- The hardest conversation for investors is when a founder has spent their initial funding but hasn't found product-market fit
- Founders often think they deserve more money even if they haven't succeeded with the initial funding
- Investors want to see results before giving more money, not just a cool team or office
- Founders should focus on solving problems and generating revenue rather than trying to impress investors
- If a company hasn't hit product-market fit, it's often better to cut costs and aim for break-even rather than asking for more time and money from investors
- When a company reaches break-even, founders gain clarity and realize they can generate money for their users without relying on investors
- Leverage is important in fundraising, and sustained growth and a product that people love are key to raising a Series A round
- YC helps companies present their business leverage effectively, but founders need to do the core work of creating a successful product
- Founders who have achieved success are more formidable and don't need flashy pitches or gimmicks
- Graphs and numbers showing growth and success are often enough to impress investors.

Michael Seibel is a partner and the CEO of YC. He cofounded Justin.tv, which was in the winter 2007 batch and Socialcam, which was in the winter 2012 batch. https://twitter.com/mwseibel

In this video Michael comments on his essay Why Does Your Company Deserve More Money? https://blog.ycombinator.com/why-does-your-company-deserve-more-money/

The YC podcast is hosted by Craig Cannon - https://twitter.com/craigcannon

***

Topics

00:00 - Why Does Your Company Deserve More Money 

1:00 - A team, a product, and an office are all just a means to an end

2:00 - If you don’t really deserve money, what is an alternate path to create leverage?

3:45 - Breaking even at Justin.tv was a moment of infinite clarity

6:00 - Series A program and leverage

Why does your company deserve more money?

The hardest conversation I have to have with the founder is when they've spent their $1-2 million angel round but haven't found product-market fit.

Unfortunately, I have to ask them a very unforgiving question.

In 1 way, we try to make YC companies feel very special.

And certainly the investing community often makes YC companies feel really special.

But man, isn't it weird that someone who's given $2 million to do something and doesn't succeed thinks, you know what, I need another $2 million.

Part of me just wants to bring people back to the real world.

Maybe the next $2 million is going to make it work.

I'm not willing to say it won't, but I think we should just, it's certainly a lot easier to raise that money if you've done something for the first $2 million.

And I think sometimes founders, once again, sometimes founders kind of cargo cult.

They think, oh well we have this team, we built a team.

And it's like, Nobody's grading you on those things.

You can't be like, oh, I'm an NFL coach and look, we have a team, we have this amazing stadium.

You can't get another contract if you have no wins.

More over, you might have all the MVPs, but if they can't play together.

And so I think that people like to confuse means for ends because Means are a lot easier to get.

So a lot of the time I have to have these conversations with founders where I'm just like, look, what is an alternative path?

If you don't really deserve money right now, what is an alternative path?

And the sad but true fact is cutting burn and trying to get to break even is more often than not the right thing to do if you haven't hit product market fit for that first 1 to $2 million.

More often, that's what's going to create that leverage.

You get to break even and that gives you time to figure things out.

You're like, like we said before, like not having product market fit doesn't mean you're not growing.

Doesn't mean you're not generating revenue, right?

It just means that you're not taking off.

And oftentimes that just means you need more time.

But asking investors for that time is oftentimes way less fruitful than just cutting, burn, and giving yourself that time with the revenue that you're generating.

And man, I learned this the hard way at Justin.TV.

Sometimes I just think at Justin.TV, I just had myself completely fooled.

Literally, I was out there pitching a site that like half of the usage was spreading copyrighted content.

Any investor could just, before the meeting, go to our website and in 3 clicks see content we did the rights to.

And then I would go in and try to pitch them how I was going to be a billion dollar business.

I don't even know how I did it, looking back.

I like to write about things where I have personal mistake experience.

But I will tell you that when we broke even at Justin.TV, that was the moment of infinite clarity.

And what was weird is that looking back, 1 of the things I see in other founders, and I recognize in myself, is that when you're operating on the investor's dime, oftentimes you're trying to optimize what the investor wants to hear.

And oftentimes you're trying to structure your pitch and your strategy to what's going to get us more money.

Because it turns out the investor is really your customer because they're the only 1 giving you the money you need to survive.

When you hit break even, there's this magical moment where you realize, wait a second, like I can just generate money for my users.

And strangely, weirdly, the only group of people who are harder to understand than users are investors.

For many people, some people can just spin investors, some people have a way with investors, but for many people, investors are this really confusing group and it's like, well, I'd rather fight the user fight than the investor fight.

We never had better execution than 2 moments.

It's like, this isn't going to die tomorrow.

You have confidence, and then all of a sudden, when you look at the other side of the table, now you have a product that the investor wants.

When you don't need investment, guess who comes around?

And I think like basically the way you wrap up is like this is about leverage.

So what you say is, don't limp into a series A fundraise.

You need to be able to show that you have taken the early investment money and used it sensibly to create a product that people love.

You need to have sustained growth to raise a series A.

Understand that and you'll be better off than most startups.

It's interesting, we have a Series A program at YC.

And we help YC companies, it tends to be like 12 to 24 months after YC, prep for and raise Series A.

And at the kickoff meeting, it's very similar to the kickoff meeting at YC.

Everyone goes around in a circle and says what they do.

But the difference is that everyone says their revenue to.

And it was so much fun to be at the kickoff meeting for the Series A because you'd hear some ideas like, oh I'm doing yada yada yada.

And like, YC, we hear ideas all the time.

It's like, yeah, okay, it's another idea.

And then the founder's like, we're doing $5 million in revenue.

And then the next person's like, we're doing $3.5 million in revenue.

And the next person's like, oh, we're doing $4 million.

And it's so funny how an idea sounds better when there's a revenue number after it.

And so what's so funny is that, I think what YC's good at is that if you can create the business leverage, if you can make your business work, we can help you present that in the leverage maximizing way.

And we can help you do a process that maximizes the leverage that you've created.

But you have to create the core leverage.

You've got to figure out the product that gets that usage, and then we can help you package it and sell it most effectively.

If you asked me years before who was going to be in that Series A program, I would not have known.

But man, those founders are far more formidable.

When they have something, They're killers.

No, you don't need a, it's funny because sometimes I see people with snazzy pitches and snazzy, things that remind me of stuff you would hear on a TV infomercial.

It's like, you don't need that much work when you have a good company.

Sean O'Toole Yeah, and it's like, oh wow, that's really working.


Speaker 0: Why does your company deserve more money? The hardest conversation I have to have with the founder is when they've spent their $1-2 million angel round but haven't found product-market fit. Unfortunately, I have to ask them a very unforgiving question. Why does your company deserve more money?

Speaker 1: Paul Wiltz Yeah, this is so hard. This is really hard for YC companies. In 1 way, we try to make YC companies feel very special. And certainly the investing community often makes YC companies feel really special. But man, isn't it weird that someone who's given $2 million to do something and doesn't succeed thinks, you know what, I need another $2 million.

Part of me just wants to bring people back to the real world. Maybe you do. Maybe the next $2 million is going to make it work. I'm not willing to say it won't, but I think we should just, it's certainly a lot easier to raise that money if you've done something for the first $2 million. And I think sometimes founders, once again, sometimes founders kind of cargo cult.

They think, oh well we have this team, we built a team. We have this product. Peter Collins We've

Speaker 0: got a cool office. Steve Zehngut

Speaker 1: Yeah, we have a cool office. Look at what we've done. And it's like, Nobody's grading you on those things. Those are means to an end, not an end. You can't be like, oh, I'm an NFL coach and look, we have a team, we have this amazing stadium.

You should renew me. Well, the record of the team is 0 wins. You can't get another contract if you have no wins.

Speaker 0: More over, you might have all the MVPs, but if they can't play together.

Speaker 1: Then no wins, right? And so I think that people like to confuse means for ends because Means are a lot easier to get. I can go out and get an office. I can go and hire. Solving people's problems, that's hard.

So a lot of the time I have to have these conversations with founders where I'm just like, look, what is an alternative path? If you don't really deserve money right now, what is an alternative path? And the sad but true fact is cutting burn and trying to get to break even is more often than not the right thing to do if you haven't hit product market fit for that first 1 to $2 million. More often, that's what's going to create that leverage. You get to break even and that gives you time to figure things out.

You're like, like we said before, like not having product market fit doesn't mean you're not growing. Doesn't mean you're not generating revenue, right? It just means that you're not taking off. And oftentimes that just means you need more time. But asking investors for that time is oftentimes way less fruitful than just cutting, burn, and giving yourself that time with the revenue that you're generating.

And man, I learned this the hard way at Justin.TV. Sometimes I just think at Justin.TV, I just had myself completely fooled. Literally, I was out there pitching a site that like half of the usage was spreading copyrighted content. It was a public site. Any investor could just, before the meeting, go to our website and in 3 clicks see content we did the rights to.

And then I would go in and try to pitch them how I was going to be a billion dollar business. I don't even know how I did it, looking back.

Speaker 0: Peter T.

Speaker 1: Leeson You

Speaker 0: seem to have made every mistake.

Speaker 1: Steve Zehngut Many, many mistakes. Many of the mistakes. I like to write about things where I have personal mistake experience. But I will tell you that when we broke even at Justin.TV, that was the moment of infinite clarity. And what was weird is that looking back, 1 of the things I see in other founders, and I recognize in myself, is that when you're operating on the investor's dime, oftentimes you're trying to optimize what the investor wants to hear.

And oftentimes you're trying to structure your pitch and your strategy to what's going to get us more money. Because it turns out the investor is really your customer because they're the only 1 giving you the money you need to survive. And your users become secondary. When you hit break even, there's this magical moment where you realize, wait a second, like I can just generate money for my users. I don't need these investors anymore.

And strangely, weirdly, the only group of people who are harder to understand than users are investors. For many people, some people can just spin investors, some people have a way with investors, but for many people, investors are this really confusing group and it's like, well, I'd rather fight the user fight than the investor fight. And that was the case for us. And it was so interesting. Man, we never had a better strategy.

We never had a better plan. We never had better execution than 2 moments. 1, when we were running out of money. And 2, when we were hit break-even. It was just wow.

The clarity was amazing. And the fear went away. It's like, this isn't going to die tomorrow.

Speaker 0: You have confidence, and then all of a sudden, when you look at the other side of the table, now you have a product that the investor wants.

Speaker 1: Isn't that funny? When you don't need investment, guess who comes around? Oh, you need some more money?

Speaker 0: Yeah, no problem. I'll cover you

Speaker 1: guys. Classic.

Speaker 0: Classic. Yeah. And I think like basically the way you wrap up is like this is about leverage. So what you say is, don't limp into a series A fundraise. You need to be able to show that you have taken the early investment money and used it sensibly to create a product that people love.

You need to have sustained growth to raise a series A. Understand that and you'll be better off than most startups.

Speaker 1: It's kind of simple, right? Yeah,

Speaker 0: I know. I know.

Speaker 1: It's interesting, we have a Series A program at YC. And we help YC companies, it tends to be like 12 to 24 months after YC, prep for and raise Series A. And at the kickoff meeting, it's very similar to the kickoff meeting at YC. Everyone goes around in a circle and says what they do. But the difference is that everyone says their revenue to.

And it was so much fun to be at the kickoff meeting for the Series A because you'd hear some ideas like, oh I'm doing yada yada yada. And like, YC, we hear ideas all the time. It's like, yeah, okay, it's another idea. And then the founder's like, we're doing $5 million in revenue. And you're like, oh, that's different.

And then the next person's like, we're doing $3.5 million in revenue. And the next person's like, oh, we're doing $4 million. And it's so funny how an idea sounds better when there's a revenue number after it. And so what's so funny is that, I think what YC's good at is that if you can create the business leverage, if you can make your business work, we can help you present that in the leverage maximizing way. And we can help you do a process that maximizes the leverage that you've created.

But you have to create the core leverage. You've got to do the work, right? You've got to do the work. You've got to figure out the product that gets that usage, and then we can help you package it and sell it most effectively. And so It's fun to see when that works.

You can't predict it. If you asked me years before who was going to be in that Series A program, I would not have known. But man, those founders are far more formidable. When they have something, They're killers. Quiet strength when you got shit.

Speaker 0: You don't need a flunnet.

Speaker 1: No, you don't need a, it's funny because sometimes I see people with snazzy pitches and snazzy, things that remind me of stuff you would hear on a TV infomercial. It's like, you don't need that much work when you have a good company. Usually you can just graphs. You just show graphs.

Speaker 0: Paul Matzkoff It's a few numbers.

Speaker 1: Sean O'Toole Yeah, and it's like, oh wow, that's really working. Yeah, it is.

Speaker 0: Awesome. All right. Thanks, Ben.

Speaker 1: All right. Thank you. You

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Why Does Your Company Deserve More Money? by Michael Seibel