CS183C Session 2: Sam Altman

Y Combinator president Sam Altman stopped by CS183C to share his thoughts on starting and scaling new ventures. Sam and John Lilly (JL) had a wide-ranging conversation that included insights, stories from the early days of YC, and questions from the students in the audience. You can watch the recording here.

• Sam took a math class in Room 380–380C
• Y Combinator funds about 250 startups per year in the core program
• The Fellowship program (1/10th the money, less advice) will be scaled beyond that
• Advice, connections, access to the community
• More than 2,000 members in the YC alumni community who buy each other products, etc.
• Dropped out of Stanford in 2005, during his final year
• “We’re pretty sure we started working on [Loopt] the day that YC was announced. We applied the day before applications were due, and flew out to Boston.”
• “We needed money and they offered money, and we needed advice and they offered advice.”
• In 2005, the world of financing was very different. Investors wanted business plans, financial models, and business people running companies. At YC, they were people like us — engineers who focused on the product.
• “We were confident that YC was the future of investing.”
• Got involved as a part-time partner (officially) at YC in 2011.
• “I raised a venture fund, which was really important, because I realized that I hated being a venture capitalist. I felt like I was a public equity picker, allocating capital. I needed to identify the best companies a little bit quicker and do a little better sales job to convince them to take my money. It felt very different from when I was doing seed investing with my own money. That is where I felt like I was having an impact on the world. I didn’t want to compete to get my dollars into companies that would be successful anyway; I wanted to help create new ones that wouldn’t otherwise happen.”
• “YC should never have been as successful as it turned out to be; the last generation of investors really dropped the ball.”
• “Boston is a fairly nice place, but it’s not here. We sucked into a vortex and can’t move more than 100 miles from Stanford.”
• “I still don’t think people understand how important network effects
• “There are 2,500 accelerators. There are only 8 billion-dollar companies that have been created by an accelerator, and all 8 came out of YC. The difference between #1 and #2 at our stage is like the difference between Facebook and MyYearbook.”
• “As much as I’d like to say the value of YC was the advice of the partners, but it’s really the network of alumni.”
• “The loyalty you feel to your investors goes down exponentially over time. The people who invested the first money really believed in you. Public shareholders will sell your shares if you miss earnings by a penny. Because we’re the first money in, entrepreneurs feel more connected to us than their later investors.”
• “We take all our founders camping once per year. We have spaces, offline and online, where founders can hang out together.”
• “A great board member is the most important thing to optimize for in your Series A round.”
• “It’s very hard to take over from a founder. But YC was very small when I took over, and because I was there all along — I was the first person that ever got a check from YC — I had the muscle memory and it wasn’t very traumatic. I was like an internal candidate.”
• “For successful new CEOs, I think it has to be a re-founding. Every time.”
• “We try to find the best founders in the world and figure out how to help them.”
• “Because the mission is so clear, and knows what we do and why, when we change the how a little bit here and there, it’s not an issue.”
• What do you look for in founders: “1. Clarity of vision. Can the founder explain exactly what they do and why? If they can’t explain it to us, they can’t explain it to other investors and employees, and they don’t really understand it themselves. When Airbnb came in, they were doing something we would never do — staying in a stranger’s living room on an air mattress. But Brian could clearly articulate why it was better to stay with locals, and his end state vision. 2. We look for people who are determined and passionate. You run into so many impediments every day that if you’re the kind of person who turns around, that’s not going to work. 3. Obviously, raw intelligence. 4. The ability to get things done quickly. Founders can’t be slow movers. Being quick and decisive correlates almost exactly with our successful founders.”
• How do you judge founders: “We look at 20,000 founders per year. We get so much data that we’ve figured out the right questions to ask.”
• JL: “The Martian is the best book about startups I’ve read in a long time.”
• “Founders can be presented with a problem that you’ve never seen before and solve it very quickly.”
• “We prefer 2–3 person teams. We’re not religiously opposed to solo founders, but even the solo founders who succeed (e.g. Dropbox, Instacart), they found a co-founder very quickly. There’s a lot to do, and the psychological toll of being a sole founder is daunting. However, it’s worse to have a bad co-founder. That ends in heartbreak 100% of the time.”
• JL: “Being a founder is a lonely job, and it’s people telling you that you’re a moron a lot of times in a row.”
• “Startups are like waves; hopefully when you’re at the bottom, your co-founder will be able to cheer you up.”
• “3 founders works (Airbnb). 4 is harder; someone ends up leaving in the first year or so.”
• “All co-founders get into big fights at some point. Not all of them tell us about it. If it gets bad, we tell them, ‘This relationship is done. One of you has to leave.’”
• Loopt: “We got into lots of fights, but we always got along.”
• How do you think about diversity at the founding level? “Diversity is a clear win. Don’t hire just because of diversity, but it’s always helpful. The only kind of diversity that doesn’t help is diversity of vision — culture, how we make decisions, how we handle disagreements. That is killer diversity.”
• “The two times we see conflict among the founding team is when they want different things for the company, or the same thing for themselves. If two people have the same background, and both want to be CEO, and both want to be on the magazine cover, that’s the worst kind of conflict.”
• “It used to be the best founding teams were one business person and one tech person. Now it’s often two tech people, but if they both want the same thing, that’s a problem.”
• “Steve Jobs and Steve Wozniak were both white guys, but in the universe of white guys, they were about as different as you can be.”
• “Hiring is harder and more fraught with peril than ever before. Our best startups hire the least. The worst startups want to hire and say, “Hey, I have 10 people working for me.” It’s hard to turn the battleship when you have too many employees. You have internal politics. Before the company is ready to scale, it just causes problems. Airbnb took 9 months to hire their first person. Stripe took about that long as well. Hiring does give you status, but also makes you less effective.”
• JL: “If you hire before you’re clear on things, you get eaten up by communication effects.”
• “The Bay Area is the best place in the world to start a startup. The dollar costs of living here are the one thing that could break that. If you have a linear growth in money and an exponential growth of users and revenues, each month makes a huge difference.”
• “The Bay Area feels like it has gotten less diverse in its founding teams. Stanford is much more diverse than the people in this room.”
• “More than half the people we fund are not from the US.”
• “Diversity is actually not as hard as people make it seem. Less than half our partnership consists of white guys. White guys say the problem is much harder to solve than it is.”
• “If you think that what you’re looking for are undervalued assets, then you want the really good ones that look bad to everyone else. Great ideas that look bad lead to outsized returns. It’s harder to do than you think. We’re all much more affected by trends and what others think. It’s really hard to have conviction when everyone else thinks you’re wrong. I still find the temptation to like what other people like really strong. You don’t want to invest in the derivative of what’s really big. In 2009 and 2010, everyone was focused on investing in the next Facebook. The companies that really mattered were Uber and Airbnb, and they looked nothing like Facebook. A lot of investors are rushing to invest in Uber-like things. ‘We’re going to be the Uber for dog walking.’ The next $100 billion company is very unlikely too be Uber for a thinly sliced market. Instead, ask, ‘What is the next $100 billion company that will look nothing like what worked last time?’ You have to have the courage of your convictions to do what’s unpopular because you understand where the world is going and others don’t.”
• “Once things start to grow and you can tell your users really love your product, the easier it is to ignore what the haters have to say. The faster you launch, the faster you can develop this conviction even when the rest of the world disagrees.”
• “If the reason you have conviction is a shift in the world, and you can identify exactly what it is (e.g. Uber and smartphones), that helps your conviction.”
• JL: What about fusion investments? “They break up the task into a lot of smaller chunks, and they know exactly what they need to accomplish every week. We brought in hardware startups. People said hardware doesn’t work like startup. We thought that the problem was that they needed to be more like software startups. If you can get 10% better every week, and do that for 3–4 years, you’ll build something pretty good.”
• “If the fusion company works, no one will ever say, ‘YC shouldn’t invest in hard tech companies.’”
• “You can ignore everybody except users. If your users tell you that your products suck, and you can’t find another group of users that disagrees, you’re in trouble.”
• “I try not to go to startup parties. The last one I went to, people were bragging about pivoting. That’s like bragging about failure. We talk too much about how great failure is. It should be tolerated, but not celebrated. The only pivots that I’ve seen work are a) it’s what the founder wanted to build anyway, and b) it’s based on something the founder learned during the process. Instagram was what Kevin wanted to build anyways. He loved photography. Burbn didn’t work, so he went away on vacation and build Instagram. Airbnb was out of money. The founders were using the little plastic sheets for storing baseball cards to keep track of all their maxed-out credit cards. They didn’t have money for rent. All they had was a spare airbed. So they rented out the space so they could pay the rent. Unless you fit into one of those two categories, shut the company down, go on vacation, and try something new when you get back.”
• “Airbnb started as an affordable housing company.”
• “I’ve never seen people stand at a whiteboard, come up with a new concept, and pivot successfully.”
• Slack and Stripe were in category 2. Slack: The game didn’t work, but people liked using the IRC client. Stripe: I’m building an iPhone app, and it’s a paid to handle payments.
• “If you’re going to join a company, join the most successful company that’s growing as fast as possible. That’s the best training you can get other than starting a company.”
• “You can work productively about 70 hours a week. Focus on product. Spend that time getting a small number of users that really love you. Focus on love, not like.”
• “All the enterprise software companies get all their customers from the YC alumni. I have no idea how you do it if you don’t have that!”
• JL: Getting the first enterprise customers almost always depends on the network.
• The post YC/Demo Day slump: “Startups work really well when founders have the gas pedal down to the floor. It feels good to win. But at some point, you have to clean up the technical and cultural debt. You can’t put growth on hold to solve these problems. You can take maybe 10% of your time to solve these problems. The prime directive of running a startup is ‘Never lose momentum.’ Your employees will sense a loss of momentum faster than the founders.”
• Fake work: “There’s a reality TV show about startups right now. It’s horrible. If you think of all the things that make good for good TV, do none of them. Focus on the things that make for boring TV — sitting and coding, talking with customers, making sales calls. Some founders love fundraising — it feels important, it’s fun. But no company has ever become great because it was great at fundraising. You either build a great product and find a way to grow, or you don’t. Some startups are great at everything except this. They have the best attorney, they have a great logo. But unless they build something great, they’ll never succeed. You have to get the big things really right, and allow the little things to be a little wrong.”
• Self-inflicted problems: “Founders that fall in love with their public image — who want to be on those 30 under 30 lists. Founders who go to networking events. ‘You were out of the office more than you were there.’ When you say it like that, the problem is obvious.”
• “The #1 mistake that great founders make is waiting too long to fire bad people. I don’t think this is a teachable lesson. You have to do it and learn the lesson. Firing people is the worst part of running a company. I’d worry if someone had an easy time firing people.”
• JL: “Maybe I can fix this person. People issues like that are tough.”
• “You hurt the employee more by keeping them longer. If you fire them 2–3 months in, they can just leave it off their resume. If you keep them a year, they’ve got a problem.”
• Machine learning: “There are a lot of machine learning companies that can optimize far better than human beings. We will have 10 years in the sun where machine learning will have great results. Someday, someone will discover the algorithm behind actual intelligence and creativity, and then there are only two possible outcomes.”
• Bitcoin: “Whenever I’m asked publicly whether people should buy Bitcoin, I say no. Every time I’ve done that, the price has gone down. None of the people in this room use Bitcoin on a daily basis. That is the whole problem with Bitcoin. It might succeed. It has the makings of something that might be huge. But I don’t think it has yet found product-market fit. It needs users who really love it. Right now, the only people who love it are people who want become really rich because they bought Bitcoins early.”
• Helion and Nupower: “I hate being on boards. I got trapped on the Reddit board, but that was not intentional. If you could pick one thing that would help the poorer half of the world, the first would be friendly, superhuman intelligence, and the second would be cheap, clean energy. When the cost of energy comes down, the quality of life goes up. This doesn’t even consider climate change and wars. I need this optimistic of the future where energy is a penny per kWh, not $0.08. My view of the world is that energy will be 80%/20% nuclear and solar, but I don’t know which is the 80 and which is the 20.”
• “When I was 19, I though I had infinite time. When I was 23, someone said to me, ‘You can’t keep up the intensity of working at a startup forever.’ You might be able to maintain that intensity for about 20 years. If you believe that, you have a limited number of shots on goal. A startup takes 2–3 years if it fails, 10 years if it succeeds. You have an incredibly short window. The mistake is to think that life is 100 years long. 20 years is not a long time, and it’s not many startups. What is the most important way I can spend that time.”
• How do you fire people? “Put yourself in the other person’s shows, treat them like a human, and do everything you possibly can to make it look like a win for them. Every person I’ve ever fired, I found a job for them before they left the company. ‘I really appreciate you as a person, but this isn’t working. I realize this sucks, and I want to do this in the best possible way for you. I’ll be super-generous on severance, I’ll help you find a job. We still say you’re here until you’re ready to announce that you’re leaving.’ If you’re respectful but firm on your decision, they’ll work with you, and people really appreciate that. The advice in the management books is to have their last paycheck ready and a bunch of legal papers. That’s terrible advice. It makes the person feel that its adversarial, and it’s happening on your terms. The person should know that the decision has been made, but to some extent, it happens on their terms.”
• “The best founders are generalists all the way through. Maybe you’re a specialist in the technology you develop, but when you transition from building a product into building a company, you need to be a generalist.”
• “We believe that rather than talking about improving the world, we just fund companies that do. The bad news is that the press doesn’t cover those companies. Two years ago, we’d funded 0 biotech companies. Now we’ve funded 30.”
• “We always tell startups not to go for the highest valuation, and sometimes we tell them not to take the money at all. The only times to worry about valuation are when you’re buying stock, which means when you’re investing, or when you’re joining the company as an employee. The intermediate valuations mean nothing. It’s frustrating because all the press ever asks is, ‘How much are YC companies worth?’ When you go to work at a startup that is worth $1 billion, assume that it’s not worth $1 billion. Don’t let the founders convince you that your equity is worth X% of the headline valuation. The key question is, how much will the startup be worth in five years?”
• “If you have an idea that you think will really matter to the world, and the best way to spread that idea is to start a startup, then you should start a startup. Joining a successful company has a higher expected value that starting a startup. Dustin Moskowitz talked about this in 183B.”
• “We’ve had success with founders who didn’t go to college, we’ve had success with founders who had PhDs. I think the extremes can be bad, but within the normal bounds, things will be fine.”