Building A Big Company: Non-Obvious Insights transcript

There's another misconception that happens that leads people to believe being the seventh best player is okay, which is well, if the winner is generating 500 million in revenue and we're generating 50 million in revenue, we're just worth like onetenth of the winner. I don't think I've ever seen this thought backed up. In fact, I think that the assumption is you're going to trend towards having no revenue. Yes. This is Dalton plus Michael.

Today, what we're going to talk about are some nonobvious insights we've had on how you actually make a very large company. I think what I'd like to explore is how maybe the advice that we give pre-product market fit is slightly different than the advice that we give postp product market fit. I think sometimes founders uh don't get this right. So >> yeah. So I mean I think to start with uh disclaimer. >> Yeah, >> this is a nuance topic. >> This is the this is a fantastic example of something that I'm happy to speak about on video and would never in a million years put on X or social media which nuance doesn't work.

Even even writing blog posts, it had to be a very long blog post. This is super nuanced. And so the nuance here is pre PMF you just need an idea and you just need to make something that people want. And so much of the advice is to stay out of midwand. >> Yes. >> So much of the advice is >> to quiet your mind. Yes. >> From all the distractions, all the, you know, super fancy strategizing you think you're doing and just like go do the thing. >> Yes. >> And that's how I would summarize lots and lots of the prepf advice is just go do the thing.

Less strategy, more help the customer, >> more just do things. >> Yeah. >> Right. And those people win. Again, here comes the nuance. Uh >> oh. >> What we will totally acknowledge is that post PMF, if all you do is that same premiumf strategy, you can end up in a local maxima. >> Yes. More common than I ever thought. And I think that there is this false belief that if I can make $10 million, I can make $100 million, I can make $500 million.

Actually, it us often starts at $1 million. >> Yep. >> The thing that makes me $1 million can make me a billion dollar. What's unfortunate is how easy it is to verify that's not true. Like what's unfortunate is you can look at a lot of software companies and ask what did they do to make their first million and is that how they're making all their money now and for just as many examples as you would find in the positive you'd find in the negative like Google monetizing search monetizing search Microsoft yeah completely different completely different get into the nuance here >> yeah I think the way I I would set up this is to say let's use the Facebook example I like to use them just cuz it's now everyone knows it's a big company, but we remember when it was not a big company. >> Yes. >> And at the time when it was a small startup, >> it had the best social network for college students. >> Yes. >> And it basically had a monopoly for people that had aedu email address. >> Yes. >> And at the time, you had to be a student at one of the universities that they supported.

Otherwise, you couldn't use it. Nope. >> That was part of what made it cool is there were no parents on it. There were no kids on it. >> It was a feature. It was a feature that was super easy. It also restricted you to only your university. >> Yes. >> And so they built a super sticky product, but at the time the conventional wisdom is >> this is some college kid niche social network. >> How can that be? >> How can that be a big business?

This is by its very definition niche. >> Yes. And then if we look back in time, the strategic decision that was not hill climbing, it was not, you know, heading to local maxima was to first allow high school students to come in. >> No, first it was the it was first the companies that a lot of the Ivy League kids went to work at. >> That was before high school kids. >> That was before high school kids. Yeah. It was uh it was like Accenture.

Oh, sure. >> Yeah. It was some of the I remember those some of the first some of the first nonedus that came up. Yeah. So Accenture was in that's >> I think Accenture got in before some high colleges got in. >> That's a departure from the original vision. Then high school kids was a really big departure. >> And then the decision to allow all people to sign up. Yes. >> I would argue is a great example of a big strategic bet. >> Yes. >> That was not related to just hill climbing what they were doing. >> No. >> Then there was the big strategic bet to do mobile. >> Yes. >> Which was betting the betting the farm on the mobile app was a big strategic bet.

All the money they were making was on web at the time, >> right? >> Yeah. >> Then there was the Facebook app store strategic bet. There was the Facebook phone strategic bet which didn't work out. Like there Instagram >> which is basically the company now. >> Yes. It's save the company. With hindsight, you can see all these times where the founder had to make a decision that was not hill climbing making the product better.

Yes. >> It was actually >> making kind of a crazy bet and betting the company on something. Yes. And with hindsight, those ones worked out. But remember back in 2005, 2006, there were a bunch of VC funded social networks. I5 >> Yep. >> tagged. >> Yep. >> And for whatever reason, those companies >> didn't make these types of moves or to the extent they made strategic moves, those moves did not work out. A takeaway from this story is if you're going to build a very very large and successful social network, probably the best way to monetize it is through advertising.

You have to figure out how to be huge. And there are a lot of other network effects that come in being huge. But if we just think about the business perspective, right, the value to an advertiser for everyone being in one place and the amount of premium you can charge, massive. You don't get that value if you're the seventh place player. I'm sure there are a lot of other product reasons why this whole path made a lot of sense, but the business reason effectively able to make Facebook to make them revenue, it does.

And I think that sometimes when we're talking to startups, I get the impression they care far more about what they believe their next fundraising milestone is than what number they'd have to hit to IPO. What number would they have to hit to be a $50 billion valuation company in the public market? What company they'd have to hit to be a hundred billion dollar? And sometimes you are inadvertently making choices that reduce your chances of actually building a valuable company.

One of the areas that we see this a lot are companies that kind of have to bundle. >> Yeah. >> So look at HR's, right? And it's just like whatever reason because why would you want to buy 17 pieces of HR software, right? Like the market wants bundles. And we see companies all the time like build a best-in-class product and then struggle with do I do more? Do I bundle? >> Hell, we're seeing this with bigger players now, right?

If you're Zoom, if you're Slack, right? You had these decisions like we got to a certain size. Do we build the bundle? >> Yep. >> If we don't, can we really the next level? >> Salesforce now. They got acquired. >> Well, so it's part of a bundle. >> Yeah. Another bundle. Yeah. Yeah. Exactly. Right. These are conversations that we never want to have with a pre-product market fit company, right? >> Yeah. If again, let's use a specific example.

Let's say someone wants to build a new cursor competitor. >> Yes. >> PrepMF, it's like, well, have you talked to your users? Like, does anyone want this? Is this better than cursor? Like, it's just the fundamentals. Any midway >> strategizing about whatever is irrelevant if you have no users. >> Your product is worse than nobody. Like if no one will use it, you have a problem. You know, if cloud code is just way better, you're over. >> Game over. >> Yes. >> But if you were sitting here right now and watching this video and you had raised a bunch of money or a series A and you were the seventh most popular >> Urser or Claude code competitor and you've done no strategic thinking, >> Yeah. >> about what the plan is. >> Yeah. >> I think you're going to have a bad time.

Right. >> Yes. And I think that there's another misconception that happens that leads people to believe being the seventh best player is okay, which is well, if the winner is generating 500 million in revenue and we're generating 50 million in revenue, we're just worth like onetenth of the winner. And I don't think I've ever seen this thought backed up. In fact, I think that the assumption is you're going to trend towards being generally no revenue.

Yes. And I guess there are some markets where there's six winners, but and so it's interesting is in your example, right? If you're the six player, like you must be obsessed about winning the whole game or just having a move. There's got to be a move >> or Yeah. or playing a different game. Yeah. Yeah. We can win that one. And we I think we encounter a lot of OC founders who um and a lot of founders in general who are kind of like, but isn't 50 million in revenue sufficient?

Like haven't I won? >> Yeah. >> Like isn't the finish line behind me? Like I got here. If I got to 50, it's a guarantee I'm going to get to 500, right? One of the things I say to a lot of founders is, "What do you think is the failure rate for a series B company?" Because like I think in their minds before I ask the question, they think every series B company wins. And then after I ask it, they're like, "I guess mathematically that wouldn't work." >> Yeah.

So, >> when they hear stuff like, "Yeah, 80 90%." They're like, "Oh, what's funny about this nuance point we're making is I could see a lot of people going like, "Yeah, totally, guys. I agree with you, but why aren't you doing all that during the batch?" Again, I I don't think people recognize how this style of thinking no is literally poison when you're trying to just ship a product, but is absolutely necessary. >> Well, I've even attack it in this way.

I think most of the times in your pre-product market fit, you're still trying to learn what the customer wants. I would almost argue you're still in the fundamental kind of let me learn what the hell's going on. I think that like when you're trying to make these high strategic moves, it's very helpful that you know some stuff. It's very helpful that you have a mental model of the customer. You have a mental model of their needs.

You have a mental model of why your product helps them or not. Like, and these are things that you're still playing with pre-product market fit. This kind of thinking creates paralysis on a pre-product market. Like, you know, instead of writing code today and talking to users, >> let's spend eight hours talking about strategy, right? >> Well, again, you go back to the Facebook example, all of the strategic work Zuckerberg did was super helpful with a guy with 100 million MAU.

Like it's like cool man you here are the keys. You get to spend a lot of time pontificating. >> Yes. >> Having some some guy >> Yeah. >> sitting in his apartment strategizing about the future of social networking. >> Yeah. >> That's not someone in a good position >> to do this type of analysis. >> When Zuck's got 2,000 Harvard kids, that's not the time. >> Yeah. >> Yeah. I love the point you made in the beginning, which is that like this gives us a little bit more time to flesh these ideas out.

I think another idea that you introduced to me, which is I think is a basic finance idea that I didn't fully embrace at first is just comps. The number of times I'm talking to founders and I'm just like, what company do you comp yourself to? Because if you're trying to think strategically, like what what does good look like? Where are we aiming for? And a number of times people will be like, oh well this company has a billion dollar valuation.

I'm comping myself to them. And I'm like, I always laugh now cuz I'm like, you have a sea of public startups that you could, it's like, you know, I don't want to learn anything about playing basketball from Michael Jordan because I like this guy who plays on Duke right now. And I'm like, all right, good. I like the Duke guy is great. Like, maybe he'll make the NBA. Like, can we talk about Michael Jordan for a sec? I like, oh, but Michael Jordan's old.

And I'm like, but he won. Go pick a newer winner. Let's talk about liberal 100. Can we just talk about someone who's really put points on the board and we're not judging them on what they might accomplish in the future. >> But founders resist this like, at least in my own experience, is it seems so foreign >> to go public or to know anyone that did. It just felt like being like, >> "Let's talk about the astronaut who walked on the moon." It just didn't seem real. whereas now >> it seems completely real, but we're in the bubble, man.

So again, I I think >> I think that's my steel man on why people I hear that, but I think, you know, it's funny, >> we've gotten to do a number of YC talks with Tony from Door Dash. And like I think he was thinking earlier than anyone ever believe that like I want to do delivery better than Amazon before he ever had the right, you know, the privilege to think that way. I think he was thinking that way and that's just a choice, right?

Like he could have only comped himself to Uber and Postmates. >> Yeah. You choose who your heroes are. Yeah. And I also think it's more exciting. Like it's scarier for sure, but it's more exciting to compete against the big big big players. All right, last dangerous topic. So I I love I love talking about this. So during early stage fundraising, we often make fun of investors who say, "What are you going to do when Google builds your thing?" It's often a sign of a unsophisticated investor.

I think it's because we heard that so much when we were founders. >> Yes. >> Well, also there's no right answer. >> Yeah. Yeah. It's like Yes. If if Mark decides to directly compete with you and ignore everything else, how would you win? It's like it's it almost feels like an unfair question. But there is a stage of company where the Google's, the Amazons, the Salesforces, the the Microsofts will take interest. I heard a great story from a YC company doing a CRM and he was like, "Have you ever heard of Microsoft Dynamics?" I was like, "I don't know about random Microsoft products." >> He's like, "Oh yeah, it's their CRM that's taking like customers out of Salesforce's hands left and right." And I'm sitting here like, "How many of our founders think Salesforce has won?" Yeah. >> And Microsoft's like, "Oh, this is around the time, you know, in the last five years.

Let's let's start. We could do that. >> Or, you know, a classic example, right? AWS. >> Yeah. >> Damn near a decade. They were the only serious player. >> Yeah. >> Google. And then Microsoft's like, "Oh, yeah, we could do that." And like the crazy thing is like, "We can hire some of the people who built your thing and ask them, hey, now that you built it, how would you do it better the next time?" And so what seems like a dumb question from a research founder, how should a leader stage founder think about these big guys because they do compete?

I think it's worth thinking about from your customer's perspective. You know, just go through the laundry list. How hard would it be for someone to switch? Are there nonobvious reasons that they wouldn't want to switch? I I think just being really honest with yourself about those things um is probably a good idea. Like in the case of Slack, I think what I heard again this is not first party, this is just third party.

I think a lot more people uh were willing to use Teams and other stuff than Slack >> and so was not as sticky as they had hoped, which is part of why they needed to get acquired. I believe that Microsoft actually did damage to Slack and that's why they got acquired was my understanding. >> It's funny. So I talked to somebody who was like a product lead at Microsoft and he was just like look like we could bundle teams and like we could effectively almost default roll it out to all Microsoft folks where every one of those deals Zoom would have to get people to adopt it upsell them figure out some IT thing do all the contracting and Microsoft was like this is the next product in the suite. me a question that is completely irrelevant to most YC founders for their whole career is if you're a product like Slack with the amount of kind of takeoff that you had or Zoom with the amount of takeoff that you had was there a way to compete against office and like one of the things I often think about is like there is a point where you might actually have to go at these big guys throats >> I mean okay one more time to go go back to the Facebook thing yeah Google decided to kill Facebook with Google+ and they put like half the company on it.

Y >> and it totally failed. But it's not cuz they didn't try. >> Nope. Nope. >> It was not. >> There was a very serious effort. Yes. >> By Google to bury Facebook. Yeah. It just didn't work out. >> It's funny cuz it's kind of like I don't know. I think about the ocean and just different size fish and like when you're a fish this small, you know, nobody the great white doesn't care. But as you get bigger, you've got bigger competitors.

And I think that I almost wish that more founders thought of that as empowering. >> I thought of more founders like, "Hey, now I get to competing against the big guys because it's not like the big guys have the better product." Often not, >> right? Like you like often by competing against the big guys, you can bring a better product to market. And like I'll use Door Dash as an example. I've been an Amazon user for 25 years.

And I would have said I've loved Amazon top five products in my life >> for maybe 20 of them. And something started happening about five years ago where I would do an Amazon search. >> I know. Yeah. >> And it's like it's hard not to buy junk. >> And I'm like, you have to really try to not buy trash on Amazon. Like the whole thing is set up to buy >> the app button. Yes. >> Yeah. You almost need to do discovery outside of Amazon deep link to the thing you want to buy and otherwise stay the hell out of it's all bad. >> Well, and and the terrorism of getting It's one thing when you sign up for some service online, it doesn't work out and you can just unsubscribe.

The terrorism of getting something physical in your home and you're just like, "Okay, if I have to return it, that's just even more time." But then this and like or or just like silly things like the photo was the wrong size. So it's like Amazon started putting this this product is often returned and I'm like why is it in the result? It was like I have to scroll down to learn. I'm sure some PM is going to get sent this video.

The email from the boss have you seen this? Please consider you know investor guys talking about it. You know, one of the other thing is the the sponsored products. Like Google taught me that like sponsored stuff's at the top and you scroll past it and then like you get the real stuff for a while and like you should be able to tell the difference between ads and not ads. >> Amazon's taught me like I don't even know what's going on.

Like is that an ad? Is that not an ad? Are those reviews fake? Are they real? I have to have a plugin to tell me whether the reviews are real or not. I'm like, on the other hand, Door Dash, I and I can't even believe I'm saying this. I'm like, because Door Dash fulfills from the local stores and like it's very hard for random spam products to get distribution in local physical stores. When I order on Door Dash, I feel safer. >> You get the thing. >> Yeah.

And it's like it's a thing that kind of is like it's gonna it's a brand I've probably heard of. >> Yeah. And it's gonna work and it gets there faster. And I feel such like a rich douchebag as I'm sitting here like I don't need these sneakers in an hour. Like I don't like >> but I'm not even using Door Dash because I needed them in an hour. >> Yeah. >> I'm just using it. Yeah. >> Right. You know it's like I feel uncomfortable.

I I mean Amazon Prime, Amazon, I got all the Amazon stuff. I got Echo throughout my whole house, >> but I'm like, very interesting. Door Dash is competing against Amazon. Yep. They've decided like we're going to take on the big boys and the big boys maybe are a little more vulnerable than they look. >> And what's funny to cap this off is that was always the plan. Like the comps were, you said this a minute ago, but the plan was always to imagine the size of the logistics business for all products was bigger than food only. >> But first, you know what he had to do?

He had to get someone a burrito in Palo Alto. Yeah. Right. You don't you don't get to have this conversation without how do I get someone a burrito in Palo Alto? >> So, use this advice correctly. Don't come back to us and don't yell at us. We don't want to hear, you know, your pre-launch companies, how do I take on Google? But if you do find yourself in a little bit of a rut in your postpartum market fit, maybe you got to be more ambitious, which is counterintuitive. >> All right. >> All right.

Thanks so much. Appreciate it.