Startup Problems Growth Doesn't Solve transcript

When things aren't going well, you have to be your own biggest fan. >> Yes. Yes. >> And when things are going well, you have to be your own biggest critic. And it's a very different >> state of mind to be very different. Right. >> Well, and also, you know, and and especially because like you don't want to be deputy downer in your company going, "Wow, but like who else is, right?" This is Dalton plus Michael and today we're going to talk about the problems that growth doesn't solve.

So, we've been accused of telling founders just grow, grow, grow, grow, grow. And we're not um retracting that advice. >> However, >> there's some nuance. There's some nuance. There's nuance. So, let's go through some of that nuance here. >> Growth does solve a whole lot of problems. Often, when someone is dealing with burnout >> or they're dealing with we can't raise money. >> Oh, yeah. >> Like there's just a whole set of problems where if you the actual fix is just to grow. >> Yes.

And then suddenly this money problem, oh that just got fixed. And suddenly the motivation or the burnout problem gets fixed. So growth is very good and does fix a whole lot of problems. >> We're not knocking growth. We're not saying oh like like being rich has a lot of problems like yeah but it's >> so so growth is still good but there's some nuance here that we wanted to talk about and and part of the reason we we were discussing why to make a video about this.

I think it's that there are AI related companies right now >> that are seeing incredible growth, >> shocking growth, >> and perhaps that doesn't solve all of their problems. You know, there's always this dichotomy in mind because, you know, you work with YC companies during the batch and you're just like, let's get a graph that goes up to the right. Let's get a graph that goes up to the right. All we have to do to convince an investor to invest in you is to convince them that this trend that's already happening will continue.

And while I think that is still very good advice, I think for founders who are kind of experiencing growth, there's some questions that we want them to ask themselves. There's some things that we want them to dig into because unfortunately and especially what's interesting to me is that there's a phase of growth that's kind of dangerous. I I'll I'll put too big of an error bar around it and you tell me what you think.

Right. I think between a million in revenue and a 100 million in revenue. That is a very dangerous error bar. That's a very dangerous zone because I think companies in that zone just raw assume anything that's happening that's going well will continue until they pass through that zone until let's call it preipo zone whereas you and I know and like you know I think is general knowledge that ever come every a million dollars in revenue does not IPO right and so it's like we know all of the death stories that happen in that zone y and there's probably one more zone in the 100 to 500 and then like you things are are are more predictable.

And so when founders are in that kind of that first zone and they're just like, man, we're making it. What are some of the questions you tell them to ask themselves? >> Okay. Well, one classic one um is the old uh unit economics thing. And so this is the >> if you give away stuff for free that costs you money, like let's say you had a website where that was like free money website. >> Yes. um that would grow like people would go to that website, they would pay [laughter] me 75 cents, I'll give you a dollar revenue through the >> Yeah, you can you can reliably grow. >> Yes. >> Um losing money and again you could be like well >> economies of scale >> and that's and that's fair there there's there are certainly very educated sophisticated strategies around >> Yes. >> losing money to get something off the ground. >> Yes.

But by and large, just growing faster doesn't mean you're going to solve uneconomic issues. Like it's not self-evident. We see more companies die by assuming that there are economies of scale without deeply probing it. Yeah. And discovering that perhaps in their company those economies of scale never arose. >> Yeah. This is a hard thing to just handwave. Yeah. Um, again to give another just like classic textbook example, it's where you get growth by spending a lot of money on ads. >> Yes. >> And you're like, "Oh, yeah.

Yeah." You know, like the payback period is going to be great. You know, we don't have any retention data yet, but this is going to be fine. >> Yes. >> That's a classic one where actually a ton of adup supported growth doesn't mean all of your problems are solved. You might still have problems. >> I mean, and I'll go one step further. When you see people who are using marketing and they're like, "Well, the marketing numbers at this scale, my CAC, my cost to acquire a customer at this scale will remain if I 100x my marketing budget." And it's like, I've never seen that.

[laughter] And so like [clears throat] the assumptions around unit economics at small scale need to be reassessed at every order of magnitude scale because oftentimes they change. It's interesting to watch people realize that their products become more exp like the internet economies get worse as they scale because they have all these hidden costs. Indeed, customer service fraud is one that bites people [laughter] that you never see.

If you get successful enough that fraud rings spend a lot of time attacking your startup, it's a high class problem. Again, like if you're lucky enough that there's a lot of people professionally trying to rip you off, it means you did something good. >> But, but man, that's hard. >> That's really hard. That's really, really hard. Okay. So, unit economics, that's a big one. Uh, where would you go next? Is >> I think Moes, again, this is one of those things that likely uh some people are annoyed of hearing about like, yeah, yeah, Moes, whatever.

But I think it's just >> we've seen people grow really, really, really fast and have no clue how to make it defensible or what how they'll prevent I always use this thought experiment. Why won't there be some YC company in the next batch? >> Yeah. >> That sees that your thing is working and then just does the same thing. like what prevents them from just taking your customers? I mean, historically, the canonical example of this was adte where it was kind of like, oh, I'm this thin layer between like a whole bunch of customers and a super big social media site, right?

This is sustainable. >> Yeah. >> And like the social super big social media is like sites like maybe I want a direct relationship with my customer. >> Yeah. It's this. >> And so again, the point here is not that you must have an A+ perfect answer all the time. No, no, we're not just saying saying that. We're just saying >> it is not self-evident that because you are growing fast, >> you have a mode. >> That you have a mode.

Those are not >> yes. [laughter] Yes. >> You know, >> and I think like that just means probe. >> Probe ask yourself the hard question. >> Yeah. Don't don't let the future YC company probe you. No. [laughter] Well, and this might be a point to to make an interesting aside here. Maybe the meta reason why we're telling you to do these things is because others won't. >> Yeah. >> Like that investor that's seeing the revenue go up to the right, they're going to be like, "Great.

Those employees, great." Like often times the press, great. Like, like when you're in that kind of inflection, often times you have to be your biggest critic. >> Correct. >> Cuz no one else will do that work. >> Yeah. It's almost like when things aren't going well, you have to be your own biggest fan. >> Yes. Yes. >> And when things are going well, you have to be your own biggest critic. And it's a very different >> state of mind to be very different.

Right. >> Well, and also, you know, and and especially because like you don't want to be deputy downer in your company going, "Wow." But like >> who else is, >> right? Right. [laughter] We're getting these mega valuations. Everyone loves you. All right. So, one thing that you brought up that I really like is this idea of like passion. So, just because you're growing doesn't mean you care about your product or your customers.

And, you know, it was interesting. I experienced this one personally. There was this point where Justin TV was pivoting into Twitch and we went from kind of more of a general audience, which is what it is, to a very specific video gaming audience, people who are really hardcore video gamers. And I I liked video games. I have video game systems, you know, it's like, but you know, I remember kind of trying to take stock of like, is this are these my people?

Like, is this what I'm going to enjoy? And what was so interesting is that while on one hand the company was doing better in some respects than it ever had been, on the other hand, I kind of was realizing I don't know that these are my people. I don't know that this is something that I am super passionate about. >> If you don't care about your customers, you don't care about the problem, growth won't, you know, it won't inherently make you more interest.

Sometimes it does. >> Sometimes it does, >> but it won't just solve that issue. >> Yeah. You know, >> and you you make a good point about nuance, right? Like sometimes it does. >> Yeah. >> I've been shocked at founders who I wouldn't expect would be super into this thing and they they grow into it. Totally. >> Yeah. Um but sometimes it doesn't. So it's a question to ask yourself. One that I think about a lot is is vision >> which is >> I have a lot of positive correlations of when you talk to founders even at the early stages >> they have a picture in their brain of what their company is supposed to be and it's a very clear picture and they can explain it to you versus people where you ask them for far future expectations and it just is they don't have a picture in their brain and so I feel like that's important to me like with the work that I'm doing um at standard is I have a very clear picture about what I want it to be.

I don't I don't know if it'll work or not, but I can promise you. >> Yeah. >> I I can see it. >> Yeah. >> Okay. And so my job is to manifest this thing I can see in my head. Yes. >> And this reminds me so much of the really successful founders. I remember doing office hours with Tony from Door Dash when he was in the back. Yeah. >> And he could explain what Door Dash was supposed to be >> perfectly well when it was two months old.

And that's exactly what it became. It kills me because when you talk to Tony at various different levels, he would always refer to Amazon. Yeah. >> And you would just be like, >> "Really?" And but then like over the years, it was like, "He did it." >> Wow. [laughter] >> And there was this one point where he was like, you know, we're n% of Amazon's daily deliveries. And that was a large percent. And I remember just being like, "Oh my god, when you said that, the other thing that I think about is that when you have a vision, you almost have like a philosophy.

You have like a weird explanation about what your customers want, how you can build a company that can serve them over a long period of time. And you can nerd out about your company in a way that's like pretty deep." And I will say I think I only truly had that experience at YC. Yeah. >> And you know, I remember thinking about YC as like it's going to be this 100red-year institution. It's going to be this combination of a university and a VC fund and a software company.

And it was just like >> you'd be in these conversations. People were kind of like, I don't care. Like, you know, you're going a level deeper than I care. And it's like, >> well, it's it's because PG had a picture in his mind. It was a very clear picture. You know, like he saw it. And um I didn't get the sense when you talk to a lot of investors, they're just like, "Oh, I have a job and it pays me a lot of money and like my job is to make money. >> Someone else figured out what this VC business is, you know?" Like they're just sort of like, >> "Yeah." Yes. >> Hey, I'm just happy to be here.

And that was not PG's vibe. >> Well, and I think that that was what is so interesting is because the thing that I would note to the fast growing startup here is like assume you have a competitor who thinks like that. >> Yeah. You want to be able to nerd out about your business and your vision and growth doesn't mean it doesn't force you to have that picture in your head. That's what we're trying to say is even if you have a hockey stick graph, >> it could be you're just drawing a blank about what this is supposed to turn into.

And I and I worry about those companies. >> Yes, >> there's a lot of folks with hockey stick graphs. And I think the folks with the clearest picture are probably going to win. That's >> 100% [laughter] and and and I think the ones who don't really dig in and ask themselves these questions, what's interesting is that they end up, you know, when you hockey stick enough, you stop competing with little startups and you start competing with the actual companies that make up the economy and they all all of them have very in-depth visions.

And when you get under their radar and if you're just like ho hom and they're like oh yeah part of our vision is taking the best startup ideas from this space and just bundling them into our product [laughter] >> like certainly a strategy >> like you're like oh man was all my work just to further their business model it's like yeah >> it was [laughter] unless you had a vision to compete against it. Yeah. No we've seen that time again.

One thing we see in companies that are growing really fast is they make bad decisions, specifically hiring decisions. >> Y >> and this I think comes from unclear thinking. You know, it's like >> it's a disaster, there's a fire, tell me who the firemen are. And like when you're an advising company and be like, there are no firemen. Like that's not something people want to hear. People want to hear if you hire this exact or you hire this person or you do step one, two, and three, the fire will go out. as opposed to hearing your goal was to to live in the fire like that.

That's what winning looks like. [laughter] There's no if the fire goes out, it's a bad thing. [laughter] >> Like Tony is in the fire. Brian Airbnb is in the fire. >> Just because it's growing doesn't mean hiring is easy. Isn't like and it doesn't mean you're going to make it's harder cuz when you're not growing, you don't even have the choice to hire for the most part, right? Suddenly all these people who seem impressive want to work with you.

Yeah. >> And then I remember this conversation. I have to change the names of the company slightly, but let's say a friend of mine. I went to visit their company and it was a high-flying company. And I met an employee who didn't realize who I was or my my relationship with the the founder. And so they gave me like this moment of honesty and they were like,"Ive picked five companies and I think these are the five kind of winning companies and my goal is to spend 18 months at each company getting over my like vesting threshold and I will have these five." And I'm just like, >> "Oh, [laughter] you've really thought this out.

I see you're more of a taker than you are a contributor." Um, and I was just like, "Oh, you know that it's easy to miss those kinds of people when you're growing fast." Um, and and they come. Another tricky one, um, that's very, very tricky is just because you're growing fast doesn't mean you are solving your customer's problem. >> Y, >> I would say the longer you are growing, the more evidence is accumulating that you are solving a customer problem.

But I cannot tell you how many companies, let's remove AI for a second. Let's just start to B2B SAS days. I loved asking people the question, "Oh, great. So, you've sold this company this number of seats for your software." It's like, "Yeah, it's like, wow, great deal." No, no, no. How many of those people who have seats go to your product? >> Oh, man. And that's the They love you for that question. >> Well, the best answer is the most innocent answer, which is like, how would we know?

Like, [laughter] >> Michael, I've never thought about we got them. We got the customer, we got the signed contract. Why would I ask who's half the seats? Yeah. >> The kind of darker answer is like when the founder does know and they're just like we're working on retention. >> We're working on retention. It's like they already bought the thing. They don't even want to use it. Like that's a and so you would be shocked at how often software is purchased in a company that no one wants is told about uses and then how often it is unpurchased.

That is a standard thing that happens I think people aren't talked about and so especially if your company kind of gets in the zeicist a little bit. >> Yeah, >> that's a common common one. Where else would you go? I think I think my last one here is it doesn't necessarily solve the founders's ability to just like deal with their day-to-day life. And if they're dealing with other tricky stuff, >> uh I don't know, like health issues or or personal issues, >> growth won't necessarily fix those and can make them worse.

Like if you have st if there's some like big stressor in your life, growth won't necessarily fix that. Well, and what's unfortunate is that when you're growing, you just have to put more of your day-to-day resources towards your company. And so, if you were just holding on, things are are tricky. I remember having this conversation with the former batch director at YC. And I remember, >> you know, she was like, "Hey, look, this growth thing is an emotional struggle.

Startups are emotional struggle." And you know, it took me a while to think back and realize that like I'd been with my now wife during my almost my entire startup journey. >> And so it was like I took it for granted. >> Yep. >> Just having that. And like >> sure helps >> like I can't even >> I can't imagine literally [laughter] I cannot imagine. And so um that's a tricky thing. Your life gets exposed a little bit when you're growing and when your company's demanding more.

So congratulations on the growth. [laughter] >> We're excited for you. >> Growth is good. Growth is the main thing. We're just trying to flag some of the stuff that if you're growing well still is a problem. >> Yeah. >> Still is a problem. >> Ask some of these questions and you know and on an optimistic note, if you root out some of these things, you these are all fixable. >> Yeah. >> Like you can fix these things. But if you put blinders on them, >> one of them is going to get you.

[laughter] It's like there's too many stray bullets around. One of these guys can get you if you're not looking. If you are looking, you can work around all of these things. >> All right, cool. Good chat. Thanks, Michael.