How Startups Close Million Dollar Deals transcript

And so, if you charge a similar amount as a startup, and it sort of resembles the way the other vendors charge, the customer like, "Oh, that makes sense. It'll fit right in." Yeah. Versus when you're a founder and you try to price it in a totally weird way, it'd be like if you were if you were like a hotel and you're like, "Oh, you pay with seashells." You know, like, "We don't take money here." >> This is Dalton plus Michael.

Today, we're going to talk about how do startups get big deals? Six-figure deals, seven-figure deals, eight-figure deals. How do they get big deals? And the kind of subtitle here is, are you selling tools or are you selling outcomes? I think a very common >> first office hour topic for companies that get accepted into YC is some version of them saying, "Dalton, how do I get big deal?" It's like Like they they they haven't even Googled it, right?

This is just like a And I think the context is that most people understand self-service because they've signed up. Like, who hasn't signed up for GitHub or signed up for Figma or, you know, we're all used to signing up for SaaS, putting in our credit card, and paying for stuff. And so, I don't think you need that much direction as a founder on how to create >> How to create $10 a month. >> Yeah, like, okay, you go set up a Stripe account and then, you know, it's it's pretty straightforward. >> Yeah. >> But it's most people have not purchased six- or seven-figure software. >> Yeah, some of them have. >> No, but most people have it.

And so, it's a complete black box, right? >> It's also, I think, scary as a result. I've never seen it happen. I mean, I know it actually happens, but I've never seen it, so am I going to go do it? >> Yep. >> Can I Can I do it? And I think that this is what's tricky because, you know, if we get to the TLDR, how many massively successful software companies never have to figure this out? I think almost everyone. And it's funny cuz even if you're a consumer company, right?

Like Facebook has eight-figure advertising deal. Like you know, it's like it is really, really, really hard to make billions of billions and billions of dollars $10 at a time. It is very, very hard. And so I often think that one of the biggest challenges founders have is when they're transitioning from the >> $10 a month self-signup to how do we figure out how to sell big deals. >> Usually the way I try to set this up from people that are just like ice cold on the topic around pricing or deal size is I ask them to think about how they purchase most products, which is to look at like three to five options.

Say it's stuff on a grocery shelf. Or say you're looking at hotel rooms. You're like, "Oh, I need to go to New York. I need a hotel." >> Yep. >> So you like go to the site >> Yep. >> and they'll be like, you know, three to five options, say they have different prices, they have different features. But you're sort of choosing between those small number options and they're all, you know, yes, relatively similar. >> This is how most people buy expensive software. >> Yes. >> Is that they're like, "Cool.

I know how much this vendor costs and this vendor costs and this vendor costs." And so if you charge a similar amount as a startup and it sort of resembles the way the other vendors charge the customer is like, "Oh, that makes sense. Cool. It's a It's 200K a year. Oh, that >> Yeah. >> It'll It'll fit right in." >> Yeah. >> Versus when you're a founder and you try to price it in a totally weird way it'd be like if you were if you were like a hotel and you're like, "Oh, you pay with seashells, you know?

Like we don't take money here." >> You take a bath that costs this much. If you only sleep on this half of the bed. >> Like you're not going to make a sale, okay? Like because you didn't take the time to understand how the customer is purchasing all this other software. >> Even if those things represent your costs. Right? So you can have this fake first principles like, well, I'll just charge as a function of my costs.

Let me transparently show my costs off. And it's like, what are you doing? >> I mean, that's fair. Yeah. >> And so, I can't stress this enough. Understand how other vendors that your potential customer pay for or would evaluate. Understand how they position and price and sell and and just be like that. >> Yeah, just just make it so if they look at you side by side with the other vendors, you don't break their brain. >> Yes. >> Well, and and that's often how you get to make a big contract being a 20-person company going up against a 1,000-person company cuz it's like the customer's buying the same thing and you're priced the way that and you can deliver the service.

Cool. You get to make more money. I think another thing that happens that I find frustrating as a business guy. I will put my business guy hat on. I think developers like to sell developers. And I think developers like to build tools and sell those tools developers who like to buy tools. >> Yes. >> And I think that like that is the easiest construction of the world, so I'm going to believe the world is constructed that way.

I think that corporate CEOs need to deliver revenue. So, I think there's like a massive disconnect, right? The CEO's incentivized by their stock compensation to deliver revenue and increase the stock price of the company. The developer wants to deliver tools and give those tools to developer. How do those tools translate into more revenue for the company? And I think there's two philosophies. Philosophy one is that's the company's problem.

Good luck. And philosophy two is that's the vendor's problem. I need to help. I think that when you're philosophy two, you get to charge a lot of money. >> Yep. >> I've heard some incredible stories about Palantir. We have so many founders who used to be like Palantir engineers. And like the economics of some of these deals, it's like we send 10 guys in to fix your thing and you pay us a billion dollars over 4 years because fixing that thing made you 10 billion dollars and nobody cares how many guys it took.

Like, I don't care if I get to make 10 billion, I'm happy to pay you one. But, if you're like, here's a tool, go figure it out, and the engineers of that company can't figure it out, so that company loses value. >> Yep. >> You can't ask for a lot of money. So, this is so confusing. Why is this so confusing? >> I think that the engineer mindset is to care how something works under the hood. >> Yes. >> And the non-engineer mindset is that you could care less how it works under the hood.

If anything, don't tell me. You're like, I don't want to know how this works. But, they really care a lot about whether their outcome is achieved as quickly as possible. >> Yes. >> If you're waiting for someone to perform a service for you and they're late and they want to give you a really long, complicated story about how there was traffic or you know, like, just like do the thing. Like, I don't care. Like, >> You don't want the details. >> And so, think about the way cameras used to be marketed versus the iPhone.

Where it's like, megapixels and like all the Japanese companies, oh, there's a new camera with this and that. >> Shutter speed. >> Yeah. Or like the way Macs were marketed versus PCs. >> Specs. >> Specs, specs, specs. And so, I just think it's different to sell a product to a solution-oriented customer versus someone that really, really, really needs to know or wants to know how it works. >> Yes. Just a different thing. >> I like your vendor argument, which is like, I'm not going to say that tools don't make money.

There are a lot of tools that make money. I will say, if you're in a market where most of the vendors are selling outcomes and you're selling tools, >> Yep. >> that's probably a recipe for disaster. Um, the other thing that I will say is I think there are a lot of companies that founders think are selling tools and they're not. Right? The number of times I've talked to a YC founder and they'll say, look, AWS is tools, um, Stripe is tools.

And it's like, it's so much Like unpack that because when AWS is selling you as a as a startup developer I mean, this might be semantics, but here's what I would ask yourself. Do these companies have large sales teams? Are these sales people compensated on size of contract? And do they have like commissions and do they have like quota? Do their largest customers pay them tens of millions of dollars a year if not more?

And so all these companies would fit that bar. Well, and if those sales people are not talking to you, that probably means that your experience of that product is not a representative experience. >> That is correct. Like signing up for Stripe for your self-service side project is different than being a very large and successful company that processes billions of dollars and is trying to figure out should we switch off of Chase Merchant Services and strip off to Stripe with our $3 billion worth of volume.

And I think that what gets people confused sometimes is that the brand of a story can often be built during the first couple years when they might only be selling tools and they might only be selling those tools to startups. And the number of people I talked to who are just like, well, obviously Stripe is just a Now more startups exist and more startups use them and I'm like, that's lazy thinking. >> I think this brings up a related topic.

I know that um some of the Sequoia folks put out like a bunch of content about selling outcomes versus selling software and to quickly introduce my understanding of the argument, it's the following. The AI models make the value of code zero. Anyone can crank out code. And if you're trying to sell software, every time a smarter model comes out, the value of your code goes down. >> Tools are getting cheaper and cheaper. >> But if you're providing services, if you're selling outcomes, and you're using the AI tools internally to produce the outcome, every time the models get smarter, your margins get better.

So you're like, oh yeah, we can deliver, you know, what do you You want a widget?" here? Oh, we can We have widgets galore. And every time a smaller model comes out, it's cheaper for you to make widgets. Yes. You're You're pumped. >> That's only if positive feedback loops. >> I'm not sure that's the right framework for literally every startup. I think that's a stretch, but I think it's an interesting way to think about the difference between high-value outcomes sales versus selling SaaS. >> So, I want to give you a challenge here.

So, I think this is a question that that can scare people. As I'm moving from selling tools to selling outcomes, you know, I'm imagining a world where I have thousands and thousands of customers. How can I understand each of their businesses well enough to be able to promise them an outcome? That seems scary. How would you unpack that kind of question? >> Well, I would start with how the comparables or competitors in your space think about this.

And I would ask the customer, "How do you evaluate outcome?" You know, this is This is like the classic phone a friend if someone asks, you know, you just ask the customer. Yes. So, be like, "Cool, how are you guys evaluating outcomes? And what does success look like? And what does not success look like?" And I'd basically get your customers to educate you on this one. >> Embedded in a lot of startup founders' minds is a volume of important customers that I wonder whether that's actually true.

I'll pick on a company like Snowflake. Like, how many customers pay Snowflake over 50 million dollars a year? I don't know. I don't know, but I don't think it's thousands. And so, I think that basically one, I think it's a simpler problem than it looks because not all customers are actually unique snowflakes. >> Yep. >> Um and probably things that work for one company industry would work for another company industry.

But I also think two, your biggest customers can get really big. Like, I've got a company that I funded, and they do logistics coordination for commerce. And it's like, you know what? You know how many Walmarts there are? There just aren't that many. So, like the reality is is that most of their customers um are going to be big. And there aren't that many big customers. So, I think that's another way that you can kind of unpack it where it's like you probably don't have to solve this problem for a thousand.

I think the second way that I would unpack it is you might have more intel than they do. Because you get to operate horizontally across a lot of your customers. You get to see how they're using your products to make money. You get to see the other things they're doing to get money. You might have a better view on what's going on than they do. What's funny is like you might not need to be an expert in their company. You might need to be an expert in how people are using your product to make money.

And then you can communicate that to your other customers. >> Is there an example of like an outcomes-based company that you like to reference in office hours? >> Well, Palantir is like the the the obvious one. >> I think the problem with Palantir is it so secretive that no one really know We shouldn't explain this video. But, uh >> Well, what's funny is like all you have to do is talk to people who work at Palantir about their individual products.

Like not what Palantir does, but just like tell me about one of your projects. And then immediately they're like >> Okay. >> Oh, like this general used this to kill these people over here and it worked really well. Oh, okay. Like And so to me, they're an obvious clear example. I think the second one that I end up hearing about a lot is whenever you talk to sales people for the hyperscalers. >> Hm. >> When the hyperscalers are selling other big companies, often non-software companies, it's a completely different conversation. >> It's not like paper API call. >> No.

No. No. It's a completely And it's all these like services they're going to provide. And like, oh, like you do this thing and we'll package our little thing here. We'll package our here. And like we're going to develop what to you looks like a nice custom solution, but to us is just picking up pieces. >> I think Workday tried to do this. >> Yep. >> Right? It's like, "Oh, what is what's your HR process? Our entire thing's flexible.

It can change as you grow, as you do do do." So, to me, there are so many examples, and what's frustrating to me is it's too easy to copy the tactics that make people $10 million, but that never make them a billion. >> I think that's the thing. It's like the number of founders I talked to where it's like, "Well, this company made $10 billion, and they raised a Series B. If I just do what they do, then we'll win." >> Yeah, you know, I think my advice in office hours about this, if I'm just reflecting over the years, was I would always advise early-stage companies to try to sell upmarket. >> Mhm. >> Cuz it usually wouldn't work.

But if you try every few months constantly, >> Yeah. >> every time you get a little bit closer to landing the big customer. >> Yeah. >> And so, if I'm just reflecting on companies that I've worked with that ended up closing seven-figure contracts, >> Yeah. >> it's not that they showed up one day and they just got it the first time they tried. It's that they kept trying to sell a seven-figure contract. >> Yeah. >> They got a no.

They understood why. >> Yeah. >> And then they changed something about their product or process, and they tried again. It's usually it'll take like a year or two to to to get to that stage, but if they wouldn't have been hitting their head against the wall trying it a bunch of times, there's 0% chance they would have figured it out. >> Zero. Well, and you bring up another thing that I think generates so much fear. Dalton, you told me I have to grow 7% week-over-week.

And now you're telling me it's going to take a year to figure out if I close this deal. What? You're You're setting me up to fail. I should just sell startups to software >> Why are you trying to trick me? >> Yes. >> I can sell software to the >> Have you guys never a Why didn't you tell me this was going to be so hard? Look. There's a lot of effort that you have to put into things that may not work. Yes, but you learn.

Yes, and it's kind of just part of the sales cycle. And so, you have to do both. Hit the growth goal and try to build and sell things that won't be successful the first time. >> That's the game. >> It's the game. >> And I the way that I communicate to founders on this point is in some ways the sales cycle being slow is a gift because you can operate a lot of these in parallel. >> Oh, yeah. That person you're >> talk to, they're going to take a 2-week vacation.

They like I think that like what founders often get frustrated by is like the mental load of keeping a big customer in their head causes them to be afraid of talking to many of them. >> Yep. >> But the reality is the time isn't that sitting you know, if you got 2-week gaps between meetings you can >> You got you can put more on your calendar. No, that's a great point. I'll sometimes be like, oh, let's pull up your calendar.

Let's see what you know. And sometimes I look at them like, oh, I don't have any ideas, but sometimes there's a lot of blank spot on the calendar. >> Yeah. >> Yes, and I think that if I can get founders to think, oh, I'm hedging. All these deals aren't going to work. Let's talk to 10 of them. And we're learning. We can compare notes. Once we're talking to 10 of them, if two of them are you know what we can do? >> Stop talking to them. >> If we're only talking to one and they're it's like, oh, you got to slug through.

And so, um but what's tricky is like if you know this is where we're going to end up. I don't even want to tell you how to get there. Just don't lie to yourself. >> You're going to have to get here at some point. >> And and don't tell yourself this fake story that like, oh, Stripe just sells software to startups. That's verified for false. >> go ask ChatGPT who are sales teams and how big are the sales teams now, right?

You can research this. >> It's so funny. I remember having a meeting with Andy Jassy. It must have been like 2018. And he was like, all right, Microsoft's finally in the game. This year AWS has to hire 5,000 sales people. And first of all, little old me, you know, like I was like, how do you hire 5,000 anything? You just casually And then he's like, I forgot the number. He's like, Microsoft has like 120,000 sales He just said some number.

I went from being like, that's the most impressive thing I've ever heard to, oh my god, you have to fight those guys. There's a hint There's a deep hint in there. And you know, Microsoft got to the party 10 years later. >> Yep. >> And that was just in time. So, if you have them up here, don't be afraid. Good shot. >> Sounds good. All right, thanks, Michael.