where the investor is actually saying, well actually it could be used for this category; it could be used as well.

And as the founder, you're like, obviously I know this! Like I’ve been thinking about this. But it's this more back and forth where the investor is actually like generating ideas and kind of participating in it."

Okay, we got a YouTube comment! These are always great! "Tray asks, what are the largest best sources for use case for case studies that show kind of before and after pivots? Are there any metrics that we should use to track like should we pivot now or are there any like generalizable rules?"

"I don't know about a library of case studies, and probably the best equivalent of that is literally this—it's startup school! Because I mean my talk, I'm not aware of there being other people that talked about this in this level of detail, so I think this is as good as it gets.

And in terms of triggers, it's usually where you're either working at an idea that is not falsifiable and it requires you to work for two or three years—I'm exaggerating—but like for a very long time with no market feedback? That's a pretty good trigger; maybe you shouldn't do that.

Or you have been doing it, and it's just every turn, a goose egg, like zero customers—like the most—it's so funny how many people, the signal to pivot is just like literally no one will use it! Here! That's it! That's a bar!

Here's one of the triggers that I use when I think about products, and it's if there's always like—if you give it to people and they always say like there’s two more features that they would use before they actually become regular users.

You know, it's like—it's basically—and you do this for like three cycles, and there's always two or three more things! Like if you’re designing a product that’s meant to be used on a regular basis then they use it for a couple days and they're like—they turn out like, that's a really good sign!

For a consumer product, that null hypothesis is, you know, people sign up, you get what they used to poke around with it and you never come back! Yeah! And for most consumer-related products that don't work, that's 80% of signups never come out!

And so I think there's like where the founders—if you're better than that, then, that's interesting. And we're founders, kind of where there's an easy mistake to make is that if you're missing like some people who use it despite the flaws, like then you're onto something! Then you maybe shouldn’t pivot; then you should actually like continue to improve it because if you've got something that has all these flaws, that's like blemished and it's hard to use and has all these bugs but yet there's like two people who just like keep using it!

That's a really good sign! That’s probably one that you want to like keep pursuing and working on without kind of pivoting completely off! Yeah, and again, the triggers are usually just: you're in this situation and you've created a complicated narrative for yourself about why it's actually okay that things aren't working and that it's like a prison that you created in your own mind of yeah, I'm just gonna keep writing code for nine months and eventually, you know, the ship will come in and yeah, like that's—that's the biggest trigger is that you're in this elaborate and you can always talk to me!

Yeah, like I think one of the things that like founders need to do is get comfortable with the idea of talking to each other about like how far along are they actually to getting the product market fit. Ask your friends, ask other people that are working on it! I'm sure there'd be people in to weigh in on that as well."

Okay! Quick question about the YC application process from Matt: "If I'm in the process of a pivot or considering a pivot, should I mention that in my YC application?"

"Yes! We have the other ideas section on the application where you mention other ideas you're excited about, and I think it's fair game! It depends on how serious you are. If you're even not serious at all, I'd still put it in the other ideas section because those are usually pretty interesting, and I think it's if you're saying, you know, if the primary application is about your primary idea and that there's subtleties about the go-to-market, like say you were, you know, we want to build a new analytics platform.

We're not sure yet if this should be B2B or blah blah blah or what industry at once. I wouldn't call that a pivot; I think it's okay in the application to enumerate that you haven't exactly figured out the market yet or that you're open to a few options!

That's pretty different than having this really disjoint application, which I don't recommend; that would be like we're doing, you know, vegan dog food and also satellites. And like this, somehow you're trying to explain them both at the same time in the application. I would usually pick one, pick the one that you liked the most, and have that be the primary part of the application and put the other one in the other ideas."

"And is that like—is that because we have YC? We don't really like—we're not looking for perfectly formed startups here; we're looking to find founders! Yeah, and it's when it's very disjoint, it's just hard to make sense of.

Yeah! What about having two applications? Should founders ever submit two applications?"

"I don't really recommend it, and the reason is you're sort of hoping that we can pick which one is better. Like the main reason you would do that is it's like a way to be like, well, whatever one they like better was the one I should work on! I don’t know! Put your best foot forward! Well and do the thing you're actually excited about, that's the thing we want to fund!

And actually before I forget, there is a—I just remembered one, all right, so last Startup School, there was a start-up in it, I believe they were there— they’re called PostHog now, and I could verify I don't know how much they did an impression they did, and they definitely watched all these videos because they told me that, so I know that.

And we funded them for a different idea, so they’re in YC; they’re in YC right now in the current batch, and they pivoted to a new idea mid-batch, and they brought some blog post about the whole process. So if you're looking for a case study, it was on Hacker News last week, and they talked about the application process. I think they talked about Startup School, they talked about the interview with me.

I funded them and they talked about the office hours I had with them when they decided to change their idea, and frankly, that’s probably the best pivot I saw this batch. So you can read the whole thing! Just give a nutshell of what the idea is: they built an open-source, self-hosted analytics tool that you could run where it comes from a first party.

Like if you’re familiar with third-party analytics, they all come from like Google’s website and other people’s websites; those look sketchy and slow down your site, and they’re blocked by ad blockers. PostHog is this open-source thing you could run on your own infrastructure to get the benefits of analytics without the downsides. When they told me about it, I was like, this is great! How fast can you build it?

They can build it fast! They had customers lined up day one! They had built it at their prior job! It was one of those things where, as per my pivoting talk, it was—they're building something that they—I was like, wow, this is awesome! And then they had a great hacker—like the market agreed!

So just to put some numbers around this: during YC, we will fund companies, we will give them $150,000, we will be big fans of the idea, big fans of the founders and everything. And then during the course of three, four weeks of like us really working with them to try to find like early customers, they realized they’d come up against that wall and they’re like, yeah, and he talks about this in the blog post, but in this case the reason they decided to change ideas was they had traction for their first idea that they applied with and we funded them for, but they never really asked for money, Eric!

Yeah! And when they started asking for money, all of this excitement evaporated! Yeah, right! It was actually nice to have—not a have to have! And so they never—they failed to—that pre-YC, they didn’t want to charge! They were afraid to charge! The minute they started charging, the whole thing just like, evaporated!

Yeah, this happens, like, just to put some numbers around this, it happens to dozens of companies in YC, and it’s totally normal! It’s in fact, it’s like sometimes this relief because they’ve been working so hard and they’re up against this wall and then they like change—change ideas or change markets or something and it just like this, you know, basically like wall of water just rushes over, and it feels like it’s working!"

We got another quick question from Dan: "Is it harder for a social app to get into YC than a B2B app?"

"I think it really depends on what you have. I don’t evaluate things as, oh, this is a social app or this is a B2B app—it sort of—is this an interesting thing that has done something different and the founders have smart things to say? The issue with social apps for the most part is it's just very crowded!

And the differentiation exists primarily in the founders’ own mind; it's not like they have users that prove that it’s differentiated or traction! It seems, you know, we see a lot of like dating apps and it’s just like another dating app.

And the difference is—and it’s like, you know, everyone wears hats! I’m exaggerating, but it’s like the differentiation, to me, is meaningless! But to the founder, they’re like, no, but no other dating app has this hat feature! This is a really big deal! And you know, that’s—and if they launched the traction and they can demonstrate it, like the people really wanted an app—let’s take that!

And so you see a lot of apps that are like, oh, well, this is like Facebook and Instagram and also privacy and also TikTok and then also with your friends. We just see so many of these things go, yeah, you got that. Oh, we’re gonna do this existing thing on the blockchain, and you know, maybe, but for the most part, the segmenting, you know, these things are not launched, and it’s mainly the founders being really convinced it’s a good thing then there being any evidence from the external world!

Usually, B2B, it's easier to get first customers, and we're used to seeing a B2B app! Hey! We have our first customer, rely of, they're paying! It's $100—great! Yeah, that's fantastic! One of the cool things I think about YC as it's grown is that we also have more and more partners! We have something like 10 to 15 partners and visiting partners at any given time!

We all read applications, and we each have different brains! So you apply! There is an expert in your domain who's really excited about reading applications at it! I guarantee that pretty much every startup that can possibly apply will have someone at YC who's like actively interested in that domain and seeking out applications!

So we actually, in the system that Dalton and his team built, we actually have a search feature where we can search for applications that just have keywords and I do this all the time, like searching for cool things that I wish would exist, and I see if there's like people building that! And so I would not like stress over whether it’s easier as a B2B company or guarantee that YC in general is interested.

Yeah, I mean, to give you a sense of the bar for social apps: if you're someone in the audience building one of these things, look often the people that build successful social companies have built and shipped things that maybe are even toys or side projects, right? Even know you call them—not companies— and we've gotten millions of users and so even if you—you know, the Facebook story!

You know when Zuckerberg was in high school he built this Winamp plugin; he put this little music plugin that Microsoft wanted to buy! Yeah! We got millions of users, and so he was always building little things and getting lots of users! And what I've—what I've successfully funded folks working on social stuff they usually extremely know what it means to make a thing, to put it out there and to grow it!

Yeah, and they're pretty sophisticated; like they know what it takes to build an app with a million downloads and they’ve done before even—they're not charging for it! Even though the same things like built some—they have this sort of—they're sophisticated about how hard it is and they have some evidence that they've like made stuff and giving it to people for even if it was like for college or was a class project or was an art project.

It's trickier when you see people that have no experience ever delivering software in any form, in any context wanting to do consumer apps! And you know, it's like you don't know what you don’t know! I think what—so if you're one of those people out there that wants to do consumer stuff, I would highly encourage you just ship anything all the time and develop a philosophy on what kind of stuff do you put out there works versus thing going to create one thing once—it’s gonna be the perfect thing, it’s in—take over the world!

That just doesn’t map to any reality! I’ve seen maybe there's counter examples but a bit of social apps usually the founders that really make something good reliably have tried a few times and have a very sophisticated internal strategy about what works and what doesn't."

Okay! The question from early: "We think it's time to pivot! How do we explain this to our current investors?"

"Okay, well, this would require more context to give you a good answer. So don’t overlisten to just this one piece of advice, but for the most part, sophisticated good investors will be like great! We’re behind you 100%! Let us know the early stage how we can help and, you know, good luck!

Sometimes that’s not the case and it’s very context dependent and you sort of need to talk to them about it and depending on what terms or whether it was a convertible note or a safe, there’s different legal ramifications about whether or not they can ask for the money back.

Yeah, I’ve seen it in both cases! Like if you have—if you still have the money and you haven't spent it—if you’ve already spent the money, the answer is pretty clear! Yeah! They know the game; they invest in the company! That’s—that's what investments like! If you still have the money, then you possibly could say like maybe I don't want be these people in my cap table anymore—they're like a biotech investor and like very specifically in that, and we're going after consumer social apps. So in that case, you can always consider making the offer; they might let it ride.

Like they might just keep the money in, but at that point, you kind of need to decide—the famous story about this is back in the day Odeo was a startup that existed and they had several investors and they offered the money back because Odeo didn't work! It was like a podcasting thing before smartphones or like podcasting walk!

And I think about half the investors took the money back and half didn't! And then they pivoted and did Twitter! Yeah! And so anyone that left the money and made a lot of money and the people that got their money back—you could change this story!

But that’s it! So basically that because that happened, it’s like bad luck or something. Like that story alone scares people to never ask for money back because of that one particular story! You know, it's usually very call!

If you invested in that, if they invested in you as great founders, like presumably you’re gonna figure—you're gonna figure something out!

I've got another question from Rahul: "Can I apply to YC when my idea is in a different market than the US?"

"Absolutely! Something like 40% of the current batch is targeting a market outside the US exclusively! So yeah, this is our bread and butter! We’ve—yeah, sounds great! We've had fantastic success with companies like this for one reason: we invest in people who have an idea or who have built something special!

I mean who are experts in this space! We're not usually experts in either the technology, the product, or the geography that they're operating! But what we are experts in is connecting to Silicon Valley, raising money, figuring how to pitch your company, connecting to like the network that we've already built! That's what we can help with!

So we have companies that come to us from India. I just did a—some concrete names. Yeah! In India, I interviewed and funded Razorpay, which I think is the second largest payment processor that you—the audience members may even use!

Yeah! I interviewed those guys and funded them, and I—you know, it worked! It was pre-launch but they had the basic setup! Rappi was a company that I interviewed and funded and in Latin America, they’re the largest online, offline company! They're basically in every city, and they're very big!

We’ve had Southeast Asian companies; we’ve had Indian divisions! And again, one of the things that you can do to help us do our jobs better is to provide some context around the problem. So oftentimes if there's a problem that's specific to your geography, you might just not be too familiar with it!

So bring it up! Like feel free! Like we love to learn things, especially about interesting different, yep, different things in different country! So like take a paragraph and kind of frame the problem, explain like the context! You can assume that we are not going to be familiar with it!

Yeah, in the case of Razorpay, I remember at the time there was a complicated two-factor authentication thing for doing digital payments in India, and that's why! Yeah! And so it was like they had to educate us a little bit about that and that explained why it needed to be its own startup and not just a multinational from the US moving into India!"

Okay! Let’s look through here! Here's a quick one from Natalie. She asks, "For a B2C app, what number of weekly active users will put me in a strong position to raise money on retention?"

"Yeah, well the key spot—a spot is expensive! Yeah! Like so if you—if you’re trying to grow brie, if you like think—I think the question is around like if you’re if you’re building a B2C app and it costs money to acquire new users how do you like that and how that operate? Because they have to have—put planets!"

"Oh yeah! Okay! You know what’s hard is when you have a consumer app that’s growing and you lose money on every user—that's good old-fashioned negative, you know, economics! And that can happen to you in—for your consumer app can definitely!

Yeah! Like imagine one of the reasons that YouTube needed to sell the company back in the day was the video hosting costs and the infrastructure costs were exorbitant! And so I don’t know how much longer YouTube could have made it as a standalone company and it needed to get acquired by someone and it was good— that was Google!

Because just operating that thing was like really expensive! And so you—you want to have a sense! So ideally, you didn't want to make money sooner so that you're not just running a thing where the faster you grow, the more money you lose! That's really frightening!

Or I don't know if there's an or that's what I would recommend! I mean a door? Yeah, yeah, there’s their counter-examples and what’s funny—another quick anecdote is the Facebook founders way back in the day, they always were profitable according to them! They had some bad ads on the site!

And so they made it so they were never in a position where it was a huge cash burn situation like YouTube was, and that helped give them leverage! There was all these like good properties of—and it buys you time to get more users!

Yeah! That's them! And so it wasn't like lots of money but I remember Apple—they had like Apple ads! Like this was like 2003, 2004—a or a Facebook, but from the movie like when the guy was going to sell ads!

Yeah! Yeah! But they had revenue, right? It wasn't what it is now, but that helped offset the burn and make it where it wasn't just the faster they grew, the more they lost money! It’s just, it’s really tricky!"

Here we've got some more planned YC questions from Marina: "We're considering applying to YC for this batch and we'd like to know what your top priorities are when reviewing applications."

"It's her first application! You know, easy to understand what's going on, easy to parse what it actually is, and just following the advice that this whole course you’re taking is— which is, you know!

Yeah! Like for example, the first thing that I do when I read an application is I read the one-liner. Yep! It's like thing at the top! Like what is your company do? Yeah! And if I can—if I can parse it and not—I have to be able to understand it, and if I can understand it, that's already like—honestly better than some large—like surprisingly large percentage of all the applications!

So if you're thinking about what like a priority for you to put time and effort into is your one-liner! You can do things like practice sharing that one-liner with other people—either Startup School, founders, friends and family! Just get some more eyeballs on it! So like if we—for the first time ever hearing about your company, read it, we understand it!

Like that, that’s a great start! Yeah! And I think just to bring up like a side point in my job here, I see or interact with a lot of people that it feels like they put a lot of energy into trying to hack the system and to figure out how to give themself edges around the application process!

And to me, that’s not a great use of time! And if it seems like you're doing that, you definitely don't endear yourself to us in our—and so one of the ways you try to hack the system is sending a lot of cold emails, you know, trying to get a bunch of fake recommendations, try—like there’s all these things that we see and it’s like people are treating this like getting a YC interview is like a lottery ticket or it’s like getting like—like that there's a game that you're—there's a game and I played a game, right?

And like you know it’s all about not whether or not your company is good, it’s about gaming the system so that you get funding! And this sucks! Not a fan of that! What we want to do is just figure out who's doing something good and do our best to fund those people!

And if there’s any like smell anywhere of like people that are trying to hack the system or manipulate the system or manipulate us or all the weird—I don’t even want to enumerate them to give you any ideas, viewer, but like it just seems very much like misplaced effort!

If you would have spent that effort on just like getting a customer, it’s gonna weigh more increase the odds you will get into YC than whatever complicated plan you have! Let me give you another example of this is there's all these people on their internet that have become obsessed with the view counts of how many times your YC application video gets viewed and where the people reading it are and all those things.

And so we actually built a whole system to—to, you know, I’m not going to explain how, but where our views of your application video no longer get reported to you! And so you should have zero views! And that is on purpose because all the efforts that people put into freaking out and posting on the internet about how many views their video got is a great example of something that like in this place time is like why are you worried about this and talking about it and posting on Reddit about it?

Like—and so you know the same thing on the application, if you put a bunch of Bit.ly links in there, you know, probably not gonna click on those! Here’s the thing, you know, like just if you’ve used Bit.ly links, you know you know how many applications did we get? Less?

Match seven or eight thousand? I get ya! We have many thousands of applications, but here’s the thing, the YC partners read hundreds if not thousands! I read thousands each! I read about 2,000, which means that, you know, we get some applications that are kind of like like gibberish or they're just not fully formed, for the fully formed applications! If you put time and effort into writing your application, we will put time and effort into reading it!

Right? This is one of the like crazy things that I think gets missed a lot! Like we read every application you get! So if you take the time to fully form your idea and put it down, it's been the hour on paper! We’ll spend like dozens of minutes—there will be like dozens of minutes worth of partner time just going in to understand your company and figuring out whether it really great fit for YC!

That's kind of like our price! And so the closing thought here, and this is related to people—we say during the bat, you know, this is a overarching lesson—is you should think about it every stage! What is the actual thing you should be doing and how do you do a good job of that then trying to game the system?

And Paul Graham talked about this a lot back in the day. People thought that he would teach them how to raise money well and how to hack the system and say the right words to raise money! And you know what he would say?

"Let me tell you the secret! The secret to raising money is to have a good startup! And so I’m going to teach you how to have a good startup, and then you can be bad at fundraising and you will still fundraise! And that’s it! And it works!

And that again—like he was this is like—yeah! This was like the thing! This was the whole thing of Y Combinator is that it wasn’t a system to teach you how to raise money!

And we don’t even talk about raising money until we’re like this area! That's like I’m not even part of the program! If the whole thing is making a company that’s worth investing in!

Yeah! And so back to applications: your job is to make something that you describe in your application or a team that you describe in your application that is worth—that is good! And then we will want to fund it and not, you know, you hack the system to get funded!"

A couple more rapid-fire questions! "Our idea is in an industry that’s not in one of the dropdowns that we have— is there anything specific we should include in our application so it’s reviewed by the right YC partners?"

"I think we're pretty good at knowing what to deal with! Others that could mean biotech or hard tech or basically any—we see some weird stuff! So I would have confidence that no matter what it is, if it looks like something related to technology or a startup, that we're to money!

But the category—like that! Yeah! Yeah, we don’t—we use difficulties too much with us! Yeah! Is YC still interested in innovative nonprofit startups? Nonprofits? What do we look for? Yes, we do! It’s much harder to get in as a nonprofit! Way harder sometimes!

Again, people hacking the system, they'll try to apply as a non-profit and then be like, well, actually because they think it's easier to get in—it is not! We’re looking for people that are really dedicated to making a difference and ideally using technology in some way first is just a standard nonprofit where they’re getting a technical advantage to do it!

But unless this is already your life's work and it’s a really big deal, I would not, like, it’s just much harder to get in! That I’ve noticed something really interesting! I’ve had the pleasure of working with a couple nonprofits in the last few batches! One of the really cool memes or trends that's happening right now is nonprofits that have a business model!

Yep! So they have some way of actually generating income that they then use to like invest in the operations or grow or whatever! And this gives them kind of this like—well first of all, they can treat it kind of like a startup! Because there’s something that they can iterate—there’s a metric, there’s a KPI that they’re working towards! They can still raise money from donations and other things, but they have this kind of like steady-state business model that’s driving the company forward!

We’ve seen some great companies! So if you—but have—you have a non-profit that's kind of in that vein, I would highly encourage you to apply to YC because we've had great success with companies like those! And we've got our eye out specifically for nonprofits like that!"

Next question about interviews: "What are the top three things we should focus on getting across in the interview? Kind of not specific to the startup but more the soft skills or the other stuff?"

"Yeah, I think if you read blog posts some other people like the PostHog guys and others and they talk about their interview, the main thing you would want to do in a YC interview is to behave like a normal human being and treat us like we are normal human beings versus treating it like this theater of awkwardness!

And so what do I mean by that? People sometimes memorize scripts; they're like, I was told—I read these blog posts and it says I need to get my three key point across, and so they come in, you sit down and—so hey, how you doing?

And they just like recite this monologue that is awkward, and usually, they soft on most people that even if you accidentally like within a minute or two, you're gonna—you’re gonna fall into your normal, like, happy animal self!

And so I think your mental model should be we are, believe it or not, normal people! And interviews is our job, and we meet with a lot of people and to the extent that it is a fun conversation—that it’s an engaging conversation!

And that we feel as though you are acting—as that you're negating tourists, I don’t know people that is highly recommended versus that there’s this over-practice! Anything that happens to people is they practice too much! They treat it like a pitch!

It's not a pitch! Yeah! Congress more than it’s a natural conversation! And that your mental model is we are normal people! We're doing our job, you’re a normal person, you’re doing your job, and we’re having a conversation—that's the mental model I would have to have a successful interview then!

Yeah! I’ve been like to get really agitated about it and treat it as a theater production or something."

Yeah! I've got a question from Toto at Nomad Players about the coronavirus: "He's built a company that has in-person events as one of the primary things that they do and they organize. He's worried that due to the coronavirus, the whole like event sector is gonna be dragged down, and that his company in its nascent stage may be affected. Any thoughts on that one?"

"Yeah, probably it will be! I mean like there's—you know, remember there were the fires in California last year that affected a lot of startups! I was running a startup during the 2008 financial crash and certainly affected my startup and everybody! I think what I remember from that era was the people that were really affected by it—there's just not much you could do!

And for—and so, so again, maybe you need to make revenue, you maybe need to change your contingency plans and wait it out, and for the companies that weren't affected by it, making smart strategic decisions often round not spending as much!

Like basically, when the market changes, if you can react to it quickly and inflexibly—yeah, flexibly! Startups tend to make it, and it's the ones that don't really react that have the hardest time! So I don’t actually have an answer for you about what you should do, but yeah, you probably would want to react to that!"

Also, going back to like how companies die, they usually die by running out of money or running out of the ability to continue working on it! So as always like spend less money and it gives you more time to iterate and to potentially find like a solution to this problem for you!

The other question on pivoting is from Garage: "He's built a service business and he's trying to pivot it to become a product business—how hard is it to do that?"

"It's pretty hard, and there's different ways to define it! So let’s attempt to define what that would mean! So, a services business could be, let's say that you have like a call center, and there’s a bunch of people, and they answer calls and it’s a services business! You have revenue and you want to turn it into—alright, let me give you a better example!

In fact, we have a dev shop! A dev shop is—you do contract mobile app development, web development for a pair, a common—we see—we actually fund a lot of these! And when we do fund one, it’s usually that they—the people running the dev shop find a specific startup idea that is really good, and they use their own dev shop resources to make the thing, and then we just evaluate it as the thing; the idea, yeah, and ignore the dev shop part.

And usually, they can clean it up by the time they get into YC. Does that make sense? Like that's good—We actually fund a large number of these! And in some ways, they're great because you've got a team that's worked together for a while in that they know each other, they know their skills, and they can actually move pretty quickly!

The downside here is sometimes people fall in love too much with that idea and they don’t think about it as like—well, they actually like—they may have too large a team!

Yeah, work on that first idea, and then they have to pivot and you're left with like 10 people kind of hanging out with an idea that really only needs two, and you get confused around consulting revenue where you're like—you try to pretend that your startup revenue is revenue from the dev shop, and like half the company's working on the product.

Like there's all these like complications! Actually, it's a much—a common case! Another case: it's two founders; they have an idea, and instead of building the product, they actually go and find customers who will pay them to kind of manually do the thing that eventually the product will do.

And in this case, it’s like—we see this sometimes for like DevOps, where then the—the problem is they need to build some sort of like infrastructure, and they’re experts in this infrastructure instead of like building the whole product, they kind of like find a customer that's willing to pay them a couple thousand dollars—like a real sum of money—and then they like basically doing cheap consulting, but they own the product that then they can find other companies to sell to!

But that I think we've seen pretty good success with! Yeah! And that’s—I would not call it a service business; I always just call that you are—yeah! But to the other, to the founded—like yeah! At the beginning, it doesn't feel like you're selling a product! Like you're kind of selling your time, but you're getting them to fund the development of the product that you will then sell to other people! That's—that's like every day of the week!

I think we do that! What percentage of international applications get accepted to YC? Is it the same like an average international application will get accepted at the same rate as an average U.S. accepted application?"

"Basically, like I don’t have—I don’t have those numbers memorized, but basically yes, the percentages all line up and there’s not like a wild difference between them! Yeah! And again, oh, it's going back to what Dom said!

Like a large percentage, almost a majority of companies in YC have some business outside of the U.S. Things like that are totally normal! Yep! One other thing that I'll clarify is like back in the old days, YC used to have this thing where it’s like they really encourage companies to move to the Bay Area and that was like a meme that that I remember as it as a founder like, oh it doesn't YC say like you have to move to the Bay Area?

That's not the case! We encourage our companies to come to the Bay Area for three months because it gives them a chance! Like if you're living in Indonesia or living in Japan or somewhere, it gives you a great opportunity to network and to build a community here in the U.S.

But we have companies that the minute YC is done, they raised their money and they like set up their HQ wherever they came from! That’s like totally fine! Exactly!"

Okay, a couple more! Where am I? So you know, other ones Joan that I should be oh here’s what you could do! Elliott from Unify asks: “Does having a provisional patent for a mobile app provide value when applying to YC or when pitching investors for initial funding rounds?”

"Probably not! Patents are usually more relevant in hard tech! And it could be that there's a business process or you're a biotech company! Software patents in general are problematic—that's feel free to Google that! That's a whole thing! And most people are not super impressed! In terms of things that you could spend time on that are very value add versus not, you can spend so much time creating a sophisticated IP strategy when you have zero customers, and it may feel like you’re accomplishing a lot!

Generally speaking for software, patents are not super valuable and investors bought—it’s almost like a line item that most people will ignore! Yeah, unfortunately! And so there could be counter examples; maybe you’re one! But like for the most part, this is a great another great example of something you could spend tons of time on, and it feels like work and that is not exactly work, or it’s not valued!

It's as if you never did it! Like focusing on an MVP, focusing on getting initial customers is gonna be like way away better! You super time like 99 times out of 100 basically!

Cool! Well, Dalton, thanks very much! Thanks, really appreciate your time! And that's it for today! Thanks!"