Best startup lessons from Y CombinatorㅣMichael Seibel

My name is Michael Seibel. I work at Y Combinator, and I was  the co-founder of two companies, Twitch and Social Cam. Today, I help founders make their companies work.

So when I went to college, I went to Yale. I thought I wanted to be a lawyer. And unfortunately, I realized this during my time at school That I did not want to be a lawyer.

One of my best friends from college, a guy named Justin Kan, He was in the first class of Y Combinator in 2005. One year after college, he decided to start a new company, the time called Justin. tv, later called Twitch, and he recruited me.

I didn't know that I wanted to do startups, but I thought to myself, When is the next time your best friend is going to ask you to start a company with you? This seems like something might only happen once in my life, and so I should do it. The first version of our startup, it was actually a reality TV show.

Justin would wear a camera on his head and he broadcast his life 24 seven, and I was the producer of the show. The problem is, is when we want to start raising money, Justin couldn't go into pitch meetings because he was broadcasting everything. And so I had to go to the meetings.

The investors kept asking, Why are we talking to you? You're not the CEO. And what they didn't realize we actually didn't even really have a CEO back then.

And so the first thing we did was effectively made me CEO so that I could go talk to the investors so we could raise money. Things were crazy back in the day. From a technical perspective, it was very hard to stream video, so we had to build our own custom hardware to stream video.

I would say on the show, the thing that was craziest was that people like to prank us. People would call the fire department on us, prank us by ordering a bunch of pizzas to our apartment. At one time, people pranked us by calling the cops on us.

It wasn't very fun for us, but I think people enjoyed watching us go through that. I would say deciding to go from a show to becoming a platform, that was a very big change. So it was pretty simple.

We realized that we weren't  very good at making a show, but we were very good at creating software. We decided instead of us being the show, we would make it easy for anyone else to broadcast their lives or whatever they wanted to broadcast on the Internet. I think we decided that within two or three months of the show, starting when we got to work on that task.

And so maybe the show came out in the spring of 2007, and by the fall of 2007, we had launched a site where anyone could come and broadcast lives video. We did YC in 2007. Probably the number one piece of advice that we got from YC at the time was from one of the partners named Paul Buchheit.

He was the original creator of Gmail, and he was the one who inspired us to build our own video system, our own live video system for Justin TV, this was probably the most important the technical decision we made in the entire history of the company. He actually said this to Kyle. Kyle Vogt was writing the video system at the time.

Kyle basically asked him, Should we build our own video system or should we buy some off-the-shelf software? Paul Buchheit said, How hard is it to write a video server? It's just bits in and bits out.

And when Kyle heard that, he thought to himself, If Paul Buffett thinks it's  easy to build a video server, I'm going to do it. And that's what he did. It allowed us to stream video on the order of ten times cheaper than all of our competitors, which was one of the main reasons why we survived.

We were still serving streamers. We still wanted to make it easy for them to broadcast live. I think the important distinction we made was that at the time a lot of the content on Justin TV was copyrighted content that streamers didn't own, or it was content that wasn't very interesting.

But about 20% of the content was people playing video games and people liked that. One of the things that got us to say maybe we should work on Twitch was Emmett really liked watching people play video games, and he wondered if we just focus on those folks and ignore everyone else. It was his idea to say, Let's go down that path.

That was a big decision, but it was kind of a focusing decision. It wasn't really a changing decision. You know, the technology was the same, the site was the same.

And at the time we called it Justin TV Gaming and we just built a clone of our site that only had the video game streamers and then we rebranded that as Twitch later. Probably the most defining moment in that company was when we were about two months away from running out of money. I believe it would have been around August 2010.

We had about 30 million people who would watch video on our site every month, but we were making about $750,000 in revenue every month, but we were spending about $1,000,000 a month running the company, and we were going to run out of money within two months. We sat everyone down. We told them we were going to figure out how to fix the company and make it profitable here or it's going to go out of business.

And we ended up coming up with a plan that made the company profitable. And that year, we generated about a million, maybe a million and a half dollars in profit, and we saved the company. Justin TV was going to die.

We needed to become the P word profitable. And that's how we invented the auto paying ad. Sorry, we added auto-playing video ads before anyone else on the internet.

We even added banner ads to our 404 page, the blank page that comes up when you type in the wrong URL in your browser. That was desperate. Our biggest moneymaking innovation was the paywall.

We had a ton of international traffic with viewers visiting the site from the US. Europe. South America.

The Middle East. And. Asia.

Unfortunately, Internet advertising rates outside the US and Europe were abysmally low. We lost money serving most of our global traffic. In one of those founder meetings, my co-founder Michael argued We should just shut off the site for those countries.

I hated that idea. I hate seeing numbers go down and then, boom, I had an idea. What if we allowed viewers worldwide to keep using the site?

But some of the time, visitors from outside the US and Europe would see a paywall which would force them to purchase a pro account If they wanted to keep watching. In the first month we only made 10,000, but six months later It was bringing in 200,000 a month. we became profitable.

Twitch was acquired by Amazon in 2014. I think the probably most interesting and surprising thing about the acquisition was that even while many of the largest Internet companies in the world were bidding to purchase Twitch, many of the best venture capitalists in the world did not want to invest. What Emmett has said later on is that if anyone had given us money to keep on running the company at even half the valuation that we got acquired at, we probably would have stayed independent.

That really taught me that at almost every level, even though founders think venture capitalists are very smart, they're not. They often make mistakes. They often don't know what they're doing.

And if you think about it from that point to today, Twitch is generating 100 X more revenue now than it was when it was acquired. If it had stayed an independent company, it would have been very interesting. I think that a lot of the companies that were bidding on Twitch understood it had potential to be a lot bigger than it was.

It was surprising that the companies understood that, but the investors did not. Regrets? It's hard to say.

I have any regret. Things went really well and I think to myself, God forbid I change anything and the outcome would change. I would say the thing that we did amazingly well always we always believed in software and we always had extremely  talented software team.

With any challenge, we could bring better software than anyone else. I think probably the most important lesson I learned on making a great product is that I often give two classic answers. The first answer is when you run out of ideas or you've run out of passion for what you're working on, I think that's a hard way of thinking about it because it's not very concrete.

You should be willing to give a customer and a problem that you care about. Two years. You should work two years on something before it's working.

If you're not willing to work two years on something, you probably shouldn't work on it at all. I think that a lot of people go into a startup thinking that they know all the answers. But if you talk to any successful startup founder, that's never the case.

They never know the answers when they start. That first two years in a startup is when you're becoming an expert, and it's very hard to skip that founder's need to get out of their own heads. Like it's very easy for you to believe that the vision in your head is the right thing, but you only find the right thing by putting something in front of users and seeing how they use it.

And you're always surprised when you do that. You always learn something. And I think it's very easy to just think that what's in your head is right and it's almost never right.

It was definitely life changing. I was able not to have to worry about money ever again, was able to make sure that my family didn't have to worry about money forever again. Again, for a little bit of time, it was fun to be almost retired.

You know, we had worked on startups our entire twenties. It was our whole twenties from 23 to almost 30. And so it was nice to not have the pressure of working on a startup again.

But very quickly I realized I didn't want to be a retired 30 year old. It made me start asking myself what I could commit myself to afterwards, and that led me to Y Combinator. So Y Combinator, we call it YC.

it is an early stage startup accelerator. We help 5 to 600 companies every year with funding advice. A lot of special deals community.

You know, since starting a YC. I think I've personally worked with over 700 companies. There were a number of things I had to unlearn.

I had to stop thinking that I could look at a business and understand how big it could be. I had to start better understanding how important a team is versus an idea. Definitely a team that has some personal relationships, definitely a team that has technical talent, but it doesn't they don't have to be very experienced.

Definitely a team that has passion about the problem it's solving and a team that is more excited about arriving at the right answer than being right. The first thing I look for is a technical team, a team of founders who can build the product, or at least the first version of the product themselves. The second thing I look for is teams of folks who know each other, who've worked with each other in some way, or are friends with each other, who are going to be able to survive all the challenges of doing a startup together.

The third thing I look for is how much progress the founding team is making over time. If the company has been around for three months, am I impressed with what they've done in that period of time? I to learn about regions all over the world because we invest all over the world.

I had to learn how to give advice in a forceful manner but a non discouraging manner. And then I had to learn a lot about the lies that founders tell themselves and how to convince them to overcome fear. You know, my wife says that I had to learn how to become a therapist.

I had to start understanding which industry software can be a really big competitive advantage and which spaces where it can't be. I'll give a couple of examples for a while. We invested in a lot of  consumer hardware companies and I would say that in the consumer hardware space, having excellent software is not sufficient.

The knowledge to manufacture consumer hardware is very rare. Manufacturing, consumer hardware is very expensive. If you make mistakes in planning that wouldn't have any negative impact on a software company.

They can have massively negative impacts on the software, on a hardware company. That's one area. Consumer packaged goods is another area.

When you're making like a consumable product, like a food or a beauty or fashion product, software can be used to help you market it or help you sell it, but it's not a software product. I think that one of YC's core thesis is that software still very early and its adoption curve in the world at its fundamental base. We want to invest in companies that are using software to create their competitive advantages.

You know, we've had to learn a lot by experimenting in other areas. Most of the mistakes that founders can make come from either being afraid or being what we call too smart. When founders are afraid, they tend to run away from the tasks that they should be running towards.

I'm afraid my users don't like my product, so instead of talking to them, I won't talk to them. I'm afraid that customers won't want to buy the product. So instead of trying to sell the product to them, I don't try to sell it.

I'm afraid that this employee is going to get angry when I have to fire them because they're not doing their job well and so I won't fire them. A lot of what founders do is make mistakes because they act out of fear and founders have to feel fear like you're going to feel it. But it's when you act primarily to run away from fear.

That's the problem. I would say the second category of mistakes founders make is they think they're too smart. They're not willing to question the assumptions that they made when starting the business, even when confronting facts that seem to disprove some of those assumptions.

Usually, I tell people that their fear is a great signal because it tells them what to run towards. Another way of saying this is to look at what's on your to-do list And whatever makes you uncomfortable. Do those things first.

I think the other thing that we do are we just talking honestly about how it feels to do a startup. I think just being very honest about how bad it can feel makes people understand when they feel bad. It's okay.

Startups, they don't talk about when things don't go well or people feeling afraid or if people feeling they get punched in the face. And so why YC's three key pieces of advice are to make something that people want, do things that don't scale and talk to your users. What's so fun about being a startup is that you're an underdog.

Almost always, you have a big competitor and almost always, you need to fight asymmetrically. The analogy that I tell people, it works way better for people from the US, but I basically say, look, in the American Revolutionary War The British had a better army. And so if you go into the middle of an open field and you try to fight them face to face, they kill you.

And so you have to fight differently. Like you can't copy the big player to beat them. You've got to do something different than them and so do things.

Don't scale is part of that philosophy. And so you need to do things that your competitor can't do. It's basically saying, well, my competitor can't have a good customer service because 100,000 people call them every hour, but only four of our customers call every hour so we can have amazing customer service.

Now we'll be able to do the same customer service when we get big, probably not. But when we're trying to figure out how to make an amazing product, we want our customers to know that we love them and we want to learn as much as possible from them. So there are so many techniques that you can use that big companies can't.

And one of the biggest mistakes that early-stage founders make is they try to copy big companies. The advice they got from Paul Graham was that is about the power of being enthusiastic. One of the things that PG is amazing at, is making you more excited about your company.

Oftentimes, I try to figure out where in my path with the company. Do they need that feeling? Do they need that enthusiasm?

Do they need to believe that they can be the ones who win? And I think I learned that from PG. I think from Sam, I learned a little bit of optimism  and a little bit of the idea that don't assume, you know, how big the winners can get.

Like the winners, the companies that succeed can get way bigger than you might think. There's a classic rule in venture capital called the Power Law Rule, and it basically states that your best investments will make far more money than any of the rest. And I think that Sam understood that in his bones.

And I think that's one of the biggest lessons, he taught me. And that would translate it to, like, don't so much worry about what  would happen if the company lost. Think a lot about how big could the company get if it won?

I think that the promise that I saw from YC when I went through it as a founder is that what YC is a product that can help founders from before they even apply to after the IPO and beyond a product that could help founders to the entire lifecycle of a company. What I hope founders understand about what I see is that it's not just an investment. It's a product that's been built to make it more likely that their company succeeds.

We want to give YC companies a disproportionate advantage in the startup ecosystem. If you go through YC, your chances of success are higher. We think that's the bar we have to hold ourselves in order to invest in companies.

Some of the major innovations that we've done is, one, building a social network for our founders that makes it easy for them to  communicate with each other, to see what each other's expertise is, so and so forth. Nothing that we've done is build a set of special deals for our founders. So literally millions of dollars of discounts and free credits to products that are going to be helpful to them.

The third is an investor database, which effectively one allows founders to find any YC company who's raised money from basically any investor to get an introduction. And that allows you to browse those investors and read reviews and comments about working with them. The other things that we've built are additional programming and batches, after you do YC, we do another program for companies after they raise a series A  called the Post A program, and after you reach product market fit and you're trying to build a company and scale a company, we do a third program for founders called the YC Growth Program.

And so at every stage we put you together with other companies at your stage and give you the advice for that stage of the company. We also have another product called Work at a Startup, which is effectively a hiring product that all YC founders get access to. It's really cool.

It makes it easy for anyone who wants to work at a startup to apply to every single YC companies all at the same time, and then only allows YC companies to look at those applications and resumes with a product that most people now called Hacker News, which is probably the single greatest collection of engineers on one site that exists. YC companies get the ability to recruit people on that site and launch their products. I love it when the markets are in crisis for startups.

I think that over the past 3 to 4 years, founders have gotten into this sort of game not because they're passionate, because they think they can get rich quickly. And I think that capital markets kind of returning to normal is going to remove a lot of these people. I also think that investors have given companies far too much money.

It's driven up the prices of everything and that's going to return back to normal. I think that founders were confused or in the spirit of time to think that they needed more money to make their companies work. And I think people are going to start realizing that money isn't the most important thing when trying to make a product work.

All of these, I think, are essential lessons. I think that we went through a bubble that was primarily driven by investors, and the investors convinced themselves that putting more money into companies is going to make the companies better and then convince the founders of that. I don't think it did anyone a great service, so I'm happy that time is passing.

I want YC to be an organization that helps founders and thrives for 100 plus years. And I think in order to do that, we have to ask ourselves, how do we make the product better every single year throughout that entire time, and how do we make it a better and better deal. One of the things that I think a lot about is I want a founder to believe that the YC that they signed up for got even better every year.

So the deal that they made with us to take our investment turns out to be a better and better deal every year.