Startup Founder Ethics transcript

There is a final judge of all startups. Like someday all will be accounted for, okay? There is a reckoning for all startups, right? And that's either, you know, when you go public and the market gives you a value, you may not like it, but that is your reckoning. Or it's you get acquired and that is a There will be a number there and someone will come up with that number. >> All right. This is Dalton plus Michael. This is a throwback episode and today we're going to be talking about the ethics of the startup game.

Maybe a topic that doesn't come up enough. What do you think, Dalton? >> This was a recurring theme in all of our talks to the YC batches over the year, which is there's some basic rule of the game and one cool thing about, you know, Silicon Valley in the tech industry is you can fail and you will be held up and celebrated by the community, right? Like it's okay if your startup doesn't succeed. >> It's not unethical to fail. >> Yeah.

That's part of the business. You earn respect from your peers. But we would always say in our advice to YC companies, there are rules and if you, you know, cheat people or lie or follow bad business practices, you will be in trouble, you know, like you are out of the business, basically. Like it is it is very hard, if not impossible, to recover from that and that is not the way to fail. >> Over the years be become painfully obvious that we're in a trust-based business and I think the major mistake that founders make is they over fetishize the next milestone.

I almost want to kill this analogy that's been popular, which is like, oh, a startup, you know, first you're pushing the rock uphill and then it's like you're pushing it down you're following downhill and that's the easy part. And it was kind of a bit of a mentality that like do whatever you can to get to the easy part because then it's going to be easy and then like whatever you'll fix it later. Where like when we talk to our friends who are running massive successful companies, I think they haven't found the easy part yet.

Like I'd argue it's like it's maybe a better analogy is pushing a rock uphill but your legs are getting stronger. When you believe this myth that like oh if I just raise that round then everything will break open or if I just hit this ARR then everything will break open. >> Yeah, it's like how small lies become big lies. >> Exactly. >> Like you start by little things and then to keep up you just dig deeper and deeper and deeper um till you can't recover, right? >> Yes.

And I think that's the tricky thing is that you know, we're both founders. I remember there was a moment where you know, I was like we're I'm pitching an investor and I'm giving them our metrics, right? Like like there's no like third-party audit on how many unique visitors we have like but then you know, my next thought was this is that ultimately I'm being graded on how much value I'm creating. Like ultimately there's an accounting.

When that ultimate accounting happens, if it shows up that like oh this is all smoke and mirrors. There's no reward at the end of that tunnel. Like you know, so it's like it's >> It's all downside, right? >> It's all downside. But it's weird because like yeah, maybe maybe it's fun on that road but if the end of the road is like no payoff is the road like is that like what like does it matter? >> It's not just no payoff.

It's like career end. Negative payoff. >> Yeah, exactly. Yeah. >> I think if you look at the history of the tech industry, um there's like a culture thing to talk about. I think that historically engineering, not software, let's talk about engineering. The deal with engineering is you had to build things that wouldn't kill people like bridges and buildings and stuff. And so I think it was built heavily into an engineering mindset that like details matter and not hurting people matters and that's literally the job.

Like >> That's the final accounting. Someone's going to walk on this bridge. >> Yeah. Um and I think it's like pretty well grounded to you. I think the other thing going on is you know, not to make generalizations, but um spectrumy type people tend to like rules. Um I guess I'm one of those people, but if you believe in logic and reason and the whole way you see the world is through an engineering mindset of like strict rules and like everyone has to follow the rules and like rules are important.

And historically engineering is like a good place for those types of people because you can put numbers on everything and you can make sense of the world and there's laws of physics and you know, there's all these rules where the where everything makes sense in a way that other parts of of society may be a little bit trickier. You still with me? >> I agree. >> The technology industry was seen as a place for people that feel that way and think that way and are aligned with everyone agreeing to a code of conduct and agreeing to rules and numbers being super factual in every way. >> Yes. >> And so I think there's always been this tension as money flows into the tech industry that the more money and lucrative this stuff gets, the more it attracts people that would not be in this industry if there were no money in it, right?

Because there's some people that are like engineers, whether they're physical engineers or software engineers, they'd be doing this even if this was like making no money, right? Cuz they like it. And there's some people that are 100% only doing this versus whatever because >> Right? >> Yeah. >> In the '60s it was starting a rock band, right? Like there's a lot of people, if you were an ambitious young person in the '60s, you started like a rock band and a lot of people went far with that.

Um starting a startup is like something you do if you're an ambitious young person. And so where I'm going with this is that in this cultural tension, I think a lot of the true nerds are very angry and upset when they see what they feel is an injustice. And again, I guess I'm one of them. Like it bugs me, too. Like I can, you know, I'm going to level with you. Um and that folks with a different perspective might just be like, "Oh, this is how everything works." And it reminds me a little bit of I don't know, like high school where there there are some people who were like, "Yeah, cheating's just part of the game.

Like of course we cheat. Like everyone cheats." And I don't know, man. Like I always just found it kind of a drag to to see some of that influence coming into the tech industry. And like last thing for me on this point, I've noticed it it has everything to do with market cycles. And when, you know, >> Yep. >> the hotter things get in terms of money, the sketchier things >> get. And when there's no heat on the on the tech industry, this is less of a problem. >> I think that investors also have a role here.

It's so funny. I remember reading something where some young investor was being given a lot of praise. And you know, some snarky Twitter person was like, "Well, those companies haven't even exited yet." And then the reply was like, "Well, how do we grade people if it takes really, really long time?" I feel like investors can get caught up in these short-term competitions. Did I get the hottest company on demo day? Like how many of my companies are raised a series A?

How fast do they raise a series A? How fast is my fastest company growing from 1 million to 10 million in ARR? Because the longer competitions take so long. And I think that unfortunately when early-stage investors get into this mindset, it can it can help infect the community with the mindset that these short-term things matter. And I don't know about you, Dalton, but like man, I've been advising startups for so long now.

You know, time separates everything out. And like the fads go away. Things that don't create value go away. Valuations become irrelevant. The amount of money you raised, how famous you are, like all those things with time the only thing that's like the core and rock is how much value you're creating. And like sometimes I kind of wish investors would have that longer-term mindset as opposed to wanting to split the long game up into short games that probably don't matter or are not indicative of the long game at all. >> Sort of to their defense, they're just worried about their career and their next promotion and whether they're, you know, like what we're saying works for us, but if you're like a junior VC and your entire career is based on if you're funding winners, otherwise you're out.

From the investor perspective, um it's hard for us to to say they should do bad things there for their career by not hyping up the companies they invested in. Right? They're they're just trying to show that they're good investors and they're trying to, you know, make their portfolio companies look good. And so I understand the incentives are a little tricky there, but to reiterate what you've been saying there is a final judge of all startups.

Like someday all will be accounted for, okay? There is a reckoning for all startups, right? And that's either you know, when you go public in the market gives you a value, you may not like it, but that is a reckoning. >> That's right. >> Or it's you get acquired and that is a There will be a number there and someone will come up with that number. And so at the end of the day, um all the numbers between when you start and when you end are a little bit made up. >> We're fair.

We're fair. >> you should be worrying about your reckoning value, which is how you articulate the value you're creating, which is a real thing and not fake vanity stuff, you know? Like that stuff's not real. >> I agree. I don't want to be on a high horse here. It is hard and during a heavy buzz game, it's hard. My parting piece of advice is the advice I often give to founders when it's like when they see something blowing up it's so often I'll be in off-hours and I'll be like, "Oh, well, these guys are they're blowing up like should we chase them?

Like da da da da I have not seen games won or lost in 6 months. And so it's like don't don't kind of like don't use some short-term excuse to justify cheating bending the thing like cooking the books. Like don't use that because you're overreacting to something that is probably going to change. And that overreaction is extremely dangerous. Why? Like it it could be current. So like don't overreact and like destroy people's trust in you over something that's probably not the end of the world. >> I worry a lot about peer stuff.

So I think a lot of why we used to talk about this in YC and I guess why we're making this video is that you can say, "Oh, these guys, you know, they're full of crap. They're just saying this." But every you know, all the founders I know are exaggerating their numbers and and lying to investors. And A um that sucks if that if that's what you you know, sorry sorry for you. Sorry to hear that if you feel like everyone is doing it. >> Yeah, like that that sucks.

You should get better friends. Um and then two again, I'm I I really mean this. I know the numbers of a lot of the most successful YC companies and they really did go public and Michael can attest to this, too. They're real. These are real companies. Whatnot's numbers are real and Brex's numbers are real and Reddit's numbers are real. Like Like this is audited. I can't stress enough that the truly successful big late-stage companies are doing something real. >> It's like cheating on like a practical test where you're learning a skill, but then you actually have to go out there like okay, we we think you know how to build a house now.

You cheated on all the tests for carpentry. We're now sending you out there to build a house. Oh, your house doesn't work? It's like well What did cheating get you in the end? Like Um you know, if if there's going to be a final accounting, cheating ain't going to help. I think in this environment for the founders who are kind of holding the line you know, we want to say we have your back. Like >> Yeah. You have a long-term value.

You have a place in this industry. We respect you. Everyone respects you, and your integrity is the most valuable thing you can have, and you should never You should never compromise on that. Like That's it. That's the game. >> Nope. That's the game. Great chat, Dalton. >> Cool. All right, thanks.