Michael Seibel, CEO @ Y Combinator. How YC picks founders and how to hit Product Market Fit with your team.A-Players - The top startups' recipes to build teams of top performers
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- 6 Oct 2020
Michael is the CEO at Y Combinator - the world's most famous accelerator who launched over 2,000 startups. In this episode, Michael shares YC's 5-step recipe to select the best founders and the the main advice he gives to pre-Product Market Fit and post-Product Market Fit startups. Listen to it if you're a founder, point blank!
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You know, the analogy that I use is kind of in the early days prior product market fit, you're building a Navy SEALs team. You're building a Special Forces team. If one person is injured, everyone else can take over the role in post product market fit. You're building an army. Everyone's got a specialized job. They do their thing great, but they really don't do other people's things. A lot of times people confuse where they are and hire the wrong types of people.
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So today I'm very honored to have you, Michael, on the Players podcast. But Michael is very known. What is it CEO at? I see him so very happy to have you today. You helped a lot of startups grow. So we won't talk about Boise because I think the profile is very famous now. And you also selected a lot of funders to join the program. And so my main question to start with the podcast would be what's in the player to you?
What's a top performer to you? Either in the funder? How do you find funders that will be top performers are in early stage employees and startups or service employees?
I think that a lot of founders make some very simple mistakes when hiring employees. I think the first mistake is that they don't logically think through the idea that even if they are a great hire or a great recruiter, probably one out of every two people that they hire will not be the right fit. And so even if they're great at hiring, they're going to also need to be a very respectful but very on the ball fire of employees. And that's part of the responsibility of hiring.
And so I think that's the first thing that the founders don't get when hiring. And the second thing the founders don't understand is when it's time to let an employee go. And so this is the rule that I use on the first day of work. You want to put a calendar event that's three months after their first day of work. And in the calendar event, you want to ask yourself a question, just put this right in the description. If this employee were to resign on that day, how would you feel?
And there are three answers. Relieved, indifferent, or you would feel like someone just broke up with you like your boyfriend or girlfriend just broke up with you. OK, essential employees, the employees that early stage startups should really hold on to are the ones that fit the third category where if this person after three months told you they were leaving, you would feel sick to your stomach. You wouldn't want to come into work the next day. This is the bar for an essential employee.
And one of the things that startups do very wrong is they hire too many employees. They have a low bar for those employees and then they don't get rid of the folks who are not performing. And this basically is one of the things that creates a death cycle that is really hard to recover from because you end up having more employees, which means you burn more money. As a founder whose product market fit your mind shifts from the customer and the product to managing the team.
And so you spend less time with your customer in your product, which means you slow down the process, getting product market fit. You speed up how much money you're burning, you slow down the prosecuting product market fit. Almost inevitably, you run out of money before you hit product market fit. Extremely common problem. So just understanding that when you take on the responsibility of hiring employees, you're also taking on the responsibility of responsibly letting them go. That's extremely important.
And if you let go of employees early, it gives you the ability to be far more generous, to offer more severance, to assist them in finding other jobs, etc.. If you get into this death spiral, inevitably when your company runs out of business, you're going to have to fire all the employees with very little notice and with very little assistance that you can provide them. So it's far more responsible to do it earlier rather than later. I think for founders, when I'm looking at founders, there are a couple of things that make great teams stand out.
I would say that let's say there are five. One is is the team technical? Do they have the ability to build the product or are they relying on outsourced engineering to is the team have some pre-existing relationship, college friends, friends outside of college work colleagues, something that's going to keep the team together when things are not going well, something that's going to allow the team to trust one another and use each other for support. The third is the amount of progress they've made over the time they've been working.
So I care less about exactly how far along they are. I care more about how much were they able to get done over the time they've been working. The next one is how clearly they communicate their ideas. A lot of founders just trip over themselves with language and they can't communicate what they're doing in clear, concise words that even their parents or their siblings would understand. The problem there is that if you can't communicate yourself clearly, how are you going to communicate to a team of twenty people, one hundred people, a thousand people, a team that you're going to have to build and motivate if.
This is going to be a successful company. The last thing is summarized is kind of unique insight. Sometimes it's called special sauce. The reality is like, do you know something that others don't? Usually that comes with having personal experience with the problem, whether you encounter the problem at work or in your life or in your loved ones lives, your community's lives. But do you know something that others don't? And can you clearly communicate that? So I would say that when we're doing interviews and reading which applications, those are the five things that we're trying to pick up from early stage founding teams.
When you say loved doing see and you say again today is that people tend to think they're good at hiring if they don't fire anybody, if they don't let go of anybody. What you are saying is the complete opposite. If you don't let go people, if you don't fire anybody, you're probably very bad at hiring because that's part of the job.
Yes, you're probably very bad it because to be honest, it's not even just the people that you're hiring. It's just that, like, sometimes great people aren't fit for your culture. They're not getting things done in your company. They don't have a passion for your company. And so this isn't to speak poorly of the employees. There are lots of very, very talented employees that would be 10x performers at one company and not great performance at another.
And so it's really your job to figure out where that employees and what's the biggest advice you give to funders about hiring when they enjoy Boise and when they leave Boise just after the demo day?
You're so within I we typically tell Founders' to not hire. And the reason why is almost inevitably, if you think about why it's a three month program, almost inevitably it's going to take you at least a month to recruit someone that's going to take you at least a month for them to be ready for their first day and at least a month on board them. Bang, that's three months. So you think that they're going to help you accomplish your goals for Demo Day?
But the reality is, is that they probably won't. After with the our typical advice is you don't hire someone for a role that you haven't done yourself. And I think that there is kind of conventional wisdom around hiring that's wrong. Which is that like, oh, you know, as a founder, you should look to hire experts for all of the roles that you have. But what I would say is that in the early days of building a company, in the very early days, you actually really need people who are cross-functional people who can do any kind of job, people who will be motivated by the mission of the company.
You want people who are flexible. You are not looking for specialists. I think post product market fit, you consider specialists. So, you know, the analogy that I use is kind of in the early days, pre product market fit. You're building a Navy SEALs team. You're building a special forces team, if one person is injured, everyone else can take over the role in post product market fit. You're building an army. Everyone's got a specialized job.
They do their thing great, but they really don't do other people's things great. And a lot of times people confuse where they are and hire the wrong types of people. The second thing is that you're probably not going to be qualified to interview someone for a role if you haven't done it yourself. If you're technical, that often means doing sales. If you're not technical, maybe that means doing product or doing PR yourself or any of the roles customer service yourself.
So typically the goal is you do the job yourself until you understand it. And until you are struggling and then you start the process of trying to hire someone to replace yourself, and when they come in, you teach them everything that you've learned about the role and hopefully they can take that and run with it and do even better than you did.
And would that mean that you would rather hire junior talents that you can train than you can give them the roadmap and the toolkits instead of seeing your talent? And that talent would rather be after a product markets. Would you say that?
Yeah, I want to distinguish between junior and senior. I think that's a little bit tricky. What I would say is that certainly there's a bias towards engineers versus not engineers pre product market fit because typically a co-founder can do what the business tasks that are needed. And in businesses that don't require expertise, there's kind of a bias for action oriented people who get things done fast versus extremely experienced. People are extremely meticulous people. I think that those people are more valuable post product market fit.
I will say that there are some exceptions, though. There are some companies that, for example, need a very complicated business development deal to really get started or need some relationship with the government or some license to get started where it can be helpful to have an experienced person there early. But that is pretty rare, I would say. OK, and do you have any advice that you give during the interview process to determine if those people are rather bias for action, or can you determine this during the interview process?
Yeah, I mean, the way that we tell whether a company has a bias for action comes back down to what have they done over the time they've been working. So I'll give you a kind of a bad example. Right. So we came up with the idea a year ago. We have an advisory board. We have mockups of the product. We've done user surveys and user interviews. We've started a business conversation with a larger company, but we haven't built a product, launched a product, gotten our first 10 users.
That's the typical profile of the company where I'm concerned. Can they execute at all? Can they actually push something out in the world and get anyone to use it? On the flip side, it's really exciting is like, oh, we're creating a consumer B2B product. We started working on it full time a month ago. We already have the first version of the product in beta and we've introduced three potential customers to it and they're trying it out. That's really exciting because they have an orientation towards action, towards learning, towards pushing product out there.
They're able to build product quickly. The way that sometimes investors talk about this is that founders who can take more shots on goal tend to be easier to fund than founders who want to take the perfect shot on goal. And so we rather a team that's action oriented, that puts something out there sees if the customer likes it, learns and iterate versus one that wants to make the perfect thing and then launch it to the world.
And is that something that you should look for in employees as well, pre product market fit?
Yes, I think free product market fit. You definitely should be looking for people who are willing to trade off some amount of technical debt for speed. I think that there is this fallacy that exists amongst some early stage software engineers. It's a fallacy that they default. Think the company is going to work. And so therefore, they should be building something that. Can work for the next 10 years. The reality is that in most industries, you shouldn't be doing that.
Of course, there are exceptions, of course, but in most industries, the biggest risk is whether or not your product solves anyone's problem, not can you build the solution in a robust way. And so what you should be thinking about is that in a scenario where almost everyone fails, getting a product in the customer's hands, you can learn from them is far more important than getting something that's perfectly scalable and that can explode with usage day one, because what's most common is you launch something and nobody cares because either you don't know how to distribute it or because it doesn't actually solve anyone's problem in the first version and you have to iterate it and change it.
So definitely folks who are action oriented should be your initial employees and folks who get excited. I've noticed the kind of engineers who are nervous about launching versus engineers who are excited about launching. The engineer who's excited about launching and willing to fix some bugs on the fly tends to be a better fit for earlier stage founders than the engineer who is trying to squash every bug before users ever seen the product.
And so far, funder's you mentioned. So those five things you're looking for, the technical ability, pre-existing relationships, the amount of progress, communication and the, you know, something that other people don't. So that's a pretty biased interview process. But then comes to the sourcing. How do you find a thunderous so you get a lot of applications to actually do outreach at sea to try to reach out to people and convince them to apply.
So see this? I think there have been probably three things that we see did very early on that I think are the base of why a lot of companies, by the way, see, the first is that we have an open application and so anyone can come to the website and apply to receive funding from us at any time. And this is very different from almost every other investor who requires you to get a warm introduction of some sort or to know somebody or to have some kind of background in order to get a conversation.
The second thing, and this seems obvious now, but it wasn't as obvious in 2005 when we started, we have a bias towards technical people. We have a bias towards the people who can actually build as opposed to folks who can't. And then the third really important thing was we have a very, very high bar. So why is the acceptance rate has only decreased over the last 15 years? And when we were very early, we were very small.
Because we want to make sure that the batches were as high quality as possible before we had a lot of applicants with that is done, has made a culture of visi that regardless of whether your batch rates are successful or not, because there's a lot of luck and being successful, they're all going to be talented. They're going to be people that you are excited to be in a group with. They're going to be people who you want to be supported with, people you want to ask questions to, people who are going to motivate you to work harder and to work faster.
And I think that that's really, really important. One of the things that I say a lot is that if you take all of the students at MIT and you move them to a tiny college down the road, that becomes one of the best engineering colleges in the world. And so a lot of what makes Y C grade is not the advice that at all. It's the quality of the people who are going through it. So nowadays we basically get to take advantage of that culture that we started.
Our acceptance rate in the Y C is now somewhere between one and a half and two percent. And, you know, every six months we'll get somewhere between ten and sixteen thousand companies apply. And so while we do do outreach specifically, we do a lot of outreach internationally and with university students, it's not really the same as a v.c who's going out there and trying to find companies to invest in. It's far more just trying to introduce the basic ideas behind doing startups to as many people as possible and trying to just teach them some of the same advice that we give to Y companies in our program.
What's very interesting is even with the large number of applicants as you have, you're still doing some outreach and still trying to what is it? Targets maybe people that wouldn't apply otherwise.
It's interesting. Yes, because one of the things that we've noticed is that a lot of people don't apply to Wisse because of something that is not true. It will be. Oh, somebody told me that you can't get into why seamless you have this or somebody told me you can't get NYC unless you have that. And so a lot of the times people don't apply because they don't think they can get in because somebody to something that doesn't know anything told them something.
And so a lot of times the purpose of outrage is to just talk about what we really do, how it really works, so that you can kind of hear from us instead of over believing people who don't know as much as us about what I see and what I like, that y see that because you're doing this, tossing around the word, then you get the smartest people from all those different countries.
And again, that's something that you didn't stay and you didn't just consider that you should target engineers in the Bay Area. You really expanded in the world. Yeah.
I mean, nowadays, somewhere between 30 and 50 percent of NYC batch is going to be international. And more and more, those folks are not building companies in the US that are coming to wiki to learn, but they're building companies in their own regions. And so we literally have founders in every major region of the world building startups, which is really exciting for us.
And so a lot of companies today, especially with a pandemic, consider hiring internationally and maybe sometimes building a fully distributed teams. What's your take on that?
I would say I don't know. I would say that this choice of whether to build, distributed or not is as much a function of the founder's personality and the type of organization they're trying to build as it is part of company strategy. So I think that covid has shown us that teams can work together effectively, remotely. But what I think it hasn't shown us is, does that create an environment that's the most motivational for your team and for you? And so I think that's a personal choice.
I've seen some founders who are massively driven by the goal of creating a remote company. We funded a company named Zappia, for example, another one named Get Lappe or two very successful companies. On the other hand, I see some founders who basically say to me, oh, well, we're building a remote company because it's cheaper. And those folks I'm not excited about at all. One, because I think it doesn't reflect how a pre product market founders should think you're not going to be hiring a lot of people pre product market fit.
And so your goal should be to hire the best people possible. And it almost doesn't matter how expensive they are, because if they can help you reach product market fit, you're going to get a deal like you're getting far more value out of that. And so I think that sometimes founders think about engineers almost like buying raw materials, like, oh, well, I can buy high quality iron here, but I could buy it for cheaper over there.
And that's what the mentality we want people to have around engineering. Meantime, we want people to have is that one great person is worth 10, sometimes 50, not great people. And so this is not about how do I acquire raw materials, commodities at the cheapest price. Software engineers are not commodities. And oftentimes kind of business founders get this confused and they kind of think about software engineers is just kind of like your hands. Oh, like this is a tech enabled business.
We have to build good software. We just need something out there. And all I need is the software engineers to type real fast and get something out there. And we're looking to invest in companies that are going to use software as one of their core competitive advantages. And so you should always think that if you're in a market with a number of competitors and most good markets have a number of competitors, who's going to win your software team or the software team of your competitors?
And if your software team isn't a competitive advantage, I would argue you should be very concerned because I've never seen customer service people, business people, business development people, lawyers. I've never seen them have as much impact as an amazing engineer. I've never seen it. And it's not to say those people aren't great. I'm a business guy myself and it's say is that like they never have as much impact as an amazing engineer.
OK, and do you have a general rule of thumb on how many people you should hire before finding product markets? Do you have that rule?
You know, I think it's tricky because every team and every founding team has different size and has different ability to manage. What I typically tell founders product market fit is try to keep your burn under fifty thousand dollars a month. And I think that this kind of guideline does two things. One, it tends to have companies oriented towards revenue because the more money they make, the more money they can spend every month. Because remember, burn rate is just your net is what leaves the bank out every month.
It's not your total expenses. The second thing that I've seen kind of time and time again is that somewhere between eight and 12 employees, the CEO's job fundamentally changes. And some people have called this the like two pizza rule, like how many people can you feed with two pizzas? But there's something around the point, somewhere between eight and 12 employees where suddenly the CEO and the founders have to really embrace the role of management and embrace the ability to communicate really well and kind of EA and under typically, they don't have to be as good managers and as good communicators because it's just a small enough group of people that it's easier to handle more informally.
And so to me, the kind of trick I'd be asking myself is, am I having to become more and more of a manager, free product, market fit, you know? So do I have to start formalizing what no one's payment band's career development, all hands meetings like you have to start doing the kind of more formal things that a company has to do, pre product market fit. If I am doing those things and once again, this is there are always exceptions, but if I am doing those things, I should hesitate and I should ask myself, is this the best use of my time or do I have too many people in my company?
And has poor hiring forced me into this management role, whereas I really should be spending all that time talking to my customers? And my last question would be, so we talked a lot of a lot of advice for early stage pre product market fit funder's, and then when you hit product market fit, everything changes. What's the top two or three advice that you give to to already hit product market fit?
I think that for the folks who already had product market fit, one of their largest challenges is hiring executives. So this is transition that a founder goes from trying to hit product market fit to what we call company building. And when you're doing company building, what you're really trying to do is to get more people to use the thing that's working. And I think in that process, sometimes founders believe that the executives they bring in to head sales or to head recruiting or to head their engineering team or to head product.
Sometimes I think that founders over rely on those executives to a fault. They believe that those executives have the right answers because they're more experienced than they are. And more often than not, what I see founders actually having to do is they're just as bad at hiring executives as they were at hiring employees. And so more often than not, they have to go through the process of hiring a number of executives, realizing that they're not a good fit, letting them go before they actually learn what a good executive does, what a good fit is, et cetera.
And so just preparing them for the idea that they're going to have to be interacting with a lot different executives, they're going to have to be very good at hiring the right ones, and they have to be very good at letting go of people who aren't a good fit. I think that's that's a really major challenge. And poor executives can effectively reverse product market fit because once you've built something that people want, everyone can see that. And so if you don't execute quickly, someone else will replicate your feature set.
And if they're executing faster than you, they can beat you. And so I think that's the biggest challenge that I see. But I have to be honest, most founders lie to themselves about product market fit. And so I actually think what's interesting is that once you have product market fit, it's almost your game to lose the bigger problem. Our founders, who tell themselves their product market fit when they really don't, who tell themselves, oh, you know, we have product market fit.
But if you look at the numbers, they're spending two hundred thousand dollars a month on marketing and only making a hundred thousand dollars back or oh, we product market fit, but we have negative unit economics. So every customer we lose or we have product market fit, we have really bad retention. And so after three months, nobody stays in the product. We have to recruit new users. That's the bigger issue. It's not post product marketing. It was part of market fit is hard, but it's a different kind of challenge.
I think lying to yourself about product market fit is the thing that harms most companies who have successfully raised the seed round. And it's why so many companies who raise money still die.
That's the big issue, is that because they don't have a real product market fit, because they don't have a real product market fit, but they think they do. So they do company building. Right. They start hiring. Executives are hiring more employees. They start hiring, hiring, hiring, and their costs increase. But because there some core problem with their product, their revenue does not increase in turn. And then they look up one day and they have 20, 30, 40 people, but they're burning a lot of money and the revenue has only grown 50 percent year over year or one hundred percent year over year.
And suddenly they're in the trap where they want to raise money, but that growth isn't exciting to an investor and they realize, oh, crap, we have all these people, we didn't actually have product market fit because our revenue is not growing and we have a problem. And so what's interesting is that I think that, like, for some reason, a lot of founders believe that the hard part is getting a product in the wild. And that's not true.
Like a lot of talented people can get a product launch. The hard part is not lying to yourself about how good that product is and is really spending a lot of time with your customers to understand whether that product is really solving their problem. And they are really desperate to use your product or whether it's just too nice to have.
OK, so the main advice that you would give is make sure your product market fit. That's the game.
And if you've raised money and you still have a small number of employees and you still have a lot of that money, stay small, stay small until you get product market fit, because it's obvious when you try to correct that no company that's ever gotten product market fit was confused about it.
OK, let's end with that. Thanks a lot. Michael was good having you. Thanks for having me. I've had a lot of fun. Thanks for listening. Podcast till the end. If you're still with us, it's probably that you enjoy the players pay players is brought to you by myself and higher suites. Well, building a sourcing automation software. And we already helped 900 tech companies hire the best science. To know more about us, go to W-W the hire suites dot com or you can add me on LinkedIn.
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