Dr. Michael Seibel "How to start a startup"

[Music] and I am very pleased to have the opportunity to introduce our guest speaker Michael Cil uh his visit is for sure one of the main highlights of this year and maybe of the years to come thank you so much for your time and for being so generous with itam and itam students so now let me introduce Michael Michael graduated from Yale University with a degree in political science in 2007 Michael co-founded Justin TV and became its CEO from 2007 to 2011 in 2014 Justin TV became twitch interactive and under the leadership of EMT shear

and Kevin Lynn sold to Amazon for $970 million Michael is also a co-founder of social cam a mobile app for Android and the iPhone that allows users to capture edit share and view videos online and this Venture participated in white combinator and sold to Autodesk for $60 million after that in 2014 Michael became full-time partner at y combinator y combinator also known as YC provides seed funding for startups twice a year YC invests a small amount of money in a large number of startups since 2005 YC has funded over 1,000 startups and has built a

community of over 2,400 Founders YC's companies have a combined valuation of over $65 billion which include companies like Dropbox and Airbnb we're thrilled to have the opportunity to listen to Michael's presentation how to start a startup please join me in welcoming Michael C [Applause] [Applause] hello everybody so um I want to keep this super informal um I don't like giving presentations I like uh answering questions so I'm going to give you guys this quick kind of overview of how we see startups at YC but mostly what I want to do is answer your questions so

um either listen to this or ignore the next 20 minutes and write down really good questions um before I begin how many of you have heard of why combinator holy okay how many of you want to be founders of companies within the next five years okay I'm talking to the right group okay um so let's get started how to start a tech company um when I start I always say something very simple um doing a startup is very hard but it is not very complex and you need to understand that it's a very important point

it is hard it's challenging every day you work very hard but it's actually a very simple thing to do and anyone can do it um I am not technical I got a polys side major I took five years to graduate from Mel not four they kicked me out one year I had a horrible GPA um and I'm doing okay so uh and oh the original idea for Justin TV was an online reality TV show so there's no way your idea is any worse than an online reality TV show I already have the worst idea so

there's really no reason why any of you can't start a company okay so this is what um I tell people when they're thinking about what do I need to get started and it's important all of you guys are thinking about this in school because school is actually the best place to start laying the groundwork for creating your startup um the first thing is your team so um how many of you people write code okay raise your hand if you don't write code okay you guys better meet those other guys um this might be your last

chance to be in a room with people who write code and technology companies innovate and create differentiation through engineering not through business through engineering so the reason why Google is better than every other search engine is not because they were the first ones to think of a search engine it's that they built a better search engine than anyone else so in colleg is a unique opportunity to become friends with the engineers that will eventually become your co-founders now speaking to the engineers you don't necessarily need business people yeah yeah but sometimes they're nice to have

around uh for example some of the things that I did when I first started was I cooked dinner for the team I cleaned the house I found our apartment where we lived I paid the bills I set up the bank account um you know the things that you need to kind of get done and then as we launched I became more important and as we started raising money I became more important but um this is like a a really important thing there is this balance between the people who can build and the people who can

take care of in the beginning what we call the work and um it's really really important for you to find the people that you really enjoy working with whether Tech or business and to make those relationships now so two to four people 50% Tech friends or colleagues that's a very long way of saying that shortly um I often recommend that people save a Year's worth of cash now this does not mean a Year's worth of you know we're rich living in a nice apartment with a Tesla this means like the bare minimum you absolutely need

to survive in a horrible place to live um but you want to give yourself a little bit of Runway because you can't ensure that you're going to raise money up front in fact your goal should not be to raise money up front your goal should be to launch and then raise money so if you're working a job if your parents gave you some money or if you got a credit card or two uh whatever you need to do have some money a little bit goes a long way and then three um startups are about going

all in um when companies who apply to YC 6,000 companies apply about 100 to 125 get in I read about 500 applications each partner reads about 500 I'm not looking looking to say yes I'm looking to say no the first thing I look for is are the founders committed if you're not committed why should I be so if you're a Founder you're all in um if this isn't for you if you want to be a halftime founder well then good luck so idea notice what came first right team came first team was on this slide

ideas on this slide this is actually very very important I care much less about your idea um as someone who is investing in startups I don't know whether you have a good idea or not and almost no one does uh I was one of the first 30 users of Dropbox I was one of the first 500 users of Twitter I loved Dropbox had no idea it was going to become a billion dollar company I loved I did not like Twitter I hated Twitter and I had no idea it was going to become a billion dollar

company I had no idea Airbnb was going to be a billion dollar company and I knew those guys since day one so nobody knows whether they have a good idea including you you do know whether you have a good team and with a good team you can build anything you can always change your idea when you're thinking about ideas I think it's really important to brainstorm them with people that you want to work with the typical construction that fails is business guy with genius idea tries to recruit Tech person to build it and give them

1% of the stock that fails don't do that um the better construction is a group of friends are shooting the talking about stuff and they come up with a cool idea together and that way everyone in that group feels some ownership everyone in that group feels like this is their startup not the other person's um oftentimes VCS and like investors will say think about personal problems I think what's important for a lot of startups is do you have some type of personal experience or like one degree separation experience where you can kind of understand the

product that you're building it's a lot harder to build a product for a user that you don't understand or that is not you um it's one of the reasons why you tend to see more consumer startups amongst younger Founders and more B2B startups amongst older Founders because older Founders have had time and compies and there all these things that they wish they had so think about this um it's much more important that you actually have some unique Insight on this problem um that you have some special take that you can look at your personal experience

your family's experience a friend's experience and and really think oh I might have thought of something that other people haven't as opposed to kind of survey the business landscape and say oh I think this is an opportunity but I don't know anything about this harder the last thing is think about how often people have the problem you're trying to solve um the perfect example I give for this is people always complain about car buying websites why are car buying websites so crappy well you think you're the user but the average person who buys a car

keeps it for seven years if you're the user of a car buying website and I give you an amazing experience you only come back seven years later so you're not the user that's why it sucks the user is the car dealership because they've got to sell a car every day in fact they've got to sell multiple cars every day so I bet whatever interface they're using looks real nice the thing you use sucks so think when you're doing a startup how do you solve a customer problem that they have often Uber is a great example

most people have to go to another location multiple times a day that means multiple times S A Day Uber has a chance to win their business so that's important Market um the best way of saying this is that the people who want to invest in your company um and easy way of thinking about them is they don't really give a about your idea or about you they want to make money and there is some really important math you need to understand um if I've raised a fund um and I've got my 10 partners with me

we've raised a fund let's say it's a $100 million fund basically our return what comes to us is 20% it's called carry that's what comes to us and now we've split that 10 ways so I get 2% of what the fund returns now the fund invests in your company let's say the fund owns 25 to 30% of your company how how big does your company have to be for the 2% that ends up in my pocket to be worth my time oh and then by the way that 2% is sometimes taxed 30% so if the

biggest your company can be is a $100 million it is not worth my time to talk to you ever and so people think startups like any startup should be able to raise money that is false people want to make money by investing in startups which means you've got to be able to show people this can be a billion doll company in fact you got to show people that it could be a 10 billion dollar company um the perfect example of this is uh I often travel to Europe and talk to entrepreneurs and I talked to

a Founder in Spain who want to build a business in Spain and I told them look it's almost impossible for you to build a big enough business in Spain alone for any VC to be interested into investing in you if you're not at least thinking Europe it's going to be too small so understand this because basically if you can't present something that can make someone money even if you've got the best idea the best team and the best execution they have no incentive to give you money okay the only other thing I would talk about

when it comes to Market use the competition's product a lot of times Founders will just tell us we're doing it better but they actually haven't even used the competitor they don't actually even know why it's better um there's no such thing as a cat idea but there is a such thing as not a wellth thought out one and it doesn't take too much time to survey the competition to talk to a couple customers where this goes off the rails is if you're taking more than three or four days to do this this does not six

months worth of research but three or four days is a lot better than just saying oh I know this is better because whatever legal um legal is actually very simple if you're going to raise money in the United States um and if you have to raise a lot of moneyy most of you will have to raise it in the United States um you need to be a Delaware C Corp um YC funds tons of international companies uh over 20% of our batch is international um and about 50% of our batch are not US citizens um

and so uh but they all create Delaware C Corps they all do it with this website clerk.com and clerky basically is your lawyer for the first year of your startup it is all the paperwork you need and it's all the paperwork that YC companies use so you can trust that it's good um and it's inexpensive MVP how many of you guys know what an MVP is Boom okay the biggest problem with startup MVPs is that they're not MVPs um usually in most cases it doesn't take more than two weeks to build an MVP now think

about the MVP you guys are thinking about building um I'm sure you guys have heard the quote if you're not painfully embarrassed by your initial product you took too long building it um what I often tell people is how fast can you get something in users hands um your initial customers the people who actually use new startup stuff are infinitely forgiving I mean most of the stuff they use sucks and fails so it doesn't matter if you give them something crappy that's what they're used to um what does matter is if you don't give them

something and what I often tell people is that the first product you build is going to be 90% wrong do you want to take six months to build something 90% wrong or two weeks to build something 90% wrong you only learn how to make it right when customers start using it so build it fast I guess it's just another way of saying that uh really pre-launch is like I mean it's not that YC doesn't accept pre-launch companies because it does all the time but uh going back to my days at Justin TV uh Paul Graham

the founder of YC commentator called me every single day and said have you launched yet that was the only advice have you launched yet and I was like oh what about this and he would say have you launched yet and then I would say no and he would angrily hang up the phone [Laughter] so have you launched yet great so when you're thinking about post launch everything is about growth um a startup is not a well organized uh thing it's extremely sloppy always broken and growing thing the growth is what rescues it um if you're

not growing because you're figuring things out if you're not growing because you're paying off technical debt if you're not growing for whatever excuse you're failing growth is everything so how do you create growth if you're building a consumer product typically you do not have money to acquire users using your product has to equal sharing your product I'll give you a perfect example Instagram when you take an Instagram photo what's the first thing they show you after you create the filters share they assume every freaking photo you take you want to share now when you use

the camera app on your iPhone and you take a photo what do they show you nothing so when you think about it Instagram said how do we beat the camera app and the camera app's got a huge Advantage it's on everyone's phone right how do we beat it well the way we beat it is we make sure that every time someone's using our product they're sharing our product virality and growth wasn't something that they bolted on afterwards it was core to the usage of the product and so you need to understand that if you're building

something for consumers is that the second I'm using it my friend should know I'm using it and you need to assume someone wants to tell their friends not assume they don't um if we're talking about B2B startups really you have to work extremely hard to get your first customers and then you have to be amazing to them because for B2B startups and Enterprise startups getting reference customers is huge um often times a business doesn't want to be the first or second customer but they have no problem being the third fourth fifth sixth and 10th customer

so if you can convince the first two or three customers which will feel extremely hard and they love you your job gets easier the last thing is advertising um basically the way you should think about whether you should be using advertising is can I make more money when the person comes to my site than it costs me to get them to come to the site now if you think about Facebook they didn't monetize for years Facebook couldn't use ads if you're a social product and you're trying to use ads it's a very bad sign um

if you're uber and every time someone uses the product you make money well now you can actually figure out how much money you can spend on advertising and whether you can make that money back and then you can buy ads so ads are not a solution for every startup for the startups that are making money from their customers up front though it's a great great thing so are people talking about your company one of the things that I think Founders need to understand is that 90% of their effort 95% of their effort should be on

growth 5% of their effort should be on Buzz are people do they know that you're growing do they know that you exist there's so much value in people knowing that a company exists for square which is one of the most crappy but buzzworthy companies was able to raise money at aund million valuation and get a100 million Yahoo exit offer when they had less than a million users and the reason why was because some people on Tech crunch liked them so they wrote about them every day that somehow magically created a $100 million worth of value

now when a company kind of goes too far in that direction uh I don't know if you guys have ever heard of clinkle or color there a couple of those like that um it's not good but being able to use press being able to get people to talk about your company is a valuable tool what you need to understand about PR is do not use um PR firms ever stop always um so my co-founder and I had this little competition and all the money that we've wasted at Justin TV um and he would waste money

on hiring people who were bad that we had to fire I would waste money on PR um I wasted $150,000 on PR and I felt bad so instead of paying the last PR person that we hired who sucked I gave them a little bit of stock that stock was worth $1 million so I wasted $1.1 million on shitty PR I wasted that money so you don't have to um when you're early reporters want to talk to you PR firms were built to insulate the founders and Executives of a company from the press to insulate you

don't want insulation you want press Uber wants insulation right so you're the most powerful advocate of your company you need to talk to the press the second most important piece of I advice I can give you is PR is like BD when you want to do a bis Dev deal do you just send a cold email to 100 people no so why do you write a press release and send a cold email to 100 people useless when you want to do a BD deal you find somebody who knows somebody and you get a warm connection

you maybe jump on the phone with them talk to them you maybe take them out for coffee grab drinks and you become friends and then when reporters are your friends you know what they do they write about your company I've gotten this down so good in my last startup that I could text a TechCrunch reporter and he would write a story within an hour because we were friends um so much better than whatever a PR firm would ever do so um think about it like that the other thing you to think about is that PR

and news reporters specifically they want news they don't want to write a profile piece on how great you guys are news is Milestones a million users a million dollars made fundraising uh important hire important bis Dev deal that's news and when you tell a reporter about news you don't say oh this is happening can you write about it you say we're announcing this is happening on this date and we want you to have the exclusive early stage I always give away exclusives exclusive means I'm only giving you this story no one else and the reason

why is one you're telling the reporter everyone's going to know about this on this date so if you don't right about it you're going to lose the story second you're telling them I like you so much that I'm only going to tell you about it and then what you do is you build a list of stories that you want to pitch in the future I call it your cue you always want to have five stories that you know are coming up so oh we know we're about to hit a thousand users we know we're about

to hit this much money we know that we raised money we know these things will happen in the next couple months we put them on our list and two weeks before they're about to happen we email a PR we email the reporter so that's how you get press um that's it I spent two years trying to get press not doing this and it didn't work and then I did it and it worked so it's very simple fundraising so I was just having this conversation with uh a group of Founders before um the number one thing

you need to understand is that you do not come up with an idea and then raise money to build the idea that's not how the game works you come up with the idea you build it you show some success and you get money as a reward so when you're coming up with your fundraising plan less money is better you're coming with fundraising plan faster is better than slower and when you're doing it you better have growth growth gives you the leverage to demand money and and actually even better if your break even like Airbnb was

when they came through YC not needing money gives you the leverage to have money and I think that like this is a very like um easy thing to understand if you think about a relationship between a man and a woman so if a guy is going after a girl and he's being way too aggressive the girl backs up if the girl's going after the guy and she's being way too aggressive the girl backs up if you're a startup going after the investor and you're being way too aggressive the investor backs up but on the flip

side if you're confident because you have growth a strong team and a good market and you lean back a little and the investor leans forward you have them so that's the dynamic the dynamic is how do you get the investor to come after you not how do you figure out the right words to go after the investor so if you're having trouble fundraising really um it's very simple one you're probably not growing um You probably come up with a reason why you need money to grow and you won't get money so you won't grow so

your company's going to die two maybe you are growing but you're not talking about it talk about it um three you are making the classic mistake of when the investor emails you you immediately take the meeting um you guys know the phrase fomo right basically um raising money is about building up demand to invest in your company when you're not fundraising and when there's enough demand that's when you pull the trigger and you want to create this fear of missing out because everyone wants to invest and only a couple people will be able to and

that's fomo so if you talk to everyone as they come in you're not any fomo at all if when people if you're doing your job you're growing you're talking about it investors start reaching out to you and you say we're not fundraising we're not fundraising we're not fundraising and now 10 investors have reached out to you then you say you're fundraising bam you're in the driver's seat um this is how most successful rounds happen um VCS pitch a very different myth VC's tell you that you go to their office you give them a presentation they

write you a check 10% of deals work that way 90% of deals work because somebody was talking about your company the VC heard about it and they reached out to you VC's wake up every day figuring out who to invest in that's their job if they're not investing in you that means that you don't have something they want to invest in and changing the words of what you're saying often is not the solution okay operations this is actually very very simple don't spend any money um you're not going to have very much money because you're

building before you fund raise so it's going to be easy to not spend very much money um the only other thing I would recommend is you should look at exactly what you spend every month um this is how at Justin TV at one point we were two months from dead we were burning $250,000 a month and the only way we Crow out of that hole was every single month we looked at every single dollar we spent you want to develop that habit early um it's very very easy especially for a startup that's starting because you

don't have very much spending so um but do it don't don't don't ignore that hiring um hiring sucks we tell companies during YC not to hire I hate hiring um I only want to hire when I'm like basically dying and I absolutely need someone hiring is an awesome opportunity to waste time waste money and literally probably 80% of the people you hire are not good for good company 50% of the people they hire need to be fired so why hire often times people think we get more work done false absolutely false you do not get

more work done when you hire you just have to have more meetings you actually get less work done there's a reason why Microsoft doesn't do much because there's a ton of people there so stay small I always think about hiring as what is the core group The smallest Core group of people that can basically build this product and get it to grow super fast that's all you want and when you get it to go super fast then you can raise more money and then that gives you the ability to hire but people don't create the

growth the growth gives you the money to hire the people so don't hire um second if you're going to hire higher smarter than you are um if the person you hire isn't bring the average intelligence of the team up don't hire them um be fair and transparent when you hire um don't try to trick your employees if you're giving them stock which you should be you need to tell them how many total outstanding shares there are they should know what percent of the company they own they should understand how vesting works like how you treat

your employees 1 through 10 will determine how your employees are treated forever and if your first 10 employees think you're dishonest they will tell everyone so it's just not worth it so do you want to know how to complete the best YC application ever probably yeah okay awkwardly it's very similar to all the I just said so um do you have that team of two to four people do you have Engineers on your team is your Equity split equally or close to equally these are all the things I look at when I'm reading an application

has the team known each other for at least six months are you guys all working on the company full-time these are the things that I check the box check the box check the box nothing to do with your idea nothing to do with your idea have you launched or is launching imminent billion dollar market we talked about it if you've launched are you growing and then most importantly I do not want to accept companies that are going to suck in YC can you be at the top of your batch um that's kind of a simple

concept this is what I look at like I said in the beginning it's hard to do these things but this is not complex this isn't a list of a thousand things each application Takes Me 2 to 6 minutes to read that's it you show me these things nine times at a 10 you get an interview you don't nine times at a 10 you don't so if any of you are trying to organize your company in a way different than this my question to you is why like I often tell Founders you don't have to reinvent

every wheel most companies copy 90% of what they do from other companies they follow the pattern and then it's that 10% difference that makes that company great a lot of entrepreneurs try to entrepreneur every every single thing in their company they try to reinvent every wheel I don't invest in those companies it's a waste of time if you can't learn from people around you you're not going to build a great company the YC interview um so if any of you guys uh get a YC interview at any point you should feel free to email me

and I will give you these pointers again because you probably won't remember them my email is Michael atom.com the most important thing about a YC interview is it's only 10 minutes and there's no PowerPoint no presentation it's just talking and you can't demo your product for the first 5 minutes if you cannot say what you do you don't get it the number one problem that Founders have is if I ask them what they do they say something and I'm an experienced entrepreneur whatever the and I have no idea what they're doing you know how they

say if your mom doesn't understand what you're doing that's a bad thing that is 100% true like I can explain to my mom what Google is it's a website where you type in what information you want in a box and then they give you web pages that have that information on it that sounds kind of dumb but that's what Google is if you say Google is organizing the world's information I'm gonna say I don't know what the Google does and you don't get into YC um um that's the biggest problem I gotta be honest I

mean you already did all that other stuff to even get an interview one out of four companies to get an interview get into YC um if you can say what you do you haven't changed everything you and your co-founders aren't literally fighting with each other in the batch like in the room probably going to get in it's not as hard as it appears okay so that's everything I know about startups all right n [Music]